Final Results

27 September 2022

K3 CAPITAL GROUP PLC

("K3", the "Company" and including its subsidiaries the "Group")

Final audited results for the year ending 31 May 2022 

Strong growth across three divisions, significantly ahead of prior year

K3 Capital Group plc, a multi-disciplinary and complementary group providing specialist advisory services to SMEs, is pleased to announce its final results for the year ended 31 May 2022.

Financial overview

· Group revenue increased by 50% to £70.7m (FY 2021: 47.2m) with strong organic growth of 24%**

· All divisions recording growth in revenues and profits:

o  Business Sales: Revenue £21.6m (FY 2021: £16m) (organic growth of 21%), EBITDA £10.8m (FY 2021 £8.3m)

o  Tax: Revenue £11.6m (FY 2021: £5.2m) (organic growth of 35%), EBITDA £5.9m (FY 2021 £3.1m)

o  Restructuring: Revenue £37.5m (FY 2021: £25.9m) (organic growth of 21%), EBITDA £6.7m (FY 2021 £6.0m)

· Group Adjusted EBITDA* growth of 30% to £20.4m (FY 2021: £15.7m*)

· Cash £13.7m (FY 2021: £14.3m), providing significant headroom to fund organic investment and acquisition opportunities

· Adjusted earnings per share*** 20.64p (FY 2021: 18.56p)

· Recommended final dividend of 8.1p per share, resulting in a total dividend for the year of 12.1p (FY21: 9.1p)

* See note 9 - alternative performance measures - for a reconciliation of profit before tax to Adjusted EBITDA and see note 6 for a calculation of adjusted EPS.

** adjusts prior year to give a full 12 month comparison

*** Refer to note 6

Operational overview

· Market opportunity robust across all divisions:

o  Business Sales: SME M&A market resilient with the Group seeing more sellers being mandated and more transactions completed than ever before

o  Tax Advisory: Record number of claims submitted to HMRC together with an acceleration in new client acquisition providing growth in contracted and recurring tax revenues 

o  Restructuring: growing demand evidenced through increasing appointment levels as SMEs face economic headwinds and unwinding of covid Government support

· Continued growth in national and international presence through investment in headcount and new office openings

· Progressive dividend policy continues to deliver value to shareholders 

Current trading and outlook

Commenting on the results, Non-Executive Chairman of K3 Capital Group plc, Ian Mattioli said:

"FY22 has been yet another brilliant year for K3 Capital Group and its team. The diligent work of the Board and employees across the Group has been exemplary and the quality of these results reflect that. My thanks goes out to all those who have contributed to the success of the Company over the last year.

"Despite a turbulent macro-economic environment, the team has delivered growth in both revenues and profits for the year and, I am particularly pleased with the increase in organic revenue growth across the Group. The business sales, tax and restructuring divisions have all made material contributions to this, highlighting the quality and expertise we have in our staff across the Group.

"Throughout the year the Board has successfully executed its strategy to drive growth through the acquisition of SME focused advisory businesses. We welcomed Knight Corporate Finance and Knight R&D to the Group in July 2021 and they are already making material contributions to the performance of the Group. JE Consulting also joined the Group in March 2022 and further diversified the services we can offer our clients. The performance of these acquisitions and the speed at which they have started to contribute to the Group's overall growth further strengthens the Board's commitment to this strategy.

"FY22 has been transformational for K3 as it continues to develop. The business has the foundations in place to be recognised as the leading mid-market specialist advisory business to SMEs. The Board remains confident in the outlook for FY23 and beyond, as early indicators show yet another strong year of trading ahead, with a robust pipeline and opportunities to grow."

John Rigby, CEO of K3 Capital Group plc said:

"I am delighted with the performance of the team over the past year, underpinned by the continued execution of the Board's strategy, delivering results ahead of expectations and driving value for shareholders. We believe it has been a pivotal year in creating a Group that we now see as extremely robust throughout the economic cycle.

"We are able to give clients a complete service offering, across our three divisions, providing advisory services and support to SMEs across the business life cycle. The Group continues to deliver results amidst a challenging macro-economic environment and our team has worked tirelessly to ensure clients receive an exceptional level of service .

"At the end of the year we are well positioned to continue this upwards trajectory and early signs looking into the new financial year are encouraging, with revenue across the three business divisions significantly ahead of the same period last year.

"K3 Capital, its staff and the Board look to the future with confidence as our diversified group with quality brands at its core continue to deliver against our strategy and achieve growth rates at the forefront of the sector and peer group."

Investor Presentation

John Rigby, Chief Executive Officer and Andy Melbourne, Chief Financial Officer, will provide a live presentation relating to the Group's full year results via the Investor Meet Company platform on 30 September 2022 at 11am. The presentation is open to all existing and potential shareholders and registration can be completed via the following link: https://www.investormeetcompany.com/k3-capital-group-plc/register-investor

Notice of Annual General Meeting

The annual report will be mailed to shareholders (including the notice) and will be made available on our website today.

K3 Capital Group's Annual General Meeting will take place on 25 October 2022 at 10:00am at KBS House, 5 Springfield Court, Summerfield Road, Bolton, BL3 2NT.

For further information, please contact:

About K3 

K3 Capital Group plc (AIM:K3C) is a multi-disciplinary and complementary group providing specialist advisory services to SMEs, incorporating Business and Company Sales, Restructuring and Insolvency and Tax Advisory services. The Group floated on the London Stock Exchange's Alternative Investment Market (AIM) in April 2017.

Services provided by the Group fall into three key operating divisions:

Business Sales Division:

· Company sales and business brokerage

· Corporate finance services

· Transaction services

· Debt advisory 

Tax Division:

· Research and development tax credit advisory

· Tax investigations

· Tax planning

· Tax advisory 

Restructuring Division:

· Restructuring advisory

· Financial advisory

· Creditor services

· Forensic accounting and expert witness

· Pensions advisory

· Accelerated M&A

Chairman's statement

I am very pleased to report on a year of significant progress for the Group, with results ahead of market expectations due to record performance driven by double digit organic growth, supplemented with growth from acquisitions in the year.

I would like to put on record my sincerest gratitude to my fellow Board members and all employees at K3 Capital Group plc ("K3") for their professionalism and dedication in continuing our growth journey that has seen the Group complete and integrate six acquisitions since the start of FY21 and deliver compound annual growth in revenue since 2019 of 71%. A very strong performance given the impact of world and domestic events during the period, including the ongoing impacts of COVID-19 and Brexit, in addition to the war in Ukraine.

I am pleased to report growth in both revenue and profits for FY22. Group revenues stood at £70.7m for FY22 (FY21: £47.2m), deriving a gross profit of £45.9m (FY21: £33.4m) which delivered £20.4m of Adjusted EBITDA* for the period (FY21: £15.7m). Cash was £13.7m (FY21: £14.3m). Adjusted EPS*** for the year was up by 2p to 21p (FY21: 19p) having adjusted for costs relating to the acquisitions, with actual EPS being 13p for the period (FY21: 8p).

Growth strategy

It is the Board's strategy, through both acquisition and organic growth, to continue building a diversified professional services group which can deliver success across the economic cycle. Our strategy is to bring together businesses which can benefit from the Group's unique distribution platforms, incorporating direct marketing, cross-selling opportunities and an ever-expanding professional introducers' network through our K3 Hub platform.

Our growth strategy remains broadly similar to last year, including:

· Investigating further complementary, SME focussed acquisition targets that could fall within our existing service lines or indeed form a further division.

· Continuing to execute a data and marketing driven approach to new client acquisition enabled by our proprietary Globe technology and leading SME dataset.

· Lateral hires and new office openings to grow our domestic and international footprint.

· Expanding and developing our K3 Hub network of referrers and introducers of work.

· Driving further cross selling opportunities with education, training and incentivisation across the Group companies.

Board and people

During FY22, the K3 Capital Group Board remained unchanged. Following the appointment of Carl Jackson and Charlotte Stranner in FY21, we feel the Board is currently well balanced and suitable for the next phase of our growth strategy.

The Board considers attracting and retaining talented and qualified people as a key part of its growth strategy. It is important to ensure that all staff maintain a common interest in the future success of the Group, and therefore the Board continued with the Save-as-you-Earn scheme during the period, allowing all employees of the Group to buy in to the Company's journey and enjoy its success through financial incentives.

The Board remains confident in its ability to continue to attract talented employees, as K3's stature within the UK professional services marketplace continues to grow. This is evident from the general growth of our headcount and fee earner base during the year and also the recruitment during FY22 of Ian Symes as Group Managing Director. Ian brings a wealth of experience having joined us from ManpowerGroup where he was Executive Vice President and global leader of the Right Management brand, a HR solutions business employing more than 900 staff across 35 countries and with revenues of more than $200m. Ian has held senior executive roles in Electrolux, Cisco and across different ManpowerGroup businesses. He comes with extensive international experience having led businesses across Europe, North America and globally.

We remain proactive in searching for the best available talent and I am delighted to report that we continue to grow our headcount in order to service our growing number of clients.

Group financials

As reported, revenues for the year stood at £70.7m (FY21: £47.2m), which generated an Adjusted EBITDA* of £20.4m (FY21: £15.7m) and an operating profit of £13.0m (FY21: £7.7m).

Cash at the year end stood at £13.7m (FY21: £14.3m).

Group net assets at 31 May 2022 were £66.5m (FY21: £49.2m) with current net assets standing at £15.1m (FY21: £9.9m). As a result, the Board is recommending a final dividend payment of 8.1p per share in addition to the interim dividend paid of 4.0p per share. This results in a total dividend for the year of 12.1p (FY21: 9.1p).

The Board remains committed to the dividend policy as detailed in the Strategic report, whilst maintaining an appropriate level of dividend cover. If approved, the final dividend is expected to be paid on 28 October 2022 with a record date of 7 October 2022.

Annual General Meeting

The K3 Annual General Meeting will take place on 25 October 2022 at 10:00am at KBS House, 5 Springfield Court, Summerfield Road, Bolton, BL3 2NT. Notice will be posted on the Company's website at: www.k3capitalgroupplc.com

Looking ahead

We are confident in the Group's outlook for FY23 and beyond, and we are delighted with the impact that the new companies and employees we have welcomed to the Group throughout the past financial year have had on the growth of K3.

Our Business Sales division continues to lead the UK rankings as the number 1 advisor by deal volume and as we enter FY23 with record levels of transactions in the legal process, we are confident in our ability to continue the journey of strong organic growth in the division.

Our Restructuring and Insolvency division has achieved double digit, organic growth against the significant headwinds of a subdued insolvency market and as those headwinds turn to tailwinds and the SME market continues to feel the pressures of the wider macro-economic turmoil and pressures we are confident that our investment in both our UK and overseas footprint will yield excellent growth and provide the Group with strong counter cyclical revenues.

Our Tax division which benefits from a high degree of contracted and therefore recurring revenue has delivered £5.9m EBITDA in FY22. With a continued approach to leverage our data and marketing platform across that division to drive further organic growth together with the wider opportunity to diversify into other specialist areas of taxation we see a strong future for the division.

The Group has seen a strong start to trading in FY23, delivering turnover of in excess of £20m and Adjusted EBITDA of c.£6.5m* in the three months to 31st August.

Overall, we anticipate that growth will continue across all divisions of the Group, both organic and through selective acquisitions and I believe the Group is in a strong position to deliver on its market expectations for FY23 and beyond. Our mid-term ambition remains to be recognised as the leading mid-market specialist advisory business to SMEs across our chosen disciplines both in the UK and across specific offshore locations with an ambition to achieve £50m EBITDA.

Ian Mattioli MBE

Non-Executive Chairman

26 September 2022

* See note 9 - alternative performance measures - for a reconciliation of profit before tax to Adjusted EBITDA and see note 6 for a calculation of adjusted EPS.

** adjusts prior year to give a full 12 month comparison

Chief Executive Officer's Report

A multi-disciplinary Group providing complementary and specialist advisory services to SMEs

FY22 has been another year of impressive performance for K3 Capital Group plc, driven by the continued execution of the Group's strategy. The Group reported a strong period of growth across all three business divisions despite uncertain wider macro-economic conditions.

Notable highlights throughout FY22 include strong organic revenue growth, the successful integration and growth acceleration of complementary acquisitions and new service lines, including debt advisory, tax advisory, and transaction services, providing further cross-selling opportunities within the Group's SME client base.

Each of the Group's divisions are experiencing growing revenues as our data-driven marketing platform and cross-referral network are leveraged across the Group. The Business Sales division has delivered a record year driven by continued organic growth momentum enabled by the Group's data driven marketing technology platform. The Restructuring division has grown well, whilst at the same time investing in both its UK business and its overseas office footprint and is seeing increasing demand for its services and a number of high-profile job wins. The Tax division has seen both organic and inorganic growth, to deliver a triple-digit increase in revenues of which a high proportion are recurring in nature.

A year of organic and inorganic growth

The period has seen the Group comfortably outperform original market expectations and deliver significantly ahead of FY21, as the acquisitions made in the prior period created what is now a diversified group, delivering high levels of organic growth as part of K3.

The Group's cash balance closed the year on £13.7m (FY21: £14.3m), giving the desired headroom after dividends and tax payments to fund smaller bolt-on acquisitions and allowing us flexibility alongside the Group's debt facility when considering larger deals.

The growth experienced throughout FY22 has been largely driven by:-

Once again, FY22 performance highlighted the importance of the Group's volume approach driven by process, technology and systems, which has seen K3 build ever-increasing visibility and robustness of future revenues through transaction fee pipelines, contracted clients and recurring revenue, delivering more cyclically balanced revenue streams across economic cycles.

Acquisitions in FY22

The Board continues to explore complementary acquisitions and bolt-ons to create an even more robust Group that can not only withstand but thrive in the face of wider macro-economic pressures and provide market-leading services to SMEs throughout the business lifecycle.

In July 2021, the Group completed the acquisitions of Knight CF and Knight R&D following a successful fundraise. These acquisitions have provided sector specific expertise to our existing corporate finance and R&D tax offerings, as well as paving the way for the development of transaction services to the Business Sales division, following the acquisition of Knight Transaction Services. As we grow our business, sector specialism becomes increasingly important and the industry-specific knowledge that comes with these acquisitions has been highly beneficial in contributing to growth during FY22.

In March 2022, the Group completed the acquisition of a professional services marketing agency, Professional Insight Marketing Ltd which trades as JE Consulting. JE Consulting is a full-service marketing agency specialising in digital and creative services to SMEs operating in the accountancy, legal and healthcare markets. The acquisition complements the Group's growth strategy by expanding and deepening the services of the K3 Hub, a centre for accountants in practice to access specialist advice, services and CPD (Continuing Professional Development) training. The acquisition strengthens the Group's presence at a time when the professional services sector is expanding, particularly in the accountancy space and further diversifies K3's recurring revenue streams.

Post year end, the Board continues to investigate a pipeline of further complementary, SME focussed acquisition targets that could fall within our existing service lines or indeed form a new division in order to further broaden our service offerings and provide additional diversification. 

We believe that the foundations are firmly in place for K3 to be recognised as the leading mid-market specialist advisory business to SMEs across our chosen disciplines both in the UK and across specific offshore locations.

Business Sales Division

K3's Business Sales division has performed exceptionally well throughout FY22, posting record levels of revenue (£21.6m, FY21: £16.0m) and EBITDA (£10.8m, FY21: £8.3m), which have been generated through the mandating of more sellers, and the completing of more transactions than ever before, which have increased by 53% and 56% respectively over the last two financial years.

Organic revenue growth for the division sat at 25%, which was complemented by the acquisition of Knight CF in July 2021 which has continued to grow as part of K3. Following the acquisition, Knight Transaction Services has had a strong post acquisition period fuelled by Group cross-selling opportunities, contributing £0.5m to revenue and £0.3m to profit before tax.

The introduction of Knight CF to K3's Business Sales division has added sector-specialisms within the telecoms and technology areas, in line with the Group's strategy to acquire complementary and value accretive businesses to build out its existing SME-focussed service lines. Knight CF has had a strong start as part of the K3 Capital Group, contributing £1.8m to revenue and £0.9m to profit before tax.

The Business Sales division's unique data driven marketing platform has been carefully designed to drive growth rather than relying on positive macro trends, which has resulted in increasing volumes of sell-side clients, new buyer registrations and, ultimately, overall transaction numbers. This has created a division that is sector and buyer type agnostic, with performance very much underpinned by the volume brands (Knightsbridge and KBS Corporate), ensuring that larger corporate finance transactions are still seen as upside opportunities. This has ensured that the business continues to be driven by its contingent fee pipeline, which provides increasing visibility of the future revenues.

Market Mapping Limited and K3 Debt Advisory Limited continue to grow and build momentum and have particularly benefitted from the cross-selling opportunities offered as part of the enlarged Group.

Restructuring Division

The Group's Restructuring division has posted double digit organic growth alongside the acquisition of Professional Marketing Insight Limited (trading as JE Consulting - "JEC") into the division, as revenues rise by 45% (£37.5m, FY21: £25.9m) and has seen growth in EBITDA (£6.7m, FY21: £6.0m) despite challenging market conditions, and investment into new overseas offices.

During the period, investment in headcount and the division's fee earner base (FY22: 250, FY21: 225) continued in anticipation of significant increases in activity levels as demand in the UK insolvency market grows following the removal of government support as a result of the COVID-19 pandemic, and a challenging economy for SMEs.

Our Restructuring division has performed well against this difficult backdrop, resulting in growth which has been driven by:

· continued investment in lateral hires and;

· continued build out of our overseas teams and locations

In continuing investment in our Restructuring division, in the year, we established a further three businesses:

Tax Division

K3 Capital Group's Tax division performed well during the period, delivering triple-digit growth in revenues (£11.6m, FY21: £5.2m), 35% of which is organic**, as well as an 90% increase in EBITDA (£5.9m, FY21 £3.1m) for the period.

The division continues to benefit from a high degree of contracted and recurring revenue, with the now added upside from the sector specialisms offered by the acquisition of Knight R&D, whilst Randd continues to grow as the division's volume brand.

The continued investment and resource in the K3 distribution platform and the integration of our volume data and marketing approach has led to record levels of HMRC R&D Tax Credit submissions, and we remain excited and encouraged about the future opportunities for this service line and the potential for even further growth ahead.

The launch of K3 Tax Advisory in FY21 further broadened our service offerings in FY22 and allowed the division to develop new revenue streams which has been driven by the abundance of cross-selling opportunities that are being delivered as part of the wider Group.

Strategy

The Board's strategy is to continue to deliver growth both organically and through further selective and accretive acquisitions. During the period, we directly employed an Acquisitions Director to identify and pursue relevant opportunities. We believe that the Group can continue to build and expand its existing divisions and core service lines through:

We believe there continues to be the opportunity to create a group of significant scale within the Business Sales, Restructuring and Tax arenas as demand for high quality, independent and conflict free advice grows against the macro and socio-economic challenges that UK businesses are facing.

K3's ability to promote its brands and services either directly to SMEs through its sales and marketing platform, or through the Group's K3 Hub accountancy network, means the Board sees significant opportunities ahead to continue growing the existing three divisions.

Our Acquisitions Director continues to consider acquisitions within alternative SME-focused service lines which are complementary to the Group's existing offerings and could either benefit from K3's existing distribution platforms or bring further strategic advantage to the wider Group.

Throughout the period, the Board have considered a number of opportunities with strict criteria around the accretive effect, the strategic fit, the cultural fit, the quality of the people and management and ultimately the commercial aspects of any transaction. Our refined strategy surrounding how the Group approaches a transaction, and how any proposed deal is structured to incentivise the key stakeholders and employees of the acquired business to become part of the Group will be an important factor in our continued success with this strategy.

Current trading and future outlook

The Board is delighted with the Group's FY22 financial performance, especially when taking into account wider macro-economic conditions. We believe it has been a pivotal year in creating a Group that we now see as extremely robust throughout the economic cycle, as we continue on our journey to create a leading multi-disciplinary Group providing complementary and specialist advisory services to SMEs.

I believe that the performance seen throughout the period emphasises that the direction and strategy which the Board has implemented can deliver significant value to all stakeholders of the Group, and K3 Capital Group is now in a better position than it ever has been to deliver high quality services to SMEs across the entire business lifecycle and deliver long-term value to investors.

The record year of trading performance that has been delivered by the Group's Business Sales division, has been driven by a strong blend of organic and inorganic growth. Improving KPI performance and growing transaction fee pipelines, underpin our expectations for FY23 and beyond.

Our Tax division now offers broader service lines and greater scale following the acquisition of Knight R&D and the further establishment of K3 Tax Advisory. We are encouraged by the high degree of contracted and recurring revenue, and our growing client base driven by the launch of Randd Globe (a tailored version of KBS Globe, our proprietary sales CRM system) which indicates a continuation of growth within the division.

Our Restructuring division is encouraged that the insolvency market is showing strong signs of recovery following the withdrawal of pandemic-related Government support, the unwinding of legislative changes and the many inflationary challenges facing UK SMEs. We are confident that our investment in both our UK fee earner base and our overseas office network will deliver strong growth in FY23 and beyond.

The Board is confident that the outlook for FY23 and beyond is positive as we continue to deliver on our strategy of organic revenue growth, the successful integration and growth acceleration of complementary acquisitions, and the development of new service lines providing further cross-selling opportunities within the Group. FY23 has started strongly with turnover from all three divisions in the three month period to 31 August trading significantly ahead of the same period in the prior year, with the Group delivering total turnover in excess of £20m and Adjusted EBITDA* of c.£6.5m.

John Rigby

Chief Executive Officer

26 September 2022

* See note 9 - alternative performance measures - for a reconciliation of profit before tax to Adjusted EBITDA and see note 6 for a calculation of adjusted EPS.

** adjusts prior year to give a full 12 month comparison

Strategic Report

The Directors present their strategic report for the year ended 31 May 2022 ("FY22").

Principal activities

During the year under review, the principal activities of K3 Capital Group plc (the "Company") together with its wholly owned and partially owned subsidiaries (the "Group") consisted of the provision of professional advisory services categorised into three main service pillars as follows:

K3 Business Sales Advisory Group Limited ("Business Sales") -

· Company sales

· Corporate Finance services

· Business brokerage services

· Transaction services

· Off-market acquisitions

K3 Restructuring Advisory Group Limited ("Restructuring") -

· Restructuring advisory: formal insolvency appointments; informal restructuring advisory; personal insolvency and pension restructuring, and insolvency advice.

· Financial advisory: comprehensive analysis of business performance through business toolkit; independent reviews; stakeholder management and turnaround; and interim support.

· Creditor Services: creditor representation; and liquidations.

· Forensic accounting and expert witness: forensic investigations; intelligence; and forensic accounting.

· Pensions advisory: corporate and trustee advisory; pension scheme restructuring advisory; covenant advisory; and expert witness.

K3 Tax Advisory Group Limited ("Tax") -

· Research & Development tax credit advisory

· Tax investigations

· Tax planning

· Tax advisory focussed on corporate finance transactions

· The Group considers itself to be a multi-disciplinary and complementary professional services group advising UK SMEs and with some operations overseas.

Financial Review

During the period under review, the Group has continued to make a number of synergistic acquisitions to expand the services offered into the Tax and Business Sales divisions. As such, reference to Group turnover and profits are not directly comparable with prior year, however segmental splits are provided. Divisional reference to Restructuring activity for FY22 is broadly comparable with Restructuring activity in FY21, with the small addition of JEC for Q4.

Revenue

Group revenue in the period significantly increased from £47.2m to £70.7m, a rise of 50%, in part due to acquisitions as detailed throughout this report.

Business Sales revenues grew overall from £16.0m to £21.6m (35%) in the period. This division made the acquisition of Knight Corporate Finance in the period, which contributed revenue of £1.8m (with 11 months consolidated in FY22). Including post acquisition growth and comparing against a full 12 month prior period, the Business Sales division has delivered organic growth of 25% on FY21. An element of this organic growth has been derived from the new Transaction Services business, acquired in July 2021, which delivered £0.5m of revenue from a standing start.

The period under review has seen the continued proven resilience of the M&A market at the lower end of the SME service delivery in which the Group predominantly operates. The Group has seen an 19% increase in the number of client completions compared to the prior year which resulted in the retention of the title 'the UK's most active dealmaker' based on volume by globally recognised third party league tables. The latest review of the Refinitiv 'Global Mid-Market M&A Review', at the date of this report sees K3 Capital Group named as most active UK advisor in H1 of calendar 2022, completing 50% more transactions than 2nd place. This table also names K3 Capital Group as third most active in Europe and seventh in the world, underlining the investments made over many years into client service delivery through a combination of technology and experience. 

In addition to completions, the Business Sales division has also seen continued growth in main operational KPIs. Excluding acquisitions, there has been organic growth in activity with the period seeing a 19% increase in the volume of non-disclosure agreements signed by potential buyers, a 25% increase in the volume of buyer meetings arranged with clients, and a 22% increase in the volume of offers received for clients businesses. These trends give the Board great comfort alongside the pipeline of client transactions carried into FY23 and confidence of the strength of this market.

The Tax division saw revenue grow from £5.2m to £11.6m (123%) in the period, largely due to the acquisition of Knight R&D in July 2021. The acquisition contributed revenue of £3.8m, with 11 months consolidated in FY22. Including post acquisition growth and comparing against a full 12 month prior period, the Tax division has delivered organic growth of 35%** on FY21. An element of this organic growth has been derived from establishing K3 Tax Advisory, a new service line introduced in July 2021 and delivered £0.8m of revenue in the first 11 months of trading.

During interim reporting, it was noted there had been a small decline in the number of claims submitted to HMRC in respect of R&D tax reclaims, which management were addressing in H2. The Group are pleased to report that FY22 has resulted in an annual increase of 9% in HMRC submissions by randd on a full 12 month comparative period, and an overall divisional increase of 48% when taking into account the acquisition of Knight R&D. This is due to a combination of more efficient internal processes, and also the introduction of a direct marketing engine which has seen a significant increase in new client wins compared to the prior period.

The Restructuring division has seen revenue grow from £25.9m to £37.5m (45%), whilst the acquisition of JE Consulting in February 2022 provided £0.4m of revenue in the period, the remaining increase has been entirely organic, representing 21% organic revenue growth**. The period has seen the launch of new offices in Singapore, Dubai and Poland, with the expansion of the Cayman office into BVI. This now gives the Quantuma brand an established global presence and a strong footprint for international work wins.

The UK restructuring market has been under well documented pressure over recent years due to significant government support to SME's during and post Covid. However, there are now strong signs of the insolvency market recovering following the withdrawal of pandemic-related Government support and the unwinding of legislative changes, in addition to new challenges facing UK SME including inflation and rising energy costs. As per the official UK insolvency statistics report in FY22 Q4 (March - May 2022) there were 5,922 insolvencies which compares to 2,928 (102% increase) in the same quarter in 2021 and 3,378 in 2020, and even surpasses pre-covid levels of 4,379 in 2019 which was more representative of historical UK statistics. Whilst the return of the market may have been slower than most had expected, the Group sees encouraging activity levels, with Quantuma maintaining market share in the region of 4% of the UK market, which has grown 74% from FY21 to FY22.

Cost of sales, distribution costs, and administrative costs

Following strategic acquisitions in FY21, the structure of cost base in the period under review is largely unchanged in comparison to prior year. The cost base has increased to £55.1m (FY21: £39.4m), but whilst acquisitions undertaken in the period have added £3.6m of costs in the period, the main increase comes from a full year of FY21 acquisitions and further investment into employees to support growing revenue lines.

The Group has continued to invest in people by expanding existing services and creating new service lines, which has seen headcount grow significantly once more in the period. The average number of employees across the Group rose by 33% in FY22 to 545 (FY21: 410). The period under review saw successful efforts to centralise the finance function, and has seen positive movement towards centralising HR and IT functions at Group level to ensure efficiencies are created whilst minimising risk and maximising group coherence. The Group continues to encourage maximum utilisation of staff, with a number of client projects being carried out by employees across the Group. The period under review has seen many successful client journeys where employees specialising in business sales, transaction services, tax advice, restructuring and R&D reclaims have all been involved at various touchpoints through the process, ensuring professional fees are retained within the group whilst maximising utilisation of staff and streamlining the client experience. 

The largest increase in costs has been derived from payroll costs increasing by 36% from £27.6m to £37.9m. The aforementioned increase in headcount is the largest driver behind this increase along with performance related pay. Whilst the UK is currently experiencing cost of living pressures, the Group continues to employ various tried and tested remuneration structures to reward individuals with performance-based earnings, alleviating some inflationary pressures with focus on take home as opposed to basic salary.

Adjusted EBITDA

Group adjusted EBITDA* in the period under review has grown significantly to £20.4m for FY22, up 30% from prior year (FY21: £15.7m). EBITDA has been adjusted for exceptional items relating to acquisitions, deemed remuneration, professional fees relating to establishing a maiden debt facility, and for charges arising from share based payments.

There has been a decline in adjusted EBITDA* margin to 29% (FY21: 33%), however this margin represents a highly diverse operation with counter cyclical and recurring revenue streams, delivering more certainty on future performance, and a more robust business model that will be further expanded over time. The Group expects sustainable margins to be c50% for Business Sales and Tax divisions, with c20% in the Restructuring division. The success of each will influence overall Group margin, as seen with FY22, the growth in Restructuring revenue has seen a decline in overall margin due to its cost base and revenue model.

Share Based Payments

Since the AIM listing, the Group has a record of rewarding employees through equity, in order to align employees with the long term and sustainable growth plan set by the Board. In previous periods, the Group has deployed Long Term Incentive Plan (LTIP) shares to employees with 50% of vesting criteria linked to Group financial performance and 50% linked to Total Shareholder Return over the life of the awards.

Following the close of the LTIP, the use of Growth Shares had been adopted by the Board as the incentive scheme of choice. All Growth Shares are held in a subsidiary company (K3 Advisory Group Limited) and may be swapped for K3 Capital Group plc shares subject to a target share price being achieved at a point in time 3-5 years from issue (typically double the share price on issue) and also subject to annual individual performance targets plus the requirement to remain employed to the end of the performance period.

During the year, a further 1,110,236 share options were issued to employees. A total of 247,546 share options lapsed in the period due to ceased employment or performance targets not being achieved. As the original LTIP schemes have now matured and are able to be exercised, the period also saw 153,897 LTIP shares exercised.

Finally, during the period a second Save As You Earn (SAYE) scheme launched for all employees in the Group. Further to the FY21 launch with 455,006 shares across 100 employees, this second launch saw an additional 160,236 shares issued across the 94 people who participated, whilst the period saw a total of 38,542 SAYE shares (6% of SAYE issued to date) lapse due to ceasing of employment. The Directors believe the strong uptake of these SAYE schemes shows long term commitment from employees to the future of K3 Capital Group plc. It is the Board's intention to open SAYE schemes every 12 months in order to allow new entrants to the scheme to share in the future success of the Group.

As at 31 May 2022, a total of 425,666 share options had vested and 5,440,781 were still within performance periods.

Acquisitions

During the year, the Group made three acquisitions:

· Knight Corporate Finance Group on 9th July 2021 for an initial consideration of £3.5m (on a cash free, debt free basis with normal levels of working capital), and further contingent deemed remuneration up to a maximum of £2.25m (payable in a combination of cash and shares) subject to EBITDA targets over the four financial years to FY25. In addition to this, a further payment capped at £3.0m will fall due at the end of FY26 linked directly to the EBITDA of Knight Transaction Services which commenced trading post acquisition.

For the financial year ended 31 March 2021, Knight Corporate Finance Group generated revenue of £1.71 million and normalised EBITDA** of £0.78 million, representing a c46% normalised EBITDA** margin (unaudited).

· Knight R&D on 9 July 2021 for an initial consideration of £10.9m (on a cash free debt free basis with normal levels of working capital), with further contingent deemed remuneration / contingent consideration up to a maximum of £7m (payable in a combination of cash and shares) subject to EBITDA targets over the four financial years to FY25.

· Professional Insight Marketing (trading as JE Consulting) on 28 February 2022 for an initial consideration of £2.7m (on a cash free debt free basis with normal levels of working capital), with further contingent deemed remuneration up to a maximum of £2.25m (payable in a combination of cash and shares) subject to EBITDA targets over the four financial years to FY26.

Exceptional Items

There were a total of £3.9m exceptional costs in FY22 (FY21 £6.0m). The majority of these costs in the period relate to deemed remuneration on Quantuma, Knight CFG and Knight R&D (total £2.2m FY22). Deemed remuneration relates to consideration on acquisitions where there is an obligation of the vendors to provide services to the Group post-acquisition for a fixed period of time, this consideration is charged to profits over the life of post-acquisition service.

Other exceptional items in the period relate to professional fees on both completed and aborted transactions and share based payment expenses.

Profit Before Tax

The Group generated a Profit Before Tax of £12.7m, a 67% increase on the prior year (FY21: £7.6m).

Taxation

The effective tax rate is 25% which is lower than the prior year (FY21: 32.1%) due to less disallowable expenses relating to acquisitions.

Earnings Per Share

Based on the weighted average of 72.7m shares in issue (FY21: 65.2m), the basic earnings per share (see note 6) was 13.11p for the year (FY21: 7.93p).

When adjusted for exceptional items (see note 6), basic adjusted earnings per share*** has increased in FY22 to 20.64p from 18.56p FY21.

Liquidity

The Group has been historically cash generative and continues to be in a strong financial position. At the end of the period under review, the Group had cash reserves of £13.7m (FY21: £14.3m). As all acquisitions to date have been made with normal levels of working capital, it is expected the Group will continue to be cash generative at an operational level, providing sufficient cover for future contingent payments relating to the acquisitions and also in order to maintain the Group's stated dividend policy.

During the period under review, the Group made use of the debt facility established in FY21 being a £10m revolving credit facility with a further £5m accordion approved though not committed. A total of £2.2m was drawn on this facility to complete the acquisition of Professional Insight Marketing in February 2022. The purpose of the balance of this facility is to support the Group's stated strategy of continuing to grow through acquisitions of complementary professional services businesses. The facility expires in May 2023.

Fundraising

In July 2021, the Group completed a fundraising of £10.0m (before expenses) through the issue of 2,941,934 shares at a price of £3.40 per share by means of a placing. On 9 July 2021, the cash raised was utilised for the acquisitions of Knight Corporate Finance Group and Knight R&D. The balance of funds raised were used to cover costs relating to both acquisitions.

Cash Flow

The Group's cash balances decreased from £14.3m at the end of FY21 to £13.7m at the end of FY22. Following a series of acquisitions in FY20, it was the Group's stated position to be broadly cash neutral over a three year period whilst settling cash elements of contingent acquisition payments and maintaining an attractive dividend pay out. The period under review has seen £7.4m of dividends paid out in addition to £2.6m of deemed remuneration payments and £0.9m of contingent consideration payments.

All acquisitions have been made on a cash free debt free basis, subject to normal levels of working capital. The nature of working capital as a Group has changed over the period, however the Group remains cash generative on an operational level, delivering an adjusted EBITDA* to operating cash conversion rate of 54%. The reduction in this on prior years largely relates to the growth of the restructuring division owing to the build up of unbilled revenue and debtors from the returning market and an increase in activity over the life of a restructuring process.

Net Assets

At 31 May 2022, net assets were £66.5m (May 21: £49.2m). £11.4m of the increase in net assets is due to issued share capital and share premium relating to shares issued to fund acquisitions in the period. The period has also seen further increases in intangible assets and contingent consideration relating to acquisitions, in addition to Right of Use assets and lease liabilities inherited through acquisitions. The period under review has seen a substantial increase in both trade receivables and unbilled income. Of this increase, c£2.5m of the year end position relates to Knight R&D and Knight CF which were both acquired in the period.

Dividend

In the prior period, the Board started a new dividend policy for future financial periods. This revised progressive policy is intended to allow sufficient cash and distributable reserves to build over future years in order to satisfy contingent payments linked to acquisitions, whilst also reserving cash from overperformance to fund potential future acquisitions.

As such, the Board is still committed to a progressive dividend policy over two financial years, being a 12.1p dividend per share ("DPS") in FY22 and 15.5p DPS in FY23. As per previous years, this will be paid approximately 1/3 on interim results and the balance on annual results.

In light of the 4.0p DPS paid on interim results, the Board is recommending an 8.1p final dividend per share (FY21: 6.1p final DPS). Subject to approval by shareholders, the final dividend is expected to be paid on 28 October 2022 with a record date of 7 October 2022. If the final dividend is approved, the total dividends paid by the Company relating to FY22 will be 12.10p per eligible ordinary share, a 33% increase on prior year (2021: 9.1p).

Financial Instruments

Company policy regarding financial instruments and risk management are disclosed in note 30 of the financial statements, available on the Company website.

Going Concern

The Group has been profitable and cash generative throughout its trading history. K3 Capital Group has shown resilience and robustness over time, including during the recent global pandemic and ensuing time of economic uncertainty.

The period ends with £13.7m of cash reserves and an undrawn £7.8m revolving credit facility, with a further £5m accordion option available if required. As the Group remains cash generative, the Directors believe there are sufficient resources to continue trading in line with expectations, and maintain reserves in order to satisfy expected dividend payments, contingent payments linked to acquisitions, and also still allow the Group to act at pace as new acquisition targets are identified.

The Directors confirm they have a reasonable expectation that the Company has adequate resources to continue in operational existence for at least 12 months from the date of signing these financial statements. Equally the stated dividend policy is such to ensure sufficient reserves to meet contingent acquisition payments whilst retaining strong levels of reserves and working capital.

This confirmation is made after having reviewed assumptions about future trading performance (including several downside scenarios), valuation projections, capital expenditure, asset purchases and debt requirements contained within the Group's current five-year plan. In addition to this, the Board has prepared detailed cash flow forecasts for the period to 31 May 2024 for the wider Group. Under the worst case scenarios, the Group is still expected to remain cash positive for at least the next 12 months. The Directors also considered potential risks and uncertainties in the business, such as credit, market and liquidity risks, including the availability of bank facilities. Further stress testing has been carried out to ensure the Group has sufficient cash resources to continue in operation for at least the next 12 months.

This stress testing included extreme downside scenarios with materially reduced levels of cash receipts over the period. These downside scenarios excluded any mitigating actions that the Board would be able to take to reduce costs. As the Board have demonstrated in previous years, other than employee costs, the Group generally has a low fixed cost base with the ability to significantly reduce marketing spend, general overheads, and payroll costs (due to performance linked pay). Under these scenarios, the Group would still expect to remain cash positive for at least the next 12 months from the date of this report. Furthermore the Directors have not identified any material uncertainties that may cast significant doubt about the Group's ability to continue to adopt the going concern basis of accounting for a period of at least 12 months from the date when the financial statements are authorised for issue.

Based on the above, together with available market information and the Directors' knowledge and experience of the Group's client portfolio and markets, the Directors continue to adopt the going concern basis in preparing the accounts for the year ended 31 May 2022.

Share Price

The market price per share of the Company's shares at 31 May 2022 was 275.0p (31 May 2021: 373.5p) and the range of market prices during the year was between 215.0p and 392.5p.

Strategic Report

This Strategic Report was approved by the Board of Directors on 26 September 2022 and signed on its behalf by:

Andrew Melbourne

Chief Financial Officer

26 September 2022

* See note 9 - alternative performance measures - for a reconciliation of profit before tax to Adjusted EBITDA and see note 6 for a calculation of adjusted EPS.

** adjusts prior year to give a full 12 month comparison

All results are from continuing operations.

* Refer to note 2

* Refer to note 2

1. Basis of preparation

K3 Capital PLC ("the Company") is a public company limited by shares, registered in England and Wales and domiciled in the UK, with company registration number 06102618. The principal activity is providing a range of specialist advisory services to SMEs across Business Sales, Restructuring and Tax advisory. The registered office is KBS House, 5 Springfield Court, Summerfield Road, Bolton, BL3 2NT.

The financial information set out in this preliminary announcement does not constitute statutory accounts as defined by section 434 of the Companies Act 2006.

These Group financial statements have been prepared on a going concern basis under the historical cost convention, modified for the revaluation of certain financial instruments; in accordance with UK-adopted International Accounting Standards and with the requirements of the Companies Act 2006 as applicable to companies reporting under those standards.

The results for the year ended 31 May 2022 have been extracted from the full accounts of the Group for that year which received an unqualified auditor's report and which have not yet been delivered to the Registrar of Companies. The financial information for the year ended 31 May 2021 is derived from the statutory accounts for that year, which have been delivered to the Registrar of Companies. The report of the auditor on those filed accounts was unqualified. The accounts for the year ended 31 May 2022 and 31 May 2021 did not contain a statement under s498 (1) to (4) of the Companies Act 2006. The statutory accounts for the year ended 31 May 2022 will be posted to shareholders at least 21 days before the Annual General Meeting and made available on our website on Tuesday 27 September 2022 and on request by contacting the Company Secretary at the Company's Registered Office.

The Directors have prepared this financial information on the fundamental assumption that the Group is a going concern and will continue to trade for at least 12 months following the date of approval of the financial information.

The principal accounting policies adopted are set out below.

Basis of Consolidation

The Group financial statements consolidate the results of the company, K3 Capital Group plc, and its subsidiaries (together referred to as the "Group").

Subsidiary undertakings acquired are included using the acquisition method of accounting. Under this method the consolidated statement of comprehensive income, consolidated statement of financial position and consolidated statement of cash flows include the results and cash flows of subsidiaries from the date of acquisition and to the date of sale outside the Group in the case of disposals of subsidiaries.

Where the Company has control over an investee, it is classified as a subsidiary. The Company controls an investee if all three of the following elements are present: power over the investee, exposure to variable returns from the investee, and the ability of the investor to use its power to affect those variable returns. Control is reassessed whenever facts and circumstances indicate that there may be a change in any of these elements of control.

New standards, amendments to and interpretations to published standards not yet effective

There are a number of standards, amendments to standards, and interpretations which have been issued by the IASB that are effective in future accounting periods that the Group has decided not to adopt early.

IFRS 17 - Insurance Contracts

Amendments to IFRS 10 and IAS 28 - Sale or Contribution of Assets between an Investor and its Associate or Joint Venture

Amendments to IAS 1 - Classification of liabilities as current or non-current

Amendments to IFRS 3 - Reference to the conceptual framework

Amendments to IAS 16 - Property, Plant and Equipment: Proceeds Before Intended Use

Amendments to IAS 37 - Onerous Contracts - Cost of Fulfilling a Contract

Annual improvements to IFRS Standards 2018-2020 Cycle - Amendments to IFRS 1 First-time Adoption of International Financial Reporting Standards, IFRS 9 Financial Instruments, IFRS 16 Leases, and IAS 41 Agriculture

Amendments to IAS 1 and IFRS Practice Statement 2 - Disclosure of Accounting Policies

Amendments to IAS 8 - Definition of Accounting Estimates

Amendments to IAS 12 - Deferred Tax related to Assets and Liabilities arising from a Single Transaction

Amendments to IAS 39, IFRS 7 and IFRS 9 - Interest Rate Benchmark Reform

The directors do not expect that the adoption of the Standards listed above will have a material impact on the financial statements of the Group in future periods.

Going Concern

The financial statements have been prepared on the basis that the Group will continue as a going concern.

The Group has been profitable and highly cash generative throughout its trading history. The current year cash has stayed relatively flat due to investment in overseas operations and we would expect a return to cash generation. K3 has shown remarkable resilience and robustness over time, including during the recent global pandemic and ensuing time of economic uncertainty.

The Group's business activities, together with factors likely to affect its future development, performance and position, are set out in the chairman's statement and strategic report. The financial position of the Group, the principal risks and uncertainties, its cash flows, liquidity position and borrowing facilities are described in the strategic report.

Furthermore, note 34 to the financial statements include full details of the Group's borrowings, in addition to the Group's objectives and policies for managing its capital, its financial risk management objectives and its exposures to credit, interest rate and liquidity risk.

At the year end the Group had cash balances of £13.7m (FY21: £14.3m) together with committed borrowing facilities of £15m (FY21: £10m), of which £2.1m was drawn down at the year end (FY21: £nil), providing significant liquidity entering the new financial year.

In carrying out their duties in respect of going concern, the directors have completed a review of the Group's current financial position and cash flow forecasts for a period of two years from the year end. This review included sensitivity analysis and stress tests to determine the potential impact on the Group of reasonably possible downside scenarios. Under all modelled scenarios, the Group's liquid cash reserves were sufficient and the borrowing facilities did not need to be drawn on further than as at the balance sheet date.

As such, the directors have a reasonable expectation that the company and the Group have adequate resources to continue in operational existence for the foreseeable future. Accordingly, they continue to adopt the going concern basis in preparing the annual report and accounts.

Revenue Recognition

Revenue comprises revenue recognised by the Group in respect of services supplied during the year, exclusive of Value Added Tax. The Group recognises revenue from the following major sources:

· Business Sales non-contingent fees arising from customers for professional advice;

· Business Sales transaction fees arising from business sales arranged by the Group companies;

· Restructuring and Tax fees arising from customers for professional advice; and

· R&D Tax fees arising from customers for professional advice.

Revenue is measured based on the consideration to which the Group expects to be entitled in a contract with a customer and excludes amounts collected on behalf of third parties. The Group recognises revenue when it transfers control of a product or service to a customer.

Business Sales - non-contingent fees

There is one performance obligation associated with Business Sales non-contingent fee income. Although there are different services provided, none of these are individually distinct. These services include the drafting of an information memorandum, as well as performing research to obtain a buyer for the client. Revenue is recognised over time because the work performed does not create an asset which has an alternate use, and the Group has an enforceable right to payment for the work of which has been performed. There is no variable consideration.

Due to revenue being recognised over time, contract liabilities are recognised when invoiced revenue is received in advance of delivery of the remaining service.

The transaction price is determined at inception of the contract. The transaction price is allocated to the performance obligation in line with the stage of completion of the non-contingent fee.

Business Sales - transaction fees

There is one performance obligation within Business Sales transaction fee income. This obligation is the completion of a Transaction as defined in K3's terms of business, being the transfer of shares or assets from a client to a 3rd party, with fees settled from the sale proceeds. No contract liabilities arise with transaction fee income, and there is no variable consideration. Further detail on revenue recognition policies is provided in the critical accounting estimates section in note 1.

R&D Tax Fees

R&D Tax fee income is recognised at the point in which it can be reliably estimated and our service is deemed to be complete. Contractual terms dictate a customer will be invoiced on receipt of a refund from HMRC, however due to the variable length from submission of claim to client refund, unbilled income is recognised at the point of claim submission to HMRC. Revenue is recognised when a claim is submitted to HMRC as we consider that as this point we have met our performance obligation to the client.

Restructuring and Tax fees

Restructuring and Tax Revenue is recognised on the basis of a contract being in place with a client, that the control of the contracted service lies with the client, and in line with contractual performance obligations at an amount reflecting that expected for the rendering of the services provided.

For the Group's formal insolvency appointments and other advisory engagements, where remuneration is typically determined based on hours worked by professional partners and staff, the Group transfers control of its services over time and recognises revenue over time if the Group provides services for which it has no alternative use or means of deriving value.

Progress on each assignment is measured using an input method based on costs incurred to date as a percentage of total anticipated costs.

In determining the amount of revenue and the related balance sheet items (such as trade receivables, unbilled income and deferred income) to recognise in the period, management is required to form a judgement on each individual contract of the total expected fees and total anticipated costs. Where appropriate, further judgement is applied on a portfolio basis to ensure consistent accounting for smaller cases.

In some instances the exact total revenue on a contract is uncertain and the total consideration for a contract can be variable based on different future outcomes. In these instances, management make an estimate of the total transaction price to the extent that it is highly probable a significant reversal in the amount of cumulative revenue will not occur when the uncertainty associated with the variable consideration is subsequently resolved. In making this assessment management consider:

· The amount of consideration is highly susceptible to factors outside the entity's influence.

· The uncertainty about the amount of consideration is not expected to be resolved for a long time.

· The entity's experience with (or other evidence from) similar types of contracts is limited or has limited predictive value.

· The contract has a large number and a broad range of possible consideration amounts.

These estimates and judgements may change over time as the engagement completes and this will be recognised in the consolidated statement of comprehensive income in the period in which the revision becomes known. It is reasonable to expect some potential upside and downside on individual contracts, however we would not expect a material deviation over the portfolio of cases.

Invoices on formal insolvency appointments are generally raised having achieved approval from creditors to draw fees. This is typically settled on a timely basis from case funds. On advisory engagements, invoices are generally raised in line with contract terms.

Clients are provided with a Terms of Engagement letter when K3 Capital Group is appointed, which acts as both the appointment date and the terms of our contract.

The value of a contract is assessed on the basis of time charged by employees to cases in 6 minute intervals at rates set within our terms of engagement. Revenue is recognised over time where there is a right to payment for performance of contracted services completed to date and, for insolvency appointments, there is approval from creditors to draw fees.

The provisioning method is used to value Unbilled Revenue where time has been charged to cases and as yet remains unbilled. This is based upon the estimated recoverability on a case by case basis by Directors of the current unbilled value with reference to the future billing against future costs to complete the service. Where a fixed fee is agreed the hourly chargeable time value is reviewed against the final fixed fee.

Services provided to clients which at the balance sheet date have not been billed are recognised as unbilled revenue within debtors.

Where amounts are billed in advance of the service being provided these are included within deferred income within creditors.

Employee Benefits

i. Short-term benefits

Wages, salaries, paid annual leave and sick leave, bonuses and non-monetary benefits are accrued in the period in which the associated services are rendered by employees of the Group.

ii. Defined Contribution plans

The Group operates a defined contribution pension scheme for employees. The assets of the scheme are held separately from those of the Group. The annual contributions are charged to the Statement of Comprehensive Income. The Group also contributes to the personal pension plans of the Directors at the Group's discretion.

Operating Profit

Operating profit is stated after all expenses, including those considered to be exceptional, but before finance income or expenses. Distribution costs relate to marketing expenses. All other operational costs are classified as administrative expenses.

EBITDA

EBITDA is utilised as a key performance indication for the Group and is calculated utilising profit before tax, adjusted for finance income and costs, amortisation and depreciation on non-current assets. See note 9 for a reconciliation to the profit and loss account.

Adjusted EBITDA & Exceptionals

The Group presents adjusted EBITDA as an operating KPI utilised by management to monitor performance.

EBITDA is adjusted for one off costs that are considered to be exceptional, being:

· Share based payment costs

· One off costs connected to acquisitions

· Deemed remuneration

These costs are considered to be exceptional because they do not relate to the ongoing trade and performance of the business and are primarily linked to the cost of acquisitions. Without presenting adjusted EBITDA, the EBITDA presented would not be consistent as it would be subject to fluctuations that do not reflect underlying performance of the Group.

See note 9 for a reconciliation of profit before tax to Adjusted EBITDA.

2. Revenue

The Group's revenue arises from the provision of services in fulfilling the principal activities. An analysis of revenue by subsidiary company is shown below:

Revenue is broken down as:

A further breakdown of revenue by service line, type and geographic location is shown below:

The Group's revenue is recognised when performance obligations are satisfied, further details of which are included in the accounting policies. As a result, contract liabilities arise when performance obligations have not been met . The contract liabilities from 31 May 2021 have been fully recognised in the reported revenue for year end 31 May 2022.

The contract balances recognised are:

The movement in contract assets in the year comprises: £1.8m increase from acquisitions in the year and £6.3m due to organic growth. The movement in contract liabilities in the year is materially organic growth.

Revenue recognised in the year that was included in deferred income at the beginning of the year was £4.1m (2021:£2.4m).

Restatement of contract assets and contract liabilities

In the prior period, contract liabilities within trade and other payables were offset with contract assets within trade and other receivables. In accordance with IFRS 15, amounts relating to contract assets and contract liabilities cannot be offset unless they relate to the same contract. The prior year statement of financial position has been represented to reflect this requirement. The impact was an increase in the amount of trade and other receivables and an increase of the amount of trade and other payables of £2.6m.

A third balance sheet has not been presented given that the subsidiary entity to which the restatement relates to was acquired during the prior financial period.

The restatement has no impact on net assets or on the income statement for the Group or Company.

3. Segment Information

The Group has 3 main reporting lines:

a. Business Sales (previously M&A) - this division constitutes the original Group companies and is involved in providing corporate finance services to customers.

b. Restructuring - this division is involved in providing funding, corporate recovery and other consultancy services to customers.

c. Tax - this division is involved in providing technical taxation advice, including R&D tax claims and support with HMRC investigations, to customers.

Internal management reports are reviewed by the Directors on a monthly basis, including revenue information by subsidiary. Such revenue information alone does not constitute sufficient information upon which to base resource allocation decisions. Performance of the segment is assessed based on a number of financial and non-financial KPIs which inform management decisions.

The Group is not reliant on a major customer or Group of customers. All revenue is generated in the UK, except that generated by the Group's overseas subsidiaries.

* The M&A division has been renamed to Business Sales in the year and all current and prior year disclosures have been amended to refer to Business Sales.

4. Operating Profit

Operating profit or loss is stated after charging/(crediting):

5. Employee Benefit Expense

The average number of persons employed by the Group during the year, including the Directors, amounted to:

The aggregate payroll costs incurred during the year by the Group, relating to the above, were:

6. Earnings per share

Basic earnings per share amounts are calculated by dividing the profit for the year attributable to equity holders of the Company by the weighted average number of ordinary shares outstanding during the period.

Diluted earnings per share are calculated by dividing the profit attributable to ordinary equity holders of the Company by the weighted average number of ordinary shares outstanding during the year plus the weighted average number of ordinary shares that would have been issued on the conversion of all dilutive potential ordinary shares into ordinary shares at the start of the year, or, if later, the date of issue.

The following reflects the income and share data used in the basic and diluted earnings per share computations:

The weighted average number of ordinary shares for the purposes of diluted earnings per share reconciles to the weighted average number of shares used in the calculation of basic earnings per share as follows:

Alternative Performance Measures

The calculation of adjusted basic and diluted headline earnings per share is based on the following data:

7. Contract liabilities

The contract liabilities arise from the non-contingent contracts provided to certain customers in respect of providing business marketing and research to these clients. It is also in the case where we have invoices in advance of satisfying our performance obligation where revenue is recognised over time.

* Refer to note 2

8. Business combinations

Professional Insight Marketing Limited ("JEC")

On 28 February 2022 the Group acquired 100% of the issued share capital of JEC (company number 05883501) at which point control passed to the Group. With over 20 years of experience, JEC is a full-service independent marketing consultancy, providing digital and creative services to SMEs, with expertise in the accountancy, legal and healthcare sectors.

The main rationale for the acquisition is that it will accelerate our strategy of enhancing our solutions for accountancy firms and their clients. This acquisition strengthens the Group's presence when the professional services sector is expanding, especially in the accountancy space, and increases our recurring revenue.

The amounts recognised in respect of the identifiable assets acquired and liabilities assumed are as set out in the table below.

Goodwill of £1,486,000 arises from the acquisition and is attributable to the acquired business and the expected economies of scale from combining the operations of the Group and the acquisition. None of the goodwill is expected to be deductible for income tax purposes.

The main factors leading to the recognition of goodwill are:

· Customer relationship and contract valuation capture existing customer relationships but excludes potential future relationships. The expectation of new relationships is included in goodwill;

· Brand valuation captures the earnings power of the marketing-related intangible asset as it existed as at the acquisition date. The brand value is expected to increase in the future in line with further growth, which is captured within goodwill;

· Identified intangible assets have limited useful lives, any going concern value towards perpetuity is attributable to goodwill;

· The assembled workforce cannot be separately recognised from goodwill.

The fair value of the 177,430 ordinary shares issued as part of the consideration paid JEC (£555,000) was determined by reference to the market price of the shares on the AIM market at £3.12.

The consideration shares are subject to a 2 year lock-in, followed by a 12 month orderly market agreement.

The earn-out arrangement requires management to achieve EBITDA earnings targets over 4 years post acquisition. The base earn-out payments will be sealed by the relevant EBITDA in any of the earn-out years divided by the base EBITDA. The potential undiscounted amount of all future payments that K3 Capital Group Plc could be required to make is limited to £2,250,000. The payment of the earnout is dependent on continued employment, and therefore it has been treated as deemed remuneration under IFRS3.

The earn out is payable in cash and shares as follows:

· FY22: 60% cash, 40% shares

· FY23: 60% cash, 40% shares

· FY24: 60% cash, 40% shares

· FY25: 60% cash, 40% shares

Earn out shares are subject to a 2 year lock-in for FY22 and a 1 year lock-in for FY23.

Acquisition-related costs (included in administrative expenses) amount to £40,000.

JEC contributed £377k revenue and £100k to the Group's profit before tax for the period between the date of acquisition and the reporting date. If the acquisition of JEC had been completed on the first day of the financial year, JEC would have contributed revenues of £1.5m and profit of £400k.

Knight R&D Limited ("Knight R&D")

On 9 July 2021 the Group acquired 100% of the issued share capital of Knight R&D Limited (company number 10271074) obtaining control. Knight R&D Limited is a firm specialising in tax R&D claims and qualifies as a business as defined in IFRS 3. The principal reason for this acquisition was that Knight R&D complements capabilities with the Group's existing tax division.