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Annual Report 2021

Plain-text annual report

Arcontech Group PLC Arcontech Group PLC Arcontech Group PLC Arcontech Group PLC 1st Floor, 11-21 Paul Street 1st Floor, 11-21 Paul Street 1st Floor, 11-21 Paul Street 1st Floor, 11-21 Paul Street LONDON LONDON LONDON LONDON EC2A 4JU EC2A 4JU EC2A 4JU EC2A 4JU tel: +44 (0)20 7256 2300 tel: +44 (0)20 7256 2300 tel: +44 (0)20 7256 2300 tel: +44 (0)20 7256 2300 web: www.arcontech.com web: www.arcontech.com web: www.arcontech.com web: www.arcontech.com email: mail@arcontech.com email: mail@arcontech.com email: mail@arcontech.com email: mail@arcontech.com eport and eport and eport and eport and ear ended 30 June 201 ear ended 30 June 201 ear ended 30 June 2021 ear ended 30 June 2020 REGISTERED NUMBER: 04062416 (England and Wales) Arcontech Group PLC Annual Report and Accounts Year ended 30 June 2021 1 Contents Company Information Chairman’s Statement Chief Executive’s Review Strategic Report Board of Directors Corporate Governance Directors’ Report Statement of Directors’ Responsibilities Independent Auditor’s Report Group Income Statement and Statement of Comprehensive Income Statement of Changes in Equity Balance Sheets Group Cash Flow Statement Company Cash Flow Statement Notes to the Financial Statements ARCONTECH GROUP PLC Page 1 2 3 4-6 7 8-18 19-20 21 22-26 27 28 29 30 31 32-56 Company Information Directors Geoff Wicks (Chairman and Non-Executive Director) Matthew Jeffs (Chief Executive Officer) Louise Barton (Non-Executive Director) Company Secretary Ben Hodges Registered Office Nominated Adviser and Broker 1st Floor 11-21 Paul Street London EC2A 4JU finnCap Ltd 1 Bartholomew Close London EC1A 7BL Registered Number 04062416 Solicitors Auditors Registrars Principal Bankers Faegre Baker Daniels LLP 7 Pilgrim Street London EC4V 6LB PKF Littlejohn Statutory Auditor Chartered Accountants 15 Westferry Circus Canary Wharf London E14 4HD Link Asset Services The Registry 34 Beckenham Road Beckenham Kent BR3 4TU Nat West Bank Plc 94 Moorgate London EC2M 6UR Company website www.arcontech.com 1 Chairman’s Statement Following my first full year as Chairman I am pleased to be able to report that Arcontech has come through the pandemic so far in good shape. The Company closed the year with revenue and profit as expected in line with last year’s performance. Profit before taxation was £1,036,314 (2020: £1,040,969) flat on last year. These figures include accruals no longer required which are unrelated to the underlying business amounting to £88,000 (2020: £86,500). After adjusting for release of these accruals, profit before taxation is £948,314 (2020: £954,469). This was achieved at the same time as maintaining our focus and investment on growing our sales and marketing capability, which will stand us in good stead as markets return to more normal conditions. Turnover was £2,988,842 (2020: £2,955,314) up by £33,528 on last year. Our customers continue to be cautious and new projects have largely been shelved. During this period of inertia in the market our focus has been on maintaining a high level of service to our current customer base while continuing to build our list of potential customers. Our recurring revenue base of around 93% provides stability and visibility of earnings and has allowed us to continue with our growth strategy with confidence. Our cost base has been managed to good effect although we have not reduced staff numbers nor did we furlough any staff as we continue to build relationships in the market and to make improvements to our products. Sales cycles have always been long for the Company and more recently decision making in our market segment is largely being postponed, although interest in our products and services is still growing. Statutory earnings per share for the year to 30 June 2021 was 7.88p (2020: 9.22p), with the decline in earnings largely reflecting the lower tax credit. At 30 June 2021 the Group has tax losses of approximately £8,500,000 (2020: £8,900,000) to offset against future trading profits. Financing Cash balances were £5,395,457 (2020: £5,006,969) at the end of the year, an increase of 7.8%, providing a robust balance sheet overall. This is a reflection of the close attention paid to the management of our cost base and allows us to have confidence to continue with our progressive dividend policy and to continue to look at ways to grow the business through means other than organically. Dividend I am pleased to announce that, subject to approval at the Annual General Meeting, we intend to pay a dividend of 2.75 pence per share for the year ended 30 June 2021 (30 June 2020: 2.5 pence), an increase of 10%, to those shareholders on the register as at the close of business on 10 September 2021 with an ex-dividend date of 9 September 2021. Employees Our first thoughts through this trying period have been for the safety and well-being of our staff. We are fortunate that they have all been able to work from home and productivity has remained high. I am pleased that our staff have performed well during this period and I would like to thank them for all their hard work adapting to new working practices and technologies. Outlook The future for our market remains uncertain and it may be some time until it returns to previous levels of activity. We continue to work towards future sales and already have a high level of pent up demand, with the strongest list of prospective new customers for a long time. However, due to the impact of Covid on net new sales in the 2020/21 financial year, this year’s profit is expected to be flat or lower, as any pick up in revenue will not be fully reflected in our results until 2022/23. As the market comes out of this difficult period we are confident we will return to growth given the flexibility provided by our strong balance sheet and the strength of our customer relationships and product profile. Geoff Wicks Chairman and Non-Executive Director ARCONTECH GROUP PLC 2 Chief Executive’s Review I am pleased to report that despite a year of uncertainty and caution that we have achieved our strategic and financial goals and at the same time, positioned the Company for continued stability and growth as normality returns to the market. Cost control remained paramount within the context of investing in sales and despite the full year’s impact of the two additional salesmen, statutory profit before tax remained broadly unchanged at £1,036,314 (2020: £1,040,969), equally, our preferred measure of profit before tax which excludes accruals unrelated to the underlying business, at £948,314 (£954,469). In terms of business development, we won a brand new Tier 1 bank client, added new business with an existing Tier 1 bank to upgrade their system and integrate it with their in-house data feed but regrettably, lost a regional client whose requirements have changed. The number of end users for our desktop software solution and Excelerator numbers remained stable. Development work for the year consisted of adding functionality in response to specific requests from existing clients, completing our newly developed alerting and monitoring capabilities to make them production ready and implementing the upgrade to our Unix system interface to the in-house system for one of our Tier 1 clients. We also made significant progress developing two new offerings for existing and potential clients in the form of a data permissioning system and a tick history database. The new permissioning system rounds out our offering for a market-data platform so that we can offer wholesale replacement rather than select components, whilst the tick history database will enable us to address a related business case that operates in parallel with the areas we currently address. The new software along with our existing systems is completely compatible with any deployment situation or combination of situations a client requires: on-premise, data centre co-location or with any cloud provider. During the year our sales team has been focused on uncovering new opportunities, resulting in numerous on-line presentations and discussions. We have as a result identified and qualified prospects across 6 countries in which we do not currently have a presence. With an initial online relationship established we look forward to strengthening ties with face-to-face visits when possible. I should also note that the existing opportunities that were in our pipeline before the pandemic remain and as confirmed by the clients and prospective clients, have simply been deferred. For existing clients our exceptional support continues to be a differentiator. We have helped several clients with projects initiated before the pandemic and continue to do so. At the same time we have helped with and resolved the usual day to day issues and queries for clients who are, in the main, also facing similar challenges of remote working and restricted travel and the Board and I are grateful to them. Given the strength of our balance sheet we are taking a more proactive approach to potential opportunities in the market. We believe that there may be potential beneficial acquisitions to explore as a result of current market conditions. In the new financial year we are continuing to support our clients and we expect to gain from the armoury of new product functionality, two new product solutions and the expanded lead base. However, face-to-face contact is still difficult with prospects outside of the U.K. which continues to hamper the winning of new business. We expect this to change as vaccination programs roll out across the world, international travel resumes and clients return to offices. Matthew Jeffs Chief Executive ARCONTECH GROUP PLC 3 Strategic Report The Directors present the group strategic report for Arcontech Group plc and its subsidiaries for the year ended 30 June 2021. Principal activities The principal activities of the Company and its subsidiaries during the year were the development and sale of proprietary software and provision of computer consultancy services. Review of the business and prospects A full review of the operations, financial position and prospects of the Group is given in the Chairman’s Statement and Chief Executive’s Review on pages 2 to 3. Key performance indicators (KPIs) The Directors monitor the business using management reports and information, reviewed and discussed at monthly Board meetings. Financial and non-financial KPIs used in this report include: Financial KPIs: Revenue £2,988,842 (2020: £2,955,314; 2019: £2,841,362) Adjusted profit £959,110 (2020: £1,131,203; 2019: £835,248) Cash £5,395,457 (2020: £5,006,969; 2019: £4,063,484) Earnings per share (basic) 7.88p (2020: 9.22; 2019: 7.51p) Earnings per share (diluted) 7.79p (2020: 9.03p; 2019: 7.42p) Non-financial KPIs: Staff retention rate (net) 93% (2020: 91%; 2019: 100%) Measurement: Revenue from sales made to all customers (excluding intra-group sales which eliminate on consolidation) Performance: Continued growth driven by increased sales of our product offering Measurement: Profit after tax and before release of accruals for administrative costs in respect of prior years Performance: Continued growth reflects increase in revenues whilst continuing to maintain tight cost control Measurement: Cash and cash equivalents held at the end of the year Performance: The Group continues to maintain healthy cash balances subject to any exceptional circumstances or acquisition opportunities Measurement: Earnings after tax divided by the weighted average number of shares Performance: Continued growth Measurement: Earnings after tax divided by the fully diluted number of shares Performance: Continued growth Measurement: Net retention after adjusting for joiners and leavers during the year Performance: Staff morale from our dedicated employees remains strong, reflected in the stable retention rate ARCONTECH GROUP PLC 4 Strategic Report (continued) Principal risks and uncertainties The Group’s performance is affected by a number of risks and uncertainties, which the Board monitor on an ongoing basis in order to identify, manage and minimise their possible impact. General risks and uncertainties include changes in economic conditions, interest rate fluctuations and the impact of competition. The Group’s principal risk areas and the action taken to mitigate their outcome are shown below: Risk area Mitigation Competition Ongoing investment in research and development Responding to the changing needs of clients to remain competitive Loss of key personnel Employee share option scheme in place Covid-19 pandemic The Directors and employees are operating remotely in order to protect their health and safety At present the Company believes that there should be no significant material disruption to its work Brexit Arcontech is a global company and as such seeks growth across a geographically diverse customer base Relations with shareholders Section 172(1) Statement - Promotion of the Company for the benefit of the members as a whole The Directors believe they have acted in the way most likely to promote the success of the Group for the benefit of its members as a whole, as required by s172 of the Companies Act 2006. The requirements of s172 are for the Directors to: Consider the likely consequences of any decision in the long term; • • Act fairly between the members of the Company; • Maintain a reputation for high standards of business conduct; • • • Consider the interests of the Company’s employees; Foster the Company’s relationships with suppliers, customers and others; and Consider the impact of the Company’s operations on the community and the environment. The Group’s operation is the development and sale of proprietary software and provision of computer consultancy services. The Board has identified its key stakeholders as its customers, shareholders, employees and suppliers. The Board keeps itself appraised of its key stakeholders’ interests through a combination of both direct and indirect engagement, and the Board has regard to these interests when discharging its duties. The application of the s172 requirements can be demonstrated in relation to some of the key decisions made during the year to 30 June 2021: • Allocation of the Group’s capital in a way which offers significant returns to shareholders in line with the Company’s dividend policy, while also ensuring that the Group retains flexibility to continue to deploy capital towards profitable growth; • Adapting a rapid response to the working location restrictions arising from the Covid-19 pandemic, ensuring that the Group continued to deliver both the high level of service and security that our customers depend on without compromising the health and safety of employees. ARCONTECH GROUP PLC 5 Strategic Report (continued) During the year to 30 June 2021, the Board assessed its current activities between the Board and its stakeholders, which demonstrated that the Board actively engages with its stakeholders and takes their various objectives into consideration when making decisions. Specifically, actions the Board has taken to engage with its stakeholders over the last twelve months include: • Attended the 2020 AGM to answer questions and receive additional feedback from investors; • Arranged meetings with certain stakeholders to provide them with updates on the Company’s operational activities and other general corporate updates; • We discussed feedback from investors’ and analysts’ meetings following the release of our annual and half-year announcements. We have an investor relations programme of meetings with existing and potential shareholders; and • Monitored company culture and engaged with employees on efforts to continuously improve company culture and morale. The Board believes that appropriate steps and considerations have been taken during the year so that each Director has an understanding of the various key stakeholders of the Company. The Board recognises its responsibility to contemplate all such stakeholder needs and concerns as part of its discussions, decision-making, and in the course of taking actions, and will continue to make stakeholder engagement a top priority in the coming years. Approved on behalf of the board on 31 August 2021 by: Matthew Jeffs Chief Executive ARCONTECH GROUP PLC 6 Board of Directors Directors - Executive Matthew Jeffs (Chief Executive Officer) Matthew was appointed Chief Executive Officer in April 2013. Matthew spent 10 years with Barclays International, 10 years with Dow Jones and then 6 years with Reuters in a variety of senior roles. In addition to the UK, he has wide experience in the Asia Pacific region, working in Hong Kong, Japan, Korea (where he was country manager for Reuters and country representative for Dow Jones), Thailand and Vietnam. In his most recent role, Matthew was the Managing Director, ICS International at Broadridge Financial Solutions where he was responsible for the overall management of the Global Proxy business with offices in the U.K., U.S., Japan, Australia and India. Matthew has an MBA from Buckinghamshire Business School. Directors – Non-Executive Geoff Wicks (Chairman) Geoff was appointed Non-Executive Director in July 2020, and Chairman and in September 2020. Geoff was most recently Chairman of ULS Technology plc, the provider of online technology platforms for the UK conveyancing and financial intermediary markets. Prior to this, he was CEO of Group NBT plc, a specialist in online brand protection and digital asset management, from 2001 until he led the sale of the business to HGCapital in 2011. He remained part of the Group NBT business, now renamed NetNames, as a non-executive director until 2013. Geoff spent much of his earlier career at Reuters, including heading divisions in the UK, France and Nordic regions and latterly was director of corporate communications. Prior to Reuters, Geoff worked in the banking and insurance industries. Louise Barton Louise was appointed Non-Executive Director in February 2007. She worked for five years with the Institute of Applied Economic and Social Research in Melbourne before joining Prudential Portfolio Managers in 1979. She moved into stock broking/investment banking in 1987, joining CCF Laurence Prust and subsequently moved to Investec Henderson Crosthwaite in 1990. She retired from the City in 2002 when she was ranked UK No 1 small company media analyst and is now an independent consultant. ARCONTECH GROUP PLC 7 Corporate Governance Corporate governance report The directors recognise the importance of, and are committed to, high standards of corporate governance. Of the two widely recognised formal codes, the directors have decided to adhere to the Quoted Companies Alliance’s Corporate Governance code. The Group’s compliance with this code is summarised below and can be found in full on the Group’s website at: www.arcontech.com. The working of the Board and its Committees At 30 June 2021, the Board comprised two Non-Executive Directors, one of whom is the Chairman, and one Executive Director. The Board is responsible to the shareholders for the proper management of the Group. It meets regularly to review financial and non-financial performance. Matters for review by the Board are circulated before the Board Meetings. All of the Directors are subject to election at the first Annual General Meeting following their appointment and to re-election at least once every three years. Non-Executive Directors who have served for more than nine years on the Board are subject to re- election annually. Louise Barton who was appointed on 15 January 2007 has served for longer than this period. The Board are of the opinion that their shareholdings align their interests with other shareholders (Refer to page 18, ‘Directors share interests”). At the 2020 Annual General Meeting 100% (2019: 100%) of shareholders voted in favour of their re-election. As such the Board consider their independence is not affected. Given Louise Barton’s length of service she will retire under Article 106 of the Company's articles of association and, being eligible, offers herself to be re-elected as a non-executive Director of the Company. The Chairman and Executive Director have other third-party commitments including directorships of other companies. The Company is satisfied that these commitments have no significant impact on their ability to carry out their responsibilities effectively. All Directors have access to the advice and services of the Company Secretary, who is responsible to the Board for ensuring that Board procedures are followed, and that applicable rules and regulations are complied with. In addition, the Company Secretary will ensure that the Directors receive appropriate training as necessary. All Directors are supplied with information in a timely manner in a form, and of a quality, appropriate to enable them to discharge their duties. During the year, certain Directors who were not Committee members attended meetings of the Audit Committee and Remuneration Committee by invitation. These details have not been included in the table. Board meeting attendance Board Meeting Audit Committee Remuneration Committee Nomination Committee Executive Directors Matthew Jeffs Non-Executive Directors Geoff Wicks (Independent) Louise Barton (Independent) Richard Last (Independent) 1 10/10 10/10 10/10 2/2 1 Richard Last ceased to be a director on 29th September 2020 Board performance 2/2 1/1 2/2 1/1 N/A 1/1 4/4 3/3 2/2 1/1 1/2 N/A The Company has a formal process of annual performance evaluation for the Board, its Committees and individual Directors. The Board and its Committees are satisfied that they are operating effectively. A performance evaluation of the Board, its Committees and individual Directors is conducted annually. ARCONTECH GROUP PLC 8 Corporate Governance (continued) Corporate governance report (continued) The review is based on key areas, to include Board composition, information, process, internal control, accountability, CEO and top management and standards of conduct. The areas are scored by all members, reviewed by the Chairman and Company Secretary and compared against the previous evaluation. Lower scores are discussed. The Company has Directors’ and officers’ liability insurance in place. Committees The following committees deal with the Group’s affairs: Audit Committee Details of the Audit Committee are given in its Report on pages 10-11. Remuneration Committee Details of the Remuneration Committee are given in its Report on pages 12-18. This includes details of the Directors’ remuneration, interest in shares, interest in share options, and service contracts. No Director is involved in decisions about their own remuneration. Nomination Committee The Nomination Committee assists the Board in discharging its responsibilities relating to the composition and make-up of the Board and any committees of the Board. It is also responsible for periodically reviewing the Board’s structure and identifying potential candidates to be appointed as Directors or committee members as the need may arise. The Nomination Committee is responsible for evaluating the balance of skills, knowledge and experience and the size, structure and composition of the Board and committees of the Board, retirements and appointments of additional and replacement Directors and committee members and will make appropriate recommendations to the Board on such matters. The Nomination Committee is chaired by Louise Barton. Geoff Wicks is the other committee member. The Nomination Committee meets not less than once a year. Geoff Wicks Chairman and Non-Executive Director 31 August 2021 ARCONTECH GROUP PLC 9 Corporate Governance (continued) Audit Committee report The Audit Committee is responsible for ensuring that the financial position of the Group is properly monitored. The Audit Committee generally meets twice a year and the Finance Director of the trading subsidiary, appointed to lead the finance function, also attends by invitation. The Committee meets with the Group & Company Auditor (“Auditor”) at least twice during the annual year end audit and has direct access to the Auditor at any time throughout the year. At 30 June 2021, the members of the Audit Committee were: Louise Barton (Chairman) Geoff Wicks Matthew Jeffs During the year to 30 June 2021, Richards Last ceased to be a member of the Audit Committee upon resignation, Geoff Wicks was appointed to the Audit Committee and Louise Barton assumed the position of Audit Committee Chairman. Objectives and responsibilities The role of the Audit Committee is to primarily monitor the Group’s financial statements, the effectiveness of financial controls and systems and to oversee the relationship with external auditors. Activities of the Audit Committee during the year The Audit Committee focuses on financial reporting and the statutory audit, and the assessment of internal controls. Financial reporting and statutory audit The Audit Committee reviews the half year and annual financial statements with emphasis on: - - - - - the overall truth and fairness of the results and financial position; the transparency and understandability of the accounts for users; the appropriateness of the accounting policies; the resolution of management’s significant accounting judgements or of matters raised by the external auditors; the quality of the Annual Report as a whole. The Audit Committee considers that the Annual Report taken as a whole is fair, balanced and understandable. Accounting policies, practices and judgements Issue • Accounting policies • Going concern review Action The Committee reviewed and discussed the significant accounting policies with management and the external auditor and reached the conclusion that each policy was appropriate to the Group. The Committee considered the ability of the Group to operate as a Going Concern considering cash flow forecast for the next 12 months and milestone achievements. It was determined by the Committee that it was reasonable to expect that the Group has or will have sufficient funds for the next 12 months and that it was appropriate for the Financial Statements to be prepared on a going concern basis. ARCONTECH GROUP PLC 10 Corporate Governance (continued) Audit Committee report (continued) Issue • Review of audit and non-audit services and fees Action The external auditor is not engaged by the Group to carry out any non-audit work in respect of which it might, in the future, be required to express an audit opinion. The Committee reviewed the fees charged for the provision of audit and non- audit services and determined that they were in line with fees to companies of similar size and stage of charged development. The Committee considered and was satisfied the external auditor’s assessment of its own independence. Internal audit The Group does not have internal auditors as the Audit Committee considers that it is not yet of a size or complexity to necessitate this. Louise Barton Audit Committee Chairman 31 August 2021 ARCONTECH GROUP PLC 11 Corporate Governance (continued) Remuneration Committee report Dear shareholder I am pleased to introduce the Directors’ Remuneration Report for the year ended 30 June 2021. The Chairman’s Statement on page 2 provides a summary of the progress the Group has made during the financial year. The Remuneration Committee is committed to structuring executive remuneration that supports the Group’s strategy and performance and to help it grow profitably. The Remuneration Committee is appointed by the Board and comprises the two independent Non- Executive Directors. Short-term performance is incentivised by an annual bonus scheme based on the achievement of certain financial performance targets. Long-term performance is incentivised by the Group’s Share Option Scheme. Louise Barton Remuneration Committee Chairman 31 August 2021 Directors’ Remuneration Policy This part of the Directors’ Remuneration Report sets out the Group’s remuneration policy. Policy on Executive Remuneration The Group’s remuneration policy is designed to ensure that the Company is able to attract, motivate and retain executives and senior management to promote long-term success. The retention of key management and the alignment of management incentives with the creation of shareholder value are key objectives of this policy. The Remuneration Committee seeks to ensure that salaries are market competitive for similar companies. Key elements of Remuneration Remuneration element Base salary Purpose Operation To attract and retain key executives. Potential remuneration The CEO’s base salary Not applicable. Performance metrics Reviewed annually, effective from 1 January/ was reviewed on: 1 July. The review considers: - Role, experience and performance; - Average workforce i) 1 January 2017 and was increased by 5% to £157,500; and ii) 1 July 2018 and salary adjustments. was increased by 4.8% to Salaries are benchmarked £165,000. against companies of similar size and sector. was increased by 3.0% to iii) 1 July 2019 and £170,000 iv) 1 July 2020 and was increased by 2.9% to £175,000 ARCONTECH GROUP PLC 12 Corporate Governance (continued) Remuneration Committee report (continued) Key elements of Remuneration (continued) Remuneration element Benefits Purpose Operation Potential remuneration Performance metrics To attract and retain key executives. An Executive Director is entitled to participate in the Company’s life and medical insurance schemes. Premiums vary from year to year. The Remuneration Committee monitors the overall cost of the benefits package. Not applicable. Pension To attract and retain key executives. The Executive Directors The Company contributes Not applicable. (together with all other eligible staff) are entitled annum of basic salary into to participate in the Company’s workplace pension scheme. 3% per the scheme. Executive Directors are able to request that the Company, at the discretion of the Remuneration Committee, makes additional contributions where salary or bonus has been waived. During the year the company made pension contributions of £5,250 (2020: £5,100). Annual bonus To incentivise the achievement of the company’s annual financial and strategic targets. Performance is measured The CEO’s maximum capped bonus potential on an annual basis for is 150% of salary. each financial year. Targets are established at the beginning of each financial year. At the end of the year the Remuneration Committee determine the extent to which these have been achieved. Bonuses are paid in cash and/or pension contributions Any bonus is discretionary and subject to achievement against targets set by the Remuneration Committee. The Remuneration Committee has discretion to adjust the bonus to ensure alignment of pay with the performance of the business in the financial year. Share Option Scheme To motivate and facilitate Options to acquire shares The number of shares share ownership. The Remuneration Committee may impose certain may be granted to eligible in respect of which employees at the discretion of the Remuneration. Committee options can be granted is limited in any performance financial year to shares with a market value of no more than 100% of salary. conditions on any option preventing its exercise unless such conditions have been satisfied. ARCONTECH GROUP PLC 13 Corporate Governance (continued) Remuneration Committee report (continued) Key elements of Remuneration (continued) Remuneration element Chairman and Non-Executive Directors Purpose Operation To attract and retain Non-Executive Directors of the right calibre. The Chairman and Non-Executive Directors’ remuneration comprises fees and share options. The Chairman’s fee is approved by the Board on the recommendation of the Non-Executive Director and Executive Directors. Performance metrics Not applicable. Potential remuneration Details of the fees currently payable are set out in the Annual Report on Remuneration. The fees are reviewed periodically taking into account the time commitment and responsibilities involved and fees paid by other companies of comparable size and complexity. Fees for the Non-Executive Directors are approved by the Board on the recommendation of the Chairman and Executive Directors. The Chairman and Non-Executive Directors are not involved in any discussion or decision about their own remuneration. The Chairman and Non-Executive Directors are entitled to be reimbursed for reasonable expenses. Alignment of Executive Remuneration and the Market The Remuneration Committee takes advantage of various annual AIM Directors’ Remuneration reports as well as available data about similar companies. The Company aims to ensure that Directors’ salaries are set at a level sufficient to ensure there is significant incentive and regard for better than average long-term results. Consideration of Employee Pay The Remuneration Committee takes account of pay and conditions of employees throughout the Group when setting pay and benefits for Executive Directors. The Company endeavours to provide competitive remuneration packages for all employees. Employees may be eligible to participate in the Share Option Scheme at the discretion of the Remuneration Committee. The Company does not consult directly with its employees as part of the process for determining Executive pay. Policy on recruitment When appointing new Executive Directors, the Remuneration Committee will consider their remuneration by reference to the Remuneration Policy set out in this Report. The Remuneration Committee would not usually expect to pay sign-on payments or compensate new Directors for any variable remuneration forfeited from any employment prior to joining the Board other than in exceptional circumstances, recognising that the Company needs to attract appropriately skilled and experienced individuals. ARCONTECH GROUP PLC 14 Corporate Governance (continued) Remuneration Committee report (continued) Policy on recruitment (continued) Salary and annual bonus will be set so as to be competitive with comparable companies and also taking into account the experience, seniority and responsibility of the appointee coming into the new role. New Executive Directors will receive benefits and pension contributions in line with the Company’s existing policy and to participate in the annual bonus scheme on a pro-rated basis for the portion of the financial year for which they are in post. Policy on Loss of Office Executive Directors leaving employment from the Group, other than in circumstances of gross misconduct or incompetence, serious dishonesty or wilful neglect of duty (in which cases no amount will be payable), will be entitled to receive salary in accordance with their notice periods and pro-rated annual bonus to the date of leaving. The notice periods and the contractual rights on termination of each Director are set out below. The Company’s Employee Share Option Scheme also provides leaver provisions as follows: An Executive Director who ceases to be a Director or employee of the Group by reason of death, retirement, ill-health, injury or disability, redundancy or the sale of the company for which he works will be a good leaver. As such they will be permitted to exercise their options. Where the cessation is on any other grounds the awards will lapse on the date of cessation, unless the Remuneration Committee determines at its discretion prior to the date of cessation that the awards shall vest. Share option awards held by good leavers that are already capable of being exercised at the date of cessation may, at the discretion of the Remuneration Committee, be exercised up to 12 months of the leaving date (depending on the reason for leaving). If the good leaver ceases to be an employee or Director before the end of the third anniversary of the grant of the award it may, at the discretion of the Remuneration Committee, be allowed to vest on the normal vesting date. External appointments It is the Board’s policy to allow Executive Directors to accept directorships of other quoted and non-quoted companies provided that they have obtained the consent of the Chairman of the group. Any such directorships must be formally notified to the Board. Policy on Non-Executive Director Remuneration The remuneration of the Chairman and the other Non-Executive Director comprises fees that are paid via the payroll. During the year incoming Chairman, Geoff Wicks, was awarded 30,000 share options as a part of the on-boarding proess (refer to note 19). The Chairman will not participate in the Company’s Share Options Scheme going forward. The Non-Executive Director no longer participates in the Company’s Share Option Scheme. Fees are reviewed annually. The Non-Executive Directors are not involved in any decisions about their own remuneration. No additional fees are payable to the chairmen of the Audit and Remuneration Committees. Details of the remuneration paid in the year to 30 June 2021 are set out below: Geoff Wicks (Chairman and Non-Executive Director) Louise Barton (Non-Executive Director) Richard Last Director) (former Chairman and Non-Executive Directors fees Share Base Payments Total remuneration 28,477 21,000 7,875 28,477 21,000 7,875 - - - ARCONTECH GROUP PLC 15 Corporate Governance (continued) Remuneration Committee report (continued) Directors’ Service Agreements Executive Directors’ Service Agreements Date of service agreement Notice period Basic salary Annual bonus Benefits Share schemes Pension contributions Matthew Jeffs 29 April 2013 3 months’ notice given by either party Currently £175,000 reviewed annually Discretionary performance related Participation in the Company’s life assurance and medical insurance schemes Eligible to participate in Company share schemes Currently 3% of basic salary contributed by the Company into the Company’s workplace pension scheme Termination payments The Company has discretion to pay a payment in lieu of notice to terminate the employment forthwith in the event of notice being given Non-Executive Directors’ Letters of Appointment The Non-Executive Directors have Letters of Appointment stating that their appointment is for an initial term up until they are required to retire by rotation. The Letters of Appointment provide for termination of the appointment on three months’ notice by either party. The current Non-Executive Directors’ appointments commenced on the following dates: Geoff Wicks 20 July 2020 Louise Barton 15 January 2007 Annual Report on Remuneration Introduction The Annual Report on Remuneration sets out information about the remuneration of the Directors of the Company for the year ended 30 June 2021. Remuneration Committee The Remuneration Committee consisted of the following Directors during the year ended 30 June 20121: Geoff Wicks, Independent Non-Executive Director (appointed 20th July 2020) and Chairman of the Board, appointed 29th September 2020 Louise Barton (Chairman), Independent Non-Executive Director Richard Last, Independent Non-Executive Director and Chairman of the Board, resigned 29th September 2020 Role of the Remuneration Committee The Remuneration Committee assists the Board in determining the remuneration and benefits package for the Executive Directors. Activities of the Remuneration Committee during the year The Remuneration Committee meets whenever it is appropriate. The committee met four times in the current year. In addition to agreeing the remuneration report and reviewing the remuneration of the Executive Directors, the award of share options to Directors and Employees was approved. ARCONTECH GROUP PLC 16 Corporate Governance (continued) Remuneration Committee report (continued) Directors’ Remuneration The detailed emoluments of the Executive and Non-Executive Directors are set out below. Year ended 30 June 2021 Salary/fees Benefits Bonus Share options Pension Total Chairman and Non-Executive Directors Geoff Wicks (Chairman) Louise Barton Richard Last (former Chairman) Total Non-Executive 28,477 21,000 7,875 57,352 16 10 621 647 - - - - - - - - - - - - - - - 28,493 21,010 8,496 57,999 - 5,250 186,178 - 5,250 186,178 244,177 - 5,250 175,000 175,000 232,352 5,928 5,928 6,575 Executive Directors Matthew Jeffs Total Executives Total remuneration Analysis of bonuses: Directors Matthew Jeffs Year ended 30 June 2020 Year ended 30 June 2021 Accrued Paid as cash Paid as pension Total (70,000) - (70,000) 70,000 - 70,000 - 5,250 5,250 - 5,250 5,250 Total (70,000) 70,000 5,250 5,250 No bonuses were awarded to Directors during the financial year ended 30 June 2021. Year ended 30 June 2020 Salary/fees Benefits Bonus Share options Pension Total Chairman and Non -Executive Directors Richard Last (Chairman) Louise Barton Total Non-Executive 31,500 21,000 52,500 797 - 797 - - - - - - - - - 32,297 23,033 55,330 Executive Directors Matthew Jeffs Michael Levy* Total Executives Total remuneration 170,000 5,066 70,000 - 5,100 250,166 10,938 180,938 233,438 1,501 6,567 7,364 2,100 72,100 72,100 - - - 328 5,428 5,428 14,867 264,973 320,303 *Fees payable to Michael Levy & Co, Chartered Accountants, in which Michael Levy is the principal, in respect of accountancy services are disclosed in note 23 to the Financial Statements. Michael Levy ceased to be a Director of the Company on 22 January 2020. ARCONTECH GROUP PLC 17 Corporate Governance (continued) Remuneration Committee report (continued) Directors’ Remuneration (Continued) Analysis of bonuses: Directors Matthew Jeffs Year ended 30 June 2019 Year ended 30 June 2020 Michael Levy Year ended 30 June 2019 Year ended 30 June 2020 Total Directors’ share interests Accrued Paid as cash Paid as pension Total (46,756) 70,000 23,244 (3,500) 1,050 (2,450) 20,794 46,756 - 46,756 3,500 1,050 4,550 51,306 - 5,100 5,100 - - - 5,100 - 75,100 75,100 - 2,100 2,100 77,200 The number of ordinary shares of the Company in which the Directors were beneficially interested at 30 June 2021 was: Director Geoff Wicks Louise Barton Matthew Jeffs Directors’ share options interests Director At 1 July 2020 Granted Exercised Geoff Wicks Louise Barton Matthew Jeffs - 40,000 20,000 100,000 50,000 - 30,000 - - - - 50,000 - - - - - - 30 June 2021 - 1,071,416 910,000 30 June 2020 n/a 1,071,416 910,000 At 30 June 2021 Exercise price 164.50 pence Normal exercise period 30,000 3 0 Jun 23 – 2 Oct 30 40,000 23.75 pence 1 Sep 17 – 31 Aug 21 25 Apr 20 – 24 Apr 27 20,000 30 Jun 21 – 29 Jun 28 100,000 30 Jun 22 – 27 Sep 29 50,000 30 Jun 23 – 2 Oct 30 50,000 64.50 pence 110.00 pence 196.00 pence 164.50 pence There are no performance conditions on the exercise of the options granted prior to 1 July 2018. The performance conditions of the share options granted during the year are set out below, with the exception of the options issued to Mr. Wicks which are not subject to any performance conditions. The Options will be exercisable from 30 June 2023, dependent on the Company’s compound annual rate of growth in fully diluted earnings* for the three financial years ending 30 June 2023. The Options will vest subject to performance criteria as follows: - compound annual earnings growth of 10% or more - fully vested (100%); - compound annual earnings growth between 5%-10% - partial vesting between 0% and 100% on a sliding scale; and - compound annual earnings growth of 5% and below - nil. Any Ordinary Shares arising from the vesting of Options must be held for a period of two years after vesting. * Fully diluted earnings will be based on: (a) the Company’s pre-tax profit excluding exceptional items and the share option charge and (b) the current UK corporation tax rate of 19%, such that the fully diluted earnings calculation takes no account of R&D and deferred tax credits. For the purposes of the fully diluted earnings calculation, the applied rate of corporation tax will remain constant at 19% irrespective of any current or future changes to corporation tax. Louise Barton Remuneration Committee Chairman 31 August 2021 ARCONTECH GROUP PLC 18 Directors’ Report The Directors present their Report and financial statements for the year ended 30 June 2021. General information Arcontech Group plc is a public limited company which is listed on the AIM market of the London Stock Exchange and is incorporated in the United Kingdom. Results and dividends Details of the results for the year are given on page 27. The Directors recommend the payment of a final dividend of 2.75 pence per ordinary share (2020: 2.5 pence per share) to be paid on 8 October 2021 to ordinary shareholders on the register on 9 September 2021 £366,515 (2020: £330,263). Directors The Directors who have held office during the period from 1 July 2020 to the date of this report are as follows: Geoff Wicks – appointed 20 July 2020 Matthew Jeffs Louise Barton Richard Last – ceased to be a Director on 29 September 2020 Geoff Wicks, who retires by rotation under Article 106 of the Company's articles of association and, who being eligible, offers himself to be re-elected as a Director of the Company. Richard Last resigned as a Director of the Company on 29 September 2020. Except as disclosed in note 23 to the financial statements none of the Directors had an interest in any contracts with the Company or its subsidiaries during the year. Independence of Non-Executive Directors Louise Barton was appointed Non-Executive Director on 19 February 2007 and has served for more than 10 years. The Board is of the opinion that her shareholding aligns her interests with other shareholders, and, in addition, she offers herself for re-election each year. At the 2020 Annual General Meeting 100% (2020: 100%) of shareholders voted in favour of her re-election. As such the Board considers her independence is not affected. Given her length of service she retires under Article 106 of the Company's articles of association and, being eligible, offers herself to be re-elected as non-executive Directors of the Company. Employees The Directors recognise the importance of good communication with employees to ensure a common awareness of factors affecting the Group. They also recognise their statutory responsibilities. Matters of current concern or interest are discussed with staff on a regular basis. Internal control The Directors acknowledge their responsibilities for the Group’s system of internal control. The Board considers major business and financial risks. All strategic decisions are referred to the Board, which meets monthly, for approval. Accepting that no system of control can provide absolute assurance against material misstatement or loss, the Directors believe that the established systems of internal control within the Group are appropriate to the business. ARCONTECH GROUP PLC 19 Directors’ Report (continued) Future developments The outlook for the year ending 30 June 2022 may be flat or lower as any pick up in revenue will not be fully reflected in our results until 2022/23. As the market comes out of this difficult period we are confident we will return to growth given the flexibility provided by our strong balance sheet and the strength of our customer relationships and product profile. Financial risk management The Group's financial instruments comprise cash and cash equivalents, and items such as trade payables and trade receivables, which arise directly from its operations. The main risks arising from the Group’s financial instruments are interest rate fluctuations and liquidity risk. Refer to Note 26 for further detail on the Group’s financial instruments and risk exposures. It is the Group’s policy to finance its operations through a mixture of cash and, where appropriate, external finance and to review the projected cash flow requirements of the Group with an acceptable level of risk exposure. Going concern On the basis of current projections and having regard to the Group’s existing cash reserves, the Directors consider that the Group has adequate resources to continue in operational existence for the foreseeable future. Accordingly, the Directors have adopted the going concern basis in the preparation of the financial statements (Refer to Note 1). Research and Development The Group continues to make progress in product development, while continuing to keep control of costs. Research and development expenditure is charged to the income statement in the year incurred, unless it meets the capitalisation criteria under IAS 38. Directors’ and Officers’ Liability Insurance Directors’ and Officers’ liability insurance is in place at the date of this report. The Board remains satisfied that an appropriate level of cover is in place and a review of cover takes place annually. Disclosures to auditors In the case of each of the persons who are Directors at the time when the report is approved, the following applies: - - so far as each of the Directors are aware, there is no relevant audit information of which the Company’s auditors are unaware; and each of the Directors have taken all the steps that they ought to have taken as Directors in order to make themselves aware of any relevant audit information and to establish that the Company’s auditors are aware of that information. This information is given and should be interpreted in accordance with the provisions of s418 of the Companies Act 2006. Auditors A resolution to re-appoint PKF Littlejohn LLP will be proposed at the annual general meeting. On behalf of the Board Matthew Jeffs Chief Executive ARCONTECH GROUP PLC 20 Statement of Directors’ Responsibilities The Directors are responsible for preparing the Strategic Report, Directors' Report and the financial statements in accordance with applicable law and regulations. Company law requires the Directors to prepare financial statements for each financial year. Under that law the Directors have elected to prepare the financial statements in accordance with applicable law and International Financial Reporting Standards (IFRSs) as adopted by the European Union and, as regards the parent company financial statements, as applied in accordance with the provisions of the Companies Act 2006. Under company law the Directors must not approve the financial statements unless they are satisfied that they give a true and fair view of the state of affairs of the company and of the group and of the profit or loss of the group for that period. In preparing these financial statements, the Directors are required to: - select suitable accounting policies and then apply them consistently; - make judgments and accounting estimates that are reasonable and prudent; - state whether applicable IFRSs as adopted by the European Union have been followed subject to any material departures disclosed and explained in the financial statements; and prepare the financial statements on the going concern basis unless it is inappropriate to presume that the Group will continue in business; - The Directors are responsible for keeping adequate accounting records that are sufficient to show and explain the company's transactions and disclose with reasonable accuracy at any time the financial position of the company and enable them to ensure that the financial statements comply with the Companies Act 2006. They are also responsible for safeguarding the assets of the company and the group and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities. The Directors are responsible for ensuring that they meet their responsibilities under the AIM rules. The Directors are responsible for the maintenance and integrity of the corporate and financial information included on the company’s website. Legislation in the United Kingdom governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions. ARCONTECH GROUP PLC 21 Independent Auditor’s Report to the members of Arcontech Group PLC Opinion We have audited the financial statements of Arcontech Group plc (the ‘parent company’) and its subsidiaries (the ‘group’) for the year ended 30 June 2021 which comprise the Group Income Statement and Statement of Comprehensive Income, the Group and Company Balance Sheets, the Group and Company Statements of Changes in Equity, the Group and Company Cash Flow Statements and notes to the financial statements, including a summary of significant accounting policies. The financial reporting framework that has been applied in their preparation is applicable law and international accounting standards in conformity with the requirements of the Companies Act 2006 and as regards the parent company financial statements, as applied in accordance with the provisions of the Companies Act 2006. In our opinion: • • • • the financial statements give a true and fair view of the state of the group’s and of the parent company’s affairs as at 30 June 2021 and of the group’s profit for the year then ended; the group financial statements have been properly prepared in accordance with international accounting standards in conformity with the requirements of the Companies Act 2006; the parent company financial statements have been properly prepared in accordance with international accounting standards in conformity with the requirements of the Companies Act 2006 and as applied in accordance with the provisions of the Companies Act 2006; and the financial statements have been prepared in accordance with the requirements of the Companies Act 2006. Basis for opinion We conducted our audit in accordance with International Standards on Auditing (UK) (ISAs (UK)) and applicable law. Our responsibilities under those standards are further described in the Auditor’s responsibilities for the audit of the financial statements section of our report. We are independent of the group and parent company in accordance with the ethical requirements that are relevant to our audit of the financial statements in the UK, including the FRC’s Ethical Standard as applied to listed entities, and we have fulfilled our other ethical responsibilities in accordance with these requirements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion. Conclusions relating to going concern In auditing the financial statements, we have concluded that the director's use of the going concern basis of accounting in the preparation of the financial statements is appropriate. Our evaluation of the directors’ assessment of the group’s and parent company’s ability to continue to adopt the going concern basis of accounting included a review of the forecast financial information prepared by management, management’s assessment of going concern, and post year end information, including contracted and committed expenditure. We have obtained an understanding of the key assumptions used to prepare this information and provided appropriate challenge. Based on the work we have performed, we have not identified any material uncertainties relating to events or conditions that, individually or collectively, may cast significant doubt on the group’s or parent company’s ability to continue as a going concern for a period of at least twelve months from when the financial statements are authorised for issue. Our responsibilities and the responsibilities of the directors with respect to going concern are described in the relevant sections of this report. Our application of materiality Materiality Performance Materiality Basis for materiality Group £44,800 Group £33,600 2% of revenue (2019: £44,300) (2019: £33,225) Company £33,600 Company £25,200 Capped at 75% of group materiality (2019: £33,325) (2019: £24,994) ARCONTECH GROUP PLC 22 Independent Auditor’s Report to the members of Arcontech Group PLC (continued) We consider revenue to be the most significant determinant of the group’s financial position and performance used by shareholders. The going concern of the group is dependent on its ability to continue to generate profits through revenue growth. Whilst materiality for the group financial statements as a whole was set at £44,800, materiality for the significant components was set at a level of £33,600 with performance materiality set at 75%. We applied the concept of materiality both in planning and performing our audit, and in evaluating the effect of misstatements. We agreed with the audit committee that we would report to the committee all audit differences identified during the course of our audit in excess of £2,240 as well as differences below these thresholds that, in our view, warranted reporting on qualitative grounds. Our approach to the audit In designing our audit, we determined materiality and assessed the risk of material misstatement in the financial statements. In particular, we looked at areas requiring the directors to make subjective judgements, for example in respect of assessing the carrying value and recoverability of investments in subsidiaries at parent company level, and goodwill at group level, the valuation of share-based payments, recoverability of deferred tax assets and the consideration of future events that are inherently uncertain. We also addressed the risk of management override of internal controls, including evaluating whether there was evidence of bias by the directors that represented a risk of material misstatement due to fraud. We considered revenue recognition to be a significant risk and key audit matter, and designed our audit procedures to address the risk of misstatement of revenue, including consideration of key contractual terms within customer agreements and whether recognition is therefore in accordance with IFRS 15 Revenue from Contracts with Customers. An audit was performed on the financial information of the group’s significant operating components which, for the year ended 30 June 2021, were located in the United Kingdom. Key audit matters Key audit matters are those matters that, in our professional judgment, were of most significance in our audit of the financial statements of the current period and include the most significant assessed risks of material misstatement (whether or not due to fraud) we identified, including those which had the greatest effect on: the overall audit strategy, the allocation of resources in the audit; and directing the efforts of the engagement team. These matters were addressed in the context of our audit of the financial statements as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters. ARCONTECH GROUP PLC 23 Independent Auditor’s Report to the members of Arcontech Group PLC (continued) Key Audit Matter How the scope of our audit responded to the key audit matter Revenue recognition (see Note 1 – Revenue Recognition policy) Our work in this area included: tailored information The group generates sales from the licensing of its time proprietary software, which delivers real market data to customer requirements, as well as support and maintenance services. Under IFRS 15 Revenue from Contracts with Customers, a key consideration for the group is whether the performance obligation/s within their licensing arrangements are met at a point in time or over time. As certain revenue streams can be recognised at a point in time whilst others have to be recognised over time, there is a risk that there has been incorrect recognition of revenue, recognising certain transactions at a point in time rather than over time. § Updating our understanding of the business and how Arcontech performs its services for its clients; § Updating our documentation of the systems and controls in place surrounding significant income streams; § Performing a walkthrough test to understand the internal control environment in operation for the significant income streams and ensure that the key controls within these systems have been operating in the period under audit; § Review the accounting treatment in respect of revenue recognition under IFRS 15 and conclude as to the appropriateness of the proposed treatment; § Substantive transactional testing of income recognised in the financial statements, including testing of deferred income balances; and § Reviewing post year end receipts to ensure completeness of income recorded in the accounting period. ARCONTECH GROUP PLC 24 Independent Auditor’s Report to the members of Arcontech Group PLC (continued) Other information The other information comprises the information included in the annual report, other than the financial statements and our auditor’s report thereon. The directors are responsible for the other information contained within the annual report. Our opinion on the group and parent company financial statements does not cover the other information and, except to the extent otherwise explicitly stated in our report, we do not express any form of assurance conclusion thereon. Our responsibility is to read the other information and, in doing so, consider whether the other information is materially inconsistent with the financial statements or our knowledge obtained in the course of the audit, or otherwise appears to be materially misstated. If we identify such material inconsistencies or apparent material misstatements, we are required to determine whether this gives rise to a material misstatement in the financial statements themselves. If, based on the work we have performed, we conclude that there is a material misstatement of this other information, we are required to report that fact. We have nothing to report in this regard. Opinions on other matters prescribed by the Companies Act 2006 In our opinion, based on the work undertaken in the course of the audit: • • the information given in the strategic report and the directors’ report for the financial year for which the financial statements are prepared is consistent with the financial statements; and the strategic report and the directors’ report have been prepared in accordance with applicable legal requirements. Matters on which we are required to report by exception In the light of the knowledge and understanding of the group and the parent company and their environment obtained in the course of the audit, we have not identified material misstatements in the strategic report or the directors’ report. We have nothing to report in respect of the following matters in relation to which the Companies Act 2006 requires us to report to you if, in our opinion: • adequate accounting records have not been kept by the parent company, or returns adequate for our audit have not been received from branches not visited by us; or • the parent company financial statements are not in agreement with the accounting records and returns; or • certain disclosures of directors’ remuneration specified by law are not made; or • we have not received all the information and explanations we require for our audit. Responsibilities of directors As explained more fully in the Statement of Directors’ Responsibilities, the directors are responsible for the preparation of the group and parent company financial statements and for being satisfied that they give a true and fair view, and for such internal control as the directors determine is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error. In preparing the group and parent company financial statements, the directors are responsible for assessing the group’s and parent company’s ability to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless the directors either intend to liquidate the group or the parent company or to cease operations, or have no realistic alternative but to do so. Auditor’s responsibilities for the audit of the financial statements Our objectives are to obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditor’s report that includes our opinion. Reasonable assurance is a high level of assurance but is not a guarantee that an audit conducted in accordance with ISAs (UK) will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these financial statements. ARCONTECH GROUP PLC 25 Independent Auditor’s Report to the members of Arcontech Group PLC (continued) Irregularities, including fraud, are instances of non-compliance with laws and regulations. We design procedures in line with our responsibilities, outlined above, to detect material misstatements in respect of irregularities, including fraud. The extent to which our procedures are capable of detecting irregularities, including fraud is detailed below: • We obtained an understanding of the group and parent company and the sector in which they operate to identify laws and regulations that could reasonably be expected to have a direct effect on the financial statements. We obtained our understanding in this regard through discussions with management and industry experience. We also selected a specific audit team based on experience with auditing entities within this industry facing similar audit and business risks. • We determined the principal laws and regulations relevant to the group and parent company in this regard to be those arising from: o Companies Act 2006 o AIM Rules o UK employment law o Local tax laws and regulations • We designed our audit procedures to ensure the audit team considered whether there were any indications of non- compliance by the group and parent company with those laws and regulations. These procedures included, but were not limited to: o Making enquiries of management; o A review of Board minutes; o A review of legal ledger accounts; and o A review of RNS announcements. • We also identified the risks of material misstatement of the financial statements due to fraud. Aside from the non- rebuttable presumption of a risk of fraud arising from management override of controls, we did not identify any significant fraud risks. • As in all of our audits, we addressed the risk of fraud arising from management override of controls by performing audit procedures which included, but were not limited to: the testing of journals, reviewing accounting estimates for evidence of bias; and evaluating the business rationale of any significant transactions that are unusual or outside the normal course of business. Because of the inherent limitations of an audit, there is a risk that we will not detect all irregularities, including those leading to a material misstatement in the financial statements or non-compliance with regulation. This risk increases the more that compliance with a law or regulation is removed from the events and transactions reflected in the financial statements, as we will be less likely to become aware of instances of non-compliance. The risk is also greater regarding irregularities occurring due to fraud rather than error, as fraud involves intentional concealment, forgery, collusion, omission or misrepresentation. A further description of our responsibilities for the audit of the financial statements is located on the Financial Reporting Council’s website at: www.frc.org.uk/auditorsresponsibilities. This description forms part of our auditor’s report. Use of our report This report is made solely to the company’s members, as a body, in accordance with Chapter 3 of Part 16 of the Companies Act 2006. Our audit work has been undertaken so that we might state to the company’s members those matters we are required to state to them in an auditor’s report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone, other than the company and the company's members as a body, for our audit work, for this report, or for the opinions we have formed. Joseph Archer (Senior Statutory Auditor) For and on behalf of PKF Littlejohn LLP Statutory Auditor 15 Westferry Circus Canary Wharf London E14 4HD ARCONTECH GROUP PLC 26 Group Income Statement and Statement of Comprehensive Income For the year ended 30 June 2021 Revenue Administrative costs Operating profit Net finance (expense) / income Profit before taxation Taxation Profit for the year after tax Total comprehensive income for the year Earnings per share (basic) Adjusted* Earnings per share (basic) Earnings per share (diluted) Adjusted* Earnings per share (diluted) Note 3 4 5 9 10 10 10 10 2021 £ 2020 £ 2,988,842 2,955,314 (1,945,481) (1,917,502) 1,043,361 1,037,812 (7,047) 3,157 1,036,314 1,040,969 10,796 176,734 1,047,110 1,217,703 1,047,110 1,217,703 7.88p 7.22p 7..79p 7.14p 9.22p 8.56p 9.03p 8.39p *Adjusted to exclude the release of accruals for administrative costs of £88,000 (2020: £86,500) in respect of prior years. All of the results relate to continuing operations. The notes on pages 32 to 56 form part of these financial statements ARCONTECH GROUP PLC 27 Statement of Changes in Equity For the year ended 30 June 2021 Group: Balance at 30 June 2019 Profit for the year Total comprehensive income for the year Dividend paid Share-based payments Transfer between reserves Balance at 30 June 2020 Profit for the year Total comprehensive income for the year Dividend paid Exercise of options Share capital £ 1,651,314 Share premium £ 56,381 - - - - - - - - - 1,651,314 - 56,381 - - - - - - 14,663 35,979 Share option reserve £ 99,647 - - - 98,428 (9,436) 188,639 - - - - Share-based payments - - 115,866 Retained earnings £ 2,842,966 Total equity £ 4,650,308 1,217,703 1,217,703 1,217,703 1,217,703 (263,591) (263,591) - 98,428 9,436 3,806,514 - 5,702,848 1,047,110 1,047,110 1,047,110 1,047,110 (333,594) (333,594) - - 50,642 115,866 Transfer between reserves Balance at 30 June 2021 - 1,665,977 - 92,360 (33,298) 271,207 33,298 4,553,329 - 6,582,873 Company: Balance at 30 June 2019 Profit for the year Total comprehensive expense for the year Dividend paid Share-based payments Transfer between reserves Balance at 30 June 2020 Profit for the year Total comprehensive income for the year Dividend paid Exercise of options Share capital £ 1,651,314 Share premium £ 56,381 Share option reserve £ 99,647 Retained earnings £ 4,378,109 Total equity £ 6,185,451 - - - - - - - - - 1,651,314 - 56,381 - - - - - - 14,663 35,979 - - - 326,348 326,348 326,348 326,348 (263,591) (263,591) 98,428 (9,436) 188,639 - - - - - 98,428 9,436 4,450,302 - 6,346,636 181,744 181,744 181,744 181,744 (333,594) (333,594) - - 50,642 115,866 Share-based payments - - 115,866 Transfer between reserves Balance as at 30 June 2021 - 1,665,977 - 92,360 (33,298) 271,207 33,298 4,331,751 - 6,361,295 The notes on pages 32 to 56 form part of these financial statements. ARCONTECH GROUP PLC 28 Balance Sheets Registered number: 04062416 As at 30 June 2021 Non-current assets Goodwill Property, plant and equipment Right of use asset Investments in subsidiaries Deferred tax asset Trade and other receivables Note 11 12 17 13 18 14 Group 2021 £ Group 2020 £ Company 2021 £ Company 2020 £ 1,715,153 11,147 365,758 - 471,000 141,750 1,715,153 19,316 512,061 - 452,000 141,750 - - - 2,017,471 55,000 - - - - 2,017,471 151,000 - Total non-current assets 2,704,809 2,840,280 2,072,471 2,168,471 Current assets Trade and other receivables Cash and cash equivalents 14 15 470,317 5,395,457 192,632 5,006,969 3,263,467 1,077,741 3,181,410 1,146,700 Total current assets Current liabilities 5,865,774 5,199,601 4,341,208 4,328,110 Trade and other payables Lease liabilities 16 17 (1,643,407) (148,450) (1,851,037) (141,693) (52,384) - (149,945) - Total current liabilities (1,791,857) (1,992,730) (52,384) (149,945) Non-current liabilities Lease liabilities 17 (195,853) (344,303) Total Non-current liabilities (195,853) (344,303) - - - - Net current assets Net assets Equity Called up share capital Share premium account Share option reserve Retained earnings 4,073,917 6,582,873 3,206,871 5,702,848 4,288,824 6,361,295 4,178,165 6,346,636 19 20 20 20 1,665,977 92,360 271,207 4,553,329 1,651,314 56,381 188,639 3,806,514 1,665,977 92,360 271,207 4,331,751 6,582,873 5,702,848 6,361,295 1,651,314 56,381 188,639 4,450,302 6,346,636 As permitted by s408 of the Companies Act 2006, the Company has not presented its own income statement. The parent Company profit for the year was £181,744 (2020: £326,348). Approved on behalf of the board on 31 August by: Matthew Jeffs Chief Executive The notes on pages 32 to 56 form part of these financial statements. ARCONTECH GROUP PLC 29 Group Cash Flow Statement For the year ended 30 June 2021 Cash generated from operations 22 809,559 1,315,421 Note 2021 £ 2020 £ Tax (paid)/recovered Net cash generated from operating activities Investing activities Interest received Purchases of plant and equipment (8,204) 9,734 801,355 1,325,155 13,260 29,914 (1,482) (12,750) Net cash generated from investing activities 11,778 17,164 Financing activities Proceeds from the issue of shares Dividend paid Payment of lease liabilities Net cash used in financing activities Net increase in cash and cash equivalents Cash and cash equivalents at beginning of year 50,642 - (333,594) (263,591) (141,693) (135,243) (424,645) (398,834) 388,488 943,485 5,006,969 4,063,484 Cash and cash equivalents at end of year 15 5,395,457 5,006,969 The notes on pages 32 to 56 form part of these financial statements. ARCONTECH GROUP PLC 30 Company Cash Flow Statement For the year ended 30 June 2021 Net cash generated by operating activities 22 210,920 320,462 Note 2021 £ 2020 £ Tax paid Net cash generated from operating activities Investing activities Interest received Net cash generated from investing activities Financing activities Proceeds from the issue of shares Dividend paid (3,319) - 207,601 320,462 6,392 6,392 11,074 11,074 50,642 - (333,594) (263,591) Net cash used in financing activities (282,952) (263,591) Net (decrease)/ increase in cash and cash equivalents (68,959) 67,945 Cash and cash equivalents at beginning of year 1,146,700 1,078,755 Cash and cash equivalents at end of year 15 1,077,741 1,146,700 The notes on pages 32 to 56 form part of these financial statements. ARCONTECH GROUP PLC 31 Notes to the Financial Statements For the year ended 30 June 2021 1. Accounting policies The principal accounting policies are summarised below. They have all been applied consistently throughout the period covered by these financial statements except where changes have been noted below. Reporting entity Arcontech Group PLC (“the Company”) is a company incorporated in England and Wales. The consolidated financial statements incorporate the financial statements of the Company and its subsidiaries (together referred to as “the Group”). Basis of preparation These financial statements have been prepared in accordance with International Financial Reporting Standards (“IFRS”) endorsed by the European Union and with those parts of the Companies Act 2006 applicable to companies reporting under IFRS. On the basis of current projections, confidence of future profitability and cash balances held, the Directors have adopted the going concern basis in the preparation of the financial statements. The financial statements have been prepared under the historical cost convention. Going Concern On the basis of current projections and having regard to the Group’s existing cash reserves, the Directors consider that the Group has adequate resources to continue in operational existence for the foreseeable future. In reaching this conclusion the Directors have taken into account of downside conditions considered reasonably possible in changes in trading performance due to the impact of Covid-19. The Board has monitored business conditions caused by the Covid-19 pandemic and assessed its impact on the Group’s performance over the last twelve months. The Group has been able to maintain its ability operate successfully with no major detrimental impact to performance being experienced. Although the board acknowledges that further virus waves could have a material impact on trading performance, the board notes the cushion provided by the strong net cash position and the ability to cut costs. Accordingly, the Directors have adopted the going concern basis in the preparation of the financial statements. Changes in accounting policies and disclosures a) New and amended Standards and Interpretations adopted by the Group and Company No standards or Interpretations that came into effect for the first time for the financial year beginning 1 July 2020 have had an impact on the Group. b) New and amended Standards and Interpretations issued but not effective for the financial year beginning 1 July 2020 At the date of approval of these financial statements, the following standards and interpretations which have not been applied in these financial statements were in issue but not yet effective (and in some cases had not been adopted by the UK): - Amendments to References to Conceptual Framework in IFRS Standards – effective from 1 January 2020 - Definition of Material (Amendments to IAS 1 and IAS 8) – effective from 1 January 2020 - Amendments to IFRS 9, IAS 39 and IFRS 17: Interest Rate Benchmark Reform - effective from 1 January 2020 - Amendment to IFRS 3 Business Combinations – effective 1 January 2020 - Amendments to IAS 1 Presentation of Financial Statements: Classification of Liabilities as Current or Non-current – effective 1 January 2023* - Amendments to IFRS 3: Business Combinations – Reference to the Conceptual Framework – effective 1 January 2022* - Amendments to IFRS 9, IAS 3, IFRS 7, IFRS 4 and IFRS 16: Interest Rate Benchmark Reform – Phase 2 - effective from 1 January 2021 - Amendments to IAS 16: Property, Plant & Equipment – effective 1 January 2022* - Amendments to IAS 37: Provisions, Contingent Liabilities and Contingent Assets – effective 1 January 2022* - Annual Improvements to IFRS Standards 2018-2020 Cycle – effective 1 January 2022* ARCONTECH GROUP PLC 32 Notes to the Financial Statements For the year ended 30 June 2021 (continued) 1. Accounting policies (continued) Changes in accounting policies and disclosures (continued) - Amendments to IAS 1: Presentation of Financial Statements and IFRS Practice Statement 2: Disclosure of Accounting Policies – effective 1 January 2023* - Amendments to IAS 8: Accounting policies, Changes in Accounting Estimates and Errors – Definition of Accounting Estimates – effective 1 January 2023* - Amendments to IFRS 16: Leases – Covid-19-Related Rent Concessions beyond 30 June 2021 – effective 1 April 2021 - Amendments to IAS 12: Income Taxes – Deferred Tax related to Assets and Liabilities arising from a Single Transaction – effective 1 January 2023* *subject to UK endorsement The new and amended Standards and Interpretations which are in issue but not yet mandatorily effective is not expected to be material. Basis of consolidation The Group financial statements incorporate the financial statements of the Company and entities controlled by the Company (its subsidiaries) prepared to 30 June 2021. Subsidiaries are entities controlled by the Group. 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: • • • 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 The ability to use its power over the investee to affect its returns. Generally, there is a presumption that a majority of voting rights result in control. To support this presumption and when the Group has less than a majority of the voting or similar rights of an investee, the Group considers all relevant facts and circumstances in assessing whether it has power over an investee, including: • • • The contractual arrangement with the other vote holders of the investee. Rights arising from other contractual arrangements. The Group’s voting rights and potential voting rights. Consolidation of a subsidiary begins when the Group obtains control over the subsidiary and ceases when the Group loses control of the subsidiary. Assets, liabilities, income and expenses of a subsidiary acquired or disposed of during the year are included in the consolidated financial statements from the date the Group gains control until the date the Group ceases to control the subsidiary. The acquisition method is used to account for the acquisition of subsidiaries. All intra-group transactions, balances, income and expenses are eliminated on consolidation. Business combinations and goodwill On acquisition, the assets and liabilities and contingent liabilities of subsidiaries are measured at their fair value at the date of acquisition. Any excess of cost of acquisition over the fair values of the identifiable net assets acquired is recognised as goodwill. Any deficiency of the cost of acquisition below the fair values of the identifiable net assets acquired (i.e. discount on acquisition) is credited to the income statement in the period of acquisition. Goodwill arising on consolidation is recognised as an asset and reviewed for impairment at least annually. Any impairment is recognised immediately in the income statement and is not subsequently reversed. ARCONTECH GROUP PLC 33 Notes to the Financial Statements For the year ended 30 June 2021 (continued) 1. Accounting policies (continued) Revenue recognition Revenue is recognised in accordance with the transfer of promised services to customers (i.e. when the customer gains control of the service) and is measured as the consideration which the group expects to be entitled to in exchange for those services. Consideration is typically fixed on the agreement of a contract except for quarterly flexible license contracts. Payment terms are agreed on a contract by contract basis. A service is distinct if the customer can benefit from the service on its own or together with other resources that are readily available to the customer and the entity's promise to transfer the service to the customer is separately identifiable from other promises in the contract. Contracts with customers do not contain a financing component. Under IFRS 15, revenue earned from contracts with customers is recognised based on a five-step model which requires the transaction price for each identified contract to be apportioned to separate performance obligations arising under the contract and recognised either when the performance obligation in the contract has been performed (point in time recognition) or over time as control of the performance obligation is transferred to the customer. The group recognises revenue when it satisfies a performance obligation by transferring a promised service to the customer as follows: • Revenue from recurring license fees and other license fees is recognised on an over time basis via a straight line across the period the services are provided. In reaching this conclusion the group has assessed that ongoing contractual obligations are not separately identifiable from other promises in the contract and are not distinct from the licence, and hence are accounted for as a single performance obligation. As the license is not distinct the combined performance obligation is recognised over time. In assessing whether a licence is distinct the Group considered the continuing requirement to:– – optimise functionality; – optimise performance; and – provide enhancements to ensure user regulatory compliance. • Revenue from flexible license contracts that include variable consideration are quarterly contracts assessed at the end of each calendar quarter and revenue is recognised based on actual usage confirmed for that quarter at the point of customer acceptance, • Revenue from project work is recognised on satisfactory completion of each project, as this is considered to be the point in time the customer gains control over the results of the project work. Taxation The tax charge/(credit) represents the sum of the tax payable/(receivable) and any deferred tax. Research and development tax credits are recognised when received. The tax payable/(receivable) is based on the taxable result for the year. The taxable result differs from the net result as reported in the income statement because it excludes items of income or expense that are taxable or deductible in other years and it further excludes items that are never taxable or deductible. The Company’s liability for current tax is calculated using tax rates that have been enacted or substantively enacted by the balance sheet date. Deferred tax is the tax expected to be payable or recoverable on differences between the carrying amounts of assets and liabilities in the financial statements and the corresponding tax bases used in the computation of taxable profit and is accounted for using the balance sheet liability method. Deferred tax liabilities are generally recognised for all taxable temporary differences and deferred tax assets are recognised to the extent that it is probable that taxable profits will be available against which deductible temporary differences can be utilised. Such assets and liabilities are not recognised if the temporary difference arises from goodwill or from the initial recognition (other than in a business combination) of other assets and liabilities in a transaction that affects neither the taxable profit nor the accounting profit. ARCONTECH GROUP PLC 34 Notes to the Financial Statements For the year ended 30 June 2010 (continued) 1. Accounting policies (continued) Taxation (continued) Deferred tax liabilities are recognised for taxable temporary differences arising on investments in subsidiaries, except where the Group is able to control the reversal of the temporary difference and it is probable that the temporary difference will not reverse in the foreseeable future. The carrying amount of deferred tax assets is reviewed at each balance sheet date. Deferred tax is calculated at the tax rates that are expected to apply in the period when the liability is settled, or the asset realised. Deferred tax is charged or credited to the income statement, except when it relates to items charged or credited directly to equity, in which case the deferred tax is also dealt with in equity. Deferred tax assets and liabilities are offset when there is a legally enforceable right to set off current tax assets against current tax liabilities and when they relate to income taxes levied by the same taxation authority and the Group intends to settle its current assets and liabilities on a net basis. Share-based payments The cost of share-based employee compensation arrangements, whereby employees receive remuneration in the form of shares or share options, is recognised as an employee benefit expense in the income statement. The total expense to be apportioned over the vesting period of the benefit is determined by reference to the fair value (excluding the effect of non market-based vesting conditions) at the date of grant. Fair value is measured by the use of the Black-Scholes model. The expected life used in the model has been adjusted, based on management’s best estimate, for the effects of the non-transferability, exercise restrictions and behavioural considerations. A cancellation of a share award by the Group or an employee is treated consistently, resulting in an acceleration of the remaining charge within the consolidated income statement in the year of cancellation. Impairment of tangible and intangible assets The carrying amounts of the Group’s and Company’s tangible and intangible assets are reviewed at each year end date to determine whether there is any indication of impairment. If any such indication exists, the asset’s recoverable amount is estimated. Expenses incurred on Research & Development are currently expensed through the income statement as the expenditure is incurred on the maintenance and enhancement of existing products. The applicability of this treatment is reviewed regularly by the Company. For goodwill, the recoverable amount is estimated at each year end date, based on value in use. The recoverable amount of other assets is the greater of their net selling price and value in use. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset. For an asset that does not generate largely independent cash inflows, the recoverable amount is determined for the cash generating unit to which the asset belongs. An impairment loss is recognised in the income statement whenever the carrying amount of an asset or its cash-generating unit exceeds its recoverable amount. Impairment losses recognised in respect of cash-generating units are allocated first to reduce the carrying amount of any goodwill allocated to cash-generating units and then to reduce the carrying amount of the other assets in the unit on a pro rata basis. A cash generating unit is the smallest identifiable group of assets that generates cash inflows that are largely independent of the cash inflows from other assets or groups of assets. ARCONTECH GROUP PLC 35 Notes to the Financial Statements For the year ended 30 June 2021 (continued 1. Accounting policies (continued) Property, plant and equipment Property, plant and equipment are stated at cost less accumulated depreciation and any recognised impairment loss. Depreciation is charged so as to write off the cost of assets, over their estimated useful lives, on the following bases: Leasehold property Computer equipment Office furniture and equipment - over the period of the lease - 33% - 40% on cost - 20% - 25% on cost or reducing balance Investments in subsidiaries Investments in subsidiaries are stated at cost less any provision for impairment. Financial instruments Financial assets and financial liabilities are recognised in the statement of financial position when the Group becomes a party to the contractual provisions of the instrument. Financial assets The Group does not hold any investments other than investments in subsidiaries. Trade receivables are held in order to collect the contractual cash flows and are initially measured at the transaction price as defined in IFRS 15, as the contracts of the Group do not contain significant financing components. Impairment losses are recognised based on lifetime expected credit losses in profit or loss. Other receivables are held in order to collect the contractual cash flows and accordingly are measured at initial recognition at fair value, which ordinarily equates to cost and are subsequently measured at cost less impairment due to their short-term nature. A provision for impairment is established based on 12-month expected credit losses unless there has been a significant increase in credit risk when lifetime expected credit losses are recognised. The amount of any provision is recognised in the income statement. Cash and cash equivalents Cash and cash equivalents comprise cash held by the Group and short-term bank deposits with an original maturity of three months or less. Financial liabilities and equity Financial liabilities and equity instruments issued by the Group are classified in accordance with the substance of the contractual arrangements entered into and the definitions of a financial liability and an equity instrument. An equity instrument is any contract that evidences a residual interest in the assets of the Group after deducting all of its liabilities. Equity instruments issued by the company are recorded at the proceeds received, net of direct issue costs. Effective interest rate method The effective interest rate method is a method of calculating the amortised cost of a financial asset or liability and allocating interest income or expense over the relevant period. The effective interest rate is the rate that exactly discounts estimated future cash flows through the expected life of the financial asset or liability, or, where appropriate, a shorter period, to the net carrying amount on initial recognition. ARCONTECH GROUP PLC 36 Notes to the Financial Statements For the year ended 30 June 2021 (continued 1. Accounting policies (continued) Financial instruments (continued) (a) Classification The Group classifies its financial assets in the following measurement categories: • • those to be measured subsequently at fair value (either through OCI or through profit or loss); and those to be measured at amortised cost. The classification depends on the Group’s business model for managing the financial assets and the contractual terms of the cash flows. For assets measured at fair value, gains and losses will be recorded either in profit or loss or in OCI. For investments in equity instruments that are not held for trading, this will depend on whether the Group has made an irrevocable election at the time of initial recognition to account for the equity investment at fair value through other comprehensive income (FVOCI). See Note 16 for further details. (b) Recognition Purchases and sales of financial assets are recognised on trade date (that is, the date on which the Group commits to purchase or sell the asset). Financial assets are derecognised when the rights to receive cash flows from the financial assets have expired or have been transferred and the Group has transferred substantially all the risks and rewards of ownership. (c) Measurement At initial recognition, the Group measures a financial asset at its fair value plus, in the case of a financial asset not at fair value through profit or loss (FVPL), transaction costs that are directly attributable to the acquisition of the financial asset. Transaction costs of financial assets carried at FVPL are expensed in profit or loss. Debt instruments Amortised cost; Assets that are held for collection of contractual cash flows, where those cash flows represent solely payments of principal and interest, are measured at amortised cost. Interest income from these financial assets is included in finance income using the effective interest rate method. Any gain or loss arising on derecognition is recognised directly in profit or loss and presented in other gains/(losses) together with foreign exchange gains and losses. Impairment losses are presented as a separate line item in the statement of profit or loss. (d) Impairment From 1 January 2018, the Group assesses, on a forward-looking basis, the expected credit losses associated with its debt instruments carried at amortised cost. The impairment methodology applied depends on whether there has been a significant increase in credit risk. For trade receivables, the Group applies the simplified approach permitted by IFRS 9, which requires expected lifetime losses to be recognised from initial recognition of the receivables. ARCONTECH GROUP PLC 37 Notes to the Financial Statements For the year ended 30 June 2021 (continued) 1. Accounting policies (continued) Leases Leases are recognised as a right-of-use asset and a corresponding lease liability at the date at which the leased asset is available for use by the Group. Assets and liabilities arising from a lease are initially measured on a present value basis. Lease liabilities include the net present value of the following lease payments: Fixed payments (including in-substance fixed payments), less any lease incentives receivable; • • Variable lease payment that are based on an index or a rate, initially measured using the index or rate as at the commencement date; • Amounts expected to be payable by the Group under residual value guarantees; • • The exercise price of a purchase option if the Group is reasonably certain to exercise that option; and Payments of penalties for terminating the lease, if the lease term reflects the Group exercising that option. Lease payments to be made under reasonably certain extension options are also included in the measurement of the liability. The lease payments are discounted using the interest rate implicit in the lease. If that rate cannot be readily determined, which is generally the case for leases in the Group, the lessee’s incremental borrowing rate is used, being the rate that the individual lessee would have to pay to borrow the funds necessary to obtain an asset of similar value to the right-of-use asset in a similar economic environment with similar terms, security and conditions. Lease payments are allocated between principal and finance cost. The finance cost is charged to profit or loss over the lease period. Right-of-use assets are measured at cost which comprises the following: The amount of the initial measurement of the lease liability; • • Any lease payments made at or before the commencement date less any lease incentives received; • Any initial direct costs; and • Restoration costs. Right-of-use assets are generally depreciated over the shorter of the asset’s useful life and the lease term on a straight-line basis. If the Group is reasonably certain to exercise a purchase option, the right-of-use asset is depreciated over the underlying asset’s useful life. Payments associated with short-term leases (term less than 12 months) and all leases of low-value assets (generally less than £4k) are recognised on a straight-line basis as an expense in profit or loss. Provisions Provisions are recognised when the Group has a present obligation, legal or constructive, resulting from past events and it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation and a reliable estimate can be made of the obligation. Research and development Research costs are charged to the income statement in the year incurred. Development expenditure is capitalised to the extent that it meets all of the criteria required by IAS 38, otherwise it is charged to the income statement in the year incurred. Pension costs and other post-retirement benefits The Group makes payments to occupational and employees’ personal pension schemes. Contributions payable for the year are charged in the income statement. ARCONTECH GROUP PLC 38 Notes to the Financial Statements For the year ended 30 June 2021 (continued) 1. Accounting policies (continued) Foreign currencies Transactions denominated in foreign currencies are translated into sterling at the exchange rate ruling when the transaction was entered into. Where consideration is received in advance of revenue being recognised the date of the transaction reflects the date the consideration is received. Foreign currency monetary assets and liabilities are translated into sterling at the exchange rate ruling at the balance sheet date. Exchange gains or losses are included in operating profit. Segment reporting Operating segments are reported in a manner consistent with the internal reporting provided to the chief operating decision- maker as required by IFRS 8 “Operating Segments”. The chief operating decision-maker responsible for allocating resources and assessing performance of the operating segments has been identified as the Board of Directors. The accounting policies of the reportable segments are consistent with the accounting policies of the group as a whole. Segment profit/(loss) represents the profit/(loss) earned by each segment without allocation of foreign exchange gains or losses, investment income, interest payable and tax. This is the measure of profit that is reported to the Board of Directors for the purpose of resource allocation and the assessment of segment performance. When assessing segment performance and considering the allocation of resources, the Board of Directors review information about segment assets and liabilities. For this purpose, all assets and liabilities are allocated to reportable segments with the exception of cash and cash equivalents and current and deferred tax assets and liabilities. 2. Critical accounting judgments and key sources of estimation uncertainty The preparation of financial statements in conformity with generally accepted accounting practice requires management to make estimates and judgements that affect the reported amounts of assets and liabilities as well as the disclosure of contingent assets and liabilities at the balance sheet date and the reported amounts of revenues and expenses during the reporting period. Estimates and judgements are continually evaluated and are based on historic experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances. Judgements Determination of performance obligations and satisfaction thereof For the purposes of recognising revenue, the Directors are required to identify distinct services in contracts and allocate the transaction price to the performance obligations. Details of determining performance obligations, passing of control and amounts recognised as costs incurred to obtain or fulfil a contract are given in Note 1 - Revenue recognition. Capitalisation of development costs As described in Note 1, the Group capitalises development costs when certain criteria are met including the probability of relevant future economic benefits. The directors have assessed the likelihood of relevant future economic benefits and have judged it appropriate to not capitalise any development costs (2020 - £Nil). Estimates Impairment of non-current assets Determining whether non-current assets are impaired requires an estimation of the value in use of the cash generating units to which non-current assets have been allocated. The value in use calculation requires the Group to estimate the future cash flows expected to arise from the cash-generating unit and a suitable discount rate in order to calculate the present value. No provision for impairment was made in the year to the carrying value of goodwill (see note 11) or investments in subsidiaries (see note 13). ARCONTECH GROUP PLC 39 Notes to the Financial Statements For the year ended 30 June 2021 (continued) 2. Critical accounting judgments and key sources of estimation uncertainty (continued) Recognition of deferred tax assets As described in Note 1, the Group recognises deferred tax assets arising from unused tax losses when certain criteria are met including the probability that future relevant taxable profits will be available. The directors have assessed the likelihood of future taxable profits being available and have judged it appropriate to recognise deferred tax assets for unused losses. At the year-end a deferred tax asset of £471,000 (2020 - £452,000) was recognised. Share based payment transactions The Company has made awards of options and over its unissued share capital to certain Directors and employees as part of their remuneration package. The valuation of these options involves making a number of critical estimates relating to price volatility, future dividend yields, expected life of the options and forfeiture rates. These assumptions have been described in more detail in Note 19. 3. Revenue An analysis of the Group’s revenue is as follows: Software development, licence fees and project work 2,988,842 2,955,315 2021 £ 2020 £ All of the Group’s revenue relates to continuing activities. 4. Operating profit for the year is stated after charging/(crediting): Depreciation of plant and equipment (see note 12) Depreciation of leased assets (see note 17) Interest on leased assets (see note 17) Staff costs (see note 8) Research and development Release of accruals for administrative costs in respect of prior years 5. Finance income and Finance costs: Finance income Income on cash and cash equivalents Finance costs Lease interest expense Net finance (expense) / income 6. Auditor’s remuneration: Fees payable to the Group’s auditor for the audit of the Group’s annual accounts Fees payable to the Group’s auditor for other services: - audit of the Company’s subsidiaries ARCONTECH GROUP PLC 2021 £ 9,651 146,303 20,307 1,491,063 506,893 (88,000) 2020 £ 8,444 146,303 26,757 1,401,227 468,680 (86,500) 2021 £ 2020 £ 13,260 29,914 (20,307) (7,047) (26,757) 3,157 2021 £ 29,750 6,000 2020 £ 28,750 6,000 40 Notes to the Financial Statements For the year ended 30 June 2021 (continued) 7. Operating segments: The Group reports internally to the Chief Operating Decision Maker (CODM), who is considered to be the Board. Intersegment license fees and management charges are not included in the reports reviewed by the CODM during the year but are calculated for statutory reporting purposes and therefore are excluded from the following revenue and operating profit disclosures. Revenue by segment Software development and licence fees External segment revenue Operating profit by segment 2021 £ 2020 £ 2,988,842 2,988,842 2,955,315 2,955,315 Software development and licence fees 1,468,132 1,575,029 Unallocated overheads Total operating profit (445,078) 1,023,054 (563,976) 1,011,053 Finance income Total profit before tax as reported in the Group income statement 13,260 1,036,314 29,916 1,040,969 Segment total of assets Software development and licence fees Unallocated assets Less intercompany debtors Total assets Segment total of liabilities Software development and licence fees Unallocated liabilities Less intercompany creditors Total liabilities 2021 £ 2020 £ 7,337,340 6,514,118 4,492,208 11,829,548 4,533,110 11,047,228 (3,258,968) 8,570,580 (3,174,349) 7,872,879 2021 £ 2020 £ 5,193,528 5,360,835 53,150 5,246,678 150,546 5,511,381 (3,258,968) 1,987,710 (3,174,349) 2,337,032 ARCONTECH GROUP PLC 41 Notes to the Financial Statements For the year ended 30 June 2021 (continued) 7. Operating segments (continued): Additions of property, plant and equipment assets by segment Software development and licence fees Total additions Depreciation of property, plant and equipment assets recognised in the period by segment Software development and licence fees Total depreciation Non-current assets by country UK Total non-current assets 2021 £ 1,482 1,482 2021 £ 9,651 9,651 2020 £ 12,750 12,750 2020 £ 8,444 8,444 2021 2020 £ 2,704,809 2,704,809 £ 2,840,280 2,840,280 Geographical information - External revenue 2021 2020 UK Europe (excluding UK) Africa North America Australia Asia Pacific £ 2,065,903 771,541 42,500 83,637 11,838 13,423 2,988,842 £ 2,000,457 821,193 45,000 78,177 4,267 6,221 2,955,315 During the year there were 3 customers (2020: 4) who accounted for more than 10% of the Group’s revenues as follows: Customer 1 Customer 2 Customer 3 Customer 4 2020 2020 Value of sales £ 668,122 522,149 375,168 - 1,565,439 % of Total 22% 17% 13% - 52% Value of sales £ 659,327 516,605 371,536 300,696 1,848,164 These revenues are attributable to the software development and licence fees segment. ARCONTECH GROUP PLC % of Total 22% 17% 13% 10% 62% 42 Notes to the Financial Statements For the year ended 30 June 2021 (continued) 8. Staff costs: a) Aggregate staff costs, including Directors’ remuneration Wages and salaries Social security costs Pension contributions Share-based payments b) The average number of employees (including executive Directors) was: Sales and administration Development and support c) Directors’ emoluments Short-term employee benefits Pension contributions Share-based payments Social security costs Key management personnel compensation Directors’ emoluments represent the staff costs of the parent company. The average number of employees of the parent company is 3 (2020: 3) The highest paid Director received remuneration of £186,178 (2020: £250,166). 2021 £ 1,206,748 144,131 24,318 115,866 1,491,063 6 11 17 £ 232,352 5,250 63,030 300,632 49,351 349,983 2020 £ 1,139,695 140,611 22,493 98,428 1,401,227 5 11 16 £ 312,902 5,428 57,432 375,762 37,536 413,298 The number of Directors that are members of a defined contribution pension scheme is 1 (2020: 1). Pension contributions paid to a defined contribution scheme in respect of the highest paid Director amounted to £5,250 (2020: £5,100). ARCONTECH GROUP PLC 43 Notes to the Financial Statements For the year ended 30 June 2021 (continued) 9. Taxation Current tax Deferred tax Total tax credit for the year 2021 £ (8,204) 19,000 10,796 2020 £ 9,734 167,000 176,734 The difference between the total tax credit shown above and the amount calculated by applying the standard rate of UK corporation tax to the profit before tax is as follows: Profit on ordinary activities before tax 2021 £ 1,036,314 2020 £ 1,040,969 Profit on ordinary activities multiplied by the standard rate of corporation tax in the UK of 19 % (2019: 19%) 196,900 197,784 Effects of: Disallowed expenses Temporary differences on deferred tax Income taxes paid Research and development tax credits 97 1,457 8,204 - 416 1,255 - (9,734) Deferred tax asset not previously recognised (19,000) (167,000) Brought forward losses utilised/loss for the year carried forward (198,454) (199,455) Total tax credit for the year (10,796) (176,734) Factors which may affect future tax charges At 30 June 2021 the Group has tax losses of approximately £8,500,000 (2020: £8,900,000) to offset against future trading profits. ARCONTECH GROUP PLC 44 Notes to the Financial Statements For the year ended 30 June 2021 (continued) 10. Earnings per share Earnings Earnings for the purpose of basic and diluted earnings per share being net profit attributable to equity shareholders Number of shares Weighted average number of ordinary shares for the purpose of basic earnings per share Number of dilutive shares under option Weighted average number of ordinary shares for the purposes of dilutive earnings per share 2021 £ 2020 £ 1,047,110 1,047,110 1,217,703 1,217,703 No. No. 13,290,672 13,210,510 143,168 268,484 13,433,840 13,478,994 The calculation of diluted earnings per share assumes conversion of all potentially dilutive ordinary shares, all of which arise from share options. A calculation is done to determine the number of shares that could have been acquired at fair value, based upon the monetary value of the subscription rights attached to outstanding share options. 11. Goodwill Cost and net book amount 2021 £ 2020 £ At 1 July 2020 and at 30 June 2021 1,715,153 1,715,153 Goodwill acquired in a business combination is allocated at acquisition, to the cash generating units (CGUs) that are expected to benefit from that business combination. The carrying amount of goodwill has been allocated as follows: Arcontech Limited 2021 £ 1,715,153 1,715,153 2020 £ 1,715,153 1,715,153 The CGU used in these calculations is Arcontech Limited. The group tests goodwill annually for impairment or more frequently if there are indications that goodwill might be impaired. The recoverable amounts of the CGUs are determined from value in use calculations. The key assumptions for the value in use calculations are those regarding the discount rates, growth rates and expected changes to selling prices and direct costs during the period. The discount rate is estimated using pre-tax rates that reflect current market assessments of the time value of money and the risks specific to the CGUs. Long-term growth rates are based on industry growth forecasts. Changes in selling prices a re based on past practices and expectations of future changes in the market. Changes in direct costs are based on expected cost of inflation of 2.5% and 1.8% after year 5. Cashflow forecasts are based on the latest financial budgets and extrapolate the cashflows for the next five years based on an estimated growth in revenue representing an average rate of 5% (2020: 5%) per annum, after which the UK long-term growth rate of 1.8% is applied. The Directors consider that this rate is appropriate, given the level of new contracts achieved during the year. Fluctuation in revenue is the most sensitive of assumptions. Should revenue fall by more than an average of 5% per annum then this could result in the value of goodwill being impaired. As the Group does not have any borrowings, the rate used to discount all the forecast cash flows is 8.8% (2020: 8.8%), which represents the Group’s cost of capital. Goodwill on the purchase of Arcontech Limited is attributable to the operating synergies that have arisen as a result of the combination. ARCONTECH GROUP PLC 45 Notes to the Financial Statements For the year ended 30 June 2021 (continued) 12. Property, plant and equipment - Group Cost At 1 July 2019 Additions At 1 July 2020 Additions At 30 June 2021 Depreciation At 1 July 2019 Charge for the year At 1 July 2020 Charge for the year At 30 June 2021 Net book amount at 30 June 2021 Net book amount at 30 June 2020 13. Investment in subsidiaries Carrying amount At 1 July 2020 Provisions written back Amounts written off At 30 June 2021 Leasehold Property £ Office furniture & equipment £ Total £ 26,199 129,469 155,668 - 12,749 12,749 26,199 142,218 168,417 - 1,482 1,482 26,199 143,700 169,899 19,136 121,521 140,657 1,461 6,983 8,444 20,597 128,504 149,101 1,461 8,190 9,651 22,058 136,694 158,752 4,141 5,602 7,008 11,147 13,714 19,316 2021 £ 2020 £ 2,017,471 2,017,471 - - - - 2,017,471 2,017,471 Details of the investments in which the Group and the Company holds 20% or more of the nominal value of any class of share capital are listed below. The Goodwill recognised in Note 11 is in connection with investments made in subsidiaries: Country of Incorporation Address Arcontech Solutions Limited England Cognita Technologies Limited England Arcontech Limited England 11-21 Paul Street, London EC2A 4JU 11-21 Paul Street, London EC2A 4JU 11-21 Paul Street, London EC2A 4JU Nature of business Dormant Ordinary shares held 100% Software development 100% Software development and consultancy 100% ARCONTECH GROUP PLC 46 Notes to the Financial Statements For the year ended 30 June 2021 (continued) 14. Trade and other receivables Group 2021 £ Group 2020 £ Company 2021 £ Company 2020 £ Due within one year: Trade and other receivables 330,740 38,162 - - Amounts owed by group undertakings - - 3,258,868 3,174,150 Prepayments and accrued income Due after more than one year: Other receivables 139,577 470,317 Group 2021 £ 141,750 141,750 154,470 192,632 4,599 3,263,467 7,160 3,181,310 Group 2020 £ 141,750 141,750 Company 2021 £ Company 2020 £ - - - - Trade receivables, which are the only financial assets at amortised cost, are non-interest bearing and generally have a 30- 90 day term. Due to their short maturities, the carrying amount of trade and other receivables is a reasonable approximation of their fair value. A provision for impairment of trade receivables is established using an expected loss model. Expected loss is calculated from a provision based on the expected lifetime default rates and estimates of loss on default. As at 30 June 2021, trade receivables of £Nil were impaired (2020: £Nil) and during the year an impairment charge relating to trade receivables of £Nil (2020: £Nil) was recognised. As at 30 June 2021 trade receivables of £100,469 (2020: £792) were past due but not impaired. The ageing analysis of these trade receivables is as follows: Group 2021 £ 100,469 - 100,469 Group 2020 £ 792 - 792 Company 2021 £ Company 2020 £ - - - - - - Up to 3 months past due 3 to 6 months past due 15. Cash and cash equivalents Cash and cash equivalents comprise cash held by the Group and short-term bank deposits with an original maturity of three months or less. The Directors consider that the carrying amount of cash and cash equivalents approximates to their fair value. ARCONTECH GROUP PLC 47 Notes to the Financial Statements For the year ended 30 June 2021 (continued) 16. Trade and other payables Trade payables Amounts owed to group undertakings Group 2021 £ 52,881 - Group 2020 £ 76,765 - Other tax and social security payable 113,083 52,033 Other payables and accruals* 388,137 527,109 Deferred income 1,089,306 1,643,407 1,195,130 1,851,037 Company 2021 £ Company 2020 £ 4,155 100 8,844 39,285 - 52,384 21,199 100 10,475 118,171 - 149,945 The Directors consider that the carrying amount of trade and other payables approximates to their fair value. Trade payables and other payables and accruals constitute the financial liabilities within the category “Financial liabilities at amortised cost” with a total value of £441,018 (2020: £603,874). *Other payables and Accruals includes a provision for dilapidations for the Office premises of £50,000 (2019: £50,000). Refer to note 1 for the Accounting Policy for Provisions. 17. Leases Under IFRS 16, the Group recognises right-of-use assets and lease liabilities for all leases on its balance sheet. The only lease applicable under IFRS 16 is the Group’s office. The key impacts on the Statement of Comprehensive Income and the Statement of Financial Position are as follows: As at 30 June 2021 Carrying value at 30 June 2020 Depreciation Interest Lease payments Lease liability £ (485,996) - (20,307) 162,000 Right of use asset £ 512,061 (146,303) - - Income statement £ - (146,303) (20,307) - Carrying value at 30 June 2021 (344,303) 365,758 (166,610) As at 30 June 2020 Balance on transition (1 July 2019) Recognised on adoption of IFRS 16 Depreciation Interest Lease payments Prepayments £ 37,125 (37,125) - - - Lease liability £ - (621,239) - (26,757) 162,000 Right of use asset £ - 658,364 (146,303) - - Income statement £ - - (146,303) (26,757) - Carrying value at 30 June 2020 - (485,996) 512,061 (173,060) ARCONTECH GROUP PLC 48 Notes to the Financial Statements For the year ended 30 June 2021 (continued) 17. Leases (continued) Contractual maturity analysis of lease liabilities as at 30 June 2021 Less than 3 months £ 40,500 3 – 12 Months £ 121,500 1 – 5 Year £ 202,800 Longer than 5 years £ - Total £ 364,800 Lease liabilities 18. Deferred tax Deferred tax is calculated in full on temporary differences under the liability method using the tax rate of 17% which came into effect from 1 April 2020. The movement on the deferred tax account is as shown below: At 1 July Tax credit recognised in group income statement Group 2021 £ 452,000 Group 2020 £ 285,000 Company 2021 £ 151,000 Company 2020 £ 125,000 19,000 167,000 (96,000) 26,000 At 30 June 471,000 452,000 55,000 151,000 The deferred tax asset has been recognised in relation to forecast taxable profits which are considered probable. Losses to offset against future trading profits at 30 June 2021 amounted to approximately £8,500,000 (2020: £8,900,000). ARCONTECH GROUP PLC 49 Notes to the Financial Statements For the year ended 30 June 2021 (continued) 19. Share capital Company Allotted and fully paid: 2021 £ 2020 £ 13,327,811 (2020: 13,210,510) Ordinary shares of 12.5p each 1,665,976 1,651,314 Share options Under the Company’s approved 2002 Share Option Scheme, certain Directors and employees held options at 30 June 2021 for unissued Ordinary Shares of 12.5 pence each as follows: Share options At 1 July 2020 Granted Exercised Forfeited At 30 June 2021 Exercise price Normal exercise period Employees: 80,000 125,000 50,000 55,000 - - - - - 75,000 Directors: Michael Levy 20,635 16,666 555 Richard Last 24,762 - - - - Geoff Wicks - 30,000 Louise Barton 40,000 20,000 Matthew Jeffs 100,000 - - - 50,000 - - 50,000 (80,000) - - - - (20,635) (16,666) - - - - - - - - - - - - - - - (555) - - - - - - - - 23.75 pence 125,000 50,000 64.50 pence 110.00 pence 55,000 196.00 pence 1 Sep 17 – 31 Aug 21 25 Apr 20 – 24 Apr 27 30 Jun 21 – 29 Jun 28 30- Jun 22 – 27 Sep 29 75,000 164.50 pence 30 Jun 23 – 2 Oct 30 - - - 64.50 pence 110.00 pence 196.00 pence 24,762 64.50 pence 25 Apr 20 – 24 Apr 27 30 Jun 21 – 29 Jun 28 30- Jun 22 – 27 Sep 29 25 Apr 20 – 24 Apr 27 30,000 164.50 pence 30 Jun 23 – 2 Oct 30 40,000 23.75 pence 1 Sep 17 – 31 Aug 21 20,000 64.50 pence 100,000 110.00 pence 50,000 50,000 196.00 pence 164.50 pence 25 Apr 20 – 24 Apr 27 30 Jun 21 – 29 Jun 28 30- Jun 22 – 27 Sep 29 30 Jun 23 – 2 Oct 30 Total 582,618 155,000 (117,301) (555) 619,762 Weighted average exercise price 92.9 pence 164.5 pence 43.2 pence 196.0 pence 120.2 pence ARCONTECH GROUP PLC 50 Notes to the Financial Statements For the year ended 30 June 2021 (continued) 19. Share capital (continued) The number of options exercisable at 30 June 2021 was 359,762 (At 30 June 2020: 310,397), these had a weighted average exercise price of 78.9 pence (2020: 128.98 pence). The weighted average share price as at the exercise date of the shares exercised in the year was 43.2 pence (2020: Nil pence and of the shares were forfeited in the year was 196.0 pence (2020: 64.5). Options granted under the Company’s approved 2002 Share Option Scheme are forfeited when the Optionholder ceases to be a Director or employee of a Participating Company. The Directors may before the expiry of 3 months following cessation of employment permit an Optionholder to exercise their Option within a period ending no later than 12 months from the cessation of employment. The highest price of the Company’s shares during the year was 209.0 pence, the lowest price was 147.5 pence and the price at the year-end was 165.0 pence. The weighted average remaining contractual life of share options outstanding at 30 June 2021 was 7 years (2020: 6 years). Share-based payments The Group operates an approved Share Option Scheme for the benefit of Directors and employees. Options are granted to acquire shares at a specified exercise price at any time following but no later than 10 years after the grant date. There are no performance conditions on the exercise of the options granted prior to 1 July 2018. The performance conditions of those granted after 1 July 2018 which apply to executive directors and certain key staff, are set out below. The options issued in November 2018, September 2019 and in October 2020 will be exercisable from 30 June 2021, 30 June 2022 and 30 June 2023 respectively, dependent on the Company’s compound annual rate of growth in fully diluted earnings* for the three financial years ending 30 June 2021, 2022 and 2023, respectively. Options issued date Exercisable from November 2018 September 2019 October 2020 30 June 2021 30 June 2022 30 June 2023 The Options will vest subject to performance criteria as follows: Dependent on the Company’s compound annual rate of growth in fully diluted earnings* for the three financial years ending 30 June 2021 30 June 2022 30 June 2023 - compound annual earnings growth of 10% or more - fully vested (100%); - compound annual earnings growth between 5%-10% - partial vesting between 0% and 100% on a sliding scale; and - compound annual earnings growth of 5% and below - nil. Any Ordinary Shares arising from the vesting of Options must be held for a period of two years after vesting. * Fully diluted earnings will be based on: (a) the Company’s pre-tax profit excluding exceptional items and the share option charge and (b) the current UK corporation tax rate of 19%, such that the fully diluted earnings calculation takes no account of R&D and deferred tax credits. For the purposes of the fully diluted earnings calculation, the applied rate of corporation tax will remain constant at 19% irrespective of any current or future changes to corporation tax. The fair value of options is valued using the Black-Scholes pricing model. An expense of £115,866 (2019: £98,428) has been recognised in the period in respect of share options granted. The cumulative share option reserve at 30 June 2021 is £271,207 (2020: £188,639). ARCONTECH GROUP PLC 51 Notes to the Financial Statements For the year ended 30 June 2021 (continued) 19. Share capital (continued) The inputs into the Black-Scholes pricing model are as follows: Directors & Employees Grant date Exercise price Expected life Expected volatility Risk free rate of interest Dividend yield Fair value of option 1 Sep 2014 23.75 pence 6 years 65% 0.5% Nil 19.64 pence 25 Apr 2017 64.5 pence 10 years 50% 0.5% Nil 36.7 pence 29 Nov 2018 110.0 pence 10 years 50% 0.75% Nil 57.0 pence 27 Sep 2019 196.0 pence 10 years 50% 0.75% Nil 115.0 pence 2 Oct 2020 164.5 pence 10 years 49% 0.00% 0.01% 91.92 pence Volatility has been estimated based on the historic volatility over a period equal to the expected term from the grant date. 20. Reserves Details of the movements in reserves are set out in the Statement of Changes in Equity. A description of each reserve is set out below. Share premium account This is used to record the aggregate amount or value of premiums paid when the Company’s shares are issued at a premium, net of issue costs, less amounts cancelled by court order. Share option reserve This relates to the fair value of options granted which has been charged to the income statement over the vesting period of the options, less amounts transferred to retained earnings. Retained earnings This relates to accumulated profits and losses together with distributable reserves arising from capital reductions, less amounts distributed to shareholders. 21. Income statement The Company has taken advantage of the exemption provided under section 408 of the Companies Act 2006 not to publish its individual income statement and related notes. ARCONTECH GROUP PLC 52 Notes to the Financial Statements For the year ended 30 June 2021 (continued) 22. Net cash generated from operations - Group Operating profit Depreciation charge Non cash share option charges Lease interest paid Adjustment for IFRS 16 (Increase)/decreas in trade and other receivables (Decrease)/increase in trade and other payables 2021 £ 2020 £ 1,043,361 1,037,812 155,954 115,867 (20,307) - (277,686) (207,630) 154,747 98,428 (26,757) (37,125) 71,244 17,072 Cash generated from operations 809,559 1,315,421 Net cash generated from operations - Company Operating profit Non cash share option charges Increase in trade and other receivables (Decrease)/increase in trade and other payables 2021 £ 274,671 115,867 (82,057) (97,561) 2020 £ 289,274 98,428 (107,891) 40,651 Cash generated by/(used in) operations 210,920 320,462 ARCONTECH GROUP PLC 53 Notes to the Financial Statements For the year ended 30 June 2021 (continued) 23. Related party transactions Group Transactions between the Company and its subsidiaries, which are related parties, have been eliminated on consolidation and are disclosed in this part of the note. Key management compensation Key management are those persons having authority and responsibility for planning, controlling and directing the activities of the Group. In the opinion of the Board, the Group’s key management are the Directors of Arcontech Group PLC. Information regarding their compensation is given in notes 8 and 19 for each of the categories specified in IAS 24 Related Party Disclosures. All emoluments given in notes 8 and 19 relate to short-term employee benefits and there are no post- employment or other long-term benefits. The financial statements include the following amounts in respect of services provided to the Group: Company Transactions between the Parent Company and its subsidiaries during the year were as follows: Management charges payable by subsidiaries £534,094 (2020: £670,640). The amounts due from/to subsidiaries at the balance sheet date were as follows: Amount due from subsidiaries Less: Provision for impairment Amount due from subsidiaries - net 2021 £ 2020 £ 7,223,539 7,324,474 (3,964,671) 3,258,868 (4,150,324) 3,174,150 During the year a provision of £185,654 was released (2020: £177,500) in respect of balances due from subsidiaries. Amount due to subsidiaries 24. Dividends 2021 £ 670,640 670,640 2020 £ 670,640 670,640 A final dividend of 2.75 pence will be proposed at the Annual General Meeting but has not been recognised as it requires approval (2020: 2.5 pence). 25. Material non-cash transactions There were no material non-cash transactions during the period. ARCONTECH GROUP PLC 54 Notes to the Financial Statements For the year ended 30 June 2021 (continued) 26. Financial instruments The Group's financial instruments comprise cash and cash equivalents, and items such as trade payables and trade receivables, which arise directly from its operations. The main purpose of these financial instruments is to provide finance for the Group's operations. The Group’s operations expose it to a variety of financial risks including credit risk, liquidity risk and interest rate risk. Given the size of the Group, the Directors have not delegated the responsibility of monitoring financial risk management to a sub-committee of the Board. The policies set by the Board of Directors are implemented by the Company’s finance department. Credit risk The Group’s credit risk is primarily attributable to its trade receivables. The Group has implemented policies that require appropriate credit checks on potential customers before sales are made. The amount of exposure to any individual counterparty is subject to a limit, which is reassessed annually by the Board. Trade receivables are considered in default and subject to additional credit control procedures when they are more than 30 days past due in line with industry practice. Trade receivables are only written off when there is no reasonable expectation of recovery due to insolvency of the debtor. The carrying amount of financial assets represents the maximum credit exposure. The maximum exposure to credit risk at the reporting date was: Trade receivables Group 2021 £ 330,740 Group 2020 £ 38,162 Company 2021 £ - Company 2020 £ - Cash and cash equivalents 5,395,457 5,006,969 1,077,741 1,146,700 Amounts owed by group undertakings - 5,726,197 - 5,045,131 3,258,868 4,336,609 3,174,250 4,320,950 Interest rate risk The Group has interest bearing assets and no interest-bearing liabilities. Interest bearing assets comprise only cash and cash equivalents, which earn interest at a variable rate. The Group has not entered into any derivative transactions during the period under review. The Group does not have any borrowings. The Group’s cash and cash equivalents earned interest at variable rates, between 0.15% below bank base rate and 0.5% above bank base rate and at fixed/variable rates of between 0.25% and 1.50% (2020: 0.30% below bank base rate and 0.6% above bank base rate and at fixed/variable rates of between 0.35% and 1.85%). Liquidity risk The Group has no short-term debt finance. The Group monitors its levels of working capital to ensure that it can meet its liabilities as they fall due. The Group’s only financial liabilities comprise trade payables and other payables and accruals, excluding deferred income, with a carrying value equal to the gross cash flows payable of £441,018 (2020: £603,874) all of which are payable within 6 months. ARCONTECH GROUP PLC 55 Notes to the Financial Statements For the year ended 30 June 2021 (continued) 26. Financial instruments (continued) Market risk and sensitivity analysis Equity price risk The Directors do not consider themselves exposed to material equity price risk due to the nature of the Group’s operations. Foreign currency exchange risk The Directors do not consider themselves exposed to material foreign currency risk due to the nature of the Group’s operations. All invoices are raised in sterling. Interest rate risk The Group is exposed to interest rate risk as a result of positive cash balances, denominated in sterling, which earn interest at variable and fixed rates. As at 30 June 2021, if bank base rate had increased by 0.5% with all other variables held constant, post-tax profit would have been £26,977 (2020: £25,035) higher and equity would have been £26,977 (2020: £25,035) higher. Conversely, if bank base rate had fallen 0.5% with all other variables held constant, post-tax profit would have been £26,977 (2019: £25,035) lower and equity would have been £26,977 (2019: £25,035) lower. 27. Capital risk management The Group’s objectives when managing capital are to safeguard the Group’s ability to continue as a going concern in order to provide returns for shareholders and maintain an optimal capital structure. The Group defines capital as being share capital plus reserves. The Board of Directors continually monitors the level of capital. The Group is not subject to any externally imposed capital requirements. 28. Ultimate controlling party There is no ultimate controlling party. 29. Copies of this statement Copies of this statement are available from the Company Secretary at the Company’s registered office at 1st Floor, 11-21 Paul Street, London, EC2A 4JU or from the Company’s website at www.arcontech.com. ARCONTECH GROUP PLC 56 PAGE LEFT INTENTIONALLY BLANK PAGE LEFT INTENTIONALLY BLANK Arcontech Group PLC Arcontech Group PLC Arcontech Group PLC Arcontech Group PLC 1st Floor, 11-21 Paul Street 1st Floor, 11-21 Paul Street 1st Floor, 11-21 Paul Street 1st Floor, 11-21 Paul Street LONDON LONDON LONDON LONDON EC2A 4JU EC2A 4JU EC2A 4JU EC2A 4JU tel: +44 (0)20 7256 2300 tel: +44 (0)20 7256 2300 tel: +44 (0)20 7256 2300 tel: +44 (0)20 7256 2300 web: www.arcontech.com web: www.arcontech.com web: www.arcontech.com web: www.arcontech.com email: mail@arcontech.com email: mail@arcontech.com email: mail@arcontech.com email: mail@arcontech.com eport and eport and eport and eport and ear ended 30 June 201 ear ended 30 June 201 ear ended 30 June 2021 ear ended 30 June 2020 

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