KRM22 plc (LON:KRM), the technology and software company focused on risk management in capital markets, has announced its audited results for the year ended 31 December 2020.
· Total revenue recognised of £4.6m (2019: £4.1m)
· A significantly improved adjusted EBITDA loss1 of £0.2m (2019: £3.1m)
· Annualised Recurring Revenue (ARR)2 as at 31 December 2020 of £4.3m (2019: £4.3m) at the 2020 constant rate (£4.1m at current rates)
o New contracted ARR in the year ended 31 December 2020 of £0.8m
· Gain on extinguishment of debt (net) of £0.7m
· Impairment of intangibles of £3.0m (2019: £2.3m)
· Loss before tax of £5.7m (2019: loss of £7.3m)
· Group Cash at 31 December 2020 of £2.0m (2019: £1.1m)
· Net increase in cash and cash equivalents of £0.9m (2019: outflow of £2.3m)
· Completed two capital raises in the year
o An equity fundraise in May 2020 raising gross proceeds of £1.3m through a placement and subscription for new ordinary shares
o Replacement of the Harbert £10.0m loan facility, of which we had drawn down £1.0m in 2019, with a new £3.0m convertible loan facility with Kestrel Partners in September 2020
· Acquisition of remaining 40% shareholding in KRM22 Market Surveillance in April 2020
· Managing the impact of COVID-19 with KRM22 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 £0.7m
· Soc 2 accreditation approved in March 2021
Keith Todd, Chief Executive Officer and Chairman of KRM22 plc, commented:
“2020 was a challenging year but we made good progress with new customer wins, improved quality of the customer base, the expansion of the Global Risk Platform (GRP) and a significant reduction in the Adjusted EBITDA loss. We now have a strong sales pipeline and suite of risk products on the GRP that will be the springboard for our future growth and delivery of the market expectations.”
1Adjusted EBITDA is the reported loss for the year, adjusted for recurring non-monetary costs including depreciation, amortisation gain on extinguishment of debt, unrealised foreign exchange loss, deferred salary bonus accrual write back and share-based payment charges and non-recurring costs including profit/(loss) on tangible/intangible assets, impairment charges, reorganisation costs and acquisition and funding costs.
2 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.
KRM22 continued to make good progress in 2020, winning top tier institutions and broadening its product offerings delivered through the Global Risk Platform. We are creating a powerful platform to help capital markets participants manage risk. The Company reported a small, adjusted EBITDA loss for the year of £0.2m compared with an adjusted EBITDA loss of £3.1m in 2019 on revenue of £4.6m (2019: £4.1m).
We completed one equity capital and one debt capital raise in 2020 to provide working capital and strengthen the balance sheet. This, together with the improving financial performance, provides KRM22 with a strong financial base for 2021.
When we started 2020, we did not envisage the dramatic impact the pandemic would have on the operating environment. In April 2020, we implemented cost cutting actions through a voluntary salary waiver that all team members participated in and general overhead reductions. In June 2020, we made some roles redundant as we continued to adjust to a slowing business climate. Travel was suspended and all team members operated from home from March 2020. There was little impact on our operating effectiveness as a result of the infrastructure and processes that we implemented from launch in 2018.
Our customers and prospects were however significantly impacted. Across the board the high volume of trading in March 2020 and April 2020, at a time when they were implementing home working for the first time, meant that there was no time for new initiatives and therefore consideration of our products was not an immediate priority. Whilst trading activity had evened out by the middle of the third quarter, adjustments to normal business practices had to be absorbed to support prospect and customer engagement through remote channels versus in person visits. The consequence of this was significant delays in new customer signings. However, despite this new contract wins in the year included the sale of new risk products to existing customers and the signing of a new contract for a suite of risk products with a major London based brokerage firm, with the customer seeing the benefits of our ability to simplify the cost and complexity of risk through technology delivered on one platform as a one-stop service. This impacted the carrying value of our intangibles, including goodwill, asset base too. We experienced an unprecedented impact of churn in the year as traders withdrew from trading while the trading pits were closed or suspended as well as some customer retrenching and reducing external spend. While some churn in 2021 can be expected as part of any market, we anticipate the level of churn going back to more normalised levels.
As we enter 2021, we are seeing strong engagement from prospects and existing customers.
Regulators are moving to an enforcement phase with increasing fines and threats of fines covering a plethora of regulatory areas. The pressure on cost efficiency, alongside regulatory compliance is top of the agenda.
Vision and mission
Our vision ‘A world in which organisations operate at their optimal threshold of risk to drive increased returns’ and mission ‘To bring increased visibility and lower cost risk management to capital market organisations’ have not changed since our inception.
Our ability to offer integrated functionality as a technology service significantly reduces the cost and complexity of managing risk for our customers. Most organisations are, in today’s market, tackling the challenges of an increase in costs added to historically costly infrastructure leading to a motivation to reduce cost. We are however on a journey with our customers to help them optimise business performance and thus deliver superior returns to their shareholders. We do this by providing cost effective risk tools as a service that eliminate multiple distinct applications that demand separate infrastructure and data sources. The replacement solution is one holistic Global Risk Platform that operates a series of risk based business processes, increasingly supported by AI tools, that operate on one single data source. As our journey progresses, and with customer agreement, we will be able to create risk benchmarks and indices that will fundamentally change how the industry measures itself. It is a truly exciting journey we are on.
What we sell
We position our product offerings within five domains of risk Enterprise, Market, Compliance, Operations and Technology. They are delivered through our single Global Risk Platform.
The Global Risk Platform is not sold as a separate product, it comes with any functional offering and includes the ability to receive news feeds, raise support questions and provides insight to other integrated risk offerings that are not currently used by the customer. The Global Risk Platform provides the unifying glue between the offerings, reduces integration costs and provides a platform for our growth. Our product offerings are supported by experienced subject matter experts which prospects and customers leverage to help define and manage risk on new instruments, respond to regulatory changes and build the ultimate risk platform tailored for each customer.
Our ‘Risk Cockpit’ offering has a full range of functionality to support real time enterprise risk as well as other department use cases. We have found that the application of what we know as the Risk Cockpit to have specific use cases within operations, compliance as well as others such as people and culture risk. The structured accountability framework, along with integrated risk functionality and dashboards, provides customers with a holistic view of a risk area and the ability to track and improve risk management. We are now exploring the use of AI to help predict risk events. This will become an add on sale to the core Risk Cockpit.
Our Market Risk offerings cover the life cycle of risk: Pre-trade, At-trade and Post-trade risk. The offerings are used across the spectrum of customers from Tier one banks to traders.
Our Compliance offerings cover a full range of regulatory requirements, the anchor of which is surveillance but extends across market abuse online training, digital on boarding (Know Your Customer) as well as regulatory reporting, enhanced individual due diligence and senior management regime. Our Compliance offering includes many partner products which expand what we can do for customers and leverages the partners investment in offerings as well as subject matter expertise.
We launched our People and Culture Risk offering in February 2021 in conjunction with Kintail Consulting as part of our Operations offering. This will leverage the Risk Cockpit functionality and online training partnerships and specifically addresses one of the industries key risk areas as identified by the Regulators – people and culture.
How we sell
We have a clear focus for increasing sales, starting with expanding sales to current customers and then targeting people we know and who are within our addressable market. We are increasing our online marketing presence as we are no longer able to attend physical industry conferences due to the pandemic. We specifically target a range of buying points within a customer organisation so that we can benefit from the master services agreement we have and internal cross referencing about the positive KRM22 experience.
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|
Technology as a service
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.
Organic growth is the central tenant of our business approach. In 2020 we secured £0.8m of new business however this organic growth was offset by an unprecedented level of existing customer churn in the year. We have implemented a sophisticated customer relationship management system that provides visibility and allows us to manage and track sales activities through completion of sales opportunities. We have a very strong pipeline of prospects across Enterprise, Market, Compliance and Operations risk.
We have implemented extensive business automation to ensure we have a scalable operational foundation covering customer acquisition, service delivery and through to financial control and administration. This will ensure that as we increase margin, we will also improve the bottom line performance.
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 established partnerships to complement our existing portfolio across Market, Compliance and Operations risk. We had to hold back on acquisitions and further partnerships in 2020 but we look to reignite these initiatives in 2021.
The investment in the team we have recruited and acquired is at the heart of our business. Team members know their roles and that KRM22 operates under the philosophy that business is a team game. The Board and I would like to thank the team for their commitment and work during a difficult year.
We are fully committed to our stakeholders including the communities in which we work. The Executive team and Board will take further action to establish a more comprehensive Environmental, Social and Governance (“ESG”) programme in 2021.
After a challenging 2020, we have entered the new financial year stronger than last year. A higher quality of customers that can grow with us and an extensive sale opportunities and prospects list, together with vaccines helping to bring the pandemic under control, we are confident of continuing our growth and delivering market expectations.
Keith Todd CBE
Executive Chairman and CEO
Despite the challenging trading conditions in the year due to the COVID-19 pandemic, total revenue recognised for the year was £4.6m, an increase of 11% on 2019 and adjusted EBITDA loss for the year was £0.2m, a significant reduction on 2019 when the Company reported an adjusted EBITDA loss of £3.1m. The reduction in adjusted EBITDA loss was a result of the continued tight control of the cost base, the full year effect of company reorganisations completed in 2019, together with a further reorganisation in 2020, and short-term cost savings through temporary salary sacrifices accepted by all staff in 2020.
Scope of financial results
This financial review focuses on the twelve month period ending 31 December 2020, whilst the prior year comparatives include the seven months of revenue and costs for the Object+ group of companies from the date of acquisition on 30 May 2019 and full year revenue and costs for all other KRM22 group companies.
Profit and Loss
Revenue recognised for the year to 31 December 2020 was £4.6m (2019: £4.1m), an increase of 11% compared with the prior year, with 91% (2019: 91%) of total revenue generated from recurring customer contracts. Non-recurring revenue the year ended 31 December 2020 totalled £0.4m (2019: £0.3m) and related principally to customer implementations and proof of concept work.
A key revenue metric for KRM22 is ARR (Annualised Recurring Revenue) and as at 31 December 2020, ARR was £4.1m at the year end FX rate or £4.3m at the FY20 average FX rate. KRM22 signed new contracted ARR in 2020 of £0.8m (2019: £0.7m) with £0.1m generated from Enterprise Risk products, £0.5m from Market Risk products and £0.2m from Compliance Risk products. The increase in ARR was offset by an increased level of churn and also impacted by the increased strengthening of Sterling against the US dollar.
Gross profit for the year to 31 December 2020 was £4.2m (2019: £3.7m) and the consistent gross profit margin of 90% continues to demonstrate the operating leverage of the business and indicates how the cost base can be covered efficiently as new recurring revenue contracts are signed.
Capitalised research and development
A total of £1.0m (2019: £1.5m) of research and development was capitalised in the year to 31 December 2020. Capitalised research and development is amortised over three years.
In the year ended 31 December 2020, impairment costs of £2.7m were recognised in connection with the recoverability of goodwill associated with the acquisition of KRM22 Market Surveillance, KRM22 ProOpticus and Object+ and impairment on account of trademarks at £0.3m. The impairment reflects the uncertain economic conditions in 2020 and in year revenue growth which was less than initial forecasts. The impairment does not reflect a change in the overall Group’s strategic outlook.
In response to delays in new customer contract signatures and general economic uncertainty as a result of COVID-19, a total or 8 FTE roles were made redundant and our Spanish operations were closed. As a result of the staff redundancies made in the year, a total of £0.4m (2019: £0.5m) of company reorganisation costs has been recognised in the year ended 31 December 2020.
Extinguishment of debt
On 16 April 2020, the Group acquired the remaining 40% minority interest in KRM22 Market Surveillance Limited (“KRM22 Market Surveillance”) from Cinnober Financial Technology AB (“Cinnober”). Under the terms of the transaction, a total of £2.9m in debt due to KRM22 and Cinnober (together the “Parent Companies”) together with £0.3m of other liabilities due to the Parent Companies was converted into ordinary shares in KRM22 Market Surveillance immediately prior to KRM22 consolidating its ownership of KRM22 Market Surveillance.
On completion of the debt to equity conversion in KRM22 Market Surveillance, KRM22 immediately acquired the remaining 40% stake in KRM22 Market Surveillance for a total consideration of £0.6m payable to Cinnober by way of a convertible loan note (CLN) provided by KRM22 to Cinnober. The CLN was for a one-year term and could be satisfied by either the allotment and issue of ordinary shares by no later than 31 July 2020 or settled by cash at any point in the CLN term, at the Company’s sole discretion. On 28 June 2020, the CLN was converted into 1,454,434 new ordinary shares at 38.4p per share in the Company and therefore no cash consideration was paid as part of the acquisition. The settlement of £1.3m of debt due to Cinnober, through the issue of the CLN, resulted in a gain on extinguishment of debt of £0.7m which has been recognised in the consolidated income statement for the year ended 31 December 2020.
Adjusted EBITDA is the key metric that the Company considers 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 2020 was a £0.2m loss (2019: loss of £3.1m) and was in line market forecasts and a significant reduction on prior year. The reduction in Adjusted EBITDA loss was driven by new sales, tight management of the underlying cost base of the business, the full year impact of cost savings plans and company reorganisations implemented in 2019, a further company reorganisation implemented in June 2020 and reduced salaries paid in the year due to the voluntary temporary salary sacrifice scheme. A reconciliation of Adjusted EBITDA loss to the reported operating loss is provided as follows:
|Adjusted EBITDA loss||(0.2)||(3.1)|
|Depreciation and amortisation||(1.7)||(1.3)|
|Unrealised FX losses||(0.2)||–|
|Impairment of intangible assets||(3.0)||(2.3)|
|Contingent consideration write back||0.3||1.5|
|Acquisition and debt expenses||(0.4)||(0.4)|
|Gain on extinguishment of debt (net)||0.7||–|
|Group restructuring costs||(0.4)||(0.5)|
|Deferred salary bonus accrual write back||0.4||–|
|Shared-based payment expense||(0.9)||(1.0)|
Net finance expense in the year was £0.3m (2019: £0.2m) and includes:
· Interest paid of £0.1m (2019: £0.1m), inclusive of early repayment charges of 5%, on the Harbert debt facility;
· Interest accrued/paid on the Kestrel Convertible Loan Facility of £0.1m; and
· IFRS16 lease liability interest of £0.1m (2019: £0.1m).
The tax credit in the year was £0.2m (2019: credit of £0.8m) which includes £0.1m (2019: £0.6m) R&D tax credit received.
Reported operating loss
Reported operating loss for the year to 31 December 2020 was £5.5m (2019: loss of £6.5m).
The cash balance as at 31 December 2020 was £2.0m (2019: £1.1m).
Current assets at 31 December 2020 include trade and other receivables of £1.4m (2019: £1.4m).
Non-current assets were £9.2m (2019: £13.1m) relating principally to: £6.7m for goodwill and assets acquired (2019: £10.4m), £1.0m for right of use assets recognised under IFRS16 (2019: £1.6m) and £1.3m (2019: £0.8m) for capitalised development costs.
As at 31 December 2020, our principal liabilities were:
· £3.0m Convertible Loan owed to Kestrel Partners LLP. The interest rate payable on the loan is 9.5% payable in cash quarterly in arears. The loan can be converted into new Ordinary Shares in the Company at any time at a conversion price of 38p and the conversion can be requested by Kestrel Partners at any time. The Company has the right to request conversion eighteen months following the date of the agreement, subject to certain conditions regarding the Company’s share price at that time.
· £0.8m (US$1.1m) discounted contingent consideration (£1.1m (US$1.6m) undiscounted) for earn out payments for the acquisition of Object+. The contingent consideration can be satisfied in either cash or Company or ordinary shares at the Company’s discretion. The undiscounted contingent consideration of US$1.6m was reduced by US$0.5m, reflecting re-appraisal of expected cash outflows given probable conditions at the statement of financial position date and this adjustment has been included in the discounted liability of £0.8m recognised at the statement of financial position date.
· £1.0m 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 2021, with the balance for periods greater than one year.
· £1.5m 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 KRM22 Market Surveillance, 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 was removed from the statement of financial position in the year ended 31 December 2020.
As an AIM-listed business, a large proportion of KRM22’s shareholders are professional investment funds. In addition, the Directors together owned 3,701,389 shares at the year end.
On 13 May 2020, the Company raised £1.3m gross proceeds in equity funding through a subscription and placement of 4,266,664 new shares at 30 pence per share.
On 15 September 2020, KRM22 entered into an agreement for a new three year £3.0m convertible loan facility (the “Convertible Loan”) with Kestrel Partners LLP (“Kestrel”), the Company’s largest shareholder following the fundraise completed on 13 May 2020. The proceeds of the Convertible Loan were used to replace the Company’s existing debt facility (the “Debt Facility”) provided Harbert European Growth Capital Fund II (“Harbert”). The outstanding balance of the Debt Facility, inclusive of loan principal, accrued interest and early repayment charges of 5%, was £0.8m.
In conjunction with the Debt Facility, the Company issued warrants over 495,049 new ordinary shares in the Company to Harbert with an exercise price of £1.01 per ordinary share. Whilst the balance of the Debt Facility was settled, the warrants remain in place and are exercisable by Harbert until 29 April 2029.
The interest rate payable on the Convertible Loan is 9.5% per annum, which compares favourably to the 11% per annum interest rate on the Harbert Debt Facility, and is paid quarterly in arrears. Kestrel can convert the Convertible Loan into new ordinary shares in the Company at any time at a conversion price of 38p. The Company has the right to request conversion 18 months following the date of the agreement, subject to certain conditions regarding the Company’s share price at that time. Kestrel has the right to prevent any conversion which would trigger a Rule 9 event under the Takeover Code.
The Convertible Loan is secured on certain KRM22 assets and includes covenants based on the Group’s financial performance, based on ARR, solvency and profitability.
COVID-19 reinforced the principle that companies need access to greater to liquidity to address uncertainties, extended sales cycles and provide potential customers with confidence in the financial strength of the Group. In addition, the Convertible Loan strengthened the financial position of the Company and provides access to working capital and growth capital.
Use of cash in the year
Our net cash inflow in the year was £0.9m, which included the £3.0m Kestrel Convertible Loan receipt, of which £1.0m was used for capitalised research and development, £0.9m was used to settle the Harbert Debt Facility and the balance was used to provide working capital for KRM22.
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 2020, KRM22 had 26,719,127 shares in issue. The undiluted weighted average number of shares for the period to 31 December 2020 was 24,414,093. The difference in the two numbers results from the timing of shares issued for the equity fundraise completed on 13 May 2020 and the conversion of the Cinnober Convertible Loan Note on 28 June 2020.
The resulting Earning per Share (“EPS”) is a 24.1p loss per share (2019: loss of 30.4p) on a weighted average number of shares basis (equivalent to 24,414,093 on the shares in issue at year end). Due to the loss made, diluted EPS is the same as EPS.
We aim to deliver capital growth for shareholders to generate an attractive total return. However we do not recommend a dividend for the year, but may choose to do so in future years.
Whilst 2020 has been challenging in terms of time taken to convert the sales pipeline and increased customer churn, adjusted EBITDA loss has reduced to £0.2m from £3.1m in 2019 and total recognised revenue has increased to £4.6m from £4.1m in 2019. The Kestrel Convertible Loan has helped strengthen the financial position of KRM22 and this, together with the sales pipeline opportunities, means that KRM22 is well placed for growth in 2021.