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| Share Name | Share Symbol | Market | Type | Share ISIN | Share Description |
|---|---|---|---|---|---|
| K3 Business Technology Group Plc | LSE:KBT | London | Ordinary Share | GB00B00P6061 | ORD 25P |
| Price Change | % Change | Share Price | Bid Price | Offer Price | High Price | Low Price | Open Price | Shares Traded | Last Trade | |
|---|---|---|---|---|---|---|---|---|---|---|
| 0.00 | 0.00% | 103.50 | 102.00 | 105.00 | 103.50 | 103.50 | 103.50 | 1,800 | 08:00:00 |
| Industry Sector | Turnover | Profit | EPS - Basic | PE Ratio | Market Cap |
|---|---|---|---|---|---|
| Fabricated Rubber Pds, Nec | 47.48M | -3.98M | -0.0902 | -11.47 | 45.63M |
From Apr 2019 to Apr 2024
TIDMKBT
RNS Number : 0911U
K3 Business Technology Group PLC
27 July 2020
AIM: KBT
27 July 2020
K3 BUSINESS TECHNOLOGY GROUP PLC
("K3" or "the Group" or "the Company")
Provider of mission-critical software (owned and third party), cloud solutions and managed services to the supply chain sector
Final results for the 12 months to 30 November 2019
Key Points
Summary
-- Results were impacted by weak trading conditions and expected high margin licence orders not coming through
-- Post year end, additional funds of GBP6.0m were raised and the loss-making UK Dynamics practice (which generated GBP21m of revenues and an operating loss of GBP3m in the year) was placed into administration
-- Results include GBP12.2m impairment charge relating to UK Dynamics
-- The Board believes that Group has the operational and financial capacity to weather the coronavirus crisis and views prospects positively beyond the current period of uncertainty
Financial
Hot Features
Premium
12 months 12 months
to 30 November to 30 November
2019 2018
Revenue GBP78.4m GBP83.3m
- recurring revenue as a % of total
(*5) 66.7% 60.1%
- annual contracted revenues as
a % of total (*4) 69.5% 63.5%
- own IP revenue as a % of total 26.6% 28.7%
Gross margin 51.1% 52.7%
Adjusted EBITDA (*9) GBP7.2m GBP8.1m
Adjusted profit from operations(*1) GBP1.8m GBP4.6m
Reported (loss)/profit from operations GBP(13.7)m GBP0.7m
Adjusted profit before tax(*2) GBP0.9m GBP4.0m
Reported (loss)/profit before tax GBP(14.5)m GBP0.0m
Adjusted (loss)/earnings per share(*3) (6.6)p 6.8p
Reported earnings per share (36.1)p (1.1)p
Net cash generated from operating GBP5.5m GBP7.8m
activities
Net debt(*6) GBP(2.4)m GBP0.6m
-- High level of recurring income, GBP52.2m including contracted revenues (2018: GBP50.0m)
-- Margin from own IP product sales was 74.2% against 42.1% from third party product sales
-- Reported loss before tax is after an impairment charge of GBP12.2m
-- Cash balances (net of overdraft) at 30 June 2020 of GBP8.9m and historically strong cash inflows in H2 from licence fee and maintenance contract renewals
Operational
-- Cornerstone own IP products are gaining traction:
o K3|imagine generated first full year revenue of GBP0.3m and secured GBP0.6m of contracts. Post year end, GBP0.8m of contracts were signed and current new business pipeline for FY20 is GBP4m and a further GBP10m in FY21
o K3|dataswitch in second year as a stand-alone product generated GBP0.7m of revenue
o Global endorsement from Microsoft for K3|fashion as the recommended fashion & apparel 'bolt-on' product for Dynamics365F&O
-- SYSPRO business continued to generate strong cash flows and delivered good results -- Global Accounts unit grew strongly with further expansion in Far East -- Further organisational simplification; Group is now structurally more efficient
Coronavirus
-- The Board's priority is the welfare and safety of staff and partners and to safely navigate the current crisis
-- Measures have been put in place to conserve cash and reduce costs, including furlough, tax deferral schemes and further efficiency programmes
Current Trading
-- Board believes that the Group is financially and operationally positioned to navigate the current coronavirus crisis
-- GBP6m of additional funding in April 2020 from shareholder loans and increased bank facilities
-- Under-performing UK Dynamics practice was placed into administration in April 2020 -- Weaker trading condition in retail sector -- IKEA franchisee customer base is performing well and ahead of expectations -- K3|fashion deals continue to close with 6 in FY20 to date totalling GBP1.0m -- Maintenance and Support revenues excluding UK Dynamics are in line with expectations
Adalsteinn Valdimarsson, Chief Executive Officer of K3, commented:
"Results show the impact of certain expected high-margin orders not coming through as well as weaker trading conditions. Nonetheless, over the year, we continued to make progress with our own-IP product offering, building out our cornerstone products, K3|imagine and K3|dataswitch, and seeing a first full year's contribution from K3|imagine. K3|fashion, our product aimed at large enterprises, was also named by Microsoft as its recommended Dynamics 'bolt-on' for fashion and apparel globally.
"The global coronavirus pandemic has now overtaken events and the Company's priority is the welfare of its employees and supporting customers and partners during the disruption. The Board has taken swift action to conserve cash and reduce costs, and has also improved the Company's liquidity by securing additional cash funding of GBP6.0m through loans from major shareholders and Barclays Bank.
"While it was a difficult decision in April to place the loss-making UK Dynamics subsidiary into administration, this now leaves the Group wholly focused on its core profitable business units.
"We are confident that K3 has the financial and operational capacity to weather the current challenges created by the coronavirus pandemic and we remain positive about K3's growth prospects beyond the crisis. We have a stable cash generative business and believes that our own IP products can create significant value ."
Enquiries:
K3 Business Technology Adalsteinn Valdimarsson T: 020 3178 6378 (today)
Group plc (CEO)
www.k3btg.com Robert Price (CFO) Thereafter 0161 876
4498
finnCap Limited Julian Blunt/ James Thompson T: 020 7220 0500
(NOMAD & Broker) (Corporate Finance)
Camille Gochez
(Corporate Broking)
KTZ Communications Katie Tzouliadis/ Dan T: 020 3178 6378
Maloney
K3 at a Glance
K3 is a leading provider of mission-critical software solutions based on own IP and third party solutions. Our customer base is large, comprising around 3,400 companies in the UK, in Europe, the Far East and the USA. Once installed, our solutions typically generate high levels of recurring revenues through annual software licence renewals, support contracts and hosting, and customer relationships are very long, something we promote through high service levels. This also creates the opportunity for us to upgrade and offer additional products and solutions.
K3's own IP is a cornerstone of the business and differentiates us in the market. It drives higher margins and enables us to repeatedly service our customers with relevant solutions specifically designed for their vertical needs. It also enables us to extend our market reach by selling through partners globally.
Building on our already strong customer foundation, we are applying and extending our IP development expertise to new areas such as K3|imagine - a cloud-native, ERP agnostic platform and library of scalable apps that easily integrate into any existing infrastructure. This is a key enabler for our strategic future growth in the rapidly changing business applications landscape and enables us to design and develop relevant and value-adding solutions for our customers.
CHAIRMAN'S AND CHIEF EXECUTIVE'S STATEMENT
Overview
Results for the year show the impact of weaker trading conditions, with customers generally more cautious about expenditure decisions. Specifically, as we reported in October 2019, several customer orders that we were expecting, including a major new contract and follow-on software licences, did not come through, and in addition a large customer entered administration. The majority of this lost revenue opportunity was for product based on our own intellectual property ("IP"), where blended margins are close to 75% (compared with third-party product sales where blended margins are about 42%), although services income was also affected.
Total revenue was 5.8% down year-on-year at GBP78.4m (2018: GBP83.3), adjusted EBITDA was GBP7.2m (2018: GBP8.1m) and adjusted profit from operations (*1) decreased to GBP1.8m (2019: GBP4.6m), showing the effect of the shortfall in own IP sales, the weak performance of the UK Dynamics practice and the adoption of IFRS16, which increased depreciation charges. The adoption of IFRS 15 increased revenue by GBP0.3m, which had been partially recognised in 2018.
While these results were disappointing, we made progress operationally and with product development. During the year, we further streamlined our organisational model. This will help to generate efficiencies, strengthen sales and improve the customer experience. We also continued to invest in increasing the sales of our own IP, focusing in particular on K3|imagine, our cutting-edge, cloud-native product launched at the end of the last financial year. We see K3|imagine as a cornerstone product for the Group as we increase own IP sales within our overall offering.
In the second half of the year, Microsoft named K3|fashion as its recommended solution for the fashion and apparel market globally. This endorsement is a valuable validation of our solution, which while based on Microsoft technology is powered by K3 IP. It should also assist with sales through our global channel partner network.
In light of UK Dynamic's performance and our strategic focus on own IP product sales, in early 2020, we commenced a process to review options for our loss-making UK Dynamics reseller subsidiary, including the potential sale of the business. The subsidiary generated an adjusted operating loss of GBP3.0m and turnover of GBP21.0m in the year under review and it was determined the Group could no longer support these losses. An impairment charge was taken on the assets and, on 21 April 2020, the Directors of K3 Business Technologies Ltd (the UK Dynamics reseller subsidiary) put the company into administration. While this was a difficult decision to take, it has left K3 with a clear focus on growing its profitable core business units, especially our flagship K3|imagine product.
At the same time, events in the new financial year have been subsequently overtaken by the spread of the coronavirus across the globe. National governments' measures to contain its spread, including 'lockdowns', have caused considerable economic and social disruption. We reacted swiftly to take action to ensure the welfare of our employees, and to conserve cash and manage the Group through the crisis as prudently as possible. In April 2020, we raised an additional GBP6.0m of cash and, having completed a series of assessments, we believe that K3 has adequate resources to navigate current uncertainties. Further comment on this is provided in this report.
Financial Results
Group revenue for the year ended 30 November 2019 totalled GBP78.4m (2018: GBP83.3m). K3 IP generated approximately 26% of this total at GBP20.9m, down 13% on the prior year (2018: GBP23.9m), mainly reflecting the reduced level of major new contracts wins/software licence orders. Third-party product sales, which made up the balance, were 3% down year-on-year at GBP57.5m (2018: GBP59.4m). The adoption of IFRS 15 increased revenue by GBP0.3m, which had been partially recognised in 2018. The adoption of IFRS 9 resulted in a reduction of net assets at 1 December 2018 of GBP0.8m.
Recurring revenue continued to increase up 4% to GBP52.2m (2018: GBP50.0m), representing 67% of Group revenue (2018: 60%). Including software term contracts recognised in the year, the Group's base of annual contracted revenue comprised 69% of Group revenue (2018: 64%).
Revenue from non-UK markets comprised 46% of total Group revenue (2018: 44.0%) and we expect it to grow, mainly driven by the own IP sales, including via our channel partner network, and from our Global Accounts unit. K3's revenue exposure to the UK high street fashion and apparel market is GBP5.4m (2018: GBP7.2m) equivalent to 6.9% of total revenue (2018: 8.6%). The vast majority of this relates to the UK Dynamics business, which is no longer part of the Group.
Group gross profit reduced by 9% to GBP40.0m (2018: GBP43.8m), with the contribution from K3 IP down 9% at GBP15.5m (2018: GBP17.0m) and third-party products down 10% to GBP24.2m (2018: GBP26.9m). K3 IP blended gross margin increased to 74.1% (2018: 71.4%), reflecting the mix of products sold. Third-party products blended gross margin reduced to 42.0% (2018: 45.3%). As a result, the overall Group margin reduced to 51.1% (2018: 52.7%) with the main reasons for the reduction being lower revenue recognition on K3|fashion deals and reduced Services utilisation and chargeability in a soft UK market.
After overheads of GBP38.2m (2018: GBP39.2m), adjusted profit from operations(*1) decreased to GBP1.8m (2018: GBP4.6m). This decline was driven by lower sales caused by Brexit softness and slippage some new own IP deals. The adoption of the IFRS 16 in the year meant that GBP0.3m of cost classified as overheads in FY2018 was classified as interest in FY2019, and FY2019 included GBP1.7m of depreciation. For comparison purposes if IFRS 16 had not been adopted in 2019 adjusted operating profit would have been GBP2.1m with an operating lease charge of GBP1.9m after adjusting for depreciation of GBP1.7m.
After exceptional reorganisation costs of GBP0.5m (2018: GBP1.4m), amortisation of acquired intangibles of GBP2.5m (2018: GBP2.5m), impairment of GBP12.2m (2018: nil), a customer settlement provision of GBP0.4m (2018: GBPnil) and a share-based payment credit of GBP0.1m (2018: charge GBP0.1m), the loss from operations was GBP(13.7)m (2018: profit from operations of GBP0.7m). The share-based payment charge related to the share options granted during the current and prior financial years, and as the amount can fluctuate significantly from year to year, the Board considers it useful to adjust for it.
Adjusted loss per share(*3) was (6.6)p (2018: adjusted earnings per share(*3) of 6.8p as restated), and the basic loss per share was (36)p (2018: loss per share of 1.1p).
Balance Sheet and Cash Generation
As expected, at the end of the financial year, net debt stood at GBP2.4m (30 November 2018: net debt of GBP0.6m) driven by lower EBITDA and increased development expenditure on K3|imagine. As at 30 June 2020, Net Bank Debt was GBP3.9m comprising GBP12.7m of cash, GBP3.8m of overdraft and GBP12.8m of drawn facilities.
The UK Dynamics subsidiary was impaired by GBP12.2m across Intangibles and non-current assets. Net working capital was GBP(4.3)m 2018: GBP(1.4)m) driven by lower multi-year deals, better credit management and lower revenue.
The adoption of IFRS 16 in the year has impacted comparability with 2018. The adoption has increased "cash generated from operations" by GBP1.7m due to the depreciation add back, and increased cash outflows of "cash flows from financing activities" by GBP1.5m. In 2018 all operating leases outflows were included in "cash generated from operating activities".
In August 2019, we extended our banking facilities to March 2021 and, in the new financial year, in April 2020, we raised GBP6.0m of additional funding.
Dividend and AGM
Given the impact of the coronavirus crisis, the Board believes it is prudent to suspend dividends until there is more certainty.
K3's Annual General Meeting was held on 29 May 2019 at 10.30am at Baltimore House, 50 Kansas Avenue, Manchester M50 2GL. In line with Government guidance, shareholders were not permitted to attend the AGM in person this year.
Business Model and Operational Progress
Business Model
A core element of our growth strategy is to increase revenues from our own IP, which will drive both Group margins and recurring revenues. We have created 'stand-alone' products, including our flagship suite, K3|imagine, and K3|dataswitch, which integrates our products into any IT infrastructure. We have also embedded our own IP within specific third-party ERP solutions, including Microsoft. As part of a third-party product, our IP enriches the existing solution and enables us to tailor it for specific market sectors. In doing so, we are able to strongly differentiate our offering in the marketplace, and create stronger customer relationships. Whilst the majority of our sales are direct, through our sales teams, we also sell through channel partners. These indirect sales have the potential to be a major profit driver for the Group and are a key focus for future growth.
Operational Progress
During the year we brought the various Business Development, Customer Experience and Service Delivery teams operating across the Group into three central functions. This model has created efficiencies but, more importantly, it has established a more effective structure from which to sell our products, both to new customers and to our existing 3,700-strong customer base. It also enables us to better manage our Global Services delivery resource.
During the year, we added additional solutions to the K3|imagine platform, our class-leading, cloud native product. These point solutions include apps such as our mobilePOS solution, as well as Self-Serve Kiosks, Store Companion and Order Ready Boards. We also provide customers with access to the K3|imagine platform itself for their own bespoke apps. All these propositions are offered on a Software-as-a-Service ("SaaS") basis i.e. on a consumption model.
Unlike traditional solutions, the K3|imagine platform and our point solutions can be quickly and easily integrated into any IT infrastructure using our K3|dataswitch integration suite. Customers therefore do not need to replace their core systems, and can readily upgrade their technology, adopting the latest solutions and applications. They also benefit from a faster return-on-investment as well as extending the life of previous IT investments. We plan to develop new applications for K3|imagine, working in conjunction with customers, and will be using proven routes-to-markets to develop sales in new geographies.
Over the year, we sold K3|imagine to existing customers in our Global Accounts business, European unit and in our UK ERP solutions business. Customers purchased access to the platform as well as point solutions, including Mobile Goods Flow, Store Companion, Self-Serve Kiosks and Order Ready Boards
K3|dataswitch, our integration services product, which completed its second year as a 'standalone' product, is now a cornerstone solution. It also supports K3|imagine, enabling it to be system agnostic. We launched a Cloud-based version of K3|dataswitch during the year and see an exciting opportunity to grow sales significantly.
K3|fashion, which is targeted at retail enterprises, added seven customers over the year, a significant uplift on the prior year, with the majority of these sales coming through our channel partners. All the contracts signed were on a subscription basis (term contracts) with payment spread over the term of the contract. This compares to the historic model of 'on-premise' solutions and a perpetual licence for which there was a large upfront payment. As previously reported, some large K3|fashion contracts that were in negotiation did not conclude as expected. However, Microsoft's global endorsement of the product in the second half of the year as the recommended Dynamics365F&O 'bolt-on' for fashion & apparel globally has raised the profile of our solution, benefiting the new business pipeline.
Our Sage practice strengthened significantly over the year. We are now a platinum developer partner and are providing the endorsed Sage 200 hosting product to the entire UK Sage base. In addition, after the year end, K3|dataswitch has been listed on Sage Additions, the Sage ISV platform, as an approved integration suite for Sage 200 globally.
We continued to expand in Asia, and the office in Kuala Lumpur, Malaysia, which opened in 2018, now comprises a team of 25. We anticipate ongoing good growth in the Far East, especially at our Global Accounts operation.
Staff
On behalf of the Board, we extend our thanks to all our staff for their hard work over the year. We have talented and motivated individuals and teams, and their dedication and drive are much appreciated.
Brexit
The Board continues to assess the risk from the UK's departure from European Union membership, and currently does not believe that it will have a material impact on the operations of the Group. As previously stated, this view reflects the 'in-country' nature of software implementations and the fact that software deployment does not have physical logistics challenges. We continue to be mindful of the negotiations during the "transition period" and their impact on the lengthening decision cycles for UK customers. However much of the Group's growth is focused on international markets and there is potential opportunity arising from any increased IT requirement from our Eire customers. The Group's consolidated reported earnings are denominated in sterling, and therefore will be affected by any currency movements.
Post Year End Events
As reported on 1 April 2020, we secured GBP6.0m of additional funding through loans from Barclays and two major shareholders, Kestrel Partners LLP ("Kestrel") and Johan Claesson, also a Non-executive Director. The cash funding has strengthened the Group's liquidity position during this period of unprecedented disruption caused by the coronavirus pandemic.
In April 2020, having taken independent advice, the difficult decision was taken to place the underperforming UK Dynamics subsidiary, a reseller of Microsoft Dynamics, into administration. The subsidiary generated an operating loss in excess of GBP3.0m on turnover of GBP21.0m in the financial year under review, and it became clear that further significant negative EBITDA and cash outflows would be produced in the 2020 financial year. Following administration, the operational assets were sold to three buyers within three weeks. The Group now follows an indirect model via partners for K3|fashion and K3|pebblestone distribution in the UK, as we currently do in all other markets globally. Whilst the subsidiary has now entered administration, it should be noted there is no adverse effect on the Group's Microsoft Dynamics practices outside the UK. Management is now fully focused on growing the Group's core profitable business units and accelerating the transition towards its own IP, in particular the new flagship K3|imagine product.
The impact on the business from the coronavirus is a non-adjusting post balance sheet event and therefore was not considered in the impairment review. The coronavirus has had an impact on trading after the year end.
Coronavirus Pandemic
The coronavirus pandemic has created global economic and social disruption. During these unprecedented times, K3 is continually reviewing the existing and potential impact of the pandemic on our employees, the Group, our customers, partner businesses, and wider stakeholder groups.
We have been able to shift to a home-based working environment depending on the local geographic office advice and we are using on-line collaboration tools to facilitate work across a number of different locations. Whilst customer site visits have been restricted we are operating normal remote support levels.
The Group has modelled a variety of coronavirus scenarios in order to assess their potential financial impact over the coming months. We have modelled scenarios that crossover different geographic territories and our revenue streams and implemented actions that mitigate our short term cost and cash outflows, including furlough and tax deferrals schemes, whilst ensuring we have a long term sustainable business.
On an assumption that we have six months of soft trading from March to August 2020, we expect a reduction in new sales of around 90% in our mainland Europe territory. In the UK, we have anticipated software sales to be 70% lower. Our Global Accounts business, which has a Far East bias, appears to be through the worst given that those countries were impacted earlier, and customers are still moving ahead with projects, and we therefore expect a low level of impact. We expect a 75% reduction in Services revenue for UK ERP projects due to delayed projects and/or fewer on-site implementations, with a corresponding reduction in service delivery staff. Channel and partner software sales are anticipated to be 30% down.
We anticipate Maintenance and Support revenue to be resilient but expect some degree of bad debt and delayed payments.
Overheads are expected to reduce by GBP4.7m following the entry into administration of the UK Dynamics business and a further GBP3.3m reduction in overheads is expected as a result of a number of measures put in place in response to coronavirus and continuing efficiency initiatives, including utilisation of government job retention schemes such as furlough and unpaid leave programmes.
Following the GBP6.0m fundraising in April 2020, by way of a shareholder loan and additional Bank facilities, as at 30 June 2020 cash balances were at GBP12.7m less overdraft of GBP3.8m with fully drawn bank facilities of GBP12.8m. Based on the assumptions above and assuming bank facilities remain fully drawn, cash balances (net of overdrafts) are expected to reach a low point of GBP6.0m in September 2020 before the seasonal fourth quarter maintenance and support renewals are received. In order for the Group to experience liquidity issues, Group maintenance and support revenues would need to reduce by 50%, which given their contracted nature is thought to be highly unlikely. Our current bank facilities agreement expires in 31 March 2021.
Outlook
K3|imagine has exciting potential to be a material driver of margins and recurring income. In the first half of the new financial year financial year, end we have closed GBP0.8m of K3|imagine contracts, with good demand for all modules, especially Self-serve. The pipeline of potential new business for this product is now worth GBP4m in FY2020 and GBP10m in FY2021, building on the GBP0.6m of total sales secured in FY2019.
Six K3|fashion orders have also been signed since the financial year end, and our channel partner pipeline is strong. Performance elsewhere is in line with management expectations, including Global Accounts, which is continuing to grow well.
As we have highlighted before, K3's revenue profile is changing, reflecting the shift towards 'consumption-based' models, away from 'on-premise' solutions. This will flatten the Group's growth profile as revenues are spread over a longer term, rather than paid upfront under the traditional model. However, it also gives us increased revenue visibility and typically promotes longer customer relationships. We expect this trend to accelerate.
The traditional seasonality between the two halves of the financial year is expected to continue, with earnings and cash flows stronger in the second half due to the timing of a large proportion of software licence and maintenance contract renewals.
Despite these challenging times, and the uncertainty caused by the coronavirus, the Board remains positive about the future. Despite the material uncertainty of the existing banking facilities expiring in March 2021, the Board is confident that the business will be in a position to obtain any necessary funding to support its working capital requirements. A stronger platform is now in place, with the loss-making UK Dynamics business no longer part of the Group and additional funding secured. The Group has a stable cash generative core business with a high proportion of own IP and generates a high level of recurring revenues. Sales of our own IP remains our major focus and success here has the potential to drive significant earnings growth and recurring revenues. We continue to remain confident that K3|imagine will create significant value.
We look forward to announcing our interim results and providing shareholders with more information on current trading.
J Manley
Chairman
Operational Review
The Group's focus is on growing own IP sales and, with improved reporting systems, we have taken the decision to restate the segmentation analysis from Own IP units and Supply Chain Solutions units to own IP product revenue and third-party product revenue. During the year, the Group moved to a functional model and the overhead base should therefore be viewed as a single overhead base not linked to specific units or products. Due to selling of our own IP across the business units, this has increased the percentage of K3 IP revenue as a proportion of total revenue compared to the revenue of own IP units as a proportion of total revenue.
Our segmental reporting reflects our objective to focus on driving own IP sales.
Revenue Gross profit Overheads (excluding Adjusted
exceptional Profit from
items) Operations
2019 2018 restated 2019 2018 restated 2019 2018 2019 2018
restated
GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
K3 IP 20.9 23.9 15.5 16.9 - - - -
Third-party
products 57.5 59.4 24.2 27.0 - - - -
Central (12) - - 0.3 - (38.2) (39.3) - -
-------------- ----- -------------- ----- -------------- --------- ------------ ------- ------
Total 78.4 83.3 40.0 43.9 (38.2) (39.3) 1.8 4.6
-------------- ----- -------------- ----- -------------- --------- ------------ ------- ------
2019 2018
Annual contracted revenues (*4) GBP54.4m GBP52.9m
Recurring revenues (*5) GBP52.1m GBP50.0m
Gross margin 51.1% 52.7%
Annual contracted revenues as a percentage of total revenue 69.5% 63.5%
Recurring revenue as a percentage of total revenue 66.7% 60.1%
Own IP revenues as a percentage of total revenue (*8) 26.6% 28.7%
Own IP gross profit as a percentage of total gross profit 38.6% 38.7%
The Group generated GBP78.4m of revenue in the financial year (2018: GBP83.3m). Recurring income accounted for 66.7% of the total revenue (2018: 60.1%), which increases to 69.5% when annual contracted revenues are included (2018: 63.5%). Own IP generated GBP20.9m of revenue (2018: GBP23.9m), making up 26.6% of total revenue (2018: 28.7%). The adoption of IFRS 15 increased revenue by GBP0.3m which had been partially recognised in 2018.
Group gross profit for the financial year was GBP40.0m, a 9% reduction year-on-year (2018: GBP43.9m). K3 IP contributed GBP15.5m (2018: GBP16.9m) or 38.6% of the total gross profit (2018: 38.7%). Gross margin in FY2019 of GBP0.3m from overheads related to the charging of customers from the R&D team.
Third-party Product Sales
K3's solutions and managed services are tailored to the requirement of the supply chain industry, including retailers, manufacturers and distributors. The Group's core offering is based on Microsoft, SYSPRO and Sage solutions.
Revenue (GBPm) Gross profit Gross margin
(GBPm)
2019 2018 2019 2018 restated 2019 2018 restated
restated
------------------- ----- ---------- ----- -------------- ------ --------------
Software licences 5.5 4.4 2.9 2.2 51.5% 50.0%
Services (*)
(11) 25.0 27.0 4.3 6.9 17.2% 25.7%
Maintenance
& support (*)
(10) 26.0 25.8 16.9 17.1 65.1% 66.1%
Hardware and
other 1.0 2.3 0.1 0.8 9.5% 31.9%
------------------- ----- ---------- ----- -------------- ------ --------------
Total 57.5 59.5 24.2 27.0 42.0% 45.3%
------------------- ----- ---------- ----- -------------- ------ --------------
Third-party product sales were 3% lower year-on-year at GBP57.5m (2018: GBP59.4m), and gross margin decreased to 42.0% (2018: 45.3 %). While o ur Global Accounts business continued to grow, our UK services business was soft, not helped by Brexit uncertainty.
Our Global Accounts business, which includes our relationship with Inter IKEA Systems B.V. (the owner and franchisor of the IKEA Concept) and the IKEA Concept franchisees, performed strongly, as expected. The main driver of this growth was the expansion in store numbers and the appointment of new franchisees. We are now seeing franchisees expand stores into South and Central America. Our Kuala Lumpur office in Malaysia, which opened in 2018 to better service growth, has expanded to a team of 25 people. We are continuing to extend sales of our own IP into the Global Accounts customer base and have secured sales for K3|imagine warehouse solution, Mobile Goods Flow and K3|dataswitch.
The SYSPRO business continued to generate strong cash flows and delivered good results. Customer renewals of software licences remained high at 98% (2018: 98%). Sage activities generated good adjusted operating profits and K3 became a Sage platinum developer partner.
Within the Microsoft Dynamics space, we are experiencing a gear-shift in how technology is being delivered, with the model changing from 'on-premise' technology to cloud-based delivery and the associated move to the consumption/subscription pricing model, away from large up-front software licence payments. During the year we saw two large implementations in the UK and Eire start on K3 sourced CSP D365F&O licenses. These will migrate to full licence purchase when the solution is ready for roll-out (although with new partners following the exit of the UK Dynamics practice). We continue to see the trend of third-party cloud-based solutions becoming more standardised thus creating additional opportunities for our products, including K3|fashion and K3|pebblestone. Cloud-based solutions are also less complex to implement. The move towards cloud-based consumption licensing has positive long-term implications for the Group. The lifetime value of customer relationships under this new model has the potential to be significantly higher compared to the traditional model of perpetual software licences (typically paid upfront at the start of a relationship). However, the shift will affect the Group's rate of reported revenue growth, since income from cloud/consumption-based contracts is recognised over longer periods. We also report consumption-based income as recurring revenue, as opposed to software revenue under the perpetual software licence model.
K3 IP
K3's IP is used in three ways:
-- it is embedded into third party solutions to add extra functionality
and produce a richer overall solution for K3's target markets;
and
-- it powers our ERP agnostic/device agnostic cloud native platform
with strong integration engines
-- it powers stand-alone point solutions and apps
K3|fashion and K3|pebblestone are examples of products based on third-party solutions that are enriched with K3
IP. Both these products are based on Microsoft Dynamics solutions.
Products that are solely K3-authored include K3|dataswitch', 'DdD' and K3|imagine. K3's strategy is to increase the proportion of own IP sales.
Revenue (GBPm) Gross profit (GBPm) Gross margin
2019 2018 restated 2019 2018 restated 2019 2018 restated
-------------------------------- ----- -------------- ------ -------------- ------ --------------
Software licences 3.2 5.2 3.2 4.5 98.1% 86.6%
Services (*) (11) 0.9 2.0 0.8 1.1 85.1% 57.1%
Maintenance & support (*) (10) 15.0 14.5 10.9 10.5 73.1% 72.3%
Hardware and other 1.8 2.2 0.6 0.9 31.9% 39.3%
-------------------------------- ----- -------------- ------ -------------- ------ --------------
Total 20.9 23.9 15.5 17.0 74.1% 71.1%
-------------------------------- ----- -------------- ------ -------------- ------ --------------
Total revenue from own IP over the year amounted to GBP20.9m (2018: GBP23.9m), with gross margins at 74.1% (2018: 71.1%). Gross profit was GBP15.5m (2018: GBP17.0m) down 8.8% compared to the prior year, reflecting the slippage and smaller initial orders of K3|fashion contracts.
Seven major K3|fashion contracts were secured over the financial year, increasing the active customer base by 30%, although we had originally expected some further large deals to be signed. Three of the deals closed were purchases of the initial licences needed to start up implementation projects, with the full purchase of licences anticipated in 2020. An existing customer SanMar, a leading US-based supplier of apparel and accessories, renewed its K3|fashion licences.
After the financial year end, a further six K3|fashion deals were closed including the full purchase of licences after initial purchases in 2019.
Our channel partner strategy is a key driver of K3|fashion sales, and the product is often part of a wider tender based on Dynamics365F&O, with K3|fashion's functionality a key element in end customers choosing Dynamics365F&O. In the second half of 2019, Microsoft recommended K3|fashion as its preferred 'bolt-on' for the global fashion and apparel vertical. We expect this to bring more opportunities in the future.
Sales of K3|pebblestone, our leading business software for the mid-market fashion industry, which we also sell through channel partners, continued to be strong.
K3|dataswitch, which is our integration suite, is in its second year of trading as a stand-alone product. Revenue increased by 45% to GBP0.7m. The technology also forms the integration layer of our K3|imagine suite, linking it to any IT infrastructure. We believe K3|dataswitch has a large addressable market and we are investing resource to maximise the opportunity. After the year end, K3|dataswitch was listed on Sage Additions, the Sage ISV platform, as an approved integration suite for Sage 200 globally.
The K3|imagine platform and modules are important strategic products for us. The platform enables us to integrate our leading-edge 'module' solutions into any existing IT infrastructure swiftly and cost-effectively. It therefore enables us to bring product innovation and the full power of the cloud to customers in a commercially attractive way. Our first suite of modules for K3|imagine were based around our retail offerings, and K3|imagine mPOS is currently being rolled out in mainland Europe. Our portfolio of imagine solutions for the supply chain sector has now been expanded and includes Mobile Goods Flow, Store Companion, Self-serve Kiosks and Order Ready Boards. K3|imagine revenue in 2019 was GBP0.3m and since then we have signed GBP0.8m of additional contracts.
As expected, our Point of Sale product, DdD, showed a net decline in anticipation of the build of K3|imagine. So POS units performed well in part to revenue recognition spreading revenue over time as a cloud SaaS offering. Customers operating these products will be offered migration to the more advanced K3|imagine retail suite.
Overheads
Following the organisation changes, Group overheads now include sales and marketing, customer support teams, and central support teams such as human resources, internal IT, and accounting. Total adjusted overheads/support costs were lower than the prior year at GBP38.2m (2018: GBP39.3m), reflecting progress in internal efficiencies whilst still investing in sales and software development. However the adoption of the IFRS 16 in the year meant that GBP0.3m of cost classified as overheads in FY2018 was classified as interest in FY2019, and FY2019 included GBP1.7m of depreciation. Under IAS 17 in FY2019 GBP2.0m of operating leases would have been classified in Overheads. Overheads also included a material bad debt charge of GBP0.5m from a large retail customer. After the UK Dynamics re-seller business was put into administration, overheads have reduced.
Outlook
The technical capability of our products is excellent, and we remain especially excited about long term growth prospects for K3|imagine and K3|dataswitch. The volume and quality of K3|fashion's new business pipeline is also encouraging, and the growth of Global Accounts activities is set to continue.
We therefore remain confident of improving the Group's performance over the new financial year.
As noted in the Chairman's report, we remain focused on the challenges created by coronavirus and believe we have adequate financial resources to weather the storm.
Adalsteinn Valdimarsson
Chief Executive Officer
Financial Review
Trading Results
Revenue for the year ended 30 November 2019 was GBP78.4m (2018: GBP83.3m) and gross profit was GBP40.0m (2018: GBP43.9m) with gross margins of 51.1% and 52.7% respectively. The adoption of IFRS 15 increased revenue by GBP0.3m, which had been partially recognised in 2018.
The Group registered an adjusted profit from operations(*1) of GBP1.8m (2018: adjusted profit(*1) of GBP4.6m). The loss from operations was GBP(13.7)m (2018: profit of GBP0.7m).
During the year, the Group incurred exceptional reorganisation costs of GBP0.5m (2018: GBP1.4m). The costs in 2018 related largely to the consolidation of our UK Microsoft Dynamics operations. The Group also impaired assets for the UK Dynamics practice of GBP12.2m (2018: nil). The amortisation of acquired intangible assets was GBP2.5m (2018: GBP2.5m). Also included is a one-off customer settlement provision of GBP0.4m (2018: GBPnil). Finance costs were GBP0.9m (2018: GBP0.7m) with the increase driven by IFRS 16 interest. The credit for share options is GBP0.1m (2018: charge GBP0.1m). This has been shown separately as the Board considers it useful to highlight to shareholders since the amount can fluctuate significantly. After tax, the resulting loss for the year was GBP(15.4)m (2018: loss of GBP(0.5)m).
During the year the Group adopted IFRS 15, IFRS 16 and IFRS 9. We have adopted the modified retrospective approach for implementation and results are not directly comparable with prior year. The impact of IFRS 16 was to increase non-current assets, liabilities and depreciation charges. IFRS 9 increased our bad debt provision. The IFRS 15 impact is detailed in the notes to the accounts.
Earnings per Share and Dividends
Adjusted loss per share (*4) was 6.6p (2018: earning per share of 6.8p). Loss per share was 36p (2018: loss per share of 1.1p). No dividend will be declared for the year ended 30 November 2019.
Taxation
There was a tax charge for the year of GBP0.9m (2018: GBP0.5m) comprising a charge of GBP0.6m (2018: GBP1.2m) for current taxation and a charge of GBP0.3m (2018: GBP0.7m credit) for deferred taxation, of which GBP0.3m (2018: GBP0.6m) related to the amortisation of intangible assets.
The large loss before taxation was driven by the large impairment charge which is non-tax deductible. The Group's tax rate is sensitive to the geographical mix of its profits and losses and with the growth of the non UK business, overseas tax is increasing. The effective tax rate for the year is -6.7%. The effective tax rate is determined as the tax expense/(credit) divided by the accounting profit/(loss) before tax.
Balance Sheet
Following an impairment review of the UK Dynamics practice, an impairment charge of GBP12.2m was generated including GBP10.1m of goodwill. This business was subsequently exited post year end via an administration process.
Following the adoption of IFRS 16 the non-current assets have increased by GBP4.1m net book value at 30 November 2019, following the recognition of right-of-use assets, being GBP5.8m of additions in the year and a depreciation charge in the year of GBP1.7m. Borrowings related to IFRS 16 adoption also increased by GBP3.9m.
Additions to development costs were GBP4.1m compared to GBP2.6m in 2018, driven by the focus on development of K3|imagine. Amortisation of development costs was GBP2.9m (2018: GBP2.6m). The amortisation charge on acquired intangible assets was GBP2.5m (2018: GBP2.5m).
Trade and Other Receivables were GBP20.7m (2018: GBP27.0m) with GBP6.3m being driven by the reduced level of multi-year deals, better credit control and reduced revenue. Trade and Other Payables were also lower than at 30 November 2018 by a combined amount of GBP3m. Net Working Capital balances were GBP(4.7)m (2018: GBP1.4m) driven by the reduction in Trade & Other Receivables.
Cash Flow and Net Debt
The Net Debt (*6) position at 30 November 2019 was GBP(2.4)m (2018 restated: GBP0.6m) with a reduction in cash & overdraft to GBP3.8m (2018: GBP6.9m).
The Net Cash from Operating Activities was GBP5.5m (2018: GBP7.8m) with a swing in GBP2.8m in working capital and of the inclusion of GBP1.7m of depreciation relating to right-of-use assets following adoption of IFRS 16. In addition, operating lease payments of GBP2.6m were deducted from operating cashflows in 2018 but are included within financing outflows in relation to the lease liability and interest in 2019. The result is that operating cashflow on a comparable basis have significantly reduced on the prior year. The net change in working capital from Trade and other receivables and Trade and Other Payables was GBP0.3m outflow (2018: inflow GBP1.8m). The Trade and Other Receivables were driven by inflows from Contract Assets (Accrued Income) relating to the invoicing and collection of contracted commitments. The decrease in Trade and Other Payables was driven by reduced accruals and contract liabilities with lower revenue than 2018 and the liabilities associated contract assets reducing.
Investing activities increased to GBP4.1m (2018: GBP2.6m) with the focus on the development of the K3|imagine platform. The purchase of property, plant and equipment also included IT equipment to run managed services.
During August 2019 the Group extended its Banking Facility agreement with Barclays to 31 March 2021 and in April 2020 increased the facility from GBP10m to GBP13m. Bank borrowings were GBP6.3m (2018: GBP7.5m) and are included in long term liabilities. The Facilities include a monthly draw down and a multi-currency overdraft facility.
Prior Period Restatements
As explained in note 29, the 2018 consolidated statement of financial position has been restated to present overdrafts of GBP2,724,000, which were previously included in cash and cash equivalents, within liabilities due within 1 year. This restatement has not impacted the previously reported profits, net current assets or net assets. An adjustment of GBP433,000 has also been made to the 2018 company statement of financial of position in respect of the same.
Robert Price
Chief Financial Officer
__________________________________________________________________________________
(Note Group adjusted profit from operations is calculated before
1) amortisation of acquired intangibles of GBP2.48m (2018:
GBP2.51m), exceptional reorganisation costs of GBP0.52m
(2018: GBP1.36m), exceptional impairment of development
costs of GBP12.2m (2018: GBPnil), acquisition costs of
GBPnil (2018: GBPnil), exceptional customer settlement
provisions of GBP0.4m (2018: GBPnil), share-based payment
credit of GBP 0.1m (2018: GBP0.1m) and release of contingent
consideration of GBPnil (2018: GBPnil).
(Note Group adjusted profit before tax is calculated before amortisation
2) of acquired intangibles of GBP2.48m (2018: GBP2.51m), exceptional
reorganisation costs of GBP0.52m (2018: GBP1.36m), exceptional
impairment of development costs of GBP12.2m (2018: GBPnil),
acquisition costs of GBPnil (2018: GBPnil), exceptional
customer settlement provisions of GBP0.4m (2018: GBPnil),
share-based payment credit of GBP0.1m (2018: GBP0.1m) and
release of contingent consideration of GBPnil (2018: GBPnil).
(Note Group adjusted earnings/(loss) per share is calculated
3) before amortisation of acquired intangibles (net of tax)
of GBP2.1m (2018: GBP1.95m), exceptional reorganisation
costs (net of tax) of GBP0.4m (2018: GBP1.36m), exceptional
impairment of development costs (net of tax) GBP9.9m (2018:
GBPnil), acquisition costs (net of tax) of GBPnil (2018:
GBPnil), exceptional customer settlement provisions of
GBP0.4m (2018: GBPnil), share-based payment credit (net
of tax) of GBP0.1m (2018: GBP0.1m) and release of contingent
consideration (net of tax) of GBPnil (2018: GBPnil). The
adjusted EPS/(LPS) for the year ended 30 November 2019
and 2018 has been amended to reflect that there was no
tax charge or credit recognised in the period on either
the exceptional reorganisation costs or on the exceptional
impairment charge. The calculation has been amended to
reflect the actual tax charge or credit directly allocable
rather than on an effective tax rate as previously determined
as the directors consider this to be a fairer representation.
(Note Annual contracted Value includes software term agreements
4)
(Note Includes contracted support and maintenance including hosting
5) and long term services revenues with a frame agreement
greater than 2 years
(Note Net Debt comprises Bank Loans and Overdrafts less Cash
6) and cash equivalents
(Note Net Working Capital comprises Trade and other Receivables
7) less Trade and other Payables
(Note Own IP revenues includes initial and annual software licences
8) and those additional revenues which flow directly from
K3 IP and K3 private cloud
(Note Adjusted EBITDA comprises Adjusted Profit from Operations
9) GBP1.8m (2018: GBP4.6m) plus Amortisation of Development
costs GBP2.9m (2081: GBP2.6m) and depreciation of property,
plant and equipment and right of use assets GBP2.5m (2018:
GBP0.9m)
(Note Maintenance & support comprises software maintenance renewals,
10) support contracts, hosting & managed services
(Note Services revenue comprises installation, integration and
11) software development services
(Note Overheads before exceptional items, impairment of acquired
12) intangibles, Foreign exchange
Risk Management
There are a number of potential risks and uncertainties, which could have a material impact on the Group's performance and could cause actual results to differ materially from expected and historical results. The Group's risk management policies and procedures to deal with operational risk are included in the Corporate Governance report on pages 25 and 29. The principal business risks which the Group faces can be categorised as follows:
Strategic
Changes in the business environment influence the Group's development in terms of the strategies that it pursues and the products and services it offers. These changes may stem from market competition or economic and technological advancement. The directors regularly review the Group's strategic progress and obtain market information to assist in strategic decisions around products, competitors and potential acquisitions. We recognise that acquisitions have played a key role in the past growth of the business and as we evaluate growth opportunities for customer acquisition and product functionality. We will evaluate opportunities through the prism of buy, build or partner.
We see the ownership of intellectual property as being critical to the future of the business, both in terms of point solutions and innovative add-ons to third party products. We see the continuing development of our own IP from point solutions such as K3|imagine and add-ons such as K3|fashion as key strategic drivers over the future years. The ability to widen our channels to market these products is also a key driver.
Business environment
The Group's customer base is mainly in the United Kingdom and Europe. The environment in which the Group offers its products and services is, therefore, dependent on the economic and other circumstances affecting these business sectors including competitor behaviour. Over the years we have developed a creative, innovative, competitive culture and a reputation for advanced functionality and product quality. The Group has made significant investment in its library of IP which protects the business from competition and increases the barrier to entry in our specialist markets. This has enabled the Group to build high levels of predictable income from its existing customer base, both in the UK and in its overseas markets. The Group's exposures to mainstream UK Retail High Street is not high and the Group is mitigating exposure by growing more internationally and investing in our new Imagine offering is focused on faster return on investment for customers and a SaaS offering.
As mentioned in the Chairman's statement, the Board has assessed the risk from Brexit and does not believe that Brexit, including a no deal Brexit, would have a material impact on the Group due to the in-country nature of implementations and that software deployment does not have physical logistics challenges. The Group GBP consolidated reported earnings would be impacted by any changes in revaluation of non-GBP earnings caused by currency movements.
Relationships
The Group benefits from a number of close commercial relationships with key suppliers and customers. Damage to or loss of these relationships could have a direct and detrimental effect on the Group's results. The key Group supplier relationships are secured by commercial agreements lasting for up to 5 years and management participate in regular product and strategy reviews with the suppliers. On an annual basis our customers commit to maintenance and support agreements that facilitate availability of product upgrades and business support.
Delivery
Our products and services operate in business-critical areas for our customers and any failure to meet contractual commitments and client expectations could damage our reputation and impact upon our financial position. To mitigate this risk, we monitor our performance continuously against contractual commitments and expectations and deploy a wide range of experienced technical specialists and project managers to evaluate performance.
As delivery of products migrates to the cloud hosted and cloud native solutions the Group will also be increasingly responsible for access and data breaches. We mitigate this risk with security controls over our hosting and data centre.
Financial
Whilst all risks may be considered to have a financial impact, the management of the Group's financial resources represents a key area of focus. Financial risks are faced in ensuring sufficient funds are available to meet financial commitments as and when they fall due and protecting the Group's financial strength against adverse movements in financial markets. Further details are provided in note 17.
-- Credit risk - The Group's credit risk is primarily attributable to its trade receivables and accrued income. The amounts presented in the statement of financial position are net of allowances for doubtful debts, estimated by the Group's management based on prior experience and their assessment of the current economic environment. The Group operates in three key verticals and hence the credit risk is concentrated on retail, manufacturing and distribution customers. The Group manages credit risk by ensuring that outlays by the Group are matched with receipts from customers where possible and by tight control over contractual terms.
-- Currency risk - The Group's currency risk is primarily attributable to its trade receivables where certain customers are billed in US Dollars, Euros and other currencies, where these are not the functional currency of the Group company. Where possible the risk is hedged by amounts payable in those currencies. The Board does not believe Brexit represents a major risk to activities.
Liquidity and cash flow - The Group has a bank loan and ensuring that it has sufficient funds to meet its obligations or commitments associated with its financial instruments by monitoring cash flow as part of its day-to-day control procedures and that appropriate facilities are available to be drawn upon when the need arises. The facilities from the Group's bankers require the Group to meet certain covenants throughout the term of the loans and the Group's forecasts indicate that the Group will remain within the set parameters. Its current banking facilities expire in March 2021 and a shareholder loan that is repayable in June 2021.
Coronavirus
The Group has managed the impact of coronavirus on employees, customers and the financial resources. Employees transitioned easily to remote working and offices were closed according to local conditions and advice in each country. The Group raised additional financing in April 2020 to ensure adequate liquidity exists for year ending 30 November 2020, allowing for reduced revenue and potential higher bad debts. Various governmental schemes were taken advantage of including furlough of staff and delayed tax payments. Further information is detailed in the Chairman and Chief Executive's statement and in note 1 of the financial statements.
This Strategic Report is signed on behalf of the Board
Adalsteinn Valdimarsson
Director
Board of directors
Jonathan Paul Manley (non-executive) age 66 (Acting Chairman)
Jonathan became a Non-executive Director in December 2015. He has over 35 years' experience in IT, both as Chief Information Officer ("CIO") and as a Consultant. Previously Jonathan was IT Director for Harrods Ltd where he was leading its IT transformation. Before that, he was IT Director of Shared Services at the John Lewis Partnership (2012-2014) and Global CIO at Estee Lauder Companies, in New York (2006-2012). In his earlier career, he was Global CIO at LSG SkyChefs and Universal Music, and a Consulting Partner at Ernst & Young. Following the resignation of Stuart Darling as Chairman, Jonathan agreed to serve as Acting Chairman until a new appointment is made.
Adalsteinn Valdimarsson (Chief Executive Officer) age 50
Adalsteinn was appointed as Chief Executive Officer on 1 October 2016 having been appointed as non-executive director on 11 July 2016. He has over 20 years of experience in the software industry and has founded and led the expansion of a number of product-based software companies. He has significant experience in the retail software sector and in particular with the Microsoft Dynamics platform. He was the Chairman of LS Retail, the supplier of retail and hospitality solutions and Microsoft Dynamics ISV of the year 2015. Prior to that, he was Executive Chairman of Hands Holding where he was responsible for the strategic restructuring of a number of large IT companies owned by Hands Holding and, before that, he was one of the founders of the Landsteinar Group, focusing on products and services for the Dynamics NAV platform.
Per Johan Claesson (non-executive) age 69
Johan was appointed a Director in March 2001. He is a Swedish national whose principal business interests are in property development and real estate and is a director of a number of listed companies. He has a controlling interest in and is chairman of Claesson and Anderzen AB ("C&A").
Robert David Price (Chief Financial Officer) age 52
Robert was appointed to the Board on 5 July 2017 having joined the Group as CFO in October 2016. He has more than 20 years' experience in senior finance roles in technology and supply chain and has worked extensively in international markets. He was previously CFO of a pan European fintech start up and prior to that CFO/COO of the private equity backed distributor Enotria Wine Group. Between 2002 and 2008 he was at Carlsberg Breweries, latterly as CFO and Change Management Director of Carlsberg Italy. Robert qualified as a chartered accountant with Ernst & Young and holds an MBA from IMD, Lausanne.
Board of directors (continued)
Stuart Darling (Non-executive - now retired) age 56
Stuart was appointed a non-executive director on 3 April 2017 and became Chairman in December 2017, having been Interim Chairman since July 2017. He is an FCA and has extensive senior level financial and commercial experience in the technology sector and with growing companies. He is currently CFO of Physiolab Technologies Limited which develops and sells repair and recovery products that aid recovery and rehabilitation of soft tissue injuries. He was previously Chief Financial Officer of Wifinity Ltd, a wireless network internet provider; CFO of YASA Motors Ltd, a supplier of customer and off-the-shelf e-motors and controllers to automotive customers; and, for 10 years, was CFO of Amino Technologies PLC, the global provider of digital TV entertainment and cloud solutions to network operators. He was Chairman of the Audit Committee. Stuart notified the board of his decision to resign his position on 5 February 2020 and he resigned as Chairman with immediate effect and continued to serve on the board until the AGM.
Paul Gilmer Morland (Non-executive - now retired ) age 59
Paul was appointed a Director on 29 May 2014. A chartered accountant, Paul's background is in equities research where he has been consistently highly ranked as an analyst throughout his career and helped many technology companies to raise funds on the stock market. Paul has also spent approximately seven years in industry, including as Finance Director at netdecisions, an IT services and consultancy company now trading as Agilisys, divisional Finance Director at Serco plc and Group Accountant at David S. Smith plc, a leading European packaging company. Paul notified the board of his decision to resign his position on 5 February 2020, but continued to serve on the board until the AGM.
Oliver Scott (Non-executive) age 53
Oliver joined the board as a Non-executive Director in February 2020. Oliver is a partner of Kestrel Partners LLP, a business he co-founded in 2009 and which specialises in investing in smaller quoted technology companies. Prior to this, he spent over 20 years advising smaller quoted and unquoted companies, latterly as a Director of KBC Peel Hunt Corporate Finance. Oliver has acted as Kestrel's representative on the Boards of various of its investee companies. He is currently a non-executive Director of ULS Technology PLC and was previously a non-executive Director of IQGeo Group plc, IDOX PLC and KBC Advanced Technologies plc prior to its takeover by Yokogawa.
Introduction from K3's Chairman
The K3 Board supports the principles of good governance. In fulfilling their responsibilities, the directors believe that they govern the company in the best interests of the shareholders, whilst having due regard to the interests of the stakeholders in the group including, in particular customers, employees and suppliers.
Pursuant to the AIM Rules, in 2018 K3 adopted the Quoted Companies Alliance's (QCA) Corporate Governance Code ("the Code") being the most appropriate recognised corporate governance code having regard to the size and nature of the K3 Group. In the financial year to 30 November 2019, K3 continued to apply the Code.
K3 has reviewed and considered where and how we apply each of the principles of the Code, and we set out an explanation of this on our website at https://www.k3btg.com/investor-centre/corporate-govenanance/corporate-governance-code-disclosures.
As Chairman of the Board, I am responsible for implementing corporate governance at the K3 group, working with the other members of the board and the company secretary. I chair meetings of the board and am responsible for ensuring the board agenda appropriately focuses on the Group's delivery against its strategic objectives. As a member of each board committee I also have specific roles in relation to the work of those committees, and any associated governance implications.
I am a passionate believer in robust corporate governance, and the continuing embedding of some recent changes at K3, in respect of our corporate governance practices, shareholder engagement and our wider business indicate our commitment to this. Our corporate governance practices will not remain static, and we will be regularly reviewing practices to seek improvement, and to keep pace with our business change. Our disclosures will be subject to update on our website, and our annual report will continue to provide detailed governance updates.
Board Composition
During the period the Board comprised the Chairman (Mr S Darling), two executive directors (Mr A Valdimarsson and Mr R D Price) and three Non-executive Directors (Mr P G Morland, Mr P J Claesson and Mr J P Manley). Subsequent to 30 November 2019, there have been changes to Board composition with Mr S Darling and Mr P G Morland resigning their positions with effect from the AGM and Mr O Scott having been appointed on 14 February 2020. Mr S Darling also ceased his role as Chairman with from effect 5 February 2020, and was replaced by Mr J Manley, as acting Chairman. Biographical details of the Board are included on pages 23 and 24. The composition of the Board is designed to provide an appropriate balance of Group, industry and general commercial experience and is reviewed as required to ensure that it remains appropriate to the nature of the Group's activities. Board skills are kept up to date both independently by directors and by board-wide updates and knowledge sharing.
The roles of the Chairman and Chief Executive are distinct. The office of Chairman is currently held by acting Chairman Mr J Manley (succeeding Mr S Darling on 5 February 2020) and the office of Chief Executive is held by Mr A Valdimarsson.
Recommendations for appointments to the Board are the responsibility of the Nominations Committee. All non-executive directors have written terms of appointment and are paid a fixed fee for their office which is not performance or incentive based.
During the period, the Company had three independent non-executive directors (Mr P G Morland, Mr S Darling and Mr J P Manley), as recommended by the QCA Code. Mr J P Manley provided additional consultancy services for the Company for which he is paid a fee, in addition to his role as Non-executive Director, but this is not regarded as compromising his independence. Mr P J Claesson (Non-executive Director) is a significant shareholder and has been on the board for over 9 years and would therefore more likely not be regarded as independent in accordance with the Code. Mr O Scott (who was appointed a Non-executive Director after the relevant period in February 2020) is a founding partner of another significant shareholder, Kestrel Partners LLP, and, accordingly, Mr O Scott would also likely not be regarded as independent in accordance with the Code.
Notwithstanding this, the Board believes that the interests of each non-executive director are aligned with those of shareholders and that the board composition is appropriate for the circumstances of the Company.
All directors are subject to election by shareholders at the first opportunity after their appointment. The Articles of Association of the Company require that no fewer than one-third of directors should be subject to re-election at each AGM. Any non-executive director serving over 9 years since first appointment is also subject to re-election at each AGM in accordance with the Company's articles. The terms and conditions of appointment of the non-executive director are available for inspection upon request.
Operation of the Board
The Board is responsible for determining the main aims of the Company and agreeing a strategy to achieve those aims. The Board is also responsible for monitoring progress against K3's strategic and financial goals and for initiating any corrective measures. The strategic report on pages 5 to 22 sets out the Board's strategy and business model to promote long-term value for shareholders.
The Board has determined those matters which are retained for Board sanction and those matters which are delegated to the executive management of the business. Day to day management of the business is dealt with by the Chief Executive Officer who has a Senior Management Team reporting to him. The types of decisions which are to be taken by the Board are:
-- approval of the financial statements and financial budgets and plans for the Group; -- approval of all shareholders' circulars and announcements; -- the purchase or sale of any business or subsidiary; -- any new borrowings, facilities and related guarantees; and
-- any asset purchase or lease, hire purchase facility or rental agreement over prescribed authority limits.
Board Meetings and Effectiveness
The Board met on 12 occasions during the financial period. Directors are expected to attend all meetings, and to dedicate sufficient time to the Group's business and affairs so as to enable them to discharge their duties. Board (and committee) meeting attendance during the financial period was as set out below. In light of circumstances, the members of the nominations committee determined that no formal meetings of the nominations committee were required to be held during the financial period.
Director Board (12) Remuneration Audit (3)
(2)
S Darling 12 2 3
J P Manley 12 2 3
P G Morland 10 2 3
R D Price 12 n/a n/a
A Valdimarsson 12 n/a n/a
P J Claesson 9 2 3
The Board is supplied in a timely manner with information of a quality to enable it to discharge its duties, which includes a regular monthly Board pack including updates from the executive management team, detailed financial information relating to the financial period to date, including measurement against pre-defined KPIs.
The Board is also provided with regular weekly operational updates, and non-executive directors regularly communicate with executive directors between formal board meetings.
The Directors have established a procedure, agreed by the Board, for directors in the furtherance of their duties to take independent professional advice, if necessary, at the company's expense.
The Board has established an annual process of Board performance review the first of which was carried out in February 2020. This has superseded what was previously a more informal evaluation approach. The new review process assists the board in identifying any structural, procedural and/or individual development needs by reference to clear objectives and the results will inform improvement activities.
Board Committees
The Board has established three standing sub-committees to assist in the discharge of corporate governance responsibilities. They are the nominations committee, remuneration committee and audit committee. The roles of the committees and their activities are available at https://www.k3btg.com/investor-centre/corporate-governance/corporate-governance-code-disclosures/
During the financial period, all four non-executive directors were the members of each committee.
Nominations Committee
During the period the Nominations Committee was chaired by Mr P G Morland. Meetings of the committee are arranged as necessary. The committee is responsible for nominating candidates (both executive and non-executive) for the approval of the Board to fill vacancies or appoint additional persons to the Board.
All Directors receive induction on joining the Board covering the Group's operations, goals and strategy, and their responsibilities as directors of the Group. The Company supports the directors in developing their knowledge and capabilities.
Remuneration Committee
During the period the Remuneration Committee was chaired by Mr P G Morland. The duties and role of the Remuneration Committee are set out in the Remuneration Committee report on pages 32 to 34.
Audit Committee
During the period the Audit Committee was chaired by the Chairman, Mr S Darling. The duties and role of the Audit Committee are set out in the audit committee report on pages 30 and 31.
Corporate Culture and Ethical Values
The Group seeks to carry out its business with the highest standards of integrity, and on the basis of sound ethical values, and its corporate culture seeks to reflect this premise.
The Board maintains oversight of this through receipt of regular management reporting, which would, where appropriate, include any material issues relating to corporate culture and integrity and ethics, including any updates to or non-compliance with key internal ethics policies.
The Group maintains written policies and procedures concerning a number of areas that impact on its ethical values, and these policies, which are shared with all of the Group's staff, underpin some of the ethical elements of the Group's culture. These include detailed policies addressing health and safety, anti-bribery and corruption, whistleblowing, equal opportunities and anti-harassment.
Relations with Shareholders
The Company seeks to maintain good communication with shareholders. The Group Chief Executive Officer together with members of the Senior Management Team make presentations to institutional shareholders covering the interim and full year results. Whilst most shareholder contact is with Chief Executive Officer and Chief Financial Officer, the Chairman and the non-executive directors are available to meet major shareholders if requested to do so. The views of major shareholders are obtained through direct face-to-face contact and analysts' or brokers' briefings.
The Board considers the AGM to be an important opportunity to communicate with shareholders and encourages their participation. The company despatches the notice of AGM, with explanatory notes describing items of special business, at least 21 days before the meeting. All shareholders have the opportunity, formally or informally, to put questions to the company's AGMs. All directors attend the AGM and the Chairman of the Audit, Remuneration and Nominations Committees is available to answer questions from shareholders.
The Company has also recently commenced, and plans to continue, a programme of investor presentations, to enhance investor engagement with management, and to elicit feedback.
The Company maintains RNS details on its web-site at: http://www.k3btg.com/investor-centre/regulatory-news/regulatory-news/
These include notices of, as well as results of, the AGM together with prior years' annual reports.
Internal Control and Risk Management
The Board recognises its ultimate accountability for maintaining an effective system of internal control which is appropriate in relation to both the scope and nature of the group's activities. The system covers all controls including:
-- financial; -- operational; -- compliance; and -- risk management.
The responsibility for managing risks on a day to day basis lies with the CEO and Senior Management Team. The principal business risks and the actions to mitigate the risks are included in the Strategic Report on pages 20 to 22. Details of operational risks are included below. A description of the risk management adopted by the Board to address the risks highlighted, and in order to deliver on its strategy, is set out below and on pages 30 to 31.
Operational
These risks, which are inherent in all business activities, are those which mainly result from the potential breakdown of individual business units or the Group's control of its human, physical and operating resources. The principal financial risks to which the group is exposed through its operations are liquidity and credit risk. The potential financial or reputational loss arising from failures in internal controls, flaws or malfunctions in computer systems and poor product design or delivery all fall within these categories.
There is an ongoing process for identifying, evaluating and managing the significant issues faced by the group which has been in place throughout the period. It has been regularly reviewed by the Board.
The Board and Senior Management Team are committed to managing the key risks which face the business. Whilst they recognise that it is not possible to eliminate risk completely, they have established an infrastructure of controls, systems, staff and processes which aim to minimise the likelihood of risks occurring or reduce the impact should they do so. The key elements of this infrastructure which enable the Board to review the effectiveness of the system of internal controls are as follows:
-- establishment of a formal management structure, including the specification of matters reserved for decision by the Board;
-- setting and reviewing the strategic objectives of the Group; -- Board involvement in the setting and review of the annual budget; -- the regular review of the Group's performance compared with budget and forecasts; -- pre and post investment appraisal of K3 IP development expenditure; and
-- group reporting instructions and procedures including delegation of authority and authorisation levels, segregation of duties and other control procedures, and standardised accounting policies.
Audit Committee Report
Audit Committee Composition
During the financial period, the Audit Committee was chaired by the Chairman, Mr S Darling, and included other non-executive directors, Mr P G Morland, Mr P J Claesson and Mr J P Manley.
The Chief Executive, Chief Financial Officer and external auditors attend meetings of the Audit Committee by invitation.
Audit Committee Role and Duties
The role of the Audit Committee is to consider the appointment of the auditors, audit fees, scope of audit work and any resultant findings. It reviews external audit activities, monitors compliance with statutory requirements for financial reporting and reviews the interim and full year financial statements before they are presented to the Board for approval. The committee is also required to review the effectiveness of the group's internal control systems, to review the group's statement on internal control systems prior to endorsement by the Board and to consider, from time to time, the need for a "risk sub-committee" to assist in monitoring the Group's internal control systems.
The Audit Committee considers and determines relevant action in respect of any control issues raised by the auditors. Given the size of the Group and the close day to day control exercised by the Senior Management Team, no formal internal audit department is considered necessary.
The key matters considered and actioned by the Audit Committee during the financial period were:
-- review of audit plan and consideration of key audit matters; -- review of Annual Report and financial statements; -- review and consideration of external audit report and management representation letter; -- going concern review; -- internal control systems review; and -- audit meeting with external auditor, without management.
External Auditor and Audit Process
The external auditor, BDO LLP, sets out the scope of its audit in an audit plan, which is reviewed and approved in advance by the Committee. Following the audit, the auditor presented its findings to the Audit Committee, and no major areas of concern were highlighted.
The Audit Committee regularly reviews auditor independence, including the provision of any non-audit services by the auditor. The Audit Committee has confirmed its recommendation to re-appoint BDO LLP at the next AGM.
Auditors' remuneration
Fees for services provided by the auditors have been as follows:
Year Year ended
ended 30 November
30 November 2018
2019
GBP000 GBP000
Audit services
* Statutory audit of the company 25 25
-- Statutory audit of the subsidiaries 141 93
Further assurance services:
Tax services
- -
* Advisory services
* Overseas tax advice - 3
Other services
* Other services 6 1
----------------------- -------------
172 122
----------------------- -------------
During the period, the auditors provided non-audit services in relation to tax advice to the overseas subsidiaries. The Board considered the proposed non-audit services in advance to ensure that it was satisfied that neither the nature nor the scale of the non-audit services would impair the auditors' objectivity and independence.
Risk Management and Compliance
The Audit Committee has reviewed both the Company's risk management and internal controls (reference on page 30), and the Company's policies on key compliance matters, such as anti-bribery and whistleblowing, and is satisfied that current control systems and policies are operating effectively.
Remuneration Committee Report
Remuneration Committee Composition
During the period the Remuneration Committee was chaired by Mr P G Morland, and included other non-executive directors, Mr S Darling, Mr P J Claesson and Mr J P Manley.
The Chief Executive Officer and Chief Financial Officer attend meetings of the Remuneration Committee by invitation, where appropriate.
Remuneration Committee Role and Duties
The Remuneration Committee reviews the remuneration and contractual arrangements of the executive directors. The remuneration of the Chairman and the non-executive directors is determined by the Board as a whole, based on a review of the current practices in other companies. The committee meets when necessary.
The salaries (and other remuneration) of the executive directors are determined after giving full consideration to the best practice provisions and after a review of the performance of the individual. It is the aim to reward directors competitively; consideration is, therefore, given to the median remuneration paid to senior management of comparable public companies. No director is involved in deciding his own remuneration.
The key matters considered and actioned by the Remuneration Committee during the financial period were:
-- the approval of the award of share options under the Group's long-term incentive plan for senior management and employees; and
-- Review and consideration of executive director remuneration.
Directors' Remuneration
Set out below is a summary of the total gross remuneration of directors who served during the financial period to 30 November 2019.
Year ended 30 November 2019 Year ended
30 November
2018
Fees/ basic Taxable Annual Pension Total Total
salary benefits bonuses contributions
GBP GBP GBP GBP GBP GBP
Chairman
S Darling 55,000 - - 2,383 57,383 52,217
Executive
A Valdimarsson 300,000 9,000 30,000 339,000 339,000
RD Price 170,000 9,233 17,000 196,233 190,500
Non-executive
PJ Claesson 25,000 25,000 23,333
PG Morland 30,000 1,300 31,300 29,100
JP Manley 49,250 49,250 71,218
------------ ---------- --------- --------------- -------- -------------
Aggregate
emoluments 629,250 18,233 50,683 698,166 705,368
------------ ---------- --------- --------------- -------- -------------
Included within the fees/ basic salary amount for Mr JP Manley was GBP19,250 (2018: GBP42,884) in relation to consultancy on the own IP positioning and development and for management of internal systems.
The executive directors have service contracts providing 12 months' notice.
Directors' pension entitlements
The company makes contributions to defined contribution schemes for Mr A Valdimarsson, Mr RD Price, Mr S Darling and Mr PG Morland.
Directors' share options and warrants
Mr PJ Claesson has interests in warrants for 25p ordinary shares held by companies associated with him as follows:
Company Number of warrants Exercise price CA Fastigheter AB 400,000 123.5p CA Fastigheter AB 600,000 25p
Clients of Kestrel Partners LLP (in which Mr O Scott is a partner) have interests in 600,000 warrants for 25p ordinary shares, exercisable at a price of GBP0.25 per ordinary share. Both these warrants the CA Fastigheter AB 600,000 warrants were associated with the April 2020 shareholder loan issue.
The market price of the ordinary shares at 30 November 2019 was 155p and the range during the year was 155p to 237.5p.
There are no options outstanding or held by any of the directors, other than as set out below .
1,390,000 options ("LTIP Options") were granted to Mr A Valdimarsson and Mr R D Price during the year ended 30 November 2018 under the terms of a new K3 Long Term Incentive Plan (the "LTIP"). They are exercisable at a price of 25p per share, being nominal value. The LTIP Options vest in three tranches, as set out below, based on the achievement of certain hurdles relating to the adjusted operating profit ("AOP", being operating profits prior to any share based payment charges) of the Group for each of the two years to 30 November 2019 and, in respect of the last tranche, a further criteria based on the Company's share price during the 30 days immediately following the announcement of K3's results for the year ended 30 November 2020 (the "Price Vesting Criteria") and the Adjusted Profit per share for the year ending 30 November 2020.
The performance measures relate to the three years to 30 November 2020. The proportion of each award vesting upon delivery are set out in note 20 to the financial statements.
Aggregate emoluments do not include any amounts for the value of options to acquire ordinary shares in the company granted to or held by the directors. Details of the options are as follows:
Name of 1 December Granted Exercised Lapsed 30 November Director 2018 2019 A Valdimarsson 840,000 - - - 840,000 R D Price 550,000 - - - 550,000
All options are exercisable at a price of 25p.
The Directors present their report together with the audited financial statements for the year ended 30 November 2019. The corporate governance statement on pages 25 to 29 also forms part of the Directors' report.
Review of Business
The Chairman's statement on pages 5 to 11 and the Chief Executive's review on pages 12 to 16 provide a review of the business, the Group's trading for the year ended 30 November 2019, key performance indicators and an indication of future developments.
Research and Development
During the year, the Group carried out development work of which GBP4.1m (2018: GBP2.63m) was capitalised. Development related to the Group's own IP including the K3|imagine platform.
Result and Dividend
The Group has reported its Consolidated financial statements in accordance with International Financial Reporting Standards as adopted by the European Union.
The Group's results for the year are set out in the Consolidated Income Statement on page 47. The Company has applied FRS 101: Reduced Disclosure Framework to the Company accounts for the year ended 30 November 2019.
The directors do not propose a dividend (2018: 1.54p per share). A final dividend relating to the year ended 30 November 2018 of 1.54p, amounting to GBP0.66m, was paid during the year. No interim dividend was paid during either period.
Directors
The directors who served during the year were as follows:
PJ Claesson
S Darling
J P Manley
P G Morland
R D Price
A Valdimarsson
Mr PJ Claesson and Mr A Valdimarsson retire by rotation and offer themselves for re-election.
Subsequent to 30 November 2019, there have been changes to Board composition with Mr S Darling and Mr P G Morland resigned with effect from the AGM and Mr O Scott having been appointed. In accordance with the Company's current Articles of Association, Mr O Scott also resigned, offered himself for re-election and was reappointed.
Directors' Interest
Directors hold interests in the company's shares as follows:
As at 30 As at 30
November November
2019 2018
Number of Number of
shares shares
PJ Claesson 9,828,923 5,087,697
S Darling 14,286 14,286
J P Manley 20,680 20,680
R D Price 54,728 50,000
A Valdimarsson 71,429 71,429
Mr A Valdimarsson acquired an additional 30,000 ordinary shares in the company on 14 February 2020.
Kestrel Partners LLP (in which Mr O Scott is a partner) is interested in 10,354,591 shares.
Financial Instruments Risks
Details of financial instruments risks are included in note 18 to the financial statements.
Substantial Shareholdings
The company had been notified of the following interests in the ordinary share capital of the company at 31 May 2020.
Name of holder Number Percentage
Held
Kestrel Partners 10,033,198 24.06%
PJ Claesson 9,828,923 22.89%
Canaccord Genuity 5,994,785 13.96%
Liontrust Asset Management 4,727,635 11.01%
Richard Griffiths 4,529,464 10.55%
Disabled Employees
Applications for employment by disabled persons are always fully considered, bearing in mind the aptitudes of the applicant concerned. In the event of members of staff becoming disabled every effort is made to ensure that their employment with the Group continues and that appropriate training is arranged. It is the policy of the group that the training, career development and promotion of disabled persons should, as far as possible, be identical with that of other employees.
Employee Consultation
The Group places considerable value on the involvement of its employees and has continued to keep them informed on matters affecting them as employees and on the various factors affecting the performance of the Group. This is achieved through regular web presentations by and newsletters from the Chief Executive Officer and informal discussions between management and other employees at a local level.
Directors' indemnity cover
All directors benefit from qualifying third-party indemnity provisions in place during the financial period and at the date of this report.
Going Concern
After making enquiries, the directors have formed a judgement, at the time of approving the financial statements, that there is a reasonable expectation that the Group has adequate resources to continue in operational existence for the foreseeable future. The Group's current syndicated facility agreement expires March 2021 and the current coronavirus disruption continues to impact on global operations and markets.
At 30 November 2019, the Group had incurred a loss of GBP15.4m, resulting in negative retained earnings of GBP2.6m, and had suffered a cash outflow of GBP3.5m. Much of the trading loss has arisen due to one off charges to profit and loss as the directors continue to focus the business on profit making operations.
Since the year end the disruption arising from COVID-19 has introduced additional uncertainty in respect of making predictions for future trading and operations. The Group has modelled a variety of coronavirus scenarios in order to assess their potential financial impact over the coming months. The Directors have modelled scenarios that crossover different geographic territories and our revenue streams and implemented actions that mitigate our short term cost and cash outflows, including furlough and tax deferrals schemes, whilst ensuring we have a long term sustainable business.
While the Directors have concluded that these circumstances represent a material uncertainty, additional loan funding has been secured since the year end to ease immediate operating cash flow pressures. These facilities are due for renewal in March 2021 and the Group does not currently have the funds to repay these. Additional funding or asset disposals could be initiated as required and the directors believe that appropriate refinancing of the existing debt is possible when the renewal date falls due. Therefore, after making enquiries and considering the uncertainties as described above, the Directors have a reasonable expectation that the Group has adequate resources to continue in operational existence for the foreseeable future. For these reasons, they continue to adopt the going basis of accounting in preparing this financial information.
Events after the reporting date
These are detailed in note 27 to the consolidated financial statements.
Auditors
All of the current directors have taken all of the steps that they ought to have taken to make themselves aware of any information needed by the company's auditors for the purposes of their audit and to establish that the auditors are aware of the information. The directors are not aware of any relevant audit information of which the auditors are unaware.
The Notice of General Meeting contains a resolution to re-appoint BDO LLP as auditors for the ensuing year.
By order of the Board Baltimore House
50 Kansas Avenue Manchester
M50 2GL
A Valdimarsson
Director
Statement of Directors' Responsibilities
The directors are responsible for preparing the strategic report, the annual report and financial statements in accordance with applicable law and regulations.
Company law requires the directors to prepare financial statements for each financial year. The financial reporting framework that has been applied in the preparation of the group financial statements is applicable law and IFRSs as adopted by the European Union. The financial reporting framework that has been applied in the preparation of the parent company financial statements is applicable law and United Kingdom Accounting Standards (United Kingdom Generally Accepted Accounting Practice) including Financial Reporting Standard 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 company and of the profit or loss for the group for that period.
In preparing these financial statements, the directors are required to:
-- select suitable accounting policies and then apply them consistently; -- make judgements and accounting estimates that are reasonable and prudent;
-- state whether they have been prepared in accordance with IFRSs as adopted by the European Union, subject to any material departures disclosed and explained in the financial statements;
-- state whether applicable UK Accounting Standards have been followed, subject to any material departures disclosed and explained in the financial statements; and
-- prepare the financial statements on a going concern basis unless it is inappropriate to presume that the company will continue in business.
The directors are responsible for keeping adequate accounting records that are sufficient to show and explain the company's transactions and disclose with reasonable accuracy at any time the financial position of the company and enable them to ensure that the financial statements comply with the requirements of the Companies Act 2006. They are also responsible for safeguarding the assets of the company and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities.
Website publication
The directors are responsible for ensuring the annual report and the financial statements are made available on a website. Financial statements are published on the company's website in accordance with legislation in the United Kingdom governing the preparation and dissemination of financial statements, which may vary from legislation in other jurisdictions. The maintenance and integrity of the company's website is the responsibility of the directors. The directors' responsibility also extends to the ongoing integrity of the financial statements contained therein.
Independent Auditors' Report to the Members of K3 Business Technology Group plc
Opinion
We have audited the financial statements of K3 Business Technology Group Plc (the 'parent company') and its subsidiaries (the 'group') for the year ended 30 November 2019 which comprise the consolidated income statement, the consolidated statement of comprehensive income, the consolidated statement of financial position, the parent company balance sheet, the consolidated statement of cash flows, the consolidated and parent company statement of changes in equity and notes to the financial statements, including a summary of significant accounting policies.
The financial reporting framework that has been applied in the preparation of the group financial statements is applicable law and International Financial Reporting Standards (IFRSs) as adopted by the European Union. The financial reporting framework that has been applied in the preparation of the parent company financial statements is applicable law and United Kingdom Accounting Standards, including Financial Reporting Standard 101 Reduced Disclosure Framework (United Kingdom Generally Accepted Accounting Practice).
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 30 November 2019 and of the group's loss for the year then ended;
-- the group financial statements have been properly prepared in accordance with IFRSs as adopted by the European Union;
-- the parent company financial statements have been properly prepared in accordance with United Kingdom Generally Accepted Accounting Practice; and
-- the financial statements have been prepared in accordance with the requirements of the Companies Act 2006.
Basis for opinion
We conducted our audit in accordance with International Standards on Auditing (UK) (ISAs (UK)) and applicable law. Our responsibilities under those standards are further described in the Auditor's responsibilities for the audit of the financial statements section of our report. We are independent of the group and the parent company in accordance with the ethical requirements that are relevant to our audit of the financial statements in the UK, including the FRC's Ethical Standard as applied to listed entities, and we have fulfilled our other ethical responsibilities in accordance with these requirements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion.
Material uncertainty related to going concern
We draw attention to note 1 to the financial statements, which indicates the directors consideration over going concern, in particular the potential impact of the Covid-19 pandemic on the ability to obtain new bank facilities when the current facilities expire in March 2021. As stated in note 1, these events or conditions, along with other matters as set out in note 1, indicate that a material uncertainty exists that may cast significant doubt on the company's ability to continue as a going concern. Our opinion is not modified in respect of this matter.
Due to the level of uncertainty, and the additional impact of Covid-19, and the significant assumptions required to be made by management in considering going concern a significant audit risk has been identified since the planning stage of the audit, and accordingly, going concern has been considered to be a key audit matter.
In respect of this key audit matter we carried out the following procedures:
-- Obtained an understanding of the required financing facilities, including the nature of the facilities, repayment terms, covenants and attached conditions;
-- We have considered the historic success of management to raise funds through bank facilities or shareholders;
-- Assessed the facility headroom calculations on both a base case scenario and the directors' reverse stress test as a result of the ongoing Covid-19 pandemic;
-- Challenged the appropriateness of management's assessment of going concern by testing the mechanical accuracy, assessing historical forecasting accuracy, understanding management's consideration of downside sensitivity and the impact on facilities and covenants;
-- Reviewed any mitigating actions and cost savings that have been proposed by management;
-- Considered the consistency of management's forecasts with other areas of the audit, such as impairment models; and
-- Considered the adequacy of the disclosures in the financial statements against the requirements of the accounting standards.
Key audit matters
Key audit matters are those matters that, in our professional judgment, were of most significance in our audit of the financial statements of the current period and include the most significant assessed risks of material misstatement (whether or not due to fraud) we identified, including those which had the greatest effect on: the overall audit strategy, the allocation of resources in the audit; and directing the efforts of the engagement team. These matters were addressed in the context of our audit of the financial statements as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters. In addition to going concern reported above, the following key audit matters were identified:
Revenue recognition How We Addressed the Key Audit
Matter in the Audit
The group adopted IFRS 15 Revenue
from Contracts with Customers * We reviewed and discussed the management prepared
('IFRS 15') from 1 December memo on how they have implemented IFRS 15 in the year
2018. The group has a number and the impact it had on the revenue recognition for
of different revenue streams, each stream and specific complex contracts. We
each of which has a different considered whether the accounting treatment was in
revenue recognition policy accordance with IFRS 15 for each revenue stream.
which increases the complexity
of the implementation of IFRS
15. * We tested a sample of large revenue contracts, across
the group, to assess whether the revenue had been
We focused on this area because correctly recognised in line with IFRS 15 and the
the recognition of revenue revenue recognition policy. We examined each
for each component of a sale, agreement in our sample to understand the contractual
when sold together under one obligations, to understand the distinct deliverables
contract with a customer, requires within the contract and whether the entities have
the application of judgment fulfilled the requirements of the contract and earned
in the recognition of revenue the right to consideration where revenue has been
between the components of the recognised.
contract.
In view of the judgements required * We tested a sample of multi-year deals with reference
to be made by management in to the terms of the contracts and the fulfilment of
this area we have determined obligations by all parties to the contract.
that revenue recognition is
a significant risk in the audit
and hence a key audit matter. * We confirmed appropriate cut-off had been applied at
the year end for each revenue stream by testing a
Refer to note 1 of the financial sample to supporting documentation.
statements for disclosure.
* We tested a sample of deferred and accrued income
balances, agreeing to supporting documentation around
the year end to check that these amounts have been
recognised in the appropriate period.
* We tested a sample of debtors and accrued income
balances to post year end cash (and invoice) to
confirm their existence.
Key observations:
We consider the judgements
that management have made are
reasonable in respect of the
adoption of IFRS 15 and revenue
recognition. In particular
where the performance obligations
are distinct and recognised
at the right point in time.
------------------------------------------------------------------
Development costs How We Addressed the Key Audit
Matter in the Audit
All development expenditure
that meets the criteria within * We have agreed a sample of development costs
International Accounting Standard capitalised by management to supporting documentation
38 'Intangible assets' must such as timecards, external invoices, etc.
be capitalised as an asset
and amortised over the assets
useful economic life from * For each project for which development expenditure
the date the asset is available has been capitalised we have obtained supporting
for use. evidence in relation to the future revenue to be
generated from the development expenditure, including
Management are also required contracts evidencing sales of the software
to consider the carrying value development undertaken.
of all capitalised development
costs, including those capitalised
in previous periods, both * We have tested a sample of the brought forward
with reference to the future development costs to check that they remain supported
cash flows expected to be by future cashflows.
generated from the assets
and the reasonableness of
the amortisation period assigned * We have reviewed the appropriateness of the
to the asset. impairment of development costs based on future
cashflows.
Refer to notes 1 and 12 of
the financial statements for
disclosure. * We have considered the appropriateness of the
amortisation period by comparison to market averages
and a review of net book values supported by future
cashflows.
Key observations:
We consider that management
have appropriately capitalised
directly attributable relevant
costs and assessed the economic
return of the projects.
-------------------------------------------------------------------
Carrying value of Intangibles How We Addressed the Key Audit
and Goodwill Matter in the Audit
-------------------------------------------------------------------
Management are required to
review the carrying value * We have challenged the calculations prepared by
of goodwill and test it annually management in the impairment review, specifically the
for impairment. discount rate.
Management exercise significant
judgement in determining the * We have assessed the reasonableness of the
underlying assumptions used assumptions underlying management's assessment of
in the impairment review; goodwill, including the pipeline and cashflow
the assumptions include the forecasts for each CGU.
discount rate used, the allocation
of assets to cash generating
units (CGU) and the future * We have consulted with our valuation specialists to
cash flows attributed to each review the appropriateness of the discount rate.
CGU.
Refer to notes 1, 12 and 13 * We have performed sensitivity analysis for all CGUs
of the financial statements on the discount rate and reductions in cashflow
for disclosure. forecast. We have compared actual results for year
ended 30 November 2019 to the forecast results for FY
2020 to identify CGUs with ambitious growth. Those
identified have been challenged further.
* We have considered and specifically assessed the
carrying value of the Group's other intangible assets,
specifically the growth rates and amortisation
periods adopted.
Key observations:
We consider the assumptions
supporting the cash flows of
each CGU to be appropriately
identified and reasonable.
-------------------------------------------------------------------
Our application of materiality
We define materiality as the magnitude of misstatement in the financial statements that makes it probable that the economic decisions of a reasonably knowledgeable person would be changed or influenced. We use materiality both in planning the scope of our audit work and in evaluating the results of our work.
Based on our professional judgement, we determined materiality for the financial statements as a whole as follows:
Group materiality GBP395,000 (2018: GBP416,000)
Basis for materiality 0.5% of revenue (2018: 0.5% of revenue)
Rationale for the Revenue is the most stable and relevant
benchmark adopted measure, the percentage determined was
considered appropriate for a listed
entity.
====================== ========================================
In considering individual account balances and classes of transactions we apply a lower level of materiality (performance materiality) in order to reduce to an appropriately low level the probability that the aggregate of uncorrected and undetected misstatements exceeds materiality. Performance materiality was set at GBP276,500 (2018: GBP291,200), representing 70% of materiality.
Component materiality ranged from GBP282,000 to GBP186,000 (2018: GBP312,000 to GBP143,000) Parent company materiality was GBP186,000 (2018: GBP143,000). Performance materiality was set at 70% for components and the parent company.
We agreed with the audit committee that we would report to them all individual audit differences identified during the course of our audit in excess of GBP11,850 (2018: GBP13,500). We also agreed to report differences below these thresholds that, in our view, warranted reporting on qualitative grounds.
An overview of the scope of our audit
Our group audit was scoped by obtaining an understanding of the Group and its environment, including group-wide controls, and assessing the risks of material misstatement at the group level.
Our group audit scope focused on the group's significant components, which are located in the UK and Netherlands, all of which were audited by BDO LLP.
In assessing the risk of material misstatement to the Group financial statements, and to ensure we had adequate quantitative coverage of significant accounts and transactions in the financial statements, our Group audit scope focused on the Group's significant components: the parent company, K3 Business Technologies Limited and KS Business Solutions BV. Together with the subsidiaries located in Ireland (which were also subject to full audit scope) and the insignificant components subject to limited scope procedures these components account for 83% of the Group's revenue and 91% of the Group's net assets.
Other information
The directors are responsible for the other information. The other information comprises the information included in the annual report and financial statements, other than the financial statements and our auditor's report thereon. Our opinion on the financial statements does not cover the other information and, except to the extent otherwise explicitly stated in our report, we do not express any form of assurance conclusion thereon.
In connection with our audit of the financial statements, our responsibility is to read the other information and, in doing so, consider whether the other information is materially inconsistent with the financial statements or our knowledge obtained in the audit or otherwise appears to be materially misstated. If we identify such material inconsistencies or apparent material misstatements, we are required to determine whether there is a material misstatement in the financial statements or a material misstatement of the other information. If, based on the work we have performed, we conclude that there is a material misstatement of this other information, we are required to report that fact. We have nothing to report in this regard.
Opinions on other matters prescribed by the Companies Act 2006
In our opinion, based on the work undertaken in the course of the audit:
-- the information given in the strategic report and the directors' report for the financial year for which the financial statements are prepared is consistent with the financial statements; and
-- the strategic report and the directors' report have been prepared in accordance with applicable legal requirements.
Matters on which we are required to report by exception
In the light of the knowledge and understanding of the group and the parent company and its environment obtained in the course of the audit, we have not identified material misstatements in the strategic report or the directors' report.
We have nothing to report in respect of the following matters in relation to which the Companies Act 2006 requires us to report to you if, in our opinion:
-- adequate accounting records have not been kept, or returns adequate for our audit have not been received from branches not visited by us; or
-- the parent company financial statements are not in agreement with the accounting records and returns; or
-- certain disclosures of directors' remuneration specified by law are not made; or -- we have not received all the information and explanations we require for our audit.
Responsibilities of directors
As explained more fully in the directors' responsibilities statement set out on page 39, the directors are responsible for the preparation of the financial statements and for being satisfied that they give a true and fair view, and for such internal control as the directors determine is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error.
In preparing the financial statements, the directors are responsible for assessing the group's and the parent company's ability to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless the directors either intend to liquidate the group or the parent company or to cease operations, or have no realistic alternative but to do so.
Auditor's responsibilities for the audit of the financial statements
Our objectives are to obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditor's report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with ISAs (UK) will always detect a material misstatement when it exists.
Misstatements can arise from fraud or error and are considered material if, individually or in the
aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these financial statements.
A further description of our responsibilities for the audit of the financial statements is located on the Financial Reporting Council's website at: www.frc.org.uk/auditorsresponsibilities . This description forms part of our auditor's report.
Use of our report
This report is made solely to the parent company's members, as a body, in accordance with Chapter 3 of Part 16 of the Companies Act 2006. Our audit work has been undertaken so that we might state to the parent company's members those matters we are required to state to them in an auditor's report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the parent company and the parent company's members as a body, for our audit work, for this report, or for the opinions we have formed.
Julien Rye (Senior Statutory Auditor)
For and on behalf of BDO LLP, Statutory Auditor
Manchester, UK
24 July 2020
BDO LLP is a limited liability partnership registered in England and Wales (with registered number OC305127).
Consolidated Income Statement for the Year Ended 20 November 2019
Notes Year ended Year
30 November ended 30 November
2019 2018
GBP'000 GBP'000
Revenue 2 78,412 83,335
Cost of sales (38,376) (39,446)
-------------------------------------- ------ ------------- -------------------
Gross profit 40,036 43,889
Administrative expenses (52,826) (42,128)
Impairment losses on financial
assets 3 (870) (1,077)
Adjusted profit from operations 1,831 4,649
Amortisation of acquired intangibles 12 (2, 482 ) (2,507)
Exceptional Impairment of
Dynamics UK 12 (12,188) -
Exceptional reorganisation
costs 3 (524) (1,355)
Exceptional customer settlement
provision 16 (400) -
Share-based payment credit/(charge) 3 103 (103)
(Loss)/Profit from operations 3 (13,660) 684
Finance expense 6 (856) (667)
-------------------------------------- ------ ------------- -------------------
(Loss)/Profit before taxation (14,516) 17
-------------------------------------- ------ ------------- -------------------
Tax expense 7 (931) (505)
-------------------------------------- ------ ------------- -------------------
Loss for the year (15,447) (488)
All of the loss for the year is attributable to equity shareholders of the parent.
(Loss) per share Year ended Year ended
30 November 30 November
2019 2018
Basic 9 (36.0)p (1.1)p
Diluted 9 (36.0)p (1.1)p
Year ended Year ended
30 November 30 November
2019 2018
GBP'000 GBP'000
Loss for the year (15,447) (488)
------------------------------------- ------------- -------------
Other comprehensive income
Exchange differences on translation
of foreign operations (928) 300
Other comprehensive income (928) 300
Total comprehensive expense for
the year (16,375) (188)
------------------------------------- ------------- -------------
All of the total comprehensive expense is attributable to equity holders of the parent. All of the other comprehensive income will be reclassified subsequently to profit or loss when specific conditions are met. None of the items within other comprehensive income/(expense) had a tax impact.
Consolidated Statement of Financial Position as at 30 November 2019
2018
Restated
(refer to
Notes 2019 note 29)
GBP'000 GBP'000
ASSETS
Non-current assets
Property, plant and equipment 10 2,107 2,326
Right-of-use assets 11 4,058 -
Goodwill 12/13 40,467 51,187
Other intangible assets 12 14,422 18,184
Deferred tax assets 19 825 1,307
Available-for-sale investments - 98
-------- -----------
Total non-current assets 61, 879 73,102
-------- -----------
Current assets
Trade and other receivables 15 20,746 27,006
Cash and cash equivalents 8,226 9,638
-------- -----------
Total current assets 28,972 36,644
-------- -----------
Total assets 90,851 109,746
-------- -----------
LIABILITIES
Non-current liabilities
Lease liabilities 22 2,507 -
Obligations under finance leases 22 - 15
Borrowings 17 6,262 -
Provisions 30 294 -
Deferred tax liabilities 19 1,115 1,814
-------- -----------
Total non-current liabilities 10,178 1,829
-------- -----------
Current liabilities
Trade and other payables 16 25,00 8 28,428
Current tax liabilities 493 279
Lease liabilities 22 1,410 -
Obligations under finance leases 22 - 32
Borrowings 17 4,385 10,209
Provisions 30 120 -
-------- -----------
Total current liabilities 31,416 38,948
-------- -----------
Total liabilities 41,594 40,777
-------- -----------
Notes 2019 2018
Restated
(refer to
note 29)
GBP'000 GBP'000
EQUITY
Share capital 20 10,737 10,737
Share premium account 21 28,897 28,897
Other reserves 21 10,448 10,448
Translation reserve 21 1,558 2,486
Retained earnings 21 (2,383) 16,401
-------- -----------
Total equity attributable to equity
holders of the parent 49,257 68,969
-------- -----------
Total equity and liabilities 90,851 109,746
-------- -----------
The financial statements on pages 47 to 113 were approved and authorised for issue by the Board of Directors on 24 July 2020 and were signed on its behalf by:
RD Price
Director
Consolidated Statement of Cash Flows for the Year Ended 30 November 2019
Year ended Year ended
30-Nov 30-Nov
Notes 2019 2018
GBP'000 GBP'000
Cash flows from operating activities
Loss for the period (15,447) (488)
Adjustments for:
Finance expense 6 856 667
Tax expense 7 931 505
Depreciation of property, plant and equipment 10 794 885
Impairment loss on property, plant and equipment 10 73 -
Depreciation of right-of-use assets 11 1,737 -
Amortisation of intangible assets and development expenditure 12 5, 377 5,091
Impairment of intangible assets 12 12,062 -
Impairment of investments 98 -
Loss on sale of property, plant and equipment 10 - 22
Share-based payments credit/ (charge) 25 (103) 103
Increase in provisions 30 414 -
Decrease in trade and other receivables 3,629 2,697
Decrease in trade and other payables (4,348) (853)
--------------------------------------------------------------- ------ ----------- -----------
Cash generated from operations 28 6,073 8,629
Finance expense paid (385) (662)
Income taxes (191) (151)
--------------------------------------------------------------- ------ ----------- -----------
Net cash from operating activities 5,497 7,816
Cash flows from investing activities
Development expenditure capitalised 12 (4,080) (2,627)
Purchase of property, plant and equipment 10 (666) (748)
--------------------------------------------------------------- ------ ----------- -----------
Net cash used in investing activities (4,746) (3,375)
Cash flows from financing activities
Proceeds from loans and borrowings 4,500 1,204
Repayment of loans and borrowings (5,750) -
Repayment of lease liabilities (1,505) -
Payments of obligations under finance leases - (58)
Interest paid on lease liabilities (347) -
Dividends paid 8 (661) (601)
--------------------------------------------------------------- ------ ----------- -----------
Net cash from financing activities (3,763) 545
--------------------------------------------------------------- ------ ----------- -----------
Net change in cash and cash equivalents (3,012) 4,986
--------------------------------------------------------------- ------ ----------- -----------
Cash and cash equivalents at start of year 28 6,914 1,941
Exchange gains /(losses) on cash and cash equivalents (61) (13)
--------------------------------------------------------------- ------ ----------- -----------
Cash and cash equivalents at end of year 28 3,841 6,914
Consolidated Statement of Changes in Equity for the Year Ended 30 November 2019
Share Other Translation Retained
Note capital Share premium reserves reserve earnings Total equity
GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
At 30 November
2017 10,737 28,897 10,448 2,186 17,389 69,657
Changes in equity
for year ended 30
November 2018
Loss for the year - - - - (488) (488)
Other
comprehensive
income for the
year - - - 300 - 300
Total
comprehensive
income/(expense) - - - 300 (488) (188)
Share-based
payment credit - - - - 103 103
Movement in own
shares held - - - - (2) (2)
Dividends to
equity holders - - - - (601) (601)
At 30 November
2018 10,737 28,897 10,448 2,486 16,401 68,969 Effect of adoption of IFRS 15 1 - - - - (1,804) (1,804) Effect of adoption of IFRS 9 1 - - - - (769) (769) At 1 December 2018 as restated 10,737 28,897 10,448 2,486 13,828 66,396 Changes in equity for year ended 30 November 2019 Loss for the year - - - - (15,447) (15,447) Other comprehensive income for the year - - - (928) - (928) Total comprehensive income/(expense) - - - (928) (15,447) (16,375) Share based reversal - - - - (103) (103) Dividends to equity holders 8 - - - - (661) (661) At 30 November 2019 10,737 28,897 10,448 1,558 (2,383) 49,257
Other components of equity reflects deferred tax profit taken to profit.
The own shares are held by a wholly-owned subsidiary, K3 Business Technology Group Trustees Company Limited, as trustee of the group's employee share ownership plan. The own shares represent 66,739 shares held under an employee share ownership plan which will be issued to the employees when they choose to withdraw them. The current market value of these shares as at 30 November 2019 was GBP103,445 (2018: GBP180,000).
Notes Forming Part of the Financial Statements for the Year Ended 30 November 2019
1 Accounting policies for the group financial statements
Statement of compliance
These group financial statements have been prepared in accordance with International Financial Reporting Standards (IFRSs and IFRIC interpretations) as endorsed by the European Union ("endorsed IFRS") and with those parts of the Companies Act 2006 applicable to companies preparing their accounts under endorsed IFRS. The company financial statements have been prepared in accordance with Financial Reporting Standard 101, Reduced Disclosure Framework ("FRS101"); these are presented on pages 116 to 125.
The financial statements have been prepared on the historical cost basis. Historical cost is generally based on the fair value of the consideration given in exchange for goods and services.
Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date, regardless of whether that price is directly observable or estimated using another valuation technique. In estimating the fair value of an asset or a liability, the Group takes into account the characteristics of the asset or liability if market participants would take those characteristics into account when pricing the asset or liability at the measurement date. Fair value for measurement and/or disclosure purposes in these consolidated financial statements is determined on such a basis, except for share-based payment transactions that are within the scope of IFRS 2, leasing transactions that are within the scope of IFRS 16, and measurements that have some similarities to fair value but are not fair value, such as net realisable value in IAS 2 or value in use in IAS 36.
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 periods presented unless the Group has exercised any exemptions arising following the adoption of new or revised IFRSs allowing the Group to not restate the comparative information.
The financial statements are presented in Sterling and in round thousands.
Going Concern
At 30 November 2019, the Group had incurred a loss of GBP15.5m, resulting in negative retained earnings of GBP2.4m, and had suffered a cash outflow of GBP3m. Much of the trading loss has arisen due to one off charges to profit and loss as the directors continue to focus the business on profit making operations.
Since the year end the disruption arising from COVID-19 has introduced additional uncertainty in respect of making predictions for future trading and operations. The Group has modelled a variety of coronavirus scenarios in order to assess their potential financial impact over the coming months. The Directors have modelled scenarios that crossover different geographic territories and our revenue streams and implemented actions that mitigate our short term cost and cash outflows, including furlough and tax deferrals schemes, whilst ensuring we have a long term sustainable business.
1 Accounting policies for the group financial statements (continued)
While the Directors have concluded that these circumstances represent a material uncertainty, additional loan funding has been secured since the year end to ease immediate operating cash flow pressures. These facilities are due for renewal in March 2021 and the group does not currently have the funds to repay these. Additional funding or asset disposals could be initiated as required and the directors believe that appropriate refinancing of the existing debt is possible when the renewal date falls due. Therefore, after making enquiries and considering the uncertainties as described above, the Directors have a reasonable expectation that the Group has adequate resources to continue in operational existence for the foreseeable future. For these reasons, they continue to adopt the going basis of accounting in preparing this financial information.
Adoption of new and revised standards
New accounting standards adopted by the Group
The following IFRS have been adopted by the Group for the first time in these financial statements:
IFRS 15 'Revenue from Contracts with Customers'
IFRS 15 'Revenue from Contracts with Customers' is effective for accounting periods beginning on or after 1 January 2018 and, therefore, the transition to IFRS 15 for the Group has been implemented from 1 December 2018. IFRS 15 sets out the requirements for recognising revenue with customers and the related disclosure requirements. The standard requires entities to apportion revenue earned from contracts to performance obligations on a relative stand-alone basis, based on a five-step model.
Application of this guidance will depend on the facts and circumstances present in a contract with a customer and will require the exercise of judgment.
The Group has carried out a project to assess the effect of the adoption of IFRS 15 and has assessed the group's performance obligations under each significant contract in order to assess whether they are distinct and to determine the point in time, or period over which, it is appropriate to recognise revenue. This has also included determining whether customers have a right to use or a right to access the software. The Group's initial assessment as disclosed in the financial statements for the previous period was that there may be some contracts where revenue may need to be recognised differently under IFRS 15 than under existing IFRS and these areas included the following:
-- Software licences where there are significant customisation and installation obligations
-- Customers rights under multi-year deals -- Customers rights under hosted services -- Bundled software and support services
Having reviewed the Group's contracts covering each of the above, it has been concluded that revenue recognised in three areas previously recorded under IAS 18 are inconsistent with the treatment required under IFRS 15.
These three areas have the impact of deferring revenue previously recognised in 2018 and earlier into 2019 and beyond.
1 Accounting policies for the group financial statements (continued)
These three contractual areas with their impact on opening reserves are:
-- a right to access SaaS POS product which the Group controlled under IFRS 15 which is recognised overtime; GBP804k. Under IFRS 15 based on the terms of these contracts and the rights the customer has that software, maintenance and support revenue is not considered to be distinct from each other. This differs to the accounting treatment under IAS 18 where each revenue stream were considered to be separately identifiable. The group retains control of the asset throughout the period and the software is not available to purchase separately from the maintenance and support services. There are considered to be significant performance obligations of the Group throughout the life of the contract which ensure that the customer has access to all updates/enhancements of the software without which the software would not be fit for purpose. Therefore under IFRS 15 all revenue is recognised over time rather than previously at a point in time under IAS 18;
-- a multi year complex product build and deployment contract for a single customer which included variable consideration under IFRS 15; GBP960k. The contract for these services included a clause where there was a possibility of a refund if the customer did not ultimately accept the product. Under IAS 18 the group considered that they had provided the services, had earned the right to consideration and settlement was probable therefore revenue was recognised for these services. However, due to the fact that there was variable consideration in the contract, under IFRS 15 as it was not considered highly probable that a significant reversal of revenue would not occur, it is appropriate to defer the revenue relating to the variable consideration until the uncertainty around the refund was resolved; and
-- own IP for which the customer controlled under IFRS 15 but for which K3 has an ongoing performance obligation; GBP409k. Under IFRS 15, there is considered to be a distinct performance obligation for upgrades and enhancements that was previously included in the software sale. This is considered to be a distinct performance obligation for which the revenue will be deferred and recognised over time. Under IAS 18 this was not considered to be distinct and as such was recognised at a point in time (sale of the software).
Effect of adoption of IFRS 15 at 1 December 2018
The following balances were restated as at 1 December 2018 due to the implementation of IFRS 15. The impact on these balances are as follows:
GBP'000s
Retained income (1,804)
Contract assets (1,213)
Contract liabilities (960)
Deferred tax assets 369
Had the Group continued to report in accordance with IAS 18 for the year ended 30 November 2019, it would have reported the following amounts in these financial statements:
As reported under IFRS15 Effect As would have been reported
GBP'000 GBP'000 GBP'000
Revenue 78,412 (338) 78,074
Loss for the year (15,447) (963) (16,410)
Contract assets / Accrued income 3,955 1,213 5,168
1 Accounting policies for the group financial statements (continued)
The Group will continue to review the terms of significant new contracts to consider whether there are situations where there are significant customisation and installation obligations or where other performance obligations are distinct that may affect the timing of the recognition of revenue.
The adoption of IFRS 15 has also resulted in changes to the disclosures in the Annual Report. The key changes are as follows:
-- existing revenue disclosures has been amended to comply with the requirements to disaggregate revenue recognised from contracts with customers into categories that depict how the nature, amount, timing and uncertainty of revenue and associated cash flows are affected by economic factors
-- further detail has been provided around contract balances and their movements
-- an aggregate amount of the transaction price allocated to the performance obligation that are unsatisfied as of the end of the reporting period and an explanation of when the entity expects the amounts to be recognised as revenue has been provided.
IFRS 9 'Financial instruments'
IFRS 9 'Financial instruments' is effective for accounting periods beginning on or after 1 January 2018 and, therefore, the transition to IFRS 9 for the Group has been from 1 December 2018. The standard replaces IAS 39 Financial Instruments: Recognition and Measurement. IFRS 9 sets out a new forward looking 'expected credit loss (ECL)' model which replaces the incurred loss model in IAS 39 and applies to, amongst other financial assets and liabilities, trade receivables and accrued income (a 'contract asset' within the standard). The new requirements will lead to the earlier recognition of larger credit losses. Unlike IAS 39, entities will be required to consider forward looking information when measuring ECL. Therefore, a credit event (or impairment 'trigger') no longer has to occur before credit losses are recognised. Therefore, the provision for impairment of trade receivables will take account of the forward-looking information. The Group has decided to apply the cumulative effect method as of the date of initial application with no restatement of comparatives. The cumulative effect of applying the new standard has been recorded as an adjustment to the opening balance of equity (retained earnings) at the date of initial application, i.e. 1 December 2018.
The Group assesses the expected credit loss on 3 segments of customers: large retailers, small retailers and POS systems and manufacturing customers with decreasing level of credit loss percentages. The opening expected credit loss allowance at 1 December 2018 was GBP2,001k and at 30 November 2019 GBP1,889k with the increase driven by the exposure to large retailers under the adoption of IFRS 9. Financial assets as at 1/12/2018 have decreased by GBP926k and increased the deferred tax asset by GBP157k due to an increase in the Expected Credit Loss.
The Group has adopted the 'simplified approach' permitted under the standard to its trade receivables and contract assets, i.e. accrued income, as these do not contain a significant financing component under IFRS 15 (i.e. are generally due within 12 months). A provision matrix has been determined based on historical loss rates adjusted for forward looking information. The impact on transition on retained earnings is detailed below. Although the classification of financial instruments has changed, they continue to be measured at amortised cost.
1 Accounting policies for the group financial statements (continued)
The table below provides details of the classification and measurement of financial assets and liabilities under IAS 39 and IFRS 9 at 1 December 2018, date of initial application after taking account the impact of IFRS 15 as described above.
Original IAS39 Revised IFRS 9 IFRS 9 Carrying
IFRS9 measurement Category measurement category IAS39 Carrying Amount Amount
GBP'000 GBP'000
Financial Assets
Trade Receivables,
other receivables,
cash and cash Loans & receivables Financial Assets at
equivalents (amortised cost) amortised cost 30,017 29,091
IFRS 16 'Leases'
IFRS 16 'Leases' was issued on 13 January 2016 and is mandatory for the Group from 1 December 2019 with early adoption permitted if IFRS 15 'Revenue from Contracts with Customers' has also been applied. IFRS 16 replaced IAS17 Leases and IFRIC 4 determining whether an arrangement contains a lease.
The Group has opted to adopt the standard early and, therefore, the transition to IFRS 16 for the Group has been from 1 December 2018. The standard represents a significant change in the accounting and reporting of leases for lessees as it provides a single lessee accounting model, and as such, requires lessees to recognise assets and liabilities for all leases unless the underlying asset has a low value or the lease term is 12 months or less. On adoption of IFRS 16, the Group has recognised within the balance sheet a right of use asset and lease liability for all applicable leases, and within the income statement rent expense has been replaced by depreciation and interest expense which has resulted in a decrease in administrative expenses and an increase in finance expenses.
As a lessee, the Group previously classified as operating or finance leases based on its assessment of whether the lease transferred substantially all of the risks and rewards of ownership. Under IFRS 16, the Group recognises right of use assets and lease liabilities for most leases. However the Group has elected not to recognise right of use assets and lease liabilities for leases with less than 12 months or less and are using the low value exemption.
The average discount rate applied to all leases on transition is 6%, where there was an outstanding accrued or prepaid cost this has been deducted or added to the cost of the right of use asset.
1 Accounting policies for the group financial statements (continued)
In summary on adoption of IFRS 16, the Group has recognised right of use assets and lease liabilities as follows:
Classification under IAS17 Right of use assets Lease Liabilities
--------------------------- ------------------------------------------- ------------------------------------------
Operating leases Office space: Right of use assets are Measured at the present value of the
measured at an amount equal to the lease remaining lease payments, discounted
liability, using the Group's
adjusted by the amount of any prepaid or incremental borrowing rate is the rate at
accrued lease payments, subject to the which a similar borrowing could be
practical obtained from
expedients noted above an independent creditor under comparable
terms and conditions. The weighted
average rate applied
was 6%
--------------------------- ------------------------------------------- ------------------------------------------
Finance leases Measured based on carrying values for the lease assets and liabilities immediately
before
the date of initial application (i.e. carrying values brought forward, unadjusted).
--------------------------- ---------------------------------------------------------------------------------------
Adopting the new standard has also impacted a number of statutory measures such as profit from operations and cash generated from operations.
The group has applied the modified retrospective approach, with recognition of transitional adjustments on the date of initial application (1 December 2018). The revised requirements are thus not reflected in the prior year financial statements, and there has been no restatement of comparatives, rather these changes have been processed at the date of the initial application (1 December 2018). There was no change in the opening equity balances resulting from the change.
Practical Expedients Utilised:
The group applied the following practical expedients when applying IFRS 16 to leases previously classified as operating leases under IAS 17:
-- Applied a single discount rate to a portfolio of leases with reasonably similar characteristics
-- Reliance on previous assessments on whether leases are onerous as opposed to preparing an impairment review under IAS 36 as of the date of initial application
-- Applied the exemption not to recognise right of use assets and liabilities for leases with less than 12 months of lease term remaining as of the date of initial application.
1 Accounting policies for the group financial statements (continued)
The following table presents the impact of adopting IFRS 16 on the statement
of financial position as at 1 December 2018:
30 November 2018
Adjustments IFRS16 01 December 2018
As originally
presented
GBP'000 GBP'000 GBP'000
Assets
PPE a) 2,326 (47) 2,279
Right of use assets - 4,770 4,770
Liabilities
Obligations under finance
lease b) 47 (47) -
Lease Liabilities - 4,770 4,770
Equity
Retained Earnings - - -
a) IFRS 16 introduces a new category of assets, right of use assets, representing the asset value of those assets held under leases. In addition any items of PPE held under finance leases, were also reclassified to right of use assets from PPE.
b) IFRS 16 introduces a new category of liabilities, lease liabilities, representing the liability value of the leases entered into by the group. As a result of implementing IFRS 16 and finance lease liabilities were reclassified.
The following table shows the operating lease commitments disclosed applying IAS 17 at 30 November 2018, discounted using the incremental borrowing rate at the date of initial application and the lease liabilities recognised in the statement of financial position at the date of initial application.
1 December 2018
GBP'000
Minimum operating lease commitment at 30 November 2018 5,910
Add: Omitted operating lease commitments as at 30 November 2018 190
----------------
Undiscounted lease payments 6,100
Less: effect of discounting using the incremental borrowing rate (1,377)
----------------
Lease liabilities for leases classified as operating type under IAS17 4,723
Plus: leases previously classified as finance type under IAS17 47
----------------
Lease liability as at 1 December 2018 4,770
Other new and amended standards and interpretations issued by the IASB did not impact the Group as they are either not relevant to the Group's activities or require accounting which is consistent with the Group's current accounting policies.
1 Accounting policies for the group financial statements (continued)
Impact of adoption of IFRS standards in the year on Opening Reserves
The cumulative impact on retained earnings of adopting the new accounting standards is shown below:
Retained Earnings Adjustments
2018
IFRS 15, IFRS 16 and IFRS9 Impact on Retained Earnings GBP'000
At 30 November 2018 (As Originally Stated) 16,401
Adjustment to retained earnings on adoption of IFRS 15 (1,804)
Adjustment to retained earnings on adoption of IFRS 9 (769)
Total Adjustment (2,573)
Retained earnings as at 1 December 2018 as restated 13,828
--------
New and revised IFRS Standards in issue but not yet effective
At the date of authorisation of these financial statements, the Group has not applied the following new and revised IFRS Standards that have been issued but are not yet effective and, in some cases, had not yet been adopted by the EU:
IFRS 17 Insurance Contracts
IFRS 10 and IAS 28 (amendments) Sale of Contribution of Assets between and
Investor and it Associate or Joint Venture
Amendments to IFRS 3 Definition of a business
Amendments to IFRS 9, Interest Rate Benchmark Reform
IAS 39 and IFRS 7
Amendments to IAS 1 Definition of material
and IAS 8
Conceptual Framework Amendments to References to the Conceptual
Framework in IFRS Standards
The directors do not expect that the adoption of the Standards listed above will have a material impact on the financial statements of the Group in future periods.
Basis of consolidation
The consolidated financial statements incorporate the financial statements of the Company and entities controlled by the Company (its subsidiaries) made up to 30 November each year. The company controls an investee if all three of the following elements are present:
-- power over the investee; -- exposure, or has rights, to variable returns from the investee; and -- the ability of the investor to use its power to affect those returns.
Control is reassessed whenever facts and circumstances indicate that there may be a change in any of these elements of control.
1 Accounting policies for the group financial statements (continued)
Consolidation of a subsidiary begins when the Company obtains control over the subsidiary and ceases when the Company loses control of the subsidiary.
Where necessary, adjustments are made to the financial statements of subsidiaries to bring the accounting policies used into line with the Group's accounting policies.
All intragroup assets and liabilities, equity, income, expenses and cash flows relating to transactions between the members of the Group are eliminated on consolidation.
Business combinations
All business combinations are accounted for by applying the acquisition method. The consideration transferred in a business combination is measured at fair value, which is calculated as the sum of the acquisition date fair values of assets transferred by the Group, liabilities incurred by the Group to the former owners of the acquiree and the equity interest issued by the Group in exchange for control of the acquiree. Acquisition-related costs are recognised in profit or loss as incurred.
At the acquisition date, the identifiable assets acquired and the liabilities assumed are recognised at their fair value at the acquisition date, except that:
-- deferred tax assets or liabilities and assets or liabilities related to employee benefit arrangements are recognised and measured in accordance with IAS 12 and IAS 19 respectively;
-- liabilities or equity instruments related to share-based payment arrangements of the acquiree or share-based payment arrangements of the Group entered into to replace share-based payment arrangements of the acquiree are measured in accordance with IFRS 2 at the acquisition date (see below); and
-- assets (or disposal groups) that are classified as held for sale in accordance with IFRS 5 are measured in accordance with that Standard.
Goodwill is measured as the excess of the sum of the consideration transferred, the amount of any non-controlling interests in the acquiree, and the fair value of the acquirer's previously held equity interest in the acquiree (if any) over the net of the acquisition-date amounts of the identifiable assets acquired and the liabilities assumed. If, after reassessment, the net of the acquisition-date amounts of the identifiable assets acquired and liabilities assumed exceeds the sum of the consideration transferred, the amount of any non-controlling interests in the acquiree and the fair value of the acquirer's previously held interest in the acquiree (if any), the excess is recognised immediately in profit or loss as a bargain purchase gain.
When the consideration transferred by the Group in a business combination includes a contingent consideration arrangement, the contingent consideration is measured at its acquisition-date fair value and included as part of the consideration transferred in a business combination. Changes in fair value of the contingent consideration that qualify as measurement period adjustments are adjusted retrospectively, with corresponding adjustments against goodwill. Measurement period adjustments are adjustments that arise from additional information obtained during the 'measurement period' (which cannot exceed one year from the acquisition date) about facts and circumstances that existed at the acquisition date.
1 Accounting policies for the group financial statements (continued)
The subsequent accounting for changes in the fair value of the contingent consideration that do not qualify as measurement period adjustments depends on how the contingent consideration is classified. Contingent consideration that is classified as equity is not remeasured at subsequent reporting dates and its subsequent settlement is accounted for within equity. Other contingent consideration is remeasured to fair value at subsequent reporting dates with changes in fair value recognised in profit or loss.
When a business combination is achieved in stages, the Group's previously held interests (including joint operations) in the acquired entity are remeasured to its acquisition-date fair value and the resulting gain or loss, if any, is recognised in profit or loss. Amounts arising from interests in the acquiree prior to the acquisition date that have previously been recognised in other comprehensive income are reclassified to profit or loss, where such treatment would be appropriate if that interest were disposed of.
If the initial accounting for a business combination is incomplete by the end of the reporting period in which the combination occurs, the Group reports provisional amounts for the items for which the accounting is incomplete. Those provisional amounts are adjusted during the measurement period (see above), or additional assets or liabilities are recognised, to reflect new information obtained about facts and circumstances that existed as of the acquisition date that, if known, would have affected the amounts recognised as of that date.
Goodwill
Goodwill is initially recognised and measured as set out above.
Goodwill is not amortised but is reviewed for impairment at least annually. For the purpose of impairment testing, goodwill is allocated to each of the Group's subsidiaries or cash-generating units (or groups of cash-generating units) expected to benefit from the synergies of the combination. Cash-generating units to which goodwill has been allocated are tested for impairment annually, or more frequently when there is an indication that the unit may be impaired. If the recoverable amount of the cash-generating unit is less than the carrying amount of the unit, the impairment loss is allocated first to reduce the carrying amount of any goodwill allocated to the unit and then to the other assets of the unit pro-rata on the basis of the carrying amount of each asset in the unit. An impairment loss recognised for goodwill is not reversed in a subsequent period.
On disposal of a subsidiary or cash-generating unit, the attributable net book value of goodwill is included in the determination of the profit or loss on disposal.
1 Accounting policies for the group financial statements (continued)
Revenue recognition
Adoption of IFRS 15, interpretation and application by K3 revenue stream.
The Group contracts for products and services in a variety of contractual forms and deployment methods which impact IFRS 15 revenue recognition. These include:
-- Reselling of 3rd party products for which following contracting the Group has no continuing performance obligations for software and the customer controls the software. These are usually perpetual licenses with customer on premise installations. Since the Group is reselling these all already functional products, services are unbundled. Customers can also choose to take maintenance and support for these products or indeed obtain services, support and maintenance from different suppliers.
-- K3 own software IP (Intellectual Property) that adds incremental vertical functionality and bolts onto Microsoft Dynamics products and that is either sold directly to customer or via a channel partner. K3 does not control the software after the contract and issue of access code, which is contemporaneous. There is an ongoing performance obligation to maintain the product to ensure the functionality continues to bolt onto Microsoft Dynamics products.
-- K3 own IP on products for which K3 controls and has ongoing performance obligations. These products are typically SaaS (Software as a Service) based subscription products which include a right to access as the customer continuously consumes functionality. The product offer is a typical bundle of software access, maintenance and support. The contracts typically have a low level of services.
Software revenue:
Software licenses for 3(rd) party products are recognised at a point in time, on contract and issue of the initial license key which is contemporaneous.
K3 bolt on own IP is recognised at a point in time, on contract and issue of the license key which is contemporaneous.
K3 own IP which is SaaS based is recognised over time and not in software but rather in maintenance and support for the purposes of revenue disaggregation disclosures. Revenue is recognised over time as K3 controls the product, the license is not distinct and the customer continually receives benefits.
Services revenues
Services revenues for the Group are heavily biased to the implementation of 3(rd) party ERP solutions. Services are usually linked to implementation and set up rather than product functionality build. Services are contracted for on a time and materials basis, the customer takes ownership of the work delivered and revenue is recognized as it is performed.
1 Accounting policies for the group financial statements (continued)
Hardware :
Hardware is peripheral to a number of contract implementations, the revenue is recognised when the customer takes control of the asset on delivery .
Maintenance and Support :
Maintenance refers to the maintenance of the products and ensuring a right to upgrade whilst Support refers to ongoing customer support including for example help desk access.
3(rd) party products maintenance is provided by the product's author K3 has no performance obligation and this is sold through K3 for a margin. Revenue is recognised for the term of the contract at a point in time when the contract is signed. Support of 3(rd) party products is provided by K3 over time over the term of the contract.
K3 bolt on own IP is typically re-sold via channel partners who provide support. K3 has an ongoing performance obligation for the maintenance of the product and recognises a portion of revenue associated with that over time.
K3 own IP SaaS / subscription based is typically a bundled offer of maintenance and support which are both performance obligations for K3 and revenue is recognised over time.
Allocation of transaction price:
Transaction price is measured based on the consideration specified in a contract with a customer and, where applicable, the best estimate of any consideration related to modifications to the contract which has yet to be agreed. Any amounts expected to be paid to the customer, such as penalties for late delivery, are deducted from the consideration. Where a transaction price has to be allocated between multiple performance obligations, this is generally achieved through allocating a proportion of total price against each using either standard list sales prices or an estimated costs methodology
Leases
The Group has applied IFRS 16 using the modified retrospective approach and therefore comparative information has not been restated and is presented under IAS 17. The details of accounting policies under both IAS 17 and IFRS 16 are presented separately below.
Policies applicable from 1 December 2018
The Group assesses whether a contract is or contains a lease, at inception of the contract. The Group recognises a right-of-use asset and a corresponding lease liability with respect to all lease arrangements in which it is the lessee, except for short-term leases (defined as leases with a lease term of 12 months or less) and leases of low value assets (such as tablets and personal computers, small items of office furniture and telephones). For these leases, the Group recognises the lease payments as an operating expense on a straight-line basis over the term of the lease unless another systematic basis is more representative of the time pattern in which economic benefits from the leased assets are consumed.
The lease liability is initially measured at the present value of the lease payments that are not paid at the commencement date, discounted by using the rate implicit in the lease. If this rate cannot be readily determined, the lessee uses its incremental borrowing rate.
1 Accounting policies for the group financial statements (continued)
Lease payments included in the measurement of the lease liability comprise:
-- Fixed lease payments (including in-substance fixed payments), less any lease incentives receivable;
-- Variable lease payments that depend on an index or rate, initially measured using the index or rate at the commencement date;
-- The amount expected to be payable by the lessee under residual value guarantees;
-- The exercise price of purchase options, if the lessee is reasonably certain to exercise the options; and
-- Payments of penalties for terminating the lease, if the lease term reflects the exercise of an option to terminate the lease.
The lease liability is presented as a separate line in the consolidated statement of financial position.
The lease liability is subsequently measured by increasing the carrying amount to reflect interest on the lease
liability (using the effective interest method) and by reducing the carrying amount to reflect the lease payments made.
The Group remeasures the lease liability (and makes a corresponding adjustment to the related right-of-use asset) whenever:
-- The lease term has changed or there is a significant event or change in circumstances resulting in a change in the assessment of exercise of a purchase option, in which case the lease liability is remeasured by discounting the revised lease payments using a revised discount rate.
-- The lease payments change due to changes in an index or rate or a change in expected payment under a guaranteed residual value, in which cases the lease liability is remeasured by discounting the revised lease payments using an unchanged discount rate (unless the lease payments change is due to a change in a floating interest rate, in which case a revised discount rate is used).
-- A lease contract is modified and the lease modification is not accounted for as a separate lease, in which case the lease liability is remeasured based on the lease term of the modified lease by discounting the revised lease payments using a revised discount rate at the effective date of the modification.
The Group did not make any such adjustments during the periods presented.
The right-of-use assets comprise the initial measurement of the corresponding lease liability, lease payments made at or before the commencement day, less any lease incentives received and any initial direct costs. They are subsequently measured at cost less accumulated depreciation and impairment losses.
Whenever the Group incurs an obligation for costs to dismantle and remove a leased asset, restore the site on which it is located or restore the underlying asset to the condition required by the terms and conditions of the lease, a provision is recognised and measured under IAS 37. To the extent that the costs relate to a right-of-use asset, the costs are included in the related right-of-use asset, unless those costs are incurred to produce inventories.
Right-of-use assets are depreciated over the shorter period of lease term and useful life of the underlying asset. If a lease transfers ownership of the underlying asset or the cost of the right-of-use asset reflects that the Group expects to exercise a purchase option, the related right-of-use asset is depreciated over the useful life of the underlying asset. The depreciation starts at the commencement date of the lease.
1 Accounting policies for the group financial statements (continued)
The right-of-use assets are presented as a separate line in the consolidated statement of financial position.
The Group applies IAS 36 to determine whether a right-of-use asset is impaired and accounts for any identified
impairment loss as described in the 'Property, Plant and Equipment' policy.
Policies applicable prior to 1 December 2018
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 recognised as assets of the Group at their fair value or, if lower, at the present value of the minimum lease payments, each determined at the inception of the lease. The corresponding liability to the lessor is included in the statement of financial position as a finance lease obligation.
Lease payments are apportioned between finance expenses and reduction of the lease obligation so as to achieve a constant rate of interest on the remaining balance of the liability. Finance expenses are recognised immediately in 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 (see below). Contingent rentals are recognised as expenses in the periods in which they are incurred.
Rentals payable under operating leases are charged to income on a straight-line basis over the term of the relevant lease except where another more systematic basis is more representative of the time pattern in which economic benefits from the lease 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 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.
Taxation
The tax expense represents the sum of the tax currently payable and deferred tax.
The tax currently payable is based on taxable profit for the 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 or substantively enacted by the reporting date.
1 Accounting policies for the group financial statements (continued)
Deferred tax is the tax expected to be payable or recoverable on differences between the carrying amounts of assets and liabilities in the financial statements and the corresponding tax bases used in the computation of taxable profit, and is accounted for using the balance sheet liability method. Deferred tax liabilities are generally recognised for all taxable temporary differences and deferred tax assets are recognised to the extent that it is probable that taxable profits will be available against which deductible temporary differences can be utilised. Such assets and liabilities are not recognised if the temporary difference arises from goodwill or from the initial recognition (other than in a business combination) of other assets and liabilities in a transaction that affects neither the tax profit nor the accounting profit. Deferred tax liabilities are recognised on intangible assets and other temporary differences recognised in business combinations.
Deferred tax liabilities are recognised for taxable temporary differences arising on investments in subsidiaries and associates, except where the group is able to control the reversal of the temporary difference and it is probable that the temporary difference will not reverse in the foreseeable future.
The carrying amount of deferred tax assets is reviewed at each reporting date and reduced to the extent that it is no longer probable that sufficient taxable profits will be available to allow all or part of the asset to be recovered.
Deferred tax is calculated at the tax rates that are expected to apply in the period when the liability is settled or the asset is realised. Deferred tax is charged or credited in the income statement, except when it relates to items charged or credited directly to equity, in which case the deferred tax is also dealt with in equity.
Deferred tax assets and liabilities are offset when the group has a legally enforceable right to offset current tax assets and liabilities and the deferred tax assets and liabilities relate to taxes levied by the same tax authority on either:
-- the same taxable group company; or
-- different group entities which intend either to settle current tax assets and liabilities on a net basis, or to realise the assets and settle the liabilities simultaneously, in each future period in which significant amounts of deferred tax assets or liabilities are expected to be settled or recovered.
Dividends
Dividends are recognised when paid.
Property, plant and equipment
Items of property, plant and equipment are stated at cost less accumulated depreciation and accumulated impairment loss.
The cost of items of property, plant and equipment is its purchase cost, together with any incidental costs of acquisition. As well as the purchase price, cost includes directly attributable costs of bringing the asset into use.
1 Accounting policies for the group financial statements (continued)
Depreciation is recognised so as to write off, on a straight-line basis over the expected useful economic lives of the asset concerned, the cost of property, plant and equipment, less estimated residual values, which are adjusted, if appropriate, at each reporting date. The principal economic lives used for this purpose are:
-- Long leasehold buildings Period of lease -- Leasehold improvements Period of lease -- Plant, fixtures and equipment Three to five years
The estimated useful lives, residual values and depreciation method are reviewed at the end of each reporting period, with the effect of any changes in estimate accounted for on a prospective basis.
Right-of-use assets are depreciated over the shorter period of the lease term and the useful life of the underlying asset. If a lease transfers ownership of the underlying asset or the cost of the right-of-use asset reflects that the Group expects to exercise a purchase option, the related right-of-use asset is depreciated over the useful life of the underlying asset.
Provision is made against the carrying value of items of property, plant and equipment where impairment in value is deemed to have occurred.
An item of property, plant and equipment is derecognised upon disposal or when no future economic benefits are expected to arise from the continued use of the asset. The gain or loss arising on the disposal or retirement of an asset is determined as the difference between the sales proceeds and the carrying amount of the asset and is recognised in profit or loss.
Externally acquired intangible assets
Externally acquired intangible assets are initially recognised at cost and subsequently amortised on a straight-line basis over their useful economic lives. The amortisation expense is included within administrative expenses in the consolidated income statement.
Intangible assets are recognised on business combinations if they are separable from the acquired entity or give rise to other contractual/legal rights. The amounts ascribed to such intangibles are arrived at by using appropriate valuation techniques (see section related to critical estimates and judgements below).
The significant intangibles recognised by the group, their estimated useful economic lives and the methods used to determine the cost of intangibles acquired in business combinations are as follows:
Intangible asset Estimated useful Valuation method
economic life
Software distribution 5-9 years Estimated royalty stream if the
agreements rights were to be licensed
Contractual and non-contractual 5-15 years Estimated discounted cash flow
customer relationships
Intellectual property 6-10 years Estimated royalty stream if the
rights rights were to be licensed
1 Accounting policies for the group financial statements (continued)
Internally generated intangible assets (research and development costs)
Expenditure on research activities is recognised as an expense in the period in which it is incurred. An internally-generated intangible asset arising from the group's software development is recognised only if all of the following conditions are met:
-- 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.
The expenditure capitalised represents the cost of direct labour incurred in developing the software product.
Capitalised development costs are amortised on a straight-line basis over their useful lives commencing from the date the asset is available for use. The estimated useful lives for development expenditure are estimated to be in a range of between three and seven years. Where the estimate useful life is more than five years, this reflects the judgement that there will be more substantial economic benefit flowing in the last five years of the period. The amortisation expense is included within administrative expenses in the consolidated income statement. Where no internally-generated intangible asset can be recognised, development expenditure is recognised as an expense in the period in which it is incurred.
Impairment of property, plant and equipment and intangible assets excluding goodwill
At each reporting date, the Group reviews the carrying amounts of its property, plant and equipment and intangible assets to determine whether there is any indication that those assets have suffered an impairment loss. If any such indication exists, the recoverable amount of the asset is estimated to determine the extent of the impairment loss (if any). Where the asset does not generate cash flows that are independent from other assets, the Group estimates the recoverable amount of the cash-generating unit to which the asset belongs. When a reasonable and consistent basis of allocation can be identified, corporate assets are also allocated to individual cash-generating units, or otherwise they are allocated to the smallest group of cash-generating units for which a reasonable and consistent allocation basis can be identified.
Intangible assets with an indefinite useful life are tested for impairment at least annually and whenever there is an indication at the end of a reporting period that the asset may be impaired.
Recoverable amount is the higher of fair value less costs of disposal and value in use. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset for which the estimates of future cash flows have not been adjusted.
If the recoverable amount of an asset (or cash-generating unit) is estimated to be less than its carrying amount, the carrying amount of the asset (or cash-generating unit) is reduced to its recoverable amount. An impairment loss is recognised immediately in profit or loss.
1 Accounting policies for the group financial statements (continued)
Where an impairment loss subsequently reverses, the carrying amount of the asset (or cash-generating unit) is increased to the revised estimate of its recoverable amount, but so that the increased carrying amount does not exceed the carrying amount that would have been determined had no impairment loss been recognised for the asset (or cash-generating unit) in prior years. A reversal of an impairment loss is recognised immediately in profit or loss to the extent that it eliminates the impairment loss which has been recognised for the asset in prior years.
Financial instruments
Financial assets and financial liabilities are recognised in the Group's statement of financial position when the Group becomes a party to the contractual provisions of the instrument.
Financial assets and financial liabilities are initially measured at fair value. Transaction costs that are directly attributable to the acquisition or issue of financial assets and financial liabilities (other than financial assets and financial liabilities at fair value through profit or loss) are added to or deducted from the fair value of the financial assets or financial liabilities, as appropriate, on initial recognition.
Financial assets
All recognised financial assets are measured subsequently in their entirety at either amortised cost or fair value, depending on the classification of the financial assets. All of the group's debt instruments are measured subsequently at amortised cost.
The effective interest method is a method of calculating the amortised cost of a debt instrument and of allocating interest income over the relevant period.
For financial assets other than purchased or originated credit -- impaired financial assets (i.e. assets that are credit -- impaired on initial recognition), the effective interest rate is the rate that exactly discounts estimated future cash receipts (including all fees and points paid or received that form an integral part of the effective interest rate, transaction costs and other premiums or discounts) excluding expected credit losses, through the expected life of the debt instrument, or, where appropriate, a shorter period, to the gross carrying amount of the debt instrument on initial recognition
The amortised cost of a financial asset is the amount at which the financial asset is measured at initial recognition minus the principal repayments, plus the cumulative amortisation using the effective interest method of any difference between that initial amount and the maturity amount, adjusted for any loss allowance. The gross carrying amount of a financial asset is the amortised cost of a financial asset before adjusting for any loss allowance.
Interest income is recognised using the effective interest method for debt instruments measured subsequently at amortised cost and at FVTOCI. For financial assets other than purchased or originated credit -- impaired financial assets, interest income is calculated by applying the effective interest rate to the gross carrying amount of a financial asset, except for financial assets that have subsequently become credit -- impaired (see below). For financial assets that have subsequently become credit -- impaired, interest income is recognised by applying the effective interest rate to the amortised cost of the financial asset. If, in subsequent reporting periods, the credit risk on the credit -- impaired financial instrument improves so that the financial asset is no longer credit -- impaired, interest income is recognised by applying the effective interest rate to the gross carrying amount of the financial asset.
1 Accounting policies for the group financial statements (continued)
The Group recognises a loss allowance for expected credit losses on trade receivables and contract assets. The amount of expected credit losses is updated at each reporting date to reflect changes in credit risk since initial recognition of the respective financial instrument.
The Group always recognises lifetime ECL for trade receivables and contract assets. The expected credit losses on these financial assets are estimated using a provision matrix based on the Group's historical credit loss experience, adjusted for factors that are specific to the debtors, general economic conditions and an assessment of both the current as well as the forecast direction of conditions at the reporting date, including time value of money where appropriate.
Lifetime ECL represents the expected credit losses that will result from all possible default events over the expected life of a financial instrument.
In assessing whether the credit risk on a financial instrument has increased significantly since initial recognition, the Group compares the risk of a default occurring on the financial instrument at the reporting date with the risk of a default occurring on the financial instrument at the date of initial recognition. In making this assessment, the Group considers both quantitative and qualitative information that is reasonable and supportable, including historical experience and forward -- looking information that is available without undue cost or effort. Forward -- looking information considered includes the future prospects of the industries in which the Group's debtors operate, obtained from economic expert reports, financial analysts, governmental bodies, relevant think -- tanks and other similar organisations, as well as consideration of various external sources of actual and forecast economic information that relate to the Group's core operations.
In particular, the following information is taken into account when assessing whether credit risk has increased significantly since initial recognition:
-- existing or forecast adverse changes in business, financial or economic conditions that are expected to cause a significant decrease in the debtor's ability to meet its debt obligations;
-- an actual or expected significant deterioration in the operating results of the debtor; -- significant increases in credit risk on other financial instruments of the same debtor;
-- an actual or expected significant adverse change in the regulatory, economic, or technological environment of the debtor that results in a significant decrease in the debtor's ability to meet its debt obligations.
Irrespective of the outcome of the above assessment, the Group presumes that the credit risk on a financial asset has increased significantly since initial recognition when contractual payments are more than 30 days past due, unless the Group has reasonable and supportable information that demonstrates otherwise.
Despite the foregoing, the Group assumes that the credit risk on a financial instrument has not increased significantly since initial recognition if the financial instrument is determined to have low credit risk at the reporting date. A financial instrument is determined to have low credit risk if:
(1) The financial instrument has a low risk of default,
(2) The debtor has a strong capacity to meet its contractual cash flow obligations in the near term, and
(3) Adverse changes in economic and business conditions in the longer term may, but will not necessarily, reduce the ability of the borrower to fulfil its contractual cash flow obligations.
1 Accounting policies for the group financial statements (continued)
The Group writes off a financial asset when there is information indicating that the debtor is in severe financial difficulty and there is no realistic prospect of recovery, e.g. when the debtor has been placed under liquidation or has entered into bankruptcy proceedings, or in the case of trade receivables, when the amounts are over two years past due, whichever occurs sooner. Financial assets written off may still be subject to enforcement activities under the Group's recovery procedures, taking into account legal advice where appropriate. Any recoveries made are recognised in profit or loss.
Financial liabilities
All financial liabilities are measured subsequently at amortised cost using the effective interest method.
The effective interest method is a method of calculating the amortised cost of a financial liability and of allocating interest expense over the relevant period. The effective interest rate is the rate that exactly discounts estimated future cash payments (including all fees and points paid or received that form an integral part of the effective interest rate, transaction costs and other premiums or discounts) through the expected life of the financial liability, or (where appropriate) a shorter period, to the amortised cost of a financial liability.
The Group derecognises financial liabilities when, and only when, the Group's obligations are discharged, cancelled or have expired. The difference between the carrying amount of the financial liability derecognised and the consideration paid and payable is recognised in profit or loss.
When the Group exchanges with the existing lender one debt instrument into another one with the substantially different terms, such exchange is accounted for as an extinguishment of the original financial liability and the recognition of a new financial liability. Similarly, the Group accounts for substantial modification of terms of an existing liability or part of it as an extinguishment of the original financial liability and the recognition of a new liability
Equity instruments
Equity instruments issued by the group are recorded at the proceeds received, net of direct issue costs.
Provisions
Provisions are recognised when the Group has a present obligation (legal or constructive) as a result of a past event, it is probable that the Group will be required to settle that obligation and a reliable estimate can be made of the amount of the obligation.
The amount recognised as a provision is the best estimate of the consideration required to settle the present obligation at the reporting date, taking into account the risks and uncertainties surrounding the obligation. Where a provision is measured using the cash flows estimated to settle the present obligation, its carrying amount is the present value of those cash flows (when the effect of the time value of money is material).
When some or all of the economic benefits required to settle a provision are expected to be recovered from a third party, a receivable is recognised as an asset if it is virtually certain that reimbursement will be received and the amount of the receivable can be measured reliably.
1 Accounting policies for the group financial statements (continued)
Restructurings
A restructuring provision is recognised when the Group has developed a detailed formal plan for the restructuring and has raised a valid expectation in those affected that it will carry out the restructuring by starting to implement the plan or announcing its main features to those affected by it. The measurement of a restructuring provision includes only the direct expenditures arising from the restructuring, which are those amounts that are both necessarily entailed by the restructuring and not associated with the ongoing activities of the entity.
Onerous contracts
Present obligations arising under onerous contracts are recognised and measured as provisions. An onerous contract is considered to exist where the Group has a contract under which the unavoidable costs of meeting the obligations under the contract exceed the economic benefits expected to be received under it.
Restoration provisions
Provisions for the costs to restore leased assets to their original condition, as required by the terms and conditions of the lease, are recognised when the obligation is incurred, either at the commencement date or as a consequence of having used the underlying asset during a particular period of the lease, at the directors' best estimate of the expenditure that would be required to restore the assets. Estimates are regularly reviewed and adjusted as appropriate for new circumstances.
Employee share ownership plans
As the company is deemed to have control of its ESOP trust, it is treated as a subsidiary and consolidated for the purposes of the group accounts. The material assets, liabilities, income and costs of the K3 Business Technology Group plc Share Incentive Plan are included in the financial statements. Until such time as the group's own shares vest unconditionally with employees, the consideration paid for the shares is deducted in equity shareholders' funds.
Share-based payments
The group issues equity-settled share-based payments to certain employees (i.e. share options). Equity-settled share-based payments are measured at fair value at the date of grant. Fair value is measured by use of a trinomial lattice model. The expected life used in the model has been adjusted, based on the group's best estimate for the effects of non-transferability, exercise restrictions and behavioural considerations.
The fair value determined at the grant date is expensed on a straight-line basis over the vesting period, based on the group's estimate of the number of shares that will eventually vest. Non-market vesting conditions are taken into account by adjusting the number of equity instruments expected to vest at each balance sheet date so that, ultimately, the cumulative amount recognised over the vesting period is based on the amount that eventually vest. Market vesting conditions are factored into the fair value of the options and warrants granted. As long as all other vesting conditions are satisfied, a charge is made irrespective of whether the market vesting conditions are satisfied. The group no longer feels that the conditions will be met for the options to vest and as such the charge in year end of 30 November 2018 of GBP103k has been reversed in the year end 30 November 2019.
1 Accounting policies for the group financial statements (continued)
Pension contributions
Obligations for contributions to defined contribution pension plans are recognised as an expense in the income statement as incurred. The group has no defined benefit arrangements in place.
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. Bank overdrafts that are repayable on demand and form an integral part of the group's cash management system are included as a component of cash and cash equivalents for the purpose of the statement of cash flows.
Foreign currency translation
The presentational currency is sterling.
Transactions entered into by group entities in a currency other than the currency of the primary economic environment in which they operate (the "functional currency") are translated at the rates ruling at the dates of transactions. Monetary assets and liabilities denominated in foreign currencies at the reporting date are translated at the rates ruling at that date. Exchange differences arising on the retranslation of unsettled monetary assets and liabilities are similarly recognised immediately in the income statement.
On consolidation, results of overseas subsidiaries are translated using the average exchange rate for the period. The balance sheets of overseas subsidiaries are translated using the closing period end rate. Exchange differences arising, if any, are taken to a separate component in equity (the translation reserve). Such translation differences are recognised as income or as expenses in the period in which the operation is disposed of.
Goodwill and fair value adjustments arising on the acquisition of a foreign entity are treated as assets and liabilities of the foreign entity and translated at the closing rate. The group has elected to treat goodwill and fair value adjustments arising on acquisitions before the date of transition to IFRS as sterling denominated assets and liabilities.
Exchange differences recognised in the income statement of group entities' separate financial statements on the translation of long-term monetary items forming part of the group's net investment in the overseas operation concerned are reclassified to the translation reserve on consolidation.
Critical accounting estimates and judgements
In applying the Group's accounting policies above the directors are required to make judgements (other than those involving estimations) that have a significant impact on the amounts recognised and to make estimates and assumptions about the carrying amounts of assets and liabilities that are not readily apparent from other sources. The estimates and associated assumptions are based on historical experience and other factors that are considered to be relevant. Actual results may differ from these estimates.
The estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the period in which the estimate is revised if the revision affects only that period, or in the period of the revision and future periods if the revision affects both current and future periods.
1 Accounting policies for the group financial statements (continued)
The directors are of the opinion that there are no significant judgements to be disclosed except those over going concern which are disclosed in detail in the basis of preparation accounting policy in note 1.
The key sources of estimation that have a significant impact on the carrying value of assets and liabilities are discussed below:
Impairment of goodwill and other intangibles
Determining whether goodwill is impaired requires an estimation of the value in use of the cash generating units to which goodwill has been allocated. The value in use calculation requires an entity to estimate the future cash flows expected to arise from the cash generating unit. It also requires judgement as to a suitable discount rate in order to calculate present value, i.e. the directors' current best estimate of the weighted average cost of capital ("WACC"). Other intangibles are assessed annually for impairment as well as when triggers of impairment arise. An impairment review has been performed at the reporting date. More details including carrying values are included in note 13.
Capitalised development expenditure and subsequent amortisation
Where such expenditure meets the relevant criteria, the group is required to capitalise development expenditure. In order to assess whether the criteria are met the Board is required to make estimates in relation to likely income generation and financial and technical viability of the relevant development projects and the period over which the group is likely to benefit from such expenditure. Development projects are subject to an investment appraisal process with the product managers to assess the status of the development and the expected commercial opportunities. Development costs are assessed for impairment which requires an estimation of the future expected revenues to be generated from each product. This methodology, which is similar to that used to assess any impairment of goodwill, is discussed further in note 133. Expenditure is only capitalised when the investment appraisal process has assessed that the product is likely to benefit the Group in the future. More details including carrying values are included in note 12.
Calculation of loss allowance
When measuring expected credit losses the Group uses reasonable and supportable forward looking information, which is based on assumptions for the future movement of different economic drivers and how these drivers will affect each other.
Loss given default is an estimate of the loss arising on default. It is based on the difference between the contractual cash flows due and those that the lender would expect to receive, taking into account cash flows from collateral and integral credit enhancements.
Probability of default constitutes a key input in measuring Expected Credit Losses (ECL). Probability of default is an estimate of the likelihood of default over a given time horizon, the calculation of which includes historical data, assumptions and expectations of future conditions.
If the ECL rates on trade receivables between 61 and 90 days past due had been 50 per cent higher as of November 2019, the loss allowance on trade receivables would have been GBP149k (2018: GBP300k) higher.
1 Accounting policies for the group financial statements (continued)
If the ECL rates on trade receivables between 31 and 60 days past due had been 50 per cent higher as of November 2019, the loss allowance on trade receivables would have been GBP17k (2018: GBP18k) higher.
Calculation of incremental borrowing rate and lease term in respect of IFRS 16
Lease liabilities are measured at the present value of the contractual payments due to the lessor over the lease term, with the discount rate determined by reference to the rate inherent in the lease unless (as is typically the case) this is not readily determinable, in which case the group's incremental borrowing rate on commencement of the lease is used. The group's incremental borrowing rate is calculated by reference to borrowing rates applicable to the group's other borrowings/financial liabilities and then adjusted for the specifics of the lease and asset. For every 0.5% increase in the incremental borrowing rate the right of use asset and lease liability recognised would increase by approximately GBP300,000, conversely an equivalent reduction in the incremental borrowing rate would decrease the right of use asset and liability by approximately GBP300,000.
Lease term is ordinarily calculated by reference to the contractual terms of the group's leases. Management may change their estimates in respect of the term of any lease if the probability of an extension or termination option, within the lease contract, being exercised changes. As a result of any change in estimate of the lease term the group adjusts the carrying amount of the lease liability to reflect the payments to make over the revised term, which are discounted using a revised discount rate. An equivalent adjustment is made to the carrying value of the right-of-use asset, with the revised carrying amount being amortised over the remaining (revised) lease term. If the carrying amount of the right-of-use asset is adjusted to zero, any further reduction is recognised in profit or loss. Further details are provided in note 22.
2 Revenue
Year Year
ended 30 November ended 30
2019 November
2018
GBP'000 GBP'000
The group's revenue comprises:
Software licence revenue 8,820 9,619
Services revenue* 25,900 28,987
Maintenance & support** 40,936 40,291
Hardware and other revenue 2,756 4,438
------------------- ----------
Revenue 78,412 83,335
------------------- ----------
* from installation, integration and software development services
**from software maintenance renewals, support contracts and hosting and managed services
3 Profit/(loss) from operations
Year Year
ended 30 ended 30
November November
Note 2019 2018
GBP'000 GBP'000
This has been arrived at after charging /
(crediting):
Staff costs 4 39,366 43,208
Depreciation of property, plant and equipment 10 794 885
Loss on disposal of fixed assets 10 - 22
Depreciation of right-of-use assets 11 1,737 -
Amortisation of acquired intangible assets 12 2,482 2,507
Amortisation of development costs 12 2,895 2,584
Exceptional impairment of Dynamics UK 13 12,188 -
Exceptional reorganisation costs (see below) 524 1,355
Exceptional customer settlement provisions 400
Loss allowance on trade receivables 870 1,077
Operating lease expenses
-Plant and machinery - 905
-Property - 1,691
Audit fees:
-Audit services 166 118
-Non-audit services 6 4
3 Profit /(loss) from operations (continued)
During the year the Group continued to achieve operating efficiencies, following on from the reorganisation programme of previous years. The total reorganisation costs, predominantly redundancy were GBP0.52m.
During the prior year, the Group carried out a programme to combine its UK Microsoft Dynamics businesses in addition to continuing the reorganisation programme commenced during the previous period and incurred reorganisation costs, predominantly redundancy costs, of GBP1.36m.
During the year, the income for share options was GBP0.1m. An exceptional charge has been recognised in relation to the likely settlement for a customer dispute for products and services delivered in previous years.
Fees paid to the company's auditors are disclosed in the Corporate Governance statement on page 31.
4 Staff costs
Year Year
ended 30 November ended 30
2019 November
2018
GBP'000 GBP'000
Staff costs (including directors) comprise:
Wages and salaries 33,154 36,472
Short-term non-monetary benefits 72 1,092
Defined contribution pension cost 2,263 1,847
Share-based payment (credit)/ expense (see
note 25) (103) 103
Employers national insurance contributions
and similar taxes 3,980 3,694
------------------- ----------
39,366 43,208
------------------- ----------
Of the above staff costs, GBP3.5m (2018: GBP2.42m) has been capitalised within development costs (see note 12).
The average number of employees during the year was:
Year Year
ended 30 November ended 30
2019 November
2018
Number Number
Consultants and programmers 511 506
Sales and distribution 81 80
Administration 98 101
------------------- ----------
690 687
------------------- ----------
4. Staff costs (continued)
Directors and key management personnel remuneration
Key management personnel are those persons having authority and responsibility for planning, directing and controlling the activities of the group, including the Directors of the company listed on page 23 and the divisional directors.
Year Year
ended 30 November ended 30
2019 November
2018
GBP'000 GBP'000
Key management personnel remuneration consists
of:
Remuneration 1,402 1,321
Company contributions to defined contribution
pension schemes 113 99
Share-based payment expense (note 25) - 87
Employers national insurance contributions
and similar taxes 110 141
------------------- ----------
1,625 1,648
------------------- ----------
No share options were exercised during the year, hence there were no gains on exercise of share options (30 November 2018: GBPnil).
Included in the totals above is directors' remuneration:
Year ended Year ended
30 November 30 November
2019 2018
GBP'000 GBP'000
Directors' remuneration consists of:
Emoluments 647 656
Contributions to personal pension schemes 51 49
------------- -------------
Total per remuneration report (page 32) 698 705
Employers national insurance contributions
and similar taxes 35 84
------------- -------------
733 789
------------- -------------
Year ended Year ended
30 November 30 November
2019 2018
GBP'000 GBP'000
Remuneration in respect of the highest paid
director:
Aggregate emoluments 309 309
Pension contributions 30 30
339 339
------------- -------------
There were 4 directors in defined contribution pension schemes ( 2018: 4 ).
Note that the directors' emoluments include amounts attributed to benefits-in-kind on which directors are assessed for tax purposes. This may differ to the cost to the group of providing those benefits included in this note.
5 Segment information
During the past two financial years the group has moved to a more streamlined organisation with management resource focused on working across the group in a more unified manner to increase the focus on the level of our own IP sales. As a result of the change of focus internally segmental reporting for sales has been restated based on product sales and gross margin compared to previous years' reporting when revenue, gross margin and overheads were reported along business unit lines. Reporting is now based on product K3 own, IP and 3(rd) party revenue and gross margin. Overheads and administrative expenses are included as a central costs given resource works across both K3 own IP and 3(rd) party products.
The activities and products and services of the operating segments are detailed in the Strategic Report on pages 12 to 16.
Transactions between operating segments are on an arms-length basis.
The CODM (Chief Operating Decision Maker, the Board) primarily assesses the performance of the operating segments based on product revenue, gross margin and group adjusted profit from operations.
The segment results for the year ended 30 November 2019 and for the year ended 30 November 2018, reconciled to Adjusted Profit from Operations.
Year ended 30 November 2019
K3 Own IP products 3(rd) party products Central Costs Total
GBP'000 GBP'000 GBP'000 GBP'000
Total segment revenue 24,161 64,841 89,002
Less Inter-segment revenue (3,284) (7,306) (10,590)
Software licence revenue 3,246 5,574 8,820
Services revenue 939 24,961 25,900
Maintenance & support 14,938 25,998 40,936
Hardware and other revenue 1,754 1,002 2,756
----------------------------------------------- ------------------- --------------------- -------------- ---------
External revenue 20,877 57,535 78,412
Cost of sales (5,411) (33,351) 386 (38,376)
----------------------------------------------- ------------------- --------------------- -------------- ---------
Gross profit 15,466 24,184 386 40,036
Administrative expenses (38,205) (38,205)
----------------------------------------------- ------------------- --------------------- -------------- ---------
Adjusted operating profit/(loss) from
operations 1,831
5 Segment information (continued)
Year ended 30 November 2018 (restated)
K3 Own IP products 3(rd) party products Central Costs Total
GBP'000 GBP'000 GBP'000 GBP'000
Total segment revenue 28,698 64,423 93,121
Less Inter-segment revenue (4,836) (4,950) (9,786)
Software licence revenue 5,174 4,445 9,619
Services revenue 2,029 26,958 28,987
Maintenance & support 14,491 25,800 40,291
Hardware and other revenue 2,168 2,270 4,438
----------------------------------------------- ------------------- --------------------- -------------- ---------
External revenue 23,862 59,473 83,335
Cost of sales (6,899) (32,547) - (39,446)
----------------------------------------------- ------------------- --------------------- -------------- ---------
Gross profit 16,963 26,926 - 43,889
Administrative expenses (39,240) (39,240)
----------------------------------------------- ------------------- --------------------- -------------- ---------
Adjusted operating profit/(loss) from
operations 4,649
Segment assets and segment liabilities are reviewed by the CODM in a consolidated statement of financial position. Accordingly, this information is replicated in the group consolidated statement of financial position on page 49. As no measure of assets or liabilities for individual segments is reviewed regularly by the CODM, no disclosure of total assets or liabilities has been made, in accordance with the amendment to paragraph 23 of IFRS 8.
The accounting policies of the operating segments are the same as those described in the summary of significant accounting policies. Transactions between segments are accounted for at cost.
The Group's revenue does not arise from any individual customer accounting for in excess of 10% of revenues.
5 Segment information (continued)
Analysis of the group's external revenues (by customer geography) and non-current assets by geographical location are detailed below:
External Revenue by end customer geography
External revenue Non-current assets
Year ended
30 November Year ended
2019 30 November 2018 2019 2018
GBP000 GBP000 GBP000 GBP000
United Kingdom 42,208 46,567 32,023 46,292
Netherlands 12,050 12,784 5,336 12,200
Ireland 3,539 2,892 16,490 6,402
Rest of Europe 11,022 12,120 7,976 8,168
Middle East 3,076 3,236 - -
Asia 3,936 3,344 52 37
USA 1,598 1,656 1 3
Rest of World 982 736 - -
----------- --------
78,412 83,335 61,879 73,102
--------------------- ------------- ------------------ ----------- --------
% of non-UK revenue 46% 44%
External revenue by Business Unit Geography
2019
External Revenue by Market
UK High
Street Fashion Other UK Non UK Total
GBP'000 GBP'000 GBP'000 GBP'000
Software Licence Revenue 773 3,856 4,191 8,820
Services Revenue 2,479 7,930 15,491 25,900
Maintenance & Support 2,096 23,630 15,210 40,936
Hardware and other Revenue 51 1,004 1,701 2,756
Total 5,399 36,420 36,593 78,412
5 Segment information (continued)
External revenue by business unit
geography
Maintenance Total
Software Services & support Hardware &
Licencing Revenue Revenue Other Revenue
GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
United
Kingdom 4,628 10,409 25,725 1,056 41,818
Netherlands 673 6,979 4,645 144 12,441
Ireland 1,012 465 2,063 3,540
Rest of
Europe 1,404 2,645 5,416 1,556 11,021
Middle East 153 2,053 869 3,075
Asia 212 2,602 1,122 3,936
USA 628 193 778 1,599
Rest of
World 110 554 318 982
------------- ------------------------- ---------------------- ------------ --------------------------------- ---------
8,820 25,900 40,936 2,756 78,412
External Revenue by revenue recognition category
Maintenance
Software Services & support Hardware
Licencing Revenue Revenue & Other Revenue Total
GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
Goods Transferred
at a point in
time 8,820 2,756 11,576
Services transferred
at a point in
time 25,900 12,999 38,899
Services transferred
over time 27,937 27,937
---------------------- ----------- --------- ------------ ----------------- --------
Total 8,820 25,900 40,936 2,756 78,412
---------------------- ----------- --------- ------------ ----------------- --------
Revenue to be recognised in the future, related to agreed performance obligations that are unsatisfied or partially satisfied as at 30 November 2019, was as follows
2020 2021 Later Total
GBP'000 GBP'000 GBP'000 GBP'000
Software
Licence
Revenue
Services
Revenue 243 - - 243
Maintenance
& Support 8,928 - - 8,928
Hardware and
other
Revenue 504 - - 504
---------------------------------- ---------------------------- --------------------------------- ---------------------------------
9,676 - - 9,676
---------------------------------- ---------------------------- --------------------------------- ---------------------------------
5 Segment information (continued)
2018
External Revenue
by Market
UK High
Street Fashion Other UK Non UK Total
GBP'000 GBP'000 GBP'000 GBP'000
Software Licence
Revenue 669 2,036 6,914 9,619
Services Revenue 4,026 9,703 15,258 28,987
Maintenance & Support
Revenue 2,459 24,051 13,781 40,291
Hardware and other
Revenue 39 2,281 2,118 4,438
------------------------- ---------------- --------- -------- --------------------------------
7,193 38,071 38,071 83,335
External Revenue by business unit geography
Maintenance & support
Software Licencing Services Revenue Revenue Hardware & Other Revenue Total
GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
United
Kingdom 2,705 13,729 26,510 2,321 45,265
Netherlands 1,025 6,976 3,767 226 11,994
Ireland 1,531 535 2,083 4 4,153
Rest of
Europe 2,416 2,745 5,235 1,887 12,283
Middle East 225 1,879 717 - 2,821
Asia 319 2,383 930 - 3,632
USA 1,204 229 772 - 2,205
Rest of
World 194 511 277 - 982
9,619 28,987 40,291 4,438 83,335
External Revenue by revenue recognition category
Maintenance
Software Services & support Hardware
Licencing Revenue Revenue & Other Revenue Total
GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
Goods Transferred
at a point in
time 9,619 4,438 14,057
Services transferred
at a point in
time 28,987 12,142 41,129
Services transferred
over time 28,149 28,149
---------------------- ----------- --------- ------------ ----------------- --------
Total 9,619 28,987 40,291 4,438 83,335
5 Segment information (continued)
Revenue to be recognised in the future, related to agreed performance obligations that are unsatisfied or partially satisfied as at 30 November 2018, was as follows:
2019 2020 Later Total
GBP'000 GBP'000 GBP'000 GBP'000
Software
Licence
Revenue
Services
Revenue 772 - - 772
Maintenance
& Support 8,939 - - 8,939
Hardware and
other
Revenue 807 - - 807
------------- ----------------------------------- ---------------------------- --------- ----------------------------------
10,519 - - 10,519
Revenue recognised and included within contract assets can be reconciled as follows:
2019
GBP'000
At 1 December 8,617
Impact of IFRS 15 (1,213)
--------
Restated at 1 December 7,404
Transfers in the period from contract assets to trade receivables (6,207)
Excess of revenue recognised over cash (or rights to cash) being recognised during the period 2,758
At 30 November 3,955
--------
Revenue recognised and included within contract liabilities can be reconciled as follows:
2019
GBP'000
At 1 December 10,520
Impact of IFRS 15 960
---------
Restated at 1 December 11,480
Amounts included in contract liabilities that was recognised as revenue during the period (11,480)
Cash received in advance of performance and not recognised as revenue during the period 9,677
At 30 November 9,677
---------
6 Finance income and expense
Year ended 30 November 2019 Year ended 30 November 2018
GBP'000 GBP'000
Finance expense
Bank borrowings 317 754
Interest expense on lease liabilities 347 -
Interest on obligations under finance leases - 4
Other finance costs 192 (91)
---------------------------- ----------------------------
Net finance expense 856 667
---------------------------- ----------------------------
7 Tax expense
Year ended Year ended 30 November
30 November 2019 2018
GBP'000 GBP'000 GBP'000 GBP'000
Current tax expense/(credit)
Income tax of overseas operations
on profits/(losses) for the
period 532 472
Adjustment in respect of prior
periods 92 745
--------- ------------
624 1,217
Deferred tax income
Origination and reversal of
temporary differences 307 (629)
Effect of change in rate of
deferred tax - (83)
--------- ------------
307 (712)
--------- -----------
Total tax expense/(credit) in
current year 931 505
--------- -----------
In November 2019, the Prime Minister announced that he intended to cancel the future reduction in corporation tax rate from 19% to 17% which was due to be effective from 1 April 2020. This was announced in the Budget on 11 March 2020 and was substantially enacted on 17 March 2020. Deferred taxes at the balance sheet date have been measured using these enacted tax rates and reflected in these financial statements.
The reasons for the difference between the actual tax charge for the period and the standard rate of corporation tax in the UK applied to profits/(losses) for the year are as follows:
Year ended % Year ended %
30 November 30 November
2019 2018
GBP'000 GBP'000
(Loss)/profit before tax (14,532) 17
Expected tax charges based on the standard
rate of corporation tax (2,761) 19% 3 17.6%
Expenses not deductible for tax purposes 2,611 (64)
Movement in losses not recognised (see
note 18) 809 (331)
Different tax rates applied in overseas
jurisdictions 88 191
Effect of change in rate for deferred
tax 78 (83)
Adjustment for under provision in prior
periods 106 789
Total tax expense in current period 931 6.4% 505 2970%
Deferred tax recognised directly in equity was GBP596k credit (2018: NIL). Current tax recognised in equity was nil (2018: GBP15k).
None of the items within other comprehensive income in the Consolidated Statement of Comprehensive Income have resulted in a tax expense or tax income.
8 Dividends
Year Year
ended 30 November ended 30
2019 November
2018
GBP'000 GBP'000
Final dividend of 1.54p (2018: 1.4p) per ordinary
share proposed and paid during the period relating
to the previous period's results 661 601
------------------- ----------
No dividend in respect of the year ended 30 November 2019 will be proposed.
9 (Loss)/earnings per share
The calculations of (loss)/earnings per share are based on the profit/(loss) for the year and the following numbers of shares:
2019 2018
Number of shares Number of shares
Denominator
Weighted average number of shares used in basic EPS 42,871,000 42,871,000
Weighted average number of shares used in diluted EPS 42,871,000 42,871,000
----------------- -----------------
Certain employee options and warrants have not been included in the calculation of diluted EPS because their exercise is contingent on the satisfaction of certain criteria that had not been met at the end of the year.
The alternative earnings per share calculations have been computed because the directors consider that they are useful to shareholders and investors. These are based on the following profits/(losses) and the above number of shares.
Year ended Year ended
30 November 2019 30 November 2018
Per share Per share Per share Per share
amount amount amount amount
Earnings Basic Diluted Earnings Basic Diluted
GBP000 p p GBP000 p p
Numerator
Loss per share (15,447) (36.0) (36.0) (488) (1.1) (1.1)
Add back:
Amortisation of acquired
intangibles (net of tax
recognised) 2,061 4.8 4.8 1,952 4.6 4.6
Exceptional
reorganisation costs
(net of tax recognised) 424 1.0 1.0 1,355 3.2 3.2
Exceptional impairment
costs (net of tax
recognised) 9,872 23.0 23.0
Exceptional settlement
provision (net of tax
recognised) 324 0.8 0.8
Share-based payment
charge (net of tax
recognised) (103) (0.2) (0.2) 103 0.1 0.1
--------- --------------- ---------------- --------- ---------------- ----------------
Adjusted (LPS)/EPS (2,869) (6.6) (6.6) 2,922 6.8 6.8
--------- --------------- ---------------- --------- ---------------- ----------------
10 Property, plant and equipment
Long leasehold land and Plant, fixtures and
buildings Leasehold improvements equipment Total
GBP'000 GBP'000 GBP'000 GBP'000
Cost
At 30 November
2017 750 419 6,672 7,841
Additions - - 748 748
Disposals - (372) (488) (860)
Effect of
movements in
foreign
exchange rate - - 20 20
---------------------------- ----------------------- ------------------------ --------------------
At 30 November
2018 750 47 6,952 7,749
Additions - - 666 666
Effect of
movements in
foreign
exchange rate - - (92) (92)
At 30 November
2019 750 47 7,526 8,323
---------------------------- ----------------------- ------------------------ --------------------
Accumulated
depreciation
At 30 November
2017 107 387 4,868 5,362
Depreciation
charge 10 23 852 885
Disposals - (363) (475) (838)
Effect of
movements in
foreign
exchange rate - - 14 14
---------------------------- ----------------------- ------------------------ --------------------
At 30 November
2018 117 47 5,259 5,423
Depreciation
charge 10 - 784 794
Impairment
loss - - 73 73
Effect of
movements in
foreign
exchange rate - - (74) (74)
------------------------ --------------------
At 30 November
2019 127 47 6,042 6,216
---------------------------- ----------------------- ------------------------ --------------------
Net book value
At 30 November
2017 643 32 1,804 2,479
---------------------------- ----------------------- ------------------------ --------------------
At 30 November
2018 633 - 1,693 2,326
---------------------------- ----------------------- ------------------------ --------------------
At 30 November
2019 623 - 1,484 2,107
---------------------------- ----------------------- ------------------------ --------------------
Bank borrowings are secured on certain assets of the group including property, plant and equipment. There is a fixed charge over the long leasehold property.
The impairment relates to the Dynamics UK division which is further explained in note 12.
11 Leases
Right-of-use assets
Equipment
and motor
Buildings vehicles Total
GBP'000 GBP'000 GBP'000
Cost
At 1 December 2018 3,798 972 4,770
Additions 610 415 1,025
At 30 November 2019 4,408 1,387 5,795
--------------------------- ----------- --------
Accumulated depreciation
At 1 December 2018 - - -
Depreciation charge 1,208 529 1,737
At 30 November 2019 1,208 529 1,737
--------------------------- ----------- --------
Net book value
At 30 November 2019 3,200 858 4,058
--------------------------- ----------- --------
The Group leases several assets including buildings, motor vehicles and equipment. The average lease term is 2.1 years (2018: 2.2 years).
The Group's obligations are secured by the lessors' title to the leased assets for such leases.
Approximately one tenth of the leases for property, plant and equipment expired in the current financial year. The expired contracts were replaced by new leases for identical underlying assets. This resulted in additions to right-of-use assets of GBP0.6 million in 2019. The maturity analysis of lease liabilities is presented in note 22.
Amounts recognised in profit and loss
30 November 2019
GBP,000
Depreciation expense on right-of-use assets 1,737
Interest expense on lease liabilities 347
12 Intangible assets
Contractual
and non-contractual Intellectual
Development customer Distribution property
Goodwill costs relationships agreements rights Total
GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
Cost or valuation
At November 2017 51,019 20,630 24,011 10,557 4,278 110,495
Additions - 2,627 - - - 2,627
Effect of movements
in foreign exchange
rate 168 76 88 - 32 364
----------- -------------- --------------------- --------------- --------------- --------
At 30 November
2018 51,187 23,333 24,099 10,557 4,310 113,486
Additions - 4,080 - - - 4,080
Effect of movements
in foreign exchange
rate (669) - (230) - (128) (1,027)
----------- -------------- --------------------- --------------- --------------- --------
At 30 November
2019 50,518 27,413 23,869 10,557 4,182 116,539
----------- -------------- --------------------- --------------- --------------- --------
Accumulated amortisation
At 30 November
2017 - 10,857 15,962 10,557 1,561 38,937
Amortisation
charge - 2,584 1,980 - 527 5,091
Effect of movements
in foreign exchange
rate - 7 67 - 13 87
-------- ------- ------- -------- ------- -------
At 30 November
2018 - 13,448 18,009 10,557 2,101 44,115
Amortisation
charge - 2,895 1,955 - 527 5,377
Impairment 10,051 1,356 655 - - 12,062
Effect of movements
in foreign exchange
rate - 339 (172) - (71) 96
-------- ------- ------- -------- ------- -------
At 30 November
2019 10,051 18,038 20,447 10,557 2,557 61,650
-------- ------- ------- -------- ------- -------
Net book value
At 30 November
2017 51,019 9,773 8,049 - 2,717 71,558
-------- ------- ------- -------- ------- -------
At 30 November
2018 51 ,187 9,885 6,090 - 2 ,209 69,371
-------- ------- ------- -------- ------- -------
At 30 November
2019 40,467 9,375 3,422 - 1,625 54,889
-------- ------- ------- -------- ------- -------
All intangible assets, other than goodwill which has an indefinite life, have a useful economic life of between 3 and 10 years. The remaining useful life of development costs is between 1 and 6 years, for contractual and non-contractual customer relationships is between 0 and 8 years and for intellectual property rights is between 0 and 4 years. The impairment of Development costs relates to assets held in UK Dynamics.
13 Goodwill and impairment
Goodwill acquired in business combinations is allocated at acquisition to the cash generating units ("CGUs") that are expected to benefit from that business combination. Details of goodwill allocated to each CGU are as follows:
Goodwill carrying amount
2019 2018
GBP'000 GBP'000
Walton 1,555 1,555
Syspro 13,680 13,680
Hosting and managed services 2,905 2,905
Dynamics UK - 10,051
Dynamics International 9,247 9,650
IP 396 413
Sage 4,556 4,556
Retail Systems Group (RSG) (including Merac) 1,707 1,707
Unisoft 839 876
Integrated Business Solutions (IBS) 770 770
DdD Retail 4,812 5,024
40,467 51,187
------------- ------------
The recoverable amounts of the CGUs are determined from value in use calculations, derived from the present value of future cash flows generated by the CGUs. There are a number of assumptions and estimates involved in calculating the present value of the future cash flows, including but not restricted to the following:
-- growth rates applied to profit from operations used as the basis for the future cash flows; -- the discount rate applied to the cash flows to calculate their present value.
The basis of the assumptions used is as follows:
-- management estimates discount rates using pre-tax rates that reflect current market assessments of the time value of money and the risks specific to the business. The growth rates are based on management forecasts for the markets in which each CGU operates.
-- the group prepares pre-tax cash flow forecasts derived from the most recent financial forecasts approved by the Board for the next five years with key assumptions by CGU as follows:
o The Walton relates to small systems and a gradual attrition of revenue is expected, and an attrition rate of 2% has been applied.
o Syspro growth rates of 2.5% for services and maintenance reflecting the price increases and 10% of software growth.
o Hosting and Managed services growth of 5%-10% relates to growth in hosting and increased demand for GDPR & security services.
o Dynamics UK which starts from a loss making position for the year end November 2019 together with assumed negative growth rates due to the challenging UK retail market and customer attrition and as a result requires a full impairment to the Goodwill of GBP10.1m and other assets of the CGU, the total value of impairment being GBP12.2m.
o Dynamics International shows services revenue growth of 20% - 5% with support and maintenance growing 5% and term contract software growth of 50% - 20% from a low base.
o IP growth rates are strong driven by K3|imagine growth rates of 100% to 20% over the 5 years from a low base.
o Sage shows 2% growth rates over the 5 years.
13. Goodwill and impairment (continued)
o Retail Systems Group inc Merac shows growth of 5% to 10% over the 5 years driven by expansion of the K3|imgine retail suite and associated revenue.
o Unisoft and DdD show a 5% growth driven by expansion of the K3|imgine retail suite and associated revenue.
o The IBS CGU also relates to small systems and is forecast to have no growth during the next 5 years.
o The most recent financial forecasts have been prepared on the assumption that gross margins will be consistent with those generated historically (taking into account the change in the sales mix, in particular the shift towards "consumption-based" models) and that overheads are in line with any changes in the level of revenues forecast adjusted for the reorganisation benefit.
o The growth rates are based on industry growth rates, the Board's view of the observable markets as well as historical and estimated requirement by customers for the products and services.
-- the rate used to discount the forecast pre-tax cash flows is 13.6% and represents the directors' current best estimate of the weighted average cost of capital ("WACC"). The directors consider that there are no material differences in the WACC for different CGUs.
For the majority of the CGUs no reasonable change to the assumptions used in the impairment test would give rise to an impairment. For Sage and IBS with the lowest headroom, the Sage forecasts would annually decline by 1% without changing the cost base nor the annual inflation. IBS revenue would have to annually decline by 10% for there to be an impairment.
The impairment of UK Dynamics at GBP12.2m is a material item. The impairment was based on a value in use base in which goodwill, intangible and property, plant and equipment were fully written off. Working capital balances remained unimpaired as the business continued to trade and these assets had a realizable value. The value in use exercise highlighted that the assets of the CGU were unlikely to be recoverable due to the key factors such as: the company continued to incur losses throughout the financial year despite a significant restructure in prior year; significant contracts were not successfully converted as anticipated; a challenging UK retail market; and customer attrition. This assessment compounded with the impact of Covid 19 has lead to the company been put in to administration post year end.
14 Subsidiaries
The trading subsidiaries of K3 Business Technology Group plc, all of which have been included in these consolidated financial statements are as follows:
Name Country of Proportion of ownership
incorporation interest and ordinary
share capital held
K3 BTG Limited UK 100%
K3 Business Solutions Limited (see below) UK 100%
K3 Business Technologies Limited (formerly
K3 Retail Solutions Limited) UK 100%
K3 Business Technology Group Trustees
Company Limited UK 100%
K3 CRM Limited (see below) UK 100%
K3 FDS Limited UK 100%
K3 Syspro Limited UK 100%
K3 Systems Support Limited UK 100%
Retail Systems Group Limited UK 100%
Starcom Technologies Limited UK 100%
FDS Technology Systems Limited Ireland 100%
Integrated Manufacturing Software Limited Ireland 100%
K3 Business Technologies Ireland Limited Ireland 100%
K3 Business Solutions BV Netherlands 100%
K3 Software Solutions BV Netherlands 100%
K3 Solutions BV Netherlands 100%
K3 Business Solutions Pte Limited Singapore 100%
K3 Business Solutions SDN BHD Malaysia 100%
K3 Business Solutions ehf Iceland 100%
K3 Software Solutions LLC USA 100%
DdD Retail A/S Denmark 100%
DdD Retail Norway A/S Norway 100%
DdD Retail Germany AG Germany 100%
Detalj Data i Sverige AB Sweden 100%
The principal activity of all of the above subsidiary undertakings is the supply of computer software and consultancy with the exception of the following: Starcom Technologies Limited, and K3 Systems Support Limited which are hosting and managed services providers; K3 Business Technology Group Trustees Company Limited which is the trustee for the group's employee share ownership plan.
K3 Business Solutions Limited and K3 CRM Limited ceased to trade on 1 October 2018 when the trade and assets of both businesses were transferred to K3 Business Technologies Limited.
Details of movements in investments are recorded in note 5 of the company financial statements.
14 Subsidiaries
The registered office for all the UK companies is Baltimore House, 50 Kansas Avenue, Manchester, M50 2GL. The registered office for all the Irish companies is Beaux Lane House, Mercer Street Lower, Dublin 2, Ireland. The registered offices for the other overseas subsidiaries are:
K3 Business Solutions BV Gildeweg 9b, 2632 BD Nootdorp, The Netherlands K3 Software Solutions BV Gildeweg 9b, 2632 BD Nootdorp, The Netherlands K3 Solutions BV Cartografenweg 6, 5141 MT Waalwijk, The Netherlands K3 Business Solutions 133 New Bridge Road, #10-09 Chinatown Point, Pte Limited Singapore 059413 K3 Business Solutions First Avenue, One Utama, 47800 Petaling Jaya, SDN BHD Kuala Lumpur, Malaysia K3 Business Solutions Austurstræt 12, 101 Reykjavik , Iceland ehf K3 Software Solutions 33S 6th St., Suite 4200, Minneapolis MN 55402, LLC USA DdD Retail A/S Theilgaards Allé 2, 4600 Køge, Denmark DdD Retail Norway A/S 195, Stensarmen 4, 3112, Tonsberg, Norway DdD Retail Germany AG Weilstrasse 41, 89143 Balubeuren, Germany Detalj Data i Sverige Vallhal Park, Stjernsvards Alle 52, 262 74 AB Angelholm, Sweden 14. Subsidiaries
In addition, the company has the following subsidiaries which are non-trading or intermediate holding companies and all of which have been included in these consolidated financial statements:
Name Country of Proportion of ownership
incorporation interest and ordinary
share capital held
Clarita Support Limited UK 100%
Colne Investments Limited UK 100%
Fashion Cloud Software.com, LLC USA 100%
FDS Holdco Limited UK 100%
Fifth Dimension Systems Limited UK 100%
Intelligent Solutions Consultancy Limited UK 100%
K3 AX Limited UK 100%
K3 Business Systems Holdco Limited UK 100%
K3 FD Systems Limited UK 100%
K3 Global Products Limited UK 100%
K3 Hosting Limited UK 100%
K3 Information Engineering Limited UK 100%
K3 Information Services Limited UK 100%
K3 International Support Services Limited Ireland 100%
K3 Landsteinar Limited UK 100%
K3 Managed Services Holdco Limited UK 100%
K3 Partner Network (International) Limited Ireland 100%
K3 Retail and Business Solutions Holdco
Limited UK 100%
Merac Limited UK 100%
Retail Computer Maintenance Limited UK 100%
Retail Technology Limited UK 100%
Sense Enterprise Solutions Limited UK 100%
Shine Marketing UK Limited UK 100%
Syspro (UK) Limited UK 100%
Syspro Europe Limited UK 100%
Syspro Limited UK 100%
K3 Holdings BV Netherlands 100%
K3 Managed Services Inc USA 100%
Retail Support International ApS Denmark 100%
15 Trade and other receivables
2019 2018
GBP'000 GBP'000
Trade receivables 16,407 16,445
Loss allowance (1,889) (1,075)
-------- --------
Trade receivables - net 14,518 15,370
Current taxes - 91
Other receivables 186 231
Contract assets 3,955 8,617
Prepayments & Stock 2,08 7 2,697
20, 746 27,006
-------- --------
As at 1 December 2017, trade receivables from contracts with customers amounted to GBP18.0m (net of loss allowance of GBP1.5m).
The fair value of trade and other receivables approximates to book value at 30 November 2019 and 30 November 2018.
Of the above, trade receivables of GBPnil (2018: GBPnil) and contract assets of GBP1.89m (2018: GBP2.97m) is due after more than one year.
The group is exposed to credit risk with respect to trade receivables due and accrued income which will become due from its customers. The group has c.3,700 at the period end customers spread across various industries, although predominantly in the retail, manufacturing and distribution sectors, and hence the concentration of credit risk is limited due to the large and diverse customer base. The group assesses the credit rating for new customers to minimise the credit risk.
The average credit period on sales is 30 days. No interest is charged on outstanding trade receivables.
The group always measures the loss allowance for trade receivables at an amount equal to lifetime ECL. The expected credit losses on trade receivables are estimated using a provision matrix by reference to past default experience of the debtor and an analysis of the debtor's current financial position, adjusted for factors that are specific to the debtors, general economic conditions of the industry in which the debtors operate and an assessment of both the current as well as the forecast direction of conditions at the reporting date.
The group writes off a trade receivable when there is information indicating that the debtor is in severe financial difficulty and there is no realistic prospect of recovery, e.g. when the debtor has been placed under liquidation or has entered into bankruptcy proceedings, or when the trade receivables are over two years past due, whichever occurs earlier.
15 Trade and other receivables (continued)
The following table details the risk profile of trade receivables and Contract Asset based on the group's provision matrix. As the group's historical credit loss experience does not show significantly different loss patterns for different customer segments, the provision for loss allowance based on past due status is not further distinguished between the Group's different customer segments.
Trade Receivables and Contract Assets receivables - days past due
Not past
30/11/19 due <30 31-60 61-90 >90 days Total
GBP '000 GBP '000 GBP '000 GBP '000 GBP '000 GBP '000
Expected credit loss
rate 1.7% 2.3% 3.0% 5.0% 78.2% 9.3%
Estimated total gross
carrying amount at
default 12,894 3,790 1,131 602 1,945 20,362
Lifetime ECL (217) (88) (33) (30) (1,521) (1,889)
18,473
The carrying amounts of the group's trade and other receivables are denominated in the following currencies:
2019 2018
GBP'000 GBP'000
Pound sterling 11,171 17,036
Euro 8,584 8,709
Other 991 1,261
20,746 27,006
-------- --------
The currency denominated receivables are predominantly held in the functional currency of the relevant subsidiary.
Movements on the group provision for impairment of trade receivables are as follows:
2019 2018
GBP'000 GBP'000
At beginning of year 1,075 1,460
Prior year adjustment arising from IFRS 9 implementation 926 -
-------- --------
Restated brought forward balance 2,001 1,460
Provided during the period 870 1,077
Utilised during the period (690) (1,335)
Unused amounts released (292) (127)
At end of year 1,889 1,075
-------- --------
The movement on the provision for impaired receivables has been included in administrative expenses in the consolidated income statement.
Other classes of financial assets included within trade and other receivables do not contain impaired assets.
The maximum exposure to credit risk at the reporting date is the fair value of each class of receivable set out above.
16 Trade and other payables
2019 2018
GBP'000 GBP'000
Trade payables 4,645 5,163
Other payables 1,630 903
Accruals 5, 016 6,945
-------- --------
Total financial liabilities, excluding loans
and borrowings, classified as financial liabilities
measured at amortised cost 11,291 13,011
Other tax and social security taxes 4,040 4,897
Contract liabilities 9,677 10,520
25,008 28,428
-------- --------
Trade payables and accruals principally comprise amounts outstanding for trade purchases and ongoing costs. The average credit period taken for trade purchases is 60 days. The Group has financial risk management policies in place to ensure that all payables are paid within the pre-agreed credit terms.
To the extent trade and other payables are not carried at fair value in the consolidated balance sheet, book value approximates to fair value at 30 November 2019 and 30 November 2018.
17 Borrowings
2018
Restated
(refer to
2019 note 29)
GBP'000 GBP'000
Non-current
Bank loans (secured) 6,262 -
6,262 -
-------- -----------
Current
Bank overdrafts (secured) 4,385 2,724
Bank loans (secured) - 7,485
4,385 10,209
-------- -----------
Total borrowings 10,647 10,209
-------- -----------
The Group's bank overdrafts are secured by cross guarantees and debentures (fixed and floating charges over
the assets of all the Group companies). The Group's bankers have a formal right of set-off and provides a net
overdraft facility across the Group of GBP2,000,000 (2018: GBP2,000,000) as an allocation of the overall funding facility. In April 2020, the overdraft allocation was reduced to GBP250,000 of the total GBP13m facility.
Principal terms and the debt repayment schedule of the group's loans and borrowings are as follows:
Currency Nominal rate % Year of Security
maturity
Secured bank loan GBP 2.1% - 6.00 % over 2021 See below
LIBOR
17 Borrowings (continued)
During August 2019 the Group extended its Banking Facility agreement with Barclays to 31 March 2021 (further details are included in note 27). Bank borrowings were GBP6.3m (2018: short term liabilities GBP7.5m) are included in long term liabilities. The Facilities include a monthly draw down and a multi-currency overdraft facility.
Maturity analysis of borrowings:
2019 2018 restated
(refer to
note 29)
GBP'000 GBP'000
In less than one year 4,385 10,209
In more than one year but not more than two 6,262 -
years
10,647 10,209
Bank borrowings
The bank loans are secured by a fixed charge over the group's long leasehold property and floating charges over the remaining assets of the group.
The group has undrawn committed Banking facilities available at 30 November 2019 of GBP3.7m ( 2018: GBP 12.4m ) for which all conditions have been met. It is a revolving loan facility on which interest is charged at a floating rate linked to LIBOR. For the purposes of reporting fair value is equivalent to the carrying value of the borrowings.
The currency profile of the group's loans and borrowings is as follows:
2018 restated
(refer to
2019 note 29)
GBP'000 GBP'000
Pound sterling 5,931 5,453
Euro 4,716 4,756
10,647 10,209
-------- ---------------
Post year end, in April 2020, the group increased its banking facility by GBP3m and raised a further GBP3m from a shareholder loan. The bank facility is expected to reduce in October 2020.
18 Financial instruments
Risk Management
The group is exposed through its operations to one or more of the following financial risks:
-- Market risk -- Liquidity risk -- Credit risk 18 Financial instruments (continued)
Policy for managing these risks is set by the Board following recommendations from the Chief Financial Officer. Certain risks are managed centrally, while others are managed locally following guidelines communicated from the centre. The policy for each of the above risks is described in more detail below. Further quantitative information in respect of these risks is presented throughout these financial statements.
There have been no substantive changes from previous periods in the group's exposure to financial instrument risks, its objectives, policies and processes for managing those risks or methods used to measure them.
Principal financial instruments
The principal financial instruments used by the group, from which financial risk arises, are as follows:
-- Trade receivables; -- Cash at bank; -- Trade and other payables; -- Floating-rate bank loans and overdrafts; and -- Loans from related parties.
Market risk
Market risk arises from the group's use of interest bearing, tradable and foreign currency financial instruments. It is the risk that the fair value of future cash flows of a financial instrument will fluctuate because of changes in interest rates (interest rate risk), foreign exchange rates (currency risk) or other market factors (other price risk).
Fair value and cash flow interest rate risk
The group has fixed interest loans in respect of leases with a net book value of GBP4.06m . The fixed rate applicable on lease liabilities is 6%.
Bank debt totalling GBP6.3m (2018: GBP7.5m) is held under floating rates linked to quarterly LIBOR.
Foreign currency risk
Foreign exchange risk arises because the group has operations located overseas whose functional currency is not the same as the group's primary functional currency (sterling). The net assets from overseas operations are exposed to currency risk giving rise to gains or losses on retranslation into sterling.
Foreign exchange risk also arises when individual group operations enter into transactions denominated in a currency other than their functional currency. It is group policy that such transactions should be hedged by entering into forward contracts where it is considered the risk to the group is significant. This policy is managed centrally by group treasury entering into a matching forward contract with a reputable bank.
It is group policy that transactions between group entities are always denominated in the selling entity's functional currency thereby giving rise to foreign exchange risk in the income statement of both the purchasing group entity and the group. No external hedge is entered into as there is no exposure to consolidated net assets from intra-group transactions.
18 Financial instruments (continued)
Liquidity risk
The liquidity risk of each group entity is managed centrally by the group treasury function comparing to budgets and quarterly forecasts.
The group maintains a syndicated revolving loan facility with Barclays to manage any unexpected short-term cash shortfalls. The facilities from the Group's bankers require the Group to meet certain covenants throughout the term of the loans with which the Group was compliant during the year and the Group's forecasts indicate that it will remain within the set parameters.
The principal terms of the group's borrowings are set out in note 17.
Credit risk
Credit risk is the risk that a counterparty will default on its contractual obligations resulting in a financial loss to the group. The group is mainly exposed to credit risk from credit sales. It is group policy, implemented locally, to assess the credit risk of new customers before entering contracts. Such credit ratings, taking into account local business practices, are then factored into any contractual arrangements.
The group does not have any significant credit risk exposure to any single customer. The carrying amount of financial assets recorded in the financial statements, which is net of impairment losses, represents the group's maximum exposure to credit risk.
Further details, including quantitative information, are included in note 15.
Capital disclosures
The group monitors "adjusted capital" which comprises all components of equity (i.e. share capital, share premium, retained earnings and other reserves) other than amounts in the translation reserve. Other reserves comprise a merger relief reserve.
2019 2018
GBP000 GBP'000
Total equity 49 , 257 68,969
Less: amounts in translation reserve (1,558) (2,486)
--------- --------
47,699 66,483
--------- --------
The group's objective when maintaining capital is to safeguard the company's ability to continue as a going concern so that it can continue to provide returns to shareholders and benefits for other stakeholders. In order to maintain the capital structure, the group may adjust the amount of dividends paid to shareholders, return capital to shareholders, issue new shares, or sell assets to reduce debt.
18 Financial instruments (continued)
Sensitivity analysis
Whilst the group takes steps to minimise its exposure to cash flow interest rate risk and foreign exchange risk as described above, changes in interest and foreign exchange rates will have an impact on profit.
The directors consider that interest rates are likely to remain low and unlikely to increase. A small increase of 0.1% movement in the interest rate could be reasonably possible as at the reporting date and would cause additional annual interest charges of GBP10k, assuming the Banking Facility is fully drawn.
The group's foreign exchange risk is dependent on the movement in the Euro to sterling exchange rate. The directors consider a 3% movement in the Euro rate to be reasonably possible as at the reporting date. The effect of a 3% strengthening or weakening in the Euro against sterling at the balance sheet date on the Euro denominated debt would be immaterial.
Financial Instruments by category
The carrying value of the Group's financial instruments are analysed as follows:
As at 30 November 2019
Notes Amortised cost At FVTPL Total
GBP'000 GBP'000 GBP'000
Assets
Trade and other receivables: - - -
Trade receivables 15 14,518 - 14,518
Other non-derivative financial assets 15 186 - 186
Contract assets 15 3,955 - 3,955
Cash and cash equivalents 28 8,226 - 8,226
--------------- --------- ----------
Total assets 26,885 - 26,885
--------------- --------- ----------
Liabilities
Borrowings:
Current 22 ( 5,795 ) - (5,795)
Non-current 1 7 ( 8,769 ) - (8,769)
Trade and other payables:
Trade payables 1 6 (4,645) - (4, 565 )
Other non-derivative financial liabilities 16 (6,646) - ( 6,646 )
Total liabilities (25,855) - (25,855)
--------------- --------- ----------
1,030 - 1,030
--------------- --------- ----------
18 Financial instruments (continued)
Financial Instruments by category (continued)
As at 30 November 2018
Notes Loans and receivables Available-for-sale Amortised cost At FVTPL Total
GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
Assets
Available-for-sale - 98 - - 98
Trade and other
receivables:
Trade receivables 15 15,370 - - - 15,370
Other non-derivative
financial assets 15 231 - - - 231
Contract assets 15 8,617 - - - 8,617
Cash and cash equivalents 28 9,638 - - - 9,638
---------------------- ------------------- --------------- --------- ---------
Total assets 33,856 98 - - 33,954
---------------------- ------------------- --------------- --------- ---------
Liabilities
Borrowings:
Current 17/22 - - (10,241) - (10,241)
Non-current 22 - - (15) - (15)
Trade and other payables:
Trade payables 16 - - (5,163) - (5,163)
Other non-derivative
financial liabilities 16 - - (7,848) - (7,848)
Total liabilities - - (23,267) - (20,543)
---------------------- ------------------- --------------- --------- ---------
33,856 98 (23,267) - 10,687
---------------------- ------------------- --------------- --------- ---------
Financial instruments measured at fair value
There were no financial instruments measured subsequent to initial recognition at fair value at the end of either period.
19 Deferred tax
Recognised deferred tax assets and liabilities and attributable to the following:
GBP000's Assets Liabilities Net
2019 2018 2019 2018 2019 2018
Plant & Equipment 265 392 - - 265 392
Other temporary differences 519 874 - (280) 519 594
Business combinations 41 41 (1,115) (1,534) (1,074) (1,493)
----------------------------- ----- ------ -------- -------- -------- --------
Deferred tax assets
/ (liabilities) 825 1,307 (1,115) (1,814) (290) (507)
----------------------------- ----- ------ -------- -------- -------- --------
Movement in deferred tax during the year
1 December 2018 Recognised in income Recognised in equity 30 November 2019
Plant & Equipment 392 (127) - 265
Other temporary differences 594 (601) 526 519
Business combinations (1,493) 419 - (1,074)
----------------------------------- ---------------- --------------------- --------------------- -----------------
Deferred tax assets /
(liabilities) (507) (309) 526 (290)
----------------------------------- ---------------- --------------------- --------------------- -----------------
The Group have not recognised a deferred tax asset on GBP1.9m (2018: GBP0.39m) of tax losses and short term timing differences carried forward due to uncertainties over recovery.
Deferred tax of GBP526,000 was recognised in equity due to the implementation of IFRS 9 and 15 in the year.
No deferred tax liability is recognised on temporary differences of GBPNil (2018: GBP2.19m) relating to the unremitted earnings of overseas subsidiaries as the Group is able to control the timing of the reversal of these temporary differences and it is probable that they will not reverse in the foreseeable future.
20 Share capital
Issued and fully paid
2019 2018
Number GBP'000 Number GBP'000
Ordinary shares of 25p each
At beginning of the year 42,946,665 10,737 42,946,665 10,737
At end of the year 42,946,665 10,737 42,946,665 10,737
----------- -------- ----------- --------
All shares have equal voting rights and there are no restrictions on the distribution of dividends or repayment of capital.
No shares were allocated under the employee share option schemes during the year.
2019 2018
Number Number
Own shares held 66,739 75,665
------- -------
20 Share capital (continued)
Own shares are held by a subsidiary undertaking, K3 Business Technology Group Trustees Company Limited, as trustee of the group's employee share ownership plan.
500,000 warrants for ordinary shares of 25p each were issued to CA Fastigheter AB during 2007 in recognition of the reduction in its security following the increase in borrowings from the bank to fund the acquisition of McGuffie Brunton Limited. The warrants were exercisable at 123.5p and until the date on which the loan to CA Fastigheter AB was repaid upon meeting the following conditions: 300,000 of the warrants were exercisable when the company's share price stands at GBP2.50; 100,000 were exercisable when it stands at GBP3.25; 100,000 had no conditions attached to them. The 100,000 warrants with no conditions attached to them were exercised on 4 July 2017. The remaining warrants remain outstanding at the same exercise price and upon the same company share prices but, following conversion of the loan due to CA Fastigheter AB into equity, the terms were amended such that the warrants are now exercisable until 5 July 2022. This has had no impact on the diluted earnings per share.
217,497 options were under the SAYE 2016 scheme (no options granted during the either the year ended 30 November 2019 or the year ended 30 November 2018). None of these options have been exercised during either period.
2,890,000 options ("LTIP Options") were granted during the year ended 30 November 2018, with a further 350,000 being granted during the year ended 30 November 2019 under the terms of a new K3 Long Term Incentive Plan (the "LTIP"). They are exercisable at a price of 25p per share, being nominal value. The LTIP Options vest in three tranches, as set out below, based on the achievement of certain hurdles relating to the adjusted operating profit ("AOP", as defined in the option agreements as being operating profits prior to any share based payment charges) of the Group for each of the two years to 30 November 2019 and, in respect of the last tranche, a further criteria based on the Company's share price during the 30 days immediately following the announcement of K3's results for the year ended 30 November 2020 (the "Price Vesting Criteria") and the Adjusted Profit per share for the year ending 30 November 2020. The model and key assumptions used in the valuation of the share-based payment are disclosed in note 25.
The performance measures for each of the three years to 30 November 2020, and the proportion of each award vesting upon delivery are as follows:
Tranche Year to 30 November Minimum AOP to trigger award % of total award triggered
1 2018 AOP of GBP5.8m 20%
2 2019 AOP of GBP8.0m 10%
3a 2020 Adjusted profit per share 0% - 35% (based on a straight-line sliding
GBP0.19 - GBP0.28 scale)
3b 2020 results announcement Share Price GBP2.20 - GBP3.20 0% - 35% (based on a straight-line sliding
scale)
If performance criteria are missed for the first and/or second tranches, the awarded LTIP Options will be rolled over into the following year(s) but will only vest upon the achievement of the performance criteria of the second or third tranche, as the case may be. In the event that the first and second tranches are rolled into the third tranche, they will vest on the basis of a 50/50 split between the two separate third tranche tests, and upon achievement of the minimum target for the relevant of the two tests.
21 Reserves
The following describes the nature and purpose of each reserve within shareholders' equity:
Reserve Description and purpose
Share premium Amount subscribed for share capital in excess of nominal value.
Other reserve Merger relief reserve for amount in excess of nominal value on issue of shares in relation to business combinations.
Translation Gains/losses arising on retranslating the net assets of overseas operations into sterling and currency movements on loans treated as part of the effective hedge of the net investment in foreign entities.
Retained earnings Cumulative net gains and losses recognised in the consolidated income statement and credits to equity in relation to share-based payments.
22 Lease liabilities
30 November
2019
GBP'000
Analysed as:
Non-current 2,507
Current 1,410
------------
3,917
------------
30 November
2019
Maturity analysis GBP'000
Year 1 1,410
Years 2 to 5 2,007
Onwards 500
------------
3,917
------------
The Group does not face a significant liquidity risk with regard to its lease liabilities. Lease liabilities are monitored
within the Group's treasury function.
All lease obligations are denominated in Sterling, Euros, Singapore Dollars or Icelandic Krona.
Minimum lease
payments
30 November
2018
Amounts payable under finance leases: GBP'000
Within one year 33
In the second to fifth years inclusive 18
After five years -
--------------
51
Less: future finance charges (4)
Present value of lease obligations 47
--------------
22 Lease liabilities (continued)
Present value
of minimum lease
payments
30 November
2018
Amounts payable under finance leases: GBP'000
Within one year 32
In the second to fifth years inclusive 15
After five years -
------------------
Present value of lease obligations 47
------------------
Analysed as:
Non-current 15
Current 32
------------------
47
------------------
It is the Group's policy to lease certain of its fixtures and equipment under finance leases. The average lease term is 2 years. For the year ended 30 November 2018, the average effective borrowing rate was 3 per cent. Interest rates are fixed at the contract date. All leases are on a fixed repayment basis and no arrangements have been entered into for contingent rental payments.
All lease obligations are denominated in Sterling, Euros, Singapore Dollars or Icelandic Krona.
The fair value of the Group's lease obligations as at 30 November 2018 is estimated to be GBP44k using an 6 per cent discount rate based on the Group's calculated discount rate.
The Group's obligations under finance leases are secured by the lessors' rights over the leased assets disclosed in note 11.
23 Operating lease arrangements
2018
GBP'000
Minimum lease payments under operating leases recognised as an expense in the year 2,596
At the reporting date, the group had outstanding commitments for future minimum lease payments
under non-cancellable operating leases, which fall due as follows: 2018
GBP'000
Within one year 2,214
In the second to fifth years inclusive 3,032
After five years 664
--------
5,910
--------
With the exception of the property in Manchester, the group leases all of its properties. The terms of property leases vary, although they all tend to be tenant repairing with rent reviews every 2 to 5 years and many have break clauses. In addition, the group leases the majority of its motor vehicles which are generally 3-year contracts.
24 Retirement benefits
The group operates a defined contribution scheme and also makes contributions to personal pension schemes of certain senior employees and directors.
Pension costs for defined contribution schemes in the year to 30 November 2019 are GBP2.26m ( 2018 : GBP1.85m).
25 Share-based payments
As disclosed in note 20, K3 Business Technology Group plc operates an equity-settled share-based remuneration scheme for employees: the K3 Long Term Incentive Plan ("LTIP") for certain senior management including executive directors. Under the scheme there are two types of share options: those where the options vest based on the achievement of a share price target and those where the options vest on the achievement of adjusted operating profit or adjusted earnings per share, i.e. adjusted for amortisation of acquired intangibles, cost of share-based payments and exceptional items. All options are subject to the employee having completed three years' service from the date of grant. The group also operates a Save As You Earn ("SAYE") scheme for employees.
2019 2018
Weighted average exercise Weighted average exercise
price Options price Options
(pence) (number) (pence) (number)
Outstanding at beginning of
the year 35.4 3,005,522 295.5 141,711
Granted during the year 25.0 350,000 25.0 2,890,000
Exercised during the year - - - -
Lapsed during the year 25.0 (100,000) 295.5 (26,189)
Outstanding at the end of the
year 34.6 3,255,522 35.4 3,005,522
------------------------------ ---------- ------------------------------ ----------
The exercise price of options outstanding at the end of the year was 25p under the LTIP scheme and 295.5p under the SAYE scheme (2018: 25p under the LTIP scheme and 295.5p under the SAYE scheme) and their weighted average contractual life was 8.46 years (30 November 2018: 9.76 years).
No options had vested or were exercisable at the end of either period.
The weighted average fair value of options granted during the year was 0.0p , 2018, 87.6p .
The options granted during the previous year were valued using a trinomial lattice model, the Hoadley Options model. The weighted average share price at the date of grant was 174.9p; the exercise price was 25p; and the weighted average contractual life was 10 years. The weighted average expected volatility was 33.8%; the weighted average expected dividend growth was 7%; and the weighted average risk-free rate was 0.97%.
The volatility assumption, measured at the standard deviation of expected share price returns, is based on a statistical analysis of daily share prices for the Company over the last four years.
25 Share-based payments (continued)
The share-based remuneration expense (note 4) comprises:
Year ended 30 November Year ended 30 November 2018
2019
GBP'000 GBP'000
Equity-settled schemes (103) 103
----------------------- ----------------------------
The group did not enter into any share-based payment transactions with parties other than employees during the current or previous period.
26 Related party transactions
Details of directors and key management compensation are given in the Remuneration Report on pages 32 to 34 and note 4. Included within the fees/ basic salary amount for Mr JP Manley was GBP19,250 (2018: GBP42,884) in relation to consultancy on the own IP positioning and development and for management of internal systems. The balance owed to JP Manley at 30 November 2019 was GBP12k (2018:Nil).
Other than their remuneration and participation in the group's share option schemes, there are no transactions with key management personnel. Other related party transactions are as follows:
500,000 warrants for ordinary shares of 25p each were issued to CA Fastigheter AB during 2007 in recognition of the reduction in its security following the increase in borrowings from the bank to fund the acquisition of McGuffie Brunton Limited. The warrants were exercisable at GBP1.235 and until the loan was repaid upon meeting the following conditions: 300,000 of the warrants were exercisable when the company's share price stands at GBP2.50, 100,000 are exercisable when it stands at GBP3.25; 100,000 had no conditions attached to them. The 100,000 warrants with no conditions attached to them were exercised on 4 July 2017. The remaining warrants remain outstanding at the same exercise price and upon the same company share prices but, following conversion of the loan into equity, the terms were amended such that the warrants are now exercisable until 5 July 2022.
27 Events after the reporting date
The impact on the business from the coronavirus is a non-adjusting post balance sheet event and therefore was not considered in the impairment review. The coronavirus disruption has had an impact on trading after the year end and as a result the directors have performed a re-assessment (but not adjustment) of the carrying value of the reported assets and liabilities for the following key impacts:
-- expected delay in cash collection; -- potential increase in bad debts; -- possible delays in signing new contracts; and -- changes to treasury management. 27 Events after the reporting date (continued)
Any permanent negative effect on trading would have a bearing on the value in use calculations used for the impairment of goodwill and intangible assets. At this time we do not consider there to be any adjustments required to balances as at 30 November 2019.
On the 21st April 2020, K3 Business Technologies Ltd, the UK based subsidiary of the K3 Group was placed into administration. The company for the year end 30 November 2019 had revenue of GBP22m and an Adjusted Operating Loss in excess of GBP3.0m.
During April 2020 the group secured GBP6.0m of loans from Barclays and its two major shareholders, Kestrel Partners LLP ("Kestrel") and Johan Claesson, also a non-executive director. The cash funding will strengthen the Group's liquidity position during this period of unprecedented disruption caused by the Coronavirus pandemic.
Barclays has extended its existing loan facilities to K3 by GBP3.0m to a maximum of GBP13.0m in total. The terms of the loan facilities, including their duration, are similar to the existing facilities, which expire on 31 March 2021.
Kestrel (which has appointed Oliver Scott to the Board as its non-executive director representative) and Johan Claesson (together "the Lenders") are providing an unsecured term loan of GBP3.0m until 30 June 2021 ("Shareholder Loan"). The Shareholder Loan is split equally between the two Lenders. Mr Claesson will provide his part of the loan via his associated company, CA Fastigheter AB and Kestrel's loan is provided via its discretionary clients.
The main terms of the Shareholder Loan are as follows:
-- unsecured and subordinated to all indebtedness with Barclays; -- 8.0% annual coupon, with interest rolling up on a quarterly basis; and
-- 1 warrant issued for every GBP2.50 of Shareholder Loan. Warrants are over ordinary shares of 25p each are transferrable, have a 10 year duration and a strike price of 25p
28 Notes to the cash flow statement
Cash and cash equivalents
2019 2018 restated
(refer to
note 29)
GBP'000 GBP'000
Cash and bank balances available on demand 8,226 9,638
Bank overdrafts (4,385) (2,724)
-------- --------------
3,841 6,914
-------- --------------
Cash and cash equivalents comprise cash and bank balances available on demand. The carrying amount of these assets is approximately equal to their fair value. Cash and cash equivalents at the end of the reporting period as shown in the consolidated statement of cash flows can be reconciled to the related items in the consolidated reporting position as shown above.
28 Notes to the cash flow statement (continued)
Non -cash transactions
Additions to buildings, motor vehicles and equipment during the year amounting to GBP611k were financed by new leases.
Change in liabilities arising from financing activities
The table below details changes in the Group's liabilities arising from financing activities, including both cash and non-cash changes. Liabilities arising from financing activities are those for which cash flows were, or future cash flows will be, classified in the Group's consolidated cash flow statement as cash flows from financing activities.
Non-cash changes
1 December 2017 Financing cash flows Other changes 30 November 2018
GBP'000 GBP'000 GBP'000 GBP'000
Bank loans (note 17) 6,124 1,204 157 7,485
Finance leases (note 22) 105 (58) - 47
---------------- --------------------- ----------------- -----------------
Total liabilities from financing
activities 6,229 1,146 157 7,532
---------------- --------------------- ----------------- -----------------
Non-cash changes
1 December Financing IFRS 30 November
2018 cash flows 16 impact New leases Other changes 2019
GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
Bank loans (note
17) 7,485 (1,250) - - 27 6,262
Finance leases
(note 22) 47 - (47) - - -
Lease liabilities
(note 22) - (1,505) 4,817 611 (6) 3,917
----------- ------------ ----------- ----------- -------------- ------------
Total liabilities
from financing
activities 7,532 (2,755) 4,770 611 21 10,179
----------- ------------ ----------- ----------- -------------- ------------
28 Notes to the cash flow statement (continued)
Adjusted cash generated from operations
Cash flows from operations include acquisition costs, exceptional costs and exceptional income. The adjusted cash generated from operations has been computed because the directors consider it more useful to shareholders and investors in assessing the underlying operating cash flow of the Group. The adjusted cash generated from operations is calculated as follows:
Year Year
ended ended 30
30 November November
2019 2018
GBP'000 GBP'000
Cash generated from operating activities 6,073 8,629
Add:
Exceptional reorganisation costs 524 1,355
Adjusted cash generated from operations 6,597 9,984
------------- ----------
29 Prior period restatement
At 30 November 2018 cash and cash equivalents in the consolidated statement of financial position, as originally presented, included bank overdrafts of GBP2,724,000. Detailed consideration of the evidence supporting this treatment has concluded that the conditions for this net presentation were not met and the error has been corrected within the comparatives, reclassifying the overdrafts to current liabilities. The restated cash and cash equivalents, after this reclassification is GBP9,638,000.
The correction of these errors has not had any impact on previously reported profits, net current assets or net assets.
30 Provisions
In the current year a dilapidation provision totalling GBP414k has been recognised which is equivalent to the balance stated at year end. The provision is split between current and non-current liabilities as follows: current liabilities GBP120k and non-current liabilities GBP294k.
Company Balance Sheet as at 30 November 2019
2018
Notes 2019 (Restated refer to note 16)
GBP'000 GBP'000
Fixed assets
Tangible assets 5 459 419
Investments 6 41,251 45,751
------------ -----------------------------
41,710 46,170
Current assets
Debtors 7 18,254 37,772
Cash at bank and in hand - 541
Deferred tax 10 31 67
------------ -----------------------------
18,285 38,380
Creditors: Amounts falling due within one year 8 (11,677 ) (15,107)
Net current assets 6, 608 23,273
Creditors: Amounts falling due after more than one year 9 (6,262) -
------------ -----------------------------
Net assets 42,056 69,443
Capital and reserves
Called-up share capital 11 10,737 10,737
Share premium account 28,897 28,897
Other reserve 10,324 10,324
Profit and loss account (7,90 2 ) 19,485
------------ -----------------------------
Equity shareholders' funds 42, 056 69,443
As permitted under section 408 of the Companies Act 2006, no separate profit and loss account is presented in respect of the parent company.
The loss for the year dealt with in the financial statements of the parent company was GBP26,623,000 (2018: Profit GBP2,406,000).
The financial statements on pages 114 to 123 were approved and authorised for issue by the board of directors on 24 July 2020 and signed on its behalf by:
RD Price
Director
Company Statement of Changes in Equity as at 30 November 2019
Share capital Share premium Other reserve Retained earnings Total equity
GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
At 30 November 2017 10,737 28,897 10,324 17,579 67,537
Changes in equity for year ended
30 November 2018
Profit for the period - - - 2,406 2,406
Total comprehensive income - - - 2,406 2,406
Share-based payment - - - 103 103
Movement in own shares held - - - (2) (2)
Dividends paid to equity holders - - - (601) (601)
----------------------------------- -------------- -------------- -------------- ------------------ -------------
At 30 November 2018 10,737 28,897 10,324 19,485 69,443
Changes in equity for year ended
30 November 2019
Loss for the year - - - (26,623) (26,623)
Total comprehensive expense - - - (26,623) (26,623)
Share based payment (103) (103)
Dividends paid to equity holders (661) (661)
----------------------------------- -------------- -------------- -------------- ------------------ -------------
At 30 November 2019 10,737 28,897 10,324 (7,902) 42,056
Of the above reserves, the directors only consider the profit and loss account to be distributable. The dividends paid in the year were voted and approved when the company had sufficient distributable reserves based on published accounts at the time.
The own shares are held by a wholly-owned subsidiary, K3 Business Technology Group Trustees Company Limited, as trustee of the group's employee share ownership plan. The own shares represent 66,739 shares held under an employee share ownership plan which will be issued to the employees when they choose to withdraw them. The current market value of these shares as at 30 November 2019 was GBP103,445 (2018: GBP180,000).
1 Accounting policies for the company financial statements
The principal accounting policies are summarised below where they differ from those in the consolidated financial statements on pages 54 to 78. They have all been applied consistently throughout the current year and the preceding period.
Basis of accounting
The financial statements have been prepared in accordance with Financial Reporting Standard 101, Reduced Disclosure Framework ("FRS 101").
The financial statements have been prepared under the historical cost convention. The principal accounting policies adopted by the company are set out below.
In preparing these financial statements, the company has taken advantage of certain exemptions permitted by FRS 101, as the equivalent disclosures are made in the group accounts. Exemptions have been applied in respect of the following disclosures:
-- The cash flow statement and related notes -- Capital management disclosures -- The effects of new IFRSs -- The disclosure of the remuneration of key management personnel
-- Disclosure of related party transactions with other wholly owned members of the K3 Business Technology Group plc group of companies
-- Financial instrument disclosures
Investments
Fixed asset investments are shown at cost less provision for impairment. Loans due from subsidiary companies which are of a long-term nature are regarded as permanent equity and included in investments. For investments in subsidiaries acquired for consideration including the issue of shares qualifying for merger relief, cost is measured either by reference to the nominal value or the fair value of the shares where appropriate. Any premium is ignored when the nominal value is used.
Financial instruments
Financial assets and financial liabilities are recognised in the company's statement of financial position when the company becomes a party to the contractual provisions of the instrument.
Financial assets and financial liabilities are initially measured at fair value. Transaction costs that are directly attributable to the acquisition or issue of financial assets and financial liabilities are added to or deducted from the fair value of the financial assets or financial liabilities, as appropriate, on initial recognition.
Intercompany loans are subsequently measured at amortised cost. Interest income is recognised using the effective interest method.
1 Accounting policies for the company financial statements (continued)
The carrying amount of financial assets and liabilities that are denominated in a foreign currency is determined in that foreign currency and translated at the spot rate at the end of each reporting period. For financial assets and liabilities measured at amortised cost that are not part of a designated hedging relationship, exchange
differences are recognised in profit or loss
2. Profit/(loss) from operations
Year Year
ended 30 ended 30
November November
Note 2019 2018
GBP'000 GBP'000
This has been arrived at after charging /
(crediting):
Staff costs 3 2,577 2,185
Depreciation of property, plant and equipment 5 128 93
Exceptional impairment of Dynamics UK 25,550 -
Exceptional reorganisation costs 20 84
Foreign exchange differences 335 2
3. Staff numbers
The average monthly number of employees (including executive directors) was:
Year Year
ended 30 ended 30
November November
2019 2018
Number Number
Administration 35 19
--------- ---------
Their aggregate remuneration comprised:
Year Year ended
ended 30 30 November
November 2018
2019
GBP'000 GBP'000
Wages and salaries 2,125 1,577
Social security costs 242 187
Other pension costs (see note 12) 167 158
Share-based payment costs (103) 103
Short term non-monetary benefits 146 160
--------- -------------
2,577 2,185
--------- -------------
4. Directors' remuneration, interests and transactions
Directors' remuneration is disclosed in note 4 to the consolidated financial statements.
Directors' share options are disclosed in the Remuneration Report on pages 32 to 34.
5. Tangible fixed assets
Plant,
office
equipment
and fixtures
GBP'000
Cost
At 1 December 2017 429
Additions 125
At 1 December 2018 554
Additions 168
At 30 November 2019 722
-------------
Depreciation
At 1 December 2017 42
Charge for the year 93
At 1 December 2018 135
Charge for the year 128
At 30 November 2019 263
-------------
Net book value
At 30 November 2019 459
-------------
At 30 November 2018 419
At 30 November 2017 387
-------------
6. Fixed asset investments
2019 2018
GBP'000 GBP'000
Subsidiary undertakings 41,251 45,751
-------- --------
Subsidiary undertakings
The trading subsidiaries of K3 Business Technology Group plc are disclosed in note 14 to the consolidated financial statements.
All subsidiary undertakings are wholly owned and all shares consist of ordinary shares only.
Cost of investment Total
GBP'000 GBP'000
Cost
At 1 December 2018 45,751 45,751
Additions 2,500 2,500
Impairments (7,000) (7,000)
At 30 November 2019 41,251 41,251
------------------ --------
Net book value
At 30 November 2019 41,251 41,251
------------------ --------
At 30 November 2018 45,751 45,751
------------------ --------
Additions in the year represent the capital contribution to the subsidiary K3 Business Technologies limited. The impairment related to the impairment of K3 Business Technologies ltd, the UK Dynamics unit details of which are included in note 13 of the group accounts previous.
6. Fixed asset investments (continued)
Under section 479A of the Companies Act 2006 the Group's subsidiaries, listed below, are claiming exemption from audit. The parent undertaking, K3 Business Technology Group plc, registered number 02641001, guarantees all outstanding liabilities to which each subsidiary is subject at the end of the financial year (being the year ended 30 November 2019 for each company listed below). The guarantee is enforceable against the parent undertaking by any person to whom the subsidiary undertaking is liable in respect of those liabilities.
Colne Investments Limited 03563989
K3 BTG Limited 06338304
K3 Systems Support Limited 08497112
Retail Systems Group Limited 01763900
7. Debtors
2019 2018
GBP '000 GBP '000
Amounts falling due within one year:
Amounts owed by subsidiary undertakings 17,902 36,977
Other debtors 24 374
Corporation tax - 317
Taxation and social security 119 -
Prepayments 209 104
18,254 37,772
------------------------- -------------------------
Interest is charged on amount owed by subsidiary undertakings at 4.25% (2018: 4.25%) which is deemed to be a market rate. The company impaired GBP18,550k on the inter company receivables from K3 Business Technologies Limited and Colne Investments Limited.
8. Creditors: Amounts falling due within one year
2018
(Restated
refer to
2019 note 16)
GBP '000 GBP '000
Bank loans and overdrafts 890 7,918
Trade creditors 308 163
Amounts owed to subsidiary undertakings 9,628 6,066
Taxation and social security - 129
Other creditors 417 384
Accruals 434 447
11,677 15,107
------------------------- -------------------------
The bank loans and overdrafts are secured by a fixed and floating charge over the assets of the group.
Interest is charged on amount owed to subsidiary undertakings at 4.25% (2018: 4.25%) which is deemed to be a market rate.
9. Creditors: Amounts falling due after more than one year
At the year end, other borrowings were repayable as follows:
2019 2018
GBP'000 GBP'000
Bank loans (secured) 6,262 -
------------------------ ------------------------
Bank loans
On demand or within one year - 7,918
Between one and two years 6,262 -
6,262 7,918
------------------------ ------------------------
10. Deferred taxation
2019 2018
GBP'000 GBP'000
Accelerated capital allowances (9) 15
Other timing differences 40 52
Deferred tax asset 31 67
======== ========
The movements in deferred tax assets (liabilities) during the year are:
Accelerated Other timing
capital allowances differences Total
GBP'000 GBP'000 GBP'000
At 1 December 2018 15 52 67
Charged to profit and loss (24) (12) (36)
-------------------- ------------- --------
At 30 November 2019 (9) 40 31
-------------------- ------------- --------
The company has no unrecognised tax losses in either period. The deferred tax assets have been recognised as they are expected to be recoverable against future taxable profits.
11. Called-up share capital
2019 2018
GBP'000 GBP'000
Allotted, called-up and fully-paid
42,946,665 ordinary shares of 25p each (2018:
42,946,665) 10,737 10,737
_________ _________
See note 20 to the consolidated financial statements for details of the movements in called-up share capital and of outstanding warrants.
12. Share-based payment
K3 Business Technology Group plc operates an equity-settled share-based remuneration scheme for employees: the K3 Long Term Incentive Plan ("LTIP") for certain senior management including executive directors, and a Save As You Earn (SAYE) scheme for employees. See note 25 to the consolidated financial statements for details regarding share-based payments.
13. Pension arrangements
The company operates a defined contribution scheme and also makes contributions to personal pension schemes of certain senior employees and directors for which the total pension cost charge for the year amounted to GBP167,000 (2018: GBP158,000).
14. Related party transactions
Related party transactions are disclosed in note 26 to the consolidated financial statements. There were no other transactions with related parties during the year.
15. Contingent liability
The company has entered into a cross-guarantee with fellow group undertakings in relation to liabilities with Barclays Bank plc. At the period end the liabilities covered by this guarantee totalled GBP6,262,000.
16. Prior period restatement
At 30 November 2018 cash and cash equivalents in the company statement of financial position, as originally presented, included bank overdrafts of GBP433,000. Detailed consideration of the evidence supporting this treatment has concluded that the conditions for this net presentation were not met and the error has been corrected within the comparatives, reclassifying the overdrafts to current liabilities. The restated cash and cash equivalents, after this reclassification is GBP541,000.
The correction of these errors has not had any impact on previously reported profits, net current assets or net assets.
Unaudited Five Year Summary
17 months ended
Year ended 30 Year ended 30 30 November Year ended 30 Year ended 30
November 2019 November 2018 2017 June 2016 June 2015
GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
Revenue 78,412 83,335 118,176 89,175 83,427
Adjusted profit/(loss)
from operations(*1) 1,831 4,649 (1,666) 9,501 8,151
(Loss)/profit from
operations (13,660) 789 (14,783) 5,229 4,805
(Loss)/profit before tax (14,516) 17 (16,143) 4,528 3,879
(Loss)/profit after tax (15,447) (488) (13,370) 4,103 3,443
Adjusted basic (loss)/
earnings per share(*2)
(pence)
(2017 as restated) (6.6) 6.8 (3.0) 23.5 19.4
Basic (loss)/earnings per
share (pence) (36.0) (1.1) (35.3) 12.6 10.9
Cash and cash equivalents 3,841 6,914 1,941 2,772 1,895
Gross debt(*3) 6,262 7,532 6,229 11,648 13,974
Net debt(*4) 2,421 618 4,288 8,876 12,079
Adjusted cashflow from
operations(*5) 6,597 9,984 10,600 6,848 9,911
Net cashflow from
operations 6,073 8,629 5,954 5,502 9,600
(*1) Adjusted profit from operations is calculated before amortisation of acquired intangibles, acquisition costs, exceptional costs and exceptional income.
(*2) Calculated before amortisation of acquired intangibles, acquisition costs, exceptional costs, and exceptional income, all net of attributable taxation.
(*3) Gross debt includes bank loans and overdrafts, finance lease creditors excluding IFRS 16 creditors and loans from related parties.
(*4) Net debt is gross Bank debt net of cash and cash equivalents.
(*5) Adjusted cash flow from operations is calculated before payments which the directors consider to be costs of acquisitions, including payments to regularise liabilities, acquisition costs, exceptional costs and exceptional income. See note 28 to the consolidated financial statements.
Notice of General Meeting
THIS DOCUMENT IS IMPORTANT AND REQUIRES YOUR IMMEDIATE ATTENTION.
If you are in any doubt as to what action you should take, you are recommended to seek your own financial advice from your stockbroker or other independent adviser authorised under the Financial Services and Markets Act 2000.
If you have sold or transferred all of your shares in K3 Business Technology Group plc (the "Company"), please forward this document, together with the accompanying documents, as soon as possible either to the purchaser or transferee or to the person who arranged the sale or transfer so they can pass these documents to the person who now holds the shares.
NOTICE of General Meeting
Notice is hereby given that a general meeting of the Company will be held at the Company's offices at Baltimore House, 50 Kansas Avenue, Manchester M50 2GL on Friday 28 August 2020 at 10:30am at which the following business will be transacted.
You will be asked to consider and vote on the resolutions below which will be proposed as ordinary resolutions.
Ordinary Resolutions
To consider and, if thought fit, pass the following resolutions which will be proposed as ordinary resolutions:
1. To receive, consider and adopt the directors' and auditors' reports and the financial statements for the year ended 30 November 2019.
2. To re-appoint BDO LLP as auditors of the Company to hold office from the conclusion of this meeting until the conclusion of the next general meeting at which financial statements are laid before the Company.
3. To authorise the directors of the Company to determine the auditors' remuneration.
Registered Office August 2020
K3 Business Technology Group plc By order of the Board
Baltimore House
50 Kansas Avenue K Curry
Manchester M50 2GL Company Secretary
Explanatory Notes to the Resolutions proposed in the Notice of General Meeting
Please refer to notes 3 to 16 relating to entitlement to attend and vote at the meeting and the appointment of proxies.
1. Resolution 1 - The Directors are required to present to shareholders at a general meeting the Annual Report and Accounts for the financial year ended 30 November 2019 together with the Director's and Auditor's reports on such accounts.
2. Resolutions 2 and 3 - The Company is required at each general meeting at which accounts are presented to appoint auditors to hold office until the next such meeting. BDO LLP have indicated their willingness to continue in office. Accordingly, Resolution 2 reappoints BDO LLP as the Auditor of the Company and Resolution 3 authorises the Directors to fix their remuneration.
Notes to the Notice of General Meeting
Entitlement to attend and vote
3. On a show of hands every shareholder present in person has one vote and on a poll every shareholder has one vote for each share held by him. The necessary quorum at this meeting is two members present in person or by proxy and entitled to vote upon the business to be transacted.
4. The Company specifies that only those members registered on the Company's register of members at:
-- close of business on 26 August 2020; or,
-- if this Meeting is adjourned, at close of business on the day two days prior to the adjourned meeting,
shall be entitled to attend and vote at the Meeting. Changes to the register of members after the relevant deadline shall be disregarded in determining the rights of any person to attend and vote at the meeting.
Issued shares and total voting rights
5. As at close of business on the date of the notice of general meeting, the Company's issued share capital comprised 42,946,665 ordinary shares of 25 pence each. Each ordinary share carries the right to one vote at a general meeting of the Company and, therefore, the total number of voting rights in the Company as at close of business on the date of the notice of general meeting is 42,946,665.
Appointment of proxies
6. If you are a member of the Company at the time set out in note 4 above, you are entitled to appoint a proxy to exercise all or any of your rights to attend, speak and vote at the Meeting. You can only appoint a proxy using the procedures set out in these notes and the notes to the proxy form.
7. A proxy does not need to be a member of the Company but must attend the Meeting to represent you. Details of how to appoint the Chair of the Meeting or another person as your proxy using the proxy form are set out in the notes to the proxy form. If you wish your proxy to speak on your behalf at the Meeting you will need to appoint your own choice of proxy (not the Chair) and give your instructions directly to them.
8. You may appoint more than one proxy provided each proxy is appointed to exercise rights attached to different shares. You may not appoint more than one proxy to exercise rights attached to any one share. To appoint more than one proxy please complete new proxy forms for each proxy appointed and list the details of each proxy on a separate form. Please indicate in the box next to the proxy's name the number of shares in relation to which he/she is authorised to act as your proxy. Failure to specify the number of shares to which a proxy appointment relates or specifying a number in excess of those held by the Member will result in the proxy appointment being invalid. Please also indicate by selecting the box provided if the proxy instruction is one of multiple instructions being given.
9. A vote withheld is not a vote in law, which means that the vote will not be counted in the calculation of votes for or against the resolution. If no voting indication is given, your proxy will vote or abstain from voting at his or her discretion. Your proxy will vote (or abstain from voting) as he or she thinks fit in relation to any other matter which is put before the Meeting.
Members can
-- Register their proxy appointment electronically (see note 10 ).
-- If a CREST member registers their proxy appointment by utilising the CREST electronic proxy appointment service (see note 11 ).
-- Request a hard copy form of proxy directly from the registrars, Link Asset Services on Tel: 0371 664 0300 (see note 12 ).
Proxy voting using the Registrar's share portal
10. You may also submit your proxy vote electronically using the Share Portal service at www.signalshares.com. If not already registered for the Share Portal, you will need your Investor Code as shown on a recent dividend tax voucher or recent share certificate. For an electronic proxy vote to be valid, your appointment must be received by no later than 10.30 am on 26 August 2020.
CREST proxy voting (uncertificated shareholders)
11. (a) CREST members who wish to appoint a proxy or proxies through the CREST electronic proxy appointment service may do so by using the procedures described in the CREST Manual. CREST personal members or other CREST sponsored members and those CREST members who have appointed a voting service provider(s), should refer to their CREST sponsor or voting service provider(s) who will be able to take the appropriate action on their behalf.
(b) In order for a proxy appointment or instruction made using the CREST service to be valid, the appropriate CREST message (a "CREST Proxy Instruction") must be properly authenticated in accordance with Euroclear UK & Ireland Limited (formerly CRESTCo's) specifications and must contain the information required for such instructions, as described in the CREST Manual. The message, regardless of whether it constitutes the appointment of a proxy or an amendment to the instruction given to a previously appointed proxy, must, in order to be valid, be transmitted so as to be received by the issuers' agent (ID RA10) by the latest time for receipt of proxy appointments specified in this notice or, in the event of an adjourned meeting, 48 hours before the adjourned meeting . For this purpose, the time of receipt will be taken to be the time (as determined by the timestamp applied to the message by the CREST Applications Host) from which the registrars are able to retrieve the message by enquiry to CREST in the manner prescribed by CREST. After this time, any change of instructions to proxies appointed through CREST should be communicated to the appointee through other means. CREST members and, where applicable, their CREST sponsors or voting service provider(s) should note that Euroclear UK & Ireland Limited does not make available special procedures in CREST for any particular messages. Normal system timings and limitations will therefore apply in relation to the input of CREST Proxy Instructions. It is the responsibility of the CREST member concerned to take (or, if the CREST member is a CREST personal member or sponsored member or has appointed a voting service provider(s), to procure that his CREST sponsor or voting service provider(s) take(s)) such action as shall be necessary to ensure that a message is transmitted by means of the CREST system by any particular time. In this connection, CREST members and, where applicable, their CREST sponsors or voting service providers are referred, in particular, to those sections of the CREST Manual concerning practical limitations of the CREST system and timings. The Company may treat as invalid a CREST Proxy Instruction in the circumstances set out in Regulation 35(5)(a) of the Uncertificated Securities Regulations 2001.
Appointment of proxy using hard copy proxy form
12. The notes to the proxy form explain how to direct your proxy to vote on each resolution or withhold their vote.
To appoint a proxy using the proxy form, the form must be:
-- completed and signed;
-- sent to Link Asset Services, PXS, 34 Beckenham Road, Beckenham, Kent BR3 4TU or delivered to Link Asset Services at The Registry, 34 Beckenham Road, Beckenham Road, Kent BR3 4TU (multiple forms should be returned in the same envelope); and
-- received by Link Asset Services no later than 10.30 am on 26 August 2020.
In the case of a member which is a company, the proxy form must be executed under its common seal or signed on its behalf by an officer of the company or an attorney for the company.
Any power of attorney or any other authority under which the proxy form is signed (or a duly certified copy of such power or authority) must be included with the proxy form.
Calls to Link Asset Services are charged at the standard geographic rate and will vary by provider. Calls outside the United Kingdom will be charged at the applicable international rate. Lines are open between 09:00 - 17:30, Monday to Friday excluding public holidays in England and Wales.
Appointment of proxy by joint members
13. In the case of joint holders, where more than one of the joint holders purports to appoint a proxy, only the appointment submitted by the most senior holder will be accepted. Seniority is determined by the order in which the names of the joint holders appear in the Company's register of members in respect of the joint holding (the first-named being the most senior).
Changing proxy instructions
14. To change your proxy instructions simply submit a new proxy appointment using the method set out above. Note that the cut-off time for receipt of proxy appointments (see above) also apply in relation to amended instructions; any amended proxy appointment received after the relevant cut-off time will be disregarded.
Where you have appointed a proxy using the hard-copy proxy form and would like to change the instructions using another hard-copy proxy form, please contact Link Asset Services on 0371 664 0300. Calls to Link Asset Services are charged at the standard geographic rate and will vary by provider. Calls outside the United Kingdom will be charged at the applicable international rate. Lines are open between 09:00 - 17:30, Monday to Friday excluding public holidays in England and Wales.
If you submit more than one valid proxy appointment, the appointment received last before the latest time for the receipt of proxies will take precedence. If the Company is unable to determine which of more than one valid proxy appointment was deposited or delivered last in time, none of them shall be treated as valid in respect of the share(s) to which they relate.
Termination of proxy appointments
15. In order to revoke a proxy instruction you will need to inform the Company by sending a signed hard copy notice clearly stating your intention to revoke your proxy appointment to Link Asset Services, PXS, 34 Beckenham Road, Beckenham, Kent BR3 4TU. In the case of a member which is a company, the revocation notice must be executed under its common seal or signed on its behalf by an officer of the company or an attorney for the company. Any power of attorney or any other authority under which the revocation notice is signed (or a duly certified copy of such power or authority) must be included with the revocation notice.
The revocation notice must be received by Link Asset Services, PXS, 34 Beckenham Road, Beckenham, Kent BR3 4TU no later than 10.30 am on 26 August 2020.
Appointment of a proxy does not preclude you from attending the Meeting and voting in person. If you have appointed a proxy and attend the Meeting in person, your proxy appointment will automatically be terminated.
Corporate representatives
16. A corporation which is a shareholder can appoint one or more representatives who may exercise, on its behalf, all its powers as a shareholder provided that no more than one corporate representative exercises power over the same share.
17. Notwithstanding the information contained in notes 1 to 16 above and the rights of shareholders set out in the Act and the Company's articles of association, the Directors' strong recommendation is that shareholders do not attend the general meeting in person and, instead, submit proxy votes appointing the Chair of the general meeting as your proxy as set out in this notice of general meeting. Moreover, the Directors would like to reiterate that, if any shareholder (or other proxy appointed by a shareholder other than the Chair of general meeting) does, nonetheless, travel to attend the meeting in person, it is highly likely that they will be denied access to it based on the prevailing circumstances and, as a result, will not be able to participate in the business to be transacted at the general meeting.
Enquiring about your shareholding
If you want to ask, or need information, about your shareholding, please contact our registrar, Link Asset Services, on 0371 664 0300. Calls to Link Asset Services are charged at the standard geographic rate and will vary by provider. Calls outside the United Kingdom will be charged at the applicable international rate. Lines are open between 09:00 - 17:30, Monday to Friday excluding public holidays in England and Wales. Alternatively, if you have internet access, you can access the shareholder portal at www.signalshares.com where you can, amongst other things, view details of your shareholding, set up or amend a dividend mandate and update your address details.
Electronic communications
You can elect to receive shareholder communications electronically by writing to our registrar, Link Asset Services, FREEPOST SAS, 34 BECKENHAM ROAD, BR3 9ZA. Alternatively, if you have internet access, you can access the shareholder portal at www.signalshares.com where you can elect to receive shareholder communications electronically. This will save on printing and distribution costs, creating environmental benefits. When you register, you will be sent a notification to say when shareholder communications are available on our website and you will be provided with a link to that information.
Company Information
REGISTERED OFFICE
Baltimore House
50 Kansas Avenue
Manchester M50 2GL
COMPANY WEBSITE
www.k3btg.com
DIRECTORS
A Valdimarsson
R D Price
S Darling (non-executive)
P J Claesson (non-executive)
J P Manley (Acting Chairman)
P G Morland (non-executive)
O Scott (non- executive)
COMPANY SECRETARY
K J Curry
COUNTRY OF INCORPORATION OF PARENT COMPANY
England and Wales
Company number
2641001
Legal form
Public limited company
ADVISORS
Legal advisors to the Group
Squire Patton Boggs LLP DWF LLP No1 Spinningfields 1 Scott Place 1 Hardman Square 2 Hardman Street Manchester M3 3EB Manchester M3 3AA
Nominated Advisor
finnCap Limited
Cardinal Place
60 New Broad Street
London EC2M 1JJ
Auditors
BDO LLP
3 Hardman Street
Spinningfields
Manchester M3 3AT
ACCOUNTANTS
Beever and Struthers
St George's House
215-219 Chester Road
Manchester M15 4JE
Bankers
Barclays Bank plc
1(st) Floor
3 Hardman Street
Spinningfields
Manchester M3 3HF
Registrars
Link Asset Services
The Registry
34 Beckenham Road
Beckenham
Kent BR3 4TU
Financial PR
KTZ Communications
No.1 Cornhill
London EC3V 3ND
Designed and produced by Mears Ash Limited
Telephone +44 207 736 6408 www.mearsash.co.uk
This information is provided by RNS, the news service of the London Stock Exchange. RNS is approved by the Financial Conduct Authority to act as a Primary Information Provider in the United Kingdom. Terms and conditions relating to the use and distribution of this information may apply. For further information, please contact rns@lseg.com or visit www.rns.com.
END
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(END) Dow Jones Newswires
July 27, 2020 02:00 ET (06:00 GMT)
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