Final Results for the year ended 31 December 2020
Yü Group PLC
(the "Group")
Final results for the year ended 31 December 2020
· Strong 2020 performance continuing into 2021
· Strategy delivering with business on track for profitable growth
· Strong cash position and strengthened management team underpin growth
Yü Group PLC (AIM; YU.), the independent supplier of gas, electricity and water to the UK SME and Corporate sector, announces its final results for the year to 31 December 2020.
Bobby Kalar, Chief Executive Officer, said:
" The business is primed and ready for profitable growth.
I am pleased to confirm a strong performance for FY2020 and a good start to 2021, further strengthening our 2021 contracted revenue from the £93m already secured in 2020 . Our strategy is working well and as such the Board is confident that the business is on track to deliver its operational KPIs and to report profitable growth in FY2021. This has been a fantastic effort by the whole team through a difficult period and is a huge boost for 2021 and beyond.
Our strong top line performance and earnings in FY2020 have exceeded market expectations and are a clear indicator of the Group's positive trajectory and speed of travel. Monthly bookings have far exceeded the Board's expectations, particularly pleasing in light of the ongoing economic impact of the pandemic. I'm pleased to report that we've continued to see improved Q1 2021 booked revenue compared to the same period last year.
Net customer contribution, which measures gross margin less bad debt, rose to 6.1% in 2020, up from 2.5% in 2019, demonstrating a clear improving trend and this gives the Board significant comfort that the business is performing ahead of plan.
Given the collective shock suffered by British businesses in an extraordinary year, I am pleased with the Group's operational performance. Our intra month bill to cash position has remained strong and we continue to have significant cash in the bank, while maintaining a laser like focus on collection of customer receivable balances.
The Group acquired two cash generative customer books in 2020 and successfully integrated circa 5,000 meter points quickly and seamlessly over a 24 hour period following completion of each acquisition. Strategic acquisitions form part of our ambitious scaling plan. As the market consolidates further, and with an interesting pipeline of opportunities, I am confident the Group is well placed to continue acquiring value creating books that complement our portfolio.
It has clearly been a positive year for the Group, however, it has also been a challenging period and I want to thank all the team for their unwavering support, commitment and hard work. Having quickly adapted to how our business operated and served our customers under the lockdown, I'm proud of the resilience the Group has shown. Record bookings, billing efficiencies and strong cash collection throughout the year, as well as acquiring two competitor customer books, shows organisational strength and is testament to the team's progress and maturity.
I still passionately believe in the original growth opportunity that prompted me to found this business and the very significant growth and market share potential in this sector. As CEO and majority shareholder, I remain fully committed to successfully steering the business through this next exciting growth phase.
Underpinning our growth ambitions in an extraordinarily large market is our sound balance sheet, experienced and vested management team and scalable platform. We have made a good start to 2021. I'm pleased to be able to look forward to the future with absolute confidence. From the 'hard yards' I see good times ahead."
Financial Review:
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31 December |
2020 |
2019 |
|
|
£'000 |
£'000 |
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|
|
|
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Revenue |
101,527 |
111,613 |
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Adjusted EBITDA 1 |
(1,714) |
(4,242) |
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Loss for the year |
(1,165) |
(4,968) |
|
Operating cash inflow/(outflow) |
12,102 |
(11,280) |
|
Cash |
11,740 |
2,377 |
|
Overdue customer receivables 2 |
8 days |
7 days |
|
Loss per share: |
|
|
|
Adjusted |
(11.0)p |
(24.0)p |
|
Statutory |
(7.0)p |
(31.0)p |
|
Dividend per share |
0p |
0p |
· Revenue of £101.5m (2019: £111.6m), ahead of market expectations.
· Strong adjusted EBITDA momentum, despite H1 2020 headwinds, and significantly above market expectations:
o Adjusted EBITDA loss for the year of £1.7m, after £1.8m loss in H1 which included significant impact from Covid-19.
o Adjusted EBITDA profit for H2 2020 of £0.1m, with a strong start to Q1 2021.
· Loss for the year (after tax) of £1.2m, significantly ahead of market expectations (2019: loss of £5.0m).
· Very strong cash performance. Cash held of £11.7m at 31 December 2020 (2019: £2.4m), with 99% of operational bill to cash conversion.
Strategic and operational highlights:
· Good revenue visibility with £93m contracted for FY 2021, an increase of 16% on prior year (2019: £80m contracted for FY 2020).
· Accelerating performance to deliver an ambitious organic growth rate:
o Average monthly bookings nearly doubled year-on year to £8.3m (2019: £4.2m).
o Average contract term booked increased to 24 months (2019: 22 months).
· Scalable platform fully tested, with successful onboarding of two profitable acquisitions during H2 2020.
· Resilient customer volumes and profitability in H2 2020, with demand pick-up from the initial shock event of the first lockdown.
Positioning for the future:
· High revenue momentum in to 2021 from strong H2 2020 sequential revenue growth of 22% and record H2 monthly bookings of £10.3m (up 62% on H1). New digital sales portal performing well.
· Targeting continued lengthening of average contract term to strengthen contracted revenue, increased renewal rates and more products per customer.
· Significant improvement in net customer contribution expected as legacy contracts have now washed through.
· Efficiency initiatives underway to reduce overheads from 6.2% of revenue over medium term.
· Sound balance sheet (cash £11.7m) with scope to add further value creating acquisitions now scalable platform fully tested.
Outlook:
· Good start to 2021 and Board expects strong revenue performance, and adjusted EBITDA growth momentum providing confidence in exceeding current market expectations as the Group embarks on its rapid scale phase.
· Strong cash position and strengthened management team supports compelling organic and inorganic growth and value creation ambitions. Significant scope to leverage proven scalable digital platform and continue to increase market share.
The information communicated in this announcement would have constituted inside information for the purposes of Article 7 of Regulation 596/2014.
1 Adjusted EBITDA is earnings before interest, tax, depreciation and amortisation, and also before non-recurring items, share based payments and unrealised gains or losses on derivative contracts. See reconciliation in note 3 to the financial statements below.
2 Overdue customer receivables is expressed in days of sales, and relates to the total balance, net of provisions, of accrued income which is outside of the normal billing cycle, plus overdue trade receivables (net of VAT and CCL).
For further information please contact:
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Yü Group PLC |
+44 (0) 115 975 8258 |
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Bobby Kalar |
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Paul Rawson |
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SP Angel Corporate Finance LLP |
+44 (0) 20 3470 0470 |
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Jeff Keating |
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Bruce Fraser Caroline Rowe |
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Tulchan Group |
+44 (0) 20 7353 4200 |
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David Allchurch |
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Giles Kernick |
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Notes to Editors
Information on the Group
Yü Group PLC, trading as Yü Energy, is an independent supplier of gas, electricity and water focused on servicing the SME and corporate sector throughout the UK. It has no involvement in the domestic retail market. The Group was listed on the AIM market of the London Stock Exchange in March 2016.
A ROBUST AND RESILIENT PERFORMANCE
Resilience, growth and agility driven by breadth and depth of expertise, a reinvigorated Board and a strengthened management team.
Introduction
I am delighted to provide my second statement to shareholders after what has been a pivotal, positive and highly constructive year for the Group.
Since I joined the Board in January 2020 the world has been much altered by a global pandemic. This continues to present evolving challenges in the macro‑environment within which we and our customers' businesses operate. The Board's ethos remains one of regarding challenging market conditions as providing opportunities both to test the mettle in the Group's positive momentum, and to leverage its now strengthened overall position.
New ways of working, improved systems and streamlined processes have been stress‑tested in the real world and have proved both robust and scalable. Despite the pandemic these have resulted in a c.60% reduction in year-on-year losses to an adjusted EBITDA position of -£1.7m together with a strong bookings performance and blended contract margins which have greatly improved by 2.7% to 7.6%. Bad debt has been contained at 3.1%.
In a clear demonstration of both intent and capability, last year the Group made and integrated two immediately earnings-enhancing acquisitions of competitors' books. The Group generated operating cash flow of £12.1m and remains largely debt free. We are now poised to significantly accelerate the realisation of our ambitions for scaled and sustainable growth.
Robustly balanced decision-making processes and a clear and effective Board relationship with the Executive Committee have enabled agile leadership and the swift implementation of agreed strategies.
Given the wider socio-economic context, a small profit in H2 2020 was most encouraging at this stage of our evolution. Perhaps more notable has been the establishment of a clear trajectory, evidenced by much-improved results, as legacy lower margin contracts were put behind us. This trajectory is the result of significant and sustained efforts made by all of my colleagues throughout the Group.
In further and additional preparation for entering our scaling-up phase, the Group has changed its nominated adviser and broker and appointed new external corporate and financial communications advisers. I joined an ambitious and growing business and the team and I are delighted to have entered the next growth phase for the Group in which we accelerate our clear potential to generate further growth and sustainable profitability.
Momentum built on significant improvements and maintained differentiation
Your Board, in accordance with modern corporate governance practice, is now well balanced and comprises three independent non-executive directors and two executive directors. An effective blend of key skills across industry knowledge, M&A, digitalisation and effective corporate and financial governance is now being advantageously harnessed.
Inter alia, the Board's focus has been on: mapping its ambitious objectives to a clearly defined and effective set of timelined implementable strategies; evolving and maintaining the clarity of efficient and appropriate management structures; embedding "joined-up" risk assurance and corporate governance within a judiciously defined risk / opportunity appetite. The Board has been fully engaged in supporting and mentoring the Group's high calibre Executive Management Team to enable us to achieve our position as the growing principal disruptor and the leading "challenger" business in the sector.
Key elements of the differentiation within the Group continue to be: its nimble and entrepreneurial approach, its rigorous customer-centricity and a constant "can-do" willingness to either do things better or differently. A principal tenet of the Board has been to seek to balance and maintain this agility whilst ensuring the maturity of governance that is required to support the business as it accelerates in its "scale-up", not least in its continuing adoption of a vital "digital-first" approach.
Following on from last year's statement I am pleased to report that the integration of the organisational and management structures of the Board and the Executive Management Team, down through the organisation as a whole is now well-embedded and efficiently providing the framework for continued out-performance.
A high-functioning, driven and effective Executive Committee ("ExCo") is in place and is actively pursuing its mandated growth opportunities whilst improving processes and systems to contain general overheads. These remain largely unchanged at 6.2% of sales. The team has highly experienced and motivated individuals in place and, importantly, the Group having thoroughly reviewed its retention policies continues to attract and retain top-quality and value-enhancing talent, at all levels, into its ranks.
The resilience of our systems and processes has been tested and proven, not least by the completed acquisitions of two of our competitors' customer books during H2 2020. These books were speedily and seamlessly integrated into the Group's scalable platform. Both acquisitions had very short investment payback periods and were immediately earnings enhancing.
The Board has therefore a confirmed and evidenced confidence in the ability of the Group to continue to scale, over the short to medium term, both organically and by acquisition.
In keeping with last year's statement of intent to enhance and improve our communications with the market and our investors, we have appointed a new nominated adviser and broker and new corporate and financial communications advisers in order to complement our excellent in-house capabilities. These moves are part of a programme to widen and deepen the Group's relationships with our investor, banking and commercial audiences. We are seeking to create a more engaged environment for our partners and stakeholders in order to accelerate the meeting of our objectives for further automation, digitalisation and scaling-up.
Implementation of risk assured governance without loss of agility or opportunity
The benefits of having undergone a transformation in our governance have included the adoption of a detailed, sophisticated and robust approach to the identification, setting and management of judiciously defined risk appetites. Top-to bottom line of sight governance from risk assurance to strategic objectives underpinned by "joined-up" internal processes- within a defined risk management framework, are now embedded.
These are evidenced by regular and frequent standing "intra‑group" reviews at every level of the business. These include a regular and dedicated ExCo-led risk assurance forum.
This, mentored and supported by the independent non-executive directors of the Audit Committee, is mindful that the essential speed and agility required of a challenger business remain uncompromised.
The AIM investigation into the self-identified matters which arose in 2018 was satisfactorily closed during 2020.
An ambitious and balanced strategy
Having achieved upward momentum in our performance, the Board is now focused on the next phase of the Group's evolution.
The Group's strategic priorities span: delivering organic growth supplemented by value-enhancing non-organic opportunities; driving cash and profitability as outlined in our financial framework; utilising digital technologies and innovation to assist in growth and improve cost efficiency; and maintaining and evolving the strong foundations of good governance and robust risk management.
Now entering a significant scaleup phase with good momentum
The Covid-19 pandemic has clearly tested many businesses across the world. In their mature response to the pandemic our staff, throughout the organisation, have demonstrated great dedication and fortitude. I sincerely thank them all for their clear focus on prioritising adherence to Government guidelines whilst managing these risks and continuing to deliver an unparalleled level of service to our valued customers.
The Group is in a sound overall position, is largely debt free and with many positive key indicators. Adjusted EBITDA losses have been reduced by 60%, gross margins improved from 4.9% to 7.6%, general overhead costs are contained at 6.2%, and newly developed portal sales have contributed to a record H2 2020 performance, of £10.3m in average monthly bookings.
With people, systems and networks now in place your Board is highly confident in scaling the Group up to the next order of magnitude within our sector.
In short, the Group is now ready to launch a period of sustainable growth as it scales up to address and increase its rightful share of a £35bn market.
CHIEF EXECUTIVE OFFICER'S STATEMENT
A DEFINING YEAR
A defining year underscoring the strength, maturity and momentum of our business.
I'm particularly pleased with the strength, maturity and focus the team have shown throughout the year. An incredibly strong performance, in extraordinary economic circumstances, is a testament to the hard work of the past few years, and I know this will continue to benefit the Group as it continues to scale over the coming years.
I have spoken passionately in previous statements about the errors of the past and the need to reset and strengthen the business: about tightening processes and controls, having stricter corporate governance in place and closing gaps and cracks to stop gross margin leakage throughout the customer lifecycle. In summary, realigning the business for strong, sustained and profitable growth, the results in these annual accounts show that we have achieved this difficult but necessary result. This reset period is now firmly behind us and I'm pleased and relieved to be able to draw a line under that period of our business journey. Our focus is now firmly on scaling the business (bigger, better, faster, stronger) using our unique position to leverage partnerships and other relationships to accelerate growth whilst enhancing shareholder confidence.
Strong management team and organisational support
In the first quarter of 2020 the Group announced the appointment of a new Chairman and a senior independent director creating a Board composition of three independent non-executives and two executive directors. Whilst the Board has only been physically able to meet once before lockdown, I'm pleased with the blend of support and challenge we've established during subsequent "Teams" Board meetings. It was never going to be easy establishing a new Board during this period, but the support and contribution of each Board member has helped position the business for growth.
The ExCo has been simplified, streamlined and strengthened. Its primary role is to deliver the Board's strategy and implement the business plan, whilst managing communication from the Board to the wider business and vice versa. Each member chairs and hosts specific monthly business forums such as sales and marketing, debt and commercial, people, risk and digital transformation. KPIs and targets set in the business plan are validated, tracked, measured and monitored in these forums. This level of analysis gives the Board confidence that the business is collectively delivering in accordance with the business plan. This strategy has been the single biggest factor in both our performance in 2020 and the heightened confidence the Board has in its ambition for sustainable profitable growth.
I am confident the ExCo is adequately supported, vested and incentivised to achieve targets set for 2021 and beyond. We are experts in the B2B utilities market, and I expect to leverage our position to target complementary opportunities.
Bigger (high growth)
The investment in our sales strategy has delivered very impressive results and set the bar for subsequent years. We have made some tough decisions to end relations with some channel partners in favour of more specialised partners which are able to better pinpoint our target market both demographically and segmentally. Additionally, our digital channel launched in Q1 2020 has exceeded expectations producing annualised bookings of over £21m in H2. Overall new booked business has outperformed expectations, more so given the added pressure of Covid-19 and the effect on British businesses. Our monthly run rate in 2020 averaged £8.2m with H1 averaging £6.2m and H2 averaging £10.3m.
The management team has remained disciplined in targeting only good quality, good margin contracts and with legacy low margin contracts now behind us we are seeing improved gross margins being realised in the business. The Group aims to at least maintain these margins in forward years. Further, the Group will now target a retention rate of 70%.
In addition to strong organic growth, the Group successfully completed two competitor book acquisitions in H2 2020.
The combined books account for around 4,500 meters including Bristol City Council and form part of the Group's strategic growth plans. The acquisitions were immediately cash generative with no noticeable additional cost to serve. I'm pleased to have demonstrated the Group's appetite and ability to seamlessly migrate these meters into our scalable operating platform over the course of a weekend. We now have a proven template for deals and are confident our operating model is robust. We are actively looking to complement our accelerating organic portfolio with strategic acquisitions as the utilities market further consolidates.
Better (more profitable)
It's relatively simple and easy to quickly grow a B2B supply business by selling supply contracts to a vast addressable market. The Group reported that it had tendered a combined £2.5bn of available supply contracts in 2020. A modest additional 10% of tendered business being secured would have seen booked revenue of £250m generated, increasing bookings by a further 125% to that achieved in 2020.
The fact is being able to "attract, contract and extract" good quality, good gross margin business that will complete the lifecycle journey from "booking through to cash" without margin leakage and take additional products during their term, and remain "sticky" for a further term, is in fact very difficult. It's often tempting to compromise quality for quantity in a market where scale is important. The "hard yards" have paid off for the Group and we've developed strong expertise in successfully and selectively being able to "attract" and "contract" business that completes the lifecycle journey and "extract" profit. The Group will remain resolutely focused and disciplined in maintaining this strategy and is confident that the result will contribute positively to our EBITDA.
Our systems now allow us to track the position of any contract in our portfolio and pinpoint whether it is contributing positively or negatively to the target profit. Such granularity and speed is a game changer in our business and having removed significant gaps and cracks in the business we've created a well-oiled organisation. I'm pleased that the results speak for themselves.
Faster (digital first)
Having complete confidence around the strength of the business, the Group will now focus on making the customer journey (from tender through to cash) faster, through a digital-first strategy.
I've spoken previously about the Group's desire to automate and digitalise our front facing and back office business processes. Although we've already made great strides, the Group emphasis is on delivering its digital strategy in 2021 for benefit in 2022.
The recruitment of Jason Prothero as Commercial and Digital Transformation Director earlier this month shows clear intent in the Group's appetite to embrace innovation through technology. Having established strong foundations, automating and digitally transforming the business will allow us to optimise the business by removing costs and manual processes, whilst also providing a better customer experience.
The Group sees automation and digitalisation as an opportunity to further disrupt the market, and to scale more quickly and predictably. It will also enable efficiencies in cost to serve and cost to acquire, enabling bottom line profitability to be increased further as the Group scales.
Stronger (robust and resilient)
If ever there was an ideal opportunity to stress-test the strength of a business, then Covid-19 provided it. We successfully transitioned our workforce to remote working before lockdown with no disruption to the levels of customer service or business operations as we launched our business continuity plan.
Q1 2020
With a newly formed Board, and after the work to reset the Group, the business started 2020 in a strong position with significant optimism.
Q2 2020
April saw usage volumes impacted directly because of lockdown as our customers used 35% less energy than they expected in a normal April period. During Q2 the business did not see levels of customer debt increase as previously modelled and our strong billing performance meant we were able to collect payments for the energy used. New sales bookings remained strong and continued to grow month on month. The impact of the reduced levels of volume usage in Q2 meant that not only did our customers use less energy but we also had to sell the excess energy back to the grid at a lower price than originally purchased due to commodity market movements.
The EBITDA impact to the business due to Covid-19 was the predominant driver of the £1.8m loss incurred in H1. Excluding the impact of the first, shock, lockdown, I'm confident our business was set to meet its previous objectives of returning to break-even position during H1.
Q3 2020
As the UK came out of lockdown and businesses began to find new ways of operating, customer volume levels increased to 90% of pre-Covid-19 levels and pleasingly sales momentum continued into Q3 with July recording a record bookings month of £13.3m. Very strong billing and cash collection performance continued, with the business seeing 99.5% of monthly billed revenue collected and tight controls maintained around customer debt management. During the period the Group successfully onboarded c. 4,000 meter points onto its operating platform. This was the Group's first acquisition and a test case for further such opportunities. An excellent team effort and a determination to immediately enhance value saw the business manage the full migration process quickly and seamlessly.
Q4 2020
The announcement that from the 5 November the UK would go into its second lockdown echoed fears that customer volume usage would be impacted as in Q2. More businesses that had managed to survive thus far may not financially survive a second lockdown and the net effect on our business could be worse than before.
However, apart from a slight dip in volume in November the business felt little impact in this second lockdown and by December customer volume usage had increased to 93%. All other KPIs trended in line with Q3.
Summary
It certainly has been a year of four quarters and each quarter has brought new challenges which we have successfully overcome. We enter the new financial year in a strong position and with excitement.
In summary:
We have a strong balance sheet even after purchasing two customer books.
· Our sales strategy has worked well with good margin business being booked and with all legacy contracts behind us. I see the sales momentum and discipline continuing to drive performance and deliver profits.
· Strengthening our billing and cash collection performance has had an immediate positive impact on intramonth cash collected. Combined this year we have collected 99% of what we have billed in the year. For 2021, we expect to see a similar performance.
· Customer receivables have been closely monitored throughout the year, and our overdue balance performance remains strong at eight days.
· A strengthened and much improved Board and Executive Committee is ready to take the business to half a billion of revenue.
· We are an entrepreneurial, agile and ambitious business with the strong foundations on which to scale.
Finally, I'd like to extend my heartfelt gratitude to the whole team who have helped and supported the Group by playing an integral part of delivering a defining year.
Outlook
I am extremely pleased to report that the new financial year has started strongly building on our very strong 2020 performance. As we entered 2021 contracted revenue was already over 90% of the revenue recorded in FY 2020. We will continue to build as we add new sales bookings through acquisition of new customers and via renewal and cross-sell to existing customers.
Average monthly bookings during Q1 2021 are performing ahead of 2020 following a very strong H2 2020 where monthly bookings averaged £10.3m. Bookings represent an annualised value of contracts, and typically our contracts are offered over a one, two or three-year term leading to additional forward revenue being secured with our average contract term increasing from 22 months in 2019 to 24 months in 2020 with further improvements targeted for FY21.
Renewal rates of 60% are also targeted to increase to over 70%; and the average number of products enjoyed by each customer is expected to expand. As a result of this accelerating organic growth performance we expect revenue in FY 2021 to be significantly above the £101.5m delivered in FY 2020; and ahead of market expectations. We also expect adjusted EBITDA to be significantly ahead of market expectations for 2021.
Our confidence is based on the high quality, profitable and growing contract book in place; the impact of H2 2020 acquisitions to flow into 2021; and a strong emphasis on control of overheads using digital technology as the Group embarks on its rapid scale phase.
In addition, management continue to review the potential for earnings enhancing acquisitions of competitors' customer books. These would provide further significant value increasing our scale and providing benefits via our platform, whilst unlocking significant cross sell opportunities. I believe these opportunities will arise over the short to medium term, as the market looks to consolidate.
FINANCE REVIEW
STRONG AND IMPROVING UNDERLYING PERFORMANCE
A clear and pleasing improvement in our performance, delivered under our robust financial framework.
Results
The results for the year to 31 December 2020 demonstrate clear momentum in the financial performance of the Group.
Revenues of £101.5m (2019: £111.6m) were ahead of market expectations. A very strong H2 2020 performance, at £55.6m (21% higher than H1 2020), was achieved as accelerated new sales bookings and book acquisitions strengthened revenues, and customer energy consumption recovered post the initial "shock" of the first lockdown.
The Group's loss for the year ended 31 December 2020 was £1.2m, significantly below the £5.0m loss for the prior year.
Adjusted EBITDA1 loss at £1.7m for the year was significantly improved from the prior year (2019: loss of £4.2m). The Board is also pleased to note H2 2020 showed an adjusted EBITDA profit of £0.1m (H1 2020: £1.8m loss, largely due to Covid-19). Whilst this level of profit is not at the scale the Board is satisfied with, it is pleasing to see the Group return to a profitable footing with positive trends across all key indicators.
Analysing profitability
Gross margin for the year was 7.6%, up from 4.9% in 2019 despite the 1.5% impact of Covid-19 during 2020. Gross margin for H2 2020 was 9.1% (H1 2020: 5.7%, 2019: 4.9%), showing significant improvement.
Net customer contribution2, representing underlying profitability achieved from customer contracts, was 6.1% for the full year and 6.3% for H2 2020. Management is pleased to report this 2.5x increase in H2 2020 from the prior year (2019: 2.5%).
Continued positive momentum in net customer contribution is targeted by management. Legacy, low margin contracts have, as expected, washed through during 2020. They are now replaced with higher quality, higher margin contracts, and the Group continues to focus on customer lifecycle initiatives.
The Board is pleased to report that, at 31 December 2020, contracted revenue for 2021 is £93m, consisting wholly of these new improved margin contracts. The improving net customer contribution performance in 2020, to 6.1%, is after a 3.1% charge for bad debt (2019: 2.5%). The level of provisioning has been increased in view of the wider economic context caused by Covid-19, despite solid cash collection for FY 2020. The Board targets a reduced bad debt charge in 2021 to support continued improvement in net customer contribution.
Estimating the impact of Covid-19
Isolating the impact of the pandemic on the financial results reported is a complex exercise which requires management judgement. The full impact of the pandemic is, therefore, reflected in the Group's reported adjusted EBITDA and not included as an exceptional cost. In calculating net customer contribution as an underlying performance metric, management has made an estimate of the significant one-off costs incurred.
A fall in customer energy consumption was particularly evident in April and May 2020, at the time of the first lockdown, when demand fell to c.65% of normal levels. This "shock" volume reduction led to an over-hedged (i.e. a long) traded commodity position which coincided with a significant decline in commodity prices caused by the near global lockdown. The combined consequence was a gross margin loss on the over-purchased energy. In addition, there were significant additional costs over the same period in operating the national energy system which were passed through to energy suppliers.
Management estimates that a substantial proportion of the £1.8m loss incurred in H1 2020 was a direct result of the initial shock of the first lockdown.
For H2 2020, customer energy volumes have been more stable, at c.90% of pre pandemic demand, and management have implemented some risk mitigation and commercial strategies for this new normal.
Whilst the Group's revenues and gross margin have been impacted, the extent of the impact is more difficult to isolate than the costs incurred during the initial shock of the first lockdown. The Group's internal net customer contribution metric for H2 2020 has not, therefore, been adjusted.
Clear results under our financial framework
Our financial framework is entering a new phase after significant reset work over the last two and a half years.
· Scaling recurring revenues: We plan to secure significant organic revenue growth to take advantage of the available market opportunity. Average monthly bookings accelerated during 31 December 2020, rising from £4.2m in FY 2019 to £10.3m in H2 2020. The Group also exited 2020 with good forward revenue visibility, with £93m already contracted for FY 2021 - an increase of 16% on the comparable measure from 2019.
· EBITDA, by increasing net customer contribution ("NCC"): We optimise anticipated NCC at point of sale and throughout the contract lifecycle. Our NCC (which is pre the impact of Covid-19) has improved to 6.1% in FY 2020 (2.5% in FY 2019). The expiry of low margin contracts, the immediately earnings enhancing acquisition of two customer books, and certain customer lifecycle value campaigns have increased NCC to 6.3% for H2 2020. Management continues to invest effort to enhance this measure further in the short term and to reduce the negative impact of bad debt.
· EBITDA, by controlling overheads: We manage general overhead levels closely to gain scale benefits on our fixed base cost. For FY 2020 these overheads were 6.2% of revenues, a small improvement from FY 2019 of 6.3%. These overheads split, broadly, into three equal categories (cost to acquire, cost to serve and management overhead). Scale benefits are expected to reduce the level of overheads as a % of revenues. The use of digital technologies to acquire new business and serve our customers is also expected to drive further benefit.
· Managing cash: A laser focus on customer receivables management, plus the utilisation of our scalable commodity trading arrangements with our partner, SmartestEnergy, have led to an improvement of £9.4m in available cash during FY 2020, to a balance of £11.7m at 31 December 2020. The Group plans to utilise available cash resources to acquire new customer books which fit our strict value criteria.
Customer receivables and accrued income
The Board has been pleased to see cash conversion on customer receivables during FY 2020 at 99% of billed levels, which suggests an under 1% underlying bad debt rate on new debtors arising. In addition, it is encouraging to note the genuine diversity of businesses served by the Group: from healthcare, manufacturing and the public sector through to hospitality, leisure and retail. Through close management, and careful dialogue and support for customers, there has been no evidence in 2020 of significant impacts on working capital or bad debts from the pandemic. This resilience is partly as sectors most impacted by lockdowns are consuming less energy and thereby generating less revenue and customer receivable balances - giving the Group a structural reduction on some bad debt risk.
Risk models implemented by the Group carefully concentrate resources to identify potential issues in order for appropriate support and action to be taken. Process improvements made during 2019 and 2020 have paid dividends for the Group in this respect. The Group continues to deploy new technologies to support its credit control activities.
In view of the potential wider economic impact from the pandemic the Board has assessed, with reference to third-party forecasts, the potential risk of increased business failures across various sectors.
As a result of this analysis the Group results include a prudent 70% uplift in the expected credit loss provision against certain customer receivable and accrued income balances.
Customer receivable balances, gross of provisions, were £8.1m at 31 December 2020 (2019: £7.8m). At 31 December 2020 the total provision for expected credit loss is £5.2m, being 64% of the gross receivable balance (2019: £4.9m, being 63% of the gross receivable balance). For accrued income, a provision of £0.9m is held, being 7.5% of the gross balance (2019: £0.2m provision, being 2% of the gross balance).
The charge to the income statement for expected credit loss and bad debt is 3.1% of revenue (2019: 2.8%). This charge includes the impact of additional prudent provisioning as a result of the wider economic context caused by the pandemic; despite the strong cash collection performance on customer receivables noted to date. Management target a reduced charge for FY 2021 which would enable further increases in adjusted EBITDA.
Investments, balance sheet and cash
The Group has taken possession of its new purpose-built office in Leicester which will be used as a hub for sales, marketing and innovation activities. The balance sheet at 31 December 2020 held £1.0m in assets under construction and £0.2m as land. A further £2.2m, being the total capital commitment as disclosed in note 12, was paid in Q1 2021 and financed by the cash reserves of the Group.
The Group successfully acquired two customer books, and associated customer receivable balances, during H2 2020. The assets acquired and consideration are disclosed in note 14.
The acquisition of the business customer activities of Bristol Energy completed in August 2020, for consideration of £1.3m. The acquisition included £1.3m (net of provision) of trade debtors and accrued income balances, which were largely converted to cash within four weeks of completion of the contract, leading to a quick payback period. The customer book acquired for £0.6m is included in intangible assets, and the Group also recognised a £0.6m industry liability which is payable in August 2021.
The Group generated an operating cash inflow of £12.1m during FY 2020 (2019: £11.3m outflow). After the investment in property and other outflows, the cash balance at 31 December 2020 is £11.7m (2019: £2.4m).
The cash flow for the year includes the benefit of £10.2m for the return of certain cash collateral posted as part of forward trading commitments. These repayments were a consequence of the agreement with SmartestEnergy, who provide a commodity trading limit which scales with the Group, reducing the need to provide cash collateral. The relationship continues to be positive.
The Group has also taken advantage of the deferral of c.£3.6m of HMRC payments of VAT and PAYE otherwise due in H1 2020, which will be repaid during 2021 and 2022. Post 31 December 2020, the Group's cash performance has continued to be strong.
Summary
There has been significant progress during FY 2020 in the Group's financial performance despite the obvious headwinds caused by the pandemic. The Group generated a small profit during H2 2020, and momentum is building with a clear financial framework in place covering:
· significant organic growth, with higher quality and higher margin contracts;
· increasing net customer contribution through customer lifecycle value initiatives and close management of bad debt;
· achieving clear scale benefits in overheads, to leverage the fixed costs of the Group and drive efficiency utilising digital technologies; and
· continuing to closely manage cash, utilising scalable trading commodity arrangements and investing in further customer book/asset purchases where they have clear earnings and cash upside.
With these building blocks now in place the Group is well placed to continue the strong trajectory and generate returns within the near future.
1. Adjusted EBITDA is earnings before interest, tax, depreciation and amortisation, and before certain exceptional or one-off costs. The reconciliation between IFRS and adjusted EBITDA, as an alternative reporting measure, is included in note 3 below to this financial information.
2. Net customer contribution represents, as a percentage of revenue, gross margin less bad debt. It also excludes the estimated impact of Covid-19 incurred during H1 2020. Without this estimate of Covid-19 impact, the net customer contribution for the year would be 4.5%.
Condensed consolidated statement of profit and loss and other comprehensive income
For the year ended 31 December 2020
|
| 31 December 2020 £'000 | 31 December 2019 £'000 |
|
|
|
|
| Revenue | 101,527 | 111,613 |
| Cost of sales | (93,858) | (106,128) |
| Gross profit | 7,669 | 5,485 |
| Operating costs before non-recurring items, unrealised gains on derivative contracts and share based payment charges | (9,934) | (10,362) |
| Operating costs - non-recurring items | - | (378) |
| Operating costs - unrealised losses on derivative contracts | 1,011 | (518) |
| Operating costs - share based payment charges | (320) | (125) |
| Total operating costs | (9,243) | (11,383) |
| Operating loss | (1,574) | (5,898) |
| Finance income | 74 | 33 |
| Finance costs | (39) | (112) |
| Loss before tax | (1,539) | (5,977) |
| Taxation | 374 | 1,009 |
| Loss for the year | (1,165) | (4,968) |
| Other comprehensive income | - | - |
| Total comprehensive income for the year | (1,165) | (4,968) |
| Earnings per share |
|
|
| Basic | (£0.07) | (£0.31) |
| Diluted | (£0.07) | (£0.31) |
Condensed consolidated balance sheet
At 31 December 2020
|
|
| |||
31 December 2020 £'000 | 31 December 2019 £'000 |
| |||
ASSETS |
|
|
|
| |
Non-current assets |
|
|
|
| |
Intangible assets |
| 606 | 52 |
| |
Property, plant and equipment |
| 1,377 | 671 |
| |
Right of use assets |
| 273 | 481 |
| |
Deferred tax |
| 4,789 | 4,355 |
| |
|
| 7,045 | 5,559 |
| |
Current assets |
|
|
|
| |
Trade and other receivables |
| 18,267 | 25,886 |
| |
Cash and cash equivalents |
| 11,740 | 2,377 |
| |
|
| 30,007 | 28,263 |
| |
Total assets |
| 37,052 | 33,822 |
| |
LIABILITIES |
|
|
|
| |
Current liabilities |
|
|
|
| |
Trade and other payables |
| (31,430) | (28,076) |
| |
Non-current liabilities |
| (1,109) | (448) |
| |
Total liabilities |
| (32,539) | (28,524) |
| |
Net assets |
| 4,513 | 5,298 |
| |
EQUITY |
|
|
|
| |
Share capital |
| 82 | 82 |
| |
Share premium |
| 11,690 | 11,690 |
| |
Merger reserve |
| (50) | (50) |
| |
Accumulated losses |
| (7,209) | (6,424) |
| |
|
| 4,513 | 5,298 |
| |
Condensed consolidated statement of changes in equity
For the year ended 31 December 2020
| Share capital £'000 | Share premium £'000 | Merger reserve £'000 | Retained earnings £'000 | Total £'000 |
Balance at 1 January 2019 | 81 | 11,689 | (50) | (1,282) | 10,438 |
Adjustment following adoption of IFRS 16 | - | - | - | (125) | (125) |
Adjusted balance at 1 January 2019 | 81 | 11,689 | (50) | (1,407) | 10,313 |
Total comprehensive income for the year |
|
|
|
|
|
Loss for the year | - | - | - | (4,968) | (4,968) |
Other comprehensive income | - | - | - | - | - |
| - | - | - | (4,968) | (4,968) |
Transactions with owners of the Company |
|
|
|
|
|
Contributions and distributions |
|
|
|
|
|
Equity-settled share based payments | - | - | - | 125 | 125 |
Deferred tax on share based payments | - | - | - | 21 | 21 |
Proceeds from share issues | 1 | 1 | - | - | 2 |
Equity dividend paid in the year | - | - | - | (195) | (195) |
Total transactions with owners of the Company | 1 | 1 | - | (49) | (47) |
Balance at 31 December 2019 | 82 | 11,690 | (50) | (6,424) | 5,298 |
Balance at 1 January 2020 | 82 | 11,690 | (50) | (6,424) | 5,298 |
Total comprehensive income for the year |
|
|
|
|
|
Loss for the year | - | - | - | (1,165) | (1,165) |
Other comprehensive income | - | - | - | - | - |
| - | - | - | (1,165) | (1,165) |
Transactions with owners of the Company |
|
|
|
|
|
Contributions and distributions |
|
|
|
|
|
Equity-settled share based payments | - | - | - | 320 | 320 |
Deferred tax on share based payments | - | - | - | 60 | 60 |
Equity dividend paid in the year | - | - | - | - | - |
Total transactions with owners of the Company | - | - | - | 380 | 380 |
Balance at 31 December 2020 | 82 | 11,690 | (50) | (7,209) | 4,513 |
Condensed consolidated statement of cash flows
For the year ended 31 December 2020
| 31 December 2020 £'000 | 31 December 2019 £'000 |
Cash flows from operating activities |
|
|
Loss for the financial year | (1,165) | (4,968) |
Adjustments for: |
|
|
Depreciation of property, plant and equipment | 215 | 289 |
Depreciation of right-of-use assets | 204 | 108 |
Amortisation of intangible assets | 132 | 2 |
Finance income | (74) | (33) |
Finance costs | 39 | 112 |
Taxation | (374) | (1,009) |
Share based payment charge | 320 | 125 |
Decrease/(Increase) in cash collateral deposits lodged with trading counterparties | 10,158 | (10,408) |
Increase in trade and other receivables | (948) | (1,909) |
Increase in trade and other creditors | 3,595 | 6,411 |
Net cash from/(used in) operating activities | 12,102 | (11,280) |
Cash flows from investing activities |
|
|
Purchase of property, plant and equipment | (921) | (565) |
Purchase of customer books | (1,673) | - |
Net cash used in investing activities | (2,594) | (565) |
Cash flows from financing activities |
|
|
Net proceeds from share placing and option exercises | - | 2 |
Net interest | 35 | (79) |
Dividend paid during the year | - | (195) |
Repayment of borrowings and leasing liabilities | (180) | (118) |
Net cash used in financing activities | (145) | (390) |
Net increase/(decrease) in cash and cash equivalents | 9,363 | (12,235) |
Cash and cash equivalents at the start of the year | 2,377 | 14,612 |
Cash and cash equivalents at the end of the year | 11,740 | 2,377 |
Notes to the condensed consolidated financial report
1. Significant accounting policies
Yü Group PLC (the "Company") is a public limited company incorporated and domiciled in the United Kingdom. The Company's ordinary shares are traded on AIM. These condensed consolidated financial statements ("Financial statements") as at and for the year ended 31 December 2020 comprise the Company and its subsidiaries (together referred to as the "Group"). The Group is primarily involved in the supply of electricity, gas and water to SMEs and larger corporates in the UK.
Basis of preparation
Whilst the financial information included in this preliminary announcement has been prepared on the basis of the requirements of International Accounting Standards in conformity with the requirements of the Companies Act 2006 and effective at 31 December 2020, this announcement does not itself contain sufficient information to comply with International Accounting Standards.
The financial information set out in this preliminary announcement does not constitute the company's statutory financial statements for the years ended 31 December 2020 or 2019 but is derived from those financial statements.
Statutory financial statements for 2019 have been delivered to the registrar of companies and those for 2020 will be delivered in due course. The auditors have reported on those financial statements; their reports were (i) unqualified and (ii) did not contain a statement under section 498 (2) or (3) of the Companies Act 2006.
The condensed consolidated financial information is presented in British pounds sterling (£) and all values are rounded to the nearest thousand (£000) except where otherwise indicated.
Going concern
The financial statements are prepared on a going concern basis.
At 31 December 2020 the Group had net assets of £4.5m (2019: £5.3m) and net cash of £11.4m (2019: £1.8m).
Management prepare detailed budgets and forecasts of financial performance and cash flow (including capital commitments as disclosed in note 12) over the coming 12 to 36 months. The Board has confidence in achieving such targets and forecasts and has performed comprehensive analysis of various risks and sensitivities in relation to performance.
The Group has demonstrated significant progress in its results due to various actions taken by the Board. Losses have decreased significantly from 2018, notwithstanding the initial impact of Covid-19 particularly experienced in H1 2020. This strong momentum is forecasted to continue and lead to a return to profitability. The turnaround has been as a result of clear commercial action to focus on contract lifecycle value, including the termination of low margin legacy contracts which are now replaced by higher margin contracts with more robust customers.
Group available cash increased by £9.4m during 2020, to £11.7m. This increase is despite the investment in the acquisition of two earnings enhancing customer books and the deposit payment on a newly built innovation and sales office in Leicester. The strong performance in cash has been due to the close control over customer receivables and the return of previously provided cash collateral required on legacy commodity trading agreements.
The Group has no debt other than £0.3m (at 31 December 2020) recognised from IFRS 16 as a consequence of operating leases for the Group's premises.
The five year commodity trading arrangement between SmartestEnergy Ltd and the trading entities of the Group (Yü Energy Holding Limited and Yü Energy Retail Limited), signed December 2019, enables the Group to purchase electricity and gas on forward commodity markets in line with its hedging strategy, supporting the Group's commodity hedging position. As part of the arrangement, SmartestEnergy Ltd holds security over the trading assets of the Group. In return, a variable commodity trading limit is provided, which scales with the Group, having the benefit of significantly reducing the need to post cash collateral from cash reserves. The Board carefully monitors covenants associated with this agreement to assess the likelihood of the credit facility being reduced.
Covid-19
The Board has taken steps to mitigate, where possible, the impact from Covid-19 and continues to be mindful of future risks. These steps are explained in more detail in the Strategic Report of the full Annual Report and Accounts.
The Group successfully implemented its business continuity plan during lockdown and continues to operate to its high standards of customer care.
The initial lockdown, in March and April 2020, had an immediate and significant impact on customer demand, and market prices, leading to losses reported in H1 2020. H1 2021 has improved significantly as the impact from the pandemic is better understood.
The Board remains confident in the ability to grow market share, despite the wider economic context caused by the pandemic.
The Group has seen strong performance in cash collection since the pandemic began. The Board remains vigilant, however, over the short to medium term, on the basis of the increased risk of business failures in some markets.
The Board has adequate visibility, based on the outcome from previous lockdowns, of scenarios to consider when assessing risks to the Group from Covid-19 and has assessed such risks in its assessment of the ability of the Group to continue as a going concern.
Further details of the sensitivity analysis carried out is shown in note 10.
Summary
Following extensive review of the Group's forward business plan and associated risks and sensitivities to these base forecasts, the Board concludes that it is appropriate to prepare the financial statements on a going concern basis.
Basis of consolidation
The consolidated accounts of the Group include the assets, liabilities and results of the Company and subsidiary undertakings in which Yü Group PLC has a controlling interest. Control is achieved when the Group is exposed, or has rights, to variable returns from its involvement with the investee and has the ability to affect those returns through its power over the investee. Specifically, the Group controls an investee if, and only if, the Group has all of the following: power over the investee (i.e. existing rights that give it the current ability to direct the relevant activities of the investee); exposure, or rights, to variable returns from its involvement with the investee; and the ability to use its power over the investee to affect its returns. When necessary, adjustments are made to the financial statements of subsidiaries to bring their accounting policies into line with the Group's accounting policies. All intragroup assets and liabilities, equity, income, expenses and cash flows relating to transactions between members of the Group are eliminated in full on consolidation.
Use of estimates and judgements
The preparation of the financial statements in conformity with adopted IFRSs requires the use of estimates and judgements. Although these estimates are based on management's best knowledge, actual results ultimately may differ from these estimates.
Estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the period in which the estimates are revised and in any future periods affected. The key areas of estimation and judgement are the estimated consumption (in lieu of accurate meter readings) of energy by customers, the level of accrual for unbilled revenue, the assumptions input to the IFRS 2 share option charge calculations and the recoverability of deferred tax assets and trade receivables.
Revenue estimates are based on industry knowledge or source information, where available, and can therefore represent estimates which are lower or higher than the actual out-turn of energy consumption once accurate meter readings are obtained.
To estimate the level of accrual for unbilled revenue, management estimates the level of consumption, and anticipated revenue, which is due to be charged to the customer, and recognises such revenue where it is considered that revenue will flow to the Group.
Deferred tax asset recoverability is assessed based on Directors' judgement of the recoverability, by the realisation of future profits, of the tax losses over the short to medium term, which inherently is based on estimates.
Trade receivables recoverability is estimated, with appropriate allowance for expected credit loss provisions, based on historical performance and the Directors' estimate of losses over the Group's customer receivable balances.
Revenue recognition
The Group enters into contracts to supply gas, electricity and water to its customers. Revenue represents the fair value of the consideration received or receivable from the sale of actual and estimated gas, electricity and water supplied during the year, net of discounts, Climate Change Levy and value added tax. Revenue is recognised on consumption, being the point at which the transfer of the goods or services to the customer takes place, and based on an assessment of the extent to which performance obligations have been achieved.
Due to the nature of the energy supply industry and its reliance upon estimated meter readings, gas, electricity and water revenue includes the Directors' best estimate of differences between estimated sales and billed sales. The Group makes estimates of customer consumption based on available industry data, and also seasonal usage curves that have been estimated through historical actual usage data. It also considers any adjustments expected where an estimated meter reading (using industry data) is expected to be different to the consumption pattern of the customer including as a result of the Covid-19 pandemic.
Government grants
Grants from the government are recognised at their fair value where there is a reasonable assurance that the grant will be received and the group will comply with all attached conditions.
Financial instruments
Non-derivative financial instruments
Non-derivative financial instruments comprise trade and other receivables, cash and cash equivalents and trade and other payables.
Trade and other receivables
Trade and other receivables are recognised initially at fair value. Subsequent to initial recognition they are measured at amortised cost using the effective interest method, less any impairment and expected credit losses.
Impairment
The Group has elected to measure loss allowances for trade receivables and accrued income at an amount equal to lifetime expected credit losses (ECL's). Specific impairments are made when there is a known impairment need against trade receivables and accrued income. When estimating ECL's, the Group assesses reasonable, relevant and supportable information, which does not require undue cost or effort to produce. This includes quantitative and qualitative information and analysis, incorporating historical experience, informed credit assessments and forward looking information. Loss allowances are deducted from the gross carrying amount of the assets.
Trade and other payables
Trade and other payables are recognised initially at fair value. Subsequent to initial recognition they are measured at amortised cost using the effective interest method.
Cash and cash equivalents
Cash and cash equivalents comprise cash balances and short-term deposits (monies held on deposit are accessible with one month's written notice). Cash and cash equivalents excludes any cash collateral posted with third parties. Bank overdrafts that are repayable on demand and form an integral part of the Group's cash management are included as a component of cash and cash equivalents.
Derivative financial instruments
The Group uses commodity purchase contracts to hedge its exposures to fluctuations in gas and electricity commodity prices. The majority of commodity purchase contracts are expected to be delivered entirely to the Group's customers and therefore the Group classifies them as "own use" contracts and outside the scope of IFRS 9 "Financial Instruments". This is achieved when:
• a physical delivery takes place under all such contracts;
• the volumes purchased or sold under the contracts correspond to the Group's operating requirements; and
• no part of the contract is settled net in cash.
This classification as "own use" allows the Group not to recognise the commodity purchase contracts on its balance sheet at the year end.
The commodity purchase contracts that do not meet the criteria listed above are recognised at fair value under IFRS 9. The gain or loss on remeasurement to fair value is recognised immediately in profit or loss.
Classification of financial instruments issued by the Group
Financial instruments issued by the Group are treated as equity only to the extent that they meet the following two conditions:
(a) they include no contractual obligations upon the Group to deliver cash or other financial assets or to exchange financial assets or financial liabilities with another party under conditions that are potentially unfavourable to the Group; and
(b) where the instrument will or may be settled in the Group's own equity instruments, it is either a non-derivative that includes no obligation to deliver a variable number of the Company's own equity instruments or is a derivative that will be settled by the Company exchanging a fixed amount of cash or other financial assets for a fixed number of its own equity instruments.
To the extent that this definition is not met, the proceeds of issue are classified as a financial liability. Where the instrument so classified takes the legal form of the Company's own shares, the amounts presented in these financial statements for called up share capital and share premium account exclude amounts in relation to those shares.
Details of the sensitivity analysis performed in relation to the Group's financial instruments is included in note 10.
Intangible assets
Intangible assets that are acquired separately by the Group are stated at cost less accumulated amortisation and accumulated impairment losses.
Intangible assets acquired in a business combination and recognised separately from goodwill are initial recognised at their fair value at the acquisition date. Subsequent to initial recognition, intangible assets acquired in a business combination are reported at their initial fair value less amortisation and accumulated impairment losses.
Amortisation is charged to the statement of profit and loss on a straight-line basis over the estimated useful lives of the intangible assets, unless such lives are indefinite. Intangible assets with an indefinite useful life and goodwill are systematically tested for impairment at each balance sheet date. Other intangible assets are amortised from the date they are available for use. The estimated useful lives are as follows:
· Licence - 35 years
· Customer contract books - Over the period of the contracts acquired (typically 2 years)
Property, plant and equipment
Items of property, plant and equipment are measured at cost less accumulated depreciation and accumulated impairment losses.
Depreciation is recognised in profit or loss on a straight-line basis over the estimated useful lives of each part of an item of property, plant and equipment. The estimated useful lives for the current and comparative periods are as follows:
• Freehold land - Not depreciated
• Freehold property - 30 years
• Computer equipment - 3 years
• Fixtures and fittings - 3 years
Assets under construction are not depreciated until the period they are brought into use.
Business combinations
The acquisition method of accounting is used to account for business combinations regardless of whether equity instruments or other assets are acquired.
The consideration transferred is the sum of the acquisition-date fair values of the assets transferred, equity instruments issued or liabilities incurred by the acquirer to former owners of the acquiree and the amount of any non-controlling interest in the acquiree. All acquisition costs are expensed as incurred to profit or loss.
On the acquisition of a business, the consolidated entity assesses the financial assets acquired and liabilities assumed for appropriate classification and designation in accordance with the contractual terms, economic conditions, the consolidated entity's operating or accounting policies and other pertinent conditions in existence at the acquisition date.
Contingent consideration to be transferred by the acquirer is recognised at the acquisition-date fair value. Subsequent changes in the fair value of the contingent consideration classified as an asset or liability is recognised in profit or loss. Contingent consideration classified as equity is not remeasured and its subsequent settlement is accounted for within equity.
The difference between the acquisition-date fair value of assets acquired and liabilities assumed and the fair value of the consideration transferred is recognised as goodwill. If the consideration transferred and the pre-existing fair value are less than the fair value of the identifiable net assets acquired, being a bargain purchase to the acquirer, the difference is recognised as a gain directly in profit or loss by the acquirer on the acquisition date, but only after a reassessment of the identification and measurement of the net assets acquired and the consideration transferred.
Business combinations are initially accounted for on a provisional basis. The acquirer retrospectively adjusts the provisional amounts recognised and also recognises additional assets or liabilities during the measurement period, based on new information obtained about the facts and circumstances that existed at the acquisition date. The measurement period ends on either the earlier of (i) 12 months from the date of the acquisition or (ii) when the acquirer receives all the information possible to determine fair value.
Leased assets
The Group as a lessee
For any new contract entered into the Group considers whether a contract is, or contains, a lease. A lease is defined as "a contract, or part of a contract, that conveys the right to use an asset (the underlying asset) for a period of time in exchange for consideration". To apply this definition the Group assesses whether the contract meets three key evaluations which are whether:
• the contract contains an identified asset, which is either explicitly identified in the contract or implicitly specified by being identified at the time the asset is made available to the Group;
• the Group has the right to obtain substantially all of the economic benefits from use of the identified asset throughout the period of use, considering its rights within the defined scope of the contract; and
• the Group has the right to direct the use of the identified asset throughout the period of use. The Group assess whether it has the right to direct "how and for what purpose" the asset is used throughout the period of use.
Measurement and recognition of leases as a lessee
At the lease commencement date, the Group recognises a right-of-use asset and a lease liability on the balance sheet. The right-of-use asset is measured at cost, which is made up of the initial measurement of the lease liability, any initial direct costs incurred by the Group, an estimate of any costs to dismantle and remove the asset at the end of the lease, and any lease payments made in advance of the lease commencement date (net of any incentives received).
The Group depreciates the right-of-use assets on a straight-line basis from the lease commencement date to the earlier of the end of the useful life of the right-of-use asset or the end of the lease term. The Group also assesses the right-of-use asset for impairment when such indicators exist.
At the commencement date, the Group measures the lease liability at the present value of the lease payments unpaid at that date, discounted using the interest rate implicit in the lease if that rate is readily available or the Group's incremental borrowing rate.
Lease payments included in the measurement of the lease liability are made up of fixed payments (including in-substance fixed), variable payments based on an index or rate, amounts expected to be payable under a residual value guarantee and payments arising from options reasonably certain to be exercised.
Subsequent to initial measurement, the liability will be reduced for payments made and increased for interest. It is remeasured to reflect any reassessment or modification, or if there are changes in in-substance fixed payments.
When the lease liability is remeasured, the corresponding adjustment is reflected in the right-of-use asset, or profit and loss if the right-of-use asset is already reduced to zero.
The Group has elected to account for short-term leases and leases of low value assets using the practical expedients. Instead of recognising a right-of-use asset and lease liability, the payments in relation to these are recognised as an expense in profit or loss on a straight-line basis over the lease term.
On the statement of financial position, right-of-use assets have been included in property, plant and equipment and lease liabilities have been included in trade and other payables.
Share based payments
Share based payment arrangements in which the Group receives goods or services as consideration for its own equity instruments are accounted for as equity-settled share based payment transactions, regardless of how the equity instruments are obtained by the Group.
The cost of equity settled transactions with employees is measured by reference to the fair value on the date they are granted. Where there are no market conditions attaching to the exercise of the option, the fair value is determined using a range of inputs into a Black-Scholes pricing model. Where there are market conditions attaching to the exercise of the options a trinomial option pricing model is used to determine fair value based on a range of inputs. The value of equity settled-transactions is charged to the Statement of Comprehensive Income over the period in which the service conditions are fulfilled with a corresponding credit to a share-based payments reserve in equity.
Pension and Post-retirement benefits
The group operates a defined contribution scheme which is available to all employees. The assets of the scheme are held separately from those of the group in independently administered funds. Payments are made by the group to this scheme and contributions are charged in the Statement of Comprehensive Income as they become payable.
Taxation
Tax on the profit or loss for the period comprises current and deferred tax. Tax is recognised in the statement of profit and loss except to the extent that it relates to items recognised directly in equity, in which case it is recognised in equity.
Current tax is the expected tax payable or receivable on the taxable income or loss for the period, using tax rates enacted or substantively enacted at the balance sheet date, and any adjustment to tax payable in respect of previous periods.
Deferred tax is provided on temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for taxation purposes. The following temporary differences are not provided for: the initial recognition of goodwill; the initial recognition of assets or liabilities that affect neither accounting nor taxable profit other than in a business combination; and differences relating to investments in subsidiaries to the extent that they will probably not reverse in the foreseeable future. The amount of deferred tax provided is based on the expected manner of realisation or settlement of the carrying amount of assets and liabilities, using tax rates enacted or substantively enacted at the balance sheet date.
A deferred tax asset is recognised only to the extent that it is probable that future taxable profits will be available against which the temporary difference can be utilised.
Segmental reporting
In accordance with IFRS 8 "Operating Segments", the Group has made the following considerations to arrive at the disclosure made in this financial information.
IFRS 8 requires consideration of the Chief Operating Decision Maker ("CODM") within the Group. In line with the Group's internal reporting framework and management structure, the key strategic and operating decisions are made by the Board of Directors, which regularly reviews the Group's performance and balance sheet position and receives financial information for the Group as a whole. Accordingly, the Board of Directors is deemed to be the CODM.
The Group's revenue and profit were derived from its principal activity, which is the supply of utilities to business customers in the UK. As a consequence the Group has one reportable segment, which is the supply of electricity, gas and water to businesses. Segmental profit is measured at operating profit level, as shown on the face of the statement of profit and loss.
As there is only one reportable segment whose losses, expenses, assets, liabilities and cash flows are measured and reported on a basis consistent with the financial statements, no additional numerical disclosures are necessary.
Standards and interpretations
The Group has adopted all of the new or amended accounting standards and interpretations issued by the International Accounting Standards Board ("IASB") that are mandatory for the current reporting period.
Any new or amended accounting standards or interpretations that are not yet mandatory have not been early adopted.
2. Segmental analysis
Operating segments
The Directors consider there to be one operating segment, being the supply of utilities to businesses.
Geographical segments
100 per cent of the Group revenue is generated from sales to customers in the United Kingdom (2019: 100 per cent).
The Group has no individual customers representing over 10 per cent of revenue (2019: nil).
3. Reconciliation to Adjusted EBITDA
A key alternative performance measure used by the Directors to assess the underlying performance of the business is Adjusted EBITDA.
| 2020 | 2019 |
| £'000 | £'000 |
Adjusted EBITDA reconciliation |
|
|
Operating loss | (1,574) | (5,898) |
Add back: |
|
|
Non-recurring operational costs | - | 378 |
Non-recurring mutualisation costs related to domestic energy supplier failures | - | 236 |
Unrealised (gain)/loss on derivative contracts | (1,011) | 518 |
Equity-settled share based payment charge | 320 | 125 |
Depreciation of property, plant and equipment | 215 | 289 |
Depreciation of right-of-use assets | 204 | 108 |
Amortisation of intangibles | 132 | 2 |
Adjusted EBITDA | (1,714) | (4,242) |
The 2019 non-recurring mutualisation costs of £236,000 relate to Renewable Obligation Certificate ("ROC") and capacity market costs that have been levied on the Group over and above the expected costs, to cover the cost of other failing suppliers in the market. The Board has not treated costs incurred in 2020 of £180,000 as non-recurring (and hence such costs are set against adjusted EBITDA) on the basis of a reasonable expectation that such mutualisation costs may continue due to failure of domestic energy suppliers.
The unrealised (gain)/loss on derivative contracts is excluded from adjusted EBITDA in view of its non-cash nature, with significant potential variability as the forward energy commodity market moves.
The 2019 non-recurring operational costs of £378,000 consist of restructuring payroll costs and legal and professional fees in relation to the issue identified in the Q4 2018 accounting review and regulatory investigation. No further costs beyond those accrued are anticipated.
4. Earnings per share
Basic loss per share
Basic loss per share is based on the loss attributable to ordinary shareholders and the weighted average number of ordinary shares outstanding.
| 2020 £'000 | 2019 £'000 |
Loss for the year attributable to ordinary shareholders | (1,165) | (4,968) |
| 2020 | 2019 |
Weighted average number of ordinary shares |
|
|
At the start of the year | 16,281,055 | 16,267,555 |
Effect of shares issued in the year | - | 11,133 |
Number of ordinary shares for basic earnings per share calculation | 16,281,055 | 16,278,688 |
Dilutive effect of outstanding share options | 929,830 | 786,547 |
Number of ordinary shares for diluted earnings per share calculation | 17,210,885 | 17,065,235 |
| 2020 £ | 2019 £ |
Basic earnings per share | (0.07) | (0.31) |
Diluted earnings per share | (0.07) | (0.31) |
Adjusted earnings per share
Adjusted earnings per share is based on the result attributable to ordinary shareholders before non-recurring items after tax and unrealised (gains)/losses on derivative contracts, and the cost of cash and equity-settled share based payments, and the weighted average number of ordinary shares outstanding:
| 2020 £'000 | 2019 £'000 |
Adjusted earnings per share |
|
|
Loss for the year attributable to ordinary shareholders | (1,165) | (4,968) |
Add back: |
|
|
Non-recurring items after tax | - | 497 |
Unrealised loss on derivative contracts after tax (gross gain of £1,011,000) | (819) | 420 |
Share based payments after tax (gross cost of £320,000) | 259 | 101 |
Adjusted basic loss for the year | (1,725) | (3,950) |
| 2020 £ | 2019 £ |
Adjusted earnings per share | (0.11) | (0.24) |
5. Dividends
The Group did not pay an interim dividend in relation to 2020 (2019: nil per share).
The Directors do not propose a final dividend in relation to 2020 (2019: nil per share).
The 2018 interim dividend of £195,000 was paid to shareholders in January 2019.
6. Right-of-use assets and lease liabilities
|
Right of Use Assets £'000 |
Cost |
|
At 1 January 2020 | 955 |
Additions | - |
Disposals | (156) |
At 31 December 2020 | 799 |
Depreciation |
|
At 1 January 2020 | 474 |
Charge for the year | 204 |
Disposals | (152) |
At 31 December 2020 | 526 |
Net book value at 31 December 2020 | 273 |
Cost |
|
At 1 January 2019 | 811 |
Additions | 144 |
Disposals | - |
At 31 December 2019 | 955 |
Depreciation |
|
At 1 January 2019 | 366 |
Charge for the year | 108 |
Disposals | - |
At 31 December 2019 | 474 |
Net book value at 31 December 2019 | 481 |
The Group has a lease arrangement for its main office facilities in Nottingham. A lease for a temporary Leicester office, pending the construction of a new purpose-built sales, marketing and innovation hub in the city, was held in 2019 and was terminated during 2020. One vehicle was leased in 2019, which was terminated during 2020.
Other leases are short term or of low value underlying assets.
The Nottingham office lease is reflected on the balance sheet as a right-of-use asset and a lease liability at 31 December 2020 (2019: the Nottingham and temporary Leicester office were included).
The property lease for the Nottingham office has a term of 3.5 years remaining at 31 December 2020.
Leases typically impose a restriction that, unless there is a contractual right for the Group to sublet the asset to another party, the right-of-use asset can only be used by the Group. Leases are either non-cancellable or may only be cancelled by incurring a substantive termination fee. Some leases contain an option to extend the lease for a further term. For leases over office buildings the Group is obligated to keep those properties in a good state of repair and return the properties in their original condition at the end of the lease. Further, the Group must insure items of property, plant and equipment and incur maintenance fees on such items in accordance with the lease contracts.
The table below provides details of the Group's right-of-use assets and lease liabilities recognised on the balance sheet at 31 December 2020:
Right-of-use asset | Remaining term | Asset carrying amount | Lease liability | Depreciation expense | Interest expense |
Premises | 3.5 years | £273,000 | £368,000 | £80,000 | £23,000 |
The total cash outflow for leases in 2020 was £180,000 (2019: £118,000).
Lease payments not recognised as a liability
The Group has elected not to recognise a right-of-use asset or lease liability for short-term leases (leases of expected terms of 12 months or less) or leases of low value assets. Payments under such leases are expensed on a straight-line basis. During FY 2020 the amount expensed to profit and loss was £1,000 (2019: £6,000).
7. Trade and other receivables
| Group |
| Company | ||
| 2020 £'000 | 2019 £'000 |
| 2020 £'000 | 2019 £'000 |
Gross trade receivables | 8,129 | 7,801 |
| - | - |
Provision for doubtful debts and expected credit loss | (5,162) | (4,901) |
| - | - |
Net trade receivables | 2,967 | 2,900 |
| - | - |
Accrued income - net of provision | 11,169 | 9,278 |
| - | - |
Prepayments | 1,355 | 2,185 |
| - | - |
Other receivables | 2,148 | 11,523 |
| 500 | 500 |
Financial derivative asset | 628 | - |
| - | - |
Amount due from subsidiary undertakings | - | - |
| 14,747 | 15,545 |
| 18,267 | 25,886 |
| 15,247 | 16,045 |
Movements in the provision for doubtful debts and expected credit loss are as follows:
| 2020 | 2019 |
| £'000 | £'000 |
Opening balance | 4,901 | 4,803 |
Provisions recognised less unused amounts reversed | 2,420 | 2,931 |
Provision utilised in the year | (2,159) | (2,833) |
Closing balance - provision for doubtful debts and expected credit losses | 5,162 | 4,901 |
The Directors have assessed the level of provision at 31 December 2020 by reference to the recoverability of customer receivable balances post the year end, and believe the provision carried of £5,162,000 is adequate.
In addition to the £2,420,000 (2019: £2,931,000) provision recognised during FY 2020 in relation to trade receivables, there was an additional provision of £707,000 (2019: £159,000) made against accrued income to consider the potential additional risk related to Covid-19. Expected credit losses are recognised in the bad debt expense line of the income statement.
None of the Group's receivables fall due after more than one year.
The Directors consider that the carrying amount of trade and other receivables approximates to their fair value.
Group other receivables includes £250,000 (2019: £10,408,000) paid in cash to trading counterparties as collateral.
The Company other receivables balance of £500,000, which is also included in the Group consolidated balance, relates to a bank cash deposit. This cash deposit does not fulfil the criteria of being classified as cash and cash equivalents in view of the balance being secured for operational activities of the Group.
The amount due from subsidiary undertakings in the Company accounts of Yü Group PLC at 31 December 2020 represents amounts drawn down by the subsidiary undertakings as part of a formal loan facility (key terms of which are that the loan is payable in 14 months following written request from Yü Group PLC and interest is payable by the subsidiary undertakings at a rate of 2 per cent. above Bank of England base rate). Included in the outstanding amount at 31 December 2020 is £372,000 of accrued interest.
The Board of Yü Group PLC has considered the provisions around impairment of intercompany indebtedness contained within IFRS 9 "Financial Instruments" and has concluded that an additional expected credit loss provision of £37,500 be booked against the outstanding intercompany receivables in 2020 (total ECL provision of £287,500 at 31 December 2020 (2019: £250,000)).
8. Cash and cash equivalents
| Group |
| Company | ||
| 2020 £'000 | 2019 £'000 |
| 2020 £'000 | 2019 £'000 |
Cash at bank and in hand | 11,740 | 2,377 |
| 501 | 500 |
| 11,740 | 2,377 |
| 501 | 500 |
As disclosed in note 7, the cash and cash equivalents amounts excludes £500,000 of cash, which is included in Company and Group other receivables. This cash balance is held on deposit and secured under arrangements with the Group's bankers.
9. Trade and other payables
| Group |
| Company | ||
| 2020 £'000 | 2019 £'000 |
| 2020 £'000 | 2019 £'000 |
Current |
|
|
|
|
|
Trade payables | 2,319 | 1,409 |
| - | - |
Accrued expenses and deferred income | 19,250 | 20,889 |
| 8 | 140 |
Lease liabilities | 102 | 149 |
| - | - |
Derivative financial liability | - | 383 |
| - | - |
Other payables | 9,759 | 5,246 |
| - | - |
Amounts due to subsidiary undertakings | - | - |
| 300 | 300 |
| 31,430 | 28,076 |
| 308 | 440 |
Non-current |
|
|
|
|
|
Other payables | 843 | - |
| - | - |
Lease liabilities | 266 | 448 |
| - | - |
| 1,109 | 448 |
| - | - |
Details of the lease liabilities are included in note 6.
Current and non-current other payables at 31 December 2020 includes £3,600,000 related to VAT and PAYE which has been deferred under the UK Government's Covid-19 business relief schemes (2019: £nil). The balance is payable monthly in interest free instalments from April 2021 to March 2022.
10. Financial instruments and risk management
The Group's principal financial instruments are cash, trade receivables, trade payables and derivative financial assets and liabilities. The Group has exposure to the following risks from its use of financial instruments:
(a) Fair values of financial instruments
Fair values
Derivative financial instruments are measured at fair value through profit and loss. The derivative instruments are level 1 financial instruments and their fair value is therefore measured by reference to quoted prices in active markets for identical assets or liabilities. All derivatives are held at a carrying amount equal to their fair value at the period end.
(b) Customer or counterparty credit risk
Credit risk is the risk of financial loss to the Group if a customer or counterparty to a financial instrument fails to meet its contractual obligations and arises principally from the Group's receivables from customers.
These trading exposures are monitored and managed at Group level. All customers are UK based and turnover is made up of a large number of customers each owing relatively small amounts. New customers have their credit checked using an external credit reference agency prior to being accepted as a customer.
Credit risk is also managed through the Group's standard business terms, which require all customers to make a monthly payment predominantly by direct debit. At the year end there were no significant concentrations of credit risk. The carrying amount of the financial assets (less the element of VAT and CCL included in the invoiced balance, which is recoverable in the event of non-payment by the customer) represents the maximum credit exposure at any point in time.
The ageing of trade receivables, net of provision for doubtful debts and expected credit loss, at the balance sheet date was:
| 2020 £'000 | 2019 £'000 |
Not past due | 290 | 69 |
Past due (0-30 days) | 1,816 | 1,529 |
Past due (31-120 days) | 861 | 1,302 |
More than 120 days | - | - |
| 2,967 | 2,900 |
At 31 December 2020 the Group held a provision against doubtful debts and expected credit loss of £6,029,000 (2019: £5,858,000). This is a combined provision against both trade receivables (£5,162,000) and accrued income (£867,000).
(c) Commodity market risk
Market risk is the risk that changes in market prices, such as commodity and energy prices, will affect the Group's income.
Commodity and energy prices
The Group uses commodity purchase contracts to manage its exposures to fluctuations in gas and electricity commodity prices. The Group's objective is to reduce risk from fluctuations in energy prices by entering into back to back energy contracts with its suppliers and customers, in accordance with a Board approved risk mandate. Commodity purchase contracts are entered into as part of the Group's normal business activities.
The majority of commodity purchase contracts are expected to be delivered entirely to the Group's customers and are therefore classified as "own use" contracts. These instruments do not fall into the scope of IFRS 9 and therefore are not recognised in the financial statements. A proportion of the contracts in the Group's portfolio are expected to be settled net in cash where 100% of the volume hedged is not delivered to the Group's customers and is instead sold back to via the commodity settlement process in order to smooth demand on a real time basis. An assumption is made based on past experience of the proportion of the portfolio expected to be settled in this way and these contracts are measured at fair value. The gain or loss on remeasurement to fair value is recognised immediately in profit or loss.
As far as practical, in accordance with the risk mandate, the Group attempts to match new sales orders with corresponding commodity purchase contracts. There is a risk that at any point in time the Group is over or under hedged. Holding an over or under -hedged position opens the Group up to market risk which may result in either a positive or negative impact on the Group's margin and cash flow, depending on the movement in commodity prices. The Group applies premia in its pricing of contracts to cover some market volatility.
The Board continues to evaluate the use of commodity purchase contracts and whether their classification as "own use" is appropriate. The key requirements considered by the Board are as listed below:
• whether physical delivery takes place under the contracts;
• whether the volumes purchased or sold under the contract correspond to the Group's operating requirements; and
• whether there are any circumstances where the Group would settle the contracts net in cash.
All commodity purchase contracts are entered into exclusively for own use, to supply energy to business customers. However, as noted above, a number of these contracts do not meet the stringent requirements of IFRS 9, and so are subject to fair value measurement through the income statement.
The fair value mark-to-market adjustment at 31 December 2020 is a gain of £1,011,000 (2019: loss of £518,000). See note 7 for the corresponding derivative financial asset (2019: financial liability).
The Group's exposure to commodity price risk according to IFRS 7 is measured by reference to the Group's IFRS 9 commodity contracts. IFRS 7 requires disclosure of a sensitivity analysis for market risks that is intended to illustrate the sensitivity of the Group's financial position and performance to changes in market variables impacting upon the fair values or cash flows associated with the Group's financial instruments.
Therefore, the sensitivity analysis provided below discloses the impact on profit or loss at the balance sheet date assuming that a reasonably possible change in commodity prices had occurred and been applied to the risk exposures in place at that date. The reasonably possible changes in commodity price used in the sensitivity analysis were determined based on calculated or implied volatilities where available, or historical data.
The sensitivity analysis has been calculated on the basis that the proportion of commodity contracts that are IFRS 9 financial instruments remains consistent with those at that point. Excluded from this analysis are all commodity contracts that are not financial instruments under IFRS 9.
Open market price of forward contracts | Reasonably possible increase/ decrease in variable | Impact on profit and net assets £'000 |
UK gas (p/therm) | +/-25% | 103 |
UK power (£/MWh) | +/-25% | 364 |
|
| 467 |
Liquidity risk from commodity trading
The Group's trading arrangements can result in a cash call being made by counterparties when commodity markets are below the Group's traded position. A significant reduction in electricity and gas markets could lead to a material cash call from the Group's trading counterparties in the absence of a suitable trading credit limit. Whilst such a cash call would not impact the Group's profit, it would have an impact on the Group's cash reserves. As described below, the structured trading arrangement, entered into with SmartestEnergy in December 2019, has reduced this liquidity risk.
(d) Liquidity risk
Liquidity risk is the risk that the Group will not be able to meet its financial obligations as they fall due. The Board is responsible for ensuring that the Group has sufficient liquidity to meet its financial liabilities as they fall due and does so by monitoring cash flow forecasts and budgets.
In order to enter into the necessary commodity purchase contracts, the Group is required to secure appropriate credit lines or lodge funds on deposit with either its bank or direct with our commodity trading counterparties.
In December 2019 the Group announced a new structured trading arrangement with SmartestEnergy Limited. This arrangement provides a significant trading credit facility and as such reduces the need to lodge cash collateral. As disclosed in note 1, the Board has considered the cash flow forecasts, along with the interaction in trading credit lines and the potential need for cash collateral or Letter of Credit requirements.
At 31 December 2020 the Group had £0.25m lodged as cash collateral with trading counterparties (2019: £10.4m). The material reduction in cash posted is a result of the new structured trading agreement, which is structured to scale with the Group's business growth.
Any excess cash balances are held in short-term deposit accounts which are either interest or non-interest accounts. At 31 December 2020 the Group had £11.7m of cash and bank balances, as per note 8.
(e) Foreign currency risk
The Group trades entirely in pounds sterling and therefore it has no foreign currency risk.
(f) Impact from the Covid-19 pandemic
The Covid-19 pandemic continues to have a significant impact on the UK economy. Businesses have been able to take advantage of various Government incentive schemes to help them through 2020; however there is a risk that once this Government support ends there could be an increase in customer payment defaults and a reduction in the recoverability of customer receivables (being trade receivables and accrued income).
The total customer receivable balance at 31 December 2020, net of provision for doubtful debts and expected credit losses, is 14,136,000. The Directors assess the level of provision as adequate after consideration of cash received post 31 December 2020.
The risk of prolonged lockdowns or reduced Government support impacting the recoverability of customer receivables balances in the future is being monitored closely by the Board and is further detailed in the Strategic Report's review of the risks and uncertainties related to Covid-19. The Board also continues to monitor any impact on the reduction of customer volume and therefore the revenue of the Group.
In assessing sensitivity to the level of credit risk on customer receivables, a 10% increase in the level of bad debt will result in approximately £264,000 of additional expected credit loss.
If energy commodity volumes consumed by customers significantly decrease as a result of further enforced lockdowns (and outside the normal operating assumptions of the Group), there may be exposure to additional mark-to-market volume risk as some of the volume purchased forward would need to be sold. The impact could also be increased if the reduction in customer demand coincided with further declines in energy commodity markets. This scenario occurred in H1 2020. Whilst the Directors continue to take steps to mitigate this risk, the sensitivity caused by a 10% decline in contracted revenue for the year ended 31 December 2021 would reduce gross margin by approximately £1,100,000, excluding any gain or loss on the sale of commodity.
11. Share based payments
The Group operates a number of share option plans for qualifying employees. Options in the plans are settled in equity in the Company. The options are subject to a vesting schedule, details of which are listed below.
On 4 October 2020, the Group made its first round of awards under the new Executive LTIP. These awards are the first options awarded by the Group to have vesting conditions linked to the share price performance of the business.
The terms and conditions of the outstanding grants made under the Group's schemes are as follows:
|
| Exercisable between |
|
|
| |
Date of grant | Expected term | Commencement | Lapse | Exercise price | Vesting schedule | Amount outstanding at 31 December 2020 |
17 February 2016 | 3 | 17 February 2019 | 17 February 2026 | £0.09 | 1 | 27,000 |
22 December 2016 | 3 | 22 December 2019 | 22 December 2026 | £3.25 | 1 | 13,500 |
6 April 2017 | 3 | 6 April 2020 | 6 April 2027 | £0.005 | 1 | 79,110 |
6 April 2017 | 6.5 | 6 April 2020 | 6 April 2027 | £2.844 | 1 | 158,220 |
28 September 2017 | 6.5 | 28 September 2020 | 28 September 2027 | £5.825 | 1 | 40,500 |
9 April 2018 | 6.5 | 9 April 2021 | 9 April 2028 | £10.38 | 1 | 78,351 |
26 September 2018 | 6.5 | 26 September 2021 | 26 September 2028 | £8.665 | 1 | 6,539 |
25 February 2019 | 6.5 | 25 February 2022 | 25 February 2029 | £1.09 | 1 | 53,333 |
25 February 2019 | 3 | 25 February 2022 | 25 February 2029 | £0.005 | 1 | 250,000 |
18 June 2019 | 3 | 1 August 2022 | 1 February 2023 | £1.40 | 2 | 86,138 |
4 October 2020 | 3 | 30 April 2023 | 4 October 2030 | £0.005 | 3 | 287,312 |
4 October 2020 | 3 | 30 April 2024 | 4 October 2030 | £0.005 | 3 | 210,696 |
|
|
|
|
|
| 1,290,699 |
The following vesting schedules apply:
1. 100% of options vest on third anniversary of date of grant.
2. 100% of options vest on third anniversary of the Save As You Earn (SAYE) savings contract start date.
3. Level of vesting is dependent on a performance condition, being the Group's share price at pre-determined dates in the future
The number and weighted average exercise price of share options were as follows:
| 2020 | 2019 |
| Shares | Shares |
Balance at the start of the period | 830,468 | 573,290 |
Granted | 498,008 | 437,248 |
Forfeited | (37,777) | (166,570) |
Lapsed | - | - |
Exercised | - | (13,500) |
Balance at the end of the period | 1,290,699 | 830,468 |
Vested at the end of the period | 318,330 | 40,500 |
Exercisable at the end of the period | 318,330 | 40,500 |
| 2020 | 2019 |
|
|
|
Weighted average exercise price for: |
|
|
Options granted in the period | £0.005 | £0.55 |
Options forfeited in the period | £1.35 | £2.29 |
Options exercised in the period | - | £0.09 |
Exercise price in the range: |
|
|
From | £0.005 | £0.005 |
To | £10.380 | £10.380 |
The fair value of each option grant is estimated on the grant date using an appropriate option pricing model with the following fair value assumptions:
| 2020 | 2019 |
Dividend yield | 0% | 0% |
Risk-free rate | 1.5% | 1.5% |
Share price volatility | 117.1% | 124.3-127.8% |
Expected life (years) | 3 years | 3-6.5 years |
Weighted average fair value of options granted during the period | £0.90 | £1.14 |
The share price volatility assumption is based on the actual historical share price of the Group since IPO in March 2016.
The total expenses recognised for the year arising from share based payments are as follows:
| 2020 £'000 | 2019 £'000 |
Equity-settled share based payment expense | 320 | 125 |
Total share based payment charge | 320 | 125 |
12. Commitments
Capital commitments
The Group had committed, at 31 December 2020, to the purchase of a newly developed office building and associated land at a site in Leicester. At 31 December 2020 the Group had incurred £1,163,000 of cost (£150,000 of land and £1,013,000 of assets under construction). The Group has a remaining capital commitment at 31 December 2020 of £2,207,000 (2019: £3,090,000).
Following the year end, on 10 February 2021, the Group settled the commitment by payment, in cash, of the remaining balance (with the exception of an immaterial retention amount) and took possession of the completed building. The building, following fit-out, will be occupied by the Group's sales, marketing and digital innovation teams in mid-2021.
Security
The Group entered into an arrangement with a commodity trading counterparty, SmartestEnergy Limited, in December 2019. As part of the arrangement, there is a fixed and floating charge over the main trading subsidiaries of the Group, Yü Energy Holding Limited and Yü Energy Retail Limited.
As disclosed in note 7, included in other receivables of the Company and the Group is an amount of £500,000 held in a separate bank account over which the Group's bankers have a fixed and floating charge.
Contingent liabilities
The Group had no contingent liabilities at 31 December 2020 (2019: £nil).
13. Related parties and related party transactions
The Group has transacted with CPK Investments Limited (an entity owned by Bobby Kalar). CPK Investments Limited owns the property from which the Group operates from via a lease to Yü Energy Retail Limited. During 2020 the Group paid £120,000 in lease rental and service charges to CPK Investments Limited (2019: £120,000). The amount owing to CPK Investments at 31 December 2020 was £10,000 (2019: £10,000).
All transactions with related parties have been carried out on an arm's length basis.
14. Business combinations
On 7 August 2020 Yü Energy Retail Limited, a subsidiary of Yü Group PLC, acquired the business to business ("B2B") customer book of Bristol Energy Limited for a total consideration of £1,285,000. The acquisition is part of the Group's strategy to drive growth, both organically and by supplementing via inorganic acquisitions where earnings enhancing.
The values identified in relation to the acquisition of the Bristol Energy B2B customer book are final as at 31 December 2020. The fair values of the identifiable assets acquired and the liabilities recognised at the date of acquisition were as follows:
| 2020 £'000 |
Customer book intangible asset | 597 |
Trade receivables (net of provision) | 924 |
Accrued income | 344 |
Accruals | (580) |
Net identifiable assets acquired | 1,285 |
The accrual balance acquired of £580,000 is due for payment in August 2021.
The fair value of the consideration at the date of acquisition is as follows:
| 2020 £'000 |
Cash paid at completion | 841 |
Deferred consideration now paid | 444 |
Total consideration paid | 1,285 |
No further consideration is payable.
The fair value of the trade receivables acquired was £924,000. The gross value was £1,050,000 with a provision against expected non-payment of £126,000.
The trade receivables of £924,000 and the accrued income of £344,000 were largely converted to cash promptly post the completion of the acquisition.
On 9 November 2020, Yü Energy Retail Limited completed the acquisition of another competitor B2B customer book adding further meter points to the Group's gas customer portfolio. The transaction involved cash consideration of £388,000 to acquire trade receivables and accrued income, net of a £43,000 provision for expected non-payment. A customer book intangible asset of £65,000 was also recognised.
No business combinations or acquisitions took place in 2019.
15. Post-balance sheet events
As disclosed in note 12, the Group completed its acquisition of a new purpose built sales, marketing and innovation office. The transaction completed on 10 February 2021.
There are no other significant or disclosable post-balance sheet events.
Copies of the Annual Report and Accounts for the year ended 31 December 2020 will be available to download from the Company's website at www.yugroupplc.com later today, Tuesday 30 March 2021. Hard copies will be posted to shareholders on 13 April 2021.
The AGM is scheduled to take place on 27 May 2021 and the AGM notice is included in the Annual Report and Accounts. The Group Chairman would like to make the following statement in relation to the AGM:
The health of the Company's shareholders, as well as its employees, is of paramount importance. In view of the UK Government placing restrictions on travel because of the coronavirus (Covid-19) pandemic, shareholders are unlikely to be permitted to attend the annual general meeting in person. The Board encourages shareholders to monitor the Company's website (yugroupplc.com/investors) and regulatory news services for any updates in relation to the annual general meeting that may need to be provided. In the meantime, the Board encourages shareholders to submit their proxy form as early as possible by post or electronically as detailed in the notes to the notice of annual general meeting and the proxy form.
Ordinarily, shareholders are entitled to appoint a proxy to attend and to exercise all or any of their rights to vote and to speak at the annual general meeting instead of the shareholder. However, in view of the ongoing coronavirus pandemic, the Company is encouraging ordinary shareholders to appoint the Chairman as their proxy (either electronically or by post) with their voting instructions as shareholders or their proxies are unlikely to be allowed to attend the annual general meeting in person. The deadline for doing this is set out in the notes to the notice of annual general meeting and the proxy form. The Company is taking these precautionary measures to safeguard its shareholders' and employees' health and make the annual general meeting as safe and efficient as possible.
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