Annual Report & Accounts 2018 TRACSIS PLC | 1 Contents Strategic Report Our Business at a Glance Strategy and Business Model Chairman and Chief Executive Officer’s Report (incorporating Business Review and Future Developments) Risk Management Key Performance Indicators Governance Board of Directors Directors’ Report Directors’ Remuneration Report Corporate Governance Statement of Directors’ Responsibilities Independent Auditor’s Report to the members of Tracsis plc Financial Statements Consolidated Statement of Comprehensive Income Consolidated Balance Sheet Consolidated Statement of Changes in Equity Consolidated Cash Flow Statement Notes to the Consolidated Financial Statements Company Balance Sheet Company Statement of Changes in Equity Notes to the Company Balance Sheet Group Information 2 3 4 9 13 14 15 18 22 24 25 29 30 31 32 33 68 69 70 77 2 | Annual Report and Accounts 2018 Strategic Report Our Business at a Glance Tracsis plc was founded in January 2004 to commercialise world class research and expertise developed in the field of transport scheduling and software optimisation technologies. In the subsequent years Tracsis has grown rapidly, diversified into related transport technologies, and successfully executed a strategy that has seen it make a total of ten acquisitions and three investments. Today, the Group specialises in solving a variety of data capture, reporting and resource optimisation problems along with the provision of a range of associated professional services. Tracsis’ products and services are used to increase efficiency, reduce cost and improve the operational performance and decision making capabilities for its customers. The Group has a blue chip client base which includes the majority of UK transport operators and the business also works extensively with large transport authorities and infrastructure operators such as Network Rail, the Department for Transport, Transport Scotland, Transport for London, local authorities and a variety of large engineering and infrastructure companies. The Group’s products and services comprise two principal offerings: • Rail Technology & Services o Software: Industry strength optimisation, rail management, planning and delay-repay software that cover a variety of asset and information classes, plus related hosting services; o Remote Condition Monitoring (RCM): Technology and reporting for critical infrastructure assets in real time, to identify problems and aid with preventative maintenance; o Professional Services: Consulting and technology related professional services across the operational and strategic planning horizon for traffic and transport customers and network operators • Traffic & Data Services: o Collection, collation and analytical services of traffic and passenger/customer data within rail, traffic and pedestrian rich environments; o Event planning, traffic management and parking for outdoor and sporting event markets. Tracsis has multiple offices in the UK which service our growing client base. The business drives growth both organically and via strategic acquisition and has made ten acquisitions since coming to market in 2007. Financial highlights for the year ended 31 July 2018: • Revenues increased 16% to £39.8m (2017: £34.5m) • Adjusted EBITDA* increased 11% to £9.4m (2017: £8.5m) • Statutory Profit before Tax after exceptional items of £8.3m (2017: £4.6m) • Cash balances of £22.3m (2017: £15.4m) • Full year dividend increased 14% to 1.6p per share (2017: 1.4p) *Reconciliation provided in note 31. TRACSIS PLC | 3 Strategic Report Strategy and Business Model Our vision for Tracsis is to become a leading provider of high value, niche technology solutions and services for the global traffic and transportations markets. Our business model remains focussed on specialist offerings that have high barriers to entry, are sold on a recurring basis under contract, and to a retained customer base that is largely blue chip in nature. Our vision is being achieved via the delivery of a three pronged strategy. 1) Manageable, industry-led organic growth through continual innovation of products and services and an excellent close working relationship with our customers. 2) International expansion into select overseas markets that share problems with the industries we currently serve. 3) Reinvesting company profits to fund further accretive acquisitions that meet with our disciplined investment criteria. We believe our strategy will allow Tracsis to continue the growth trajectory we have achieved since IPO in 2007 and deliver further significant value to shareholders in the short, medium and long term. Achievements made in the past year in respect of our business strategy can be summarised as follows: Strand of Strategy: Achievements 2017/8: 1 Organic further sales from existing products to UK • Ongoing delivery of a multi-million contract win for TRACS Enterprise with a major UK Train Operating Company • Renewal of a significant contract with a major global engineering company • High level of Software licence renewals achieved across the whole Group • Strong sales made to the Group’s key UK customer • New revenue stream developed for Passenger Counts business 2 Overseas Markets showing good promise and remain relatively untapped • Additional work secured from a key client in North America for the Group’s Remote Condition Monitoring technology, and further sales targeted Traffic Data business in Ireland continues positive trading • • Software sale in New Zealand delivered 3 Acquisitions • Completion of acquisitions of Travel Compensation Services Limited and Delay Repay Sniper Limited • Additional investments made into Vivacity Labs Limited and Nutshell Software Limited in the year • Numerous potential targets appraised in the year 4 | Annual Report and Accounts 2018 Strategic Report Chairman & Chief Executive Officer’s Report A welcome from Chris Cole, Non-Executive Chairman I am pleased to report that once again Tracsis has achieved another successful year of trading with good organic growth across all areas of the Group, record levels of revenue and profitability and further progress on a range of operational and strategic goals across both divisions of the business. Tracsis also completed two successful acquisitions of well run and profitable enterprises (TCS and DRS) which continues the established theme of considered, accretive M&A in line with our stated growth strategy. The culmination of this progress has translated into strong financial performance, and a business that is well positioned to take advantage of interesting and dynamic traffic and transport markets that are changing at a significant pace. On behalf of the Board, my sincere thanks go to all Tracsis employees for their continued hard work and dedication and I look forward to the coming year. Introduction The year ended 31 July 2018 was a further year of growth, with Group revenues close to £40m, an overall increase of 16%, with organic revenue growth, excluding acquisitions, of some 14% which was particularly pleasing. The impact of M&A activity was negligible given the specific timing of the Travel Compensation Services (TCS) and Delay Repay Sniper (DRS) transactions and we expect these enterprises to make a good contribution with a full year of trading and the chance to integrate and leverage their operations and technology across the wider Group. The Group’s financial position at year end remained strong, with cash balances in excess of £22m and no debt. Business overview Tracsis specialises in providing software, hosting services, consultancy and technology solutions to high value, mission critical challenges within the transport and traffic sector. The Group’s market offering can be broadly categorised into two distinct offerings: 1. Rail Technology & Services: Application software development and licensing, cloud-based data hosting, remote condition monitoring technology (RCM), and associated operational, implementation and strategic consulting services. The Group has a long pedigree in developing industrial strength application software that facilitates a variety of resource/asset optimisation that removes extraneous cost, increases network uptime and robustness and improves overall service delivery. Our software offering is primarily used by transport operators but also by infrastructure providers and maintainers. The Group also has a separate Remote Condition Monitoring (RCM) offering – hardware and software – that allows for real-time reporting on the status and health of critical infrastructure assets that can identify problems before they lead to failure and aid with preventative maintenance. Utilising our expertise in the sector, the Group’s professional services division provides consultancy and specialist advice across the operational and strategic planning horizons and play a key role in advising owning Groups, operators and a range of regulatory bodies. The recent acquisition of TCS and DRS has expanded our technology offering and moves Tracsis into a new and disruptive element of the passenger transport market that we believe will experience significant growth in the near term. The current focus of the Rail Technology & Services division is one of product expansion and improvement, customer upsell/cross-sell and the move to cloud based services. Our UK customer base continues to provide the best opportunities for organic growth by building on existing relationships and capabilities. 2. Traffic & Data Services: Data capture, analysis, categorisation and interpretation of traffic and pedestrian movement. Tracsis provides a means to help our clients understand demand for their services and in turn this allows for informed decision making and capital expenditure to ultimately aid with the planning, building and eventual day-to-day operations of a transport environment. Over a number of years, the Group has developed what is now the largest traffic and transport data capture and analytics business in the UK. Latterly this has been bolstered through the acquisition of SEP and the investment made into Citi Logik and Vivacity Labs. This division has now expanded its addressable markets from roads, rail and highways to include the pedestrian rich environments of major sporting and outdoor events and is now focusing on the advent of urban planning and traffic management for Smart Cities. The current focus of the Traffic & Data Services division is one of technology and process transition to undertake broader, more complex and ultimately more valuable projects for our clients. In moving this division to a stronger technology footing we expect to see a significant improvement in operating margin and good progress has been made in the past year in improving this metric. TRACSIS PLC | 5 Chairman & Chief Executive Officer’s Report continued The Group's mission is to help our clients solve complex, high value, data driven problems for which there is typically little by way of an alternative offering. Tracsis chooses to operate within the traffic and transport markets due to the abundance of complex problems where our expertise and products have clear and demonstrable benefit. These markets also exhibit several attractive traits for the Group – high barriers to entry due to domain knowledge, large and disparate data sets, well informed customers that understand the value/costs in the problems we solve, and a large pool of interesting M&A opportunities that can be difficult for external parties to access or understand without sector expertise. The Directors believe that the traffic, transport and pedestrian rich environments are particularly well positioned for consistent, long term, and sustainable growth and that the Group will capitalise on this via an expanding portfolio of products and services that have a common theme of ‘smart’ planning and ‘intelligent’ mobility whilst delivering the savings and improvements our customers have grown to expect. Financial summary The Group achieved revenues of £39.8m which was an increase of 16% on the previous year (2017: £34.5m). It is important to note that the vast majority of this increase was organic, with limited revenue from M&A given the specific timing of the TCS and DRS acquisitions. Adjusted EBITDA* of £9.4m was an increase of 11% on the previous year (2017: £8.5m), with Adjusted Profit** of £8.7m being 13% higher than the previous year (2017: £7.7m). Statutory Profit before Tax was £8.3m (2017: £4.6m), although this includes an exceptional £2.65m credit relating to contingent consideration in respect of the Ontrac acquisition which arose due to specific target milestones not being met, though it is important to note that Ontrac performed very well all the same. Statutory Profit before Tax net of this exceptional credit was £5.6m which shows a comparable improvement on the prior year of some 22%. All of the financial metrics show good growth on the previous year and a solid organic performance. At 31 July 2018, the Group’s cash balances had increased to £22.3m (2017: £15.4m), and cash generation continues to be strong. Overall cash balances increased by £6.9m in the financial year, after the acquisition of TCS and DRS (£1.7m cash outflow), the investments in Vivacity Labs and Nutshell amounting to £0.7m, and paying contingent consideration of £0.3m (in respect of the SEP year two earn out). Post period end, an amount of £2.1m was paid in respect of the Ontrac year two earn out which represented good trading and profitability. The business therefore generated net cash of c. £10m which once again demonstrates strong conversion of profits to cash. The Group continues to be debt free. As mentioned above, the statutory results include an exceptional credit of £2.65m in respect of the finalisation of the Ontrac contingent consideration, as required by IFRS3. This credit came about due to the inclusion of profit related performance targets within the deal structure for Ontrac. Whilst this business has performed very well in the past two years, the full contingent consideration was not maximised which gave rise to the credit. Needless to say, this is a non-cash exceptional credit and should be viewed as a non recurring item that is not part of underlying performance. * Earnings before finance income, tax, depreciation, amortisation, exceptional items, other operating income, and share-based payment charges and share of result of equity accounted investees – see note 31 for reconciliation ** Earnings before finance income, tax, amortisation, exceptional items, other operating income, share-based payment charges, and share of result of equity accounted investees – see note 31 for reconciliation Trading Progress and Prospects Rail Technology & Services Summary segment results: £19.0m (2017: £16.0m) +19% Revenue +5% (2017: £6.5m) £6.8m EBITDA * +4% (2017: £6.3m) Profit before Tax £6.6m Software (excluding £2.65m exceptional credit) Software sales, excluding Ontrac, were £7.7m (2017: £6.4m), which was a significant increase (20%) on the previous year, mainly due to the Group starting work on delivering a major multiyear contract with one of the largest Train Operating Companies in the UK for our TRACS Enterprise solution. Delivery of this programme has been challenging and rewarding, with good progress being made, and the implementation will continue throughout the rest of current financial year. In preparation for the delivery of larger technology engagements of this type in future, we have taken active steps to significantly expand our development team which following a period of extensive recruitment is now close to full strength. Going forwards we will continue to market TRACS Enterprise to the rest of the UK market and are confident of making progress in the months and years to come. Outside this major contract, all aspects of the software portfolio once again performed well, with excellent renewal rates for the TRACS, Compass, and Retail & Operations product suites. 6 | Annual Report and Accounts 2018 Chairman & Chief Executive Officer’s Report continued Ontrac Ontrac once again performed very well in the period and contributed revenue of £5.9m (2017: £5.3m), with the business completing a number of bespoke development projects for its key client, as well as benefitting from the high levels of recurring revenue that comes from its software licences and hosting services. The business continues to specialise in the digitisation, visualisation and streamlining of asset information and works closely with infrastructure clients and the railway supply chain on a number of key initiatives where shared information can result in significant improvements in data quality whilst removing extraneous processes and costs. Ontrac’s Rail Hub and eTrac products remain highly relevant to the UK rail market and the business continues to market these initiatives along with other innovations to their customer base. Ontrac performed well during the two year earn out period following acquisition by Tracsis in 2015 and additional performance related contingent consideration of £2.1m was paid to Ontrac shareholders post period end. Going forwards, Ontrac trading will now be included within the software element of the Rail Technology & Services division although we intend to maintain the Ontrac brand which is a well-known and reputable brand within its target market. Remote Condition Monitoring (RCM) Revenues of £3.0m were 15% higher than the previous year (2017: £2.6m), due to a combination of positive trading with the Group’s main UK rail infrastructure client, additional business generated from other UK supply chain customers and further sales made within North America. As intimated previously, we now have business development resources within the US and we have seen a lot of activity in the past year which has led to several pilots and trial engagements. Whilst it is true to say this activity has not yet translated into meaningful revenue, we continue to believe there is a significant latent opportunity with overseas RCM and our plans remain unchanged for the coming year. Within the UK, our busbar pilot remains ongoing, and we continue to work with our major client for this exciting project which has huge growth potential in the future if successful. Consultancy and Professional Services Consultancy and professional services revenue was £1.9m (2017: £1.7m) which was a good performance helped by high levels of franchise bid work. Tracsis supported a bidder for the West Coast Partnership, Southeastern, and also Wales & Borders rail operations. In addition, we picked up good work from other government bodies, a variety of other train operating companies (TOCs), and several multi-disciplinary engineering companies. Acquisitions: Travel Compensation Services (TCS) and Delay Repay Sniper (DRS) In the six months post acquisition, TCS and DRS contributed £0.5m of revenue (2017: £nil). The business continues to work on a number of significant, high profile tenders which if successful, will lead to further growth in the future. The business has come a long way in a short space of time, and the area in which it operates is ripe for technology disruption with the solution that TCS provides offering a compelling return on investment for operators to dramatically reduce their delay repay processing costs. The Directors are keen to grow this part of the Group and integration has begun and is well underway. Most recently, TCS launched its new compensation service for the corporate business travel market which we believe is a further growth area outside of TOC and passenger engagement. Traffic & Data Services Summary segment results: £20.8m (2017: £18.5m) +13% Revenue +28% (2017: £2.0m) EBITDA * £2.6m +46% (2017: £1.4m) Profit before Tax £2.0m Traffic Data and Passenger Counts Revenues of £14.5m were delivered in the year (2017: £12.8m), which reflect good organic growth in the year. Our traffic data business delivered multiple large and diverse projects including a significant and challenging project for Transport for London looking at City wide cycle assets (given rising demand and inherent safety concerns), and also renewed and expanded a major contract with a global engineering consultancy. General trading elsewhere remained solid, and margins were improved by the structural and technological changes that were started in the previous financial year and remain ongoing. The result of our efforts led to significant cost reductions, a refocussed management team, and a streamlined business unit that has produced a strong performance in the year. With regard to passenger counting, we also developed a piece of analysis software that allows for automatic train loading data (i.e. passenger counts) to be taken directly from trains currently in service. This information is highly relevant to TOCs when making revenue protection and performance decisions and requires a high degree of accuracy given the vagaries of timetable changes, delays and unit swaps which can lead to erroneous information being used. The Board is pleased to be are up and running with this software service within a short space of time, and also with the meaningful revenue achieved in the year under review. TRACSIS PLC | 7 Chairman & Chief Executive Officer’s Report continued Our traffic data offering continues to benefit from a sizeable market share within its relevant sector with a good and varied service offering to allow significant and diverse projects to be delivered. The strategy for this part of our business is unchanged – to transition what was historically a ‘project led, service business’ to a ‘product led, technology business’. In doing so the Group believes it can achieve enhanced operational efficiencies via increased use of technology and process improvements to improve both gross and net margin. Tracsis remains excited by the opportunity new technology poses and our investment into the Vivacity Labs ‘Felicity’ platform is showing real promise in terms of increasing our data analysis ability and transitioning to a more technology led approach. SEP SEP achieved revenues of £6.3m (2017: £5.7m) which was pleasing, and the business has made good progress in transitioning from an owner managed business to a division of a public company. The delivery during the peak summer months was strong as always, and this year also saw the continuation of clients using our Tracsis Live Traffic software, which provides event operators with a real time insight into traffic and pedestrian dynamics that comprises ANPR technology, together with application software developed internally by the Group’s development team The Group continues to work closely with one of the largest clubs in the English Premier League and looks forward to replicating our success within this market in the year ahead as we target other stadiums and fixed venue events. Overall, it was pleasing to see margins within the T&DS Division increasing compared to the previous year, which was a key objective set out at the start of the financial year. Dividends In February 2012, the Board implemented a progressive dividend policy and the Group intends to maintain this going forwards. An interim dividend of 0.7p per share for 2016/17 was paid in April 2018. A final dividend of 0.9p per share in respect of 2017/18 is proposed, to take the full year dividend to 1.6p. This represents a 14% increase on the previous year’s dividend of 1.4p per share. As always, the dividends remain well covered by the Group’s profitability and cash position, which supports its primary focus on growth via acquisition and through further development of new products and services. The Board is committed to maintaining the progressive dividend policy as the business continues to trade profitably and in line with its expectations. The dividend will be paid on 15 February 2019 to shareholders on the register on 1 February 2019. Acquisitions The Board was delighted to have completed the acquisitions of TCS and DRS during the year. Both businesses operate within the Delay Repay (DR) space which is a passenger compensation regime that exists within multiple transport environments for delayed or cancelled services. Within the rail sector, DR has existed for many years and is an obligation of most franchise operations. In recent years however, a combination of rising fares, poor service performance and government policy/intervention has raised the profile of DR which has in turn given rise to far greater volumes of passenger claims. This in turn has created several areas where Tracsis can get involved with the main one being assisting TOCs automatically process valid DR claims through an intelligent software engine that process claims at a far higher accuracy, with greater speed and lower cost than a human counterpart (similar in concept to the rest of Tracsis’ software suite). TCS and DRS were acquired with a deal structure that reflects the significant growth opportunities that exist within their markets, and hence have a large amount of contingent consideration potentially payable should the businesses grow significantly from their current levels. An amount, reflecting the current performance of each business was paid upfront, with the balance payable subject to various stretch targets being achieved. In the six months post acquisition, TCS and DRS delivered revenue of £0.5m, and a PBT of £0.1m (pre exceptional deal costs and amortisation). Numerous other acquisition opportunities were appraised during the year and the pipeline of opportunities remains as strong as always. The Group’s appetite for making further accretive acquisitions that meet with our stated investment criteria remains unchanged and we expect to complete further transactions in due course. Investments During the previous year, the Group announced that it had made a strategic investment of up to £1.3m into Vivacity Labs Limited ("Vivacity"), a provider of smart, hyperlocal data for smart cities and intelligent transport systems, in return for a 28.1% equity stake. To the end of July 2018, Tracsis has invested £1.0m of this total amount, in return for 23.3% of the equity, including an investment of £0.6m that was made in the current financial year. Tracsis held a warrant to subscribe for a further 4.8% of the enlarged share capital for an additional £0.3m which was exercised post period end. 8 | Annual Report and Accounts 2018 Chairman & Chief Executive Officer’s Report continued The Traffic & Data Services Division also entered into an Agreement to begin to adopt the Vivacity machine learning technology, which has the potential to significantly enhance our traffic analysis capability whilst also reducing the associated overhead costs of video processing. This work is still at a relatively early stage but is showing significant promise and will be a key focus for the Traffic Data team in the coming year. The Group continues to hold an investment in Citi Logik Limited and at year-end held 17.24%. Citi Logik was successful in securing further monies from Innovate UK during the year and has won multiple First of a Kind (FOAK) projects to demonstrate mobile network data analytics (i.e. utilising consumer mobile phone data to model traffic and pedestrian movements in near real time). Summary and Outlook In summary, 2017-18 was another good year for Tracsis on multiple fronts, with strong organic growth and financial performance coupled with operational progress and capped off by an exciting acquisition. The Group continues to mature and evolve both in terms of people, processes and technologies and remains well positioned for the future. Tracsis’ growth strategy remains unchanged: to deliver shareholder value both organically and through acquisition of complementary businesses, and by developing products and services that solve well recognised, high value problems that are poorly served by existing technology. The Group’s business model continues to focus on markets that generally have high barriers to entry, with contracts that are sold on a recurring/repeat basis, and to a retained customer base that is predominantly blue chip in nature. This strategy has worked well in the past to generate consistent growth and significant returns for shareholders and the Group believes it will continue to work well in the future. As always our thanks go to our staff, customers and other partners, and we look forward to sharing further success with them in the years ahead. Chris Cole, Chairman John McArthur, Chief Executive Officer 8th November 2018 TRACSIS PLC | 9 Strategic Report Risk Management Key risks The board carefully considers the risks facing the Group and endeavour to minimise the impact of those risks. The key risks are as follows: Description/Potential impact: Rail industry structure changes Area of Group impacted: Mitigation: Change in the year: present structure and The organisation of the rail industry in the UK may be changed in the future, or by a future government, impacting the Group. The Group continues to derive a significant amount of its results from the UK rail industry. 1. Rail Technology & Services of the Group’s Several products and services are expected to be still in demand regardless of the structure of the industry they have a clear value demonstrable and proposition some (though more than others) and return on investment case. The Group expects that demand for certain solutions will remain regardless ownership of structure. However, in certain circumstances, there is very against little politically driven changes or other structural changes. mitigation Competition The success of the Group may lead to increased competition, in particular in Traffic & Data Services where our products and services may be more easily replicated. The Group has a variety of product and service offerings and some are more exposed to more competition than others. 1. Traffic & Data Services 2. Rail Technology & Services Reduced government spending to subject pays pricing close The Group attention and to customer satisfaction for areas most strong competition and endeavours to make sure it is competitively appropriate. priced where Where possible, the Group tries to ensure its products and services have a clear value return on proposition and investment such the products and services are embedded within its customer base to reduce the exposure to new entrants. The Group restructured its Traffic & Data Services Division the previous year and saw the benefits of this during the year under review. that in The Group continues to derive revenues directly and indirectly from government commitment to invest and modernise transport infrastructure, and would be significantly these funding streams were public reduced. impacted if 1. Traffic & Data Services 2. Rail Technology & Services the exposure As the Group continues to grow and diversify its revenue streams, to government spending should reduce but will always be a risk for the Traffic & Data Services Division due to the nature of its customer base. For the Rail Technology Services Division, the Group attempts to ensure that its offerings have a clear return on investment and value proposition, to ensure demand will remain strong. & Increased given the recent rail industry challenges that have been well publicised in the press and the political headlines rail the that industry has received. No change in the year to the risk of overall competition across the Group. Increased in the year given the increased proximity to the ‘Brexit’ uncertainties this may potentially bring. and 10 | Annual Report and Accounts 2018 Risk Management continued Description/Potential impact: Area of Group impacted: Mitigation: Change in the year: Reliance on certain key customers The Group has a large number of customers but derives a significant amount of business from one key customer for a large part of its Rail Technology & Services offering. There can be no guarantee as to the timing or quantum of any potential future orders from this customer. the Group’s Traffic & Data Services division operates under a number of Framework Agreements with one large one in particular from whom a significant amount of revenue is obtained. Furthermore, Attraction and retention of key employees to The Group continues to have a number of key individuals. Skills and expertise in our markets are specialist and hard find or develop, and so further growth of the business may be restricted should key individuals leave the business or if the business is unable to attract and recruit new staff to deliver its growth plans. Delays to project delivery the previous year, During the Group was successful in securing a significant contract with a major UK Train Operating Company which has a number of deadlines implementation, along with for certain penalties the programme not be implemented in accordance with the contractual requirements and timeframes. should 1. Rail Technology & Services 2. Traffic & Data Services to certain engaging As the Group continues to grow and evolve, the exposure to and reliance on any one customer will reduce. Although the Group will always be exposed key customers, it manages this risk the by customers to understand their needs and respond to them in terms of changes to products or service the offerings relationship to ensure that its products and services are embedded with the customer as best as possible. proactively reinforce with to All parts of the Group. 1. Rail Technology & Services The Group believes it offers remuneration competitive packages, and also offers various incentive share schemes to staff in order to attract and retain high calibre share employees. schemes are designed such that employees are rewarded in the success of the Group, and are tied in for a period of time. Such delivery The Group has deployed an team, extensive following a major recruitment exercise, and has worked with the client to establish a project plan to ensure that the project has the best chance of successful delivery. No major change in the year. Total revenues from the Group’s largest customer were of Group 14% revenue (2017: 16%). Revenues in respect of the Group’s Remote Condition Monitoring accounted for around 8% (2017: 8%) of total Group revenue. continued The Traffic & Data Services Division to account for over half of overall Group revenues and derived (2017: £3.2m £2.5m) from one particular customer. Increased in the year for parts of the Group given two periods of contingent consideration ended. Increased in the year as delivery of this key contract progressed. Risk Management continued Description/Potential impact: Technological changes Area of Group impacted: 1. Traffic & Data Services 2. Rail Technology & Services The Group has a variety of product and service offerings which may be under threat should competitors develop rival technology or should more effective ways of doing things be discovered which make some of the Group’s services redundant. This could potentially to reduced levels of business. lead Customer pricing pressure Price pressure from customers may potentially result in margins being eroded over time if lower revenues are achieved than those which were achieved historically. 1. Traffic & Data Services 2. Rail Technology & Services TRACSIS PLC | 11 Mitigation: Change in the year: No change in the year. No change in the year. they The Group continues to invest in research and development for its technology products to ensure that they remain up to date and also relevant to the customer base, as it also takes feedback from its clients about what they require from the products. This helps to ensure that relevant. remain Some of the Group’s offerings are protected by customer Framework relationships, contractual Agreements, agreements also significant development costs, which provide protection even if new entrants may come along. The Group made a strategic investment in Vivacity the Labs Limited during previous year to the risks mitigate some of posed by technology to the Traffic & Data Services Division. to seek and cost The Group believes it operates a relatively lean structure in order to protect against pricing pressure, and is constantly searching for ways to maintain operating its base efficiently. When reviewing tenders and enquiries, pricing is submitted accordingly on the most favourable commercial terms. The Group is committed to customer satisfaction and offering a compelling on investment for its products with a clear value proposition, with the objective that the customer base will continue to take its products due to their quality and business case, with price being of less concern to them. ensuring return 12 | Annual Report and Accounts 2018 Risk Management continued Description/Potential impact: Area of Group impacted: Mitigation: Change in the year: Health & Safety The Group has a large number of employees operating at a variety of sites around the country. 1. Traffic & Data Services 2. Rail Technology & Services All parts of the Group All parts of the Group Brand reputation Any adverse publicity concerning the Group, or any of its subsidiary businesses may have an impact on the trading prospects future if Group’s adversely brand affected as a result of this. is Impact of EU Referendum to on leave The decision the European Union may have a potential the impact macroeconomic conditions in the UK, from which the Group derives the majority of its revenue and profit, which may impact on the Group’s customers, in particular those revenues derived from the public sector should this lead to in government any spending. has customers in Ireland and Sweden. The Group reduction No change in the year. No change in the year. Increased in the year as the the date for European Union gets closer. leaving employs The Group a dedicated Health & Safety team for its Traffic & Data Services division, and where necessary elsewhere engages the services of a specialist Health & Safety Advisor. Business unit heads report on Health & safety matters to the Board at every board meeting. Across the Group, there are a number of policies, procedures to and method statements provide mitigation against health & safety risk. The Board maintains regular dialogue with Operational staff and Heads of Department and so is made aware of any issues so that corrective action can be taken if necessary. Tracsis continues to operate within specific niche verticals of the traffic data and transport markets. The Group believes that its market offering and the sectors in which it operates provides it with good resilience to external influences although these remains vigilant of influences. TRACSIS PLC | 13 Strategic Report Key Performance Indicators 1. The Group’s main Key Performance Indicators (KPIs) assessed at Group Level are as follows: a. Sales Revenue and various Profit metrics versus budget, forecast and prior year b. Sales prospects and forecasts versus budget and prior year c. Cash balances, debtors and working capital requirements 2. Additional Key Performance Indicators specific to specific divisions: a. Rail Technology & Services i. Customer renewal rates for Software and new customer take up / product matrix ii. Staff utilisation and chargeability iii. Revenue by customer and by product type iv. Delivery of major orders versus customer requirements b. Traffic & Data Services: i. Customer enquiries and conversion rates, ii. Working capital tie up in debtors and work in progress and Capital expenditure iii. Number of events and event days, plus casual staff costs relative to revenue 50 40 30 20 10 0 10 8 6 4 2 0 25 20 15 10 5 0 Revenue - £m 32.6 34.5 39.8 22.4 25.4 Revenue 2014 2015 2016 2017 2018 Profit Before Tax - £m 8.3 4.2 4.5 4.0 4.6 Adjusted EBITDA - £m (see note 31 for reconciliation) 8.5 7.6 9.4 6.5 5.4 Adjusted EBITDA 2014 2015 2016 2017 2018 Basic Earnings Per Share - p 25.7 12.9 14.1 12.7 13.4 10 5 0 30 20 10 0 PBT Basic EPS 2014 2015 2016 2017 2018 2014 2015 2016 2017 2018 Cash - £m 22.3 13.3 11.4 15.4 8.9 Cash 2014 2015 2016 2017 2018 14 | Annual Report and Accounts 2018 Governance Board of Directors Executive Directors John McArthur (43) Chief Executive Officer John has been the Chief Executive Officer of Tracsis since the formation of the company in January 2004. Prior to this he worked as an investment manager with Techtran Group Limited which specialises in developing the commercial potential of intellectual property developed at the University of Leeds. John also worked for several years with Axiomlab Group plc, a technology venture capital company, having started his career with Arthur Andersen & Co. He holds a first class degree in Management Science from the University of Strathclyde in Glasgow. Max Cawthra (40) Chief Financial Officer Max joined Tracsis in September 2010 as Financial Controller and was promoted to the Board in August 2011. Max is a Chartered Accountant, having trained with Ernst & Young in Leeds. Prior to joining Tracsis, Max spent seven years at Persimmon plc in a variety of roles. Non-Executive Directors Current: Chris Cole (72) Independent Non-Executive Chairman Chris is Non-Executive Chairman of WSP Global Inc. (listed on the Toronto Stock Exchange), the successor to WSP Group plc, and Non-Executive Chairman of Redcentric plc. Up until September 2018, he was also Non-Executive Chairman of Ashtead Group plc. Chris brings significant general business and public market experience to the Board from his current and previous roles. Member of Audit Committee, Remuneration Committee and Nominations Committee. Lisa Charles-Jones (47) Independent Non-Executive Director Lisa, is a HR professional and worked for LSL Property Services plc for 13 years, which is listed on the Main Market of the London Stock Exchange, firstly as Head of HR and for the last ten years as Group HR Director. She is a member of the Chartered Institute of Personnel and Development and holds an MBA from the University of Durham. Lisa brings a wide range of HR experience to the Board. Member of Audit Committee, Remuneration Committee and Nominations Committee. Liz Richards (60) Independent Non-Executive Director Liz was previously Group Finance Director of Callcredit Information Group, from 2000 to 2015. Callcredit is a consumer data business, which grew from a start-up in 2000 to a £150m turnover business with over 1,000 employees. Following its significant growth and success, the business was sold in 2014 for circa £500m. Liz is a Chartered Accountant, having trained with EY, and currently is Non-executive Director and audit committee chair of LINK Scheme Ltd, the UK ATM network operator. Prior to Callcredit, Liz worked in a variety of finance roles. Liz brings extensive Finance experience to the Board. Member of Audit Committee, Remuneration Committee and Nominations Committee. Mac Andrade (42) Independent Non-Executive Director (appointed 1 November 2018) Mac was appointed to the Board on 1 November 2018. Mac has held various senior roles at FirstGroup Plc, Network Rail, Scottish & Southern Energy and National Grid. Mac brings extensive rail industry expertise and knowledge to the Board. Member of Audit Committee, Remuneration Committee and Nominations Committee. Other Directors serving in the year: John Nelson (71) Independent Non-Executive Director John served as a Non-Executive Director during the year and until his resignation on 1 November 2018, and brought extensive rail industry experience to the Board having been involved in the industry for 50 years. John served as a member of Audit Committee, Remuneration Committee and Nominations Committee during the year. TRACSIS PLC | 15 Governance Directors’ Report The directors present their report and the audited financial statements for the year ended 31 July 2018. Tracsis plc (‘the Company’) is a public limited company incorporated and domiciled in the United Kingdom and under the Companies Act 2006. The address of the Company’s registered office is Leeds Innovation Centre, 103 Clarendon Road, Leeds, LS2 9DF. The Company is listed on AIM, part of the London Stock Exchange. The Group financial statements were authorised for issue by the Board of Directors on 8 November 2018. Further information on the activities of the business, the Group strategy and an indication of the outlook for the business are presented in the Chairman and Chief Executive Officer’s Statement and the Strategy and Business Model sections of the report. Financial results Details of the Group’s financial results are set out in the Consolidated Statement of Comprehensive Income, other primary statements and in the Notes to the Consolidated Financial Statements on pages 29 to 67. Dividends The Directors have adopted a progressive dividend policy, subject to growth, profitability and cash position in the future. An interim dividend of 0.7p per share was paid in April 2018. The Directors propose a final dividend of 0.9p per share, subject to shareholder approval at the forthcoming Annual General Meeting. This will give a full year dividend of 1.6p per share (2017: 1.4p). Directors The directors who serve on the Board and on Board Committees during the year are set out on page 14. John Nelson resigned as a Director on 1 November 2018 and Mac Andrade was appointed as a Director on 1 November 2018. Under the Articles of Association of the Company, one third of the directors are subject to retirement by rotation at the forthcoming Annual General Meeting, notice of which accompanies this Report and Accounts. Accordingly Liz Richards and Lisa Charles-Jones retire by rotation and, being eligible, offer themselves for re-election. In relation to the re-elections of each of the directors, the Board is satisfied that each of these directors continues to be effective and to demonstrate commitment to the Company. Information in respect of directors’ remuneration is given in the Directors’ Remuneration Report on pages 18 to 21. Directors’ shareholdings Directors’ beneficial interests in the shares of the Company, including family interests, at 31 July 2018 and 2017 were as follows: 31 July 2018 31 July 2017 Number of shares % of issued share capital Number % of issued of share shares capital 957,783 3.38% 1,062,783 3.80% 168,022 0.59% 188,022 0.67% John McArthur Max Cawthra John Nelson (resigned 1 Nov 18) 125,824 0.44% 100,824 0.36% Chris Cole Lisa Charles-Jones Liz Richards Mac Andrade (appointed 1 Nov 18) 7,000 0.02% 7,000 0.02% - - - - - - - - - - - - None of the Directors had any interests in the share capital of subsidiaries. Further details of share options held by the directors are set out in the Directors’ Remuneration Report. 16 | Annual Report and Accounts 2018 Directors’ Report continued Substantial shareholdings At 7 November 2018, being the latest practicable date prior to the publication of this document, the Company has been advised of the following shareholdings of 3% or more in the issued share capital of Tracsis plc: Number of shares 3,050,909 Liontrust Asset Management 2,017,035 AXA Framlington 1,975,545 Unicorn Asset Management Ennismore Fund Management 1,905,616 Schroder Investment Management 1,573,684 1,318,304 Downing LLP 1,113,846 Investec Asset Management 1,014,526 Tellworth Investments 991,700 NFU Mutual 957,783 John McArthur % of issued shares 10.7% 7.1% 7.0% 6.7% 5.5% 4.6% 3.9% 3.6% 3.5% 3.4% Payment of suppliers It is the Group’s policy to pay suppliers in accordance with the terms and conditions agreed in advance, providing all trading terms and conditions have been met. All payments are made in the ordinary course of business and the Group expects to pay all supplier debts as they become due. Trade payable days for the Group at 31 July 2018 were 46 days (2017: 54 days). Research and development During the year the Group incurred £1,942,000 (2017: £1,214,000) of expenditure on research activity, which has been charged to the Income Statement. Financial instruments Details of the Group’s exposure to financial risks are set out in Note 26 to the financial statements. Employment policy It is the policy of the Group to operate a fair employment policy. No employee or job applicant is less favourably treated than another on the grounds of their sex, sexual orientation, age, marital status, religion, race, nationality, ethnic or national origin, colour or disability and all appointments and promotions are determined solely on merit. The Directors encourage employees to be aware of all issues affecting the Group and place considerable emphasis on employees sharing in its success through its employee share option scheme. Environment The Group adheres to all environmental regulations and has, where possible, utilised environmental-sustaining policies such as recycling and waste reduction. Significant Contracts One of the Group’s subsidiaries, MPEC Technology Limited, has a significant Framework Agreement with a major railway infrastructure provider, from which it has historically derived a significant amount of business. Tracsis Traffic Data Limited, another subsidiary company, has a significant contract with a major worldwide engineering consultancy company from which it has historically derived a significant amount of business. Ontrac Limited works extensively with a major railway infrastructure provider, from which it has historically derived a significant amount of business. SEP Limited has a number of significant, multi- year contracts with a number of key clients. TRACSIS PLC | 17 Directors’ Report continued Charitable donations The Group made charitable donations to various charities amounting to £nil during the year (2017: £5,029). No political donations were made. Auditor A resolution to appoint KPMG LLP will be proposed at the Annual General Meeting. Provision of information to auditor All of the current Directors have taken all steps that they ought to have taken to make themselves aware of any information needed by the Company’s auditor for the purposes of their audit and to establish that the auditor is aware of that information. The Directors are not aware of any relevant audit information of which the auditor is unaware. Third party indemnity provisions All directors benefit from qualifying third party indemnity provisions in place during the financial year and at the date of this report. By order of the Board Max Cawthra Company Secretary 8 November 2018 Leeds Innovation Centre 103 Clarendon Road Leeds LS2 9DF 18 | Annual Report and Accounts 2018 Governance Directors’ Remuneration Report Unaudited information: Tracsis plc, presents its remuneration report below. Remuneration committee The Remuneration Committee is described in the Report on Corporate Governance. The remuneration for each Executive Director is determined by the Remuneration Committee, which comprises the Non-Executive Directors. None of the committee members has any personal financial interest, other than as shareholders, in the matters to be decided. Service contracts It is the Group’s policy to enter into service contracts or letters of appointment with all Directors. Specific terms are: Executive Directors John McArthur Max Cawthra Non-Executive Directors John Nelson (resigned 1 Nov 18) Chris Cole Lisa Charles-Jones Liz Richards Mac Andrade (appointed 1 Nov 18) Date Commencement Unexpired of contract date term Notice period 21.11.07 20.09.10 21.11.07 28.04.14 25.08.16 01.09.16 01.11.18 01.01.04 Indefinite 6 months 20.09.10 Indefinite 3 months 21.11.07 Indefinite 3 months 28.04.14 Indefinite 3 months 25.08.16 Indefinite 3 months 01.09.16 Indefinite 3 months 01.11.18 Indefinite 3 months None of the service contracts or letters of appointment provide for any termination payments. Remuneration policy The remuneration packages for Directors and senior management have been structured so as to fairly compensate them for their contribution to the Group and to encourage them to remain within the Group, plus motivating them to deliver the Group’s strategy. The basic components of these packages include: Basic salary and bonus arrangements Each Director receives an annual salary or Directors’ fee for his/her services. These salaries are reviewed annually by the Remuneration Committee and take into account the financial performance of the Group and market conditions. The Group operates a bonus scheme. The Remuneration Committee is entitled to decide whether any bonuses are payable, and if so, what amounts should be granted to Executive Directors. External appointments The committee recognises that its directors may be invited to become executive or non-executive directors of other companies or to become involved in charitable or public service organisations. As the Committee believes that this can broaden the knowledge and experience of the directors to the benefit of the Group, it is the Group’s policy to approve such appointments provided that there is no conflict of interest and the commitment is not excessive. The director concerned can retain the fees relating to any such appointment. TRACSIS PLC | 19 Directors’ Remuneration Report continued Pensions and benefits in kind All staff, Executive Directors and senior management are entitled to participate in the stakeholder pension plan established by the Group. Benefits are provided to certain Executive Directors, including private health cover. The Group does not provide any company cars to any of its Directors. The Group makes employer pension contributions to the pension schemes of J McArthur and M Cawthra at a standard 5% of basic salary, in line with the level of contributions for other members of staff. During a previous financial year, John McArthur elected to take a reduction in basic salary in return for additional employers pension contributions and this was continued in the financial year under review. There was no additional cost to the Group in respect of this arrangement. Directors’ remuneration Directors’ remuneration for the year ended 31 July 2018 is set out below Executive Directors John McArthur Max Cawthra Non-Executive Directors John Nelson (resigned 1 Nov 18) Chris Cole Lisa Charles-Jones Liz Richards Charles Winward (resigned 17 Nov 16) Mac Andrade (appointed 1 Nov 18) Basic Pension Conts salary £000 £’000 196 148 344 23 50 28 28 - - 129 40 7 47 - - - - - - - Bonus £000 140 90 230 - - - - - - - Benefits in kind £000 - - - - - - - - - - Total 2018 £000 376 245 621 23 50 28 28 - - Total 2017 £000 231 151 382 23 50 25 25 8 - 129 131 Directors’ interests in shares options in the Executive Share Option Schemes At 1 August At Exercise Date from 31 July price Which 2017 Granted (Note b) Lapsed (Note a) Exercised 2018 pence Exercisable Expiry date Executive Directors John McArthur 81,227 44,342 (10,627) - 114,942 0.4p See note a/b Max Cawthra 54,152 - (7,085) - 47,067 0.4p See note a/b 15 Dec 2025 / 6 Jan 2027 / 28 Feb 2028 15 Dec 2025 / 6 Jan 2027 Non-Executive Directors John Nelson Chris Cole Lisa Charles- Jones Liz Richards Mac Andrade 25,000 - - - - - - - - - - - - - - (25,000) - - - - - - - - - - - - - - - - - - - - - - - - In accordance with Corporate Governance best practice, the Group will no longer be granting stock options to Non-Executive Directors in lieu of salary. This will ensure objectivity and independence within the Board’s decision making process. 20 | Annual Report and Accounts 2018 Directors’ Remuneration Report continued Directors’ interests in shares options in the Executive Share Option Schemes (continued) Note a Original conditions: '2015 LTIP' • John McArthur granted maximum of 38,182 options, Max Cawthra granted a maximum of 25,455 options • Full award is only payable should statutory diluted EPS for the year ending 31 July 2018 be 17.95p, and TSR versus the peer group is in the top quartile • Should statutory diluted EPS for the year ending 31 July 2018 be less than 14.95p, and TSR versus the peer group is less than the median, no options will be awarded • For scenarios between the above range, the options will be exercisable on a sliding scale basis in both instances For the year ended 31 July 2018, EPS (excluding the contingent consideration credit was 15.75p, which meant that part of the performance criteria that were linked to EPS were met, and TSR was between the median and upper quartile meaning that a part of the performance criteria that were linked to TSR were met. These items combined led to options vesting for John McArthur of 27,555 share options, with 10,627 lapsing, and options vesting for Max Cawthra of 18,370 options, with 7,085 lapsing. The options that have vested can be exercised from 15 December 2018 onwards, being three years from the grant date. Note b ‘2016 LTIP’ • John McArthur granted maximum of 43,045 options, Max Cawthra granted a maximum of 28,697 options • Full award is only payable should statutory diluted EPS for the year ending 31 July 2019 be 17.38p, and TSR versus the peer group is in the top quartile • Should statutory diluted EPS for the year ending 31 July 2019 be less than 14.38p, and TSR versus the peer group is less than the median, no options will be awarded • For scenarios between the above range, the options will be exercisable on a sliding scale basis in both instances • Any options vesting will be able to be exercised from 6 January 2020 onwards, being three years from the grant date ‘2017 LTIP’ • John McArthur granted maximum of 44,342 options • Full award is only payable should statutory diluted EPS for the year ending 31 July 2020 be 16.87p, and TSR versus the peer group is in the top quartile • Should statutory diluted EPS for the year ending 31 July 2020 be less than 13.87p, and TSR versus the peer group is less than the median, no options will be awarded • For scenarios between the above range, the options will be exercisable on a sliding scale basis in both instances • Any options vesting will be able to be exercised from 28 February 2021 being three years from the grant date The aggregate amount of pre-tax gains made by directors on the exercise of share options was £100,000 (2017: £nil). This is based on John Nelson’s exercise referred to above, where 25,000 options were exercised with a price of £1.75 per share and a market value at the time of exercise of £5.75 per share. No shares were disposed of. No directors received or were due to receive any shares under long term incentive schemes other than under the share options schemes set out above. TRACSIS PLC | 21 Directors’ Remuneration Report continued Performance graph The following graph shows the Company’s share price (rebased) compared with the performance of the FTSE AIM all-share index (rebased) for the period from 1 August 2017 to 31 July 2018. 140 130 120 110 100 90 80 Jul-17 Aug-17 Sep-17 Oct-17 Nov-17 Dec-17 Jan-18 Feb-18 Mar-18 Apr-18 May-18 Jun-18 Jul-18 Tracsis AIM All-Share Index The committee has selected the above indices because they are most relevant for a company of Tracsis’s size and sector. On behalf of the Board Lisa Charles-Jones Chair of the Remuneration Committee 8 November 2018 22 | Annual Report and Accounts 2018 Governance Corporate Governance Tracsis plc was listed on AIM on 27 November 2007. The Group recognises the importance of, and is committed to, high standards of corporate governance. Tracsis plc, as an AIM Company, adopts the Quoted Company Alliance’s Corporate Governance Code for Small and Mid-Size Quoted Companies 2013 (updated April 2018) (the “QCA Code”) which supports the Group’s long term success and strategy for growth. The Board There are currently 6 Board members, comprising two Executive Directors and four Non-Executive Directors. The role of the Non-Executive Directors is to bring independent judgement to Board deliberations and decisions. Chris Cole was appointed as a Non-Executive Chairman of the Board in 2014 to oversee Board meetings and field all concerns regarding the executive management of the Group and the performance of the Executive Directors. A biography of each Director appears on page 14. The Directors each have diverse backgrounds and a wide range of experience is available to the Group. The Board meets on a monthly basis to review the Group’s performance and to review and determine strategies for future growth. The Board has delegated specific responsibilities to its committees as set out below. Each of the Directors is subject to either an executive services agreement or a letter of appointment as set out on page 18. Tracsis plc’s Articles of Association require directors to retire from office and submit themselves for re-election on a one third rotation at each Annual General Meeting. Liz Richards and Lisa Charles-Jones will be retiring at the Annual General Meeting and submitting themselves for re-election. Board meetings and attendance Board meetings were held on 10 occasions during the year. The table below shows attendance at the meetings whether in person or by telephone. The Company Secretary records attendance at all board meetings including where attendance is by telephone conference. Board Nomination Remuneration Committee Meetings - - 2/2 2/2 2/2 2/2 Meetings Committee Meetings - - - - - - (total/poss) 10/10 10/10 10/10 10/10 9/10 10/10 Audit Committee Meetings - - 2/2 2/2 2/2 2/2 John McArthur Max Cawthra John Nelson Chris Cole Lisa Charles-Jones Liz Richards Board committees Nomination Committee The Nomination Committee comprises Chris Cole as Chairman, Mac Andrade (from 1 Nov 18), John Nelson (to 1 Nov 18), Lisa Charles-Jones and Liz Richards. The committee’s primary responsibilities are to make recommendations to the Directors on all new appointments of Directors and senior management, interviewing nominees, to take up references and to consider related matters. Remuneration Committee The Remuneration Committee comprises Lisa Charles-Jones as Chairperson, Mac Andrade (from 1 Nov 18), John Nelson (to 1 Nov 18), Liz Richards and Chris Cole as attendee. The committee’s primary responsibilities are to review the performance of the Executive Directors and to determine the terms and conditions of service of senior management and any Executive Director appointed to the Board (including the remuneration of and grant of options to any such person under any share scheme adopted by the Group). TRACSIS PLC | 23 Corporate Governance continued Audit Committee The Audit Committee similarly comprises Liz Richards as Chairperson, Mac Andrade (from 1 Nov 18), John Nelson (to 1 Nov 18), Lisa Charles-Jones and Chris Cole as attendee. The audit committee’s primary responsibilities are to monitor the financial affairs of the Group, to ensure that the financial performance of the Group is properly measured and reported on, and to review reports from the Group’s auditor relating to the accounting and internal controls. The significant issues considered by the Audit Committee relating to the Group’s financial statements include Revenue recognition, Intangible Assets, and Contingent Consideration, as detailed in note 4 to the financial statements. Non audit services In accordance with its policy on non audit services provided by the Group’s auditor, the Audit Committee reviews and approves the award of any such work. The Audit Committee refers to the Board for approval of any work comprising non audit services where the fees for such work represent more than 25% of the annual audit fee. During the year, KPMG LLP did not provide any non audit services (2017: nil). Auditor independence and conflicts of interest The Audit Committee continues to evaluate the independence and objectivity of the external auditor and takes into consideration all United Kingdom professional and regulatory requirements. Consideration is given to all relationships between the Group and the audit firm (including in respect of the provision of non audit services). The Audit Committee considers whether, taken as a whole, and having regard to the views, as appropriate, of the external auditor and management, those relationships appear to impair the auditor’s judgement or independence. The Audit Committee feels they do not. Internal audit The Audit Committee agrees that there should be no internal audit function of the Group at this time considering the size of the Group and the close involvement of senior management over the Group’s accounting systems. However, the Committee will keep this matter under review in the event that circumstances warrant an internal function for the Group in the future. Control procedures The Board approves the annual budget each year. This process allows the Board to identify key performance targets and risks expected during the upcoming year. The Board also considers the agreed budget when reviewing trading updates and considering expenditures throughout the year. Progress against budget is monitored via monthly reporting of actual financial performance against budget and prior year actual results. The Group has clear authority limits deriving from the list of matters reserved for decision by the Board including capital expenditure approval procedures. Relations with shareholders The Board recognises and understands that it has a fiduciary responsibility to the shareholders. The Chairman’s Statement and Chief Executive’s Statement include detailed analysis of the Group’s performance and future expectations. The Group’s website (www.tracsis.com) allows shareholders access to information, including contact details and the current share price. The Chief Executive is responsible for on-going dialogue and relationships with shareholders, alongside the Chief Financial officer and Chairman. The Annual General Meeting will be a platform for the Board to communicate with shareholders and the Board welcomes the attendance and participation of all shareholders. Going concern The Directors have a reasonable expectation that the Group has adequate resources to continue for the foreseeable future in operational existence and have therefore adopted the going concern basis in preparing the accounts. Independence of Non-Executive Directors The Directors consider all Non-Executive Directors to be independent. Board evaluation process The Board completed a formal evaluation process in a previous financial year which resulted in charges to the Board but has not completed a formal board evaluation process during the year. 24 | Annual Report and Accounts 2018 Statement of Directors’ Responsibilities in respect of the Annual Report and the Financial Statements 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. Under the AIM Rules of the London Stock Exchange they are required to prepare the Group financial statements in accordance with International Financial Reporting Standards as adopted by the European Union (IFRSs as adopted by the EU) and applicable law and they have elected to prepare the parent Company financial statements in accordance with UK accounting standards and applicable law (UK Generally Accepted Accounting Practice), including FRS 101 Reduced Disclosure Framework. Under company law the directors must not approve the financial statements unless they are satisfied that they give a true and fair view of the state of affairs of the Group and parent Company and of their profit or loss for that period. In preparing each of the Group and Parent company financial statements, the directors are required to: select suitable accounting policies and then apply them consistently; • • make judgements and estimates that are reasonable, relevant, reliable and prudent; • for the Group financial statements, state whether they have been prepared in accordance with IFRSs as adopted by the EU; for the parent Company financial statements, state whether applicable UK accounting standards have been followed, subject to any material departures disclosed and explained in the financial statements; assess the Group and parent Company’s ability to continue as a going concern, disclosing, as applicable, matters related to going concern; and use the going concern basis of accounting unless they either intend to liquidate the Group or the parent Company or to cease operations, or have no realistic alternative but to do so. • • • The directors are responsible for keeping adequate accounting records that are sufficient to show and explain the parent Company’s transactions and disclose with reasonable accuracy at any time the financial position of the parent Company and enable them to ensure that its financial statements comply with the Companies Act 2006. They are responsible for such internal control as they determine is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error, and have general responsibility for taking such steps as are reasonably open to them to safeguard the assets of the Group and to prevent and detect fraud and other irregularities. Under applicable law and regulations, the directors are also responsible for preparing a Strategic Report and a Directors’ Report that complies with that law and those regulations. The directors are responsible for the maintenance and integrity of the corporate and financial information included on the company’s website. Legislation in the UK governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions. TRACSIS PLC | 25 Independent auditor’s report to the members of Tracsis plc 1. Our opinion is unmodified We have audited the financial statements of Tracsis plc (“the Company”) for the year ended 31 July 2018 which comprise the Consolidated Statement of Comprehensive Income, the Consolidated and Company Balance Sheet, the Consolidated and Company Statement of Changes in Equity, the Consolidated Cash Flow Statement and the related notes, including the accounting policies in note 3. 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 July 2018 and of the Group’s profit for the year then ended; — the Group financial statements have been properly prepared in accordance with International Financial Reporting Standards as adopted by the European Union; — the parent Company financial statements have been properly prepared in accordance with UK accounting standards, including FRS 101 Reduced Disclosure Framework; and — the financial statements have been prepared in accordance with the requirements of the Companies Act 2006. Basis for opinion We conducted our audit in accordance with International Standards on Auditing (UK) (“ISAs (UK)”) and applicable law. Our responsibilities are described below. We have fulfilled our ethical responsibilities under, and are independent of the Group in accordance with, UK ethical requirements including the FRC Ethical Standard as applied to listed entities. We believe that the audit evidence we have obtained is a sufficient and appropriate basis for our opinion. Materiality: Group financial statements as a whole Coverage £260k (2017: £225k) 4.8% (2017: 4.9%) of Group profit before tax and contingent consideration credit 94% (2017:99%) of Group profit before tax Risks of material misstatement vs 2017 Event driven New: Business combinations accounting including valuation of acquired intangible assets and contingent consideration Recurring risks Revenue recognition – ◄► software contracts 26 | Annual Report and Accounts 2018 2. Key audit matters: our assessment of risks of material misstatement Key audit matters are those matters that, in our professional judgment, were of most significance in the audit of the financial statements and include the most significant assessed risks of material misstatement (whether or not due to fraud) identified by us, including those which had the greatest effect on: the overall audit strategy; the allocation of resources in the audit; and directing the efforts of the engagement team. These matters were addressed in the context of our audit of the financial statements as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters. In arriving at our audit opinion above, the key audit matters, in decreasing order of audit significance, were as follows including Acquisition accounting as a new risk for 2018. Business combinations accounting including valuation of acquired intangible assets and contingent consideration Acquired Intangible assets £2,916k Contingent consideration payable £1,200k Refer to page 36 (accounting policy) and page 42 (financial disclosures) Revenue Recognition – Software Contracts The risk Our response Subjective Valuation: Our procedures included: The Group has acquired Delay Repay Sniper Limited (DRS) and Travel Compensation Services Limited (TCS). The exercise to recognise intangible assets acquired at fair value involves a significant degree of judgement on the inputs used to value the intangibles, (such as useful economic life of assets and discount rate) and is a material estimate. The valuation of contingent consideration recognised at fair value involves a significant degree of judgement and is a material estimate. — Accounting analysis: We assessed the judgements taken around fair value adjustments having regard to relevant accounting standards. — Considering the separately identified intangible assets acquired through gaining an understanding of the business’ acquired and applying our professional experience and judgement; — Benchmarking assumptions: challenging the basis for the key assumptions used in the valuation such as discount rate and growth rates applied in the valuation of acquired intangibles having regard to internal and external data; and — Challenging the basis for key assumptions used in the valuation of contingent consideration such as forecast future performance and probability weightings. — Assessing transparency: considering the adequacy of the Groups disclosures in respect of business combinations accounting and contingent consideration payable. Complex Accounting Treatment Our procedures included: Software contracts are a key revenue stream for the Group. — Accounting analysis: We critically (Group and Parent) assessed the Group’s accounting policies in relation to revenue recognition with [We continue to perform procedures over [identify key audit matter]. However, following [explain why risk is less significant this Software revenue (Group) reference to the accounting standards; year], we have not assessed this as one of the most significant risks in our current year audit and, therefore, it is not separately £14,010k, (2017: £11,711k) identified in our report this year.] Deferred income (Group) £3,740k (2017: £4,086k) These contracts often contain multiple components resulting in complex revenue, and ultimately profit, recognition considerations. Software revenue (parent company) £3,500k (2017: £2,333k) Deferred Income (parent company) £423k (2017: £407k) Given the complexity there is a risk of error on the amount of revenue recognised or deferred on those contracts at year end. Refer to page 35 (accounting policy), page 44 and page74 (financial disclosures). — Test of Detail: We agreed a sample of sales to customer orders and sales invoices to determine whether the contractual terms such as timing and value had been taken into account in calculating revenue. — Expectation vs. Outcome: We performed a recalculation over a sample of deferred income at the year end to determine, based on our understanding of the transaction price and value of the deliverable if the correct deferred income amount had been recognised by reference to the contractual terms. TRACSIS PLC | 27 Group Materiality £260k (2017: £225k) £260k Whole financial statements materiality (2017: £225k) £214.6k Range of materiality at 13 (2017: 11) components £214.6k - £2.3k) (2017: £200k – £20k) 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 £260k (2017: £225k), determined with reference to a benchmark of Group profit before tax normalised to exclude this years contingent credit of £2,653k as disclosed in note 9.3. (of which it represents 4.6% (2017: 4.9%of profit before tax). Profit before tax and contingent consideration credit £5,622k (2017 profit before tax: £4,616k) Materiality for the parent company financial statements as a whole was set at £180.7k (2017: £184k), determined with reference to a benchmark of Company profit before tax normalised to exclude this years contingent consideration credit of £2,653k as disclosed in note 9.3, of which it represents 4.9% (2017: 4.7% of company profit before tax). We agreed to report to the Audit Committee any corrected or uncorrected identified misstatements exceeding £13k, in addition to other identified misstatements that warranted reporting on qualitative grounds. Of the Group's 13 (2017: 11) reporting components, we subjected 11 (2017: 9) to full scope audits for Group purposes. For the residual 2 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 components within the scope of our work accounted for the percentages illustrated opposite. The work on all 13 (2017: 11) components was performed by the Group team. The Group team performed procedures on the items excluded from normalised group profit before tax Profit before tax Group materiality £13k Misstatements reported to the audit committee £13k (2017: £11.3k) Group revenue Group profit before tax 94% (2017: 99%) 99 94 100% (2017: 100%) 100 100 Group total assets 100% (2017: 99%) 99 100 Key: Full scope for Group audit purposes 2018 Full scope for Group audit purposes 2017 Residual components 28 | Annual Report and Accounts 2018 4. We have nothing to report on going concern 7. Respective responsibilities We are required to report to you if we have concluded that the use of the going concern basis of accounting is inappropriate or there is an undisclosed material uncertainty that may cast significant doubt over the use of that basis for a period of at least twelve months from the date of approval of the financial statements. We have nothing to report in these respects. 5. We have nothing to report on the other information in the Annual Report The directors are responsible for the other information presented in the Annual Report together with the financial statements. Our opinion on the financial statements does not cover the other information and, accordingly, we do not express an audit opinion or, except as explicitly stated below, any form of assurance conclusion thereon. Our responsibility is to read the other information and, in doing so, consider whether, based on our financial statements audit work, the information therein is materially misstated or inconsistent with the financial statements or our audit knowledge. Based solely on that work we have not identified material misstatements in the other information. Strategic report and directors’ report Based solely on our work on the other information: — 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: — 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 Directors’ responsibilities As explained more fully in their statement set out on page 24, 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 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. David Morritt (Senior Statutory Auditor) for and on behalf of KPMG LLP, Statutory Auditor Chartered Accountants 1 Sovereign Square Sovereign Street Leeds LS1 4DA 8 November 2018 TRACSIS PLC | 29 Financial Statements Consolidated Statement of Comprehensive Income for the year ended 31 July 2018 Revenue Cost of sales Gross profit Administrative costs Adjusted EBITDA* Depreciation Adjusted profit ** Amortisation of intangible assets Other operating income Share-based payment charges 2018 2017 Continuing operations Acquisitions Notes £000 £000 Total £000 £000 6 39,370 464 39,834 34,486 (16,623) - (16,623) (15,279) 22,747 464 23,211 19,207 (14,211) (516) (14,727) (14,491) 6 14 15 9.4 8 9,311 (758) 8,553 114 (2) 112 9,425 (760) 8,665 8,494 (799) 7,695 (1,674) (100) (1,774) (1,674) 197 (1,193) 17 - 214 134 (1,193) (1,300) Operating profit / (loss) before exceptional items 5,883 29 5,912 4,855 Exceptional items 9.3 2,653 (81) 2,572 (139) Operating profit / (loss) Finance income Finance expense Share of result of equity accounted investees Profit / (loss) before tax Taxation Profit / (loss) after tax and total comprehensive income Earnings per ordinary share Basic Diluted 8,536 (52) 8,484 4,716 9 10 11 16 19 (27) (201) 8,327 12 (1,004) 7,323 - - - (52) (25) (77) 19 (27) (201) 15 (38) (77) 8,275 4,616 (1,029) (901) 7,246 3,715 13 13 25.97p 25.11p (0.27p) (0.26p) 25.70p 24.85p 13.36p 12.93p * Earnings before finance income, tax, depreciation, amortisation, exceptional items, other operating income, and share-based payment charges and share of result of equity accounted investees – see note 31. ** Earnings before finance income, tax, amortisation, exceptional items, other operating income, share-based payment charges, and share of result of equity accounted investees – see note 31. The accompanying notes form an integral part of these financial statements 30 | Annual Report and Accounts 2018 Financial Statements Consolidated Balance Sheet as at 31 July 2018 Company number: 05019106 Non-current assets Property, plant and equipment Intangible assets Investments – equity Loans due from associated undertakings Investments in equity accounted investees Deferred tax assets Current assets Inventories Trade and other receivables Cash and cash equivalents Total assets Non-current liabilities Hire-purchase contracts Contingent consideration payable Deferred tax liabilities Current liabilities Hire-purchase contracts Trade and other payables Contingent consideration payable Current tax liabilities Total liabilities Net assets Equity attributable to equity holders of the company Called up share capital Share premium reserve Merger reserve Retained earnings Total equity Note 14 15 16 16 16 22 17 19 18 21 22 18 20 21 23 24 24 24 2018 £000 2,181 26,223 250 250 972 602 2017 £000 2,461 24,458 675 187 111 457 30,478 28,349 253 7,329 22,329 29,911 60,389 121 1,100 3,875 5,096 157 10,316 2,165 546 13,184 18,280 42,109 113 6,243 3,160 32,593 42,109 239 8,480 15,350 24,069 52,418 230 - 3,718 3,948 320 8,842 5,041 620 14,823 18,771 33,647 112 5,948 3,010 24,577 33,647 The financial statements on pages 29 to 67 were approved and authorised for issue by the Board of Directors on 8 November 2018 and were signed on its behalf by: John McArthur – Chief Executive Officer Max Cawthra – Chief Financial Officer The accompanying notes form an integral part of these financial statements Financial Statements Consolidated Statement of Changes in Equity TRACSIS PLC | 31 Share Capital £’000 Share Premium £’000 Merger reserve £’000 Retained Earnings £’000 Total £’000 110 5,622 3,010 19,924 28,666 - - - - 2 - - - - 326 5,948 - - - - - 3,715 3,715 (362) 1,300 - 3,715 3,715 (362) 1,300 328 3,010 24,577 33,647 At 1 August 2016 Profit for the year Total comprehensive income Transactions with owners: Dividends Share based payment charges Exercise of share options At 31 July 2017 112 At 1 August 2017 Profit for the year Total comprehensive income Transactions with owners: Dividends Share based payment charges Exercise of share options Shares issued as consideration for business combinations At 31 July 2018 112 5,948 3,010 24,577 33,647 - - - - 1 - - - - - 295 - - - - - - 150 7,246 7,246 (423) 1,193 - - 7,246 7,246 (423) 1,193 296 150 113 6,243 3,160 32,593 42,109 Details of the nature of each component of equity are set out in Notes 23 and 24. The accompanying notes form an integral part of these financial statements 32 | Annual Report and Accounts 2018 Financial Statements Consolidated Cash Flow Statement for the year ended 31 July 2018 Operating activities Profit for the year Finance income Finance expense Depreciation Loss on disposal of plant and equipment Non cash exceptional items Other operating income Amortisation of intangible assets Share of result of equity accounted investees Income tax charge Share based payment charges Operating cash inflow before changes in working capital Movement in inventories Movement in trade and other receivables Movement in trade and other payables Cash generated from operations Interest received Interest paid Income tax paid Net cash flow from operating activities Investing activities Purchase of plant and equipment Proceeds from disposal of plant and equipment Acquisition of subsidiaries (net of cash acquired) Equity investments and loans to investments Repayment of loans from investments Receipt of deferred consideration Payment of contingent consideration Net cash flow used in investing activities Financing activities Dividends paid Proceeds from exercise of share options Hire purchase repayments Net cash flow used in from financing activities Net increase in cash and cash equivalents Cash and cash equivalents at the beginning of the year Cash and cash equivalents at the end of the year Notes 10 11 14 9.3 9.4 15 16 12 8 10 11 14 5 5 16 21 30 18 2018 £000 7,246 (19) 27 760 17 (2,653) (214) 1,774 201 1,029 1,193 9,361 (14) 1,259 1,411 12,017 19 (27) (1,407) 10,602 (509) 53 (1,714) (700) - - (323) (3,193) (423) 296 (303) (430) 6,979 15,350 22,329 2017 £000 3,715 (15) 38 799 12 139 (134) 1,674 77 901 1,300 8,506 32 (2,314) 488 6,712 15 (38) (664) 6,025 (558) 56 - (550) 111 300 (1,109) (1,750) (362) 328 (276) (310) 3,965 11,385 15,350 The accompanying notes form an integral part of these financial statements TRACSIS PLC | 33 Financial Statements Notes to the Consolidated Financial Statements 1 Reporting entity Tracsis plc (the ‘Company’) is a company incorporated in the United Kingdom. The consolidated financial statements of the Company for the year ended 31 July 2018 comprise the Company and its subsidiaries (together referred to as the ‘Group’). 2 Basis of preparation (a) (b) (c) (d) Statement of compliance The Group consolidated financial statements have been prepared in accordance with International Financial Reporting Standards as adopted by the EU (‘IFRSs’) and applicable law. The Company has elected to prepare its parent company financial statements in accordance with FRS 101. These parent company statements appear after the notes to the consolidated financial statements. Basis of measurement The Accounts have been prepared under the historical cost convention. Presentation currency These consolidated financial statements are presented in sterling. All financial information presented in sterling has been rounded to the nearest thousand. Use of estimates and judgements The preparation of financial statements in conformity with IFRSs requires management to make judgements, estimates and assumptions that affect the application of policies and reported amounts of assets and liabilities, income and expenses. The estimates and associated assumptions are based on historical experience and various other factors that are believed to be reasonable under the circumstances, the results of which form the basis of making the judgements about carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates. The estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the period in which the estimate is revised if the revision only affects that period, or in the period of the revision and future periods, if the revision affects both current and future periods. Judgements made by management in the application of IFRSs that have a significant effect on the Group financial statements and estimates with a significant risk of material adjustment in future years are disclosed in Note 4. (e) Accounting developments The Group and Company financial statements have been prepared and approved by the directors in accordance with International Financial Reporting Standards as adopted by the EU (“Adopted IFRSs”). The accounting policies have been applied consistently to all periods presented in the consolidated financial statements, unless otherwise stated. Certain new standards, amendments and interpretations to existing standards have been published that are mandatory for the Group’s accounting period beginning on or after 1 August 2017. The following new standards and amendments to standards are mandatory and have been adopted for the first time for the financial year beginning 1 August 2017: • Disclosure Initiative (Amendments to IAS 7) • Recognition of Deferred Tax Assets for Unrealised Losses (Amendments to IAS 12) • Annual Improvements to IFRSs 2014-2016 Cycle (Amendments to IFRS 12) These standards have not had a material impact on the Consolidated Financial Statements. The following new or revised standards and interpretations issued by the International Accounting Standards Board (IASB) have not been applied in preparing these accounts as their effective dates fall in periods beginning on or after 1 August 2018. 34 | Annual Report and Accounts 2018 Notes to the Consolidated Financial Statements continued 2 Basis of preparation (continued) Effective for the year ending 31 July 2019 • • • IFRS 2 ‘Share-based payment’ – amendments clarifying how to account for certain types of share-based payment transactions IFRS 9 ‘Financial instruments’ – introduces new requirements for classification and measurement of financial assets and financial liabilities, impairment methodology and hedge accounting. IFRS 15 ‘Revenue from contracts with customers’ – provides a single model for measuring and recognising revenue arising from contracts with customers, unless the contracts are in the scope of other standards, such as IAS 17. It supersedes all existing revenue requirements in IFRS. • Annual Improvements to IFRSs 2014-2016 Cycle (Amendments to IFRS 1 and IAS 28) Effective for the year ending 31 July 2020 • IFRS 16 ‘Leases’ – provides a single lessee accounting model, specifying how leases are recognised, measured, presented and disclosed IFRS 15 “Revenue from Contracts with Customers” The Group is required to adopt IFRS 15 “Revenue from Contracts with Customers” from 1 August 2018. IFRS 15 establishes a comprehensive framework for determining whether, how much and when revenue is recognised. It replaces existing revenue recognition guidance, including IAS 18 “Revenue” and IAS 11 “Construction Contracts”. The principles in IFRS 15 must be applied using the following five step model: Identify the contract(s) with a customer Identify the performance obligations in the contract 1. 2. 3. Determine the transaction price 4. Allocate the transaction price to the performance obligations in the contract 5. Recognise revenue when or as the entity satisfies its performance obligations Revenue is recognised either when the performance obligation in the contract has been performed (so “point in time” recognition) or “over time” as control of the performance obligation is transferred to the customer. The Group is continuing to assess the estimated impact that the initial application of IFRS 15 will have on its consolidated financial statements. The estimated impact of the adoption of this standard on the Group is based on initial assessments undertaken to date and is summarised below. The actual impact of adopting the standard at 1 August 2018 may change as whilst the Group has made an assessment of all the significant income streams, it has not finalised the assessment of all income streams and controls over its new reporting approach. An initial assessment of the impact of IFRS 15 is summarised as follows: Rail Technology & Services There are a number of revenue streams within this division. The Group has a number of different arrangements in respect of software and other related services such as hosting, support and maintenance. The revenue recognition in respect of perpetual licence sales, and also bespoke development work under IFRS 15 is expected to be the same as current accounting. Software licences which involve hosting are currently generally spread over the term of the licence on a straight line basis and this is expected to continue under IFRS 15. Software licences which do not involve hosting, but moreover access to the Software are divided into licence fees and support, both of which have different accounting treatments and are expected to continue under IFRS 15. Revenue in respect of contracts which involve purely hosting, or support and maintenance is spread on a straight line basis is over the term of the Agreement, which again is expected to continue under IFRS 15. In respect of remote condition monitoring, revenue is recognised once the units are despatched to the Customer and under IFRS 15, this is not expected to change under IFRS 15. For consultancy services, revenue is recognised when the services are performed and this is not expected to change under IFRS 15. Traffic & Data Services In respect of traffic data collection and passenger counting, the Group currently recognises revenue based on the stage of completion, with ‘Amounts Recoverable on Contract’ (accrued income based on the stage of completion of certain projects – as detailed in note 19) being recognised. Under IFRS 15, this will no longer be recognised but will be replaced by a ‘Contract Asset’ representing the costs incurred in respect of the partially completed projects at the end of a reporting period, which will have the effect of deferring any profit to be recognised on partially completed projects. In respect of event planning, parking and traffic management, revenue is recognised when the event takes place and the service provided, and no changes are expected to take place to this revenue recognition under IFRS 15. TRACSIS PLC | 35 Notes to the Consolidated Financial Statements continued 2 Basis of preparation (continued) IFRS 16 “Leases” IFRS 16 “Leases” will first be effective for the Group during the year ending 30 July 2020. It will bring most leases on to the balance sheet for lessees, eliminating the distinction between operating leases and finance leases. The Group has a number of operating lease arrangements and it is considered that the broad impact of IFRS 16 will be to recognise a right-of-use asset and a corresponding lease liability for the lease commitments which are detailed in note 25. In addition, rentals on operating leases currently charged to the statement of comprehensive income will be replaced by a depreciation charge on the asset and an interest expense on the lease liability. Details of operating lease rental charges are outlined in note 9. IFRS 9 ‘Financial Instruments’ is not expected to have a material impact on the Group’s financial statements. (f) Going concern The Group is debt free and has substantial cash resources. The Board has prepared cash flow forecasts for the forthcoming year based upon assumptions for trading and the requirements for cash resources. Based upon this analysis, the Board has concluded that the Group has adequate working capital resources and that it is appropriate to use the going concern basis for the preparation of the consolidated financial statements. 3 Significant accounting policies The accounting policies set out below have been applied consistently to all periods presented in these consolidated financial statements and have been applied consistently by Group entities, except as stated in note 2(e), which addresses changes in accounting policies. (a) Basis of consolidation The Group’s accounting policy with respect to business combinations is set out below. Subsidiaries are entities controlled by the Company. The financial statements of subsidiaries are included in the consolidated financial statements from the date that control commences until the date control ceases. The accounting policies of subsidiary companies have been changed where necessary to align them with the policies adopted by the Group. The Group entities included in these consolidated financial statements are those listed in note 29. All intra- group balance and transactions, including unrealised profits arising from intra-group transactions, are eliminated fully on consolidation. (b) Revenue recognition Revenue is measured at the fair value of the consideration received or receivable (excluding value added tax and discounts given) derived from the provision of goods and services to customers during the period. The Group derives revenue from software, post contract customer support, sale of hardware & condition monitoring technology, consultancy and professional services, hosting services, along with data collection, capture, passenger counting and event planning, parking and traffic management services. Revenue from software is derived from the sale of software both as a perpetual and non-cancellable annual licences, the provision of software as a service and the support and hosting services associated with this. The Group recognises the revenue from the sale of perpetual and non-cancellable annual software licences and specified upgrades upon shipment of the software product or upgrade, when there are no significant vendor obligations remaining, when the fee is fixed and determinable and when collectability is considered probable. Where appropriate the Group provides a reserve for estimated returns under the standard acceptance terms at the time the revenue is recognised. Payment terms are agreed separately with each customer. Revenue from the provision of Software as a Service under contracts with extended terms which combine software and support services elements are recognised evenly over the period to which the services relate. Customers pay an agreed fee covering a range of periods, for a defined contractual term, and the contracts provide the customer with various rights during the term of the contract. This policy reflects the continuous nature of the transfer of value to the customer. 36 | Annual Report and Accounts 2018 Notes to the Consolidated Financial Statements continued 3 Significant accounting policies (continued) Revenue recognition (continued) Revenue capable of being allocated to customer support services is recognised on a straight-line basis over the term of the support contract. Revenue not recognised in the income statement under this policy is classified as deferred income in the balance sheet. Revenue capable of being allocated to hosting services is recognised on a straight line basis over the term of the hosting contract. Revenue not recognised in the income statement under this policy is classified as deferred income in the balance sheet. In the case where a single contract involves the combination of any or all of sale of software as a perpetual or non- cancellable annual licence, provision of Software as a Service, support services and hosting services, the amount of consideration is derived from an assessment of the fair value of each of the individual constituent elements of the goods and services provided. The revenue allocated to each element is recognised as outlined above. Revenue from hardware sales and condition monitoring technology is recognised as the products are shipped to customers. Provision is made for any returns to customers, or credit notes to be issued. Revenue from consultancy and professional services is recognised when the services have been performed, once the work and value has been agreed with the customer. In respect of data collection and counting services, revenue is recognised on services not yet billed at the fair value of consideration expected to be receivable to the extent that the work has already been carried out at the year end. Where the outcome of a contract can be estimated reliably, revenue and costs are recognised by reference to the stage of completion of the contract activity at the end of the reporting period, measured based on work performed and if its receipt is considered probable. Where the outcome of a contract cannot be estimated reliably, contract revenue is only recognised to the extent of contract costs incurred that it is probable will be recoverable. Contract costs are recognised as expenses in the period in which they are incurred. When it is probable that total contract costs will exceed total contract revenue, the expected loss is recognised as an expense immediately. Revenue from event planning and traffic management services is recognised when the services have been performed, once the work and value has been agreed with the customer. (c) Property, plant and equipment Items of property, plant and equipment are initially recognised at cost. As well as the purchase price, cost includes directly attributable costs. The corresponding liability is recognised within provisions. Items of property, plant and equipment are carried at depreciated cost. Depreciation is provided on all items of property, plant and equipment so as to write off the carrying value of items over their expected useful economic lives. It is applied at the following rates: Freehold buildings (excluding land) Computer equipment Office fixtures and fittings Motor vehicles – – – – 4% on cost 33 1/3% on cost 10% – 20% on cost 20 – 25% per annum reducing balance basis (d) Intangible assets Goodwill Goodwill arising on acquisitions comprises the excess of the fair value of the consideration for investments in subsidiary undertakings over the fair value of the net identifiable assets acquired at the date of acquisition. Adjustments are made to fair values to bring the accounting policies of the acquired businesses into alignment with those of the Company. The costs of integrating and reorganising acquired businesses are charged to the post acquisition income statement. Goodwill arising on acquisitions of subsidiaries is included in intangible assets. Goodwill is not amortised but is tested annually for impairment and carried at cost less accumulated impairment losses. Gains and losses on the disposal of an entity include the carrying amount of goodwill relating to the entity sold. TRACSIS PLC | 37 Notes to the Consolidated Financial Statements continued 3 Significant accounting policies (continued) Goodwill (continued) Goodwill is allocated to cash-generating units for the purpose of impairment testing. Each of those cash-generating units represents the lowest level within the group at which the associated level of goodwill is monitored for management purposes and are not larger than the operating segments determined in accordance with IFRS 8 “Operating Segments”. Business Combinations From 1 August 2009 the Group has applied IFRS 3 Business Combinations (2008) in accounting for business combinations. The change in accounting policy has been applied prospectively and has had no material impact on earnings per share. Business combinations are accounted for using the acquisition method as at the acquisition date, which is the date on which control is transferred to the Group. An investor controls an investee when the investor is exposed, or has rights, to variable returns from its involvement with the investee and has the ability to affect those returns through its power over the investee. For acquisitions on or after 1 August 2009, the Group measures goodwill at the acquisition date as: • • • the fair value of the consideration transferred; plus the recognised amount of any non-controlling interests in the acquiree; plus if the business combination is achieved in stages, the fair value of the existing equity interest in the acquiree; less the net recognised amount (generally fair value) of the identifiable assets acquired and liabilities assumed. When the excess is negative, a bargain purchase gain is recognised immediately in profit or loss. The consideration transferred does not include amounts related to the settlement of pre-existing relationships. Such amounts are generally recognised in profit or loss. Costs related to the acquisition, other than those associated with the issue of debt or equity securities, that the Group incurs in connection with a business combination are expensed as incurred. Any contingent consideration payable is recognised at fair value at the acquisition date. If the contingent consideration is classified as equity, it is not remeasured and settlement is accounted for within equity. Otherwise, subsequent changes to the fair value of the contingent consideration are recognised in profit or loss. Contingent consideration is treated as part of the costs of acquisition provided it is not contingent on the continuing employment of the vendors. For acquisitions prior to 1 August 2009, goodwill represents the excess of the cost of the acquisition over the Group’s interest in the recognised amounts (generally fair value) of the identifiable assets, liabilities and contingent liabilities of the acquiree. Transaction costs, other than those associated with the issue of debt or equity securities, that the Group incurred in connection with business combinations were capitalised as part of the cost of acquisition. An intangible asset, which is an identifiable non-monetary asset without physical substance, is recognised to the extent that it is probable that the expected future economic benefits attributable to the asset will flow to the group and that its cost can be measured reliably. The asset is deemed to be identifiable when it is separable or when it arises from contractual or other legal rights. Intangible assets, primarily customer relationships and technology related assets, acquired as part of a business combination are capitalised separately from goodwill and are carried at cost less accumulated amortisation and accumulated impairment losses. Amortisation is calculated using a straight line method over the estimated useful life of the assets of 10 to 20 years for customer related assets and 10 years for technology related assets. (e) Impairment of non-current assets Where an indication of impairment is identified, the recoverable amount of the asset is estimated in order to determine the extent of the impairment loss (if any). If the recoverable amount (higher of fair value less cost to sell and value in use of an asset) is estimated to be less than its carrying amount, the carrying amount of the asset is reduced to its recoverable amount. 38 | Annual Report and Accounts 2018 Notes to the Consolidated Financial Statements continued 3 Significant accounting policies (continued) (f) Research and Development Costs Expenditure on internally developed products is capitalised as intangible assets if it can be demonstrated that: • • • • • • it is technically feasible to develop the product for it to be sold; adequate resources are available to complete the development; there is an intention to complete and sell the product; the Group is able to sell the product; sale of the product will generate future economic benefits; and expenditure on the project can be measured reliably. Capitalised development costs would be amortised over the periods the Group expected to benefit from selling the products developed. At present, the Group has not considered that its development expenditure meets the criteria for capitalisation. Development expenditure not satisfying the above criteria and expenditure on the research phase of internal projects are recognised in the income statement as incurred. (g) Financial instruments The Group classifies its financial instruments, or their component parts, on initial recognition as a financial asset, a financial liability or an equity instrument in accordance with the substance of the contractual arrangement. Financial instruments are recognised on the balance sheet when the Group becomes a party to the contractual provisions of the instrument. Financial instruments issued by the Group are treated as equity only to the extent that they do not meet the definition of a financial liability. The Group’s ordinary shares are classified as equity instruments, net of issue costs. Trade receivables Cash and cash equivalents (i) Cash and cash equivalents in the balance sheet are included at cost and comprise cash at bank, cash in hand and short term deposits with an original maturity of three months or less. (ii) Trade receivables do not carry interest and are stated at their nominal value as reduced by appropriate allowances for estimated irrecoverable amounts. (iii) Trade payables Trade payables are not interest bearing and are stated at their nominal value. (iv) Equity instruments issued by the Group are recorded at the proceeds received, net of direct issue costs. Equity instruments (h) Taxation The tax on the profit or loss for the year represents current and deferred tax. The tax currently payable is based on taxable profit for the period. 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 at the balance sheet date. Deferred tax is provided in full, using the liability method, on temporary differences arising between the tax bases of assets and liabilities and their carrying value in the financial statements. The principal temporary differences arise from depreciation on plant and equipment and share options granted by the Group to employees and directors. Deferred tax assets and liabilities are measured on an undiscounted basis at the tax rates that are expected to apply when the related asset is realised or liability is settled, based on tax rates and laws enacted or substantively enacted at the balance sheet date. Where the deferred tax asset recognised in respect of share-based payments would give rise to a credit in excess of the related accounting charge at the prevailing tax rate the excess is recognised directly in equity. Deferred tax assets are recognised to the extent that it is probable that future taxable profit will be available against which the temporary differences can be utilised. (i) Dividend distribution Dividend distribution to the Company’s shareholders is recognised as a liability in the Group’s financial statements in the period in which the dividends are approved by the Company’s shareholders, or in the case of interim dividends, when paid. TRACSIS PLC | 39 Notes to the Consolidated Financial Statements continued 3 (j) (k) (l) Significant accounting policies (continued) Leases Leases are classified as finance leases whenever the terms of the lease transfer substantially all the risks and rewards of ownership to the lessee. All other leases are classified as operating 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 balance sheet as a finance lease obligation. Lease payments are apportioned between finance charges and reduction of the lease obligation so as to achieve a constant rate of interest on the remaining balance of the liability. Finance charges are charged directly to profit or loss, 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. Operating lease payments are recognised as an expense on a straight line basis over the lease term, except where another systematic basis is more representative of the time pattern in which economic benefits from the leased asset are consumed. Contingent rentals arising under operating leases are recognised as an expense in the period in which they are incurred. In the event that lease incentives are received to enter into operating leases, such incentives are recognised as a liability. The aggregate benefit of incentives is recognised as a reduction of rental expense on a straight line basis, except where another systematic basis is more representative of the time pattern in which economic benefits from the leased asset are consumed. Employee benefits Wages, salaries, social security contributions, paid annual leave, bonuses and non-monetary benefits are accrued in the year in which the associated services are rendered by the employees of the Group. Where the Group provides long term employee benefits, the cost is accrued to match the rendering of the services by the employees concerned. Share based payments The Group issues equity-settled share based payments to certain employees (including directors). Equity-settled share based payments are measured at fair value at the date of grant. The fair value determined at the grant date of the equity-settled share based payments is expensed on a straight line basis over the vesting period, together with a corresponding increase in equity, based upon the Group’s estimate of the shares that will eventually vest. Fair value is measured using the Black-Scholes 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 the terms and conditions of options are modified, as a minimum an expense is recognised as if the terms had not been modified. In addition, an expense is recognised for any increase in the value of the transaction as a result of the modification, as measured at the date of modification. Where an equity-settled transaction is cancelled, it is treated as if it had vested on the date of the cancellation, and any expense not yet recognised for the transaction is recognised immediately. However, if a new transaction is substituted for the cancelled transaction, and designated as a replacement transaction on the date that it was granted, the cancelled and new transactions are treated as if they were a modification of the original transaction as described in the previous paragraph. Directors LTIPs have two conditions attached – Earnings per Share (non-market condition) and Total Shareholder Return (TSR – market condition). An assessment of the fair value is made when the options are granted and in respect of TSR/market conditions, no further adjustment is made regardless of whether the conditions are met or not. (m) Retirement benefits Contributions to defined contribution pension schemes are charged to the income statement in the year to which they relate. 40 | Annual Report and Accounts 2018 Notes to the Consolidated Financial Statements continued 3 Significant accounting policies (continued) (n) (o) (p) (q) (r) (s) Exceptional items Items which are significant by virtue of their size or nature and/or which are considered non-recurring are classified as exceptional operating items. Such items, which include for example costs relating to acquisitions, contingent consideration credits, any goodwill impairments and profit/loss on disposal, are included within the appropriate consolidated income statement category but are highlighted separately. Exceptional operating items are excluded from the profit measures used by the board to monitor underlying performance. Finance income Finance income comprises interest income on funds invested. Interest income is recognised as it accrues in profit or loss, using the effective interest method. Cash and cash equivalents Cash and cash equivalents comprise cash balances and call deposits. The Group considers all highly liquid investments with original maturity dates of three months or less to be cash equivalents. Operating segments The Group has divided its results into two segments being ‘Rail Technology and Services’ and ‘Traffic & Data Services’. The level of disclosure of segmental and other information is determined by such assessment. Further details of the considerations made and the resulting disclosures are provided in note 6 to the financial statements. Inventories Inventories are measured at the lower of cost and net realisable value. Provision is made for slow moving and obsolete inventories on a line by line basis. Foreign currencies 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, the results and financial position of each Group entity are expressed in Pounds Sterling, which is the functional currency of the Company and the presentation currency for the consolidated financial statements. 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 at the dates of the transactions. At each balance sheet date, monetary items denominated in foreign currencies are retranslated at the rates prevailing at the balance sheet date. Non-monetary items carried at fair value that are denominated in foreign currencies are retranslated at the rates prevailing at the date when the fair value was determined. Non-monetary items that are measured in terms of historical cost in a foreign currency are not retranslated. Exchange differences are recognised in profit or loss in the period in which they arise except for: • • exchange differences that relate to assets under construction for future productive use, which are included in the cost of those assets when they are regarded as an adjustment to interest costs on foreign currency borrowings; and exchange differences on monetary items receivable from or payable to a foreign operation for which settlement is neither planned nor likely to occur, which form part of the net investment in a foreign operation, and which are recognised in the foreign currency translation reserve and recognised in profit or loss on disposal of the net investment. (t) Translation of financial statements of foreign entities The assets and liabilities of foreign operations are translated using exchange rates at the balance sheet date. The components of shareholders’ equity are stated at historical value. An average exchange rate for the period is used to translate the results and cash flows of foreign operations. Exchange differences arising on translating the results and net assets of foreign operations are taken to the translation reserve in equity until the disposal of the investment. The gain or loss in the income statement on the disposal of foreign operations includes the release of the translation reserve relating to the operation that is being sold. TRACSIS PLC | 41 Notes to the Consolidated Financial Statements continued 3 (u) (v) Significant accounting policies (continued) Investments Investments are carried at fair value. Where it is deemed that the group has a significant influence over the investment, then the investment will be accounted for as an associated undertaking under the equity method. Equity accounted investees Associates are accounted for using the equity method (equity accounted investees) and are initially recognised at cost. The Group’s investment includes goodwill identified on acquisition, net of any accumulated impairment losses. The consolidated financial statements include the Group’s share of the total comprehensive income and equity movements of equity accounted investees, from the date that significant influence commences until the date that significant influence ceases. When the Group’s share of losses exceeds its interest in an equity accounted investee, the Group’s carrying amount is reduced to nil and recognition of further losses is discontinued except to the extent that the Group has incurred legal or constructive obligations or made payments on behalf of an investee. 4 Critical Accounting Estimates and Judgements The Group’s accounting policies are set out in Note 3. The Directors consider that the key judgements and estimates made in the preparation of the consolidated financial statements are: Estimates Revenue recognition Certain of the Group’s contracts for software licences, software provided as a service, maintenance services and other consultancy projects have a term of more than one year. The Directors assess the fair value of the entire contract attributable to each of the different services and the timing of when revenues should be recognised and this assessment can differ from the legally contracted values. A level estimation is required in assessing the level of potential customer returns for certain hardware products. Some of the Group’s revenue is derived from data capture/counting services, in which projects can last for an extended period of time. As such, an element of estimation is required when assessing the stage of completion at a period end. Intangible fixed assets On acquisition, the Company calculates the fair value of the net assets acquired. Due to the nature of the companies acquired, this often requires the recognition of additional intangible assets, specifically in relation to technology or customer relationships. The assessment of intangible assets acquired is necessarily judgemental and has been performed using a discounted cash flow model. Significant judgement has been applied in assessing the future revenues to be achieved from that acquisition, the growth rate of that revenue, the associated costs and the discount factor to be applied. In addition, management make estimates as to the useful economic life of the resulting intangible assets, based on their industry expertise. These estimates affect the amount of amortisation recognised in each financial year. Actual results may vary significantly from expectations in future years. Annual reviews of the Group’s intangible fixed assets are carried out, using commercial judgements to determine whether there is any evidence that the useful economic life is no longer appropriate, or whether there are impairment indicators relating to specific intangible assets due to changes in circumstance during the financial year in question. Contingent consideration Within the share purchase agreements for the acquisitions of Travel Compensation Services Limited and Delay Repay Sniper Limited, are various provisions relating to the payment of contingent consideration which are linked to financial performance post acquisition. Included within the balance sheet is an amount of £1.2m, which is management’s best estimates of the fair value of the amount payable. Judgements There were no significant judgements applied in the preparation of the consolidated financial statements. 42 | Annual Report and Accounts 2018 Notes to the Consolidated Financial Statements continued 5 a) Acquisitions and investments in the current year Acquisition: S Dalby Consulting Limited, Travel Compensation Services Limited and Delay Repay Sniper Limited On 1 February 2018, the Group acquired the entire issued share capital of Travel Compensation Services Limited ('TCS'), Delay Repay Sniper Limited ('DRS') and S Dalby Consulting Limited (the holding company of TCS). All three companies were subject to one Share Purchase Agreement. The Directors believe that the areas in which TCS and DRS operate are likely to be opportunities for growth in the future and believe that the Group should have a product offering to take advantage of such growth. TCS is a software provider of enterprise delay repay solutions to the UK Rail Industry. The business has developed technology that allows train operators to automatically process large volumes of consumer claims arising from rail delays and in doing so lower the transactional costs involved whilst speeding up response times and helping eliminate fraud. DRS is a consumer facing web portal (www.delayrepaysniper.com) that enables rail passengers to quickly and easily submit valid claims under the delay repay scheme to rail operators. The business operates a subscription service model and is relevant to regular rail travellers and commuters who are often delayed many times per month and wish to forego the time and effort involved in submitting multiple individual claims. In the year ended 30 September 2017, TCS and DRS generated revenue of £0.7m and a profit before tax of £0.3m. Under the terms of the acquisition there is a three year earn out period during which Tracsis expect both businesses to achieve growth. The acquisition consideration comprised an initial cash payment of £1.75m, the issue of 28,571 Ordinary Shares in Tracsis at a total value of £0.15m, an additional cash payment in respect of net current assets of £0.2m; and Contingent deferred cash consideration of up to £4.7m, payable annually based on the significant growth in performance of the acquisitions over a three year period. The contingent consideration could range from £nil to £4.7m depending on the financial performance over the three years since acquisition and the Directors concluded that £1.2m was the fair value of the contingent consideration payable and included this in the balance sheet. In the period to 31 July 2018 TCS and DRS contributed revenue of £0.5m and pre tax profit of £0.1m to the Group’s results, before amortisation of associated intangible assets and exceptional deal costs. If the acquisition had occurred on 1 August 2017, management estimates that the contribution to Group revenue would have been £0.8m and Group pre tax profit for the period of £0.1m. In determining these amounts, management has assumed that the fair value adjustments, determined provisionally that arose on the date of acquisition would have been the same if the acquisition had occurred on 1 August 2017. Pre-acquisition carrying amounts were determined based on applicable IFRSs, immediately prior to the acquisition. The values of assets and liabilities recognised on acquisition are the estimated fair values. The goodwill that arose on acquisition can be attributed to a multitude of assets that cannot readily be separately identified for the purposes of fair value accounting and includes the workforce of TCS and DRS. The fair value adjustments arise in accordance with the requirements of IFRSs to recognise intangible assets acquired. In determining the fair values of intangible assets the Group has used discounted cash flow forecasts. The fair value of shares issued was based on market value at the date of issue. The Group incurred acquisition related costs of £81,000 which are included within administrative expenses. TCS was subsequently renamed Tracsis Travel Compensation Services Limited. The acquisition (in respect of both trading companies – which have been amalgamated) had the following effect on the Group’s assets and liabilities on the acquisition date: TRACSIS PLC | 43 Notes to the Consolidated Financial Statements continued 5 a) Acquisitions and investments in the current year (continued) Acquisition: S Dalby Consulting Limited, Travel Compensation Services Limited and Delay Repay Sniper Limited (continued) Pre-acquisition Fair value value on carrying amount adjustments acquisition Recognised Intangible assets: Technology assets Intangible assets: Customer relationships Tangible fixed assets Cash and cash equivalents Trade and other receivables Trade and other payables Income tax payable Deferred tax liability Net identified assets and liabilities Goodwill on acquisition Consideration paid in cash Consideration paid: fair value of shares issued Fair value of contingent consideration payable Total consideration b) Investment: Vivacity Labs Limited £000 - - 10 214 108 (63) (32) (2) 235 £000 1,678 1,238 - - - - - (496) 2,420 £000 1,678 1,238 10 214 108 (63) (32) (498) 2,655 623 3,278 1,928 150 1,200 3,278 On 3 April 2017, the Group entered into an agreement to acquire up to 28.1% of Vivacity Labs Limited for total consideration of £1.3m, split between equity investments to be made in three tranches of £1.0m, plus a warrant for a further £0.3m. The first tranche of the investment took place during the year ended 31 July 2017 and comprised an investment of £0.425m in return for 11.4%. Tranches two and three were made during the year ending 31 July 2018, and comprised a further investment of £0.575m in return for a further 11.9% to take the total investment to 23.3%, for total consideration of £1.0m. Tracsis holds a further warrant for the remaining 4.8% to take the total potential investment to 28.1%. Vivacity has developed novel machine learning software and sensor technology which is applied to solve a wide range of traffic and transport issues, most specifically for the automatic counting and classification of pedestrian and vehicle flows in a variety of environments. During the year ended 31 July 2017, the investment was carried at cost as the investment was only 11.4%. In the year ended 31 July 2018, it was accounted for as an associated undertaking given the shareholding of 23.3%. Further details are provided in note 16. c) Investment: Nutshell Software Limited On 21 July 2016, the Group entered into an agreement to acquire up to 37.8% of Nutshell Software Limited for total consideration of £0.5m split as £0.25m of equity and £0.25m of debt. The investment was made in three tranches and the first one made in July 2016 comprised a total of £0.25m which was split £0.125m equity and £0.125m of debt in return for 23.3% of the shares in the company, and the second one was made in March 2017 and comprised a total of £0.125m which was split as £0.0625m equity and £0.0625m of debt in return for a further 8.0% of the shares in the company to take the total holding to 31.3%. During the year ended 31 July 2018, the third investment was made, which comprised a total of £0.125m which was split as £0.0625m equity and £0.0625m of debt in return for a further 6.5% of the shares in the company to take the total holding to 37.8%. The investment is accounted for as an Associated undertaking, and further details are provided in note 16. 44 | Annual Report and Accounts 2018 Notes to the Consolidated Financial Statements continued 6 Segmental analysis The Group has divided its results into two segments being ‘Rail Technology and Services’ and ‘Traffic & Data Services’. Travel Compensation Services Limited and Delay Repay Sniper Limited are reported within ‘Rail Technology & Services’. The group has a wide range of products and services and products and services for the rail industry, such as software, hosting services, consultancy and remote condition monitoring, and these have been included within the Rail Technology & Services segment as they have similar customer bases (such as Train Operating Companies and Infrastructure Providers), whereas traffic data collection and event planning & traffic management have similar economic characteristics and distribution methods and so have been included within the Traffic & Data Services segment. In accordance with IFRS 8 ‘Operating Segments’, the Group has made the following considerations to arrive at the disclosure made in these financial statements. IFRS 8 requires consideration of the Chief Operating Decision Maker (“CODM”) within the Group. In line with the Group’s internal reporting framework and management structure, the key strategic and operating decisions are made by the Board of Directors, who review internal monthly management reports, budgets and forecast information as part of this. Accordingly, the Board of Directors are deemed to be the CODM. Operating segments have then been identified based on the internal reporting information and management structures within the Group. From such information it has been noted that the CODM reviews the business as two operating segments, receiving internal information on that basis. The management structure and allocation of key resources, such as operational and administrative resources, are arranged on a centralised basis. Sales revenue is summarised below Rail Technology & Services Traffic & Data Services Total revenue Revenue can also be analysed as follows: Software and related services Other Total 2018 £000 18,968 20,866 39,834 2018 £000 14,010 25,824 39,834 2017 £000 15,964 18,522 34,486 2017 £000 11,711 22,775 34,486 Reconciliations of reportable segment revenues, profit or loss, assets and liabilities and other material items Information regarding the results of the reportable segment is included below. Performance is measured based on segment profit before income tax, as included in the internal management reports that are reviewed by the Board of Directors. Segment profit is used to measure performance. There are no material inter-segment transactions, however, when they do occur, pricing between segments is determined on an arm’s length basis. Revenues disclosed below materially represent revenues to external customers. TRACSIS PLC | 45 Notes to the Consolidated Financial Statements continued 6 Segmental analysis (continued) 2018 Rail Technology & Services £000 Traffic & Data Services £000 Unallocated £000 Revenues Total revenue for reportable segments Consolidated revenue Profit or loss EBITDA for reportable segments Amortisation of intangible assets Depreciation Exceptional items Other operating income Share-based payment charges Interest receivable/payable(net) Share of result of equity accounted investees 18,968 18,968 6,802 - (135) 2,572 - - - - 20,866 20,866 2,623 - (625) - - - - - Consolidated profit before tax 9,239 1,998 - - - (1,774) - - 214 (1,193) (8) (201) (2,962) 2017 Rail Technology & Services £000 Traffic & Data Services £000 Unallocated £000 Revenues Total revenue for reportable segments Consolidated revenue Profit or loss EBITDA for reportable segments Amortisation of intangible assets Depreciation Exceptional items Other operating income Share-based payment charges Interest receivable/payable(net) Share of result of equity accounted investees 15,964 15,964 6,451 - (124) - - - - - 18,522 18,522 2,043 - (675) - - - - - - - - (1,674) - (139) 134 (23) (77) Consolidated profit before tax 6,327 1,368 (3,079) Total £000 39,834 39,834 9,425 (1,774) (760) 2,572 214 (1,193) (8) (201) 8,275 Total £000 34,486 34,486 8,494 (1,674) (799) (139) 134 (23) (77) 4,616 (1,300) (1,300) 46 | Annual Report and Accounts 2018 Notes to the Consolidated Financial Statements continued 6 Segmental analysis (continued) 2018 Rail Technology & Services £’000 Traffic & Data Services £000 Unallocated £000 Assets Total assets for reportable segments (exc. cash) 3,142 6,621 Intangible assets and investments Deferred tax assets Cash and cash equivalents Consolidated total assets Liabilities - - 5,673 8,815 - - 3,520 10,141 Total liabilities for reportable segments (6,489) (4,651) Deferred tax liabilities Contingent consideration Consolidated total liabilities - - - - (6,489) (4,651) - 27,695 602 13,136 41,433 - (3,875) (3,265) (7,140) 2017 Rail Technology & Services £’000 Traffic & Data Services £000 Unallocated £000 Assets Total assets for reportable segments (exc. cash) 3,581 7,599 Intangible assets and investments Deferred tax assets Cash and cash equivalents Consolidated total assets Liabilities - - 3,784 7,365 - - 1,844 9,443 Total liabilities for reportable segments (6,142) (3,870) Deferred tax Contingent consideration Consolidated total liabilities - - - - (6,142) (3,870) - 25,431 457 9,722 35,610 - (3,718) (5,041) (8,759) Major customers Transactions with the Group’s largest customer represent 14% of the Group’s total revenues (2017: 16%). Total £000 9,763 27,695 602 22,329 60,389 (11,140) (3,875) (3,265) (18,280) Total £000 11,180 25,431 457 15,350 52,418 (10,012) (3,718) (5,041) (18,771) Geographic split of revenue A geographical analysis of revenue is provided below: United Kingdom North America Rest of the World Total 2018 £000 38,388 260 1,186 39,834 2017 £000 33,224 437 825 34,486 TRACSIS PLC | 47 Notes to the Consolidated Financial Statements continued 7 Employees and personnel costs Staff costs: Wages and salaries Social security contributions Contributions to defined contribution plans Equity-settled share based payment transactions 2018 £000 17,240 1,374 352 1,193 20,159 2017 £000 15,273 1,200 303 1,300 18,076 Average number of employees (including directors) in the year 667 683 The staff number calculation above takes account of the Group’s permanent members of staff, and also takes account of a large number of casual employees that are used, and includes a ‘full time equivalent’ number in respect of them. The directors’ remuneration and share options are detailed within the Directors’ Remuneration Report on pages 18 to 21. Total directors’ remuneration, including bonus and pension contributions was £750,000 (2017: £513,000). The aggregate remuneration of the highest paid director was £376,000 (2017: £231,000). The highest paid director did not exercise any share options nor did he receive any shares under a long term incentive plan during the year. One director (2017: one) exercised share options during the year. Two directors (2017: two) participate in the long term incentive plan. Two directors (2017: two) receive employer pension contributions into a personal pension scheme. Directors of the Company control 4.4% of the voting shares of the company (2017: 4.9%). Details of other key management personnel are disclosed in note 27. 8 Share based payments The Group has various share option schemes for its employees. EMI Share options Options are exercisable at a price agreed at the date of grant. The vesting period is usually between one and five years. The exercise of options is dependent upon eligible employees meeting performance criteria. The options are settled in equity once exercised. If the options remain unexercised after a period of 10 years from the date of grant, the options expire. Options are forfeited if the employee leaves the Group before the options vest. Discounted EMI Share options In August 2012, the Group implemented a new EMI share option scheme, resulting in discounted EMI share options being issued to staff instead of cash bonuses, provided certain predetermined performance criteria were met for both the overall group, and the part of the business the employee directly works in. This scheme was made available to all staff. Staff are also able to exchange an element of annual salary in return for share options too. The vesting period is three years. The options are settled in equity once exercised. If the options remain unexercised after a period of 10 years from the date of grant, the options expire. Options are forfeited if the employee leaves the Group before the options vest. Unapproved Share options In August 2015, the Group implemented a revised share option scheme, resulting in discounted unapproved share options being issued to staff instead of cash bonuses, provided certain predetermined performance criteria were met for both the overall group, and the part of the business the employee directly works in. This scheme was made available to all staff except for Directors. Staff are also able to exchange an element of annual salary in return for share options too. The vesting period is three and a half years. The options are settled in equity once exercised. If the options remain unexercised after a period of 10 years from the date of grant, the options expire. Options are forfeited if the employee leaves the Group before the options vest. Directors’ scheme Directors were not entitled to take part in the 2015, 2016 or 2017 staff schemes and a revised scheme was implemented by the Remuneration Committee. Details of this scheme are provided in the Directors Remuneration Report. 48 | Annual Report and Accounts 2018 Notes to the Consolidated Financial Statements continued 8 Share based payments (continued) Details of the schemes are given below: Employees Number Performance Exercise entitled of options conditions price (p) Grant date Staff schemes 28/01/2009 20/05/2010 22/09/2011 21/11/2011 02/08/2012 02/08/2012 08/01/2013 28/01/2013 01/08/2013 01/08/2013 01/01/2014 01/01/2014 01/08/2014 01/08/2015 25/09/2015 01/12/2015 01/08/2016 01/08/2017 Directors’ schemes 15/12/2015 06/01/2017 28/02/2018 Outstanding Earliest exercise date 28/07/2009* 20/01/2011* 22/03/2012* 21/05/2012* 02/08/2013** 02/02/2013* 08/07/2013* 28/07/2013* 01/02/2014* 52.0 51.5 63.5 57.5 0.40 123.0 159.0 155.5 162.5 0.40 01/08/2014** 199.5 01/07/2014* 0.40 0.40 01/01/2015** 01/08/2015** 0.40 01/08/2016**** 0.40 25/09/2016**** 0.40 01/12/2016**** 0.40 01/08/2017**** 0.40 01/08/2018**** Expiry date 28/01/2019 20/05/2020 22/09/2021 21/11/2021 02/08/2022 02/08/2022 08/01/2023 28/01/2023 01/08/2023 01/08/2023 01/01/2024 01/01/2024 01/08/2024 01/08/2025 25/09/2025 01/12/2025 01/08/2026 01/08/2027 15/12/2025 06/01/2027 28/02/2028 21,000 30,000 32,351 25,000 10,089 22,683 Time served Time served Time served Time served Time served Time served 9,000 Time served 70,000 34,501 8,523 11,250 21,178 70,268 139,138 77,269 53,188 213,515 84,128 Time served Time served Time served Time served Time served Time served Time served Time served Time served Time served Time served 1 1 2 1 8 3 1 1 4 6 1 1 29 84 21 6 91 60 2 2 1 45,925 71,742 44,342 EPS and TSR EPS and TSR EPS and TSR 0.40 0.40 0.40 15/12/2018 06/01/2020 28/02/2021 1,095,090 * Vesting dates for these options are: 10% vest six months after grant date, 15% vest 12 months after grant date, 15% vest 18 months after grant date, 15% vest 24 months after grant date, 20% vest 30 months after grant date, 25% vest 36 months after grant date. ** Vesting dates for these options are linked to time served, and were awarded based on certain performance conditions being met, and in exchange for an annual cash bonus. The full vesting is achieved over a 3 year period, with various forfeit/reductions if exercise takes place sooner *** Vesting dates for these options are in equal three month instalments over a 24 month period **** Vesting dates for these options are linked to time served, and were awarded based on certain performance conditions being met, and in exchange for an annual cash bonus. The full vesting is achieved over a 3.5 year period, with various forfeit/reductions if exercise takes place sooner TRACSIS PLC | 49 Notes to the Consolidated Financial Statements continued 8 Share based payments (continued) The number and weighted average exercise price of share options are as follows: Outstanding at 1 August Granted Lapsed Exercised Outstanding at 31 July Exercisable at 31 July 2018 Weighted Average 2018 Exercise Number 1,342,730 137,103 (43,012) (341,731) 1,095,090 613,006 Price 44.0p 0.4p 0.4p 86.7p 26.9p 47.6p 2017 Number 1,556,094 324,002 (119,841) (417,525) 1,342,730 736,801 2017 Weighted Average Exercise Price 59.0p 0.4p 0.4p 78.4p 44.0p 80.0p Share options were exercised at numerous points in the year, and the average share price for the year ended 31 July 2018 was 515p (2017: 454p). The share options outstanding at the end of the year have a weighted average remaining contractual life of 5 years (2017: 7 years). Fair value assumptions of share based payment charges The estimate of the fair value of share based awards is calculated using the Black-Scholes option pricing model. The following assumptions were used: Options granted in previous years: Options granted on Share price at date of grant Exercise price Vesting period (years) Expected volatility Option life (years) Expected life (years) Risk-free rate 01/06/ 2011 50.0p 50.0p 3 12/01/ 2011 49.5p 49.5p 3 01/08/ 2010 50.5p 50.5p 3 20/05/ 2010 51.5p 51.5p 3 17/03/ 2010 50.5p 50.5p 3 15% 15% 15% 15% 15% 10 10 10 10 10 10 10 10 10 10 28/01/ 2009 52p 26/11/ 2007 40p 52p 3 15% 10 10 40p 1 40% 10 10 3.5% 0.5% 0.5% 0.5% 0.5% 0.5% 4.75% Expected dividends expressed as a dividend yield - - - - - - - Options granted in previous years (continued): Options granted on Share price at date of grant Exercise price Vesting period (years) Expected volatility Option life (years) Expected life (years) Risk-free rate 22/09/ 2011 63.5p 63.5p 3 21/11/ 2011 57.5p 57.5p 3 01/02/ 2012 62.0p 62.0p 3 20/06/ 2012 89.0p 89.0p 3 50% 50% 50% 50% 10 10 10 10 10 10 10 10 3.5% 3.5% 3.5% 3.5% Expected dividends expressed as a dividend yield - - - - 50 | Annual Report and Accounts 2018 Notes to the Consolidated Financial Statements continued 8 Share based payments (continued) Options granted in previous years (continued): Options granted on Share price at date of grant Exercise price Vesting period (years) Expected volatility Option life (years) Expected life (years) Risk-free rate 02/08/ 2012 123.0p 02/08/ 2012 123.0p 01/11/ 2012 133.5p 08/01/ 2013 159.0p 28/01/ 2013 155.5p 28/01/ 2013 155.0p 26/03/ 2013 175.0p 26/03/ 2013 175.0p 0.4p 123.0p 133.5p 159.0p 0.4p 155.0p 175.0p 0.4p 3 3 3 3 3 3 2 3 20% 20% 20% 20% 20% 20% 20% 20% 10 10 10 10 10 10 10 10 10 10 10 10 10 10 10 10 3.5% 3.5% 3.5% 3.5% 3.5% 3.5% 3.5% 3.5% Expected dividends expressed as a dividend yield - - - - - - - - Options granted on Share price at date of grant Exercise price Vesting period (years) Expected volatility Option life (years) Expected life (years) Risk-free rate 01/08/ 2013 162.5p 162.5p 01/08/ 2013 162.5p 01/11/ 2013 185.0p 01/01/ 2014 199.5p 01/01/ 2014 01/08/ 2014 199.5p 330.0p 02/01/ 2015 411.5p 0.4p 185.0p 199.5p 0.4p 0.4p 0.4p 3 3 3 3 3 3 3 30% 30% 30% 30% 30% 30% 30% 10 10 10 10 10 10 10 10 10 10 10 10 10 10 3.5% 3.5% 3.5% 3.5% 3.5% 3.5% 3.5% Expected dividends expressed as a dividend yield - - - - - - - Options granted on Share price at date of grant Exercise price Vesting period (years) Expected volatility Option life (years) Expected life (years) Risk-free rate 01/08/ 2015 420.0p 25/09/ 2015 452.5p 01/12/ 2015 462.5p 15/12/ 2015 550.0p 15/12/ 2015 550.0p 01/08/ 2016 06/01/ 2017 438.0p 502.5p 0.4p 3.5 30% 10 10 0.4p 3.5 30% 10 10 0.4p 3.5 30% 10 10 0.4p 2 30% 10 10 0.4p 3 30% 10 10 0.4p 3.5 30% 10 10 0.4p 3 30% 10 10 3.5% 3.5% 3.5% 3.5% 3.5% 3.5% 3.5% Expected dividends expressed as a dividend yield - - - - - - - Options granted in the current year: Options granted on Share price at date of grant Exercise price Vesting period (years) Expected volatility Option life (years) Expected life (years) Risk-free rate Expected dividends expressed as a dividend yield 01/08/ 2017 445.0p 28/02/ 2018 500.0p 0.4p 3.5 30% 10 10 0.4p 3 30% 10 10 3.5% 3.5% - - The expected volatility is based on the historic volatility of the Company’s share price. An assessment of the likelihood of market conditions being achieved is made at the time that the options are granted. Notes to the Consolidated Financial Statements continued TRACSIS PLC | 51 8 Share based payments (continued) Charge to the income statement Share based payment charges 9 Operating profit 9.1 Operating profit is stated after charging: Depreciation of property, plant and equipment - owned Depreciation of property, plant and equipment - leased Total depreciation Loss on disposal of plant and equipment Operating lease rentals: Land and buildings Operating lease rentals: Plant & machinery Total operating lease rentals 2018 £000 1,193 2018 £000 592 168 760 17 474 37 511 2017 £000 1,300 2017 £000 595 204 799 12 418 29 447 Research and development expenditure expensed as incurred 1,942 1,214 9.2 Auditor’s remuneration: Audit of these financial statements Amounts receivable by auditors and their associates in respect of: - Audit of financial statements of subsidiaries pursuant to legislation - Other services 2018 £000 25 75 - 9.3 Exceptional items: The Group incurred a number of exceptional items in 2018 and 2017 which are analysed as follows: Non cash: Provision against investment Contingent consideration credit Cash: Legal and professional fees in respect of acquisitions Total exceptional items 2018 £000 - (2,653) 81 (2,572) 2017 £000 18 45 - 2017 £000 139 - - 139 2018 During the year, the Group acquired Travel Compensation Services Limited and Delay Repay Sniper Limited, and incurred £81,000 of exceptional deal related costs as a result. An exceptional credit on contingent consideration arose as the final amounts in respect of the acquisition of Ontrac Limited was finalised and £2,058,000 was paid post year end against an amount included in the Balance Sheet of £4,711,000 resulting in an exceptional credit of £2,653,000 2017 The provision against the investment relates to the Group’s interests in Citi Logik Limited. Following a review of the carrying value in the year, the Directors concluded that the value of the investment should be partly provided against and as such, an impairment was recognised for the carrying value. 52 | Annual Report and Accounts 2018 Notes to the Consolidated Financial Statements continued 9.4 Other operating income: The Group no longer qualifies as a SME for R&D purposes and as such is governed by the large company ‘above the line’ credit in respect of research and development costs for Corporation Tax purposes. This amounted to £214,000 in 2018 (2017: £134,000). 10 Finance income Interest received on bank deposits 11 Finance expense Interest on finance lease obligations 12 Taxation Recognised in the income statement Current tax expense Current year Adjustment in respect of prior periods Total current tax Deferred tax Current year Origination and reversal of temporary differences Rate changes Total deferred tax Total tax in income statement Reconciliation of the effective tax rate Profit before tax for the period Expected tax charge based on the standard rate of corporation tax in the UK of 19.00% (2017: 19.67%) Expenses not deductible for tax purposes Non taxable income Effect of rate changes Other movements Total tax expense 2018 £000 19 2018 £000 27 2018 £000 1,515 - 1,515 (486) - (486) 1,029 2018 £000 8,275 1,572 26 (504) - (65) 1,029 2018 % 100.0 19.0 0.3 (6.1) - (0.8) 12.4 2017 £000 4,616 908 127 - (189) 55 901 2017 £000 15 2017 £000 38 2017 £000 1,351 - 1,351 (261) (189) (450) 901 2017 % 100.0 19.7 2.7 - (4.1) 1.2 19.5 Reductions in the UK corporation tax rate from 23% to 21% (effective from 1 April 2014) and 20% (effective from 1 April 2015) were substantively enacted on 2 July 2013. Further reductions to 19% (effective from 1 April 2017) and to 18% (effective 1 April 2020) were substantively enacted on 26 October 2015, and an additional reduction to 17% (effective from 1 April 2020) was announced in the Budget on 16 March 2016. The deferred tax asset and liability at 31 July 2018 and 31 July 2017 has been calculated based on these rates. This will reduce the company's future current tax charge accordingly and reduce the deferred tax asset and liability further. TRACSIS PLC | 53 Notes to the Consolidated Financial Statements continued 13 Earnings per share Basic earnings per share The calculation of basic earnings per share at 31 July 2018 was based on the profit attributable to ordinary shareholders of £7,246,000 (2017: £3,715,000) and a weighted average number of ordinary shares in issue of 28,196,000 (2017: 27,804,000), calculated as follows: Weighted average number of ordinary shares In thousands of shares Issued ordinary shares at 1 August Effect of shares issued related to business combinations Effect of shares issued for cash Weighted average number of shares at 31 July 2018 27,964 14 218 28,196 2017 27,546 - 258 27,804 Diluted earnings per share The calculation of diluted earnings per share at 31 July 2018 was based on profit attributable to ordinary shareholders of £7,246,000 (2017: £3,715,000) and a weighted average number of ordinary shares in issue after adjustment for the effects of all dilutive potential ordinary shares of 29,159,000 (2017: 28,738,000): Adjusted EPS In addition, Adjusted Profit EPS is shown below on the grounds that it is a common metric used by the market in monitoring similar businesses. A reconciliation of this figure is provided below: Profit attributable to ordinary shareholders Amortisation of intangible assets Share-based payment charges Exceptional items Other operating income Adjusted profit for EPS purposes Weighted average number of ordinary shares In thousands of shares For the purposes of calculating Basic earnings per share Adjustment for the effects of all dilutive potential ordinary shares Basic adjusted earnings per share Diluted adjusted earnings per share 2018 £’000 7,246 1,774 1,193 (2,572) (214) 7,427 28,196 29,159 26.34p 25.47p 2017 £’000 3,715 1,674 1,300 139 (134) 6,694 27,804 28,738 24.08p 23.29p 54 | Annual Report and Accounts 2018 Notes to the Consolidated Financial Statements continued 14 Property, plant and equipment Cost At 1 August 2016 Additions Disposals At 31 July 2017 Additions Arising on acquisition Disposals At 31 July 2018 Depreciation At 1 August 2016 Charge for the year Disposals At 31 July 2017 Charge for the year Disposals At 31 July 2018 Net book value At 1 August 2016 At 31 July 2017 At 31 July 2018 Freehold Land & Motor Computer Plant, machinery, fixtures Buildings Vehicles equipment & fittings £000 £000 £000 £000 400 - - 400 - - - 400 66 12 - 78 12 - 90 334 322 310 1,306 322 (252) 1,376 54 - (210) 1,220 423 255 (194) 484 224 (151) 557 883 892 663 1,523 98 (2) 1,619 143 10 (147) 1,625 1,189 196 (1) 1,384 157 (147) 1,394 334 235 231 2,070 300 (171) 2,199 343 - (582) 1,960 1,013 336 (162) 1,187 367 (571) 983 1,057 1,012 977 Total £000 5,299 720 (425) 5,594 540 10 (939) 5,205 2,691 799 (357) 3,133 760 (869) 3,024 2,608 2,461 2,181 The net book value of assets held under finance lease obligations is £511,000 (2017: £709,000). Notes to the Consolidated Financial Statements continued TRACSIS PLC | 55 15 Intangible assets Cost At 1 August 2016 and 2017 Arising on acquisition At 31 July 2018 Amortisation and impairment At 1 August 2016 Charge for the year At 31 July 2017 Charge for the year At 31 July 2018 Carrying amounts At 1 August 2016 At 31 July 2017 At 31 July 2018 Customer related intangibles £000 Technology related intangibles £000 22,373 1,238 23,611 2,272 1,276 3,548 1,327 4,875 20,101 18,825 18,736 3,974 1,678 5,652 968 398 1,366 447 1,813 3,006 2,608 3,839 Goodwill £000 3,025 623 3,648 - - - - - 3,025 3,025 3,648 Total £000 29,372 3,539 32,911 3,240 1,674 4,914 1,774 6,688 26,132 24,458 26,223 The following carrying values of intangible assets arising from the acquisitions that the Group has completed in the current and previous years are analysed as follows: Goodwill 2018 £000 2017 £000 Customer related intangibles 2018 2017 Technology related intangibles 2018 2017 £000 £000 £000 £000 Tracsis Rail Consultancy Limited Tracsis Passenger Counts Limited Safety Information Systems Limited MPEC Technology Limited Tracsis Traffic Data Limited Datasys Integration Limited SEP Limited Ontrac Technology Limited Tracsis Travel Compensation Services Limited & Delay Repay Sniper Limited 671 43 136 269 390 359 555 602 623 671 43 136 269 390 359 555 602 - 390 203 154 819 802 2,446 1,039 425 221 168 883 973 2,601 1,184 11,695 12,370 1,188 - 3,648 3,025 18,736 18,825 The amortisation charge is recognised in the following line items in the income statement: Administrative expenses - - 31 193 - 961 - 1,026 1,628 3,839 2018 £000 1,774 - - 53 262 - 1,127 - 1,166 - 2,608 2017 £000 1,674 56 | Annual Report and Accounts 2018 Notes to the Consolidated Financial Statements continued 15 Intangible assets (continued) Customer related intangibles and technology related intangibles are amortised over their useful life, which is the period during which they are expected to generate revenue. Goodwill acquired in a business combination is allocated to cash generating units (CGUs) and is tested for impairment on an annual basis, or more frequently if there are indications that the carrying value might be impaired, by comparing the carrying amount against the discounted cash flow projections of the CGU. CGUs are not larger than the operating segments of the Group. The carrying value of the goodwill has been determined based on value in use calculations, covering detailed budgets and three year forecasts, followed by an extrapolation of expected cash flows at growth rates given below. The growth rates reflect prudent long term growth rates for the services provided by the CGU. Gross and operating margins have been assumed to remain constant based on budget and past experience. Long term growth rate Discount rate 2018 1.0% 10-12% 2017 1.0% 10-12% A rate of 10% is used for acquisitions within the Rail Technology & Services segment, and a rate of 12% is used for acquisitions within the Traffic & Data Services segment. The directors’ key assumptions relate to profitability, revenue growth and the discount rate, however, carrying value is not significantly sensitive to reasonably foreseeable changes in these assumptions in respect of all acquired intangible assets with the exception of those resulting from the acquisition of Ontrac Technology Limited, where profits could fall by circa 25% versus projected numbers before an impairment would be recognised of intangible assets and also the carrying value of the investment within Tracsis plc. If profits were to fall by more than 25% then an impairment would be recognised. No impairment charges in respect of goodwill arose during the year. 16 Investments The Group has made investments in Vivacity Labs Limited, Citi Logik Limited and Nutshell Software Limited. Further details regarding these transactions are shown in note 5 ‘Acquisitions and investments in the current year’. The total gross investments made were as follows (a combination of debt and equity) Citi Logik Limited Nutshell Software Limited Vivacity Labs Limited These are split as follows: Equity investments: Citi Logik Limited Nutshell Software Limited Vivacity Labs Limited % held At 31 July 17.2% 37.8% 23.3% 2018 £000 500 500 1,000 2,000 2018 £000 375 250 1,000 1,625 2017 £000 500 375 425 1,300 2017 £000 375 188 425 988 TRACSIS PLC | 57 Notes to the Consolidated Financial Statements continued 16 Investments (continued) Convertible Loan notes receivable from investments: Citi Logik Limited Nutshell Software Limited 2018 £000 125 250 375 2017 £000 125 187 312 During the previous financial year, Citi Logik Limited repaid loan notes amounting to £111,000, and a provision of £139,000 was made against the carrying value of the investment in Citi Logik Limited comprising amounts against the equity value of £125,000 and the remaining debt of £14,000, following a conversion of the remaining debt that took place. During the year, the Group increased its investment in Vivacity Labs Limited from 11.4% to 23.3% and as such it has been accounted for as an equity accounted investee. A share of the results of £121,000 was recognised. Nutshell Software Limited was accounted for as an associated undertaking, with a share of results of £80,000 being recognised based on the Group’s holding of 31.3% for a period of time and 37.8% for part of the financial year. Following this accounting treatment, investment, repayment and provision, the carrying value of the investments as follows: Investments – equity Citi Logik Limited Vivacity Labs Limited Convertible Loan notes receivable from associated undertakings: Nutshell Software Limited Investments in equity accounted investees: Nutshell Software Limited Vivacity Labs Limited 2018 £000 250 - 250 2018 £000 250 250 2018 £000 93 879 972 2017 £000 250 425 675 2017 £000 187 187 2017 £000 111 - 111 During the year, the Group increased its investment in Vivacity Labs Limited from 11.4% to 23.3% and as such it has been accounted for as an equity accounted investee. At start of the year Reclassification of Vivacity Labs Limited investment Additional investment made Share of results of equity accounted investee At end of the year 2018 £000 111 425 637 (201) 972 2017 £000 125 - 63 (77) 111 58 | Annual Report and Accounts 2018 Notes to the Consolidated Financial Statements continued 17 Inventories Raw materials & work in progress Finished goods 2018 £000 180 73 253 2017 £000 159 80 239 The value of inventories expensed in the period in cost of sales was £698,000 (2017: £600,000). Provision is made for slow moving and obsolete stock on a line by line basis. The value of any write downs/reversals in the current and previous period was not material. 18 Hire purchase contracts Due within one year Due after more than one year: Between one and two years Between two and three years Total due after more than one year Total hire purchase contract obligation A reconciliation of the obligation is stated below. At start of the year New hire purchase contracts Repayments At end of the year Hire Purchase Obligations 2018 2017 2018 £000 157 114 7 121 278 2018 £000 550 31 (303) 278 2017 £000 320 145 85 230 550 2017 £000 664 162 (276) 550 Carrying amount £000 Contractual cash flows £000 Less than one year £000 One to Two years £000 Two to Five years £000 278 550 301 620 172 375 120 155 9 90 TRACSIS PLC | 59 Notes to the Consolidated Financial Statements continued 19 Trade and other receivables Trade receivables Other receivables and prepayments Amounts recoverable on contracts 2018 £000 6,573 521 235 7,329 2017 £000 7,223 409 848 8,480 Although the Group has a large number of customers, there is a concentration of risk in that the Group derives a large amount of revenue from one major customer as detailed in note 6 (2018: 14% of revenue, 2017: 16% of revenue), though the credit worthiness of this customer is unquestionably strong. In other cases, where one customer represents a significant proportion of overall revenue, the relationship consists of a large number of small contracts which are not considered to be interdependent. The directors do not consider that any of the amounts from the sale of goods to be irrecoverable, hence no provision has been made for bad or doubtful debts in either the current or preceding year. The fair values of trade and other receivables are the same as their book values. Amounts recoverable on contracts relate to part completed projects related to the Group’s transportation data collection operations within the Traffic & Data Services division. Trade receivables that are past due are considered individually for impairment. The Group uses a monthly ageing profile as an indicator when considering impairment. The summarised ageing analysis of trade receivables past due but considered to be not impaired is as follows: Under 30 days overdue Between 30 and 60 days overdue Over 60 days overdue 2018 £000 978 80 - 1,058 2017 £000 1,070 295 172 1,537 The other classes within trade and other receivables do not contain impaired assets. The Group did not incur any material impairment losses on trade receivables in the period. The ageing profile above takes account of the enlarged Group, and the fact that the payment terms/collection period for an enlarged Group with a wide variety of customers continues to evolve. 60 | Annual Report and Accounts 2018 Notes to the Consolidated Financial Statements continued 20 Trade and other payables Trade payables Other tax and social security Deferred income Accruals and other payables 2018 £000 1,075 2,122 3,740 3,379 10,316 2017 £000 1,178 1,761 4,086 1,817 8,842 The Directors consider that the carrying amounts of trade payables approximates to their fair value. Deferred income relates to sales invoiced in advance of the completion of post contract customer support and hosting obligations, instances where the Group has raised sales invoices in advance of installation and acceptance of certain software sales, and also for software licences covering several accounting periods. Support, and revenue from Software as a Service will be recognised in the income statement over the remaining period of the contract, with other deferred income being recognised when the successful installation takes place, or over the period of time for which multiyear deals relate to. 21 Contingent consideration During the year, the Group acquired Travel Compensation Services Limited (renamed Tracsis Travel Compensation Services Limited) and Delay Repay Sniper Limited. Under the share purchase agreement, contingent consideration is payable which is linked to the profitability of the acquired businesses for a three year period post acquisition. The maximum amount payable is £4,700,000. The fair value of the amount payable was assessed at £1,200,000. During the year, contingent consideration of £323,000 was paid in respect of the SEP acquisition which was made in the year ended 31 July 2016, and £nil was paid in respect of the Ontrac acquisition which was made in the year ended 31 July 2016. An amount of £2,058,000 was paid after the Balance Sheet date in respect of the Ontrac acquisition which was agreed with the Sellers and also £7,000 in respect of SEP Limited. At the balance sheet date, the Directors assessed the fair value of the remaining amounts payable which were deemed to be as follows. SEP Limited Ontrac Limited Tracsis Travel Compensation Services Limited & Delay Repay Sniper Limited 2018 £000 7 2,058 1,200 3,265 2017 £000 330 4,711 - 5,041 The group has made numerous acquisitions over the past few years and carries contingent consideration payable in respect of them, which is considered to be a ‘Level 3 financial liability’ as defined by IFRS 13. These are carried at fair value, which is based on the estimated amounts payable based on the provisions of the Share Purchase Agreements and involves assumptions about future profit forecasts. The movement on contingent consideration can be summarised as follows: At the start of the year Arising on acquisition Cash payment Release to Statement of Comprehensive Income At the end of the year 2018 £000 5,041 1,200 (323) (2,653) 3,265 2017 £000 6,150 - (1,109) - 5,041 TRACSIS PLC | 61 Notes to the Consolidated Financial Statements continued 21 Contingent consideration (continued) The ageing profile of the remaining liabilities can be summarised as follows: Payable in less than one year Payable in more than one year Total 22 Deferred tax Non-current liability/(asset) At 31 July 2016 (Credit)/charge to income statement (note 12) At 31 July 2017 Arising on acquisition (note 5) (Credit)/charge to income statement (note 12) At 31 July 2018 2018 £000 2,165 1,100 3,265 2017 £000 5,041 - 5,041 Accelerated Intangible capital Share assets allowances options £000 £000 £000 4,159 (515) 3,644 496 (301) 3,839 125 (51) 74 2 (40) 36 (573) 116 (457) - (145) (602) Total £000 3,711 (450) 3,261 498 (486) 3,273 The closing deferred tax asset and liability has been calculated at 17% as at 31 July 2018 (2017: 17%). This is presented on the Balance Sheet as follows within non-current assets and liabilities. Deferred tax assets Deferred tax liabilities Net liability per table above 23 Share capital Allotted, called up and fully paid: Ordinary shares of 0.4p each 2018 £000 (602) 3,875 3,273 2017 £000 (457) 3,718 3,261 2018 2018 2017 2017 Number £ Number £ 28,334,086 113,336 27,963,784 111,855 The following share transactions have taken place during the year ended 31 July 2018: At start of the year Issued as consideration for business combinations Exercise of share options (Note 8) At end of the year 2018 Number 2017 Number 27,963,784 27,546,259 28,571 341,731 - 417,525 28,334,086 27,963,784 During the year, a number of options were exercised from the schemes with exercise price varying from 0.4p to 199.5p. 62 | Annual Report and Accounts 2018 Notes to the Consolidated Financial Statements continued 24 Capital and reserves The following describes the nature and purpose of each reserve: Reserve Share capital Share premium Merger reserve Retained earnings Description and purpose Amount subscribed for share capital at nominal value Amount subscribed for share capital in excess of nominal value Amounts arising from the premium of the fair value of shares issued over their nominal value, in respect of certain business combinations Cumulative net profits recognised in the income statement. The share based payment reserve which was previously shown separately was incorporated into retained earnings during the previous year. 25 Operating leases The Group leases several office facilities under operating leases plus various other assets. During the year £511,000 was recognised as an expense in the income statement in respect of operating leases (2017: £447,000). Leases as lessee Total outstanding commitments for future minimum lease payments under non-cancellable operating leases are set out below: Land and buildings Minimum lease payments are payable as follows: Within one year In the second to fifth years Plant and machinery Within one year In the second to fifth years 2018 £’000 338 413 751 2018 £’000 46 72 118 2017 £’000 410 659 1,069 2017 £’000 20 37 57 26 Financial risk management The principal financial instruments comprise cash and short term deposits. The main purpose of these financial instruments is to provide finance for the Group’s operations. The Group has various other financial instruments, such as trade receivables and payables that arise directly from its operations. The Group has taken advantage of the exemption to exclude short term debtors and creditors from the disclosures given below. The fair values of the financial instruments are equal to their year end carrying values and represent the maximum exposure. Financial assets 2018 Fixed Floating Rate £000 Rate £000 Total £000 Cash and short term deposits - 22,329 22,329 2017 Fixed Floating Rate £000 Rate £000 Total £000 - 15,350 15,350 TRACSIS PLC | 63 Notes to the Consolidated Financial Statements continued 26 Financial risk management (continued) The Group had no financial liabilities or derivative contracts in either the current or previous year. It is policy that no trading in financial instruments should be undertaken. The surplus cash balances have been invested in deposit accounts. The principal financial instruments used by the Group, from which financial instrument risk arises, are as follows: • • • trade receivables; cash at bank; trade and other payables. The main risks arising from the financial instruments are interest rate risk and liquidity risk. The Board reviews and agrees policies for managing each of these risks and they are summarised below. Fair value or cash flow interest rate risk Currently the Group has surplus cash balances so does not have a borrowing requirement. Surplus cash is put on short term deposit with high credit worthy banking institutions where appropriate at either fixed or floating rates. The Board monitors the financial markets and the Group’s future cash requirements to ensure that this policy is exercised in the Group’s best interests. At 31 July 2018, the Group did not have any fixed-rate deposits in place. Credit risk The Group monitors credit risk closely and considers that its current policies of credit checks meet its objectives of managing exposure to risk. The Group has no significant concentration of credit risk. Amounts shown in the balance sheet best represent the maximum credit risk exposure in the event that other parties fail to perform their obligations under financial instruments. Liquidity risk Liquidity risk is managed on a day to day basis. Facilities are agreed at appropriate levels having regard to the Group’s forecast operating cash flows and future capital expenditures. The Group holds its cash balances with highly rated financial institutions and it is also spread across numerous institutions to avoid any exposure to one individual bank. Capital disclosures The Group’s objectives when maintaining capital are: - to safeguard the entity’s ability to continue as a going concern, so that it can continue to provide returns for shareholders and benefits for other stakeholders, and; to provide an adequate return to shareholders by pricing products and services commensurately with the level of risk. - The capital structure of the Group consists of cash and cash equivalents, and equity attributable to shareholders of the parent, comprising issued share capital, reserves and retained earnings as disclosed in the Consolidated Statement of Changes in Equity and Notes 13, 23 and 24. The Group sets the amount of capital it requires in proportion to risk. The Group manages its capital structure and makes adjustments to it in the light of changes in economic conditions and the risk characteristics of the underlying assets. In order to maintain or adjust the capital structure, the Group may adjust the amount of dividends paid to shareholders, return capital to shareholders, issue new shares or sell assets. Sensitivity analysis In managing interest rates the Group aims to reduce the impact of short term fluctuations on the Group’s earnings. Over the long term, permanent changes in interest rates would have an impact on consolidated earnings. The Directors consider that a change of 100 basis points in interest rates at any period end would not have a material impact on cash flows. Market risks The Directors consider that the Group has no significant exposure to market risks with respect to its financial instruments. Foreign currency risk The Group makes some overseas sales and some overseas purchases, some of which are invoiced in Sterling and others in the local currency, so there continues to be a small exposure to foreign currency, in particular to the American dollar. 64 | Annual Report and Accounts 2018 Notes to the Consolidated Financial Statements continued 27 Related Party Transactions The following transactions took place during the year with other related parties: Leeds Innovation Centre Limited (1) Ashtead Plant Hire Co Limited (2) Flash Forward Consulting Limited (3) Citi Logik Limited (4) Nutshell Software Limited (4) Vivacity Labs Limited (4) WSP UK Limited (5) Flash Forward Consulting Limited (3) Citi Logik Limited (4) Purchase of Amounts owed to goods and services related parties 2018 £000 99 5 28 36 107 17 2017 £000 79 13 - 126 6 7 2018 £000 13 1 5 - 9 - 2017 £000 8 2 - 7 - Sale of Amounts owed by goods and services related parties 2018 £000 3,180 1 30 2017 £000 2,489 - - 2018 £000 883 - 36 2017 £000 708 - - (1) Leeds Innovation Centre Limited is a company which is connected to The University of Leeds. Tracsis plc rents its office accommodation, along with related office services, from this company. (2) Ashtead Plant Hire Co Limited is a subsidiary of Ashtead Group plc (Ashtead) of which Chris Cole is Chairman. SEP Limited, one of the Group’s subsidiaries purchased goods and services from Ashtead during the year. All transactions with Ashtead took place at arm’s length commercial rates and were not connected to Mr Cole’s position at Ashtead. SEP Limited traded with Ashtead prior to its acquisition by Tracsis plc. (3) Flash Forward Consulting Limited is a related party as John Nelson served as a Non-executive Director of Tracsis plc during the year and also Chairman of Flash Forward Consulting Limited (4) Citi Logik Limited, Nutshell Software Limited, and Vivacity Labs Limited, are related parties by virtue of the Group’s shareholding in these entities. (5) WSP UK Limited (WSP) is a company which is connected to Chris Cole who serves as non-executive Chairman of Tracsis plc and also of WSP Global Inc, WSP’s parent company. Sales to WSP took place at arm’s length commercial rates and were not connected to Mr Cole’s position at WSP. Terms and conditions of transactions with related parties The purchases from related parties are made at normal market prices. Outstanding balances that relate to trading balances are unsecured, interest free and settlement occurs in cash. There have been no guarantees provided or received for any related party receivables or payables. Compensation of key management personnel of the Group The Group considers the key management personnel to be its directors and the directors of the Group’s subsidiaries. Full details of their compensation are set out below: Total remuneration Share based payment charges 2018 £’000 2,214 451 2,665 2017 £’000 1,589 495 2,084 TRACSIS PLC | 65 Notes to the Consolidated Financial Statements continued 28 Employee benefits The Group makes contributions to defined contribution pension schemes for its employees. The pension cost charge for the year comprises contributions payable by the Group to the schemes and other personal pension plans and amounted to £352,000 (2017: £303,000). There were outstanding contributions at 31 July 2018 of £62,000 (2017: £36,000). 29 Group entities Below are the subsidiary undertakings which contribute to the Group results: Held by Tracsis plc Principal activity Country of incorporation Tracsis Rail Consultancy Limited (1) Rail industry consultancy England and Wales Tracsis Passenger Counts Limited (1) Rail industry consultancy England and Wales Safety Information Systems Limited (1) MPEC Technology Limited (1) Tracsis Traffic Data Limited (2) Datasys Integration Limited (1) Tracsis Retail & Operations Limited (1) SEP Limited (1) SEP Events Limited (1) Ontrac Technology Limited (1) Ontrac Limited (1) S-H TrafficData Solutions Private Limited (6) Tracsis Travel Compensation Services Limited (1) Delay Repay Sniper Limited (1) S Dalby Consulting Limited (1) Sky High Data Capture Limited (2) Sky High Traffic Data Limited (2) The Web Factory Birmingham Limited (2) Forsyth Whitehead & Associates Limited (2) Sky High Technology (Scotland) Limited (2) Count on Us Traffic Limited (2) Burra Burra Distribution Limited (2) Sky High NCS Limited (2) Halifax Computer Services Limited (2) Skyhightraffic Limited (2) The Traffic Survey Company Limited (2) The People Counting Company Limited (2) Myratech.net Limited (2) Footfall Verification Limited (2) Minority investments: Citi Logik Limited (3) Nutshell Software Limited (4) Vivacity Labs Limited (5) Software and consultancy Rail industry hardware & Datalogging Transportation data collection England and Wales England and Wales England and Wales Holding Company England and Wales Rail industry software Event planning & traffic management Dormant England and Wales England and Wales England and Wales Holding company England and Wales Rail industry software England and Wales Data processing India Rail industry software England and Wales Rail industry software England and Wales Dormant Dormant Dormant Dormant Dormant Dormant Dormant Dormant Dormant Dormant Dormant Dormant Dormant Dormant Dormant England and Wales England and Wales England and Wales England and Wales England and Wales England and Wales England and Wales England and Wales England and Wales England and Wales England and Wales England and Wales England and Wales England and Wales England and Wales Mobile Network Data Analysis Mobile application development Machine Learning technology England and Wales England and Wales England and Wales 17.2% 37.8% 23.3% % ordinary share capital owned 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 66 | Annual Report and Accounts 2018 Notes to the Consolidated Financial Statements continued 29 Group entities (continued) The registered offices of the subsidiaries are as follows: (1) (2) (3) (4) (5) (6) Leeds Innovation Centre, 103 Clarendon Road, Leeds, England, LS2 9DF Templar House, 1 Sandbeck Court, Sandbeck Way, Wetherby, England LS22 7BA Albury Mill Mill Lane, Chilworth, Guildford, England, GU4 8RU Floor 1, Baltimore House, Baltic Business Quarter, Gateshead, Tyne And Wear, England, NE8 3DF International House 24 Holborn Viaduct, City Of London, London, England, EC1A 2BN No.61, 2nd Main, 1st Block, Koramangala, Bangalore – 560034, India 30 Dividends The Group introduced a progressive dividend policy during previous years. The cash cost of the dividend payments is below: Final dividend for 2015/16 of 0.70p per share paid Interim dividend for 2016/17 of 0.60p per share paid Final dividend for 2016/17 of 0.80p per share paid Interim dividend for 2017/18 of 0.70p per share paid Total dividends paid The dividends paid or proposed in respect of each financial year is as follows: 2018 £000 - - 225 198 423 2017 £000 195 167 - - 362 Interim dividend for 2011/12 of 0.20p per share paid Final dividend for 2011/12 of 0.35p per share paid Interim dividend for 2012/13 of 0.30p per share paid Final dividend for 2012/13 of 0.40p per share paid Interim dividend for 2013/14 of 0.35p per share paid Final dividend for 2013/14 of 0.45p per share paid Interim dividend for 2014/15 of 0.40p per share paid Final dividend for 2014/15 of 0.60p per share paid Interim dividend for 2015/16 of 0.50p per share paid Final dividend for 2015/16 of 0.70p per share paid Interim dividend for 2016/17 of 0.60p per share paid Final dividend for 2016/17 of 0.80p per share paid Interim dividend for 2017/18 of 0.70p per share paid Final dividend for 2017/18 of 0.90p per share proposed 2018 £000 - - - - - - - - - - - - 198 255 2017 2016 2015 2014 2013 2012 £000 £000 £000 £000 £000 £000 - - - - - - - - - - 167 225 - - - - - - - - - - 137 195 - - - - - - - - - - 106 164 - - - - - - - - - - 89 119 - - - - - - - - - - 75 102 - - - - - - - - - - 48 87 - - - - - - - - - - - - The total dividends paid or proposed in respect of each financial year ended 31 July is as follows: Total dividends paid per share 2018 1.6p 2017 1.4p 2016 1.2p 2015 1.0p 2014 0.8p 2013 0.7p 2012 0.55p The dividend will be payable on 15 February 2019 to shareholders on the Register at 1 February 2019. TRACSIS PLC | 67 Notes to the Consolidated Financial Statements continued 31 Reconciliation of adjusted profit metrics In addition to the statutory profit measures of Operating profit and profit before tax, the Group quotes Adjusted EBITDA and Adjusted profit. These figures are relevant to the Group and are provided to provide a comparison to similar businesses and are metrics used by Equities Analysts who cover the Group. Adjusted EBITDA is defined as Earnings before finance income, tax, depreciation, amortisation, exceptional items, other operating income, and share-based payment charges and share of result of equity accounted investees. Adjusted EBITDA can be reconciled to statutory profit before tax as set out below: Profit before tax Finance income / expense – net Share-based payment charges Exceptional items Other operating income Amortisation of intangible assets Depreciation Share of result of equity accounted investees Adjusted EBITDA 2018 £000 8,275 8 1,193 (2,572) (214) 1,774 760 201 9,425 2017 £000 4,616 23 1,300 139 (134) 1,674 799 77 8,494 Adjusted profit is defined as Earnings before finance income, tax, amortisation, exceptional items, other operating income, share- based payment charges, and share of result of equity accounted investees. Adjusted profit can be reconciled to statutory profit before tax as set out below: Profit before tax Finance income / expense – net Share-based payment charges Exceptional items Other operating income Amortisation of intangible assets Share of result of equity accounted investees Adjusted profit Adjusted EBITDA reconciles to adjusted profit as set out below: Adjusted EBITDA Depreciation Adjusted profit 2018 £000 8,275 8 1,193 (2,572) (214) 1,774 201 8,665 2018 £000 9,425 (760) 8,665 2017 £000 4,616 23 1,300 139 (134) 1,674 77 7,695 2017 £000 8,494 (799) 7,695 32 Events after the Balance Sheet Date An amount of £2.1m was paid in respect of the acquisition of Ontrac Limited following the finalisation of the amounts due to the Sellers under the terms of the Share Purchase Agreement. 68 | Annual Report and Accounts 2018 Financial Statements Company Balance Sheet (prepared under FRS 101) as at 31 July 2018 Company number: 05019106 Non-current assets Property, plant and equipment Investments Deferred tax assets Current assets Cash and cash equivalents Trade and other receivables Total assets Non-current liabilities Contingent consideration Current liabilities Trade and other payables Contingent consideration Total liabilities Net assets Capital and reserves Called up share capital Share premium reserve Merger reserve Retained earnings Total equity Note 34 35 39 36 38 37 38 40 2018 £000 342 38,845 360 39,547 10,152 2,608 12,760 2017 £000 328 34,867 369 35,564 7,648 2,866 10,514 52,307 46,078 1,100 1,100 - - 10,304 2,165 12,469 9,830 5,041 14,871 13,569 14,871 38,738 31,207 113 6,243 3,160 29,222 38,738 112 5,948 3,010 22,137 31,207 The Company’s profit for the year, after dividends received was £6,315,000 (2017: £3,855,000) The financial statements were approved and authorised for issue by the Board of Directors on 8 November 2018 and were signed on its behalf by: John McArthur – Chief Executive Officer Max Cawthra – Chief Financial Officer The accompanying notes form an integral part of these financial statements TRACSIS PLC | 69 Total equity £000 31,207 6,315 (423) 1,193 150 296 Financial Statements Company Statement of Changes in Equity At 1 August 2017 Profit and total comprehensive income Dividends Share based payment charges Shares issued as consideration for business combinations Exercise of share options At 31 July 2018 At 1 August 2016 Profit and total comprehensive income Dividends Share based payment charges Exercise of share options At 31 July 2017 Share capital £000 112 Share premium £000 5,948 Merger reserve £000 3,010 Retained earnings £000 22,137 - - - - 1 113 - - - - 295 6,243 - - - 150 - 6,315 (423) 1,193 - - 3,160 29,222 38,738 Share capital £000 110 Share premium £000 5,622 Merger reserve £000 3,010 Retained earnings £000 17,344 - - - 2 112 - - - 326 5,948 - - - - 3,855 (362) 1,300 - Total equity £000 26,086 3,855 (362) 1,300 328 3,010 22,137 31,207 The following describes the nature and purpose of each reserve: Reserve Share capital Share premium Merger reserve Retained earnings Description and purpose Amount subscribed for share capital at nominal value Amount subscribed for share capital in excess of nominal value Amounts arising from the premium of the fair value of shares issued over their nominal value, in respect of certain business combinations Cumulative net profits recognised in the income statement. The share based payment reserve which was previously shown separately was incorporated into retained earnings during the previous year. The accompanying notes form an integral part of these financial statements 70 | Annual Report and Accounts 2018 Financial Statements Notes to the Company Balance Sheet 33 Company accounting policies Tracsis plc (“the Company”) was incorporated and is domiciled in the United Kingdom. Its registered office is Leeds Innovation Centre, 103 Clarendon Road, Leeds, LS2 9DF, registered number 05019106. The principal activity of Tracsis plc is that of a holding company and also software development and consultancy for the rail industry. The company’s accounting reference date is 31 July. Basis of preparation The financial statements have been prepared in accordance with Financial Reporting Standard 101 ‘Reduced Disclosure Framework’ (“FRS 101”) which has been applied. The principal accounting policies adopted in the preparation of the financial statements are set out below. The policies have been consistently applied to all the years presented, unless otherwise stated. The financial statements have been prepared on a historical cost basis. The presentation currency used is sterling and amounts have been presented in round thousands (“£000s”). Disclosure exemptions adopted: In preparing these financial statements the company has taken advantage of all disclosure exemptions conferred by FRS 101. Therefore these financial statements do not include: • • • • • • • certain comparative information as otherwise required by EU endorsed IFRS; certain disclosures regarding the company’s capital; a statement of cash flows; the effect of future accounting standards not yet adopted; these financial statements do not include certain disclosures in respect of share based payments. the disclosure of the remuneration of key management personnel; and disclosure of related party transactions with other wholly owned members of the Tracsis plc group of companies. In addition, and in accordance with FRS 101 further disclosure exemptions have been adopted because equivalent disclosures are included in the Company’s financial statements. TRACSIS PLC | 71 Notes to the Company Balance Sheet continued 33 Company accounting policies (continued) Revenue recognition Revenue is measured at the fair value of the consideration received or receivable (excluding value added tax and discounts given) derived from the provision of goods and services to customers during the period. The Company derives revenue from software licences, post contract customer support and consultancy services. The Company recognises the revenue from the sale of software licences and specified upgrades upon shipment of the software product or upgrade, when there are no significant vendor obligations remaining, when the fee is fixed and determinable and when collectability is considered probable. Where appropriate the Company provides a reserve for estimated returns under the standard acceptance terms at the time the revenue is recognised. Payment terms are agreed separately with each customer. Revenue from post contract customer support and consultancy services is recognised on a straight-line basis over the term of the contract. Revenue received and not recognised in the profit and loss account under this policy is classified as deferred income in the balance sheet. Revenue from other products and services is recognised as the products are shipped or services provided. Revenue from consultancy and professional services is recognised when the services have been performed, once the work and value has been agreed with the customer. Property, plant and equipment Property, plant and equipment is initially recognised at cost. As well as the purchase price, cost includes directly attributable costs. Depreciation is provided on all items so as to write off the carrying value of items over their expected useful economic lives. It is applied at the following rates: Freehold buildings (excluding land) Computer equipment – – 4% on cost 33 1/3% on cost Investments Fixed asset investments are stated at cost less provision for impairment where appropriate. The directors consider annually whether a provision against the value of investments on an individual basis is required. Such provisions are charged in the income statement in the year. Taxation The tax on the profit or loss for the year represents current and deferred tax. The tax currently payable is based on taxable profit for the period. 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 Company’s liability for current tax is calculated using tax rates that have been enacted at the balance sheet date. Deferred tax is provided in full, using the liability method, on temporary differences arising between the tax bases of assets and liabilities and their carrying value in the financial statements. The principal temporary differences arise from depreciation on plant and equipment and share options granted by the Group to employees and directors. Deferred tax assets and liabilities are measured on an undiscounted basis at the tax rates that are expected to apply when the related asset is realised or liability is settled, based on tax rates and laws enacted or substantively enacted at the balance sheet date. Where the deferred tax asset recognised in respect of share-based payments would give rise to a credit in excess of the related accounting charge at the prevailing tax rate the excess is recognised directly in equity. Deferred tax assets are recognised to the extent that it is probable that future taxable profit will be available against which the temporary differences can be utilised. 72 | Annual Report and Accounts 2018 Notes to the Company Balance Sheet continued 33 Company accounting policies (continued) Leases Leases are classified as finance leases whenever the terms of the lease transfer substantially all the risks and rewards of ownership to the lessee. All other leases are classified as operating leases. Operating lease payments are recognised as an expense on a straight line basis over the lease term, except where another systematic basis is more representative of the time pattern in which economic benefits from the leased asset are consumed. Share based payments The Company’s accounting policies followed are in all material regards the same as the Group’s policy as shown on page 39. Where there are charges relating to subsidiary undertakings, these are borne by the relevant subsidiary undertakings via a recharge. The Company has not presented its own profit and loss account as permitted by Section 408 of the Companies Act 2006. The Company’s profit after taxation for the year amounted to £6,315,000 after receiving dividends from subsidiary undertakings of £3,350,000 and an exceptional contingent consideration credit of £2,653,000 (2017: profit of £3,855,000 after receiving dividends of £3,550,000). 34 Property, plant and equipment Cost At 1 August 2017 Additions At 31 July 2018 Depreciation At 1 August 2017 Charge for the year At 31 July 2018 Net book value At 31 July 2017 At 31 July 2018 *Includes land of £100,000 which is not depreciated 35 Investments At 1 August 2017 Additions At 31 July 2018 Freehold Land & Computer Buildings* equipment £000 £000 400 - 400 78 12 90 322 310 34 34 68 28 8 36 6 32 Total £000 434 34 468 106 20 126 328 342 Shares in, and loans to subsidiary undertakings £000 34,867 3,978 38,845 TRACSIS PLC | 73 Notes to the Company Balance Sheet continued 35 Investments (continued) The companies in which Tracsis plc’s interest is more than 10% at the year end are as follows: Name Subsidiary undertakings: Tracsis Rail Consultancy Limited Tracsis Passenger Counts Limited Safety Information Systems Limited Country of incorporation Class and percentage Principal activity of shares held Holding England and Wales Rail industry consultancy Ordinary 100% Direct Rail industry ancillary services Ordinary 100% Direct England and Wales England and Wales MPEC Technology Limited England and Wales Tracsis Traffic Data Limited England and Wales Software and consultancy Rail industry hardware & datalogging Transportation data collection Datasys Integration Limited Tracsis Retail & Operations Limited England and Wales Holding Company England and Wales Rail industry software SEP Limited England and Wales SEP Events Limited England and Wales Event planning & traffic management Dormant Ontrac Technology Limited England and Wales Holding Company England and Wales Rail industry software India Data processing Ordinary 100% Indirect England and Wales Rail industry software England and Wales Rail industry software Ordinary 100% Ordinary 100% Ordinary 100% Ordinary 100% Ordinary 100% Ordinary 100% Ordinary 100% Ordinary 100% Ordinary 100% Direct Direct Direct Direct Indirect Direct Indirect Direct Indirect Ordinary 100% Ordinary 100% Ordinary 100% Ordinary 100% Ordinary 100% Indirect Direct Direct Indirect Indirect Dormant Dormant Dormant Dormant Ordinary 100% Indirect Dormant Ordinary 100% Indirect Dormant Ordinary 100% Indirect Dormant Ordinary 100% Indirect Dormant Ordinary 100% Indirect Dormant Ordinary 100% Indirect Dormant Ordinary 100% Indirect Dormant Ordinary 100% Indirect Dormant Ordinary 100% Indirect Dormant Ordinary 100% Indirect Dormant Dormant Ordinary 100% Ordinary 100% Indirect Indirect Ontrac Limited S-H TrafficData Solutions Private Limited Tracsis Travel Compensation Services Limited Delay Repay Sniper Limited S Dalby Consulting Limited England and Wales Sky High Data Capture Limited England and Wales Sky High Traffic Data Limited The Web Factory Birmingham Limited Forsyth Whitehead & Associates Limited Sky High Technology (Scotland) Limited Count on Us Traffic Limited Burra Burra Distribution Limited Sky High NCS Limited Halifax Computer Services Limited Skyhightraffic Limited The Traffic Survey Company Limited The People Counting Company Limited Myratech.net Limited England and Wales England and Wales England and Wales England and Wales England and Wales England and Wales England and Wales England and Wales England and Wales England and Wales England and Wales England and Wales Footfall Verification Limited England and Wales Minority investments Citi Logik Limited England and Wales Mobile network data analysis Ordinary 17.2% Nutshell Software Limited England and Wales Mobile application development Ordinary 37.8% Vivacity Labs Limited England and Wales Machine learning technology Ordinary 23.3% Direct Direct Direct 74 | Annual Report and Accounts 2018 Notes to the Company Balance Sheet continued 36 Trade and other receivables Trade receivables Amounts owed by group undertakings Other debtors Corporation Tax Prepayments 2018 £000 294 1,168 362 756 28 2,608 2017 £000 356 1,573 348 577 12 2,866 The carrying value of trade receivables approximates to the fair value. Amounts owed by group undertakings are interest free and repayable on demand. Corporation tax is recoverable from other Group companies as Tracsis plc acts as the lead company for the Group’s Payment on Account regime. 37 Trade and other payables Trade payables Other tax and social security Amounts owed to group undertakings Accruals and deferred income 2018 £000 125 60 8,996 1,123 10,304 2017 £000 27 45 9,229 529 9,830 The carrying value of trade receivables approximates to the fair value. Amounts owed to group undertakings are interest free and repayable on demand. 38 Contingent consideration During the year, the Group acquired Travel Compensation Services Limited and Delay Repay Sniper Limited. Under the share purchase agreement, contingent consideration is payable which is linked to the profitability of the acquired businesses for a three year period post acquisition. The maximum amount payable is £4,700,000. The fair value of the amount payable was assessed at £1,200,000. During the year, deferred and contingent consideration of £323,000 was paid in respect of the SEP acquisition which was made in the year ended 31 July 2016, and £nil was paid in respect of the Ontrac acquisition which was made in the year ended 31 July 2016. An amount of £2,058,000 was paid after the Balance Sheet date in respect of the Ontrac acquisition which was agreed with the Sellers and also £7,000 in respect of SEP Limited. At the balance sheet date, the Directors assessed the fair value of the remaining amounts payable which were deemed to be as follows. SEP Limited Ontrac Limited Travel Compensation Services Limited & Delay Repay Sniper Limited 2018 £000 7 2,058 1,200 3,265 2017 £000 330 4,711 - 5,041 An exceptional release to the Statement of Comprehensive Income was recognised amounting to £2,653,000 TRACSIS PLC | 75 2018 £000 2,165 1,100 3,265 2017 £000 5,041 - 5,041 2018 £000 (369) 9 (360) 2018 £000 - (360) (360) 2017 £000 (436) 67 (369) 2017 £000 (3) (366) (369) Notes to the Company Balance Sheet continued 38 Contingent consideration (continued) The ageing profile of the remaining liabilities can be summarised as follows: Payable in less than one year Payable in more than one year Total 39 Deferred tax (asset) / liability At start of the year Charge to income statement during the year At end of the year The deferred tax asset can be split as follows: Accelerated Capital Allowances Share options At end of the year 40 Share capital Allotted, called up and fully paid: Ordinary shares of 0.4p each 2018 2018 2017 2017 Number £ Number £ 28,334,086 113,336 27,963,784 111,855 The following share transactions have taken place during the year ended 31 July 2018: At start of the year Issued as consideration for business combinations Exercise of share options At end of the year 2018 Number 2017 Number 27,963,784 27,546,259 28,571 341,731 - 417,525 28,334,086 27,963,784 76 | Annual Report and Accounts 2018 Notes to the Company Balance Sheet continued 41 Operating leases Operating lease commitments. Minimum lease payments are payable as follows: Land and buildings: Within one year Between one and two years 42 Related Party Transactions 2018 £’000 26 - 2017 £’000 61 25 The following transactions took place during the year with other related parties: Leeds Innovation Centre Limited Purchase of Amounts owed to goods and services related parties 2018 £000 99 2017 £000 79 2018 £000 13 2017 £000 8 Leeds Innovation Centre Limited is a company which is connected to The University of Leeds. Tracsis plc rents its office accommodation, along with related office services, from this company. Terms and conditions of transactions with related parties The purchases from related parties are made at normal market prices. Outstanding balances that relate to trading balances are unsecured, interest free and settlement occurs in cash. There have been no guarantees provided or received for any related party receivables or payables. Compensation of key management personnel of the Group The Company considers the directors to be its key management personnel. Full details of their compensation are set out in the Directors’ Remuneration Report. Group information Company Secretary and Registered Office Max Cawthra Auditor KPMG LLP Leeds Innovation Centre 103 Clarendon Road Leeds LS2 9DF 1 Sovereign Square Sovereign Street Leeds LS1 4DA Telephone +44 (0) 845 125 9162 Principal bankers Fax +44 (0) 845 125 9163 Registered number 05019106 Website www.tracsis.com HSBC Bank plc 33 Park Row Leeds LS1 1LD TRACSIS PLC | 77 Nominated Advisor and Stockbroker finnCap Limited 60 New Broad Street London EC2M 1JJ Registrars Neville Registrars 18 Laurel Lane Halesowen West Midlands B63 3DA Additional bankers Solicitors Barclays NatWest Santander Royal Bank of Scotland Co-Operative Rosenblatt Solicitors 9-13 St Andrew Street London EC4A 3AF
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