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Escher Group Holdings plc
Annual report 2011
31
Financial statements
Corporate governance
Business review
Overview
for the year ended 31 December 2011
Notes to the consolidated financial statements
1. General information
Escher Group Holdings plc and its wholly owned subsidiaries (collectively the “Group”) are leading providers of distributed
messaging and data management solutions and services. They develop, market, sell and support enterprise-wide software
applications for post office counter automation and distributed network communication. The Group’s principal customers
are international postal services. The Group services these customers from their offices in Ireland, the United States,
Singapore, South Africa and the United Kingdom.
The company was incorporated in the Republic of Ireland on 7 June 2007 as NG Postal Limited, a private company limited
by shares. On 14 September 2007, the company acquired the main operating subsidiaries (see note 13) giving rise to the
goodwill asset (see note 12). The company was renamed Escher Group Holdings Limited on 2 September 2008.
The company re-registered as a public limited company on 14 July 2011 and changed its name to Escher Group Holdings plc
on 14 July 2011. On 25 July 2011, the Group filed for an Initial Public Offering on London’s AIM. Admission to AIM occurred
on 8 August 2011.
The company’s registered office is North Wall Quay, Dublin 1, Ireland.
2. Going concern
The financial statements have been prepared on a going concern basis which assumes the Group will continue in operational
existence for the foreseeable future. The Group recorded a profit after tax of US$0.6 million in the year and its net current
liabilities were US$8.8 million at 31 December 2011, due mainly to the classification of US$11.8 million of borrowings as current
at 31 December 2011. This loan was repayable in September 2012. The loan contains a debt covenant and in late 2009, the Group
experienced an increase in leverage due in part due to a delay in certain debtors due prior to year end, the end of a large contract
and additional research and development costs in the furtherance of a new product. As such the Group exceeded its maximum
leverage threshold in the fourth quarter of 2009 and has been in breach of its leverage covenant since that date.
On 8 August 2011, the company raised US$25 million (gross before US$3.5 million directly attributable costs) in new equity
from institutional investors from its initial public offering on AIM of the London Stock Exchange. These funds were used to pay
down US$5.6 million of the debenture and renegotiate the balance at a significantly lower interest rate. The funds were also
used to partially repay US$10.8 million off the Irish Bank Resolution Corporation facility thereby reducing the bank debt
significantly at 31 December 2011.
On 5 January 2012, the Group undertook a refinancing with Bank of Ireland where existing bank loans and debentures were
repaid and new debt was raised with Bank of Ireland. This new financing put in place a US$9.7 million term loan facility and
a revolving twelve‑month facility for US$1.8 million. The term loan is amortising being fully repayable by 2015.
The combination of both fundraising activities has given sufficient working capital to enable the Group to execute its business
plan. In addition to this fundraising, the Group has also signed a new US customer contract which has a 54‑month base period
and renewal options. The contract is expected to generate, over a fifteen-year term, approximately US$50 million in revenue
for the Group, but with scope for substantial additional revenue.
Taking the above factors into account along with reviewing the company’s budgets and forecasts, the Directors have
a reasonable expectation that the company and the Group have and will have adequate resources to continue in operational
existence for the foreseeable future. For this reason, the Directors continue to adopt the going concern basis in preparing
the financial statements.
3. Financial risk management
Financial risk factors
The Group’s activities expose it to a variety of financial risks: market risk (including cash flow risk, interest rate risk, currency
risk and price risk), credit risk and liquidity risk. The Group’s overall risk management programme focuses on the unpredictability
of financial markets and seeks to minimise potential adverse effects on the Group’s financial performance. The Board is responsible
for setting risk management policies and management are responsible for implementing these policies.
(a) Market rate risk
Market rate risk refers to the exposure of the Group’s financial position to movements in interest rates, currency rates and general
price risk.
The principal aim of managing the interest rate risk is to limit the adverse impact on cash flows and shareholder value
of movements in interest rates.
Cash flow and fair value interest rate risk
The Group’s interest rate risk arises from bank borrowings. Borrowings issued at variable rates expose the Group to cash flow
interest rate risk which is partially offset by cash held at variable rates. Cash and cash equivalents and borrowings issued at
fixed rates expose the Group to fair value interest rate risk. Group policy is to maintain in excess of its 50% of its borrowings
in fixed rate instruments. During 2011 and 2010, the Group’s borrowings at variable rate were denominated in US Dollars.
The Group manages its cash flow interest rate risk by using floating-to-fixed interest rate swaps. Such interest rate swaps
have the economic effect of converting borrowings from floating rates to fixed rates. Generally, the Group raises long-term
borrowings at floating rates and swaps them into fixed rates that are lower than those available if the Group borrowed at
fixed rates directly. Under the interest rate swaps, the Group agrees with other parties to exchange, at specified intervals
(primarily quarterly), the difference between fixed contract rates and floating-rate interest amounts calculated by reference
to the agreed notional amounts.
Cash and cash equivalents and borrowings at variable rates expose the Group to cash flow interest rate risk.