REDSTONECONNECT PLC Annual Report for the Year Ended 31 January 2018 CONTENTS Highlights Chairman’s statement Strategic report: Strategy and operational review Strategic report: Financial review Strategic report: Principal risks Directors and officers Company information and advisers Directors’ report Independent auditor’s report Consolidated statement of comprehensive income Consolidated statement of financial position Consolidated statement of cash flows Consolidated statement of changes in equity Company statement of financial position Company statement of cash flows Company statement of changes in equity Notes to the financial statements 3 5 8 13 20 21 23 24 29 33 34 35 36 37 38 39 40 HIGHLIGHTS FINANCIAL HIGHLIGHTS: • Revenue up 15% to £47.6 million (2017: £41.5 million) • Gross profit up 45% to £13.4 million (2017: £9.2 million), with an increased gross margin of 28% (2017: 22%) • Adjusted EBITDA* up 60% to £3.2 million (2017: £2.0 million) reflecting the successful implementation of the strategy to focus on higher quality, higher margin business • Adjusted profit before tax** of £2.4 million (2017: £1.3 million) • Profit before tax from continuing operations of £1.5 million (2017: £1.2 million) • Profit after tax from continuing operations of £1.5 million (2017: £1.8 million) OPERATIONAL HIGHLIGHTS: • In May 2017, completed a successful placing to raise £6.5 million, of which £1.4 million was used to acquire Anders + Kern (“A+K”), a systems and solutions integrator specialising in meeting room management and audio visual solutions: o Integration of A+K is now complete, providing the group with an indirect sales channel to sell the Group’s meeting room and space management software solutions to small and mid- sized clients, both in the UK and overseas o A+K made a positive contribution to the Group’s performance in the year • £1.2 million of proceeds have been invested in development of the Group’s software platform: o In December 2017 we released OneSpace Link a locally installed meeting room management solution which integrates with Microsoft Outlook o Ongoing development of a full web-based meeting room management tool which will be offered as a module of the OneSpace platform o Continued development of our OneSpace platform adding to existing modules which include desk management, wayfinding, car parking, visitor management, frictionless vending and space management • Cash at year end of £3.4 million (2017: £3.2 million) and net cash of £1.2 million (2017: £0.8 million) • Basic earnings per share from continuing operations of 7.72 pence (2017: 11.14 pence) • OneSpace continues to gain traction. In December 2017, we announced a deal with a market- leading global technology business to provide an Original Equipment Manufacturer (“OEM”) version of our platform. This deal was worth £2.25 million, our largest single contract for OneSpace thus far • Adjusted earnings per share from continuing operations 12.81 pence (2017: 13.13 pence) • Continued strong performance and levels of renewals from our Managed Services division * profit for the period from continuing operations before net finance costs, tax, depreciation, amortisation, integration costs and transactional items, impairment charge and share based payments. ** adjusted profit before tax is before: integration costs and transactional items, impairment charge, share based payments and amortisation recognised as a result of purchase price allocation under IFRS. • Agreements secured in the year for the Company’s innovative in-Building Cellular (“IBC”) and Distributed Antenna Systems (“DAS”) solutions POST YEAR END: • Announced the proposed sale of the Systems Integration and Managed Services divisions for a total consideration of £23.0 million comprising; £19.6 million payable in cash on completion; £2.0 million payable on or before 30 November 2018, subject to completion of an already contracted project by Redstone Converged Solutions Ltd; and the waiver of loans owed by the Company to the divisions of £1.4 million. Owing to its size the disposal requires the approval of shareholders • This disposal will allow the Group to focus on developing and growing the Company’s software proposition in the smart building and co-working space markets both in the UK and internationally 3 4 CHAIRMAN’S STATEMENT Following the disposal of the Managed Services and Systems Integration business the Group will reduce in size operationally. However, we plan to use the funds realised from the disposal to accelerate the growth of our Software business. This growth will initially be organic through the development of our direct and indirect sales channels, both in the UK and overseas. However, should we identify appropriate targets, we also plan to make acquisitions of businesses which either have a customer base that can be migrated onto our OneSpace platform or offer complementary technology that can add value to the OneSpace platform. After what has been a very traumatic number of years where we have taken the business from crisis to stabilisation we have now reached another important junction in the RedstoneConnect journey. The disposal of the Systems Integration and Managed Services business brings to an end the restructuring of the Group. From here we see a very exciting future where we build a business which is focused on high margin annuity revenues with significant international growth potential. Frank Beechinor Chairman 29 May 2018 On 29 May 2018 we announced the disposal of the Systems Integration and Managed Services divisions. The disposal, which owing to its size, is subject to shareholder approval at a meeting on 15 June 2018, will substantially change the shape of the Group. The Board has, for some time, considered that the growth prospects for our Systems Integration and Managed Services divisions are lower than those for the Software business. For the future we wish to focus on higher margin business in a less mature market with better visibility of revenues and with significant potential to grow internationally. The Systems Integration business is predominantly project based with the associated lack of forward visibility of revenues with a lower margin than we can achieve from sales of software. The Board therefore believes that by focusing investment on the development of the Software division, there is greater scope to build higher levels of better quality recurring earnings and therefore generate more attractive returns for shareholders. Management believes the disposal terms represent a good return for both the Company and our shareholders. The two businesses were acquired for a combined consideration of £11.9 million and the disposal is for £21.6 million, £19.6 million payable in cash on completion, £2.0 million payable on or before 30 November 2018, subject to completion of an already contracted project by Redstone Converged Solutions Ltd, and the waiver of loans owed by the Company to the divisions of £1.4 million. Following the disposal, the Group’s focus will be entirely on building our business in the world of smart building and agile workplace markets after a successful year for the Group’s OneSpace offering in the smart buildings space. The Software division demonstrated not only strong revenue growth in the year but using some of the funds raised in May 2017 further developed its owned IP and brought to market a number of new modules in our OneSpace platform. RedstoneConnect is continuing to be seen as a visionary in the workspace management solutions market. We are working with a number of enterprise clients who recognise our vision that this new generation of technology is a way of optimising their corporate real estate as well as creating a better work environment for their employees. I am encouraged by the increased traction we are experiencing for our software solutions. We have secured a number of engagements to pilot our technology, with major international businesses. These pilots are the initial step to a full rollout. The pricing model for these deployments is a monthly fee per desk / room. We are working hard to ensure these relationships will develop into meaningful contracts. Whilst the focus will be on growing the Group’s Software as a Service (SaaS) based revenues through multi-year contracts, over the near team the Board believes there also continue to be opportunities to deliver licensed based agreements aligned with the buying requirements of the potential customer base. OUTLOOK There is currently a tipping point in the evolution of the workplace technology market. Until relatively recently the main focus of technology in the context of smart buildings has been on monitoring and managing energy use. However, today building operators are now far more interested in occupant well-being and space optimisation. Because this workplace technology market is in its infancy and is highly fragmented, RedstoneConnect has an opportunity to establish leadership through technology. The market is expanding rapidly with estimated compound annual growth rates between 2017 and 2022 of 25% in EMEA, North America and Asia. We want to use our available resources to capitalise on this opportunity. I am pleased to report another year of solid progress for RedstoneConnect Plc (“RedstoneConnect”). During this period, we broadened our operational base through acquisition, made significant investment in software product development and have grown our pre-tax profits. It was also a year where we set in motion the plan to focus on our Software business through the disposal of our Systems Integration and Managed Services divisions. RedstoneConnect’s software offering has been enhanced following the fundraising in May 2017, which enabled the Group to develop its owned IP and release a number of new modules within our OneSpace software platform. Using the proceeds from the fundraising, the Group acquired A+K, a systems integrator specialising in the meeting room management and audio-visual market, and I am delighted to welcome the team to RedstoneConnect. I am pleased to report the business is now fully integrated and making a positive contribution to trading. A+K will be the basis to build our channel sales capability allowing us to target mid-market clients with our meeting room and desk management solutions. These partners operate in the UK and internationally, and have established customer bases with meeting room hardware in place. Our aim is to sell our software through these channel partners enabling their end users to get more from their investment. As we develop further OneSpace modules, it is our intention also to offer these through this partner network. 5 6 STRATEGIC REPORT: STRATEGY AND OPERATIONAL REVIEW STRATEGY The Group’s strategy has been to provide a broad and innovative platform of systems integration, managed services and software solutions to the Smart Buildings and Smart Commercial Spaces market. Once approved by shareholders, the recommended disposal of the Systems Integration and Managed Services business will enable the Company to focus its resources on the Software business, which the Board believes has the greatest potential to drive long-term growth in shareholder value. An important component of our strategy is to invest in the development of our software IP. The changing business environment brings with it challenges for modern organisations in how to ensure both effective and efficient working. This challenge is one that faces all organisations both big and small, but one that becomes more difficult to manage effectively, the larger and more diverse the organisation. Speaking with clients, we are finding the key drivers for creating a successful office environment are not only the financial benefits associated with an efficient working environment by utilising space effectively, but also the benefits of a modern workplace when recruiting and retaining talent. We believe a digital experience is essential to achieving employee wellbeing and retention, through better engagement with the workplace, empowering employees to enjoy a more engaging work experience, driving productivity gains. We see this change gathering pace as more of the millennials join today’s and tomorrow’s workforce and as digitalisation continues to gather pace. In 2017, the global market for occupancy analytics based software services was estimated to be worth $1.54 billion with growth of 24.5% CAGR rising to $4.60 billion in 2022 (Memoori, Occupancy Analytics and In- Building Location Based Services in the Commercial Office Space Report, Q1 2018). Industry analysts, Memoori, position RedstoneConnect’s software technology as one of the top 6 global Workplace Management Platforms and in a recent market report Verdantix cited RedstoneConnect as one of the smart innovators in their analysis of the space management market. We intend to focus our energies on exploiting the enormous potential for growth in this market. Our immediate key strategic priorities to drive future growth remain as follows: • to focus on developing technology-led intellectual property based on OneSpace; • to continue to grow our Smart Buildings software offering through a combination of organic growth and acquisition both in our domestic market and overseas; • to develop new sales channels to market for our software solutions, focusing where possible on SaaS agreements; and • to deliver higher quality earnings which, in turn, improve cash generation. PRINCIPAL ACTIVITIES DURING THE YEAR During the year the Group continued to trade through three operating business segments: Systems Integration, Managed Services and Software. The Systems Integration segment remained product-agnostic with a strong pedigree in addressing the enterprise market. This division offers physical, wireless and virtual infrastructure solutions, including fully integrated smart solutions such as innovative location-based services and in-building cellular or Distributed Aerial Systems (DAS). The Group’s Systems Integration division has established an extensive range of skills and experience in the rapidly advancing market for smart buildings. In addition to the traditional project implementation business, the division has seen consulting engagements become a growing part of its portfolio of services. Our Managed Services division has a number of long standing service engagements, typically 3-5 years’ duration, all with blue chip enterprise-level customers. The Managed Services division combines an on-site client engagement services offering, with a hosted IT services capability. The Software division’s principal offering is a cutting-edge workspace management platform called OneSpace, with global reach and application. The application and services suite provides a broad range of location-based services, which originally established its 7 8 STRATEGIC REPORT: STRATEGY AND OPERATIONAL REVIEW continued strong user experience credentials in the smart city, retail and hospitality sectors, markets which remain active for our software technology today. OneSpace materially helps customers optimise space and enhance employee wellbeing. The functionality includes: • 2D/3D mapping; • Wayfinding; • Desk management; • Visitor management; • Car parking management; • Meeting room management; • Cashless vending; and • Analytics. The software suite is built to an open-architecture standard, is applicable to both on-premise and cloud strategies and has a secure API layer, allowing easy integration with third party applications. The data gathering, analytics and dashboard functionality enables clients to deploy mobile and agile working strategies, configuring space to achieve increased engagement with the workforce whilst realising significant cost benefits. Whilst the corporate real estate market presents a huge opportunity, the combination of the above functions and services also apply to additional market segments such as co-working office environments. The value in today’s world of understanding business data cannot be underestimated. Our software platform aims to collect data from every end- point and product API. The value adding activities, which are enabled from both the collection and analysis of this data are what drives the financial return on investment. This is certainly the case for the OneSpace product. Understanding current working behaviours and utilisation of office and commercial spaces enables clients to right size their office portfolios. We have already seen existing 9 clients experience a compelling return on investment where the use of OneSpace has enabled, multi-million pound savings in both capital expenditure and annual operating expense. Our software offering is suited to both direct and channel routes to market. With the investment made in the year, we believe our products have a broader appeal beyond just enterprises and can be deployed to mid-market clients and SME’s. Customers can purchase individual modules allowing us to ‘land and expand’ from an initial sale of, say a meeting room management solution to adopting the full OneSpace suite. OVERVIEW OF PERFORMANCE We are pleased with the progress the Group has made in the financial year ended 31 January 2018 during which we focused on three key opportunities, namely: • maximising organic growth initiatives; • investing in software development; and • leveraging the acquisition of A+K, completed in May 2017. Overall the Group delivered a good operational performance in the year, in both Managed Services and more significantly, the Software division, resulting in an increase in the Group’s gross profit and operating margins. However, 2017 was challenging for the Systems Integration division which saw a marked reduction in profitability. In the year to 31 January 2018, Group revenues increased by 15% to £47.6 million (2017: £41.5 million). More significantly however, gross profit increased by approximately 45% to £13.4 million (2017: £9.2 million) largely thanks to the excellent growth seen in the Software division in the year. Group gross margin increased to 28% (2017: 22%). This strong headline trading performance has been achieved despite the challenges experienced in the Systems Integration division and is predominantly due to the progress made in the year by the Software division. The Software division worked on a number of high value assignments during the year including a smart city UK project, a smart shopping centre in Munich as well as several corporate projects for enterprise level customers. During the year we increased the scope of the global master framework agreements for OneSpace with the investment bank UBS and global media events company UBM, with deployments of OneSpace into a number of both companies’ international offices. We continue to develop further opportunities with OneSpace and already have a number of revenue generating pilot projects, which we hope in time will develop into full deployments of the solution. In December 2017 we announced a major contract with an Original Equipment Manufacturer (“OEM”) to allow them to embed OneSpace into their hardware solutions. The contract, with a value of £2.25 million, is the largest contract we have signed to date for our OneSpace product as is the first major contract to embed our software into a third party solution, a fantastic endorsement of the OneSpace product. The Board has been considering the options available to it to maximise shareholder value from the Systems Integration and Managed Services divisions given that they operate in slower growth and lower margin markets. The Systems Integration division also has high levels of project-based work with less predictable revenues. There are furthermore considerable swings in the division’s working capital requirements. Although the division achieved lower revenues in the current financial year, it had built a strong pipeline of business at the year end which will benefit the following year and this led to higher than normal levels of working capital being employed in the business at the year end, with a resulting negative impact on the Group’s net cash. The action which the Board proposes to take in this regard is explained in the proposed post balance sheet events section below. The financial performance of the Group for the year is covered in more detail in the Financial Review. SOFTWARE DEVELOPMENT In May 2017 the Company raised funds to accelerate the development and functionality of OneSpace, in particular, to improve the platform architecture and develop further modules. As a result of the Board’s efforts and the investments made to date in the software offering, the Software division has grown considerably over the past twelve months. During the year we invested £1.2 million to improve scalability and enable the technology to operate on multiple cloud platforms. This supports deployments of our software platform in smart city, retail, hospitality and commercial real estate markets. Importantly, we further developed the OneSpace product family to address the integrated Workspace Management opportunity emerging in commercial real estate, as organisations adapt to more agile working environments and greater workforce mobility. At the end of the year we announced delivery of the first new module for the OneSpace family, an entry-level meeting room scheduling tool called Link that integrates with Microsoft Outlook to make room scheduling and associated services such as audio-visual equipment and catering, easily booked from the desktop. Link has also been integrated with Liso, a well-established meeting room signage product deployed across the world by Swedish manufacturer, Evoko. Other developments include important enhancements to OneSpace, some of which were going through user-acceptance testing as we closed out the year. Specifically, we are adding web- based resource scheduling for meeting rooms, desks and car parking to an already impressive workspace management technology that provides powerful wayfinding and analytics for workspace utilisation. Additionally, all end user applications for OneSpace are being made available through a powerful new mobile application available in both iOS and Android variants. Our development team has also made significant progress in developing our technology platform to incorporate a microservice architecture platform, through which services and applications can be deployed across multiple cloud-provider technologies. This modular deployment provides a scalable platform for a SaaS-based solution as well as reducing the future development time to create new functions and modules. ACQUISITION As we create additional modules for OneSpace we are productising them to be channel ready so we may rapidly expand market access in the future through value-add partners. The acquisition of A+K in May 2017 for £1.4 million cash has brought with it expertise in designing channel ready products and provides the route to engaging with an important channel to market, the AV reseller (audio- visual). AV resellers operate across the market spectrum from small to very large businesses, providing solutions to improve the quality, efficiency and performance of meetings. New OneSpace product modules fit this market well and provide customers with a strong meeting room management solution that can act as a starting point for more innovative functions available to support the modern workplace, such as visitor management, desk management, wayfinding (indoor navigation) and analytics that help workspace planners optimise the working environment. We continue to develop this theme within our product development and go-to-market strategy. The acquisition added a team of 20 staff to the Group and A + K contributed revenues of £2.1 million and EBITDA of £0.1 million in the year. PROPOSED POST BALANCE SHEET DISPOSAL Following the acquisition of Connect IB in March 2016, the Board has focused on the development of the Company into a software-led business. The Board believes that the Group’s capital resources are best utilised in growing the technology-led software business with the focus on higher margin, recurring SaaS revenue. As a result, the Group announced on 29 May 2018 the proposed disposal of the Systems Integration and Managed Services divisions to Excel I.T. Services Limited for a total consideration of £21.6 million in cash, of which £19.6 million is payable on completion, and a further £2.0 million payable on or before 30 November 2018, subject to completion of an already contracted project by Redstone Converged Solutions Ltd (“Additional Consideration”). In addition, intercompany loans to the divisions amounting to a further £1.4 million will be waived. The Additional Consideration will be retained by the Purchaser for working capital purposes relating to a project, which is due to complete in November 2018. In the event that the Additional Consideration is not sufficient to cover the ongoing working 10 STRATEGIC REPORT: STRATEGY AND OPERATIONAL REVIEW continued capital relating to the project, the Company may be required to provide additional working capital equal to any such deficit, subject to the terms of the Share Purchase Agreement. Under Excel I.T. Services’ ownership the Systems Integration and Managed Services businesses will continue to act as a channel for the Company’s software products and services. As well as providing the Board with the opportunity to focus its energies on maintaining and accelerating the progress in the Software division, the disposal of the Systems Integration and Managed Services divisions will: • provide the Board with a clear platform to execute its strategy of becoming a software led company focused on the attractive smart buildings and co- working technology markets; • strengthen the Group’s balance sheet, greatly improving our cash position; and • enable the Group to invest in its technology as well as providing the Group with the flexibility to take advantage of potential acquisition opportunities which broaden its software suite of products into the smart building and co-working space technology markets. The Board believes that the proposed terms of the disposal represent good value for shareholders. If approved by shareholders, it is expected that completion of the disposal will occur on 15 June 2018. OUTLOOK The Board believes there are substantial opportunities for growth in the smart software and co-working technology markets, particularly in light of increasing interest in agile working and the connected office environment, a core focus for the Group’s occupancy management software platform, OneSpace. The Board further believes the Group is in a strong position following the investment made in developing our software and smart working solutions over the past 24 months. RedstoneConnect’s software platform, services and application suite have broad appeal and we have increasing interest and early engagements, giving us confidence in securing new client mandates over the coming months. The opportunity in the corporate real estate market, which enables employee and visitor engagements through software technology, continues to gather pace and we are ideally positioned to benefit. Our plan in the coming year is to invest into sales and marketing to maximize the opportunity in the market for workplace technology. We will also continue to invest in software product, focusing development efforts on functionality to enhance the existing offering thus maintain competitive differentiation through technology innovation. With the benefit of the proceeds from the disposal of the Systems Integration and Managed Services businesses, we will be well placed to explore opportunities to complement the organic growth opportunity we see for our software products with acquisition opportunities that could deliver either a complementary suite of software products into the smart building and co-working sectors or have the potential to increase our customer base and geographic reach. Finally, on behalf of the Board, I wish personally to thank and acknowledge my colleagues for what they have achieved during the year. Mark Braund Chief Executive Officer 29 May 2018 11 1212 STRATEGIC REPORT: FINANCIAL REVIEW OVERVIEW The main focus during the year has been to continue to strengthen our software offering. The Company raised additional capital in May 2017 and has since invested some of the funds raised to deliver a defined program of software development. This has resulted in a broader OneSpace proposition which has enhanced functionality across the platform, its mobile offering and various modular point solutions. We have complemented this development program with an acquisition, which we anticipate will benefit the Group in future years as we take these new software offerings to market. The acquisition of A+K is seen as a key component in our channel strategy. During the year the Group reported improved trading performance, with its Software division recording the biggest divisional increase in both revenue and profit. Managed Services has also performed reasonably well with the added benefit of a full year contribution from Commensus. The Systems Integration division however had a challenging year, experiencing a slow first half and whilst the second half reported better performance, full year revenue, gross margin and profitability was not as strong as the prior year. The Systems Integration division is a projects business and as a result gross profit margins can fluctuate based on the size and complexity of each project. SHARE CONSOLIDATION AND CAPITAL REDUCTION On 5 June 2017 the Group held its AGM, at which a share consolidation was approved 13 whereby every 100 ‘Existing Ordinary Shares’ with a nominal value of 0.1 pence be consolidated into one ‘New Issued Ordinary Share’ with a nominal value of 10 pence. The share consolidation involved 2,078,479,485 shares of 0.1 pence in the issued share capital of the Company being consolidated into 20,784,795 ordinary shares of 10 pence each, effective 6 June 2017. At the same time, shareholders approved a Reduction of Capital which resulted in the following transactions: (a) the Company’s share premium account was transferred to the Company’s accumulated deficit in distributable funds; (b) the Company’s deferred shares were cancelled and the capital redemption reserve arising was transferred to the Company’s accumulated deficit; and (c) the Company’s merger reserve was transferred to the Company’s accumulated deficit. This resulted in the Company having an accumulated surplus in distributable funds of £12,410,292. The Directors believe that, subject to the future performance of the Group, this should give the Company the ability to make distributions to Shareholders and/ or buy back its own ordinary shares if, the Directors consider that it is appropriate to do so. The Reduction of Capital was approved by the Courts and became effective on 28 June 2017. Where applicable, the comparative figures relating to number or value of shares throughout this report have been amended to reflect the effects of the share consolidation had it been in place at the beginning of the previous financial year. ACQUISITIONS On 9 May 2017 (prior to the Group’s share consolidation), RedstoneConnect acquired 100% of the share capital of Easter Road Holdings Limited (“ERH”), and its 100% owned subsidiary Anders + Kern U.K. Limited (“A+K”), for a total consideration of £1.4 million. Deal costs of £0.1 million were incurred and recorded under integration and transactional items in the Income Statement. The transaction was satisfied fully by cash which was financed out of the proceeds of a placing of 433,333,334 new ordinary shares of 0.1 pence each (prior to the share consolidation) at a price of 1.5 pence per share, raising £6.5 million, before expenses. TRADING PERFORMANCE Revenue for the year of £47.6 million (2017: £41.5 million) increased by £6.1 million or 15% year on year. This increase in revenue was, in the most part, achieved as a result of a full year contribution from Commensus of £2.4 million, the acquisition of A+K in May 2017 (which contributed £2.1 million in revenue in the year), as well as strong growth seen in the Software division. The Software division, benefitted from the OEM software contract recorded in the second half of the year which contributed revenues of £2.25 million. These increases in revenue were offset in part by the reduction in revenue performance from the Systems Integration division. The Group reported gross profit for the year of £13.4 million, which was 45% ahead of the prior year (2017: £9.2 million), and gross profit margin at 28% which represents a 600 basis points increase over the same period (2017: 22%). The uplift in gross profit performance has been achieved through a greater contribution from the Software division, with its high gross margin at 83% and to a lesser extent, the Managed Services division, with a full year contribution from Commensus with its higher margin service offering, offset by lower margin contribution from Systems Integration. As a result of the strong gross profit performance, adjusted EBITDA has increased in the year by 60% to £3.2 million (2017: £2.0 million), this increase being supported by an additional £1.5 million EBITDA contribution from the Software division. The improved trading performance resulted in a £0.4 million increase at the operating level, with profit of £1.6 million (2017: £1.2 million), representing a 32% year on year increase. The Group reports its second consecutive profitable year following its recent restructuring, recording profit before tax from continuing operations of £1.5 million (2017: £1.2 million) and post-tax earnings from continuing operations of £1.5 million (2017: £1.8 million), with the prior year benefitting from a credit to tax of £0.6 million versus £0.1 million credit in the current year. Year ended 31 January 2018 Revenue Gross profit Gross margin Adjusted EBITDA Operating profit from continuing operations Adjusted profit before taxation Profit after taxation from continuing operations Operating profit from continuing operations Adjusting items: Integration and transactional costs included within administrative expenses Depreciation Amortisation Share based payment charge Adjusted EBITDA Profit/(loss) before taxation from continuing operations Adjusting items: Integration and transactional costs included within administrative expenses Amortisation of intangible assets from business combinations Share based payment charge Adjusted profit before taxation Amortisation split: Development capitalised Software capitalised Business combinations Amortisation of intangible assets £000 24,213 3,777 15.6% 613 409 463 405 409 12 93 59 40 613 404 12 7 40 463 - 52 7 59 Systems Integration Managed Services Software Group Overheads £000 18,023 5,140 28.5% 2,567 1,948 2,207 1,986 £000 5,338 4,441 83.2% 1,884 1,371 1,660 1,374 £000 - - - (1,857) (2,157) (1,959) (2,249) Total £000 47,574 13,358 28.1% 3,207 1,571 2,371 1,516 1,948 1,371 (2,157) 1,571 36 252 281 50 171 47 285 10 218 10 - 72 437 402 625 172 2,567 1,884 (1,857) 3,207 1,952 1,348 (2,249) 1,455 36 169 50 2,207 - 112 169 281 171 131 10 218 - 72 437 307 172 1,660 (1,959) 2,371 152 2 131 285 - - - - 152 166 307 625 14 STRATEGIC REPORT: FINANCIAL REVIEW continued Year ended 31 January 2017 Revenue Gross profit Gross margin Adjusted EBITDA Operating profit from continuing operations Adjusted profit before taxation Profit after taxation from continuing operations Systems Integration Managed Services Software Group Overheads £000 24,586 4,084 16.6% 1,082 874 888 1,478 £000 15,310 3,714 24.3% 1,959 1,432 1,524 1,432 £000 1,625 1,426 87.8% 343 (19) 321 7 £000 - - - (1,374) (1,096) (1,407) (1,128) Total £000 41,521 9,224 22.2% 2,010 1,191 1,326 1,789 Operating profit from continuing operations 874 1,432 (19) (1,096) 1,191 Adjusting items: Integration and transactional costs included within administrative expenses Depreciation Amortisation Impairment of intangible assets Share based payment charge Adjusted EBITDA 9 122 70 - 7 50 281 183 - 13 1,082 1,959 77 20 118 146 1 343 (347) (211) 1 - - 68 424 371 146 89 (1,374) 2,010 Profit/(loss) before taxation from continuing operations 872 1,426 (16) (1,128) 1,154 Adjusting items: Integration and transactional costs included within administrative expenses Amortisation of intangible assets from business combinations Impairment of intangible assets Share based payment charge Adjusted profit before taxation Amortisation split: Development capitalised Software capitalised Business combinations Amortisation of intangible assets 9 - - 7 50 35 - 13 888 1,524 21 49 - 70 43 105 35 183 77 113 146 1 321 3 2 113 118 (347) (211) - - 68 148 146 89 (1,407) 1.326 - - - - 67 156 148 371 15 SYSTEMS INTEGRATION The Systems Integration division had a challenging year following a slow first half. It reported lower revenues in the year at £24.2 million (2017: £24.6 million), albeit with a second half weighting which was anticipated at the start of the year, as result of order unwind and the profile of new project wins and delivery. The revenue shortfall was a result of slower uptake and delays in delivering infrastructure projects for both Smart building and DAS engagements. Gross margin percentage at 15.6% is down 100 basis points from 16.6% in 2017, contributing a gross profit of £3.8 million, down £0.3 million (2017: £4.1 million). The decrease in gross profit margin is a result of two material infrastructure projects one of which is traditional cabling and the other a Smart Building mandate, which are contracted at lower margins. As a result, adjusted EBITDA at £0.6 million (2017: £1.1 million) and operating profit on continuing operations at £0.4 million (2017: £0.9 million) are both down £0.5 million on the prior year. A+K’s sales of AV products and services contributed £0.7 million of revenues and £0.3 million gross margin from the date of its acquisition in May 2017. MANAGED SERVICES During the year, revenues grew by 18% to £18.0 million (2017: £15.3 million) and gross profit increased by £1.4 million or 38% to £5.1 million (2017: £3.7 million). The year ended 31 January 2018 was the first full year of contribution from Commensus which was acquired in November 2016. The full year contribution from Commensus was £2.4 million of revenue (2017: £0.5 million) and £1.3 million (2017: £0.3 million) of gross profit. The increase in gross margin has been offset by a corresponding increase in overheads of £0.8 million, resulting in an increase in adjusted EBITDA of £0.6 million to £2.6 million (2017: £2.0 million) and operating profit of £2.0 million (2017: £1.4 million). SOFTWARE This division includes revenues and profits generated from Connect IB product offerings including OneSpace. Revenues of £5.3 million (2017: £1.6 million) generated gross profit of £4.4 million at a margin of 83.2% (2017: £1.4 million and a margin of 87.8%), resulting in a positive adjusted EBITDA contribution of £1.9 million (2017: £0.3 million) and operating profits of £1.4 million (2017: loss of £0.02 million after £0.1 million impairment of intangible assets). The performance has been underpinned by a few notable contracts, including the £2.25 million OEM for OneSpace alongside the mandates for a smart city solution and a digital retail solution. Investment in overheads of £1.2 million has been made during the year, with additional employees complementing the existing team and supporting a scalable business platform, as we look to grow the business following this year’s period of investment in product. The impact of the investments in the Software business is beginning to show positive signs and, we have already seen increased client engagements, which start with a pilot or proof of concept. This increase in client activity across a range of vertical markets, we hope over time will develop into full contract engagements and global mandates. We also see the investment program as essential in our strategy of developing new channels to market, and some of the investment has been and will continue to be focused on productising aspects of the modular platform offering, to enable other vendors and partners to take our software products to market. We see this as a big opportunity in 2019 and beyond. The impairment charge in the prior year arose as a result of the development in previous years of the original OneSpace product, following the acquisition of Connect IB and re-engineering of the product to what it is today as a component of our cloud platform. The charge results from the now ‘end of life’ previous version of the OneSpace product. GROUP OVERHEADS The Group reported central overheads of £2.2 million at an operating level (2017: £1.1 million). This includes a charge in the current year relating to integration and transactional items of £0.4 million (2017: credit of £0.2 million). The previous year also benefited from an exceptional credit of £0.2 million relating to the unwinding of accruals associated with former premises, thus the increase in continuing overheads was £0.3 million. This increase reflects investment in additional headcount and marketing activities. INTEGRATION AND TRANSACTIONAL ITEMS A charge of £0.4 million (2017: £0.2 million credit) has been recorded in integration and transactional items from continued operations in the year. This charge comprises an integration charge of £0.3 million (2017: £0.4 million credit) and a transactional charge of £0.1 million (2017: £0.2 million charge). The integration charge includes £0.2 million employee related costs and £0.1 million business restructuring costs, whilst the £0.1 million transactional items resulted from professional fees associated with the acquisition of A+K as well as fees incurred in respect of the share placing, share consolidation and capital reduction. 16 STRATEGIC REPORT: FINANCIAL REVIEW continued TAXATION The tax credit reported in the income statement of £0.1 million (2017: £0.6 million) is the release of the deferred tax liability associated with the amortisation of the corresponding intangible assets from business combinations of £0.1 million (2017: £0.03 million), with the prior year also benefitting from the recording of a tax asset of £0.6 million in relation to previous years’ trading losses. The Group has the benefit of trading losses which are available to offset against future profits. As at 31 January 2018, the tax losses in the Group totalled £10.4 million (2017: losses of £9.7 million), of which we anticipate utilising £3.6 million against future profits and as such have recognised a deferred tax asset of £0.6 million (2017: £0.6 million). The tax losses primarily sit within the Systems Integration division at £4.7 million, with £1.4 million and £0.9 million trading losses relating to the Managed Services and Software divisions respectively, and the remaining £3.4 million in relation to the central function. Following the disposal of the Systems Integration and Managed Services divisions, £5.3 million of the tax losses will leave the Group, with £5.1 million losses remaining, £1.7 million in the Software division and £3.4 million within the central function. EARNINGS PER SHARE - CONTINUING OPERATIONS Basic earnings per share (“EPS”) recorded in the year was 7.7 pence, which was down against the prior year at 11.1 pence. EPS on a diluted basis, allowing for employee share options and warrants, was 7.1 pence (2017: 10.1 pence). An analysis is provided in note 14 ‘Earnings per share’. Adjusted basic earnings per share recorded in the year was 12.8 pence, which was marginally behind the prior year at 13.1 pence. Adjusted EPS on a diluted basis, allowing for employee share options and warrants, was 12.8 pence (2017: 11.9 pence). An analysis is provided in note 14 ‘Earnings per share’. 17 On a comparable basis, both EPS and adjusted EPS have been impacted by the dilutive effect of the shares issued during the year, with an additional 3.5 million shares and 1.9 million weighted average shares in 2018 on a basic and diluted basis. The previous year also benefitted from the credit to the income statement from integration and transactional items of £0.2 million (2018: charge of £0.4 million) as well as the release of accruals of £0.2 million (2018: £nil) in relation to previous premises and a tax credit of £0.6 million (2018: £0.1 million credit). RESEARCH AND DEVELOPMENT During the year the Group has made a significant investment of £1.2 million (2017: £0.4 million) in further developing the Software IP, as well as extending the OneSpace product family, each one bringing added functionality to the product offering. New products launched in the year included the Meeting Room Management plug-in, a full web based Meeting Room Management product, and a market leading mobile application. There has also been significant investment in the core platform which hosts the OneSpace product offering. The platform is now multi-tenanted with a microservices architecture and is truly cloud agnostic, which allows for speedy deployment and upgrades to all instances of installed product. This investment is capitalised and recorded in the statement of financial position as an intangible asset. An analysis is provided in note 16 ‘Other intangible assets’. We anticipate more development in 2019 as we further improve the software offering, with already identified specific enhancements. INTANGIBLE ASSETS AND GOODWILL As a result of the acquisition of A+K, the Group intangible assets increased by £0.2 million and goodwill by £1.1 million. A breakdown of the intangible assets and goodwill arising on the acquisition is provided in note 6 ‘Acquisitions of businesses’. Amortisation of £0.3 million has been recognised in the income statement in respect of total acquired intangible assets (2017: £0.2 million). Cash flows generated from financing activities of £5.7 million (2017: £5.2 million) comprised funds raised from the issue of new equity, net of issue costs of £6.2 million (2017: £3.0 million) and cash outflows relating to repayment of debt and interest totalling £0.6 million (2017: £2.3 million). The funds raised during the year were used to fund the acquisition of A+K and investment made in software IP. CASH FLOW DIVIDEND POLICY Cash and cash equivalents at the end of the year was £3.4 million (2017: £3.2 million), an increase of £0.2 million. Net cash at the year-end amounted to £1.2 million (2017: £0.8 million). The business operations generated cash of £2.7 million (2017: £1.9 million) from profitable trading during the year. Increased working capital requirements primarily in the Software and Systems Integration businesses resulted in a net cash outflow from operating activities of £2.3 million (2017: £0.9 million cash inflow), largely as a result of higher debtors and accrued income which resulted in an outflow of £4.9 million (2017: £0.1 million). In particular, this outflow has arisen from substantially higher fourth quarter activity in 2018 on infrastructure projects which will benefit revenues in the next financial year. In prior years, including 2017, quarter four has traditionally been our slowest quarter and has therefore seen working capital inflows. The proposed disposal of the Systems Integration and Managed Services divisions involves the recovery of £3.6 million of cash and excess working capital tied up in those divisions at the year end. Cash outflows from investing activities of £3.1 million (2017: cash outflows £4.0 million), resulted from the investments in A+K of £1.2 million (net of cash acquired), investment in the development of software IP of £1.2 million and investment in fixed and intangible assets of £0.6 million. Following the capital reduction implemented after last year’s AGM, the Company is in a position to adopt a dividend policy. The proposed disposal of the Systems Integration and Managed Services divisions will furthermore generate a profit on disposal as well as substantial cash resources. The Board considers that it is in shareholders’ best interests to retain resources in the Group to invest in further software development and potential acquisitions. However, should it become apparent in the next 24 months that not all of the available resources are required, the Board will consider implementing a distribution policy or return of capital to shareholders. BORROWING AND BANK FACILITY As reported in 2017, on 14 November 2016 the Group entered into a long-term arrangement with Barclays to finance the acquisition of Commensus with a fixed term loan of £2.35 million. The loan is repayable over four years, with quarterly repayments of £0.15 million, and carries a coupon of 3.5%. The first repayment was made in February 2017 and a total of £0.6 million has been repaid in the year ended 31 January 2018. As a result of the fixed term loan, a reduced revolving loan facility of £1.65 million was agreed (previously £2.5 million). This facility will ratchet back up to a maximum of £2.5 million in line with the repayments of the £2.35 million term loan, and as such the facility is £2.24 million at 31 January 2018. The facility remains undrawn as at the balance sheet date. Subsequent to the acquisition of A+K in May 2017, as part of the integration within the Group the business moved its banking facilities from Clydesdale Bank to Barclays. At the time of acquisition, A+K had bank loans with Clydesdale amounting to £0.3 million. As part of the bank transition a £0.5 million mortgage, secured against the property owned by A+K, was put in place through Barclays and the funds used in part to repay the Clydesdale loans. The Barclays mortgage loan represents 69% of the property value of £0.7 million, carries a coupon of 2.5% and is repayable over three years. Repayments are £0.01 million quarterly, and represent repayment of principal and interest. As a result of the Group’s term loan and facility arrangements, the following banking covenants are in place: - • Leverage cover: total borrowings must not exceed 200% of trailing twelve month EBITDA; • Debt service: adjusted cash flow as a ratio to adjusted debt service shall not fall below 2 times; • Interest cover: Earnings Before Interest and Tax, (“EBIT”), must exceed 2.5 times gross financing costs; and • Debtor cover: debtor book cover less than 90 days cannot fall below 3 times the drawn facility. These covenants must be tested at each financial quarter, and must be based on the previous 12 month period results. During the year to 31 January 2018 the covenants have been tested at the quarterly interval, and all have been within the facility limits. Should the disposal of the Systems Integration and Managed Services divisions be approved by shareholders, the Group intends to use part of the proceeds to repay the balance of the fixed term loan. If the Group were to repay the outstanding loan balance as the date of this report, the maximum breakage costs incurred would be £0.09 million. Spencer Dredge Chief Financial Officer 29 May 2018 18 STRATEGIC REPORT: PRINCIPAL RISKS PRINCIPAL RISKS AND UNCERTAINTIES The Group could potentially be affected by a number of uncertainties and risks that are not wholly within its control: REGULATORY CHANGES RESULTING FROM THE UK’S EXIT FROM THE EUROPEAN UNION The Board continues to monitor its operations as a result of the UK’s referendum to leave the European Union (“Brexit”). It is not expected that Brexit will have either a material impact on operations or financial performance as the Group looks to expand both in the UK and geographically. The Board believes that smart software technologies will resonate with clients anywhere in the world and therefore Brexit is not a material concern. RELIANCE ON KEY PERSONNEL AND MANAGEMENT The success of the Group will rely upon attracting and retaining the right calibre of talent. The Group operates an active talent and development program. The Group continuously monitors and develop this programme to meet the ambitious requirements of the business. The loss of key staff would be detrimental to the Group. The Group utilises a number of tools to retain its senior management including: an annual bonus and long term incentive plans. TECHNOLOGICAL CHANGE AND COMPETITION The pace of technology advancement in today’s world is apparent and affects all aspects of life. The Group strategy is underpinned by our software offering. We will continue to understand client requirements and research the market to ensure we focus our product development program to ensure we have the most relevant software which is competitive in the global market. The risk should we not continue to build upon recent investment in software is considerable and therefore identifying increased product functionality and differentiation, will ensure we manage and mitigate this risk. SALES AND CHANNEL DEVELOPMENT Key to our future success will be developing successful channels to market. Productising our software offering is crucial to ensuring a successful channel strategy, ease of sale and installation are both key components to ensure partner adoption. Failure to develop channels to market is likely to impact our ability to scale the business. Recent and ongoing investment will ensure we have products to share with channel partners along with the necessary training and installation support. CLIENT DELIVERY Our software solution addresses many client requirements, some of which can be complex installations. Client IT environments are not uniform and therefore delivery is a key component to successful client relationships. Project management, with technically capable trained resource and planning are essential in delivering an excellent installation experience ensuring long term client retention. ACCREDITATIONS AND INDUSTRY STANDARDS standards of practice. IP PROTECTION The barriers to entry in our software markets are significant. Therefore, we must maintain protection around our IP otherwise risk these barriers to competition. Maintaining contractual disciplines and vetting who we chose to share any level of object or source code, product knowledge and wherewithal and general secrets of how we operate are constantly monitored and reviewed. Confidentiality is a key component to managing this risk and the Group has legally binding agreements to ensure this is robust and maintained. POST ACQUISITION RISK The Board’s stated strategy is that it is seeking to make acquisitions to complement the Company’s products and services. Integrating new acquisitions involves risk resulting from poor communication, inadequate business processes, loss of staff, loss of clients and other factors. Therefore, integration risk needs to be assessed and monitored to ensure value is achieved from any business combination. Post-acquisition risk is managed by both Executive and senior management. The Strategic Report, comprising the Strategy and Operational Review, Financial Review and Principal Risks was approved by the Board on 29 May 2018 and signed on its behalf by: Industry standards are constantly changing with data and cyber security key concerns for most organisations. Ensuring the Group is planning and maintaining its accreditations will mitigate the risk associated with ever changing high Mark Braund Chief Executive Officer 29 May 2018 20 1919 DIRECTORS AND OFFICERS Frank Beechinor (Chairman) Frank was appointed Chairman of the Board on 10 July 2014 and is Chairman of the Nominations Committee. He has significant corporate experience, particularly of IT and Software services and is also currently Non-Executive Chairman of dotDigital Group plc and CEO of Cadence Performance Limited. Frank was previously founder and CEO of OneClick HR plc from 1997 to 2011. Mark Braund (Chief Executive Officer) Mark was appointed CEO on 1 January 2016, following his stint as a Non-Executive Director appointed on 9 March 2015. He is a former director of IBM (EMEA) and an experienced technology and business services executive with a proven ability to turn around and grow businesses. He founded, developed and then sold Barker Personnel Services to Carlisle Holdings plc and subsequently led the turnarounds of TAC Europe, Lorien plc and First Advantage Inc., all of which saw rapid increases in market share and profitability before being sold to private investors. Mark was CEO of InterQuest Group plc from April 2011 to December 2015, one of the leading digital technology contract services and recruitment specialists in the UK. Spencer Dredge (Chief Financial Officer) Spencer was appointed as Director on 2 September 2015. Spencer is a qualified Chartered Management Accountant and has more than a decade of experience in the Technology sector having held a number of senior positions for quoted UK technology companies, including his previous role as CFO of Castleton Technology Plc, where he helped complete the Groups restructuring. He has experience in corporate finance, playing a pivotal role in executing successful M&A programs at Redstone plc, Maxima Holdings plc and Redcentric plc. Guy van Zwanenberg (Non-Executive Director) Guy joined the Board on 9 March 2015 and is Chairman of the Remuneration Committee and a member of the Audit Committee and the Nominations Committee. Guy has 40 years’ experience in industry and practice. He qualified as a Chartered Accountant with Grant Thornton and then spent three years working with James Gulliver. Guy subsequently moved to become UK Finance Director of an American computer accessory company which was taken public in 1989. In 1991, he established his own interim financial management business and has since been involved in a number of SME businesses providing strategic and financial help. Guy joined Gamingking PLC in 1998 on a part time basis as Finance Director and became Company Secretary and Non-Executive Director in 2006, remaining until May 2013. He joined Quixant plc as a Non-Executive in March 2013 as part of the float team. Guy is both a Fellow of The Institute of Chartered Accountants in England and Wales and a Chartered Director. Diana Dyer Bartlett (Non-Executive Director) Diana was appointed to the Board in October 2013 and is Chairman of the Audit Committee and a member of the Remuneration and Nominations Committees. Diana acted as interim FD of the Company between the end of 2014 and Spencer’s appointment in September 2015. With 30 years’ experience in accountancy, investment banking and finance, Diana has an impressive track record in investments, mergers and acquisitions, corporate governance and business transformation in publicly quoted, venture capital and private equity backed companies. Her previous roles include Chief Financial Officer for Precious Cells International Limited, Company Secretary for Tullett Prebon plc, Finance Director of Pelamis Wave Power Limited and Chairman and Honorary Treasurer for BreastCancer Haven. Diana is an Associate of the Institute of Chartered Accountants in England and Wales. 21 22 COMPANY INFORMATION AND ADVISERS DIRECTORS’ REPORT REGISTERED OFFICE 40 Holborn Viaduct London EC1N 2PB COMPANY NUMBER 5332126 COMPANY ADVISERS NOMINATED ADVISER AND JOINT BROKER Cantor Fitzgerald 1 Churchill Place Canary Wharf London E14 5RB JOINT BROKER Whitman Howard First Floor 1 – 3 Connaught House, Mount Street, London W1K 3NB AUDITOR KPMG LLP Chartered Accountants & Statutory Auditors Arlington Business Park Theale Reading Berkshire RG7 4SD REGISTRAR Share Registrars Ltd Craven House West Street Farnham Surrey GU9 7EN BANKER Barclays Bank Plc 1 Churchill Place London E14 5HP The Directors’ submit this report together with the accounts of RedstoneConnect plc (‘the Company’) and its subsidiary undertakings (together ‘the Group’) for the year ended 31 January 2018. PRINCIPAL ACTIVITIES During the year the Group’s principal activities were infrastructure services, managed services and software products. DIRECTORS AND THEIR INTERESTS The Directors who held office during the year were as follows: RESULTS AND DIVIDEND The results for the year are set out in the consolidated statement of comprehensive income on page 33. The Directors do not recommend payment of a dividend (2017: £nil). REVIEW OF BUSINESS A review of the business of the Group, together with comments on future developments is given in the Strategic Report. Frank Beechinor Chairman Mark Braund Chief Executive Officer Spencer Dredge Chief Financial Officer Diana Dyer Bartlett Non-Executive Director Guy van Zwanenberg Non-Executive Director The remuneration of the Directors who held office during the year was as follows: DIRECTORS’ REMUNERATION Salary Bonus Share Based Payment Benefit in kind Total Pension 2018 Total 2017 Total £000 £000 £000 £000 £000 £000 £000 £000 65 300 150 40 40 - 50 30 - - 6 40 16 4 2 - 4 1 - - 71 394 197 44 42 - 38 9 - - 71 432 206 44 42 65 365 190 42 40 Frank Beechinor Mark Braund Spencer Dredge Diana Dyer Bartlett Guy van Zwanenberg 23 24 DIRECTORS’ REPORT continued The interests of those Directors serving during the year ended 31 January 2018, as at the year-end, all of which are beneficial, in the share capital of the Company, were as follows: DIRECTOR Ordinary shares of 10p each Frank Beechinor Mark Braund Spencer Dredge Diana Dyer Bartlett Guy van Zwanenberg 2018 No 90,000 144,853 32,126 40,000 30,000 2017 No 90,000 144,853 32,126 40,000 30,000 During the year, the Company effected a share consolidation, reducing the ordinary share capital by a factor of 100:1 which was approved by shareholders at the AGM held on 5 June 2017. The effect of the share consolidation was to consolidate 2.1 billion 0.1p ordinary shares into 20.1 million 10p ordinary shares. The comparative figures in the table above, and throughout this report have been amended to reflect the effects of the share consolidation had it been in place at the start of the last reporting period. The beneficial holdings include, where applicable, the holdings of connected parties. DIRECTORS’ SHARE OPTIONS As at 31 January 2018 the Company had granted the following share options to Directors of the Company which remained outstanding at the year-end: NO OF ORDINARY EXERCISE DIRECTOR INSTRUMENT SHARES OF 10p PRICE GRANT DATE Frank Beechinor Mark Braund Spencer Dredge Diana Dyer Bartlett Guy van Zwanenberg Share option Share option Share option Share option Share option 100,000 650,000 260,000 70,000 30,000 92p 92p 92p 92p 92p 11/12/2015 11/12/2015 11/12/2015 11/12/2015 11/12/2015 None of the Directors had any beneficial interest in the shares of any subsidiary companies. The movement on Directors share warrants and options during the year is set out below: 2018 2017 Number Weighted average exercise price Number Weighted average exercise price Outstanding at start of year Outstanding at end of year Exercisable at end of year 1,100,000 1,100,000 - 92p 92p - 1,100,000 1,100,000 - 92p 92p - benefit from training and career development programmes in common with all employees. The Group has continued its policy of employee involvement by making information available to employees through the medium of frequent staff meetings, together with personal appraisals and feedback sessions. During the year the Group introduced a SAYE share incentive scheme in which all staff were invited to participate, thereby aligning their interests with those of the shareholders. SHARE CAPITAL BOARD OF DIRECTORS Details of the Company’s share capital are disclosed in note 25 to the financial statements. FINANCIAL INSTRUMENTS Details of the use of financial instruments by the Company and its subsidiary undertakings are disclosed in note 29 to the financial statements. STATEMENT TO THE AUDITOR So far as the Directors are aware, there is no relevant audit information (as defined by section 418 of the Companies Act 2006) of which the Company’s auditor is unaware, and each Director has taken all the steps that he/ she ought to have taken as a Director in order to make himself/ herself aware of any relevant audit information and to establish that the Company’s auditor is aware of that information. CORPORATE GOVERNANCE Achieving good governance is key to the long term success of the business. It ensures we remain a responsible Company and underpins our culture and reputation as an organisation. As a Board we are conscious of our obligations to think deeply, thoroughly and on a continuing basis regarding our duties. The Group has Non-Executive Board members with extensive experience in areas critical to the long term future success of the Company, covering a deep understanding of technology, corporate strategy, finance and investment. This experience enables the Non-Executives to add entrepreneurial leadership, with open and rigorous debate that provides a valuable external and balanced perspective to the Board. We believe that our Board members complement each other, delivering a broad and appropriate balance of skills. At the year end the Board consisted of a Chairman, Chief Executive, Chief Financial Officer and two Non-Executive Directors. The Board meets on a regular basis and the agenda of matters discussed and approved consists of matters concerned with the future direction of the business. The Board is responsible for formulating, reviewing and approving the Group’s strategy, budgets and major items of expenditure. REMUNERATION COMMITTEE The Remuneration Committee agrees the terms and conditions, including annual remuneration, of Executive Directors and reviews such matters for other senior personnel including their participation in long term incentive schemes. AUDIT COMMITTEE The Audit Committee recommends the appointment, scope and fees of the external auditor, discusses issues that arise from the audit, reviews reports of the external auditors and internal control procedures and considers any financial statements before their publication. The auditor also attends meetings of the Audit Committee as required by the Committee to consider any issues arising from the audit and the auditor’s work. NOMINATIONS COMMITTEE The Nominations Committee makes recommendations to the Board for all Board appointments and succession planning. EMPLOYEES The Group has continued to give full and fair consideration to applications made by disabled persons, having regard to their respective aptitudes and abilities, and to ensure that they 25 26 DIRECTORS’ REPORT continued SUBSTANTIAL SHAREHOLDINGS As at the 25 May 2018, the following interests in 3% or more of the issued ordinary share capital had been notified to the Company: SHAREHOLDER NUMBER OF SHARES % HOLDING Canaccord Genuity Group JO Hambro Capital Management Herald Investment Management Close Brothers Asset Management DIRECTORS’ RESPONSIBILITIES The directors are responsible for preparing the Annual Report and the Group and parent Company financial statements in accordance with applicable law and regulations. Company law requires the directors to prepare Group and parent Company financial statements for each financial year. As required by the AIM Rules of the London Stock Exchange they are required to prepare the Group financial statements in accordance with International Financial Reporting Standards (“IFRS’s”) as adopted by the EU and applicable law and have elected to prepare the parent Company financial statements on the same basis. Under company law the directors must not approve the financial statements unless they are satisfied that they give a true and fair view of the state of affairs of the Group and parent Company and of their profit or loss for that period. In preparing each of the Group and parent Company financial statements, the directors are required to: • select suitable accounting policies and then apply them consistently; • make judgements and 27 2,621,170 2,469,999 1,611,987 1,122,137 12.6% 11.9% 7.8% 5.4% regulations, the directors are also responsible for preparing a Strategic Report and a Directors’ Report that complies with that law and those regulations. The directors are responsible for the maintenance and integrity of the corporate and financial information included on the Company’s website. Legislation in the UK governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions. LISTING The Company’s ordinary shares have been traded on London’s AIM Market since 6 September 2006. Cantor Fitzgerald are the Company’s Nominated Adviser, and the Company has Joint Brokers, Cantor Fitzgerald and Whitman Howard. The closing mid-market share price at 31 January 2018 was 109 pence (31 January 2017: 160 pence). PUBLICATION OF FINANCIAL STATEMENTS The Company’s financial statements will be made available on the Company’s website www.redstoneconnectplc. com. The maintenance and integrity of the website is the responsibility of the Directors. The Directors’ responsibility also extends to the financial statements contained therein. Shareholders who estimates that are reasonable, relevant and reliable • state whether they have been prepared in accordance with IFRS’s as adopted by the EU; • assess the Group and parent Company’s ability to continue as a going concern, disclosing, as applicable, matters related to going concern; and •use the going concern basis of accounting unless they either intend to liquidate the Group or the parent Company or to cease operations, or have no realistic alternative but to do so. The directors are responsible for keeping adequate accounting records that are sufficient to show and explain the parent Company’s transactions and disclose with reasonable accuracy at any time the financial position of the parent Company and enable them to ensure that its financial statements comply with the Companies Act 2006. They are responsible for such internal control as they determine is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error, and have general responsibility for taking such steps as are reasonably open to them to safeguard the assets of the Group and to prevent and detect fraud and other irregularities. Under applicable law and would like to receive a copy of the financial statements by post, should apply to the Company Secretary at the Company’s registered office. ANNUAL GENERAL MEETING Further details in relation to the Annual General Meeting shall be provided in due course. GOING CONCERN The Group’s business activities and performance, and the financial position of the Group, its cash flows and borrowing facilities, together with the factors likely to affect its future development, performance and position, are explained in the Strategic report. Analysis of the Group’s key risks is also set out in the Strategic report. Further information regarding the assessment of going concern is in note 1 to the financial statements. After making appropriate enquiries, the Directors consider that the Company and the Group have adequate resources to continue in operational existence for the foreseeable future. For this reason, they continue to adopt the going concern basis in preparing the financial statements. AUDITOR In accordance with section 485 of the Companies Act 2006, a resolution proposing that KPMG LLP be re-appointed as auditor will be put to the Annual General Meeting. The Report of the Directors was approved by the Board on 29 May 2018 and signed on its behalf by: Spencer Dredge Director 29 May 2018 28 28 INDEPENDENT AUDITOR’S REPORT TO THE MEMBERS OF REDSTONECONNECT PLC 1. OUR OPINION IS UNMODIFIED We have audited the financial statements of RedstoneConnect Plc (“the Company”) for the year ended 31 January 2018 which comprise the consolidated statement of comprehensive income, the consolidated and company statement of financial position, the consolidated statement of changes in equity, the company statement of changes in equity, the consolidated and company statement of cashflows, and the related notes, including the accounting policies in note 2. 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 January 2018 and of the Group’s profit for the year then ended; • the Group financial statements have been properly prepared in accordance with International Financial Reporting Standards as adopted by the European Union (IFRSs as adopted by the EU); • the parent Company financial statements have been properly prepared in accordance with IFRSs as adopted by the EU 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 are described below. We have fulfilled our ethical responsibilities under, and are independent of the Group in accordance with, UK ethical requirements including the FRC Ethical Standard as applied to listed entities. We believe that the audit evidence we have obtained is a sufficient and appropriate basis for our opinion. 2. KEY AUDIT MATTERS: OUR ASSESSMENT OF RISKS OF MATERIAL MISSTATEMENT Key audit matters are those matters that, in our professional judgement, were of most significance in the audit of the financial statements and include the most significant assessed risks of material misstatement (whether or not due to fraud) identified by us, including those which had the greatest effect on: the overall audit strategy; the allocation of resources in the audit; and directing the efforts of the engagement team. These matters were addressed in the context of our audit of the financial statements as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters. In arriving at our audit opinion above, the key audit matters, in decreasing order of audit significance, were as follows (unchanged from 2017): Systems Integration Revenue 2018: £24.2 million (2017: £24.6 million) Recoverability of parent Company’s investment in subsidiaries 2018: £14.4 million (2017: £13.0 million) 29 The risk Our Response Substantive estimates: Our procedures included: Revenue for installation work in the Systems Integration division is recognised by reference to the stage of completion of the contract at the end of the reporting period. This is assessed by the proportion of contract costs incurred to the total expected cost to complete. Significant judgement is required to estimate total forecast costs and changes to this estimate could give rise to material variances in the amount of revenue and margin recognised - Controls design: We attended project meetings where all contracts were discussed and cost variances investigated; - Our sector experience: We inspected those live contracts contributing the highest level of project revenue and considered estimates for total contract costs and forecast costs to complete including assessing historical forecasting trends; - Historical comparisons: We assessed the accuracy of forecasting by comparing total cost forecast to actuals; and - Assessing Transparency: We assessed the adequacy of the Group’s disclosures in respect of Systems Integration revenue as a significant judgement. Low risk, high value Our procedures included: The carrying amount of the parent Company’s investments in subsidiaries represents 86% (2017: 90%) of the parent Company’s total assets. Their recoverability is not at a high risk of significant misstatement or subject to significant judgement. However, due to their materiality in the context of the parent Company financial statements, this is considered to be the area that had the greatest effect on our overall parent Company audit. -Test of details: Comparing the carrying amount of 100% of investments with the relevant subsidiaries’ draft balance sheets to identify whether their net assets, being an approximation of their minimum recoverable amount, were in excess of their carrying amount and assessing whether those subsidiaries have historically been profit-making. -Assessing subsidiary company audits: Assessing the work performed by the subsidiary company audit teams on all of those subsidiaries and considering the results of that work, on those subsidiaries’ profits and net assets. 3. OUR APPLICATION OF MATERIALITY AND AN OVERVIEW OF THE SCOPE OF OUR AUDIT Materiality for the Group financial statements as a whole was set at £480,000 (2017: £400,000), determined with reference to a benchmark of revenue of £47,574,000 (2017: £41,521,000), of which it represents 1.0% (2017: 1.0%). We consider total revenue to be the most appropriate benchmark as it provides a more stable measure year on year than Group profit before tax. Materiality for the parent Company financial statements as a whole was set at £360,000 (2017: £400,000), determined with reference to a benchmark of parent Company net assets, of which it represents 3.0% (2017: 6.0%). We agreed to report to the Audit Committee any corrected or uncorrected identified misstatements exceeding £24,000 (2017: £20,000), in addition to other identified misstatements that warranted reporting on qualitative grounds. Of the Group’s 9 (2017: 8) reporting components, we subjected 6 (2017: 5) to full scope audits for Group purposes. The components within the scope of our work accounted for the percentages illustrated opposite. For the residual components, we performed analysis at an aggregated Group level to re- examine our assessment that there were no significant risks of material misstatement within these. The Group team used component materialities which ranged from £360,000 to £63,000, (2017: £300,000 to £50,000), having regard to the mix of size and Group revenue Group profit before tax 0 0 100% (2017 100%) 100 100 0 0 100% (2017 100%) 100 100 Group total assets 0 0 100% 100 100 Key: Full scope for group audit purposes 2018 Specified risk-focused audit procedures 2018 Full scope for group audit purposes 2017 Specified risk-focused audit procedures 2017 Residual components 30 might state to the Company’s members those matters we are required to state to them in an auditor’s report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the Company and the Company’s members, as a body, for our audit work, for this report, or for the opinions we have formed. Derek McAllan (Senior Statutory Auditor) for and on behalf of KPMG LLP Chartered Accountants & Statutory Auditors Arlington Business Park Theale Reading Berkshire RG7 4SD 29 May 2018 INDEPENDENT AUDITOR’S REPORT TO THE MEMBERS OF REDSTONECONNECT PLC continued risk profile of the Group across the components. The work on all components, including the audit of the parent Company, was performed by the Group team. 4. WE HAVE NOTHING TO REPORT ON GOING CONCERN We are required to report to you if we have concluded that the use of the going concern basis of accounting is inappropriate or there is an undisclosed material uncertainty that may cast significant doubt over the use of that basis for a period of at least twelve months from the date of approval of the financial statements. We have nothing to report in these respects. 5. WE HAVE NOTHING TO REPORT ON THE OTHER INFORMATION IN THE ANNUAL REPORT The directors are responsible for the other information presented in the Annual Report together with the financial statements. Our opinion on the financial statements does not cover the other information and, accordingly, we do not express an audit opinion or, except as explicitly stated below, any form of assurance conclusion thereon. Our responsibility is to read the other information and, in doing so, consider whether, based on our financial statements audit work, the information therein is materially misstated or inconsistent with the financial statements or our audit knowledge. Based solely on that work we have not identified material misstatements in the other information. Strategic report and directors’ report Based solely on our work on the other information: 31 • we have not identified material misstatements in the strategic report and the directors’ report; • in our opinion the information given in those reports for the financial year is consistent with the financial statements; and • in our opinion those reports have been prepared in accordance with the Companies Act 2006 6. WE HAVE NOTHING TO REPORT ON THE OTHER MATTERS ON WHICH WE ARE REQUIRED TO REPORT BY EXCEPTION UNDER THE COMPANIES ACT 2006, WE ARE REQUIRED TO REPORT TO YOU IF, IN OUR OPINION: Under the Companies Act 2006, we are required to report to you if, in our opinion: • adequate accounting records have not been kept by the parent Company, or returns adequate for our audit have not been received from branches not visited by us; or • the parent Company financial statements are not in agreement with the accounting records and returns; or • certain disclosures of directors’ remuneration specified by law are not made; or • we have not received all the information and explanations we require for our audit. We have nothing to report in these respects. 7. RESPECTIVE RESPONSIBILITIES Directors’ responsibilities As explained more fully in their statement set out on page 27, the directors are responsible for: the preparation of the financial statements including being satisfied that they give a true and fair view; such internal control as they determine is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error; assessing the Group and parent Company’s ability to continue as a going concern, disclosing, as applicable, matters related to going concern; and using the going concern basis of accounting unless they either intend to liquidate the Group or the parent Company or to cease operations, or have no realistic alternative but to do so. Auditor’s responsibilities Our objectives are to obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue our opinion in an auditor’s report. Reasonable assurance is a high level of assurance, but does not guarantee that an audit conducted in accordance with ISAs (UK) will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of the financial statements. A fuller description of our responsibilities is provided on the FRC’s website at www.frc.org.uk/ auditorsresponsibilities. 8. THE PURPOSE OF OUR AUDIT WORK AND TO WHOM WE OWE OUR RESPONSIBILITIES This report is made solely to the Company’s members, as a body, in accordance with Chapter 3 of Part 16 of the Companies Act 2006. Our audit work has been undertaken so that we 3232 CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME For the year ended 31 January 2018 CONSOLIDATED STATEMENT OF FINANCIAL POSITION As at 31 January 2018 NOTES 2018 2017 NOTES 2018 2 017 £000 £000 Revenue Cost of sales Gross profit Administrative expenses Operating profit Adjusted EBITDA* Integration and transactional items included within administrative expenses Depreciation Amortisation Impairment of intangible assets Share based payment charge Operating profit Net finance costs Profit before tax Taxation Profit for the year after tax Discontinued operations Profit for the year Total comprehensive profit for the year attributable to equity holders Basic earnings/(loss) per share Continuing operations Discontinued operations Total Diluted earnings/(loss) per share Continuing operations Discontinued operations Total 4,5 10 8 10 10 9 10 10 12 13c 7 14 14 14 14 14 14 £000 47,574 (34,216) 13,358 (11,787) 1,571 £000 41,521 (32,297) 9,224 (8,033) 1,191 3,207 2,010 (437) (402) (625) - (172) 1,571 (116) 1,455 61 1,516 (7) 1,509 1,509 7.72p (0.03p) 7.69p 7.72p (0.03p) 7.69p 211 (424) (371) (146) (89) 1,191 (37) 1,154 635 1,789 316 2,105 2,105 11.14p 1.97p 13.11p 10.12p 1.79p 11.91p * Profit for the year from continuing operations before net finance costs, tax, depreciation, amortisation, integration and transactional items, impairment charges and share based payment charge. The notes on pages 40 to 71 are an integral part of these consolidated financial statements. 33 ASSETS Non-current assets Goodwill Other intangible assets Property, plant and equipment Deferred tax Total non-current assets Current assets Inventories Trade and other receivables Cash and cash equivalents Total current assets Total assets EQUITY and LIABILITIES Capital and reserves attributable to equity shareholders Share capital Share premium Merger reserve Reverse acquisition reserve Accumulated surplus/(deficit) Total equity Current liabilities Overdraft Bank loans Trade and other payables Corporation tax Total current liabilities Non-current liabilities Provisions Bank loans Total non-current liabilities Total liabilities Total equity and liabilities 15 16 17 24 18 19 20 25 25 25 20 22 21 13a 23 22 12,232 4,212 1,614 34 18,092 224 13,605 4,423 18,252 36,344 2,078 - - (4,236) 24,560 22,402 980 638 10,595 - 12,213 141 1,588 1,729 13,942 36,344 The financial statements were approved by the Board of Directors and authorised for issue on 29 May 2018. They were signed on its behalf by: Spencer Dredge, Chief Financial Officer, RedstoneConnect Plc, Company Number: 5332126 11,087 3,222 906 62 15,277 143 8,779 4,468 13,390 28,667 3,687 32,589 1,911 (4,236) (19,470) 14,481 1,273 653 10,318 11 12,255 169 1,762 1,931 14,186 28,667 34 CONSOLIDATED STATEMENT OF CASH FLOWS For the year ended 31 January 2018 CONSOLIDATED STATEMENT OF CHANGES IN EQUITY Attributable to equity holders of the Company NOTES 2018 2017 Cash flows from operating activities Profit for the year £000 1,509 £000 2,105 Depreciation 402 424 Note Share capital Share premium/ merger reserve Reverse acquisition reserve Accumulated (deficit)/ surplus Total £000 £000 £000 £000 £000 3,436 31,374 (4,236) (21,664) 8,910 At 1 February 2016 Profit for the year Total comprehensive profit for the year Transactions with the owners: Proceeds from shares issued 25 251 Share issue costs Share based payment charge At 31 January 2017 At 1 February 2017 Profit for the year Total comprehensive profit for the year Transactions with the owners: Proceeds from shares issued 25 Share issue costs Capital reduction Share based payment charge - - - - 3,687 3,687 - - 433 - - - 3,272 (146) - - - - - - 2,105 2,105 - - 89 2,105 2,105 3,523 (146) 89 34,500 (4,236) (19,470) 14,481 34,500 (4,236) (19,470) 14,481 - - 6,067 (260) (2,042) (40,307) - - - - - - - - 1,509 1,509 - - 42,349 172 1,509 1,509 6,500 (260) - 172 At 31 January 2018 2,078 - (4,236) 24,560 22,402 Amortisation Share based payment charge Net finance costs Taxation Intangible asset impairment Provisions released Operating cash flows before movements in working capital Decrease in inventories Increase in receivables Decrease in payables Movement in provisions Operating cash flows after movements in working capital Tax (paid)/refunded Net cash (used in)/generated from operating activities Cash flows from investing activities Research and development Acquisition of subsidiaries (net of cash acquired) Acquisition of intangible assets Acquisition of property, plant and equipment Net cash used in investing activities Cash flows from financing activities Proceeds from issues of share capital (net of issue costs) Loan drawn Loan repaid Net finance costs Net cash generated from financing activities Net increase in cash and cash equivalents Cash and cash equivalents at start of year Cash and cash equivalents at end of year 9,16 625 172 116 (61) - (28) 2,735 92 (4,894) (248) - (2,315) (54) (2,369) (1,232) (1,249) (176) (395) (3,052) 6,240 1,150 (1,605) (116) 5,669 248 3,195 3,443 371 89 37 (635) 146 (610) 1,927 37 (133) (270) (687) 874 39 913 (367) (3,140) (138) (351) (3,996) 2,979 3,789 (1,500) (37) 5,231 2,148 1,047 3,195 Cash and cash equivalents comprise cash at bank and other short-term highly liquid investments with maturity of three months or less, as adjusted for any bank overdrafts. 35 36 COMPANY STATEMENT OF FINANCIAL POSITION As at 31 January 2018 COMPANY STATEMENT OF CASH FLOWS For the year ended 31 January 2018 NOTES 2018 2017 2018 2017 ASSETS Non-current assets Investment in subsidiaries Tangible assets Total non-current assets Current assets Trade and other receivables Cash and cash equivalents Total current assets Total assets EQUITY and LIABILITIES Capital and reserves attributable to equity shareholders Share capital Share premium Merger reserve Accumulated surplus/(deficit) Total equity Current liabilities Overdraft Bank loans Trade and other payables Total current liabilities Non-current liabilities Provisions Bank loans Total non-current liabilities Total liabilities Total equity and liabilities 30 19 25 25 25 20 22 21 23 22 £000 £000 14,375 45 14,420 2,274 29 2,303 16,723 2,078 - - 10,544 12,622 - 588 2,283 2,871 55 1,175 1,230 4,101 16,273 12,975 3 12,978 1,519 - 1,519 14,497 3,687 32,589 1,911 (29,938) 8,249 639 588 3,204 4,431 55 1,762 1,817 6,248 14,497 The financial statements were approved by the Board of Directors and authorised for issue on 29 May 2018. They were signed on its behalf by: Spencer Dredge, Chief Financial Officer, Company Number: 5332126 37 Cash flows from operating activities Loss before taxation Depreciation Share based payment charge Net finance costs Provisions released Operating cash flows before movements in working capital Increase/(decrease) in receivables (Decrease)/increase in payables Movement in provisions Net cash used in operating activities Cash flows from investing activities Investment in subsidiary Acquisition of property, plant and equipment Net cash used in investing activities Cash flows from financing activities Proceeds from issues of share capital (net of issue costs) Loans drawn Loans repaid Net finance costs Net cash generated from financing activities Net increase in cash and cash equivalents Cash and cash equivalents at start of year Cash and cash equivalents at end of year £000 (1,939) 10 72 105 - (1,752) 123 (1,798) - (3,427) (1,400) (52) (1,452) 6,240 - (588) (105) 5,547 668 (639) 29 £000 (834) 1 68 30 (610) (1,345) (113) 660 (473) (1,271) (3,281) (2) (3,283) 2,979 3,850 (1,500) (31) 5,298 744 (1,383) (639) 38 COMPANY STATEMENT OF CHANGES IN EQUITY Attributable to equity holders of the Company At 1 February 2016 Loss for the year Total comprehensive loss for the year Transactions with the owners: Proceeds from shares issued Share issue costs Share based payment charge At 31 January 2017 At 1 February 2017 Loss for the year Total comprehensive loss for the year Transactions with the owners: Proceeds from shares issued Share issue costs Capital reduction Share based payment charge At 31 January 2018 Share premium/ merger reserve Accumulated (deficit)/ surplus Total £000 £000 £000 31,374 (29,172) 5,638 - - (834) (834) 3,272 (146) - - - 68 34,500 (29,938) 34,500 (29,938) (834) (834) 3,523 (146) 68 8,249 8,249 - - (1,939) (1,939) (1,939) (1,939) Note Share capital £000 3,436 - - 25 251 - - 3,687 3,687 - - 433 - 25 6,067 (260) - - 6,500 (260) - 72 (2,042) (40,307) 42,349 - 2,078 - - 72 10,544 12,622 NOTES TO THE FINANCIAL STATEMENTS 1 GENERAL INFORMATION RedstoneConnect plc is a company incorporated in England and Wales under the Companies Act 2006 and listed on the AIM market. The address of the registered office is given on page 23. The nature of the Group’s operations and its principal activities are set out in the Directors’ report and in the Operational review. The financial statements are presented in pounds sterling as that is the currency of the primary economic environment in which the Group operates. There are no foreign subsidiaries in the Group. GOING CONCERN As detailed in the Directors’ report, the Directors consider that the Company and the Group have adequate resources to continue in existence for the foreseeable future. In assessing the outlook for the Company and Group, the Board took account of the £21.6 million consideration for the proposed disposal of the Systems Integration and Managed Services divisions to Excel I.T. Services Limited, of which £19.6 million is payable on completion and a further £2.0 million by 30 November 2018, as well as the Group’s £2.24 million overdraft facility. The Directors have assessed the Group’s current forecasts, taking into account reasonable changes in trading performance. The assessment considered stress tests and mitigating actions available to the Group. On the basis of this review, the Directors believe that the Group will continue to operate within the resources currently available to it. Furthermore, the Directors have reviewed the projections in accordance with the banking facility covenants and current cash flow forecasts indicate that the Group will not breach these terms in the foreseeable future. The Directors accordingly continue to adopt the going concern basis in preparing the financial statements. 2 BASIS OF PREPARATION AND SIGNIFICANT ACCOUNTING POLICIES The consolidated financial statements of RedstoneConnect plc have been prepared in accordance with International Financial Reporting Standards as adopted by the European Union (IFRS’s as adopted by the EU), IFRS Interpretations Committee and the Companies Act 2006 applicable to companies reporting under IFRS. The consolidated financial statements have been prepared under the historical cost convention. The preparation of financial statements in conformity with IFRS requires the use of certain critical accounting estimates. It also requires management to exercise its judgement in the process of applying the Group’s accounting policies. The areas involving a higher degree of judgement or complexity, or areas where assumptions and estimates are significant to the consolidated financial statements are disclosed in note 3. Except as described below, the accounting policies applied are consistent with those of the annual financial statements for the period ended 31 January 2017 as described in those annual financial statements. STANDARDS, AMENDMENTS TO AND INTERPRETATION OF EXISTING STANDARDS NOT YET EFFECTIVE At the date of approval of these financial statements, the following standards, interpretations and amendments were issued but not yet mandatory for the Group and early adoption has not been applied: International Financial reporting Standards (IFRS) Recognition of Deferred Tax Assets for Unrealised Losses – Amendments to IAS 12 Disclosure Initiative – Amendments to IAS 7 IFRS 9 Financial Instruments IFRS 15 Revenue from Contracts with Customers Clarifications to IFRS 15 Revenue from Contracts with Customers Effective date of IFRS 15 – amendment to IFRS 15 Classification and Measurement of Share-based Payment Transactions – Amendments to IFRS 2 IFRS 16 Leases All other amendments to existing standards are not yet endorsed by the EU at the date of approval of these financial statements. As at the report date the Board are not in a position to report on the impact, if any, of the effect of adoption of the above standards. The Group have commissioned an independent report to assess the potential financial impact of the adoption of IFRS 15 on its consolidated statements. This assessment will focus in particular on the changes in revenue recognition specific to the treatment of software licences. The majority of the Group’s software licences are perpetual in nature and recognised in full on delivery; hence, the Group do not expect that the implementation of IFRS 15 will lead to a material difference in revenues reported in comparative periods. BASIS OF CONSOLIDATION The consolidated financial statements incorporate the financial statements of the Company and entities controlled by the Company (its subsidiaries) made up to 31 January each year. Control is achieved when the Company is exposed, or has rights, to variable 39 40 NOTES TO THE FINANCIAL STATEMENTS continued CATEGORY AND EXAMPLES ACCOUNTING TREATMENT revenue recognition is appropriate and consistent throughout the Group. When products are bundled together in one sales transaction, it is necessary to apply the recognition criteria to each separately identifiable component in order to reflect the substance of the transaction. The associated revenue is allocated between the constituent parts of the bundle on a relative fair value basis. When customers are offered discounts on bundled products and/or services, the combined discount is allocated to the constituent elements of the bundle, based upon market prices for each component. The Group reports revenue under five revenue categories and the basis of recognition for each category is described overleaf: returns from its involvement with the investee and has the ability to affect those returns through its power over the investee. On acquisition, the assets and liabilities and contingent liabilities of a subsidiary are measured at their fair values at the date of acquisition. Any excess of the cost of acquisition over the fair values of the identifiable net assets acquired is recognised as goodwill. All intra-group transactions, balances, income and expenses are eliminated on consolidation. 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. As permitted by section 408 of the Companies Act 2006 the company has elected not to present its own profit and loss account for the year. The Company reported a loss for the financial year ended 31 January 2018 of £1,939,000 (2017: loss of £834,000). REVERSE ACQUISITION ACCOUNTING The acquisition of Coms.com Limited in the year ended 31 January 2007 was accounted for as a reverse acquisition of RedstoneConnect plc by Coms.com Limited. The consolidated financial statements prepared following the reverse takeover were issued in the name of RedstoneConnect plc, but they are a continuance of the financial statements of Coms.com Limited. Therefore, the assets and liabilities of Coms.com Limited were recognised and measured in the consolidated financial statements at their pre-combination carrying values. The financial statements reflect the continuance of the financial statements of Coms.com Limited. The retained earnings and other equity balances recognised in these consolidated financial statements at the time of the acquisition were 41 the retained earnings and other equity balances of Coms.com Limited immediately before the business combination. Under reverse acquisition accounting: • an adjustment within shareholders’ funds is required to eliminate the cost of acquisition in the issuing Company’s books, and introduce a notional cost of acquiring the smaller issuing Company based on the fair value of its shares • an adjustment is required to show the share capital of the legal parent in the consolidated balance sheet rather than that of the deemed acquirer Both adjustments have been included in the reverse acquisition reserve. MERGER RESERVE The merger reserve is used when a share issue is undertaken and merger relief is available. The conditions for merger relief are when the consideration for shares in another company includes issued shares of the acquirer and on completion of the transaction, the company issuing the shares will have secured at least 90% equity holding in the acquiree. Following a capital re-organisation in the year this reserve was transferred to accumulated funds. REVENUE RECOGNITION Revenue is recognised when it is probable that future economic benefits will flow to the Group and those benefits can be measured reliably. Revenue is measured at the fair value of the consideration received or receivable and represents amounts received or receivable for goods and services provided in the normal course of business, net of discounts and VAT. The revenue recognition criteria as set out under IAS 18 is applied to each sales transaction, to ensure Systems integration projects Smart cabling & building installations Revenue from system integration projects is a mix of revenue from installation works along with revenue from the sale of hardware used in those projects. Revenue generated from the sale of hardware is recognised when delivered, whilst revenue from installation works is measured and recognised by reference to the stage of completion of the contract at the end of the reporting period. In order to measure the stage of completion, an assessment is made by comparing the proportion of contract costs incurred to date to the total expected costs to complete. Revenue from such projects are typically invoiced at various stages during the contract as specified in the contract. Any revenue recognised during the period but not invoiced at the end of the reporting period is classified as ‘amounts recoverable on contracts’ in the balance sheet, whilst any invoiced revenue at the end of the reporting period which relates to future periods is classified as deferred income on the balance sheet. Recurring revenue is revenue earned from customers for the provision of services, where risks and rewards are transferred to the customer over the term of a contract, with the customer getting the benefits of those services over that period. Recurring revenue is recognised on a straight-line basis over the term of the contract. Revenue invoiced at the end of the reporting period which relates to future periods is classified as deferred income on the balance sheet. Software licence fees as well as specified upgrades revenue are recognised when the risks and rewards of ownership relating to the licence have been transferred and it is probable that the economic benefits associated with the transaction will flow to the Group. This is deemed to be when the goods have been delivered to the customer, either physically or electronically, and when acceptance of such products has been demonstrated by the client. In the case of term software licences, revenue is recognised in full at the point of delivery to the customer as the risk and rewards of the licences have transferred at that point to the buyer and the Group does not retain managerial involvement or effective control over the software or the licences. Recurring revenue Managed services Maintenance and support contracts Software as a service DASaaS Software Perpetuity and term software licences Upgrades to licences Software related products Hardware Hardware revenue is recognised when the products have been delivered to the customer. Professional services Consultancy Installation Training Analysis and reporting Professional services revenue combines consultancy projects as well as ad-hoc specific consultancy services. Typically ad-hoc consultancy services include installation days, training days and analysis and reporting days. These type of services are purchased in advance by clients and used when required. Revenue from these services is recognised upon delivery of the services to the client. Consultancy projects revenue is measured and recognised by reference to the stage of completion of the contract at the end of the reporting period. 42 NOTES TO THE FINANCIAL STATEMENTS continued PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment are stated at cost of acquisition less accumulated depreciation and impairment losses. Depreciation is provided on a straight-line basis at rates calculated to write off the cost less the estimated residual value of each asset over its expected useful economic life. The residual value is the estimated amount that would currently be obtained from disposal of the asset if the asset were already of the age and in the condition expected at the end of its useful life. DEPRECIATION Property, plant and equipment are depreciated using the straight-line method based on estimated useful lives. The annual rates of depreciation for each class of depreciable asset across the Company are: Fixtures and fittings – 20-25% straight line Office equipment – 25-33.3% straight line Leasehold improvements – 20% straight line Freehold Land – 2% straight line The carrying value is assessed annually and any impairment is charged to the income statement. FINANCIAL ASSETS The Group classifies its financial assets into one of the categories below, depending on the purpose for which the asset was acquired. TRADE RECEIVABLES AND OTHER DEBTORS These are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. They arise principally through the provision of goods and services but also incorporate other 43 types of contractual monetary assets. They are initially recognised at fair value plus transaction costs that are directly attributable to their acquisition or issue, and are subsequently carried at amortised cost using the effective interest rate method, less provision for impairment. A provision for impairment is established when there is objective evidence that the Group will not be able to collect all amounts due according to the original terms of the receivables. CASH AND CASH EQUIVALENTS These include cash in hand, deposits held at call with banks and bank overdrafts. FINANCIAL LIABILITIES The Group’s financial liabilities are trade payables, bank borrowings and other financial liabilities. These are initially recognised at fair value and subsequently carried at amortised cost using the effective interest rate method. PROVISIONS A provision is recognised in the balance sheet when the Group has a present legal or constructive obligation as a result of a past event, and it is probable that an outflow of economic benefits will be required to settle the obligation. If the effect is material, provisions are determined by discounting the expected future cash flows at a pre-tax rate that reflects the current market assessment of the time value of money and, where appropriate, the risks specific to the liability. CORPORATION TAX The tax expense represents the sum of the tax currently payable and deferred tax. The tax currently payable is based on taxable profit for the year. Taxable profit differs from net profit as reported in the income statement because it excludes items of income or expense that are taxable or deductible in other years and it further excludes items that are never taxable or deductible. The Group’s liability for current tax is calculated using tax rates that have been enacted or substantively enacted by the balance sheet date. DEFERRED TAX Deferred tax is the tax expected to be payable or recoverable on differences between the carrying amounts of assets and liabilities in the financial statements and the corresponding tax bases used in the computation of taxable profit, and is accounted for using the balance sheet liability method. Deferred tax liabilities are generally recognised for all taxable temporary differences and deferred tax assets are recognised to the extent that it is probable that taxable profits will be available against which deductible temporary differences can be utilised. Such assets and liabilities are not recognised if the temporary difference arises from goodwill or from the initial recognition (other than in a business combination) of other assets and liabilities in a transaction that affects neither the tax profit nor the accounting profit. Deferred tax liabilities are recognised for taxable temporary differences arising on investments in subsidiaries and associates, and interests in joint ventures, except where the Group is able to control the reversal of the temporary difference and it is probable that the temporary difference will not reverse in the foreseeable future. The carrying amount of deferred tax assets is reviewed at each balance sheet date and reduced to the extent that it is no longer probable that sufficient taxable profits will be available to allow all or part of the asset to be recovered. Deferred tax is calculated at the tax rates that are expected to apply in the year when the liability is settled or the asset is realised. Deferred tax is charged or credited in the income statement, except when it relates to items charged or credited directly to equity, in which case the deferred tax is also dealt with in equity. OTHER INTANGIBLE ASSETS All intangible assets excluding goodwill are stated at cost less accumulated amortisation and any accumulated impairment losses. GOODWILL Goodwill represents the amount by which the fair value of the cost of a business combination exceeds the fair value of net assets acquired. Goodwill is not amortised and is stated at cost less any accumulated impairment losses. The recoverable amount of goodwill is tested for impairment annually or when events or changes in circumstance indicate that it might be impaired. Impairment charges are deducted from the carrying value and recognised immediately in the income statement. For the purpose of impairment testing, goodwill is allocated to each of the Group’s cash generating units expected to benefit from the synergies of the combination. If the recoverable amount of the cash generating unit is less than the carrying amount of the unit, the impairment loss is allocated first to reduce the carrying amount of any goodwill allocated to the unit and then to the other assets of the unit pro- rata on the basis of the carrying amount of each asset in the unit. An impairment loss recognised for goodwill is not reversed in a subsequent period. RESEARCH AND DEVELOPMENT Expenditure on research activities is expensed as incurred. Internally-generated intangible assets arising from the development are recognised only if all of the following conditions are met: • an asset is created that can be identified (such as software and new processes); • it is probable that the asset created will generate future economic benefits; • the development cost of the asset can be measured reliably; • an intention to complete the intangible asset and use or sell it; • ability to use or sell the intangible asset, and • the availability of adequate technical financial and other resources to complete the development and to use or sell the intangible asset. ACQUIRED INTANGIBLE ASSETS Following business combinations, the assets acquired are classified into tangible and intangible assets and fair values applied using the principles of IFRS 3. This leads to creation of intangible assets recognised on the balance sheet. AMORTISATION Internally-generated intangible assets are amortised on a straight- line basis over their estimated useful life. Where no internally- generated intangible asset can be recognised, development expenditure is recognised as an expense in the year in which it is incurred. IMPAIRMENT OF TANGIBLE AND INTANGIBLE ASSETS At each balance sheet date, the Group reviews the carrying amounts of its tangible and intangible assets to determine whether there is any indication that those assets have suffered an impairment loss. If any such indication exists, the recoverable amount of the asset is estimated in order to determine the extent of the impairment loss (if any). Where the asset does not generate cash flows that are independent from other assets, the Group estimates the recoverable amount of the cash-generating unit to which the asset belongs. An intangible asset with an indefinite useful life is tested for impairment annually and whenever there is an indication that the asset may be impaired. Recoverable amount is the higher of fair value less costs to sell and value in use. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset for which the estimates of future cash flows have not been adjusted. If the recoverable amount of an asset (or cash-generating unit) is estimated to be less than its carrying amount, the carrying amount of the asset (cash- generating unit) is reduced to its recoverable amount. An impairment loss is recognised as an expense immediately, unless the relevant asset is carried at a re-valued amount, in which case the impairment loss is treated as a revaluation decrease. Where an impairment loss subsequently reverses, the carrying amount of the asset (cash- generating unit) is increased to the revised estimate of its recoverable amount, but so that the increased carrying amount does not exceed the carrying amount that would have been determined had no impairment loss been recognised for the asset/cash-generating unit in prior years. A reversal of an impairment loss is recognised as income immediately, unless the relevant asset is carried at a revalued amount, in which case the reversal of the impairment loss is treated as a revaluation increase. INVENTORIES Inventories are stated at the lower of cost and net realisable value. Cost comprises materials and, where applicable, direct labour costs and those overheads that have been incurred in bringing the inventories to their present 44 NOTES TO THE FINANCIAL STATEMENTS continued location and condition. Cost is calculated using the weighted average method. Net realisable value represents the estimated selling price less all estimated costs of completion and costs to be incurred in marketing, selling and distribution. SHARE BASED PAYMENTS Where share options are awarded to employees, the fair value of the option is calculated at the date of grant and is subsequently charged to the income statement over the vesting period. Non-market vesting conditions are taken into account by adjusting the number of equity instruments expected to vest at the balance sheet date so that, ultimately, the cumulative amount recognised over the vesting period is based on the number of options that eventually vest. Market vesting conditions are factored into the fair value of the options granted. As long as all other vesting conditions are satisfied, a charge is made irrespective of whether the market vesting conditions are satisfied. The cumulative expense is not adjusted for failure to achieve a market vesting condition. Fair value is measured using an appropriate option pricing model. The expected life used in the model has been adjusted, based on management’s best estimate, for the effects of non- transferability, exercise restrictions and behavioural considerations. Where equity instruments are granted to persons other than employees, the consolidated income statement is charged with the fair value of goods and services received. FOREIGN CURRENCY The individual financial statements of each group entity are presented in the currency of the primary economic environment in which the entity operates (its functional currency). For the purpose of the consolidated financial statements, 45 the results and financial position of each entity are expressed in pounds sterling which is also the presentation currency for the consolidated and Company financial statements. The functional currency of the Company is pounds sterling. In preparing the financial statements of the individual entities, transactions in currencies other than the entity’s functional currency (foreign currencies) are recorded at the rates of exchange prevailing on the dates of the transactions. At each balance sheet date, monetary items denominated in foreign currencies are re- translated at the rates prevailing at the balance sheet date. Exchange differences arising on the settlement of monetary items and on the re-translation of monetary items are included in the income statement. INVESTMENTS IN SUBSIDIARIES Investments in subsidiaries are stated at cost less, where appropriate, provisions for impairment. LEASES Assets held under finance leases are initially recognised as assets of the Group at their fair value at the inception of the lease or, if lower, at the present value of the minimum lease payments. The corresponding liability to the lessor is included in the statement of financial position as a finance lease obligation. Lease payments are treated as a reduction of the lease obligation on the remaining balance of the liability. Finance expenses are recognised immediately in the income statement, unless they are directly attributable to qualifying assets, in which case they are capitalised in accordance with the Group’s general policy on borrowing costs. Contingent rentals are recognised as expenses in the periods in which they are incurred. Rental leases in which a significant portion of the risks and rewards of ownership are retained by the lessor are classified as operating leases. Payments made under operating leases (net of any incentives received from the lessor) are charged to the income statement. 3 CRITICAL ACCOUNTING ESTIMATES AND JUDGEMENTS The Group makes estimates and assumptions concerning the future, which may differ from the actual results. The estimates and assumptions that have a significant risk of causing a material adjustment to the carrying amount of assets and liabilities within the next financial year are set out below. REVENUE RECOGNITION Revenue and expenses on fixed price contracts are recognised using the percentage-of-completion method. Revenue, expenses, and ultimately profit are therefore recognised over the life of the activity of the contract. When the outcome of a contract cannot be reliably estimated then revenue can only be recognised to the extent that it is recoverable. When total expected costs exceed the total contract value the expected loss is recognised immediately. As revenue is therefore recognised on a percentage-of-completion basis which will be based on management’s best estimate it is an area that requires critical estimation and judgement. The amounts recognised in the balance sheet at the year-end in respect of the percentage- of-completion approach are included as follows; accrued revenue disclosed in note 19 under ‘amounts recoverable on contracts’; deferred cost of sales included in ‘prepayments’ disclosed in note 19; deferred income disclosed in note 21 under ‘deferred income’; and accrued cost of sales disclosed in note 21 under ‘accruals’. IMPAIRMENT OF GOODWILL The Group is required to test goodwill for potential impairment on an annual basis. The recoverable amount of goodwill relating to continuing activities is determined based on the value in use calculations which require the estimation of future cash flows and the selection of a discount rate. Actual outcomes of this calculation may vary; further information concerning issues affecting the carrying values is given in note 9. including future revenues and costs derived from these assets and the selection of an appropriate discount rate in order to calculate the present values of those cash flows. A detailed analysis of the valuation of assets acquired during the year is given in note 6. For material acquisitions, the Group employs expert valuers to assist in the calculation of the intangible assets. the Board have amended the segments by which it reports the business activities of the Group. In the opinion of the Directors the Group’s activities comprise three material business segments which reflect the profiles of the risks, rewards and internal reporting structures within the Group. ACQUIRED INTANGIBLE ASSETS 4 SEGMENTAL REPORTING On acquisition of a business, the Group is required to value the assets acquired and recognise intangible assets on the balance sheet. The valuation of these assets relies on various assumptions, The Group has undergone a period of transformation over the last two financial periods, with the disposal of the telecommunications business and the acquisition of Connect IB Ltd and Commensus Ltd. In order to support this, These are as follows: • Systems Integration • Managed Services • Software All activities were conducted within the United Kingdom and it is the opinion of the Directors that this represents one geographical segment. YEAR ENDED 31 JANUARY 2018 Systems Integration Managed Services Software Group Overhead Revenue Cost of sales Gross Profit Administrative expenses Adjusted EBITDA/(LBITDA)* Integration and transactional costs included within administrative expenses Depreciation Amortisation Share based payment charge Operating profit/(loss) Net finance costs Profit/(loss) before taxation Taxation Profit/(loss) after taxation £000 24,213 £000 18,023 (20,436) (12,883) 3,777 (3,164) 613 5,140 (2,573) 2,567 (12) (93) (59) (40) 409 (5) 404 1 405 (36) (252) (281) (50) 1,948 4 1,952 34 1,986 £000 5,338 (897) 4,441 (2,557) 1,884 (171) (47) (285) (10) 1,371 (23) 1,348 26 1,374 £000 - - - (1,857) (1,857) (218) (10) - (72) (2,157) (92) (2,249) - (2,249) Total £000 47,574 (34,216) 13,358 (10,151) 3,207 (437) (402) (625) (172) 1,571 (116) 1,455 61 1,516 46 NOTES TO THE FINANCIAL STATEMENTS continued YEAR ENDED 31 JANUARY 2017 Systems Integration Managed Services Software Group Overhead Revenue Cost of sales Gross Profit Administrative expenses Adjusted EBITDA/(LBITDA)* Integration and transactional costs included within administrative expenses Depreciation Amortisation Impairment of intangible assets Share based payment charge Operating profit/(loss) Net finance costs Profit/(loss) before taxation Taxation £000 24,586 £000 15,310 (20,502) (11,596) 4,084 (3,002) 1,082 3,714 (1,755) 1,959 (9) (122) (70) - (7) 874 (2) 872 606 (50) (281) (183) - (13) 1,432 (6) 1,426 6 1,432 £000 1,625 (199) 1,426 (1,083) 343 (77) (20) (118) (146) (1) (19) 3 (16) 23 7 £000 - - - (1,374) (1,374) 347 (1) - - (68) (1,096) (32) (1,128) - (1,128) Total £000 41,521 (32,297) 9,224 (7,214) 2,010 211 (424) (371) (146) (89) 1,191 (37) 1,154 635 1,789 Profit/(loss) after taxation 1,478 * profit for the period from continuing operations before net finance costs, tax, depreciation, amortisation, integration costs and transactional items, impairment charge and share based payments. 5 REVENUE Sale of goods Rendering of services Construction contract revenue Total revenue 2018 2017 £000 6,322 17,747 23,505 47,574 £000 1,108 16,071 24,342 41,521 6 ACQUISITIONS OF BUSINESSES On 9 May 2017 (prior to the Group’s share consolidation), RedstoneConnect acquired 100% of the share capital of Easter Road Holding Limited (“ERH”), and its 100% owned subsidiary Anders + Kern U.K. Limited (“A+K”), for a total consideration of £1.4 million. Deal costs of £0.1 million were incurred and recorded under integration and transactional items in the Income Statement. The transaction was satisfied fully by cash which was financed out of the placing of 433,333,334 new ordinary shares of 0.1 pence each at a price of 1.5 pence per share, raising £6.5 million, before expenses. The acquisition of ERH is in line with The book value of A + K net assets acquired and their fair values are summarised below: RedstoneConnect’s strategy of developing its core Redstone business through both organic and acquisitive growth. In addition, this acquisition offers significant synergies for the enlarged group in terms of potential new clients for RedstoneConnect and a channel to market for the Group product and services. Book Value Fair Value Adjustments Fair Value To Group £000 £000 £000 Intangible assets - 207 207 Property, plant and equipment 715 - 715 Current assets Current liabilities 307 - 307 (552) (66) (618) Non-current liabilities (266) - (266) Deferred tax liability (50) (40) (90) Total net assets 154 101 255 Fair value of net assets acquired 255 Goodwill 1,145 Total consideration 1,400 Cash Cash 1,400 1,400 Less: cash acquired (151) Total cash consideration net of cash acquired 1,249 47 48 The identifiable intangible assets and related deferred tax liability are as follows: Integration and transactional costs included within NOTES TO THE FINANCIAL STATEMENTS continued The fair value of the financial assets including trade receivables with a fair value and gross contractual value of £158,000. The best estimate at acquisition date of the contractual cash flows to be collected was £110,000. The goodwill arising from the acquisitions is not deductible for income tax purposes. Since acquisition date Anders + Kern (U.K.) Limited contributed £2,068,000 in revenue and £25,000 to the Group’s profit before taxation in the year. Had the acquisition occurred at the beginning of the year, the Group’s revenue would have been £48,400,000 and the Group’s profit before taxation would have been £1,487,000 for the year. The goodwill acquired represents the value of the sales channel within the acquired business as well as potential future synergies within the Groups sales function. Brand and customer relationships 207 Deferred tax liability (40) Total 167 Fair Value To Group £000 The Group has applied the ‘Income Approach’ valuation method to identify the above acquired intangible assets. The Income Approach focuses on the income-producing capability of the subject asset. The underlying premise of this approach is that the value of an asset can be measured by the present worth of the net economic benefit (cash receipts less cash outlays) to be received over the life of the subject asset. The steps followed in applying this approach include estimating the expected after-tax cash flows or profits attributable to the asset over its life and converting these after-tax cash flows to present value. This has been calculated using the Discounted Cashflow Methodology (“DCF”). The discounting process uses a rate of return, which accounts for both the time value of money and investment risk factors. Finally, the present value of the after-tax cashflows over the life of the asset is totalled to arrive at an indication of Fair Value of the asset. For the Customer relationships we have approached this by way of ascertaining the post-tax annual value of these contracts after applying an attrition rate based on historical trends. 7 DISCONTINUED OPERATIONS NOTES 2018 2017 £000 £000 Revenue Cost of sales Gross profit Administrative expenses Adjusted LBITDA* administrative expenses Depreciation Amortisation Impairment charge Operating (loss)/profit (Loss)/profit before tax Taxation (Loss)/profit for the year after tax (Loss)/profit for the year Total comprehensive (loss)/profit for the year attributable to equity holders Basic (loss)/earnings per share 4,5 8 10 10 9 10 13c - - - - - (7) - - - (7) (7) - (7) (7) (7) 14 (0.03p) - - - (1) (1) 318 - - - 317 317 (1) 316 316 316 1.97p * results for the period before net finance costs, depreciation, amortisation, integration costs and transactional items, impairment charge and share based payments. Net cash flow used in operating activities Net cash from financing activities Net cash flow for the period 2018 2017 £000 (3) - (3) £000 (9) (1) (10) During 2016 the Group disposed of the trade and assets of its Telephony and Media divisions. The subsidiaries that operated within those divisions were classed as discontinued in 2016, and provisions were made against the costs to settle supplier disputes within those entities as well as for intercompany balances owing to the Group. The £7,000 loss from discontinued operations during the year represents the deconsolidation of balance sheets, which includes provisions made in relation to supplier disputes. In 2017, all subsidiaries associated with those divisions were entered into a voluntary liquidation process, see note 30 for a full list of subsidiaries. Due to contractual obligations, one company is yet to be dissolved as at 31 January 2018. 49 50 NOTES TO THE FINANCIAL STATEMENTS continued 8 INTEGRATION, TRANSACTIONAL AND DECONSOLIDATION ITEMS Integration costs/(credits) Transactional costs Deconsolidation costs/(credits) 2018 2017 £000 300 137 7 444 £000 (380) 171 (318) (527) The integration costs include both employee and other restructuring costs such as provisions in respect of onerous contracts. Employee costs include salary, redundancy and other exit costs. In 2018, transactional items include the costs involved with the acquisition of Anders + Kern (U.K.) Limited, fees in respect of the share placing, share consolidation and capital reduction, whilst the 2017 transactional items related to the costs involved with the acquisition of Connect IB Limited and Commensus Ltd and fee’s in respect of the share placing. The deconsolidation credits in 2017 represent the unwinding of supplier provisions made in 2016 after settlement was reached and £70,000 was paid during the year in relation to those disputes. The integration, transactional and deconsolidation charge of £444,000 (2017: £527,000 credit) comprises £437,000 charge from continued operations (2017: £211,000 charge) and £7,000 from discontinued operations (2017: £318,000 credit). 9 IMPAIRMENT CHARGE The impairment charge in 2017 relates to research and development costs capitalised in prior periods. 10 OPERATING PROFIT Operating profit from all operations is arrived at after charging: NOTE 2018 2017 Cost of Inventory is recognised as an expense 10,377 13,572 £000 £000 Amortisation of intangibles Depreciation of property, plant and equipment Staff costs Share based payment charge (Gain)/loss on foreign exchange Rentals under operating leases Impairment charge Integration and transactional charge/(credit) Audit fees -audit of the Company’s financial statements -audit of the Company’s subsidiaries pursuant to legislation 16 17 11 11 9 8 625 402 19,445 172 (171) 650 - 444 47 50 371 424 16,359 89 51 437 146 (527) 44 35 NOTES 2018 2017 The analysis of administrative expenses in the consolidated income statement by nature of expense is as follows: Other intangible assets 16 £000 - - £000 146 146 • • • • Administrative staff costs £2,952,000 (2017: £2,607,000) Operating leases £650,000 (2017: £437,000) Depreciation and amortisation £1,027,000 (2017: £795,000) Other operating expenses £6,394,000 (2017: £4,169,000) OTHER INTANGIBLE ASSETS During 2017, the Board’s impairment review resulted in an impairment of £146,000 to development costs capitalised on the original OneSpace product. Following the acquisition of Connect IB and re-engineering of the product to be what it is today as a component of our cloud platform, the ‘end of life’ previous version of the OneSpace product was impaired in full. 51 52 NOTES TO THE FINANCIAL STATEMENTS continued 11 STAFF COSTS The average number of employees was: 13A TAXATION The Group tax charge for the year can be reconciled to the profit as disclosed in the statement of comprehensive income as follows: GROUP 2018 2017 GROUP 2018 2017 Sales Technical support Administrative Total employees Their aggregate remuneration comprised: Wages and salaries Share based payments (see note 32) Social security costs Pension costs Total remuneration Number Number 43 262 44 349 28 252 37 317 £000 £000 16,963 172 1,918 392 19,445 14,355 89 1,607 308 16,359 Of the above staff costs, £11,453,000 (2017: £11,180,000) were included in cost of sales in the consolidated income statement. 12 NET FINANCE COSTS GROUP 2018 2017 Net finance costs £000 116 £000 37 Profit before taxation Taxation Profit for the year after taxation Tax at the UK corporation tax rate of 19.17% (2017: 20.00%) Overseas tax payable Non-deductible expenses Unused tax losses not recognised as assets Recognition of previously unrecognised tax losses Research and development relief Utilisation of previously unrecognised tax losses Depreciation in excess of capital allowances Utilisation of tax losses and group relief Double taxation relief Over provided in prior years Taxation credit on continuing operations £000 1,455 61 1,516 279 - 72 56 (61) (224) (83) (39) (61) - - (61) £000 1,154 635 1,789 231 (6) 17 129 (624) (162) (112) 48 (146) (5) (5) (635) At 31 January 2018 the Group had estimated tax losses of £10,439,000 (2017: £9,730,000) to carry forward against future profits. These tax losses arose through historical trading in specific activities within the Group, and as such, the losses are ring-fenced and can only be utilised against future profits from the same trade. The directors have assessed the recoverability of these losses and anticipate utilisation of £3,600,000 of these tax losses against future profits, and as such the deferred tax asset of £617,000 has been recorded in the balance sheet at year end (2017: £617,000). In the 8 July 2015 Budget, the government announced a reduction in the Corporation Tax rate from 20% to 19% for the Financial Years beginning 1 April 2017, 1 April 2018 and 1 April 2019, with a further reduction from 19% to 18% for the Financial Year beginning 1 April 2020. In the 16 March 2016 Budget the Chancellor announced plans to further reduce the Corporation Tax rate to 17% for the Financial Year beginning 1 April 2020. This will reduce the Company’s future current tax charge accordingly. The deferred tax liability at 31 January 2018 has been calculated based on the rate of 17% substantively enacted at the balance sheet date. 53 54 NOTES TO THE FINANCIAL STATEMENTS continued 13B DEFERRED TAXATION The analysis of deferred tax assets and deferred tax liabilities is as follows: GROUP 2018 2017 Deferred tax assets Deferred tax liabilities Deferred tax asset Deferred tax assets comprised of: Tax losses Deferred tax liabilities arose on: Business combinations £000 617 (583) 34 617 (583) £000 617 (555) 62 617 (555) 13C TAXATION CHARGE The taxation credit for the year of £61,000 (2017: £635,000 credit) related to continued operations only and is in respect of the release of deferred tax liability in relation to amortisation of intangible assets recognised as a result of business combinations. 14 EARNINGS PER SHARE Earnings per share data is based on the Group profit/(loss) for the year and the weighted average number of ordinary shares in issue. On 5 June 2017, the Group held its AGM at which the Shareholders approved a share consolidation whereby every 100 ‘Existing Ordinary Share’ with a nominal value of 0.1 pence would be consolidated into one ‘New Issued Ordinary Share’ with a nominal value of 10 pence each. This resolution was approved by the shareholders at the AGM and subsequently the consolidation took effect on 6 June 2017. The ‘weighted average ordinary share in issue’ and ‘weighted average potential diluted shares in issue’ values used in the earning per share calculations have been restated to reflect the position had the share consolidation been in affect at those reporting dates. Continuing Discontinued Total 2018 Profit/(loss) for the year Adjustment to basic earnings/(loss): Integration and transactional costs Tax credit on integration and transactional costs Intangible asset amortisation Deferred tax credit on intangible asset amortisation Share based payment charge Deferred tax credit on share based payment charge Adjusted earnings attributable to owners of the Company £000 1,516 437 (84) 625 (120) 172 (33) 2,513 £000 (7) 7 (1) - - - - (1) Number of shares No. No. £000 1,509 444 (85) 625 (120) 172 (33) 2,512 No. Weighted average ordinary shares in issue 19,621,325 19,621,325 19,621,325 Weighted average potential diluted shares in issue 19,621,325 19,621,325 19,621,325 Earnings/(loss) per share Basic earnings/(loss) per share Diluted earnings/(loss) per share Adjusted earnings/(loss) per share Basic earnings/(loss) per share Diluted earnings/(loss) per share 7.72 pence (0.03) pence 7.69 pence 7.72 pence (0.03) pence 7.69 pence 12.81 pence (0.01) pence 12.80 pence 12.81 pence (0.01) pence 12.80 pence 55 55 56 NOTES TO THE FINANCIAL STATEMENTS continued Continuing Discontinued Total £000 £000 £000 Profit for the year 1,789 316 2,105 2017 Adjustment to basic earnings: Integration and transactional costs Tax credit on integration and transactional costs Intangible asset amortisation Deferred tax credit on intangible asset amortisation Impairment of intangible assets Tax credit on impairment of intangible assets Share based payment charge Deferred tax credit on share based payment charge (211) 40 371 (70) 146 (27) 89 (17) (318) 60 - - - - - - Adjusted earnings attributable to owners of the Company 2,110 58 Number of shares No. No. (529) 100 371 (70) 146 (27) 89 (17) 2,168 No. Weighted average ordinary shares in issue 16,068,962 16,068,962 16,068,962 Weighted average potential diluted shares in issue 17,685,269 17,685,269 17,685,269 Earnings per share Basic earnings per share Diluted earnings per share Adjusted earnings per share Basic earnings per share Diluted earnings per share 11.14 pence 1.97 pence 13.11 pence 10.12 pence 1.79 pence 11.91 pence 13.13 pence 0.36 pence 13.49 pence 11.93 pence 0.33 pence 12.26 pence 57 15 GOODWILL Cost At 31 January 2016 Additions At 31 January 2017 Additions At 31 January 2018 Accumulated impairment charge At 31 January 2017 At 31 January 2018 Carrying value at 31 January 2018 Carrying value at 31 January 2017 Carrying value at 31 January 2016 The carrying value of goodwill is allocated as follows: Redstone Converged Solutions Ltd Connect IB Limited Commensus Limited Anders + Kern (U.K) Limited Carrying value The carrying value of goodwill aligns to the segments as follows: GROUP £000 16,558 2,363 18,921 1,145 20,066 7,834 7,834 12,232 11,087 8,724 2018 2017 £000 8,724 835 1,528 1,145 12,232 £000 8,724 835 1,528 - 11,087 8,724 2018 2017 11,087 Systems Integration Managed Services Software Carrying value FAIR VALUE Goodwill on consolidation has been allocated for impairment testing purposes between the cash-generating units (“CGUs”) and these CGU’s aligned to the Group’s three business segments; Systems Integration, Managed Services and Software. On 29 May 2018 the Group announced the disposal of the Systems Integration and Managed Services divisions. The recoverable amount of the CGU’s aligned to those divisions are therefore based on ‘fair value less cost to sell’ calculations using the projected sales proceeds, which are payable in cash on completion, less associated costs. The recoverable amount of the CGU aligned to the Software division are based on ‘value in use’ calculations using cash flow projections approved by the Directors covering a three-year period and a terminal growth rate of 2% thereafter. The projections for the CGU aligned to the Software division are based on the assumption that the Group can realise projected sales. If the projected sales do not materialise there is a risk that the total value of the intangible assets shown above would be impaired. The Company, in its approach has based its projections on key assumptions of annualised incremental growth in revenue and cost of sales of 2% (2017: 2%) with 2% (2017: 2%) attributed to administrative costs. The calculation of residual value has utilised 2% growth rates (2017: 2%). Sensitivity analysis indicates that £000 1,549 9,218 1,465 12,232 £000 1,068 9,184 835 11,087 if revenues declined by 10% (2017: 10% decline) or administrative expenses increased by 10% (2017: 10% increase), this would not give rise to an impairment charge. A pre-tax discount rate of 13.6% (2017: 14.5%) has been used for the CGU aligned to the Software division. This rate takes into consideration the Group’s cost of capital, the expected rate of return and various risks relating to the CGU. At the year end, based on these assumptions there is no indication of impairment in the remaining goodwill. Sensitivity analysis indicates that if the pre-tax discount rate increased by 1% (2017: 1%) this would not give rise to an impairment charge. 58 NOTES TO THE FINANCIAL STATEMENTS continued 16 OTHER INTANGIBLE ASSETS 17 PROPERTY, PLANT AND EQUIPMENT GROUP COMPANY GROUP Development costs Other Intangible assets Total Other Intangible assets Plant & machinery Freehold land Leasehold improvements Fixtures & fittings Computer equipment Total £000 £000 £000 £000 £000 £000 £000 £000 £000 £000 Cost or valuation At 31 January 2016 Additions at acquisition Additions Impairment At 31 January 2017 Additions at acquisition Additions At 31 January 2018 Accumulated amortisation and impairment At 31 January 2016 Charge for the year Impairment At 31 January 2017 Charge for the year At 31 January 2018 Carrying value At 31 January 2018 At 31 January 2017 At 31 January 2016 132 - 367 (211) 288 - 1,232 1,520 - 67 (65) 2 152 154 1,366 286 132 305 2,925 138 - 3,368 207 176 3,751 128 304 - 432 473 905 2,846 2,936 177 437 2,925 505 (211) 3,656 207 1,408 5,271 128 371 (65) 434 625 1,059 4,212 3,222 309 During the year, the Board conducted a review of the carrying value of the Group’s intangible assets. As a result, the Group recorded a £nil (2017: £146,000 charge) impairment charge for the period, as detailed in note 9. - - - - - - - - - - - - - - - - - Cost At 31 January 2016 - Additions at acquisition - Additions - Disposals - At 31 January 2017 - Additions at acquisition 38 Additions 8 Disposals - At 31 January 2018 46 Accumulated depreciation and impairment At 31 January 2016 - Charge for the year - Disposals - At 31 January 2017 - Charge for the year 17 Disposals - At 31 January 2017 17 Carrying value At 31 January 2018 29 At 31 January 2017 - At 31 January 2016 - - - - - - 649 - - 649 - - - - 9 - 9 640 - - 456 - 138 (5) 589 - 37 - 626 151 97 (5) 243 124 - 367 259 346 305 79 - 57 - 136 11 5 (76) 76 25 18 - 43 36 (76) 3 73 93 54 1,055 342 156 (178) 1,375 17 345 - 1,737 777 309 (178) 908 216 - 1,124 613 467 278 1,590 342 351 (183) 2,100 715 395 (76) 3,134 953 424 (183) 1,194 402 (76) 1,520 1,614 906 637 During the year, the Directors concluded a review of the Group’s property, plant and equipment carrying values, specifically in light of the Board’s decision to vacate certain Group office locations. No impairment charge was deemed necessary to the remaining assets following the disposals during the year (2017: £nil). Subsequent to the acquisition of Anders + Kern (U.K.) Ltd in May 2017, as part of the integration within the Group the business moved its banking facilities from Clydesdale Bank to Barclays. At the time of acquisition, A+K had bank loans with Clydesdale amounting to £0.3 million. As part of the bank transition a £0.5 million mortgage, secured against the property owned by A+K, was put in place through Barclays and the funds used in part to repay the Clydesdale loans. The Barclays mortgage loan represents 69% of the freehold land value of £0.7 million, carries a coupon of 2.5% and is repayable over three years. Repayments are £0.01 million quarterly, and represent repayment of principal and interest. 59 60 NOTES TO THE FINANCIAL STATEMENTS continued 18 INVENTORIES 20 CASH AND CASH EQUIVALENTS GROUP COMPANY 2018 2017 2018 2017 GROUP 2018 2017 £000 224 £000 143 Bank current account Bank overdraft Total £000 £000 4,423 (980) 3,443 4,468 (1,273) 3,195 £000 29 - 29 £000 - (639) (639) The carrying amount of these assets approximates their fair value. Interest is variable and overdrafts are payable on demand. GROUP COMPANY 2018 2017 2018 2017 21 TRADE AND OTHER PAYABLES £000 £000 £000 £000 GROUP COMPANY 2018 2017 2018 2017 5,741 6,605 202 - 4 5,177 2,174 230 - - 12,552 7,581 - - 201 1,938 43 2,182 1,053 1,198 92 - - 201 1,059 - 1,260 259 1,519 £000 £000 £000 £000 Financial liabilities Trade payables Social security and other taxes Deferred income Accruals Deferred consideration Amounts owed to subsidiary company 5,847 1,492 731 2,475 50 - 4,765 1,601 987 2,915 50 - Total 10,595 10,318 185 36 - 149 50 1,863 2,283 259 379 - 429 50 2,087 3,204 The amounts owed to subsidiary companies are non-interest bearing and repayable on demand. The Directors consider that the carrying amount of trade and other payables equals their fair value. Finished goods 19 TRADE AND OTHER RECEIVABLES Current Financial assets Trade receivables Amounts recoverable on contracts Other receivables Amounts due from subsidiaries less impairment provisions Taxes and social security costs Non-financial assets Prepayments Total 13,605 8,779 2,274 The Directors consider that the carrying amount of trade and other receivables equals their fair value. Amounts recoverable on contracts includes contract costs plus recognised profits of £15,194,000 (2017: £7,227,000) less progress billings of £10,742,000 (2017: £6,104,000) and retention monies. 61 62 NOTES TO THE FINANCIAL STATEMENTS continued 25 SHARE CAPITAL AND RESERVES 22 FINANCIAL BORROWINGS During 2017 the Group secured a bank loan to fund the acquisition of Commensus Ltd. The Group’s banking arrangements are secured by a debenture over the assets of the principal operating businesses and cross guarantees. Details of the repayments are set out below: GROUP COMPANY 2018 2017 2018 2017 £000 638 1,588 2,226 £000 653 1,762 2,415 £000 588 1,175 1,763 £000 588 1,762 2,350 Amounts due within one year Amounts due after one year Total 23 PROVISIONS The Group had provisions as follows: GROUP £000 Dilapidations Balance at 1 February 2017 169 Provisions made during the year 9 Provisions reversed during the year (37) On 5 June 2017 the Group held its AGM, at which a share consolidation was approved whereby every 100 ‘Existing Ordinary Shares’ with a nominal value of 0.1 pence be consolidated into one ‘New Issued Ordinary Share’ with a nominal value of 10 pence. The share consolidation involved 2,078,479,485 shares of 0.1 pence in the issued share capital of the Company being consolidated into 20,784,795 ordinary shares of 10 pence each, effective 6 June 2017. At the same time, shareholders approved a Reduction of Capital which resulted in the following transactions: (a) the Company’s share premium account was transferred to the Company’s accumulated deficit in distributable funds; (b) the Company’s deferred shares were cancelled and the capital redemption reserve arising was transferred to the Company’s accumulated deficit; and (c) the Company’s merger reserve was transferred to the Company’s accumulated deficit. This resulted in the Company having an accumulated surplus in distributable funds of £12,410,292. The Directors believe that, subject to the future performance of the Group, this should give the Company the ability to make distributions to Shareholders and/or buy back its own ordinary shares if, the Directors consider that it is appropriate to do so. The Reduction of Capital was approved by the Courts and became effective on 28 June 2017. The movement in issued and fully paid ordinary share capital detailed below reflects these changes. 2018 2017 2018 2017 Number Number £000 £000 Allotted, called up and fully paid: Ordinary shares of 10p each 20,784,795 16,451,461 2,078 Deferred shares of 100p each Deferred shares of 10p each - - 1,271,440 7,707,140 - - 2,078 Balance at 31 January 2018 141 MOVEMENTS IN ISSUED AND FULLY PAID ORDINARY SHARES CAPITAL Current Non-current 141 - Balance at 31 January 2018 141 At 31 January 2018 the Parent Company carried provisions relates to property dilapidations of £55,000 (2017: £55,000). 24 DEFERRED TAX ASSET GROUP 2018 2017 Number Issue Price £000 4,333,334 £000 1.5p 4,333,334 16,451,461 20,784,795 Share Capital £000 433 - - 433 1,645 2,078 Share Premium £000 6,067 (260) (38,396) (32,589) 32,589 - Placing and open offer Placing fee Capital reduction Total movement In the year At 31 January 2017 At 31 January 2018 The share premium account comprises the amount subscribed for share capital in excess of nominal value. Deferred tax asset An analysis of the above asset is set out in note 13B ‘Deferred taxation’ 63 £000 34 £000 62 The merger reserve arose where equity shares were allotted on the acquisition of subsidiaries and represents the difference between the fair value attributed to the share allotment in excess of the nominal value of the shares allotted. The reverse acquisition reserve arose on the acquisition of Coms.com Limited which was accounted for as a reverse acquisition. Under IFRS the consolidated accounts of RedstoneConnect plc are treated as though they are a continuation of the consolidated accounts of Coms.com Limited. The reverse acquisition reserve represents the difference between the initial equity share capital of RedstoneConnect plc and the share capital and share premium of Coms.com Limited at the date of acquisition. The accumulated deficit represents the cumulative loss of the Group attributable to equity shareholders of RedstoneConnect plc. 64 1,645 1,271 771 3,687 Total £000 6,500 (260) Merger Reserve £000 - - (1,911) (40,307) (1,911) (34,067) 1,911 - 36,145 2,078 NOTES TO THE FINANCIAL STATEMENTS continued 26 RETIREMENT BENEFIT SCHEMES The Group operates a defined contribution company pension scheme for the Executive Directors and employees. The assets of the scheme are held separately from those of the Company. The annual contributions payable are charged to the income statement. For the period, pension costs incurred were £392,000 (2017: £308,000) with £188,000 (2017: £188,000) being included in cost of sales. 27 RELATED PARTY TRANSACTIONS Transactions between the Company and its subsidiaries, which are related parties, have been eliminated on consolidation and are not disclosed in this note. At 31 January 2018 the Parent Company had the following balances with subsidiaries: The transactions between the Parent and the subsidiaries during the year represent transfers of cash between the Companies. 28 COMMITMENTS Capital commitments There were no capital commitments at 31 January 2018 (2017: £nil). Operating lease commitments The Group leases office buildings and warehousing under licences/leases to occupy. FUTURE MINIMUM LEASE PAYMENTS 2018 2018 2017 2017 UNDER NON-CANCELLABLE OPERATING Property Vehicles Property Vehicles LEASES ARE AS FOLLOWS: 2018 2017 Within one year After one year but not more than 5 years £000 1,863 (1,938) £000 2,087 (1,059) 29 FINANCIAL INSTRUMENTS FINANCIAL INSTRUMENTS £000 593 394 987 £000 108 57 165 £000 597 771 1,368 £000 67 78 145 Directors’ fees at the year end. DIRECTORS’ TRANSACTIONS PRODUCTS AND SERVICES During the year the Company did not enter into trading activities with companies or partnerships connected with the Directors. Directors fees of £40,000 (2017: £38,000) were charged by Warspite Limited, a company connected to Diana Dyer Bartlett, in respect of services provided by Diana Dyer Bartlett; £nil (2017: £nil) was outstanding at the year end. Directors fees of £40,000 (2017: £38,000) were charged by VZ Limited, a company connected to Guy van Zwanenberg, in respect of services provided by Guy van Zwanenberg; £4,299 (2017: £4,211) was outstanding In common with other businesses, the Group is exposed to risks that arise from its use of financial instruments. This note describes the Group’s objectives, policies and processes for managing those risks and the methods used to measure them. Further quantitative information in respect of these risks is presented throughout these financial statements. The significant accounting policies regarding financial instruments are disclosed in the section ‘Financial assets and liabilities’ in note 2. There have been no substantive changes in the Group’s exposure to financial instrument risks, its objectives, policies and processes for managing those risks or the methods used to measure them from previous periods unless otherwise stated in this note. PRINCIPAL FINANCIAL INSTRUMENTS The principal financial instruments used by the Group, from which financial instrument risk arises, are as follows: GROUP COMPANY NOTES 2018 2017 2018 2017 Financial assets Financial liabilities 19 21 £000 12,552 10,595 £000 7,581 10,318 £000 2,182 2,283 £000 1,260 3,204 There were no material differences between the fair value and the carrying amounts of the Group’s financial instruments. Amounts owed to subsidiaries Amounts due from subsidiaries REMUNERATION OF COMPANY DIRECTORS During the year there were a number of transactions between the Company and Directors’ related parties. The fees below relate to the Directors of the company and are included in the ‘Directors and their interests’ section of the Director’s report. 65 66 NOTES TO THE FINANCIAL STATEMENTS continued FINANCIAL RISK MANAGEMENT The Board has overall responsibility for the determination of the Group’s risk management objectives and policies and, while 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 overall objective of the Board is to set polices that seek to reduce risk as far as possible without unduly affecting the Group’s competitiveness and flexibility. Further details regarding these policies are set out below. CREDIT RISK Credit risk is the risk that a counterparty to a transaction with the Group fails to discharge its obligations in respect of the instrument. The Group’s credit risk arises on (i) transactions with customers in connection with delivery of products or services (ii) cash and cash equivalents placed with banks and financial institutions. Management focuses strongly on working capital management and the collection of due invoices. Regular reports of overdue invoices are circulated amongst senior management and the Board reviews debtor days each month as part of the monthly reporting cycle. The risk with any one customer is limited by constant review of debtor balances and amounts receivable on contracts and action to resolve any issues preventing discharge of obligations. The ageing analysis of trade receivables of the Group is as follows: TOTAL NOT YET DUE 0-60 DAYS 60-90 DAYS >90 DAY 2018 2017 £000 5,712 5,218 £000 3,948 2,754 £000 1,136 1,093 £000 431 527 £000 197 844 30 FIXED ASSET INVESTMENTS Details of the Company’s subsidiaries at 31 January 2018 are as follows: Subsidiary Comunica Holdings Limited Redstone Converged Solutions Limited Connect IB Limited Commensus Limited Coms Media Limited Easter Road Holdings Limited Anders + Kern (U.K.) Limited Reference Place of incorporation Proportion of ownership interest % Proportion of voting power held % Nature Of Business 1 2 England England England England England England England 100 100 100 100 100 100 100 100 Holding company 100 100 100 100 100 100 100 100 Infrastructure Software Managed Services Media Dormant Infrastructure Dormant Dormant Connect Labs USA Incorporated USA 100 Coms Limited England 100 Reference 1 Redstone Converged Solutions Limited is a wholly-owned subsidiary of Comunica Holdings Limited Credit risk on cash and cash equivalents is reduced by placing funds with banks with high credit ratings. 2 Coms Media Limited is wholly owned by Coms Limited LIQUIDITY RISK Liquidity risk is the risk that the Group cannot meet financial liabilities when they fall due. The Group’s policy for managing liquidity risk is to ensure that the business has enough financial resources to carry out its day-to- day activities at any point in time. Management believes that the cash resources on hand, together with the profits of the business, more than cover the resources needed to meet the financial liabilities of the Group. INTEREST RATE RISK Interest-bearing bank loans and overdrafts are recorded at fair value, net of direct issue costs. Finance charges, including premiums payable on settlement or redemption and direct issue costs, are accounted for on an effective interest method and are added to the carrying 67 amount of the instrument to the extent that they are not settled in the period in which they relate. share issues or the issue of debt, the Group considers not only its short-term position but also its long-term operational and strategic objectives. CAPITAL The Group considers its capital to comprise its ordinary share capital, share premium account, reverse acquisition reserve and accumulated retained surplus as its capital reserves. A summary of the amounts of capital in each of these categories is shown in the consolidated statement of changes in equity on page 36. In managing its capital, the Group’s primary objective is to provide a return for its equity shareholders through capital growth. Going forward the Group will seek to maintain a gearing ratio that balances risks and returns at an acceptable level and also to maintain a sufficient funding base to enable the Group to meet its working capital and strategic investment needs. In making decisions to adjust its capital structure to achieve these aims, either through new There have been no other significant changes to the Group’s management objectives, policies and processes in the year nor has there been any change in what the Group considers to be capital. CURRENCY RISK The Group occasionally provides services in markets outside the UK. In most examples the material equity and financial liabilities are contracted in Sterling and hence there is no significant currency risk. In the event there is a material exposure to foreign currencies other than Sterling the Group will hedge its exposure, these events are continuously reviewed on an on-going basis. The registered office of the subsidiaries incorporated in England is: 40 Holborn Viaduct, London, EC1N 2PB. The registered office of the subsidiary incorporated in USA is: 874 Walker Road, Suite C Dover Kent 19904 USA 68 NOTES TO THE FINANCIAL STATEMENTS continued 31 OPTIONS AND WARRANTS The Company had the following share options and warrants outstanding at 31 January 2018: INVESTMENT IN SUBSIDIARIES Cost At 1 February 2016 Additions At 31 January 2017 Additions Investments written off At 31 January 2018 Accumulated amortisation and impairment At 1 February 2017 Investments written off At 31 January 2018 Carrying value At 31 January 2018 At 31 January 2017 At 31 January 2016 TOTAL £000 15,236 3,728 18,964 1,400 (5,989) 14,375 5,989 (5,989) - 14,375 12,975 9,247 The carrying value of the investment at the year-end represents investment in Redstone Converged Solutions Ltd, Connect IB Ltd, Commensus Ltd, and Anders + Kern (U.K.) Ltd all of which are wholly owned subsidiaries. During the year Exchangext Limited and Coms.com Limited were dissolved. The investments totalling £5,989,000 were fully impaired at the point of write off. Warrants Options Options Options Options 32 SHARE BASED PAYMENTS The Group operates three equity settled share based payments plans: an EMI scheme, an Unapproved share scheme and an all employee SAYE scheme. During the year the Group issued options over 159,367 ordinary shares under the Group’s SAYE scheme (2017: 236,775 under the Group’s SAYE scheme). Options granted in 2016 under the EMI and Unapproved share option scheme over a total of 731,271 and 578,260 ordinary shares respectively were outstanding at Date Granted Price Per Share Vesting Period Number 40,000 30,000 12 Jun 13 1 Nov 13 1,309,532 11 Dec 15 199,510 125,205 1 Dec 16 1 Feb 17 the year end. The EMI and Unapproved share option scheme incorporate the same general terms and conditions, with the EMI scheme benefiting from certain tax advantages. At 31 January 2018 there were warrants and employee share options outstanding over a total of 1,699,446 (2017: 1,616,306) ordinary shares. There were no options exercised during the year (2017: none). 500p 350p 92p 127p 127p 12 Jun 13 - 11 Jun 23 1 Feb 14 - 31 Jan 17 31 Dec 18 - 10 Dec 25 1 Dec 19 – 1 Jul 19 1 Feb 20 – 1 Sept 20 The outstanding options at the year-end have an exercise price in the range of 92 pence to 500 pence (2017: 92 pence to 500 pence). The weighted average remaining contractual life of the share options outstanding at the year-end is 6 years 7 months (2017: 7 years 10 months). The expense recognised for equity- settled share-based payments during the year to 31 January 2018 was £172,000 (2017: £89,000). 2018 2017 Outstanding at start of year Granted during the year Forfeited during the year Outstanding at end of year Exercisable at end of year Number 1,616,306 125,205 (42,065) 1,699,446 70,000 Weighted average exercise price 110p 127p 127p 110p 440p Number 1,385,532 236,774 (6,000) 1,616,306 70,000 Weighted average exercise price 110p 127p 350p 110p 440p 69 70 NOTES TO THE FINANCIAL STATEMENTS continued The fair value of the equity-settled share options granted is estimated as at the date of the grant using a Black Scholes model taking into consideration the terms upon which the options were granted. During the year ended 31 January 2018 there were options over 159,367 over ordinary shares granted (2017: 236,775). The following table lists the inputs into the model used to calculate the fair value. Grant date Option price Dividend yield Vesting period (years) Assumed volatility at date of grant Risk-free discount rate Expected life of option Fair value per option Share price at grant 1 February 2017 126.5p nil 3 years 79% 0.22% 3 years 88.9p 155.0p The expected volatility is based on historic volatility, adjusted for any expected changes to future volatility. The 1 February 2017 grant of share options were offered to eligible employees under the Save as You Earn Scheme (‘SAYE’). The SAYE scheme is a savings related share scheme whereby the employees can buy 10 pence ordinary shares in the Company for a fixed discounted price of 126.5 pence (a 20% discount to the average share price at the date of grant). The employee agrees to save a fixed monthly amount (capped at £500) over the three year term of the scheme, which at the end of the term can be used to buy shares at the fixed price. 33 SUBSEQUENT EVENTS On 29 May 2018 the Group announced the proposed disposal of the Systems Integration and Managed Services divisions to Excel I.T. Services Limited for a total consideration of £21.6 million in cash, of which £19.6 million is payable on completion, and a further £2.0 million payable on or before 30 November 2018, subject to completion of an already contracted project by Redstone Converged Solutions Ltd (“Additional Consideration”). In addition, intercompany loans to the divisions amounting to a further £1.4 million will be waived. The Additional Consideration will be retained by the Purchaser for working capital purposes relating to a project, which is due to complete in November 2018. In the event that the Additional Consideration is not sufficient to cover the ongoing working capital relating to the project, the Company may be required to provide additional working capital equal to any such deficit, subject to the terms of the Share Purchase Agreement. IF YOU WOULD LIKE TO FIND OUT MORE, CONTACT US: REDSTONECONNECT PLC t: 0207 148 1200 e: enquiries@redcplc.com w: redstoneconnectplc.com 71 72
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