THIS ANNOUNCEMENT CONTAINS INSIDE INFORMATION FOR THE PURPOSES OF UK MARKET ABUSE REGULATION. UPON THE PUBLICATION OF THIS ANNOUNCEMENT THIS INSIDE INFORMATION IS NOW CONSIDERED TO BE WITHIN THE PUBLIC DOMAIN.

24 April 2023

Checkit plc

("Checkit", the "Company" or the "Group")

Preliminary results for the Year Ended 31 January 2023

 Checkit plc (AIM: CKT), the intelligent operations platform for the deskless worker, is pleased to report its audited preliminary results for the year ended 31 January 2023 ("FY23"). The audited accounts and annual report for FY23 will be published ahead of the Company's Annual General Meeting, which is expected to take place on 8 June 2023.

The Group's management team will host a live webinar which will include an opportunity for questions at 12:00 (BST) today. The webinar can be accessed via the news area of the website at https://www.checkit.net/news/ or by using this link:

https://www.investormeetcompany.com/checkit-plc/register-investor

FY23 HIGHLIGHTS

·    FY23 results ahead of market expectations, with annual recurring revenue ("ARR") increasing 28%  to £11.5m* (FY22: £9.0m) 

·    ARR has doubled over the last two years, reflecting the Group's strategy to focus solely on subscription based sales, with recurring revenue accounting for 93% of total FY23 revenues 

·    US footprint expansion, with 91% year-on-year growth in US ARR to £2.8m (FY22: £1.5m) 

·    Continued success in retaining and growing the existing customer base, with net revenue retention ("NRR") of 116%**

·    Closure of Building Energy Management Systems ("BEMS") division completed as planned

·    Path to profitability accelerated, with increased focus on cost efficiency, resulting in improving gross margins of 63% (FY22: 54%***) 

·    Recurring revenue increased +41% to £9.6m (FY22: £6.8m) 

·    Total Group revenue from continuing operations of £10.3m (+22%) (FY22: £8.4m***) 

·    Adjusted LBITDA **** from continuing operations of £6.4m (FY22: loss of £5.6m***)  

·    Net cash at year end of £15.6m (FY22: £24.2m), with the emphasis in H2 on operational efficiency resulting in a 17% reduction in net cash outflows during H2 compared to H1

NOTES

* Annual Recurring Revenue ("ARR") is defined as the annualised value of contracted recurring revenue from subscription services as at the period end, including committed annual recurring revenue from new wins. This has been restated from the prior year (reported ARR of £8.2m), where it related only to contracts that were installed.  

** Net retention revenue ("NRR") is defined as the amount of recurring revenue from existing customers retained over the year, excluding new wins in the last 12 months

*** Continuing operations only

**** Adjusted LBITDA is the loss on operating activities before depreciation and amortisation, share based payment charges and non-recurring or special items 

Outlook

·    FY24 has started well, with continued sales momentum in line with the Board's expectations. We continue to execute against our growth strategy and develop our technology, while progressing further operating efficiencies and accelerating our path to profitability.

·    The Board expects to meet market expectations for FY24 and remains confident that the Group is well positioned to deliver strong, sustainable organic growth in the years ahead.

CHAIRMAN'S STATEMENT

Dear Shareholders

Despite the economic uncertainty that has characterised the financial year ending 31 January 2023, Checkit has delivered a strong set of results ahead of Board and market expectations. I am particularly pleased that recurring revenues now account for more than 90% of total revenues. Following our successful transformation into a pure subscription business, we are focused on growing revenues within our core markets of Western Europe and North America. The Group continues to benefit from a strong balance sheet which will allow it to continue to execute against its growth strategy and develop its technology, whilst driving further operating efficiencies and accelerating the path to profitability. 

We have continued to examine board composition particularly with a view to improving diversity and focus and recently announced the appointment of Alex Curran as a Non-Executive Director. Alex brings a wealth of experience from growing and scaling software businesses in North America, a primary growth region for us, where she is currently regional chief executive officer for Aptitude Software. At the same time, John Wilson, previously Senior Independent Non-Executive Director made the decision to step down from the Board. I should like to pay tribute to the significant contribution that John has made to Checkit. In 2019 he led the disposal of Bulgin from the Group which enabled the return of £81 million to shareholders. Since that time he remained as a Non-Executive Director and Chair of the Remuneration and Audit Committees. Shareholders have benefited greatly from the value he has created and I am personally grateful for his wise counsel over a long period. 

Finally, and importantly, I should like to thank all past and present employees of Checkit for their energy and dedication in creating value for shareholders, which will ensure that the future for Checkit is bright.

Keith Daley

Chair

CEO'S STATEMENT

Checkit's financial results for FY23 were ahead of Board and market expectations, generating an overall increase in ARR of 28% to £11.5m (FY22: £9.0m). The results are reflective of the continuing success of the Group's strategy to transition the business exclusively to higher quality and higher value recurring revenues.

The results are all the more impressive in the context of a turbulent economic and political backdrop in addition to growing inflationary pressures. These challenges have, so far, been navigated successfully with a focus on driving operational efficiencies and preserving cash. Together with the ongoing development of its technology, Checkit continues to accelerate its path to profitability.

Financial performance

Checkit has delivered a third consecutive year of high quality recurring revenue growth.  ARR has doubled over the last two years, from £5.7m in FY21 to £11.5m in FY23 and now accounts for over 90% of total revenue. The increase in ARR resulted in 41% growth in reported recurring revenues of £9.6m (FY22: £6.8m). Pleasingly, the Company continues to expand into the US market, achieving 91% year-on-year growth in US ARR contribution from £1.5m in FY22 to £2.8m in FY23.

This consistent growth reflects the quantifiable value we provide to customers through operational insight, increased staff retention, cost efficiencies and improved compliance. Through our 'land and expand' customer strategy, we win new business in a discreet customer location or function and form close customer bonds that allow us to expand the services we offer over time. We do this by building trust through valuable insights and enhancing our customers' own operational performance. Our ability to grow with our customers is demonstrated by a net retention rate of 116% and provides great visibility over future ARR growth.

Our transition into a subscription-only business, with an emphasis on technology solutions, led to the planned closure of the BEMS business unit, which is now reported as a discontinued operation.

Adjusted LBITDA for the year increased to £6.4m (FY22: £5.6m), reflecting the ongoing investment in product development and sales and marketing capabilities to support the strong revenue growth. New product development spend increased to £4.2m (FY22: £3.4m), of which £1.8m was capitalised (FY22: £1.5m), with investments in the evolution of the platform and new analytics dashboards. Sales and marketing investment increased by 13% to £3.0m to maintain growth rates. 

The economic environment has become more challenging and whilst the on-going conflict in Ukraine has no direct impact on the Group's activities, the Board remains cautious about its indirect impact together with the potential for general inflationary cost pressures. As a result, we have weighed our growth ambitions with an increased emphasis on cost efficiency, as we execute an accelerated path to profitability. This is demonstrated by an increased gross margin of 63% (FY22: 54%), as well as operational cost savings across the business. Our cash burn peaked in H1 and has reduced by 17% in H2.

The net cash position of £15.6m as at 31 January 2023 means we are well positioned to continue on our growth trajectory, and develop our technology at the same time as achieving further cost efficiencies.

New business pipeline

The Group's focus is around building sustainable and higher conversion rate pipeline across retail, healthcare, facilities management, franchise and biopharma verticals. Meanwhile, our 'land and expand' sales strategy is focused on the quality of our pipeline with increased traction into mid- and large-enterprise accounts.

The split of the sales pipeline by target organisation size at the end of the year between tier one (large enterprise), tier two (enterprise) and tier three (midsize) targets was 67%, 13% and 14% respectively. Checkit's new customer pipeline in the US - a key growth market - now includes a number of multi-site organisations across the healthcare, food retail and hospitality sectors. The US remains on course to be the largest contributor to Group revenues.

Growth strategy and ambitions

Our growth strategy is proving effective. We are meeting market demand with an unrivalled end-to-end solution, with powerful data and analytics capabilities which provide meaningful insights and enable our customers to make data driven decisions.

We are on track to deliver our longer-term objective:  to become the market leader in augmented workflow management for the deskless industry. We have had considerable success in converting Checkit into a pure-subscription business - with non-recurring revenues now representing less than 10% of total revenue. This transition provides us with visibility over future revenue, enabling us to deepen customer relationships and opportunities to enhance contract values. We are facilitating our customer 'stickiness' through continued investment in our platform, which has the ability to integrate third-party technology, to create a market leading platform. Our sales and marketing strategy is focused around developing higher quality, higher conversion rate sales pipelines across our target sectors as well as further expansion into the US.  In the meantime we remain focused on optimising our operating costs so that we can pivot into profitability and deliver value to our investors.

Going forward, we will consider compelling partner opportunities as an additional scale opportunity. Of paramount importance will be our ability to balance cost and growth initiatives in order to cultivate and maintain a high achieving mentality across the Checkit workforce.

Positive outlook

Our purpose is to simplify and digitise operational activity for the deskless workforce - and never has that been more important. We know that simplifying how organisations manage operational performance has a transformative impact on organisational success, the wellbeing of employees and the outcomes for customers.

When we look back at what was a tumultuous year for us all, we are excited at the progress we have made as a business and proud of the support we have given our customers, providing them with the insight, tools, and methodology to thrive in these challenging times.

I join our Chairman and the rest of the management team in thanking our entire team around the world for their support through what has been a tough year for so many. I am incredibly proud of everything the team has achieved to date, building a market leading offering as well as a long term, international, blue-chip customer base.

We are very much still at the start of our journey, but the opportunities ahead of us are immense. Global supply chain challenges, the rising cost of labour and increased compliance requirements mean that the premium on simplifying deskless operations has never been more relevant.

The Board expects to meet FY24 market expectations and remains confident that the Group is well positioned to deliver strong, sustainable organic growth.

Kit Kyte

CEO

FINANCIAL REVIEW

Executing on our Strategy

FY23 saw another year of strong performance for Checkit, continuing to deliver strong top line growth, while making operational efficiencies to accelerate the path to profitability.

ARR has doubled over the last two years to £11.5m, reflecting the Group's decision to focus solely on recurring revenues from our technology solutions and to invest in its growth. The success of this strategy can be seen through recurring revenue, which now represents 93% of total revenue, and in the US where ARR grew by 91% year-on-year. 

Adjusted LBITDA of £6.4m (FY22: £5.6m) reflects ongoing investment in the Group's product development and sales and marketing capabilities. At the same time, the Group has recognised the changing and challenging economic environment it is operating within and so has sought to balance its longer term vision with a focus on cash preservation, delivering cost savings which have resulted in gross margin expansion to 63% (FY22: 54%).  

The Group continues to benefit from a strong balance sheet and in light of market conditions, will continue to execute against its growth strategy and develop its technology, whilst also driving further operating efficiencies and accelerating its path to profitability. 

ARR and Revenue

ARR grew by 28% to £11.5m (FY22 £9.0m), driven by consistent sales momentum, despite a challenging economic and political environment.

Revenue from continuing operations for FY23 was £10.3m, an increase of 22% compared to the prior year.

ARR growth benefited from both sales to new customers, as well as upsell with existing customers and improved pricing.

New business reflects the attractiveness of our technology with new customers, where we look to secure an initial relationship and then build over time. This land and expand strategy has allowed us to grow with our customers, identifying additional use cases and extending our footprint, resulting in a net retention rate of 116%.

The Group has continued to grow in the US market, achieving 91% year-on-year ARR growth to £2.8m as a result of a number of contract wins, including continued growth in its footprint with its biopharma customers and a new contract with a large resort and casino operator. These new contract wins have the potential to grow significantly over time. Our US business is on track to be the largest revenue contributor of the Group.

Checkit has also renewed one of its largest existing enterprise contracts with an integrated energy company in the UK to provide real time operations management capability to over 300 sites, which evidences the value and stickiness of the platform and IoT offering. This stickiness is reflected in the low churn experienced by the Group, with a gross retention rate of 99%.

Recurring revenue growth has exceeded 30% for the third consecutive year and now accounts for 93% of total revenue, demonstrating Checkit's successful transition into a subscription-based model.

While recurring revenue grew by 41%, non-recurring revenue declined in line with management's expectations, driven by the ongoing conversion of US customers from maintenance contracts to subscription income during the year.

Following the decision to close the BEMS business unit, this is now reported as a discontinued operation. Revenue from discontinued operations in the year amounted to £0.6m (FY22: £4.9m). The Group is now wholly focused on delivering recurring revenue from its technology solutions. 

LBITDA

Checkit's adjusted LBITDA for the year was £6.4m (FY22: £5.6m), reflecting the strong growth in revenue in the year, alongside continuing investment behind this growth.

Investment in sales and marketing has identified new solution areas and use cases across several industries, including hospitality, facilities management and senior living. Investment in sales and marketing grew by 13% in the year to £3.0m (FY22: £2.6m).

New product development (NPD) spend totaled £4.2m (FY22: £3.4m), of which £1.8m was capitalised (FY22: £1.5m), as the Group invested in the evolution of the platform and new analytics dashboards.

At the same time, the Group has balanced its growth strategy with an increased focus on operational efficiency, as it pursues a clear path to profitability. This has resulted in gross margin improvement to 63% (FY22: 54%), as the Group was able to reduce the cost of delivery and secure procurement savings in its platform costs.

The Group was also able to deliver efficiencies in operating costs, especially in H2 where operating costs reduced by £0.5m from H1, as the Group undertook targeted headcount reductions of 10% in its operations and ceased to use outsourced software development capacity for NPD, bringing all work in-house.

Non-recurring or special items

Non-recurring or special items in the year of £4.8m related to the impairment of goodwill and amortisation of acquired intangible assets. These are non-cash items:

Following the decision to close the BEMS business unit, the Group carried out a thorough impairment review of the goodwill relating to the acquisition of Checkit UK Limited (formerly Next Control Systems Limited) and concluded that this goodwill should be fully impaired. This business unit is now reported as a discontinued operation. 

Taxation

The Group is currently loss making and therefore no corporate tax charge is reported for the year FY23. A tax credit of £0.3m arises from R&D tax credits claimed and the amortisation of intangible assets arising on the acquisition of Checkit UK Limited. There remains over £25m in Group carried forward taxable losses and therefore there is no expectation of tax payments in the short to medium term. 

EPS - continuing operations

Following the successful placing in November 2021, where the Group raised net proceeds of approximately £20.0m, the weighted average number of shares in issue in FY23 increased to 108.0m (FY22: 68.1m). Loss per share (basic & diluted) was 11.2 pence (FY22: 12.0 pence). 

Cash

The Group cash position at 31 January 2023 was £15.6m (31 January 2022: £24.2m; 31 July 2022: £19.5m). As a result of the strong revenue growth and increased focus on operational efficiency seen in FY23, the average cash burn per month peaked in H1 and reduced by 17% in H2. The Group is consequently well placed to execute against its growth strategy and develop its technology, whilst also driving further operating efficiencies and accelerating its path to profitability. 

Consolidated statement of comprehensive income

year ended 31 January 2023

*Adjusted loss before interest, tax, depreciation and amortisation ("LBITDA") is calculated by taking operating profit and adding back depreciation & amortisation, share-based payment charge and non-recurring or special items

Consolidated balance sheet

as at 31 January 2023

Consolidated statement of changes in equity

year ended 31 January 2023

Consolidated statement of cash flows

year ended 31 January 2023

1.     Basis of Preparation 

The consolidated statement of comprehensive income, the consolidated balance sheet, the consolidated statement of changes in equity, the consolidated cash flow statement and the associated notes for the year ended 31 January 2023 have been extracted from the Group's financial statements upon which the auditor's opinion is unqualified and does not include any statement under section 498 of the Companies Act 2006.

There were no new standards or amendments or interpretations to existing standards that became effective during the year that were material to the Group.

No new standards, amendments or interpretations to existing standards having an impact on the financial statements that have been published and that are mandatory for the Group's accounting periods beginning on or before 1 February 2023, or later periods, have been adopted early.

Whilst the financial information included in this preliminary announcement has been computed in accordance with international accounting standards, this announcement does not itself contain sufficient information to comply with all IFRS disclosure requirements. The Company's 2023 Annual Report and Accounts will be prepared in compliance with UK-adopted International Accounting Standards (IFRS).

The unaudited preliminary announcement does not constitute a dissemination of the annual financial report and does not therefore need to meet the dissemination requirements for annual financial reports. A separate dissemination announcement in accordance with Disclosure and Transparency Rules (DTR) 6.3 will be made when the annual report and audited financial statements are available on the Company's website.

Statutory Information

The financial information included in this preliminary announcement does not constitute statutory accounts and is consistent with the accounting policies of the Group, which were set out on pages 60 to 67 of the 2022 Annual Report and Accounts.

The statutory accounts for the year ended 31 January 2023 will be finalised on the basis of the financial information presented by the directors in this preliminary announcement and will be delivered to the Registrar of Companies following the Group's Annual General Meeting. The announcement of the preliminary results was approved on behalf of the Board of directors on 21 April 2023. 

Restatement of prior year

During the year, the Group discontinued its activity in Building Energy Management Systems. Consequently, the results from this revenue stream are included as discontinued operations.

The prior year consolidated statement of comprehensive income and related notes have been restated to show continuing activities, allowing for suitable comparison between periods. The overall operating loss for the year for the Group remains unchanged.

Quantitative impact of restatement on financial results

2. Segmental reporting

Management provides information reported to the Chief Operating Decision Maker ("CODM") as a single operating segment for the purpose of assessing performance and allocating resources. The CODM is the Chief Executive Officer.

The Group's main activities are the supply of Connected Workflow Management, automated monitoring, Internet of Things ("IoT"), and operational insight-based products and services.

Revenue by type of the continuing operations

The following table presents the different revenue streams of Checkit:

Geographical information

The Group considers its operations to be in the following geographical regions:

Information about major customers of the continuing operations

During FY22, the Group had one customer who generated revenues of 16% of total revenue (FY22: 22%).

Revenue expected to be recognised

The Group expects to recognise revenue amounting to £4.1m (2022: £2.3m)  in FY24 relating to performance obligations from existing contracts that are unsatisfied or partially satisfied as at 31 January 2023.

3. Operating loss - continuing operations

Included within auditor's remuneration for audit services in FY23 is a sum for less than £0.1m (2021: less than £0.1m) for the audit of overseas subsidiaries carried out by an auditor other than Cooper Parry Group Limited.

Cooper Parry Group Limited was paid £nil for tax advisory and compliance services (2022: Grant Thornton UK LLP: less than £0.1m).

4. Net cash flows from operating activities

5. Taxation

(a) Analysis of tax (credit)/charge for the year - continuing operations

(b) Analysis of tax charge for the year - discontinued operations

(c) Factors affecting taxation charge for the year - continuing operations

The effective tax rate for the year was 19%.

(d) Factors affecting taxation charge for the year - discontinued operations

(e) Factors that may affect future taxation charges

Deferred taxation assets amounting to £6.5m (2022: £4.1m) have not been provided in respect of unutilised income tax losses of £25.8m (2022: £22.0m) that can only be carried forward against future taxable income of that same trade as there is currently insufficient evidence that these assets will be recovered.

The UK Budget 2021 announcements on 3 March 2021 included measures to support economic recovery as a result of the ongoing COVID-19 pandemic. These included an increase to the UK's main corporation tax rate to 25%, which is due to be effective from 1 April 2023. These changes were substantively enacted at the balance sheet date and hence any deferred tax balances have been calculated at 25%. 

6. Earnings per share

Earnings per share (EPS) is the amount of post-tax profit attributable to each share (excluding those held in the Employee Benefit Trust or by the Company). Basic EPS measures are calculated as the Group profit for the year attributable to equity shareholders divided by the weighted average number of shares in issue during the year. Diluted EPS takes into account the dilutive effect of all outstanding share options priced below the market price, in arriving at the number of shares used in its calculation.

Both of these measures are also presented on an adjusted basis, to remove the effects of non-recurring or special items, being items of both income and expense which are sufficiently large, volatile or one-off in nature, to assist the reader of the financial statements to get a better understanding of the underlying performance of the Group. The note below demonstrates how this calculation has been performed.

The adjusted EPS information is considered to provide a fairer representation of the Group's trading performance.

Discontinued earnings per share

Total earnings per share for the year attributable to equity shareholders

*       In the current and prior year, the dilutive impact of employee share options is ignored since there is no dilutive impact on continuing operations EPS measures given the continuing loss for the year.

7. Intangible assets

Acquired intangible assets are made up of the separately identified intangibles acquired with the purchase of Next Control Systems in May 2019 and those acquired with the purchase of Tutela LLC in February 2021.

Impairment testing for goodwill

The Group identifies cash-generating units (CGUs) at the operating company level, as this represents the lowest level at which cash inflows are largely independent of other cash inflows. Goodwill acquired in a business combination is allocated, at acquisition, to the groups of CGUs that are expected to benefit from that business combination.

Goodwill at 31 January 2021 all relates to the acquisition of Checkit UK Limited in May 2019. Goodwill acquired in the year ending 31 January 2022 relates to the acquisition of Tutela LLC in February 2021.

Goodwill values have been tested for impairment by comparing them against the "value in use" in perpetuity of the relevant CGU group. The value in use calculations were based on projected cash flows, derived from the latest forecasts prepared by management and budgets approved by the Board, discounted at CGU specific, risk adjusted, discount rates to calculate their net present value.

Key assumptions used in "value in use" calculations

The calculation of "value in use" is most sensitive to the CGU specific operating and growth assumptions, that are reflected in management forecasts for the five years to January 2028. CGU specific operating assumptions are applicable to the forecasted cash flows and relate to revenue forecasts and forecast operating margins in each of the operating companies and are based on the strategic plans for the Group. Long-term growth rates are capped at 1%.

The revenue growth rates used in the cash flow forecast are based on management's expectations of the future opportunities for the Checkit platform and the ability to upsell to existing customers on a global basis, including the planned US expansion. The forecasts include the costs associated with delivering the Checkit platforms, which are directly linked to the forecast sales growth.

Discount rates are based on estimations of the assumptions that market participants operating in similar sectors would make, using the Group's economic profile as a starting point and adjusting appropriately. Sensitivity to the discount rate has been applied to evaluate impairment testing using discount rates ranging from 10% to 20%.

Following the decision to close the BEMS business unit, management has assessed that the carrying value of the goodwill associated with the acquisition of Checkit UK should be fully impaired.

The carrying value in relation to the acquisition of Checkit LLC has not identified any impairment.

8. Discontinued operations

During the year the Group discontinued its activity in Building Energy Management Systems, consequently the results from this revenue stream are included as discontinued operations.

During the year ending 31 January 2021, the Group sold assets relating to its Elektron Eye Technology business. Consequently, the business has continued to be included as discontinued operations.

Total discontinued operations comprise:

Building Energy Management Systems

The results of ceasing operations of Building Energy Management Systems, which have been included in the consolidated statement of comprehensive income, were as follows:

Cash flows from Building Energy Management Systems

Elektron Eye Technology

The results of the Elektron Eye Technology discontinued operation, which have been included in the consolidated statement of comprehensive income, were as follows:

Cash flows from Elektron Eye Technology

On 1 July 2020 and 13 January 2021, the Group disposed of assets relating to its Elektron Eye Technology business for a total net proceeds of £0.9m, with £nil (2022: £0.2m) payable as deferred consideration at the end of the year.

9. Businesses acquired - Checkit LLC

In the prior financial year, the Group acquired 100% of the equity of Checkit LLC (formerly Tutela Monitoring Systems LLC), a US-based business. The results for the comparative year ended 31 January 2022 incorporate results from the date of acquisition, being 4 February 2021.

Checkit LLC generated a loss of £0.2m on sales of £1.6m for the period from 4 February 2021 to 31 January 2022. If Checkit LLC had been acquired on 1 February 2021, revenues and profits would have been unchanged for the comparative period.

10. Non-GAAP performance measures

A reconciliation of non-GAAP performance measures to reported results is set out below:

Profit measures - LBITDA - continuing operations