Yu Group PLC Final Results (8134I)

TIDMYU.

RNS Number : 8134I

Yu Group PLC

06 April 2020

Yü Group PLC

(the "Group")

Final results for the year ended 31 December 2019

Yü Group PLC (AIM; YU.), the independent supplier of gas, electricity and water to the UK business sector, announces its final results for the year to 31 December 2019.

Financial Review:

 
 31 December                         2019      2018 
------------------------------  ---------  -------- 
                                  GBP'000   GBP'000 
 
 Revenue                          111,613    80,635 
 Adjusted EBITDA                  (4,242)   (6,283) 
 Loss for the year                (4,968)   (6,267) 
 Operating cash outflow          (11,280)   (1,320) 
 Cash                               2,377    14,612 
 Overdue customer receivables      7 days    9 days 
 Loss per share: 
            Adjusted              (24.0)p   (37.0)p 
            Statutory             (31.0)p   (42.0)p 
 Dividend per share                    0p      1.2p 
==============================  =========  ======== 
 

-- Revenue increased by 38 per cent. to GBP111.6m (2018: GBP80.6m). Statutory loss of GBP5.0m for FY 2019, an improvement of 20.7 per cent. on FY 2018 (GBP6.3m loss)

-- Gross margin improvement, with 4.9 per cent. for FY 2019 (2018 restated(1): 4 per cent.), and 6.7 per cent. for H2 2019 (2.1 per cent. for H2 2018)

-- Adjusted EBITDA(2) loss of GBP4.2m (2018 loss: GBP6.3m), above market expectations. H2 2019 losses less than 60 per cent. of H1 2019 loss as legacy, low margin contracts continue to expire

-- Overdue customer receivables of seven days at 31 December 2019, an improvement from nine days at 31 December 2018(3)

-- Net cash of GBP1.8m (net of lease liability under IFRS 16 ) at 31 December 2019 (2018: GBP14.6m). Cash collateral of GBP10.4m, prior to the impact of the new GBP13.0m credit facility to support the Group's hedging activities

-- Contracted revenue for 2020, as at 31 December 2019, of GBP79.5m (GBP88m at 31 December 2018 contracted for 2019) based on estimated usage of customers (prior to any impact from Covid-19)

o Legacy, low margin contracts account for GBP35m of contracted revenue for FY 2020, and less than GBP5m for FY 2021

-- Financial impact from Covid-19, including available support from the Government, is evolving and is deemed to represent a material risk for the Group. Available cash at 31 March 2020 of GBP10.9m, with a further GBP6.1m in collateral deposits

Operational Review:

-- Business continuity plan deployed in reaction to Covid-19. Proactive monitoring and forward analysis of business and financial risks together with rolling mitigation programmes have been undertaken and are being implemented

   --      Reshaping of the Board finalised and senior management team strengthened in key areas 

-- Business fully reset with stronger governance, internal control and management. Further investment in systems and technology to automate key processes

-- Reducing impact expected from legacy, low margin contracts in FY 2020. New contracts secured at higher margin

-- Sales bookings achieving higher gross margins and increasing in H2 2019. Significant market opportunity remains

   --      Trustpilot score of 4.5 stars (2018: 3.5 stars), a leader in the B2B energy supply market 

-- Commercial arrangements finalised for new Leicester office due to open in 2021 to support the Group's growth ambition

Bobby Kalar, Group Chief Executive Officer, said:

"One of the main objectives of the year under review was to strengthen our internal processes so that scaling would not create further pressure points on the business as we have witnessed in the past. We have been working on transforming the customer journey from 'prospect' through to 'cash' and I'm pleased with the positive results so far.

Significant milestones have been achieved and we are now well placed to deliver profitable growth. Improvements made during the year included adopting more disciplined processes and cost controls, and focusing on enhancing gross margin, and as a result the Group has exceeded market forecasts for revenues and adjusted EBITDA for 2019.

Whilst there has been, to date, a manageable financial and operational impact of Covid-19, the Board continues to assess the rapidly evolving situation which adds a level of uncertainty as we start the new year. Looking forward, we expect revenue, bad debt, operating cashflow to be impacted, as well as temporary reduced sales growth. However, the Group is in a more robust position than previously, with significantly improving margins on the contracts we have booked. The Group has available cash of GBP10.9m at 31 March 2020, with an additional GBP6.1m in cash collateral deposits with trading counterparties expected to be available in Q2 2020.

The health and welfare of our employees is paramount and I'm pleased we have been able to successfully transition all of our workforce to working remotely with negligible impact to the running of the business. As is the case with many UK businesses at this time, we have been focusing on cost savings as well as utilising the assistance offered by HMRC.

The fundamental market opportunity remains significant, with the Group at present only servicing 0.2 per cent. of the B2B market. The Group is now in a position, once the economic context recovers, to drive sustainable, profitable growth, with a fresh, new approach to businesses' utility needs. As such, we continue to be confident in the medium and long term market opportunities, and look forward to getting back to disrupting the energy market through significant and profitable growth. I would like to thank all of our employees for their consistent hard work and I look forward to updating the market again in due course ."

The information communicated in this announcement would have constituted inside information for the purposes of Article 7 of Regulation 596/2014.

[1] The year ended 31 December 2018 has been restated to reclassify GBP2,625,000 of amounts payable to third-party intermediaries from operating costs to cost of sales.

2 Adjusted EBITDA is earnings before interest, tax, depreciation and amortisation, and also before non-recurring items, share based payments and unrealised gains or losses on derivative contracts. For FY 2018, it also excludes the impact of first-time adoption of IFRS 9. See reconciliation in note 3 to this financial report.

3 Overdue customer receivables is expressed in days of sales, and relates to the total balance, net of provisions, of accrued income which is outside of the normal billing cycle, plus overdue trade receivables (net of VAT and CCL).

4 IFRS 16 results in a lease liability and corresponding asset being booked, for assets used under operating leases.

For further information please contact:

 
 Yu Group PLC        [phone] 
 Bobby Kalar 
 Paul Rawson 
 
 Shore Capital       [phone] 
 Edward Mansfield 
 Anita Ghanekar 
  James Thomas 
 
 Alma PR             [phone] 
 Josh Royston 
  John Coles 
 Hilary Buchanan 
 Helena Bogle 
 

Notes to Editors

Information on the Group

Yü Group PLC, trading as Yü Energy, is an independent supplier of gas, electricity and water focused on servicing the corporate sector throughout the UK. It has no involvement in the domestic retail market. The Group was listed on the AIM market of the London Stock Exchange in March 2016.

The impact of Covid-19

This pandemic is clearly a worrying time for the global population, for people in the UK, and, of course, the wider economy and our business customers.

The business priority has, rightly, been on ensuring our colleagues', customers' and other stakeholders' health and safety is considered. We have closely followed official health advice, taken steps to mitigate the impact on our employees, and successfully implemented our business continuity plan.

The impact on the Group's financial performance and liquidity is dependent on a variety of factors: from the time for which the virus materially impacts society; the Government action to protect the UK economy, particularly the support it provides to small and medium-sized entities; and the ability for our customers to continue their operations through this difficult period and beyond.

The Group's revenues are generated from activities across various business customers' market segments, from retail, education, leisure and offices through to care homes, manufacturers and data centres. The Board has assessed its contracted revenue for the year to 31 March 2021 and has identified 43 per cent. is generated from sectors which may be at higher risk of impact from Covid-19; 41 per cent. from customers with a medium risk profile; and 16 per cent. from lower risk customers.

The anticipated reduction in revenue and, potentially, margin within various customer segments (resulting from a lower energy consumption) combined with potential for delay in the collection of customer receivables, and anticipated increased levels of bad debt, represents a significant risk to the Group. Any potential breach of covenants related to the new trading facility and the level of commercial credit which it affords will require close management in order to mitigate any potentially adverse impact on the Group's financial performance.

As at 31 March 2020 the Group had GBP10.9m cash at bank, plus a further GBP6.1m in cash collateral which is expected to become available in Q2 2020 due to the new structured trading arrangement. The Board is currently comfortable, based on analysis to date and announcements by the Government to support businesses, that there is sufficient headroom (and levers, if required) in the Group's cash position without recourse to seeking additional equity to support the Group's capital base.

Nonetheless, unpredictability regarding the possible future impacts of Covid-19 on our business is highly complex to accurately model and this, in and of itself, constitutes a potential material uncertainty regarding the ability to wholly and unreservedly affirm the forward-looking statement of going concern. As such, the Directors have made an appropriate disclosure to this effect in the published audited annual accounts of the Group.

Whilst our priority is on playing our part in ensuring the world can recover from the de-stabilisation caused by Covid-19, the business consequences for the Group are still evolving, and are being closely and actively monitored by the Board.

Chairman's statement

Introduction

Since joining Yü Group PLC as Chairman in January 2020, I have been impressed by the progress, resilience and determination to succeed, as demonstrated during the recent "reset" of the business. Systems and processes have been improved, the Executive Management Team has been strengthened, new partnerships have been established which support the Group's cash position and ability to hedge risks, and there is a clear strategy to scale in a GBP35 billion business to business ("B2B") addressable market.

To further support this, the Board has taken action to provide very strong foundations upon which we can seek to effectively manage the current economic turmoil with a view to driving growth once the market recovers.

Indeed, we are already seeing the impact of implementing the actions required to achieve our strategic priorities. In FY 2019, prior to the outbreak of Covid-19, sales increased 38 per cent. to GBP111.6m supported by a substantial improvement of gross margin on new business now booked at "high single digit" levels. Losses reduced from GBP2.7m in H1 2019 to GBP1.6m in H2 2019 as legacy, low margin contracts continued to expire from the contract book, and we have managed down the impact of bad debt to 2.7 per cent. in FY 2019 (from 4.5 per cent. in FY 2018). We believe the platform is now in place for the Group to weather the current economic storm and grow in a controlled manner at the appropriate juncture.

Strengthening of the Board will support, mentor and challenge an ambitious Executive

I joined the Board as Independent Chairman with the mission to ensure that the Group takes an effective, mature and well-considered approach to implementing the "best in class" governance structures required in order to move the Group on to the next stages in its evolution.

One of my principal roles is to ensure collegiate adherence to a clearly defined governance framework which is designed to enable robust, well-challenged and effective decision-making behaviours, these being indispensable to securing the Group's future and achieving sustainable growth in due course.

The Board and the Executive have recently undergone a "refresh" and I am joined on the Board by two further Independent Non-executive Directors who will significantly increase the Board's ability to support and mentor Yü Group's wider Executive Management Team. My new colleagues are:

Tony Perkins, who was also appointed in January 2020, joins the Group as our Senior Independent Director. Tony was previously at accountants BDO where he was appointed a partner in 1990, having joined in 1980. He has acted for many fully listed and AIM companies in the professional services, natural resources, technology, manufacturing and retail sectors. He has extensive experience in financial, governance and risk management and has advised on corporate strategy, transactions and expansion of businesses in the UK and internationally. Tony has held senior management positions at BDO as a member of the firm's leadership team including head of its London operations and national head of audit. Tony brings vastly significant finance, audit and compliance expertise to the Board. He also serves as Chairman of the Audit Committee whose remit now includes a revitalised focus on risk and opportunity assurance.

John Glasgow continues as an Independent Non-executive Director and serves as Chairman of the Remuneration Committee and, with me, will serve on the Audit Committee. John brings deep industry, commercial and technical knowledge to the Board, having been head of strategy at the establishment of the new E.ON energy services business, E.ON director of new connections & metering and director of operations and asset management at E.ON Central Networks. During this time John was also a board member of the Energy Networks Association and a member of the DECC Energy Emergencies Executive Committee (E3C). Upon leaving E.ON John became managing director of Sterling Power Utilities Ltd. John is also a board member of the St Modwen Environmental Trust.

The Board is therefore now rebalanced, and complying with best practice, is comprised of three Independent Non-executive Directors with two Executive Directors:

Bobby Kalar, Executive Director, Board member and Chief Executive Officer, now also chairs a re-designed Executive Committee ("ExCo") and is responsible to the Board for the day-to-day management and implementation of the agreed Board strategies, to which he is a major strategy contributor.

Paul Rawson, Executive Director, Board member, also serves as our Chief Financial Officer and Company Secretary. Paul has significant industry and financial experience, as part of the Engie Group (ex GDF-Suez) and has been instrumental in implementing our "reset" as well as the embedding and enhancement of various "best practice" processes also suggested in the PwC reports which the Group commissioned.

Whilst we have recently focused on strengthening the effectiveness of our governance and the implementation of strengthened and joined-up internal controls across the business, it is vital for us to continue ensuring that the business retains an agile, pivotable "industry disruptive" mindset.

I believe that the Board now has the appropriate structure, balance and blend of skills together with the expertise and experience that will enable appropriate challenge, constructive strategic debate and the promotion of the best interests of all of our shareholders and stakeholders.

I am delighted to have joined this young, robust and now well-structured Group, which I believe has a bright future, a fresh outlook and a significant and value-generating market to address.

An experienced Executive Management Team

Reporting to the Board via the CEO, a strong and experienced management team has now been re-engineered and tasked with implementing the business plan as agreed by the Board. The ExCo, led by the CEO, consisting of the management team of Executive Directors and senior managers, will drive the day to day activities of the business, reporting to and seeking counsel from the Board.

The Group has strengthened its management team during FY 2019, including the appointment of a Sales and Marketing Director and a Head of Commercial Operations to improve the bill to cash cycle of the Group. A new Group Operations and Transformation Director has also been appointed to digitalise key sales and operational processes, and to further enhance the Group in preparation for future growth. As part of this Garry Pickering, previously COO, has taken a new role on this newly formed ExCo to ensure continued focus on the Group's hedging of commodity risks.

The strength-in-depth of the Executive Management Team will help the continuing evolution of our business, ultimately enabling a lower cost to serve, improved gross margins and a great service for our customers.

This strength has been recently and amply demonstrated in the efficient and level-headed response to undertaking the extensive planning required to put in place effective mitigation action plans in order to address the varied challenges occasioned by the coronavirus outbreak.

Covid-19

In response to the recent outbreak of the coronavirus disease, Covid-19, we have successfully deployed the Group's business continuity plan. Whilst there has been little material financial or operational impact to date, my colleagues across the business are working tirelessly with key partners and stakeholders to ensure continued and effective delivery of our services to customers. Our seasoned and mature teams' proven professional ability to model, hedge and risk manage abnormal movements in commodity prices and partner and customer behaviours is complemented and supported by our new trading arrangements as well as robust working capital and cash positions.

The Group remains debt free and the Board remains focused on ensuring that, whilst we may be required to temporarily flex our planned rates of ambitious organic growth, we will remain well positioned to take advantage, in due course, of such significant market opportunities as may arise from the current period of uncertainty.

The measures taken, and the potential risks to the Group associated with the Covid-19 outbreak, are further detailed in the Finance Review and the risks and uncertainties section of the annual report.

Strategic focus

The Board remains resolute in its determination to scale the business, differentiating itself by the level of customer service it offers and its agility in providing new and disruptive solutions and by constant evolution to increase customers' ease of interaction and access to the benefits of the solutions we offer.

Whilst the impact of Covid-19 will create some new and challenging priorities for the Board, the four pillars of our medium to long-term strategy remain: (i) to focus on generating controlled growth through the provision of existing and new products and services; (ii) to achieve sustainable profitability through gross margin and overhead management; (iii) to generate cash and reduce the working capital required; and (iv) to ensure sound foundations for the business from customer service to engaging with our employees through to acting in accordance with appropriately high standards of corporate governance.

The future

Notwithstanding recent developments re the coronavirus the rest of the Board and I believe that the business, after its "reset" now has a great and exciting opportunity to challenge and disrupt our market and to deliver, in future, on our strategy to scale.

I look forward to updating our shareholders and other key stakeholders in due course.

Chief Executive Officer's Statement

As a consequence of previous uncontrolled rapid growth, a "back to basics" root and branch approach has allowed the Group to focus on key areas which required strengthening, and parts of the business that were inefficient or heavily reliant on manual processes. The full journey of our customers' lifecycle has been redesigned so that an efficient process targets a right first-time mentality: from "prospect to booking", "sale to registration" and "bill to cash".

I'm pleased that this approach and continued development during the year has established a strong focus on enhancing gross margin and cost discipline, along with refocused sales and operational, financial and commercial controls.

These actions are starting to be reflected in the Group's financial performance and will continue to be as low margin contracts expire and are washed out of the forward contract book.

Adjusted EBITDA loss has decreased to GBP4.2m (2018: GBP6.3m), which is better than market expectations, and our H2 2019 (loss of GBP1.6m) performance was significantly better than H1 2019 (loss of GBP2.7m) and H2 2018 (loss of GBP5.2m).

As the Group continues to mature, I am pleased that the culture and behaviours in the business are now fully aligned to providing customers with a high quality service.

The Board is confident that the results of the Group will continue to progress with improved margins secured as new contracts are booked and the economy recovers from the impact of Covid-19. With that in mind, the Board and I remain convinced in the future potential for the Group to expand and realise profitable growth.

Strategic review

The purpose of our Group is to provide Yütility Simplicity, that is, to make it easy for businesses across the UK to access simple, innovative products for their utility supply. It has never been more appropriate to support small businesses, who are the bedrock of a thriving UK economy.

Our strategic priorities span four key areas and we use these focus areas to drive our business performance:

Growth. There is an enormous addressable B2B market. Our priority is to scale via the supply of gas, electricity and water to businesses across the UK. This growth is generated through various sales channels and the core business activities are complemented by additional products.

Profitability. We continue to take steps to ensure the long-term profitability of the Group. We are enhancing gross margins through a more selective, albeit still ambitious, growth strategy and a focus on managing customer lifecycle value. We also focus on reducing overheads, particularly as we scale.

Cash generation. The Group benefits from a cash generative working capital cycle and a new trading arrangement to cover its trading requirements, which structurally results in a positive operational cash flow despite the Group's growth. Our focus is to closely manage the prompt billing and collection of the Group's revenues and to manage cash carefully to drive long-term value. The Group also continues to implement new digital tools to automate processes which are appropriate for a growing business.

Solid foundations. Ensuring a focus on good customer service, demonstrating our values and behaviours by engaging with employees, being clear on organisational accountability and maintaining fit and proper governance processes are all key considerations in the Group's activities.

Covid-19

The business risk related to Covid-19 is further detailed in the Finance Review, and the annual report, together with the actions taken to mitigate, as much as possible, the risks.

This pandemic is clearly a worrying time for the global population, for people in the UK, and, of course, for the wider economy and our business customers. Our Group generates a significant proportion of revenue from sectors which are likely to have been materially impacted by Covid-19, which we are continuing to monitor.

As CEO of a growing and maturing business, my priority has been ensuring our colleagues', customers' and other stakeholders' health and safety is considered. We have closely followed official health advice, taken steps to mitigate the impact on our employees, and successfully implemented our business continuity plan.

I'm proud of my team's response and thank them for their continued efforts to maintain health and safety, whilst keeping the business running to serve our customers and key partners. In line with Government guidance all of our staff have been successfully transitioned to remote working status with minimal disruption to customers or working practices.

Market context

There has been a significant reduction in forward gas and electricity commodity market prices during 2019 and early 2020, driven by various macroeconomic factors, including excess gas becoming available in the global market and, more recently, the economic impact Covid-19 is having on economic growth. This commodity market price reduction has two contrasting impacts on our business. Firstly, customers are more likely to take advantage of the lower market to "lock in" the reduction for the coming years. Whilst the revenue booked may be lower in absolute terms (as a result of the lower commodity market) for individual customers, the margin per customer opportunity is not adversely impacted.

Secondly, a reducing forward commodity market leads to trading counterparties being exposed to mark-to-market risk if the purchase of commodity is not fulfilled, traditionally leading to "cash calls" being made. Such cash calls led to GBP10.4m of deposits being lodged as collateral with trading counterparties at 31 December 2019 (GBPnil at 31 December 2018).

Our new structured trading arrangement with SmartestEnergy, part of the major Japanese entity Marubeni provides a c.GBP13.0m variable credit facility which is designed to scale up in tandem with the growth in the business. This has the key benefit of freeing up cash, enabling a more efficient use of the Group's capital. I'm pleased that our Group has secured this new arrangement; following a period of significant due diligence, our strategic goals and core principles are aligned and I look forward to working closely with our new partners over the coming months and years.

Market opportunity

I founded this business when, as a small business owner myself (operating in the care home sector), I had lost all faith in the major energy companies. I didn't feel as though I was receiving a fair service, or value for money and all I wanted was an easy experience and to feel like a customer. It is this position that drives me in my passion to provide a new approach, based on simplicity and innovation.

Competition in the B2B energy supply market is less prevalent than the domestic sector. In the last nine months, there have been no new B2B supply licence applications to Ofgem for either gas or electricity. There are additional barriers to entry in the B2B market, such as the need to provide half hourly pricing, which requires additional operations and technical capability. The B2B market is dominated by larger players who have inefficient, expensive and inflexible systems and less ability to understand and serve the customer. I believe that the market dynamics give the Group a great opportunity. Our success in this market depends on providing simple and innovative solutions which can be accessed easily; a good, fair, service to our customers so they remain with us; and by controlling our costs as we scale.

Once the economy recovers the potential for growth is enormous. As in the business to consumer market, opportunities will arise where synergies will further push our growth and provide greater return. We currently only serve 0.2 per cent. of the B2B market and our Group is now in a position to scale rapidly, offering a fresh, new approach to businesses' utility needs.

The Group offers leading customer service and simple, innovative products to businesses across the UK. For example, we are the only multi-utility (gas, electricity and water) supplier enabling business customers to receive simple bundled products for all their utilities. Our three-ring pick up policy, UK call centre and use of digital technologies make it easy for customers and partners to engage with us.

In addition, our internal criteria to select the right growth opportunities has been enhanced and we now target our efforts more carefully regarding the customers we wish to serve and the channels we use to develop our business.

Bookings

Bookings represent the annualised value of contracts secured during a period and are a core indicator for business growth. Our average monthly bookings for FY 2019 were GBP4.2m (FY 2018: GBP8.4m), with an increase in H2 2019 (GBP5.3m) when compared to H1 2019 (GBP3.2m). The Board believes the Group can now manage significantly increased levels of bookings, post the establishment of new automated processes and stronger governance.

Gross margin on bookings during FY 2019 have averaged high single digit gross margins, which is broadly double the gross margins achieved on bookings in FY 2018. This increased gross margin will continue to flow through to an improved financial position over FY 2020 and beyond as the legacy, low margin contracts expire.

The Group ended 2019 with GBP79.5m of revenue, prior to any impact from Covid-19, contracted for FY 2020. Of the contracted revenue, approximately GBP45m was booked in FY 2019 at increased margins. The remaining GBP35m contracted revenue are legacy, low margin contracts. The majority of these legacy contracts will expire in FY 2020, leading to enhanced gross margins from FY 2021.

Our business foundations

We have always had ambitious plans to scale the business and to that end the Group has established strong business foundations upon which to build. These systems will help us manage the unprecedented market turmoil that is currently being experienced and will leave us well positioned as and when the situation improves.

Customer service also remains a top priority. The Group continues to offer a three-ring pick up policy, providing dedicated relationship managers to resolve customer queries. Our Trustpilot score has improved from 3.5 stars at 31 December 2018 to 4.5 stars at 31 December 2019. This score ranks the Group as a leader in the B2B energy supply sector.

As well as the strengthened and refocused Board, an experienced and committed management team has been established to drive business performance. We have implemented a new people strategy and work hard to engage and empower teams and to promote the Group's values.

We have also commenced an ambitious plan to build on improved sales and onboarding processes to bring new digital tools to our customers and to utilise them to improve efficiency in our operations.

Summary

I am satisfied that the business has turned a corner and achieved a full reset. Our goal, in time, is to be one of the largest "go to" SME utility suppliers in the UK.

The work done has been immense:

-- strengthening of the Board to create good corporate governance and a support mechanism for the Executive to explore new synergies;

-- redesigning the organisational structure and recruiting a strong Executive Committee to manage the sales strategy, commercial function and risk management;

-- a renewed discipline on gross margin throughout the business and a strong approach to debt management, which is already showing a positive impact;

-- our new deal with SmartestEnergy which has effectively removed cash as a barrier to growth and means we can significantly scale the business for the next three to four years without having to lodge cash;

-- a commitment to further accelerate our customer experience by digitising our business and reducing the cost to serve; and

-- utilising data to drive insight to better understand market habits and risks, which I believe is a game changing growth accelerator.

Notwithstanding the challenges caused by Covid-19, I am confident the past "chapter" can now be closed and am expecting to report more positive updates in the future.

Lastly this has been an enormous team effort and my sincere gratitude to all my team; I look forward to returning the business back to profit soon.

Outlook

The business has been reset and I fully believe that the experience and processes we now have established will drive sustainable, profitable growth, once the economic context recovers. Gross margin improved to 4.9 per cent. for FY 2019 (2018 restated: 4 per cent.), and 6.7 per cent. for H2 2019 (2.1 per cent. for H2 2018).

Our Adjusted EBITDA loss has decreased significantly, from GBP5.3m in H2 2018 to GBP1.6m in H2 2019, and our overdue customer receivables position has improved by two days, to stand at seven days, demonstrating our clear financial and working capital discipline.

The Group exceeded market forecasts in relation to revenues and Adjusted EBITDA in FY 2019.

The Board is continuously assessing and managing the impact of the Covid-19 outbreak on the business and the financial and operational performance of the Group. Some revenue reduction impact is anticipated as a result of lower demand from business customers across Great Britain, and as sales bookings decrease due to a change in customer priorities. The impact from Covid-19 on bad debt, operating cash flows (through late payment of customer receivables) and reduced sales growth is also uncertain, as the UK economy deals with the impact of the pandemic, although the reassurance from the UK Government to support businesses is pleasing to hear.

The Group's business model, strategy and risk management are in a much more robust position than previously, with significantly improving margins and Adjusted EBITDA in the medium term. Although the short-term business consequences from the outbreak of Covid-19 are largely uncertain, the medium to long-term growth opportunity remains clear and the Group's core target.

6 Source: independent analysis from Bfy Consulting of B2B energy supply market, February 2020.

Finance Review

Results

The results for the year to 31 December 2019 have seen a 38 per cent. growth in revenue to GBP111.6m (2018: GBP80.6m). Most encouragingly, the tighter commercial and financial management across the business is now being evidenced in the improved financial results.

The Group's Adjusted EBITDA loss of GBP4.2m for FY 2019 exceeded market expectations and is significantly below the GBP6.3m loss level in FY 2018. The half-yearly trend is also encouraging, with the Adjusted EBITDA loss reducing from GBP5.2m for H2 2018, to GBP2.7m for H1 2019 and GBP1.6m for H2 2019.

 
 GBP'000            H2 2019   H1 2019   H2 2018   H1 2018 
 Revenue             55,052    56,561    47,305    33,330 
                   --------  --------  --------  -------- 
 Gross margin %        6.7%      3.2%      2.1%      6.7% 
                   --------  --------  --------  -------- 
 Adjusted EBITDA    (1,568)   (2,674)   (5,238)   (1,045) 
                   --------  --------  --------  -------- 
 

The Group recorded a gross margin of 4.9 per cent. for FY 2019, an improvement from the 4.0 per cent. recognised in FY 2018 . Gross margin in H2 2019 achieved 6.7 per cent., compared to 2.1 per cent. in H2 2018 and 3.2 per cent. in H1 2019. This improvement in gross margin from H2 2018 to H2 2019 reflects the reduced impact of legacy, low margin contracts after the various initiatives taken by the Group in early 2019.

Assessing the impact of Covid-19

The potentially unprecedented (in modern times) impact as a result of the Covid-19 virus pandemic is an evolving picture across the world - and the health, societal and economic impacts are still being understood as the Group's annual accounts are published.

The Board is committed to working with all stakeholders, our customers, colleagues, suppliers, regulators and members of the local communities in which we operate, to ensure the Group plays its part in combating the virus, and its associated impacts.

The business and financial risks associated with the Covid-19 outbreak are being closely monitored by the Board, and mitigating actions are being taken where possible. The key business risks and actions include:

-- Health and safety: The Group is taking appropriate steps to protect its employees and other key stakeholders, based on Government advice.

-- Business continuity and customer service : The Group has implemented its business continuity plan to ensure key operations and customer service teams can operate, alongside key support functions.

-- Lower commodity sales volume: Social distancing and the potential closure or reduction in business output across the UK is likely to suppress customer demand for energy, which reduces revenues, gross margin and, ultimately, the EBITDA of the Group. Significant differences between forecasted customer demand and actual demand can also create additional risks (or opportunities) from commodity market volatility as the Group rebalances its hedged position. The Board will continue to monitor this risk and take appropriate action to reduce the impact.

-- Curtailed growth: The Group's strategic priorities include a significant focus to scale the business to benefit from the economies of scale, and to achieve profitability. The Group also planned the further expansion of sales activities in a new Leicester office. The impact on UK businesses may reduce the ability to scale at the rates previously considered and this is being closely monitored by the Board.

-- Economic context, bad debt and working capital: The Government has announced certain measures to support businesses across the UK - specifically aimed at small and medium-Sized Entities, which is the Group's target market. However, the economic impact of the virus pandemic could impact the ability for customers to meet their contractual liabilities on time, impacting cash flow, and could ultimately lead to higher levels of bad debt and reduce the Group's profitability.

Measures at UK level, including the announced Government support to businesses, together with the swift and robust measures taken by the Group during 2020, are mitigating some of the impact of the Covid-19 outbreak. In addition, the Group's new trading arrangement with SmartestEnergy has created additional cash flow to provide a level of headroom to the Group's balance sheet, leading to a more robust position.

Ultimately, like many other companies, the Board considers that there is currently a material new risk in the Group's business model which needs to be monitored carefully. Such uncertainty predominantly relates to the wider economic impact of the Covid-19 outbreak, and the timescales over which the virus may continue to disrupt the UK economy. In view of the level of uncertainty, the Board has concluded that such uncertainty is so material that it may cause significant doubt on the Group's ability to continue as a going concern, as disclosed in note 1 to the financial statements.

The Board is focused on protecting, first and foremost, the health and safety of its colleagues, customers and partners, at what is a difficult time for all. The Board is also confident in the Group's ability to "weather the storm", especially after the work done in FY 2019 to fully reset the Group.

Analysing profitability

The Board monitors profitability, as a percentage of revenue, by breaking down Adjusted EBITDA between net customer contribution and general overheads:

Net customer contribution represents the contribution to profit of the Group's core activities and consists of gross margin (excluding any non-recurring items excluded from Adjusted EBITDA) less bad debt.

General overheads, being overheads charged to Adjusted EBITDA excluding bad debt, represents the investment in sales, general administrative costs and the costs incurred to manage the customers contracts.

 
 % of revenues                FY 2019   FY 2018 
 Adjusted EBITDA               (3.8%)    (7.8%) 
                             --------  -------- 
 Of which: 
                             --------  -------- 
 Net customer contribution       2.5%    (0.4%) 
                             --------  -------- 
 General overheads             (6.3%)    (7.4%) 
                             --------  -------- 
 

Net customer contribution for FY 2019 was 2.5 per cent., compared to a negative contribution of 0.4 per cent. in FY 2018. The improvement is a consequence of the higher gross margins through stronger commercial actions and the reduction in the level of bad debt. The Board targets a "mid to high single digit" net customer contribution based on the revised sales and commercial policies now in place - with ultimately the Group achieving nearer the level of 12.4 per cent. reported (after restatement) for FY 2017. This target is prior to the impact of the Covid-19 outbreak, which is further considered below.

General overheads have decreased as a proportion of revenue to 6.3 per cent. in FY 2019 (2018: 7.4 per cent.). The Group has continued to invest significantly in sales and marketing to take advantage of the market opportunity available. The remaining overheads are allocated between cost to serve, which is expected to benefit from economies of scale as the Group grows and automates processes, and the more fixed in nature general administrative costs.

As the Group grows over the medium term, the level of general overheads as a percentage of revenue is expected to decrease based on the Group benefiting from economies of scale.

The Group's loss for the year was GBP5.0m, an improvement from the GBP6.3m loss in FY 2018. The loss for FY 2019 includes costs outside of Adjusted EBITDA related to certain non-recurring items, share based payment charges and unrealised losses on derivative contracts. The reconciliation of statutory loss to Adjusted EBITDA is included in note 3 of the financial statements.

Forward visibility

The Group monitors its forward contract book which gives good visibility of the revenues expected (on a normalised, pre Covid-19 basis) over the coming periods from contracts which have been entered into. At 31 December 2019, the Group had such contracted revenues of GBP79.5m for FY 2020.

The level of contracted revenue is below the GBP88m contracted at 31 December 2018 for FY 2019. This slowdown follows a reset of the Group's commercial strategy in early 2019, which contributed to a reduced level of average monthly bookings for FY 2019, of GBP4.2m (2018: GBP8.4m). Whilst the level of gross margin on bookings has increased significantly, the reduced bookings are expected to result in a flatter revenue in FY 2020.

Legacy contracts, which were typically booked at low single digit gross margins, are expiring and are either being renewed at higher margins or "positively lost" (i.e. not renewed) due to the stricter commercial and financial criteria now applied. These legacy, low margin contracts contribute approximately GBP35m of the GBP79.5m contracted revenue for FY 2020, and less than GBP5m for FY 2021. As these low margin contracts time expire and are replaced by higher-margin contracts, the net customer contribution is expected to increase.

Forward contracted revenue for the year to 31 March 2021 is split between 43 per cent. of customers who are likely to be significantly impacted by Covid-19, such as schools, retail outlets, hotels, restaurants and leisure venues. Medium risk customer segments, such as supply to offices, manufacturing plants and construction sites, represent 41 per cent. of contracted revenue, and the remaining 16 per cent. relates to lower risk businesses such as manufacturing and healthcare sites.

The reduced volume of energy will reduce revenues and gross margin for FY 2020, though such impact will depend on the overall impact across all business sectors on their energy consumption, and the length of time for which the Covid-19 crisis continues. The reduced margin, impact on hedging position of any over-purchased consumption and any consequential impact to bad debt and working capital management may be significant to the Group, though is not easily estimated in view of the evolving nature of the crisis.

Balance sheet, Net cash and working capital performance

Customer receivables have reduced by GBP0.6m in the year despite the Group's revenue growth. Trade receivables have decreased by GBP0.2m to GBP2.9m (net of GBP4.9m provision) at 31 December 2019 (31 December 2018: balance of GBP3.1m, net of GBP4.8m provision). Accrued income, net of expected credit loss provisions, has decreased by GBP0.4m to GBP9.3m at 31 December 2019 (GBP9.7m at 31 December 2018).

Overdue customer receivables ("OCR") were seven days at 31 December 2019, an improvement of two days from the position at 31 December 2018. The Board is pleased with the continued performance on OCR, having reduced the metric from 14 days at 31 December 2017, which is utilised to ensure revenue and debtors are under close management.

The Group has net cash, being cash and cash equivalents less debt (in the form of lease liabilities), of GBP1.8m, excluding GBP10.4m of cash posted with trading counterparties. In accordance with IFRS 16 "Leases", a liability of GBP0.6m has been recognised in the year, with a corresponding asset value of GBP0.5m. The recognition of this liability and assets relates, primarily, to property leased by the Group under operating leases which were, prior to IFRS 16, not held as an asset or liability on the Group's balance sheet. The Group continues to have no bank or other debt.

The Group's total cash outflow during the year to 31 December 2019 was GBP12.2m, of which GBP11.3m relates to operational activities.

Of the operational cash outflow, GBP10.4m is attributable to the payment of trading counterparty deposits required in line with the Group's forward commodity trading arrangements due to the significant decline in forward commodity markets.

The benefit from the Group's new structured trading arrangement with SmartestEnergy (the "Facility"), providing a variable credit line of approximately GBP13m, had not been realised at 31 December 2019. The new Facility will free up cash which would otherwise be needed as collateral with trading counterparties. To secure the Facility, the Group has agreed certain covenants, and fixed and floating charges, related to the main trading subsidiaries of the Group. Regular and constructive dialogue with our trading partners in relation to the potential impact of the Covid-19 pandemic on aspects of the Facility arrangement has been welcomed by the Board.

The remaining operational cash outflow of GBP0.9m mainly derives from the Adjusted EBITDA loss, the prepayment of certain industry costs, and the benefit from the Group's positive working capital cycle.

The Group is investing in a new purpose-built sales, marketing and innovation office in Leicester. This property has led to a cash outflow in H2 2019 of GBP0.3m, and a further GBP0.7m which has been paid in Q1 of FY 2020. The Group targets financing the residual value through a loan facility, when appropriate during FY 2020. Beyond the new property, the Group does not expect significant capital expenditure beyond the level in FY 2019.

The Group paid the 2018 interim dividend in January 2019. The Board does not propose the payment of a dividend for FY 2019.

Cash position and liquidity

The Group has cash available, with GBP10.9m cash at bank at 31 March 2020 and a further GBP6.1m in cash collateral.

UK Government announcements related to the deferral of VAT, and potential financing, provides additional comfort, and the Group also has certain other commercial levers to manage its liquidity over this period of uncertainty.

Summary

The Group has taken numerous financial and commercial measures to improve its financial returns and to benefit from the available market opportunity. These results are starting to be shown in the evolution of the financial results of the Group.

The impact of Covid-19 represents an evolving and material uncertainty to the Group's business model, though the Board continues to take all appropriate action to protect health and to mitigate, to the extent possible, the impact which the pandemic has on the Group's financial performance.

7 Adjusted EBITDA is earnings before interest, tax, depreciation and amortisation, and before certain exceptional or one-off costs. The reconciliation between IFRS and Adjusted EBITDA, as an alternative reporting measure, is included in note 3 to the condensed financial statements.

8 Gross Margin % is after reclassification of third-party intermediary costs to be included in cost of sales. Such costs were previously allocated as overheads.

Condensed consolidated statement of profit and loss and other comprehensive income

For the year ended 31 December 2019

 
                                                          31 December       31 December 
                                                                 2019   2018 (restated) 
                                                              GBP'000           GBP'000 
 -------------------------------------------------------  -----------  ---------------- 
 
 Revenue                                                      111,613            80,635 
 Cost of sales                                              (106,128)          (77,387) 
 -------------------------------------------------------  -----------  ---------------- 
 Gross profit                                                   5,485             3,248 
 -------------------------------------------------------  -----------  ---------------- 
 Operating costs before non-recurring items, unrealised 
  gains on derivative contracts and IFRS 2 charges           (10,362)          (11,963) 
 Operating costs - non-recurring items                          (378)             (441) 
 Operating costs - unrealised losses on derivative 
  contracts                                                     (518)             (125) 
 Operating costs - IFRS 2 charges                               (125)             (314) 
 -------------------------------------------------------  -----------  ---------------- 
 Total operating costs                                       (11,383)          (12,843) 
 -------------------------------------------------------  -----------  ---------------- 
 Loss from operations                                         (5,898)           (9,595) 
 Finance income                                                    33                21 
 Finance costs                                                  (112)              (63) 
 -------------------------------------------------------  -----------  ---------------- 
 Loss before tax                                              (5,977)           (9,637) 
 Taxation                                                       1,009             3,370 
 -------------------------------------------------------  -----------  ---------------- 
 Loss for the year                                            (4,968)           (6,267) 
 -------------------------------------------------------  -----------  ---------------- 
 Other comprehensive income                                         -                 - 
 -------------------------------------------------------  -----------  ---------------- 
 Total comprehensive income for the year                      (4,968)           (6,267) 
 -------------------------------------------------------  -----------  ---------------- 
 Earnings per share 
 Basic                                                      (GBP0.31)         (GBP0.42) 
 Diluted                                                            -                 - 
 -------------------------------------------------------  -----------  ---------------- 
 

The year ended 31 December 2018 has been restated to reclassify, due to a change in accounting policy, GBP2,625,000 of amounts payable to third-party intermediaries from operating costs to cost of sales.

Condensed consolidated balance sheet

At 31 December 2019

 
 
                                 31 December  31 December 
                                        2019         2018 
                                     GBP'000      GBP'000 
------------------------------   -----------  ----------- 
ASSETS 
Non-current assets 
Intangible assets                         52           54 
Property, plant and equipment            671          395 
Right of use assets                      481            - 
Deferred tax                           4,355        3,325 
-------------------------------  -----------  ----------- 
                                       5,559        3,774 
 ------------------------------  -----------  ----------- 
Current assets 
Trade and other receivables           25,886       13,569 
Cash and cash equivalents              2,377       14,612 
-------------------------------  -----------  ----------- 
                                      28,263       28,181 
 ------------------------------  -----------  ----------- 
Total assets                          33,822       31,955 
-------------------------------  -----------  ----------- 
LIABILITIES 
Current liabilities 
Trade and other payables            (28,076)     (21,517) 
Non-current liabilities                (448)            - 
-------------------------------  -----------  ----------- 
Total liabilities                   (28,524)     (21,517) 
-------------------------------  -----------  ----------- 
Net assets                             5,298       10,438 
-------------------------------  -----------  ----------- 
EQUITY 
Share capital                             82           81 
Share premium                         11,690       11,689 
Merger reserve                          (50)         (50) 
Retained earnings                    (6,424)      (1,282) 
-------------------------------  -----------  ----------- 
                                       5,298       10,438 
 ------------------------------  -----------  ----------- 
 

Condensed consolidated statement of changes in equity

For the year ended 31 December 2019

 
                                     Share     Share    Merger   Retained 
                                   capital   premium   reserve   earnings     Total 
                                   GBP'000   GBP'000   GBP'000    GBP'000   GBP'000 
--------------------------------  --------  --------  --------  ---------  -------- 
Balance at 1 January 2019               81    11,689      (50)    (1,282)    10,438 
Adjustment following adoption 
 of IFRS 16                              -         -         -      (125)     (125) 
--------------------------------  --------  --------  --------  ---------  -------- 
Adjusted balance at 1 January 
 2019                                   81    11,689      (50)    (1,407)    10,313 
--------------------------------  --------  --------  --------  ---------  -------- 
Total comprehensive income 
 for the year 
Loss for the year                        -         -         -    (4,968)   (4,968) 
Other comprehensive income               -         -         -          -         - 
--------------------------------  --------  --------  --------  ---------  -------- 
                                         -         -         -    (4,968)   (4,968) 
--------------------------------  --------  --------  --------  ---------  -------- 
Transactions with owners 
 of the Company 
Contributions and distributions 
Equity-settled share based 
 payments                                -         -         -        125       125 
Deferred tax on share based 
 payments                                -         -         -         21        21 
Proceeds from share issues               1         1         -          -         2 
Equity dividend paid in 
 the year                                -         -         -      (195)     (195) 
--------------------------------  --------  --------  --------  ---------  -------- 
Total transactions with 
 owners of the Company                   1         1         -       (49)      (47) 
--------------------------------  --------  --------  --------  ---------  -------- 
Balance at 31 December 2019             82    11,690      (50)    (6,424)     5,298 
--------------------------------  --------  --------  --------  ---------  -------- 
Balance at 1 January 2018               70         -      (50)      6,366     6,386 
--------------------------------  --------  --------  --------  ---------  -------- 
Total comprehensive income 
 for the year 
Loss for the year                        -         -         -    (6,267)   (6,267) 
Other comprehensive income               -         -         -          -         - 
--------------------------------  --------  --------  --------  ---------  -------- 
                                         -         -         -    (6,267)   (6,267) 
--------------------------------  --------  --------  --------  ---------  -------- 
Transactions with owners 
 of the Company 
Contributions and distributions 
Equity-settled share based 
 payments                                -         -         -        685       685 
Deferred tax on share based 
 payments                                -         -         -    (1,600)   (1,600) 
Proceeds from share issues              11    12,079         -          -    12,090 
Share issue costs                        -     (390)         -          -     (390) 
Equity dividend paid in 
 the year                                -         -         -      (466)     (466) 
--------------------------------  --------  --------  --------  ---------  -------- 
Total transactions with 
 owners of the Company                  11    11,689         -    (1,381)    10,319 
--------------------------------  --------  --------  --------  ---------  -------- 
Balance at 31 December 2018             81    11,689      (50)    (1,282)    10,438 
--------------------------------  --------  --------  --------  ---------  -------- 
 

Condensed consolidated statement of cash flows

For the year ended 31 December 2019

 
                                                       31 December  31 December 
                                                              2019         2018 
                                                           GBP'000      GBP'000 
-----------------------------------------------------  -----------  ----------- 
Cash flows from operating activities 
Loss for the financial year                                (4,968)      (6,267) 
Adjustments for: 
Depreciation of property, plant and equipment and 
 right-of-use assets                                           397          291 
Amortisation of intangible assets                                2            2 
Finance income                                                (33)         (21) 
Finance costs                                                  112           63 
Taxation                                                   (1,009)      (3,370) 
Share based payment charge                                     125          685 
Increase in cash collateral deposits lodged with 
 trading counterparties                                   (10,408)            - 
Increase in trade and other receivables                    (1,909)      (3,404) 
Increase in trade and other creditors                        6,411       11,072 
Decrease in provisions for employee benefits                     -        (371) 
-----------------------------------------------------  -----------  ----------- 
Net cash used in operating activities                     (11,280)      (1,320) 
-----------------------------------------------------  -----------  ----------- 
Cash flows from investing activities 
Purchase of property, plant and equipment                    (565)        (147) 
Net interest                                                  (79)         (42) 
-----------------------------------------------------  -----------  ----------- 
Net cash used in investing activities                        (644)        (189) 
-----------------------------------------------------  -----------  ----------- 
Cash flows from financing activities 
Net proceeds from share placing and option exercises             2       11,700 
Dividend paid during the year                                (195)        (466) 
Repayment of borrowings and leasing liabilities              (118)            - 
-----------------------------------------------------  -----------  ----------- 
Net cash (used in)/from financing activities                 (311)       11,234 
-----------------------------------------------------  -----------  ----------- 
Net (decrease)/increase in cash and cash equivalents      (12,235)        9,725 
Cash and cash equivalents at the start of the year          14,612        4,887 
-----------------------------------------------------  -----------  ----------- 
Cash and cash equivalents at the end of the year             2,377       14,612 
-----------------------------------------------------  -----------  ----------- 
 

Notes to the condensed consolidated financial report

   1.     Significant accounting policies 

Yü Group PLC (the "Company") is a public limited company incorporated and domiciled in the United Kingdom. The Company's ordinary shares are traded on AIM. These condensed consolidated financial statements ("Financial statements") as at and for the year ended 31 December 2019 comprise the Company and its subsidiaries (together referred to as the "Group"). The Group is primarily involved in the supply of electricity, gas and water to SMEs and larger corporates in the UK.

Basis of preparation

Whilst the financial information included in this preliminary announcement has been prepared on the basis of the requirements of International Financial Reporting Standards ("IFRSs") in issue, as adopted by the European Union ("EU") and effective at 31 December 2019, this announcement does not itself contain sufficient information to comply with IFRS.

The financial information set out in this preliminary announcement does not constitute the company's statutory financial statements for the years ended 31 December 2019 or 2018 but is derived from those financial statements.

Statutory financial statements for 2018 have been delivered to the registrar of companies and those for 2019 will be delivered in due course. The auditors have reported on those financial statements; their reports were (i) unqualified and (ii) did not contain a statement under section 498 (2) or (3) of the Companies Act 2006.

The condensed consolidated financial information is presented in British pounds sterling (GBP) and all values are rounded to the nearest thousand (GBP000) except where otherwise indicated.

Going concern

The financial statements are prepared on a going concern basis.

At 31 December 2019 the Group had net assets of GBP5.3m (2018: net assets of GBP10.4m). Management prepares detailed budgets and forecasts of financial performance and cash flow (including capital commitments as disclosed in note 12) over the coming 12 to 36 months. The Group has confidence in achieving such targets and forecasts in a normal business environment.

The Group's low margin, legacy contracts are unwinding and being replaced with higher-margin contracts with more robust customers. Losses have therefore decreased significantly, and the Directors are confident of a continued improvement on a normalised basis.

In December 2019 the main trading entities of the Group (Yü Energy Holding Limited and Yü Energy Retail Limited) entered into a new structured trading arrangement, for an initial period of five years, with SmartestEnergy Limited. The facility with Smartest will currently provide a variable credit facility to support the Group's hedging position, leading to a corresponding benefit to the Group's cash position. The Board monitors covenants associated with this facility.

The risks related to the Covid-19 pandemic have been assessed by the Board and are further detailed in the Strategic Report included in the full 2019 Annual Report and Financial Statements.

The unprecedented events, which are still evolving, are likely to have a short to medium-term impact on the Group's financial performance - though are not easily forecasted. The Directors have prepared detailed revised forecasts based on a variety of scenarios in relation to the pandemic, and stress cases of key assumptions.

To date, the Group has not experienced any significant impact on its financial performance.

The Directors have, however, considered the Groups exposure to business segments which are expected to be materially impacted by the social distancing measures introduced in March 2020. This assessment has classified its forward contracted revenue (to March 2021) between segments which are high risk (retail, leisure venues etc), medium risk (manufacturing, real estate etc) and lower risk (for example, the healthcare or utility sector). The Group has a significant (c45 per cent.) exposure to high risk sectors, with a further c40 per cent. exposure in medium sectors.

The Group anticipates a reduced revenue and margin from such customers, reducing forward profitability and resulting in a Mark-to-Market loss on energy over-purchased which is to be sold back to market. The Directors have also assumed that Covid-19 may result in additional customer credit losses (in the form of bad debt) or late customer payments, which will impact on the Group's ability to generate operating cashflow.

The Directors are taking all available steps to efficiently manage cashflow, to reduce costs and to plan appropriate mitigative commercial actions to take during this period of instability across the UK economy. Constructive dialogue is ongoing with the Group's trading counterparty (who provide a material credit facility under the Group's structured trading arrangements) related to the potential future breach of certain covenants in the event of a significant impact on business performance. Further, whilst the Board has not yet secured assistance from sources of Government or regulatory support (such as the deferral of certain industry obligations and payments) as may be or become available, discussions and representations are ongoing both through sector representative groups and directly to Ofgem. The Board acknowledge and welcome the Government's commitment to support businesses through this uncertain period and awaits further information in order to be in a position to gain access to such assistance as it may potentially be able to secure.

The Directors assessment of scenarios related to Covid-19 continuing over Q2 2020 and beyond, with enhanced levels of credit loss, may result in significant financial pressure and the technical but commercially manageable temporary breach of certain covenants.

Based on the above, the Directors believe that it remains appropriate to prepare the financial statements on a going concern basis. However in view of the unprecedented coronavirus outbreak, and the risks it may pose to the Group, together with the essentially unpredictable and constantly evolving nature of the pandemic, the Directors have decided to formally note the existence of a level of material uncertainty which may potentially cast doubt on the Group's future ability to continue as a going concern.

The financial statements do not include any adjustments that would result from the basis of preparation as a Going Concern being inappropriate.

Use of estimates and judgements

The preparation of the financial statements in conformity with adopted IFRSs requires the use of estimates and assumptions. Although these estimates are based on management's best knowledge, actual results ultimately may differ from these estimates.

Estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the period in which the estimates are revised and in any future periods affected. The key areas of estimation and judgement are the estimated consumption (in lieu of accurate meter readings) of energy by customers, the level of accrual for unbilled revenue, the inputs to the IFRS 2 share option charge calculations and the recoverability of deferred tax assets and trade receivables.

Revenue estimates are based on industry knowledge or source information, where available, and can therefore represent estimates which are lower or higher than the actual out-turn of energy consumption once accurate meter readings are obtained.

To estimate the level of accrual for unbilled revenue, management estimates the level of consumption, and anticipated revenue, which is due to be charged to the customer, and recognises such revenue where it is considered that revenue will flow to the Group.

Inputs to IFRS 2 share option charge calculations are based on estimates of share price volatility, the expected time to exercise of such options and the risk-free rate of return.

Deferred tax assets recoverability is assessed based on Directors' judgement of the recoverability, by the realisation of future profits, of the tax losses over the short to medium term, which inherently is based on estimates.

Trade receivables recoverability is estimated, with appropriate allowance for expected credit loss provisions, based on historical performance and the Director's estimate of losses over the Group's customer receivable balances.

Revenue recognition

The Group enters into contracts to supply gas, electricity and water to its customers. Revenue represents the fair value of the consideration received or receivable from the sale of actual and estimated gas, electricity and water supplied during the year, net of discounts, Climate Change Levy and Value Added Tax. Revenue is recognised on consumption being the point at which the transfer of the goods or services to the customer takes place and based on an assessment of the extent to which performance obligations have been achieved.

Due to the nature of the energy supply industry and its reliance upon estimated meter readings, both gas and electricity revenue includes the Directors' best estimate of differences between estimated sales and billed sales. The Group makes estimates of customer consumption based on available industry data, and also seasonal usage curves that have been estimated through historical actual usage data.

Financial instruments

Non-derivative financial instruments

Non-derivative financial instruments comprise trade and other receivables, cash and cash equivalents and trade and other payables.

Trade and other receivables

Trade and other receivables are recognised initially at fair value. Subsequent to initial recognition they are measured at amortised cost using the effective interest method, less any impairment and expected credit losses.

Trade and other payables

Trade and other payables are recognised initially at fair value. Subsequent to initial recognition they are measured at amortised cost using the effective interest method.

Cash and cash equivalents

Cash and cash equivalents comprise cash balances and short-term deposits (monies held on deposit are accessible with one month's written notice). Cash and cash equivalents excludes any cash collateral posted with third parties. Bank overdrafts that are repayable on demand and form an integral part of the Group's cash management are included as a component of cash and cash equivalents.

Derivative financial instruments

The Group uses commodity purchase contracts to hedge its exposures to fluctuations in gas and electricity commodity prices. The majority of commodity purchase contracts are expected to be delivered entirely to the Group's customers and therefore the Group classifies them as "own use" contracts and outside the scope of IFRS 9 "Financial Instruments". This is achieved when:

   --     a physical delivery takes place under all such contracts; 

-- the volumes purchased or sold under the contracts correspond to the Group's operating requirements; and

   --     no part of the contract is settled net in cash. 

This classification as "own use" allows the Group not to recognise the commodity purchase contracts on its balance sheet at the year end.

The commodity purchase contracts that do not meet the criteria listed above are recognised at fair value under IFRS 9. The gain or loss on remeasurement to fair value is recognised immediately in profit or loss.

Classification of financial instruments issued by the Group

Financial instruments issued by the Group are treated as equity only to the extent that they meet the following two conditions:

(a) they include no contractual obligations upon the Group to deliver cash or other financial assets or to exchange financial assets or financial liabilities with another party under conditions that are potentially unfavourable to the Group; and

(b) where the instrument will or may be settled in the Group's own equity instruments, it is either a non-derivative that includes no obligation to deliver a variable number of the Company's own equity instruments or is a derivative that will be settled by the Company's exchanging a fixed amount of cash or other financial assets for a fixed number of its own equity instruments.

To the extent that this definition is not met, the proceeds of issue are classified as a financial liability. Where the instrument so classified takes the legal form of the Company's own shares, the amounts presented in these financial statements for called up share capital and share premium account exclude amounts in relation to those shares.

Share based payments

Share based payment arrangements in which the Group receives goods or services as consideration for its own equity instruments are accounted for as equity-settled share based payment transactions, regardless of how the equity instruments are obtained by the Group.

The grant date fair value of share based payment awards granted to employees is recognised as an employee expense, with a corresponding increase in equity, over the period that the employees become unconditionally entitled to the awards. The fair value of the options granted is measured using an option valuation model, taking into account the terms and conditions upon which the options were granted. The amount recognised as an expense is adjusted to reflect the actual number of awards for which the related service and non-market vesting conditions are expected to be met, such that the amount ultimately recognised as an expense is based on the number of awards that do meet the related service and non-market performance conditions at the vesting date. For share based payment awards with non-vesting conditions, the grant date fair value of the share based payment is measured to reflect such conditions and there is no true-up for differences between expected and actual outcomes.

Taxation

Tax on the profit or loss for the period comprises current and deferred tax. Tax is recognised in the statement of profit and loss except to the extent that it relates to items recognised directly in equity, in which case it is recognised in equity.

Current tax is the expected tax payable or receivable on the taxable income or loss for the period, using tax rates enacted or substantively enacted at the balance sheet date, and any adjustment to tax payable in respect of previous periods.

Deferred tax is provided on temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for taxation purposes. The following temporary differences are not provided for: the initial recognition of goodwill; the initial recognition of assets or liabilities that affect neither accounting nor taxable profit other than in a business combination; and differences relating to investments in subsidiaries to the extent that they will probably not reverse in the foreseeable future. The amount of deferred tax provided is based on the expected manner of realisation or settlement of the carrying amount of assets and liabilities, using tax rates enacted or substantively enacted at the balance sheet date.

A deferred tax asset is recognised only to the extent that it is probable that future taxable profits will be available against which the temporary difference can be utilised.

Leased assets

The Group as a lessee

For any new contracts entered into on or after 1 January 2019, the Group considers whether a contract is, or contains, a lease. A lease is defined as "a contract, or part of a contract, that conveys the right to use an asset (the underlying asset) for a period of time in exchange for consideration". To apply this definition the Group assesses whether the contract meets three key evaluations which are whether:

-- the contract contains an identified asset, which is either explicitly identified in the contract or implicitly specified by being identified at the time the asset is made available to the Group;

-- the Group has the right to obtain substantially all of the economic benefits from use of the identified asset throughout the period of use, considering its rights within the defined scope of the contract;

-- the Group has the right to direct the use of the identified asset throughout the period of use. The Group assess whether it has the right to direct "how and for what purpose" the asset is used throughout the period of use.

Leases signed before 1 January 2019 are treated in accordance with the disclosure noted in changes in accounting policy below.

Measurement and recognition of leases as a lessee

At lease commencement date, the Group recognises a right-of-use asset and a lease liability on the balance sheet. The right-of-use asset is measured at cost, which is made up of the initial measurement of the lease liability, any initial direct costs incurred by the Group, an estimate of any costs to dismantle and remove the asset at the end of the lease, and any lease payments made in advance of the lease commencement date (net of any incentives received).

The Group depreciates the right-of-use assets on a straight-line basis from the lease commencement date to the earlier of the end of the useful life of the right-of-use asset or the end of the lease term. The Group also assesses the right-of-use asset for impairment when such indicators exist.

At the commencement date, the Group measures the lease liability at the present value of the lease payments unpaid at that date, discounted using the interest rate implicit in the lease if that rate is readily available or the Group's incremental borrowing rate.

Lease payments included in the measurement of the lease liability are made up of fixed payments (including in-substance fixed), variable payments based on an index or rate, amounts expected to be payable under a residual value guarantee and payments arising from options reasonably certain to be exercised.

Subsequent to initial measurement, the liability will be reduced for payments made and increased for interest. It is remeasured to reflect any reassessment or modification, or if there are changes in in-substance fixed payments.

When the lease liability is remeasured, the corresponding adjustment is reflected in the right-of-use asset, or profit and loss if the right-of-use asset is already reduced to zero.

The Group has elected to account for short-term leases and leases of low-value assets using the practical expedients. Instead of recognising a right-of-use asset and lease liability, the payments in relation to these are recognised as an expense in profit or loss on a straight-line basis over the lease term.

On the statement of financial position, right-of-use assets have been included in property, plant and equipment and lease liabilities have been included in trade and other payables.

Changes in accounting policies - IFRS 16 "Leases"

This note explains the impact of the adoption of IFRS 16 "Leases" on the Group's financial statements and discloses the new accounting policies that have been applied from 1 January 2019.

The Group has adopted IFRS 16 retrospectively from 1 January 2019 and has not restated comparatives for the 2018 reporting period, as permitted under the specific transitional provisions in the standard. The reclassifications and the adjustments arising from the new leasing rules are therefore recognised in the opening balance sheet on 1 January 2019.

Adjustments recognised on adoption of IFRS 16

On adoption of IFRS 16, the Group recognised lease liabilities in relation to leases which had previously been classified as "operating leases" under the principles of IAS 17 "Leases". These liabilities were measured at the present value of the remaining lease payments, discounted using the Group's incremental borrowing rate as of 1 January 2019. The weighted average incremental borrowing rate applied to the lease liabilities on 1 January 2019 was 5 per cent.

The Group does not have any leases that were previously classified as finance leases under IAS 17.

 
 
                                               GBP'000 
-------------------------------------------  --------- 
Operating lease commitments disclosed 
 at 31 December 2018                               669 
 
Less: 
Impact of discounting                             (94) 
Short-term leases recognised as an expense 
 on a straight-line basis                          (6) 
-------------------------------------------  --------- 
Lease liability recognised at 1 January 
 2019                                              569 
-------------------------------------------  --------- 
  Of which: 
   Current lease liabilities                        96 
   Non-current lease liabilities                   473 
-------------------------------------------  --------- 
 

In applying IFRS 16 for the first time, the Group has used the following practical expedients permitted by the standard:

-- the use of a single discount rate to a portfolio of leases with reasonably similar characteristics;

   --      reliance on previous assessments on whether leases are onerous; 

-- the accounting for operating leases with a remaining lease term of less than 12 months as at 1 January 2019 as short-term leases;

-- the exclusion of initial direct costs for the measurement of the right-of-use asset at the date of initial application; and

-- the use of hindsight in determining the lease term where the contract contains options to extend or terminate the lease.

For all contracts that existed prior to 1 January 2019, the Group has not applied IFRS 16 to reassess whether each contract is, or contains, a lease.

The impact of IFRS 16 on the previously reported equity of the Group is GBP125,000 as detailed in the condensed consolidated statement of changes in equity.

The Group had leases prior to 1 January 2019 for its Nottingham office premises and a number of vehicles. Rental contracts are typically made for fixed periods of 3 to 10 years but may have extension options. Lease terms are negotiated on an individual and arm's length basis and contain different terms and conditions. The lease agreements do not impose any covenants.

For the financial year 2018 and prior, leases of property, plant and equipment were classified as either finance or operating leases. Payments made under operating leases (net of any incentives received from the lessor) were charged to profit or loss on a straight-line basis over the period of the lease.

From 1 January 2019, leases are recognised as a right-of-use asset and a corresponding liability at the date at which the leased asset is available for use by the Group. Each lease payment is allocated between the liability and finance cost. The finance cost is charged to profit or loss over the lease period so as to produce a constant periodic rate of interest on the remaining balance of the liability for each period. The right-of-use asset is depreciated over the shorter of the asset's useful life and the lease term on a straight-line basis.

Assets and liabilities arising from a lease are initially measured on a present value basis. Lease liabilities include the net present value of the following lease payments:

-- fixed payments (including in-substance fixed payments), less any lease incentives receivable;

   --      variable lease payments that are based on an index or a rate; 
   --      amounts expected to be payable by the lessee under residual value guarantees; 

-- the exercise price of a purchase option if the lessee is reasonably certain to exercise that option; and

-- payments of penalties for terminating the lease, if the lease term reflects the lessee exercising that option.

The lease payments are discounted using the interest rate implicit in the lease if such rate is available. If that rate cannot be determined the Group's incremental borrowing rate is used, being the rate that the Group would have to pay to borrow the funds necessary to obtain an asset of similar value in a similar economic environment with comparable terms and conditions

Right-of-use assets are measured at cost comprising the following:

   --      the amount of the initial measurement of lease liability; 

-- any lease payments made at or before the commencement date less any lease incentives received;

   --      any initial direct costs; and 
   --      restoration costs. 

Changes in accounting policies - third-party intermediary costs

The year ended 31 December 2018 has been restated to reclassify, due to a change in accounting policy, GBP2,625,000 of amounts payable to third-party intermediaries from operating costs to cost of sales.

2. Segmental analysis

Operating segments

The Directors consider there to be one operating segment, being the supply of electricity, gas and water to SMEs and larger corporates.

Geographical segments

100 per cent of the Group revenue is generated from sales to customers in the United Kingdom (2018: 100 per cent).

The Group has no individual customers representing over 10 per cent of revenue (2018: nil).

3. Reconciliation to Adjusted EBITDA

A key alternative performance measure used by the Directors to assess the underlying performance of the business is Adjusted EBITDA.

 
                                                   2019     2018 
                                                GBP'000  GBP'000 
----------------------------------------------  -------  ------- 
Adjusted EBITDA reconciliation 
Loss from operations                            (5,898)  (9,595) 
Add back: 
Non-recurring operational costs                     378      441 
Non-recurring mutualisation costs                   236        - 
Impact of first-time adoption of IFRS 9               -    1,768 
Unrealised loss on derivative contracts             518      125 
Equity-settled share based payment charge           125      685 
Depreciation of property, plant and equipment       397      291 
Amortisation of intangibles                           2        2 
----------------------------------------------  -------  ------- 
Adjusted EBITDA                                 (4,242)  (6,283) 
----------------------------------------------  -------  ------- 
 

The 2019 non-recurring operational costs of GBP378,000 consist of restructuring payroll costs and legal and professional fees in relation to the issue identified in the Q4 2018 accounting review and regulatory investigation. No further costs beyond those accrued are anticipated.

The mutualisation costs of GBP236,000 relate to Renewable Obligation Certificate ("ROC") and Capacity Market costs that have been levied on the Group over and above the expected costs, to cover the cost of other failing suppliers in the market.

The unrealised loss on derivative contracts is excluded from Adjusted EBITDA in view of its non-cash nature, with significant variability as the forward energy commodity market moves.

Following the adoption of IFRS 16 the Group now recognises depreciation on the right-of-use asset and an interest expense on the lease liability as included in note 6. The comparable 2018 Adjusted EBITDA loss excluding the lease rental costs would have been GBP6,138,000.

4. Earnings per share

Basic loss per share

Basic loss per share is based on the loss attributable to ordinary shareholders and the weighted average number of ordinary shares outstanding.

 
                                                              2019      2018 
                                                           GBP'000   GBP'000 
--------------------------------------------------------  --------  -------- 
Loss for the year attributable to ordinary shareholders    (4,968)   (6,267) 
--------------------------------------------------------  --------  -------- 
 
 
                                                       2019        2018 
-----------------------------------------------  ----------  ---------- 
Weighted average number of ordinary shares 
At the start of the year                         16,267,555  14,054,055 
Effect of shares issued in the year                  11,133     787,370 
-----------------------------------------------  ----------  ---------- 
Number of ordinary shares for basic earnings 
 per share calculation                           16,278,688  14,841,425 
Dilutive effect of outstanding share options        786,547     768,025 
-----------------------------------------------  ----------  ---------- 
Number of ordinary shares for diluted earnings 
 per share calculation                           17,065,235  15,609,450 
-----------------------------------------------  ----------  ---------- 
 
 
                               2019    2018 
                                GBP     GBP 
---------------------------  ------  ------ 
Basic earnings per share     (0.31)  (0.42) 
Diluted earnings per share        -       - 
---------------------------  ------  ------ 
 

Adjusted earnings per share

Adjusted earnings per share is based on the result attributable to ordinary shareholders before exceptional items and the cost of cash and equity-settled share based payments, and the weighted average number of ordinary shares outstanding:

 
                                                              2019      2018 
                                                           GBP'000   GBP'000 
--------------------------------------------------------  --------  -------- 
Adjusted earnings per share 
Loss for the year attributable to ordinary shareholders    (4,968)   (6,267) 
Add back: 
Non-recurring items after tax (see note 3 - gross 
 cost of GBP614,000)                                           497       357 
Unrealised loss on derivative contracts after 
 tax (gross cost of GBP518,000)                                420       101 
Share based payments after tax (gross cost of 
 GBP125,000)                                                   101       254 
--------------------------------------------------------  --------  -------- 
Adjusted basic loss for the year                           (3,950)   (5,555) 
--------------------------------------------------------  --------  -------- 
 
 
                                2019    2018 
                                 GBP     GBP 
----------------------------  ------  ------ 
Adjusted earnings per share   (0.24)  (0.37) 
----------------------------  ------  ------ 
 

5. Dividends

The Group did not pay an interim dividend in relation to 2019 (2018: 1.2p per share).

The Directors do not propose a final dividend in relation to 2019 (2018: nil per share).

6. Leases

The Group has entered into lease arrangements for its main office facilities in Nottingham and Leicester and for some vehicles. With the exception of short-term leases and leases of low value underlying assets, each lease is reflected on the balance sheet as a right-of-use asset and a lease liability. The Group discloses its right-of-use assets as a separate line item in fixed assets on the face of the balance sheet and its lease liabilities as part of trade and other payables.

Property leases generally have a lease term ranging from 3 years to 10 years. Leases of vehicles are generally limited to a lease term of 3 years.

Each lease typically imposes a restriction that, unless there is a contractual right for the Group to sublet the asset to another party, the right-of-use asset can only be used by the Group. Leases are either non-cancellable or may only be cancelled by incurring a substantive termination fee. Some leases contain an option to extend the lease for a further term. For leases over office buildings the Group is obligated to keep those properties in a good state of repair and return the properties in their original condition at the end of the lease. Further, the Group must insure items of property, plant and equipment and incur maintenance fees on such items in accordance with the lease contracts.

The table below provides details of the Groups right-of-use assets and lease liabilities recognised on the balance sheet at 31 December 2019:

 
 Right-of-use    Remaining   Asset carrying   Lease liability   Depreciation   Interest expense 
  asset               term           amount                          expense 
 Premises       2.5 to 4.5       GBP473,000        GBP589,000     GBP104,000          GBP35,000 
                     years 
               -----------  ---------------  ----------------  -------------  ----------------- 
 Vehicles          2 years         GBP8,000          GBP8,000       GBP4,000           GBP1,000 
               -----------  ---------------  ----------------  -------------  ----------------- 
 Total                           GBP481,000        GBP597,000     GBP108,000          GBP36,000 
               -----------  ---------------  ----------------  -------------  ----------------- 
 

Lease payments not recognised as a liability

The Group has elected not to recognise a right-of-use asset or lease liability for short-term leases (leases of expected term of 12 months or less) or for leases of low value assets. Payments under such leases are expensed on a straight-line basis. During FY 2019 the amount expensed to profit and loss was GBP6,000.

7. Trade and other receivables

 
                                                Group              Company 
                                          ------------------  ------------------ 
                                              2019      2018      2019      2018 
                                           GBP'000   GBP'000   GBP'000   GBP'000 
----------------------------------------  --------  --------  --------  -------- 
Gross trade receivables                      7,801     7,898         -         - 
Provision for doubtful debts 
 and expected credit loss                  (4,901)   (4,803)         -         - 
----------------------------------------  --------  --------  --------  -------- 
Net trade receivables                        2,900     3,095         -         - 
----------------------------------------  --------  --------  --------  -------- 
Accrued income - net of provision            9,278     9,688         -         - 
Prepayments                                  2,185       245         -         - 
Other receivables                           11,523       406       500         - 
Financial derivative asset                       -       135         -         - 
Amount due from subsidiary undertakings          -         -    15,545     4,642 
----------------------------------------  --------  --------  --------  -------- 
                                            25,886    13,569    16,045     4,642 
----------------------------------------  --------  --------  --------  -------- 
 

Movements in the provision for doubtful debts and expected credit loss are as follows:

 
                                                    2019     2018 
                                                 GBP'000  GBP'000 
-----------------------------------------------  -------  ------- 
Opening balance                                    4,803      272 
Additional provisions recognised                   2,931    4,531 
Provision utilised in the year                   (2,833)        - 
Unused amounts reversed                                -        - 
-----------------------------------------------  -------  ------- 
Closing balance - provision for doubtful debts 
 and expected credit losses                        4,901    4,803 
-----------------------------------------------  -------  ------- 
 

The Directors have assessed the level of provision at 31 December 2019 by reference to the recoverability of customer receivable balances post the year end, and believe the provision carried of GBP4,901,000 is adequate.

In addition to the GBP2,931,000 (2018: GBP4,531,000) provision recognised in relation to trade receivables, there was an additional provision of GBP159,000 (2018: GBP875,000) made against accrued income.

None of the Group's receivables fall due after more than one year.

The amount due from subsidiary undertakings in the books of Yü Group PLC at 31 December 2019 is non-interest bearing and is repayable on demand. Subsequent to the year end, the subsidiary undertakings drew down on the newly arranged formal loan facility (key terms of which are that the loan is payable in 14 months following written request from Yü Group PLC and interest is payable by the subsidiary undertakings at a rate of 2 per cent. above Bank of England base rate).

The Board of Yü Group PLC has considered the provisions around impairment of intercompany indebtedness contained within IFRS 9 "Financial Instruments" and has concluded that an expected credit loss provision of GBP250,000 be booked against the outstanding intercompany receivables.

The Directors consider that the carrying amount of trade and other receivables approximates to their fair value.

Group other receivables includes GBP10,408,000 (2018: GBPnil) paid in cash to trading counterparties as collateral.

The Company other receivables balance of GBP500,000 relates to a non-cash and cash equivalent deposit.

8. Cash and cash equivalents

 
                                 Group              Company 
                           ------------------  ------------------ 
                               2019      2018      2019      2018 
                            GBP'000   GBP'000   GBP'000   GBP'000 
-------------------------  --------  --------  --------  -------- 
Cash at bank and in hand      2,377    11,112       500     8,865 
Short-term deposits               -     3,500         -     3,500 
-------------------------  --------  --------  --------  -------- 
                              2,377    14,612       500    12,365 
-------------------------  --------  --------  --------  -------- 
 

The short-term deposit at 31 December 2018 related to cash held at bank which was utilised to support collateral in the form of letters of credits with trading counterparties.

9. Trade and other payables

 
                                               Group              Company 
                                         ------------------  ------------------ 
                                             2019      2018      2019      2018 
                                          GBP'000   GBP'000   GBP'000   GBP'000 
---------------------------------------  --------  --------  --------  -------- 
Current 
Trade payables                              1,409     1,231         -         - 
Accrued expenses and deferred 
 income                                    20,889    15,603       140         - 
Corporation tax                                 -        16         -         - 
Lease liabilities                             149         -         -         - 
Derivative financial liability                383         -         -         - 
Other payables                              5,246     4,667         -         - 
Amounts due to subsidiary undertakings          -         -       300         - 
---------------------------------------  --------  --------  --------  -------- 
                                           28,076    21,517       440         - 
---------------------------------------  --------  --------  --------  -------- 
Non-current 
Lease liabilities                             448         -         -         - 
---------------------------------------  --------  --------  --------  -------- 
 

Details of the lease liabilities are included in note 6.

10. Financial instruments and risk management

The Group's principal financial instruments are cash, trade receivables, trade payables and derivative financial assets and liabilities. The Group has exposure to the following risks from its use of financial instruments:

(a) Fair values of financial instruments

Fair values

Derivative financial instruments are measured at fair value through profit and loss. The derivative instruments are level 1 financial instruments and their fair value is therefore measured by reference to quoted prices in active markets for identical assets or liabilities. All derivatives are held at a carrying amount equal to their fair value at the period end.

(b) Market risk

Market risk is the risk that changes in market prices, such as commodity and energy prices, will affect the Group's income.

Commodity and energy prices

The Group uses commodity purchase contracts to manage its exposures to fluctuations in gas and electricity commodity prices. The Group's objective is to reduce risk from fluctuations in energy prices by entering into back to back energy contracts with its suppliers and customers, in accordance with a Board approved risk mandate. Commodity purchase contracts are entered into as part of the Group's normal business activities. The majority of commodity purchase contracts are expected to be delivered entirely to the Group's customers and are therefore classified as "own use" contracts. These instruments do not fall into the scope of IFRS 9 and therefore are not recognised in the financial statements. A proportion of the contracts in the Group's portfolio are expected to be settled net in cash where 100 per cent. of the volume hedged is not delivered to the Group's customers and is instead sold back to the grid in order to smooth demand on a real time basis. An assumption is made based on past experience of the proportion of the portfolio expected to be settled in this way and these contracts are measured at fair value. The gain or loss on remeasurement to fair value is recognised immediately in profit or loss.

As far as possible, in accordance with the risk mandate, the Group attempts to match new sales orders with corresponding commodity purchase contracts. There is a risk that at any point in time the Group is over or under hedged. Holding an over or under hedged position opens the Group up to market risk which may result in either a positive or negative impact on the Group's margin and cash flow, depending on the movement in commodity prices.

The Board continues to evaluate the use of commodity purchase contracts and whether their classification as "own use" is appropriate. The key requirements considered by the Board are as listed below:

   --     whether physical delivery takes place under the contracts; 

-- the volumes purchased or sold under the contract correspond to the Group's operating requirements; and

   --     whether there are any circumstances where the Group would settle the contracts net in cash. 

All commodity purchase contracts are entered into exclusively for own use, to supply energy to business customers. However, as noted above, a number of these contracts do not meet the stringent requirements of IFRS 9, and so are subject to fair value measurement through the income statement.

The fair value mark-to-market adjustment at 31 December 2019 is a loss of GBP518,000 (2018: loss of GBP125,000). See note 9 for the corresponding derivative financial liability.

The Group's exposure to commodity price risk according to IFRS 7 is measured by reference to the Group's IFRS 9 commodity contracts. IFRS 7 requires disclosure of a sensitivity analysis for market risks that is intended to illustrate the sensitivity of the Group's financial position and performance to changes in market variables impacting upon the fair values or cash flows associated with the Group's financial instruments.

Therefore, the sensitivity analysis provided below discloses the impact on profit or loss at the balance sheet date assuming that a reasonably possible change in commodity prices had occurred and been applied to the risk exposures in place at that date. The reasonably possible changes in commodity price used in the sensitivity analysis were determined based on calculated or implied volatilities where available, or historical data.

The sensitivity analysis has been calculated on the basis that the proportion of commodity contracts that are IFRS 9 financial instruments remains consistent with those at that point. Excluded from this analysis are all commodity contracts that are not financial instruments under IFRS 9.

 
                                         Reasonably 
                                           possible      Impact 
                                          increase/   on profit 
                                           decrease     and net 
                                                 in      assets 
Open market price of forward contracts     variable     GBP'000 
---------------------------------------  ----------  ---------- 
UK gas (p/therm)                             +/-50%         303 
UK power (GBP/MWh)                           +/-50%         285 
---------------------------------------  ----------  ---------- 
                                                            588 
---------------------------------------  ----------  ---------- 
 

Liquidity risk from commodity trading

The Group's trading arrangements can result in a cash call being made by counterparties when commodity markets are below the Group's traded position. A significant reduction in electricity and gas markets could lead to a material cash call from the Group's trading counterparties. Whilst such a cash call would not impact the Group's profit, it would have an impact on the Group's cash reserves. As described below, the new structured trading arrangement with SmartestEnergy has reduced this liquidity risk.

(c) Credit risk

Credit risk is the risk of financial loss to the Group if a customer or counterparty to a financial instrument fails to meet its contractual obligations and arises principally from the Group's receivables from customers.

These trading exposures are monitored and managed at Group level. All customers are UK based and turnover is made up of a large number of customers each owing relatively small amounts. New customers have their credit checked using an external credit reference agency prior to being accepted as a customer.

Credit risk is also managed through the Group's standard business terms, which require all customers to make a monthly payment predominantly by direct debit. At the year end there were no significant concentrations of credit risk. The carrying amount of the financial assets (less the element of VAT and CCL included in the invoiced balance, which is recoverable in the event of non-payment by the customer) represents the maximum credit exposure at any point in time.

The ageing of trade receivables, net of bad debt provision, at the balance sheet date was:

 
                             2019      2018 
                          GBP'000   GBP'000 
-----------------------  --------  -------- 
Not past due                   69       104 
Past due (0-30 days)        1,529     1,949 
Past due (31-120 days)      1,302     1,006 
More than 120 days              -        36 
-----------------------  --------  -------- 
                            2,900     3,095 
-----------------------  --------  -------- 
 

At 31 December 2019 the Group held a provision against doubtful debts of GBP5,858,000 (2018: GBP5,678,000). This is a combined provision against both trade receivables (GBP4,901,000) and accrued income (GBP957,000).

(d) Liquidity risk

Liquidity risk is the risk that the Group will not be able to meet its financial obligations as they fall due. The Board is responsible for ensuring that the Group has sufficient liquidity to meet its financial liabilities as they fall due and does so by monitoring cash flow forecasts and budgets. In order to enter into the necessary commodity purchase contracts, the Group is required to lodge funds on deposit with either its bank or direct with our commodity trading counterparties. At 31 December 2019 the Group had GBP10.4m lodged as cash collateral with trading counterparties (2018: GBP3.5m lodged as collateral with banking partners to provide a letter of credit). On 16 December 2019 the Group announced a new structured trading arrangement with SmartestEnergy Limited. This arrangement provides a significant credit facility and as such reduces the need to lodge cash collateral. The Board has considered the cash flow forecasts, along with the collateral and LOC requirements, for the next 12 months, which show that the Group expects to operate within its working capital facilities throughout the year excluding any impact from Covid-19 (as disclosed in note 1 to this financial report and in the risks and uncertainties section of the Strategic Report in the 2019 Annual Report and Accounts).

Any excess cash balances are held in short-term, interest bearing deposit accounts. At 31 December 2019 the Group had GBP2.4m of cash and bank balances, as per note 8.

(e) Foreign currency risk

The Group trades entirely in pounds sterling and therefore it has no foreign currency risk.

(f) Impact from the Covid-19 virus outbreak

The Covid-19 pandemic impacted the UK post the year end. There is a risk that the resulting impact on the UK economy will reduce the recoverability of customer receivables (being trade receivables and accrued income).

The total customer receivables balance at 31 December 2019, net of provision for doubtful debts and expected credit losses, is GBP12,178,000. The Directors assess the level of provision as adequate after consideration of cash received post 31 December 2019.

The risk of the virus outbreak impacting the recoverability of customer receivables balances in the future is being monitored closely by the Board and is further detailed in the Strategic Report's review of the Risks and Uncertainties related to Covid-19. The Board is also monitoring any impact in the reduction of customer volume, and therefore the revenue of the Group.

The UK Government has noted the intention to do "whatever it takes" to protect the economy, and as such the risk of significant business failure is reduced.

However, in assessing sensitivity to the level of credit risk on customer receivables, a 10 per cent. increase in the level of bad debt will result in approximately GBP1,200,000 of additional excepted credit loss.

If energy commodity volumes consumed by customers significantly decrease as a result of the outbreak (and outside the normal operating assumptions of the Group), there may be exposure to additional mark-to-market volume risk as some of the volume purchased forward would need to be sold. The impact could also be increased if the reduction in customer demand coincided with further declines in energy commodity markets. Whilst the Directors have taken steps to mitigate this action, the sensitivity caused by a 10 per cent. decline in contracted revenue for the year ended 31 March 2021 would reduce gross margin by approximately GBP350,000, excluding any gain or loss on the sale of commodity.

11. Share based payments

The Group operates a number of share option plans for qualifying employees of the Group. Options in the plans are settled in equity in the Company. The options are subject to a vesting schedule, but not conditional on any performance criteria being achieved. The only vesting condition is that the employee is employed by the Group at the date when the option vests.

On 18 June 2019, the Group made its first round of awards under the new SAYE plan. This plan is available to all employees of the Group.

The terms and conditions of the outstanding grants made under the schemes are as follows:

 
                              Exercisable between 
                          --------------------------- 
                                                                                  Amount 
                                                                             outstanding 
                                                                                      at 
                Expected                               Exercise    Vesting   31 December 
Date of grant       term   Commencement         Lapse     price   schedule          2019 
--------------  --------  -------------  ------------  --------  ---------  ------------ 
17 February                 17 February   17 February 
 2016                  3           2019          2026   GBP0.09          2        27,000 
22 December                 22 December   22 December 
 2016                  3           2019          2026   GBP3.25          2        13,500 
6 April 2017           3   6 April 2020  6 April 2027  GBP0.005          2        79,110 
6 April 2017         6.5   6 April 2020  6 April 2027  GBP2.844          2       158,220 
28 September               28 September  28 September 
 2017                6.5           2020          2027  GBP5.825          2        40,500 
9 April 2018         6.5   9 April 2021  9 April 2028  GBP10.38          2        78,351 
26 September               26 September  26 September 
 2018                6.5           2021          2028  GBP8.665          2         6,539 
25 February                 25 February   25 February 
 2019                6.5           2022          2029   GBP1.09          2        60,000 
25 February                 25 February   25 February 
 2019                  3           2022          2029  GBP0.005          2       250,000 
                                           1 February 
18 June 2019           3  1 August 2022          2023   GBP1.40          3       117,248 
--------------  --------  -------------  ------------  --------  ---------  ------------ 
                                                                                 830,468 
--------------  --------  -------------  ------------  --------  ---------  ------------ 
 

The following vesting schedules apply:

1. 50 per cent. of options vest on first anniversary of date of grant and 50 per cent. vest on second anniversary.

   2.    100 per cent. of options vest on third anniversary of date of grant. 
   3.    100 per cent. of options vest on third anniversary of savings contract start date. 

The number and weighted average exercise price of share options were as follows:

 
                                            2019         2018 
-------------------------------------  ---------  ----------- 
Balance at the start of the period       573,290    1,464,310 
Granted                                  437,248      154,317 
Forfeited                              (166,570)     (31,837) 
Lapsed                                         -            - 
Exercised                               (13,500)  (1,013,500) 
-------------------------------------  ---------  ----------- 
Balance at the end of the period         830,468      573,290 
-------------------------------------  ---------  ----------- 
Vested at the end of the period           40,500            - 
-------------------------------------  ---------  ----------- 
Exercisable at the end of the period      40,500            - 
-------------------------------------  ---------  ----------- 
Weighted average exercise price for: 
Options granted in the period            GBP0.55      GBP7.41 
Options forfeited in the period          GBP2.29      GBP5.67 
Options exercised in the period          GBP0.09      GBP0.09 
-------------------------------------  ---------  ----------- 
Exercise price in the range: 
From                                    GBP0.005     GBP0.005 
To                                     GBP10.380    GBP10.380 
-------------------------------------  ---------  ----------- 
 

The fair value of each option grant is estimated on the grant date using a Black Scholes option pricing model with the following fair value assumptions:

 
                                                         2019         2018 
-----------------------------------------------  ------------  ----------- 
Dividend yield                                             0%   0.29-0.35% 
Risk-free rate                                           1.5%         1.5% 
Share price volatility                           124.3-127.8%   36.0-36.7% 
Expected life (years)                             3-6.5 years  3-6.5 years 
Weighted average fair value of options granted 
 during the period                                    GBP1.14      GBP5.67 
-----------------------------------------------  ------------  ----------- 
 

The share price volatility assumption is based on the actual historical share price of the Group since IPO in March 2016.

The total expenses recognised for the year arising from share based payments are as follows:

 
                                                      2019      2018 
                                                   GBP'000   GBP'000 
------------------------------------------------  --------  -------- 
Equity-settled share based payment expense             125       685 
Cash-settled share based payment expense/(gain)          -     (371) 
------------------------------------------------  --------  -------- 
                                                       125       314 
------------------------------------------------  --------  -------- 
 

12. Commitments

Capital commitments

The Group has entered into an agreement to purchase a newly developed office building and associated land at a site in Leicester city centre. At 31 December 2019 the Group had incurred GBP340,000 of cost which is currently included in the fixed assets total as GBP150,000 of land and GBP190,000 assets under construction. The Group has a remaining capital commitment at 31 December 2019 of GBP3,090,000 (2018: GBPnil).

The remaining cash flows are anticipated to be staggered between 2020 and H1 2021, at which time the Group should take possession of the completed building.

Security

The Group has entered into an arrangement with a new trading counterparty, SmartestEnergy Limited ("Smartest"), in December 2019. As part of this arrangement, Smartest has a fixed and floating charge over the main trading subsidiaries of the Group, Yü Energy Holding Limited and Yü Energy Retail Limited.

As disclosed in note 7, included in other receivables is an amount of GBP500,000 held in a separate bank account over which the Group's bankers have a fixed and floating charge.

Contingent liabilities

The Group had no contingent liabilities at 31 December 2019 (2018: GBPnil).

13. Related parties and related party transactions

The Group has transacted with CPK Investments Limited (an entity owned by Bobby Kalar). CPK Investments Limited owns the property from which the Group operates from via a lease to Yü Energy Retail Limited. During 2019 the Group paid GBP120,000 in lease rentals and service charges to CPK Investments Limited (2018: GBP120,000). The amount owing to CPK Investments at 31 December 2019 was GBP10,000 (2018: GBPnil).

All transactions with related parties have been carried out on an arm's length basis.

14. Post-balance sheet events

The Covid-19 pandemic started to materially impact the UK from March 2020. The Directors' assessment of the potential risk and impact are further disclosed in the risk and uncertainties section of the Strategic Report in the 2019 Annual Report and Accounts, and in note 1 to this financial report.

There are no other significant or disclosable post-balance sheet events.

Copies of the Annual Report and Accounts for the year ended 31 December 2019 will be available to download from the Company's website at www.yugroupplc.com later today, Monday 6 April 2020. Hard copies will be posted to shareholders on 17 April 2020.

The AGM is scheduled to take place on 21 May 2020 and the AGM notice is included in the Annual Report and Accounts. The Group Chairman would like to make the following statement in relation to the AGM:

The health of the Company's shareholders, as well as its employees, is of paramount importance. In view of the UK Government placing restrictions on travel because of the coronavirus (Covid-19) pandemic, shareholders will not be permitted to attend the annual general meeting in person. The Board encourages shareholders to monitor the Company's website (yugroupplc.com/investors) and regulatory news services for any updates in relation to the annual general meeting that may need to be provided. In the meantime, the Board encourages shareholders to submit their proxy form as early as possible by post or electronically as detailed in the notes to the notice of annual general meeting and the proxy form.

Ordinarily, shareholders are entitled to appoint a proxy to attend and to exercise all or any of their rights to vote and to speak at the annual general meeting instead of the shareholder. However, in view of the ongoing coronavirus pandemic, the Company is encouraging ordinary shareholders to appoint the Chairman as their proxy (either electronically or by post) with their voting instructions as shareholders or their proxies will not be allowed to attend the annual general meeting in person. The deadline for doing this is set out in the notes to the notice of annual general meeting and the proxy form. The Company is taking these precautionary measures to safeguard its shareholders' and employees' health and make the annual general meeting as safe and efficient as possible .

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 [e-mail] or visit www.rns.com.

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April 06, 2020 02:00 ET (06:00 GMT)