AIM: KBT

30 March 2021

K3 BUSINESS TECHNOLOGY GROUP PLC

("K3" or "the Group" or "the Company")

Provider of mission-critical software (owned and third party) and cloud solutions to the supply chain sector.

Final results for the 12 months to 30 November 2020

Key Points

Financial

See Note 10 for details of the alternative performance measures

*exceptional impairments (all non-cash items) totalling £16.9m, which related to legacy products, the third-party Sage business and historic capitalised development costs.

*** Discontinued activities relate to UK Dynamics and Starcom Technologies Limited (see note 6 for further details)

Operational

Post-period events and Outlook 

Tom Crawford, Chairman of K3, said:

"In the face of unprecedented challenges created by the coronavirus pandemic, I am pleased with the resilience K3 has demonstrated. Our high level of predictable and recurring revenues, as well as our large and diverse customer base, led to robust results at a trading level.

"Implementing our strategy to focus on Own IP and Global Accounts and to cease investing in legacy POS products, we took a number of important strategic decisions in line with our growth strategy.  These included placing the loss-making UK Dynamics unit into administration, raising additional funding and, in late February 2021, selling Starcom, our managed services unit, for £14.7m. The Group is now in a significantly stronger financial position and is better placed to drive our Own-IP strategy.

"Following Starcom's sale, Adalsteinn Valdimarsson stepped down as Chief Executive Officer, and I am pleased to welcome Marco Vergani as his successor.  He brings significant sector experience and a strong record of driving sales.

"Marco will be leading a re-evaluation of our target markets for K3|imagine, which continues to offer exciting growth potential. We have a strong product offering and look forward to a return to more normal trading conditions as the coronavirus vaccine programme continues and lockdown restrictions are eased."

Enquiries:

This announcement contains inside information for the purposes of Article 7 of the Market Abuse Regulation (EU) 596/2014 as it forms part of UK domestic law by virtue of the European Union (Withdrawal) Act 2018 ("MAR"), and is disclosed in accordance with the company's obligations under Article 17 of MAR.

CHAIRMAN'S STATEMENT

Overview

This is my first Statement as Chairman, having joined the Group and the Board at the end of October 2020.  It has been a challenging year for K3. Nonetheless, some important strategic decisions and actions were taken, and the Group's performance has shown a significant degree of resilience despite the impact of the coronavirus pandemic on a number of areas of operation.  Revenue from continuing operations over the financial year decreased by 2.5% to £48.8m (2019: £50.1m), and gross profit decreased slightly to £28.7m (2019: £28.8m). These robust results at a trading level were supported by our high level of predictable revenues and the geographically diverse customer base. However, the Group's reported losses, before discontinued operations, increased to £20.9m (2019: £1.1m) after non-cash impairment and reorganisation charges.

Throughout the pandemic, the safety and welfare of our staff, customers, partners, and suppliers have been priorities. Our staff made a tremendous effort in responding to the challenges we faced, and I am extremely grateful to everyone for the sacrifices they have made and for their hard work and loyalty to the Group.

The transition to working from home, virtual global collaboration and remote customer delivery went smoothly, although trading was affected by the impact of coronavirus-related restrictions on some customers and sub-sectors. We implemented cost saving measures to conserve cash and used government support where appropriate. This included furlough schemes in the UK and Denmark and tax deferral in the UK, amounting to £2.0m of tax, which will unwind in 2021.

As previously reported, in April 2020, having explored other options, the difficult decision was taken to place the loss-making UK Dynamics business into administration. The decision has left the Group focused on its core profitable business units, and the sales route for our K3|fashion and K3|pebblestone products in the UK is now through channel partners - as it is in Europe and international markets.

On 31 March 2020, we raised £6.0m in funding, through a shareholder loan of £3.0m and a £3.0m increase in banking facilities with Barclays. In the first quarter of the new financial year, in late February 2021, we agreed the sale of Starcom Technologies Limited ("Starcom"), our managed services unit, for £14.7m in cash. The sale generated over £10 million of profit on disposal. On 26 March 2021 we successfully agreed an extension to our Revolving Credit Facility with Barclays to March 2022. In addition, we are in advanced discussions with shareholders to convert the £3.0m of shareholder loans to equity in the near future. These actions have placed the Group on a more solid financial footing. These transactions are part of our strategic focus to develop our own IP products, and in particular our K3|imagine platform.

With the sale of Starcom successfully concluded and the Group's balance sheet strengthened, Adalsteinn Valdimarsson stepped down as Chief Executive Officer in early March. We are pleased to announce the appointment of Marco Vergani as his successor. Marco brings significant relevant commercial and industry experience and a strong track record in driving sales growth.

K3 has a good platform on which to move forward, and our growth strategy is focused on developing our own IP products and revenue streams, in particular SaaS revenue from our K3|imagine suite and revenue from our Global Accounts segment.  Given the opportunity this presents, and with a new Chief Executive assuming control of the Group in a global environment changed by the pandemic, we are going to re-evaluate market strategy to ensure that we are investing in market segments with attractive, long-term growth opportunities.

Financial Results

Results from continuing activities

Revenue from continuing operations over the financial year totalled £48.8m (2019: £50.1m) with recurring or predictable revenue² accounting for 76.2% of the total revenue (2019: 73.2%). The Own IP business segment generated £16.1m of revenue (2019: £17.9m) which is 33.1% of total revenue (2019: 35.7%). Global Accounts (our business supporting Inter IKEA Systems B.V. (the owner and franchisor of the IKEA concept) and the Inter IKEA Concept franchisees) generated £17.3m of revenue (2019: £15.7m), an increase of 9.7%, which is 35.4% of total revenue (2019: 31.4%).

Group gross profit for the financial year was £28.7m (2019: £28.8m), with own IP contributing £12.2m (2019: £12.6m) or 42.6% of the total gross profit (2019: 44.0%). Gross margin increased to 58.8% (2019: 57.4%), driven by our Own IP and Global Accounts businesses.

Underlying support/admin expenses⁷ increased by 14.5% to £24.7m (2019: £21.6m) as a result of investment in commercial and product development resource. Adjusted EBITDA¹ from continuing activities decreased to £4.0m (2019: £7.1m). This largely reflects the investment in increased commercial and product resource, lower fashion software sales and the adverse effects of the coronavirus outbreak.

Following impairment and reorganisation costs the loss before tax from continuing activities was £20.9m (2019: £1.1m) as administrative expenses increased to £48.5m (2019: £28.7m). In line with our strategic decision to cease developing legacy products and  focus development of our own IP products, we recognised exceptional impairments (all non-cash items) totalling £16.9m, which comprises a £14.3m impairment of goodwill in the third-party Sage business (£4.9m), and legacy products within Own IP (relating to legacy products in the DdD, RSG and Unisoft CGUs) (£9.4m) and an impairment of historic capitalised development costs within our Own IP segment (£2.6m) (2019: £nil).After these items, the resultant loss before tax from continuing activities was £20.9m (2019: £0.2m profit).

Whilst our customer base is resilient and well-diversified, both geographically and by market vertical, the challenges of the pandemic, including lockdown restrictions, created certain impediments to sales and the adoption of new, and developing, K3|imagine solutions.

Reported results including discontinued activities

Discontinued activities relate to the UK Dynamics subsidiary and Starcom Technologies Limited ("Starcom"). UK Dynamics was put into administration on 21 April 2020, and the loss after tax from discontinued activities was £1.0m (2019: £15.2m).

Starcom was held for sale at 30 November 2020. The profit after tax from discontinued activities was £0.8m (2019: £0.9m).

Dividend and AGM

Given the financial position of the Group and ongoing investment in the Own IP strategy, the Board believes it is prudent to maintain the suspension of dividends for the foreseeable future.

K3's Annual General Meeting will be held on Wednesday 19 May 2021 at Baltimore House, 50 Kansas Avenue, Manchester M50 2GL.  The meeting will be conducted in line with Government guidance at this time.

Growth Strategy

The Group strategy remains focused on growing own-IP sales, and on developing the commercial opportunity presented by the K3|imagine platform and applications.  This strategy has the scope to generate high quality, SaaS revenue and higher margins. To this end, with a new Chief Executive now in place and the global environment changed by the pandemic, we are going to re-evaluate market strategy to ensure that we invest in attractive market segments with long-term growth themes and potential.

The K3|imagine suite is relevant for existing as well as new customers. Its platform and applications, such as self-serve kiosks, enable customers to adopt powerful technology rapidly and easily, and offer attractive returns on investment. The suite provides an upgrade path for existing customers using legacy technology as well as an opportunity to cross-sell into Global Accounts and other customers. Consequently, we made the decision in October 2020 to cease marketing some of our legacy products and start an initiative to promote the phased adoption of the K3|imagine retail suite by point-of-sale customers.

K3|fashion remains an important product for us and Microsoft's global endorsement of it for the fashion and apparel sectors enhances its market appeal.  We now sell the product via channel partners across all markets, which include Europe and the US, with partners responsible for implementations. Sales are typically with larger companies and comprise upfront software licence income together with ongoing maintenance income. They tend to be high value although often with longer and more complex sales cycles.

Global Accounts, which is a significant business segment, includes our Inter IKEA Systems B.V. (the owner and franchisor of the IKEA concept) and the Inter IKEA Concept franchisees, is growing well. This reflects the strong relationships we have established, our high service levels, and the ongoing expansion of the IKEA franchisees networks. We have increased investment in resource in the Kuala Lumpur office to support growth, and are in the process of standardising service implementation, which should protect services gross margin.  We expect to see this area of operation continue to grow, including within the newer geographies. 

In line with our growth strategy, UK Dynamics was put into administration on 21 April 2020 and Starcom Technologies Limited was held for sale at 30 November 2020. As a result, third Party solutions now principally comprises our SYSPRO and Sage products, which we sell in the UK. SYSPRO's core markets are manufacturing, and distribution and our large installed customer base generates significant earnings and cash flows from annual software licence, support, and maintenance renewals. Sage and SYSPRO suffered from sluggish new business impacted by Brexit and the coronavirus pandemic. As the impact of Brexit decreases and we begin to move out of the significant disruption caused by the coronavirus pandemic, the prospects and situation for the SYSPRO business is also beginning to improve.

Board Changes

We are very pleased to welcome Marco Vergani to the Board as Chief Executive Officer. Marco has over 30 years' experience in technology, principally in commercial sales, including in the UK, Europe, the Far East, and USA.  He has wide sector experience, which includes retail, consumer, and e-commerce. A major part of his career was spent at IBM, the multi-national technology company, where he ran the Retail Store Solutions Division in Europe, Middle East, and Africa prior to joining the IBM Business Process Outsourcing division where he was promoted to Vice President of Sales for Europe. In 2014, he joined Digital River, the US-based global e-commerce, payments and marketing services company becoming its Senior Vice President, Global Sales and Account Management. More recently, he was Chief Operating Officer at Qubit, the venture capitalist-backed personalisation technology company. 

Marco replaces Adalsteinn Valdimarrson who stepped down from the Board and Company in early March 2021. We would like to thank Adalsteinn for his significant contribution to the Group. He successfully led a fundamental restructuring of the Group and refocused its strategic direction.  We wish him every success in his new ventures.

Over the year under review, a number of other changes were made to the Board. Oliver Scott joined as Non-Executive Director in February 2020. Oliver is a partner of Kestrel Partners LLP, the independent investment manager, which he co-founded in 2009, having previously spent 20 years advising smaller quoted and unquoted companies, latterly as a director of KBC Peel Hunt Corporate Finance. He is also a non-executive director of ULS Technology PLC. Kestrel is K3's largest shareholder, with a current holding representing 24.3% of the Company's share capital.

In May 2020 Non-Executive Directors Stuart Darling and Paul Morland retired from the Board and at the end of October 2020, I was pleased to join the Group, taking over the role of Chairman from Jonathan Manley (interim Chair). I temporarily assumed the role of Interim Chief Executive Officer in March 2021 ahead of Marco joining the Board. My career to date has been in the global software industry, both in the UK and internationally, including Europe and North America. I also have significant experience in growing and developing product-based software businesses, and was, until January 2020, Chief Executive Officer of Aptitude Software Group Plc, the global financial management software company.

Staff

On behalf of the Board, we extend our thanks to all our staff for their hard work in this unprecedented year. Our teams have shown significant dedication and commitment during this time, and their response to adapting to the new conditions created by the pandemic was outstanding.

Outlook

Trading so far in the new financial year has been in line with the same period last year. In the first quarter of the new financial year ending 30 November 2021, term contracts with a total contract value of £1.5m have been closed in K3|fashion with £0.5m of new contracts signed for K3|imagine. Global Accounts is maintaining momentum and initiatives to promote the migration of key customers on legacy POS solutions to our K3|imagine retail suite are in planning and development. We are re-examining the wider market opportunities for K3|imagine and remain excited about its growth potential.

The Board remains confident in the plans for the future of the Group and the repositioning strategy to focus on own-IP lead growth and SaaS in attractive markets. We look forward to more normal trading conditions as the coronavirus vaccine programme rolls out and pandemic restrictions are eased.

Operational and financial Review

The Directors consider the key performance indicators by which they measure the performance of the Group to be turnover, gross profit, gross margin, recurring or predictable revenue² and Own IP gross profit as a percentage of total gross profit⁴. The Group's results for the year end to 30 November 2020, together with comparatives for the same period in 2019, are summarised in the tables below. 2019 comparatives have been restated following the classification of UK Dynamics as a discontinued activity (after its administration in April 2020) and Starcom as an asset held for sale as at 30 November 2020.

During the year we have realigned our segmental reporting in line with our growth strategy. With the continuing growth in Global Accounts, we now recognise it as a separate segment and include revenue and costs relating to the Inter IKEA Systems B.V. (the owner and franchisor of the IKEA concept) and the Inter IKEA Concept franchisees. Our segmental analysis provides further information on the Group's performance across key areas of activity; Own IP, Global Accounts and Third-party products (including SYSPRO and Sage).

Continuing Activities

Own IP

K3's own-IP includes;

·      IP embedded within third-party solutions to add extra functionality and produce a richer overall solution for K3's target markets. These solutions include K3|fashion and K3|pebblestone;

·      K3|imagine, our cloud-native platform, solutions, and apps, with our integration engine, K3|dataswitch; and

·      other stand-alone point solutions and apps including our legacy point of sale ("POS") products.

Own-IP revenue decreased by 9.7% to £16.1m (2019: £17.9m) gross profit fell to £12.2m (2019: £12.6m), reflecting a product mix that included a greater contribution from K3|fashion sales and lower contribution from POS products. In line with this, gross margin increased to 75.8% (2019: 70.7%).

Despite the challenges that the lockdown restrictions created for the retail sector, £1.4m of contracts were closed for K3|fashion over the financial year (2019: £2.4m). In the first quarter of the new financial year ending 30 November 2021, £1.5m of contracts have been closed with both European and US retailers in line with our sales strategy for this product.

We remain confident about prospects for K3|fashion and its endorsement by Microsoft as its recommended 'add-on' solution for the fashion and apparel sector globally that has given our product additional profile in the market.

Our K3|imagine platform and its applications are provided on a Platform-as-a-Service ("PaaS") and Software-as-a-Solution ("SaaS") basis. Customers bought from across the suite of applications, including self-serve kiosks, point of sale, companion apps, and make tax digital.  However, the retail solution sales have been impacted by coronavirus restrictions and poor trading conditions throughout 2020, and this trend has continued into 2021. In total £1.0m of contracts were closed over the year (2019: £0.3m).

As a result of the focus on our K3|imagine platform and its suite of applications we have recognised an impairment of £12.0m within Own IP. This is comprised of an impairment to Goodwill and Other Intangibles of £9.4m relating to the legacy POS products and a £2.6m impairment of legacy development costs.

Global Accounts

Revenue from Global Accounts continued to grow, increasing by 10.1% to £17.3m (2019: £15.7m). Gross profit increased by 19.4% to £7.4m (2019: £6.2m) with gross margin increasing to 43.1% (2019: 39.1%).

This strong performance reflected our ability to support the ongoing expansion of the IKEA franchisee network into new geographies such as South and Central America.  The increased activity mainly contributed to services income. The Far East has generally proven to be more resilient to the impact of coronavirus than the West, with Far Eastern customers being impacted for less time. We anticipate continued growth in Global Accounts and have further expanded resource at our Kuala Lumpur office to support this.

Third-party products

Third-party products include our SYSPRO and Sage products, which we resell in the UK. This area of activity was the most badly affected by the coronavirus crisis and Brexit uncertainty as customers in distribution and manufacturing held back from supply chain investments and services projects. We implemented mitigating actions to reduce the impact, including furlough. Revenue decreased by 6.7% to £15.4m (2019: £16.5m) and gross profit reduced by 9.0% to £9.1m (2019: £10.0m).  Gross margin was 58.8% (2019: 60.4%).

Our manufacturing customer base, which largely comprises SYSPRO customers, was more resilient to coronavirus although SYSPRO services income was impacted by some customer sites being closed. Encouragingly SYSPRO new business discussions continued throughout the period.

Our retail and distribution customer base, which is more biased to Sage, was more disrupted by coronavirus-related restrictions, and new business opportunities and pipeline remain soft. We do not expect substantial new sales in the future from our Sage business and as a result have recognised a £4.9m impairment of goodwill relating to the Sage business unit. 

The second half of the financial year benefited from the high level of software licence and maintenance and support contract renewals from the SYSPRO customer base in this period. This was reflected in the typically strong weighting in earnings and cash generation to the fourth quarter.

Administrative expenses

Underlying Support/Administration costs⁷ have increased to £24.7m (2019: £21.6m) reflecting investment in the commercial and product development teams. Total administrative expenses increased to £48.5m (2019: £28.7m). This includes exceptional impairments (all non-cash items) totalling £16.9m, which relate to a £14.3m impairment of goodwill in the third-party Sage business (£4.9m), and legacy products within Own IP (£9.4m) and an impairment of historic capitalised development costs within our Own IP segment (£2.6m) (2019: £nil).

Coronavirus Pandemic and Brexit

The Group responded swiftly to the coronavirus pandemic with employees moving to remote working and offices that remained operational implementing protective measures, in line with government guidance.

Coronavirus lockdown restrictions created challenges for the Group more prominently within the retail and hospitality sectors resulting in reduced contract wins for K3|imagine retail suite and visitor attractions solutions. Our third-party products segment was also impacted as customers in distribution and manufacturing delayed investments in supply chain investments and services projects.  In response to these challenges the Group utilised furlough schemes in the UK and Denmark, which reflected specific verticals that were impacted, and staff volunteered temporary salary reductions. The Group also made use of Government tax deferral schemes, with a total of £2.0m of tax deferred at the financial year end.

Additional funding totalling £6.0m was secured in April 2020, when we extended our loan facility with Barclays by £3.0m and raised £3.0m via a shareholder loan.

Brexit impacted our UK operations, especially for third party product sales. However, these units recovered somewhat in the final quarter of the financial year, helped by sales opportunities cultivated during the lockdown in the manufacturing vertical coming through and by the investment in sales resources.

Discontinued Activities - UK Dynamics

On 21 April 2020, the UK Dynamics subsidiary was put into administration. The subsidiary's reported results show a loss before tax of £1.3m (2019: loss of £14.8m). The UK Dynamics business had, despite several restructurings, continued to be cash consumptive, with long deal cycles and high operating costs. Following its administration, we have maintained relationships with UK Dynamics customers using K3 Own IP and now use channel partners as the route to market in the UK for K3|fashion and K3|pebblestone, as we do in non-UK territories.

Discontinued Activities - Starcom Technologies Limited

In September 2020, the Board embarked on a programme to explore options to sell Starcom Technologies Limited ("Starcom"), our managed services unit, since managed services was not seen as a strategic growth area. Starcom was therefore classified as an 'available for sale' asset as at 30 November 2020 and it has been accounted for in discontinued activities.

Starcom's total external revenue for the year ended 30 November 2020 was £9.5m (2019: £9.3m) and the unit generated profit before taxation of £0.8m (2019: £1.0m). In February 2021, the unit was sold for £14.7m including £0.5m of cash on the balance sheet. The management team and staff of Starcom have transferred with the sale of the business together with its 280 customers.  Under the terms of a services agreement Starcom will continue to provide K3 and its customers with managed services for at least three years.

Earnings per Share and Dividends

Adjusted loss per share⁶ was 4.8p (2019: adjusted profit per share⁶ 2.6p).  Loss per share was 49.3p (2019: 36.0p).

No dividend will be declared for the year ended 30 November 2020 (2019: nil).

Taxation

There was a tax benefit for the financial year of £0.3m (2019: £0.9m charge) comprising a charge of £0.3m (2019: £0.6m) for current taxation and a benefit of £0.6m (2019: £0.3m charge) for deferred taxation, of which £0.2m (2019: £0.3m) related to the amortisation of intangible assets.

The loss before taxation was driven by the large impairment charge which is non-tax deductible. The Group's tax rate is sensitive to the geographical mix of its profits and losses and with the growth of the non-UK business, overseas tax is increasing. The effective tax rate for the year is 1.3% (2019: (6.4%). The effective tax rate is determined as the tax expense/(credit) divided by the accounting profit/(loss) before tax.

Balance Sheet

As a result of the Group's strategic focus moving away from older POS products and towards the new own IP products, particularly the K3|imagine platform, as well as reduced expectations for future sales in mature business components, an impairment charge of £16.9m was recognised in the year. This consisted of a £12.8m impairment of Goodwill and a £1.5m impairment of IP and Customer Relationships, relating to older POS products and the Sage unit, and a £2.6m impairment of historical development costs.

The assets, and associated liabilities, for Starcom have been classified as held for sale as at 30 November 2020 with a net asset value of £3.3m.

Additions to development costs were £4.5m compared to £4.1m in 2019, driven by the focus on development of K3|imagine. Amortisation of development costs was £2.5m (2019: £2.9m).  An impairment loss of £2.6m was recognised against the development costs of older products. The amortisation charge on acquired intangible assets was £1.8m (2019: £2.5m).

Trade and other receivables were £12.2m (2019: £20.7m). Included within the 2019 balance was £5.9m for UK Dynamics, and £1.7m for Starcom. The remaining £0.9m reduction compared to 2019 is due to better credit control management. Trade and other payables were £19.1m (2019: £25.0m). Included within the 2019 balance was £5.1m for UK Dynamics and £3.0m for Starcom, so underlying trade payables have increased by £2.2m, of which HMRC coronavirus deferrals were £2.0m.

The net debt⁵ position at 30 November 2020 was £1.9m and comprised £0.8m of bank net cash and a shareholder loan of £2.7m. £0.3m of the total shareholder loan value of £3.0m is recognised in equity as a fair value adjustment for the associated warrants, which were issued alongside the loan, at 30 November 2020. This will be amortised as a finance expense in 2021. Net debt at the same point in 2019 amounted to £2.4m and was entirely bank net debt.

Cash Flow

The net cash from continuing operating activities was £8.2m (2019: £5.8m). The net change in working capital from trade and other receivables and trade and other payables was £4.1m inflow (2019: £0.3m outflow). The main drivers for these movements were the release of balances related to UK Dynamics along with better credit control and invoicing procedures.

Investing activities increased to £5.2m (2019: £4.7m) with the focus on the development of the K3|imagine platform. The purchase of property, plant and equipment also included IT equipment to run managed services and IFRS 16 right to use asset additions.