AUK Aukett Swanke Group Plc

Chief Executive's Report

Introduction

I became Chief Executive in April 2023 and am pleased to present my first annual report, which comes after twelve months of significant change in the scale and nature of the Group's activities, encompassing four acquisitions and two disposals.

In the first six months of the period under review the Group's focus was on its core architecture businesses and completing the acquisition of Torpedo Factory Group. In the second six months and subsequently, we have been implementing our new strategy.

With the new management team now firmly bedded in and four completed acquisitions we have made an encouraging start.

Our plan

Architecture

In the UK we have two established architecture businesses, Aukett Swanke, a traditional full design business with roots going back to 1906, and Veretec, an executive architecture business working with designers from other firms.

These businesses are well established in their chosen markets and our plan is to grow them organically by the recruitment of additional architects, and by acquisition.

As the UK's only listed architecture group we have a unique advantage in being able to use our shares to fund the acquisition of successful architecture practices where the traditional exit for owners of selling out to the next generation typically no longer exists.

Smart buildings

By contrast we are a new entrant in the provision of smart building services, but acquisitions allow us to bring in new technology, proprietary software, relevant case studies and the staff whose expertise delivered those case studies. In this manner we are able to demonstrate our credentials in this new area, using the existing contacts of the architecture businesses to accelerate our progress.

Our plan here is to become a leading provider of Smart Building services. Breaking this down we plan to become:

·      Smart Building Systems Designers

·      Smart Building Systems Integrators

·      Smart Building Systems Operators

We will do this via a buy and build strategy - but having completed four acquisitions our short term focus will be getting our businesses sharing skills, resources, and technologies. We hope the stock market will reward us for progress in this area, allowing us to consider further acquisitions on better terms for our investors.

Commercial rationale for Smart Buildings

In contrast to a traditional architecture business, which has high fixed costs and where once the project is completed there is no further income, under a Smart Buildings business model, there is more scope for revenues that contractually recur over the lifetime of a building. Technology is used to its utmost; rapid growth is achievable without the often time consuming and expensive recruitment of additional staff; and short term fluctuations in economic activity do not dictate customer buying decisions.

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

The challenge of both the architecture and system integration business models is that revenue is project based. We need to continually sell new products just to stand still and typically need to add more people and more working capital in order to grow. By contrast under a SaaS business model customers sign up for long-term contracts, and typically renew when those contracts expire.

Such revenues do however take time to build - because today's order is only recognised as revenue over many years. When a SaaS business makes a new sale, however, the run rate of revenues increases. They have as a result become highly prized and valued by investors.

We believe our strong architecture market presence will be a great help in building meaningful SaaS revenues from smart building software.

Acquisitions

Torpedo Factory Group Limited

In March 2023 we acquired Torpedo Factory Group Limited ("TFG") an audio, visual and stage technology systems integrator to organisations in the UK and Europe by way of a share for share exchange, under which the shareholders of TFG were issued 110,142,286 shares then representing 40% of the enlarged Group. The enlarged Group has also issued 8,400,000 options to two TFG staff exercisable at a price of 1p per share to replace TFG options that were cancelled as part of the transaction. I know the TFG business well, having founded it in 1997, and I joined your Group's board on completion of the acquisition.

TFG is a technology systems integrator and services business operating in the UK and continental Europe in two principal areas:

·      Intelligent Environments, which designs, installs and maintains integrated audio-visual systems for corporate and public sector clients, primarily working directly with commercial property occupiers but also with main contractors on construction fit-out projects;

·      Stage Technology, which creates and maintains technologically powerful systems for a wide range of performance spaces - typically theatres, and drama spaces in education settings.

It also included a Live Events business, which was sold to its management, as it was not core to the new strategy.

Anders + Kern U.K. Limited

In July 2023 we acquired Anders + Kern U.K. Limited ("A+K"), a business that we have known for some time, from SmartSpace Software PLC for a cash consideration of approximately £515,000.

A+K distributes smart workplace systems. Its revenues are principally derived from the provision of hardware, software, and installation services for room and desk booking systems, and the provision of Internet of Things ("IoT") sensors to monitor environmental and occupancy data. The data created can be analysed using Artificial Intelligence (AI) to get meaningful actionable insights to improve occupier experience within the built environment.

A+K retains its status as a distributor of SpaceConnect, SmartSpace Software's workspace optimisation SaaS product.

For the year ended 31 January 2023 SmartSpace reported A+K revenues of £2.09 million and a trading loss before tax of £169,000. During that period it employed an average of 11 people, though by the time of acquisition this had been reduced to 7.

ecoDriver Ltd

In October 2023 we acquired TR Control Solutions Limited (TRCS), a developer of energy management software and provider of energy efficiency services. On acquisition TRCS changed its name to ecoDriver Ltd ("ecoDriver").

ecoDriver's revenues are derived from the provision of its proprietary energy monitoring software, energy efficiency consultancy services, and the provision of IoT sensors, meters and other hardware to monitor environmental and energy usage data.

ecoDriver operates in a high growth business segment, which we believe should grow rapidly as part of the Group, by accessing the Group's wide customer base and contacts, and utilising the Group's operational delivery capabilities.

The acquisition gives us scope to develop the use of Artificial Intelligence (AI) in building management by using AI to deliver scalable decision-making around energy usage in the built environment.

The consideration was £360,450, comprising the issue to the vendors of 17,800,000 shares at 1.525p per share and £89,000 in cash, half of which was paid on completion with the remaining half due 12 months later. The consideration shares are subject to a 12-month lock-in, followed by an orderly market arrangement for a further 12 months.

In the few months since its acquisition ecoDriver has secured in excess of £300,000 of new orders. This is equivalent to approximately 60% of its prior year revenue and confirms our belief in its prospects as part of the wider Group.

Vanti

On 20 March 2024 we acquired the assets of Vanti, a widely respected smart building consultancy, master systems integrator, and smart building software developer. 13 previous Vanti staff have joined us and their client base has been hugely supportive. Vanti was previously an audio visual systems integrator and their visionary approach saw them make an early transition to the role of Master Systems Integrator ("MSI"). Their experience and their expertise will help accelerate TFG's journey, making the same transition but on a larger scale. The profits from their MSI activities were used to develop two software products. One, Kahu, is a workplace technology platform of the kind A+K distribute.

The second, Smart Core, is potentially transformational for our Group. Smart Core is a Building Operating System. This controls a building's systems, and provides for the appropriate sharing of data between landlord, tenants, and users through APIs. Smart Core is in the early stages of development, but has been deployed across several buildings in a number of different countries. It is primarily used as an open source Community Edition, but an Enterprise Edition has been developed and is ready to be marketed.

Smart Core can be sold either as a SaaS model, where the customer pays monthly or annually over the long term, or a Capex licence model, where a one-off licence sale is made, with a lower annual maintenance fee to cover support and upgrades. We see attractions in both areas - Capex sales lend themselves well to the existing model of procuring and delivering a new building, where a main contractor manages a sizeable capital outlay, and the building owner wants to keep a competitively low service charge. The SaaS model works well for the retrofit market (where ecoDriver specialises), and where a Building Operating System can more than pay for itself through savings from running the building better, and from improved reporting across an entire portfolio of properties, which may be running a wide variety of Building Management Systems from a number of different legacy providers.

Synergies

The ecoDriver software provides our architects with a solution to their client's needs.  Also of note is that much of TFG Stage Technology's installed client base is in the education sector, a key target for ecoDriver's products.

The Vanti acquisition multiplies the number of synergies. ecoDriver can potentially be used to share information with Kahu to provide a richer tenant experience, and Kahu could provide information to ecoDriver to offer insight into required energy usage. Our AI efforts can help Smart Core with its building management. The smart building consultants employed alongside the Vanti acquisition broaden the range of services our architects can provide, while our architects ensure that smart building considerations are higher priority than has been the case hitherto.

The trading year in review

Basis of inclusion

The year to 30 September 2023 includes a full year of trading from our architecture businesses, but only six months from the Torpedo Factory Group businesses, and less than three months from Anders+Kern.

In July 2023 we were pleased to note that The Architects' Journal recognised our UK Architecture activities at 48^th place in their AJ100 list of UK architects by practice size, up from 70^th place in 2022.

Aukett Swanke Limited - traditional full service architecture

Aukett Swanke worked on a number of notable projects during the year: 

·      Orchard Wharf is a River Thames fed 80,000 square feet logistics building with additional residential and public realm targeting planning submission in April 2024.

·      SafeStore is an agile new generation 15,000 square feet warehouse just south of London Bridge targeting planning submission in May 2024.

·      We have created a 18.2 hectare multi-level and multi-use intensification masterplan for Network Rail in South London.

·      As part of the Kings Cross Knowledge Quarter, we have designed a mixed use 230,000 square feet hybrid scheme of life sciences, light industrial, public realm and with the potential for residential due for planning in 2024. 

·      We are further developing our highly sustainable 100 year chassis design approach for a 1m square feet riverside scheme that can accommodate a vast array of uses with multi century potential.

Veretec Limited - executive architecture

Veretec, our executive architecture business completed the 15,000 square meter n2 Nova building in Victoria in June 2023 for Landsec, working with Mace and Lynch Architects.

Projects in progress include:

·      Holloway Park, the site of the former women's prison, a residential development for Peabody / London Square with AHMM; and

·      London Dock for St George / The Berkeley Group with Patel Taylor.

Heritage projects under way include:

·      Grade II listed 84 Moorgate for City of London with Osborne and Ben Adams;

·      41 Lothbury for Pembroke RE with Stiff +Trevillion, also Grade II listed;

·      Greycoat Place in Westminster for Victoria Spaces with SPPAR; and

·      West King Street Renewal Project (Hammersmith Town Hall) with Ardmore and RSHP Architects.

84 Moorgate, 41 Lothbury and Greycoat Place are all due for completion in H1 2024.

German investments

Our German investments continued to perform strongly.

We own a 25% interest in Aukett + Heese GmbH, a Berlin architecture practice, and have a joint venture in Aukett + Heese Frankfurt GmbH, in which we own 50%. Collectively these assets are valued in our accounts at £1,071,000 at 30 September 2023, reflecting our share of the underlying balance sheets. We received management fees and dividends during the year of £382,000 more than justifying the current accounting carrying value.

Torpedo Factory Group - Systems Integration

TFG's results are only consolidated from the date of acquisition in March 2023.

The Intelligent Environments business, which during the period developed a particular niche in London offices for international law firms, performed strongly from the date of acquisition.

The Stage Technology business also performed well from its acquisition, in part as it has a seasonal bias with its best months over the summer when schools and colleges are closed and in part as the result of a £2 million project to deliver the technical infrastructure of a new entertainment venue in Manchester.

The TFG businesses also bedded in the new ERP system implemented in the previous year, which is designed to make the business more scalable.

Anders + Kern

We acquired Anders+Kern two and a half months before the year end, and include its results from that date.

The operational highlights included the migration of the A+K business to the Group's ERP systems and reshaping the sales team and product line-up, with the benefits expected to accrue in future periods.

Employee Share Schemes

Before the TFG acquisition, a majority of the company's shares were held by around two dozen former directors of the Group and its architecture businesses, with almost no ownership by the existing management and staff. Ownership is normal in professional services firms, and while there was an eagerness from management to participate, there was no clear structure for it to happen.

Following the year end, we have therefore implemented three routes to increase employee ownership across the Group, as follows:

First, in November 2023, we implemented AESOP, a Share Incentive Plan. This is a tax efficient method for all employees to build a base level of ownership from their monthly salary. I am delighted to report that around 40% of the Group's employees have chosen to become shareholders. We now have around 70 current director/employee shareholders, up from 10 a few months ago.

Second, we are implementing MSOP, our Management Share Ownership Plan. Under this, the directors of the Group's businesses have been asked to commit to invest sums equivalent to at least 5% of their gross salary in purchasing the Group's shares on the open market. Purchases are expected to be made approximately quarterly. The executive directors on the plc board will invest 8% of their gross salary, and a small number of senior management just below subsidiary director level have been asked to invest 2.5% of their gross salary. The commitment becomes optional once the director in question owns at least 0.5% of the Group's share capital (0.25% for non directors). Participation has been strong, with 32 members of the management team making commitments, out of 34 members who were invited.

Third, a Company Share Option Plan allows for the grant of share options in a tax efficient manner. Our intention is that option grants will be made annually, but only to those employees who make the commitment under the MSOP to invest in the business. This will build into a portfolio of options, acting as an employee retention tool, as at any point those granted within the past three years cannot ordinarily be exercised.

Collectively I expect these employee share schemes will provide a natural and persistent demand for our shares to the benefit of the staff concerned aligning their interests with those of shareholders. More importantly they are already changing the culture of the Group, as staff become owners. It enables so many people who are key to our future start to build meaningful ownership stakes. I believe they also give us the best employee ownership package in the market, and I am confident we can use this to attract and retain the best talent available.

Current Trading & Outlook

It is difficult to predict with confidence how the current year will unfold.  We have a strong pipeline of projects but more so than in previous years the starting point for these projects, and the dates from which we can charge, are at risk of delay.

As was the case in the year under review there is likely to be a loss in the first half of the year with the position improving in the second half.

The combination of pressure on cashflow from continuing to pay down the Coronavirus Business Interruption Loan Scheme loans, project delays, and the freehold property mortgage expiring in February 2025 leads the Board to give careful consideration in the assessment of going concern. The material uncertainty, the measures taken by the Board, and other mitigating options which could be taken are discussed at length in the Financial Review, the Directors' Report and note 1. This only serves to underline the need to balance the nature of the Group's revenue streams.

Aukett Swanke Ltd designed the world's first Smartscore accredited smart building in 2021, and the recent acquisition of Vanti allows the Group to expand its smart building consultancy work.

It is too early in the Group's Smart Buildings operations to speak of the likely outcome for the current year with confidence. However, TFG was already starting to deliver Master Systems Integration activities and the recent Vanti acquisition will accelerate this.

Smart buildings will clearly require artificial intelligence to take decisions on how sites should best be run. We announced on 19 February 2024 that we are participating in a consortium between 6 industrial and 3 research university partners to develop AI for energy saving. This project is backed by an Innovate UK grant. Our staff have completed AI courses at Oxford University and we are exploring opportunities to further develop our AI capabilities.

While our smart building activities are at an early stage we seem to be on the right track with growth expected across all our smart buildings offerings.

Our team

December 2023 saw the retirement of Keith Morgan, Veretec chairman, after 39 years with the Group. We are grateful for all he did to help Veretec become one of the best respected and successful firms in its specialist field. In connection with its acquisition by ASG, TFG also lost two longstanding directors - Keith McCullagh, who retired as its non-executive chairman at acquisition, and John-David Papworth, who departed with the disposal of the Live Events business. I have worked with both of them since the 1990s and wish them well.

There are however many new faces to welcome as we begin what I hope will be a phase of rapid growth, to create a larger UK architecture business that operates as part of a successful smart buildings group.

Rapid growth means rapid change, and change is often unsettling. I am delighted at how well our people have responded to the changes so far, and would like to thank all of them for their support. They make our business what it is, and more importantly, they shape what it will become.

We have an exciting year ahead and I look forward to reporting on our progress.

Nicholas Clark

Chief Executive

27 March 2024

Financial review

The headline financial results of the Group were:

¹Alternative performance measures, refer to pages 19-20 for definition

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

The Group reported a small trading profit of £28k (2022: loss £72k) with a significant contribution from TFG and A+K post-acquisition, and an improvement in the result of the United Kingdom architecture operation, partially offset by higher central Group costs.

The result of the discontinued Middle East operations was a nominal profit before tax of £10k (2022: loss £0.50m) with nominal activity.

Revenues for the year from continuing operations were £14.34m, an increase of 65.8% on the previous year (2022: 8.65m). Revenues less sub consultants increased by 97.9% to £14.10m (2022: £7.13m), with subconsultant costs falling by 84.7% to £0.23m (2022: £1.52m), due to growth in the UK hub combined with revenue from the Torpedo Factory Group and Anders + Kern acquisitions.

UK architectural hub, revenue less sub consultant costs increased 24.6% to £8.69m (2022: £6.98m), their highest level in over 6 years, as the UK operations further recovered following the lows experienced during the COVID-19 pandemic.

In Continental Europe, another strong performance from the Berlin associate and Frankfurt joint venture producing a combined share of profits of £0.34m (2022: £0.33m), however performance in Turkey was below expectations as the operation struggled with ongoing high inflation and stop start workloads. The Turkey operation was sold to one of the local directors post year end.

Operating expenses in the year increased by £4.11m due to the operating costs of TFG and A+K post-acquisition, combined with higher personnel related costs in UK architecture as the group recruited to meet staffing needs for new projects won.

Other operating income was unchanged from the prior year at £326k, due to post acquisition sub-let rental income from TFG's London office, being offset by lower property rental income from the London Bonhill Street office as the subtenant occupied less space with the growth in UK architectural technical staff headcount taking up the available space.

The Group increased technical staff numbers (UK net revenue per FTE technical staff was down marginally at £102k, whilst the UK average FTE technical staff increased by 18 to 85).

The Group incurred significant one-off acquisition costs totalling £379k relating to the TFG and A+K acquisitions turning the small trading profit into a loss before tax. Tax Credits then bring the post tax position back into profit.

The profit after tax at £92k gives an EPS of 0.04 pence per share (2022: loss 1.38 pence per share),

United Kingdom

¹Alternative performance measures, refer to pages 19-20 for definition

The UK's revenue increased 4.6%, however stripping on pass through subconsultant costs revenue increased 24.6% year on year to its highest level in over 6 years. The prior year revenue included projects that Veretec executive architecture acted on as the lead consultant, as these progressed into later stages sub consultant expertise reduced to nominal levels.

The first half of the year saw 11.4% growth in the UK business compared to the prior year second half, with revenue less subconsultant costs of £4.09m (2022: H2: £3.67m) as the business continued to win new work and rebound post the lows of the COVID affected years.

Veretec was awarded and commenced £5.85m of new orders being a mixture of residential and commercial projects, providing significant revenue growth through H2 and a stronger order book leading into the year commencing 1 October 2023.

With the higher workload, recruitment enabled staff numbers (FTE technical staff) being 77 in October 2022 to grow month on month through the year to 94 FTE's by 30 September 2023.

Net revenue per FTE was £102k for the full year a touch down on the £104k in the prior year primarily due to the timing of project pauses.

The improvement in revenue particularly in H2, was partially offset by inflationary pressures on staffing, utility and IT costs and the one off costs of recruitment fees, whilst our net revenue per FTE was marginally lower. This translated into the year on year segmental result being static compared to the prior year, with the hub to recording a profit before tax (excluding Group management charges) of £0.20m. This represented a year of transition with the hub positioned with a larger order book and stronger staff offering to be able to improve margins in the coming year.

Continental Europe

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

¹Alternative performance measures, refer to pages 19-20 for definition

The hub result before tax (including Group management charges), including the joint venture and associate in Germany, was a profit of £277k (2022: £275k).

Continental Europe's result is materially dominated by the associate Berlin and joint venture in Frankfurt. The year to September 2023 represented another profitable year. They together contributed £341k (2022: £328k) profit (including Group management charges) to the Continental Europe result.

Reported revenues, comprise the Turkish subsidiary. Turkey reported revenues for the year of £194k (2022: £180k), with revenue less subconsultant costs decreasing to £128k (2022: £152k). The reduction in earnings was due to a further devaluation of the Turkish Lira across the period, with the average TRY to GBP rate in the year at 26.29 (2022: 18.44). However, whilst the year on year revenue increased modestly in local currency, clients pausing projects led to sub optimal efficiency of staff time with large gaps in workloads, and the very high levels of inflation in Turkey increased operating costs of the company whilst the rates on existing projects were not able to fully absorb the increased costs that followed. As a result, Turkey recorded another year of local losses (including Group management charges) of £64k (2022: £52k) and loss (excluding Group management charges) of £53k (2022: £36k).

With ongoing high inflation and uncertainty in the Turkish economy and no clear path to turn the losses around, management commenced a process to sell the operation to the local directors which was completed after the year end (note 28).

Total revenues under management increased 30.6%, whilst revenue less sub consultant costs increased 17.9%. Staff numbers increased to 121 FTE's (2022: 108), due to growth in the Berlin office. The growth in Germany also led to an increase in net revenue per FTE technical staff to £103k (2022: £98k) and with it slightly improved profitability.

Middle East - discontinued operation

¹Alternative performance measures, refer to pages 19-20 for definition

Following the disposal of JRHP in April 2022, and management's decision to take on no new projects and transition to cease activities in the region, revenue and costs were nominal in the year. Minor gains on costs settled below the levels of prior year accruals and a small gain on the movement of IFRS 9 loss allowance provisions enabled the hub to record a profit before tax of £10k.

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

Torpedo Factory Group

¹Alternative performance measures, refer to pages 19-20 for definition

The results shown above relate only to the performance from the date of acquisition on 20 March 2023, when its results were consolidated into the Group, to the new year end on 30 September 2023. TFG performed strongly delivering revenues and profit in excess of its own internal budgets. The profits are delivered by its two trading subsidiaries - at an entity level Torpedo Factory Group Ltd continued to make losses while it holds on to its freehold property and associated mortgage. The footprint of the building means it is no longer a strategic fit for the underlying business after the disposal of Torpedo Factory Ltd.'s Live Events business announced in April 2023, and the property is being marketed for sale.

The subsidiary TFG Stage Technology Ltd contributed the majority of the TFG profit with an excellent performance in its projects department, internal teams utilised the relatively new ERP system to help deliver its largest ever project which contributed revenues in excess of £2m.

While Torpedo Factory Ltd did not perform as strongly as the Stage Technology business it still delivered small profits after internal management charges. Recurring revenue within the service department has continued to increase making the company less reliant on projects wins although this is still the majority of the revenue within the entity.

Anders + Kern

¹Alternative performance measures, refer to pages 19-20 for definition

Anders + Kern U.K. Ltd performed marginally ahead of internal budgets for the period from acquisition on 17 July 2023 to the year end, and results for that brief period are shown above. The company transitioned well to new premises with a more streamlined team to deliver its revenues and planned the changes that have been implemented following the year end.

Financing

The net deficit (see note 25) at the year end was significantly higher than the prior year as a result of the mortgage and secure bank Coronavirus Business Interruption Loan Scheme ("CBILS")  loans consolidated into the Group on acquisition of TFG in the year. This gave a deficit of £2,140k (2022: £621k), comprising cash of £522k (2022: £28k), cash included in assets held for sale (see note 28) of £30k (2022: £nil), a net overdraft of £122k (2022: £232k), the Coutts CBILS loan which reduced to £167k (2022: £417k), a NatWest CBILS loan of £992k, and a mortgage of £1,411k both consolidated into the Group from the acquisition with TFG.

The Group's £250k overdraft facility from its bankers Coutts & Co and was renewed in December 2022.

In December 2023, Coutts & Co confirmed the renewal of the £250k overdraft facility for an initial period to 31 March 2024, and subsequently has agreed to extend this renewal to 30 September 2024, continuing to provide working capital flexibility and to support the UK business. This is discussed further in note 1.

The Coutts CBILS loan set out in note 24 was arranged with Coutts & Co in response to the challenges impacting trade incurring losses during the COVID pandemic. The loan is repayable over 3 years with the first instalment made in June 2022, to be paid back in 24 monthly instalments through to May 2024. As at 30 September 2023, the first 16 instalments had been made on time as planned, as have all subsequent scheduled payments.

The mortgage and the NatWest CBILS bank loan set out in note 24 were arranged by National Westminster Bank plc (NatWest) and are secured by way of a first legal charge over The Old Torpedo Factory freehold property, a debenture and cross guarantee from Torpedo Factory Group Limited, Torpedo Factory Limited and TFG Stage Technology Limited. The bank loan initially drawn at £1.75m is being repaid at £29k per month. The loan is at a fixed rate of interest of 3.66%pa.

The mortgage that subsisted during the year was initially drawn in 2018 at £1.73m with a duration of 5 years and was extended for a year during the pandemic, so was due to expire in February 2024, and is therefore wholly shown due for settlement within 12 months. The mortgage carried interest at base rate + 1.93%. The mortgage has recently been renewed for a further 12 month period to February 2025 carrying a higher interest rate of base rate + 5.00%pa pending a disposal of the associated freehold property.

The Group had four leases taken out by Aukett Swanke Limited ("ASL") to fund the purchase of fit-out costs of the London office in June & November 2018 on 5 year terms, which are capitalised as right of use assets and lease liabilities. The lease liability (see note 16) as at 30 September 2023 was down to £1k (2022: £55k), and has been fully paid off post year end.

The Group recognises a right of use asset and lease liability on the London office which was taken out on a 10 year lease to May 2028. The lease liability as at 30 September 2023 was £1,961k (2022: £2,364k).

With the acquisition of TFG, the Group now recognises right of use assets and lease liabilities on two further buildings and a number of motor vehicles. The aggregate lease liability of these assets as at 30 September 2023 was £275k.

There are no office leases remaining in the UAE. The office lease in Turkey is short term and responsibility for it left us as part of the disposal.

Throughout the year there has continued to be a very strong focus on cash management, liquidity forecasts and covenant compliance. Whilst covenants may have been removed from the Coutts & Co facility during the prior year, management continue to review monthly management account measurements indicating whether the former covenants would be adhered to if they had been in force.

The overdraft was utilised throughout the year. The acquisition of TFG on 20 March 2023 improved short term available cash, which was partly (£515k) utilised in the consideration for the acquisition of A+K in July 2023.

The Plc continues to act as the Group's central banker, and it continued to seek to optimise the Group's position by maximising cash flows and flexibility across geographies. The overdraft is effectively assigned to the UK businesses. All other businesses are required to be cash generative or as a minimum cash neutral. Subject to formal approval, short term working capital advances or small funding loans may be made.

Going Concern    

Excluding the freehold property held for sale, net current liabilities as at 30 September 2023 were approximately £3.0 million, and in the period following the year end so far, project billing and cash collection has been lower than we originally budgeted resulting in an overdue quarterly VAT balance due in February 2024 and an overdue balance of PAYE due to HMRC. As such the assessment of going concern needs careful consideration. The Board has therefore produced cash flow forecasts for a period of at least 12 months from the approval of the financial statements, which comprise detailed income statements, statements of the financial position and cash flow statements for each of the Group's operations. The Board has also considered the risks and uncertainties associated with the principal operations and the funding position in general, including the consideration of a number of differing scenarios based on varying trading performance across the Group.

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

As part of this review the Directors note that for the year ended 30 September 2023 both the core UK architecture businesses reported stronger performance than in the previous financial year with each making an improved contribution to central costs. The Directors also note the continued strong performance and cash contribution from the Group's German investments but more importantly that the Group has now successfully exited from all its unprofitable and cash consuming overseas investments.

In the financial year ended 30 September 2023, the net cash position of the Group, largely as the result of the TFG acquisition, improved by more than £500,000.  The Group has continued to invest in growth, most notably with the acquisition of Anders+Kern in July 2023 which had a cash cost before expenses of £515,057. Since the end of the financial year the Group acquired TR Control Solutions Limited (later renamed ecoDriver Limited) with an initial cash cost of £44,500 (with a further £44,500 deferred for a year) and some working capital support paid into the company.

With the ever increasing costs associated with being a quoted company, which the Board estimates to be currently in excess of £1 million annually, there is no point in staying as we are. The Board's stated intention is to achieve a leading presence in the provision of smart buildings services through a combination of organic growth and targeted acquisitions. Inevitably this requires an element of cash, as part of the purchase consideration and for the associated professional fees.

To date, including the acquisition of TFG, the Group has made four Smart Building related acquisitions and plans to make others in the coming months and years. In connection with this assessment of going concern the Directors note that each such acquisition is a discretionary event as is the proportion of the consideration paid in cash. The Board's plan is to avoid placing undue stress on the Group's cashflows from expanding at a pace faster than can be sensibly funded.

Whilst we continue to pay down the mortgage and CBILS loans, lower than originally budgeted project billings and cash collection in the period after the year end so far due to a combination of project instruction delays and cash to invest in strengthening staffing in the recent acquisitions which will take time to convert into generating higher revenues, has resulted in the Group delaying payment on the UK architecture quarterly VAT balance due in February 2024 and an overdue balance of PAYE due to HMRC. The Group's forecasts, indicate that this shortfall is a temporary position which will improve during the 12-month period following the approval of the financial statements, and we are actively engaging in communications with HMRC and will seek to agree a short term repayment plan if required.

A prime issue when considering the Group's cashflows over the next 12 months is that the mortgage on the freehold property (balance of £1.39m as at Jan 2024) is due to be renewed before the end of the 12 month assessment period in February 2025. Although it is the Board's intention to sell the underlying property and repay the mortgage well before renewal is due, there is no certainty this will be the case or that if required the mortgage would be renewed.

Additionally, given the Group's current cash balances and the nature of the Group's activities, which remain largely project based with the inherent risks that projects are not won; are won at too low a fee; do not start on time; stall; or that the client fails to pay on time or at all, the Directors consider that there is a material uncertainty over the going concern assessment, which may cause significant doubt on the Group's and Parent Company's ability to continue as a going concern and therefore their ability to realise their assets and discharge their liabilities in the normal course of business.

The Group has recently agreed with Coutts to extend the £250,000 overdraft through to 30 September 2024, announced it is raising £425,000 through the issue of new equity (see note 39), and Torpedo Factory Limited has received a fully approved offer for a £500,000 loan which can be drawn down whenever needed, subject only to the approval of the proposed guarantors (Nick Clark and Freddie Jenner).

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

·      The Group continues to seek a buyer for the freehold property acquired as part of the TFG acquisition in March 2023. The Board believes the commercial value of the building very comfortably exceeds its commercial mortgage of £1.41 million as at 30 September 2023. Additionally, the Group's property agent has confirmed that it is reasonable to expect offers well in excess of the mortgage liability.

·      The Board believes the commercial value of its German investments is substantial in relation to the Group as a whole and if necessary could be realised by a sale for in excess of book value.

·      The Board also believes that in the event of the introduction of invoice discounting the Group, which typically has in excess of £3.0 million tied up in trade debtors at each month end, could release a significant proportion of this amount. In this regard, Torpedo Factory Limited has received updated indicative terms from a leading provider of sales ledger finance of an invoice discounting line to the value of 50% of eligible debtors or £600,000, whichever is lower. Formal approval of this facility would be subject to an audit of the Torpedo Factory Limited systems by the lender. For 18 years from 2003-2021 Torpedo Factory Limited had an invoice discounting facility so is fully familiar with the processes.

·      The Group is currently paying off its liabilities in respect of state funding provided during the Covid pandemic. The balance of the CBILS drawn by the Group in May 2021 will be fully repaid in May 2024. The CBILS loan drawn by TFG will be fully repaid by July 2026. By replacing this debt with a new facility repayable over a longer period the annual cash costs associated with this debt would fall.

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

The recently announced proposal to sell the Old Torpedo Factory freehold would pay off the remaining balance on the mortgage, prepay a portion of the NatWest CBILS loan, and provide a significant balance of cash to the Group eliminating the net deficit. Other funding and mitigating options available to the board are also discussed in note 1.

Notwithstanding the material uncertainty described above, after making enquiries and assessing the progress against the forecast, projections and the feasibility of the mitigating actions referred to above,  which if not achieved may cause significant doubt on the Group's and Parent Company's ability to continue as a going concern and therefore their ability to realise their assets and discharge their liabilities in the normal course of business, the Directors have a reasonable expectation that the Group and the Parent Company will continue in operation and meet its commitments as they fall due over the going concern period.

For this reason, the Board considers it appropriate to prepare the financial statements on a going concern basis.

The financial statements therefore do not include the adjustments that would result if the Group or the Parent Company was unable to continue as a going concern.

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

Key Performance Indicators ("KPIs")

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

·      Total revenues under management. This includes 100% of the revenues generated by our joint venture in Frankfurt and associate in Berlin. This is used as a measurement of the overall size and reach of the Group and is disclosed on pages 12 and 14. As total revenues under management includes revenue derived from subconsultants, this figure can vary significantly year on year depending on the nature of external expertise required on individual projects as described on page 14.  Consolidated Group revenue can be reconciled to total revenues under management by adding i) the revenue of the associate disclosed in note 18; and ii) double the share of revenue in joint ventures disclosed in note 19;

·      Revenue less sub consultant costs which reflects the revenue generated by our own technical staff but excludes the revenue attributable to sub consultants, which are mainly passed through at cost. This is the key driver of profitability for our business, and is discussed by segment on pages 12 to 16;

·      Revenue less sub consultant costs being generated per full time equivalent (FTE) technical member of staff ('net revenue per FTE technical staff'). For our larger operations this provides a barometer of near term efficiency and financial health. This figure when compared to the movement in total costs provides an insight into the likely direction of profitability and is a key measure of productivity. This KPI is only analysed on a segmental basis and calculations for each segment can be found on pages 13 to 16; 

·      Result before taxation (excluding Group management charges), and result before taxation (including Group management charges), which are further assessed on pages 13 to 16;

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

The numbers of full time equivalent technical members of staff differ from the employee numbers disclosed in note 8 as, at times, the Group uses some non-employed workers through agencies and freelance contracts. Staff working on a part time basis, or on long term leave, are also pro-rated in the number of full time equivalent staff numbers, which differs from the method of calculating the average number of employees for the year under the Companies Act 2006 as disclosed in note 8. Full time equivalent technical members of staff are given for each hub on pages 13 to 16.

Antony Barkwith

Group Finance Director

27 March 2024

Strategic report

The Directors present their Strategic Report for the Group for the year ended 30 September 2023.

Strategy

For most of the Group's existence we have been a professional services group that principally provides architectural design services along with specialisms in master planning, interior design, executive architecture; audio visual and stage technology; smart workplace systems and energy management software.

Our strategic objective is to become a leading provider of Smart Building services as Smart Building Systems designers, integrators and operators, while maintaining our status as leading architects in the UK.

We aim to create shareholder value over the longer term by increasing profits and at the same time provide an attractive and rewarding working environment for our staff.

Business Model

Architecture

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

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

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

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

Smart Buildings

We are looking to establish a leading presence in the delivery of smart buildings services in the UK building on the experience from the Torpedo Factory Group's operations, the three subsequent acquisitions, and by future targeted acquisitions and organic development.

As this side of the Group's activities develops and as we come to own our own systems, we will look to charge on a SaaS basis for the services provided. In so doing this element of the Group's business will be far more scalable than the traditional architecture model where growth generally requires the recruitment of additional staff and once a project is completed there is no further revenue.

As a Group, we now have a total average full time equivalent ("FTE") staff contingent of 303 (2022: 223) throughout our organisation which includes both wholly owned and joint venture operations. We are ranked by professional staff in the 2024 World Architecture 100 at number 60 (2023 WA100 number 61).

Principal Risks and Uncertainties

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

Levels of property development activity

Changes in development activity levels have a direct impact on the number of projects that are available. These changes can be identified by rises and falls in overall GDP, construction output, planning application submissions, construction tenders and starts, investment in the property sector and numbers of new clients. Due to lack of information in the relevant market places, we have to adapt to the information flow that is available.

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

Geo-political factors

Political events and decisions, or the lack thereof, can seriously affect the markets and economies in which the Group operates, leading to a lack of decisions by government bodies and also by clients. In turn this directly impacts workload and can even delay committed projects.

The Ukraine conflict and global inflationary pressure and interest rate rises have affected business sentiment and is likely to continue to do so until the conflict ends.

Share price volatility

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

Operational gearing and funding

In common with other professional services businesses, the Group has a relatively high level of operational gearing, through staffing, IT and property costs, which makes it difficult to reduce costs sufficiently quickly to immediately avoid losses and associated cash outflows when faced with sharp and unpredicted falls in revenue.

UK architecture continues to maintain a balance in the mix of permanent vs. contract and agency staff to give flexibility to respond to fluctuation in revenue as has been experienced in recent years.

The project payment arrangements under which the Group operates vary significantly by operation. Payment terms are typically:

·      Aukett Swanke Limited and Veretec: It is usual to agree in advance with the client at the start of a project a monthly billing schedule which generally leads to relatively low levels of contracts assets (and consequentially higher levels of contract liabilities);

·      Torpedo Factory Ltd, TFG Stage Technology Ltd, Anders + Kern U.K. Ltd: Standard payment terms for all companies are 30 days for smaller works completed. It is usual on larger projects to agree in advance with the client at the start of the project a monthly billing schedule which generally leads to relatively low levels of contracts assets (and consequentially higher levels of contract liabilities). These larger projects tend to be 30 days although certain JCT contracts may extend to 60 day terms. Service Contracts as standard are billed annually in advance for a 12 month period.

The losses sustained in the prior three years during the COVID-19 pandemic and in the recovery period since, tightened the free cash available within the Group. However, the acquisition of TFG in March 2023 provided a significant boost to the net assets and cash balance of the Group, but adding further CBILS loan and a mortgage liability.

The month end timing of UK architecture debtor receipts in September 2023 meant that the Group was in a position of utilising part of its overdraft facility at the year end, though having net cash in the accounts of other Group subsidiaries.

Dividends were received from the Berlin associate during the year, however the Berlin associate only remits dividends on the basis of local GAAP accounting, which restricts the recognition of profits until the final completion of individual projects, and as such there is a lag between recognising distributable reserves vs IFRS profits.

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

The Group's principal bankers remain supportive and in December 2023 renewed the Group's overdraft facility for an initial period until 31 March 2024, and subsequently have agreed to extend this renewal to 30 September 2024 at the existing £250k level.

The mortgage on the Old Torpedo Factory freehold has been extended for another year to February 2025, while the Group are actively marketing it for sale.

Staff skills and retention

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

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

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

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

Quality of technical delivery

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

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

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

The Group maintains professional indemnity insurance in respect of professional negligence claims but is exposed to the cost of excess deductibles on any successful claims.

Contract pricing

All mature markets are subject to downward pricing pressures as a result of the wide spectrum of available suppliers to each project. This pressure is increased if activity levels are low such as in the economic downturns and global recession. Additionally, architects may be under pressure to work without fees (for a time) in order to win a project or retain sufficient qualified staff to complete the project if won. The Group mitigates this risk by focusing on markets where it has clear skills that are well above average, or avoids it by not lowering prices, thus risking the loss of such work.

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

When acting as general designer for projects located outside the UK, the Group is usually exposed to the risk of actual sub consultant costs varying from those anticipated when the overall fee was agreed with the client. To mitigate this risk, fee proposals are usually sought from sub consultants covering the major design disciplines as part of the process of preparing the overall fee proposal.

Under performing acquisitions

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

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

Future developments

An indication of likely future developments in the business of the Group is contained in the Chief Executive's Report on page 10.

The Strategic Report was approved by the Board on 27 March 2024 and signed on its behalf by

Nicholas Clark

Chief Executive