17 September 2019
This announcement contains inside information for the purposes of Article 7 of Regulation 596/2014 ("MAR")
K3 CAPITAL GROUP PLC
("K3", the "Company" and including its subsidiaries, the "Group")
Final audited results for the year ending 31 May 2019
K3 Capital Group plc, a leading business and company sales specialist in the UK, today announces its final results for the year ended 31 May 2019.
Financial overview
| £m | 2019 | 2018 | % change |
| Group revenue | £13.6m | £16.5m | (18%) |
| Knightsbridge | £2.2m | £1.6m | 38% |
| KBS Corporate* | £10.6m | £8.6m | 23% |
| KBS Corporate Finance* | £0.8m | £6.3m | (87%) |
| EBITDA | £5.0m | £7.4m | (33%) |
| Profit before tax | £4.9m | £7.3m | (33%) |
| Net cash | £5.8m | £7.5m | (23%) |
| Earnings per share | 9.43p | 14.10p | (34%) |
| Dividend per share | **7.60p | 11.25p | (33%) |
* Revenue adjusted to reflect KBS Corporate Sales clients invoiced through KBS Corporate Finance following an enhanced service offering, as further detailed in the Annual Report.
** Dividend per share includes proposed final dividend
Operational overview
· Full year results for FY19 show EBITDA at the top end of previously revised market expectations of £4.5-5.0m
· Continued turnover growth across volume brands - Knightsbridge (+38%) and KBS Corporate (+23%)
· Decline in group turnover and profits due to under performance of Corporate Finance division
· Improving KPIs across volume brands, with more sellers mandated, more buyers sourced, and a greater number of transactions completed
· Number one advisor for UK deal volume - Thomson Reuters 2017, 2018 & H1 2019 (Refinitiv)
· Significant WIP pipeline across the Group heading into FY20
· Continued investment in our people (165 employees as of 31 May 2019)
· Ever improving quality of earnings through performance in volume brands
Outlook
· Our Group strategy for FY20 is in line with our previously stated strategy of continuing to drive organic growth across the volume brands within the Group
· KBS Corporate Finance Transaction Fee income for Q1 FY20 has exceeded the income for the year FY19
· Ongoing enhancement of proprietary buyer matching software is delivering significant increases in buyer volumes (+48%)
· Relocation of Knightsbridge brand into adjoining office space, providing increased capacity to develop the Knightsbridge Commercial offering
· Continued Investment in our people, their training and development
· The Company continues to look at potential complementary bolt-on acquisitions that the Board believe would be additive to the overall product offering with a view to diversifying the Company's revenue streams
Commenting on the results, K3 Capital Group plc, Chairman, Ian Mattioli said:
"I am pleased to report a satisfactory year of trading at K3 Capital Group plc and continued growth in the volume brands within the Group. The trading period has seen significant increases in these brands however, it has seen a significant reduction in Corporate Finance transactions completing within the period.
"Given the growth of the volume brands, it is pleasing to report that the Board has made significant progress in creating a more robust business model with a reduced reliance on larger mandates, and given the strong pipelines heading into the new financial year.
"I remain confident of making further progress and delivering on expectations for FY20."
John Rigby, CEO of K3 Capital Group plc said:
"As an innovative and disruptive player within the fragmented business and company sales marketplace, K3 Capital continued to outperform the general market, completing 57% more deals than any other advisor (Thomson Reuters Small Cap M&A Review 2018) to maintain its market leading position as the UK's most active deal maker.
"The most pleasing result of FY19 comes from the fact that a growing percentage of Group revenue and therefore Group profits are being generated from within the volume brands of Knightsbridge and KBS Corporate.
"All three brands have brought forward strong WIP pipelines and whilst the timing and certainty of transactions are not guaranteed, we are excited by the prospects for the current financial year and beyond."
-ENDS-
For further information please contact:
| K3 Capital Group plc | |
| John Rigby, Chief Executive Officer | |
| Andrew Melbourne, Chief Financial Officer | |
| | |
| finnCap Ltd (Nominated Adviser and Broker) | Tel: 020 7220 0500 |
| Jonny Franklin-Adams, Anthony Adams | |
| (Corporate Finance) | |
| Tim Redfern, Richard Chambers (Corporate Broking) | |
| | |
Information on K3 Capital Group plc can be accessed via the Group's website at www.k3capitalgroupplc.com
Forward looking statements and disclaimer
Certain statements included or incorporated by reference within this announcement may be, or may be deemed to be "forward-looking statements" in respect of the Company's operations, performance, prospects and/or financial condition. Forward-looking statements are sometimes, but not always, identified by their use of a date in the future or such words and words of similar meaning as "due", "could", "may", "will", "should", "expects", "believes", "intends", "plans", "potential", "targets" or "estimates".
By their nature, forward-looking statements involve a number of risks, uncertainties and assumptions and actual results or events may differ materially from those expressed or implied by those statements. Accordingly, no assurance can be given that any particular expectation will be met and reliance should not be placed on any forward-looking statement. Additionally, forward-looking statements regarding past trends or activities should not be taken as a representation that such trends or activities will continue in the future. Except as required by applicable law or regulation (including to meet the requirements of the AIM Rules, MAR, the Prospectus Rules and/or the FSMA), the Company expressly disclaims any responsibility or obligation is accepted to publish any updates or revisions to any forward-looking statements resulting from new information, future events or otherwise whether following any change to reflect events or circumstances after the date of this announcement. Nothing in this announcement should be construed as a profit forecast.
Disclaimer
This announcement and information communicated orally in relation to it does not constitute or form part of any offer or invitation to sell, or any solicitation of any offer to purchase any shares or other securities in K3 Capital Group plc, nor shall it or any part of it or the fact of its distribution form the basis of, or be relied on in connection with, any contract or commitment or investment decisions relating thereto, nor does it constitute a recommendation regarding the shares or other securities of the Company. Past performance cannot be relied upon as a guide to future performance and persons needing advice should consult an independent financial adviser.
Statements in this announcement reflect the knowledge and information available at the time of its preparation. Liability arising from anything in this announcement shall be governed by English law. Nothing in this announcement shall exclude any liability under applicable laws that cannot be excluded in accordance with such laws.
All subsequent oral or written forward-looking statements attributed to K3 Capital Group plc or any persons acting on its behalf are expressly qualified in their entirety by the cautionary statement above. All forward-looking statements contained in this announcement are based on information available to the directors of the Company at the date of this announcement, unless some other time is specified in relation to them, and the posting or receipt of this announcement shall not give rise to any implication that there has been no change in the facts set forth herein since such date.
Strategic Report
Chairman's statement
I am pleased to report a satisfactory year of trading at K3 Capital Group plc and continued growth in the volume brands within the Group, demonstrated by a 5% increase in the volume of new client mandates and a 7% increase in the volume of completed transactions.
The trading period has seen significant increases in the volume of low to mid value transactions; however, it has equally seen a significant reduction in high value transactions.
As previously communicated, the continuing backdrop of economic and political uncertainty, particularly surrounding Brexit, has impacted the number of Corporate Finance transactions which have completed within the reporting period.
I can therefore report revenues of £13.6m (FY18: £16.5m) and EBITDA of £5.0m (FY18: £7.4m). I can also report a profit after tax of £4.0m (FY18: £6.0m).
Given the growth of the volume brands, it is pleasing to report that the Board has made significant progress in creating a more robust business model with a reduced reliance on larger mandates, and given the strong pipelines heading into the new financial year, I remain confident of making further progress and delivering on expectations for FY20.
Throughout the financial year, K3 continued to build capacity within its sales departments as well as refining its direct marketing approach. This has yielded a 16% increase in non-contingent fee income to £8.1m (FY18: £7.0m).
Due to various issues discussed later in this report, there has been a reduction of Transaction Fee income in the year to £5.4m. However, our KBS Corporate and Knightsbridge operations departments have had a successful trading period with record levels of Group transactions, 7% ahead of the comparative period. These departments have continued to grow as a direct result of investment into people, management and technology and we are delighted with the dedication of the team throughout the year who remain highly focussed on delivering successful outcomes for many clients.
Once again, we find ourselves excelling in national league tables, with Refinitiv (formerly Thomson Reuters) naming us as the most active dealmaker in the Small Cap Financial Advisory review for H1 2019 and 2018. Such accolades are testament to the dedication of the Board and employees in having the drive and determination to improve performance across the Group.
Financials
As reported, revenues for the year stood at £13.6m (FY18: £16.5m), and in line with reduced Group expectations announced in April 2019.
We can report an EBITDA of £5.0m (FY18: £7.4m) and an Operating Profit of £4.9m (FY18: £7.3m).
Net cash at the year end stands at £5.8m (FY18: £7.5m). It is pleasing to report that 'free cash' (as detailed in the CFO report) has risen to £3.1m (FY18: £2.2m).
Group net assets at FY19 were £7.2m (FY18: £8.3m) with current net assets standing at £3.1m (FY18: £4.2m). This is largely due to a reduction in cash balances as a result of the FY18 final dividend paid in October 18.
As a result, the Board is recommending a final dividend payment of 4.0p per share. This results in a total dividend of 7.60p (FY18: 11.25p).
The Board remains committed to the dividend policy as set out on admission and as detailed in the Chief Financial Officer's report, whilst maintaining an appropriate level of dividend cover. If approved, the final dividend will be paid on 22 October 2019 to shareholders on the register at the close of business on 3 October 2019.
Summary
Whilst the continuing economic and political uncertainty has led to a downturn in transactions within the Corporate Finance division in the reporting period, the Board is satisfied with the performance of the Group as a whole.
The Directors believe the Group has ended the financial year with a more robust business model which sees less reliance on larger transactions in order to achieve future market expectations. The Board remains positive for the outlook in FY20 due to significant pipelines and continued increases in major KPIs across the Group, as detailed in the CEO report.
Ian Mattioli MBE
Chairman
16 September 2019
Chief Executive Officer's Report
Introduction and highlights
The reporting period has been set against a backdrop of significant political and economic uncertainty, with the wider M&A market witnessing a slowdown in both value and volume of completed transactions. Despite these ongoing challenges I am pleased to report that within the period, the Group has experienced an increase in the number of both mandated clients and registered buyers, resulting in a rise in the volume of completed transactions.
As an innovative and disruptive player within the fragmented business and company sales marketplace, K3 Capital continued to outperform the general market, completing 57% more deals than any other advisor (Thomson Reuters Small Cap M&A Review 2018) to maintain its market leading position as the UK's most active deal maker. Amid the current uncertainty around Brexit negotiations, this success gives me a great deal of optimism, hinting at an even brighter future once there is more certainty in the market.
We have continued with the implementation of our growth strategy, predicated on effective use of data and industry leading marketing strategies supported by our own proprietary technology and delivered through our team of highly motivated and incentivised staff. The Group's performance is continually monitored through key performance indicators, including the volume and average value of mandates, completed transactions and average transaction fees.
The most pleasing result of FY19 comes from the fact that a growing percentage of Group revenue and therefore Group profits are being generated from within the volume brands of Knightsbridge and KBS Corporate. Whilst this revenue delivers lower margins than the higher value, lower volume Corporate Finance transactions, we see these revenue streams as more predictable and sustainable, therefore of higher quality due to them being derived from a high volume of lower value transactions.
The technological initiatives launched in the previous financial year have helped propel growth in FY19 and remain a key part of our ongoing growth strategy to attract both more sellers and more buyers to the Group. Continued investment in our people has led to increases in both capacity and skill sets, which leaves us well placed to leverage commercial advantage from our market leading position.
With the exception of our Corporate Finance division, the Group has continued to deliver our ongoing 'bigger and better' strategy, demonstrated by further increases in average retainer fees and transaction fees within the Knightsbridge and KBS Corporate divisions.
I would like to once again thank my fellow Directors and all the staff across the Group for their hard work and dedication over the last 12 months. In the face of adverse market conditions and uncertainty in the wider macro-economic environment, to have achieved growth across many areas of the Group is testimony to our increasingly robust business model.
Our marketing spend has increased in line with our strategy to mandate and transact 'bigger and better', higher value clients. The period has seen a 9% increase in marketing spend to £1.0m and has driven new client wins across KBS Corporate Finance, KBS Corporate and Knightsbridge, many of which we hope will convert into transaction fee income as we move into FY20.
Knightsbridge Business Sales
Sales
During the prior financial year we repositioned the brand, launching Knightsbridge Commercial in order to focus on the more profitable commercial market, in addition to the 'retail' market, which Knightsbridge has traditionally served. FY19 has seen the new Knightsbridge Commercial brand gain significant traction. The recruitment of a further Regional Sales Manager, increasing the team to eight, has created additional sales capacity.
This has resulted in the number of new client appointments increasing by 29%, the value of retainer fee (non-contingent fee) quotes increasing by 121%, the number of new client mandates increasing by 20%, and the average non-contingent fee increasing by 37%, when compared to the prior year.
The new brand, investment into the team, and the above KPI improvements have led to a 51% increase in non-contingent fee income in this division.
Operations
With the creation of Knightsbridge Commercial came a separate department to negotiate commercial transactions. Despite the time lag from mandate to completion, this department has already added significant value to the transaction fee income derived from the division, something which we very much see gaining further traction as we move into FY20 and beyond.
The growth across all operational KPIs included: monthly non-disclosure agreements increasing by 72%, monthly buyer meetings increasing by 28%, and monthly offers increasing by 18%. Due to the new commercial offering, the average transaction fee has increased by 15% against the prior year, a trend which we expect to continue going forwards.
The new commercial department and an improved client journey, combined with the above KPI improvements has seen a 17% increase in transaction fee income from the department.
KBS Corporate
Sales
The launch of Knightsbridge Commercial, coupled with the growth of the KBS Corporate regional sales team and the additional capacity this has created, has allowed the brand to increase its focus on the delivery of our 'bigger and better' strategy.
The ability to spend more time with clients in order to understand their objectives and exit strategy allows us to better tailor our service offering to the client's needs. This has resulted in an increase of 7% in the value of non-contingent fees quoted, and a further increase of 20% in the average non-contingent fee received, when compared to the prior year.
As a result of the above, we have seen an 11% increase in non-contingent fee income within the brand.
Operations
Our strategy of mandating higher value clients, combined with a significant uplift in the number of registered buyers, due to our investment into data, technology and buyer targeting, has continued to deliver increases in both the volume of transactions completed and the average fee relating to these transactions.
The investment in management, head count, data and systems has delivered some pleasing results across all major operational KPIs. These include monthly non-disclosure agreements (NDAs) received increasing by 40%, the number of monthly buyer meetings increasing by 36%, and the number of monthly offers received increasing by 38%, compared to FY18.
All of the above has resulted in Transaction Fee income increasing by 47%*, completing 22%* more transactions, and has seen the average transaction fee increase by 21%* compared to the prior year. We are confident that the investment will deliver further revenue growth and profitability in FY20.
KBS Corporate Finance
Operations
Despite our optimism during the year due to a number of significant transactions expected to close, FY19 has ultimately been a disappointing year for KBS Corporate Finance, resulting in a significant reduction in both the volume and value of completed transactions within the reporting period.
FY19 has seen a 60%* reduction in the volume of transactions, and an 87%* reduction in transaction fee income compared to FY18.
Whilst we do not believe that there is any one specific reason for these transactions not completing within the period, we are of the belief that the wider political and economic backdrop, and the uncertainty this has created within the UK, has resulted in the tightening of bank lending and a slowdown of private equity investment. This has led to some investment decisions being delayed until outcomes are better known, and has clearly had an impact on a buyer's propensity to complete a transaction in a timely manner; confidence in the market, after-all, is an integral factor in people's investment decisions.
We continue to receive interest from many UK and overseas investors, private equity, and trade acquirers, which, when coupled with our strong WIP (transactions in legal exclusivity), should underpin our forecasts into FY20 and beyond.
There are several positive and encouraging KPIs within the division, including a 33% increase in the total client mandates compared to the prior year. In line with our 'bigger and better' strategy across the Group, it is pleasing to note that KBS Corporate Finance has seen an 80% increase in clients achieving £3-5m trading profit, and a 67% increase in clients achieving over £5m trading profit.
Looking ahead
Our Group strategy for FY20 is in line with our previously stated strategy of continuing to drive organic growth across the volume brands within the Group, combined with the ongoing delivery of our 'bigger and better' mantra. This further reduces the reliance on the Corporate Finance division delivering significant transactions within fixed accounting periods. The improved quality of earnings derived from the higher volume brands provides the Board with a more robust foundation from which to forecast future performance.
Whilst the Corporate Finance brand continues to present an exciting opportunity to deliver significant transactions and therefore incremental revenue and profits, it is the Board's intention to continue the transition towards a model where the happening of such fees represents upside opportunity rather than downside risk.
We feel that this transition is well underway, evidenced by the fact that a far greater proportion of revenue and profit in FY19 was created by the volume brands of the Group, and also that forecasts for FY20 and beyond contain a significantly reduced reliance on revenue and profit created through the KBS Corporate Finance division.
To achieve this, we will continue to leverage our data, technology and people to find more sellers, more buyers and complete more transactions than any other UK advisor, with the intention of maintaining our position as the UK's number one advisor in the small cap market.
Our people remain at the core of our business. We continually strive to recruit high quality, experienced people and we have recently identified additional office space within our current business park in order to relocate the growing Knightsbridge brand. This will provide it with a further springboard to continue its growth strategy and provide KBS Corporate with additional office space within the existing unit.
The Company continues to look at potential bolt-on acquisitions that the Board believe would be additive to the overall product offering with a view to diversifying the Company's revenue streams.
We have started the year positively with the Group trading in line with market expectations. The first quarter has already seen our KBS Corporate Finance team complete the same number of transactions and exceed the Transaction Fee income delivered during the entirety of FY19.
All three brands have brought forward strong WIP pipelines and whilst the timing and certainty of transactions are not guaranteed, we are excited by the prospects for the current financial year and beyond.
John Rigby
Chief Executive Officer
16 September 2019
*Transaction fee income and Transaction volumes are adjusted to reflect KBS Corporate Sales clients invoiced through KBS Corporate Finance following an enhanced service offering, as further detailed in the CFO report.
Chief Financial Officer's Report
Income Statement
Group turnover for the year amounted to £13.6m (FY18: £16.5m). Previous investment into staff and technology continues to deliver growth and success from many areas of the Group.
Headcount has grown to 165 as at May 19 (May 18: 133), with additional resource being given to all departments in order to maintain the high levels of customer service we expect to deliver to our clients, both new and existing.
In addition to this, the development of owned intellectual property including KBS Globe (a bespoke CRM system), the Buyer Matching Engine (proprietary buyer outreach software), and the Mandate Portal (a secure platform for known investors to view opportunities) has led to increases in major KPIs in FY19, with the Group mandating 5% more clients, sourcing 49% more buyers (NDAs), and completing 7% more transactions than in the corresponding period of FY18.
The year has seen the continued growth and development of the volume brands within the Group, delivering what the Directors believe is a more robust platform for the growth plan ahead, with an ever-reducing reliance on high fee value transactions.
Due to the under performance of the Corporate Finance division against a challenging backdrop of economic and political uncertainty, EBITDA for FY19 closed on £5.0m (FY18: £7.4m), with a PAT result of £4.0m (FY18: £6.0m).
Retainer fee Income
Recognised retainer fee income (or non-contingent fee Income) grew by 16% to £8.1m, representing a £1.1m increase on the previous year (FY18: £7.0m).
FY19 saw the adoption of IFRS15 which was an area heavily scrutinised by the Board prior to AIM listing. The revenue recognition policy for non-contingent fees was updated in FY17 to be consistent with IFRS15; therefore, there has been no impact on revenue following transition. The revenue recognition policy continues to see the recognised figures take into account the contractual nature of new client mandates, and spreads income throughout the life of a contract. As in previous years, sat behind this revenue recognition policy is 'banked' income. This 'banked' non-contingent fee income has risen to £8.5m in FY19, an increase of £1.3m from FY18 (£7.2m), demonstrating the ongoing success of the sales and marketing team.
This continued growth in fee income is driven by a combination of targeting and winning an increased quantity and quality of client mandates, in line with the 'bigger and better' mantra that has been in place for many years. The launch of 'Knightsbridge Commercial' has allowed the Knightsbridge team to move upstream, which in turn has allowed the KBS Corporate team to invest more time and focus on larger profit clients. This has driven significant growth in both fee income and, importantly, the pipeline of higher fee value mandates moving into the operational departments across the Group.
FY19 saw the average Group retainer fee increasing by 13%, and the total number of new client mandates raising by 5% compared to FY18.
Following on from the FY18 report in which I was pleased to announce a larger footprint through an expanded national sales team, FY19 has seen this continue with the recruitment of additional regional sales staff to further increase capacity. On average, the teams are sitting approaching 600 new client appointments each month. With additions to the regional teams, we fully expect this capacity to increase going into FY20.
Transaction fee income
Group Transaction Fee income (or contingent fee income) for FY19 was £5.4m, a frustrating decline on FY18 (£9.5m). The headline movement has come from the KBS Corporate Finance department, where no significant transactions (fees in excess of £0.5m) were concluded in the period.
Whilst the department has seen a number of transactions conclude in Q1 FY20, and carries forward a strong WIP pipeline, the FY19 under performance does underline the caution we have previously exercised in respect of the certainty and timing of these significant transactions.
The Board recognises this issue and has taken steps over recent years to de-risk the Group from the natural uncertainty of low volume/high value transactions, creating an internal department to address this. The 'CF Lite' team was created in FY17 with a view to taking KBS Corporate clients through an enhanced service. This team is tasked with handling transactions typically ranging from £2m to £10m+ of enterprise value.
Initially starting in FY17 with 3 employees, we have taken experienced deal leaders from KBS Corporate Sales and teamed up with experienced KBS Corporate Finance staff on specific transactions, in order to focus on delivering the 'bigger and better' mantra on the operational side. This department has grown to 10 employees in FY19 and has seen fee income grow from £1.0m over 12 transactions in FY17, to £2.6m of income and 21 transactions in FY19. This increasing volume-based approach allows the best of the Corporate department for sourcing buyers and marketing client opportunities, to combine with senior Corporate Finance resource to negotiate technical issues and enable clients to transact at higher levels - whilst still allowing the KBS Corporate Finance team to work on the progression of significant transactions.
This CF Lite team continues to grow in terms of mandate volumes and potential fee value, with FY19 seeing a 62% increase in the number of mandates within the team. The Board believes this provides a higher quality of earnings by delivering an increasing number of these mid-value transactions and a reduced reliance on large Corporate Finance clients.
Due to the nature of this CF Lite service, some clients are invoiced through KBS Corporate Sales Limited and some through KBS Corporate Finance Limited dependant on the level of service provided and the employees involved. FY19 saw 10 CF Lite clients and £1.9m of income invoiced through KBS Corporate Finance Limited (FY18: £0.3m, 3 transactions).
When adjusted for this CF Lite allocation, the KBS Corporate Finance team delivered £0.8m of fee income in FY19 (FY18: £6.3m), highlighting the issues around the certainty and timing of significant transactions.
However, this allocation equally sees the KBS Corporate Sales team delivering £4.0m of fee income, a 48% increase on FY18 (£2.7m), delivering 22% more transactions than the prior year at a higher average fee.
Given the strength of our KPIs and WIP pipeline, the Board believes this income to be more sustainable and predictable, giving confidence into FY20 and beyond.
In respect of Knightsbridge, the commercial offering has started to gain traction. Transaction Fee income rose from £0.5m in FY18 to £0.6m - with the teams completing more transactions at higher average fees than the prior year, further demonstrating the positive transition to Knightsbridge Commercial.
Marketing costs
Group marketing spend has increased by 9% in FY19 to £1.1m (FY18 £1.0m). We have made efficiencies and reallocated marketing spend to ensure we continue to increase the volume and quality of direct and digital marketing without overspending. Continued investment into 'high profit' and 'Tripletrack'™ mailings, utilising high quality, glossy marketing brochures and success stories to potential large clients, has seen further success with new Corporate Finance mandates won in the year - an increase of 33% on FY19.
A reallocation of spend has also seen a heightened focus on our buyer contact strategy, playing a key role in sourcing buyers at all levels across the Group.
Overhead costs
Overheads have reduced in FY19 to £7.6m, from £8.2m in FY18. To understand this, we can split these costs into two components. Overheads excluding wages have increased by 3% in the year, following on from the modest 2% increase in FY18. This again demonstrates the culture throughout the Group of driving value and continually monitoring costs to ensure efficiency in our spending.
The decrease in costs has therefore entirely come from Group wages, declining from £6.6m in FY18 to £6.0m in FY19. Despite the rise in headcount in the period, the remuneration culture within the Group has always been that of rewarding people based largely on performance. The decline in transaction fee income has seen significantly less bonus paid out in FY19 to operational employees. In addition, with Group performance being below market expectations, many senior management and Directors have not qualified for bonus within the period. This is in contrast to FY18 when performance was significantly ahead of market expectations.
FY19 saw a total of £1.4m paid out in bonuses to all employees, a significant decline from £2.9m paid out in FY18. This statistic demonstrates the robust nature of the business model, as the Board recalibrate bonus structures across the business to align with market expectations annually. Therefore fixed payroll costs (excluding bonus) have risen to £4.6m (FY18: £3.7m) a 24% increase, matching the 24% increase in headcount.
IFRS16 is to be adopted in FY20, which will in essence result in operating lease costs falling below the EBITDA line. A full assessment has been carried out in respect of this and, whilst there is not likely to be a material change to the PBT of the Group, this will clearly have a positive impact on EBITDA and will be detailed in full on future annual reports.
EBITDA
EBITDA for the period is £5.0m (FY18: £7.4m), with an EBITDA margin of 37% (FY18: 45%). This movement in EBITDA margin is predominantly caused by the reduction in the volume of significant transactions within the Corporate Finance brand.
Taxation
The effective tax rate is 18.5% which is marginally lower than the prior year (FY18: 18.6%).
Earnings per share
Based on the closing 42.2m shares in circulation, the basic earnings per share was 9.43p for the year (FY18: 14.10p).
Statement of financial position
Cash
The Group cash balances have declined during the period due to previously stated dividend policy of paying approximately 80% of profit after tax. The year ends with £5.8m of cash (FY18: £7.5m).
The Group business model continues to be highly cash generative with non-contingent fee income typically being paid in advance of services, although is recognised in the accounts over a period of time. Due to the month end processing of wages, and bonus payments being made after receipt of income, this leaves minimal requirement for working capital in the business.
There have been no exceptional cash items in the period.
As noted in previous reports, whilst a £5.8m cash balance appears high for a Group with minimal working capital requirement, once a provision for corporation tax, VAT and PAYE (£1.0m), and a provision for a final dividend (£1.7m) are taken into account, this leaves a free balance
of £3.1m (FY18: £2.2m), approximately 4 months' total overheads, which the Directors feel is sufficient liquidity for the Group.
By exception, other points of note with regard to the statement of financial position are:
· Significant decrease in other taxation and social security due to quantum of year end bonuses for the Group processed in May 18 payroll vs May 19 payroll
· Trade receivables/payables are subject to the timing of transactions and recognised income around the reporting date
· Contract liabilities continues to grow in line with non-contingent fee income to underpin future turnover
Risks and uncertainties
Management consider the following issues to be the principal risks potentially affecting the business:
Risk: Personnel
Management consider there could be a risk to the Group growth strategy should it fail to retain or attract effective personnel.
Mitigation:
Subsequent to the AIM floatation, key members of staff were granted share options as part of an LTIP as an incentive to retain talent within the Group. This was widened within the previous financial year under an additional scheme to bring a total of 30 employees into the schemes at the end of FY19. The performance periods under these schemes commenced 1 June 2017 and 1 December 2017, and both run for 3-year cycles. There are currently 1,627,123 shares granted to staff under the scheme.
In addition, K3 Capital Group has continued to search for employee wellbeing incentives and during the year has established a Death In Service policy for all members of staff, a Healthcare Plan and Employee Discount Scheme. The year has also seen a full review and transfer of pension provider to give employees a wider choice of investments, security and visibility of their savings. This, combined with regular social events, team incentives and rewards, is deemed to be sufficient for improving and maintaining the attractiveness of employment within the Group; however, Directors regularly review opportunities to improve.
Risk: Supply
The AIM floatation process uncovered some initial weaknesses in contractual terms with clients and suppliers alike.
Mitigation:
Prior to AIM listing, a full review was carried out of all suppliers. Where some suppliers had informal arrangements due to trading history, the Group now has contractual terms to formalise arrangements. Any non-limited supplier is requested to confirm their status as a UK tax payer and provide a Unique Taxpayer Reference on each invoice submitted. In addition to this, all new suppliers are checked to ensure trading names, addresses, VAT registration and bank details are all correct before placing an order. A revised supplier risk policy and CCO policy is expected in FY20.
In respect of clients, a review of the standard terms of engagement was carried out by our legal partners, with changes made to support the Group position and update for current UK legislation on matters such as data protection.
Risk: Regulation
With exception of KBS Capital Markets Ltd, K3 Capital Group predominantly operates within a partially unregulated marketplace and relies on a specific exemption from FCA in order to trade without regulation.
Mitigation:
New client terms of business were put into circulation during FY18 to make it explicitly clear that the main Group trading entities are not FCA regulated and are not able to offer advice on minority share sales. There has been an internal team established to monitor all transactions in Heads of Agreement to ensure that the 50% threshold is not breached, whilst at the same time, our legal partners have been written to asking to inform the Group if a transaction falls below this level.
An additional mitigation to this risk comes from the FCA regulated Group vehicle, KBS Capital Markets Limited. All Group contracts have the right to assign a client to Group companies. This will allow K3 to act on minority share sales and AIM listings in the future, where required. This provides greater flexibility when operating around regulated markets.
Risk: Data Protection
There was a large change in May 2018 in respect of data protection that could have threatened the marketing capabilities of businesses who were not prepared. The General Data Protection Regulation (GDPR) (Regulation (EU) 2016/679) is a regulation by which the European Parliament, the Council of European Union and the European Commission intend to strengthen and unify data protection for the individuals within the European union (EU) and covers firms that hold client data.
Mitigation:
The taskforce formed in FY17 to ensure compliance with GDPR was successful, with new processes and procedures put in place. Every new employee now receives training on GDPR, with ongoing CPD sessions to keep current employees updated. There are handouts for clients and buyers alike to explain how the Group handles data, and their individual rights.
This matter is addressed at each Board meeting to keep the Board aware of any issues should they arise.
Risk: Economical & Political
Macro-economic conditions such as government regulation, political instability or recession could cause volatility in the UK economy. The wider economic impacts of the outcome of the EU referendum may also be felt throughout the UK economy.
Mitigation:
The continued Group policy of sourcing both clients and buyers from all sectors and industries, across all geographic regions of the UK, is expected to sufficiently spread this risk of downturn in individual markets or areas. All income is derived from a diverse portfolio of clients, across a broad range of sectors.
The economic impacts of the outcome of the EU referendum will be monitored and mitigated where possible by the Board with the appropriate action being taken in a timely manner.
Risk: Growth Management
The Group's future success will depend, in part, on its ability to manage anticipated expansion. Such expansion is expected to place significant demands on management, support functions, accounting, sales and marketing and other resources. If the Group is unable to manage its expansion effectively, its business and financial results could suffer.
Mitigation:
Over the course of FY19, there have been various promotions to management, and additional roles created to ensure appropriate supervision of staff and continued high quality service delivery. Further to this, a new unit on the existing business park has been identified which is expected for FY20. This will allow Knightsbridge to have its own premises and give room for expansion, whilst at the same time making space for the rest of the Group to expand in the current Head Office.
Risk: Insurance Coverage
The Group seeks to cap its liability to clients under its standard terms to the fees charged in respect of that client transaction. However, the Group's business may expose it to potential professional indemnity and other risks. In the future, if the Group's insurance is not adequate or available to pay liabilities associated with its operations, or if there is any failure to maintain adequate controls and processes in relation to processing of confidential information and personal data, or if the Group is unable to purchase adequate insurance at reasonable rates, it may have a material adverse effect on the Group's business, financial condition, future trading performance, prospects and its ability to attract and retain certain members.
Mitigation:
For the FY18 Group insurance renewal, a full market exercise was carried out with a number of brokers to ensure that all policies are fit for purpose and all relevant policies were in place. This market exercise confirmed that all policies were indeed correct, and helped keep premium rises to a minimum.
A similar exercise was carried out for the FY19 renewal, which saw a number of providers changed in order to maintain appropriate levels of coverage without huge rises in premiums.
Risk: Reputational
The ability of the Group to attract new business and to retain its existing clients depends in part upon the maintenance of its reputation in the market. The industry in which the Group operates demands a high level of integrity. Client trust is paramount and the Group is thus susceptible to adverse market perception. Any failure to satisfy the Group's responsibilities to its clients, any negative publicity resulting from such activities or the association of such actions with the Group, could have a material adverse effect on the financial condition, results or operations of the company.
Mitigation:
Throughout the Group there are strict recruitment policies to ensure only potential employees with an appropriate professional and cultural fit are allowed to join. When combined with ongoing training, support, and development, the Board believes that this professional and motivated workforce will continue to deliver the exceptional levels of client service that is expected from them. There is an internal complaints procedure to ensure that any reports of client dissatisfaction are addressed at a senior level until resolved, which are logged and discussed at regular management meetings.
Social media sites and professional review pages are regularly monitored to ensure the Group has a positive outward facing perception. These average scores are reported in management meetings each month and tracked against that of competitors.
Shareholders' dividend
The Board is recommending a final dividend of 4.00 pence per ordinary share payable to shareholders on the register at 27 September 2019.
The final dividend, together with the January interim dividend of 3.60p, gives an indicative total dividend of 7.60 pence per share for the year (FY18: 11.25 pence).
On admission, the Board outlined an intention to pay approximately 80% of the Group's post tax profits for the year weighted 1/3 on interim results and 2/3 on final results. The 7.60p dividend represents 80.6% of the Group's post tax profits for the year.
Going forward, the Board expects to maintain its dividend policy as set out on admission.
Review of distributable reserves and rectification of prior dividend (the Relevant Dividend)
During the FY19 audit process, the Board has been made aware of certain technical issues relating to the levels of distributable reserves within the Company and the payment of the interim dividend by the parent company to our shareholders in February 2019 ('the Relevant Dividend').
K3's Group structure is that the trading subsidiaries generate profits for the Group and, from time to time, such reserves are distributed to K3 Capital Group plc as the parent entity. K3 Capital Group plc is itself a non-trading holding company. Throughout this period at all times, K3 Capital Group plc had adequate distributable reserves at Company level from current relevant management accounts to enable payment of the Relevant Dividend, following interim inter-company dividends declared and documented in the period.
However, a review by our auditors has uncovered a technical irregularity. At the time of the Relevant Dividend, the last published accounts at Company level for K3 Capital Group plc were the FY18 results, which detailed £4.3m of distributable reserves. The final dividend paid in October 2018 of £3.5m, when combined with the Relevant Dividend paid in February 2019 of £1.5m, saw distributions exceed the level stated in the last published accounts at Company level. To be clear, the Company did have sufficient distributable reserves which were shown in the latest relevant management accounts when declaring and paying the Relevant Dividend (in the spirit of the Companies Act 2006). However, the Board was not aware that the Companies Act 2006 required the publication of interim accounts to demonstrate the sufficiency of distributable reserves at Company level if this could not be shown by reference to the last filed accounts.
We have undertaken a series of procedural steps in order to rectify this issue and put the Company and its subsidiaries in the position whereby all reserves are periodically distributed up to K3 Capital Group plc (subject to due compliance with the Companies Act 2006 in each case). The effect of this will be that in respect of dividends from FY19 onwards the Company will publish interim accounts for the Company (as well as the Group) in order to support any interim dividends, or final dividends, which cannot be justified by reference only to the filed annual accounts of the Company.
Now we are aware of this issue, in addition to the Relevant Dividend, whilst the Group has more than sufficient reserves on a consolidated basis, the FY19 final accounts will also not show sufficient reserves at Company level to allow the proposed FY19 final dividend.
In order to remedy both of these issues, we will file interim accounts at Company level for K3 Capital Group plc as at 30 November 2018, and as at 30 August 2019, both of which demonstrate sufficient funds were/are available to allow the Relevant Dividend and proposed FY19 final dividend respectively.
In addition to this, new resolutions will be put to shareholders at the forthcoming Annual General Meeting to be held on 18 October 2019 which, if passed, would put all potentially affected parties, in so far as possible, in the position they were always intended to have been, had the Relevant Dividend been paid in accordance with the requirements of the Companies Act 2006. Full details are included in the circular and notice of Annual General Meeting to be sent to shareholders as set out at page 81 of this document.
Share price
The K3 Capital Group plc share price closed the financial year at 135.5 pence (31 May 18: 318.0 pence).
Going concern
After making enquiries, the Directors have formed a judgement, at the time of approving the financial statements, that there is a reasonable expectation that the Group has adequate resources to continue in operational existence for the foreseeable future. For this reason, the Directors continue to adopt the going concern basis in preparing the financial statements.
Strategic report
The Strategic Report was approved by the Board of Directors on 16 September 2019 and signed on its behalf by:
Andrew Melbourne
Chief Financial Officer
16 September 2019
|
Consolidated Statement of Comprehensive Income | | |
| | 2019 | 2018 |
| | £000 | £000 |
| Revenue | 13,564 | 16,485 |
| | | |
| Distribution costs | (1,065) | (979) |
| Administrative expenses | (7,626) | (8,195) |
| | | |
| EBITDA (before exceptional costs) | 4,976 | 7,386 |
| Depreciation of tangible assets | (87) | (69) |
| Amortisation of intangible assets | (16) | (6) |
| | ------------------------ | ------------------------ |
| Operating profit | 4,873 | 7,311 |
| | | |
| Finance income | 6 | 9 |
| Finance costs | - | (5) |
| | ------------------------ | ------------------------ |
| Profit before taxation | 4,879 | 7,315 |
| | | |
| Taxation | (901) | (1,362) |
| | ------------------------ | ------------------------ |
| Profit and total other comprehensive income for the financial year | 3,978 | 5,953 |
| | ================ | ================ |
| | | |
| Attributable to the owners of the Company | 3,978 | 5,953 |
| | ================ | ================ |
| | | |
| Earnings per share: | | |
| Basic and diluted EPS | £0.09 | £0.14 |
All the activities of the group are from continuing operations.
| Consolidated Statement of Financial Position | | |
| | 2019 | 2018 |
| | £000 | £000 |
| ASSETS | | |
| Non-current assets | | |
| Intangible assets | 4,065 | 3,992 |
| Property, plant and equipment | 88 | 102 |
| | ------------------------ | ------------------------ |
| Total non-current assets | 4,153 | 4,094 |
| | ------------------------ | ------------------------ |
| | | |
| Current assets | | |
| Trade and other receivables | 443 | 199 |
| Other assets | 380 | 337 |
| Cash and cash equivalents | 5,753 | 7,522 |
| | ------------------------ | ------------------------ |
| Total current assets | 6,176 | 8,058 |
| | ------------------------ | ------------------------ |
| TOTAL ASSETS | 10,329 | 12,152 |
| | ================ | ================ |
| | | |
| Current liabilities | | |
| Trade and other payables | 1,130 | 1,589 |
| Current tax liabilities | 288 | 849 |
| Contract Liabilities | 1,645 | 1,416 |
| | ------------------------ | ------------------------ |
| Total current liabilities | 3,063 | 3,854 |
| | ------------------------ | ------------------------ |
| | | |
| Non-current liabilities | | |
| Deferred tax liabilities | 35 | 23 |
| | ------------------------ | ------------------------ |
| Total non-current liabilities | 35 | 23 |
| | ------------------------ | ------------------------ |
| TOTAL LIABILITIES | 3,098 | 3,877 |
| | ------------------------ | ------------------------ |
| NET ASSETS | 7,231 | 8,275 |
| | ================ | ================ |
| EQUITY | | |
| Equity attributable to owners of the Company: | | |
| Issued capital and share premium | 2,413 | 2,413 |
| Share option reserve | 75 | 32 |
| Retained earnings | 4,743 | 5,830 |
| | ------------------------ | ------------------------ |
| TOTAL EQUITY | 7,231 | 8,275 |
| | ================ | ================ |
| Consolidated Statement of Changes in Equity | Share capital | Share premium | Share option reserve | Retained earnings | Total |
| | | | | | |
| | £000 | £000 | £000 | £000 | £000 |
| Balance at 1 June 2017 | 422 | 1,991 | - | 2,937 | 5,350 |
| | | | | | |
| Profit and total comprehensive income for the year | - | - | - | 5,953 | 5,953 |
| | | | | | |
| Transactions with owners: | | | | | |
| Share based payments | - | - | 32 | - | 32 |
| Dividends | - | - | - | (3,060) | (3,060) |
| | ---------------- | ---------------- | ---------------- | ---------------- | ---------------- |
| Balance at 31 May 2018 | 422 | 1,991 | 32 | 5,830 | 8,275 |
| | | | | | |
| Profit and total comprehensive income for the year | - | - | - | 3,978 | 3,978 |
| | | | | | |
| Transactions with owners: | | | | | |
| Share based payments | - | - | 43 | - | 43 |
| Dividends | - | - | - | (5,065) | (5,065) |
| | ---------------- | ---------------- | ---------------- | ---------------- | ---------------- |
| As at 31 May 2019 | 422 | 1,991 | 75 | 4,743 | 7,231 |
| | ========== | ========== | ========== | ========== | ========== |
| Consolidated Statement of Cash Flows | | |
| | 2019 | 2018 |
| | £000 | £000 |
| Cash flows from operating activities | | |
| Profit for the financial year | 3,978 | 5,953 |
| | | |
| Adjustments for: | | |
| Depreciation and amortisation | 103 | 75 |
| Finance income | (6) | (9) |
| Finance costs | - | 5 |
| Income tax expense | 901 | 1,362 |
| Expense recognised in respect of equity-settled share-based payments | 43 | 32 |
| | ------------------------ | ------------------------ |
| | 5,019 | 7,418 |
| | | |
| Movement in working capital: | | |
| Decrease / (Increase) in trade and other receivables | 155 | (94) |
| (Increase) in other assets | (43) | (51) |
| Decrease / (Increase) in trade and other payables | (459) | 536 |
| Increase in contract liabilities | 229 | 279 |
| | ------------------------ | ------------------------ |
| Cash generated from operations | 4,901 | 8,088 |
| | | |
| Finance costs paid | - | (5) |
| Finance income received | 6 | 9 |
| Income taxes paid | (1,450) | (835) |
| | ------------------------ | ------------------------ |
| Net cash from operating activities | 3,457 | 7,257 |
| | ================ | ================ |
| Investing activities | | |
| Purchase of property, plant and equipment | (72) | (25) |
| Purchase of intangible assets | (89) | (20) |
| | ------------------------ | ------------------------ |
| Net cash used in investing activities | (161) | (45) |
| | ================ | ================ |
| Financing activities | | |
| Repayment of bank borrowings | - | (431) |
| Dividends paid to owners of the Company | (5,065) | (3,060) |
| | ------------------------ | ------------------------ |
| Net cash used in financing activities | (5,065) | (3,491) |
| | ================ | ================ |
| Net (Decrease) / Increase in cash and cash equivalents | (1,769) | 3,721 |
| Cash and cash equivalents at beginning of year | 7,522 | 3,801 |
| | ------------------------ | ------------------------ |
| Cash and equivalents at end of year | 5,753 | 7,522 |
| | ================ | ================ |
1. Basis of preparation
The preliminary financial information does not constitute statutory accounts for the financial years ended 31 May 2019 and 31 May 2018, but has been derived from those accounts. The accounting policies used in preparation of this preliminary announcement are in line with the 2019 annual report, with the principal accounting policies disclosed below. Statutory financial statements for the year ended 31 May 2019 will be delivered to the Registrar of Companies following the Company's annual general meeting. The auditors have reported on those accounts and their reports were unqualified, did not draw attention to any matters by way of emphasis, and did not contain a statement under 498(2) or 498(3) of the Companies Act 2006
Basis of Consolidation
The Group financial statements consolidate the results of the Company, K3 Capital Group plc, and its subsidiaries (together referred to as the "Group").
Subsidiary undertakings acquired are included using the acquisition method of accounting. Under this method the consolidated statement of comprehensive income, consolidated statement of financial position and consolidated statement of cash flows included the results and cash flows of subsidiaries from the date of acquisition and to the date of sale outside the Group in the case of disposals of subsidiaries.
Where the company has control over an investee, it is classified as a subsidiary. The Company controls an investee if all three of the following elements are present: power over the investee, exposure to variable returns from the investee, and the ability of the investor to use its power to affect those variable returns. Control is reassessed whenever facts and circumstances indicate that there may be a change in any of these elements of control.
New standards, amendments to and interpretations to published standard
New standards that the Group has adopted in the annual financial statements for the year ended 31 May 2019 are:
IFRS 9 Financial Instruments (IFRS 9); and
IFRS 15 Revenue from Contracts with Customers (IFRS 15)
IFRS 9 has impacted the way in which the group accounts for certain financial assets and financial liabilities. The standard has introduced an expected credit loss model, when assessing impairment of financial assets. Historically, the directors would have considered trade receivables to be potentially impaired if they were not settled within the credit terms stated on the invoice. The expected credit loss methodology is forward looking and requires the calculation of an expected credit loss of which will arise in the future. The K3 Capital group has a low value of trade receivables and the application of IFRS 9 has not had a material impact.
With respect to the classification and measurement of financial assets, the number of categories of financial assets under IFRS 9 has been reduced compared to IAS 39. Under IFRS 9, the classification of financial assets is based both on the business model of which the asset is held and the contractual cashflow characteristics of the asset. There are three principal classification categories for financial assets that are debt instruments: (i) amortised cost, (ii) fair value through other comprehensive income (FVTOCI) and (iii) fair value through profit or loss (FVTPL) IFRS 9 had no effect on the classification of financial instruments held by the group.
Intercompany loans are considered in line with the general approach, under IFRS 9. This involves taking into account all available relevant information about the subsidiary undertakings current and expected operating performance and cash flow. The group has chosen not to restate comparatives on adoption of IFRS 9 as there has been no material impact on the calculation of the impairment provision under the expected loss model. As a result of this, there has been no adjustment recorded in respect of the IFRS 9 transition in opening equity at 1 June 2018.
In respect of IFRS 15 the directors had pre-determined at the date of the float of the company on the AIM market that IFRS 15 would have no material impact on revenue recognition as the revenue recognition policy adopted at the time met the requirements of both IAS 18 and IFRS 15. This assessment has been subject to ongoing review. In determining that the impact of adopting IFRS 15 would not be material to the group the directors have made the following judgements:
· The performance obligation of recognising contingent fee revenue is the completion of a successful transaction. Under IAS 18 income recognition for contingent fees was on the basis that the income was virtually certain, which would only be known on completion of a corporate finance transaction. The directors determine that the revenue recognition criteria have not changed.
· There is one performance obligation within Transaction Fee income. There are multiple services involved in a retainer, such as providing marketing documents in respect of the business for sale. These services are not individually distinct. The service provided creates a bespoke asset for the customer, of which has no alternative use. K3 Capital Group are also entitled to payment, for the work carried out on these retainers, to date. Under IAS 18 where services are provided under a contract, income was recognised by reference to the level of contract progression. As a result, the Directors have determined the revenue recognition under IFRS 15 for Retainer Fee income is not materially different to that under IAS 18.
As a result, the only noticeable change has been to provide more extensive disclosures for the group's revenue transactions and to amend reference to deferred revenue to contract liabilities on the face of the statement of financial position and in the notes.
Other new and amended standards and Interpretations issued by the IASB that will apply for the first time in the annual financial statements are not expected to impact the group as they are either not relevant to the group's activities or require accounting which is consistent with the group's current accounting policies.
New standards, amendments to and interpretations to published standards not yet effective
There are a number of standards, amendments to standards, and interpretations which have been issued by the IASB that are effective in future accounting periods that the group has decided not to adopt early. The most significant of these is:
IFRS 16 Leases (mandatorily effective for periods beginning on or after 1 January 2019)
The group has progressed its projects dealing with the implementation of this key new accounting standard and is able to provide the following information regarding their likely impact:
IFRS 16 Leases
Adoption of IFRS 16 will result in the group recognising right-of-use assets and lease liabilities for all contracts that are, or contain, a lease. For leases currently classified as operating leases, under current accounting requirements the group does not recognise related assets or liabilities, and instead spreads the lease payments on a straight-line basis over the lease term, disclosing in its annual financial statements the total commitment.
The Board has decided it will apply the modified retrospective adoption method in IFRS 16, and, therefore, will only recognise leases on balance sheet as at 1 June 2019. In addition, it has decided to measure right-of-use assets by reference to the measurement of the lease liability on that date. This will ensure there is no immediate impact to net assets on that date. At 31 May 2019 operating lease commitments amounted to £522,000, which is not expected to be materially different to the amount which is expected to be disclosed at 1 June 2019. The effect of discounting those commitments is anticipated to result in right-of-use assets and lease liabilities of approximately £1.4 million being recognised on 1 June 2019. The Board have decided that early terminations or extensions to leases are unlikely at this stage. There is no impact on the parent Company on the adoption of IFRS 16.
Instead of recognising an operating expense for its operating lease payments, the group will instead recognise interest on its lease liabilities and amortisation on its right-of-use assets. This will increase reported EBITDA by the amount of its current operating lease cost, which for the year ended 31 May 2019 was approximately £0.3 million had IFRS 16 been early adopted.
Other
The Group does not expect any other standards issued by the IASB, but not yet effective, to have a material impact on the group.
Going Concern
The financial statements have been prepared on the basis that the Group will continue as a going concern.
After making enquiries, the Directors consider that the Group has adequate resources and committed borrowing facilities to continue in operational existence for the foreseeable future. Consequently, they have adopted the going concern basis in preparing the financial statements.
Revenue Recognition
Revenue comprises revenue recognised by the Group in respect of services supplied during the year, exclusive of Value Added Tax.
The Group recognises revenue from the following major sources:
Non-contingent fees arising from customers for professional advice
Transaction fees arising from business sales arranged by the group companies
Revenue is measured based on the consideration to which the Group expects to be entitled in a contract with a customer and excludes amounts collected on behalf of third parties. The Group recognises revenue when it transfers control of a product or service to a customer.
There is one performance obligation associated with retainer fee income. Although there are different services provided, none of these are individually distinct. These services include the drafting of an information memorandum, as well as performing research to obtain a buyer for the client. Revenue is recognised over time because the work performed does not create an asset of which has an alternate use, and the K3 Capital Group have an enforceable right to payment for the work of which has been performed. There is no variable consideration.
Due to revenue being recognised over time, and agreements overlapping the period end, contract liabilities are recognised when invoiced revenue is recognised in advance of delivery of the remaining service of the retainer. As these contracts are similar in nature, the review of milestone completion and calculation of contract liabilities is done on a portfolio basis.
The transaction price is determined at inception of the contract. The transaction price is allocated to the performance obligation in line with the stage of completion of the retainer.
There is one performance obligation within Transaction Fee income. This obligation is the completion of a Transaction as defined in K3 terms of business, being the transfer of shares or assets from a client to a 3rd party, with fees settled from the sale proceeds. No contract liabilities arise with transaction fee income, and there is no variable consideration.
Employee benefits
i Short-term benefits
Wages, salaries, paid annual leave and sick leave, bonuses and non-monetary benefits are accrued in the period in which the associated services are rendered by employees of the Group.
ii Defined Contribution plans
The Group operates a defined contribution pension scheme for employees. The assets of the scheme are held separately from those of the Group. The annual contributions are charged to the Statement of Comprehensive Income. The Group also contributes to the personal pension plans of the Directors at the Group's discretion.
Operating Profit
Operating profit is stated after all expenses, including those considered to be exceptional, but before finance income or expenses. Distribution costs relate to marketing expenses. All other operational costs are classified as administrative expenses.
EBITDA
EBITDA is utilised as a key performance indication for the Group and is calculated utilising profit before tax, adjusted for finance income and costs, amortisation and depreciation on non-current assets.
2. Revenue
The Group's revenue arises from the provision of services in fulfilling the principal activities. An analysis of revenue by subsidiary company is shown below:
| | 2019 | 2018 |
| | £000 | £000 |
| KBS Corporate Sales Limited | 8,693 | 8,319 |
| KBS Corporate Finance Limited | 2,671 | 6,589 |
| Knightsbridge Business Sales Limited | 2,200 | 1,577 |
| | ------------------------ | ------------------------ |
| | 13,564 | 16,485 |
| | ================ | ================ |
A further breakdown of revenue by type is shown below:
| | 2019 | 2018 |
| | £000 | £000 |
| Non-contingent fees | 8,130 | 6,965 |
| | ------------------------ | ------------------------ |
| Transaction fees | 5,434 | 9,520 |
| | ------------------------ | ------------------------ |
| | 13,564 | 16,485 |
| | ================ | ================ |
3. Operating Profit
Operating profit or loss is stated after charging:
| | 2019 | 2018 |
| | £000 | £000 |
| Amortisation of intangibles - website costs | 16 | 6 |
| Depreciation of owned assets | 86 | 69 |
| Auditor remuneration | 31 | 30 |
| Equity - settled share based payments expenses | 43 | 32 |
| Operating lease charge | 235 | 192 |
| | ================ | ================ |
4. Employee Benefit Expense
The average number of persons employed by the Group during the year, including the directors, amounted to:
| | 2019 | 2018 |
| | No. | No. |
| Management | 10 | 9 |
| Sales | 71 | 57 |
| Marketing/Administration | 72 | 55 |
| | ------------------------ | ------------------------ |
| | 153 | 121 |
| | ================ | ================ |
The aggregate payroll costs incurred during the year by the Group, relating to the above, were:
| | 2019 | 2018 |
| | £000 | £000 |
| Wages, salaries, bonuses & benefits in kind | 5,416 | 5,907 |
| Share-based payments | 43 | 32 |
| Social security costs | 526 | 670 |
| Other pension costs | 54 | 24 |
| | ------------------------ | ------------------------ |
| | 6,039 | 6,633 |
| | ================ | ================ |
5. Earnings per share
Basic earnings per share amounts are calculated by dividing the profit for the year attributable to equity holders of the Company by the weighted average number of ordinary shares outstanding during the period.
Diluted earnings per share are calculated by dividing the profit attributable to ordinary equity holders of the Company by the weighted average number of ordinary shares outstanding during the year plus the weighted average number of ordinary shares that would have been issued on the conversion of all dilutive potential ordinary shares into ordinary shares at the start of the year, or, if later, the date of issue.
The following reflects the income and share data used in the basic and diluted earnings per share computations:
| | 2019 | 2018 |
| | £000 | £000 |
| Net profit attributable to equity holders of the Company | 3,978 | 5,953 |
| Initial weighted average of ordinary shares | 42,210,526 | 42,210,526 |
| Basic earnings per share | 9.43p | 14.10p |
The weighted average number of ordinary shares for the purposes of diluted earnings per share reconciles to the weighted average number of shares used in the calculation of basic earnings per share as follows:-
| | 2019 | 2018 |
| | £000 | £000 |
| Weighted average number of ordinary shares used in the calculation of basic earnings per share | 42,210,526 | 42,210,526 |
| Dilutive effects of share options | 142,322 | 595,501 |
| | ------------------------ | ------------------------ |
| Dilutive weighted average number of ordinary shares | 42,352,848 | 42,806,027 |
| | ================ | ================ |
| Diluted earnings per share | 9.39p | 13.91p |
6. Contract liabilities
| | Group | Company | ||
| | 2019 | 2018 | 2019 | 2018 |
| | £000 | £000 | £000 | £000 |
| Arising from client contracts | 1,645 | 1,416 | - | - |
| | ================ | ================ | ================ | ================ |
The contract liabilities arises from the non-contingent contracts provided to certain customers in respect of providing services including business marketing and research to these clients. Revenue is recognised in accordance with services provided within contract terms. All contract liabilities as 31 May 2019 will be recognised within revenue in full in the next financial year.
Annual Report
The annual report will be mailed to shareholders and made available on our website on or around 16 September 2019. Copies will be made available after that date from: The Secretary, KBS House, 5 Springfield Court, Summerfield Road, Bolton, BL3 2NT.
Annual General Meeting
It is our intention to hold the Annual General Meeting (AGM) on Friday 18 October at 11.00am at the offices of TLT LLP, 3 Hardman Square, Spinningfields, Manchester, M3 3EB.
Copies of the announcement can be found on the Investor Relations section of the Company's website: www.k3capitalgroupplc.com