NOTES

1      Basis of preparation

Statement of compliance

The Group financial statements from which this statement of Final Results is extracted have been prepared in accordance with UK endorsed IFRS in conformity with the requirements of the Companies Act 2006 ("IFRS") ("UK Adopted internal accounting standards"). 

The financial information has been prepared under the historical cost convention except for derivative financial instruments which are stated at their fair value.

Whilst the financial information included in this statement of Final Results has been prepared in accordance with the recognition and measurement criteria of IFRS, this announcement does not itself contain sufficient information to comply with IFRS.

The Group's statutory financial statements for the year ended 30 November 2024, from which the financial information presented in this announcement has been extracted, were prepared using the accounting policies disclosed in the principal accounting policies set out in the Group's Annual Report. These policies have been consistently applied to all years presented.

The preparation of financial statements in conformity with IFRS requires the use of estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting year. Although these estimates are based on management's best knowledge of the amount, event or actions, actual results ultimately may differ from these estimates.

This statement of Final Results does not constitute the Company's statutory accounts for the years ended 30 November 2024 and 30 November 2023 within the meaning of Section 435 of the Companies Act 2006 but is derived from those statutory accounts.

The Group's statutory accounts for the year ended 30 November 2023 have been filed with the Registrar of Companies, and those for 2024 will be delivered following the Company's Annual General Meeting. The Auditor has reported on the statutory accounts for 2024 and 2023. Their report for 2024 was (i) unqualified, (ii) did not contain any material uncertainties and (iii) did not contain statements under Sections 498 (2) or 498 (3) of the Companies Act 2006 in relation to the financial statements.

Going Concern

The Group closely reviews its funding position throughout the year, including monitoring compliance with covenants and available facilities to ensure it has sufficient headroom to fund operations. The Group cancelled its current Banking Facilities arrangements with Barclays plc in anticipation of receipt of the proceeds from the sale of NexSys Solutions, which were received on 6 January 2025 totalling £36m gross (£34.3m net pf transaction fees and costs).

The Group ended the year ended 30 November 2024 with a Net Cash position of £8.3m, including operations held for sale.

The Group has prepared a cashflow forecast for a period of at least 12 months from the date of approval of the financial statements which shows that the Group will have reasonable headroom to support its forecast working capital requirements. The forecast includes an assumption that an element of the proceeds from the sale of NexSys Solutions will be retained for working capital requirements, with a substantial proportion of the proceeds being returned to shareholders. The forecast has undergone sensitivity analysis and stress testing and the Directors have concluded that there is no worst-case scenario that is likely which would mean the Group would run out of cash.

The Directors therefore have a reasonable expectation that there are no material uncertainties that cast significant doubt about the Group's ability to continue in operation and meet its liabilities as they fall due for the foreseeable future, being a period of at least 12 months from the date of approval of the financial statements. For these reasons the financial statements have been prepared on a going concern basis.

2      Key Accounting policies for the Group financial statements

Goodwill

Goodwill is initially recognised and measured as set out above.

Goodwill is not amortised but is reviewed for impairment at least annually. For impairment testing, goodwill is allocated to each of the Group's subsidiaries or cash-generating units (or groups of cash-generating units) expected to benefit from the synergies of the combination. Cash-generating units to which goodwill has been allocated are tested for impairment annually, or more frequently when there is an indication that the unit may be impaired. If the recoverable amount of the cash-generating unit is less than the carrying amount of the unit, the impairment loss is allocated first to reduce the carrying amount of any goodwill allocated to the

unit and then to the other assets of the unit pro-rata based on the carrying amount of each asset in the unit. An impairment loss recognised for goodwill is not reversed in a subsequent year.

On disposal of a subsidiary or cash-generating unit, the attributable net book value of goodwill is included in the determination of the profit or loss on disposal.

Revenue recognition

The Group contracts for products and services in a variety of contractual forms and deployment methods which impact IFRS 15 revenue recognition. These include:

·      Reselling of 3rd party products for which following contracting, the Group has no continuing performance obligations for software and the customer controls the software. These are usually perpetual licenses with customer on premise installations. Since the Group is reselling these all already functional products, services are unbundled. Customers can also choose to take maintenance and support for these products or indeed obtain services, support, and maintenance from different suppliers.

·      K3 bolt on own software IP (Intellectual Property) that adds incremental vertical functionality and bolts onto Microsoft Dynamics products and that is either sold directly to customer or via a channel partner. There is an ongoing performance obligation to maintain the product to ensure the functionality continues to bolt onto Microsoft Dynamics products.

·      K3 own products for which K3 controls and has ongoing performance obligations. These products are typically SaaS (Software as a Service) based subscription products which include a right to access as the customer continuously consumes functionality. The product offer is a typical bundle of software access, maintenance, and support. The contracts typically have a low level of services.

Software licence revenue:

Software licenses for 3rd party products are recognised at a point in time, on contract and issue of the initial license key which is contemporaneous.

K3 bolt on own software IP is recognised over time.

K3 own products which is SaaS based is recognised over time and not in software but rather in maintenance and support for the purposes of revenue disaggregation disclosures. Revenue is recognised over time as K3 controls the product, the license is not distinct, and the customer continually receives benefits.

Services revenues:

Services are linked to implementation and set up of K3 own and 3rd party products, rather than product functionality build. Services are contracted for on a time and materials basis, the customer takes ownership of the work delivered and revenue is recognised as it is performed.

Hardware:

Hardware is peripheral to a number of contract implementations; the revenue is recognised when the customer takes control of the asset on delivery.

Maintenance and Support:

Maintenance refers to the maintenance of the products and ensuring a right to upgrade whilst Support refers to ongoing customer support including for example help desk access.

3rd party products maintenance is provided by the product's author. K3 has no performance obligation and this is sold through K3 for a margin. Revenue is recognised for the term of the contract at a point in time when the contract is signed. Support of 3rd party products is provided by K3 over time over the term of the contract.

K3 bolt on own software IP is typically re-sold via channel partners who provide support. K3 has an ongoing performance obligation for the maintenance of the product and recognises a portion of revenue associated with that over time.

K3 own SaaS/subscription products and usually hosted by K3 and typically a bundled offer of maintenance and support is provided to customers which are both performance obligations for K3 and revenue is recognised over time.

Allocation of transaction price:

Transaction price is measured based on the consideration specified in a contract with a customer and, where applicable, the best estimate of any consideration related to modifications to the contract which has yet to be agreed. Any amounts expected to be paid to the customer, such as penalties for late delivery, are deducted from the consideration. Where a transaction price must be allocated between multiple performance obligations, this is generally achieved through allocating a proportion of total price against each using either standard list sales prices or an estimated cost methodology.

Critical accounting estimates and judgements

In applying the Group's accounting policies above the Directors are required to make judgements (other than those involving estimations) that have a significant impact on the amounts recognised and to make estimates and assumptions about the carrying amounts of assets and liabilities that are not readily apparent from other sources. The estimates and associated assumptions are based on historical experience and other factors that are considered to be relevant. Actual results may differ from these estimates.

The estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the year in which the estimate is revised if the revision affects only that year, or in the year of the revision and future years if the revision affects both current and future years.

The Directors are of the opinion that there are no significant judgements to be disclosed. The key sources of estimation that have a significant impact on the carrying value of assets and liabilities are discussed below:

Impairment of goodwill and other intangibles

Determining whether goodwill is impaired requires an estimation of the value in use of the cash generating units to which goodwill has been allocated. The value in use calculation requires an entity to estimate the future cash flows expected to arise from the cash generating unit. It also requires judgement as to a suitable discount rate in order to calculate present value, i.e., the Directors' current best estimate of the weighted average cost of capital ("WACC"). Other intangibles are assessed annually for impairment as well as when triggers of impairment arise. An impairment review has been performed at the reporting date.

Recoverability of investments in subsidiaries held by the Parent

Investments in subsidiaries held by the Parent Company are compared to the net assets of the entities which the investment is held against when considering whether the investments are recoverable. Where the net assets fall below the investment value, the investment is assessed against other criteria, such as past profitability, future expected profitability and other known information such as recent dividend payments. A value in use calculation is performed to assess the appropriateness alongside the other known information as to whether the investment is considered recoverable. If the investment is deemed not to be supportable, it is written off through the Consolidated Income Statement.

Capitalised development expenditure and subsequent amortisation

Where such expenditure meets the relevant criteria, the Group is required to capitalise development expenditure. In order to assess whether the criteria are met the Board is required to make estimates in relation to likely income generation and financial and technical viability of the relevant development projects and the period over which the Group is likely to benefit from such expenditure. Development projects are subject to an investment appraisal process with the product managers to assess the status of the development and the expected commercial opportunities. Development costs are assessed for impairment which requires an estimation of the future expected revenues to be generated from each product. This methodology is similar to that used to assess any impairment of goodwill. Expenditure is only capitalised when the investment appraisal process has assessed that the product is likely to benefit the Group in the future.

3          Segment information

The Group operates a streamlined organisation with management resource and central services focused on working across the Group in a more unified manner to increase the strategic focus on the level of our own product sales.

Reporting is based on product split between K3 own products ('K3 Products') and Third-party reseller activities ('Third-party Solutions') across revenue and gross margin. Global Accounts and Third-Party Products continue to be merged into Third-party Solutions. Overheads and administrative expenses are included as a central cost given resource works across these three segments. The activities and products and services of the operating segments are detailed in the Strategic Report.

Transactions between operating segments are on an arms-length basis. The CODM (Chief Operating Decision Maker, the Board) primarily assesses the performance of the operating segments based on product revenue, gross margin and Group adjusted operating profit/(loss). The segment results for the year ended 30 November 2024 and for the year ended 30 November 2023, reconciled to profit for the year.

Segment assets and segment liabilities are reviewed by the CODM in a consolidated statement of financial position. Accordingly, this information is replicated in the Group consolidated statement of financial position. As no measure of assets or liabilities for individual segments is reviewed regularly by the CODM, no disclosure of total assets or liabilities has been made, in accordance with the amendment to paragraph 23 of IFRS 8.

The accounting policies of the operating segments are the same as those described in the summary of significant accounting policies. Transactions between segments are accounted for at cost.

The Group has one customer relationship which accounts for 12% (2023: 42%) of external Group revenue.

Analysis of the Group's external revenues (by customer geography) and non-current assets by geographical location are detailed below:

External revenue by end-customer geography

4          Tax credit/(charge)

Deferred tax recognised directly in equity for the year was £nil (2023: £nil). Current tax recognised in equity for the year was £nil (2023: £nil). None of the items within other comprehensive income in the Consolidated Statement of Comprehensive Income have resulted in a tax expense or tax income. 

5          Discontinued operations held for sale

Total disposals

On 29 November 2024, the Group announced the proposed sale of NexSys to SYSPRO and on 20 December 2024, the Group sold K3 Systems Support Limited ("SSL"). NexSys was part of the Third-party Solutions segment and SSL was part of the K3 Products segment. The total results of these two entities can be seen in the below table, with individual tables provided later in the note:

The major classes of assets and liabilities of the both entities classified as held for sale as at 30 November 2024 can be seen in the below table, with individual tables provided later in the note:

* Included in this caption is £3m of contract liabilities.

NexSys Solutions Limited ("NexSys")

On 29 November 2024, the Group announced the proposed sale of NexSys to SYSPRO, via funds managed and/or advised by Advent International, for gross consideration of £36.0m. The sale was subject to shareholder approval, which was received post year-end on 19 December 2024, with final completion and funds being received on 6 January 2025. NexSys has been classified as a disposal group held for sale as it represents a major line of business of the Group. The carrying amount of the disposal group is lower than its fair value less costs to sell and therefore no impairment loss is recognised.

The results of the NexSys business for the year are presented below:

The major classes of assets and liabilities of the NexSys business classified as held for sale as at 30 November 2024 are as follows:

The net cashflows incurred by NexSys are as follows:

K3 Systems Support Limited ("SSL")

On 20 December 2024, the Group sold SSL to its management team for consideration of £20k, being £500 cash consideration and £19.5k deferred consideration.

The results of the SSL business for the year are presented below:

The major classes of assets and liabilities of the SSL business classified as held for sale as at 30 November 2024 are as follows:

The net cashflows incurred by SSL are as follows:

6          Goodwill and impairment

Goodwill acquired in business combinations is allocated at acquisition to the cash generating units ("CGUs") that are expected to benefit from that business combination. The allocation made represents the lowest level at which goodwill is monitored for internal management purposes and are not larger than the single operating segment defined under IFRS 8 (Operating Segments).

During the prior year, IBS CGU was merged with that of NexSys CGU as IBS entity merged with NexSys entity to drive operational efficiency. This CGU has been moved to held for sale in the current year.

The carrying value of goodwill in respect of all CGUs is set out below. These are fully supported by value in use calculations in the year.

The recoverable amounts of the remaining CGUs are determined from value in use calculations. The key assumptions for these calculations are discount rates, sales growth, gross margin, and admin expense growth rates. The assumptions for these calculations reflect the current economic environment. The discount rate represents the current market assessment of the risks specific to the Group, taking into consideration the time value of money and individual risks of the underlying assets that have not been incorporated in the cash flow estimates. The discount rate calculation is based on the specific circumstances of the Group and its operating segments and is derived from the weighted average cost of capital (WACC). Other assumptions used are based on external data and management's best estimates.

For all the CGUs where the recoverable amount is determined from value in use, the Group performs impairment reviews by forecasting cash flows based upon the Annual Budget starting in 2025, which anticipates sales, gross margin and admin cost growth based on management's best estimates. A projection of sales and cash flows based upon a blended inflation rate 2% for the Walton CGU and nil inflation rate for the Global Accounts CGU is then made for a further four years, into a terminal amount.

The rate used to discount the forecast pre-tax cash flows is 20.7% for Global Accounts and 20.6% for Walton, which represents the Directors' current best estimates of the pre-tax weighted average cost of capital ("WACC"). The Directors consider that there are no material differences in the post-tax WACC for different CGUs. For the Global Accounts CGU to become impaired, which would be a £3.5m reduction in headroom, the pre-tax WACC would need to increase to 25.9%, an increase in the pre-tax WACC of 25% (post tax WACC of 16.6% and a 34.4% increase).

7          Notes to the cash flow statement

Cash and cash equivalents

Cash and cash equivalents comprise cash and bank balances available on demand. The carrying amount of these assets is approximately equal to their fair value. Cash and cash equivalents at the end of the reporting year as shown in the consolidated statement of cash flows can be reconciled to the related items in the consolidated reporting position as shown above.

Non-cash transactions

Additions to buildings and motor vehicles during the year amounting to £0.1m (2023: £0.8m) were financed by new leases.

Reconciliation of financial liabilities

No reconciliation of financing liabilities is shown in this note as the only financing liabilities are the lease liabilities.

8      Events after the reporting date

On 19 December 2024, the sale of NexSys Solutions Limited to SYSPRO (controlled by funds managed and/or advised by Advent International), received Shareholder approval and gross proceeds of £36m were received by the Group on 6 January 2025. The Group profit on disposal was £15.7m.

On 20 December 2024, the Group sold K3 Systems Support Limited ("SSL") to its management team, for total consideration of 20k, being £500 cash consideration and £19.5k deferred consideration.

Glossary of terms

'Adjusted administrative expense' - administrative expenses adjusted to exclude exceptional impairment costs, exceptional re-organisation cost and exceptional acquisition costs/(income) and share-based payment charges/(credit).

'Adjusted loss/earnings per share' is the basic profit/(loss) per share from continuing operations adjusted to exclude exceptional impairment costs, exceptional re-organisation cost and exceptional acquisition costs/(income) and share-based payment charges/(credit), net of the related tax charge.

'Adjusted operating profit/(loss)' is the profit/(loss) from continuing activities adjusted to exclude exceptional impairment costs, exceptional re-organisation cost and exceptional acquisition costs/(income) and share-based payment charges/(credit).

'ARR' stands for Annual Recurring Revenue. It is ongoing revenue from contracted support, maintenance and annual licenses for the future periods after taking into account churn and cancellations, price increases and new revenue.

'ERP' means Enterprise Resource Planning and refers to a type of software used by businesses to manage day-to-day business activities.

'FY' means financial year.

'IP' means Intellectual Property, intangible assets owned by the company and legal protected from outside use or implementation without consent.

'Net cash' is calculated as cash and cash equivalents balances less bank borrowings. The 2023 cash excludes NexSys Solutions Limited and K3 Systems Support Limited as discontinued operations. The prior year balance sheet has not been represented in line with IFRS 5. See Note 5 for further details.

'NRR' mean Net Revenue Retention and is calculated as ARR (defined above) less new revenue, taken as a % of the prior year revenue.

'Recurring revenue (ARR)' means Annual recurring Revenue. See more detail below under 'ARR'.

'Re-presented' means that the 2023 results have been re-presented to show NexSys Solutions Limited and K3 Systems Support Limited as discontinued operations in line with IFRS 5. See Note 5 for further details.

'SaaS' stands for Software as a Service.