TIDMSAG
RNS Number : 7573E
Science Group PLC
03 March 2020
3 March 2020
SCIENCE GROUP PLC
AUDITED RESULTS
FOR THE YEARED 31 DECEMBER 2019
Science Group plc (the 'Company') together with its subsidiaries
('Science Group' or the 'Group') reports its audited results for
the year ended 31 December 2019.
Summary
-- Organic business performance in line with upgraded expectations.
-- Acquisition of Frontier Smart Technologies completed, funded
primarily from existing cash resources.
-- Frontier restructuring and integration programme effectively
completed. Costs recognised in 2019.
-- Group retains a strong balance sheet with significant freehold property assets.
Science Group plc
Tel: +44 (0) 1223 875
Martyn Ratcliffe, Chairman 200
Rebecca Archer, Finance Director www.sciencegroup.com
Panmure Gordon
Nominated Adviser: Dominic Morley, Alina Tel: +44 (0) 20 7886
Vaskina 2500
Corporate Broking: Erik Anderson
MHP Communications (PR Adviser to Science
Group)
Tel: +44 (0) 20 3128
Reg Hoare, Pete Lambie 8100
* Alternative performance measures are provided in order to
enhance the shareholders' ability to evaluate and analyse the
underlying financial performance of the Group. Refer to Note 1 for
detail and explanation of the measures used.
Note: This announcement contains inside information which is
disclosed in accordance with the Market Abuse Regulation (No
596/2014).
Chairman's Statement
Science Group plc together with its subsidiaries is an
international, science & technology services and product
development organisation, supported by a strong balance sheet
including significant freehold property assets. In 2019, the Group
delivered a consistent operating performance from its organic
business activities and completed a major acquisition followed by
an accelerated restructuring and integration programme. As a
result, the progress of Science Group has continued despite the
background of macroeconomic and political uncertainty during
2019.
The strategy of enhancing the organic development of the Group
through acquisitions has created a financially and operationally
resilient organisation. The acquisition of Frontier Smart
Technologies Group Limited ('Frontier') was again funded primarily
from the Group's existing cash resources, minimising shareholder
dilution. This strategy has delivered a substantial increase in
scale, profit and the asset base of the Group, with offices in UK,
Europe, North America and Asia, serving a range of vertical markets
including medical, consumer, food & beverage and industrial
sectors.
Financial Summary
Organic business performance in 2019 was positive. The Group's
statutory results for the year are significantly influenced by the
Frontier acquisition and the associated intensive restructuring
undertaken to position the Group to realise the benefit in 2020 and
beyond. As explained within this report, the accounting treatment
associated with the acquisition is complex and, in order to provide
transparency to shareholders, the Group results are summarised in
the table below.
Adjusted
Revenue Operating Revenue Adjusted Operating
2019 Profit 2019 2018 Profit 2018
GBP000 GBP000 GBP000 GBP000
Services Operating
Business (excluding
Frontier and exited
operations) 48,710 8,221 47,195 7,564
-------- ------------- -------- -------------------
Freehold properties 3,871 1,503 3,920 1,573
-------- ------------- -------- -------------------
Corporate costs - (1,737) - (1,574)
-------- ------------- -------- -------------------
Intra-Group elimination (2,874) - (2,858) -
-------- ------------- -------- -------------------
Group excluding Frontier
and exited operations 49,707 7,987 48,257 7,563
-------- ------------- -------- -------------------
Exited operations - - 413 168
-------- ------------- -------- -------------------
Frontier 7,540 (1,283) - -
-------- ------------- -------- -------------------
Group 57,247 6,704 48,670 7,731
-------- ------------- -------- -------------------
For the year ended 31 December 2019, Group revenue was GBP57.2
million (2018: GBP48.7 million) of which organic revenue was
GBP49.7 million (2018: GBP48.3 million excluding exited
operations). Adjusted operating profit ('AOP') for the organic
business for the year ended 31 December 2019 was in line with the
Board's expectations at the time of the October trading update,
despite the negative impact of foreign currency movements during
the last few months of the year, a period of considerable
volatility for Sterling. The Group result comprised a profit
contribution of GBP8.0 million (2018: GBP7.6 million excluding
exited operations) from organic business activities and a loss of
GBP1.3 million from the Frontier operations, as anticipated.
(Adjusted operating profit and other Alternative Performance
Measures used in this report are defined in the Finance Director's
Report. The Group exited operations in Central Europe in H1 2018
and the continuing measure provides comparability.)
In line with the Group's established model, acquisition
restructuring and integration have been expedited and associated
costs recognised at the earliest opportunity. Costs related to the
Frontier acquisition including professional fees; share
revaluation; property lease provisions; and the
integration/restructuring process totalled GBP4.1 million.
Amortisation of acquisition related intangibles and share based
payment charge totalled GBP3.5 million (2018: GBP2.8 million) and
as a result, in line with the Board's expectations, the Group
reported an operating loss of GBP0.2 million for the year (2018:
profit of GBP5.3 million).
Balance Sheet
The Group maintains a strong balance sheet, even after the
Frontier acquisition, with significant cash resources, low debt and
two substantial freehold properties hosting the Group's main UK
laboratories and offices (see below).
Reflecting the deployment of cash to acquire Frontier, at 31
December 2019, gross cash was GBP13.9 million (2018: GBP21.5
million) and net debt was GBP2.3 million (2018: net funds of GBP8.8
million). The Group's bank debt at 31 December 2019 was GBP16.2
million (2018: GBP12.7 million). The Group's bank debt is tied to
interest rate swaps to produce a net fixed rate (effectively 3.6%)
to 2026 and is secured on the Group's freehold property assets.
Subject to net debt not exceeding GBP10 million, the bank debt is
not subject to operating covenants.
During the year, the Company sold some treasury shares in
association with the Frontier acquisition. As a result, at 31
December 2019, shares in issue (excluding treasury shares held of
0.4m) were 41.7 million (2018: 40.0 million). Apart from the
treasury shares, the acquisition of Frontier was undertaken using
the Group's existing resources. This is consistent with the Board's
prior practice, which has delivered substantial growth in revenue
and profit over the past 9 years without shareholder dilution.
(Issued share capital, excluding treasury shares, at 31 December
2010 was 41.7 million, the same as at 31 December 2019.)
Dividend
In recent years, the Group has progressively increased the
dividend paid to shareholders ahead of the rate of inflation.
Following the cash deployed in the Frontier acquisition, the Board
has decided to recommend that this year the dividend is held at 4.6
pence per share. Subject to shareholder approval at the Annual
General Meeting ('AGM'), the dividend will be payable on 12 June
2020 to shareholders on the register at the close of business on 22
May 2020.
Services Operating Business Overview
For the year ended 31 December 2019, revenue from the Group's
services operating business (which excludes Frontier and property
income) increased to GBP48.7 million (2018: GBP47.2 million,
excluding exited operations). Adjusted operating profit generated
from the services operating business was GBP8.2 million (2018:
GBP7.6 million), in line with the trading update in October,
despite the foreign exchange impact within the fourth quarter
related to Brexit uncertainty. This profitability measure includes
property rental costs charged to the services operating business at
market rates on an arms-length basis. As a result, while there are
operational and liability mitigation benefits from the Group's
freehold property, the financial performance of the services
operating business is not enhanced by these assets.
Product Development
The Group provides product development consulting services to
the medical, consumer, food & beverage and industrial markets
helping clients develop innovative products and technologies.
Science Group services are differentiated by their combination of
deep scientific understanding, engineering excellence and sector
domain knowledge.
Revenues for the Product Development business increased to
GBP23.2 million (2018: GBP22.0 million). The Commercial (consumer,
food & beverage and industrial sectors) business delivered very
strong results compared to the prior year. The Medical business,
characterised by large projects with a greater customer
concentration, was impacted in H1 2019 as a result of some large
projects completing at the end of 2018, but recovered well in the
second half of the year. The largest Product Development client
accounted for GBP3.1 million of revenue in 2019.
The acquisition of Frontier enhances the Product Development
business' Internet of Things ('IoT') proposition, particularly in
the Commercial sectors. Prior to the Frontier acquisition, IoT has
been a growth area as companies seek to evolve their business
models in line with this digital market trend. However, one of the
less understood but critical aspects of deploying IoT strategies is
the requirement for ongoing support infrastructure to enable, for
example, the updating of firmware; system control; data analysis;
and maintenance monitoring. The Nuvola infrastructure, originally
established to support Frontier's smart radio ('SmartRadio') and
smart audio models which now has an installed base of several
million field-deployed units, brings a new capability to the
Group's strategy.
Advisory
The Group's Advisory business provides clients a combination of
sector understanding and science/technology expertise. These
consulting services help clients innovate, typically looking at
market developments and opportunities in the 3-10 year horizon. The
client base is mainly large, blue-chip organisations, but
project-size is typically smaller than product development
projects. The largest Advisory client accounted for GBP1.2 million
of revenue in 2019.
The Advisory business had a good performance in 2019 with
revenue increasing to GBP8.2 million (2018: GBP7.6 million). The
Consumer and Food & Beverage sectors performed strongly,
benefitting from the Group's wider capabilities in Product
Development and Regulatory services. The Industrial (including
Energy) sector performed satisfactorily.
Regulatory
The Regulatory businesses provide science-based regulatory
consulting services to clients in the food & beverage,
agritech, consumer and chemicals market sectors. The Group delivers
services to clients predominantly in Europe and North America, but
provides international coverage across wider geographical
territories, particularly in food & beverage where services
cover over 100 countries, a key differentiating factor in this
global market.
The revenues from the Group's Regulatory businesses slightly
declined to GBP16.8 million (2018: GBP17.3 million from continuing
operations). Performance was strong in food & beverage,
reflecting the Group's market leadership position and scalable
services model. In the US regulatory business, the market was
impacted significantly in the first part of the year by the federal
government shutdown, recovering in the second half with growth in
the federal and state renewals business which provides repeat
revenue from the established client base. In Europe, the prior year
benefited from a regulatory deadline relating to the REACH
programme and the revenue in 2019 therefore declined slightly. The
largest Regulatory client accounted for GBP0.5m of revenue in the
year.
Frontier Acquisition
Science Group completed the acquisition of Frontier in October.
Due to the progressive increase of the Science Group shareholding
between May and October, the accounting treatment of the 2019
results is complex. In brief, prior to 11 July 2019, the
shareholding was deemed to be an investment. Thereafter, Frontier
was treated as an associate until 23 August 2019, at which point
Science Group obtained control and the results were consolidated
(with the proportion relating to the other Frontier shareholders
being separately attributed). On 11 October 2019, completion of the
statutory merger resulted in Science Group obtaining 100% ownership
of Frontier.
The accounting treatment is further complicated by the variation
in price paid per share during the course of the acquisition. On 23
August, the Group's weighted average cost per Frontier share for
shares acquired prior to that date, through on-market purchases and
the formal offer ('Offer'), was 30.6 pence, at which time Science
Group owned 19.4 million shares in Frontier. The price per share
for the subsequent statutory merger was 25 pence and as a result a
paper accounting loss of 5.6 pence per share was incurred on the
Group's holding, equivalent to GBP1.1 million, although the Board's
action produced a cash saving to Science Group of approximately
GBP2.7 million compared to the original Offer price of 35 pence per
Frontier share. This unusual circumstance, which was significantly
beneficial to Science Group, was only possible due to Frontier not
being subject to the UK Code on Takeovers and Mergers and the
Frontier Board rejecting the original Science Group Offer.
At an adjusted operating level, the underlying loss reported by
Frontier was GBP0.8 million. In addition, acquisition accounting
treatment of work-in-progress and finished goods in accordance with
IFRS 3, Business Combinations, results in an adjustment of GBP0.5
million reported as an operating loss. Professional fees; share
revaluation; property lease provisions; and the costs arising from
integration/restructuring activities totalled GBP4.1 million.
In terms of the balance sheet on 23 August, when consolidation
commenced, goodwill of GBP2.8 million ($3.5 million) and
acquisition related intangible assets of GBP8.8 million ($10.7
million) were recognised. Subsequently, due to the fluctuation in
exchange rates and amortisation of acquisition related intangible
assets, at 31 December 2019 these balances were GBP2.6 million and
GBP7.6 million respectively. Frontier also has significant
unrecognised tax losses, in the order of GBP24 million.
Frontier Integration and Strategy
Since completion in October, a very intensive restructuring and
integration programme has been executed by the new Frontier
management team. Excellent progress has been made including:
-- The Romanian operations have been closed and the legal entity
is anticipated to be terminated in 2020;
-- The Frontier London office has been closed and staff
relocated to the Science Group London office;
-- The Cambridge (Sawston) office has been closed and staff
relocated to Science Group's freehold facility in Harston,
Cambridge, with onerous lease costs being recognised in 2019;
-- In Hong Kong the office space has been reduced by
approximately half with the associated onerous costs being
recognised in 2019;
-- A substantial reduction in the cost base has resulted in
headcount reducing from 110 in October 2019 to 67 in February 2020;
and
-- A reduction in the number of module variants, including
end-of-life programmes for unprofitable product lines.
The market for Frontier products is relatively stable with
upticks in demand associated with country transitions to digital
broadcasting. Frontier holds a majority share in its core digital
radio (DAB/DAB+) market and demand for Frontier products is
therefore fundamentally linked to the scale and dynamics of the
market. Frontier has historically been over-optimistic in its
forecasting and failed to manage distribution/retail channel
inventory, a particular issue in late 2018 which resulted in
incentives to customers towards the end of the year having a
material impact on demand in 2019. This not only resulted in
forecast downgrades in Frontier but such short-term incentives to
customers exacerbate price/margin pressure and revenue volatility.
The Frontier strategy in future will be to allow revenue to move in
line with market developments to produce a more sustainable, and
profitable, operating model.
The substantial reduction in the cost base resulting from the
accelerated integration/restructuring programme, should enable
Frontier performance to recover in 2020. However, the impact of the
coronavirus (COVID-19) outbreak is uncertain, a global challenge
particularly affecting production facilities in China where
Frontier and Frontier customers manufacture their products. The
Frontier manufacturing facility was temporarily closed but has now
been partially reopened following approval from the local
authority. The situation remains under close review.
Frontier revenue and material costs are transacted in US
dollars, as is common practice in consumer electronics manufactured
in China since most materials are priced in that currency. As a
consequence, the Frontier business is exposed to exchange rate
fluctuations between Sterling and US dollars.
Frontier Product Strategy
The Frontier business comprises:
DAB Radio: Frontier is the market leader in design and
manufacture of chips and modules which are used in DAB radios. The
skills involved in designing, developing and manufacturing these
products include embedded software engineering, RF and digital
hardware development and high-volume/low cost manufacturing. This
product category contributes the majority of Frontier revenue.
The market of approximately 5 million chips/modules is
concentrated in geographies such as Germany and the UK which have
been major adopters of the DAB digital broadcast technology. The
underlying, broadly flat market volume is enhanced when major
geographies accelerate their national digital strategies or
implement digital switchover.
SmartRadio: Frontier also designs and manufactures modules which
contain internet radio technology in addition to DAB chips. The
resulting products feature in an emerging category increasingly
referred to as 'SmartRadio'. These products enable consumers to
listen to broadcast radio through DAB and/or a wide range of global
internet radio stations in addition to music streaming services
such as Spotify. The category aims to combine the simplicity of
radio together with the scope of the internet, without the privacy
concerns sometimes associated with the smart speaker category.
In terms of market volume, SmartRadio currently accounts for
around 15% of Frontier shipments. Frontier SmartRadios are
connected to the Group's cloud platform ('Nuvola') which enables
certain internet functionality and delivers firmware updates when
required.
Smart Audio: In recent years, Frontier invested heavily in
developing modules that enable voice-activated smart speakers and
other audio devices. This product-line absorbed very substantial
funds resulting in the lack of profitability of Frontier. While the
product category contributes some valuable technology and
capability in voice activation of the major ecosystems and remains
part of the product portfolio, as a stand-alone product category
the importance has now been de-emphasised. A provision against
excess inventory was taken in 2019.
IoT: As part of Frontier's smart radio and smart audio strategy,
Frontier developed the cloud architecture, Nuvola, which enables
certain functionality and firmware updates of internet-connected
products in the field. This architecture has been technically
well-conceived and currently supports an installed base of several
million devices, of which around 1.5 million were actively
connecting to Nuvola in January 2020. This architecture will
continue to support Frontier products and, as explained above, will
potentially provide an enabler for the Group's wider Product
Development and IoT strategies.
Freehold Properties
The last formal valuation of the Group's freehold properties,
Harston Mill, near Cambridge, and Great Burgh, near Epsom, was
undertaken in March 2018. This report indicated that the aggregate
'vacant possession' valuation was estimated at GBP22.6 million and,
based on market rents and property yields at that time, the
aggregate sale & leaseback valuation was estimated at GBP33.9
million. The properties are held on the balance sheet at an
aggregate value of GBP21.4 million (2018: GBP21.6 million) on the
historical cost-based valuation model.
Following the 2018 strategic review, the freehold properties are
managed outside of the operating business activities and the
operations are charged rent and service charges on an arms-length
basis. For the year ended 31 December 2019, the property business
generated a total revenue of GBP3.9 million. This comprised GBP1.0
million (2018: GBP1.1 million) from third party tenants and GBP2.9
million (2018: GBP2.9 million) from intra-Group rental charges. On
a stand-alone basis, the Group's freehold property delivered a
GBP1.5 million (2018: GBP1.6 million) adjusted operating profit,
although at Group level, the intra-Group trading is eliminated on
consolidation.
The vacant space in the Mill building on the Harston Mill site
has been used to accommodate Frontier. During the year, one larger
tenant went into insolvency and currently there is 6,000 square
feet of lettable space at Harston Mill. Additional tenant turnover
is anticipated in the year ahead and marketing of potential free
space has been initiated.
The Board previously concluded that the Harston Mill property
should be moved out of Sagentia into a separate company and this
was due to be actioned early in 2020, with a corresponding tax cash
outflow of approximately GBP2 million. The preparatory work has
been completed. However, following the Frontier acquisition and the
deployment of cash resources into expanding the Group's business
operations, the Board has decided to defer the Harston Mill
transfer and to review later in the year. There are no material
operating consequences of this deferral.
External Factors
There are several external factors which may influence the Group
in the year ahead.
Brexit is the highest profile political change but it remains
unclear what the net effect on the Group's services operations will
be, since some capabilities may be in greater demand while R&D
tax credit arrangements in EU countries may in some cases make UK
consultancy services less attractive. With regard to the Frontier
product business, supply is provided directly from China/Hong Kong
and it is not anticipated that Brexit will have any material effect
on this division. In addition to Brexit, the US Presidential
election could influence Science Group's services operations later
in the year since a high proportion of this revenue is derived from
North America. The Board monitors developments and awaits greater
certainty before reviewing the Group's strategy, if
appropriate.
The Covid-19 virus has to date only had a minor effect and this
has been in relation to the Frontier manufacturing in China.
However, while the timing of the outbreak around the Lunar New Year
was unfortunate, this time of year was planned to be a quieter
business period due to the holiday. As a result, to date there has
been only limited financial impact and the Frontier manufacturing
operations have now partially reopened in accordance with local
procedures. In summary, at present it is considered that any
material effect on Science Group is likely to derive from the
indirect consequences on the global economy (R&D investment,
business travel, etc). The Board are closely monitoring the
situation.
However, in regard to factors beyond the Board's control, the
greatest financial impact is likely to derive from movements in
currency exchange rates with the Group benefitting from a strong US
dollar and weaker Sterling. Currency rates may be directly or
indirectly related to the above and/or other external factors.
Corporate
The major corporate activity during 2019 was the Frontier
acquisition. Not only was this the largest acquisition in the
Group's history, but it was also a complex bid for an AIM-listed,
Cayman-domiciled entity, which was actively resisted by the
Frontier Board. The transaction included market purchases; a formal
offer; an equity investment; and finally a cross-border statutory
merger, subject to English and Cayman law. The UK Code on Takeovers
and Mergers did not apply.
With Frontier having operations in Cambridge, London, Romania,
Hong Kong and China, the integration has been intense particularly
since the operational restructuring has been effectively completed
in just a few months. Finalising the corporate administrative
procedures and implementing the new strategy is ongoing.
Corporate costs for the Group for the year increased to GBP1.7
million (2018: GBP1.6 million).
Summary
The financial performance of the Group's organic operations in
2019 was in line with expectations. The Board anticipate continued
progress in the year ahead and the new year has started
satisfactorily.
Despite only completing the acquisition in October, the
restructuring and integration of Frontier, has made very good
progress, resulting in a substantial reduction in the cost base and
a clear future strategy for this business. While the impact of
Covid-19 cannot be fully evaluated, the Board is confident that the
operational, financial and commercial transformation that has been
undertaken in the last few months will render the business more
resilient to external factors.
The Group retains a strong balance sheet with significant cash
resources; low net debt (without any operating covenants at the
current level); and substantial freehold property assets. This
foundation, together with the Group's portfolio of complementary
business operations, diversified across geography and industry
sectors, provides stability and opportunity in an unpredictable
world.
Martyn Ratcliffe
Chairman
Finance Director's Report
Overview of results
In the year ended 31 December 2019, the Group generated revenue
of GBP57.2 million (2018: GBP48.7 million) benefitting from the
inclusion of 4 months trading of Frontier following the acquisition
during 2019. Revenue from the services and product operating
businesses, that is revenue derived from consultancy services,
materials recharged on these projects and product revenue,
increased to GBP56.2 million (2018: GBP47.6 million). Revenue
generated by freehold properties, comprising property and
associated services income derived from space let to third parties
in the Harston Mill facility, was GBP1.0 million (2018: GBP1.1
million).
Adjusted operating profit for the Group of GBP6.7 million (2018:
GBP7.7 million) includes an adjusted operating loss of GBP1.3
million for Frontier within which an acquisition accounting loss of
GBP0.5 million arose due to the revaluation of acquired inventory.
The Group statutory operating loss of GBP0.2 million (2018: profit
of GBP5.3 million) includes the costs resulting from the
restructuring of Frontier and the one-off costs and accounting
adjustments arising from the acquisition as set out in the
Chairman's Statement. The statutory loss before tax was GBP1.6
million (2018: profit before tax of GBP4.9 million) and statutory
loss after tax was GBP1.8 million (2018: profit after tax of GBP4.3
million).
(Adjusted operating profit is an alternative profit measure that
is calculated as operating profit excluding amortisation of
acquisition related intangible assets, impairment of investments,
acquisition integration costs, share based payment charges and
other specified items that meet the criteria to be adjusted. Refer
to the notes to the financial statements for further information on
this and other alternative performance measures).
Frontier
The Frontier transaction started in early May 2019 when the
initial on-market purchases of shares were made. On 11 July 2019,
the Group ownership reached 35.6% and the Group commenced equity
accounting for the investment. The Group continued to acquire
shares on the market and made an offer for Frontier at 35 pence per
share resulting in ownership of 47.5% on 19 July 2019. On 23 August
2019, through an issue of 4 million shares by Frontier, Science
Group increased its ownership to 52.2% gaining control of Frontier
and the consolidation of results commenced. Additional shares were
acquired on the market taking the ownership to 72.3% on 6 September
2019 with the remaining Frontier shares being acquired on 11
October 2019 by way of a statutory merger. The statutory merger was
effected by SG Bidco Limited (a 100% owned subsidiary of Science
Group plc) merging with Frontier Smart Technologies Group Limited,
the parent company of the Frontier Group, through which Science
Group obtained full ownership of the Frontier business. Refer to
Note 16 for further information on the acquisition process and
accounting of Frontier.
Included within the Frontier adjusted operating loss for the
post acquisition period is a fair value adjustment related to the
acquisition accounting of inventory that increased the Frontier
loss by GBP0.5 million. All assets and liabilities are recorded at
fair value at the date of acquisition and the valuation of
inventory is adjusted to take into account the work done up until
this date. Therefore, work in progress and manufactured finished
goods held are not valued at cost and instead the fair value is
measured by taking into account the stage of development in the
production cycle of the item, with the fair value being the
estimated selling price less certain costs and a margin thereon.
This methodology, as required under IFRS 3, Business Combinations,
has resulted in an accounting adjustment to the value of acquired
inventory of GBP0.7 million and has reduced the adjusted operating
profit in 2019 by GBP0.5 million with the balance reducing adjusted
operating profit in 2020.
Adjusting items
The acquisition and restructuring activities have resulted in
significant one-off costs including: professional fees and
integration costs of GBP2.5 million; a provision for onerous costs
relating to property leases (including an impairment of the leased
right of use asset) of GBP1.1 million; and a loss on remeasurement
of the equity investment in Frontier of GBP0.5 million. The
capitalised acquisition related intangible assets in respect of
Frontier has resulted in the associated amortisation increasing to
GBP2.3 million (2018: GBP2.0 million) and the share based payment
charge has increased to GBP1.2 million (2018: GBP0.8 million) due
to the full year effect of the share options granted under the
Enhanced Executive Incentive scheme and the increase in PSP share
options granted resulting from the growth of the Group.
Foreign exchange
A significant proportion of the Group's revenue is denominated
in US Dollars and Euros and changes in exchange rates can have a
significant influence on the Group's financial performance. In
2019, GBP28.7 million of the Group operating business revenue was
denominated in US Dollars (2018: GBP16.6 million), including all of
Frontier revenue, and GBP3.6 million of the Group operating
business revenue was denominated in Euros (2018: GBP5.7 million).
The Group continues to monitor the volatility of exchange rates and
to date has decided not to utilise foreign exchange hedging
instruments.
IFRS 16 Leases
The Group adopted IFRS 16 Leases from 1 January 2019 using the
modified retrospective approach, under which the cumulative effect
of initial application is recognised in retained earnings at 1
January 2019. This applies to property leases held by the Group
companies. The effect was to recognise a Right of Use asset and a
Lease liability of GBP2.8 million at 1 January 2019. As a result,
in the Consolidated Income Statement for the year ended 31 December
2019, adjusted operating profit increased by a net of GBP12,000 and
interest cost increased by GBP95,000.
Taxation
The tax charge for the year was GBP0.2 million (2018: GBP0.6
million). The underlying tax charge on the profits generated by the
organic operating business has been partially offset against the
tax income arising on losses generated by Frontier from when it was
100% owned in the Group and a Research and Development tax credit
of GBP0.4 million (2018: GBP0.4 million). A significant proportion
of the one-off costs resulting from the acquisition and
restructuring activities are not anticipated to be tax
deductible.
At 31 December 2019, Science Group had GBP34.7 million (2018:
GBP10.8 million) of tax losses of which GBP0.2 million (2018:
GBP0.4 million) relate to trading losses which have been recognised
as a deferred tax asset and are anticipated to be used to offset
future trading profits. Tax losses of GBP24.0 million (2018:
GBPnil) relate to the acquired Frontier companies of which GBP22.4
million (2018: GBPnil) are held by the trading company of Frontier
(Frontier Smart Technologies Limited) and would be able to be
offset against future profits generated by this company but due to
the uncertainty in the timing of utilisation of these losses, they
have not been recognised as a deferred tax asset. The remaining tax
losses of GBP10.5 million (2018: GBP10.4 million) have not been
recognised as a deferred tax asset due to the low probability that
these losses will be able to be utilised in operating
activities.
Statutory basic earnings per share ('EPS') was a loss of 4.5
pence (2018: profit of 10.7 pence) due to the Frontier one-off
costs relating to the acquisition and integration.
Cash flow
Cash flow from operating activities excluding Client
Registration Funds ('CRF') was GBP5.4 million (2018: GBP5.0
million). Reported cash from operating activities in accordance
with IFRS was GBP5.4 million (2018: GBP5.6 million). The difference
in these two metrics relates to the fact that TSG, particularly in
the USA, processes regulatory registration payments on behalf of
clients. The alternative performance measures, adjusting for CRF,
more accurately reflect the Group's cash position and cash
flow.
The cash outflow in acquiring the shares of Frontier was GBP12.8
million which represented an average price per share of 27.3 pence.
Frontier held cash at the end of August 2019 of GBP2.8 million and
had a revolving credit facility with Clydesdale of GBP5.0 million
which was repaid by Science Group following the statutory merger.
During the post-acquisition period, the working capital of Frontier
was normalised by paying overdue balances owed to suppliers to
address the extended payment terms necessitated by Frontier's
financial position. Partially offsetting this was the reduction in
trade receivables and inventory arising from Frontier's seasonality
which experiences peak shipments in the summer months.
Financing and cash
The Group's term loan with Lloyds Bank plc ('Lloyds'), secured
on the Group's freehold properties, is a 10 year fixed term loan
expiring in 2026. It was increased during the year to GBP17.5
million on similar terms to those previously in place. Phased
interest rate swaps hedge the loan resulting in a 10 year fixed
effective interest rate of 3.6%, comprising a margin over 3 month
LIBOR, the cost of the loan arrangement fee and the cost of the
swap instruments. The term loan has no operating covenants as long
as the Group net bank debt is less than GBP10 million. If this
threshold is crossed, two conditions apply: (i) a financial
covenant, measured half-yearly on a 12 month rolling basis, such
that annual EBITDA must exceed 1.25 times annual debt servicing
(capital and interest) and (ii) a security covenant whereby the
loan to value ('LTV') ratio of the securitised properties must
remain below 75%. If either of these conditions are breached, a
remedy period of 6 months is provided, during which time the EBITDA
or LTV condition can be remedied or the net bank debt can be
reduced to less than GBP10 million. The Group has adopted hedge
accounting for the interest rate swap related to the bank loan
under IFRS 9, Financial Instruments, and the loss on change in fair
value of the interest rate swaps was GBP408,000 (2018: gain of
GBP66,000) which was recognised directly within equity.
The Group cash position (excluding CRF) at 31 December 2019 was
GBP13.9 million (2018: GBP21.5 million) and net debt was GBP2.3
million (2018: net funds of GBP8.8 million) following the cash
outflows for the consideration of Frontier, restructuring costs and
the realignment of the Frontier working capital position. CRF of
GBP1.5 million (2018: GBP1.5 million) were held at the year end.
Working capital management during the year continued to be a focus
with debtor days of 32 days at 31 December 2019 (2018: 37 days)
while combined debtor and WIP days was similar to prior year at
negative 7 days (2018: negative 9 days). (WIP is defined as the net
of accrued income and payments received on account). Following the
acquisition of Frontier, the Group holds inventory which, at 31
December 2019, was GBP2.1 million (2018: GBPnil).
Share capital
At 31 December 2019, the Company had 41,700,440 ordinary shares
in issue (2018: 40,040,227) excluding 361,595 shares in treasury
(2018: 2,021,808). Of the ordinary shares in issue, 104,400 (2018:
nil) shares are held by the EBT and hence the voting rights in the
Company are 41,596,040. In this report, all references to measures
relative to the number of shares in issue exclude shares held in
treasury unless explicitly stated to the contrary.
Employee Benefit Trust
Prior to acquisition, Frontier Smart Technologies Employee
Benefit Trust ('EBT') held 2.0 million Frontier shares. On
completion of the statutory merger, the EBT received GBP0.5 million
in settlement of the shares of which GBP0.3 million was paid to SG
Bidco Limited to settle an outstanding loan. 104,400 shares in
Science Group plc were acquired by the EBT (by issuing shares held
in treasury) which will be used to satisfy employee share options
issued to the Joint Managing Directors of the Frontier business.
The voting rights and right to dividends in respect of the ordinary
shares held by the EBT are waived.
Rebecca Archer
Finance Director
Consolidated Income Statement
For the year ended 31 December 2019
2019 2018
Notes GBP000 GBP000
----------------------------------------------------------------- ----- -------- --------
Revenue 2 57,247 48,670
Operating expenses before adjusting items (50,543) (40,939)
================================================================= ===== ======== ========
Adjusted operating profit 2 6,704 7,731
Acquisition and integration costs 16 (3,571) (76)
Loss on remeasurement of equity-accounted investee (491) -
Amortisation of acquisition related intangible assets (2,345) (2,004)
Share based payment charge (1,167) (812)
Release of provision on settlement of legal claim 12 687 -
Release of contingent consideration 13 - 519
Impairment of other investments - (50)
----------------------------------------------------------------- ----- -------- --------
Operating (loss)/profit (183) 5,308
Finance income 22 10
Finance costs (852) (451)
Share of loss of equity-accounted investee, net of tax (592) -
================================================================= ===== ======== ========
(Loss)/profit before income tax (1,605) 4,867
Income tax charge (including R&D tax credit of GBP406,000)
(2018: GBP432,000)) 3 (226) (580)
================================================================= ===== ======== ========
(Loss)/profit for the year (1,831) 4,287
================================================================= ===== ======== ========
Earnings per share
Earnings per share from continuing operations (basic) 5 (4.5)p 10.7p
Earnings per share from continuing operations (diluted) 5 (4.4)p 10.5p
Adjusted earnings per share from continuing operations (basic) 5 11.6p 14.7p
Adjusted earnings per share from continuing operations (diluted) 5 11.3p 14.4p
----------------------------------------------------------------- ----- -------- --------
Consolidated Statement of Comprehensive Income
For the year ended 31 December 2019
2019 2018
GBP000 GBP000
----------------------------------------------------------- ------- -------
(Loss)/profit for the year attributable to:
Equity holders of the parent (1,669) 4,287
Non-controlling interests (162) -
----------------------------------------------------------- ------- -------
(Loss) / profit for the year (1,831) 4,287
----------------------------------------------------------- ------- -------
Other comprehensive income
Items that will or may be reclassified to profit or loss:
Exchange differences on translating foreign operations (939) (50)
Fair value (loss)/gain on interest rate swap (408) 66
Deferred tax on interest rate swap 77 (13)
----------------------------------------------------------- ------- -------
Other comprehensive (expense)/income for the year (1,270) 3
----------------------------------------------------------- ------- -------
Total comprehensive income for the period attributable to:
Equity holders of the parent (2,939) 4,290
Non-controlling interests (162) -
----------------------------------------------------------- ------- -------
Total comprehensive (expense)/income for the year (3,101) 4,290
----------------------------------------------------------- ------- -------
Consolidated Statement of Changes in Shareholders' Equity
For the year ended 31 December 2019
Attributable to owners of the Company
==================================================================================
Issued Share Treasury Merger Translation Share Retained Total Non-controlling Total
capital premium stock reserve reserve based earnings - interests equity
payment Share-holders
reserve funds GBP000
GBP000 GBP000 GBP000 GBP000 GBP000 GBP000 GBP000 GBP000 GBP000
============== ======= ======= ======== ======= =========== ======= ======== ============= ================ ========
Balance
at 1 January
2018 421 8,230 (3,569) 10,343 310 2,663 19,341 37,739 - 37,739
-------------- ------- ------- -------- ------- ----------- ------- -------- ------------- ---------------- --------
Contributions
and
distributions
Purchase
of own shares - - (190) - - - - (190) - (190)
Issue of
shares out
of treasury
stock - - 995 - - - (880) 115 - 115
Dividends
paid - - - - - - (1,760) (1,760) - (1,760)
Share based
payment
charge (Note
23) - - - - - 812 - 812 - 812
Deferred
tax on share
based payment
transactions - - - - - - (48) (48) - (48)
============== ======= ======= ======== ======= =========== ======= ======== ============= ================ ========
Transactions
with owners - - 805 - - 812 (2,688) (1,071) - (1,071)
============== ======= ======= ======== ======= =========== ======= ======== ============= ================ ========
Profit for
the year - - - - - - 4,287 4,287 - 4,287
Other
comprehensive
income:
Fair value
gain on
interest
rate swap - - - - - - 66 66 - 66
Exchange
differences
on
translating
foreign
operations - - - - (50) - - (50) - (50)
Deferred
tax on
interest
rate swap - - - - - - (13) (13) - (13)
============== ======= ======= ======== ======= =========== ======= ======== ============= ================ ========
Total
comprehensive
income for
the year - - - - (50) - 4,340 4,290 - 4,290
============== ======= ======= ======== ======= =========== ======= ======== ============= ================ ========
Balance
at 31
December
2018 421 8,230 (2,764) 10,343 260 3,475 20,993 40,958 - 40,958
-------------- ------- ------- -------- ------- ----------- ------- -------- ------------- ---------------- --------
Attributable to owners of the Company
==================================================================================
Issued Share Treasury Merger Translation Share Retained Total Non-controlling Total
capital premium stock reserve reserve based earnings - interests equity
payment Share-holders
reserve funds GBP000
GBP000 GBP000 GBP000 GBP000 GBP000 GBP000 GBP000 GBP000 GBP000
============== ======= ======= ======== ======= ======= ======== ============= ---------------- --------
Balance
at 1 January
2019 421 8,230 (2,764) 10,343 260 3,475 20,993 40,958 - 40,958
Contributions
and
distributions
Purchase
of own shares - - (203) - - - - (203) - (203)
Issue of
shares out
of treasury
stock - - 2,307 - - - 109 2,416 - 2,416
Dividends
paid - - - - - - (1,840) (1,840) - (1,840)
Share based
payment
charge - - - - - 1,167 - 1,167 - 1,167
Deferred
tax on share
based payment
transactions - - - - - (25) (25) - (25)
-------------- ------- ------- -------- ------- ----------- ------- -------- ------------- ---------------- --------
Total
contributions
and
distributions - - 2,104 - - 1,167 (1,756) 1,515 - 1,515
-------------- ------- ------- -------- ------- ----------- ------- -------- ------------- ---------------- --------
Changes
in ownership
interests
Acquisition
of subsidiary
with NCI - - - - - - - - 2,763 2,763
Acquisition
of NCI
without
change in
control - - - - - - (3,265) (3,265) (2,601) (5,866)
-------------- ------- ------- -------- ------- ----------- ------- -------- ------------- ---------------- --------
Total changes
in ownership
interests - - - - - - (3,265) (3,265) 162 (3,103)
-------------- ------- ------- -------- ------- ----------- ------- -------- ------------- ---------------- --------
Total
transactions
with owners - - 2,104 - - 1,167 (5,021) (1,750) 162 (1,588)
============== ======= ======= ======== ======= =========== ======= ======== ============= ================ ========
Loss for
the year (1,669) (1,669) (162) (1,831)
Other
comprehensive
income:
Fair value
loss on
interest
rate swap - - - - - - (408) (408) - (408)
Exchange
differences
on
translating
foreign
operations - - - - (939) - - (939) - (939)
Deferred
tax on
interest
rate swap - - - - - - 77 77 - 77
============== ======= ======= ======== ======= =========== ======= ======== ============= ================ ========
Total
comprehensive
income for
the year - - - - (939) - (2,000) (2,939) (162) (3,101)
============== ======= ======= ======== ======= =========== ======= ======== ============= ================ ========
Balance
at 31
December
2019 421 8,230 (660) 10,343 (679) 4,642 13,972 36,269 - 36,269
-------------- ------- ------- -------- ------- ----------- ------- -------- ------------- ---------------- --------
Consolidated Balance Sheet
At 31 December 2019
Group
2019 2018
Notes GBP000 GBP000
Assets
Non-current assets
Acquisition related intangible assets 7 13,222 7,495
Goodwill 7 13,808 11,239
Property, plant and equipment 25,870 23,353
Derivative financial assets - 293
Deferred tax assets 4 47 16
52,947 42,396
--------------------------------------- ----- ------- -------
Current assets
Inventories 8 2,060 -
Trade and other receivables 9 10,239 9,717
Current tax asset 482 245
Cash and cash equivalents - Client
registration funds 10 1,517 1,487
Cash and cash equivalents - Group cash 10 13,912 21,520
--------------------------------------- ----- ------- -------
28,210 32,969
Total assets 81,157 75,365
--------------------------------------- ----- ------- -------
Liabilities
Current liabilities
Trade and other payables 11 20,581 17,376
Current tax liabilities 226 374
Provisions 12 172 1,038
Borrowings 15 1,200 1,000
Lease Liabilities 1,212 -
--------------------------------------- ----- ------- -------
23,391 19,788
--------------------------------------- ----- ------- -------
Non-current liabilities
Provisions 12 480 296
Borrowings 15 15,013 11,689
Lease Liabilities 2,111 -
Financial Instruments 115 -
Deferred tax liabilities 4 3,778 2,634
--------------------------------------- ----- ------- -------
21,497 14,619
--------------------------------------- ----- ------- -------
Total liabilities 44,888 34,407
--------------------------------------- ----- ------- -------
Net assets 36,269 40,958
--------------------------------------- ----- ------- -------
Shareholders' equity
Share capital 14 421 421
Share premium 8,230 8,230
Treasury stock 14 (660) (2,764)
Merger reserve 10,343 10,343
Translation reserve (679) 260
Share based payment reserve 4,642 3,475
Retained earnings 13,972 20,993
--------------------------------------- ----- ------- -------
Total equity 36,269 40,958
--------------------------------------- ----- ------- -------
Consolidated Statement of Cash Flows
For the year ended 31 December 2019
Group
--------------------------------------------- ------ ------------------
Notes 2019 2018
GBP000 GBP000
--------------------------------------------- ------ -------- --------
(Loss)/profit before income tax (1,605) 4,867
--------------------------------------------- ------ -------- --------
Adjustments for:
Share of loss of equity-accounted investee,
net of tax 592 -
Loss on remeasurement of equity-accounted
investee 491 -
Amortisation on acquisition related
intangible assets 2,345 2,004
Depreciation on property, plant and
equipment 776 760
Impairment of right of use asset 796 -
Depreciation of right of use asset 1,033 -
Net interest cost 830 441
Release of contingent consideration 13 - (519)
Share based payment charge 1,167 812
Impairment of cost of investment - 50
Decrease in inventories 1,863 -
Decrease/(increase) in receivables 3,432 (354)
(Decrease)/increase in payables representing
client registration funds (30) 600
Decrease in payables excluding balances
representing client registration funds (3,846) (1,535)
Changes in provisions (933) 257
--------------------------------------------- ------ -------- --------
Cash generated from operations 6,911 7,383
--------------------------------------------- ------ -------- --------
Interest paid (781) (555)
UK corporation tax paid (554) (1,025)
Foreign corporation tax paid (196) (159)
--------------------------------------------- ------ -------- --------
Cash flows from operating activities 5,380 5,644
--------------------------------------------- ------ -------- --------
Interest received 22 10
Purchase of property, plant and equipment (555) (444)
Purchase of subsidiary undertakings,
net of cash received 16(c) (4,118) -
Cash flows used in investing activities (4,651) (434)
Issue of shares out of treasury 2,416 115
Repurchase of own shares (203) (190)
Dividends paid 16(c) (1,840) (1,760)
Acquisition of NCI 15 (5,869) -
Proceeds of bank loan received 15 4,750 -
Repayment of term loan 15 (1,200) (1,250)
Repayment of revolving credit facility (5,000) -
Payment of lease liabilities (998) -
Cash flows used in financing activities (7,944) (3,085)
--------------------------------------------- ------ -------- --------
(Decrease)/increase in cash and cash
equivalents in the year (7,215) 2,125
Cash and cash equivalents at the beginning
of the year 23,007 20,780
Exchange (loss)/gains on cash (363) 102
--------------------------------------------- ------ -------- --------
Cash and cash equivalents at the end
of the year 15,429 23,007
--------------------------------------------- ------ -------- --------
Cash and cash equivalents is analysed as follows:
2019 2018
GBP000 GBP000
------------------------------------------------ ------- -------
Cash and cash equivalents - Client registration
funds 1,517 1,487
Cash and cash equivalents - Group cash 13,912 21,520
----------------------------------------------------- ------- -------
15,429 23,007
--------------------------------------------------- ------- -------
Extracts from notes to the financial statements
1. General information
Science Group plc (the 'Company') together with its subsidiaries
('Science Group' or 'Group') is an international, science &
technology services and product development organisation . The
Company is the ultimate parent company in which the results of all
Science Group companies are consolidated.
The Group and Company accounts of Science Group plc were
prepared under IFRS as adopted by the European Union, and have been
audited by KPMG LLP. Accounts are available from the Company's
registered office; Harston Mill, Harston, Cambridge, CB22 7GG.
The Company is incorporated and domiciled in England and Wales
under the Companies Act 2006 and has its primary listing on the AIM
Market of the London Stock Exchange (SAG.L). The value of Science
Group plc shares, as quoted on the London Stock Exchange at 31
December 2019, was 249.0 pence per share (31 December 2018: 210.0
pence).
Alternative performance measures
The Group uses alternative (non-Generally Accepted Accounting
Practice ('non-GAAP')) performance measures of 'adjusted operating
profit', 'adjusted earnings per share' and 'net funds' which are
not defined within the International Financial Reporting Standards
(IFRS). These are explained as follows:
(a) Adjusted operating profit
The Group calculates this measure by making adjustments to
exclude certain items from operating profit namely: impairment of
goodwill and investments, amortisation of acquisition related
intangible assets, acquisition integration costs, share based
payment charges and other specified items that meet the criteria to
be adjusted.
The criteria for the adjusted items in the calculation of
adjusted operating profit is operating income or expenses that are
material and either arise from an irregular and significant event
or the income/cost is recognised in a pattern that is unrelated to
the resulting operational performance. Materiality is defined as an
amount which, to a user, would influence the decision making.
Acquisition integration costs include all costs incurred directly
related to the restructuring, relocation and integration of
acquired businesses. Adjustments for share based payment charges
occurs because: once the cost has been calculated, the Directors
cannot influence the share based payment charge incurred in
subsequent years; it is understood that many investors/analysts
exclude the cost from their valuation analysis of the business; and
the value of the share option to the employee differs considerably
in value and timing from the actual cash cost to the Group.
The calculation of this measure is shown on the Consolidated
Income Statement.
(b) Adjusted earnings per share ('EPS')
The Group calculates this measure by dividing adjusted profit
after tax by the weighted average number of shares in issue and the
calculation of this measure is disclosed in Note 5. The tax rate
applied to calculate the tax charge in this measure is the tax at
the blended corporation tax rate across the various jurisdictions
rate for the year which is 19.4% (2018: 19.4%) which results in a
comparable tax charge year on year.
(c) Net funds
The Group calculates this measure as the net of cash and cash
equivalents - Group cash and borrowings. Client registration funds
are excluded from this calculation because these monies are pass
through funds held on behalf of the client solely for the purpose
of payment of registration fees to regulatory bodies and for which
no revenue is recognised. This cash is not available for use in day
to day operations. This measure is calculated as follows:
2019 2018
GBP000 GBP000
---------------------------- --- -------- --------
Cash and cash equivalents -
Group cash 13,912 21,520
Borrowings (16,213) (12,689)
---------------------------------- -------- --------
Net (debt)/funds (2,301) 8,831
---------------------------------- -------- --------
Alternative performance measures
The Directors believe that disclosing these alternative
performance measures enhances shareholders' ability to evaluate and
analyse the underlying financial performance of the Group.
Specifically, the adjusted operating profit measure is used
internally in order to assess the underlying operational
performance of the Group, aid financial, operational and commercial
decisions and in determining employee compensation. The adjusted
EPS measure allows the shareholder to understand the underlying
value generated by the Group on a per share basis. Net funds
represents the Group's cash available for day to day operations and
investments. As such, the Board considers these measures enhance
shareholders' understanding of the Group results and should be
considered alongside the IFRS measures.
2. Segment information
Following the Corporate Review in 2018, from 1 January 2019 the
Group financial reporting was changed to show the performance of
the operating business separately from the value generated by the
Group's significant freehold property assets and the Corporate
costs. The Operating Business (excluding Frontier) is managed via
the service lines of Applied Science and Product Development,
Technology advisory and Regulatory. Financial information is
provided to the chief operating decision makers ('CODMs') in line
with this structure: the service lines in Operating Businesses; the
Product Operating Business (Frontier); the Freehold Properties and
Corporate costs.
The service lines of Applied Science and Product Development,
Technology advisory and Regulatory have been aggregated resulting
in one Services Operating Business segment because the service
lines have similar economic characteristics such as similar
long-term average gross margins, trends in sales growth and
operating cash flows and are also similar in respect of their
nature, delivery and types of customers that the services are
provided to. This aggregation does not the impact the user's
ability to understand the entity's performance, its prospects for
future cash flows or the user's decisions about the entity as a
whole as it is a fair representation of the performance of each
service line.
As a result, the Group results are presented across 4 reporting
segments: Services Operating Business, Product Operating Business,
Freehold Properties and Corporate. This provides greater
transparency and facilitates shareholder analysis of the component
parts of the Group and the prior period financial information has
been restated to be in line with this new basis.
Services Operating Business revenue includes all consultancy
fees and other revenue includes recharged materials, expenses and
licence revenue generated directly from the Services Operating
Business activities. Product Operating Business revenue includes
sales of chips and modules which are incorporated into digital
radios. The Freehold Properties segment includes the results for
the two freehold properties owned by the group. Income is derived
from third party tenants from the Harston Mill site and from the
Services and Product Operating Businesses which have been charged
fees equivalent to market-based rents for their utilised property
space and associated costs. Corporate costs include PLC/Group
costs.
The segmental analysis is reviewed to operating profit. Other
resources are shared across the Group.
The Group closed the Central/Eastern Europe offices during 2018
and the results generated by these offices are separately reported
under exited operations in 2018 on a pro forma basis.
Services Operating Business 2019 2018 2018 2018
Total Continuing Exited Total
GBP000 GBP000 GBP000 GBP000
======== ============ ======= =======
Services revenue 46,885 46,085 413 46,498
Other 1,825 1,110 - 1,110
-------- ------------ ------- -------
Revenue 48,710 47,195 413 47,608
======== ============ ======= -------
Adjusted operating profit 8,221 7,564 168 7,732
======== ============ ======= -------
Gain on settlement of legal claim 687 - - --
Amortisation of acquisition related intangible assets (2,006) (2,004) - (2,004)
Acquisition integration costs - (76) - (76)
Release of contingent consideration - 519 - 519
Impairment of other investments - (50) - (50)
Share based payment charge (1,008) (695) - (695)
======== ============ =======
Operating profit 5,894 5,258 168 5,426
-------- ------------ ------- -------
Product Operating Business 2019 2018
GBP000 GBP000
======== =======
Product revenue 7,540 -
Revenue 7,540 -
======== -------
Adjusted operating loss (1,283) -
======== -------
Amortisation of acquisition related intangible assets (339) -
Professional fees and charges in relation to the acquisition (1,672) -
Acquisition integration costs (794) -
Provisions relating to onerous leases and impairment of right of use assets (1,105) -
Loss on revaluation of investment (491) -
Share based payment charge (12) -
========
Operating loss (5,696) -
-------- -------
Freehold Properties 2019 2018
GBP000 GBP000
======= =======
Inter-company property income 2,874 2,858
Third party property income 997 1,062
=======
Revenue 3,871 3,920
======= -------
Adjusted operating profit 1,503 1,573
======= -------
Share based payment charge (14) (12)
-------
Operating profit 1,489 1,561
------- -------
Corporate 2019 2018
GBP000 GBP000
======= =======
Adjusted operating loss (1,737) (1,574)
======= -------
Share based payment charge (133) (105)
------- -------
Operating loss (1,870) (1,679)
------- -------
Group 2019 Organic 2019 Acquired 2019 2018 Continuing 2018 2018
GBP000 GBP000 Total GBP000 Exited Total
GBP000 GBP000 GBP000
============= ============== ======== ================ ======= =======
Services revenue 46,885 - 46,885 46,085 413 46,498
Products revenue - 7,540 7,540 - - -
Third party property income 997 - 997 1,062 - 1,062
Other 1,825 - 1,825 1,110 - 1,110
Revenue 49,707 7,540 57,247 48,257 413 48,670
============= ============== ======== ================ ======= -------
Adjusted operating profit/(loss) 7,987 (1,283) 6,704 7,563 168 7,731
============= ============== ======== ================ ======= -------
Gain on settlement of legal claim 687 - 687 - - -
Amortisation of acquisition related
intangible assets (2,006) (339) (2,345) (2,004) - (2,004)
Professional fees and charges in relation
to the acquisition - (1,672) (1,672) - - -
Acquisition integration costs - (794) (794) (76) - (76)
Provisions relating to onerous leases and
impairment of right of use assets - (1,105) (1,105) - - -
Release of contingent consideration - - - 519 - 519
Impairment of other investments - - - (50) - (50)
Loss on remeasurement of equity-accounted
investment - (491) (491) - - -
Share based payment charge (1,155) (12) (1,167) (812) - (812)
------------- -------------- -------- ---------------- ------- -------
Operating profit/(loss) 5,513 (5,696) (183) 5,140 168 5,308
Finance charges (net) (665) (165) (830) (441) - (441)
Share of loss of equity-accounted
investment, net of tax - (592) (592) - - -
------------- -------------- -------- ---------------- ------- -------
Profit/(loss) before income tax 4,848 (6,453) (1,605) 4,699 168 4,867
Income tax (charge)/credit (505) 279 (226) (580) - (580)
------------- -------------- -------- ---------------- ------- -------
Profit/(loss) for the period 4,343 (6,174) (1,831) 4,119 168 4,287
------------- -------------- -------- ---------------- ------- -------
Geographical segments
Revenue and non-current assets (excluding deferred tax assets)
by geographical area are as follows:
2019 2018
------------------------- -------------------- --------------------
Revenue Non-current Revenue Non-current
GBP000 assets GBP000 assets
GBP000 GBP000
------------------------- ------- ----------- ------- -----------
United Kingdom 12,263 52,459 8,948 42,262
Other European countries 12,345 54 18,197 33
North America 23,642 56 19,080 85
Other 8,997 331 2,445 -
------------------------- ------- ----------- ------- -----------
Total 57,247 52,900 48,670 42,380
------------------------- ------- ----------- ------- -----------
For the purpose of the analysis of revenue, geographical markets
are defined as the country or area in which the client is based.
Non-current assets are allocated based on their physical
location.
During 2019, no single customer accounted for more than 10% of
the Group's revenue (2018: GBPnil). Operating profit for the
Services Operating Business included a depreciation charge of
GBP1.1 million (2018: GBP0.3 million), the Product Operating
Business included a depreciation charge of GBP0.2 million (2018:
GBPnil) and the Freehold Properties included a depreciation charge
of GBP0.5m (2018: GBP0.5 million).
3. Income tax
The tax charge comprises:
Year ended 31 December 2019 2018
GBP000 GBP000
------------------------------------------ ------- -------
Current taxation (1,280) (1,377)
Current taxation - adjustment in respect
of prior years 311 196
Deferred taxation 579 218
Deferred taxation - adjustment in respect
of prior years (242) (49)
R&D tax credit 406 432
(226) (580)
------------------------------------------ ------- -------
The corporation tax on Science Group's profit before tax differs
from the theoretical amount that would arise using the blended
corporation tax rate across the various jurisdictions applicable to
profits of the consolidated companies of 19.4% (2018: 19.4%) as
follows:
2019 2018
GBP000 GBP000
================================================= ======= =======
(Loss)/profit before tax (1,605) 4,867
================================================= ======= =======
Tax calculated at domestic tax rates applicable
to profits/(losses) in the respective countries 311 (946)
Expenses not deductible for tax purposes (1,022) (179)
Adjustment in respect of prior years - current
tax 311 196
Adjustment in respect of prior years - deferred
tax (242) (49)
Movement in deferred tax due to change in tax
rate 27 (239)
Share scheme movements 100 293
Current year losses for which no deferred tax
asset was recognised (180) (73)
Mandatory earnings and profits one-time tax - (78)
Prior year losses used in the current year
which were not previously recognised 63 63
R&D tax credit 406 432
================================================= ======= =======
Tax (charge) (226) (580)
------------------------------------------------- ------- -------
In 2017, the United States Federal Government released the Tax
Cuts and Jobs Act. The impact of this bill resulted in the
recognition of a corporation tax liability of GBP120,000 as at 31
December 2017 based on the estimated undistributed profits of all
foreign subsidiaries of Technology Sciences Group Inc. During the
prior year, the final liability in respect of these earnings and
profits one-time tax was calculated and an additional charge of
GBP78,000 was recognised in the year ended 31 December 2018.
The Group claims Research and Development tax credits under both
the R&D expenditure credit scheme and the Small or Medium-sized
Scheme. In the current year, the Group recognised a tax credit of
GBP0.4 million (2018: GBP0.4 million). The Group performed a
reasonable estimate of all amounts involved to determine the
R&D tax credits to be recognised in the period to which it
relates.
4. Deferred tax
The movement in deferred tax assets and liabilities during the
year by each type of temporary difference is as follows:
Accelerated Tax losses Share based Acquisition Other temporary Total
capital payment related differences
allowances intangible
assets GBP000
GBP000 GBP000 GBP000 GBP000 GBP000
========================== =========== ========== =========== =========== =============== =======
At 1 January 2018 (1,734) 104 477 (2,001) 428 (2,726)
Charged to the income
statement (138) (39) (28) 456 (33) 218
Charge to the income
statement
(prior year adjustment) - (49) - - - (49)
Charged to equity - - (48) - (13) (61)
========================== =========== ========== =========== =========== =============== =======
At 31 December 2018 (1,872) 16 401 (1,545) 382 (2,618)
Charged to the income
statement 33 47 130 469 (100) 579
Deferred taxation
relating to acquisitions - - - (1,498) (130) (1,628)
Charge to the income
statement
(prior year adjustment) (54) (16) - - (172) (242)
Charged to Equity - - (25) - 77 52
Effect of movements
in exchange rates 121 5 126
========================== =========== ========== =========== =========== =============== =======
At 31 December 2019 (1,893) 47 506 (2,453) 62 (3,731)
-------------------------- ----------- ---------- ----------- ----------- --------------- -------
2019 2018
GBP000 GBP000
--------------------------- ------- -------
Deferred tax assets 47 16
Deferred tax liabilities (3,778) (2,634)
Net deferred tax liability (3,731) (2,618)
----------------------------- ------- -------
Deferred tax assets are recognised for tax loss carry-forwards
to the extent that the realisation of the related tax benefit
through the future taxable profits is probable. Deferred tax
liabilities are recognised against accelerated capital allowances.
The Group has available tax losses of approximately GBP34.7 million
(2018: GBP10.8 million) and of these losses, GBP34.5 million are
not recognised as a deferred tax asset and they do not expire. The
available tax losses at 31 December 2019 include estimated tax
losses of GBP24.0 million relating to Frontier. These tax losses
are subject to approval by the UK tax authorities and none have
been recognised as a deferred tax asse t.
Factors affecting future tax charges
A reduction in the UK corporation tax rate from 20% to 19%
(effective from 1 April 2017) and to 18% (effective 1 April 2020)
were substantively enacted on 26 October 2015, and an additional
reduction to 17% (effective 1 April 2020) was substantively enacted
on 6 September 2016. This will reduce the company's future current
tax charge accordingly. The US federal rate had a reduction from
35% to 21%, effective from 1 January 2018. Deferred tax
assets/(liabilities) were calculated at the substantively enacted
corporation tax rates in the respective jurisdictions.
5. Earnings per share
The calculation of earnings per share is based on the following
result and weighted average number of shares:
2019 2018
----------------------------- ---------------------------------------- ----------------------
Profit Weighted Pence Profit Weighted Pence
after average per share after average per share
tax number tax number
of shares of shares
GBP000 GBP000
============================= ======= ========== ========== ======= ========== ==========
Basic earnings per ordinary
share (1,831) 40,767,070 (4.5) 4,287 39,889,693 10.7
Effect of dilutive potential
ordinary shares: share
options - 1,257,907 0.1 - 1,021,609 (0.2)
============================= ======= ========== ========== ======= ========== ==========
Diluted earnings per
ordinary share (1,831) 42,024,977 (4.4) 4,287 40,911,302 10.5
----------------------------- ------- ---------- ---------- ------- ---------- ----------
Only the share options granted are dilutive.
The calculation of adjusted earnings per share is as
follows:
2019 2018
----------------------------- -------------------------------------------- -----------------------
Adjusted* Weighted Pence Adjusted* Weighted Pence
profit average per share profit average per share
after number after number
tax of shares tax of shares
GBP000 GBP000
============================= ========= ========== ========== ========= =========== ==========
Adjusted basic earnings
per ordinary share 4,735 40,767,070 11.6 5,876 39,889,693 14.7
Effect of dilutive potential
ordinary shares: share
options - 1,257,907 (0.3) - 1,021,609 (0.3)
============================= ========= ========== ========== ========= =========== ==========
Adjusted diluted earnings
per ordinary share 4,735 42,024,977 11.3 5,876 40,911,302 14.4
----------------------------- --------- ---------- ---------- --------- ----------- ----------
*Calculation of adjusted profit after tax:
2019 2018
GBP000 GBP000
=============================================== ======= =========
Adjusted operating profit 6,704 7,731
Finance income 22 10
Finance costs (852) (451)
=============================================== ======= =========
Adjusted profit before tax 5,874 7,290
Tax charge at the blended corporation tax rate
across the various jurisdictions 19.4%
(2018: 19.4%) (1,139) (1,414)
=============================================== ======= =========
Adjusted profit after tax 4,735 5,876
----------------------------------------------- ------- ---------
The tax charge is calculated using the blended corporation tax
rate across the various jurisdictions in which the Group companies
are incorporated.
6. Dividends
The proposed final dividend for 2018 of 4.6 pence per share was
approved by Shareholders and the Board on 24 April 2019. An amount
of GBP1.8 million was recognised as a distribution to equity
holders in the year ended 31 December 2019.
The Board has proposed a final dividend for 2019 of 4.6 pence
per share. The dividend is subject to approval by shareholders at
the next Annual General Meeting and the expected cost of GBP1.9
million has not been included as a liability as at 31 December
2019.
7. Intangible Assets
Customer
Technology relationships Goodwill Total
GBP000 GBP000 GBP000 GBP000
================================== ============= =============== ========== ========
Cost
At 1 January 2018 and 31 December
2018 - 12,620 13,464 26,084
Acquisitions through business
combination (note 16) 7,630 1,184 2,845 11,659
Effect of movement in exchange
rates (635) (137) (276) (1,048)
================================== ============= =============== ========== ========
At 31 December 2019 6,995 13,667 16,033 36,695
---------------------------------- ------------- --------------- ---------- --------
Accumulated amortisation
At 1 January 2018 - (3,114) - (3,114)
Amortisation charged in year - (2,004) - (2,004)
================================== ============= =============== ========== ========
At 31 December 2018 - (5,118) - (5,118)
Amortisation charged in year (307) (2,038) - (2,345)
Effect of movement in exchange
rates 15 15 - 30
---------------------------------- ------------- --------------- ---------- --------
At 31 December 2019 (292) (7,141) - (7,433)
---------------------------------- ------------- --------------- ---------- --------
Accumulated impairment
---------------------------------- ------------- --------------- ---------- --------
At 1 January 2018, 31 December
2018 and
31 December 2019 - (7) (2,225) (2,232)
---------------------------------- ------------- --------------- ---------- --------
Carrying amount
At 31 December 2018 - 7,495 11,239 18,734
================================== ============= =============== ========== ========
At 31 December 2019 6 ,703 6 ,519 1 3,808 27 ,030
---------------------------------- ------------- --------------- ---------- --------
Goodwill and acquisition related intangible assets recognised
arose from acquisitions during 2013, 2015, 2017 and 2019. The
discount rates used for goodwill impairment reviews and the
carrying amount of goodwill is allocated as follows:
2019 2018
---------------------------- ------------------- ------------------
Pre-tax Pre-tax
discount GBP000 discount GBP000
rate rate
============================ ========= ======== ========= =======
Advisory 11.2% 3,383 11.2% 3,383
Leatherhead Research 11.2% 650 11.2% 650
TSG - Americas 11.0% 2,621 11.0% 2,660
TSG - Europe 11.0% 4,546 11.0% 4,546
Frontier Smart Technologies
Group 13.6% 2,608 - -
============================ ========= ======== ========= =======
13,808 11,239
---------------------------- --------- -------- --------- -------
Impairment review of goodwill
The Group tests goodwill annually for impairment or more
frequently if there are indications that goodwill might be
impaired. The recoverable amounts of the CGUs are determined from
value in use. The key assumptions for the value in use calculations
are those regarding the discount rates, growth rates and operating
profit margins.
The Group prepares the cash flow forecasts derived from the most
recent financial plan approved by the Board and extrapolates cash
flows for the following three years based on forecast rates of
growth or decline in revenue by the CGU. The operating profit
margin for the CGU that is incorporated in the cash flow forecasts
is derived from the most recent financial plan approved by the
Board.
The Group monitors its post-tax Weighted Average Cost of Capital
and those of its competitors using market data. In considering the
discount rates applying to CGUs, the Directors have considered the
relative sizes, risks and the inter-dependencies of its CGUs. The
impairment reviews use a discount rate adjusted for pre-tax cash
flows and are included in the table above.
8. Inventories
2019 2018
GBP000 GBP000
----------------- ------- -------
Raw materials 340 -
Work in progress 490 -
Finished goods 1,230 -
-------------------- ------- -------
2,060 -
----------------- ------- -------
9. Trade and other receivables
2019 2018
GBP000 GBP000
================================= ======= =======
Current assets:
Trade receivables 7,365 7,980
Provision for impairment (100) (144)
=================================== ======= =======
Trade receivables - net 7,265 7,836
Amounts recoverable on contracts 1,541 1,017
Other receivables 144 11
VAT 51 6
Prepayments 1,238 847
=================================== ======= =======
10,239 9,717
--------------------------------- ------- -------
10. Cash and cash equivalents
2019 2018
GBP000 GBP000
---------------------------------- ------- -------
Short term bank deposits - Group
cash 39 37
Cash at bank and in hand - Group
cash 13,873 21,483
------------------------------------ ------- -------
Cash and cash equivalents -
Group cash 13,912 21,520
Cash at bank and in hand - Client
registration funds 1,517 1,487
15,429 23,007
---------------------------------- ------- -------
The Group receives cash from clients which are pass through
funds solely for the purpose of payment of registration fees to
regulatory bodies. This cash is separated in the day to day
operations of the business, is separately identified for reporting
purposes and is unrestricted.
11. Trade and other payables
2019 2018
GBP000 GBP000
----------------------------- ------- -------
Current liabilities
Payments received on account 10,341 10,752
Trade payables 2,548 1,110
Other taxation and social
security 884 786
VAT 120 392
Accruals 6,688 4,336
-------------------------------- ------- -------
20,581 17,376
----------------------------- ------- -------
12. Provisions
Onerous
lease Dilapidations Restructuring Legal Total
GBP000 GBP000 GBP000 GBP000 GBP000
======================= ======= ============= ============= ======= =======
At 1 January 2018 495 199 - 597 1,291
Provisions made during
the year - 170 199 391 760
Provisions used during
the year (190) - (57) - (247)
Provisions reversed
during the year (95) (108) - (300) (503)
Loss/(gain) on foreign
exchange fluctuations 15 1 - 17 33
At 31 December 2018 225 262 142 705 1,334
Assumed in business
combination - 300 - - 300
Provisions made during
the year - 31 - - 31
Provisions used during
the year (126) - (52) (5) (183)
Provisions reversed
during the year (94) - - (687) (781)
Loss/(gain) on foreign
exchange fluctuations (5) (31) - (13) (49)
======================= ======= ============= ============= ======= =======
At 31 December 2019 - 562 90 - 652
----------------------- ------- ------------- ------------- ------- -------
2019 2018
GBP000 GBP000
------------------------ ------- -------
Current liabilities 172 1,038
Non-current liabilities 480 296
--------------------------- ------- -------
652 1,334
------------------------ ------- -------
Provisions for onerous leases and dilapidation provisions have
been recognised at the present value of the expected obligation.
These discounts will unwind to their undiscounted value over the
remaining lives of the leases via a finance charge within the
income statement.
The average remaining life of the leases at 31 December 2019 is
2 years (2018: 1 year).
The restructuring provision relates to the costs associated with
the closure of the Central/Eastern Europe offices and is
anticipated to be utilised during the next 18 months.
Legal provisions represent the best estimate of the future
economic outflow of settling potential litigation claims and
associated costs such as legal fees. During the period ended 31
December 2019, a claim was settled by insurers with a cash outflow
of GBP5,000 being required hence the remaining unutilised provision
of GBP687,000 was released to the Consolidated Income Statement and
is separately disclosed as an adjusting item.
13. Contingent consideration
During the prior year, contingent consideration of GBP0.5
million was released to the Consolidated Income Statement. This
related to the consideration for the acquisition of TSG in 2017.
Certain agreed conditions on the vendor ceased to be met in the
year ended 31 December 2018 hence the contingent consideration was
no longer payable and was released accordingly.
14. Called-up share capital
2019 2018
GBP000 GBP000
------------------------------ ---------- ----------
Allotted, called-up and fully
paid
Ordinary shares of GBP0.01
each 421 421
-------------------------------- ---------- ----------
Number Number
------------------------------ ---------- ----------
Allotted, called-up and fully
paid
Ordinary shares of GBP0.01
each 42,062,035 42,062,035
-------------------------------- ---------- ----------
The allotted, called-up and fully paid share capital of the
Company as at 31 December 2019 was 42,062,035 shares (2018:
42,062,035) and the total number of ordinary shares in issue
(excluding treasury shares) was 41,700,440 (2018: 40,040,227). Of
the ordinary shares in issue, 104,400 (2018: nil) shares are held
by the Frontier Smart Technologies Employee Benefit Trust ('EBT')
and hence the voting rights in the Company are 41,596,040.
Prior to acquisition of Frontier, the EBT held 2.0 million
Frontier shares. On completion of the statutory merger (Note 16),
the EBT received GBP0.5 million in settlement of the shares of
which GBP0.3 million was paid to SG Bidco Limited to settle an
outstanding loan. 104,400 shares in Science Group plc were acquired
by the EBT (by issuing shares held in treasury) which will be used
to satisfy employee share options issued to the Joint Managing
Directors of the Frontier business.
A reconciliation of treasury shares held by the Company is as
follows:
Reconciliation of treasury shares 2019 2018
Number Number
================================== =========== =========
At beginning of year 2,021,808 2,694,907
Purchase of own shares 97,913 89,800
Sale of own shares (1,187,401) -
Settlement of share options (570,725) (762,899)
================================== =========== =========
At end of year 361,595 2,021,808
---------------------------------- ----------- ---------
It is the intention of the Company to hold the treasury shares
for the purpose of settling employee share schemes and for settling
liquidated sums of cash consideration in any future business
acquisitions, and in limited circumstances to satisfy shareholder
demand which market liquidity is unable to meet. No dividend or
other distribution may be made to the Company in respect of the
treasury shares.
15. Borrowings
2019 2018
GBP000 GBP000
---------------------------- ------- -------
Non-current bank borrowings 15,013 11,689
C urrent b ank borrowings 1,200 1,000
============================ ======= =======
16,213 12,689
---------------------------- ------- -------
2019 2018
GBP000 GBP000
----------------------------------------------- ------- -------
Opening balance 12,689 13,926
Increase in bank borrowing - term loan 4,750 -
Revolving credit facility assumed in business
combination (note 16) 4,969 -
Repayments in the year - term loan (1,200) (1,250)
Repayments in year - revolving credit facility (5,000) -
Arrangement fee associated with new borrowing (39) -
Impairment of loan arrangement fee 31 -
Amortisation of loan arrangement fee 13 13
Total borrowings 16,213 12,689
----------------------------------------------- ------- -------
During the year ended 31 December 2016, the Group entered into a
10-year fixed term loan of GBP15 million which is secured on the
freehold properties of the Group and on which interest is payable
based on LIBOR plus 2.6% margin. The repayment profile of the loan
is GBP1 million per annum over the term with the remaining GBP5
million repaid on expiry of the loan in 2026. Costs directly
associated with entering into the loan of GBP90,000 were incurred,
have been offset against the balance outstanding and are being
amortised over the period of the loan.
The reconciliation of bank loans interest expense is shown
below.
2019 2018
GBP000 GBP000
------------------------------------- ------- -------
Interest expense 717 451
Interest paid (646) (555)
Impairment of loan arrangement fee (31) -
Amortisation of loan arrangement fee (13) (13)
-------------------------------------- ------- -------
Increase/(decrease) in accruals 27 (117)
-------------------------------------- ------- -------
During the year ended 31 December 2019, the Group increased the
10-year fixed-term loan by GBP4.8 million to GBP17.5 million on
otherwise similar terms. The repayment profile of the additional
loan is GBP50,000 per quarter up to 30 June 2026 with the remaining
GBP3.2m repayable on 30 September 2026. Costs directly associated
with entering into the additional loan of GBP39,000 were incurred,
have been offset against the balance outstanding and are being
amortised over the period of the loan.
The term loan has no operating covenants while the Group net
bank debt is less than GBP10 million. If this threshold is crossed,
two conditions apply: a financial covenant, measured half-yearly on
a 12 month rolling basis, such that annual EBITDA must exceed 1.25
times annual debt servicing (capital and interest); and a security
covenant whereby the loan to value ('LTV') ratio of the securitised
properties must remain below 75%. If either of these conditions is
breached, a remedy period of 6 months is provided, during which
time the EBITDA or LTV condition can be remedied or the net bank
debt can be reduced to less than GBP10 million.
The Group assumed a revolving credit facility of GBP5.0 million
with the acquisition of Frontier Smart Technologies Group Limited
(note 16) less unamortised arrangement fees of GBP31,000. The
revolving credit facility was repaid in October 2019 and the
unamortised arrangement fees were expensed to finance costs.
In accordance with an agreed repayment schedule with the bank,
bank borrowings are repayable to Lloyds as follows:
2019 2018
GBP000 GBP000
====================== ======= =======
Within one year 1,200 1,000
Between 1 and 2 years 1,200 1,000
Between 2 and 5 years 3,600 3,000
Over 5 years 10,300 7,750
====================== ======= =======
16,300 12,750
---------------------- ------- -------
In order to address interest rate risk, the Group entered into
phased interest rate swaps in order to fully hedge the loan
resulting in a 10-year fixed effective interest rate of 3.5%. The
interest cost on the additional GBP4.8 million has been fixed by
entering into an interest rate swap at an effective interest rate
of 4.0%. The combined effective interest rate is 3.6%.
The Group has adopted hedge accounting for the interest rate
swaps under IFRS 9, Financial Instruments, and the loss on change
in fair value of the interest rate swaps of GBP408,000 (2018: gain
of GBP66,000) was recognised directly within equity.
The fair value of the swap at 31 December 2019 was a liability
of GBP115,000 (2018: asset of GBP293,000).
16. Acquisition of subsidiary
The Group completed the acquisition of Frontier Smart
Technologies Group Limited ('Frontier') in October 2019. The
acquisition is expected to increase the scale and profitability of
the Group in line with the strategic review undertaken in 2018.
The acquisition of Frontier started in May 2019 when the initial
on-market purchases of shares were made. On 11 July 2019, the Group
ownership reached 35.6% and the Group commenced equity accounting
for the investment. The Group continued to acquire shares on the
market and made an offer for Frontier at 35 pence per share
resulting in ownership of 47.5% on 19 July 2019. On 23 August 2019,
through an issue of 4 million shares by Frontier, Science Group
increased its ownership to 52.2% obtaining control of Frontier and
the consolidation of results commenced. Additional shares were
acquired on the market taking the ownership to 72.3% on 6 September
2019 with the remaining shares being acquired on 11 October 2019 by
way of a statutory merger. The statutory merger was effected by SG
Bidco Limited (a 100% owned subsidiary of Science Group plc)
merging with Frontier Smart Technologies Group Limited, the parent
company of the Frontier Group, through which Science Group obtained
full ownership of the Frontier business. The consideration for all
the shares were paid in cash.
The Group incurred acquisition and integration costs of GBP3.6
million in relation to Frontier, which have been reported in the
Consolidated Income Statement and further details are shown
below.
Acquisition and integration costs 2019
GBP000
========================================== =======
Professional fees and charges relating to
the acquisition 1,672
Provisions relating to onerous leases and
impairment of right of us assets. 1,105
Acquisition integration costs 794
Total 3,571
------------------------------------------- -------
The Income Statement of Frontier for the period from 23 August
2019 to 31 December 2019 that was consolidated into the Group is
shown below:
GBP000
===================================================== =======
Revenue 7,540
Operating expenses before adjusting items (8,823)
-------
Adjusted operating loss (1,283)
Acquisition integration costs (794)
Provisions relating to onerous leases and impairment
of right-of-use assets (1,105)
Share based payment charge (12)
-------
Operating loss (3,194)
Finance costs (165)
====================================================== =======
Loss before income tax (3,359)
====================================================== =======
If the acquisition of Frontier had been completed on the first
day of the financial year, Group revenue would have been GBP14.4
million higher and Group profit attributable to equity holders of
the parent would have been GBP3.6 million lower.
(a) Accounting treatment
Details of the acquisition and the accounting treatment of the
investment in Frontier over the period 9 May 2019 to 11 October
2019 are summarised below:
Consideration Paid
Period Ownership Accounting Treatment GBP000
Fair value through profit or
On 9 May 2019 Acquired 3.1% of voting shares loss 144
------------------------------- ------------------------------- -------------------
10 May 2019 to Holding of voting shares Fair value through profit or
10 July 2019 increased to 29.7% loss 3,229
------------------------------- ------------------------------- -------------------
Acquired 5.9% of voting shares Equity accounted from 11 July
11 July 2019 Holding increased to 35.6% 2019 (Note 1) 858
------------------------------- ------------------------------- -------------------
12 July 2019 to Holding of voting shares
22 August 2019 increased to 47.5% Equity accounted 1,711
------------------------------- ------------------------------- -------------------
Control obtained,
consolidation commenced (Note
2)
Remeasure pre-existing equity
interest at acquisition date
fair value
Goodwill calculated based on
Frontier issued 4 million consideration, net assets and
shares which were acquired by non controlling interest
Science Group ('NCI')
23 August 2019 Holding increased to 52.2% at 23 August 2019 1,000
------------------------------- ------------------------------- -------------------
Consolidated subsidiary with
non-controlling interest
Change in Group's interest in
24 August 2019 to 10 October Holding of voting shares Frontier accounted for as an
2019 increased to 72.3% equity transaction 2,277
------------------------------- ------------------------------- -------------------
Completion of Statutory Merger
resulting in remaining shares
being acquired and holding Remaining shares acquired
increased accounted for as an equity
11 October 2019 to 100% transaction 3,592
------------------------------- ------------------------------- -------------------
T otal consideration 12,811
----------------------------------------------------------------------------------------------- -------------------
Note 1
The Group commenced equity accounting for the investment as an
associate on 11 July 2019 when the shareholding of voting shares
increased to 35.6%. Prior to this date, Science Group had no
representation on the Board of Directors of Frontier. Further, the
Group was unable participate in policy-making decisions due to 4
other significant shareholders whose combined holding totalled more
than the voting shares held by Science Group. As a result, the
Group was not able to exercise significant influence over
Frontier.
On 11 July 2019, the Group increased its ownership of voting
shares to 35.6% at which point the Group's shareholding exceeded
that of the other significant shareholders and hence was able to
participate in the policy-making processes. As a result, the Group
was able to exercise significant influence and equity accounting
commenced on this date.
Note 2
On 23 August 2019, the Group increased its holding of voting
shares to 52.2%, obtained control of Frontier and commenced
consolidation of the results.
On 23 August 2019, the equity accounted interest in Frontier was
remeasured to fair value based on the market price per share of
25p. The Group had acquired 19.4 million shares up until this date
and paid an average price of 30.6 pence per share hence the loss on
remeasurement was GBP1.1 million.
In the period from 11 July 2019 to 22 August 2019, Frontier was
equity accounted as an associate and the Group recorded its share
of loss of the equity accounted investment of GBP0.6 million. The
loss on remeasurement of GBP1.1 million has therefore been recorded
in the Consolidated Income Statement as follows:
2019
GBP000
============================================== =======
Share of loss of equity accounted investment
(from 11 July 2019 to 22 August 2019) 592
Loss on remeasurement of equity-accounted
investment (at 23 August 2019) 488
Transaction costs associated with acquisition 3
1,083
---------------------------------------------- -------
Frontier was accounted for as a subsidiary with a
non-controlling interest from 23 August 2019. During the period
from 23 August 2019 to 11 October 2019, the remaining NCI was
acquired by the Group and Frontier became a 100% owned subsidiary
on 11 October 2019. The change in the Group's interest in Frontier
has not resulted in loss of control and has been accounted for as
an equity transaction
(b) Identifiable assets acquired and liabilities assumed
The following table summarises the recognised amounts of assets
acquired and liabilities assumed at the date of acquisition (23
August 2019):
Fair value
GBP000
----------------------------------------- ----------
Net assets acquired:
Acquisition related intangible assets 8,814
Property, plant and equipment (Note 15) 259
Right-of-use asset (Note 25) 1,337
Inventories 3,947
Trade and other receivables 3,992
Current tax asset 211
Cash and cash equivalents 2,824
Trade and other payables (7,350)
Lease Liabilities (Note 25) (1,357)
Provisions (Note 21) (300)
Bank loan (Note 24) (4,969)
Deferred tax asset/(liability) (Note 11) (1,628)
----------------------------------------- ----------
Total identifiable net assets acquired 5,780
----------------------------------------- ----------
i. Measurement of fair values
The valuation techniques used for measuring the fair value of
material assets acquired were as follows.
Assets acquired Valuation technique
Intangible Assets Technology-based and customer-related intangible assets have been valued using the replacement
cost method and excess earnings method respectively.
-----------------------------------------------------------------------------------------------
Inventories The fair value has been determined based on estimated selling prices in the ordinary course
of business less the estimated costs of completion and sale, and a reasonable profit margin
based on the effort required to complete and sell the inventories.
-----------------------------------------------------------------------------------------------
(c) Consideration paid
The consideration of GBP12.8 million was paid in cash and the
net cash outflow on acquisition is summarised in the table
below.
Net cash outflow arising on acquisition GBP000
---------------------------------------- -------
Total cash consideration 12,811
Cash and cash equivalents (2,824)
----------------------------------------- -------
Net cash outflow on acquisition 9,987
----------------------------------------- -------
The consideration has been reported in the Consolidated and
Company Statement of Cash Flows under investing activities and
financing activities as shown below.
GBP000
---------------------------------------------- ------
Investing activities - purchase of subsidiary
undertakings, net of cash received 4,118
Financing activities - acquisition of NCI 5,869
----------------------------------------------- ------
Net cash outflow on acquisition 9,987
----------------------------------------------- ------
(d) Goodwill
Goodwill arising from the acquisition has been calculated as
follows:
GBP000
Consideration from 9 May 2019 to 22 August 2019 5,942
Share of loss of equity-accounted investment (between 11 July 2019 and 22 August 2019) (592)
Consideration for shares on 23 August 2019 1,000
--------
Carrying amount of equity-accounted investment in Frontier at 23 August 2019 6,350
Fair value adjustment at 23 August 2019 (Note 26 (e)) (488)
--------
Fair value of investment in Frontier at 23 August 2019 based on 25p per share 5,862
NCI, based on their proportionate interest in the recognised amounts of assets and liabilities
of Frontier at 23 August 2019 2,763
Fair value of identifiable net assets at 23 August 2019 (5,780)
--------
Goodwill 2,845
--------
The goodwill is attributable mainly to the skills and technical
knowledge of Frontier's work force and the synergies expected to be
achieved from the restructuring and integration programme.
(e) Acquisition of NCI
The Group increased its ownership in Frontier from 52.5% to 100%
over the period from 24 August 2019 to 11 October 2019. The
carrying amount of Frontier's net assets at 23 August 2019 was
GBP5.8 million. Retained losses in the period from 23 August 2019
to 11 October 2019 were GBP1.1 million.
GBP000
Carrying amount of NCI at 23 August 2019 (GBP5,780,000 x 47.8%) 2,763
NCI share of losses in between 23 August 2019 and 11 October 2019, based on average NCI ownership (162)
Carrying amount of NCI at 11 October 2019 2,601
Consideration paid (including transaction costs) 5,869
Transaction costs (3)
-------
Consideration paid to NCI 5,866
A decrease in equity attributable to owners of the Company 3,265
-------
(f) Loss on remeasurement of equity-accounted investment
The loss on revaluation of investment in Frontier has been
determined by the remeasurement of the equity investment in
Frontier to fair value at 23 August 2019, when Frontier became a
52.2% owned subsidiary.
GBP000
Remeasurement of equity accounted investment in Frontier to fair value on 23 August 2019 (Note
26.d) (488)
Transactions costs associated with acquisition (3)
-------
Total loss on revaluation of investment per consolidated income statement (491)
17. Statement by the directors
Whilst the information included in this preliminary announcement
has been prepared in accordance with the recognition and
measurement criteria of International Financial Reporting Standards
('IFRSs') as adopted by the European Union and as issued by the
International Accounting Standards Board, this announcement does
not itself contain sufficient information to comply with IFRSs. The
accounting policies adopted in this preliminary announcement are
consistent with the Annual Report for the year ended 31 December
2019.
The financial information set out above, which was approved by
the Board on 2 March 2020, is derived from the full Group accounts
for the year ended 31 December 2019 and does not constitute the
statutory accounts within the meaning of section 434 of the
Companies Act 2006. The Group accounts on which the auditors have
given an unqualified report, which does not contain a statement
under section 498(2) or (3) of the Companies Act 2006 in respect of
the accounts for 2019, will be delivered to the Registrar of
Companies in due course.
The Board of Science Group approved the release of this
preliminary announcement on 2 March 2020.
The Annual Report for the year ended 31 December 2019 will be
posted to shareholders in due course and will be delivered to the
Registrar of Companies following the Annual General Meeting of the
Company. The report will also be available on the investor
relations page of the Group's website.
Further copies will be available on request and free of charge
from the Company Secretary.
- Ends -
This information is provided by RNS, the news service of the
London Stock Exchange. RNS is approved by the Financial Conduct
Authority to act as a Primary Information Provider in the United
Kingdom. Terms and conditions relating to the use and distribution
of this information may apply. For further information, please
contact rns@lseg.com or visit www.rns.com.
END
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