KRM22 plc (LON:KRM), the technology and software investment company, with a particular focus on risk management in capital markets, has announced its unaudited interim results for the six months ended 30 June 2020.
Highlights
Financial
· Total revenue recognised of £2.3m (H1 2019: £1.8m)
· Organic growth in revenue recognised of 19%
· Undisputed Annualised Recurring Revenue* (“ARR”) of £4.0m at 30 June 2020 (H1 2019: £4.1m)
· Adjusted EBITDA loss** of £0.3m (H1 2019: loss of £2.4m)
· Loss before tax of £1.2m (H1 2019: £4.4m)
· Cash and cash equivalents at 30 June 2020 of £0.8m (FY 2019: £1.1m)
· Raised gross proceeds of £1.3m in the period through a placement and subscription for new ordinary shares
· Converted £1.3m of debt and liabilities into equity, following the acquisition of the remaining 40% stake in Irisium
Operational
· Acquisition of remaining 40% shareholding in Irisium by the Group
· Managing the impact of COVID-19 with the Company being fully operational, globally, from home as a result of internal infrastructure and process implemented from launch
· Group restructure, with annual cost savings of £0.6m
Post-Period Events
· Growth in undisputed ARR to £4.3m
· R&D tax credit receipt of £0.1m
· Entered into an agreement for a new £3.0m loan facility arranged by Kestrel Partners LLP to replace the existing Harbert debt facility
* Undisputed Annualised Recurring Revenue (ARR) is the value of contracted Software-as-a-Service (SaaS) revenue normalised to a one year period and excludes one time fees
** Adjusted EBITDA is the reported profit/(loss), adjusted for depreciation, amortisation, share-based payment charges and unrealised foreign currency gains/losses and non-recurring exceptional costs including impairment charges, reorganisation costs, gain on extinguishment of debt and acquisition and funding costs
Commenting on the results, Executive Chairman and CEO of KRM22, Keith Todd CBE, said:
“The first half has naturally been impacted by the effects of COVID-19, with extending sales cycles and delays in decision making but we remain encouraged by our customer engagement and the pipeline remains strong which we are looking to convert in the second half of the year. We have managed through these recent turbulent times and are on track to deliver full year market expectations. The new convertible loan facility, with one of our substantial shareholders, will strengthen the capital base of the company as we drive growth. The outlook for the second half of the year continues to be positive with a broad engagement of prospects in Europe, Asia and North America.”
CHAIRMAN’S REPORT
The first half of 2020 has been unprecedented, and our activities have not been immune to the effects of COVID-19 with extending sales cycles and delays in decision making by potential customers. However good progress has been made with year on year growth, cost reduction as well as strengthening our access to capital to support future growth.
Growth
The Company has experienced slowed business activity in the period as customers and prospects have transitioned to home working and with the increased operational burden resulting from market volatility. Notwithstanding the backdrop, the Company has secured two new customers in the period for the purchase of Enterprise and Market Risk products in addition to sales of new products to an existing customer. The total revenue recognised in the six-month period was £2.3m (H1 2019: £1.8m) which included 19% organic growth.
The Company had total undisputed ARR as at 30 June 2020 of £4.0m.
As of the date of this report, undisputed ARR has increased to £4.3m following the signing of a new contract in August 2020. The latest contact win is a four-year contract for a UK Brokerage firm worth £1.2m over the life of the contract and covers a range of our Market, Compliance and Enterprise risk products accessed via our Global Risk Platform. The customer saw the benefits of KRM22’s ability to simplify the cost and complexity of risk management through technology delivered on one platform as a one-stop service.
The total undisputed ARR of £4.3m, as of the date of this report, is after accounting for the loss of four institutional customers who have terminated their contracts with the Company in the period amounting to an aggregate of £0.3m ARR and one further customer with £0.3m ARR where the contract is in dispute. The terminations were due to a variety of market factors and COVID-19 but are not related to the performance of our product offering. The Company originally had disputed ARR of £0.4m from two customers however, with one of these customers, the Company has now negotiated a contract at a lower value to retain them as a customer and assist their early stage development and the revised contract value is now included in the undisputed ARR of value of £4.0m at 30 June 2020. Discussions continue with the other customer to try and find a commercial resolution for the remaining £0.3m.
The Company continues to have a strong pipeline of opportunities and is progressing well through the procurement process with two further tier one banks which the Company expects will close in the second half of the year.
Adjusted EBITDA
The new contract wins, together with the cost reduction actions implemented, have resulted in a substantial improvement in adjusted EBITDA with a loss of £0.3m (H1 2019: loss of £2.4m) at the period end. The cost reduction has been achieved through a combination of salary sacrifices across all staff in 2020, staff redundancies and general overhead reductions.
Acquisition
In April 2020 we acquired the remaining 40% stake in Irisium for £0.55m, which was paid for through the issue of a Convertible Loan Note (“CLN”). The CLN was converted into 1,454,434 ordinary shares in the Company in June 2020. No cash was paid as part of the transaction and the transaction removed a total of £1.3m of debt and liabilities from the Group’s consolidated balance sheet as at 30 June 2020. The settlement of £1.3m of debt, through the issue of the CLN, resulted in a gain on extinguishment of debt of £0.7m which has been recognised in the income statement for the period ended 30 June 2020. Further information on this transaction is disclosed in note 7 of this interim announcement.
Cash
Cash as at 30 June 2020 was £0.8m (31 December 2019: £1.1m). In May 2020, we raised £1.3m in equity through a placement and subscription for ordinary shares to support the Company’s working capital requirements.
Debt
The Group’s net debt as at 30 June 2020 was £0.0m (31 December 2019: £0.9m) following the acquisition of the remaining 40% stake in Irisium from Cinnober Financial Technologies AB (“Cinnober”) and the subsequent conversion of the CLN due to Cinnober. The net debt included cash of £0.8m and gross debt of £0.8m (31 December 2019: cash of £1.1m and gross debt of £2.0m).
On the 15 September 2020 the Company entered into an agreement with Kestrel Partners LLP for a new £3.0m three-year, convertible loan. Kestrel Partners LLP currently owns 18.7% of the Company’s issued share capital. The facility will be drawn down shortly to repay the outstanding liabilities of the Harbert Debt Facility and provide additional working capital. The convertible loan has a three-year term and coupon of 9.5%. Kestrel Partners LLP can convert at any time and the Company has the right to force conversion after eighteen months subject to meeting certain share price criteria and other conditions. Full details are in the RNS announcing the facility. We are delighted with the support from one of our major shareholders.
Strategy
The clarity of our strategy has sustained us well though turbulent times. The focus of delivering integrated risk tools as a service through a global risk platform provides our customers with the tools to effectively manage risk and reduces the cost and complexity of their operations. Our focus on combining subject matter experts with high quality integrated technology services differentiates us from the competitive pack. The internal efficiency we have established by driving business automation and building a robust team culture that delivers superior customer service have contributed to the growth and the improved profitability. The integration of our acquisitions and partnership products and development of new products on the Global Risk Platform have underpinned the strengthening of our sales pipeline. Our focus on the five core domains of risk: Enterprise, Compliance, Market, Operations and Technology allow us to address the priority issues prospects and customers face, while providing them optionality to take additional integrated products in the future.
Outlook
COVID-19 has resulted in challenging market conditions with extended sales cycles and has forced the Company to review operations and manage the cost base accordingly however the recent contract win in August 2020 and the maturity of the sales pipeline gives me confidence that KRM22 will generate further recurring revenue in the remainder of the year and achieve market forecasts.
Keith Todd CBE
Executive Chairman and CEO
15 September 2020
FINANCIAL REVIEW
Financial numbers included in the period
The results for the six months to 30 June 2020 include six months of revenue and costs for the Group. For comparative purposes, the results for the six months to 30 June 2019 (H1 2019) include one month of Object+ revenue and costs and six months of revenue and costs for all other KRM22 group companies.
Income statement
Total revenue
Total revenue reported in the period was £2.3m (H1 2019: £1.8m) and 94% was generated from recurring customer contracts. The total revenue recognised includes non-recurring revenue of £0.1m (H1 2019: £0.1m) and this included organic growth of 19%. Organic growth is calculated as the period on period growth in total revenue recognised, excluding revenue recognised by Object+, the acquisition completed in May 2019.
Recurring revenue
Recurring revenue recognised for the period was £2.2m (H1 2019: £1.7m). As at 30 June 2020, the KRM22 group had undisputed contracted ARR of £4.0m. As at the date of this report, contracted ARR had increased to £4.3m.
Gross profit
Gross profit for the period was £2.1m (H1 2019: £1.6m) and the consistent gross profit margin of 91% continues to demonstrate how the Company can cover its cost base efficiently as new recurring revenue contracts are signed.
Loss for the period
The operating loss for the period was £1.0m (H1 2019: loss of £4.4m).
Adjusted EBITDA
Adjusted EBITDA is a key metric to consider in order to understand the cash-profitability of the business due in particular to the non-cash items that impact the Income Statement under IFRS accounting, such as non-cash share-based costs.
Adjusted EBITDA for the period was a loss of £0.3m (H1 2019: loss of £2.4m) and a reconciliation of adjusted EBITDA loss to operating loss is provided as follows:
| H1 2020 £’m | H1 2019 £’m | ||
| Adjusted EBITDA loss | (0.3) | (2.5) | |
| Depreciation and amortisation | (0.9) | (0.6) | |
| Impairment of intangible assets | (0.1) | – | |
| Acquisition and debt expenses | (0.1) | (0.6) | |
| Unrealised foreign exchange gain | 0.4 | 0.1 | |
| Gain on extinguishment of debt | 0.8 | – | |
| Group restructuring costs | (0.4) | (0.3) | |
| Share-based payment expense | (0.4) | (0.5) | |
| Operating loss | (1.0) | (4.4) |
Total comprehensive loss
KRM22 reported a total comprehensive loss for the period of £1.2m (H1 2019: loss of £4.4m).
Financial position
Cash
As of 30 June 2020, KRM22 held £0.8m in cash (31 December 2019: £1.1m). The Company raised gross proceeds of £1.3m in the period through the placement and subscription of 4,266,664 new ordinary shares in the Company.
Liabilities
As at 30 June 2020, our principal liabilities were:
· £0.8m loan owed to Harbert European Growth Fund.
· £1.1m (US$1.5m discounted contingent consideration (£1.7m (US$2.2m) undiscounted) for earn out payments for the acquisition of Object+. The contingent consideration can be satisfied in either cash or Company ordinary shares at the Company’s discretion.
· £1.2m for the right of use assets relating to all future payments of leased-office rentals under IFRS16 ‘Leases’, of which £0.5m will be paid within twelve months with the balance for periods greater than one year.
· £1.1m of deferred revenue; contracted and paid services that will be released in a future period.
As a result of acquiring the remaining 40% shareholding in Irisium by way of a Convertible Loan Note (“CLN”) and the subsequent conversion of the CLN into ordinary shares in the Company, a total of £1.3m in debt has been removed in the six months ended 30 June 2020. The settlement of £1.3m of debt, through the issue of the CLN, resulted in a gain on extinguishment of debt of £0.7m which has been recognised in the income statement for the period ended 30 June 2020.
Principal risks and uncertainties
The principal risks and uncertainties facing the Group remain broadly consistent with the Principle Risks and Uncertainties reported in the Group’s 31 December 2019 Annual Report. Since the 2019 Annual Report, the Board have been monitoring and mitigating the effects of the following international events on the Group’s business:
COVID-19
In March 2020, the World Health Organisation declared a global pandemic due to the COVID-19 virus that has spread across the globe, causing different governments and countries to enforce restrictions on people movements, a stop to international travel, and other precautionary measures. This has had a widespread impact economically and a number of industries have been heavily impacted. This has resulted in impacts on certain industries and a more general need to consider whether budgets and targets previously set are realistic in light of these events.
As described above, the COVID-19 pandemic has impacted our business but the Board believes that the business is well positioned to be able to navigate through the impact of COVID-19 due to:
· The completion of the £1.3m equity raise completed in May 2020;
· The Group restructure plans implemented in June 2020;
· The replacement of the existing debt facility with a loan of £3.0m; and
· The signing of new customer contracts.
Brexit
The United Kingdom (‘UK’) formally left the European Union (‘EU’) on 30 January 2020. The period of time from when the UK voted to exit the EU on 23 June 2016 and the formal process initiated by the UK government to withdraw from the EU, or Brexit, created volatility in the global financial markets. The UK now enters a transition period, being an intermediary arrangement covering matters like trade and border arrangements, citizens’ rights and jurisdiction on matters including dispute resolution, taking account of The EU (Withdrawal Agreement) Act 2020, which ratified the Withdrawal Agreement, as agreed between the UK and the EU. The transition period is currently due to end on 31 December 2020 and ahead of this date, negotiations are ongoing to determine and conclude a formal agreement between the UK and EU on the aforementioned matters.
As the Group operates subsidiaries in many countries, there are several channels available to us to continue business with the same customers, should the need arise, with little to no effect from Brexit changes. As such, the Directors currently deem that the effects of the UK’s current transitional period outside the EU and the impact of ongoing discussions with the EU will not have a significant impact on the Group’s operations due to the global geographical footprint of the business and the nature of is operations. However, the Directors and Senior Leadership Team are closely monitoring the situation to be in a position to manage the risk of any volatility in global financial markets and impact on global economic performance due to Brexit.
Kim Suter
CFO
15 September 2020
