CONSOLIDATED STATEMENT OF CASH FLOWS

FOR THE YEAR ENDED 31 MARCH

1.       Nature of operations and general information

GRC International Group plc (GRC International Group or 'the Company') is a public limited company limited by shares, incorporated and domiciled in England and Wales. The registered company number is 11036180 and the registered office is Unit 3 Clive Court, Bartholemew's Walk, Cambridgeshire Business Park, Ely, Cambridgeshire, CB7 4EA.

The principal activities of GRC International Group plc and its subsidiary companies (together, the "Group") are those of a one-stop shop for IT Governance including books, tools, learning and consultancy services.

The financial information for the year ended 31 March 2023 and the year ended 31 March 2022 does not constitute the company's statutory accounts for those years. Statutory accounts for the year ended 31 March 2022 have been delivered to the Registrar of Companies. The statutory accounts for the year ended 31 March 2023 will be delivered to the Registrar of Companies in due course.

The auditors' report on the accounts for 31 March 2023 and 31 March 2022 respectively was unqualified, did not draw attention to any matters by way of emphasis, and did not contain a statement under 498(2) or 498(3) of the Companies Act 2006.

2.      Principal Accounting Policies

Basis of preparation

The consolidated financial statements of GRC International Group plc and entities controlled by the Company (its subsidiaries) for the years presented has been prepared in accordance with UK-adopted international accounting standards

Basis of consolidation

The results for the year ended 31 March 2023 and 31 March 2022 include the results of GRC International Group plc and its subsidiaries.

A subsidiary is a company controlled directly by the Group. Control is achieved where the Group has the power over the investee, rights to variable returns and the ability to use the power to affect the investee's returns.

Income and expenses of subsidiaries acquired during the year are included in the Consolidated Income Statement from the effective date of control. When necessary, adjustments are made to the financial statements of subsidiaries to bring their accounting policies into line with those used by the Group.

All intra-Group transactions, balances, income and expenses are eliminated in full on consolidation.

The principal accounting policies adopted are set out in the Annual Report and Financial Statements.

These accounting policies comply with each IFRS that is mandatory for accounting periods ending on 31 March 2023.

Going concern

The financial statements have been prepared on a going concern basis.

The Group has recorded a loss for the year of £1.3m (2022: £1.0m) and as at 31 March 2023 its current liabilities exceeded its current assets by £4.8m (2022: £3.2m).

The Group has been through a transitionary period, pivoting the business from a predominantly consulting and training business to a more comprehensive cyber security 'defence in depth' business, still incorporating consultancy and training products but increasingly focused on platform-based technology services sold on subscription or retainer style contracts. This transition was significantly impacted by the COVID-19 pandemic in FY21 and, to a much lesser extent, by the macro-economic and political uncertainty through the current year Q3 (calendar Q4 of 2022), with positive momentum and revenue growth returning in Q4. The Group has now delivered two consecutive EBITDA positive trading years, being FY22 and FY23, and the positive momentum seen through Q4 FY23 has continued into FY24.

During the COVID-19 pandemic the Group accumulated PAYE and VAT arrears of £1.7m as part of its response to the unprecedented trading environment, in respect of which it has formally agreed repayment plans with HMRC and £1.4m had been repaid at the balance sheet date, with the remaining £0.3m to be paid through FY24.

The Directors have prepared an integrated income statement, balance sheet and cash flow forecast by month which runs to 31 March 2025. For the purposes of Management's assessment of going concern a shortened period to 12 months from approval of the Group financial statements to 30 September 2024 has been used by Management for their assessment ("the going concern review period"). Additionally, the Directors have prepared a sensitised forecast with lower than expected revenues and appropriate cost reduction measures. The revenues in the sensitised forecast are 15% lower than the Group's base case forecast in FY24 and 22% lower in FY25, representing a 2% reduction in FY24 against the current year revenue achieved and only 3% year on year growth to FY25. Both the forecast and the sensitised forecast show the Group operating within facilities already available to the Group through the going concern review period to 30 September 2024 and include the Group's fixed commitments in terms of settlement of HMRC liabilities, borrowings, and lease liabilities. The Directors note that the Group has good forward visibility of revenue, with 73% of FY23 revenue coming from recurring revenue products, and consultancy projects typically scheduled 1 to 3 months in advance giving Management clear visibility to structure an affordable cost base and programme for capital expenditure through the going concern review period. Further comfort is drawn from the Group's track record of trading successfully through volatile and uncertain trading conditions, demonstrating the ability to adjust the cost base appropriately and manage cash.

The Directors have reviewed the Group's going concern forecasts and projections to 30 September 2024 which, taking account

of reasonably possible changes in trading performance, show that the Group is able to generate sufficient liquidity to continue in operational existence for the foreseeable future. Specifically, the forecasts include estimates for the impact of inflation. To the extent that these estimates turn out to be insufficient in the current climate the Directors are confident that there is sufficient flexibility in discretional or uncommitted capital spend to absorb unexpected cost increases or cash outflows resulting from the current macro-economic climate. On this basis the Directors believe that the Group will be able to generate sufficient cash through its normal business trading and there is sufficient flexibility in its ongoing cost base and capital expenditure spend to enable it to continue to meet its liabilities as they fall due during the going concern review period. In making this assessment the Directors have assessed the maturity of the Group's liabilities, which at 31 March 2023 were comprised of the amounts set out in note 16. Consideration has also been given to the aging and recoverability of the Group's receivables, the continuance through the going concern review period of facilities provided by Mr Andrew Brode (refer to note 24) and the access to additional liquidity via undrawn available facilities in excess of £0.5m comprising; undrawn and committed facilities from Mr Andrew Brode (refer to note 24) and available invoice discounting facilities within DQM. For this reason, the Directors continue to adopt the going concern basis in the preparation of its financial statements.

3.      Taxation

Analysis of credit in the year:

An increase to the UK Corporation tax rate to 25% with effect from 1 April 2023 was enacted by the Finance Act 2021 on 14 May 2021.

As a result deferred tax balances as at 31 March 2023 are measured at 25%.

At the balance sheet date, the Group has the following unused tax losses:

At the balance sheet date, a deferred tax asset has not been recognised for these amounts on the basis that at the present time the Group has not recorded a recent taxable profit.

The Group records tax credits for research and development tax credits in the financial statements when the claims have been quantified. No amount has been quantified at the current time in relation to the year ended 31 March 2023. As explained in note 15, as and when credits are claimed and credited to the tax accounts of the Group, the amounts are expected to reduce the Group's outstanding balances payable to HMRC.

Tax credits of £164,000 and £164,000 were claimed in relation to the year ended 31 March 2021 and 31 March 2022 respectively and were recorded in the year ended 31 March 2023.

DEFERRED TAX

The following are the major deferred tax liabilities and assets recognised by the Group and movements thereon during the current and prior reporting period.

Deferred tax assets and liabilities are offset where the Group has a legally enforceable right to do so.

4.      Segmental Reporting

OPERATING SEGMENTS

For the purposes of segmental reporting, the Group's Chief Operating Decision Maker ('CODM') is considered to be the Board of Executive Directors of the Company. The Board receives information on a consolidated basis. Given the extent and nature of central services provided in support of the Group's different revenue streams, the Board considers that the Group has only one operating segment.

REVENUE BY GEOGRAPHIC DESTINATION

Revenue across all operating segments is generated from the UK but includes overseas sales:

2023 Non-UK revenue includes United States of America £1,581,000 (2022: £1,150,000), Ireland £484,000 (2022: £442,000), Italy £75,000 (2022: £141,000), Rest of Europe £582,000 (2022: £461,000), Australia £44,000 (2022: £121,000) and Rest of the World £318,000 (2022: £707,000).

2023 Non-UK non-current assets includes Ireland £19,000 (2022: £29,000) and Germany £15,000 (2022: £17,000).

INFORMATION ABOUT MAJOR CUSTOMERS

No customers contributed 10% or more to the Group's revenue in any period presented.

5.      Revenue

Revenue is all derived from continuing operations.

Notwithstanding that the Group's revenues are often interdependent, the Group has disaggregated revenue into various categories in the following tables which is intended to depict how the nature, amount, timing and uncertainty of revenue and cash flows are affected by economic date:

6.      Goodwill

Goodwill arising from business combinations has been allocated to the Group's DQM cash-generating unit ('CGU'). Goodwill is tested at least annually for impairment and whenever there are indications that goodwill might be impaired.

For the DQM CGU, the carrying amount of goodwill has been assessed for impairment by comparing the carrying amount of the CGU in which it is included to the recoverable amount based on value in use of the CGU. The value in use calculation for the cash-generating unit uses: estimated future cash flows, for which the key assumptions are forecast revenue and EBITDA over the next five years, based on management's estimates; the terminal growth rate for revenues and EBITDA beyond that period, which reflects a cautious approach for the purpose of measuring a value in use; and a pre-tax discount rate, which is based on management's assessment of risk inherent in the estimated future cash flows.

The pre-tax cash flows for the forecast period are derived from the DQM element of the Group's 5-year business plan. The plan incorporates the Group's approved FY24 granular budget model and 4 further years forecast in marginally less detail. The figures have been reviewed and approved by the Board and include input from divisional managers around the business. The figures have not been prepared specifically for the impairment review but are used for wider business planning, setting management objectives, and informing market guidance. The forecast includes revenue growth averaging approximately 15% per year across the 5-year period and EBITDA growth in line with the revenue growth, assuming that EBITDA remains a consistent percentage of revenue. It is noted that whilst the FY24 budget includes revenue up only 12% on the FY23 result the EBITDA is forecast to improve from 33% of revenue to 51% of revenue. The improvement comes from a range of operational efficiencies that management expect to be the result of investment taking place to grow higher margin revenue lines and internal projects designed to integrate DQM more fully with the rest of the Group, making better use of central resources.

As of 31 March 2023, the value in use of the CGU was greater by £3,160k than its carrying amount. The key assumptions used were the revenue and EBITDA growth assumptions as explained above, the terminal growth rate of 2%, and the pre-tax discount rate of 12.53%. Management's methodology includes a 4% small company premium derived from independent third-party data, as would be expected for a Company the size of DQM. Management also notes the inherent uncertainty of results expected to be delivered through the planned operational efficiencies and takes comfort from the fact that a specific risk premium of up to 3% could be added to the WACC to allow for this without triggering an impairment. A 3% specific risk premium added to the WACC would result in the value of the CGU being greater by £230k than its carrying amount. Management also notes the fact that current year WACC rates have been pushed up because of high interest rates designed to tackle inflation, and that official Bank of England forecasts show inflation (and therefore interest rates) should reduce again within the forecast period. The growth in cash flows and the selection of the discount rate are judgements that management has made which may have a bearing on the identification of impairment losses.

The changes in key assumptions that would individually give rise to a material impairment loss are as follows:

a)               The discount rate would have to increase by 3.4%;

b)               Either operating costs would have to rise, or future revenue increases would need to be less than forecast (assuming margins remained the same) such that EBITDA was more than 25% less than forecast, all other variables remaining constant.; or

c)               EBITDA margin would have to fall to less than 38% on the forecast revenue numbers.

7.      Intangibles Assets

Amortisation is included within administrative expenses.

Intangible assets includes capitalised related party costs incurred as further explained in note 25.

All intangible assets have been developed internally with the exception of those arising on the business acquisition in 2019. For CGUs requiring impairment testing under IAS 36 Impairment of Assets, the method used to determine recoverable amount is value-in-use.

8.      Trade and Other Receivables

None of the Company's trade and other receivables are secured by collateral or credit enhancements.

The Group applies the IFRS 9 simplified approach to measuring expected credit losses on a collective basis. To measure expected credit losses on a collective basis, trade receivables and contract assets are grouped based on a similar credit risk and ageing.

The Group's policy for monitoring default risk over receivables is based on the ongoing evaluation of the collectability and ageing analysis of trade and other receivables. Considerable judgement is required in assessing the ultimate realisation of these receivables, including reviewing the potential likelihood of default, the past collection history of each customer and the current economic conditions.

The Group uses a third party credit scoring system to assess the creditworthiness of potential new customers before accepting them. Credit limits are defined by customer based on this information. All customer accounts are subject to review on a regular basis by senior management and actions are taken to address debt ageing issues.

To determine the level of expected credit loss provision required, historical loss rates are adjusted for current and forward-looking information on macroeconomic factors affecting the Group's customers. The Group has identified gross domestic product growth rates, employment rates and inflation rates as the key macroeconomic factors in the countries in which the Group operates. The rates applied vary from 10% to 100% depending on the above factors and the age of the debt.

The Group has not previously recorded any credit loss provision on the grounds of materiality.

The Directors consider that the carrying amount of trade and other receivables approximates to the fair value. Included in the Group's trade receivable balance as at the year end were customer balances with a carrying amount of £197,000 (2022: £396,000) which

are past due at the reporting date for which the Group has not recorded a provision, however the Directors still believe the amounts to be recoverable in full.

The maturity profile of trade and other receivables is set out in the table below:

The analysis of trade and other receivables by foreign currency is set out in the table below:

The Group's foreign currency receivables are denominated in the functional currency of the subsidiaries in which they arise. There is no impact on the loss for the year from foreign exchange rate movements on such financial instruments.

9.      Trade and other payables

Amounts falling due within one year:

Amounts falling due after one year:

Amounts falling due after one year relate to the non-current element of the other tax and social security arrangements agreed with HMRC on the basis of time to pay arrangements (see Note 18). The balance payable will reduce as cash payments are made and is also expected to reduce as R&D tax credits are claimed from HMRC as and when quantified in respect of year ended 31 March 2023.

10.    Borrowings

(I) SECURED LIABILITIES AND ASSETS PLEDGED AS SECURITY

Of the loans, £77,000 (2022: £82,000) is secured against receipts from sales. The remaining secured loans are secured against assets of the business.

The Group has a number of loans in the period presented, and they are summarised as follows:

In addition, the Group has access to an invoicing discounting facility.

11.    Earnings per Share

Basic earnings per share is based on the loss after tax for the year and the weighted average number of shares in issue during each year.

Diluted earnings per share is calculated by adjusting the average number of shares in issue during the year to assume conversion of all dilutive potential ordinary shares.

Taking the Group's share options into consideration in respect of the Group's weighted average number of ordinary shares for the purposes of diluted earnings per share, is as follows:

Due to the losses incurred during the year, a diluted loss per share has not been calculated as this would serve to reduce the basic loss per share. There were 526,760 (2022: 426,760) share options outstanding at the end of the year that could potentially dilute basic earnings per share in the future.