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SQE
SQE
SQE - Square One - Audited results for the year ended 31 December 2009
Square One Solutions Group Limited
(Incorporated in the Republic of South Africa)
(Registration number 1999/026822/06)
Share code: SQE & ISIN: ZAE000023768
("Square One" or "the company")
Audited results for the year ended 31 December 2009
The Audited results of Square One Solutions Group for the year ended 31
December 2009 are set out below.
STATEMENT OF FINANCIAL POSITION
Figures in Rand Audited Unaudited Audited
31 December 30 June 2009 31 December
2009 R `000 2008
R `000 R `000
ASSETS
NonCurrent Assets 34 861 46 083 47 460
Fixed Assets 4 370 5 916 7 482
Intangible assets 21 434 31 302 31 156
Deferred Tax 9 057 8 865 8 822
Current Assets 28 214 81 275 71 536
Inventory 12 155 15 510 14 525
Trade and other 15 227 65 124 56 994
receivables
Cash and cash equivalents 832 634 10
Taxation - 7 7
Total Assets 63 075 127 358 118 996
EQUITY AND LIABILITIES
Equity and reserves 19 246 38 372 38 483
Share capital 31 268 31 268 31 268
Retained income (12 022) 7 104 7 215
NonCurrent Liabilities 18 394 24 814 15 444
Long term liabilities 18 394 24 814 15 444
Current Liabilities 25 435 65 069
Current portion of long 1 080 1 284 1 752
term liabilities
Current tax payable 106 - -
Trade and other payables 22 961 61 931 60 134
Provisions 1 288 957 1 214
Bank overdraft - - 1 969
Total Equity and 63 075 127 358 118 996
Liabilities
Net asset value per share 43.4 86.4 86.7
(cents)
Net tangible asset value -4.9 15.9 16.5
per share (cents)
Number of shares in issue 44 394 44 394 44 394
at period end (`000)
STATEMENT OF COMPREHENSIVE INCOME
Figures in Rand Audited Unaudited Audited
Year ended 6 months Year ended
31 December ended 31 December
2009 30 June 2009 2008
R`000 R`000 R`000
Revenue 76 533 54 252 207 790
Operating profit 2 139 385 2 495
Finance costs (net) (477) (547) (2 268)
Loss on disposal of (7 860) - (80)
subsidiary
Amortization of goodwill (12 123) - -
and intangible assets
Profit on disposal of asset - 8 -
(Loss)/Profit before (18 321) (154) 147
taxation
Taxation (916) 43 (64)
(Loss) / Profit for the (19 237) (111) 83
period
Attributable to minorities - - -
Attributable to ordinary (19 237) (111) 83
equity holders
Reconciliation
Adjustments for headline
earnings:
Loss on disposal of non- 7 860 - 80
core subsidiary
Profit on sale of asset - (8) -
Amortization of intangible 12 123
assets
Headline earnings/(loss) 746 (119) 163
for the period
Earnings/(loss) per share -43.3 -0.3 0.2
(cents)
Headline earnings/(loss) 1.7 -0.3 0.4
per share (cents)
Weighted average number of 44 394 44 394 44 394
shares in issue (`000)
STATEMENT OF CHANGES IN EQUITY
Figures in Rand Share Share Distribu Sub- Minorit
capital premium table total y Total
R `000 R `000 Reserves R `000 Interes equity
R `000 ts R`000
R `000
Balance at 01 444 30 824 7 132 38 400 - 38 400
January 2008
Surplus for the 83 83 83
year
Balance at 31 444 30 824 7 215 38 483 - 38 483
December 2008
Shortfall for (19 237) (19 (19 237)
the year 237)5
Balance at 31 444 30 824 (12 022) 19 246 - 19 246
December 2009
CASH FLOW STATEMENTS
Figures in Rand 31 December 30 June 31 December
2009 2009 2008
R `000 R `000 R `000
Cash flows (utilised 1 759 (6 114) 3 296
in)/generated from
operating activities
Cash flows utilised in (1 918) (662) (3 589)
investing activities
Cash flows from financing 2 950 9 369 (5 114)
activities
Total cash movement for the 2 791 2 593 (5 407)
period
Cash at the beginning of (1 959) (1 959) 3 448
the period
Total cash at end of the 832 634 (1 959)
period
COMMENTARY
The board of directors hereby presents the company`s results for the
financial year ended 31 December 2009. These audited results and the
unaudited interims have been prepared in accordance with AC500 and IAS 34 -
Interim Financial Reporting respectively on the basis of consistent
accounting policies that comply with International Financial Reporting
Standards ("IFRS"),the Listings requirements of the JSE and the Companies Act
of 1973 as ammended. The accounting policies that have been applied in the
Group are consistent with those applied in the previous annual financial
statements.
BACKGROUND AND NATURE OF BUSINESS
The Square One Solutions Group was founded in 1986 and listed in the year
2000. The Group is an applied technology company listed under the
"Information Technology (IT) - Software and Computer Services" sector of the
JSE Limited ("JSE").
Square One Solutions Group`s primary focus is the provision of niche, applied
technology solutions. The Group has strong black ownership and management, a
national footprint and more than 23 years experience focused on the South
African market. The Group`s value-based offerings are centred on:
Unified Communication solutions
Networking solutions
Data
Voice
Software Application integration solutions
Infrastructure solutions
- Power solutions
- Facility solutions
Coding and Marking solutions
- CIJ
- Laser
- Outer case coding
- Commercial printing
- Outsourced coding solutions
Finance and leasing services
The Group focuses on coupling innovation, technology and service in order to
achieve value for its clients while striving to achieve superior returns and
growth in earnings for its shareholders.
INDUSTRY AND BUSINESS OVERVIEW
Square One`s primary service focuses on providing niche business-enabling,
technology solutions, which create value for its clients through the
application of business knowledge and best practices, technological skills
and capability. The Group`s core operations are focused on the provision of
value-based solutions centred around Unified Communications solutions,
Infrastructure, Electrical and Facility solutions, Industrial Coding and
Marking solutions and Finance, Leasing and Rental solutions to its key target
market of enterprise, SME, corporate and Government clients. The Company also
provides 24x365 national support and service.
FINANCIAL OVERVIEW
The results for the financial year ended 31 December 2009 reflect a decline
in earnings and an increase in headline earnings attributable to ordinary
shareholders of R(19,237,000)(2008: Earnings R83,000) and R746,000 (2008:
Headline Earnings R163,000) respectively for the period under review. The
deficit and headline earnings per share for the year ended 31 December 2009
is -43.3 cents (2008: Earnings 0.2 cents) and 1.7 cents (2008: 0.4 cents) per
share respectively.
REVIEW OF STATEMENT OF COMPREHENSIVE INCOME
Turnover has decreased by 63% over the prior period largely as a result of
cutbacks in technology spend budgets by clients across the board in response
to the major economic downturn especially from late 2008 to end 2009. In
addition a major contract with a dominant fixed line operator which was
expected to yield in excess of R100 million in turnover based on projects
that had previously been planned, only yielded approximately R850,000 in new
orders in 2009. As the business had been geared to service this important new
segment of our business the lack of orders had a massive negative impact on
our business overall.
Gross profit has however only decreased by 45% (2008:12%) due to higher
margins achieved. In line with prior year initiatives, the Group has
continued with its focus on reducing turnover from low margin business and
moving more towards service and contract type business which typically
attracts a higher gross margin for the Group. Consequently, gross margins in
the operating units have held up very well and in some cases increased, quite
a feat, particularly in light of the economic decline that has severely
impacted us as a result of the financial markets driven turmoil.
The contracts being signed with customers vary from 1 to 5 year service
and/or rental contracts. In addition, the Group in the past year, focussed on
diversifying the customer base and strategically positioning the company into
new and parallel markets, primarily the government and parastatal markets. As
stated above, unfortunately orders from a major fixed line telecommunications
client declined substantially mainly attributable to the current economic
climate. This contract has lapsed and was not renewed by the
telecommunications operator. The loss making subsidiary was sold out of the
Group with effect from 1 July 2009. The results presented show a loss on
disposal of the subsidiary of R(7,860,000) (2008: R(80,000))
Operating expenses decreased approximately 26.6% in the current period as
compared to the prior period. This was largely due to staff cutbacks and
attendant cost reductions as part of the repositioning of the Group to ensure
long term longevity in light of prevailing market conditions.
As stated above, expenses were reviewed and where appropriate action was
taken to realign our cost structures with current revenue levels. As part of
this process employee headcount was reduced by approximately 41%. This
process also resulted in the departure of the previous CEO and COO of the
Group to pursue other business interests. Whilst this process was painful we
are now reaping the benefits of longer term sustainability as a more than 23
year-old business in this tough trading environment. We continue to manage
costs and will act aggressively where necessary to make timely adjustments to
ensure the longevity of our business for shareholders, employees and all
other interested stakeholders
Net finance costs decreased for the comparable period notwithstanding the
injection of further working capital by shareholders.
During the current year management decided to write off goodwill of
approximately R12 million partly as a result of an internal restructuring
process as well as part of the process of streamlining the Group to focus on
core areas where we see significant growth. Accordingly goodwill that had
been raised in prior years now required impairment due to changed operating
circumstances and muted growth expectations in the short term. Some of the
goodwill impairment was also tied to activities that the group has exited or
entities sold out of the Group.
The Group has, for the past five years, returned consistent growth for the
market and shareholders alike. Accordingly, the executive team trusts that
the market, our valued shareholders, clients, partners and other stakeholders
will support the continued strategic intent to accelerate the growth of the
business through the initiatives concluded in the prior year and current
reporting period, in particular the push into the public sector.
In particular, the Group is starting to experience the positive effects of
its focus on the government and parastatal sector with growing orders being
received from provincial and national government departments. Indications are
there that 2010 should be a year of significant growth in this market
segment, consistent with government`s intent to focus more on visible service
delivery.
REVIEW OF STATEMENT OF FINANCIAL POSITION
Fixed assets have decreased by approximately 42% over the prior year as there
has been no significant acquisitions of assets in the reporting period. The
decline is largely due to depreciation as the bulk of the assets acquired in
the group are technological in nature and are therefore amortised over a 3
year period. There is also some impact pertaining to the disposal of the
subsidiary.
With the recent financial markets turmoil, there is a sharp pull back on
financing activities and we have seen a sharp slowdown in the Finance and
Leasing Services business unit for the first half of 2009. However as
interest rates have declined we have started to see recovery in this business
unit and expect that 2010 will be a year of resuming strong sustained growth.
Accordingly we have embarked on a measured recruitment drive to ensure that
we capitalise on opportunities as they arise in the market.
Accounts receivable decreased by 76% (2008: increase 33%), primarily due to
the decline in turnover overall as well as a focus on debtor collections to
improve cashflow availability to the Group. Stock declined by 16% (2008:35%)
from the prior period due to improved management of stock levels and the
requirement for upfront payments in the new business area.
Accounts payable decreased by 63% compared to a marginal increase in 2008
directly in line with reduced trading activity in the current period.
REVIEW OF STATEMENTCASH FLOWS
As mentioned earlier, the businesses being retained were profitable and
generated positive cash flow in the current reporting period. Cash inflow
from financing activities primarily relates to shareholder funding advanced
to the Group. This was required to support the necessary investment to
consolidate the several transversal contracts secured through the strategic
initiatives of the Group. In addition, further funding than had been
anticipated was required to support the funding needs of the subsidiary that
had been established to fulfil on the major contract with the major fixed
line operator.
The increase in applied shareholder funding further validates the faith and
commitment that the founding shareholders have in the strategic direction of
the business. As stated above, a large portion of the shareholder funding
introduced in the past year was spent on integrating the new transversal
government contracts into the group as well as funding operating costs
pertaining to the personnel and delivery infrastructure for the major
contract with the fixed line operator that failed to materialise.
RECONCILIATION OF CHANGES
There is an improvement in the earnings per share from the previously
reported numbers, whilst the headline earnings are consistent with previous
reported numbers.
The audited balance sheet differs materially with the previously published
unaudited results arising from differences of interpretation between
management and the auditors relating to the valuation and consequent
recognition of Intangibles (including deferred taxation assets) and Goodwill.
In order to be prudent, the board has accepted the views of the auditors
pertaining to what would be considered fair value of the relevant items.
However in terms of IFRS the Group will be able to review and if appropriate
readjust these items within one financial year as allowed by IFRS3, subject
to demonstrated improvement in the underlying performance of the business.
Based upon our pipeline and sales activity we believe that we will be able to
do so in this 2010 financial year.
Accordingly the strict adoption of IFRS3 requirements has given rise to the
following adjustments to the unaudited results that were previously
published:
Previously Adjustment As per Audited
disclosed Increase/(decrease) Financial
Statements
STATEMENT OF R`000 R`000 R`000
COMPREHENSIVE INCOME
Amortisation of 15,826 3,703 12,123
Intangible
Net loss before (22,025) 3,703 (18,322)
taxation
Net Loss after (22,940) 3,703 (19,237)
taxation
STATEMENT OF
FINANCIAL POSITION
Equity and
Liabilities
Retained Income (15,725) 3,703 (12,022)
Long-Term 63,111 (44,717) 18,394
Liabilities
Trade and other 22,467 494 22,961
payables
Total (40,520)
Total Assets
Intangible Assets 54,768 (33,334) 21,434
Deferred Taxation 15,928 (6,871) 9,057
Trade and other 15,542 (315) 15,227
receivables
Total (40,520)
STATEMENT OF
CASHFLOWS
Net cash
inflow/outflow from 3,394 (1,635) 1,759
operating activities
Net cash
inflow/outflow from (48,268) 46,350 (1,918)
investment
activities
Net cash
inflow/outflow from 47,667 (44,717) 2,950
financing activities
The cashflow impact of these adjustments is neutral as these items are all
non-cash items in the main or relate to reclassifications between assets and
liabilities of debit and credit balances.
The intangible asset and deferred taxation asset arose due to trading losses
incurred by a subsidiary prior to its incorporation into the Group which were
by and large funded by major shareholders and other Group companies prior to
acquisition as part of the process of taking control of the entity. The
entity in question holds critical transversal contracts that are essential
for the Group`s thrust into the public sector.
For the Group going forward as stated elsewhere the government sector in
general is seen as crucial to contributing towards significant future growth
and the Group would not have been in a position to accelerate its efforts
into this sector without the acquisition.
EMPHASIS OF MATTER
Shareholders are advised that the unqualified audit opinion of the auditors
contains the emphasis of matter set out below:
Without qualifying our opinion, we draw attention to the statement of
comprehensive income which indicates that the company has incurred a net
loss of R 18,3 million during the year ended 31 December 2009 and as of
that date the company had a deferred tax asset and intangible asset of R
9,0 million and R 21,2 million respectively. These conditions indicate
the existence of a material uncertainty that may cast significant doubt
about the company`s ability to continue as a going concern.
The directors wish to highlight that losses referred to above comprise R12,1
pertaining to the impairment of goodwill which is a non cashflow item and the
loss on sale of subsidiary of R7,8 million. As the loss making subsidiary has
been disposed off we believe that the potential future drain on the Group has
been curtailed. The remaining businesses have achieved headline earnings
after tax of R746,000 and are therefore trading profitably.
In addition, the major shareholders of the Group have continued to provide
working capital support to the Group as and when required and this is
expected to continue should it be required. The Group is experiencing a
healthy increase in demand and growth in orders and is expected to manage to
meet its operational requirements in the normal course of business.
DIVIDENDS
The directors have decided not to declare a dividend.
ACQUISITIONS AND ISSUE OF SHARES FOR CASH
Tecor Group (Pty) Ltd pursuant to a section 311 offer of compromise was
bought and brought into the Group with effect from 1 July 2009. Tecor holds
several significant transversal tenders required by the Group to execute on
its strategy of growing its public sector business portfolio. Tecor has now
been renamed Square One Telecoms (Pty) Ltd.
SUBSEQUENT EVENTS
There have been no significant subsequent events that require reporting.
DIRECTOR CHANGES
As reported previously Mr FF Gqiba resigned as a Director of Square One, with
effect from 1 February 2010.
CHANGE OF AUDITOR
There have been no changes to the auditors to the company.
LITIGATION
There is no material litigation pending against the company.
FUTURE PROSPECTS
Whilst the results appear to indicate a decline in the business, the
fundamentals and state of contracts are all healthy. The business and
customers are more diversified. The Group has and continues to bolster its
core skills sets and has a balance of seasoned professionals working for the
business. Square One operates at the top of the SME market and has now
successfully entered the government and parastatal markets through
acquisition of several transversal contracts in the public sector space and
strategic alliances and associated initiatives. Square One`s existing
business is still profitable albeit supported by key restructuring
initiatives on an ongoing basis and Square One is geared up to service the
new business opportunities recently secured. The strategic direction of the
Group remains consistent with previously stated intent and the group has used
this solid foundation as a springboard into the newly acquired markets and
client base.
Square One expects a continued, managed and sustainable growth trend in its
strategic areas of focus. Operating costs continue to be reviewed and where
appropriate reduced and Square One is now starting to realise the benefits
from the new direction taken in the second half of the 2009 financial year.
With the groundwork now in place, Square One expects to unlock greater
profitability, whilst continuing to secure additional, sustainable and
predictable contract based revenues for the group.
Johannesburg
30 April 2010
Sponsor:
Grindrod Bank Limited
Date: 30/04/2010 15:38:01 Produced by the JSE SENS Department.
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