AUDITED RESULTS FOR THE YEAR ENDED 31 DEC 2019

 

 

KRM22 plc
("KRM22", the "Group" and the "Company")

 

AUDITED RESULTS STATEMENT FOR THE YEAR ENDED 31 DECEMBER 2019

 

KRM22 plc (AIM: KRM), the technology and software company focused on risk management in capital markets, announces its audited results for the year ended 31 December 2019 ("2019", the "Year"). 

 

Financial highlights

·    Total revenue recognised of £4.1m (2018 - £1.3m, based on seven months and three months post-acquisition revenue from Irisium and ProOpticus respectively)

·    Annualised Recurring Revenue (ARR):

o  Current undisputed ARR of £4.0m (May 2020)

o  ARR at 31 December 2019 of £4.3m (2018 - £3.3m)

o  Net organic ARR growth of 21% in the year (2018 - 10%) including 33% ARR growth from institutional customers

o  Acquired ARR growth of £0.5m from the acquisition of Object+

·    Adjusted EBITDA loss of £3.1m (2018 - loss of £3.3m)

·    Loss before tax of £7.3m (2018 - loss of £5.4m)

·    Cash at 31 December 2019 of £1.1m (2018 - £3.4m)

·    Net cash outflow of £2.3m (2018 - inflow of £3.3m)

·    Raised gross proceeds of £2.8m through a placement and subscription for new ordinary shares

·    Agreed a £10.0m loan facility with an initial drawdown of £1.0m in April 2019 and a committed £0.5m drawdown in 2020 available at the Company's discretion

 

Operational highlights

·    Acquisition of Object+ in May 2019 to provide a suite of "pre-trade" and "at trade" market risk applications to complement existing "post-trade" applications

·    Global Risk Platform and Enterprise Risk Cockpit launched in March 2019 and first significant customer of Enterprise Risk Cockpit in October 2019

·    Six new partnerships signed covering client onboarding, enhanced due diligence, online training, individual accountability regime and regulatory reporting

 

Post Year end matters

·    Acquired the remaining 40% non-controlling interest in Irisium from Cinnober on 16 April 2020

·    Raised gross proceeds of £1.3m in a placing and subscription of shares in May 2020

·    Current cash position of £1.4m

 

 

Keith Todd, Chief Executive Officer and Chairman of KRM22 plc, commented:

"We made significant progress in 2019 launching the KRM22 Global Risk Platform with its range of market risk and regulatory services.  In the later part of 2019, we suspended our acquisition activity and focussed on organic growth in which we are continuing with this plan through 2020 and the 'COVID' crisis.  I am pleased to say that the business is operating very effectively working from home as a result of the automation and flexible working we established from day one.  We are confident of further progress with new and existing customers providing organic growth and remain confident of meeting management expectations."

 

 

 

For further information please contact:

 

KRM22 plc                                                                                                           [email protected]

Keith Todd CBE, Executive Chairman and CEO

Kim Suter, CFO

 

 

finnCap Ltd (Nominated Adviser and Sole Broker)                                                         +44 (0)20 7220 0500

Carl Holmes / Kate Bannatyne / Matthew Radley

Alice Lane/Sunila de Silva (ECM)

 

The information communicated in this announcement is inside information for the purposes of Article 7 of Regulation 596/2014.

 

 

About KRM22 plc

KRM22 is a closed-ended investment company which listed on AIM on 30 April 2018.  The Company has been established with the objective of creating value for its investors through the investment in, and subsequent growth and development of, target companies in the technology and software sector, with a focus on risk management in capital markets.

 

Through its investments and the Global Risk Platform, KRM22 helps capital market companies reduce the cost and complexity of risk management. The Global Risk Platform provides applications to help address firms' regulatory, market, technology and operations risk challenges and to manage their entire enterprise risk profile.

 

Capital markets companies' partner with KRM22 to optimise risk management systems and processes, improving profitability and expanding opportunities to increase portfolio returns by leveraging risk as alpha.

 

KRM22 PLC is quoted on AIM and the Group is headquartered in London, with offices in several of the world's major financial centres.

 

See more about KRM22 at KRM22.com.

 

 

CHAIRMAN'S STATEMENT

 

2019 was the first full year of KRM22 as a trading public company, during which the Group has made significant progress on many fronts.

·    We have delivered on our strategy to acquire specialised risk management software and subject matter expertise, develop the underlying technology of the Global Risk Platform, and establish partnerships with third-party applications

·    We have delivered a financial performance in line with market expectations on adjusted EBITDA loss

·    We have built a foundation for future business growth

 

Financial performance

We have reported revenues of £4.1m (£1.3m in 2018) and our Annual Recurring Revenue (ARR) as at 31 December 2019 was £4.3m (£3.3m in 2018).  In 2019 we reported £0.3m of non-recurring income and we expect to contract at least a similar level in 2020.  Since 31 December 2019 we have generated an additional £0.1m ARR from existing customers buying new products however one existing customer, using the surveillance product, has terminated their contract for £0.1m ARR and two contracts with ARR of £0.4m combined in dispute.  At the date of this report we have undisputed ARR of £4.0m from 34 customers.

 

As a result of our tight control of costs and deferral of some investments, we have achieved an EBITDA loss inline with our market forecasts at £3.1m (2018 - adjusted EBITDA loss of £3.3m).  Adjusted EBITDA is a key metric in order to understand the cash profitability of the business as it excludes exceptional cash items such as acquisition costs and non-cash items including share-based payment charges, depreciation, amortisation and impairments, reorganisation costs and disposal of assets.  At the date of this report, our operational cost base is currently running at £4.6m per annum.

 

To achieve adjusted EBITDA positive on a run rate basis in 2020 we need to recognise total revenue of £5.0m and this can be achieved if we sign additional ARR in new business above the £4.3m ARR recognised at 31 December 2019 together with anticipated non-recurring revenue, a continued containment of operating costs and taking into account known customer churn in 2020.

 

We spent £1.5m on capitalised software development in 2019 but currently plan to spend £0.8m in 2020.

 

Cash at 31 December 2019 was £1.1m.  We benefit from commercial terms where customers pay in advance, either annually or quarterly, and as a result, new customer wins generate cash before revenue is reported.  In addition, we continue to have the Harbert Debt Facility available to us, which allows for drawdowns in £0.5m increments, based on annual recurring revenue growth and we anticipate receiving a tax R&D credit.  Cash as at the date of this report is £1.4m, following receipt of £1.1m for the Placing Shares from the placement completed on 14 May 2020.

 

Strategy

Our strategy consists of six core pillars that ensure we build a successful company.

 

'Foundation of the business'	'Driving Growth'
Technology as a service	Organic growth
Business automation	Acquisitions
Team effectiveness	Partnerships

 

At the heart of our philosophy is the concept of reducing the cost and complexity of risk management for customers through technology delivered on an open platform, while driving increased business margins for investors.

 

Our Global Risk Platform is live and being used by customers to access our risk management applications.  We now have thirteen applications accessible through the platform and we are well advanced in integrating the common utilities.  The platform provides efficiency and reduced cost for customers.

 

We launched the Enterprise Risk Cockpit in March 2019, our first native application available through the Global Risk Platform, and achieved our first significant Enterprise Risk customer contract in October 2019.

 

Acquisitions and commercial partnerships

We have been clear from the start of KRM22 that we build, acquire and partner to bring products to the Global Risk Platform and therefore to our customers and prospects.  We have now completed four acquisitions since inception, including the acquisition of the Enterprise Risk expert team, and eight partnerships.  In May 2019 we acquired Object+, a provider of pre-trade and at-trade risk management applications.  The team has been fully integrated, and we have made our first sale to a new customer for one of the products, which was in Asia.

 

We have established partnerships to complement our existing portfolio across regulatory, market and operational risk.  Revenue from partnerships has been low so far, with only one partnership product sold in 2019, however we are expecting to see an increase in partnership sales in 2020.

 

Business automation

We have implemented extensive business automation to ensure we have a scalable operational foundation covering customer acquisition and service, through to financial control and administration.  This will ensure the maximum margin can drop to the bottom line.

 

Team effectiveness

The investment in the team we have recruited and acquired is at the heart of our engine.  We have clear company values:

·    Focus wins

·    Business is a team game

·    Clear accountabilities for all

These guiding principles, along with the team appraisal process and open internal communication, help to ensure we achieve optimal team performance.

 

Organic growth

Organic growth is at the heart of our business approach.  In 2019, our net organic growth was 21%.

 

Through our business automation program, we have implemented a sophisticated customer relationship management system that provides visibility and allows us to manage and track activities through completion of sales opportunities.  The Global Risk Platform facilitates cross selling through its single logon facility, allowing all users to see the other applications which KRM22 provides, but also by the shared data utilities which offers increased operational and cost efficiency for customers.  We have a very strong pipeline of prospects across enterprise, market, regulatory and operations risk.

 

COVID-19

The rapid spread of the coronavirus and resulting COVID-19 global pandemic has had an operational and financial impact on KRM22.  We are seeing that sales cycles for contracts are extending due to restrictions imposed by governments across the world and due to the high volatility in markets and trading volumes increasing daily workloads for our customers and prospects. 

 

We have taken action to mitigate the financial impact by implementing further cost cutting actions which is expected to reduce the overall cost-base of KRM22 by over £1.0m over twelve months through salary sacrifices for all staff, general overhead reductions, reduced spend on travel as a result of the restrictions imposed pursuant to COVID-19 and reduced property and office costs.  The cost reductions will not affect KRM22's ability to support its existing customers or win new potential customers.

 

KRM22 is fully operational globally from home as a result of the infrastructure and processes that were implemented from launch.

 

Our foundation for growth

Since 30 April 2018 when we listed, we have built the core of a business that is now a springboard for growth.  The business development team is represented across major financial centers worldwide in the US, London, Singapore and Sydney enabling us to support local opportunities as well as global customers.  The array of offerings accessible through the Global Risk Platform increases cross sell opportunities and provide highly competitive functionality at competitive cost.

 

The Board

Garry Jones, Steve Sparke and Kim Suter joined the board and bring a wealth of Industry credibility and contacts to assist us on the next phase of growth.  I would again like to thank Karen Bach, David Ellis, Jim Oliff and Matt Reed who stepped down from the board for the insights and assistance during the formation and early period of KRM22.

 

The team and communities

We could not have achieved so much without the energy and commitment of our team for which the board and I thank them.

 

We have been able to support a few charities, including 'Future for Kids', as part of our commitment to fulfilling a full role in our industry and community.

 

Outlook

The coronavirus (COVID-19) pandemic and related risks and uncertainties continue to evolve however we are confident that we will deliver on our growth and adjusted EBITDA profit plans.

 

 

 

Keith Todd CBE

Executive Chairman and CEO

 

 

 

FINANCIAL REVIEW

 

The 2019 financial results for KRM22 reflect our first full year of trading in which we have grown revenue, increased our contracted annualised recurring revenue (ARR), completed an acquisition and managed tight control of our cost base.  2018 was a trading year however the financial results were driven largely by transactions in the period since IPO on 30 April 2018.

 

Scope of financial results

This financial review focuses on the twelve month period ending 31 December 2019 and include the results of the Object+ group of companies from 30 May 2019, whilst the prior year comparatives include twelve months of costs for the core KRM22 group and the revenue of Irisium and ProOpticus from the date of acquisition on 5 June 2018 and 25 September 2018 respectively.

 

The financial results of the entities acquired in the year (Object+) have been aligned with IFRS and KRM22's accounting policies.

 

Acquisitions

 

Object+

On 30 May 2019, we acquired 100% of the issued share capital and voting rights of Object+ Holding B.V. ("Object+").

 

Amsterdam-based Object+, provides post-trade services software and, at the time of investment had 8 institutional customers and £0.5m ARR.  Revenue generated by Object+ in 2019 in the seven months post acquisition was £0.4m.

 

On completion of the acquisition of Object+, KRM22 paid US$0.5m (£0.4m) in cash consideration and issued 606,909 KRM22 Plc shares to the Object+ vendors.  Based on the revenue growth of Object+ products and services, a total discounted earn out consideration of US$1.5m (£1.2m) (undiscounted earn-out consideration of US$2.7m (£2.3m)) may be payable in three tranches over a three year period following acquisition, payable in cash or shares, at KRM22's discretion.

 

Profit and Loss

 

Total revenue

Revenue recognised for the year to 31 December 2019 was £4.1m (2018 - £1.3m) and this was seven months of revenue generated by Object+ (£0.4m) and twelve months of revenue generated by remaining KRM22 group companies.  Revenue recognised in 2018 was based on seven months of revenue generated by Irisium and three months of revenue generated by ProOpticus.

 

Revenue generated from recurring customer contracts for the year ended 31 December 2019 was 91% (2018 - 87%).  In addition, KRM22 generates some non-recurring revenue related principally to customer implementations and, following the acquisition of Object+, legacy recurring consultancy revenue.  Non-recurring revenue recognised for the year ended 31 December 2019 was £0.3m (2018 - £0.2m).

 

Recurring revenue

The key revenue metric for KRM22 is ARR (Annualised Recurring Revenue) and as at 31 December 2019, we had grown ARR by £1.0m to £4.3m, which included acquired ARR of £0.5m following the acquisition of Object+.  Since 31 December 2019, we have signed new contracts totalling £0.1m however one customer has terminated their contract for £0.1m ARR for cost purposes and two customers with total ARR of £0.4m are in dispute.  At the date of this report, KRM22 has non-disputed contracted ARR of £4.0m.

Whilst ARR growth in 2019 was behind market forecasts, net organic growth in 2019 was 21% (2018 - 10%) which includes 33% ARR growth from institutional customers.  This growth in ARR validates our strategic approach to acquiring and scaling businesses through our shared network and customer base, and the streamlining of back office functions.

 

Gross profit

Gross profit for the year to 31 December 2019 was £3.7m (2018 - £1.1m) and included £0.4m gross profit contribution from Object+.  This 90% gross profit margin demonstrates the operating leverage of the business and indicates how we can cover our cost base efficiently as we sell new recurring revenue contracts.

 

Capitalised research and development

Our total investment in research and development for the year to 31 December 2019 was £2.5m (2018 - £2.7m).  Of this, £1.5m or 60% was capitalised and the amount of development capitalised by product was:

·    KRM22 Global Risk Platform £0.5m;

·    KRM22 Enterprise Risk Cockpit £0.1m;

·    Irisium £0.7m;

·    ProOpticus £0.1m; and

·    Object+ £0.1m. 

Capitalised research and development is amortised over three years.

 

Impairment

In the year ended 31 December 2019, impairment costs of £2.3m were recognised in connection with market surveillance development costs.  The carrying amount of these development costs has been impaired on the basis that development work has been suspended in 2020 due to lack of capital and it is therefore prudent to assume that capitalised development costs will not generate cash inflows in the near future.

 

Reorganisation costs

A total of £0.5m of company reorganisation costs has been recognised in the year ended 31 December 2019 and were a result of staff redundancies made in the year.  The key drivers of the redundancies were:

·    Synergies as a result of Irisium and ProOpticus, the acquisitions completed in 2018, being fully integrated into central KRM22 systems;

·    Delays in new customer contract signatures; and

·    Fundraising challenges experienced in the year to continue our acquisition strategy. 

At the start of 2019 KRM22 planned to raise additional funding to continue the acquisition strategy of investing in specialised risk management businesses however, as a result of market circumstances, with Brexit uncertainty and the effect of revised FCA regulation on fund liquidity, KRM22 was not able to secure the necessary funding to complete all planned acquisition opportunities.  The limited access to funding impaired the ability to close all the acquisition opportunities and investments planned, resulting in KRM22 scaling back certain business operations resulting in staff redundancies. 

 

Adjusted EBITDA

We believe the Adjusted EBITDA is the key metric to consider in order to understand the cash-profitability of the business.  This is 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 year to 31 December 2019 was a £3.1m loss (2018 - loss of £3.3m) and was inline with market forecasts.  The Adjusted EBITDA loss is as per the reported operating loss, adjusted for:

·    Depreciation and amortisation £1.3m;

·    Impairment charges £2.3m;

·    Contingent consideration write back £1.4m;

·    Reorganisation costs £0.5m;

·    Non-recurring costs of acquisitions of £0.2m;

·    Non-recurring costs of debt and equity funding £0.2m; and

·    Share-based payment cost £1.0m.

 

Finance charges

Net finance expense in the year was £0.2m (2018 - £0.1m) and includes:

·    accrued interest due on the Cinnober shareholder loan of £0.1m;

·    interest paid of £0.1m on the initial £1.0m draw down on the Harbert debt facility before accounting for a £0.1m fair value gain on the warrants issued in conjunction with the debt facility; and

·    IFRS16 lease liability interest of £0.1m.

 

Taxation

The tax credit in the year was £0.8m (2018 - credit of £0.0m) which includes £0.6m (2018 - £nil) R&D tax credit received. 

 

Reported operating loss

Reported operating loss for the year to 31 December 2019 was £6.5m (2018 - loss of £5.4m). 

 

Balance sheet

 

Assets

As at 31 December 2019, we held current assets of £1.1m cash (2018 - £3.4m) and trade and other receivables of £1.4m (2018 - £1.1m).

 

Non-current assets were £13.1m (2018 - £12.4m) relating principally to: £10.4m for goodwill and assets acquired (2018 - £8.7m), £1.6m for right of use assets recognised under IFRS16 (2018 - £1.6m) and £0.8m (2018 - £1.8m) for capitalised development costs.

 

Liabilities

As at 31 December 2019, our principal liabilities were:

·    £1.2m minority shareholder loan owned to Cinnober by Irisium.  Cinnober owned 40% of Irisium and this balance includes capitalised interest.  The loan and capitalised interest was converted to equity on 16 April 2020 and replaced by a convertible loan note.

·    £0.8m loan owed to Harbert European Growth Capital Fund II.  The interest rate payable on the loan is 11% per annum, is repayable in monthly instalments and will be repaid in full by October 2022.

·    £1.1m (US$1.5m) discounted contingent consideration (£1.7m (US$2.2m) undiscounted) for earn out payments for the acquisition of Object+. 

·    £1.5m for the right of use of assets relating to all future payments of leased-office rentals under IFRS16 'Leases' whereby such lease payments are provided for at today's value.  In practice, these rental payments will be spread over the next few years.  As a result, £0.5m of the related liability is shown in current liabilities as it relates to lease payments that will be paid in 2020, with the balance for periods greater than one year.

·    There is £1.1m of contingent revenue; contracted and paid services that will be released in a future period.

 

Investors

As an AIM-listed business, a large proportion of KRM22's shareholders are professional investment funds.  In addition, the Directors together owned 3,463,334 shares at the year end.

 

Funding

On 3 April 2019, we raised £1.8m gross proceeds in equity funding through a subscription and placement of 2,118,967 new shares at 85 pence per share.  Subsequently on 7 November 2019, we raised £1.0m gross proceeds and issued 1,895,765 new shares at 52 pence per share.  Funding fees for both transactions totalled £0.1m.

 

On 29 April 2019, we entered into a five-year debt facility (the "Debt Facility") with Harbert European Growth Capital Fund II ("Harbert") to support future business growth.  The Debt Facility is for up to £10.0m of which an initial £1.0m was drawn down on 30 April 2019.  The availability of additional drawdowns is based on the value and growth of KRM22's annualised recurring revenues.  Drawdowns can be made until 31 December 2020.

 

The interest rate payable is 11% per annum on the initial £1.0m drawdown.  The interest rate payable on future additional drawdowns will be at the higher of 11% or 11% plus one year EURO Libor.  The Debt Facility is secured on certain KRM22 assets however there are no covenants based on KRM22's financial performance.

 

In conjunction with the Debt Facility, the Company has constituted warrants over a number of Ordinary shares in the Company to Harbert with a total value equal to a maximum of £1.0m.  Upon initial drawdown, warrants over 495,049 new Ordinary Shares were issued with an exercise price of £1.01 per Ordinary Share.  Additional warrants will be issued in an amount equal to 5.6% of each subsequent drawdown of the Facility (up to a maximum value of £500,000 in aggregate) calculated by reference to an exercise price of the lower of a 10% discount to the prevailing market price or £1.01 per new Ordinary Share.

 

Since year end we have raised £1.3m of gross proceeds in equity funding.

 

Use of cash in the year

Our net cash outflow in the year was £2.3m, of which, £1.5m was used for capitalised research and development, £0.4m was used to fund the acquisition of Object+, £0.8m for acquisition and funding fees and the balance used for building the infrastructure of KRM22.

 

Going concern

Analysis of KRM22's going concern position is detailed in note 2 (notes to the financial information).

 

Shareholdings and Earnings per share

As at 31 December 2019, KRM22 had 20,998,029 shares in issue.  The undiluted weighted average number of shares for the period to 31 December 2019 was 18,552,176.  The difference in the two numbers results from the timing of shares issued for the equity fundraise completed on 3 April 2019 and 7 November 2019 and the Object+ acquisition on 30 May 2019.

 

The resulting Earning per Share ("EPS") is a 30.4p loss per share (2018 - loss of 55.5p) on a weighted average number of shares basis (equivalent to 18,552,176 on the shares in issue at year end).  Due to the loss made, diluted EPS is the same as EPS.

 

Financial processes and integration

As KRM22 continues to grow, we aim to support that growth by effective and efficient internal systems and processes.  When KRM22 completes an acquisition, the detailed financial history of the acquired company is fully transferred onto central KRM22 systems with bank accounts and all processes centrally managed.  The agile integration approach not only establishes good governance but also frees up the acquired management team and allows them to focus on customers, product development and growth.  Object+ was fully integrated into central KRM22 systems by 31 December 2019.

 

Dividend

We aim to deliver capital growth for shareholders to generate an attractive total return.  Accordingly, we do not recommend a dividend for the year, but may choose to do so in future years.

 

Conclusion

Whilst 2019 has been challenging in terms of fundraising to continue our acquisition strategy and time taken to convert the sales pipeline, we have recognised revenue of £4.1m, increased ARR by £1.0m, achieved organic growth of 21%, maintained strong relationships with institutional customers, expanded our product offering and restructured our cost base to utilise operational efficiencies.

 

 

 

Kim Suter

CFO