Chief Executive's Report

Introduction

I am pleased to present this review of the year ended 30 September 2024 and to set out our plans for the future. While the financial result is disappointing we made important progress towards achieving our strategic goals and I am excited by the opportunity ahead of us.

Trading review

The financial year under review includes 12 months' trading from most of the Group's businesses but we had the benefit of the Vanti assets for only the final six months of the period.

The Group was active across a wider range of activities than in recent years with revenue increasing to £19.7 million, of which architectural services accounted for £9.6 million or 48% of the total; the first time in the Group's history that the majority of revenue has not come from architectural services. However, profitability suffered from the investment required to build up our smart buildings capabilities, from delays to the start of a number of projects and other challenges.

Performance in the two halves of the year was very different. The Group made a profit from its architecture businesses in the first half, but losses in the rest of the Group plus increased central costs pushed us to a loss overall.

In the second half as expected both the smart buildings and architecture divisions reported trading profits at a level sufficient collectively to more than cover central costs. Despite the write down of the goodwill associated with the acquisition of Anders + Kern the Group achieved a small trading profit overall in the second half, which reduced the pre-tax loss for the year as a whole.

Smart Buildings

The vision

We plan to create significant shareholder value by building a technology led property services group drawing on our strong architecture heritage.

As a reminder, smart buildings integrate advanced technologies, data analytics, and automation to create vibrant ecosystems. They optimise energy consumption, streamline operations, and personalise experiences for occupants. By leveraging the Internet of Things (IoT) and artificial intelligence (AI), smart buildings offer real-time monitoring, energy savings, improved comfort, proactive maintenance, and cost reduction.

The business model

In comparison with pure architecture a smart buildings business model has two fundamental advantages essential to create shareholder value, namely scalability and longevity.

·      Selling property related software and services not constrained by the need to take on ever increasing numbers of staff provides an ability to scale revenues disproportionally to costs, which does not exist where income is principally the function of hours charged.

·      Architects also typically primarily get paid during a building's planning and construction phases whereas with smart buildings a greater degree of income can be generated throughout the entire life of the building.

The Group's unique advantage is its ability to draw on its architecture heritage to help generate and convert smart buildings leads at an earlier stage than a business solely operating in the smart buildings space.

Smart buildings businesses

The Group's smart buildings businesses reported a trading profit, before property write downs and central management charges of approximately £86,000 on revenues of £10.2 million.

Vanti

Vanti is the focus of the Group's smart buildings activities. It has been created by rebranding Torpedo Factory Ltd, the master systems integrator we acquired in March 2023 as part of the Torpedo Factory Group purchase and which was the subsidiary we used to acquire the Vanti assets in March 2024.

The expanded Vanti business leads our principal smart buildings activities. As master systems integrators, Vanti transform buildings into intelligent environments where people want to work, play, and learn. Their proprietary software is used in sites with over 2 million square feet of floorspace, in locations from Santa Monica to Singapore, from Birmingham to Bahrain.

Vanti reported a particularly strong second half, including the first sale of the Enterprise edition of Smart Core, Vanti's open source Building Operating System, to the owners of a notable skyscraper in the City of London.

Stage Technology

The TFG Stage Technology business delivers technology system integration for theatres and other performance venues.

Stage Technology had a disappointing year after the completion in September 2023 of its largest ever project, suffering from the lack of a similar-sized project to replace it. The Stage Technology business is typically seasonal with the summer months usually accounting for a good proportion of annual sales. However, in the year under review and for a variety of reasons that summer boost was delayed, with the expected upturn not starting until September 2024.

ecoDriver

ecoDriver provides energy monitoring software, energy efficiency consulting services and the provision of sensors and other hardware to monitor energy usage.

Revenues grew strongly, albeit from a low base, but were not quite sufficient to generate a profit as costs increased at a faster rate reflecting the Group's continued investment principally to build out the sales team.

ecoDriver's in house developers created an Artificial Intelligence application during the year to overcome a barrier to the rate at which the business can scale. Once ecoDriver's software is monitoring a site, the client generally needs help evaluating how best to act on the data. ecoDriver's sustainability engineers are on hand to help them through this process. However, one of the challenges is that the client needs educating in this field and this can take up engineering time. To combat this the team developed EDDIE, the ecoDriver Data Intelligence Engine, an AI chatbot which connects to a specific site's data, and can provide helpful insights into the way energy is used. This frees up the company's sustainability engineers meaning the number of sites that one engineer can cover is significantly higher.

Anders + Kern

Anders + Kern is a distributor of hardware and software for the installation of room and desk booking systems and other workplace technology.

Anders + Kern's clients are generally system integrators many of whom need help taking advantage of the opportunities offered by smart buildings. The company had a difficult year, the principal cause of which was the impact of manufacturers of two of its largest product lines changing ownership, with both new owners having existing alternative routes to market.

We responded by substantially reducing overheads in order to sharply reduce losses. The longer term strategy is to use the Anders + Kern client base to distribute the software that the group develops, to increase the speed of deployment.

Architecture

The Group has two established UK architecture businesses, Veretec, which offers executive architecture services - often in partnership with pure design architects - and Aukett Swanke Limited, which offers a full design service.  Additionally the Group owns 25% of Aukett + Heese, a leading Berlin based architecture practice and 50% of Aukett + Heese Frankfurt, an architecture and general planning practice serving businesses in the Frankfurt area.

In addition to their cash contributions from their core activities these businesses are also tasked to help facilitate the growth in smart buildings revenues.

Veretec

Veretec provides executive architecture services in partnership with other design architects and now employs over 65 full time equivalent fee earning staff. The business has grown steadily in recent years as executive architecture becomes a more established part of the wider architecture scene, particularly in London. Veretec is a true leader in this part of the market and is showing strong growth.

Veretec met its revenue target during the year, with sales of £5.9m representing growth of 11.2% on the prior year.

In the current financial year Veretec has secured a number of sizeable projects, particularly in the West End of London, including a luxury hotel in Mayfair. Veretec is also expanding its successful work monitoring projects, and following the legislative changes that have emerged from the Grenfell tragedy has trained up staff to fulfil the important Principal Designer role created by the Building Safety Act.

Aukett Swanke Limited

Aukett Swanke Limited (ASL) provides a full architectural and interior design service and now employs approximately 23 full time equivalent fee earning staff. By its very nature ASL's business is lumpy, typically with a small number of relatively large contracts. A major hotel project in Midtown London for which ASL was appointed repeatedly missed deadlines for securing project finance and was subsequently sold to new developers.

Since the end of the financial year under review ASL has begun to see movement on larger projects. One such project was the hotel in Midtown London mentioned above, where we are delivering the project despite the change in ownership. Converting one or more additional larger projects would provide a sufficient pipeline to underpin the studio's current cost base for several years.

A key attribute of the ASL business is its ability to open up smart buildings opportunities for other parts of the Group, and progress on this has been pleasing. As such pure profitability is not the only basis on which we assess ASL's contribution.

German investments

The Berlin business employs approximately 121 full time equivalent architects and generated a solid performance, with profits of approximately €1.2 million before management charges and local tax on gross revenue of €18.3 million and with cash balances of approximately €2.4 million at 30 September 2024.

Frankfurt is a smaller business, serving a smaller metropolitan area and employs 11 full time equivalent architects. It broadly broke even on revenues of €1.4 million.

Both German businesses are accounted for as associated undertakings, which means we do not include their results in the consolidated revenue and operating profit numbers.

In total the Group received approximately £0.3 million in management charges and dividends from our German investments. As under German accounting rules dividends can only be paid after a contract has been completed, regardless of any income received during the life of such a contract and with contracts sometimes lasting for several years, there is an inevitable delay in receiving dividend payments that under UK accounting rules could be made years earlier.

While the accounting carrying value of our German investments is £1.0 million we regard their true commercial value as being much greater.

Central costs

The Group's central costs, being the costs of the central management team and all the costs associated with being a publicly listed company, are too much for a Group of our size. We are seeking to reduce these costs where we can - in particular we have already made significant savings from the change of auditor.

We recognise there is little point being a public company with a market capitalisation much below £50 million and more realistically £100 million. Our plan is therefore to grow rapidly and in so doing the central costs will be absorbed over a wider base.

Funding

The losses recorded in the first half of the financial year created pressure on the Group's working capital, which improved during the remainder of the financial year as the result of better trading, asset sales and cost cutting.

In September 2024 we completed the sale of the freehold building acquired at the time of the TFG acquisition for a cash consideration of £2.5 million plus VAT, with the proceeds of the sale being used to pay down Group debt.

Additionally, during the year under review we completed an exercise intended to reduce annual costs by £2 million, with the principal savings being freehold property finance and operating costs, general regulatory and administrative costs and by removing 12 full time equivalent positions in Aukett Swanke Ltd, 9 in Vanti/TFG Stage Technology, and 4 in Anders + Kern.

Current trading

Performance in the first half of the current financial year is materially better than in the year under review.

We are particularly encouraged by progress across most of our smart buildings businesses. Vanti and TFG Stage Technology have a large pipeline of work and a number of exciting prospects, and ecoDriver is growing strongly. We are merging the Vanti and TFG Stage Technology entities in one company to create operating efficiencies and to reduce costs further. Anders + Kern is building its way back to profitability following the loss of the two major supplier relationships through circumstances outside its control.

At our architecture businesses, trading at Veretec remains strong with headcount continuing to increase to support a growing workload and increasing revenues, with record profitability targeted. At Aukett Swanke Limited trading remains dependent on the progress of a relatively small number of high value projects.

Our German investments look set to have an improved performance this year off the back of some notable contract wins. Berlin looks set to deliver another reliable performance and Frankfurt has secured sizeable contracts with two EU agencies so should have a strong year.

The costs reduction actions referred to above have also led to lower central costs.

Future plans

Our focus is on building a profitable smart buildings core for the Group aided by the contacts and extensive property market expertise in our architecture businesses.

As has been widely reported, there are difficulties in obtaining expansion funding for businesses of the size of interest to us. This presents opportunities, as this shortage of investment capital is leading to otherwise viable projects and companies becoming distressed assets, with only limited competition to take them forward. In short it is a buyers' market.

In the first 12 months under the new strategy we completed four acquisitions and have used the time since to focus on their integration. We now wish to move forward with the next set of acquisitions, based principally around building out our smart buildings activities.

We have divided these acquisition opportunities into three categories. The first covers growth businesses which have run out of funding and which can be acquired at a low cost, such as Vanti, where for a minimal outlay we have acquired something potentially worth a great deal.  The second category covers more established businesses, which we believe would justify an element of dilution for the commercial benefits they would bring. A third category covers opportunistic acquisitions where there is a clear commercial rationale either to provide funding for the Group as a whole or to add sustainable earnings or assets.

I would like to thank our employees for their support and fortitude in a challenging year, particularly those who continue to purchase our shares each month, showing their confidence in our vision. We are excited by the opportunity ahead and I look forward to sharing news of our progress.

Running an AIM company is a privilege offered to few entrepreneurs and I intend to take full advantage of the quote to show how a valuable PropTech group can be built.

Current and prospective shareholders are encouraged to visit our investor-focused website at www.builtcybernetics.com and sign up to receive updates and engage with the business.

Nick Clark

Chief Executive

21 March 2025

Financial review

The headline financial results of the Group were:

¹Alternative performance measure, refer to page 16 for definition

The result for the year is split between continuing operations and the discontinued Middle East operations.

Segmental analysis from continuing operations  

*Group costs are shown net of management charges to subsidiaries, and the German associate and joint venture. Group costs excluding income from management charges are disclosed in Note 4.

Overview

The Group reported a trading loss of £536k (2023: profit £28k) principally as the result of the continuing investment in our smart buildings activities and the high central cost burden for a Group of our size.

Group revenues

Revenues for the year from continuing operations were £19.72m, an increase of 37.5% on the previous year (2023: £14.34m). Revenues less sub consultants increased by 37.9% to £19.45m (2023: £14.10m), with subconsultant costs increasing by 31.0% to £0.30m (2023: £0.23m).

This significant increase in revenue is due to the full year of consolidated revenue from the Torpedo Factory Group (comprising Vanti Ltd and TFG Stage Technology Ltd) and Anders + Kern operations following their acquisitions during the prior year, as well as revenue following the ecoDriver acquisition in the year together with a six month's contribution from the Vanti assets acquired in March 2024.

Smart Buildings businesses

Torpedo Factory Group (including Vanti and TFG Stage Technology)

¹Alternative performance measures, refer to page 16 for definition

Basis of inclusion

The results shown above for the prior year related only to the performance from the date of acquisition of Torpedo Factory Group Limited on 20 March 2023, when its results were consolidated into the Group, and therefore represented just over 6 months' trade for the year ended 30 September 2023. Much of the year on year increase in revenue and gross profit is therefore due to a full year of consolidated trade in the reporting year.

Results

The loss before tax includes a one-off £585k cost of revaluation of The Old Torpedo Factory freehold property sold during the year, and £14k relating to RTS Technology Solutions Limited ("Vanti") assets acquisition costs.

Excluding this exceptional cost gives a more comparable year on year indication of the trading performance of these operations, which would show a profit before tax (excluding Group management charges) of £226k.

TFG was behind expectations at the half-way stage in its performance in what was a year of significant change. This included the purchase of certain assets of RTS Technology Solutions Ltd on 20 March 2024 in its Torpedo Factory Ltd subsidiary (renamed Vanti Ltd on 9 October 2024) and the sale of the freehold of its main operational hub The Old Torpedo Factory on 17 September 2024. This raised working capital for the wider group and reduced costs from an underutilised premises. Encouragingly, TFG returned to profitability in the second half of the financial year. 

The subsidiary Vanti Ltd contributed the majority of the TFG profit with a strong performance in its projects department off the back of its expedited move to master systems integration work from the acquisition of the Vanti assets. Software revenue increased recurring revenue within the service department, making the company less reliant on new project wins.

TFG Stage Technology Ltd performed poorly after a record breaking previous financial year. Much of this was due to the lack of a comparable replacement for its largest ever project in 2022/23. TFG Stage Technology's pipeline and work in progress significantly increased towards the end of the financial year under review providing greater stability to future revenue streams.

The property sale in September 2024 will also result in a significantly reduced overhead for Vanti as a result of being able to move its operational hub to Birmingham where a large proportion of its staff are based.

Anders + Kern

¹Alternative performance measures, refer to page 16 for definition

The results shown above for the prior year related only to the performance from the date of acquisition on 14 July 2023, when its results were consolidated into the Group, and therefore represented just over 2 & 1/2 months' trade for the year ended 30 September 2023.

Anders + Kern U.K. Ltd performed significantly behind expectations. The company lost key distribution rights and is now transitioning to be more focussed on SaaS and smart building revenue streams. The company's cost base has been realigned to match its level of activities in the current financial year.

ecoDriver

¹Alternative performance measures, refer to page 16 for definition

The results shown above for the current year related only to the performance from the date of acquisition on 17 October 2023, when its results were consolidated into the Group, and therefore represented just under 11 & 1/2 months' trade for the year ended 30 September 2024.

ecoDriver grew strongly in its first year of ownership by the Group, with revenue of £477k with second half revenue 21% higher than the first half. The segment recorded a small loss excluding group management charges, with £110k of software development costs being capitalised. Approximately 30% of ecoDriver's revenue is recurring, under long term contracts for software licence fees and advisory services.

Architecture businesses

United Kingdom Architecture

¹Alternative performance measures, refer to page 16 for definition

The UK's architecture revenue increased 7.5%, and stripping out pass through subconsultant costs revenue increased 6.5% year on year.   

With net revenue per full time equivalent technical staff remaining broadly constant with the previous year the increase in revenues together with the cost cutting actions referred to in the Chief Executive's report fed through to an increase in the contribution of the UK architecture businesses both before and after central management charges.

The loss before tax includes a provision of £264,000 relating to a call from The Wren, a mutual insurance organisation of which the Group's UK Architecture businesses are members and through which they obtain their professional indemnity insurance, to meet a regulatory requirement to strengthen its capital base.

Improvements in the market in the final quarter of the year saw significant new enquiries and success, Veretec in particular converting the enquiries into confirmed work. As a result, Veretec started the year commencing 1 October 2024 with a much stronger order book and has been undertaking significant levels of recruitment.

Continental Europe

The principal components of the Continental Europe hub are the two German investments, for which under the prevailing accounting rules we do not show revenue and costs but only report our share of profits.

¹Alternative performance measures, refer to page 16 for definition

The hub result before tax (including Group management charges), including the joint venture and associate in Germany, was a profit of £73k (2023: £277k).

Continental Europe's result is materially dominated by the associate in Berlin and joint venture in Frankfurt. The year to 30 September 2024 represented another profitable year, albeit down on the prior year, as the operations experienced a significant slowdown in the local market, primarily in the residential sector. However, they together still contributed £157k (2023: £341k) profit (including Group management charges) to the Continental Europe result.

Reported revenues comprise the Turkish subsidiary for the 3 months up to the sale of the operation in December 2023. Revenues therefore decreased to £39k (2023: £194k), with revenue less subconsultant costs of £39k (2023: £128k). The operation made a £4k profit before tax across those months, however the segment result includes a charge of £88k being the accounting loss on disposal.

Total revenues under management decreased 7.9%, whilst revenue less sub consultant costs decreased 8.0%. Staff numbers decreased to 117 FTEs (2023: 121), due to the sale of the Turkish subsidiary. Lower efficiency in Germany due to market driven project pauses and delays led to a decrease in net revenue per FTE technical staff to £98k (2023: £103k) and with it the reduction in profitability.

Middle East - discontinued operation

¹Alternative performance measures, refer to page 16 for definition

Following the disposal of John R Harris & Partners (JRHP) in April 2022, and management's decision to take on no new projects and transition to cease activities in the region, costs were nominal in the year.

The Middle East hub continues to be treated as a discontinued operation.

Financing

The year under review and subsequently has seen a marked improvement in the Group's cash position.

The net deficit (see note 25) at the year-end was significantly lower than the prior year as a result of the cash generated from the sale of The Old Torpedo Factory freehold property sale, from which the mortgage on the freehold was fully repaid, along with a partial prepayment against the Coronavirus Business Interruption Loan Scheme ("CBILS") loan TFG has with NatWest.

The year-end deficit was £253k (2023: £2,140k), comprising cash of £353k (2023: £522k), cash included in assets held for sale (see note 28) of £nil (2023: £30k), a net overdraft of £164k (2023: £122k), the balance of the Coutts CBILS loan fully paid off in the year £nil (2023: £167k), the NatWest CBILS loan reduced to £417k (2023: £992k), and the mortgage paid off £nil (2023: £1,411k). When TRCS (renamed ecoDriver) was acquired in Oct-23 it had a Lloyds Banking Group loan facility guaranteed by the Bounce Back Loan Scheme (BBLS), the balance as at 30 September 24 was £25k.

The Group's £250k overdraft facility from its bankers Coutts & Co was renewed in September 2024 for 6 months to 31 March 2025, continuing to provide working capital flexibility and to support the UK Architecture businesses. Coutts have indicated they intend to extend an overdraft for a longer period and will review the amount at the renewal date. This is discussed further in note 1.

The Coutts CBILS loan set out in note 24 was arranged with Coutts & Co in response to the challenges impacting trade incurring losses during the COVID pandemic. The loan was repayable over 3 years with a 12 month payment holiday, and the first instalment made in June 2022, to be paid back in 24 monthly instalments through to May 2024. The final payment on the loan was made as scheduled during the year.

Vanti Ltd and TFG Stage Technology Ltd have a combined Invoice Finance Agreement with Bibby Factors, amounts due in respect of this facility are disclosed under other creditors. The companies can use these facilities to draw down a percentage of the value of certain sales invoices and applications. This is limited to a maximum draw down of £540k across both companies with a year-end balance drawn of £535k, this is secured by way of debenture.

Going Concern

Overview

As set out more fully in the Chief Executive's report the Group's two divisions are trading well, with strong order books, circumstances which, in the Directors' opinion, are sufficient to allow the Group's debts to be discharged as they fall due.

In the event trading deteriorates the Group has a number of actions it could take to mitigate funding pressure, including an existing undrawn financial facility of £920k.

Basis of the board's opinion

The Board has produced cash flow forecasts for a period of 18 months from the approval of these financial statements, which comprise detailed income statements, statements of the financial position and cash flow statements for each of the Group's operations. The Board has also considered the risks and uncertainties associated with the principal operations and the funding position in general, including the consideration of a number of differing scenarios based on varying trading performance across the Group.

The Group's forecasts are prepared using information on secure contracted work and potential work which is deemed to have a greater than 50% chance of being undertaken, with the income figures suitably discounted, and on new work based on historical experience.

Acquisitions

The Board's stated intention is to achieve a leading presence in the provision of smart buildings services through a combination of organic growth and targeted acquisitions. To date, the Group has made four Smart Building related acquisitions and plans to make others in the coming months and years. Inevitably this requires an element of cash, as part of the purchase consideration and for the associated professional fees.

However, in connection with this assessment of going concern the Directors note that each such acquisition is a discretionary event, as is the proportion of any consideration paid in cash. The Board's intention is to avoid placing undue stress on the Group's cashflows from expanding at a pace faster than can be sensibly funded.

Bank debt

As at 30 September 2024 total borrowings were significantly lower than the prior year at £606k (2023: £2,692k), as the Group paid off the final balance of the Coutts CBILS loan, repaid the balance of the mortgage on completion of the sale of the freehold property and made significant payments on the NatWest CBILS loan. Of this balance, current borrowings were £522k (2023: £2,050k).

The Coutts overdraft is due for renewal from 31 March 2025. Based on discussions to date the board expects a facility to be offered on an acceptable basis.

Mitigating action

Should either the cash generation from the Group's existing business units decline or the push for growth in the smart buildings arena lead to a prolonged shortfall in cash the Board has the following funding or mitigating options beyond the typical cost cutting in the face of declining activities:

·      Vanti Ltd has received a time limited fully approved offer for a £920k loan which can be drawn down if needed.

·      The Board also believes that the existing invoice discounting facility may be extended to a larger limit.

·      The Group is currently paying off its liability in respect of state-backed funding provided during the Covid pandemic. The CBILS loan drawn by TFG will be fully repaid by July 2026. By replacing this debt with a new facility repayable over a longer period the annual cash costs associated with this debt would fall.

·      The Board believes the commercial value of a number of its businesses and investments is substantial in relation to the Group as a whole and if necessary could be realised at values which are in excess of book value.

·      As a company with shares quoted on the London Stock Exchange there is the option to seek additional equity investment from the issue of new shares, as was demonstrated by the share subscription in connection with the Vanti transaction.

·      The Group has outstanding warrants entitling holders to subscribe £375,000 of cash for new shares. The exercise price is 1 penny per share, which is a significant discount to the current market price, and it is therefore reasonable to expect the warrants will be exercised prior to their expiry in April 2027.

Other funding and mitigating options available to the board are also discussed in note 1.

Based on forecasts prepared and reviewed for the period to 30 September 2026, the Directors have a reasonable expectation that the Group will have adequate resources to continue in operational existence for the foreseeable future. For this reason, the Board considers it appropriate to prepare the financial statements on a going concern basis.

The going concern statement in the Directors' report and corresponding section in note 1 provide a summary of the assessments made by the directors to establish the financial risk to the Group over the next 12 months. This is further supplemented by the principal risks and uncertainties section in the Strategic Report.

Key Performance Indicators ("KPIs")

The key performance indicators used within the Group for assessing financial performance are:

·    Revenue less sub consultant costs which reflects the revenue generated by our own technical staff but excludes the revenue attributable to sub consultants, which are mainly passed through at cost. This is the key driver of profitability for our business, and is discussed by segment on pages 9 to 14;

·   Revenue less sub consultant costs being generated per full time equivalent (FTE) technical member of staff ('net revenue per FTE technical staff'). This KPI is only analysed on a segmental basis and calculations for each segment can be found on pages 10 to 14; 

·   Result before taxation (excluding Group management charges), and result before taxation (including Group management charges), which are further assessed on pages 10 to 14;

·     Cash at bank and in hand and net funds / (debt), which is assessed further on page 2.

·     Full time equivalent technical members of staff are given for each hub on pages 10 to 14.

Antony Barkwith

Group Finance Director

21 March 2025

Strategic report

The Directors present their Strategic Report for the Group for the year ended 30 September 2024.

Strategy

We aim to create shareholder value over the medium and longer terms through the provision of smart building services to the property sector drawing on our extensive architecture heritage. At the same time we aim to provide an attractive and rewarding working environment for our staff.

On 27 February 2025, in recognition of the progression of the Group's strategy, the Group's name was changed to Built Cybernetics plc.

Business Model

Smart Buildings

We intend to establish a leading presence in the delivery of smart buildings services, which entails acquiring and developing our own smart buildings software and the provision of support services.

We have completed four related acquisitions and for the first time in the Group's history income from non-architecture activities exceeds income from architecture.

As this side of the Group's activities continues to develop and as we further develop our own systems the proportion of income represented by software licencing and related services is expected to increase. In so doing this element of the Group's business will be far more scalable than the traditional architecture model, where growth generally requires the recruitment of additional staff and once a project is completed there is no further revenue.

Architecture

Our architecture and interior design businesses operate in the UK and Germany. Our operation in Turkey was sold to local management in December 2023, and along with other locations will continue to operate through licence based arrangements where the responsibility for profit rests with local management and owners. 

The United Kingdom hub comprises two principal service offers: an executive architectural delivery service operating under the Veretec brand, and a comprehensive architectural design including master planning, interior design and fit-out capability under the Aukett Swanke brand.

Additionally, we have equity interest in leading architecture practices in Berlin and Frankfurt and brand licence arrangements in the UAE and Turkey.

Our architecture business model is to charge on a time or project basis for the work of our professional staff.

Principal Risks and Uncertainties

The directors consider the principal risks and uncertainties facing the business are as follows:

Geo-political factors

Political events and decisions, or the lack thereof, can seriously affect the markets and economies in which the Group operates, leading to a lack of decisions by government bodies and also by clients.  More specifically anything that creates or adds to economic uncertainty has the possibility of delaying long term property related investment decisions. In turn this directly impacts workload and can even delay committed projects.

Levels of property development activity

Changes in development activity levels have a direct impact on the number of projects that are available. These changes can be identified by rises and falls in overall GDP, construction output, planning application submissions, construction tenders and starts, investment in the property sector and numbers of new clients.

In addressing this risk, the Group considers which markets and which clients to focus upon based on the strength of their financial covenant so that there is clear ability to provide both project seed capital and geared funding to complete the delivery process.

Share price volatility

A strong share price and higher market capitalisation attract new investors and provide the Group with greater flexibility when considering M&A activity. Conversely a weaker share price affords the Group less flexibility.

The widely reported issues with AIM, which in 2024 lost 9% of its companies remains a concern, but one outside the Company's control.

Technical Risk

There can be no guarantee that the Group's current competitors or new entrants to the markets in which the Group's businesses operate will not bring superior technologies, software, products or services to the market which, in consequence, make the Group's current offerings obsolete. The Group therefore needs to enhance and develop these offerings and will need to anticipate or respond promptly and successfully to technological change. If the Group is unable to do this sufficiently well, or at all, it may be at a significant disadvantage to the competition. The Group seeks to mitigate this risk through, inter alia, a well structured development programme and ongoing investment in its software and by staying abreast of market trends.

Operational gearing and funding

As a small but acquisitive Group we have a relatively high level of operational gearing, through staffing, IT and property costs, which makes it difficult to reduce costs sufficiently quickly to immediately avoid losses and associated cash outflows when faced with sharp and unpredicted falls in revenue.

Nevertheless in 2024 we instigated a £2.0 million cost savings programme which, together with the disposal of a freehold property for £2.5 million in September 2024, improved the position.

The Directors seek to ensure that the Group retains appropriate funding arrangements and regularly and stringently monitor expected future requirements through the Group's annual budgeting, monthly forecasting and cash flow, and weekly and daily cash reporting processes in order to react immediately to a required change with maximum flexibility.     

Staff skills and retention

Our business model relies upon a certain standard and number of skilled individuals based on qualifications and project track record. Failure to retain such skills makes the strategies of the Group difficult to achieve.

The Group aims to ensure that knowledge is shared and that particular skills are not unique to just one individual.

The Group conducts external surveys to ensure that salaries and benefits are appropriate and comparable to market levels and endeavours to provide an attractive working environment for staff.

Staff training programmes, career appraisals and education assistance are provided, including helping our professionally qualified staff comply with their continuing professional development obligations. Training programmes take various forms including external courses and external speakers.

Quality of technical delivery

In common with other firms providing professional services, the Group is subject to the risk of claims of professional negligence from clients.

The Group seeks to minimise these risks by retaining skilled professionals at all levels and operating quality assurance systems which have many facets. These systems include identifying specific individuals whose roles include focusing on maintaining quality assurance standards and spreading best practice.

The Group's UK architecture operation is registered under ISO 9001 which reflects the quality of the internal systems under which we work. As part of these registrations an external assessor undertakes regular compliance reviews. In addition, as part of its service to members, the Mutual, which provides professional indemnity insurance to the UK, undertakes annual quality control assessments.

The Group's UK architecture businesses maintain professional indemnity insurance in respect of professional negligence claims but are exposed to the cost of excess deductibles on any successful claims. This insurance cover is provided by The Wren, which is an industry body formed to provide such insurance, and of which the Group's UK architecture businesses are members.  The Wren is a mutual organisation owned and funded by its members and accordingly, the Group's UK architecture businesses can be subject to cash calls alongside other members in the event The Wren's reserves fall to a level where its capital ratios are below the level required by its regulator.

Contract pricing

Fee proposals to clients are prepared by experienced practice directors who will be responsible for the delivery of the projects. Fee proposals are based on appropriate due diligence regarding the scope and nature of the project, knowledge of similar projects previously undertaken by the Group and estimates of the resources necessary to deliver the project. Fee proposals for larger projects are subject to review and approval by senior Group management and caveats are included where appropriate.

Under performing acquisitions

The acquisition of businesses for too high a price or which do not trade as expected can have a material negative impact on the Group, affecting results and cash, as well as absorbing excessive management time.

The Group invests senior management time and Group resources into both pre- and post-acquisition work. Pre-acquisition there is a due diligence process and price modelling based on several criteria. Agreements entered into are subject to commercial technical and legal review. Post-acquisition there is structured implementation planning and ongoing monitoring and review.

Cybersecurity Risk

An unauthorised intrusion, phishing infiltration, denial of service or some similar act by a malevolent party could disrupt the integrity, continuity, security and trust of the Group's systems, including those licenced to customers. Although the Group has protections and backup systems in place, should these protections fail or be breached in a cyber attack, this could impact the day to day operations of the Group and result in costly litigation, significant financial liability and a loss in confidence in the Group's ability to serve its clients securely, which could have a material adverse impact on the Group's business. In addition, due to the ever-evolving nature of these threats, the Group is required to continue to invest resources to enhance the Group's security systems. The Group has technical and physical controls in place to mitigate unauthorised access to client data, but may not be able to prevent a material event in the future.

The Strategic Report was approved by the Board on 21 March 2025 and signed on its behalf by

Nick Clark

Chief Executive