dotdigital Group plc
Annual Report 2013

Plain-text annual report

www.dotdigitalgroup.com Annual Report and Accounts 2012/2013 Innovating SaaS Technology and Tools for Marketers Corporate Statement dotDigital Group is the UK market leader in the provision of Email Marketing software to digital marketing professionals. The group’s fl agship product, dotMailer, is a powerful SaaS-based email marketing automation platform used by its clients to engage with their customers to build brand awareness, develop customer loyalty, generate new leads and promote repeat business. Contents Corporate Statement 2013 Key Highlights Chairman ‘s Statement Chief Executive’s Report Corporate Social Responsibility Our Board of Directors Corporate Governance Report Audit Committee Report Remuneration Committee Report Report of the Directors Report of the Independent Auditors b IBC Consolidated Income Statement Consolidated Statement of Comprehensive Income Consolidated Statement of Financial Position Company Statement of Financial Position Consolidated Statement of Changes in Equity Company Statement of Changes in Equity Consolidated Statement of Cash Flows Company Statement of Cash Flows Notes to the Consolidated Financial Statements Company Information 1 2 3 12 14 16 17 18 20 25 26 26 27 28 29 30 31 31 32 IBC 2013 Key Highlights Company Information Directors S Bird P A Simmonds I Taylor G Fidura R Kellett-Clarke F Beechinor-Collins S J Barratt (appointed 9 October 2012) +16% increase in Total Group Revenues Secretary M Patel Registered Offi ce Finsgate 5-7 Cranwood Street London EC1V 9EE Registered Number 06289659 (England and Wales) Auditors Jeff reys Henry LLP Statutory Auditor Continued strong Finsgate net cash generated from 5-7 Cranwood Street operating activites London EC1V 9EE £3.6m Solicitors BPE Solicitors LLP St James House St James Square Cheltenham GL50 3PR Principal Bankers National Westminster Bank plc Charing Cross, London Branch PO Box 113 Cavell House 2a Charing Cross Road London WC2H 0PD Innovating SaaS Technology and Tools for Marketers Registrars Share Registrars Limited Suite E First Floor 9 Lion and Lamb Yard Farnham Surrey GU9 7LL Revenues in SaaS Products up Nomad/Broker N+1 Singer 1 Bartholomew Lane London EC2N 2AX +28% (from £9.5m to £12.2m) Joint Broker Finncap 60 New Broad Street London EC2M 1JJ Website www.dotdigitalgroup.com +21%increase in EBITDA to £4.1m London Bridge 6-8 Emerson Street London SaaS Products division SE1 9DU operating profit increased T: 020 7654 8686 +41% (from £3.2m to £4.5m) Croydon No. 1 Croydon 12-16 Addiscombe Road CR0 0XT +18% T: 020 8662 2762 increase in profit before Manchester exceptionals Pall Mall Court 61-67 King Street Manchester M2 4PD Edinburgh MWB Business Exchange 9-10 St Andrews Square Edinburgh EH2 2AF T: 0131 718 6037 New York Suite 307, 3rd fl oor 350 7th Avenue New York, 10001 United States Strong cash position of T: 1-212-971-940 £6.1m as at 30 June 2013 T: 0161 618 1070 Design and production by Philosophy www.philosophydesign.com Print by Moore Print www.mooreprint.co.uk dotDigital Group Plc Annual Report and Accounts 2012/2013 1 www.dotdigitalgroup.com Annual Report and Accounts 2012/2013Chairman’s Statement Chief Executive’s Report There has been a dramatic increase in the number of clients signing longer-term contracts as well as an increase in monthly spend per client. The core SaaS Products division under the dotMailer brand has performed strongly with revenue growth of 28% and profit before tax growing from £3.2m to £4.5m, an increase of 41%. We are delighted to report that during the 2012/13 financial year dotDigital Group PLC (“dotDigital”) has continued the success of previous years with strong growth in our SAAS email platform business. The Group continues to be cash generative with no debt. There has been a dramatic increase in the number of clients signing longer-term contracts as well as an increase in monthly spend per client. We have made considerable progress in signing larger corporate clients. At the half year we announced that we were reviewing our agency business and how that sits within the Group. That review was completed in the second half of the year. After considering all the strategic options it was decided that we run down the order book and transfer some of the skills and experiences of individuals into the core business. This ensured that we used the opportunity to focus management’s efforts on our core SAAS email business. The impact of this is already evident and reflected in our continued growth and profitability. The Board has recently appointed a new Nominated Advisor and Joint Brokers and I would like to take this opportunity to thank Charles Stanley and Zeus Capital for their efforts in their time as advisors to the business. In the 2012/13 financial year, we will reinvest a proportion of our cash (£6.1m at the year end) to further accelerate the organic growth of the business. We will invest a significant part of those funds in additional sales and marketing resource with particular emphasis on channel sales and overseas sales development. Our New York office is up and running and we hope to accelerate our activities there as well as identifying strategic channel partners in both the UK and further afield. We will also make further investment in our SaaS platform and hardware infrastructure ensuring we maintain our competitive advantage. Whilst we have not ruled out acquisition our focus is very much on organic growth by continued growth in revenues from our existing customers and signing new larger clients on longer contracts. On behalf of all our stakeholders, I would like to thank our employees for their invaluable contribution to another successful year. I would also like to pay tribute to the executive management team for their continued commitment, hard work and passion in developing the business. Divisional Profit & Loss Products 30.6.13 £m Products 30.6.12 £m Sales Cost of Sales Gross Profit Administrative Exp Profit before tax* * Before exceptional items 12.2 0.9 11.3 6.8 4.5 9.5 0.5 9.0 5.8 3.2 Growth % 28 Services 30.6.13 £m Services 30.6.12 £m Central 30.6.13 £m Central 30.6.12 £m Growth % (33) Consolidated Consolidated 30.6.12 £m 30.6.13 £m Growth % 1.6 1.0 0.6 1.1 2.4 0.8 1.6 1.3 0.3 41 (0.5) 0.7 (0.7) 0.7 (0.7) - (275) 13.8 1.9 11.9 8.6 3.3 11.9 1.3 10.6 7.8 2.8 Frank Beechinor-Collins Chairman In addition to the operating loss in this division, the Board have reviewed the goodwill being carried from the Netcallidus acquisition in 2009 and these results contain an exceptional (non-cash) goodwill impairment charge of £2.3m of which £1.3m relates to the impairment of the consideration paid and the balance relating to the contingent consideration that was accured at the date of acquisition but eventually not paid. More detail can be found in the table on page 7. The Company has now fully exited from the services division with the exception of a small number of ecommerce clients where on-going support is being provided, leaving trailing revenues of c£30k per month. Financial Overview As announced in the trading update on 15 August , the Group delivered EBITDA and profits, before exceptional items, ahead of expectations. Total revenues including discontinued operations for the period to 30 June 2013 increased by 16% compared to the same period in 2012 and profit before tax and exceptional items grew by 18%. The table above shows that performance in the core SaaS Products division under the dotMailer brand has performed strongly with revenue growth of 28% and profit before tax growing from £3.2m to £4.5m, an increase of 41%. The consolidated profit for this year was however impacted by the decision, announced at the interim stage, to exit from the Services Division (web design and search) where revenues charged to third parties declined by 33% and profits fell from £0.3m to a loss of £0.5m. 2 Frank Beechinor-Collins Chairman Peter Simmonds Chief Executive and Chief Financial Officer Growth % 16 18 3 dotDigital Group Plc Annual Report and Accounts 2012/2013www.dotdigitalgroup.com Annual Report and Accounts 2012/2013 Chief Executive’s Report continued “I don’t think of dotMailer as a separate organisation, I see them as an integral part of my communications team, delivering a quality service that goes far beyond just taking in content and sending out emails.” o ri F olts, DHL L DHL DHL required an Email Service Provider offering a fully managed service who could provide a streamlined solution for organising and delivering multiple country and language versions of their email campaigns. In a typical sales cycle, which can last from three to nine months, DHL can send out up to four hundred thousand emails across three waves in five different languages and to 40 different countries. Along with the multiple language translations required by DHL, they also needed an email service provider that could react fluidly to the cultural differences of the countries they are dealing with. dotMailer provides DHL Americas with a complete, centrally managed email service, including an email template translation service into five languages. The bespoke email template designs dotMailer created for DHL Americas were designed to maintain and ensure brand consistency and corporate quality standards, whilst delivering further benefits. Talking to Lori Folts, there is no doubt that she is very comfortable with the relationship that dotMailer and DHL Americas have built. “We couldn’t have done that without the dedication, skill and knowledge of dotMailer’s people”. Market Leading Provider of Email Marketing Software dotDigital has grown to become a leader in the provision of intuitive Software-as-a- Service (SaaS) products for digital marketing professionals. Its flagship product, dotMailer, is a powerful email and cross-channel marketing automation platform with easy to use tools that enable large corporations and SME marketers to efficiently create, manage, execute and evaluate effective targeted campaigns. Alongside its SaaS technology, the Group also provides expert email marketing consultancy and services for businesses seeking to maximise customer acquisition, conversion and retention. The Company is headquartered in the UK and employed 140 staff at the end of June 2013. Email is one of the most established online marketing channels and has consistently year on year been in the top performing digital channels for return on investment (ROI), as it can be used effectively to acquire, convert, retain and grow customers. The DMA Email Marketing Council’s 2013 National Client Email report underscores this, with respondents to a poll indicated an average ROI of £21.48 for every £1 spent in 2012 on email marketing. The UK market for email marketing platforms and services was worth £438m in 2012 and will grow by an estimated 13% year-on-year to a value of £495m by the end of 2013. Source: e-Consultancy Value of UK email marketing industry, 2004-2013 This chart shows the growth of the email marketing industry since 2004 £495m £438m £388m £336m £292m £254m £221m £178m £148m £120m 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 (Estimated) Source: e-Consultancy Market Size The UK market for email marketing platforms and services is forecast to be worth nearly £500m this year. Over the last five years, continuing revenues in the Group have grown 457% from £2.5m to £13.8m (year to June 2013) and EBITDA has grown from £0.8m to £4.1m June 2013. This equates to a 5-year CAGR of 41%, which is higher than the market growth in that time, reflecting market share gains. Whilst the Group has always enjoyed a high degree of repeating revenue, much work has been done in the last 18 months to shift its revenues to contractual, recurring revenues (which reduces churn), with the sales team incentivised on total contracted value of deals (so length of deal also a factor). This has had the effect of increasing the overall ratio of monthly billing under contract from 51% in Dec 2011 (49% pay as you go) to 71% in June 2013 (29% pay as you go). In the year to June 2013, 65% of new contracts signed have been on long-term agreements ranging from 12-36 months. dotMailer is a well-established product with over 70,000 users in over 150 countries. Over the last seven years, we have seen strong evidence of the scalability of the Group’s platform with monthly send volumes growing from under 5m sends per month to currently nearly 300m sends per month. The Company has done significant development work on the dotMailer platform over the years, providing continuous innovation and functionality to its users. This includes a highly compelling visual drag and drop email template editor, drag and drop segmentation and query builder, translation of the user interface into eight languages and responsive template toolkits that optimises display content and layout on mobile devices (smartphones and tablets). The Company also has pre-built integrations with best-in-class CRM products and e-commerce platforms such as Salesforce, Microsoft Dynamics, SalesLogix and Magento. dotMailer has a broad customer base, with the five largest clients accounting for approximately 5% of total revenues (top 20 clients less than 15% of total revenue). To some extent, this reflects some of the Group’s historical success in the SME space but increasingly, the Group is gaining solid traction in the mid-to-large corporate market. Example wins in this area include BBC worldwide, e-Consultancy, Harveys, England Hockey Board, Investec, Osprey London, BP International, ITV, Odeon Cinemas, Ryman, Balfour Beatty, EDF Energy, Nationwide, Liverpool Victoria and Michael Page International. dotMailer’s client portfolio includes: 4 5 dotDigital Group Plc Annual Report and Accounts 2012/2013www.dotdigitalgroup.com Annual Report and Accounts 2012/2013Chief Executive’s Report continued Spicerhaart Spicerhaart operates through five well-known estate agencies covering different parts of the UK, including Haart, Spicer McColl, Haybrook, Felicity J Lord and Chewton Rose, together with Darlows in Wales. As well as having a strong high street presence in its designated areas, Spicerhaart uses a wide array of ways to attract customers. These start with the best-known property portals, such as Rightmove and Primelocation, and include a dozen other property portals, together with over 100 regional newspapers, email and a range of web-based applications including tailored apps and social media. “We use our database to keep track of all the applicant details, but the way dotMailer is configured means that it keeps track of unsubscribes or bounced addresses, so won’t email someone unless it knows they are actively open to receiving emails.” As part of the group rollout we are also building a programme that tailors mails to the property buying lifecycle. Matt Dale, explains, “Email is a great way to build awareness. Of course there are many ways people can find out about a property, but getting a picture of a house that perfectly suits your requirements straight to your PC or smartphone, even before it hits the web, is hugely compelling.” “Currently we average around 40% to 50% open rates, and when we’re building a campaign, for example, to launch a new development we can use four or five different messages and easily see which features are most attractive, whether that’s a 5% contribution, part exchange deals, or a choice of kitchen.” a tt D ale, Spicerhaart M 6 Email & Cross-Channel Marketing Automation Services Division On 19 March 2013, following completion of a thorough review of the Group’s Services Division (dotAgency Limitied which had been providing a bespoke website design and search engine optimisation service) the Board announced its plans to gradually wind down activity within this division, which had become non-core. We have managed the exit of this division at a cost to the Group of less than £200k with remaining trailing revenues of around £30k per month being managed by a small team of support staff. As previously disclosed, the remaining goodwill on the acquisition of Netcallidus will be written-off as a one-off non-cash adjustment. Analysis of Netcallidas Acquisition Actual consideration paid Cumulative actual consideration paid Purchase price recognised in financial statement due to IFRS3 Accounting adjustments Impairment - Adjustment to purchase price Finance Income - Adjustment to contingent consideration Impairment - Adjustment to valuation Profit contribution post acquisition Cumulative profit contribution dotMailer’s client portfolio includes: Whilst it is disappointing to exit from this division the additional focus within the business on the core email marketing business has already started to provide tangible benefits in terms of prioritisation of resource allocation and clarity of marketing message. A summary of the financial impact of the acquisition of search engine optimisation business Netcallidus in 2010 is provided below. May 2010 £m 1.0 1.0 June 2012 £m 0.2 1.3 1.2 1.1 June 2010 £m 0.1 1.1 3.5 0.03 0.03 June 2011 £m 1.1 0.2 0.2 December 2012 £m June 2013 £m 1.0 0.5 0.3 0.5 0.8 (0.2) 0.3 7 dotDigital Group Plc Annual Report and Accounts 2012/2013www.dotdigitalgroup.com Annual Report and Accounts 2012/2013 Chief Executive’s Report continued “Now we’re looking forward to using it to bring us closer to our supporters by keeping them informed of things they’re interested in and building on that interest to continue our mission.” s e o r e n H e nson, Help for H e B Help for Heroes One of Help for Heroes (“H4H”) key tools to keep the 500,000 people who have signed up to the Charity informed about events, merchandise and fund raising activities is email. Until the end of 2012, H4H had been using a different platform to drive its campaigns, but the Charity needed something much more dynamic to turn email from a broadcasting tool into a means of targeting precisely specific messages to relevant supporters. To do this it needed a platform that offered seamless integration with its Microsoft Dynamics CRM system. So when they looked at an email platform the ability to integrate seamlessly with MS Dynamics was a key requirement. dotMailer not only stood out as a very powerful and easy-to-use application; it also offered a plug-in that linked directly with MS Dynamics to create a very precise and targetable communications tool. Help for Heroes’ mailing content covers three principal areas – the main Charity, where mailings are primarily about keeping supporters informed and fund raising. ‘Retail’ covers direct sales of a range of H4H branded merchandise that now covers over 500 items, and ‘Events and Challenges’, which as its name suggests, encourages people to take part in and organize events to support the Charity’s work and fundraising. Ben Henson, IT Change Manager explains. “Being able to refine mailings not just by content but by targeting them directly towards those people we know are most likely to respond is going to have a profoundly beneficial effect on the success of email. We’ve already seen that the linking of MS Dynamics and dotMailer offers huge potential for streamlining our operations and reducing costs.” Balance Sheet and Cash Position The Company continues to be strongly cash generative from its operations with the year end cash balance growing, yet again, at the year end by £2.1m to £6.1m. This has also been partly as a result of more effective and efficient cash collection processes and a push towards cash collection via direct debit (approximately 50% at year end). In addition, apart from a small number of operating leases there is no debt finance. Together, this has led to an even stronger balance sheet position at the year end. People In October 2012, we announced the appointment to the Board as non-Executive Director; Simone who has a wealth of relevant sector experience having been Managing Director of e-Dialog UK, an eBay Group Company, for 10 years and more recently President of e-Dialog globally. Focus on organic growth During the year we evaluated a number of potential acquisition opportunities in the email marketing space. However, in the opinion of the Board none of the businesses evaluated were judged to be likely to create long-term shareholder value when integration risks were factored in. Simone’s background, growing a multi- channel marketing platform across EMEA and APAC as well as the US, is proving invaluable as we embark on our international expansion programme. Analysis of historic activities combined with the market leading position of the dotMailer brand has convinced the Board that there is the potential for significant return on investment from hiring additional sales personnel and effective targeted marketing. Therefore our strategy for 2013/14 will focus on successful organic growth and as a business we will invest in cost effective marketing, adding more sales and account management staff and continue to invest in the dotMailer platform to ensure that the significant long-term growth opportunity is maximised. The Board has agreed to allocate up to half of the Group’s current cash to accelerate our organic growth by hiring a further 20-30 sales and account management executives and increasing marketing spend. Dividend Policy I am pleased to report that the Board has conducted a review of the business plan for the next three years including evaluating the cash needs for increased investment in organic growth and has concluded that the business has reached the point where we have sufficient confidence in its on-going cash generation capabilities to commence paying a dividend to shareholders. Therefore, subject to approval at the AGM, the Board proposes that the Company will pay a maiden dividend of 0.1 pence per share, payable at the end of January 2014. With ambitious growth plans for the future the Board believes that hiring the best people and providing a culture where all staff are engaged in the business is vital to the continued success, albeit this will have a short impact on cost/income ratios. The Board’s commitment to an open and honest working environment continues with clear communication of business progress through weekly Company meetings; including an anonymous ‘Ask the Board’ Directors questions slot, regular newsletters, and lunches for new and existing employees with the Board. The Board strives to continue to offer a competitive benefits package in order to attract and retain the best talent, including share option schemes and bonuses based on the Company and individual performances. Total reward statements are now available to all employees to provide complete visibility into the total value of salaries, benefits and rewards earned through the year. dotMailer’s client portfolio includes: 8 www.dotdigitalgroup.com Annual Report and Accounts 2012/2013 dotDigital Group Plc Annual Report and Accounts 2012/2013 9 Chief Executive’s Report continued “We didn’t just want a technology – we wanted a partner that could deliver a complete email service, and one of the first things that stood out about dotMailer is the company’s service-led approach.” b u l C l l a b t o o F e c a l a al P yst M Ik e Sinnerton, Cr Current Trading Performance and Outlook I am pleased to report that for the first three months of the new financial year our new business sales and monthly recurring revenues have been in line with our plans. The strategy, announced in August, to invest in hiring additional sales, account management and marketing staff has resulted in an increase of 12 staff over the last three months and we will start to see the impact of their activities over the coming months. We recently completed an “Investors in Customers” survey on our existing clients and were awarded an “outstanding” rating. This exercise helped highlight some areas where we can continue to make improvements to delight our clients and we will be focussing on these areas in the coming 12 months including aligning staff rewards to levels of client satisfaction. It was particularly pleasing to see that client feedback about our underlying email marketing product was extremely positive and the areas for improvement lie largely in areas where additional training and more segmented approaches to service can be implemented quickly and at relatively low cost. In the first quarter we have seen some notable new customer signings in the UK including Heal’s, Payzone, Paperchase, DMA and Shakespeare’s Globe and in the US we have signed Verifone, AIP and Chromogenex where we are also seeing average order values significantly higher than the UK average. In the US, dotMailer was recently placed in the final three in the GREAT Tech awards sponsored by the UKTI for demonstrating potential to grow in the US market. As sentiment in the UK economic situation improves we are starting to see customers investing in new initiatives and for the first time in some years actually talking about increasing marketing budgets. This should translate into increased spending from our existing customers over the coming years and this combined with continued new client wins with higher average spending patterns than the past years gives rise to confidence about the year ahead. P A Simmonds Chief Executive and Chief Financial Officer dotMailer’s client portfolio includes: Crystal Palace Football Club In 2010, Crystal Palace Football Club demonstrated the power of a strong fan base when Lloyds Bank was persuaded to sell the freehold of its ground at Selhurst Park to a consortium of four local business people determined to secure the Club’s future. One of the new owners’ first moves was to build a management team that could lead a series of initiatives to consolidate and develop the Club’s commercial position. Leading that team, as Chief Executive, is Phil Alexander, a respected figure in the Football League and the FA, whose experience spans both the traditional and American forms of the sport. “Fans are the heart of a football club. They’re the people who come through the turnstiles every week and in football, your gate money is your second biggest revenue after TV, so you need to make sure you build a close and two-way relationship with them.” “To increase that closeness we’ve developed a number of channels that embrace the web, social media and direct communication through SMS and email,” he continues. “It’s all part of building a relationship that goes much deeper than just filling seats.” Mike Sinnerton is the Club’s Assistant Communications Manager, and has the day-to-day responsibility of managing interaction with the different fan bases. “Our record through the turnstiles for a match so far this season is 21,000, but of course not everyone attends regularly. So the challenge for us is to increase our level of engagement right across the fan base. Of course we’d like to see this reflected in higher attendance at matches, but there are many other ways that people can feel part of the club.” 10 11 dotDigital Group Plc Annual Report and Accounts 2012/2013www.dotdigitalgroup.com Annual Report and Accounts 2012/2013 Corporate Social Responsibility Report During the past year the Group continued with its on-going commitment to social responsibility in the market in which it operates, to its employees, suppliers and to the broader environment. Employees The Group has continued to invest in the development of our people across the Group thus underpinning the critical role that our employees play in the success of the business. Clients The Company prides itself on ensuring that our products and services are designed to meet the expectations of our clients and their customers. Feature forums are offered to allow clients to request features and vote on feature priority, which feeds directly into the development schedules for our SaaS product offerings. The Group is committed to complete transparency with our clients, providing pricing structures that are clear, and offering packages that allow clients to deliver successful campaigns. A pricing calculator is provided for dotMailer licenses and packages to allow clients and potential clients to cost their campaigns and our experienced sales team are able to assist clients in pricing guidance across all our products and services. dotMailer is also offered with a money- back guarantee to give clients maximum confidence in our products and services. dotDigital products and services are supported by an expert team; giving access to support via email, telephone and live chat. We also provide additional managed services for our products, enabling our clients to deliver successful campaigns and projects. The Board has significantly enhanced the training and development program available, to provide all employees with access to bespoke key skills training, as well as continuing specific skills development in areas relating to the industry we operate in and professional skills development. The Group now has a greater percentage of employees than ever before studying towards and achieving professional qualifications, equipping themselves and the business with specialist expertise. The Board’s commitment to an open and honest working environment continues with clear communication of business progress through weekly Company meetings; including an anonymous ‘Ask the Board’ Directors questions slot, regular newsletters, and lunches for new and existing employees with the Board. The Board strives to continue to offer a competitive benefits package in order to attract and retain the best talent, including share option schemes and bonuses based on Company and individuals performance. Total reward statements are now available to all employees to provide complete visibility into the total value of salaries, benefits and rewards earned through the year. It is the policy of the Group to ensure that at all times there are equal opportunities for all employees with no discrimination on account of race, age, gender, sexual orientation, disability and political or religious beliefs. Our philosophy is to ensure that ability, contribution to the business and potential to develop are the determining factors in the selection, training, career development and promotion of all employees. Investment in our offices continues, ensuring both a pleasant and safe working environment for all employees. Above all, the Board continually monitor that our work places are safe and comply with all relevant legislation; the Group has not been subject to sanctions or fines for environmental, health and safety or other infringements. Community Our roots within our community are very important, the Board are committed to working with our local and wider communities across our various sites to continue to build the connections that have been developed over the years. dotDigital feels strongly in not only giving back to our community but the software development industry as a whole which is why this year we began supporting Code Club a nationwide network of volunteer-led after school clubs that teach children aged 9-11 computer coding skills. Some of the activities we supported in the past year included the Board pledging donations in conjunction with our entry to the Sunday Times 100 Best Companies and donating gifts at Christmas time to this charity. The Group also offers its products and services to all charities at preferential rates, and we’re very proud of our strong client base of charitable organisations including The Disabilities Trust, the Fairtrade Foundation and SeeAbility. This year the Board has increased the commitment to sponsoring Louise Cook, the British Female Rally Champion. Louise masterminded a unique sponsorship program to allow her to race and the Board are delighted to be able to support her on-going successes on the rallying circuit. Within our local communities the Company provides work experience and internship opportunities for local students and we actively recruit within the local talent pool. The Company continues to allow paid time off for all employees to volunteer on a number of programs, including local environmental projects and fund raising events. Risks The Board is cognisant of the need to monitor potential threats to the business and our workforce. To this end the Board has established a Risk Committee consisting of both non-Executive Directors and management. This committee meets regularly to evaluate on-going risks to the business and this includes risks posed both to our employees and any potential risks to the business from suppliers and partners. Any recommendations by this committee are put directly to the Board for further discussion and implementation. Environment The very nature of dotDigital business activities works to move our clients away from traditional paper-based marketing methods by providing digital marketing channels, through email marketing, online surveys and by enhancing digital presences through websites and other online profile drivers. Our modern offices are optimised to deliver an environmentally-friendly working environment, from power saving lights that are linked to motion sensors to low energy modern equipment. Our on-going investment in our IT infrastructure means that the Group is continuously improving upon our environmental impact. Extensive recycling facilities are provided and along-side day to day waste recycling, we also ensure old furniture or IT equipment are recycled or reused. The Group actively aims to reduce the amount of consumables used and source our products responsibly, for example our cleaning suppliers use eco-friendly cleaning consumables. Our employees are encouraged to travel for business by public transport where possible to reduce transportation emissions. Suppliers As a part of the Group’s strong commitment to our local community we aim to source local suppliers wherever possible. This is underlined by the fact that a number of our suppliers have been with the Company for many years and we consider our key suppliers as partners. dotDigital aims to work with partners and suppliers with similar ethical standards and values. At dotDigital we understand the importance or fair and equal treatment, and particularly drive towards transparent and fair payment terms and processes. 12 13 dotDigital Group Plc Annual Report and Accounts 2012/2013www.dotdigitalgroup.com Annual Report and Accounts 2012/2013Our Board of Directors Peter Simmonds FCCA, aged 55 Chief Executive and Finance Director Peter Simmonds FCCA commenced his career in 1976 as a trainee accountant with Unilever Plc and has over 30 years of experience at senior management and board level, principally in the areas of banking, insurance, finance, IT, outsourcing and software. As well as large company experience he has considerable entrepreneurial experience having been involved at start up or early stage of a number of companies in various industry sectors including consultancy services, vehicle leasing, software and internet solutions. As well as being an experienced finance professional Peter has considerable experience of acquisitions, disposals, post-acquisition integration, change management and creating a cultures and structures to facilitate entrepreneurship and growth. 14 Simon Bird, aged 37 Chief Technical Officer Simon Bird has developed an in depth technical knowledge of the internet and its applications. Prior to co-founding dotDigital Group he assisted in the development of a major internet access provider. He has provided services to a number of well known companies and organisations in helping create websites, intranets, extranets, content management systems and other online solutions. “Tink” Ian Taylor, aged 40 Chief Operating Officer Tink Taylor has many years experience in the field of interactive electronic communications. Tink has wide ranging experience in introducing the concept of digital marketing to companies large and small. He is an elected member of the Direct Marketing Association’s Email Marketing Council and also a member of the Internet Advertising Bureaus E-communications Council. Tink was a judge for the Email and Virals category at the DMA awards 2008. “Skip” Gorden Fidura, aged 44 Client Services Director Skip Fidura joined the dotDigital Group in January 2009 with a remit to build our digital strategy services offering. Skip’s been in marketing for over 14 years, most recently as Email Partner at OgilvyOne London and prior to that as the Director of European Operations for Acxiom Digital. He has worked with clients such as BT, Kodak, hp, Intel, and Travelocity. co.uk. Skip is also Vice-Chairman of the UK DMA Email Marketing Council and was listed by Revolution Magazine as one of the 50 most influential people in new media. Our Non Executive Directors Frank Beechinor, aged 49 Non-Executive Chairman Frank Beechinor, was for 11 years, CEO of One Click HR, an AIM quoted IT/Human Resources business of which he was a Co- founder. The Company operated in the UK and North America and had around 200 employees. Frank oversaw the successful sale of the business to ADP, a $4bn NYSE listed company, for US $25m. In notable addition, Frank was for 5 years, Operations Director of GMCS, part of Grand Metropolitan, a UK based training services provider, with several thousand employees. Frank brings a great deal of corporate experience to the Board, gained over 25 years of working for and running public and private companies. Frank has a strong track record in M&A and brings with him a quality network of contacts in the fields of managed services and Software as a service. Simone Barratt, aged 53 Non-Executive Director Simone Barratt has over 15 years’ experience of ecommerce and online marketing. She has grown businesses to multi $m from incorporation. She has International expansion experience in Europe and the Asia Pac. She was appointed Global President of e-Dialog Inc an Ebay company in 2011 with Income Statement responsibility for just under $100m business across USA, EMEA and APAC and 450 employees. Richard Kellett-Clarke FCA, aged 58 Non-Executive Director Richard Kellett-Clarke brings to the board over 30 years of management experience in the turn round and strategic repositioning and recovery of creative businesses in CMCG, media, electronics and software industries. He was a founder of AFX NEWS Limited, now part of Thomson Reuters, and Sealed Media, now owned by Oracle. He has held numerous CFO roles in subsidiaries of large PLC’s as well as the role of IT Director at Financial Times Information. He was part of the team as CFO which brought Picwick Group PLC to the main market and Brady Plc to AIM. He is currently the CEO of Idox Plc an AIM listed specialist software, solutions and KM consultancy business. Our Company Secretary Milan Patel ACCA ACSI, aged 29 Company Secretary & Financial Controller Milan joined the Company in 2007 and was appointed Group Company Secretary in 2009. Milan is a member of the Association of Chartered Certified Accountants, an associate member of the Chartered Institute of Securities and Investments and holds a B.A (Hons) degree in Accounting and Finance. Milan has over 8 years experience in Accounting and Finance within the Digital Media, Technology and Logistics industry. He has been responsible for the financial and legal aspects of the reverse acquisition of West End Ventures PLC, admission to Plus and the introduction to AIM. He is also responsible for the Group’s functions in financial management & reporting, regulatory compliance, legal and corporate governance. 15 dotDigital Group Plc Annual Report and Accounts 2012/2013www.dotdigitalgroup.com Annual Report and Accounts 2012/2013 Corporate Governance Report Audit Committee Report The Board have decided to provide corporate governance disclosures in accordance with the principles and provisions of “The Combined Code: Principles of Good Governance and the Code of Best Practice” (“the Code”). As part of this process Turnbull guidelines set out in “Guidance for Directors on the Combined Code” have also been reviewed and are covered under “Internal control” below. An explanation of how dotDigital Group Plc (the “Group”) has applied the principles and the extent to which the provisions in the Code have been complied which appears below. Compliance statement (a) Directors The details of the Group’s Board, together with the audit and remuneration committees, are set out on page14, 17 and 18. The Board meets monthly and is responsible for strategy, performance, approval of major capital projects and the framework of internal controls. The Board has a formal schedule of matters reserved for specific review and decision. To enable the Board to discharge its duties, all Directors receive appropriate and timely information. Briefing papers are distributed to all Directors in advance of Board meetings. All Directors have access to the advice and services of the Company Secretary, who is responsible for ensuring that Board procedures are followed and that applicable rules and regulations are complied with. At the year end there were four Executive Directors, two independent Non-Executive Directors and an independent Non-Executive Chairman. The current constitution of the remuneration committee and the audit committee is shown on page 17 and 18. Appointments to the Board are nominated by an Executive Director and then considered by the full Board. The service contracts of the Executive Directors are less than one year and determinable by six months notice. (b) Directors’ remuneration As set out on page 18 and the remuneration of the Executive Directors is determined by the Remuneration Committee whilst that of the Non-Executives is determined by the whole Board. The Directors are conscious of the importance of performance related incentives and bonuses are paid based on performance as deemed appropriate by the remuneration committee. The remuneration committee use both financial and non- financial benchmarks to determine the Executive Director bonuses. (c) Relations with shareholders The Group encourages two-way communications with all its shareholders and responds quickly to all requests or queries received. All shareholders have at least twenty one working days’ notice of the annual general meeting at which all of the Directors and the Chairman are normally available for questions. Comments and questions are encouraged from the shareholders at the meeting. (d) Accountability and Audit (i) Financial reporting Detailed reviews of the performance and financial position of the Group are included in the Chief Executive’s statement. The Board uses this and the Directors’ report on pages 20 to 24 to present a balanced and understandable assessment of the Group’s position and prospects. The Directors’ responsibility for the financial statements is described on page 24. (ii) Internal control The Board confirms that it has established the procedures necessary to implement the guidance set out in “Internal Control: Guidance for Directors on the Combined Code”. The process of risk identification, evaluation and management has been considered by the Board. It is the intention that this will continue to be kept under constant review and will be considered at each board meeting in the future. The Board is continuing to take steps to embed internal control and risk management further into the operations of the business and to deal 16 with areas of improvement which come to management and the Board’s attention. The Directors acknowledge their responsibilities for the Group’s system of internal financial control. Such a system can provide reasonable but not absolute assurance against material misstatement or loss. The Board confirms that the procedures necessary to comply with the provisions of the Code, including the guidance of Turnbull, have been in place throughout the year ended 30 June 2013 and up to the date of the Directors’ report. It has considered the major business risks and the control environment. Important control procedures, in addition to the day to day supervision of the business, include comparison of monthly management accounts to the budget. (iii) Audit committee and auditors The Audit Committee comprises of Frank Beechinor-Collins and is chaired by Richard Kellett-Clarke. The auditors of the Group may also attend part or all of each meeting and they have direct access to the committee for independent discussions, without the presence of the Executive Director if required. The audit committee may examine any matters relating to the financial affairs of the Group, and to the Group’s audit. This includes reviews of the annual accounts and announcements, accounting policies, compliance with accounting standards, the appointment and fees of auditors and such other related functions as the Board may require. (iv) Going concern basis After making enquiries, the Directors have formed a judgment, at the time of approving the financial statements, that there is a reasonable expectation that the Group has adequate resources to continue in operational existence for the foreseeable future. For this reason the Directors continue to adopt the going concern basis in preparing the financial statements. The Audit Committee is a sub-committee of the Board. The responsibilities of the committee include: • Reviewing the half-yearly and full year accounts and results announcements of the Company and any other formal announcements relating to the Company’s financial performance and recommending them to the Board for approval; • Reviewing the Group’s systems for internal financial control and risk management; • Monitoring and reviewing the effectiveness of the Group’s internal accounting function and considering regular reports which arise; • Considering the appointment of the external auditors, overseeing the process for their selection and making recommendations to the Board in relation to their appointment to be put to shareholders for approval at a general meeting; • Monitoring and reviewing the effectiveness and independence of the external auditors, agreeing the nature and scope of their audit, agreeing their remuneration, and considering their reports on the Group’s accounts, reports to shareholders and their evaluation of the systems of internal financial control and risk management. Composition of the Audit Committee The Audit Committee comprises of Frank Beechinor-Collins and Richard Kellett-Clarke. The Chairman of the Audit Committee is Richard Kellett-Clarke. The Committee meets separately with the external auditors without management being present. Independence of External Auditors Both the Board and the external auditors have safeguards in place to avoid the possibility that the auditors’ objectivity and independence could be compromised. Our policy in respect of services provided by the external auditors is as follows: • Audit related services – the external auditors are invited to provide services which, in their position as auditors, they must or are best placed to undertake. This includes formalities relating to borrowings, shareholders’ and other circulars, various other regulatory reports and work in respect of acquisitions and disposals; • Tax consulting – in cases where they are best suited, we use the external auditors. All other significant tax consulting work is put out to tender; • General consulting – in recognition of public concern over the effect of consulting services on auditors’ independence, our policy is that the external auditors are not invited to tender for general consulting work. Internal management accounting The Audit Committee reviewed the performance of the internal accounting function, the department’s resource requirements and also approved the internal budgets for the year ended 30 June 2013. The Committee concluded that these budgets were both prudent and realistic in the context of the Group’s ambitions. The Secretary to the committee is Milan Patel, the Company Secretary. Main Activities of the Audit Committee At its meeting on the 2 October 2013, the Committee reviewed the Group’s preliminary announcement of its results for the financial year 30 June 2013 and the draft report and accounts for that year. The Committee received reports from the external auditors on the conduct of their audit, their review of the accounts, including accounting policies and areas of judgment, and their comments on risk management and control matters. The Group’s corporate social responsibility reporting arrangements and procedures were also reviewed. The external auditors also presented their proposed fees and scope for the forthcoming year’s audit. The Committee also reviewed the performance of both the internal accounting function and external auditors. The review of the external auditors was used to confirm the appropriateness of their reappointment and included assessment of their independence, qualification, expertise and resources, and effectiveness of their audit process. The Audit Committee also reviewed the effectiveness of the Company’s systems for internal financial control and risk management. The Committee reviewed the Group’s credit control procedures and risks concerning IT controls. Richard Kellett-Clarke Chairman of the Audit Committee 17 dotDigital Group Plc Annual Report and Accounts 2012/2013www.dotdigitalgroup.com Annual Report and Accounts 2012/2013Remuneration Committee Report The Remuneration Committee The Remuneration Committee was established to keep under review the remuneration and terms of employment of Executive Directors and to recommend such remuneration and terms and changes thereof to the Board. The Committee’s composition, responsibilities and operation comply with the Combined Code. In forming its remuneration policy, the Committee confirms that it has complied with the Combined Code. The Committee comprised Richard Kellett-Clarke (Chairman) and Frank Beechinor-Collins. The Secretary to the committee is Milan Patel, the Company Secretary Remuneration Policy The Group’s executive remuneration policy objectives are: (a) To ensure that individual rewards and incentives are directly aligned with the performance of the Group and that of the interests of the shareholders; (b) To maintain a competitive program which enables the Group to attract and retain high calibre executives; and (c) To determine the terms of employment and remuneration for Executive Directors. Key Elements of Remuneration for Executive Directors The Committee considers the key elements in total to ensure there is the right balance between reward for short term success and long term growth. For Executive Directors, this is summarised as follows: Base Pay Reviewed against: • Salary levels in comparable sized companies listed on AIM; • Market Conditions and Company performance; • Level of pay awards in rest of the business; • Role and responsibility of the individual Director. Benefits • Aligned to total reward structure for all employees; • Provided on a market competitive basis. Annual Bonus Scheme • Group PBT with an individual performance element linked to object delivery; • Drive profitability and strategic change across the Group; • Delivery of the overall business strategy. Service Contracts On 7 January 2009, the Executive Directors each entered into a service contract with the Group, the terms of which commenced upon Admission to PLUS Markets on the 2 February 2009. Each appointment runs for one year from that date and is terminable by six months’ notice by either party to expire at the end of that year or at any time thereafter. The agreement contains restrictive covenants. Upon termination, no benefits (other than those accruing during the notice period) are due to the Director. Employee Incentive Schemes The Group has awarded share options under EMI, approved share option schemes to key employees who had completed their probation period at the date of grant. The board considers the performance of staff in conjunction with the Group during the, bi-annual review process. Discretionary bonuses are awarded based on individual and Group performance. Approved by the Remuneration Committee Signed on its behalf by Directors’ Emoluments Executive Director P Simmonds I Taylor S Bird G Fidura Non Executive Directors F Beechinor-Collins R Kellett-Clarke S J Barrett Executive Director P Simmonds I Taylor S Bird G Fidura Non Executive Directors F Beechinor-Collins R Kellett-Clarke N Nelson Salary/Fees £’000 12 month period ended 30.6.13 Bonus £’000 Benefits £’000 Pension £’000 Mean Remuneration of AIM profitable companies* £’000 Total £’000 306 120 111 111 80 422 11 7 7 4 29 50 50 50 - 150 11 11 11 2 35 Salary/Fees £’000 Benefits £’000 Bonus £’000 Pension £’000 35 30 23 88 - - - - - - - - - - - - 192 179 179 86 636 Total £’000 35 30 23 88 Salary/Fees £’000 12 month period ended 30.6.12 Bonus £’000 Benefits £’000 Pension £’000 Mean Remuneration of AIM profitable companies* £’000 Total £’000 281 110 110 110 77 407 Salary/Fees £’000 35 32 18 85 5 7 7 4 23 Benefits £’000 - - - - 40 40 40 12 132 Bonus £’000 - - - - 11 11 11 2 35 Pension £’000 - - - - 166 168 168 95 597 Total £’000 35 32 18 85 * Mean remuneration for AIM profitable companies is based on Vitesse Media Research report of Directors’ Pay 2013 Director Interests The respective interests, all of which are beneficial, in the shares of the Company for the members of the Board at the year end and subsequent to that date are stated below: Richard Kellett-Clarke Chairman of Remuneration Committee Director P Simmonds* I Taylor S Bird F Beechinor-Collins S J Barratt No. of Shares held as at 30.6.13 % Holding 16,073,841 49,876,667 41,876,667 674,194 215,000 108,716,369 5.79 17.98 15.09 0.24 0.08 39.18 * 3.27% of Peter Simmonds holdings/voting rights has been held by Frank Nominees Limited who acts as the nominee for Alliance Trust Pensions Limited, which is the trustee of a SIPP established by Peter Anthony Simmonds. Frank Nominees is the vehicle used by Kleinwort Benson Limited to hold securities for clients, trusts, SIPP’s etc. The beneficiary of the SIPP is Peter Anthony Simmonds. Directors’ Interest in Share Options Under the Group’s executive share option scheme the following Directors have the right to acquire Ordinary shares. Executive Director G Fidura Grant Date 22/10/2009 11/11/2010 13/10/2011 No. of Share options granted Option Price (Pence) Date First Exercisable Expiry Date 800,000 800,000 537,932 5.000 5.125 7.250 01/07/2010 01/02/2019 01/05/2012 31/12/2015 01/05/2013 01/02/2016 19 18 dotDigital Group Plc Annual Report and Accounts 2012/2013www.dotdigitalgroup.com Annual Report and Accounts 2012/2013 Report of the Directors The Directors present their report with the financial statements of the Company and the Group for the year ended 30 June 2013. Principal Activity The principal activity of the Group in the year under review was that of providing intuitive software as a service (“SaaS”) and managed services to digital Marketing professionals. Review of Business During the year the Group has shown significant growth from continuing operations in customer numbers, sales, and profits. Revenues grew from £9.5m in the year ended June 2012 to £12.2m for the year ended June 2013, an increase of 28%. Pre-tax profits grew from £2.4m in 12 months to June 2012 to £4.0m for the year ended June 2013; an increase of 67%. On 19 March 2013, following completion of a thorough review of the Group’s Services Division, dotAgency, the Board announced its plans to gradually wind down activity within this division, which had become non-core. We have managed the exit of this division at a cost to the Group of less than £200k with remaining trailing revenues of around £30k per month being managed by a small team of support staff. As previously disclosed, the remaining goodwill on the acquisition of Netcallidus will be written-off as a one-off non-cash adjustment. Key Performance Indicators The operations as a whole and the individual business units are managed and controlled using a variety of key performance indicators appropriate to the goals they have been set. Examples of key performance indicators from the Group are: Revenue EBITDA Volume of Sends Recurring revenue as a % 2013 £m 13.8 4.1 2,645 75 2012 £m 12.0 3.4 1,828 70 % Increase 16% 21% 45% Key Risks & Uncertainties (i) Supplier, computer hardware and internet reliability related risks The Group rents space for its servers located at hosting centres and purchases bandwidth from service providers in the UK to run the software and services it supplies. Although, it spreads the risk of computer hardware failure across multiple servers in multiple hosting centres and to date, there have been no significant failures, there is no assurance of continuity of supply. An event resulting in a hosting centre going off-line for any significant period of time or the termination of provision of services by one of those hosting centres for any reason may result in significant loss of revenues and therefore materially harm the Group’s business, operating results and financial condition. Similarly, events preventing or obstructing the servers from communicating over the internet, such as the future availability of a finite number of IP addresses, may restrict the capacity of the business. (ii) ISP reputation related risks A significant proportion of the Group’s revenue is currently derived by charging a price per email for sending marketing emails on behalf of commercial marketing departments. The largest volume senders of emails tend to be companies sending to consumers. Consequently some of dotMailer’s largest customers send large numbers of emails to consumers. The EU anti-spam regulations and US CAN_SPAM laws place restrictions on what and when companies are allowed to send marketing emails to consumers. dotMailer rents the use of its software and servers for clients to upload their own email lists and send their email marketing campaigns. dotMailer acts as the data processor in all instances and neither owns lists nor provide third parties with data and is therefore not directly liable for any breaches of the EU or US anti-spam regulations. However, where clients are considered by email recipients to be sending unwanted emails, there is an inherent mechanism within most email clients to make a complaint against the sender. The level or number of complaints is recorded by the larger ISP’s (Hotmail, Yahoo, AOL etc) against the IP address of the server sending the email; this complaint rate record establishes the reputation of each IP address. An IP address with a poor reputation may not get a high level of delivery of emails. dotMailer closely monitors the complaint rates for each of its clients and reacts quickly and accordingly to stop rogue campaigns. However if too many new clients create and send campaigns which attracted high complaint rates, the reputation of dotMailer’s sending IP addresses could be diminished. This diminished reputation could affect dotMailer’s ability to win or retain new clients and therefore could significantly affect its planned growth in revenues. dotMailer also faces risks from commercial and non-commercial anti spam services. There are a number of organisations who provide a service to individuals and companies to help them reduce spam in their inbox; examples include Spamhaus and Spamcop. These organisations allow individuals to report an email as spam. This reporting can rapidly propagate the blacklisting of an IP address or domain used to send the reported email. This could impact on dotMailer’s ability to deliver emails on behalf of other clients which could in turn impact on revenues.It is also to be noted that as the ISP communities adopt ever tougher measure to deal with the problem of spam there is a risk that genuine marketing emails could be falsely labelled as spam and do not get delivered to the intended recipients. (iii) Hacking & information security Although in the opinion of the Group’s Directors, the technical team at the Group takes sensible precautions against intrusions and loss of data and dotMailer employs a security manager to mitigate this risk, there is a possible risk that a hacking attack could result in a denial of service or loss of data. (iv) Competitive environment Although the Group’s revenues have consistently grown year on year, it competes in a competitive sector. Some of its competitors and potential competitors may have advantages over it in terms of financial backing, business size, broader brand recognition and coverage of other geographic markets globally. Their capacity to leverage their marketing expenditures across a broader range of potential customers, form relationships with brand owners or make acquisitions of complimentary products inherently increases the risk to the Group‘s business model. (v) Hire and retain key personnel The Group depends on the continued contributions of the Group’s senior management and other key personnel. The loss of the services of any of these executive officers or other key employees could harm the Group’s business. The future success of the Group also depends on its ability to identify, attract and retain highly skilled technical, managerial and sales personnel. The Group faces intense competition for qualified individuals from numerous technology and marketing companies. (vi) Development of products The digital marketing industry is fast paced and rapidly adopts developing technologies. In order to stay competitive the Group needs to deploy resources to research and development activity and to constantly innovate. The Group’s growth will depend upon the development, commercialisation and marketing of new products. If this is not done successfully, then the growth of the Group may be impaired. There is also a risk that this activity may not result in a leading edge or competitive products being brought to market in time to maintain a competitive advantage. The Group may be unsuccessful in its efforts to develop products.Whilst the Group will continue to strive to ensure it is able to deliver products and services that meet the needs of its target clients, there is a risk that competitors may be first to the market with products that entice clients away from dotMailer. (v) Data Privacy Evolving data privacy regulations around the world may restrict our clients’ ability to collect, process, disclose and use personal information for marketing purposes which may impact on the use of digital marketing or its effectiveness. Governments and supervising authorities have enacted and may in the future enact, laws and regulations concerning the solicitation, collection, processing, disclosure or use of consumers’ personal information. Evolving and changing regulations regarding personal data and personal information, both within the European Union and elsewhere, especially relating to classification of IP addresses, machine identification, location data and other information, impact our business. Such laws and regulations require or may require us and our clients to implement privacy and security policies, permit consumers to access, correct or delete personal information stored or maintained by such companies, inform individuals of security incidents that affect their personal information, and, in some cases, obtain consent to use personal information for certain purposes. Other possible legislation could, if enacted, impose additional requirements and prohibit the use of certain technologies, such as those that track individuals’ activities on web pages or record when individuals click on a link contained in an email message. Such laws and regulations could restrict our clients’ ability to collect and use email addresses, web browsing data and personal information, which may reduce demand for our solutions. 20 21 dotDigital Group Plc Annual Report and Accounts 2012/2013www.dotdigitalgroup.com Annual Report and Accounts 2012/2013 Report of the Directors continued (v) Evolving Technology and customer requirements Failure to respond to evolving technological and customer requirements or to introduce competitive enhancements and new features, our SaaS solutions could become less competitive. To remain a credible provider of multi-channel marketing SaaS solutions, we must continue to invest in research and development of new solutions and enhancements to our platform. The process of developing new technologies, products and services is complex and expensive and requires highly skilled and talented software engineers and marketing expertise. SaaS development requires implementation of rapidly changing technologies, adhering to standards and regulations, anticipating client requirements and frequent product enhancements. The introduction of new solutions by competitors potentially makes our solutions less attractive or easy to sell. The success of our planned enhancements and new solutions depend on many factors, including user interface design, quality assurance testing, customer acceptance and training and good marketing communication. Failure to anticipate client requirements and successfully develop new solutions or features may impact growth and retention of existing clients. Dividends The Board recommend the payment of a final dividend of 0.1p per ordinary share. The Board’s dividend policy will be reviewed annually in line with ensuring there is adequate cash within the business to maintain high growth strategy. Future Outlook The Group provides email and cross-channel marketing technology and services. Each of these areas have shown market growth significantly above that of the UK economy. The Board believes that our widespread brand recognition and strong product will continue to present opportunities to expand and diversify profitability in the coming year. Directors The Directors shown below have held office during the whole of the period from 1 July 2012 to the date of this report. • S Bird • P A Simmonds • I Taylor • G Fidura • R Kellett-Clarke • F Beechinor-Collins • S J Barratt (appointed 9 October 2012) Group’s Policy on Payment of Creditors The Group does not have a formal code that it follows with regard to payments to suppliers. It agrees payments terms with its suppliers at the time it enters into a binding contract for the supply of goods and services. The Company seeks to abide by these payment terms whenever it is satisfied that the supplier has provided the goods or services in accordance with the agreed terms. Publication of Accounts on Company Website Financial statements are published on the Company’s website. The maintenance and integrity of the website is the responsibility of the Directors. The Directors’ responsibility also extends to the financial statements contained therein. Indemnity of Officers The Group purchases Directors and officers insurance against their costs in defending themselves in legal proceedings taken against them in that capacity, and in respect of damages resulting from the unsuccessful defence of any proceedings. Financial Instruments Details of the Group’s risk management objectives and policies together with its exposure to financial risk are set out in Note 21 to the financial statements. The purpose of the policies is to ensure that adequate cost effective funding is available to the Group and exposure to financial risk - interest rate, liquidity and credit risk is minimised. Research and Development In the markets in which the Group operates, effective research and development is vital to maintaining competitive advantage and securing future income streams. Going Concern After making appropriate enquires, the Directors consider that the Company and the Group has adequate resources to continue in operational existence for the foreseeable future. For this reason they continue to adopt the going concern basis preparing the financial statements. Events After the Reporting Period There are no events after the date of this report or the date the financial statements were approved by the board of Directors which impact on the figures as presented. Listing The Group’s ordinary shares have been traded on London Alternative Investment Market (AIM) since 29 March 2011. N+1 Singer are the Group’s nominated advisors and together with Finncap are the joint brokers. The closing mid market share price at 30 June 2013 was 14.875p (2012: 11.25p). 22 The Directors who served during the period and their beneficial interests in the shares of the Group as recorded in the Register of Directors’ interests at 30 June 2013 are as follows:- Directors S Bird I Taylor P Simmonds G Fidura F Beecher-Collins S Barratt R Kellett-Clarke 30.6.13 Number of shares held Percentage Shareholding % 30.6.12 Number of shares held Percentage Shareholding % 41,876,667 49,876,667 16,073,841* - 674,194** 215,000 - 15.09 17.98 45,860,000 53,876,667 5.79 19,959,999* - 0.24 0.08 - - 674,194** - - 16.25 19.57 7.25 - 0.20 - - * Frank Nominees Limited holds 3.27% in respect of Peter Simmonds holding/voting rights act as nominee for Trust Alliance Pensions Limited. Frank Nominees is a vehicle used by Kleinwort Benson Limited to hold securities for clients, trusts, SIPPs etc. The beneficiary of the SIPP is Peter Anthony Simmonds. ** The 674,194 share shown as being held by Mr Beechinor-Collins are owned by Curra Trust, a trust established for the benefit of his children and which he has no beneficial interest. The Directors who served during the period and their beneficial interests in share options in the Group, as recorded in the register of Directors’ interests as at 30 June 2013 are as follows:- Executive Directors G Fidura 30.6.13 Number of options held 30.6.12 Number of options held 2,137,930 2,137,930 Substantial Interests On 10 October 2013, the following parties had notified the Group of a beneficial interest that represents 3% or more of the Group’s issued share capital at that date: Shareholders I Taylor S Bird Legal and General Group PLC Investec P Simmonds Lion Trust Newedge Group SA 2013 Number of shares held Percentage Shareholding % 49,876,667 41,876,667 19,192,000 22,000,000 16,073,841 14,101,527 11,361,000 17.98 15.09 6.92 7.93 5.79 5.08 4.09 23 dotDigital Group Plc Annual Report and Accounts 2012/2013www.dotdigitalgroup.com Annual Report and Accounts 2012/2013 Report of the Directors continued Report of the Independent Auditors Auditors The auditors, Jeffreys Henry LLP, will be proposed for re-appointment at the forthcoming Annual General Meeting. On behalf of the Board P A Simmonds Director 14 October 2013 Statement of Directors’ Responsibilities The Directors are responsible for preparing the Report of the Directors 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 International Financial Reporting Standards as adopted by the European Union. 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 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 judgements and accounting estimates that are reasonable and prudent; • state whether the Group and Parent Company financial statements have been prepared in accordance with IFRS’s as adopted by the European Union subject to any materials departures disclosed and explained in the financial statements. • prepare the financial statements on the going concern basis unless it is inappropriate to presume that the Company will continue in business. The Directors are responsible for keeping adequate accounting records that are sufficient to show and explain the Company’s and the Group’s transactions and disclose with reasonable accuracy at any time the financial position of the Company and the Group 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 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. Statement as to Disclosure of Information to Auditors So far as the Directors are aware, there is no relevant audit information (as defined by Section 418 of the Companies Act 2006) of which the Group’s auditors are unaware, and each Director has taken all the steps that he ought to have taken as a Director in order to make himself aware of any relevant audit information and to establish that the Group’s auditors are aware of that information. We have audited the financial statements of dotDigital Group Plc for the year ended 30 June 2013, which comprise the Consolidated Income Statement, Consolidated Statement of Comprehensive Income, Consolidated Statement of Changes of Equity, Company Statement of Changes in Equity, Consolidated Statement of Financial Position, Company Statement of Financial Position, Consolidated Statement of Cash Flows, Company Statement of Cash Flows and the related notes. The financial reporting framework that has been applied in their preparation is 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. 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 auditors 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. Respective responsibilities of Directors and auditors As explained more fully in the Statement of Directors’ Responsibilities, the Directors are responsible for the preparation of the financial statements and for being satisfied that they give a true and fair view. Our responsibility is to audit the financial statements in accordance with applicable law and International Standards on Auditing (UK and Ireland). Those standards require us to comply with the Auditing Practices Board’s Ethical Standards for Auditors. Scope of the audit of the financial statements An audit involves obtaining evidence about the amounts and disclosures in the financial statements sufficient to give reasonable assurance that the financial statements are free from material misstatement, whether caused by fraud or error. This includes an assessment of: whether the accounting policies are appropriate to the Group’s and the Parent Company’s circumstances and have been consistently applied and adequately disclosed; the reasonableness of significant accounting estimates made by the Directors; and the presentation of the financial statements. In addition, we read all the financial and non-financial information in the Chairman’s and Chief Executive’s report, Corporate Social Responsibility report, Corporate Governance report, Audit Committee report, Remuneration Committee report and Directors’ report to identify material inconsistencies with the audited financial statements. If we become aware of any apparent material misstatements or inconsistencies we consider the implications for our report. Opinion on financial statements In our opinion the financial statements: • give a true and fair view of the state of the Group’s and the Parent Company’s affairs as at 30 June 2013 and of the Group’s profit and Group’s and Parent Company’s cash flow for the year then ended; • have been properly prepared in accordance with IFRSs as adopted by the European Union; • • the Parent Company financial statements have been properly prepared in accordance with IFRSs as adopted by the European Union and as applies 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. Opinion on other matter prescribed by the Companies Act 2006 In our opinion the information given in the Report of the Directors for the financial year for which the financial statements are prepared is consistent with the financial statements. Matters on which we are required to report by exception We have nothing to report in respect of the following matters where 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. Jonthan Isaacs Senior Statutory Auditor For and on behalf of Jeffreys Henry LLP (Statutory Auditors) Finsgate 5-7 Cranwood Street London EC1V 9EE 14 October 2013 24 25 dotDigital Group Plc Annual Report and Accounts 2012/2013www.dotdigitalgroup.com Annual Report and Accounts 2012/2013Consolidated Income Statement For the year ended 30 June 2013 Consolidated Statement of Financial Position For the year ended 30 June 2013 Continuing operations Revenue Cost of sales Gross profit Administrative expenses Operating profit Finance costs Finance income Profit before corporation tax Corporation tax Profit for the year from continuing operations Discontinued operations (Loss)/profit for the period from discontinuing operations Profit/(loss) for the period Attributable to the owners of the parent: Profit for the period from continuing operations (Loss)/profit for the period from discontinuing operations Profit for the period attributable to the owners of the Company Earnings per share from continuous operations expressed in pence per share Basic Diluted Earnings per share from continuing and discontinued operations expressed in pence per share Basic Diluted Adjusted excluding exceptional items Adjusted Consolidated Statement of Comprehensive Income For the year ended 30 June 2013 Profit for the year Exchange differences on translating foreign operations Total comprehensive income for the year Total comprehensive income attributable to : Owners of the parent Notes 7 6 6 8 4 4 10 10 10 10 Notes 30.6.13 £’000 12,197 (887) 11,310 (7,338) 3,972 - 13 3,985 (220) 3,765 (3,023) (3,023) 3,765 (3,023) 742 1.36 1.32 0.27 0.26 1.11 1.07 30.6.12 £’000 (restated) 9,547 (576) 8,971 (6,532) 2,439 (1) 8 2,446 (260) 2,186 281 281 2,186 281 2,467 0.79 0.77 0.90 0.88 0.94 0.92 30.6.13 £’000 742 (2) 740 740 30.6.12 £’000 (restated) 2,467 - 2,467 2,467 Assets Non-current assets Goodwill Intangible assets Property, plant and machinery Current assets Trade and other receivables Cash and cash equivalents Total assets Equity attributable to the owners of the parent Called up share capital Share premium Reverse acquisition reserve Other reserves Retranslation reserve Retained earnings Total equity Liabilities Non-Current Liabilities Deferred Tax Current liabilities Trade and other payables Tax payable Total liabilities Total equity & liabilities Notes 30.6.13 £’000 30.6.12 £’000 11 12 13 15 16 17 18 18 18 18 18 22 19 609 2,449 472 3,530 2,893 6,072 8,965 2,934 1,753 404 5,091 2,198 4,021 6,219 12,495 11,310 1,387 4,863 (4,695) 13 (2) 9,071 10,637 1,377 4,755 (4,695) 127 - 8,202 9,766 14 25 1,681 163 1,844 1,858 1,335 184 1,519 1,544 12,495 11,310 The financial statements were approved and authorised for issue by the Board of Directors on 14 October 2013 and were signed on its behalf by P A Simmonds Director Company registration number: 06289659 (England and Wales) 26 27 dotDigital Group Plc Annual Report and Accounts 2012/2013www.dotdigitalgroup.com Annual Report and Accounts 2012/2013 Company Statement of Financial Position For the year ended 30 June 2013 Consolidated Statement of Changes in Equity For the year ended 30 June 2013 Assets Non-current assists Investments Current assets Trade and other receivables Cash and cash equivalents Total assets Equity attributable to the owners of the parent Called up share capital Share premium Other reserves Retained earnings Total equity Liabilities current liabilities Trade and other payables Total liabilities Total equity & liabilities Notes 30.6.13 £’000 30.6.12 £’000 14 15 16 17 18 18 18 19 5,186 5,186 5,423 70 5,493 10,679 1,387 4,863 13 3,065 9,328 1,351 1,351 1,351 10,679 7,511 7,511 13 83 96 7,607 1,377 4,755 127 129 6,388 1,219 1,219 1,219 7,607 The financial statements were approved and authorised for issue by the Board of Directors on 14 October 2013 and were signed on its behalf by P A Simmonds Director Company registration number: 06289659 (England and Wales) Balance as at 1 July 2011 Issue of share capital Transactions with owners Profit for the year Total comprehensive income Balance as at 30 June 2012 Issue of share capital Reclassification of reserves Transactions with owners Profit for the year Total comprehensive income Balance as at 30 June 2013 Balance as at 1 July 2011 Issue of share capital Share based payments Transactions with owners Profit for the year Total comprehensive income Balance as at 30 June 2012 Issue of share capital Reclassification of reserves Share based payments Retranslation reserve Transactions with owners Profit for the year Total comprehensive income Balance as at 30 June 2013 Called up share capital £’000 Retained earnings £’000 1,375 2 2 - - 1,377 10 - 10 - - 5,735 - - 2,467 2,467 8,202 - 127 127 742 742 Share premium £’000 4,737 18 18 - - 4,755 108 - 108 - - 1,387 9,071 4,863 Retranslation reserve £’000 - - - - - - - - - - (2) (2) - - (2) Reverse acquisition reserve £’000 (4,695) - - - - - (4,695) - - - - - - - (4,695) Other reserves £’000 70 - 57 57 - - 127 - (127) 13 - (114) - - 13 Total equity £’000 7,222 20 57 77 2,467 2,467 9,766 118 - 13 (2) 129 742 742 10,637 • Share capital is the amount subscribed for shares at nominal value. • Share premium represents the excess of the amount subscribed for share capital over the nominal value of the net share issue expenses. • Retained earnings represents the cumulative earnings of the Group attributable to equity shareholders. • The reverse acquisition reserve relates to the adjustment required to account the reverse acquisition in accordance with International Financial Reporting Standards. • Other reserves relate to the charge for the share based payment in accordance with International Financial Reporting Standard 2. • Retranslation reserve relates to the retranslation of a foreign subsidiary into the functional currency of the Group. 28 29 dotDigital Group Plc Annual Report and Accounts 2012/2013www.dotdigitalgroup.com Annual Report and Accounts 2012/2013 Company Statement of Changes in Equity For the year ended 30 June 2013 Consolidated Statement of Cash Flows For the year ended 30 June 2013 Balance as at 1 July 2011 Issue of share capital Transactions with owners Profit for the year Total comprehensive income Balance as at 30 June 2012 Issue of share capital Reclassification of reserves Transactions with owners Profit for the year Total comprehensive income Balance as at 30 June 2013 Balance as at 1 July 2011 Issue of share capital Share based payments Transactions with owners Profit for the year Total comprehensive income Balance as at 30 June 2012 Issue of share capital Reclassification of reserves Share based payments Transactions with owners Profit for the year Total comprehensive income Balance as at 30 June 2013 Called up share capital £’000 Retained earnings £’000 1,375 2 2 - - 1,377 10 - 10 - - 1,387 498 - - (369) (369) 129 - 127 127 2,809 2,809 3,065 Other reserves £’000 70 - 57 57 - - 127 - (127) 13 (114) - - 13 Share premium £’000 4,737 18 18 - - 4,755 108 108 - - 4,863 Total equity £’000 6,680 20 57 77 (369) (369) 6,388 118 - 13 131 2,809 2,809 9,328 • Share capital is the amount subscribed for shares at nominal value. • Share premium represents the excess of the amount subscribed for share capital over the nominal value of the net share issue expenses. • Retained earnings represents the cumulative earnings of the Group attributable to equity shareholders. • Other reserves relate to the charge for the share based payment in accordance with International Financial Reporting Standard 2. Cash flows from operating activities Cash generated from operations Interest paid Corporation tax paid Net cash generated from operating activities Cash flows from investing activities Contingent consideration on acquisition of subsidiary Purchase of intangible fixed assets Purchase of tangible fixed assets Sale of tangible fixed assets Interest received Net cash flows used in investing activities Cash flows from financing activates Loan repayments in period Share issue Net cash flows from financing activities Increase in cash and cash equivalents Cash and cash equivalents at beginning of year Cash and cash equivalents at end of year Increase in cash and cash equivalents from continuing operations Increase in cash and cash equivalents from discontinuing operations Increase in cash and cash equivalents Company Statement of Cash Flows For the year ended 30 June 2013 Cash flows from operating activities Cash generated from operations Cash flows from investing activities Net cash generated from operating activities Contingent consideration on acquisition of subsidiary Net cash flows used in investing activities Cash flows from financing activates Loan from Group companies Share issue Net cash flows from financing activities Increase in cash and cash equivalents Cash and cash equivalents at beginning of year Cash and cash equivalents at end of year 30 Notes 27 28 28 Notes 27 28 28 30.6.13 £’000 3,817 - (253) 3,564 - (1,352) (292) - 13 (1,631) - 118 118 2,051 4,021 6,072 2,076 (25) 2,051 30.6.13 £’000 (273) (273) - - 142 118 260 (13) 83 70 30.6.12 £’000 3,275 (1) (192) 3,082 (164) (1,173) (315) 1 8 (1,643) (6) 20 14 1,453 2,568 4,021 1,424 29 1,453 30.6.12 £’000 (236) (236) (164) (164) 228 20 248 (152) 235 83 31 dotDigital Group Plc Annual Report and Accounts 2012/2013www.dotdigitalgroup.com Annual Report and Accounts 2012/2013 Notes to the Consolidated Financial Statements For the year ended 30 June 2013 • The assets and liabilities of the legal subsidiary, dotMailer Limited are recognised and measured in the consolidated financial statements at their pre combination carrying amounts, without restatement to their fair value; • The retained reserves recognised in the consolidated financial statements for the beginning of the prior period reflect the retained reserves of dotMailer Limited to 30 April 2008. However, in accordance with IFRS3 ‘Business combinations’ the equity structure appearing in the consolidated financial statements reflects the equity structure of the legal parent dotDigital Plc, including the equity instruments issued under the share exchange to effect the business combination; • A reverse acquisition reserve has been created to enable the presentation of a consolidated balance sheet which combines the equity structure of the legal parent with the non statutory reserves of the legal subsidiary; • Comparative numbers are prepared on the same basis. • The following accounting treatment has been applied in respect of the acquisition of dotDigital Plc: • The assets and liabilities of dotDigital Plc are recognised and measured in the consolidated financial statements at their fair value at the date of acquisition. • The cost of an acquisition is measured as the fair value of the assets given, equity instruments issued and liabilities incurred or assumed at the date of exchange, plus costs directly attributable to the acquisition. Identifiable assets acquired and liabilities assumed in a business combination are measured initially at their fair values at the date of acquisition, irrespective of the extent of any minority interest. The excess of the cost of acquisition over the fair value of the Group’s share of the identifiable net assets acquired is recorded as goodwill. If the cost of acquisition is less than the fair value of the net assets of the subsidiary acquired, the difference is recognised directly in the income statement. Subsidiaries A subsidiary is an entity whose operating and financing policies are controlled by the Group. Subsidiaries are consolidated from the date on which control was transferred to the Group. Subsidiaries cease to be consolidated from the date the Group no longer has control. Intercompany transactions, balances and unrealised gains on transactions between Group companies have been eliminated on consolidation. As a result of applying reverse acquisition accounting in the prior period, the consolidated IFRS financial information of dotDigital Group Plc is a continuation of the financial information of dotMailer Limited. Revenue recognition Revenue comprises the fair value of the consideration received or receivable for the sale of goods and services in the ordinary course of the Group’s activities. Revenue is shown net of value added tax returns, rebates and discounts after eliminating sales within the Group. The Group recognises revenue when the amount of revenue can be reliably measured and it is probable that the future economic benefits will flow to the entity. The Group bases it’s estimates on historical results, taking in to consideration the type of customer, the type of transaction and the specifics of each arrangement. The Group sells web based marketing services to other businesses and services are either provided on a usage basis or fixed price bespoke contract. Revenue from contracts are recognised under percentage of completion method based on a percentage of services performed to date as a percentage of the total services to be performed. Goodwill Goodwill represents the excess of the fair value of the consideration over the fair values of the identifiable net tangible and intangible assets acquired. Under IFRS 3 “Business Combinations” goodwill arising on acquisitions is not subject to amortisation but is subject to annual impairment testing. Any impairment is recognised immediately in the income statement and not subsequently reversed. 1. General information dotDigital Group Plc (“dotDigital”) is a company incorporated in England and Wales and quoted on the AIM Market. The address of the registered office is disclosed on the inside back cover of the financial statements. The principal activity of the Group is described on page 20. 2. Accounting policies Basis of preparation These financial statements have been prepared in accordance with International Financial Reporting Standards and IFRIC interpretations and with those parts of the Companies Act 2006 applicable to companies reporting under IFRS. The financial statements have been prepared under the historical cost convention. The Group has applied all accounting standards and interpretations issued by the International Accountancy Standards Board and International Accounting Interpretations Committee effective at the time of preparing the financial statements. The financial statements are presented in sterling (£), rounded to the nearest thousand. New and amended standards adopted by the Company There are no IFRSs or IFRIC interpretations that are effective for the first time in this financial period that would be expected to have a material impact on the Group. New standards, amendments and interpretations issued but not effective There are no IFRSs or IFRIC interpretations that are not yet effective that would be expected to have a material impact on the Group. Basis of consolidation In the period ended 2009 the Company acquired via a share for share exchange the entire issued share capital of dotMailer Limited, whose principle activity is that of web and email based marketing. Under IFRS 3 ‘Business combinations’ the dotMailer Limited share exchange has been accounted for as a reverse acquisition. Although these consolidated financial statements have been issued in the name of the legal parent, the Company it represents in substance is a continuation of the financial information of the legal subsidiary, dotMailer Limited. The following accounting treatment has been applied in respect of the reverse acquisition: 32 Intangible assets Intangible assets are recorded as separately identifiable assets and recognised at historical cost less any accumulated amortisation. These assets are amortised over their useful economic lives 4-5 years, with the charge included in administrative expenses in the income statement. Intangible assets are reviewed for impairment annually. Impairment is measured by determining the recoverable amount of an asset or cash generating unit (CGU) which is the greater of its value in use and its fair value less costs to sell. 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 or CGU. For the purpose of impairment testing, assets that cannot be tested individually are grouped together into the smallest Group of assets that generates cash inflows from continuing use that are largely independent of the cash inflows of other assets or CGU. • Domain names Acquired domain names are shown at historical cost. Domain names have a finite life and are carried at cost less accumulated amortisation. Amortisation is calculated using straight line method to allocate the cost of domain names over their useful lives of four years. • Software Acquired software and websites are shown at historical cost. They have a finite life and are carried at cost less accumulated amortisation. Amortisation is calculated using straight line method to allocate the cost of software and websites over their useful lives of four years. • Product development Product development expenditure is capitalised when it is considered that there is a commercially and viable technically product, the related expenditure is separable identifiable and there is a reasonable expectation that the related expenditure will be exceeded by future revenues. Following initial recognition, product developments are carried at cost less any accumulated amortisation and any accumulated impairment losses. The useful lives of these intangible assets are assessed to have a finite life of five years. Amortisation is charged on assets with finite lives, this expense is taken to the income statement and useful lives are reviewed on an annual basis. Amortisation is provided at the following annual rates’ commencing from the date the asset is developed to a stage at which the Company can receive economic benefits from the asset. Property, plant and equipment Tangible non current assets are stated at historical cost less depreciation. Historical cost includes expenditure that is directly attributable to the acquisition of the items. Subsequent costs are included in the assets carrying amount or recognised as a separate asset, as appropriate, only when it is probable that future economic benefits are associated with the item will flow to the Company and the cost of the item can be measured reliably. The carrying amount of the replaced part is derecognised. All other repairs and maintenance are charged to the income statement during the financial period in which they are incurred. Depreciation is provided at the following rates in order to write off each asset over its estimated useful life and are based on the cost of assets less residual value. Significant components of individual assets are assessed and if a component has a useful life that is different from the remainder of that asset, that component is depreciated separately. Short leasehold: Fixtures and fittings: Computer equipment: 25% on cost 25% on cost 25% on cost The asset’s residual values and useful economic lives are reviewed and adjusted, if appropriate, at each balance sheet date. An asset’s carrying amount is written down immediately to its recoverable amount if the asset’s carrying amount is greater then its estimated recoverable value. Gains and losses on disposals are determined by comparing the proceeds with the carrying amount and are recognised within other (losses) or gains in the income statement. When devalued assets are sold, the amounts included in other reserves are transferred to retained earnings. Borrowings Borrowings are recognised at their fair value net of transaction costs incurred. They are classified as current liabilities unless the Group has an unconditional right to defer the settlement of the liability of at least 12 months after the balance sheet date. Borrowing costs are recognised in the income statement in the period in which they are incurred. Capital risk management The Group manages it’s capital to ensure it is able to continue as a going concern while maximising the return to stakeholders through the optimisation of the debt and equity balance. The capital structure of the Group consists of, cash and cash equivalents, short term finance and equity attributable to the owners of the parent as disclosed in the Statement of Changes in Equity. Taxation Current taxes are based on the results shown in the financial statements and are calculated according to local tax rules, using tax rates enacted or substantially enacted by the balance sheet date. Deferred taxation Deferred income tax is provided in full, using the liability method, on temporary differences arising between the tax bases of assets and liabilities and their carrying amounts in the financial statements. Deferred income tax assets are recognised to the extent that it is probable that future taxable profit will be available against which the temporary difference will be utilised. Deferred income tax is determined using tax rates that have been enacted or substantially enacted by the balance sheet date and are expected to apply when they related deferred income asset is realised or deferred income tax liability is settled. Research and development Research expenditure is recognised as an expense when incurred. Costs incurred on development projects (relating to the design and testing of new or improved products) are recognised as intangible assets when the following criteria are fulfilled: • It is technically feasible to complete the intangible asset so that it will be available of use or resale • Management intends to complete the intangible asset and use or sell it • There is an ability to use or sell the intangible • It can be demonstrated how the intangible asset will generate possible future economic benefits • Adequate technical, financial and other resource to complete the development and to use or sell the intangible asset are available and • The expenditure attributable to the intangible asset during its development can be reliably measured. 33 dotDigital Group Plc Annual Report and Accounts 2012/2013www.dotdigitalgroup.com Annual Report and Accounts 2012/2013Notes to the Consolidated Financial Statements continued For the year ended 30 June 2013 Other development expenditures that do not meet these criteria are recognised as an expense as incurred. Development costs previously recognised as an expense are not recognised as an asset in a subsequent period. Capitalised development costs are recorded as intangible assets and amortised from the point at which they are ready for use on a straight line basis over its useful life. Operating leases Leases in terms of which the Group assumes substantially all the risks and rewards of ownership are classified as finance leases. Upon initial recognition the leased asset is measured at an amount equal to the lower of its fair value and present value of the minimum lease payments. Subsequent to initial recognition, the asset is accounted for in accordance the accounting policy applicable to that asset. Other leases are operating leases and are not recognised in the Group’s statement of financial position on a straight line basis over the term of the lease. Lease incentives received are recognised as an integral part of the total expense, over the term of the lease. Use of estimates and judgements The Group makes judgements, estimates and assumptions that effect the application of policies and reported amounts of assets and liabilities, income and expenses. The resulting accounting estimates calculated using these judgements and assumptions will, by definition, seldom equal the related actual results but are based on historical experience and expectations of future events. The estimates and underlying assumptions are reviewed on a ongoing basis. Revisions to accounting estimates are recognised in the period in which the estimate is revised if the revision effects only that period, or in the period of revision and future periods if the revision affects both current and future periods. The estimates and assumptions which have a significant risk of causing a material adjustment to the carrying amount of assets and liabilities are discussed below: • Impairment of non financial assets (excluding goodwill) • Plant and equipment, intangible assets & impairment of goodwill At each balance sheet date, the Group reviews the carrying amounts of its tangible and intangible assets to determine whether there is any indication that those assets have suffered an impairment loss. If any such indication exists, the recoverable amount of the asset is estimated in order to determine the extent of the impairment loss (if any). Where the asset does not generate cash flows that are independent from other assets, the Group estimates the recoverable amount of the cash- generating unit to which the asset belongs. An intangible asset with an indefinite useful life is tested for impairment annually and whenever there is an indication that the asset may be impaired. Recoverable amount is the higher of fair value less costs to sell 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 which the estimates of future cash flows have not been adjusted. If the recoverable amount of an asset (or cash-generating unit) is estimated to be less than its carrying amount, the carrying amount of the asset (cash-generating unit) is reduced to its recoverable amount. An impairment loss is recognised as an expense immediately, unless the relevant asset is carried at a re-valued amount, in which case the impairment loss is treated as a revaluation decrease. Where an impairment loss subsequently reverses, the carrying amount of the asset (cash-generating unit) is increased to the revised estimate of its recoverable amount, but so that the increased carrying amount does not exceed the carrying amount that would have been determined had no impairment loss been recognised for the asset (cash-generating unit) in prior years. A reversal of an impairment loss is recognised as income immediately, unless the relevant asset is carried at a revalued amount, in which case the reversal of the impairment loss is treated as a revaluation increase. Intangible assets excluding goodwill and plant and equipment are amortised or depreciated over their useful lives. Useful lives are based on management’s estimates of the period that the assets will generate revenue, which are periodically reviewed for continued appropriateness. Changes to the estimates used can result in significant variations in the carrying value. The Group assesses the impairment of plant and equipment and intangible assets subject to amortisation or depreciation whenever events or changes in circumstances indicate that the carrying value may not be recoverable. Additionally, goodwill arising on acquisitions is subject to impairment review. The Group’s management undertakes an impairment review of goodwill annually or more frequently if events or changes in circumstances indicate that the carrying value may not be recoverable. The complexity of the estimation process and issues related to the assumptions, risks and uncertainties inherent in the application of the Group’s accounting estimates in relation to plant and equipment and intangible assets affect the amounts reported in the financial statements, especially the estimates of the expected useful economic lives and the carrying values of those assets. If business conditions were different, or if different assumptions were used in the application of this and other accounting estimates, it is likely that materially different amounts could be reported in the Group’s financial statements. The Directors have carried out a detailed impairment review in respect of goodwill. The Group assesses at each reporting date whether there is an indication that an asset may be impaired, by considering the net present value of discounted cash flows forecasts which have been discounted at 10%. The cash flow projections are based on the assumption that the Group can realise projected sales. A prudent approach has been applied with no residual value being factored. At the period end, based on these assumptions there was an indication of impairment of the value of goodwill for dotSearch. See note 10 for details. Employee benefit costs The Group operates a defined contribution pension scheme. Contributions payable by the Group’s pension scheme are charged to the income statement in the period in which they relate. Segment reporting A business segment is a group of assets and operations engaged in providing products or services that are subject to risks and returns that are different from those of other business segments. A geographical segment is engaged in providing products or services within a particular economic environment that are subject to risks and returns that are different from those of segments operating in other economic environment. 3. Segmental reporting The Groups’ primary reporting format is business segments and its second format is geographical segments. The Group only operates in a single business and geographical segment. The Group’s single line of business is the provision of web based marketing services, whilst the geographical segment in which it operates is currently restricted to the UK. Accordingly no segmental information for business segment or geographical segment is required. However, if the projected sales do not materialise there is a risk that the value of the intangible assets shown above would be impaired. • Share-based compensation The fair value of options and warrants are determined by reference to the fair value of the options granted, excluding the impact of any non-market vesting conditions (for example, profitability and sales growth targets). Non-market vesting conditions are included in assumptions about the number of options that are expected to vest. At each balance sheet date, the entity revises its estimates of the number of options that are expected to vest. It recognises the impact of the revision to original estimates if any, in the income statement, with corresponding adjustment to equity. Trade receivables Trade receivables are recognised initially at the lower of their original invoiced value and recoverable amount. A provision is made when it is likely that the balance will not be recovered in full. Terms on receivables range from 30 to 90 days. Equity Share capital is the amount subscribed for shares at their nominal value. Share premium represents the excess of the amount subscribed for the share capital over the nominal value of the respective shares net of share issue expenses. Retained earnings represent the cumulative earnings of the Group attributable to equity Shareholders. The reverse acquisition reserve relates to the adjustment required by accounting for the reverse acquisition in accordance with IFRS3 ‘Business combinations’. Other reserves relate to the charge for share based payments in accordance with IFRS2 ‘Share based payments’. Share based payments For equity settled share based payment transactions the Group, in accordance with IFRS 2 “Share Based Payments” measuring their value, and the corresponding increase in equity, indirectly, by reference to the fair value of the equity instruments granted. The fair value of those equity instruments is measured at the grant date using the trinomial method. The expense is apportioned over the vesting period of the financial instrument and is based on the number which is expected to vest and the fair value of those financial instruments at the date of grant. If the equity instruments granted vested immediately, the expense is recognised in full. The assumptions on the expected life of share options, volatility of shares and risk free yield to maturity and expected dividend yield on shares are used in the fair value calculation of the share options outstanding at the year end (see note 26). Trade payables Trade payables are recognised initially at fair value and subsequently measured at amortised cost using the effective interest method. Terms on accounts payables range from 10 to 90 days. Functional currency translation • Functional and presentation currency Items included in the financial statements if the Company are measured using the currency of the primary economic environment in which the entity operates (functional currency), which is mainly pounds sterling (£) and it this currency the financial statements are presented in. • Transaction and balances Foreign currency transactions are translated in to the presentation currency using exchange rates prevailing at the dates of the transactions. Foreign exchange gains and losses resulting from the settlement of such transactions and from the translation at the year end exchange rates of monetary assets and liabilities denominated in foreign currencies are recognised in the income statement. 34 35 dotDigital Group Plc Annual Report and Accounts 2012/2013www.dotdigitalgroup.com Annual Report and Accounts 2012/2013Notes to the Consolidated Financial Statements continued For the year ended 30 June 2013 4. Discontinued Operations Analysis of continuing and discontinued operations is as follows: Year ended 30 June 2013 Revenue Cost of sales Gross profit Administrative expenses Operating profit /(loss) before exceptional items Exceptional item: Impairment of goodwill Finance income Corporation tax Profit for the year attributable to owners Year ended 30 June 2012 Revenue Cost of sales Gross profit Administrative expenses Operating profit before exceptional items Exceptional item: Impairment to goodwill Finance costs Finance income including exceptional items Corporation tax Profit for the year attributable to owners Continuing operations 30.6.13 £’000 Discontinued operations 30.6.13 £’000 12,197 (887) 11,310 (7,338) 3,972 - 13 (220) 3,765 1,651 (1,033) 618 (1,315) (697) (2,326) - - (3,023) Continuing operations 30.6.12 (restated) £’000 Discontinued operations 30.6.12 (restated) £’000 9,547 (576) 8,971 (6,532) 2,439 - (1) 8 (260) 2,186 2,440 (692) 1,748 (1,314) 434 (1,187) - 1,079 (45) 281 The exceptional item outlined above for the year ended 30 June 2012 under finance income relates to the revision of the contingent consideration due in relation to the acquisition of dotAgency Limited (previously known as dotSearch Limited) in 2011. IFRS 3 relating to business combinations directed that any revaluations to the consideration should be credited to the income statement as financial income. See note 14 for further details. 5. Employees and Directors Wages and salaries Social security costs Other pension costs The average monthly number of employees during the year are as follows Directors Sales Web designers, SEO and developers Administration 36 30.6.13 £’000 4,445 556 97 5,098 30.6.12 £’000 4,234 461 78 4,773 30.6.13 30.6.12 7 60 46 41 154 6 48 66 41 161 6. Net Finance Income Finance income: Deposit account interest Finance costs: Loan 7. Operating Profit before Exceptional Items Costs by nature Profit from continuing operations has been arrived after charging/(crediting):- Direct marketing Outsourcing Other costs Total cost of sales Staff related costs (inc Directors emoluments) Operating leases: Land and buildings Operating lease: Other Audit remuneration Amortisation of intangibles Depreciation charge Legal, professional and consultancy fees Computer expenditure Bad debts Foreign exchange gains Travelling Office running Other costs Total administration costs During the year the Group obtained the following services from the Group’s auditor at costs detailed below: 30.6.13 £’000 30.6.12 £’000 13 13 - - 30.6.13 £’000 474 376 37 887 30.6.13 £’000 4,715 353 63 25 655 209 336 282 138 (3) 187 153 225 8 8 1 1 30.6.12 £’000 (restated) 358 200 18 576 30.6.12 £’000 (restated) 3,858 338 64 25 410 145 416 407 200 (3) 182 173 317 7,338 6,532 30.6.13 £’000 30.6.12 £’000 Fees payable to the Company’s auditor for audit of Parent Company and consolidated financial statements Fees payable to the Company’s auditor for other services: - - Non audit fees: All other services The audit of Company’s subsidiaries 7 26 5 38 7 25 5 37 37 dotDigital Group Plc Annual Report and Accounts 2012/2013www.dotdigitalgroup.com Annual Report and Accounts 2012/2013 Notes to the Consolidated Financial Statements continued For the year ended 30 June 2013 8. Corporation Tax Analysis of the tax charge from continuing operations: Current tax: Tax Deferred tax Analysis of the tax charge from discontinued operations: Current tax: Tax Tax charge from continuing operations Tax charge from discontinued operations Factors affecting the tax charge: Profit on ordinary activities before tax Profit on ordinary activities multiplied by the standard rate of corporation tax in the UK of 23.75% (2012: 25%) Effects of: Expenses not deductable Research and development enhanced claim Effect of profits within marginal rate Expenditure permitted on exercising options Prior year under provision Exceptional item: impairment of goodwill Exceptional item: adjustment to contingent consideration Capital allowances in excess of depreciation Total corporation tax 30.6.13 £’000 231 (11) 220 - - 220 - 220 30.6.13 £’000 962 218 52 (716) (8) (45) - 552 - 167 220 30.6.12 £’000 236 24 260 45 45 260 45 305 30.6.12 £’000 2,773 693 113 (560) (6) - 16 297 (270) (2) 281 9. Profit/(Loss) of Parent Company As permitted by Section 408 of the Companies Act 2006, the profit and loss account of the Parent Company is not presented as part of these financial statements. The Parent Company’s profit for the financial year was £2,808,521 (2012: loss £368,977). 10. Earnings per Share Earnings per share data is based on the consolidated profit using and the weighted average number of shares in issue of the Parent Company. Basic earnings per share are calculated by dividing the earnings attributable to ordinary shareholders by the weighted average number of ordinary shares outstanding during the period. Diluted earnings per share is calculated using the weighted average number of shares adjusted to assume the conversion of all dilutive potential ordinary shares. Reconciliations are as follows:- From continuing operations Basic EPS Net income attributable to the owners of the parent Diluted EPS Net income attributable to the owners of the parent Adjusted EPS Effect of exceptional items: Impairment of goodwill - Adjusted earnings Effect of dilutive shares Options and Warrants Adjusted diluted EPS Adjusted earnings From discontinued operations Basic EPS Diluted EPS Both the EPS and the diluted EPS are same due to the anti-dilutive effect. Basic EPS Net income attributable to the owners of the parent Diluted EPS Net income attributable to the owners of the parent Adjusted EPS Effect of exceptional items: - - Impairment of goodwill Reversal of financial instrument Adjusted earnings Effect of dilutive shares Options and Warrants Adjusted diluted EPS Adjusted earnings 30.6.13 Weighted average number of shares Earnings £’000 742 275,839,565 742 285,687,852 2,326 - 3,068 275,839,565 - 9,848,287 Per share amount pence 0.27 0.26 - 1.11 - 3,068 285,687,852 1.07 30.6.13 Per share amount pence 30.6.12 Per share amount pence (0.01) (0.01) 0.001 0.001 30.6.12 Weighted average number of shares Earnings £’000 2,467 275,019,565 2,467 281,111,611 1,187 (1,079) - - 2,575 275,019,565 - 6,092,046 Per share amount pence 0.90 0.88 - - 0.94 - 2,575 281,111,611 0.92 38 39 dotDigital Group Plc Annual Report and Accounts 2012/2013www.dotdigitalgroup.com Annual Report and Accounts 2012/2013 Notes to the Consolidated Financial Statements continued For the year ended 30 June 2013 11. Goodwill Group Cost At 1 July And 30 July Amortisation At 1 July 2012 Impairment At 30 June 2013 Net Book Value 30.6.13 £’000 30.6.12 £’000 4,121 4,121 1,187 2,326 3,512 609 - 1,187 1,187 2,934 The Board took the decision in the year to wind down the operations of dotAgency Limited resulting in the full impairment of the remaining goodwill arising from the acquisition of Netcallidus Limited now known as dotAgency Limited. Goodwill acquired in a business combination is allocated, at acquisition, to cash generating units (CGUs) that are expected to benefit from that business combination. The carrying amount of goodwill relates wholly to the Group’s single trading activity and business segment. The recoverable amounts of the CGUs have been determined from value in use calculations. These calculations use post-tax cash flow projections based on financial budgets approved by management covering a five-year period. A discount factor of 10% to reflect the time value of money has been applied in these calculations. 12. Intangible Assets Group Cost At 1 July 2012 Additions At 30 June 2013 Amortisation At 1 July 2012 Amortisation for the year At 30 June 2013 Net Book Value At 30 June 2013 Cost At 1 July 2011 Additions At 30 June 2012 Amortisation At 1 July 2011 Amortisation for the year At 30 June 2012 Net Book Value At 30 June 2012 Computer software £’000 Internally generated development costs £’000 Domain names £’000 199 12 211 112 43 155 56 2,328 1,340 3,668 668 610 1,278 2,390 16 - 16 11 2 13 3 Computer software £’000 Internally generated development costs £’000 Domain names £’000 148 51 199 65 47 112 87 1,210 1,119 2,329 308 360 668 1,661 13 3 16 7 4 11 5 Totals £’000 2,543 1,352 3,895 791 655 1,446 2,449 Totals £’000 1,371 1,173 2,544 380 411 791 1,753 Development cost additions represents resources the Group have invested in the development of new innovative and ground breaking technology products for marketing professionals. This platform allows them to create, send and automate marketing campaigns. Following development of the products the Group intends to licence the use of the platform. 13. Property, plant and equipment Group Cost At 1 July 2012 Additions Disposals At 30 June 2013 Amortisation At 1 July 2012 Amortisation for the year Eliminated on disposal At 30 June 2013 Net Book Value At 30 June 2013 Cost At 1 July 2011 Additions Disposals At 30 June 2012 Amortisation At 1 July 2011 Amortisation for the year Eliminated on disposal At 30 June 2012 Net Book Value At 30 June 2012 14. Investments Company Cost At 1 July Inter group transfer At 30 July Amortisation At 1 July 2012 Impairment At 30 June 2013 Net Book Value At 30 June 2013 Short leasehold £’000 Plant and machinery £’000 Fixtures and fittings £’000 Computer equipment £’000 12 95 - 107 11 14 - 25 82 3 - (3) - 2 - (2) - - 192 85 (122) 155 144 42 (122) 64 91 716 112 (208) 620 361 163 (203) 321 299 Short leasehold £’‘000 Plant and machinery £’000 Fixtures and fittings £’000 Computer equipment £’000 12 - - 12 10 1 - 11 1 9 - (6) 3 3 2 (4) 1 2 175 17 - 192 120 25 - 145 47 419 297 - 716 243 119 - 362 354 Totals £’000 923 292 (333) 882 518 219 (327) 410 472 Totals 615 314 (6) 923 376 147 (4) 519 404 Shares in Group Undertakings 30.6.13 £’000 Shares in Group undertakings 30.6.12 £’000 8,704 1 8,705 1,193 2,326 3,519 8,704 - 8,704 - 1,193 1,193 5,186 7,511 The board took the decision in the year to wind down the operations of dotAgency Limited resulting in the full impairment of the remaining investment arising from the acquisition of Netcallidus Limited now known as dotAgency Limited. 40 41 dotDigital Group Plc Annual Report and Accounts 2012/2013www.dotdigitalgroup.com Annual Report and Accounts 2012/2013 Notes to the Consolidated Financial Statements continued For the year ended 30 June 2013 14. Investments continued The Group or the Company’s investments at the balance sheet date in the share capital of companies include the following: dotAgency (previously known as dotSearch) Limited Nature of business: Internet and website services Subsidiaries dotMailer Limited Nature of business: Web and email based marketing Class of shares: Ordinary Ordinary A Aggregate capital and reserves Profit for the year dotSurvey (previously known as dotAgency) Limited Nature of business: Dormant Class of shares: Ordinary Aggregate capital and reserves dotCommerce Limited Nature of business: Dormant Class of shares: Ordinary Aggregate capital and reserves dotEditor Limited Nature of business: Dormant Class of shares: Ordinary Aggregate capital and reserves dotSEO LImited Nature of business: Dormant Class of shares: Ordinary Aggregate capital and reserves 42 Proportion of voting power held % 100.00 100.00 30.6.12 £’000 7,531 2,658 30.6.13 £’000 6,042 3,990 Proportion of voting power held % 100.00 30.6.12 £’000 1 30.6.13 £’000 1 Proportion of voting power held % 100.00 30.6.12 £’000 1 30.6.13 £’000 1 Proportion of voting power held % 100.00 30.6.12 £’000 1 30.6.13 £’000 1 Proportion of voting power held % 100.00 30.6.12 £’000 1 30.6.13 £’000 1 Class of shares: Ordinary, B, C & D Aggregate capital and reserves Profit/(loss) for the year dotMailer Inc Nature of business: Web and email based marketing Incorporated: US Class of shares: Ordinary Aggregate capital and reserves Loss for the year dotSearch Europe Limited Nature of business: Branch company Class of shares: Ordinary Aggregate capital and reserves Loss for the year Proportion of voting power held % 100.00 30.6.12 £’000 500 202 30.6.13 £’000 (73) (573) Proportion of voting power held % 100.00 30.6.12 £’000 - - 30.6.13 £’000 (119) (117) Proportion of voting power held % 100.00 30.6.12 £’000 (33) (30) 30.6.13 £’000 (38) (4) On 17 May 2011, the Group acquired the entire share capital of dotAgency (previously known as dotSearch) Limited a company registered in England and Wales for an initial consideration of £1,152,660 and an additional contingent consideration of £2,366,320 totalling £3,518,980. The Group’s principal activity is the provision of internet and website services. Obtaining control of dotAgency (previously known as dotSearch) Limited allows the Group to incorporate the customer base in to its own while providing additional expertise to further develop and market it’s SEO products. The following summarises the major classes of consideration transferred and the recognised amounts of assets and liabilities assumed at the acquisition date: Consideration transferred: Cash Equity instruments (14,200,930 shares) Discounted fair value £’000 1,000 153 1,153 The number of shares issued in respect of the consideration transferred was based on per share pre consolidation which was the mid-market price as at 30 June 2010. 43 dotDigital Group Plc Annual Report and Accounts 2012/2013www.dotdigitalgroup.com Annual Report and Accounts 2012/2013 Notes to the Consolidated Financial Statements continued For the year ended 30 June 2013 14. Investments continued Identifiable assets acquired and liabilities assumed: Goodwill Property, plant and equipment Trade and other receivables Deposits, cash and cash equivalents Taxation Trade and other payables Net assets Goodwill: Purchase consideration: Fair value of net assets acquired Goodwill acquired Goodwill acquired from purchase of subsidiary Book and Fair Value £’000 45 3 88 41 (84) (41) 52 £’000 3,519 52 3,467 45 3,512 The contingent consideration arrangement required the Group to pay the former owners of dotAgency (previously known as dotSearch) Limited additional consideration in a combination of cash and equity in the Group. As made reference to in the previous year’s financial statements an interim payment was due to be made on finalising the profit after tax figures based on 4 times the profit after tax in the year ended 30 June 2012 less any amounts that had been paid previously. On 24 November 2011 the Board of Directors presented an early settlement package to the pre-existing shareholders of dotAgency (previously known as dotSearch) Limited which consisted of the payments made previously and an additional cash settlement of £164,100 which was accepted unanimously. With the acceptance of the package all remaining contingent consideration previously provided for in the financial statements, totalling £1,079,824 was written to the income statement as finance income in accordance with IFRS 3 regarding business combinations. The level of after tax profits generated from this investment as at the date above and as at 30 June 2012, was lower than expected based on the Vendor’s forecast at the time of the acquisition which needed to be used under IFRS 3 to determine the contingent consideration that may have been payable, under the conditions of accounting standard IAS38 it resulted in an impairment to the value of goodwill generated on the acquisition of £1,186,516 which was charged to the income statement. The net effect on the income statement of both the financial income and the impairment of the investment resulted in a charge of £106,692. 15. Trade and Other Receivables Current: Trade receivables Less: provision for impairment of trade receivables Trade receivables - net Amounts owed by Group undertakings Other receivables VAT Prepayments and accrued income Group Company 30.6.13 £’000 2,572 (249) 2,323 - 56 - 514 30.6.12 £’000 2,161 (211) 1,950 - 18 - 230 30.6.13 £’000 - - 5,400 - 9 14 2,893 2,198 5,423 30.6.12 £’000 - - - - - 13 13 16. Cash and Cash Equivalents Bank accounts 17. Called up Share Capital Allotted, issued, fully paid 277,472,065 (2012: 275,362,065) Group Company 30.6.13 £’000 6,072 6,072 30.6.12 £’000 4,021 4,021 30.6.13 £’000 30.6.12 £’000 70 70 83 83 Nominal value £0.005 30.6.13 £’000 1,387 30.6.12 £’000 1,377 1,387 1,377 During the reporting period the Company undertook the following transactions involving the issuing and reclassifying issued share capital: On 15 November 2012 a number of employees exercised their share options increasing the issued share capital by 570,000 shares. On 21 March 2013 a number of employees exercised their share options increasing the issued share capital by 580,000 shares. On 18 June 2013 a number of employees exercised their share options increasing the issued share capital by 960,000 shares. 18. Reserves Group As at 1 July 2012 Issue of share capital Reclassification of reserves Profit for the year Balance as at 30 June 2013 As at 1 July 2012 Issue of share capital Reclassification of reserves Profit for the year Currency translation Share based payment Balance as at 30 June 2013 Retained earnings £’000 8,202 - 127 742 Share premium £’000 4,755 108 - - Reverse acquisition reserve £’000 (4,695) - - - 9,071 4,863 (4,695) Retranslation reserve £’000 Other reserves £’000 - - - - (2) - (2) 127 - (127) - - 13 13 Totals £’000 8,389 108 - 742 (2) 13 9,250 44 45 dotDigital Group Plc Annual Report and Accounts 2012/2013www.dotdigitalgroup.com Annual Report and Accounts 2012/2013 Notes to the Consolidated Financial Statements continued For the year ended 30 June 2013 18. Reserves continued Group As at 1 July 2011 Issue of share capital Profit for the year Balance as at 30 June 2012 As at 1 July 2011 Issue of share capital Profit for the year Share based payment Balance as at 30 June 2012 Company At 1 July 2012 Issue of share capital Reclassification of reserves Profit for the year Share based payment At 30 June 2013 At 1 July 2011 Issue of share capital Loss for the year Share based payment At 30 June 2012 19. Trade and Other Payables Current: Trade payables Amounts owed to Group undertakings Social security and other taxes Other payables Accruals and deferred income Retained earnings £’000 5,735 - 2,467 8,202 Share premium £’000 4,737 18 - Reverse acquisition reserve £’000 (4,695) - - 4,755 (4,695) Share based Payments £’000 70 - - 57 127 Share based payments £’000 127 - (127) - 13 13 Share based payments £’000 70 - - 57 127 Retained earnings £’000 129 - 127 2,809 - 3,065 Retained earnings £’000 498 - (369) - 129 Share premium £’000 4,755 108 - - - 4,863 Share premium £’000 4,737 18 - - 4,755 Group Company 30.6.13 £’000 30.6.12 £’000 367 - 873 171 270 224 - 808 142 161 1,681 1,335 30.6.13 £’000 22 1,298 - - 31 1,351 Totals £’000 5,847 18 2,467 57 8,389 Totals £’000 5,011 108 - 2,809 13 7,941 Totals £’000 5,305 18 (369) 57 5,011 30.6.12 £’000 27 1,155 - - 37 1,219 20. Leasing Agreements Minimum lease payments under non cancellable operating leases fall due as follows:- Within one year Between two to five years Within one year Between two to five years Land & Buildings £’000 312 806 1,118 Land & Buildings £’000 66 - 66 30.6.13 Others £’000 21 12 33 30.6.12 Others £’000 40 26 66 Totals £’000 333 818 1,151 Totals £’000 106 26 132 21. Financial Instruments and Financial Risk Management The Group’s activities expose it to a number of financial risks that include credit risk, development risk, liquidity risk, market and other regulatory risk and interest rate risk. These risks, and the Group’s policies for managing them have been applied consistently throughout the year and are set out below: The Group hold no financial or non other financial instruments other than those utilised in the working operations of the Group and that listed in this note. Interest rate risk The Group’s interest rate risk arises from interest bearing assets and liabilities. The Group has in place a policy of maximising finance income by ensuring that cash balances earn a market rate of interest; offsetting where possible, cash balances and by forecasting and financing its working capital requirements. As at the end of the reporting period the Group was not exposed to any movement in interest rates in regard to loans and achieved less than 1% interest on cash holdings. The term “shares” indicates the value of ordinary share capital to be issued should targets be met and discount factors not change. Any changes resulting in revaluations of the consideration due in following reporting periods will be charged to the income statement. The Group’s working capital requirements are managed through regular monitoring of the overall cash position and regularly updated cash flow forecasts to ensure there are sufficient funds available for its operations. Liquidity risk The Group’s working capital requirements are managed through regular monitoring of the overall position and regularly updated cash flow forecasts to ensure there are funds available for its operations. Management forecasts indicate no new borrowing facilities will be required in the upcoming financial period. Development risks There is no assurance that the Group’s product development activities will be successful. Accordingly, the Group seeks to reduce this risk be reviewing the level of investment made in each product, as well as engaging qualified personnel to undertake detailed assessments of the products under development. Market and other regulatory risks Existing and possible future legislation, regulations and actions could cause additional expense, capital expenditures, delay and further product development work, the extent of which cannot be predicted. The Group takes a responsibility for ensuring that all relevant legislation is met. Credit risk Credit risk arises principally from the Group’s trade receivables which comprise amounts due from customers. Prior to accepting new customers a credit check is obtained. As at 30 June 2013 there were no significant debts pass their due period which had not been provided for. The maturity of the Groups trade receivables is as follows: 46 47 dotDigital Group Plc Annual Report and Accounts 2012/2013www.dotdigitalgroup.com Annual Report and Accounts 2012/2013 Notes to the Consolidated Financial Statements continued For the year ended 30 June 2013 21. Financial Instruments and Financial Risk Management continued 24. Related Party Disclosures The credit risk on liquid funds is low as the counterparts are banks with high credit ratings assigned by international credit ratings. Purchase of services 0-30 days 30-60 days More than 60 days As at 30.6.13 £’000 1,808 65 699 2,572 As at 30.6.12 £’000 1,425 20 716 2,161 The Group minimises its credit risk by profiling all new customers and monitoring existing client of the Group for changes in their initial profile. The level of trade receivables passed due the average collection period consisted of a value of £763,628 of which £250,269 was provided for. The Group felt that the remainder would be collected post as they were with long standing relationships, the risk of default is considered to be low and write offs due to bad debts are extremely low. The Group has no significant concentration of credit risk, with the exposure spread over a large number of customers. Details as to maximum fair values the Group’s financial assets and liabilities can be found in the consolidated statement of financial position. Capital Policy The Group’s objectives when managing capital are to safeguard its ability to continue as a going concern in order to provide optimal returns for shareholders and to maintain an efficient capital structure to reduce the cost of capital. In doing so the Group’s strategy is to maintain a capital structure commensurate with a strong credit rating and to retain appropriate levels of liquidity headroom to ensure financial stability and flexibility. To achieve this, the Group monitors key credit metrics, risk and fixed charge cover to maintain this position. In addition the Group ensures a combination of appropriate short term and long term liquidity headroom. During the year the Group had a short term loan balance of £nil (2012: £nil) and amounts payable over one year are nil. The Group had a strong cash reserve to utilise for any short term capital requirements that were needed by the Group. The Group has continued to look for a further long term investments or acquisitions and therefore to maintain or re-align the capital structure, the Group may adjust when dividends are paid to shareholders, return capital to shareholders, issue new shares or borrow from lenders. 22. Deferred Tax As at 1 July Current year provision Release of provision 23. Capital Commitments The Company and Group have no capital commitments as at the year end. 30.6.13 £’000 30.6.12 £’000 25 - (11) 14 - 25 - 25 48 Transactions between the Company and its subsidiaries, which are related parties, have been eliminated on consolidation and are not disclosed in this note. Group The following transactions were carried out with related parties Sale of services Cadence performance Entity under common directorship Email marketing services Sales of services are based on the price lists in force and at terms that would be available to third parties F-Beechinor-Collins* Entity under common directorship Barratts of Old Limited Entity under common directorship Consultancy services Consultancy services *Consultancy services to assist with the international expansion and development of channel sales strategy. Year end balances arising from sales/purchase of services F-Beechinor-Collins* Entity under common directorship Payables 30.6.13 £’000 1 1 30.6.13 £’000 6 12 18 30.6.13 £’000 - - 30.6.12 £’000 - - 30.6.12 £’000 54 - 54 30.6.12 £’000 (3) (3) The receivables and payables are unrestricted in nature and bear no interest. No provision’s are held against receivables from related parties. Key management compensation Key management includes Directors, non-Executive Directors and the Company Secretary. The compensation paid for key management for employee services are shown below Remuneration and other short term employee benefits Share based payments Directors Aggregate emoluments Company contributions to money purchase pension scheme Information in relation to the highest paid Director is as follows: Salaries Other benefits Pension costs 30.6.13 £’000 931 - 931 30.6.13 £’000 588 38 626 30.6.13 £’000 176 1 11 188 30.6.12 £’000 911 10 921 30.6.12 £’000 602 48 650 30.6.12 £’000 156 - 11 167 49 dotDigital Group Plc Annual Report and Accounts 2012/2013www.dotdigitalgroup.com Annual Report and Accounts 2012/2013 Notes to the Consolidated Financial Statements continued For the year ended 30 June 2013 24. Related Party Disclosures continued Company The following transactions were carried out with related parties Year end balances arising from sales/purchase of services Barratts of Old Limited Entity under common directorship dotMailer Limited Subsidiary dotAgency (previously known as dotSearch) Limited Subsidiary Receivables Payables Receivables 30.6.13 £’000 30.6.12 £’000 - - (1,303) (1,166) 9 10 (1,294) (1,156) The receivables and payables are unrestricted in nature and bear no interest. No provision’s are held against receivables from related parties. Loans to related parties dotMailer Limited Subsidiary At 1 July Loans advanced in year 30.6.13 £’000 30.6.12 £’000 - 5,400 5,400 - - - The loan to subsidiary company dotMailer Limited is unsecured and is made on an interest free basis. Key management compensation Key management includes Directors, non-Executive Directors and the Company Secretary. The compensation paid for key management for employee services are shown below Remuneration and other short term employee benefits Directors Aggregate emoluments 30.6.13 £’000 88 88 30.6.13 £’000 88 88 30.6.12 £’000 85 85 30.6.12 £’000 85 85 25. Ultimate Controlling Party There is no ultimate controlling party of the Group. dotDigital Group PLC acts as the Parent Company to dotMailer Limited, dotAgency Limited (previously known as dotSearch Limited), dotSearch Europe Limited, dotMailer Inc, dotSurvey (previously known as dotAgency) Limited (Dormant), dotSEO Limited (Dormant), dotCommerce Limited (Dormant) and dotEditor Limited (Dormant). 50 26. Share-Based Payment Transactions The measurement requirements of IFRS 2 have been implemented in respect of share options that were granted after 7 November 2002. The expense is recognised for share based a payment made during the year is £13,190 (2012: £57,183) Also on 9 November 2012 the Board of Directors also granted 1,500,000 (2012: 8,177,930) options to employees of the Group exercisable on or after 1 December 2014 until 30 November 2017. Vesting conditions of the options dictate that employees must remain in the employment of the Group for the whole period to qualify. Movement in issued share options during the year The table illustrates the number and weighted average exercise price (WAEP) of, and movements in share options during the period Outstanding at the beginning of the period Granted during the year Forfeited/cancelled during the period Exchanged for shares Outstanding at the end of the period Exercisable at the end of the period No of options 17,909,930 1,500,000 1,922,222 2,109,778 15,377,930 Nil 30.06.13 30.06.12 WAEP No of options 7.25p 13.00p 7.25p 6.34p 11,722,000 8,177,930 1,600,000 390,000 17,909,930 Nil WAEP 5.00p 6.54p 6.54p 7.25p The weighted average exercise price (WAEP) in regards to the comparatives have been restated to reflect the share consolidation undertaken in February 2010. The options outstanding at 30 June 2013 had a weighted average price of 6.34p (2012: 7.25p), and a weighted average remaining contractual life of 3.5 years. Number of options granted Share price at grant date Exercise price Option life in years Risk free rate Expected volatility Expected dividend yield Fair value of option/warrant 9 November 2012 13 October 2011 11 November 2010 20 October 2009 1 February 2009 1,500,000 8,177,930 6,800,000 21,250,000 7,600,000 12.95p 13.00p 6 years 2.05% 30% 0% 2.72p 6.53p 7.25p 5.13p 5.13p 1.00p 1.00p 1.00p 1.00p 4.25 years 4.5 years 8.67 years 10 years 2.43% 7.83% 0% 0.33p 2.43% 7.83% 0% 0.25p 2.55% 12% 0% 0.7p 2.55% 51% 0% 0.34p The fair value of the options granted in the year have been calculated using the Black Scholes model assuming the inputs shown below: Expected volatility was determined by calculating the historical volatility of the Group’s share price from the date it listed to the grant date of the share option. The expected life used in the model is based on management’s best estimate, for the effects of non-transferability, exercise restrictions and behavioural considerations. Number in options detailed above and the respective comparisons have been restated for the share consolidation undertaken, see note 16 for further details. 27. Group Reconciliation of Profit Before Corporation Tax to Cash Generated from Operations Group Company Current: Profit before tax from all operations Currency revaluation Exceptional item: Impairment of goodwill Depreciation Loss on disposal of fixed assets Share based payments Finance costs Finance income Increase in trade receivables Increase in trade payables Cash generated from operations 30.6.13 £’000 962 (2) 2,326 831 50 13 - (13) 4,167 (696) 346 3,817 30.6.12 £’000 2,773 - 1,187 557 1 57 1 (1,088) 3,488 (540) 327 3,275 30.6.13 £’000 2,809 - 2,326 - - 13 - - 5,148 (5,410) (11) (273) 30.6.12 £’000 (369) - 1,193 - - 57 - (1,079) (198) 1 (39) (236) 51 dotDigital Group Plc Annual Report and Accounts 2012/2013www.dotdigitalgroup.com Annual Report and Accounts 2012/2013 Corporate Statement Notes to the Consolidated Financial Statements continued For the year ended 30 June 2013 dotDigital Group is the UK market leader in the provision of Email Marketing software to digital marketing professionals. The group’s 28. Group Cash and Cash Equivalents fl agship product, dotMailer, is a powerful SaaS-based email marketing The amounts disclosed on the statement of cash flow in respect of cash and cash equivalents are in respect of these statement of financial position amounts: automation platform used by its clients to engage with their customers to build brand awareness, develop customer loyalty, generate new leads and promote repeat business. As at 01 July 2011 Group £’000 2,568 As at 31 July 2012 4,021 As at 31 July 2013 29. Net Cash Flows from Discontinued Operations Net cash generated from operating activities Net cash generated from investing activities Net cash used in financing activities 6,072 30.6.13 £’000 (148) 1 - Company £’000 235 83 70 30.6.12 £’000 420 - (207) 30. Research & Development During the period the Group incurred nil (2012: nil) in research costs and £1,339,730 (2012: £1,118,538) in development investments. All resources utilised in research and development has been categorised as outline in the accounting policy governing this area. 31. Post Balance Sheet Events There are no post balance sheet events which impact the Groups financial statements. 32. Prior Period Adjustment On 1 July 2012 the Board of Directors re-categorised the nature of some expenditure items from administrative to cost of sales. The impact of this on the comparative figures on the income statement are as follows: Revenue Cost of sales Gross profit Administrative expenses Operating profit before exceptional items Profit for the year Contents Corporate Statement 2013 Key Highlights Chairman ‘s Statement Chief Executive’s Report Corporate Social Responsibility Our Board of Directors Corporate Governance Report Audit Committee Report Remuneration Committee Report Report of the Directors Report of the Independent Auditors www.dotdigitalgroup.com Annual Report and Accounts 2012/2013 52 30.6.12 £’000 11,987 (875) 11,112 (8,240) 2,872 2,467 Continuing operations 30.6.12 (restated) £’000 Discontinued operations 30.6.12 (restated) £’000 9,547 (576) 8,971 (6,532) 2,439 2,187 2,440 (693) 1,747 (1,314) 433 281 Effect of change £’000 - (394) (394) 394 - - IBC Consolidated Income Statement Consolidated Statement of Comprehensive Income Consolidated Statement of Financial Position Company Statement of Financial Position Consolidated Statement of Changes in Equity Company Statement of Changes in Equity Consolidated Statement of Cash Flows Company Statement of Cash Flows Notes to the Consolidated Financial Statements Company Information 1 2 3 12 14 16 17 18 20 25 26 26 27 28 29 30 31 31 32 IBC Company Information Directors S Bird P A Simmonds I Taylor G Fidura R Kellett-Clarke F Beechinor-Collins S J Barratt (appointed 9 October 2012) Secretary M Patel Registered Offi ce Finsgate 5-7 Cranwood Street London EC1V 9EE Registered Number 06289659 (England and Wales) Auditors Jeff reys Henry LLP Statutory Auditor Finsgate 5-7 Cranwood Street London EC1V 9EE Solicitors BPE Solicitors LLP St James House St James Square Cheltenham GL50 3PR Croydon No. 1 Croydon 12-16 Addiscombe Road CR0 0XT T: 020 8662 2762 Manchester Pall Mall Court 61-67 King Street Manchester M2 4PD T: 0161 618 1070 Design and production by Philosophy www.philosophydesign.com Print by Moore Print www.mooreprint.co.uk Principal Bankers National Westminster Bank plc Charing Cross, London Branch PO Box 113 Cavell House 2a Charing Cross Road London WC2H 0PD Registrars Share Registrars Limited Suite E First Floor 9 Lion and Lamb Yard Farnham Surrey GU9 7LL Nomad/Broker N+1 Singer 1 Bartholomew Lane London EC2N 2AX Joint Broker Finncap 60 New Broad Street London EC2M 1JJ Website www.dotdigitalgroup.com London Bridge 6-8 Emerson Street London SE1 9DU T: 020 7654 8686 Edinburgh MWB Business Exchange 9-10 St Andrews Square Edinburgh EH2 2AF T: 0131 718 6037 New York Suite 307, 3rd fl oor 350 7th Avenue New York, 10001 United States T: 1-212-971-940 www.dotdigitalgroup.com Annual Report and Accounts 2012/2013 Innovating SaaS Technology and Tools for Marketers 

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