Quartix Technologies : Financial Statements 2023

Quartix Technologies plc

Annual Report 2023

Quartix Technologies plc	1
Financial statements for the year ended 31 December 2023

Contents

	Page
Company Information	2
Highlights	3
Chairman's Statement	5
Strategic Report: Operational Review	9
Strategic Report: Financial Review	13
Strategic Report: Section 172 (1) Statement	17
Corporate Governance Report	21
Directors' Remuneration Report	35
ESG Committee Report	38
Directors' Report	41
Independent Auditor's Report to the Members of Quartix Technologies	45
plc
Consolidated Statement of Comprehensive Income	52
Consolidated Statement of Financial Position	53
Consolidated Statement of Changes in Equity	54
Consolidated Statement of Cash Flows	55
Notes to the Consolidated Financial Statements	56
Parent Company Statement of Financial Position	87
Parent Company Statement of Changes in Equity	88
Notes to the Parent Company Financial Statements	89
Notice of Annual General Meeting	96
Notes to the Notice of Annual General Meeting	98

Quartix Technologies plc	2
Financial statements for the year ended 31 December 2023

Company Information

Company registration number:	06395159
Registered office:	No.9 Journey Campus
	Castle Park
	Cambridge
	CB3 0AX
Directors:	Paul Boughton (resigned on 25 September 2023)
	Richard Lilwall (resigned on 10 October 2023)
	Emily Rees
	Laura Seffino (resigned on 7 July 2023)
	Andrew Walters (resigned on 24 March 2023 and
	reappointed on 26 September 2023)
	David Warwick (resigned 28 November 2023)
	Russell Jones (resigned 28 November 2023)
	Alison Seekings (appointed on 28 November 2023)
	Ian Spence (appointed on 19 February 2024)
Company secretary:	Emily Rees
Bankers:	HSBC Bank Plc
	63-64 St Andrews Street
	Cambridge
	CB2 3BZ
Solicitors:	HCR Hewitsons
	50-60 Station Road
	Cambridge
	CB1 2JH
Auditor:	PKF Littlejohn LLP
	15 Westferry Circus
	London
	E14 4HD
Nominated advisor and broker:	Cavendish
	One Bartholomew Close
	London
	EC1A 7BL

Quartix Technologies plc	3
Financial statements for the year ended 31 December 2023

Highlights

Quartix is one of Europe's leading suppliers of subscription-based vehicle tracking systems, analytical software and services.

Financial highlights

• Group revenue increased by 8.6% to £29.9m (2022: £27.5m)

• • Fleet revenue increased1 by 10.6% to £29.5m (2022: £26.7m)
  • Fleet revenue represented 98.8% of total revenue (2022: 97.0%)
  • Insurance revenue2 decreased by 55.7% to £0.4m (2022: £0.8m)
• Adjusted EBITDA3 decreased by 10.8% to £5.4m (2022: £6.1m)
• Adjusted profit before tax4 decreased by 12.2% to £5.1m (2022: £5.8m)
• Statutory (Loss) for the year was (£0.9m) (2022: Profit £5.0m)
• • stated after a £3.8m non cash provision relating to the replacement of all 2G units with 4G units in France; and
  • a £2.7m non cash impairment of the goodwill from the acquisition of Konetik Deutschland GmbH ("Konetik")
• Adjusted diluted earnings per share5 fell by 2.14p to 8.75p (2022: 10.88p)
• Free cash flow6 decreased by 65.9% to £1.3m (2022: £3.8m). Free cash flow excluding the acquisition of Konetik was £3.3m.
• Final proposed dividend payment of 1.50p per share (2022: 6.30p) with no supplementary
  dividend (2022: 3.85p) giving a total dividend for the year of 3.00p per share

1. Fleet Revenue (See Strategic Report: Financial Review, Financial Overview)
2. Insurance revenue (see Strategic Report: Financial Review, Financial Overview)
3. Earnings before interest, tax, depreciation, amortisation, share based payment expense and adjustments (see note 4)
4. Adjusted measure is excluding the impairment of intangibles and the provision to replace 2G units offset by the fair value gain of the future earn out payments
5. Diluted earnings per share before adjustments (see Strategic Report: Financial Review, Financial Overview and note 10)
6. Cash flow from operations after tax and investing activities

Quartix Technologies plc	4
Financial statements for the year ended 31 December 2023

Principal activities and performance measures

The Group's main strategic objective is to profitably grow its fleet subscription base and develop the associated annualised recurring revenue.

Annualised recurring revenue (see definition in KPI table below), when measured in constant currency year on year, is the most significant forward-looking key performance measure and it grew by £2.2m to £29.1m at 31 December 2023.

The Key Performance Indicators used by the Board to assess the performance of the business are listed below and discussed in the Chairman's Statement and Strategic Report.

Key Performance Indicators ("KPIs")
Year ended 31 December	2023	2022	% change
New Fleet subscriptions1 (new units)	64,418	60,809	5.9
Fleet subscription base2 (units)	266,568	235,510	13.2
Fleet customer base3	27,268	25,342	7.6
Fleet gross attrition4 (%)	13.3	12.8
Annualised recurring revenue5 (£'000)	29,083	26,928	8.0
Fleet invoiced recurring revenue6 (£'000)	27,764	25,446	9.1
Fleet revenue7 (£'000)	29,512	26,680	10.6
Average Price erosion8 (%)	4.6	4.9

• New vehicle tracking unit subscriptions added to the subscription base before gross attrition

• The number of vehicle tracking units subscribed to the Group's fleet tracking services, including units waiting to be installed for which subscription payments have started or are committed
  3 The number of customers associated with the fleet subscription base
  4 The number of new vehicle tracking unit subscriptions, less the increase in subscription base, expressed as a percentage of the mean subscription base
  5 Annualised data services revenue for the subscription base at the year end, before deferred revenue, including revenue for units waiting to be installed for which subscription payments have started or are committed, all measured in constant currency
  6 Invoiced subscription charges before provision for deferred revenue
  7 Total Fleet revenue (see Strategic Report: Financial Review, Financial Overview)
  8 The annual decrease in average subscription price of the base expressed as a percentage of the average subscription price at the start of the year, all measured in constant currency

Quartix Technologies plc	5
Financial statements for the year ended 31 December 2023

Chairman's Statement

Introduction

Having returned to the business in September as Chairman it is very disappointing to report that the Company recorded a loss for the first time in its 23-year history due to the recognition of an impairment charge against the acquisition of Konetik in the year. Our entire focus, since my reappointment, has been to return to profitable, organic growth via our core vehicle telematics subscription service and it is a testament to the strength of that underlying business that the Company has been able to fund the issues that have arisen in 2023 from internally generated cashflow. I am sorry to have to report, however, that dividend payments to shareholders have been substantially reduced for 2023 and 2024 as a consequence.

The key metric of the business, the annualised value of its recurring revenue, increased by £2.2m, at a constant currency rate, to £29.1m at 31 December 2023. Group revenue grew by 8.6% during the year, in line with the growth in the ARR of the subscription base. A detailed review of performance by territory is shown in the table below:

	Subscription Base	New subscriptions	Customers	New Customers
United
Kingdom
2023	146,679	26,411	11,305	1,215
2022	136,514	26,363	11,426	1,523
Change (%)	7.4	0.2	(1.1)	(20.2)
France
2023	67,895	22,151	8,230	2,275
2022	52,604	17,094	6,935	2,304
Change (%)	29.1	29.6	18.7	(1.3)
USA
2023	29,235	5,994	3,849	778
2022	30,800	9,088	4,038	1,213
Change (%)	(5.1)	(34.0)	(4.7)	(35.9)
Other
European
Territories
2023	22,759	9,862	3,884	1,491
2022	15,592	8,264	2,943	1,487
Change (%)	46.0	19.3	32.0	0.3

Fleet revenue in the UK increased by 1.3% to £18.0m (2022: £17.8m).

The subscription base in the UK increased by 7% during the year, and new subscriptions were broadly in line with the prior year. New customer acquisition, particularly in the small and medium size segments, weakened, resulting in a slight reduction in the total customer base. Renewed emphasis will be placed on the core business and the effectiveness of all channels to market in the UK. Although this will take some time to restore, the Board hope to see improvements by the end of 2024.

Performance in France was excellent, with strong growth in the subscription base, new subscriptions and customer base. The rate of new customer acquisition was comparable with 2022. All channels to market delivered strong progress. Revenue increased by 25.4% to €7.9m (2022: €6.3m).

Quartix Technologies plc	6
Financial statements for the year ended 31 December 2023

Introduction (continued)

Sales and marketing operations in the USA have been subject to several changes in strategy over the past two years, resulting in the loss of key sales resources. New subscriptions, the customer base, the subscription base and customer acquisition all fell as a consequence. These issues were the most significant contributory factor in the slight increase in gross attrition at Group level. It will take time to reverse these trends but the Board hope to be able to show some improvement in key metrics before the end of 2024. Revenue increased slightly by 2.5% to $4.1m in 2023 (2022: $4.0m).

Subscription base growth in Spain, Italy and Germany was good; new customer acquisition was broadly in line with 2022. Recent progress has been very encouraging, however, particularly in Spain and Italy. The rate of new customer acquisition has started 2024 at almost double the rate of a year ago. Resource and investment will be committed to all channels in Spain and Italy, and the development of both direct and indirect channels to market in Germany will be continued. The Company will report progress in these countries on an individual basis starting with the Interim Report. Revenue in these territories increased by 55.3% to €1.9m (2022: €1.2m).

Overall, Quartix's installed base grew by 13.2% to 266,000 units, and the customer base reached 27,000 customers at year end. Group gross attrition increased to 13.3% (2022: 12.8%). Price erosion reduced to 4.6% (2022: 4.9% in constant currency), and the introduction of RPI clauses into customer contracts at the end of 2023 should see further improvement in this metric in 2024.

Results

Group revenue for the year increased by 8.6% to £29.9m (2022: £27.5m). Total fleet revenue increased by

£2.8m and represented 98.8% of total revenue (2022: 97.0%).

In 2023, the Group delivered Adjusted EBITDA of £5.4m (2022: £6.1m), slightly ahead of previous guidance, as the core business traded profitably. However there was an operating loss of £1.1m and loss before tax of £1.1m (2022: operating profit £5.6m, profit before tax £5.5m). Part of the expenses in 2023 were in funding the operational costs of Konetik Deutschland GmbH ("Konetik"), a business acquired by the Company in September 2023 and which accounted for £0.6m of the decrease in profitability year-on- year; other significant parts of the shortfall included two exceptional non-cash costs, namely the impairment of the goodwill from the acquisition of Konetik (£2.7m) and the recognition of the provision to replace all 2G units with 4G units in France (£3.8m) partially offset by the fair value gain in re-estimating the future earn out payments (£0.3m) as a result of the poorer performance in EVolve sales to expectations when Konetik was acquired (see note 33). The table below presents the underlying business performance of Quartix excluding Konetik:

	Core		Total
	Business	Konetik	Business
	£'000	£'000	£'000
Revenue	29,851	31	29,882
Business costs	(23,864)	(621)	(24,485)
Adjusted EBITDA	5,987	(590)	5,397

Quartix Technologies plc	7
Financial statements for the year ended 31 December 2023

Results (continued)

Cash conversion weakened following increased corporation tax payments in 2023 (£0.7m), resulting in an adjusted free cash flow (cash flow from operations after tax and investing activities) excluding the investment into Konetik, of £3.3m (2022: £3.8m), slightly ahead of previous guidance. Net cash decreased to £2.4m at 31 December 2023 (2022: £5.1m), following the acquisition of Konetik (€2.25m) in September from available cash reserves.

By the end of 2023, the £1.6m provision raised in 2020 for the sunsetting of the US 3G mobile network had approximately £0.4m worth of unit replacements remaining. Meaning that since the provision was raised in 2020, 73% of the total units have been replaced, with approximately £0.1m worth being replaced in 2023.

As stated in the trading statement on 9 January 2024 the Company expects the sunsetting of the 2G mobile network in France to be finalised by the end of 2026. This necessitates the replacement of a large proportion of the French installed base of tracking systems by the end of 2026. The Company has taken the decision, as it did for the US, to provide this service free of charge to customers in order to minimise the chances of incremental attrition and to further enhance the Company's reputation in the French market. As a result the Company has identified a provision with a cash cost of £4.0m and recognised a provision discounted for the time value of money of £3.8m, defined outside of adjusted EBITDA.

Additionally included as an exceptional item in the income statement is the impairment of the goodwill on consolidation after acquiring Konetik Deutschland GmbH offset by the fair value gain in the re-estimate of the future earn out payments payable under the share purchase agreement for Konetik. Following internal review, it is considered that Quartix would not be able to make a return on the investment in this company in a reasonable time period. After 31 December 2023, but before the approval of these financial statements it was concluded that the Company should wind down Konetik to reduce further losses and to remove the burden of this business. Under the terms of the transaction Quartix took on legal entities in both Germany and Hungary, together with their operational costs. There will be further cost involved in winding these down.

The Company's EVolve product will also be discontinued, as it has not yet resulted in the winning of any new customers for Quartix, despite substantial resource investment in its sales and marketing since May 2022.

Earnings per share

Basic earnings per share decreased to a loss per share of 1.88p (2022: profit of 10.42p per share). Diluted

earnings per share decreased to a loss of 1.88p per share (2022: profit of 10.38p per share). The adjusted diluted earnings per share, which in 2023 is calculated by adding back the cost of the replacement of 2G units, the impairment of Konetik offset by the fair gain on re-estimate of the future earn out payments, was 8.75p (2022: 10.88p).

Dividend policy

Our ordinary dividend policy is to pay a dividend set at approximately 50% of cash flow from operating activities, which is calculated after taxation paid but before capital expenditure.

In addition to this the Board will distribute the excess of gross cash balances over £2m on an annual basis by way of supplementary dividends, subject to a 2p per share de minimis level.

The surplus cash is calculated using the year end gross cash balance and after deduction of the proposed ordinary dividend and is intended to be paid at the same time as the final dividend. The policy will be subject to periodic review.

Quartix Technologies plc	8
Financial statements for the year ended 31 December 2023

Dividend

In the year ended 31 December 2023, the Board decided to pay an interim dividend of 1.50p per ordinary share. This totalled £0.7m and was paid on 6 October 2023 to shareholders on the register as at 11 August 2023.

The Board is recommending a final ordinary dividend of 1.50p per share, with no supplementary dividend, giving a total dividend for the year of 3.00p per share, subject to shareholder approval. The Board acknowledges the proposed final ordinary dividend is not in line with the Company's dividend policy, however as stated at the top of this report is necessary to fund the replacement programme out of cash reserves in 2024. The Board expects to return to declaring dividends in line with its dividend policy in relation to the new financial year.

The final dividend amounts to approximately £0.7m in aggregate. Subject to the approval at the forthcoming AGM, this dividend of 1.50p per share will be paid on 29 April 2024 to shareholders on the register as at 2 April 2024. The ex-dividend date is therefore 28 March 2024.

Outlook

We have started 2024 well, with new installations in January approximately 10% ahead of the same period in 2023.

The effects of the Konetik acquisition will, unfortunately, continue to have an impact on the Group's financial performance and management time in 2024 which the Board will seek to minimise. Current expectations of further cash expenditure (including operating, administrative and transaction costs) are of the order of €0.7m, which have been budgeted.

The Board has been considerably strengthened by the appointment of Alison Seekings and Ian Spence as non-executive directors since my return to the Company: their input and advice will be invaluable in strategic decision making, corporate governance and control.

Looking beyond the resolution of the Konetik acquisition, the Board is confident that a return to the Company's focus on its core telematics business will ensure its return to profitable growth.

The Board believes there are significant opportunities for business development in each of the markets in which Quartix operates. The Board and I will strive to maximise efficiency and improve the Company's growth potential in 2024 and having had a positive start to the new financial year, are confident of achieving market expectations for 2024.

AGM

The Group's AGM will be held at 11.30 a.m. on 27 March 2024 at the Company's registered address No.9 Journey Campus, Castle Park, Cambridge, CB3 0AX.

Andrew Walters

Executive Chairman

Quartix Technologies plc	9
Financial statements for the year ended 31 December 2023

Strategic Report: Operational Review

Strategy and business model

The Group's main strategic objective is to grow its fleet subscription platform profitably and develop the associated recurring revenue. This strategy is based on 5 key elements, which were first highlighted in the

2018 Annual Report. We are pleased to be able to report progress in each area, as summarised below:

1. Market development: Quartix will continue to focus on fleet markets, exploring further opportunities within its six existing markets. Investment and focus on France and the other European territories delivered the majority of Quartix's growth for 2023.
2. Cost leadership: We continue to seek improvements in the efficiency of the sales cycle and to review product and overhead costs in order to identify further operational efficiencies. The Group recognises that, in recent years, its overhead structure has grown at a faster rate than revenues, and attention will be brough to bear on this during 2024.
3. Continuous enhancement of the Group's core software and telematics services: Quartix has an ongoing modernisation program of its core software and telematics code, both from a technology and user experience perspective. These enhancements help improve the customer experience as well as increase the efficiency of its support operation. As part of this program, we are adding new features to our product suite and launching a new interface for our core product Fleet Tracking.
4. Outstanding service: Quartix maintained its excellent reputation with its fleet customers throughout the year, consistently being rated as "excellent" by TrustPilot users. Quartix achieved a Gold in the 2022 Investors in Customers survey, which recognises truly excellent service.
5. Standardisation and centralisation: the expansion into European markets has been achieved by staff operating under the existing operational structures in place in the UK, with some sales staff being located in France. Support and service functions continued to be performed from the UK.

Our fleet customers typically use the Group's vehicle telematics services for many years following an initial contract. Accordingly, the Group focuses its business model on the development of subscription revenue, with a low rate of gross attrition, providing the best return to the Group over the long term.

The number of vehicles connected to our subscription platform and the value of recurring subscription revenue derived from it are the key measures of our performance in the fleet sector. As noted in the Principal activities and performance measures section, the annualised recurring revenue increased by £2.2m, at a constant currency rate, to £29.1m at 31 December 2023.

People

We take pride in the level of service we provide, and it is gratifying to see that fleet customers consistently provide us with excellent reviews - both in person and on third-party sites such as TrustPilot. Whilst the Group's gross attrition increased to 13.3%, the Group believes this is still below the industry average.

These service achievements are a reflection of the teamwork, creativity and dedication of our people and a testament to how seriously we take our commitment to providing the best experience for our customers. Following the 2022 Investors in Customers survey, Quartix received a Gold Award, which is a testimony to our excellent customer service. Our financial performance in our core business derives from the customer service we deliver, backed by the technology we develop. The Board would like to register its personal thanks to every one of our employees who worked hard to continue our growth in 2023.