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RNS
AdEPT Telecom plc  -  ADT   

Final Results

Released 07:00 10-Jul-2018

RNS Number : 0665U
AdEPT Telecom plc
10 July 2018
 

AdEPT Telecom plc

("AdEPT", the "Company" or together with its subsidiaries the "Group")

Final results for the year ended 31 March 2018

AdEPT (AIM: ADT), a leading UK independent provider of award-winning managed services for IT, unified communications, connectivity and voice solutions, announces its results for the year ended 31 March 2018.

Financial highlights

·      15th consecutive year of increased underlying EBITDA up 24.8% to £9.8m (2017: £7.8m)

·      Revenue increased by 34.8% to £46.4m (2017: £34.4m)

·      Gross margin % increased by 5.4% to 47.7% (2017: 42.3%)**

·      Underlying EBITDA margin % of 21.0% (2017: 22.7%)

·      Profit before tax increased by 32.8% to £4.5m (2017: £3.4m)

·      26.2% increase to adjusted fully diluted earnings per share to 27.69p (2017: 21.94p)

·      12.9% increase to dividends declared to 8.75p (Interim 4.25p, Final 4.50p) (2017: 7.75p)

·      Year-end net senior debt* of £17.6m (2017: £15.5m)

·      Capital expenditure 0.8% of revenue (2017: 0.3%)

Operational highlights

·      Managed services accounted for 69.8% of total revenue (2017: 55.4%)

·      Acquisition of entire issued share capital of Atomwide Limited completed in August 2017

 

* Net senior debt is defined as cash and cash equivalents less short-term and long-term bank borrowings and prepaid bank fees

** Excluding £0.755m Openreach compensation credits

 

Commenting upon these results Chairman Roger Wilson said:

"AdEPT has delivered a 25% increase to underlying EBITDA for the year ended 31 March 2018 and the Group continues to deliver consistently high levels of free cash flow generation with more than 80% of reported EBITDA turned into net cash from operating activities after tax.  The continued strong cash generation has funded a 13% increase to dividends declared during the year and the Board is confident that continued focus on underlying profitability and cash generation will support a progressive dividend policy.

Free cash flow generated combined with the drawdown of part of the accordion debt facility, put in place in February 2017, and the convertible loan from BGF, was used by the Company to complete the earnings enhancing acquisition of Atomwide Limited during the current period.  The acquisition completed during the year combined with organic sales have increased the rate of transition of the Group towards a complete managed service provider, with revenue from managed services accounting for 70% of the total in the year ended 31 March 2018."

 

This announcement contains inside information for the purposes of Article 7 of Regulation 596/2014.

 

For further information on AdEPT please visit www.adept-telecom.co.uk or contact:

 

AdEPT Telecom Plc

Roger Wilson, Chairman

Ian Fishwick, Chief Executive

John Swaite, Finance Director

 

 

07786 111 535

01892 550 225

01892 550 243

 

Northland Capital Partners Limited

Nominated Adviser

Tom Price / Edward Hutton

 

Broking

Rob Rees

020 3861 6625

 

 

Chairman's statement

Review of operations

I am pleased to report that in the year ended 31 March 2018 the Group has made considerable progress on a wide range of fronts. In early 2015 we embarked on a journey to transform AdEPT from our original telecoms background into unified communications and then into IT. Our logic was simple: it is becoming increasingly difficult to tell where telecoms ends and IT starts in a world where 'work is something that we do, rather than necessarily, a place that you go to'.

The strategy of the Group has been focussed on increasing the proportion of revenue from managed services, combined with targeting customers in London and the South East and the public sector. We believe that the economy in London and the South East will continue to grow faster than the other regions in the UK and that there is an increasing drive in the public sector to put business with Small and Medium-sized Enterprises (SME's).

The Group has been focussed on the growth of managed service revenues and the acquisition of Atomwide, combined with organic sales, has increased the rate of transition of the Group towards managed services, which accounted for 69.6% of total revenue in the year ended 31 March 2018 (2017: 55.4%).  The team at Atomwide has proved to be an excellent fit with AdEPT and has been successful in jointly working on delivering an infrastructure and support service which can be used across all companies in the Group.

 

London and the South East

In London we are Chief Technology Partner to London Grid for Learning supplying over 3,000 schools, we have nearly 50 hospitals and specialist medical facilities, over 200 business centres, thousands of commercial customers, and a range of specialist data and cloud services being supplied to central government departments.

 

Public sector and healthcare

In March 2016, the Government set a target that 33% of public sector spend would be with SME's by 2022. Following the impact of the Atomwide acquisition, in March 2018 31% of total Group revenue was generated from public sector and healthcare customers (2017: 20%) and as customers we currently have over 100 Councils, 13 NHS Trusts, more than 30 private hospitals, twelve universities, over 3,000 schools and services being provided to central government departments. 

 

Both Atomwide and OurIT have been awarded approved supplier status on the new RM3804 Technology Services 2 Framework by Crown Commercial Services. This framework is designed to make it far easier for public sector customers to buy IT products and services.  AdEPT Tunbridge Wells has been awarded HSCN (Health and Social Care Network) Compliance and is now authorised to sell data networks to the NHS.

 

Dividends

In line with its progressive policy, AdEPT has increased the dividend proposed year-on-year by 12.9%, proposing a final dividend of 4.50p per ordinary share (2017: 4.00p), making total dividends proposed in respect of the year ended 31 March 2018 of 8.75p per ordinary share (2017: 7.75p).

 

Employees

As a result of the acquisitions completed in the year ended 31 March 2018, the Group now has just over 200 full-time employees.  The improved profitability and free cash flow generation this year was made possible by the continued hard work and focus of all employees at AdEPT. As a Group we are immensely proud of the track record we have created over the last 15 years and, on behalf of the Board, I would like to take this opportunity to thank all of our employees for their continued hard work.

 

Director changes

On 8 November 2017 we announced the appointment of Christopher Kingsman as a non-executive director.  Christopher brings a broad range of experience from investing in and being involved with a number of public and private companies across different sectors. A graduate of Cambridge University, he started his career with Fidelity Investments and has managed a hedge fund and family office. He is the principal of a private Swiss investment group, executive chairman of Aranca, a global research, analytics and advisory firm based in India, and is a director of a number of private companies.

 

Through Greenwood Investments Ltd, he has been the second largest shareholder of AdEPT since 2011.  Having increased his stake in February 2018 from 16.9% to 21.3% of the current issued share capital of the Company Christopher Kingsman is now the largest shareholder.

 

Company name change

The Board considered that the name of Company should be changed to better reflect the business of the Group as a managed service provider for IT and unified communications.  On 16 January 2018 the Company announced that at the General Meeting held on 16 January 2018 it received approval for the change of company name and that it would make a further announcement when the change became effective.  The proposed company name has not yet been able to be secured by the Company and therefore an alternative change of name will be proposed as part of the resolutions for the forthcoming AGM in September 2018.

 

Outlook

The excellent result for this year was delivered through a combination of strategic acquisition and organic contract wins, maintaining margins on customer contracts and maintaining high levels of operational efficiency. The Board is confident that continued strong cash conversion of operating profit will support its intention of a progressive dividend policy.

 

The focus for the coming year remains on developing organic sales through leveraging AdEPT's approved supplier status on the various public sector telecom frameworks, maintaining profitability and cash flow conversion, which will be used to reduce net borrowings and/or fund suitable earnings-enhancing acquisitions.

 

Roger Wilson

Non-executive Chairman

 

Strategic report

 

Principal activities and review of business

The principal activity of the Group is the provision of unified communication and IT services to both domestic and business customers. A review of the business is contained in the Chairman's statement and the highlights are summarised in this strategic report.

 

Summary of three year financial performance:


Year ended March


2018

£'000

 

Year-on-Year %

2017

£'000

 

Year-on-Year %

2016

£'000







Revenue

46,434

34.8%

34,436

19.2%

28,881

Gross margin

22,919

57.3%

14,571

25.2%

11,634

Underlying EBITDA

9,771

24.8%

7,827

27.2%

6,153

Net senior debt

17,621


15,456


5,982

 

Revenue

During the year AdEPT has continued its transition from a traditional fixed line service provider towards a managed services provider.  Total revenue generated from managed services represented 69.8% of total revenue in the year ended 31 March 2018 (2017: 55.4%).

 

Total revenue increased by 34.8% to £46.4m (2017: £34.4m):

 

·      Managed services product revenues increased by £13.3m to £32.4m (2017: £19.1m).  This reflects the impact of the 8 month contribution from the acquisition of Atomwide combined with an increased level of organic contract wins and a lower relative churn rate within the managed service customer base.  AdEPT has continued to make progress in expanding the number of circuits and connections from new customer additions and through cross-selling into the existing customer base.  As the demand for faster data connectivity speeds continues AdEPT has seen further customer orders for 10Gb services.

·      Traditional fixed line revenues decreased to £14.0m (2017: £15.4m), which is a reflection of the organic sales focus of the Group on managed services and IT combined with the substitution impact of existing customers transitioning to new technologies, such as SIP and hosted services. The Group's reliance on fluctuating call revenues continues to reduce, with call revenue providing only 10.0% of total revenue in the year ended 31 March 2018 (2017: 15.4%).

 

The proportion of AdEPT revenue being generated from recurring products and services (being all revenue excluding one-offs projects, hardware and software) remains high at 78.4% of total revenue.  All of Centrix, Comms Group, OurIT and Atomwide product sets include hardware supply and installation services, which, by their nature, are project based and not fixed recurring revenue streams; however, a high proportion of hardware supply and installations are further products and services being supplied to the existing customer base.

 

AdEPT continued to be highly successful in gaining further traction in the public sector space during the last year through leveraging its approved status on various frameworks.  AdEPT Tunbridge Wells was awarded HSCN (Health and Social Care Network) Compliance during the year, which is the replacement for the legacy N3 data network used by the NHS, and AdEPT has already contracted data connectivity services to the NHS.  AdEPT is an approved supplier to the Crown Commercial Service under the RM1045 Network Services Framework, RM3825 HSCN Access Services Framework and the RM3804 Technology Services 2 Framework and the Group has been successful in winning new business through this framework.  This is in addition to AdEPT's existing framework agreement with JISC, under which AdEPT is one of only a small number of companies approved to sell data connectivity to UK Colleges and Universities.  The proportion of total revenue generated from public sector and healthcare customers has increased to 30.6% at March 2018 which partly arises due to the contribution from the Atomwide acquisition as the whole of the acquired revenue stream is generated from their public sector customer base.

 

The Group is continuing to focus its organic sales efforts on adding and retaining larger customers whilst complementing this with an acquisitive strategy.  AdEPT is managing the customer risk with a wide spread of business sectors and no particular customer concentration, with the top ten customers accounting for 22.3% of total revenue (2017: 24.3%).

 

Gross margin

Gross margin percentage has improved to 49.4% during the year (2017: 42.3%).  The current year gross margin includes £0.76m of compensation credits received from Openreach following the settlement in relation to the deemed consent process in relation to installation of data circuits.  This compensation relates to service credits for a large number of data circuits across a number of financial periods and is not a true reflection of ongoing margin.  Excluding the compensation credits gross margin has increased to 47.7% for the year, this increase over the prior year largely arises due to the business mix moving in greater proportion to IT services.

 

Gross margins for fixed line services have decreased to 38.8% (2017: 39.5%) which is a reflection of focus on winning and retaining larger customer accounts which by their nature have larger absolute revenue and gross profit but lower than average gross margin percentage.

 

Gross margins for managed services and IT, such as installations, support and maintenance, are higher than fixed line; this is a reflection of the headcount costs of supporting the project installations, helpdesk support and maintenance services being included within operating expenditure.

 

Underlying EBITDA

Underlying EBITDA is defined as operating profit after adding back depreciation, amortisation, acquisition fees, revaluation of deferred consideration and share-based payment charges.  The Group uses underlying EBITDA as a measure of performance in line with the telecommunications sector's general approach to relative performance measurement.  As the Group operates a capex-light model, the Board considers that underlying EBITDA is the best indication of the underlying cash generation of the business.  Below is a reconciliation of underlying EBITDA to the reported profit after tax:

 


2018

£'000

2017

£'000




Underlying EBITDA

9,771

7,827

Acquisition fees

(229)

(703)

Openreach compensation credit

755

-

Share option charges

(40)

(31)

Revaluation of deferred consideration

(28)

-

Depreciation

(418)

(279)

Amortisation

(3,730)

(2,482)

Interest

(1,561)

(928)

Profit before tax

4,520

3,404

 

During the year the Group received £0.76m compensation from Openreach following the settlement in relation to the deemed consent process in relation to installation of data circuits.  The value of the compensation received by the Group has been excluded from the calculation of underlying EBITDA as it does not relate to the current year and it is not a reflection of the underlying profitability of the Group.

 

Underlying EBITDA has increased for the 15th consecutive year since AdEPT's inception in 2003.  The Group has focussed on the underlying profitability of customers and revenue streams combined with tight overhead control, industry leading debt collection and wholesale supply chain negotiation.

 

Finance costs

Total interest costs have increased to £1.56m (2017: £0.93m), arising largely from the increase in the average level of net borrowings, including the interest payable on the convertible loan note, which was used to fund the acquisition of Atomwide.  Included within interest costs is a £0.3m charge, which is non-cash, in relation to the discounted cash flow impact of the contingent deferred consideration payable in relation to the Comms Group, CAT, OurIT and Atomwide acquisitions.  A further £0.1m of non-cash interest from the application of IAS 32 and IAS 39 has been recognised in interest costs in relation to the discounting of the convertible loan liability.  Increases to interest costs have been partially mitigated through treasury management of surplus cash balances to minimise the amount of drawn funds.

 

Profit before tax

This year profit before tax has increased by £1.12m with a reported £4.52m (2017: £3.40m).  The increase to profit before tax arises from the £1.94m underlying EBITDA improvement plus the compensation credits received from Openreach of £0.76m, which has been partially absorbed by the £0.63m increase in finance costs, the acquisition costs of £0.23m, and the associated increase in depreciation and amortisation arising from the acquisitions undertaken during the current and prior year.

 

Profit after tax and earnings per share

Profit after tax for the year amounted to £3.93m (2017: £2.75m). Basic earnings per share was 16.61p (2017: 12.17p).  Adjusted fully diluted earnings per share, based on the profit for the year attributable to equity holders adding back amortisation, share option charges, revaluation of deferred consideration and acquisition costs and excluding the compensation credits (see Note 28), increased by 26.2% to 27.69p per share (2017: 21.94p).

 

Dividends and dividend per share

On the back of strong cash flow generation AdEPT announced an interim dividend of 4.25p per share, which was paid to shareholders on 7 April 2018.  The Company announced in the pre-trading update on 5 April 2018 that, subject to shareholder approval at the annual general meeting later in the year, it is proposing a final dividend of 4.50p per ordinary share (2017: 4.00p). This dividend is expected to be paid on or around 8 October 2018 to shareholders on the register at 28 September 2018.

 

Total dividends approved and proposed during the year ended 31 March 2018 of 8.75p per ordinary share represent a 12.9% increase year-on-year (2017: 7.75p).  The Board constantly monitors shareholder value and is confident that the continued strong cash generation will support a progressive dividend policy.

 

Cash flow

The Group benefits from an excellent cash-generating operating model. Low capital expenditure results in a high proportion of underlying EBITDA turning into cash.  The proportion of reported EBITDA which turned into net cash from operating activities before income tax was 95.2% (2017: 82.2%).  On an after income tax basis, the proportion of reported EBITDA turned into net cash from operating activities was 80.5% (2017: 68.1%).  The Group continues to manage its credit risk and the collections of trade receivables has improved, leading to a reduction to 26 days at year end (2017: 35 days).  This reduction is partly a reflection of an increased value of customer payments in advance received for telecom and IT maintenance and support services.

 

Cash interest paid has increased during the year to £0.91m (2017: £0.40m), which arises from the increase in net borrowings to fund the acquisition of Atomwide.

 

Cash outflows in the year ended 31 March 2018 in relation to acquisitions amounted to £14.52m (net of cash acquired).  The contingent consideration in respect of the acquisition of Comms Group was paid in July 2017 and for CAT Communications in November 2017 with no further amounts due.  The initial cash consideration for the acquisition of Atomwide of £12.0m (net of cash acquired) was paid in August 2017.

 

Dividends paid during the year ended 31 March 2018 absorbed £1.84m of cash (2017: £1.46m). This increase over the prior period arises from the continued application of the progressive dividend policy.

 

In August 2017 the Group raised £7.29m in the form of a convertible loan instrument from BGF to part fund the acquisition of Atomwide.  The convertible loan instrument is excluded from the leverage calculations by the senior debt partners, Barclays and RBS.  The Group has applied the principles of IAS 32 and IAS 39 in the recognition and measurement of the convertible loan.  The net present value of the loan of £7.09m has been split between the debt and equity components and an amount of £1.16m has been recorded in equity, with £5.93m being included within long-term debt.  The transaction cost of £0.20m is being recognised in the interest charge in the income statement across the term of the convertible instrument.

 

There was a significant increase to cash and cash equivalents during the year of £6.59m. This arises from a net increase in the drawn element of the revolving credit facility at March 2018 which was used to fund the deferred consideration for the acquisition of Our IT, with an amount of £3.65m paid in early April 2018.  The Group will continue to apply its treasury management policies to minimise the cost of finance whilst retaining flexibility to meet its growth strategies.

 

Capital expenditure

The Group continues to operate an asset light strategy and has low capital requirements; therefore, expenditure on fixed assets is low at 0.8% of revenue (2017: 0.3%).

 

Business combinations

The strategy of the Group is to concentrate organic sales efforts on attracting larger customers, particularly in the public and healthcare sector. Rather than operate a telesales operation aimed at acquiring smaller business customers organically, we use our free cash generation in combination with debt and equity instruments to acquire customer bases and businesses in the IT and telecommunications industry.

 

On 2 August 2017 the Company acquired the entire issued share capital of Atomwide.  Atomwide, founded in 1987, is an IT services provider with over 30 years' experience, offering specialised IT support services and technology solutions to approximately 2 million users in over 3,000 schools.  Atomwide is the chief technology partner for London Grid for Learning, supplying IT services to around 2,500 schools in London.  The bespoke services have been created by the in-house development team and are supported by an experienced team of IT professionals based at Atomwide's premises in Orpington, Kent.  All of the senior management team which are responsible for the strategic direction, technical development and the day-to-day operations of Atomwide are to be retained within the business post-acquisition.  The acquisition was for an initial consideration of £12.0m plus the value of the surplus cash balance of Atomwide at completion (approximately £6.5m), payable in cash. Further contingent deferred consideration of up to £8.0m will be payable, also in cash, dependent upon the performance of Atomwide post-acquisition.  The estimated deferred consideration payable at 31 March 2018 was £0.7m.

 

A fair value of £7.22m in relation to the customer contracts for the acquired business and £3.53m in relation to the Atomwide developed software applications have been recognised as intangible asset additions in the year ended 31 March 2018.  Further details on the acquisition during the year are described in Note 29 of the financial statements.

 

Net debt and bank facilities

A key strength of AdEPT is its consistent, proven ability to generate strong free cash flow and therefore support net borrowings.  As a result of the Group's focus on underlying profitability and cash conversion, free cash flow after taxes but before bank interest paid of £8.27m was generated during the year ended 31 March 2018 (2017: £4.33m).

 

Opening cash plus the free cash flow generated in the year, the proceeds of the convertible loan note issued and borrowing drawdowns form the senior debt facility have been used to fund £14.52m acquisition consideration, £1.84m dividends paid and £0.45m of capital expenditure on tangible and intangible assets.  Net senior debt, which comprises cash balances and bank borrowings, has increased to £17.62m at the year-end (2017: £15.46m) as a result of the acquisition consideration outflows.

 

The Group's available banking facilities are described in Note 29 of the financial statements. 

 

Segmental key performance indicators (KPIs)

The segmental KPIs outlined below are intended to provide useful information when interpreting the accounts.


Fixed




line

Managed



services

services

Total


£'000

£'000

£'000





Year ended 31 March 2018




Revenue

14,001

32,433

46,434

Gross profit

5,439

17,480

22,919

Gross margin %

38.8%

53.9%

49.4%

Underlying EBITDA

2,877

6,894

9,771

Underlying EBITDA%

20.5%

21.3%

21.0%





Year ended 31 March 2017




Revenue

15,365

19,071

34,436

Gross profit

6,074

8,497

14,571

Gross margin %

39.5%

44.6%

42.3%

Underlying EBITDA

3,387

4,440

7,827

Underlying EBITDA%

22.0%

23.3%

22.7%





 

There are no non-financial KPIs which are reviewed regularly by the senior management team.

 

Principal risks and uncertainties

There are a number of potential risks and uncertainties which could have a material impact on the Group's long-term performance and could cause actual results to differ materially from expected results.

 

Liquidity risk

The Group seeks to manage financial risk by ensuring sufficient liquidity is available to meet foreseeable needs and to invest cash assets safely and profitably. External funding facilities are managed to ensure that both short-term and longer-term funding is available to provide short-term flexibility whilst providing sufficient funding to the Group's forecast working capital requirements.

 

Credit risk

The Group extends credit of various durations to customers depending on customer credit worthiness and industry custom and practice for the product or service. In the event that a customer proves unable to meet payments when they fall due, the Group will suffer adverse consequences. To manage this, the Group continually monitors credit terms to ensure that no single customer is granted credit inappropriate to its credit risk. Additionally, a large proportion of our customer receipts are collected by monthly direct debit. The risk is further reduced by the customer base being spread across a wide variety of industry and service sectors. The top ten customers account for approximately 22.5% of revenues.

 

Competitor risk

The Group operates in a highly competitive market with rapidly changing product and pricing innovations. We are subject to the threat of our competitors launching new products in our markets (including updating product lines) before we make corresponding updates and developments to our own product range. This could render our products and services out-of-date and could result in loss of market share. To reduce this risk, we undertake new product development and maintain strong supplier relationships to ensure that we have products at various stages of the life cycle.

 

Competitor risk also manifests itself in price pressures which are usually experienced in more mature markets. This results not only in downward pressure on our gross margins but also in the risk that our products are not considered to represent value for money. The Group therefore monitors market prices on an ongoing basis.

 

Acquisition integration execution

The Group has set out that its strategy includes the acquisition of businesses where they are earnings enhancing. The Board acknowledges that there is a risk of operational disturbance in the course of integrating the acquired businesses with existing operations. The Group mitigates this risk by careful planning and rigorous due diligence.

 

John Swaite

Finance director

 

Consolidated statement of comprehensive income

For the year ended 31 March 2018

 


 

Note

2018

£'000

2017

£'000

 

Revenue

6

46,434

34,436

 

Cost of sales


(23,515)

(19,865)

 

Gross profit


22,919

14,571

 

Administrative expenses


(16,838)

(10,239)

 

Operating profit


6,081

4,332

 

Total operating profit - analysed:




 

Underlying EBITDA


9,771

7,827

 

Share-based payments


(40)

(31)

 

Depreciation of tangible fixed assets


(418)

(279)

 

Amortisation of intangible fixed assets


(3,730)

(2,482)

 

Loss on revaluation of deferred consideration


(28)

-

 

Acquisition fees


(229)

(703)

 

Compensation credits


755

-

 

Total operating profit


6,081

4,332

 

Finance costs

9

(1,561)

(928)

 

Profit before income tax


4,520

3,404

 

Income tax expense

11

(584)

(655)

 

Profit for the year


3,936

2,749

 

Other comprehensive income


-

-

 

Total comprehensive income


3,936

2,749

 

 




 

 

Note

2018

2017

 

Earnings per share




 

Basic earnings

28

16.61p

12.17p

 

Diluted earnings

28

16.36p

11.57p

 

All amounts relate to continuing operations.

Consolidated statement of financial position

As at 31 March 2018

 

 

Note

31 March

2018

£'000

 

31 March

2017

£'000

Assets

 

 

 

Non-current assets

 

 

 

Goodwill

13

14,531

11,217

Intangible assets

14

35,666

28,559

Property, plant and equipment

16

1,114

863

 

 

51,311

40,639

Current assets

 

 

 

Inventories

18

266

196

Contract assets

4

423

-

Trade and other receivables

19

5,867

5,514

Cash and cash equivalents

 

7,127

1,238

 

 

13,683

6,948

Total assets

 

64,994

47,587

Current liabilities

 

 

 

Trade and other payables

20

11,832

13,049

Contract liabilities

4

568

-

Income tax

 

199

664

Short-term borrowings

 

-

706

 

 

12,599

14,419

Non-current liabilities

 

 

 

Deferred tax

17

5,590

4,057

Convertible loan instrument

21

6,011

-

Long-term borrowings

21

24,749

15,988

Total liabilities

 

48,949

34,464

Net assets

 

16,045

13,123

Equity attributable to equity holders

 

 

 

Share capital

22

2,370

2,370

Share premium

 

479

479

Share capital to be issued

 

1,012

34

Capital redemption reserve

 

18

18

Retained earnings

 

12,166

10,222

Total equity

 

16,045

13,123

 

Company statement of financial position

As at 31 March 2018

 

 

Note

31 March

2018

£'000

31 March

2017

£'000

Assets

 

 

 

Non-current assets

 

 

 

Intangible assets

14

9,495

11,376

Investments

15

46,270

26,542

Property, plant and equipment

16

95

137

Deferred income tax

17

-

43


 

55,861

38,098

Current assets

 

 

 

Inventories

18

1

1

Contract assets

 

284

-

Trade and other receivables

19

1,360

1,688

Cash and cash equivalents

 

4,305

-


 

5,950

1,689

Total assets

 

61,811

39,787

Current liabilities

 

 

 

Trade and other payables

20

9,705

10,655

Contract liabilities

 

336

-

Income tax

 

133

132

Short-term borrowings

 

-

706


 

10,174

11,493

Non-current liabilities

 

 

 

Other provisions and liabilities

17

140

-

Convertible loan instrument

21

6,011

-

Long-term borrowings

21

24,749

15,988

Total liabilities

 

41,074

27,481

Net assets

 

20,736

12,306

Equity attributable to equity holders

 

 

 

Share capital

22

2,370

2,370

Share premium

 

479

479

Share capital to be issued

 

1,012

34

Capital redemption reserve

 

18

18

Retained earnings

 

16,857

9,405

Total equity

 

20,736

12,306

 

The profit for the financial year dealt with in the financial statements of the parent Company was £9,326,057 (2017: loss £566,084).

Consolidated statement of changes in equity

For the year ended 31 March 2018

 

 

Attributable to equity holders

 

Share

capital

£'000

Share

premium

£'000

Share

option

reserve

£'000

Capital

redemption

reserve

£'000

Retained

earnings

£'000

Total

equity

£'000

Equity at 1 April 2016

2,248

429

56

16

9,011

11,760

Profit for the year

-

-

-

-

2,749

2,749

Other comprehensive income

-

-

-

-

-

-

Total comprehensive income

-

-

-

-

2,749

2,749

Deferred tax asset adjustment

-

-

-

-

(69)

(69)

Exercise of warrants

-

-

(53)

-

53

-

Dividends

-

-

-

-

(1,461)

(1,461)

Share-based payments

-

-

31

-

-

31

Issue of share capital

124

50

-

-

-

174

Shares repurchased and cancelled

(2)

-

-

2

(61)

(61)

Equity at 1 April 2017

2,370

479

34

18

10,222

13,123

Impact of change in accounting policy

-

-

-

-

(174)

(174)

Adjusted equity at 1 April 2017

2,370

479

34

18

10,048

12,949

Profit for the year

-

-

-

-

3,936

3,936

Other comprehensive income

-

-

-

-

-

-

Total comprehensive income

-

-

-

-

3,936

3,936

Deferred tax asset adjustment

-

-

-

-

19

19

Dividends

-

-

-

-

(1,837)

(1,837)

Share-based payments

-

-

40

-

-

40

Equity element of convertible loan note

-

-

938

-

-

938

Equity at 31 March 2018

2,370

479

1,012

18

12,166

16,045

 

The Group has initially applied IFRS 15 using the cumulative effect method.  Under this method, the comparative information is not restated. See Note 4.

Company statement of changes in equity

For the year ended 31 March 2018

 

 

Attributable to equity holders

 

Share

capital

£'000

Share

premium

£'000

Share

option

reserve

£'000

Capital

redemption

reserve

£'000

Retained

earnings

£'000

Total

equity

£'000

Equity at 1 April 2016

2,248

429

56

16

11,509

14,258

Loss for the year

-

-

-

-

(566)

(566)

Other comprehensive income

-

-

-

-

-

-

Total comprehensive income

-

-

-

-

(566)

(566)

Deferred tax asset adjustment

-

-

-

-

(69)

(69)

Exercise of warrants

-

-

(53)

-

53

-

Dividends

-

-

-

-

(1,461)

(1,461)

Share-based payments

-

-

31

-

-

31

Issue of share capital

124

50

-

-

-

174

Shares repurchased and cancelled

(2)

-

-

2

(61)

(61)

Equity at 1 April 2017

2,370

479

34

18

9,405

12,306

Impact of change in accounting policy

-

-

-

-

(55)

(55)

Adjusted equity at 1 April 2017

2,370

479

34

18

9,350

12,251

Profit for the year

-

-

-

-

9,325

9,325

Other comprehensive income

-

-

-

-

-

-

Total comprehensive income

-

-

-

-

9,325

9,325

Deferred tax asset adjustment

-

-

-

-

19

19

Dividends

-

-

-

-

(1,837)

(1,837)

Share-based payments

-

-

40

-

-

40

Equity element of convertible loan note

-

-

938

-

-

938

Equity at 31 March 2018

2,370

479

1,012

18

16,857

20,736

 

The Company has initially applied IFRS 15 using the cumulative effect method.  Under this method, the comparative information is not restated. See Note 4.

Consolidated statement of cash flows

For the year ended 31 March 2018

 

 

2018

£'000

2017

£'000

Cash flows from operating activities

 

 

Profit before income tax

4,520

3,404

Depreciation and amortisation

4,148

2,761

Profit on sale of fixed asset

-

-

Share-based payments

40

31

Net finance costs

1,561

928

Operating cash flows before movements in working capital

10,269

7,124

Decrease/(Increase) in inventories

(39)

33

Decrease/(Increase) in trade and other receivables

479

(123)

(Decrease)/increase in trade and other payables

(972)

(1,202)

Cash generated from operations

9,737

5,832

Income taxes paid

(1,501)

(1,504)

Net cash from operating activities

8,236

4,328

Cash flows from investing activities



Interest paid

(907)

(405)

Acquisition of subsidiaries net of cash acquired

(14,523)

(11,987)

Purchase of intangible assets

(54)

(26)

Sale of property, plant and equipment

-

-

Purchase of property, plant and equipment

(364)

(146)

Net cash used in investing activities

(15,848)

(12,564)

Cash flows from financing activities



Dividends paid

(1,837)

(1,461)

Share capital issued

-

174

Payments made for share repurchases

-

(61)

Increase in bank loan

11,500

3,950

Repayment of borrowings

(2,750)

-

Issue of convertible loan note

7,294

-

Net cash from financing activities

14,207

2,602

Net (decrease)/increase in cash and cash equivalents

6,595

(5,634)

Cash and cash equivalents at beginning of year

532

6,166

Cash and cash equivalents at end of year

7,127

532

Cash and cash equivalents



Cash at bank and in hand

7,127

1,238

Short-term borrowings

-

(706)

Cash and cash equivalents

7,127

532

 

Company statement of cash flows

For the year ended 31 March 2018

 

 

2018

£'000

2017

£'000

Cash flows from operating activities

 

 

(Loss)/profit before income tax

9,495

(111)

Depreciation and amortisation

1,988

1,984

Profit on sale of fixed asset

-

-

Share-based payments

40

31

Net finance costs

1,561

928

Operating cash flows before movements in working capital

13,084

2,832

Decrease/(Increase) in inventories

-

-

Decrease/(Increase) in trade and other receivables

(390)

(326)

(Decrease)/increase in trade and other payables

1,865

2,372

Cash generated from operations

14,559

4,878

Income taxes paid

(344)

(513)

Net cash from operating activities

14,215

4,365

Cash flows from investing activities



Interest paid

(909)

(407)

Acquisition of subsidiaries net of cash acquired

(22,436)

(12,719)

Purchase of intangible assets

(39)

(26)

Sale of property, plant and equipment

-

-

Purchase of property, plant and equipment

(26)

(11)

Net cash used in investing activities

(23,410)

(13,163)

Cash flows from financing activities



Dividends paid

(1,837)

(1,461)

Dividends received

-

-

Share capital issued

-

174

Payments made for share repurchases

-

(61)

Increase in bank loan

11,500

3,950

Repayment of borrowings

(2,750)

-

Issue of convertible loan note

7,294

-

Net cash from financing activities

14,207

2,602

Net (decrease)/increase in cash and cash equivalents

5,012

(6,196)

Cash and cash equivalents at beginning of year

(706)

5,490

Cash and cash equivalents at end of year

4,306

(706)

Cash and cash equivalents



Cash at bank and in hand

4,306

-

Short-term borrowings

-

(706)

Cash and cash equivalents

4,306

(706)

 

Notes to the financial statements

For the year ended 31 March 2018

 

1. Nature of operations and general information

AdEPT is one of the UK's leading independent providers of managed services for IT, unified communications, connectivity and voice solutions focussed on enterprise business customers, public sector and healthcare customers.  The Company provides a complete communications portfolio of unified communications, IP telephony, IT services, equipment installation, managed services, Wi-Fi, IT and communications hardware and data connectivity products.

AdEPT is incorporated under the Companies Act and domiciled in the UK and the registered office is located at One Fleet Place, London, EC4M 7WS. The Company's shares are listed on AIM of the London Stock Exchange.

2. Accounting policies

Basis of preparation of financial statements

The financial statements have been prepared in accordance with applicable IFRSs as adopted by the EU.

Accounting standards require the directors to consider the appropriateness of the going concern basis when preparing the financial statements. The directors confirm that they consider that the going concern basis remains appropriate. The Group's available banking facilities are described in Note 28 to the financial statements. The Group has adequate financing arrangements which can be utilised by the Group as required. Thus they continue to adopt the going concern basis of accounting in preparing the annual financial statements.

At the date of authorisation of these financial statements, the directors have considered the standards and interpretations which have not been applied in these financial statements that were in issue but not yet effective (and in some cases had not yet been adopted by the EU) and IFRS 16 "Leases" and IFRS 9 "Financial Instruments" were considered to be relevant.

The directors have considered the application of IFRS 16 and IFRS 9, once effective, and do not consider that they will have a material impact on the net assets or retained profits of the Group.

The Group has commenced a detailed assessment to determine the impact of adopting IFRS 16, which introduces for certain lease contracts significant changes to the allocation of the costs in the statement of comprehensive income but it is not expected to have a material impact on profit before tax.  It is also expected that the recognition of lease assets and liabilities will increase the gross value of assets and liabilities but the impact on net assets will not be material. This assessment is ongoing and the Board will update the shareholders on the impact on transition, and on our ongoing accounting policy, during 2018 as appropriate.

Adoption of the other standards and interpretations are not expected to have a material impact on the results of the Group. Application of these standards may result in some changes in presentation of information within the Group's financial statements.

The financial statements are presented in sterling, which is the Group's functional and presentation currency. The figures shown in the financial statements are rounded to the nearest thousand pounds.

Segmental reporting

The directors have considered the requirements of IFRS 8 "Operating Segments" and have concluded that the Group has two segments. For further information see Note 5 of the financial statements.

Revenue

The Group has early adopted IFRS 15 "Revenue from contracts with customers" with a date of initial application of 1 April 2017 which has been applied in respect of data circuit installation and rental, further details are included in Note 4.  The Group has applied IFRS 15 using the cumulative effect method and therefore the comparative information has not been restated and continues to be reported under IAS 18.  Revenue is measured based on the consideration specified in a contract with a customer.  Revenue is recognised when it transfers control over a product or service to a customer to the extent that it is probable that the economic benefits will flow to the Group and can be reliably measured.

In the comparative period, revenue was measured at the fair value of the consideration received or receivable. Revenue from the sale of goods and equipment was recognised when the significant risks and rewards of ownership had been transferred to the customers, recovery of the consideration was probably, the associated costs and possible return of goods could be estimated reliably, there was no continuing management involvement with the goods and the amount of revenue could be measured reliably.  Revenue from rendering of services was recognised in proportion to the stage of completion of the work at the reporting date.

The following is a description of the principal activities from which the Group generates its revenue.

Segment

Product/service

Nature, timing of satisfaction of performance obligations and significant payment terms

Fixed line services

Calls and line rental

Revenue from calls, which excludes value added tax and trade discounts, is recognised in the income statement at the time the call is made. Calls made in the year, but not billed by year end, are accrued within receivables as accrued income.

Revenue from line rental is recognised in the month that the charge relates to, commencing with a full month's charge in the month of connection.

The performance obligations of calls and line rental services are fulfilled in the month in which the services are consumed by customers.

Customer payment terms are 14 days from invoice for call usage and line rental services.

Managed services

Data networks

Revenue arising from the provision of internet and other data connectivity services is recognised evenly over the periods in which the service is provided to the customer.  Revenue from installation of data connectivity services are recognised evenly over the term of the customer contract.

The performance obligations of data networks are fulfilled when the equipment is installed, the service has gone live and the associated data connectivity rental services are consumed by customers on a monthly basis.

All equipment required for data connectivity services is covered by a standard manufacturer warranty which is provided back-to-back with customer terms.

Customer payment terms are 14 days from invoice, installation charges (if applicable) are paid for upfront with the rental charges paid on a monthly, annual or quarterly basis.

Managed services

Sale of goods

Revenue from the sale of goods is recognised when the goods have been fully installed and the risks and rewards of ownership have passed to the customer.

The performance obligations of the supply of goods and equipment are met when the goods have been delivered, configured and installed.

All goods supplied are covered by a standard manufacturer warranty which is provided back-to-back with customer terms.

Customer payment terms are 30 days from invoice date.  A deposit of up to 33% is invoiced prior to delivery with the balance being invoiced once the equipment has been configured and installed.

Managed services

Support services

Support service revenues are recognised evenly over the customers contractual period for which the charges relate.  Support service charges which arise outside of the customer contracts are recognised in the month when the support service is provided.

The performance obligations of support services are fulfilled in the month in which the services are consumed by customers.

Customer payment terms are 14-30 days from invoice date, support services are invoiced and paid for up to twelve months in advance.

 

Where customer contracts have multiple components to be delivered (e.g. equipment rental and internet services), the revenue attributable to each component is calculated based on the fair value of each component.

The whole of the revenue is attributable to the provision of voice and data telecommunication services to both residential and business customers. All revenue arose within the United Kingdom.

Goodwill

Goodwill is recognised separately as intangible assets and carried at cost less accumulated impairment losses. Goodwill is tested for impairment at least annually. Any impairment is recognised immediately in the income statement. Subsequent reversals of impairment losses for goodwill are not recognised.

Intangible fixed assets acquired as part of a business combination and amortisation

In accordance with IFRS 3 "Business Combinations", an intangible asset acquired in a business combination is recognised at fair value at the acquisition date.

After initial recognition, intangible assets are carried at cost less any accumulated amortisation and any accumulated impairment losses. Impairment reviews are conducted annually from the first anniversary following acquisition.

The intangible asset 'customer base' is amortised to the income statement over its estimated useful economic life on a straight line basis.

Other intangible assets

Also included within intangible fixed assets are the development costs of the Company's billing and customer management system plus an individual licence. These other intangible assets are stated at cost, less amortisation and any provision for impairment. Amortisation is provided at rates calculated to write off the cost, less estimated residual value of each intangible asset, over its expected useful economic life on the following bases:

Customer management system  -  Three years straight line

Other licences                                  -  Contract licence period straight line

Computer software                         -  Three years straight line

Software apps                                  -  Ten years straight line

Website                                             -  Five years straight line

Investments

Shareholdings in subsidiaries are valued at cost less provision for permanent impairment.

Property, plant and equipment and depreciation

Property, plant and equipment are stated at cost, less depreciation and any provision for impairment. Depreciation is provided on all property, plant and equipment at rates calculated to write off the cost, less estimated residual value of each asset, over its expected useful life on the following bases:

Short-term leasehold improvements                -            The shorter of five years and the remaining period of the
              lease straight line

Fixtures and fittings                                               -            Three years straight line

Office equipment                                                   -            Three years straight line

Motor vehicles                                                        -            Four years straight line

Rental equipment at customer premises        -            Contract agreement period straight line

Lease accounting

The Group leases equipment under operating leases to non-related parties. Leases of equipment where the Group retains substantially all risks and rewards incidental to ownership are classified as operating leases. The underlying assets are recognised in tangible fixed assets. Rental income from operating leases (net of any incentives given to the lessees) is recognised in profit or loss on a straight line basis over the lease term.

Initial direct costs incurred by the Group in negotiating and arranging operating leases are added to the carrying amount of the leased assets and recognised as an expense in profit or loss over the lease term on the same basis as the lease income.

Inventories

Inventories are valued at the lower of cost and net realisable value after making allowance for any obsolete or slow moving items. Full provision is made for any items older than six months. Net realisable value is reviewed regularly to ensure accurate carrying values. Cost is determined on a first-in, first-out basis and includes transportation and handling costs.

Net realisable value is the estimated selling price in the ordinary course of business, less the estimated costs necessary to make the sale.

Pensions

The Group contributes to personal pension plans. The amount charged to the income statement in respect of pension costs is the contribution payable in the year.

Cash and cash equivalents

Cash and cash equivalents comprise cash at bank, cash in hand and overdrafts.

Income tax

Income tax is the tax currently payable based on taxable profit for the year.

Deferred income tax is generally provided on the difference between the carrying amounts of assets and liabilities and their tax bases. However, deferred income tax is not provided on the initial recognition of goodwill, nor on the initial recognition of an asset or liability unless the related transaction is a business combination or affects tax or accounting profit.

Deferred income tax liabilities are provided in full, with no discounting. Deferred income tax assets are recognised to the extent that it is probable that the underlying deductible temporary differences will be able to be offset against future taxable income. Current and deferred income tax assets and liabilities are calculated at tax rates that are expected to apply to their respective period of realisation, provided they are enacted or substantively enacted at the balance sheet date.

Changes in deferred income tax assets or liabilities are recognised as a component of income tax expense in the income statement, except where they relate to items that are charged or credited directly to equity, in which case the related deferred income tax is also charged or credited directly to equity.

Share-based payments

The cost of equity-settled transactions with employees is measured by reference to the fair value of the award at the date at which they are granted and is recognised as an expense over the vesting period, which ends on the date at which the relevant employees become fully entitled to the award. Fair value is appraised at the grant date using an appropriate pricing model for which the assumptions are approved by the directors.

At each balance sheet date, the cumulative expense is calculated representing the extent to which the vesting period has expired and management's best estimate of the number of equity instruments that will ultimately vest. The movement in the cumulative expense since the previous balance sheet date is recognised in the income statement, with a corresponding entry in equity.

Trade and other receivables

Trade receivables, which generally have 14 to 30 day terms, are initially recognised at fair value and subsequently held at amortised cost. A provision for impairment of trade receivables is established for any amount due in 90 or more days or when it is considered probable that the Group may not be able to collect all amounts due according to the original terms of the receivables. Significant financial difficulties of the debtor, probability that the debtor will enter bankruptcy or financial reorganisation, and default or delinquency in payments are considered indicators that the trade receivable is impaired. The provision is the difference between the asset's carrying amount and the original invoice amount less bad debts written off. The carrying amount of the asset is reduced through the use of the provision and the amount of the loss is recognised in the income statement. When a trade receivable is uncollectible, it is written off against the allowance account for trade receivables.

Subsequent recoveries of amounts previously written off are credited to the income statement.

Cash and cash equivalents

Cash and cash equivalents comprise cash on hand and demand deposits, together with other short-term, highly liquid investments that are readily convertible into known amounts of cash and which are subject to an insignificant risk of changes in value.

Trade payables

Trade payables are stated at their nominal value, recognised initially at fair value and subsequently valued at amortised cost.

Dividends

Dividend distributions to the Company's shareholders are recognised when payment has been made to shareholders.

Share buybacks

The Company has returned surplus cash to shareholders through a limited share buyback scheme pursuant to the authority given to it at the annual general meeting. Shares purchased for cancellation are deducted from retained earnings at the total consideration paid or payable. The Company will continue to monitor the level of cash required for the business and determine if further repurchases remain in the shareholders' best interests.

Financial instruments

Financial assets and liabilities are recognised on the Group's balance sheet when the Group becomes a party to the contractual provisions of the instrument.

Capital

The capital structure of the Group consists of debt, which includes the borrowings disclosed in Notes 21 and 29, cash and cash equivalents, and equity attributable to equity holders, comprising issued capital, reserves and retained earnings.

Borrowings and borrowing costs

Borrowings are recorded initially at the proceeds received, net of transaction costs incurred. Borrowings are subsequently stated at amortised cost. Any differences between the proceeds (net of transaction costs) and the redemption value is recognised in the income statement over the period of the borrowings using the effective interest method.

Borrowing costs are expensed to the income statement as incurred, with the exception of arrangement fees which are deducted from the related liability and released over the term of the related liability in accordance with IAS 39.

3. Critical accounting estimates and judgements

The key assumptions concerning the future and other key sources of estimation and uncertainty at the balance sheet date, which have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year, are discussed below.

Key sources of estimation and uncertainty are:

Measuring the fair value of customer bases on acquisition

The main estimates used to measure the fair value of the customer bases on acquisition are:

•    the churn rate (turnover of customers);

•    discount rate; and

•    gross margins.

Estimating churn, discount rate and gross margins

For Centrix and Atomwide the net present value of the discounted future cash flows is based on the actual revenues of the acquired customer bases and applying the actual gross margins achieved by the businesses.

For the remaining customer bases, the churn rates ranging between 3.0% and 13.5% are based upon actual historical churn rates of the revenue stream for each customer base.

The discount rate of 7.2% (2017: 8.0%) used to discount the cash flows is based upon the Group's weighted average cost of capital (WACC), which is the recommended discount rate suggested by IFRSs and is a calculated figure using actual input variables where available and applying estimates for those which are not, such as the equity market premium.

Gross margins applied are based upon actual margins achieved by the customer bases in the current and previous years. The actual outcomes have been materially equivalent.

Estimating the useful life of customer bases

The main estimate used to conduct the impairment review is the churn rate (turnover of customers).

The average useful economic life of all the customer bases has been estimated at 14 years (2017: 15 years) with a range of ten to 30 years.

Measuring the fair value of contingent consideration

The fair value of contingent deferred consideration is determined by reference to the growth rate for the gross margin of the acquired business and applying the contingent deferred consideration matrix as specified in the asset or share purchase agreement and discounting the net present value of the future cash flows. The range of contingent consideration in the current period was £0 to £11.75m; further details are included in Note 28.

Subsequent impairment of customer bases

The Group determines whether intangible assets are impaired on at least an annual basis. This requires an estimation of the 'value in use' of the cash-generating units to which the intangible value is allocated. Estimating a value in use amount requires management to make an estimate of the expected future cash flows from the cash-generating unit and also to choose a suitable discount rate in order to calculate the present value of those cash flows.

The calculations are sensitive to any movement in the discount rate, margin or churn rate and would therefore result in an impairment charge to the income statement. A 1% change to the discount rate, gross margin and churn rate would result in additional impairment charges of £122,455, £54,910 and £230,229 respectively.

More details, including carrying values, are included in Note 14.

Allowance for impairment of receivables

Management reviews are performed to estimate the level of provision required for irrecoverable debt. Provisions are made specifically against invoices where recoverability is uncertain. Further information on the receivables allowance account is given in Note 19.

4. Changes in accounting policies

Except for the changes below, the Group has consistently applied the accounting policies to all presented in these consolidated financial statements.  The details and quantitative impact of the changes in accounting policies are disclosed below:

Data circuit installation and rental

The Group previously recognised the revenue for the installation of data circuits when the installation had been completed and the data circuit had gone live, and the revenue for the rental of the data circuit was recognised on a monthly basis across the contract period.  Under IFRS 15, the total consideration receivable in respect of the data circuit, being the installation revenue plus the total value of the contracted monthly rental charges, is being spread evenly across the contract period.

The following tables summarise the impacts of adopting IFRS 15 on the Group's consolidated financial statements for the year ended 31 March 2018:

£'000

As reported

 

 

Adjustments

Balances without adoption of IFRS 15

Assets

 

 

 

Non-current assets

 

 

 

Goodwill

14,531

-

14,531

Intangible assets

35,666

-

35,666

Property, plant and equipment

1,114

-

1,114

 

51,311

-

51,311

Current assets

 

 

 

Inventories

266

-

266

Trade and other receivables

5,867

-

5,867

Contract assets

423

(423)

-

Cash and cash equivalents

7,127

-

7,127

 

13,683

(423)

13,260

Total assets

64,994

(423)

64,571

Current liabilities

 

 

 

Trade and other payables

11,832

-

11,832

Contract liabilities

568

(568)

-

Income tax

199

(6)

193

 

12,599

(574)

12,025

Non-current liabilities

 

 

 

Deferred income tax

5,590

-

5,590

Convertible loan instrument

6,011

-

6,011

Long-term borrowings

24,749

-

24,749

Total liabilities

48,949

(574)

48,375

Net assets

16,045

151

16,196

Equity attributable to equity holders

 

 

 

Share capital

2,370

-

2,370

Share premium

479

-

479

Retained earnings

13,196

151

13,347

Total equity

16,045

151

16,196

 

£'000

As reported

 

 

 

Adjustments

Balances without adoption of IFRS 15

Revenue

46,434

18

46,452

Cost of sales

(23,515)

(47)

(23,562)

Gross profit

22,919

(29)

22,890

Administrative expenses

(16,838)

-

(16,838)

Operating profit

6,081

(29)

6,052

Finance costs

(1,561)

-

(1,561)

Profit before income tax

4,520

(29)

4,491

Income tax expense

(584)

6

(578)

Profit for the year

3,936

(23)

3,913

Other comprehensive income

-

-

-

Total comprehensive income

3,936

(23)

3,913

 




The Group has recognised the cumulative effect of initially applying IFRS 15 with an opening adjustment to equity of £173,904 at 1 April 2017.   The net impact on profit before tax of applying IFRS 15 in the year ended 31 March 2018 was £23,051, resulting in a net adjustment to retained earnings at 31 March 2018 of £150,853.

£'000

As reported

 

 

 

Adjustments

Balances without adoption of IFRS 15

Cash flows from operating activities

 

 

 

Profit before income tax

4,520

(29)

4,491

Depreciation and amortisation

4,148

-

4,148

Share-based payments

40

-

40

Net finance costs

1,561

-

1,561

Operating cash flows before movements in working capital

10,269

(29)

10,240

Decrease in inventories

(39)

-

(39)

Increase in trade and other receivables

479

47

526

(Decrease)/increase in trade and other payables

(972)

(18)

(990)

Cash generated from operations

9,737

-

9,737

Income taxes paid

(1,501)

-

(1,501)

Net cash from operating activities

8,236

-

8,236

Cash flows from investing activities




Interest paid

(907)

-

(907)

Acquisition of subsidiaries net of cash acquired

(14,523)

-

(14,523)

Purchase of intangible assets

(54)

-

(54)

Purchase of property, plant and equipment

(364)

-

(364)

Net cash used in investing activities

(15,848)

-

(15,848)

Cash flows from financing activities




Dividends paid

(1,837)

-

(1,837)

Issue of convertible loan note

7,294

-

7,294

Increase in bank loan

11,500

-

11,500

Repayment of borrowings

(2,750)

-

(2,750)

Net cash from financing activities

14,207

-

14,207

Net (decrease)/increase in cash and cash equivalents

6,595

-

6,595

Cash and cash equivalents at beginning of year

532

-

532

Cash and cash equivalents at end of year

7,127

-

7,127

The impact of the adoption of IFRS 15 on basic and adjusted earnings per share is not material.

5. Segmental information

IFRS 8 "Operating Segments" requires identification on the basis of internal reporting about components of the Group that are regularly reviewed by the chief operating decision maker to allocate resources to the segments and to assess their performance.

The chief operating decision maker has been identified as the Board. The Board reviews the Group's internal reporting in order to assess performance and allocate resources. The operating segments are fixed line services (being calls and line rental services) and managed services (which are data connectivity, hardware, IP telephony, support and maintenance services), which are reported in a manner consistent with the internal reporting to the Board. The Board assesses the performance of the operating segments based on revenue, gross profit and underlying EBITDA.

£'000

Year ended 31 March 2018

 

Year ended 31 March 2017

Fixed line

services

Managed

services

Central

costs

Total

 

Fixed line

services

Managed

services

Central

costs

Total

Revenue

14,001

32,433

-

46,434

 

15,365

19,071

-

34,436

Gross profit

5,439

17,480

-

22,919

 

6,074

8,497

-

14,571

Gross margin %

38.8%

53.9%

-

49.4%

 

39.5%

44.6%

-

42.3%

Administrative expenses

(2,562)

(10,586)

-

(13,148)

 

2,687

4,057

-

6,744

Underlying EBITDA

2,877

6,894

-

9,771

 

3,387

4,440

-

7,827

Underlying EBITDA %

20.5%

21.3%

-

21.0%

 

22.0%

23.3%

-

22.7%

Amortisation

(2,071)

(1,659)

-

(3,730)

 

(1,907)

(575)

-

(2,482)

Depreciation

-

-

(418)

(418)

 

-

-

(279)

(279)

Revaluation of deferred consideration

-

-

(28)

(28)

 

-

-

-

-

Acquisition costs

-

-

(229)

(229)

 

-

-

(703)

(703)

Compensation credits

-

-

755

755

 

-

-

-

-

Share-based payments

-

-

(40)

(40)

 

-

-

(31)

(31)

Operating profit/(loss)

806

5,236

39

6,081

 

1,480

3,865

(1,013)

4,332

Finance costs

-

-

(1,561)

(1,561)

 

-

-

(928)

(928)

Income tax

-

-

(584)

(584)

 

-

-

(655)

(655)

Profit/(loss) after tax

806

5,236

(2,106)

3,936

 

1,480

3,865

(2,596)

2,749

 

During the year the Group received compensation from Openreach following their mis-use of the deemed consent process in relation to installation of data circuits.  This compensation relates to service credits for a large number of data circuits across a number of financial periods.  The value of the compensation received by the Group has been excluded from the calculation of managed services gross margin and underlying EBITDA as it does not relate to the current year and it is not a reflection of the underlying profitability of the Group.

The assets and liabilities relating to the above segments have not been disclosed as they are not separately identifiable and are not used by the chief operating decision maker to allocate resources. All segments are in the UK and all revenue relates to the UK.

Transactions with the largest customer of the Group are less than 10% of total turnover and do not require disclosure for either 2017 or 2018.

6. Revenue

In the following table, revenue is disaggregated by major product/service lines and timing of revenue recognition. All revenue is derived from the UK.

 

 

2018

£'000

2017

£'000

Sale of goods

 

10,003

4,698

Provision of services

 



- calls and line rental

 

14,481

15,874

- data networks

 

9,731

8,501

- support services

 

8,847

2,046

- other services

 

3,372

3,317

 

 

46,434

34,436

 

 



Timing of revenue recognition

 



Products transferred at a point in time

 

10,003

4,698

Products and services transferred over time

 

36,431

29,738

 

 

46,434

34,436

 

The Group has initially applied IFRS 15 using the cumulative effect method.  Under this method the comparative information is not restated.

The following table provides information about receivables, contract assets and contract liabilities with customers:

 

 

2018

£'000

2017

£'000

Receivables, which are included in 'Trade and other receivables'

 

3,987

3,738

Contract assets

 

423

-

Contract liabilities

 

(568)

-

 

Contract assets relate to the deferred direct costs in respect of data circuit installations which have been completed and are being recognised across the customers contractual term to which the installation relates.  The contract liabilities relate to the deferred revenue in respect of data installations which have been completed and the revenue is being recognised across the term of the customer contract.

Significant changes in the contract assets and contract liabilities balances during the period are as follows:

 

 

2018

£'000

2017

£'000

Revenue deferred into future periods

 

(568)

-

Deferred revenue recognised in the period

 

18

-

Direct costs deferred into future periods

 

423

-

Deferred direct costs recognised in the period

 

(47)

-

 

The Group recognised the cumulative effect of initially applying IFRS 15 as an adjustment to the opening balance at 1 April 2017.

The performance obligations of the underlying contracts to which the contract assets relate are expected to be met over periods of up to 5 years.  However, the performance obligations for all revenues and costs that have been deferred into future periods have been satisfied at the year end, as these relate to the installation and equipment of data networks which have been completed and the service is being used by the customer.

There are no impairment losses in relation to the contract assets recognised under IFRS 15.

7. Operating profit

The operating profit is stated after charging:

 

2018

£'000

2017

£'000

Amortisation of customer base, billing system and licence

3,730

2,482

Depreciation of tangible fixed assets:



- owned by the Group

418

279

Share option expense/(credit)

40

31

Minimum operating lease payments:



- land and buildings

466

575

- motor vehicles and other equipment

76

110

Acquisition costs

230

703

Compensation credit

755

-

 

8. Auditor's remuneration

 

2018

£'000

2017

£'000

Fees payable to the Group's auditor for the audit of the Group's annual financial statements

36

35

Fees payable to the Group's auditor and their associates in respect of:



- audit of subsidiaries

52

31

- other services relating to taxation

20

17

 

9. Finance costs

 

2018

£'000

2017

£'000

On bank loans and overdrafts

1,122

424

Bank fees

136

182

Finance cost on contingent consideration

303

322

 

1,561

928

 

The finance costs on contingent consideration arises from the release of the discounted contingent consideration liability evenly across the term of the deferred consideration period in relation to each acquisition. This is a non-cash item.

10. Employee costs

Staff costs, including directors' remuneration, were as follows:

2018

£'000

2017

£'000

Wages and salaries

8,296

4,141

Social security costs

960

483

Share option expense

40

31

114

51


9,411

4,706

 

The average monthly number of employees, including the directors, during the year was as follows:

 

2018

Number

2017

Number

Non-executive directors

3

2

Administrative staff

176

87


179

89

 

Key management personnel

The directors are considered to be the key management personnel of the Group, having authority and responsibility for planning, directing and controlling the activities of the Group.

 

11. Income tax expense

 

2018

£'000

2017

£'000

Current tax

 

 

UK corporation tax on profit for the year

1,428

1,300

Adjustments in respect of prior periods

(325)

32

Total current tax

1,103

1,332

Deferred tax

 

 

Origination and reversal of timing differences:

 

 

- fixed assets

(22)

(4)

- share options

(3)

(10)

- goodwill on business combinations

(506)

(633)

Adjustments in respect of prior periods

12

(30)

Total deferred tax (see Note 16)

(519)

(677)

Total income tax expense

584

655

 

Factors affecting tax charge for the year

The relationship between expected tax expense based on the effective tax rate of AdEPT at 19% (2017: 20%) and the tax expense actually recognised in the income statement can be reconciled as follows:

 

2018

£'000

2017

£'000

Profit before income tax

4,520

3,404

Tax rate

19%

20%

Expected tax charge

859

681

Expenses not deductible for tax purposes

126

254

Adjustments to tax charge in respect of prior periods

(313)

2

Depreciation/amortisation on non-qualifying assets

13

(2)

R&D enhanced tax deduction

(95)

-

RDEC credit taxed

3

-

Prior year IFRS 15 adjustment

(33)

-

Unprovided deferred tax movement

-

3

Difference due to deferred tax rate being lower than the standard tax rate

63

(272)

Share option relief

-

(11)

Group relief claim

(29)

-

Other

(10)

-

Actual tax expense net

584

655

 

The change in income tax rates will affect future tax charges.

12. Dividends

On 30 September 2017 the directors approved an interim dividend of 4.25p per ordinary share (2017: 3.75p), which was paid to shareholders on 7 April 2018. On 5 April 2018 the directors proposed a final dividend, subject to shareholder approval at the 2018 annual general meeting, of 4.50p per ordinary share (2017: 4.00p). Total dividends proposed in respect of the year ended 31 March 2018 will absorb £2,073,910 of shareholders' funds in future periods (2017: £1,836,892).

On 7 April 2017 the Company paid dividends of £888,818 in relation to the interim dividend declared in September 2016. On 10 October 2017 the Company paid dividends of £948,074 in relation to the final dividend declared in March 2017. Total dividends paid in the year ended 31 March 2018 absorbed £1,836,892 of cash (2017: £1,461,467).

13. Goodwill

Group

 

Total

£'000

Cost

 

At 1 April 2016

5,698

Additions

7,603

At 1 April 2017

13,301

Additions

3,313

At 31 March 2018

16,615

Impairment

 

At 1 April 2016

(2,084)

Impairment charge

-

At 1 April 2017

(2,084)

Impairment charge

-

At 31 March 2018

(2,084)

Net book value

 

At 31 March 2018

14,531

At 31 March 2017

11,217

 

The goodwill is split by cash-generating units as follows:

 

March

2018

£'000

March

2017

£'000

Centrix Limited

3,614

3,614

Comms Group UK Limited

2,672

2,672

CAT Communications Limited

248

248

OurIT Department Limited

4,683

4,683

Atomwide Limited

3,313

-

 

The assumptions are set out in note 3. The net present value of the future cash flows for some of the cash-generating units is sensitive to the weighted average cost of capital.  The rate used to discount the future cash flows is the Group's pre-tax weighted average cost of capital of 7.18%. An increase in the Groups weighted average cost of capital to above 10.9% would materially impair the carrying value of the Group's goodwill by more than £400,000.

An increase to the weighted average cost of capital may lead to impairment of goodwill, further details of the sensitivity of the variables used in the impairment testing are included in Note 3.

14. Intangible fixed assets

Group

 

Licence

£'000

Computer

software

£'000

Customer

base

£'000

Software

apps

£'000

Website

£'000

Total

£'000

Cost

 

 

 

 

 

 

At 1 April 2016

26

1,274

40,444

-

-

41,744

Additions

-

26

6,111

-

1,744

7,881

Acquired with subsidiary

-

-

1,703

-

-

1,703

At 1 April 2017

26

1,300

48,295

-

1,744

51,365

Additions

15

39

7,248

3,535

-

10,837

Acquired with subsidiary

-

-

-

-

-

-

At 31 March 2018

41

1,339

55,543

3,535

1,744

62,202

Amortisation

 

 

 

 

 

 

At 1 April 2016

26

1,112

19,186

-

-

20,324

Charge for the year

-

88

2,208

-

-

2,296

Impairment charge

-

-

186

-

-

186

At 1 April 2017

26

1,200

21,580

-

-

22,806

Charge for the year

2

83

2,947

236

249

3,517

Impairment charge

-

-

213

-

-

213

At 31 March 2018

28

1,283

24,740

236

249

26,536

Net book value

 

 

 

 

 

 

At 31 March 2018

13

56

30,803

3,299

1,495

35,666

At 31 March 2017

-

100

26,715

-

1,744

28,559

 

Included within the Group's intangible assets is:

 

Useful life

March

2018

£'000

March

2017

£'000

Centrix Limited

30 years

7,664

7,946

Comms Group UK Limited

17 years

4,331

4,662

OurIT Department Limited

17 years

2,999

3,281

CAT Communications Limited

10 years

1,055

1,289

Atomwide Limited - customer base

10 years

6,751

-

Atomwide Limited - software/apps

10 years

3,299

-

Other customer bases- AdEPT Telecom plc trading business

10-16 years

9,497

11,281

 

Company

 

Licence

£'000

Computer

software

£'000

Customer

base

£'000

Total

£'000

Cost

 

 

 

 

At 1 April 2016

26

1,274

32,045

33,345

Additions

-

26

-

26

At 1 April 2017

26

1,300

32,045

33,371

Additions

-

39

-

39

At 31 March 2018

26

1,339

32,045

33,410

Amortisation

 

 

 

 

At 1 April 2016

26

1,112

18,952

20,090

Charge for the year

-

88

1,631

1,719

Impairment charge

-

-

186

186

At 1 April 2017

26

1,200

20,769

21,995

Charge for the year

-

83

1,661

1,744

Impairment charge

-

-

176

176

At 31 March 2018

26

1,283

22,606

23,915

Net book value

 

 

 

 

At 31 March 2018

-

56

9,439

9,495

At 31 March 2017

-

100

11,276

11,376

 

Intangible assets are reviewed annually or more frequently if events or changes in circumstances indicate that the carrying value may be impaired. The net present value of cash flows for each cash-generating unit is reviewed against the carrying value at the balance sheet date. At the final reporting date of 31 March 2018 the net present value of future cash flows of certain cash-generating units was below the carrying value and an impairment charge of £212,850 (2017: £185,583) has been recorded in respect of four cash-generating units.

The useful lives of the customer base intangible assets are determined by reference to the actual historical churn rates of the revenue stream for each customer base acquired. Sensitivity of the assumptions are included in Note 3.

The rate used to discount the future cash flows is the Group's pre-tax weighted average cost of capital of 7.18%. An increase in the Groups weighted average cost of capital to above 11.4% would materially impair the carrying value of the Group's intangible assets by more than £400,000.

 

Book value of cash-generating unit

£'000s

Estimated value in use

£'000s

Centrix Limited

7,664

22,420

Comms Group UK Limited

4,331

6,212

OurIT Department Limited

2,999

3,957

CAT Communications Limited

1,055

1,473

Atomwide Limited - customer base

3,299

3,417

Atomwide Limited - software/apps

6,751

9,091

 

15. Investments in subsidiaries

Company

 

Company

£'000

Total

£'000

Cost

 

 

1 April 2016

11,846

11,846

Additions

16,157

16,157

Disposals

(1,461)

(1,461)

1 April 2017

26,542

26,542

Additions

19,728

19,728

Disposals

-

-

At 31 March 2018

46,270

46,270

Amounts written off

 

 

At 1 April 2016

-

-

Written off during the year

-

-

1 April 2017

-

-

Written off during the year

-

-

At 31 March 2018

-

-

Net book value

 

 

At 31 March 2018

46,270

46,270

At 31 March 2017

26,542

26,542

 

Details of the principal subsidiaries of the Company are included in Note 31 to the financial statements.

 

16. Property, plant and equipment

Group


Motor

vehicles

£'000

Short-term

leasehold

improvements

£'000

Fixtures

and

fittings

£'000

Office

equipment

£'000

Total

£'000

Cost

 

 

 

 

 

At 1 April 2016

105

7

338

548

998

Acquired with subsidiary

-

-

11

461

472

Additions

-

-

1

145

146

Disposals

-

-

-

(62)

(62)

At 1 April 2017

105

7

350

1,092

1,554

Acquired with subsidiary

43

256

88

66

453

Additions

-

-

9

355

364

Disposals

-

-

-

(271)

(271)

At 31 March 2018

148

263

447

1,242

2,100

Depreciation

 

 

 

 

 

At 1 April 2016

4

7

152

311

474

Charge for the year

26

-

56

197

279

Disposals

-

-

-

(62)

(62)

At 1 April 2017

30

7

208

446

691

Charge for the year

38

14

70

295

417

Disposals

-

-

-

(122)

(122)

At 31 March 2018

68

21

278

619

986

Net book value

 

 

 

 

 

At 31 March 2018

80

242

169

623

1,114

At 31 March 2017

75

-

142

646

863

 

Company

 

Motor

vehicles

£'000

Short-term

leasehold

improvements

£'000

Fixtures

and

fittings

£'000

Office

equipment

£'000

Total

£'000

Cost

 

 

 

 

 

At 1 April 2016

105

7

208

346

666

Additions

-

-

-

10

10

Disposals

-

-

-

-

-

At 1 April 2017

105

7

208

356

676

Additions

-

-

7

19

26

Disposals

-

-

-

-

-

At 31 March 2018

105

7

215

375

702

Depreciation

 

 

 

 

 

At 1 April 2016

4

7

146

305

462

Charge for the year

26

-

24

27

77

Disposals

-

-

-

-

-

At 1 April 2017

30

7

170

332

539

Charge for the year

27

-

24

17

68

Disposals

-

-

-

-

-

At 31 March 2018

57

7

194

349

606

Net book value

 

 

 

 

 

At 31 March 2018

48

-

21

26

95

At 31 March 2017

75

-

38

24

137

 

17. Deferred taxation

 

2018

Group

£'000

2018

Company

£'000

2017

Group

£'000

2017

Company

£'000

At 1 April 2017

(4,057)

43

(3,041)

106

Income statement credit/(charge)

519

18

700

6

Movement in deferred tax on share options taken to equity

19

19

(69)

(69)

Deferred tax provision on convertible loan note taken to equity

(220)

(220)

-

-

Deferred tax acquired

(22)

-

-

-

Deferred tax on business combination

(1,829)

-

(1,646)

-

At 31 March 2018

(5,590)

(140)

(4,057)

43

 

The deferred tax (liability)/asset is made up as follows:

 

2018

Group

£'000

2018

Company

£'000

2017

Group

£'000

2017

Company

£'000

Capital allowances

(49)

9

(7)

6

Short-term timing differences

33

16

17

16

Convertible loan note equity element

(208)

(208)

-

-

Deferred tax on business combinations

(5,409)

-

(4,088)

-

Share options

43

43

21

21

 

(5,590)

(140)

(4,057)

43

 

18. Inventories

 

2018

Group

£'000

2018

Company

£'000

2017

Group

£'000

2017

Company

£'000

Consumables

266

1

196

1

 

As at 31 March 2018, inventories of £100,171 (2017: £74,036) were fully provided for. During the year £26,135 has been recognised as an expense in the statement of comprehensive income.

There is no material difference between the replacement cost of inventories and the amount stated above.

19. Trade and other receivables

 

2018

Group

£'000

2018

Company

£'000

2017

Group

£'000

2017

Company

£'000

Trade receivables

3,955

1,015

3,738

1,178

Other receivables

53

7

24

7

Income tax

-

-

-

-

Prepayments

1,477

200

1,432

291

Accrued income

382

138

320

212

 

5,867

1,360

5,513

1,688

 

As at 31 March 2018, trade receivables of £121,298 (2017: £215,939) were impaired and fully provided for. The ageing of the trade receivables which are past due and not impaired is as follows:

 

2018

Group

£'000

2018

Company

£'000

2017

Group

£'000

2017

Company

£'000

31-60 days

903

108

512

147

61-90 days

213

4

182

20

Over 90 days

260

-

162

-

 

1,376

112

856

167

 

All debts which are older than 90 days relate to interim amounts in respect of large customer projects which have not yet fully completed and are considered to be fully recoverable on completion. The movement of the provision for impairment of trade receivables is as follows:

 

Group

£'000

Company

£'000

At 1 April 2016

128

128

Receivables provided for during the year as uncollectable

87

1

At 1 April 2017

215

129

Receivables provided for during the year as uncollectable

-

47

Receivables collected during the year which were previously provided

(94)

-

At 31 March 2018

121

176

 

The creation and release of a provision for impaired receivables has been included in administration expenses in the income statement. Amounts charged to the allowance account are generally written off when there is no expectation of recovering cash. Management regularly reviews the outstanding receivables and does not consider that any further impairment is required. The other asset classes within trade and other receivables do not contain impaired assets.

20. Trade and other payables

 

2018

Group

£'000

2018

Company

£'000

2017

Group

£'000

2017

Company

£'000

Trade payables

2,292

608

1,706

617

Other taxes and social security costs

1,407

435

910

174

Other payables

44

34

67

54

Amounts owed to Group undertakings

-

3,222

-

2,065

Accruals and deferred income

3,729

1,046

3,630

1,009

Contingent consideration

4,360

4,360

6,736

6,736


11,832

9,705

13,049

10,655

 

The contingent consideration liability of £4,359,527 (2017: £6,735,837) represents the year-end fair value of the contingent consideration liabilities arising on the acquisitions made during the year. The fair value of the contingent consideration liability was initially determined by reference to the forecast growth rate for the customer base and applying the contingent consideration matrix as specified in the share purchase agreement. Further details are included in Note 29.

21. Long-term borrowings

 

2018

Group

£'000

2018

Company

£'000

2017

Group

£'000

2017

Company

£'000

Between one and two years

-

-

-

-

Between two and five years

24,749

24,749

15,988

15,988

More than five years

6,011

6,011

-

-

Bank loans

30,760

30,760

15,988

15,988

 

The bank loan of £24,748,564 is secured by a debenture incorporating a fixed and floating charge over the undertaking and all property and assets present and future, including goodwill, book debts, uncalled capital, buildings, fixtures and fixed plant and machinery.

Included in long-term borrowings is an amount of £6,011,728 which is the debt component of the convertible loan instrument from BGF.  This loan instrument is sub-ordinated and sits behind the bank loan.

Details of the interest rates applicable to the borrowings are included in Note 29.

Included within bank loans are arrangement fees amounting to £251,435 (2017: £261,635) which are being released over the term of the loan in accordance with IAS 39.

22. Share capital

 

2018

£'000

2017

£'000

Authorised



65,000,000 ordinary shares of 10p each

6,500

6,500

Allotted, called up and fully paid



23,701,832 (2017: 23,701,832) ordinary shares of 10p each

2,370

2,370

 

Movement in shares in issue

 

31 March

2018

31 March

2017

Ordinary shares of 10p each

23,701,832

22,484,108

Issued upon exercise of share options and warrants

-

1,236,860

Shares repurchased and cancelled

-

(19,136)


23,701,832

23,701,832

 

Share buyback scheme

On 18 December 2014 the Company announced that it intended to commence a limited share buyback of its own ordinary shares. During the year ended 31 March 2018 the Company repurchased no shares (2017: 19,136 at an average price of 318p).

Share options

At 31 March 2018, the following options and warrants over the shares of AdEPT were in issue:

 

2018

 

2017

 

Number

of shares

under

option

Weighted

average

exercise

price

 

Number

of shares

under

option

Weighted

average

exercise

price

Outstanding at 1 April

392,500

228p

 

1,469,840

49p

Granted during the year

2,095,910

386p

 

159,520

228p

Exercised during the year

-

-

 

(1,236,860)

14p

Outstanding at 31 March

2,488,410

361p

 

392,500

228p

 

The weighted average remaining contractual life of share options and warrants at 31 March 2018 was two years.

Employee share option schemes have a vesting period of three years and are settled through new equity issues in return for cash consideration and the maximum term of share options is ten years.

The weighted average fair values of options issued during the year have been determined using the Black-Scholes-Merton Pricing Model with the following assumptions and inputs:

 

2018

2017

Risk-free interest rate

1.68%

0.50%

Expected volatility

17.0%

28.0%

Expected option life (years)

3.0

3.0

Expected dividend yield

2.7%

2.3%

Weighted average share price

335p

229p

Weighted average exercise price

335p

229p

Weighted average fair value of options granted

32p

 

The expected average volatility was determined by reviewing historical fluctuations in the share price prior to the grant date of each share instrument. An expected take-up of 100% has been applied to each share instrument. Expected dividend yield is estimated at 2.7%; this is based upon the past dividend yield of AdEPT Telecom plc and in accordance with the guidance in IFRS 2.

 

Exercise

price

 (p)

Expected

option life

 (years)

31 March

2018

No. of options

31 March

2017

No. of options

21 January 2009

11

3.0

-

-

23 August 2013

126

3.0

-

-

1 March 2016

222

3.0

240,000

240,000

1 October 2016

238

3.0

152,500

152,500

1 August 2017

335

3.0

2,095,910

-




2,488,410

392,500

 

The closing price of the ordinary shares on 31 March 2018 was 325p and the range during the year was 118p.

23. Pension commitments

At 31 March 2018 there were no pension commitments (2017: £Nil).

24. Operating lease commitments

At 31 March 2018 the lease commitments were as follows:

Group

 

Land and buildings

 

Other

2018

£'000

2017

£'000


2018

£'000

2017

£'000

Within one year

414

382


61

58

Between two and five years

948

413


38

52

 

Company

 

Land and buildings

 

Other

2018

£'000

2017

£'000


2018

£'000

2017

£'000

Within one year

29

172


37

43

Between two and five years

-

29


22

41

 

Land and buildings

The Company leases its offices under non-cancellable operating lease agreements. There is no material contingent rent payable. The lease agreements do not offer security of tenure. The lease terms are for five years.

Other

The Company leases various office equipment and motor vehicles under non-cancellable operating lease agreements. The lease terms are three years.

The lease expenditure charged to the income statement during the year is disclosed in Note 7.

25. Operating lease rentals

At 31 March 2018 the lease rental commitments outstanding from customers were as follows:

Group


Land and buildings

 

Other

2018

£'000

2017

£'000


2018

£'000

2017

£'000

Within one year

-

-


117

115

Between two and five years

-

-


79

112

 

Company


Land and buildings

 

Other

2018

£'000

2017

£'000


2018

£'000

2017

£'000

Within one year

-

-


-

-

Between two and five years

-

-


-

-

 

Other

The Company leases various telecommunications equipment to customers under non-cancellable operating lease agreements. The lease terms are three years.

The lease income is included within the operating segment 'Managed Services', see note 4, and recognised in the income statement evenly during the term of the agreement.

26. Related party transactions

During the year dividends were paid to the following directors:

 

2018

£

2017

£

I Fishwick

73

78

R Wilson

47

51

D Lukic

2

3

C Kingsman

291

-

R Burbage

16

7

J Swaite

6

5

 

There is no ultimate controlling party.

Transactions between the Company and its subsidiaries are as follows:

Provision of services from related parties

 

31 March

2018

£'000

31 March

2017

£'000

Our IT Department Limited

35

-

 

Amounts due to subsidiaries

 

31 March

2018

£'000

31 March

2017

£'000

Centrix Limited

1,168

1,008

Comms Group UK Limited

950

1,550

Brightvision Limited

-

605

Atomwide Limited

1,201

-


3,319

3,163

 

Amounts due from subsidiaries

 

31 March

2018

£'000

31 March

2017

£'000

Our IT Department Limited

97

1,097

Intra-Group dividends of £10,200,000 were paid to AdEPT Telecom plc from the subsidiary companies during the year (2017: £Nil).  These dividends are included in the Company profit for the year but are eliminated upon consolidation.

27. Capital commitments

At 31 March 2018 there were capital commitments of £Nil (2017: £Nil).

28. Earnings per share

Earnings per share is calculated on the basis of a profit of £3,936,054 (2017: £2,749,130) divided by the weighted average number of shares in issue for the year of 23,701,832 (2017: 22,585,580). The diluted earnings per share is calculated on the treasury stock method and the assumption that the weighted average unapproved and EMI share options outstanding during the period are exercised. This would give rise to a total weighted average number of ordinary shares in issue for the period of 24,052,460 (2017: 23,768,178).

Adjusted earnings per share is used to reflect the non-cash nature of certain items which are charged to the income statement and the non-trading items, such as acquisition costs, to give a better indicator of the underlying cash generation of the Group. Adjusted earnings per share is calculated by adding back amortisation of intangible assets, impairment of goodwill, the taxation deduction on purchased customer contracts, deferred tax credits on amortisation charges, share option charges, revaluation of deferred consideration, acquisition costs and excluding compensation credits from retained earnings, giving £6,660,491 (2017: £5,213,923). This is divided by the same weighted average number of shares as above.

 

2018

£'000

2017

£'000

Earnings for the purposes of basic and diluted earnings per share

 

 

Profit for the period attributable to equity holders

3,936

2,749

Add: amortisation

3,730

2,482

Less: taxation on amortisation of purchased customer contracts

(121)

(118)

Less: deferred tax credit on amortisation charges

(506)

(633)

Add: share option charges

40

31

Add: revaluation of deferred consideration

28

-

Add: acquisition costs

230

703

Less: compensation credits

(755)

-

Add: interest unwind on loan note

79

-

Adjusted profit attributable to equity holders

6,661

5,214

Number of shares

 

 

Weighted average number of shares used for earnings per share

23,701,832

22,585,580

Weighted average dilutive effect of share plans

350,628

1,182,598

Diluted weighted average number of shares

24,052,460

23,768,178

Earnings per share

 

 

Basic earnings per share

16.61p

12.17p

Diluted earnings per share

16.36p

11.57p

Adjusted earnings per share

 

 

Adjusted basic earnings per share

28.10p

23.09p

Adjusted diluted earnings per share

27.69p

21.94p

 

Earnings per share is calculated by dividing the retained earnings attributable to the equity holders by the weighted average number of ordinary shares in issue.

Adjusted earnings per share is calculated by dividing the retained earnings attributable to the equity holders (after adding back amortisation, the taxation deduction on purchased customer contracts, deferred tax credits on amortisation charges, share option charges, revaluation of deferred consideration, acquisition costs and excluding compensation credits) by the weighted average number of ordinary shares in issue.

29. Financial instruments

Set out below are the Group's financial instruments. The directors consider there to be no difference between the carrying value and fair value of the Group's financial instruments.

 

2018

Group

£'000

2018

Company

£'000

2017

Group

£'000

2017

Company

£'000

Loans and receivables at amortised cost

 

 

 

 

Cash and cash equivalents

7,127

4,305

1,238

-

Loans and receivables

3,955

1,015

3,912

1,352


11,082

5,320

5,150

1,352

Financial liabilities at amortised cost

 

 

 

 

Liabilities at amortised cost

33,051

31,367

18,400

17,312

Financial liabilities at fair value

 

 

 

 

Contingent consideration

4,360

4,360

6,426

6,426


37,411

35,727

24,826

23,738

Amounts due for settlement

 

 

 

 

Within twelve months

6,651

4,967

8,838

7,750

After twelve months

30,760

30,760

15,988

15,988


37,411

35,727

24,826

23,738

 

On 2 February 2017 the Company signed a new five year £30m revolving credit facility agreement with Barclays Bank plc and Royal Bank of Scotland plc. The revolving credit facility bears interest at 1.85-2.30% over LIBOR on drawn funds, dependent upon the net debt: EBITDA ratchet, and is repayable in full on the final repayment date of 2 February 2022.

The financial assets of the Group are cash and cash equivalents and trade and other receivables, which are offset against borrowings under the facility, and there is no separate interest rate exposure.

Barclays Bank plc and Royal Bank of Scotland plc have a cross guarantee and debenture incorporating a fixed and floating charge over the undertaking and all property and assets present and future, including goodwill, book debts, uncalled capital, buildings, fixtures and fixed plant and machinery.

The banks also hold a charge over the life assurance policy of Ian Fishwick, director of the Company, for £1,500,000.

In August 2017 the Group raised £7,293,726 in the form of a convertible loan instrument from BGF to part fund the acquisition of Atomwide.  The convertible loan instrument is excluded from the leverage calculations by the senior debt partners, Barclays and RBS.  The Group has applied the principles of IAS 32 and IAS 39 in the recognition and measurement of the convertible loan.  The net present value of the loan of £7,090,201 has been split between the debt and equity components and an amount of £1,158,317 has been recorded in equity, with £5,931,883 being included within long-term debt.

BGF has the right to convert the loan to 1,855,910 ordinary shares at a share price of £3.93 per share at anytime.  The loan instrument can be redeemed by the Company from the third anniversary. The convertible loan instrument bears an interest rate of 7%. In addition, the transaction cost with a net present value of £203,526 is being recognised in the interest charge in the income statement across the term of the convertible instrument.

Contingent consideration obligations

At 31 March 2018 a financial liability of £4,359,527 has been recognised in respect of the fair value of the contingent consideration due in respect of the acquisitions of:

 

 

Fair value as at

Fair value
 hierarchy

Valuation technique(s)

and key input(s)

Significant unobservable

input(s)

Relationship of unobservable

inputs to fair value

31 March

2017

£'000

31 March

2018

£'000

Comms Group UK Limited

3,434

-

Level 3

Based upon a multiple of

gross margin calculated

by the growth rate over a

period of twelve months.

Growth rate being the

gross margin increase as

measured by actual

increase of gross
margin over a
twelve-month period.

The higher the growth

rate the higher

the multiple.

 

The higher the gross

margin the higher the

earn out.

CAT Communications Limited

508

-

Level 3

Based upon a multiple of

gross margin calculated

by the growth rate over a

period of twelve months.

Growth rate being the

 gross margin increase as

measured by actual

increase of gross
margin over a
twelve-month period.

The higher the growth

rate the higher

the multiple.

 

The higher the gross

margin the higher the

earn out.

OurIT Department Limited

2,785

3,654

Level 3

The contingent

consideration was
based upon a multiple of
EBITDA calculated over a period of twelve months.

Measured by actual

 EBITDA over a
twelve-month period.

The higher the EBITDA

the higher the earn out.

Atomwide Limited

-

706

Level 3

Based upon a multiple of

gross margin calculated

by the growth rate over a

period of twelve months.

Growth rate being the

gross margin increase as

measured by actual

increase of gross
margin over a
twelve-month period.

The higher the growth

rate the higher

the multiple.

 

The higher the gross

margin the higher the

earn out.

 

All contingent consideration is subject to the maximum value as stated in the share purchase agreement. The net fair value of the estimated deferred consideration liability at 31 March 2018 is not materially different to that of the net values estimated at the date of acquisition. The discount charge which has been recognised as an expense in the statement of comprehensive income in relation to the deferred consideration liability is disclosed in Note 9 to these financial statements.

Reconciliation of the movement in the fair value of contingent consideration:

 

Atomwide

Limited

£'000

Comms Group

UK Limited

£'000

CAT

Communications

Limited

£'000

OurIT

Department

Limited

£'000

Total

£'000

As at 1 April 2017

-

3,434

496

2,805

6,735

Additions/adjustment

640

-

(55)

671

1,256

Discounting of deferred consideration

66

23

37

178

304

Settled in cash

-

(3,457)

(478)

-

(3,935)

As at 31 March 2018

706

-

-

3,654

4,360

 

The earn out for Atomwide Limited had not been achieved by 31 March 2018. The earnout for Our IT Department Limited was paid on 5 April 2018.

During the year total cash consideration of £14,522,818 was paid in respect of acquisitions, £3,934,239 was in respect of the settlement of deferred consideration and £10,588,579 was in respect of initial consideration (net of cash acquired).

The contingent consideration arising on the acquisition of OurIT is payable to a vendor who remained in employment in the business after acquisition. In accordance with the requirements of IFRS 3, management has considered the indicators therein and determined that the contingent amounts payable to the vendor represent consideration for the acquisition and not remuneration for post-acquisition services.

Obligations under finance leases

As at 31 March 2018 the Group had no finance lease obligations.

Sensitivity analysis

At 31 March 2018 it was estimated that a movement of 1% in interest rates would impact the Group's profit before tax by approximately £0.2m.

Interest rate risk

The Group's current interest rate policy is subject to ongoing review in line with the level of borrowings and potential interest risk exposure. At 31 March 2018, £7,293,726 of the Group's borrowings are at a fixed rate of interest (2017: 0%).

Credit risk

Credit risk associated with cash balances is managed by transacting with financial institutions with high quality credit ratings. Accordingly the Company's associated credit risk is deemed to be limited.

The carrying amount of financial assets represents the maximum credit exposure. The maximum exposure to credit risk at 31 March 2018 was £11,081,483 (2017: £4,976,694).

Loans and receivables

 

2018

Group

£'000

2018

Company

£'000

2017

Group

£'000

2017

Company

£'000

Trade receivables

3,955

1,015

3,738

1,178

Other receivables

53

7

21

7

Cash and cash equivalents

7,127

4,305

1,238

-


11,135

5,327

4,997

1,185

 

Credit risk refers to the risk that the counterparty will default on its contractual obligations resulting in financial loss to the Group. The Group has adopted a policy of only dealing with creditworthy counterparties and this policy has been implemented by requiring staff to carry out appropriate credit checks on customers before sales commence.

Trade receivables consist of a large number of customers, spread across diverse industries across the United Kingdom. Ongoing credit evaluation is performed on the financial condition of accounts receivable. The Group does not have any significant credit risk exposure to any single counterparty.

Liquidity risk

The Group has an appropriate liquidity risk management framework for the management of the Group's short, medium and long-term funding and liquidity risk management requirements. The Group manages liquidity risk by maintaining adequate banking facilities and through cash flow forecasting, acquisition planning and monitoring working capital and capital expenditure requirements on an ongoing basis.

Amortised cost

Year ended 31 March 2018

Within

1 year

£'000

1-2 years

£'000

2-5 years

£'000

More than

5 years

£'000

Borrowings

-

-

24,749

6,011

Trade and other payables

2,336

-

-

-

 

2,336

-

24,749

6,011

 

Year ended 31 March 2017

Within

1 year

£'000

1-2 years

£'000

2-5 years

£'000

More than

5 years

£'000

Borrowings

706

-

15,988

-

Trade and other payables

1,706

-

-

-

 

2,412

-

15,988

-

 

Currency risk

The Group's operations are handled entirely in sterling.

Capital risk management

The Group is subject to the risk that its capital structure will not be sufficient to support the growth of the business. The Group's objectives when managing capital are to safeguard the Group's ability to continue as a going concern in order to provide returns for shareholders and benefits for other stakeholders and to maintain an optimal capital structure to reduce the cost of capital. There were no changes to the Group's approach to capital management during the year.

As part of the banking arrangements, the Group is required to comply with certain covenants, including net debt to adjusted EBITA and interest cover.

In order to maintain or adjust the capital structure, the Company may return capital to shareholders, issue new shares or sell assets (customer bases/relationships) to reduce debt.

30. Business combinations

On 2 August 2017 the Company acquired the entire issued share capital of Atomwide Limited ('Atomwide') for an initial consideration of £12.0m plus the value of the surplus cash balance of Atomwide at completion (approximately £6.5m), payable in cash. Further contingent deferred consideration of between £Nil and £8.0m may be payable, also in cash, dependent upon the performance of Atomwide post-acquisition.

The contingent deferred consideration will be determined by reference to the forecast churn/growth rate for the gross margin of the acquired business and applying the contingent deferred consideration matrix as specified in the share purchase agreement. The fair value of contingent deferred consideration has been determined by reference to the growth rate for the gross margin of the acquired business and applying the contingent deferred consideration matrix as specified in the share purchase agreement. The contingent consideration liability of £1.3m has been discounted at the Group's weighted average cost of capital with the value of the discount of £0.1m being included within finance costs over the deferred consideration period as an interest charge.  At 31 March 2018 the estimated deferred consideration was £0.7m, a credit of £0.6m has been recognised in the statement of total comprehensive income in respect of the movement on the deferred consideration liability. Total consideration is expected to be £12.7m (net of the surplus cash acquired).

Atomwide, founded in 1987, is an IT services provider with over 30 years' experience, offering specialised IT support services and technology solutions to approximately 2 million users in over 3,000 schools.

Atomwide is the chief technology partner for London Grid for Learning, supplying IT services to around 2,500 schools in London.  The bespoke services have been created by the in-house development team and are supported by an experienced team of IT professionals based at Atomwide's premises in Orpington, Kent.

All of the senior management team which are responsible for the strategic direction, technical development and the day-to-day operations of Atomwide are to be retained within the business post-acquisition.

Details of the fair value of the assets acquired at completion and the consideration payable:


Book cost

£'000

Fair value

£'000

Software applications

-

3,535

Customer base

-

7,223

Property, plant and equipment

453

453

Inventories

30

30

Trade and other receivables

1,524

1,524

Cash and cash equivalents

7,916

7,916

Trade and other payables

(2,710)

(2,710)

Income tax

273

273

Deferred tax

-

(1,829)

Net assets

7,486

16,415

Cash


(18,502)

Contingent cash consideration


(1,226)

Fair value total consideration


(19,728)

Goodwill


3,313

 

The trade and other receivables are all considered recoverable.

Atomwide contributed revenue and profit after tax of £5.59m and £0.80m respectively for the year ended 31 March 2018 and represents an eight-month contribution. On a full year basis, Atomwide would have contributed revenue and profit after tax of £7.86m and £1.0m respectively. Acquisition related costs of £0.23m have been recognised as an expense in the statement of comprehensive income for the year ending 31 March 2018.

31. Subsidiaries

 

Country

Registered office

Class of share

% shareholding

Description

AdEPT Technology Limited

England & Wales

One Fleet Place, London, EC4M 7WS

Ordinary

100

Dormant

Centrix Limited

England & Wales

One Fleet Place, London, EC4M 7WS

Ordinary

100

Trading

Comms Group UK Limited

England & Wales

One Fleet Place, London, EC4M 7WS

Ordinary

100

Trading

Our IT Department Limited

England & Wales

One Fleet Place, London, EC4M 7WS

Ordinary

100

Trading

BrightVisions Limited

England & Wales

One Fleet Place, London, EC4M 7WS

Ordinary

100

Trading

Atomwide Limited

England & Wales

One Fleet Place, London, EC4M 7WS

Ordinary

100

Trading

CAT Communications Limited

England & Wales

One Fleet Place, London, EC4M 7WS

Ordinary

100

Dormant

AdEPT Technology Group Limited

England & Wales

One Fleet Place, London, EC4M 7WS

Ordinary

100

Dormant

32. Subsequent events

There are no subsequent events after the balance sheet date.

 

NOTE TO THE PRELIMINARY RESULTS ANNOUNCEMENT OF ADEPT TELECOM PLC FOR THE YEAR ENDED 31 MARCH 2018

The financial information set out above does not constitute the Group's financial statements for the years ended 31 March 2018 or 2017, but is derived from those financial statements. Statutory financial statements for 2017 have been delivered to the Registrar of Companies and those for 2018 will be delivered following the Group's annual general meeting. The auditors have reported on the 2017 financial statements which carried an unqualified audit report, did not include a reference to any matters to which the auditor drew attention by way of emphasis and did not contain a statement under section 498(2) or 498(3) of the Companies Act 2006.  The audit report on the 2018 financial statements is not yet signed, however an unqualified opinion is expected.

Whilst the financial information included in this preliminary announcement has been computed in accordance with International Financial Reporting Standards (IFRS), this announcement does not in itself contain sufficient information to comply with IFRS. The accounting policies used in preparation of this preliminary announcement are consistent with those in the full financial statements that have yet to be published.

AVAILABILITY OF FINANCIAL STATEMENTS

The annual report containing the full financial statements for the year to 31 March 2018 will be posted to shareholders on or around 19 August 2018, a soft copy of which will be available to download from the Company's website www.adept.co.uk.


This information is provided by RNS, the news service of the London Stock Exchange. RNS is approved by the Financial Conduct Authority to act as a Primary Information Provider in the United Kingdom. Terms and conditions relating to the use and distribution of this information may apply. For further information, please contact rns@lseg.com or visit www.rns.com.
 
END
 
 
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