Eckoh plc Annual Report 2015

Plain-text annual report

Annual Report 2015 ANNUAL REPORT 2015 CONTENTS 01 Strategic Report 04 06 07 13 Highlights of the Year Chairman’s Statement Business Review Corporate Responsibility 02 Market Review 18 19 21 22 23 24 25 27 28 29 30 31 33 34 Overview Our Clients State of the Contact Centre Market Securing Customer Service Payment Channels Case study: Screwﬁx Case study: Cooperative Response Center IVR Remains a Key Self-Service Tool for Contact Centres Case study: Transport for London Removing Call Menus Multi-Channel Self-Service Case Study: Yodel Service Strategy and Overview Our Technology What Our Clients Say about Eckoh 03 Governance Report 38 39 43 47 48 Board of Directors Director’s Report Corporate Governance Directors’ Responsibilities Independent Auditor’s Report 04 Financial Review 52 56 87 88 95 Consolidated Financial Statements Notes to the Financial Statements Company Financial Statements Notes to the Company Financial Statements Shareholder Information ANNUAL REPORT 2015 2 Strategic Report ANNUAL REPORT 2015 3 Strategic Report SECTION 01 Strategic Report 04 Highlights of the Year 06 Chairman’s Statement 07 Business Review 13 Corporate Responsibility ANNUAL REPORT 2015 4 Strategic Report Highlights of the Year Eckoh plc (AIM: ECK), the UK’s leading provider of multi-channel customer service and secure payment solutions, is pleased to announce its ﬁnal results for the year ended 31 March 2015. The Company has also announced separately today that it is in advanced discussions regarding the possible acquisition by Eckoh of the entire ordinary share capital of Netcall plc (“Netcall”), a leading customer engagement software provider, on a recommended basis. Operational Highlights: Current Trading: Record number of new UK clients, 19, largely from retail, leisure and ﬁnancial services, contracted during the ﬁnancial year; US subsidiary, Eckoh Inc, secured ﬁve customers in its ﬁrst ﬁnancial year and the US team now enlarged to six employees 100% renewal of all signiﬁcant customer contracts falling due within the period Announced advanced discussions regarding the possible recommended acquisition of Netcall. New enhanced ﬁve-year framework agreement concluded with Capita Customer Management (“Capita”), announced separately today New ﬁve-year Capita contract for leading UK transportation organisation Largest margin client renewed for two years Haloh voice and web solution (originally OneProx) has now been brought to market Encouraging sales pipeline in both the UK and US ANNUAL REPORT 2015 5 Strategic Report Financial Highlights: Revenue £17.2m Revenue up 22% to £17.2m (FY14: £14.0m) including recurring revenues of 76% EBITDA £4.5m Adjusted** EBITDA increased 40% to £4.5m (FY14: £3.2m) Gross proﬁt £13.1m Gross proﬁt increased 28% to £13.1m (FY14: £10.2m) Proﬁt before Tax £2.1m Proﬁt before Tax increased from a loss of £1.4m to a proﬁt of £2.1m Operating proﬁt £3.4m Adjusted* operating proﬁt increased by 54% to £3.4m (FY14: £2.2m) Basic EPS 0.96p Basic EPS increased to 0.96p (FY14: 0.14p) Dividend + 18% The Board recommends a 18% increase in full year dividend to 0.37 pence per share for the year ended 31 March 2015 (FY14: 0.3125 pence per share) *Adjusted Operating Proﬁt is Operating Proﬁt excluding expenses relating to share option schemes, legal fees and settlement costs and expenses relating to acquisitions **Adjusted EBITDA is the proﬁt before tax adjusted for depreciation, amortisation, ﬁnance income, ﬁnance expense and expenses relating to share option schemes, legal fees and settlement costs and amortisation and expenses relating to acquisitions ANNUAL REPORT 2015 6 Strategic Report Chairman’s Statement “We also continue to be successful in selling additional services to existing clients and growing individual contract values” - Chairman, Chris Batterham The year ending 31 March 2015 has marked another period of signiﬁcant growth for Eckoh with revenue and margin increasing by more than 20%, and adjusted* operating proﬁt growing by over 50%. Adjusted* operating proﬁt has grown from £1.5m to £3.4m over the past two ﬁnancial years. Beyond the ﬁnancials, we have seen growth across the business. We have seen record levels of client wins in the UK this year, largely driven by the regulatory demand for our secure payment proposition. We continue to be successful in satisfying client requirements with our innovative portfolio of solutions enabling us to retain all signiﬁcant clients that had a contract falling due for renewal in the year. We also continue to be successful in selling additional services to existing clients and growing individual contract values. We will be implementing an initiative in the year ahead to sell our customer services solutions into this growing portfolio of payment customers. Whilst payments are driving much of the client portfolio growth, customer services remain more lucrative opportunities and will continue to fuel the ongoing growth of the business. The growth has extended internationally also. Our ﬁrst employee in the US was engaged in February 2014 and this team has now grown to six. It is still early days in the US market but we have been able to make the infrastructure investment into the US without downgrading proﬁt forecasts in the Group as a whole. The pipeline of sales activity in the US remains larger than that in the UK and we remain conﬁdent that our opportunity for growth in the US is considerable. We have been pleased to welcome a number of new employees to the Eckoh team over the year as we ensure that we have the capacity to satisfy the demand for our solutions. We have worked hard to recruit and retain a highly skilled and committed team that are undoubtedly the foundation of the success that the Group is enjoying. I would like to thank the Eckoh employees for their ongoing hard work and commitment that has driven the ﬁnancial growth of the organisation. Chris Batterham Chairman *excluding expenses relating to share option schemes, legal fees and settlement costs and expenses relating to acquisitions ANNUAL REPORT 2015 7 Strategic Report Business Review “The 2014/5 ﬁnancial year has seen a continuation of the trend of strong growth seen in previous years” - CEO, Nik Philpot Introduction We are pleased to report on another year of excellent progress for the Group in which we have successfully invested in and established our US operation whilst continuing to drive strong results from our core UK operation. We have also announced separately today that we are in advanced discussions regarding the possible acquisition of the entire issued and to be issued ordinary share capital of Netcall plc (“Netcall”), a leading customer engagement software provider, on a recommended basis. As in previous years, we had a typically stronger period of trading in the second half of the ﬁnancial year enabling us to deliver another period of excellent growth. As well as the impressive ﬁnancial performance, we are pleased to be able to report on progress with the strategic objectives we have worked towards over recent periods. These objectives include: • • Establish and expand our US footprint to capitalise on secure payment opportunities Leverage channel partners in both UK and US markets • Bring the new payment product Haloh (formerly OneProx) to market in the past. Approximately 76% of revenue in the year was of a recurring nature. • Continue to invest in R&D to underpin next generation product development and maintain market leading position • Continue to evaluate acquisition opportunities Looking ahead, we have also identiﬁed an additional objective to support our continued growth, namely to maximise client value through cross-selling, which will be a key focus for the Group in the new ﬁnancial year. Operational Review The 2014/5 ﬁnancial year has seen a continuation of the trend of strong growth seen in previous years. Our portfolio of payment solutions has enabled us to secure a record number of new contracts with 24 new clients signing up for services from Eckoh in the year. These included customers from a range of sectors including retail, ﬁnancial services and leisure, which have all signed multi-year contracts with guaranteed levels of revenue, which will maintain the high levels of recurring revenue that we have seen The base of recurring revenue continues to be supplemented by extremely high retention rates on existing clients with all clients of signiﬁcance that had a contract expiring in the period renewing for further periods, including since year end a two year renewal with our largest margin client. While the majority of our sales pipeline is currently generated by the payment solution portfolio, the majority of our revenue is still represented by our customer service solutions. We have been successful in the past in selling additional services to our existing clients and it is important that we drive increased operational and ﬁnancial engagement with the new payments clients by cross selling products and services from Eckoh’s customer engagement solution set. During the period we secured over £2m in new contract value from our existing clients, illustrating our success in upselling and cross-selling other Eckoh products. ANNUAL REPORT 2015 8 Strategic Report Maximising client value even further is a key part of our strategy in the year ahead with internal targets set and sales incentives in place to help ensure that this occurs. We are pleased to announce separately today a new ﬁve-year contract through our partnership with Capita’s Customer Management division (“Capita”) to provide a number of Eckoh services, including EckohROUTE, EckohID and EckohPAY, to a leading UK transportation organisation. This will see Eckoh providing the ability for customers to pay their charges or ﬁnes automatically over the phone, with their vehicles identiﬁed using Eckoh’s market leading speech recognition capability. Simultaneously we have been working on an updated framework agreement with Capita that replaces the three-year contract that was ﬁrst announced in April 2013. This new ﬁve-year contract illustrates the success of this channel partner relationship that has delivered around £12m of contract value for Eckoh so far. The new contract is designed to streamline the process involved in adding new clients and to allow for a broader product set than was originally envisaged, particularly in the mobile area. Our US business has made encouraging progress in its ﬁrst ﬁnancial year of business. Eckoh Inc employed its ﬁrst employees in the spring of 2014 and began work on developing a pipeline of opportunities in the new market that has to date generated six customer contracts for CallGuard On-Site. During the year we have in conjunction with our reseller partner, West Corporation (“West”), deployed a US hosting platform on which we can provide the hosted CallGuard solutions and the new Haloh product (previously referred to as OneProx) and this has had an encouraging reaction from customers. We have recently appointed our sixth US employee and second in our direct sales team to support the volume of sales activity that we are experiencing. Many of the early direct contract wins have been for modest sized installations in large organisations where there is a possibility of further and more lucrative installations over time. We are also seeing more formal tenders being issued, which was an important feature of the historic development of the UK market. We have been working for nearly a year with West Inc. (“West”), our exclusive reseller and strategic partner in the US. Under the terms of our contract with West the launch period now runs until the end of 2015 followed by four one-year periods thereafter, with each period having sales targets. The majority of West customers being targeted are Fortune 500 corporations and would typically represent potential deal sizes several times larger than our direct opportunities. Working with large US entities on sensitive areas such as credit card security, however, is leading to long and complex sales cycles with executives from IT, Finance, Security and Contact Centre often being involved in any purchasing decision. West is advising that the average sales cycle for a typical opportunity could be as long as 18 months. Since establishing our relationship we have been working closely with West on a long list of opportunities many of which are sizeable, the vast majority of which are still being worked on and have also been supplemented by new opportunities arising over the past 12 months. We continue to invest signiﬁcant effort in Research & Development (“R&D”) activity to ensure that we remain at the forefront of our ﬁeld of expertise. We have recently rebranded our latest solution that we have previously referred to as OneProx and this is now known as ‘Haloh’. Much of our recent R&D activity has centred on Haloh, which was launched to market at the recent Card-Not- Present (“CNP”) Expo in Florida in May 2015 and has already generated signiﬁcant sales interest in both the UK and US. Haloh is attractive as no integration is required to the client’s existing systems and processes and it can be implemented either at a client’s site or through our hosted platform. It protects organisations by replacing a customer’s payment card number with either a temporary ANNUAL REPORT 2015 9 Strategic Report or permanent token before the information enters an organisation’s IT environment or contact centre, thus rendering any stored information worthless to hackers or rogue employees. The Directors believe that Haloh could have prevented many of the mass event credit card breaches that have been experienced in recent years. Haloh is currently available for transactions made over the phone and the web and our R&D activity continues to assess the opportunity for also implementing it through Pin Entry Devices used in retail outlets globally. Possible Acquisition of Netcall As announced separately today, we are also in advanced discussions regarding a possible acquisition of Netcall on a recommended basis. Subject to the ﬁnal terms and conditions of any offer, it is proposed that the consideration would be payable in a mixture of cash and Eckoh shares on the basis of 1.25 Eckoh shares and 13 pence in cash for each Netcall share. This would imply a value of approximately 63.94 pence for each Netcall share based on the closing mid- market share price of an Eckoh share of 40.75 pence on 24 June 2015. It is the belief of the directors of Netcall and Eckoh that the Acquisition would represent a highly complementary ﬁt for both businesses, offering strategic and ﬁnancial synergies. Signiﬁcant cost savings are anticipated to be available to the combined business from the elimination of duplicate board and public listing costs and the directors of Eckoh expect the acquisition to be earnings enhancing. This statement does not constitute a proﬁt forecast nor should it be interpreted to mean that the future earnings per Ordinary Share of Eckoh will necessarily match or exceed historical earnings per Ordinary Share. There can be no certainty that any offer will ultimately be made for Netcall. Further updates will be issued when appropriate. Market Opportunity News stories continue to appear on a regular basis about large data breach incidents occurring across the globe, with the Ponemon Institute reporting that in 2014 43% of US companies had suffered a data breach in the preceding 12 months, an increase of 10% on the previous year. This issue continues to drive organisations to consider how they can better protect their customers’ information. De- scoping their infrastructure entirely by removing sensitive data altogether is increasingly seen as the best way of achieving that goal and Eckoh’s secure payment products enable organisations to do this. The most relevant breach story for Eckoh was reported in April 2015 when it emerged that AT&T had agreed a ﬁne of $25m from the Federal Communications Commission (“FCC”) in relation to incidents whereby contact centre agents had been paid by third parties to provide them with sensitive customer information such as names, phone number and social security numbers. In a statement, FCC Chairman Tom Wheeler said his agency would not “stand idly by when a carrier’s lax data security practices expose the personal information of hundreds of thousands of the most vulnerable Americans to identity theft and fraud.” Eckoh’s CallGuard and Haloh solutions are speciﬁcally targeted at ensuring that Contact Centre agents do not have access to the most highly sought after item of personal information, credit card data and social security numbers. Incidents such as that suffered by AT&T continue to fuel a highly lucrative pipeline of sales opportunities both in the UK and USA. Solving the challenge of protecting data in Contact Centres is particularly difﬁcult due to the human element, and what occurred at AT&T demonstrates that small numbers of individuals can have a huge and negative impact. Organisations are recognising they need to actively take steps to reduce the risk they may suffer due to the actions of rogue employees. Eckoh currently provide payment solutions to less than 10,000 contact centre agent seats in the US where we believe the number of agents taking payments to be around four million. So we are still at the very early stages of a huge opportunity for future growth. Whilst secure payments continue to drive the largest volume of sales enquiries, it is our customer service solutions that remain the most lucrative for Eckoh and provide the greatest return on investment for our customers. These solutions enable customers to obtain information, make requests or process transactions over the phone, web or mobile, without the need to speak to a live contact centre agent; this is known as ‘self-serving’. ContactBabel report that at the end of 2014 there were 5,840 contact centres in the UK with 734,000 agent positions, meaning that 4% of the UK’s working population are employed in contact centres. This is forecast to rise to 820,000 in 2018 representing a compound increase of 2.8%. ANNUAL REPORT 2015 10 Strategic Report In 2014 there were over 42 billion minutes of inbound calling to UK contact centres, representing just over 70% of all interaction, demonstrating that despite the introduction of alternative communication methods and channels over the past decade, voice interaction still remains the primary method for consumers to interact with companies for customer service. However, it is undoubtedly true that non-voice communication is steadily increasing in popularity and use, as is self-service. Solutions of this type enable organisations to provide 24 hour customer service at a cost per transaction that is typically around 10% of the cost of the enquiry being handled by a live agent. With around two thirds of the cost in an average Contact Centre being the agent salaries it is critical that agents’ time is used effectively and Eckoh’s range of multi-channel services can assist in helping the client maximise the efﬁciency of their contact centre operation. This rise of customer contact through multiple channels has been a feature of modern contact centres for some years and it has led to the agent or adviser increasingly needing to be multi- skilled in a variety of methods of interacting with the customer and for contact centres to deploy a variety of technologies to provide this capability. This re-skilling of both the agents and the operations themselves with multi-channel interaction has meant that overall capacity is still increasing, thus the downturn in the size of contact centre operations that many predicted some years ago has not proved to be the case. Current Trading and Outlook Going into the new ﬁnancial year, we have 25 new clients (19 in the UK, 6 in the US) who will be generating revenue through the year who were not contributing revenue at all at this point last year. Combined with the high level of recurring revenue from the existing base and signiﬁcant new business pipeline, Eckoh has a strong revenue platform from which to continue to build future growth. Over the past two ﬁnancial years, revenue has increased by 56% from £11.0m to £17.2m. With the largest global market, the US, still in its infancy with regard to credit card security, the growth delivered over recent years is expected to continue as Eckoh leverages its broad portfolio of solutions as well as maximising the value of its secured customer base, underpinned by a growing and increasingly important market. Therefore the Board remains very conﬁdent of delivering continued growth going forward, which the possible Acquisition of Netcall, announced today, would support further. Financial Review Revenue & Margin The growth seen in recent years has continued in 2014/5 with revenue growing by 22% to £17.2m (FY14: £14.0m). Gross margin remained high at 76% (FY14: 73%) and gross proﬁt increased by 28% to £13.1m (FY14: £10.2m). This is the second successive year where both revenue and margin growth has exceeded 20%. Proﬁtability Measures The table below shows how the acceleration in top line growth of the business has fed through to the overall proﬁtability of the Company. The Adjusted* Operating proﬁt of the Company has increased by 54% to £3.4m (FY14: £2.2m). This was achieved despite ﬁnancing the acceleration of the US growth activity. The expansion into the US contributed to a 21% increase in the adjusted operating expenses of the Group. ANNUAL REPORT 2015 11 Strategic Report Turnover Gross proﬁt Administrative Expenses Expenses relating to share options schemes Legal fees and settlement costs (note 4) Amortisation and expenses relating to acquisitions Adjusted* Administrative Expenses Operating proﬁt / (loss) Adjusted* Operating proﬁt / (loss) Year ended 31 March 2015 £’000 17,158 13,103 12,501 (939) (527) (1,320) 9,715 602 3,388 Year ended 31 March 2014 £’000 14,035 10,215 10,425 (1,247) - (1,165) 8,013 (210) 2,202 Year ended 31 March 2013 £’000 10,985 8,294 7,180 (375) - - 6,805 1,114 1,489 *excludes expenses relating to share option schemes, legal fees and settlement costs and acquisitions A similar trend was reﬂected in other proﬁt measures with a proﬁt before tax of £2.1m (FY14: loss of £1.4m). This proﬁt was assisted by a ﬁnance income of £1.5m arising from a reduction in the contingent consideration provided for the former owners of Veritape Limited. The contingent consideration was revised in August 2014 with 6.4m new shares being issued to the former Veritape owners with challenging new targets set based on the achievement of revenue targets in the USA for the whole Group. Achievement of these targets could potentially result in a further 4.3m shares being issued. ANNUAL REPORT 2015 12 Strategic Report “Combined with the high level of recurring revenue from the existing base and signiﬁcant new business pipeline, Eckoh has a strong revenue platform from which to continue to build future growth” Adjusted EBITDA as calculated in the table below increased by 40% to £4.5m (FY14: £3.2m) and has increased by 85% over the past two ﬁnancial years. Proﬁt before tax Amortisation of intangible assets Depreciation Acquisition costs Legal fees and settlement costs (note 4) Expenses relating to share options schemes Finance expense Finance Income Net interest receivable Adjusted* EBITDA 2015 £‘000 2,121 1,710 690 - 527 939 19 (1,518) (20) 4,468 2014 £’000 (1,367) 1,306 678 175 - 1,247 1,214 - (57) 3,196 2013 £’000 1,188 276 656 - - 375 - - (74) 2,421 *Adjusted EBITDA is the proﬁt before tax adjusted for depreciation, amortisation, ﬁnance income, ﬁnance expense and expenses relating to share option schemes, legal fees and settlement costs and amortisation and expenses relating to acquisitions. Balance Sheet The major Balance Sheet movement resulted from the acquisition of the freehold of the Company headquarters in Hemel Hempstead for £3.1m in December 2014. The purchase was funded through £2.9m of loans from Barclays Bank of which £2.7m remained outstanding as at 31 March 2015. During the year we made further capital investments in creating a hosting platform in the US and expanding the capacity of the UK platform as well as undertaking ﬁt out works to the UK ofﬁce following the freehold purchase. In total, expenditure on tangible ﬁxed assets was slightly over £5.0m. Naturally, the capital investments had a negative impact on cash balances which were inﬂated at the prior year end by an advance payment made by Capita in relation to the O2 contract of £2.4m. However, the Directors believe that the Company remains well ﬁnanced with a year-end cash balance of £4.4m. The Board remains very conﬁdent about the prospects of the business and is proposing an increase in the dividend to be paid in October 2015 of 18% to 0.37p per share. ANNUAL REPORT 2015 13 Strategic Report Corporate Responsibility Our Business Development Eckoh is committed to running the business in an ethical and responsible manner and we focus our efforts on three distinct areas: workplace, community and environment. In the Workplace Eckoh believes that its employees are the source of its competitive advantage and a valuable asset to the business. We recognise that continued and sustained improvement in the performance of the Group depends on its ability to attract, motivate and retain people of the highest calibre. Eckoh is an equal opportunities employer. No applicants or employees will be unfairly discriminated against on the grounds of criteria unrelated to their job performance. We are proud of our high staff retention level and we often see people return to Eckoh after a short time of leaving the business. Our people are very proud to work for Eckoh and this is demonstrated in the company’s Best Companies Accreditation status. During the year we retained our One Star ‘very good’ status that recognises the strength of the Company’s working practices and employee care. We are pleased to have created a number of employment opportunities this year and have seen our FTE employee base increase by 25% from 93 to 116 over the course of the year. We encourage our people to develop their skills and keep up to date with new technology, standards and processes. To build a high performance culture at Eckoh and support advancement, we have retained a programme of training and development that is offered to every employee within the business. Our managers have continued to attend a Management Development Programme enabling them to effectively lead their teams to deliver our key business objectives. We have introduced a regular series of technology forums where technology experts speak to our employees about their area of expertise. We continue to invest in our employees by funding training that will enable them to progress through the organisation. We have seen in many instances that young people leaving school have taken junior roles in the organisation and have progressed to take inﬂuential roles in the organisation. In the year ahead we intend to introduce a scheme to employ young people on apprenticeship schemes. Our investment in staff helps to retain and motivate our people, as well as assisting high achieving employees to progress and ﬂourish in their role. ANNUAL REPORT 2015 14 Strategic Report Communication In the Community We maintain our enthusiastic and motivated workforce through effective two-way communication. Staff members are regularly informed of matters, both positive and negative, that are affecting the business. This news is relayed with a feedback request through bi-monthly presentations to staff by Directors and regular email bulletins. Managers are also encouraged to share progress information within team brieﬁngs. Employees attend regular employee forum meetings at which they can contribute suggestions for how the working environment can be improved. Health, Safety and Accessibility The health, safety and wellbeing of the people on our premises are our highest priority. We hold regular risk management reviews that scrutinise the safety of our working environment. We actively encourage staff to protect each other from potential harm and be aware of their surroundings, mitigating any risk of slips, trips or falls. For employees or guests with reduced mobility, our ofﬁces are fully accessible with elevators to each ﬂoor. For those who choose to cycle or run as part of their daily commute, we have provided showers for their use and convenience. We actively encourage a healthy lifestyle and we have partnered with three local ﬁtness centres that offer Eckoh discounted memberships. We also provide free fruit for all our staff to encourage health and wellbeing. Eckoh recognises the importance of giving something back to the local community, as well as supporting national causes. Kings Langley School In March 2015, employees from Eckoh attended a careers fair at Kings Langley School to talk to pupils and parents about careers and employment opportunities as they are reaching the end of their school days and for some, entering the world of work. Our industry experts spoke in great detail about careers in technology and what we have to offer here at Eckoh. The event was well attended by students and parents and the group shared their own personal career experiences as well as talk about what we do at Eckoh, our opportunities and careers available. The event was a great opportunity to help to raise our proﬁle in the local area as an employer of choice, promote Eckoh and recruit into our growing teams. Christmas Charity – Keech Hospice Eckoh’s Christmas charity was Keech Childrens Hospice. Employees donated gifts for the children in the hospice care and made a charitable donation of £750. ANNUAL REPORT 2015 15 Strategic Report Comic Relief Bake Off Headlines Charity Employees at Eckoh enjoy baking and raising money for Charity. Eckoh participated in the Comic Relief bake off and raised £258 for the charity. Macmillan Coffee Morning Eckoh supported Macmillan with their world’s biggest coffee morning, a great fundraising opportunity to help in the ﬁght to beat cancer. Our employees baked and sold cakes and raised £229 for the charity. Each year, Eckoh participate in the Sunday Times Best Companies Survey, where our employees are requested to complete an employee survey to give their feedback on their experiences on working at Eckoh. For every survey completed, we pledged to make a £5 donation to Headlines and a donation of £585 was made. Employees were given the opportunity to nominate a charity to receive a donation. Headlines was chosen by our employee, Danielle Payne who holds this charity close to her heart as she has a dear friend with a child who has a craniofacial condition. In the Environment Although operationally we do not manufacture products, Eckoh understands the impact our business can have on the environment. From the efﬁcient lighting in our ofﬁces to the fair trade coffee in our kitchen areas, we carefully consider the purchases we make and encourage our suppliers to be equally considerate in the way they conduct their business. Eckoh has taken the following steps to ensure that we are doing’ all we can for the environment and to set a good example to those who we come into contact with: • • Reduced business travel through the use of web and phone based conferencing systems Energy efﬁcient and motion sensor lighting in our ofﬁces • Comprehensive recycling programs in all possible locations • • • Photo copiers set to double-sided, black and white printing to reduce paper/ink use Provide reusable cups and glasses to reduce waste associated with disposable cups Encourage alternative methods of transport to travel to and from work e.g. cycle to work scheme. ANNUAL REPORT 2015 16 Contact Centre Market Review ANNUAL REPORT 2015 17 Contact Centre Market Review SECTION 02 Market Review 18 Overview 19 Our Clients 21 State of the Contact Centre Market 22 Securing Customer Service Payment Channels 23 Case Study: Screwﬁx 24 Case Study: Cooperative Response Center 25 IVR Remains a Key Self-Service Tool for Contact Centres 27 Case study: Transport for London 28 Removing Call Menus 29 Multi-Channel Self-Service 30 Case Study: Yodel 31 Service Strategy and Overview 33 Our Technology 34 What Our Clients Say about Eckoh ANNUAL REPORT 2015 18 Contact Centre Market Review Overview Eckoh is a global provider of secure payment products and customer service solutions. Eckoh leads in secure payment technology, specialising in assisting organisations to take payments securely when the payment card is not present, for example over the phone, web or mobile. Each year we process over £900 million in card payments for clients in accordance with Payment Card Industry Data Security Standards (PCI DSS). As a PCI DSS Level One Compliant Service Provider, more organisations every year trust Eckoh to protect their contact centre and customers from payment card fraud and security breaches. In addition to our payments products we have a portfolio of customer service technology solutions that particularly targets organisations with contact centre operations. These services enable organisations to manage their customer communications more efﬁciently and securely. Our multi- channel products give customers the ability to make enquiries, get information or make transactions over the phone, web or mobile without needing to interact with a contact centre agent or adviser. This signiﬁcantly reduces operational costs, streamlines contact centre processes and reduces inbound call queues. Our services include: Secure card payments compliant with PCI DSS Secure agent-assisted payments Automated payments E-commerce transactions Customer Service Solutions Intelligent call routing using advanced speech recognition Customer identiﬁcation and veriﬁcation Real-time information provision Customer data capture Customer surveys Product reservation and/or purchase Balance enquiries, subscriptions and renewals Delivery tracking Outbound notiﬁcations Mobile applications ANNUAL REPORT 2015 19 Contact Centre Market Review Our Clients For over 10 years, Eckoh has delivered secure payment and customer service for leading brands across an unmatched range of industry sectors. With a strong heritage in phone services using speech recognition, over the decade our proposition has broadened to become fully multi-channel, encompassing services delivered over the phone, web and mobile channels. In the UK we now handle more interactions than any other company in our marketplace. Eckoh typically works with the customer services divisions of large organisations, helping them become more efﬁcient. These companies tend to receive a high volume of customer enquiries that are handled by a live contact centre of between 50 to 2,000 agents that are either in-house or outsourced. It is this area of activity that we target with our service propositions. Our clients generally contract with us for an initial three- year period and the vast majority of them (over 95%) renew their contracts with us at the end of their term. This extremely high retention level is testament to both the quality of delivered solutions and the on-going support and improvements we provide through our Project Management and Account Management teams during the contract term. These teams are committed to ensuring that each client feels valued and cared for, and receives exceptional service. The contractual arrangements usually involve a monthly or annual use commitment, based upon volumes of interactions, transactions or payments. This provides us with a regular and predictable level of revenue across the duration of the contract. These recurring payments combined with committed monthly management fees represented 76% of the Group revenue for 2014/15 and gives the Company excellent visibility on future revenues. Our key cross-sector clients include some well-known names in their respective industries: Financial Services Access Prepaid Worldwide Assurant Group Barclays Stockbrokers Chaucer Insurance CIMA Collinson Group Co-operative Response Center Travel Addison Lee BAA Gatwick Airport Covéa Insurance London Stock Exchange Lifestyle Services Group RCI Financial Services Paratus AMC PayPoint Premium Credit National Rail Enquiries Transport for London Health Care Deaconess Healthcare Optum Housing/estates Bromford Housing Mobile Mini Trulia ANNUAL REPORT 2015 20 Contact Centre Market Review Utilities Afﬁnity Water Bournemouth Water Leisure and Media Avios Carnival Group Comic Relief Bristol & Wessex Billing Services Exodus Budget Energy Greenbank Holidays Co-operative Energy ^ Dwr Cymru Welsh Water E.ON Flow Energy Premier Inn RK Harrison Tenpin Vue Northumbrian Water William Hill Power NI South East Water South West Water Utilita Wessex Water IT/Telecoms ATOS BT Lebara LocalWorld O2 Resilient Networks Spoke Interactive Retail Electrolux Ford Hillary’s Blinds Howdens Ideal Shopping Direct Jaguar Land Rover Laura Ashley Screwﬁx/Kingﬁsher Group Tenpin The Garden Centre Group/ Wyevale Xerox Public Sector Department of Health Defra - Rural Payments Agency Essex County Council Fareham Borough Council Hampshire County Council Ministry of Justice Rural Payments Agency UK Asset Resolution Outsourcing and Distribution Azzurri Capita Customer Management Clearanswer Convergys CPM Cybersource GEOAmey Hammeroff Law Group Parcelforce Worldwide Royal Mail Rentokil Initial Sensee Serco Stream Global Yodel ANNUAL REPORT 2015 21 Contact Centre Market Review State of the Contact Centre Market The global contact centre spend grew at 5% in 2014 to reach US$300-350 billion, of which third-party outsourcing accounted for 20-25%.1 Contact Centre Outsourcer specialists dominate the market but have recorded moderate growth. Those who beneﬁtted from higher growth was due to their focus on innovation, analytics and multi-channel services. Share of non-voice channel continues to increase, being driven by the adoption of value-added services, which organisations are recognising as part of the overall contact centre operation. ContactBabel reports that at the end of 2014 there were 5,840 contact centres in the UK with 734,000 agent positions, meaning that 4% of the UK’s working population are employed in contact centres. This is forecast to rise to 820,000 in 2018 representing a compound increase of 2.8%. In comparison, in the US, there are around 44,000 contact centres, with over 3.4 million agent positions. After the US contact center industry’s decline in 2009/10, there has been strong growth. Large contact centres (with over 250 agent positions) employ almost half of all contact centre staff, despite only accounting for less than 10% of physical contact centre sites. Interestingly, similar to the UK, more than 4% of the US’s employed population work in contact centres. In 2014 there were over 42 billion minutes of inbound calling to UK contact centres, and over 200 billion of inbound calling to US contact centres respectively. This represents just over 70% of all interaction, demonstrating that despite the introduction of alternative communication methods and channels over the past decade, voice interaction still remains the primary method for consumers to interact with companies for customer service. 1 Everest Group ‘Contact Centre Outsourcing Annual Report 2015’ (2015) ANNUAL REPORT 2015 22 Contact Centre Market Review Securing Customer Service Payment Channels With the exception of business-to-business and manufacturing sectors, over 71% of organisations take card payments from customers over the phone (66% of these are through agents) 2. Most worryingly, only 20% of UK organisations surveyed by Verizon, were found to be PCI DSS compliant3. In the US over 47% of businesses take card payments without any form of automation, trusting internal processes and quality assurance to reduce the chance of fraud. In the UK In the US Still reeling from a series of breaches over the last couple of years, US organisations are looking for ways to secure and lock down their organisation from payment fraud. To capture this market, Eckoh has made excellent progress in the US, by securing six deals directly with reputable organisations including Xerox. Eckoh has ﬁrmly established an exclusive reseller agreement with West Corp to capitalise on their client base of Fortune 100 and 200 companies. Owing to the size of these businesses, progress has been inevitably slower to secure deals, but the pipeline is signiﬁcant and illustrates the severity of payment security concerns in the US. “Eckoh was chosen by the expert judges over some of the largest international secure payment providers to receive this award.” UK businesses have acknowledged PCI DSS requirements and are actively seeking to ﬁnd solutions that best ﬁt their contact centre infrastructure. Unlike the US, the UK hasn’t witnessed any exceptional breaches4, but the media attention surrounding large US multi-nationals in recent months has kept the threat ever present in this country. This will ultimately lead to an increase in competition, with new players hungry to exploit the same regulation drivers that Eckoh has targeted over the last few years. However, our pedigree of proven, watertight solutions and good client references should enable us to retain our market share and continue to win signiﬁcant deals. 80% of Eckoh’s new business in 2015 has come from the need for secure payments solutions. Not only does this conﬁrm our position in the market, but it also provides us with an upsell opportunity for self-service solutions that may not have otherwise been possible. In 2015, our CallGuard Solution was recognised as the ‘Best Call Centre Solution’ at the Card-Not-Present Expo. The CNP Awards, which were hosted in Orlando, Florida, are the only awards globally to speciﬁcally focus on security solutions for card payments made when the customer is not present, such as over the phone, on the internet or on a mobile device. The nominations came from an international scope of companies and Eckoh was chosen by the expert judges over some of the largest international secure payment providers to receive this award. This supports Eckoh’s strong footing in the US and clear brand awareness as a leader in secure payment solutions. 2 Contact Babel, The US and UK Contact Centre Decision Makers Guides 2014 3 Verizon PCI Compliance Report 2015 4 The Home Depot card fraud breach in 2014 was the largest in US history ANNUAL REPORT 2015 23 Contact Centre Market Review Screwﬁx Case Study: Screwﬁx secures its contact centre payments with Eckoh’s CallGuard Andrew Ashby, Director of Customer Operations at Screwﬁx, said, “As a business committed to providing our customers with the very best service, we wanted to ensure that all of our payment processes remain as secure as possible, including transactions made through our contact centre. CallGuard fulﬁls this need perfectly and enables us to take payments from customers over the phone in a PCI compliant way, without compromising the customer experience.” This year, Eckoh won a new three year contract with Kingﬁsher IT Services (KITS) to provide its card payment service, CallGuard, for its Screwﬁx contact centre. Screwﬁx is the UK’s largest multi- channel supplier of trade tools, work-wear, and plumbing and electrical essentials. With over 30 years’ experience in the industry, they despatch tens of thousands of parcels every week for next day and weekend delivery to tradesmen and DIY enthusiasts all over the UK. Customer Service is top priority at Screwﬁx and the business is proud of their award winning contact centre. Eckoh supplies Screwﬁx with its CallGuard payment solution which is compliant with the Payment Card Industry Data Security Standards (PCI DSS). CallGuard’s hosted service enables customers to provide card payment details to an agent securely over the phone without those details being heard, seen or transferred into the contact centre environment. Adding CallGuard within their contact centre enables Screwﬁx to remain compliant with PCI DSS as well as continuing to keep the opportunity of fraud to a minimum and to maintain a reassuring process for their customers. ANNUAL REPORT 2015 24 Contact Centre Market Review Cooperative Response Center, Inc. Case Study: CRC Protects their phone payments using CallGuard Cooperative Response Center (CRC) is a nationwide, cooperatively owned and operated, 24/7 contact centre, and alarm monitoring centre. Providing services to electric utilities, CRC currently serves over 350 members and associate members in 42 states, representing over 5.6 million consumers. With thousands of calls coming in from customers relaying credit card details, CRC needed a method that would comply with PCI Data Security Standards across the enterprise, but maintain their high level of customer service. CRC wanted to change the process of capturing credit card numbers from being spoken by the caller and then entered by the agent, to being keyed into the phone by the caller and captured by the agent’s PC. CallGuard On-Site was presented to CRC who needed to know how it was going to work operationally from a contact centre perspective. They also needed to know how well it would integrate with other IT and Telecoms within the business. After the proof of concept was approved, CRC implemented CallGuard across the entire enterprise, across multiple desktops and programs. A Decoder was installed on each desktop and phone which encrypts the card details before they enter the agent’s screen. The agent only hears the sound of the numbers being keyed in. A Filter was also installed next to the CRC call recorder to remove the DTMF tones made through the keypad and replace them with ﬂat tones. Finally, DataShield was uploaded onto the agents’ desktops to mask the card data from appearing on the screens as the Decoder interprets the pressed keys and inserts the numeric data entry. These ﬁelds cannot be accessed by agents and ensures that the information cannot be communicated, stored or written down. CRC rolled out CallGuard in a very short time of just three months. The solution now enables contact centre agents to take sensitive information from customers without seeing or hearing any data being verbally relayed to them. Paul Thompson, Vice President of Administration/CFO, Cooperative Response Center, Inc. said: “The biggest hurdle we have had to overcome was ﬁnding a solution that would allow us to continue offering 100% caller/agent interaction as well as 100% recording of payment calls. Both high level caller/agent engagement and call recordings have been viewed by our members as valuable cornerstones of CRC’s services and we believe they will continue to be important in the future. Our answer was found in CallGuard.” ANNUAL REPORT 2015 25 Contact Centre Market Review IVR Remains a Key Self-Service Tool for Contact Centres Interactive voice response (IVR) has revolutionised the contact centre world by allowing consumers to quickly resolve basic enquiries on their own. It was the ﬁrst self-service channel available to consumers, giving organisations the ability to handle larger quantities of customers and reduce operational costs. with personalising their customer service interactions by providing differentiated experiences for broad customer segments.” This will be achieved by delivering the right service experience — either via self-service or agent assisted — to the right user at the right time. Eckoh’s clients understand that they cannot stand still and “The company can now control those changes autonomously and put them ‘live’ instantly.” must keep innovating and exploring new ways of meeting customer demands through all relevant channels. Over time, although technology and The facts speak for themselves - 70% of all inbound customer contact is still handled through the telephone5 and viewed by organisations and consumers alike as a compulsory method of contact. Although, there has been an undeniable growth in other channels such as email and web chat, which has added greater choice of how consumers interact with organisations. The growth of these new channels has been ultimately driven by consumer behaviour. Today’s innovative self- service capabilities have led to contact centres tasking themselves with providing a more efﬁcient, ﬂuid customer experience. This ultimately means integrating all of their customer contact channels seamlessly, including their IVR’s. Running in parallel with these advances in technology, interactions have changed shape with each new generation of consumer. ‘Baby Boomers’ and earlier generations prefer to speak with someone directly concerning their enquiry or issue, while ‘Millennials’ prefer methods that support autonomy, giving them the freedom and choice to navigate potential options or solutions on their own, and only speaking to a customer-service agent if they cannot resolve the issue themselves. Regardless of the generational gaps, 54% of consumers still dial a customer services department, while 27% ﬁnd assistance through online self-service channels6. According to Forrester, “organisations need to go further processes have changed and improved, our clients’ goals remain the same – reducing operational costs, improving customer service, and creating efﬁciencies for their business. As a business, we strive to not only deliver up-to-date solutions, but to drive innovation and advance within our core market. Our enthusiasm to grow technically and commercially has played a fundamental part in transforming our business from a speech recognition provider, to a successful multi-channel self-service provider. Intelligent Call-Routing and Distribution The IVR market is now a mature business process, handling billions of calls every year across the world but with the modern digital savvy consumer and the advent of the web, email, mobile and social media channels, the market is experiencing a change through modernisation. The initial IVR solutions were built on call ﬂows or ‘trees’, which have grown into forests, where their ‘branches’ need to be pruned and redesigned to merge with the new multi- channel approach. This provides Eckoh with an excellent opportunity to drive this change and ensure IVR continues to play a major role in the contact centre, now and for years to come. 5 Contact Babel ‘UK Contact Centres in 2015: The State of the Industry & Technology Penetration’ (2014) 6 Zendesk Survey (2013) ANNUAL REPORT 2015 26 Contact Centre Market Review Over 20% of contact centres said that their priority investment areas was to upgrade their ACD/routing functionality and telephony systems7 in 2015. This not only demonstrates the market desire to continue voice channels, but also the need to update and enable systems to coexist and integrate to provide the centralised customer service that consumers are demanding. Call-routing and Automatic Call Distribution (ACD) design plays a huge part in making an IVR successful from a customer and agent optimisation perspective. Businesses are now more complex with more products and they have a requirement to make changes to the ‘call ﬂow’ within the IVR more regularly. Historically, any changes would be designed and delivered by the IVR hosting provider but our intelligent call-routing platform, EckohROUTE, now enables the customer to change the ﬂows themselves. This is of great value to companies that are regularly changing their customer offers or have speciﬁc information that they need to deliver on a short term basis. The company can now control those changes autonomously and put them ‘live’ instantly. EckohROUTE was ﬁrst delivered to Premier Inn across their entire estate, giving them complete control of how and where inbound calls are delivered. The system routes inbound calls to contact centres, departments, outlets or branches based on business rules, intelligent call routing plans and conﬁgurable parameters that contact centres can deﬁne in-house. All calls are delivered to the relevant destination in line with business needs and answered no matter how unpredictable the circumstances. This baseline call-routing infrastructure can have a dramatic effect on all channels that link to it, so selecting the most dynamic and ﬂexible platform is paramount for contact centres. As well as adding to our core front-end service set, Eckoh’s technical expertise has enabled us to develope this versatile back-end, call-routing technology. In 2015, one of Eckoh’s largest and long-standing clients’ Transport for London, also adopted EckohROUTE for their contact centre operation, this is expected to go live in late summer 2015. 7 Contact Babel ‘UK Contact Centres in 2015: The State of the Industry & Technology Penetration’ (2014) ANNUAL REPORT 2015 27 Contact Centre Market Review Transport for London Case Study Intelligent Call-Routing with EckohROUTE Eckoh has worked with Transport for London (TfL) since 2009 providing a range of self-service solutions, including their automated IVR Journey Planner, natural language speech recognition IVR; and secure Oyster Card identiﬁcation, veriﬁcation and secure account enquiries. In new agreements this year, Eckoh will manage all of TfL’s 15 million inbound calls with intelligent call- routing solution, EckohROUTE. Through Capita, we also now manage the automated IVR payments of Congestion, Low Emission Zone and Parking Charges. TfL chose EckohROUTE to direct calls to contact centres, departments, outlets or branches based on call-routing plans and conﬁgurable parameters that their Customer Service team could deﬁne. This intelligent call-routing solution means TfL has complete control of how and where their inbound calls are handled, plus the ﬂexibility to cater for all circumstances, especially at times when the transport network comes under pressure from unpredictable events such as severe weather conditions. As part of this contract, Eckoh will also address strategic requirements to consolidate the number and complexity of automated functions that are currently fulﬁlled by separate solutions. An existing client of both Capita and Eckoh, TfL approached Capita to optimise and automate inbound payment requests for Congestion, Low Emission and Parking Charging Payments. To pay charges, drivers just have to say their car registration, make and model to be recognised by EckohID&V. Using EckohPAY, drivers are then prompted for their card details to pay the fees. This interaction all takes place using intelligent speech recognition. ANNUAL REPORT 2015 28 Contact Centre Market Review Removing Call Menus As part of the IVR modernisation, there is now a growing requirement for contact centres to use innovative information technology options to reduce complex call menus to more effectively navigate customers to the correct agent or department. Utilising in-call routing, ACD, automatic speech recognition (ASR), computer-telephony integration, interactive voice response (IVR) systems and CRM tools, contact centres can deliver a better service to the new breed of ‘on-demand’, less patient and less forgiving consumers whilst also reducing the Average Handling Time (AHT) of each call. Speech recognition is ﬁnally gaining traction within the mainstream consumer market with major brands such as Google, Microsoft, Amazon and Apple all driving the technology development. Consumer take-up is increasing as customers are encouraged to use their voice to access search engines as well as dictate messages and emails. Sold on the beneﬁt of ‘speed and efﬁciency’, receiving instant information has never been easier or quicker. This change in consumer behaviour has now led to contact centres experimenting with natural language speech recognition as an alternative to call menus. Eckoh’s natural language application and dialogue, EckohASSIST, delivers a single phone number to the organisation and greets callers with the simple question “how can I help you?” In their own words, the caller can say why they are calling and will be routed to the correct destination, based on their reply. EckohASSIST removes lengthy menus altogether. This not only means that callers can take more control of their interaction, but in doing so, it minimises any frustration and increases their conﬁdence in the organisation they’re calling. If the system cannot conﬁrm the caller’s requirement automatically, the spoken audio is streamed instantly to a ‘hidden’ contact centre agent who can listen and classify the call manually to direct the caller to the appropriate agent or self-serve functionality to assist that customer. The advanced technology then remembers each verbal request, as well as the action of the hidden agent for that request, so if the same request is made again by another caller, the system can fulﬁl the request and send that customer to the correct agent or self-serve function automatically. As the system learns more, then the requirement for the agent reduces. This approach not only provides a compelling and satisfying customer experience, but also delivers a signiﬁcant cost saving to the organisation by ensuring that their customers get the most appropriate outcome from their call. EckohASSIST Implemented at a Tier One UK Telecoms Operator Eckoh provides a suite of self-service applications to a large tier 1 UK telecoms operator. In partnership with Capita Customer Management, Eckoh is now delivering a range of advanced speech recognition applications, of which the most signiﬁcant is EckohASSIST. Owing to the vast organisational structure of our client, the service enables customer queries to be handled more quickly and efﬁciently than through the legacy touch-tone services. ANNUAL REPORT 2015 29 Contact Centre Market Review Multi-Channel Self-Service Omni-Channel Customer Service Eckoh can enable businesses to interact with their customers effectively through any contact channel they prefer. Services can be highly personalised, recognising customers from previous interactions and meeting their needs using information already known about them. This ensures that whichever channel the customer uses to interact, their experience remains consistent and their information and personal preferences are always available in real time. Whilst Eckoh’s heritage has been in the development of many of the UK’s most complex and most widely used speech solutions, in recent years our client’s desire to deliver a coherent and consistent customer experience across all of their communication channels has provided Eckoh an opportunity to broaden its offering into web and perhaps most importantly the mobile channel. Our clients now beneﬁt from the latest self-service technologies of which advanced speech recognition is but one. 8 Thirty-eight percent of US online consumers prefer online customer service over speaking to a person on the phone. Source: Forrester’s North American Technographics Customer Experience Online Survey, 2013. 9 Contact Babel ‘UK Contact Centres in 2015: The State of the Industry & Technology Penetration’ (2014) 10 Forrester (2015) ‘Trends 2015: The Future Of Customer Service’ Customers want to use a breadth of communication channels — self-service, voice, digital, and social— to interact with a customer service organisation, and often start their interactions online.8 Forrester predicts that customer service professionals will focus on effortless interactions, exploring new communication channels such as web/video chat with screen sharing and annotation as well as remote control customer devices to perform tasks on the customers’ behalf. This prediction is in line with priority investment areas, with 13% of contact centres planning expenditure in multi- channel and email, 8% on Web Chat, 7% on telephony self-service, and 5% on Web Self-Service/customer portal.9 Mobile IVR and Self-Service to Live Agent At the end of 2014, almost two billion individuals owned a smartphone globally. This number is expected to reach more than ﬁve billion by 2019. Forrester predicts that companies will increasingly focus on providing succinct mobile interactions that can be stopped, restarted, or switched to another device without a loss of context. Companies are also predicted to invest in multimodal interactions — for example, navigating a touch-screen menu system on mobile devices (not dissimilar to an IVR menu), that will streamline the process of connecting to the appropriate customer service agent.10 As well as our automation expertise in the voice channel through speech-enabled technology, Eckoh has evolved its portfolio to include web and mobile technology that offers organisations a large range of multi-channel, self-service solutions. We have successfully provided clients with the means to complement their existing contact centre voice technologies with web and mobile applications for customers. We continue to develop our mobile channel offering in-line with current market trends and drivers, including screen navigation methods that will connect to other channels (web, SMS, webchat) or straight to agent interaction. ANNUAL REPORT 2015 30 Contact Centre Market Review Yodel Case Study Automated customer self- service 24/7 parcel tracking and redelivery. Yodel is a parcel delivery and collection service brand, with clients and customers being their main focus. Driven by the upsurge in online shopping, the logistics industry is seeing a comparable increase in demand for home delivery and collection services. Eckoh provides Yodel with an automated customer information line that allows customers to track parcels and change delivery arrangements by phone on a 24 hour, no queue basis. The automated information line uses advanced speech recognition and caller identiﬁcation technologies to recognise repeat callers, anticipate their information requests and offer personalised information about their particular parcels. The new IVR solution has led to improved customer service due to increased ways of customers being able to contact Yodel. This frees up contact centre agents to focus on more complex or higher value calls. Since implementation, caller interaction levels have been in excess of 90% and brought signiﬁcant beneﬁts and improvements: • Around 60% of all calls through the IVR are serviced without any need for a live agent to be involved, increased from 32% on the previous system. • The percentage of abandoned calls has reduced by 50% as more callers choose to use the new service. • Calls that go direct to an agent have reduced from c.60% to 10%, far exceeding initial expectations. • Callers can speak to an agent from the main menu with minimal delay. ANNUAL REPORT 2015 31 Contact Centre Market Review Service Strategy and Overview Eckoh has a growing suite of payment products, including a new multi-channel platform that uses tokenisation. Eckoh has repackaged its secure payment offering under the name of HALOH which consolidates these products into a more streamlined and concise offering. This makes it easier for those organisations seeking to keep sensitive payment data out of their business environment and/or contact centre, to select Eckoh as their chosen payment solution provider. The demand for secure payment services gathered signiﬁcant momentum in 2014. It has now become the main new business sales generator for Eckoh, with demand for self-service solutions channelling from our strategic partners. Cross-selling with our existing client base has occurred over both specialisms. Customer service clients are purchasing PCI compliant payment solutions, and our payment services clients are exploring our self-service propositions. PCI DSS Compliant Payment Solutions In 2014, Eckoh became one of the few companies to have consistently maintained its Level One PCI DSS compliant service provider status. With an additional new multi- channel payments solution added to the portfolio, we now provide the widest range of secure contact centre payment solutions on the market. Customers approach us because they want to eliminate the presence of card data from all or parts of their contact centre or organisation. To solve this problem, we ask a series of qualiﬁcation questions to determine their need and suggest the most appropriate solution for their organisation and infrastructure setup. As well as protecting their customers’ card details from fraud risk, we also help organisations reduce their scope in a PCI compliance audit. In 2015, Eckoh made the decision to repackage its secure payment products under a new brand called HALOH. “The demand for secure payment services gathered signiﬁcant momentum in 2014. It has now become the main new business sales generator for Eckoh” ANNUAL REPORT 2015 32 Contact Centre Market Review HALOH HALOH is a suite of secure multi- channel payment products, speciﬁcally designed for organisations who want to stop sensitive card payment details from entering their environment. It can prevent card data from entering the phone, mobile or web channels, preventing hackers from stealing data and reduces the scope of PCI DSS Compliance: CallGuard – protecting your phone payment channel If an organisation takes payments over the phone through a contact centre, CallGuard stops sensitive card data from entering all or parts of it. The agent asks the customer to relay card data by using their telephone keypad. By using DTMF masking technology, it ensures that the agent, systems and processes are not exposed to card data. In addition, it removes those areas from the scope of PCI DSS compliance. There are various options for CallGuard that can be tailored to any organisations’ speciﬁc needs. For instance, it can be hosted or premised based, automated or agent assisted, and will secure all or just parts of the environment. If the contact centre is multi-site, we have a variant which uses tokenisation which eradicates the need for any changes to IT systems or processes. Eckoh offers the most resilient secure phone payment products on the market, suited for any requirement. DataGuard – Protecting your network and web payment channels If an organisation takes payment through websites, mobile apps or mobile websites, DataGuard prevents sensitive card data from entering the enterprise environment. Using a hosted tokenisation system, DataGuard shields the organisation from sensitive card data. This means sensitive card data is automatically substituted with a non- sensitive equivalent, or a ‘token’, when a payment takes place. A token looks like a card number but has no intrinsic meaning or value, which makes them totally worthless to hackers if they steal them. This patent pending solution is a compelling proposition for organisations. Unlike other tokenisation systems, it requires no changes to the organisation’s IT systems or processes, keeping integration costs minimal, with maximum security. EckohPAY – Protecting multi- channel, self-service payments EckohPAY can be applied over the phone, web and mobile channels, so it is truly multi-channel. Organisations who take regular payments from customers over the phone or web, use EckohPAY to optimise and secure their automated payment processes. Not only does this reduce call queues for agents who take calls from customers to pay bills, subscriptions or ﬁnance payments, but it ensures PCI compliance at every level. Multi-Channel Customer Service Solutions As the largest UK provider of hosted, multi-channel customer service solutions, Eckoh has become instrumental in increasing the efﬁciency of large contact centres. Through customer self-service automation, Eckoh has removed the more routine interactions from agents’ responsibility so that they are freed up to assist customers with more complex enquiries. We provide this self-service automation through touchtone and speech IVR, web and mobile applications. For the beneﬁt of our clients, we have productised these services into the following: • • • • • • • • EckohASSIST – Natural language call routing which avoids complex IVR menus by simply asking the the caller “How can I help you?” A hidden live agent ensures that the system retains the highest success rate EckohADDRESS - Captures name and address information and other personal data EckohCOMMERCE – Ordering goods and services EckohID&V – Identiﬁes and securely veriﬁes callers EckohINFO – Provides callers with real-time information (e.g. travel times) EckohLOCATE - Directs customers to stores or locations based on geographical location EckohSECURE - Authenticates callers and customers using voice biometrics EckohSURVEY - Enables contact centres to quickly create and deploy automated questionnaires ANNUAL REPORT 2015 33 Contact Centre Market Review Our Technology Technology Patent Granted In June 2014, Eckoh was granted a patent (no. 2478916) for the technology that underpins the CallGuard On-Site product, giving us the intellectual property of the solution throughout the UK. This patent will not only enable us to protect our technological investment in secure contact centre payments market, but will help us strengthen our market position in providing an extremely compelling and competitive answer to contact centres’ PCI compliance and payment security issues. As a vanguard in its ﬁeld, Eckoh prepared the original patent application ﬁve years ago in 2010. Since then, CallGuard has proved its success with organisations adopting the simple plug-and-play solution that conceals sensitive customer cardholder data from call recordings, contact centre agents and agent PCs. This patent is also pending in other territories including the US. The Company’s core technology is built on enterprise/carrier grade technology, and Eckohs’ developed bespoke system layers: • Holly Connects – VXML. • Cisco networking. • • EMC storage. F5 load balancers. • Nuance speech recognition – with all ports speech enabled and all main languages available. • Eckohs bespoke secure build web and application server farms. • Mobile and web hosted solutions make full use of existing resilient and secure components ensure a true end user multi-channel experience. Eckoh’s product development and delivery teams have over a decade of experience delivering both bespoke automated solutions and developing packaged products to assist the contact centre industry. Technology Eckoh continues to make signiﬁcant investment in its self-service platform, providing cloud based solutions to its customers across the globe. The platform provides highly available, scalable and secure multichannel solutions without the need for additional capital expenditure: • • • PCI DSS Level One compliance includes all areas of Eckoh’s cloud offering and contact centre operations. Platform extended to include two US locations; Dallas and Washington DC. The platform operates on an active-active basis ensuring resilience and scalable capacity for all services. Signiﬁcant extension of core software partnerships, including a 50% expansion of Nuance speech recognition licenses. Telephony connectivity is provided by multiple tier one carriers, supporting both SIP and traditional telephony. • Web connectivity provided by multiple ISPs. • Fully redundant WAN connecting all sites. • Disaster recovery provided with instant failover. • Burst capacity available on demand for unforeseen spikes and surges in trafﬁc. ANNUAL REPORT 2015 34 Contact Centre Market Review What Our Clients Say about Eckoh For over 10 years, Eckoh has delivered customer service and payment solutions for leading brands across an unmatched range of industry sectors. We now handle more interactions than any other company in our marketplace. These are just a few examples of what our clients say about us. “Eckoh brings a great deal of expertise in the complex area of PCI DSS compliance and network management and as a trusted supplier they were the natural choice for us.” - Siobhan Fagan, Head of Customer and Business Systems at Whitbread “As a business committed to providing our customers with the very best service, we wanted to ensure that all our payment processes remain as secure as possible, including transactions through our contact centre. CallGuard fulﬁls this need perfectly and enables us to take payments from customers over the phone in a PCI compliant way, without compromising the customer experience.” – Andrew Ashby, Director of Customer Operations at Screwﬁx “Ensuring that customers’ payment card details are completely secure has always been a priority. But we are always keen to take advantage of new technology to ensure that we stay at the forefront and allow customers to transact with us in the way that they choose. After evaluating a number of secure payment solutions, we selected Eckoh as a partner because of their clear expertise in implementing payment solutions, their PCI DSS level one status and the ﬂexibility and ease-of-use of their CallGuard Hosted solution. It provides our customers who want to make payments over the phone with a convenient and highly secure payment service that delivers an excellent customer experience.” - David Lewis, ICT Director at Hillarys “The user-friendly apps created by Eckoh are a welcome addition for our 270,000 ‘pre-paid’ Keypad customers. It makes it easy for Keypad users to manage their electricity usage.” – Ralph Graham, Business Analyst at Power NI ANNUAL REPORT 2015 35 Contact Centre Market Review “Over the last two years Tenpin has received exceptional IVR service and support from Eckoh. Their excellent service record made them a great choice for us when we looked for a new supplier of a complete end-to-end telephony solution including the live contact centre. We look forward to Eckoh providing an exceptional service for our customers whilst strategically driving both businesses forward with their continued improvement and development of their technology platforms. – Graham Blackwell, Commercial Director at Tenpin “Working with Eckoh has been nothing but positive. They were very accommodating and eager to satisfy our needs. I would highly recommend them, the implementation is smooth and the product is wonderful.” - Josh Rakes, Information Security Project Manager at Optum “We are delighted with the success of both EckohPAY and CallGuard Hosted. It’s enabled us to become quickly PCI DSS compliant and increase the security of our members’ card data.” - Mie Mun, Head of IT at Chartered Institute of Management Accountants “We selected Eckoh after looking at multiple vendors in the US and overseas for our PCI DSS compliance needs. We have been really impressed with the simplicity and effectiveness of it. The plug and play nature of CallGuard On-Site was a major advantage as it meant that we could be up and running within days. We can now ensure that our agent screens and call recordings are further secured and completely PCI compliant, but most importantly, that our customers’ card data is secure.” – Canadian Automobile Association South Central Ontario (CAA SCO) “Eckoh’s solutions have solved the immediate and longer term economic impacts for PCI compliance protecting businesses and their customers’ card holder data in a cost effective and unique manner. Their elegance and simplicity in design could be considered the iPhone for PCI/DSS compliant solutions. Smart!” - Greg Ablett, Senior Vice President, West Interactive Services ANNUAL REPORT 2015 36 Governance Report ANNUAL REPORT 2015 37 Governance Report SECTION 03 Governance Report 38 Board of Directors 39 Directors’ Report 43 Corporate Governance 47 Directors’ Responsibility 48 Audit Report ANNUAL REPORT 2015 38 Governance Report Board of Directors Nik Philpot Chief Executive Ofﬁcer Nik is a founder of Eckoh and was appointed COO and Deputy CEO in September 2001, before being appointed CEO in September 2006. Nik has 28 years’ experience in the voice services industry; he was originally at British Telecom before launching and then selling a number of start-up businesses in the telecoms and technology sectors. As CEO of Eckoh, he has created a leading provider of secure payment solutions and customer service applications for the contact centre industry. Chris Batterham Non-Executive Chairman Chris qualiﬁed as an accountant with Arthur Andersen and has signiﬁcant experience in the technology based business environment, including the ﬂotation of Unipalm on the London Stock Exchange. Currently on the boards of a number of companies including SDL plc, Iomart plc and NCC Group plc, Chris brings a wealth of experience in the strategic development of companies in the IT sector. Clive Ansell Non-Executive Chairman Clive joined the Board in July 2009 and is also senior independent non-executive director on the Board of Arqiva, and works as a senior advisor with several major consulting ﬁrms. He is the former CEO of Tribal Technology at Tribal Group plc. has held a number of senior executive and strategic roles at BT, worked as a strategic consultant to the Board of Royal Mail, spent three years as an executive board director of Japan Telecom, and led major M&A projects in the US. Clive is an Oxford graduate, a patron of Crimestoppers and sits on the boards of a number of charities and business representative groups. Adam Moloney Group Finance Director Adam has been Finance Director at Eckoh since 2004 and has seen the Group through a period of continuous change over that time. Prior to joining the Company in 2003 he worked in senior ﬁnancial roles for a number of organisations and immediately prior to joining Eckoh, was Manager of Finance & Operations for the UK arm of New York based IT hardware reseller, Resilien Inc. ANNUAL REPORT 2015 39 Governance Report Director’s Report The Directors of Eckoh plc present their annual report, together with the audited ﬁnancial statements of the Company and the Group for the year ended 31 March 2015. Principal Activity The principal activity of Eckoh plc and its subsidiary undertakings (“the Group”) is the provision of multi- channel customer service and secure payment solutions for customer contact centres. The Chairman’s Statement (page 6) and the Business Review (pages 7 to 12) report on the progress made in the ﬁnancial year under review. The principal subsidiary undertakings are listed on page 74. Results and Dividends The audited ﬁnancial statements and related notes for the year ended 31 March 2015 are set out on pages 52 to 86. The Group’s proﬁt for the year is set out in the Consolidated Statement of Comprehensive Income on page 52. The Group’s ﬁnancial risk management is discussed in note 3. The Directors’ regularly assess the Group’s key commercial risks, which are considered to be the competitive market sector and the stability of the infrastructure that supports the Group’s products and services. Commercial risks are managed through the introduction of new products and services and by maintaining high levels of customer service. Infrastructure stability is managed through 24 hour technical monitoring and an approach to continuous improvements of the operations of the Group. Post Balance Sheet Events Post year end the Directors are recommending that a ﬁnal dividend for the year ended 31 March 2015 of 0.37 pence per ordinary share be paid to the shareholders whose names appear on the register at the close of business on 2 October 2015 with payment on 30 October 2015. The ex-dividend date will be 1 October 2015. This recommendation will be put to the shareholders at the Annual General Meeting. Based on the shares in issue at the year end, this payment would amount to £0.8m. Research and Development The Group capitalised £0.4m (2014: £0.6m) of development expenditure during the year. The majority of this cost arose from the effort required to develop the product range along with enhancements to client services. Financial Instruments The ﬁnancial instruments of the Group are set out in the Notes to the Financial Statements on pages 56 to 86. Please refer to note 2 for a summary of principal accounting policies; to note 3 for the Group’s ﬁnancial risk management policies in relation to liquidity risk or cash ﬂow risk, interest rate risk and foreign currency risk, as well as capital management; to note 15 for credit risk and loans and other receivables; to note 16 for short-term investments; to note 17 for cash and cash equivalents and to note 18 for trade and other payables. Related Party Transactions Related party transactions are disclosed in note 23. Signiﬁcant Accounting Policies The signiﬁcant accounting policies applied to the consolidated ﬁnancial statements are included within note 2. Annual General Meeting The next Annual General Meeting of the Company will be held at 11:00 on 23 September 2015. Details of the business to be proposed at the Annual General Meeting are contained within the Notice of Meeting, which accompanies this Report. Directors The current Directors of the Company are shown on page 38. The articles of association require that at the Annual General Meeting one third, or as near as possible, of the Directors will retire by rotation. C Ansell will retire by rotation and puts himself forward for re-election at the Annual General Meeting. ANNUAL REPORT 2015 40 Governance Report Directors’ Interests Directors’ Interests in Shares The interests of the Directors in the share capital of the Company and their options in respect of shares in the Company are shown below. No Director has had any material interest in a contract of signiﬁcance (other than service contracts) with the Company or with any subsidiary company during the year. The interests, all of which are beneﬁcial, of the Directors (and their immediate families) in the share capital of the Company are set out below: N B Philpot (i) A P Moloney C M Batterham 24 June 2015 Ordinary shares of 0.25 pence each 31 March 2015 Ordinary shares of 0.25 pence each 1 April 2014 Ordinary shares of 0.25 pence each 4,704,873 722,705 950,000 4,704,873 722,705 950,000 4,554,873 722,705 950,000 Notes: (i) N B Philpot’s spouse is the beneﬁcial owner of 80,000 shares which are included above. ANNUAL REPORT 2015 41 Governance Report Directors’ Share Options The Directors’ interests in share options are shown in the following table: Note At 1 April 2014 (number) Granted in year (number) Forfeited in year (number) Exercised in year (number) At 31 March 2015 (number) Exercise price (pence) Earliest date for exercise Latest date for exercise N B Philpot a 247,000 A P Moloney b 2,843,988 b 2,843,989 b 2,843,989 c 4,265,983 a a a 230,464 167,200 167,200 b 1,421,994 b 1,421,994 b 1,421,995 c 2,132,992 - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - 247,000 2,843,988 2,843,989 2,843,989 4,265,983 230,464 167,200 167,200 1,421,994 1,421,994 1,421,995 2,132,992 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 30.06.14 30.06.22 01.01.14 01.01.23 01.01.15 01.01.23 01.01.16 01.01.23 02.01.16 01.01.23 30.06.13 30.06.21 30.06.13 30.06.22 30.06.14 30.06.22 01.01.14 01.01.23 01.01.15 01.01.23 01.01.16 01.01.23 01.01.16 01.01.23 The information contained in this table has been audited. Notes: a) Granted under the 2010 Eckoh plc Bonus plan. Half of the bonus awards made to executives in respect of two recent ﬁnancial years were made in the form of deferred shares. The deferred shares vested in tranches of 50% on the ﬁrst and second anniversary of the grant date. Further details are available in the Remuneration report on page 44. b) Granted under the 2012 Eckoh plc Long Term Incentive Plan (“2012 LTIP”). The number of shares that will ultimately vest are subject to the satisfaction of share price targets. c) Granted under the 2012 Eckoh plc Long Term Incentive Plan (“2012 LTIP”). The number of shares that will ultimately vest are subject to the achievement of stretching share price targets at the conclusion of the three year vesting period. Directors’ Indemnity and Insurance Share Schemes The Group maintained insurance cover during the year for its Directors and Ofﬁcers and those of subsidiary companies under a Directors and Ofﬁcers liability insurance policy against liabilities that may be incurred by them while carrying out their duties. This policy is available for inspection at the registered ofﬁce of the Company during business hours on any weekday except public holidays. Share Capital and Reserves Details of changes in the authorised and issued share capital and reserves of the Company are shown in note 19 to the ﬁnancial statements. The Directors believe that a key element in attracting, motivating and retaining employees of the highest calibre is employee involvement in the performance of the Group through participation in share schemes. By doing so, the Directors believe that employees’ interests will be aligned with those of shareholders. Details of options granted under the share option schemes are set out in note 21 to the ﬁnancial statements. All permanent employees are eligible to join a scheme. ANNUAL REPORT 2015 42 Governance Report Payments to Creditors The Company and its subsidiaries have a variety of payment terms with their suppliers. The Group agrees payment terms with its suppliers when it enters into binding purchasing contracts for the supply of goods and services. The Group seeks to abide by these payment terms when it is satisﬁed that the supplier has provided the goods or services in accordance with the agreed terms and conditions. At 31 March 2015 the amount of trade creditors shown in the balance sheet represents 97 days of average purchases for the Group (2014: 72 days). The Company had no trade creditors at 31 March 2015 or 31 March 2014. Statement of Disclosure of Information to Auditors As far as the Directors are aware there is no information relevant to the audit of which the Company’s auditors are unaware and the Directors have taken all steps that they ought to have taken as Directors in order to make themselves aware of any such relevant information and to establish that the Company’s auditors are aware of that information. Auditors In accordance with Section 489 of the Companies Act 2006, a resolution for the re-appointment of KPMG LLP as auditor of the company is to be proposed at the forthcoming Annual General Meeting. Shareholder Relations The Company holds meetings with its major institutional investors and general presentations are given covering the interim and preliminary results. The Chairman, C M Batterham, is available to attend presentation meetings and other presentations on an ongoing basis. All Directors have access to the Company’s nominated advisors who give feedback from shareholders and receive copies of broker update documents. All shareholders have the opportunity to raise questions at the Company’s Annual General Meeting, or leave written questions, which will be answered in writing as soon as possible. At the meeting the Chairman will give a statement on the Group’s performance during the year, together with a statement on current trading conditions. In addition to regular ﬁnancial reporting, signiﬁcant matters relating to the trading or development of the business are disseminated to the market by way of Stock Exchange announcements. The Company’s Annual Report and Accounts, Interim Statements and other major announcements are published on the Company’s corporate web site at www.eckoh.com. Going Concern Under company law, the Company’s Directors are required to consider whether it is appropriate to prepare ﬁnancial statements on the basis that the Company and the Group are a going concern. As part of its normal business practice the Group prepares annual and longer term plans and, in reviewing this information, the Company’s Directors are satisﬁed that the Group and the Company have reasonable resources to enable them to continue in business for the foreseeable future. For this reason the Company and the Group continue to adopt the going concern basis in preparing the ﬁnancial statements. By order of the Board Adam Moloney Company Secretary 24 June 2015 ANNUAL REPORT 2015 43 Governance Report Corporate Governance Compliance Statement The Board of Eckoh plc recognises its responsibilities to maintain high standards of corporate governance throughout the Group. The Board continues to give careful consideration to the principles of corporate governance as set out in the UK Corporate Governance Code published by the Financial Reporting Council, although as a company listed on AIM it is not required to comply with the UK Corporate Governance Code. The Company is committed to complying with the UK Corporate Governance Code so far as is practicable and appropriate for a public company of its size and nature. Board of Directors The Chairman is responsible for the effective running of the Board of Directors. The Board currently has four members, comprising the Non-Executive Chairman, the Chief Executive, the Group Finance Director and a Non-executive Director. The Board has considered the independence of its Non-Executive Chairman, C M Batterham, and after due consideration, has concluded that he is independent. He does not have any involvement in the day-to-day management of the Company or its subsidiaries. The biographical details of the Board members are set out on page 38. There is a schedule of formal matters speciﬁcally reserved for the full Board’s consideration, including a policy enabling Directors to take independent professional advice in the furtherance of their duties at the Company’s expense. The Board programme is designed so that Directors have a regular opportunity to consider the Group’s strategy, policies, budgets, progress reports and ﬁnancial position and to arrive at a balanced assessment of the Group’s position and prospects. In addition, strategic developments are on the agenda at each Board meeting and are subject to further ad hoc review by the Board as triggered by relevant external factors. Also, where appropriate, the Board programme also includes a day set aside purely for strategic review and planning. The Company has a clear division of responsibility between the roles of Chairman and Chief Executive within the business. The Non-Executive Chairman has a responsibility to ensure that the strategies and policies proposed by the Executive Directors are fully discussed and critically examined, not only with regard to the best long-term interests of shareholders, but also having regard to the Company’s relationships with its employees, customers and suppliers. The Board and its Committees are supplied with information and papers to ensure that all aspects of the Company’s affairs are reviewed on at least an annual basis. Day-to-day management of the business is delegated to the Operating Board, consisting of the two Executive Directors and certain senior managers, which meets monthly. The Board is dependent on the Operating Board for the provision of accurate, complete and timely information and the Directors may seek further information where necessary. The Chairman ANNUAL REPORT 2015 44 Governance Report is responsible for ensuring that all Directors are properly briefed on issues arising at Board meetings. Under the Company’s articles of association, each year at least one third of the Directors must retire and submit themselves for re-election by the shareholders at the Annual General Meeting. The communication accompanying the Company’s Notice of Annual General Meeting sets out reasons for the Board’s belief that the individual should be re-elected. Board Committees Certain responsibilities are delegated to the Remuneration and Audit Committees. Both committees have written terms of reference, which deﬁne their authorities, duties and membership. Audit Committee Report The Audit Committee is responsible for reviewing the following: • accounting procedures and controls; • ﬁnancial information published by the Group, including the Annual Report, Preliminary & Interim Statements and on the Company’s website; • risk management and the effectiveness of the Group’s system of internal ﬁnancial control; • the terms of reference for the Group’s external valuers; and • the results and effectiveness of the Company’s external audit. The Audit Committee formally met twice during the period under review, with no absentees. A P Moloney, the Group Finance Director, attends all Audit Committee meetings by invitation and provides advice to the Committee where appropriate. The Chief Executive was invited to and attended the meetings. The Company’s auditor attended the meetings and the Committee considered reports issued by them. The auditor has direct access to the Audit Committee without the presence of an Executive Director. The Committee reviews the effectiveness of the Company’s internal ﬁnancial controls by reference to reports from the external auditors. The Committee also reviews the scope and results of the external audit as well as its cost effectiveness. The Audit Committee annually reviews the requirement for an internal full- time audit function. The Committee has decided that none is necessary at present. Instead, other monitoring processes have been applied to provide assurance to the Board that the system of internal control is functioning satisfactorily. Internal controls are discussed under the internal control and risk management section below. Internal Control and Risk Management The Directors formally acknowledge their responsibility for establishing effective internal control within the Company. In this context, control is deﬁned as those policies, processes, tasks and behaviours established to ensure that business objectives are achieved most cost effectively, assets and shareholder value are safeguarded and laws, regulations and policies are complied with. The Board has put in place a system of internal controls, set within a framework of a clearly deﬁned organisational structure, with well understood lines of responsibility, delegation of authority, accountability, policies and procedures, which is supported by training, budgeting, reporting and review procedures. A long-term business plan and an annual operating budget are prepared by management and are reviewed and approved by the Board prior to the commencement of each ﬁnancial year. Monthly reporting and analysis of results against budget, risk assessment and related internal controls and forecasts are received, discussed by management and reported formally to the Board. Informal reviews take place more frequently. There are ongoing processes for identifying, evaluating and managing the Company’s signiﬁcant risks and related internal controls that are integrated into the Company’s operations. Such processes are reported to, and reviewed by, the Board at each meeting. These processes have identiﬁed the risks most important to the Company (business, operational, ﬁnancial and compliance), determined the ﬁnancial implications, and assessed the adequacy and effectiveness of their control. The reporting and review processes provide routine assurance to the Board as to the adequacy and effectiveness of the internal controls. Remuneration Committee Report The principal objectives of the Remuneration Committee are to review the performance of the Executive Directors and make recommendations to the Board on matters relating to their remuneration and terms of employment. ANNUAL REPORT 2015 45 Governance Report Directors’ Remuneration for the Financial year was as follows: Name C Ansell (i) C M Batterham (ii) A P Moloney (iii) N B Philpot (iv) Total Salary and fees £’000 30 50 137 203 420 Cash Bonus £’000 - - 52 77 129 Other beneﬁts £’000 - - 28 37 65 2015 Total £’000 30 50 217 317 614 2014 Total £’000 30 50 251 372 703 The information contained in this table has been audited. Notes: (i) C Ansell was appointed as a Non-Executive Director on 7 July 2009. (ii) C M Batterham was appointed as Non-Executive Director on 15 July 2009 and further appointed as Non-Executive Chairman on 11 September 2009. (iii) Included within the other beneﬁts paid to A P Moloney is an employer pension contribution of £26,000 (2014: £25,000). The remainder of the other beneﬁts paid to A P Moloney relate to private healthcare costs of £2,000 (2013: £2,000) (iv) Included within the other beneﬁts paid to N B Philpot is an employer pension contribution of £35,000 (2014: £35,000). The amount of £2,000 (2014: £2,000) paid to N B Philpot within other beneﬁts relate to private healthcare costs. No share options were exercised by the Directors during the year. Share options details are disclosed in the Director’s Report on page 41. ANNUAL REPORT 2015 46 Governance Report Remuneration and Service Contracts The remuneration of the Executive Directors is determined by the Remuneration Committee. Both Executive Directors have service contracts that are terminable on twelve months’ notice. The service contracts for both Executive Directors have been reviewed for the 2015/6 ﬁnancial year. A 2% pay increase has been awarded to both with effect from 1 April 2015. Both Non-Executive Directors have service contracts terminable on six months’ notice. The fees payable to the Non-Executive Directors were reviewed at the end of the 2013/4 ﬁnancial year. Upon review, it was agreed that the fees paid to both Non-Executive Directors should remain unchanged. Bonus Arrangements The Bonus plan adopted allowed for awards based on achievement of operating proﬁt targets. To deliver a maximum payment bonus award of 100% of salary, targets must be exceeded by 15%. In the year ended 31 March 2015, performance against targets resulted in a bonus payment of 37% of salary being awarded to N B Philpot and A P Moloney. Long-Term Incentive Arrangements for Directors In June 2010 a Long Term Incentive Plan (“2010 LTIP”) was adopted by the Board. Part 1 of the plan awarded nominal value options to participants upon achievement of stretching earnings per share targets over a three year period. Vesting of these options were also subject to a Total Shareholder Return target being achieved over the corresponding period. Part 2 of the plan released value to participants in the event that there is a change of control in the business at a value which is signiﬁcantly in excess of the market value of the company at the date of the award made in June 2010. Any change of control was required to be completed before June 2013 otherwise the award under Part 2 of the 2010 LTIP would lapse. During 2012, independent professional advice was obtained to review the 2010 LTIP. The review concluded that the 2010 LTIP strongly incentivised Management to seek a disposal of the business before June 2013 which was not considered to be in the best interests of shareholders. It was agreed that a replacement Long Term Incentive Plan should be adopted which would recognise the value created since the adoption of the 2010 LTIP when the share price of the company was 4.875 pence. The new plan should also provide incentives for the generation of further shareholder value over the next three year period. The new Long Term Incentive Plan was adopted by the Board on 19 December 2012 (“2012 LTIP”). All awards made under the 2010 LTIP were forfeited by participants and replaced by nil cost share options (“Base Awards”) which are subject to their continued employment and the satisfaction of certain share price performance conditions. The Base Awards vested in two equal amounts on the anniversary of the grant in each of the subsequent three years and are subject to claw back under certain events, including if the future share price on vesting has fallen by greater than 10% on the previous year. Executive Directors can also earn a maximum of an additional 50% of the Base Award depending on the achievement of challenging share price targets within three years. At the date of award, the share price of the company was 14 pence per share. The maximum award can only be achieved in the event that the share price meets a target of 28 pence per share by 31 December 2015. Further details of the awards made are disclosed in the Directors share options section of the Director’s Report on page 41. Nomination Committee The Nomination Committee meets at least once a year and is responsible for reviewing the size, structure and composition of the Board and making recommendations to the Board if it considers that any changes are required. It has a formal procedure for appointments to the Board. ANNUAL REPORT 2015 47 Governance Report Directors’ Responsibilities • for the parent company ﬁnancial statements, state whether applicable UK Accounting Standards have been followed, subject to any material departures disclosed and explained in the ﬁnancial statements; and • prepare the ﬁnancial statements on the going concern basis unless it is inappropriate to presume that the group and the parent company will continue in business. The Directors are responsible for keeping adequate accounting records that are sufﬁcient to show and explain the parent company’s transactions and disclose with reasonable accuracy at any time the ﬁnancial position of the parent company and enable them to ensure that its ﬁnancial statements comply with the Companies Act 2006. They have general responsibility for taking such steps as are reasonably open to them to safeguard the assets of the group and to prevent and detect 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 UK governing the preparation and dissemination of ﬁnancial statements may differ from legislation in other jurisdictions. The Directors are responsible for preparing the Annual Report, comprising the Strategic Report, The Governance Report and the group and parent company ﬁnancial statements in accordance with applicable law and regulations. Company law requires the Directors to prepare group and parent company ﬁnancial statements for each ﬁnancial year. As required by the AIM Rules of the London Stock Exchange they are required to prepare the group ﬁnancial statements in accordance with IFRSs as adopted by the EU and applicable law and have elected to prepare the parent company ﬁnancial statements in accordance with UK Accounting Standards and applicable law (UK Generally Accepted Accounting Practice). 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 group and parent company and of their proﬁt or loss for that period. In preparing each of the group and parent company ﬁnancial statements, the Directors are required to: • select suitable accounting policies and then apply them consistently; • make judgements and estimates that are reasonable and prudent; • for the group ﬁnancial statements, state whether they have been prepared in accordance with IFRSs as adopted by the EU; ANNUAL REPORT 2015 48 Governance Report Independent Auditor’s Report to the Members of Eckoh plc We have audited the ﬁnancial statements of Eckoh plc for the year 31 March 2015, which comprise the Consolidated Statement of Comprehensive Income, Consolidated Statement of Financial Position, Consolidated Statement of Changes in Equity, Consolidated Statement of Cash Flows, Company Balance Sheet and the related notes. The ﬁnancial reporting framework that has been applied in the preparation of the group ﬁnancial statements is applicable law and International Financial Reporting Standards (IFRSs) as adopted by the EU. The ﬁnancial reporting framework that has been applied in preparation of the parent company ﬁnancial statements is applicable law and UK Accounting Standards (UK Generally Accepted Accounting Practice). This report is made solely to the Company’s members, as a body, in accordance with Chapter 3 of Part 16 of the Companies Act 2006. Our audit work has been undertaken so that we might state to the Company’s members those matters we are required to state to them in an auditor’s report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the Company and the Company’s members as a body, for our audit work, for this report, or for the opinions we have formed. Respective Responsibilities of Directors and Auditor As explained more fully in the Directors’ Responsibilities Statement, 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, and express an opinion on, 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 A description of the scope of an audit of ﬁnancial statements is provided on the Financial Reporting Council’s website at www.frc.org.uk/auditscopeukprivate. 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 31 March 2015 and of the group’s proﬁt for the year then ended; • the group ﬁnancial statements have been properly prepared in accordance with IFRSs as adopted by the European Union; • the parent company’s ﬁnancial statements have been properly prepared in accordance with UK Generally Accepted Accounting Practice; 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 Strategic report and the Directors’ Report for the ﬁnancial year for which the ﬁnancial statements are prepared is consistent with the ﬁnancial statements. ANNUAL REPORT 2015 49 Governance Report 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. Mark Matthewman Senior Statutory Auditor For and on behalf of KPMG LLP, Statutory Auditor Chartered Accountants Altius House One North Fourth Street Milton Keynes MK9 1NE 24 June 2015 ANNUAL REPORT 2015 50 Financial Review ANNUAL REPORT 2015 51 SECTION 04 Financial Review 52 Consolidated Financial Statements 56 Notes to the Financial Statements 87 Company Financial Statements 88 Notes to the Company Financial Statements 95 Shareholder Information ANNUAL REPORT 2015 52 Financial Review Consolidated Financial Statements Consolidated Statement of Comprehensive Income for the year ended 31 March 2015 Notes 2015 £’000 2015 £’000 2014 £’000 2014 £’000 Continuing operations Revenue Cost of sales Gross proﬁt Administrative expenses before expenses relating to share options schemes, acquisition costs and amortisation of acquired intangible assets and legal fees and settlement costs Proﬁt from operating activities before expenses relating to share option schemes, acquisition costs and amortisation of acquired intangible assets and legal fees and settlement costs Amortisation of acquired intangible assets Legal fees and settlement costs Acquisition costs Expenses relating to share option schemes Total Administrative expenses Proﬁt / (loss) from operating activities Finance expense Interest payable Finance income Interest receivable Proﬁt / (loss) before taxation Taxation Total comprehensive income for the year attributable to the equity holders of the parent company Proﬁt per share (pence) Basic earnings per 0.25p share Diluted earnings per 0.25p share 4 4 26 4 5 27 8 27 8 9 10 17,158 (4,055) 13,103 14,035 (3,820) 10,215 (9,715) (8,013) 3,388 (1,320) (527) - (939) 2,202 (990) - (175) (1,247) (12,501) 602 - (19) 1,518 20 2,121 (16) 2,105 0.96 0.85 (10,425) (210) (1,214) - - 57 (1,367) 1,665 298 0.14 0.12 ANNUAL REPORT 2015 53 Financial Review Consolidated Statement of Financial Position for the year ended 31 March 2015 Assets Non-current assets Intangible assets Tangible assets Deferred tax asset Current assets Inventories Trade and other receivables Cash and cash equivalents Total assets Liabilities Current liabilities Trade and other payables Contingent consideration Other interest-bearing loans and borrowings Non-current liabilities Other interest-bearing loans and borrowings Contingent consideration Deferred tax liability Provisions Net assets Shareholders’ equity Share capital ESOP reserve Capital redemption reserve Share premium Currency reserve Retained earnings Total shareholders’ equity Notes 2015 £’000 2014 £’000 11 12 9 14 15 17 18 18 3 3 20 9 20 19 8,317 5,191 4,938 9,636 862 4,267 18,446 14,765 224 7,033 4,419 11,676 30,122 (6,217) - (636) (6,853) (2,105) (636) (862) - (3,603) 19,666 558 (135) 198 5,175 56 13,814 19,666 104 3,576 7,341 11,021 25,786 (5,444) (1,952) - (7,396) - (2,941) (1,123) (43) (4,107) 14,283 540 (22) 198 2,411 (41) 11,197 14,283 The ﬁnancial statements were approved by the Board of Directors on 24 June 2015 and signed on its behalf by: Adam Moloney Group Finance Director Company Registration Number 3435822 ANNUAL REPORT 2015 54 Financial Review Consolidated Statement of Changes in Equity as at 31 March 2015 Share Capital £’000 ESOP reserve £’000 Capital redemption reserve £’000 Share premium £’000 Retained earnings £’000 Total Currency shareholders equity £’000 reserve £’000 Balance at 1 April 2013 522 (128) 198 1,331 11,234 (41) 13,116 Total comprehensive income for period Dividends paid in the year Shares issued on acquisition of Veritape Limited Shares transacted through Employee Beneﬁt Trust Share based payment charge Deferred tax on share options Balance at 31 March 2014 - - 18 - - - - - - 106 - - - - - - - - - - 1,080 - - - 298 (540) - (1,036) 599 642 - - - - - - 298 (540) 1,098 (930) 599 642 540 (22) 198 2,411 11,197 (41) 14,283 Balance at 1 April 2014 540 (22) 198 2,411 11,197 (41) 14,283 Total comprehensive income for period Dividends paid in the year Shares issued on acquisition of Veritape Limited Retranslation Shares transacted through Employee Beneﬁt Trust Shares issued under the share option schemes Share based payment charge Deferred tax on share options Balance at 31 March 2015 - - 16 - - 2 - - - - - - (113) - - - - - - - - - - - - - 2,105 (695) 2,722 - - 42 - - - - (25) - 322 910 - - - 97 - - - - 2,105 (695) 2,738 97 (138) 44 322 910 558 (135) 198 5,175 13,814 56 19,666 ANNUAL REPORT 2015 55 Financial Review Consolidated Statement of Cash Flows for the year ended 31 March 2015 Cash ﬂows from operating activities Cash generated in operations Taxation Net cash generated in operating activities Cash ﬂows from investing activities Acquisition of subsidiary Purchase of property, plant and equipment Purchases of intangible ﬁxed assets Decrease in short-term investments Interest paid Interest received Net cash utilised in investing activities Cash ﬂows from ﬁnancing activities Dividends paid Proceeds from new loan Repayment of borrowings Shares acquired by Employee Beneﬁt Trust Net cash generated / (utilised) in ﬁnancing activities (Decrease) / increase in cash and cash equivalents Cash and cash equivalents at the start of the period Cash and cash equivalents at the end of the period The notes on pages 56 to 86 form an integral part of these ﬁnancial statements Notes 25 2015 £’000 680 (101) 579 2014 £’000 4,816 - 4,816 27 12 11 16 8 8 17 17 - (3,599) (5,019) (391) - (19) 20 (355) (603) 3,000 - 55 (5,409) (1,502) (695) 2,900 (159) (138) 1,908 (2,922) 7,341 4,419 (540) - - (930) (1,470) 1,844 5,497 7,341 ANNUAL REPORT 2015 56 Financial Review Notes to the Financial Statements for the year ended 31 March 2015 1. Basis of Preparation The consolidated ﬁnancial statements of Eckoh plc have been prepared in accordance with International Financial Reporting Standards (“IFRS”) as adopted by the EU (“endorsed IFRS”). These ﬁnancial statements have been prepared in accordance with those IFRS standards and IFRIC interpretations issued and effective or issued and early adopted as at 31 March 2015 as endorsed by the EU. In the current year the Group has adopted the following standards and interpretations: • IFRS 10 Consolidated Financial Statements and IAS 27 (2011) Separate Financial Statements (mandatory for year commencing on or after 1 January 2014). • Amendments to IFRS 7 ‘Disclosures – Offsetting Financial Assets and Financial Liabilities’ (mandatory for year commencing on or after 1 January 2014). • Amendments to IAS 32 ‘Offsetting Financial Assets and Financial Liabilities’ (mandatory for year commencing on or after 1 January 2014). • IFRS 2 Share-based payment (effective for share-based payment transactions with grant date on or after 1 July 2014) • Annual Improvements to IFRS 2011-2013 cycle (mandatory for year commencing on or after 1 July 2014). None of these have had a material impact on the results or ﬁnancial position of the Group. The following Adopted IFRSs have been issued but have not been applied by the Group in these ﬁnancial statements. Their adoption is not expected to have a material effect on the ﬁnancial statements unless otherwise indicated: • IFRS 15 Revenue from Contracts with Customers (mandatory for year commencing on or after 1 January 2017). • Amendments to IAS 2 Inventories (mandatory for year commencing on or after 1 January 2017). • IFRS 9 Financial instruments (mandatory for year commencing on or after 1 January 2018). The Directors’ review newly issued standards and interpretations in order to assess the impact (if any) on the ﬁnancial statements of the Group in future periods. These ﬁnancial statements have been prepared in accordance with the accounting policies set out below which are based on the recognition and measurement principles of IFRS in issue as adopted by the European Union (“EU”) and effective at 31 March 2015. These Consolidated Financial Statements have been prepared under the historical cost convention, as modiﬁed by the revaluation of available-for-sale ﬁnancial assets, and ﬁnancial assets and ﬁnancial liabilities at fair value through proﬁt and loss. Going concern Under company law, the Company’s Directors are required to consider whether it is appropriate to prepare ﬁnancial statements on the basis that the Company and the Group are a going concern. As part of its normal business practice the Group prepares annual and longer term plans and, in reviewing this information, the Company’s Directors are satisﬁed that the Group and the Company have reasonable resources to enable them to continue in business for the foreseeable future. For this reason the Company and the Group continue to adopt the going concern basis in preparing the ﬁnancial statements. The Consolidated Financial Statements are presented in Pounds Sterling, which is the Company’s functional currency. All ﬁnancial information presented has been rounded to the nearest one thousand. The principal accounting policies, which have been consistently applied, are described below. ANNUAL REPORT 2015 57 Financial Review 2. Summary of Principal Accounting Policies Critical accounting policies, estimates and judgements The preparation of ﬁnancial statements in accordance with IFRS requires the use of certain critical accounting estimates. It also requires management to exercise judgement in the process of applying the Group’s accounting policies. Estimates and judgements are continually evaluated and are based on historical experience and reasonable expectations of future events. Actual results may differ from those estimates. The accounting policies cover areas that are considered by the Directors to require estimates and assumptions which have a signiﬁcant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next ﬁnancial year. The policies, and the related notes to the ﬁnancial statements, are found below: rate of return are based, respectively, on historic volatility over a similar previous period, management’s estimate of the average expected period to exercise, and the yield on zero-coupon UK government bonds of a term consistent with assumed option life. Contingent consideration (notes 18 and 20) Contingent consideration payable in a business combination is recognised at fair value on acquisition and is generally remeasured at each balance sheet date with the change in its carrying amount recognised in proﬁt or loss. Contingent consideration payable is typically dependent on performance conditions related to the future revenue or proﬁtability of the acquired business. Considerable judgement is required in assessing the likely future performance of the acquired business against such performance conditions. Revenue recognition (note 2) Deferred taxation (note 9) The Group recognises revenue on certain contracts during the period of performance prior to an invoice being raised, where work has been completed and where there is a high degree of certainty of the contract being completed, the invoice raised and cash received. In relation to Speech Solutions build fee revenue, this involves estimating a percentage completion based on the direct labour costs incurred to date as a proportion of the total estimated costs required to complete a project. Whilst these assessments are made on a recognised and consistent basis, variation in the total estimated costs derived from these assessments and estimates used by the directors could have a signiﬁcant impact on the amount and timing of revenue recognised on a project. Share based payments (note 21) The fair value of share based payments is estimated using the methods detailed in note 21 and using certain assumptions. Both the Black Scholes and Monte Carlo valuation models have been used in determining the fair value of share based payments, with management selecting the most appropriate model for each scheme, based on the varying performance-related or market- related conditions within those speciﬁc schemes. The key assumptions around volatility, expected life and risk free Deferred tax liabilities are recognised for all taxable temporary differences but, where there exist deductible temporary differences, judgement is required as to whether a deferred tax asset should be recognised based on the availability of future taxable proﬁts. At 31 March 2015, the Group recognised deferred tax assets of £4.9 million, including £2.7 million in respect of tax losses and tax credits. Deferred tax assets amounting to £0.7 million were not recognised in respect of trading losses and £6.3m in respect of capital losses of which £4.5m are restricted. It is possible that the deferred tax assets actually recoverable may differ from the amounts recognised if actual taxable proﬁts differ from estimates. Basis of consolidation (a) Business combinations Business combinations are accounted for using the acquisition method as at the acquisition date – i.e. when control is transferred to the Group. Control is the power to govern the ﬁnancial and operating policies of an entity so as to obtain beneﬁts from its activities. In assessing control, the Group takes into consideration potential voting rights that are currently exercisable. ANNUAL REPORT 2015 58 Financial Review The Group measures goodwill at the acquisition date as: (c) Loss of control • the fair value of the consideration transferred; plus • the recognised amount of any non-controlling interests in the acquiree; plus • if the business combination is achieved in stages, the fair value of the pre-existing equity interest in the acquiree; less • the net recognised amount (generally fair value) of the identiﬁable assets acquired and liabilities assumed. When the excess is negative, a bargain purchase gain is recognised immediately in proﬁt or loss. The consideration transferred does not include amounts related to the settlement of pre-existing relationships. Such amounts are generally recognised in proﬁt or loss. Transactions costs, other than those associated with the issue of debt or equity securities, that the Group incurs in connection with a business combination are expensed as incurred. Any contingent consideration payable is measured at fair value at the acquisition date. If the contingent consideration is classiﬁed as equity, then it is not remeasured and settlement is accounted for within equity. Otherwise, subsequent changes in the fair value of the contingent consideration are recognised in proﬁt or loss. If share-based payment awards (replacement awards) are required to be exchanged for awards held by the acquiree’s employees (acquiree’s awards) and relate to past services, then all or a portion of the amount of the acquirer’s replacement awards is included in measuring the consideration transferred in the business combination. This determination is based on the market-based value of the replacement awards compared with the market-based value of the acquiree’s awards and the extent to which the replacement awards relate to past and/or future service. (b) Subsidiaries Subsidiaries are entities controlled by the Group. The ﬁnancial statements of subsidiaries are included in the consolidated ﬁnancial statements from the date that control commences until the date that control ceases. On the loss of control, the Group derecognises the assets and liabilities of the subsidiary, any non-controlling interests and the other components of equity related to the subsidiary. Any surplus or deﬁcit arising on the loss of control is recognised in proﬁt or loss. If the Group retains any interest in the previous subsidiary, then such interest is measured at fair value at the date that control is lost. Subsequently that retained interest is accounted for as an equity-accounted investee or as an available-for- sale ﬁnancial asset depending on the level of inﬂuence retained. (d) Transactions eliminated on consolidation Intra-group balances and transactions, and any unrealised income and expenses arising from intra-group transactions, are eliminated in preparing the consolidated ﬁnancial statements. Unrealised gains arising from transactions with equity accounted investees are eliminated against the investment to the extent of the Group’s interest in the investee. Unrealised losses are eliminated in the same way as unrealised gains, but only to the extent that there is no evidence of impairment. Intangible assets (a) Goodwill Goodwill represents the excess of the fair value of the consideration paid over the fair value attributable to the net assets acquired and is capitalised on the Group balance sheet. Goodwill is not amortised and is reviewed for impairment at least annually. Any impairment is recognised in the period in which it is identiﬁed. (b) Intangible assets Intangible assets acquired by the Group are capitalised at the fair value of the consideration paid and amortised over their expected useful economic lives. The expected useful economic life of intangible assets is assessed for each acquisition as it arises, and is generally assumed to be three years. Other intangibles relating to software are amortised over the expected respective contract period. ANNUAL REPORT 2015 59 Financial Review (c) Research and development Research costs are charged to the income statement in the year in which they are incurred. Development expenses include expenses incurred by the Group to set up or enhance services to clients. Development costs that mainly relate to staff salaries are capitalised as intangible assets when it is probable that the project will be a success, considering its commercial and technological feasibility, and costs can be measured reliably. Development costs that do not meet those criteria are expensed as incurred. Capitalised development costs are amortised on a straight-line basis over the estimated minimum duration of the commercial contract that they arose from. In the absence of a speciﬁc commercial contract the capitalised development costs are amortised over the estimated useful life of the asset, which is generally assumed to be three years. Amortisation is charged to administrative expenses in the income statement. The carrying value of intangible assets is assessed at the end of each ﬁnancial year for impairment. See the policy entitled impairment of assets below. Impairment of non-ﬁnancial assets An impairment loss is recognised in the income statement for the amount by which the asset’s carrying amount exceeds its recoverable amount. The recoverable amount is the higher of the asset’s fair value less costs to sell, and the value-in- use based on an internal discounted cash ﬂow evaluation. For the purpose of assessing impairment, assets are grouped at the lowest levels for which there are separately identiﬁable cash ﬂows. All assets are subsequently reassessed for indications that an impairment loss previously recognised may no longer exist. Tangible assets Land and buildings Land and buildings are stated at cost or fair value at acquisition, net of depreciation and any provisions for impairment. Cost includes expenditure that is directly attributable to the acquisition of the items. Property, plant and equipment Property, plant and equipment is stated at cost or fair value at acquisition, net of depreciation and any provisions for impairment. Cost includes expenditure that is directly attributable to the acquisition of the items. Subsequent costs are included in the asset’s carrying amount or recognised as a separate asset, as appropriate, only when it is probable that future economic beneﬁts associated with the item will ﬂow to the Group and the cost of the item can be measured reliably. All other repairs and maintenance are charged to the income statement during the ﬁnancial period in which they are incurred. The gain or loss arising on the disposal of an asset is determined by comparing the disposal proceeds and the carrying amount of the asset and is recognised in the income statement. Depreciation is calculated using the straight-line method to allocate the cost of each asset to its estimated residual value over its expected useful life, as follows: Land – is not depreciated Buildings – 25 years Fixtures and equipment – between 3 and 5 years Leasehold improvements – over the term of the lease Material residual values and useful lives are reviewed, and adjusted if appropriate, at least annually. An asset’s carrying amount is written down immediately to its recoverable amount if the asset’s carrying amount is greater than its estimated recoverable amount. Financial assets Financial assets include investments in companies other than Group companies, trade and other receivables (see separate policy) ﬁnancial receivables held for investment purposes, treasury shares and other securities. A permanent impairment is provided as a direct reduction of the securities account. The Group classiﬁes its ﬁnancial assets in the following categories: available for sale investments and loans and receivables. The classiﬁcation depends on the purpose for which the investments were acquired. The classiﬁcation is determined by management at initial recognition. (a) available-for-sale investments: are non-derivative ﬁnancial assets that are either designated in this category or not classiﬁed in any of the other categories. They are included within non- current assets unless management intends to dispose of the investment within 12 months of the balance sheet date and they are carried at fair value. ANNUAL REPORT 2015 60 Financial Review (b) loans and receivables: Trade and other receivables are non-derivative ﬁnancial assets with ﬁxed or determinable payments that are not quoted in an active market and with no intention of trading. They arise principally through the provision of services to customers (e.g. trade receivables), but also incorporate other types of contractual monetary assets. Trade and other receivables which principally represent amounts due from customers and other third parties, are carried at original invoice value less an estimate made for bad and doubtful debts. They are included within current assets, with the exception of those with maturities greater than one year, which are included within non-current assets. Loans and receivables are included within trade and other receivables in the balance sheet. Gains and losses arising from investments classiﬁed as available-for-sale are recognised in the income statement when they are sold or when the investment is impaired. In the case of impairment of available-for-sale assets, any loss previously recognised in equity is transferred to the income statement. Impairment losses recognised in the income statement on equity instruments are not reversed through the income statement. An assessment for impairment is undertaken annually. Management consider the ﬁnancial information in respect of entities from which receivables are due. A ﬁnancial asset is derecognised only where the contractual rights to the cash ﬂows from the asset expire or the ﬁnancial asset is transferred and that transfer qualiﬁes for derecognition. A ﬁnancial asset is transferred if the contractual rights to receive the cash ﬂows of the asset have been transferred or the Group retains the contractual rights to receive the cash ﬂows of the asset but assumes a contractual obligation to pay the cash ﬂows to one or more recipients. A ﬁnancial asset that is transferred qualiﬁes for derecognition if the Group transfers substantially all the risks and rewards of ownership of the asset, or if the Group neither retains nor transfers substantially all the risks and rewards of ownership but does transfer control of that asset. Inventories Inventories are valued at the lower of cost and net realisable value. The cost of ﬁnished goods and work in progress comprises design costs, direct labour and other direct costs. Net realisable value is the estimated selling price in the ordinary course of business less applicable selling expenses. Trade and other receivables are stated at amortised cost less provision for impairment. A provision for the impairment of trade receivables is made when there is objective evidence that the Group will not be able to collect all amounts due to it in accordance with the original terms of those receivables. The amount of the provision is determined as the difference between the asset’s carrying amount and the present value of estimated future cash ﬂows, discounted at the effective interest rate. The amount of the provision is recognised in the income statement. Other receivables are stated at amortised cost less provision for impairment. Cash and cash equivalents Cash and cash equivalents comprise cash in hand, deposits held at call with banks, other short-term investments, with maturities of three months or less that are readily convertible into known amounts of cash and which are subject to an insigniﬁcant risk of changes in value and bank overdrafts. Bank overdrafts are shown within borrowings in current liabilities on the balance sheet. Short-term investments Short-term investments comprise funds which have been invested in short-term deposit accounts with maturities of less than twelve months and amounts held in escrow. Credit and liquidity risk management is described in note 3. Equity Equity comprises the following: Share capital represents the nominal value of ordinary shares. ESOP reserve represents the par value of ordinary shares held by the Employee Share Ownership Plan. Capital redemption reserve represents the maintenance of capital following the share buy back and tender offer. Share premium reserve represents consideration for ordinary shares in excess of the nominal value. Currency reserve represents exchange differences arising on consolidation of Group companies with a functional currency different to the presentation currency. Retained earnings represent retained proﬁts less losses and distributions. ANNUAL REPORT 2015 61 Financial Review Dividends Final dividends are recorded in the Group’s ﬁnancial statements in the period in which they are approved by the shareholders. Interim dividends are recognised when paid. Foreign currency transactions (a) Functional and presentation currency Items included in the ﬁnancial statements of each of the Group’s entities are measured using the currency of the primary economic environment in which the entity operates (the ‘functional currency’). The Consolidated Financial Statements are presented in Sterling, which is the Group companies functional and presentation currency. (b) Group companies The results and position of all Group companies that have a functional currency different from the presentation currency are translated into the presentation currency as follows: (i) assets and liabilities are translated at the closing rates of exchange ruling at the balance sheet date; (ii) income and expenses are translated at the average exchange rates. If however the average exchange rate is not a reasonable approximation of the exchange rates prevailing on the date of the transactions, the income and expenses are translated at the exchange rates at the transaction dates; and (iii) resulting exchange differences are recognised as a separate component of equity. Differences on exchange arising from the retranslation of the net investment in foreign entities are taken to shareholders equity on consolidation. When a foreign entity is sold, such exchange differences are recognised in the income statement as part of the proﬁt or loss on disposal. Goodwill and fair value adjustments arising on the acquisition of a foreign entity are treated as assets and liabilities of the foreign entity and as such are translated at the closing rate. Leases Leases are classiﬁed as ﬁnance leases whenever the terms of the lease transfer substantially all the risks and rewards of ownership to the lessee. All other leases are classiﬁed as operating leases. Assets held under ﬁnance leases are recognised assets of the Group at their fair value or, if lower, at the present value of the minimum lease payments, each determined at the inception of the lease. The corresponding liability to the lessor is included in the balance sheet as a ﬁnance lease obligation. Lease payments are apportioned between ﬁnance charges and reduction of the lease obligation so as to achieve a constant rate of interest on the remaining balance of the liability. Finance charges are charged directly against income. Rentals payable under operating leases are charged to income on a straight-line basis over the term of the relevant lease. Beneﬁts received and receivable as an incentive to enter into an operating lease are also spread on a straight-line basis over the lease term. Provisions Provisions are recognised when: the Group has a present legal or constructive obligation as a result of past events; it is more likely than not that an outﬂow of resources will be required to settle the obligation; and the amount has been reliably estimated. Provisions are not recognised for future operating losses. Provisions are measured at the present value of management’s best estimate of the expenditure required to settle the present obligation at the balance sheet date. The discount rate used reﬂects current market assessments of the time value of money and the risks speciﬁc to the liability. Employee Beneﬁts (a) Pensions The Group operates a group personal pension scheme. The assets of the schemes are held separately from those of the Group in independently administered funds. Contributions payable are charged in the income statement in the year in which they are incurred. (b) Bonus schemes The Group recognises a liability and an expense for bonuses payable to: i) employees based on a formula derived from management assessment of individual performance; and ii) senior management and executive directors based on achievement of a series of ﬁnancial and non-ﬁnancial targets. A provision is recognised where there is a past practice that has created a constructive obligation. ANNUAL REPORT 2015 62 Financial Review (c) Share-based payments Revenue recognition From time to time on a discretionary basis, the Board of Directors award high-performing employees bonuses in the form of share options. The options are subject to a three year vesting period and their fair value is recognised as an employee beneﬁts expense with a corresponding increase in equity over the vesting period. The fair value of share options granted is recognised within staff costs with a corresponding increase in equity. The proceeds received are credited to share capital and share premium when the options are exercised. The fair value of share options was measured using the more appropriate of the QCA-IRS option valuer using the Black-Scholes formula or a Monte Carlo valuation model, taking into account the terms and conditions upon which the grants were made. The amount recognised as an expense is adjusted to reﬂect the actual number of share options that vest except where forfeiture is only due to share prices not achieving the threshold of vesting. IFRS 2 has been applied to all options granted after 7 November 2002 that have not vested on or before 1 April 2006. A deferred tax adjustment is also made relating to the intrinsic value of the share options at the balance sheet date (see separate policy). As a result of the grant of share options since 6 April 1999 the Company will be obliged to pay employer’s National Insurance contributions on the difference between the market value of the underlying shares and their exercise price when the options are exercised. A provision is made for this liability using the value of the Company’s shares at the balance sheet date and is spread over the vesting period of the share options. (d) Employee Share Ownership Plan The Group’s Employee Share Ownership Plan (‘ESOP’) is a separately administered trust. The assets of the ESOP comprise shares in the Company and cash. The assets, liabilities, income and costs of the ESOP have been included in the ﬁnancial statements in accordance with SIC 12, ‘Consolidation - Special purpose entities’ and IAS 32, ‘Financial Instruments: Disclosure and Presentation’. The shares in the Company are included at cost to the ESOP and deducted from shareholders’ funds. When calculating earnings per share these shares are treated as if they were cancelled. Revenue represents the fair value of the sale of goods and services, net of Value-Added Tax, and after eliminating sales within the Group. Group revenue has four elements, being transactional, build fee, support and maintenance, and sale of hardware. Revenue is recognised as follows: • The majority of revenue in the Group is derived and recognised on a transaction basis, when the Group has determined that users have accessed its services via a telephone carrier network and/or the Group’s telecommunication call processing equipment connected to that network. • Build fee revenue is recognised on delivery and acceptance of a customer service application. In the event that work on a project which results in a build fee has commenced but not completed within an accounting period, revenue is recognised in line with the percentage that the project is complete at the end of the accounting period. The percentage of completion is calculated by taking the costs incurred on the project at the end of an accounting period and expressing that as a percentage of the total estimated costs that are anticipated to be incurred in order to complete the project. • The revenue derived from the sale of hardware is recognised when the risks and rewards of ownership are passed to the customer. • In the event that multiple revenue sources are included in the same contract, each component part is separately fair valued and individual component revenues are recognised when the revenue recognition criteria for that component has been met. Neither build fee or support and maintenance revenue are considered to be a signiﬁcant proportion of the overall revenue, and are not separately disclosed. Non-recurring items The Group presents as non-recurring items on the face of the income statement those material items of expenditure which, because of their nature and/or expected infrequency of the events giving rise to them, merit separate presentation to allow shareholder to understand the elements of ﬁnancial performance in the period, so as to facilitate comparison with prior periods. ANNUAL REPORT 2015 63 Financial Review Finance fee income Finance fee income is credited to the income statement over the term of the loan so that the amount credited is at a constant rate on the carrying amount of the receivable. Taxation Current tax is the tax currently payable based on taxable proﬁt for the year. Deferred taxation 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 consolidated ﬁnancial statements. Deferred tax is not provided if it arises from initial recognition of an asset or liability in a transaction, other than a business combination, that at the time of the transaction affects neither accounting nor taxable proﬁt or loss. Deferred tax is calculated at tax rates that are expected to apply to their respective period of realisation, provided they are enacted or substantively enacted at the balance sheet date. Deferred tax assets are recognised to the extent that it is probable that future taxable proﬁt will be available against which the temporary differences can be utilised. Deferred tax on temporary differences associated with shares in subsidiaries is not provided if reversal of these temporary differences can be controlled by the Group and it is probable that reversal will not occur in the foreseeable future. Changes in deferred tax assets or liabilities are recognised as a component of tax expense in the income statement, except where they relate to items that are charged or credited directly to equity in which case the related deferred tax is also charged or credited directly to equity. Where cash payments are received from HM Revenue and Customs relating to claims for investment tax credits relating to Research and Development relief, they are recognised in the Statement of Comprehensive Income when they are received as a credit to taxation. Financial liabilities Financial liabilities are obligations to pay cash or other ﬁnancial assets and are recognised when the Group becomes a party to the contractual provisions of the instrument. Financial liabilities are stated at amortised cost. A ﬁnancial liability is derecognised only when the obligation is discharged, is cancelled or it expires. 3. Financial risk management The operations of the Group expose it to a variety of ﬁnancial risks: liquidity risk, interest rate risk and foreign currency risk. Policies for managing these risks are set by the Board following recommendations from the Group Finance Director. All ﬁnancial risks are managed centrally. The policy for each of the above risks is described in more detail below. The Group’s ﬁnancial instruments comprise cash, short- term deposits, ﬁnance leases and various items, such as receivables and payables that arise directly from its operations. It is, and has been throughout the year under review, the Group’s policy that no trading in ﬁnancial instruments shall be undertaken. Similarly the Group did not undertake any ﬁnancial hedging arrangements during the year under review. The year-end position reﬂects these policies and there have been no changes in policies or risks since the year-end. Liquidity risk Through detailed cash ﬂow forecasting and capital expenditure planning, the Group monitors working capital and capital expenditure requirements and through the use of rolling short-term investments ensures that cash is available to meet obligations as they fall due. Cash at bank is pooled and invested in overnight money market accounts and deposits. Interest rate risk The Group principally ﬁnances its operations through shareholders’ equity and working capital. The Group took borrowings during the year applying variable interest rates, and now has exposure to interest rate ﬂuctuations on the loan, its cash and short-term deposits. The Group has adopted a sensitivity analysis that measures changes in the fair value of ﬁnancial instruments and interest-bearing loans and any resultant impact on the income statement of an increase or decrease of 2% in market interest rates. ANNUAL REPORT 2015 64 Financial Review (Decrease) / increase in fair value of short-term investments Impact on income statement: (loss) / gain Foreign currency risk Capital management 2% decrease in interest rates £’000 2% increase in interest rates £’000 (36) (36) 36 36 The Group’s principal exposure to exchange rate ﬂuctuations arises on the translation of overseas net assets, proﬁts and losses into the presentation currency. This risk is managed by taking differences that arise on the retranslation of the net overseas investments to the currency reserve. Foreign currency risk on cash balances is monitored through cash ﬂow forecasting and currency is held in foreign currency bank accounts only to the extent that it is required for working capital purposes. No sensitivity analysis is provided in respect of foreign currency risk as due to the Group’s working capital management practices, the risk is considered to be immaterial. Financial assets The Board’s policy is to maintain a strong capital base with the joint objectives to maintain investor, creditor and market conﬁdence and to sustain future development of the business. Capital comprises all components of equity (i.e. share capital, capital redemption reserve, share premium and retained earnings). The Board manages the capital structure and makes adjustments as required in the light of changes in economic conditions. The Board may return capital to shareholders, issue new shares or sell assets in order to maintain capital. Credit risk management is described in note 15. Current ﬁnancial assets Trade receivables (note 15) Other receivables (note 15) Cash and cash equivalents (note 17) Total ﬁnancial assets 2015 £’000 3,558 488 4,419 8,465 2014 £’000 1,763 28 7,341 9,132 Financial liabilities Other interest-bearing loans and borrowings All ﬁnancial liabilities held by the Group, except for contingent consideration, are measured at amortised cost and comprise trade payables of £2,383,000 (2014: £1,599,000) and other payables of £637,000 (2014: £306,000). See note 18 for further details. Information about the contractual terms of the Group’s interest-bearing loans and borrowings, which are measured at amortised cost are disclosed below. For more information about the Group’s exposure to interest rate and foreign currency risk, see above. Non-current ﬁnancial liabilities Secured bank loans Current ﬁnancial liabilities Current portion of secured bank loans 2015 £’000 2,105 636 2014 £’000 - - ANNUAL REPORT 2015 65 Financial Review Terms and debt repayment schedule Loan 1 Loan 2 The value of the collateral to these loans is supported by the collateral being the land and buildings carrying value of £3.1m. 4. Segment Analysis Since the acquisition of Veritape Limited in June 2013, internal ﬁnancial reporting within the Group has been prepared separating the acquired business from the rest of the Group. Commencing from the current ﬁnancial year the new segmentation is based on analysing Eckoh UK and Eckoh Current period segment analysis under the new basis Segment Revenue Gross proﬁt Administrative expenses Operating proﬁt / (loss) Interest received Finance expense Interest payable Finance income Proﬁt / (loss) before taxation Taxation Proﬁt after taxation Currency Sterling Sterling Nominal interest rate 2.0% plus base rate 2.5% plus base rate Maturity date See note 20 See note 20 Carrying amount 2015 £’000 1,628 1,113 2,741 Inc (US). The necessary information to produce current period segment analysis under the old basis and prior period under the new basis is not available due to the prohibitive and excessive costs associated with the need to separate the reporting information. Information regarding the results of each operating segment is included below. Performance is measured based on segment proﬁt or loss before taxation as included in the internal management reports provided to the Group’s chief operating decision maker. The UK & US entities operate independently and costs are not shared between them. Eckoh UK £’000 Eckoh Inc £’000 16,983 12,952 175 151 Total 2015 £’000 17,158 13,103 Total 2014 £’000 14,035 10,215 (12,372) (129) (12,501) (10,425) 580 20 - (19) 1,518 2,099 (16) 2,083 22 - - - - 22 - 22 602 20 - (19) 1,518 2,121 (16) 2,105 (210) 57 (1,214) - - (1,367) 1,665 298 ANNUAL REPORT 2015 66 Financial Review Segment assets Trade receivables Deferred tax asset Segment liabilities Trade and other payables Capital expenditure Purchase of tangible assets Purchase of intangible assets Depreciation Amortisation Eckoh UK £’000 Eckoh Inc £’000 3,422 4,938 136 - Total 2015 £’000 3,558 4,938 Total 2014 £’000 1,763 4,267 2,967 53 3,020 1,905 4,558 337 689 1,699 461 5,019 54 1 11 391 690 1,710 1,306 355 603 678 In 2014/15, there were two customers that individually accounted for more than 10% of the total revenue of the continuing operations of the Company (2013/14: two customers). Revenue from the largest customer totalled £2,559,000 (2013/14: £2,132,000) with the second largest customer generating revenue of £2,065,000 (2013/14: £2,052,000) both exclusively within the UK segment. Prior to the acquisition of Veritape Limited, all revenue within the Group was derived from the UK. Veritape Limited generates a signiﬁcant proportion of their revenue from outside of the UK. Revenues by geography and segment are disclosed below. Since the acquisition of Veritape, all employees have been relocated to the Hemel Hempstead ofﬁce and the business has been fully integrated within the Eckoh organisation and is not reported on separately within the organisation. The key segments now reviewed at Board level are the UK & US operations. Revenue by geography UK United States of America Rest of the World Total Revenue Eckoh UK £’000 Eckoh Inc £’000 2015 £’000 2014 £’000 16,770 186 27 16,983 - 175 - 175 16,770 13,329 361 27 631 75 17,158 14,035 ANNUAL REPORT 2015 67 Financial Review Prior period segment analysis under the old basis Segment Revenue Gross proﬁt Administrative expenses Operating (loss) / proﬁt Finance income Finance expense (Loss) / proﬁt before taxation Taxation Proﬁt after taxation Segment assets Trade receivables Segment liabilities Trade and other payables Capital expenditure Purchase of property, plant & equipment Purchase of intangible assets Revenue by geography UK United States of America Rest of the World Total Revenue Eckoh Veritape 12,715 8,937 (9,871) (934) 1,320 1,278 (554) 724 Total 2014 £’000 14,035 10,215 (10,425) (210) 57 (1,214) (1,367) 1,665 298 1,565 198 1,763 1,552 353 1,905 356 555 - 48 Eckoh Veritape 355 603 2014 £’000 12,715 - - 614 631 75 13,329 631 75 12,715 1,320 14,035 ANNUAL REPORT 2015 68 Financial Review 5. Proﬁt / (loss) from Operating Activities The Group’s loss or proﬁt from operating activities is arrived at after charging: Employee beneﬁts expense (note 6) Depreciation (note 12) Amortisation (note 11) Operating lease payments – property (note 24) 6. Employee Beneﬁts Expense Wages and salaries Less: Internal development costs capitalised in the year Amortisation of internal development costs Social security costs Pension costs Share based payments 2015 £’000 6,208 690 1,710 442 2015 £’000 4,793 (232) 357 884 84 322 2014 £’000 5,189 678 1,306 486 2014 £’000 3,924 (572) 254 953 31 599 6,208 5,189 The Directors’ Report on page 39 provides further details on the Directors’ emoluments. The average number of people (including Executive Directors) employed by the Group during the year was: Technical support Customer services Administration and management 2015 number 2014 number 61 16 39 116 51 16 26 93 Excluded from the table above are 20 (2014: 13) full time equivalent casual call centre employees who cost £256,893 (2014: £162,000) in the year. ANNUAL REPORT 2015 69 Financial Review 7. Auditor Remuneration During the year the Group obtained the following services from the Group’s auditor at costs as detailed below: Fees payable for the audit of the parent company and consolidated accounts Fees payable for other services: The audit of subsidiary undertakings comprising continuing operations Other tax advisory services Total fees payable to the Group’s auditor 2015 £’000 15 40 40 95 2014 £’000 15 39 - 54 The fees payable for the audit of the parent company and consolidated accounts are borne by a subsidiary undertaking. 8. Interest Receivable and Payable Continuing operations Bank interest receivable Continuing operations Bank interest payable 9. Taxation Tax recognised in proﬁt and loss Current tax expense Current year Adjustments in respect of prior periods Deferred tax credit Origination and reversal of temporary differences Recognition of previously unrecognised tax losses Prior year adjustment Total tax charge / (credit) 2015 £’000 20 20 2015 £’000 (19) (19) 2014 £’000 57 57 2014 £’000 - - 2015 £’000 2014 £’000 117 (79) 38 37 - (59) (22) 16 117 - 117 (986) (796) - (1,782) (1,665) £910,000 (2014: £642,000) of deferred taxation in relation to share options was recognised directly in equity. ANNUAL REPORT 2015 70 Financial Review The tax charge for the year is different to the standard rate of corporation tax in the UK of 21% (2014: 23%). The differences are explained below: Continuing operations Proﬁt for the year Total tax charge / (credit) Proﬁt / (loss) excluding tax Proﬁt / (loss) multiplied by rate of corporation tax in the UK of 21% (2014: 23%) Effect of expenses not deductible for tax purposes Adjustments in respect of prior periods (current and deferred) Share scheme relief Effect of income not taxable for tax purposes Deferred tax not recognised Effect of tax rate adjustment on closing recognised deferred tax balance Tax charge / (credit) for the year Recognition of deferred tax assets and liabilities 2015 £’000 2,105 16 2,121 445 112 (137) (82) (318) (2) (2) 16 2014 £’000 298 (1,665) (1,367) (314) 321 - - (177) (2,405) 910 (1,665) Capital allowances differences Short term timing differences arising from share based payments Tax losses Intangible assets Assets 2015 £’000 2014 £’000 376 501 1,901 931 2,661 2,835 Liabilities 2015 £’000 (2) - - 2014 £’000 - - - Net 2015 £’000 2014 £’000 374 501 1,901 931 2,661 2,835 - - (860) (1,123) (860) (1,123) Tax losses carried forward 4,938 4,267 (862) (1,123) 4,076 3,144 Movement in deferred tax balances during the year Balance at 1 April Recognised in income statement Recognised in Other Comprehensive Income Recognised through business combinations Balance at 31 March 2015 £’000 3,144 22 910 - 4,076 2014 £’000 2,040 1,782 642 (1,320) 3,144 ANNUAL REPORT 2015 71 Financial Review Unrecognised deferred tax assets There are unprovided deferred taxation assets totalling £662,000 (2014: £664,000) in respect of trading losses and £6,265,000 (2014: £6,265,000) in respect of capital losses of which £4,483,000 (2014: £4,483,000) are restricted. In the 2012 & 2013 Budgets, the Chancellor announced a reduction in the main rate of corporation tax from 24% to 21%, to be phased in over three years as follows: • With effect from 1 April 2013 - 23% • With effect from 1 April 2014 - 21% • With effect from 1 April 2015 - 20% Under IFRS, deferred tax is measured by reference to the rates which are enacted or substantively enacted at the balance sheet date. The reduction in the corporation tax rate to 20% was substantively enacted on 2 July 2013, and therefore the deferred tax assets and liabilities have been calculated at this rate. 10. Earnings per Share Basic earnings per ordinary share is calculated on the basis of the weighted average number of ordinary shares of 220,333,985 (2014: 214,704,448) in issue during the year ended 31 March 2015 after adjusting for shares held by the Employee Share Ownership Plan of 9,156 (2014: 9,156) and shares held in the Employee Beneﬁt Trust of 344,750 (2014: 55,343) and the proﬁt for the period attributable to equity holders of the parent of £2,105,000 (2014: £298,000). In calculating diluted earnings per share, the weighted average number of ordinary shares in issue, after adjusting for shares held by the Employee Share Ownership Plan and Employee Beneﬁt Trust, is further adjusted to include the dilutive effect of potential ordinary shares. The potential ordinary shares represent share options granted to employees where the exercise price is less than the average market price of ordinary shares in the period, and contingently issuable ordinary shares as a result of the Veritape Limited acquisition (see note 27). The total number of options in issue is disclosed in note 21. The dilutive effect of potential ordinary shares outstanding at the end of the year is 28,847,335 (2014: 39,468,000). Denominator Weighted average number of shares in issue in the period Shares held by employee ownership plan Shares held in Employee Beneﬁt Trust Number of shares used in calculating basic earnings per share Dilutive effect of share options Number of shares used in calculating diluted earnings per share 2015 £’000 2014 £’000 220,334 214,704 (9) (345) (9) (55) 219,980 214,640 28,847 39,468 248,827 254,108 ANNUAL REPORT 2015 72 Financial Review 11. Intangible Assets Group Cost At 1 April 2013 Additions Disposals At 31 March 2014 Additions Disposals At 31 March 2015 Amortisation At 1 April 2013 Charge for the year Disposals At 31 March 2014 Charge for the year Disposals At 31 March 2015 Carrying amount At 31 March 2015 At 31 March 2014 Internally developed computer software £’000 Other intangible assets £’000 Total £’000 1,858 603 - 20 6,610 17,800 10,631 - (15,922) Goodwill £’000 15,922 3,418 (15,922) 3,418 2,461 6,630 12,509 - - 391 - - - 391 - 3,418 2,852 6,630 12,900 15,922 1,547 - (15,922) - - - - 316 - 1,863 390 - 20 990 17,489 1,306 - (15,922) 1,010 1,320 - 2,873 1,710 - 2,253 2,330 4,583 3,418 3,418 599 598 4,300 5,620 8,317 9,636 The disposal within Goodwill in the prior year represents fully amortised historic goodwill for operating businesses no longer within the Eckoh Group. The additions within Goodwill and Other intangible assets in the prior year arose from the acquisition of Veritape Limited as disclosed in note 27. On an annual basis the impairment review of goodwill is undertaken to determine a value in use calculation for each cash generating (CGU) using cash ﬂow projections. In this regard management has performed a proﬁtability forecast of Veritape Limited over the next ﬁve years which are based on the latest three year plan approved by the Board, modiﬁed as appropriate to reﬂect the latest conditions and are satisﬁed that the carrying values of Goodwill and Other Intangible Assets are supported. As a result, no impairment has been recorded in the current year. The main assumptions for each CGU, which related to sales volume, selling prices and cost changes, are based on recent history and expectations of future changes in the market for the three main products; Call Recording, Call Guard and Haloh. ANNUAL REPORT 2015 73 Financial Review The calculated Net Present Value of acquired business including the tax amortisation beneﬁt is projected to be £15.7m (2014: £9.5m). The increase in value is mainly driven by the demand for the CallGuard onsite solution in the USA acquired through the Veritape acquisition and launch of the new product Haloh. As a result, no impairment has been recorded in the current year. The discount rate applied to the cash ﬂow forecasts for each CGU are based on a market participant’s pre-tax weighted average cost of capital of 10%. Sensitivity to the changes in assumptions If forecast revenues fell by more than 60%, this is likely to result in an impairment in the carrying values of Veritape Limited. 12. Tangible Assets Cost At 1 April 2013 Additions Disposals Acquired through business combination At 31 March 2014 Additions Disposals At 31 March 2015 Depreciation At 1 April 2013 Charge for the year Disposals Acquired through business combination At 31 March 2014 Charge for the year Disposals At 31 March 2015 Carrying amount At 31 March 2015 At 31 March 2014 Land and buildings £’000 Fixtures and equipment £’000 Total £’000 - - - - - 3,068 - 3,068 - - - - - 10 - 10 7,171 7,171 356 (95) 36 7,468 1,951 (95) 9,324 356 (95) 36 7,468 5,019 (95) 12,392 5,987 5,987 678 (95) 36 678 (95) 36 6,606 6,606 680 (95) 690 (95) 7,191 7,201 3,058 - 2,133 862 5,191 862 Purchase of Telford House. During the year the Group purchased its head ofﬁce building in Hemel Hempstead using loan facilities of £2.9m of which £2.7m (2014: nil) remains outstanding. ANNUAL REPORT 2015 74 Financial Review 13. Investment in Subsidiary Undertakings The following are the principal subsidiary undertakings of the Group, which are included in the Consolidated Financial Statements: Subsidiary undertakings Eckoh UK Limited Veritape Limited Eckoh LLC Eckoh Inc Eckoh France SAS Eckoh Enterprises Limited Eckoh Projects Limited Avorta Limited Eckoh Technologies Limited Intelliplus Group Limited Intelliplus Limited Medius Networks Limited Telford Projects Limited Swwwoosh Limited 365 Isle of Man Limited Country of incorporation Principal activities Percentage of share capital held England and Wales Speech Solutions England and Wales Secure Payment Solutions United States of America Non trading United States of America Secure Payment Solutions France England and Wales England and Wales England and Wales England and Wales England and Wales England and Wales England and Wales England and Wales England and Wales Isle of Man Non trading Dormant Non trading Dormant Dormant Dormant Non Trading Non Trading Dormant Dormant Dormant 100% 100% 100% 100% (i) 100%(i) 67% & 33%(i) 100% 100%(i) 100%(i) 100% 100%(i) 100%(i) 100% 100%(i) 100%(i) (i) Share capital held by a subsidiary undertaking. All companies have March year-ends. Information in relation to geographical operations is set out in note 4. 14. Inventories Work in progress 15. Trade and Other Receivables Current Trade receivables Less: provision for impairment of receivables Net trade receivables Other receivables Prepayments and accrued income 2015 £’000 224 224 2015 £’000 3,558 - 3,558 488 2,987 7,033 2014 £’000 104 104 2014 £’000 1,763 - 1,763 28 1,785 3,576 The Directors’ consider that the carrying value of the trade and other receivables approximate to their fair value. ANNUAL REPORT 2015 75 Financial Review Credit risk is the risk of ﬁnancial loss to the Group if a customer or counterparty to a ﬁnancial instrument fails to meet its contractual obligations. Credit risk arises principally from the Group’s trade and other receivables. Concentrations of credit risk with respect to trade receivables are limited due to working capital practices of the market sector and the Group; and the nature of the Group’s customer base. The working capital practices of the market sector within which the Group operates are such that the majority of the trade receivables balance is due from the telephony carriers under a self-bill agreement. The reputable nature of the Group’s current customer base limits exposure to credit risk. Management believe that no provision for the impairment of receivables is needed based on their historic experience and current knowledge of customers and amounts due. 16. Short-term Investments There were no short term investments held at 31 March 2015 and prior year. 17. Cash and Cash Equivalents Sterling US dollars Floating rate US dollars 2015 £’000 4,387 32 4,419 2015 £’000 4,387 32 4,419 Cash and cash equivalents comprise cash held by the Group. Surplus cash is placed in an interest bearing account. The average interest rate on the interest bearing account during the year was 0.40% (2014: 0.38%). The Group’s ﬁnancial risk management is disclosed in note 3. 18. Trade and Other Payables Trade payables Other payables Corporation tax creditor Other taxation and social security Accruals and deferred income Subtotal Contingent consideration 2015 £’000 2,383 637 55 706 2,436 6,217 - 6,217 2014 £’000 7,341 - 7,341 2014 £’000 7,341 - 7,341 2014 £’000 1,599 306 117 541 2,881 5,444 1,952 7,396 ANNUAL REPORT 2015 76 Financial Review All of the amounts above are payable within one year and trade payables that are more than three months old at the year- end represent £87,000 (2014: £7,000). The Group’s exposure to liquidity risk is disclosed in note 3. 19. Share Capital Allotted called up and fully paid Share type Ordinary shares of 0.25p each At 1 April 2014 Shares issued on acquisition of Veritape Limited Shares issued under the share option schemes At 31 March 2015 Number of shares Nominal Value £’000 216,084,577 6,443,704 553,000 223,081,281 540 16 2 558 The total authorised number of shares is 1,000,000,000 ordinary shares with a nominal value of 0.25 pence per share. All ordinary shares in issue are fully paid. The holders of the ordinary shares are entitled to receive dividends, if declared, and are entitled to vote at general meetings of the Company. There were no changes to the authorised share capital during the period. Potential ordinary shares are disclosed in note 21. 20. Non-current Liabilities At 1 April 2014 Loan drawdown Utilised during the year Credit to the proﬁt and loss in the year Shares issued Amounts released unused At 31 March 2015 Non-current contingent consideration £’000 2,941 - - (1,518) (787) - 636 Loans £’000 - 2,105 - - - - 2,105 Provision for dilapidations £’000 43 - - - - (43) - Deferred tax £’000 1,123 - (261) - - - 862 Total £’000 4,107 2,105 (261) (1,518) (787) (43) 3,603 The Contingent Consideration is in respect of the acquisition of Veritape Limited detailed in note 27, and is payable in July 2016. Note 27 gives further details on the estimation techniques undertaken by management in determining the level of contingent consideration. Following the acquisition of the Group’s Telford House ofﬁces in December 2014 the dilapidation provision will not be payable and has therefore been released. Loans and borrowings In December 2014 the Group secured two bank loan facilities with a combined carrying amount of £2.7m at 31 March 2015 to assist with the purchase of the head ofﬁce Telford House located in Hemel Hempstead. ANNUAL REPORT 2015 77 Financial Review The ﬁrst loan of £1.6m is repayable over a period of 5 years. Eleven quarterly repayments of £40,700 will commence in March 2017 with a single ﬁnal repayment instalment sufﬁcient to repay the remaining Loan in full on maturity. A ﬁxed interest is payable at a monthly rate of 2% per annum plus a variable base rate currently at 0.5%. The second loan of £1.3m is repayable over a period of 2 years with 8 quarterly instalments of £159,000 commencing March 2015. A ﬁxed interest is payable at a monthly rate of 2.5% per annum plus a variable base rate currently at 0.5%. 21. Share Based Payments The Eckoh plc Share Option Scheme (‘the Scheme’) was introduced in November 1999. Under the Scheme the Board can grant options over shares in the Company to Group employees. The grant price of share options is the middle market quotation price as derived from the Daily Ofﬁcial List of the London Stock Exchange on the date of the grant. The contractual life of an option is ten years. Options granted under the Scheme become exercisable subject to the share price exceeding RPI plus 15% after the third anniversary of the grant date. Exercise of an option is subject to continued employment, with certain exceptions, as speciﬁed in the Scheme rules. The Eckoh plc Enterprise Management Incentive Scheme (‘the EMI Scheme’) was introduced in February 2007. Under the Scheme the Board can grant options over shares in the Company to Group employees. The grant price of share options is the middle market quotation price as derived from the Daily Ofﬁcial List of the London Stock Exchange on the date of the grant. The contractual life of an option is ten years. Options granted under the EMI Scheme become exercisable subject to the percentage growth in earnings per share in the three years following the year of grant being at least 5% (compounded) per annum. Exercise of an option is subject to continued employment, subject to certain exceptions as speciﬁed in the EMI Scheme rules. The Eckoh plc Share Incentive Plan (‘the SIP’) was introduced in April 2007. Under the SIP, employees can buy partnership shares worth up to up to £1,500 per annum and receive matching shares in the ratio of 2:1 by completing the partnership/ matching share agreement. The purchase price will be the prevailing market price on that day when the shares are purchased. The SIP trustees buy shares twice a year. Subject to continuing employment, within three years of purchase partnership shares can be withdrawn from the SIP with a corresponding charge to income tax and national insurance however the associated matching shares cannot be withdrawn within the ﬁrst three years. Subject to continuing employment, between three and ﬁve years of the purchase date, both partnership and matching shares can be withdrawn from the SIP with a corresponding charge to income tax and national insurance. Subject to continuing employment, ﬁve years after the purchase date, both partnership and matching shares can be withdrawn from the SIP without a corresponding charge to income tax and national insurance. Both partnership and matching shares can be withdrawn from the SIP within ﬁve years of the purchase date without a corresponding charge to income tax and national insurance subject to employment terminating for certain reasons as speciﬁed under the SIP rules. The Eckoh plc 2010 Long Term Incentive Plan (“2010 LTIP”) was introduced in June 2010. Awards under the plan are made in two parts. Part 1 awards are in the form of options exercisable at 0.25 pence, which vest dependent on performance against Earnings per share targets set at the beginning of each ﬁnancial period. None of the Part 1 awards are released until 3 years have elapsed during which targets relating to Total Shareholder Return must also be achieved. The Part 1 awards have a matching mechanism whereby additional awards are made to match any purchase of shares made by recipients up to a cap of 25% of the Executive’s remuneration. Part 2 awards are made to executive directors and key management in the event that the Company undergoes a change of control (“trigger event”). The value of part 2 awards is dependent on the increase in value obtained for shareholders from a trigger event in comparison to the value of the Company shares at the date of award. As there is currently no probability of a “trigger event” taking place before the lapse date of the awards of 30 June 2013, no charge was made to the Statement of Comprehensive Income in respect of Part 2 of these awards. Further information is available in the Remuneration Report on page 45 and in the Directors Report on page 39. ANNUAL REPORT 2015 78 Financial Review The 2010 Eckoh plc Bonus scheme paid half of any bonus payable to executives and key management personnel in the form of deferred nil cost share options. The awards relating to the 2010/11 ﬁnancial year were made on 30 June 2011 (“calculation date”) with further detail available in the Remuneration Report on page 45. An award relating to the 2011/12 ﬁnancial year is expected to be made on 30 June 2012 (“calculation date”). The deferred share options will vest in two halves 12 and 24 months following the calculation dates. The Eckoh plc 2012 Long Term Incentive Plan (“2012 LTIP”) was introduced in December 2012 and replaced the 2010 LTIP introduced in June 2010. Base Awards were made to participants to reﬂect the value generated for shareholders since the introduction of the 2010. These awards will vest in three equal tranches of the grant date provided share price targets are achieved and the participant remains employed with the Company. Match awards can be further awarded three years after the original award date provided share price targets have been satisﬁed. The fair value of share options granted under the Scheme, the EMI Scheme and the SIP was measured using the QCA-IRS option valuer based on the Black-Scholes formula, taking into account the terms and conditions upon which the grants were made. The fair value per option granted and the assumptions used in the calculation are as follows: Share price (pence) Exercise price (pence) Number of employees Shares under option Vesting period (years) Expected volatility Option life (years) Expected life (years) Risk free rate Expected dividends expressed as a dividend yield Fair value per option (pence) 26 Mar 2012 8 Jun 2012 12 Jun 2014 5 Dec 2014 25 Mar 2015 10.875 11.0 13 11.125 11.25 2 46.16 37.5 1 46.25 46.25 1 37.50 46.5 1 1,275,000 300,000 500,000 150,000 500,000 3 42% 10 3 3 40% 10 3 3 26% 10 3 3 20% 10 3 3 22% 10 3 2.75% 2.75% 1.76% 1.76% 1.76% - 3.15 - 3.18 - 8.89 - 6.89 - 6.08 The expected volatility is based on historical volatility over the last three years. The expected life is the average expected period to exercise. The risk free rate of return is the yield on zero- coupon UK government bonds of a term consistent with assumed option life. The fair value of awards made under the 2010 LTIP scheme was measured using a model using the Monte Carlo method, taking into account the terms and conditions upon which the awards were made. The fair value of awards made under the Bonus scheme was measured using the QCA-IRS option valuer based on the Black-Scholes formula. The fair value per award granted and the assumptions used in the calculation are as follows; ANNUAL REPORT 2015 79 Financial Review Award type Share price (pence) Exercise price (pence) Number of employees Shares under option Vesting period (years) Expected volatility Option life (years) Expected life (years) Risk free rate Expected dividends expressed as a dividend yield Fair value per option (pence) Award type Share price (pence) Exercise price (pence) Number of employees Shares under option Vesting period (years) Expected volatility Option life (years) Expected life (years) Risk free rate Expected dividends expressed as a dividend yield Fair value per option (pence) 30 June 2010 28 February 2011 LTIP 4.875 0.25 2 LTIP 7.125 0.25 1 4,846,153 150,000 3 43% 10 3 1.38% - 2.53 2.34 43% 9.34 2.34 1.61% - 4.98 30 June 2010 30 June 2010 30 June 2011 30 June 2011 Bonus 7.875 0.00 4 Bonus 7.875 0.00 4 Bonus 11.25 0.00 4 Bonus 11.25 0.00 4 831,794 831,794 633,228 633,228 2 43% 10 2 3 43% 10 3 1.38% 1.38% - 4.75 - 4.75 2 43% 10 2 4.0% - 7.75 3 43% 10 3 4.0% - 7.75 The fair value of awards made under the 2012 LTIP scheme was measured using a model using the Monte Carlo method, taking into account the terms and conditions upon which the awards were made. The fair value of Match awards made under the 2013 LTIP scheme was measured using a model based on the Black-Scholes formula. The fair value per award granted and the assumptions used in the calculation are as follows: ANNUAL REPORT 2015 80 Financial Review Award type Share price (pence) Exercise price (pence) Number of employees Shares under option Vesting period (years) Expected volatility Option life (years) Expected life (years) Risk free rate Expected dividends expressed as a dividend yield Fair value per option (pence) 1 January 2013 1 January 2013 1 January 2013 1 January 2013 LTIP 14.25 0.00 4 LTIP 14.25 0.00 4 LTIP LTIP Match 14.25 0.00 4 14.25 0.00 5 5,687,976 5,687,977 5,687,980 9,598,463 1 28% 10 1 0.32% 0.70% 8.54 2 28% 10 2 0.39% 0.70% 9.43 3 28% 10 3 0.56% 0.70% 10.06 3 28% 10 3 0.56% 0.70% 1.57 The expected volatility is based on historical volatility over the last three years. The expected life is the average expected period to exercise. The risk free rate of return is the yield on zero-coupon UK government bonds of a term consistent with assumed option life. A reconciliation of option movements over the year to 31 March 2015 is shown below: 2015 Number of Weighted average exercise price share options Outstanding at 1 April Granted Exercised Lapsed Forfeited Outstanding at 31 March Exercisable at 31 March 30,607,608 1,150,000 (973,348) - - 30,784,260 12,772,817 0.85 0.43 5.34 - - 0.85 0.27 Number of share options 34,882,644 - (4,275,036) - - 30,607,608 6,924,960 2014 Weighted average exercise price 1.24 - 4.02 - - 0.85 0.66 2015 2014 Range of exercise prices (pence) 0 – 0.5 4.5 – 6.5 8.5 – 10.5 10.5 – 12.5 37.5 – 39.5 44.5 – 46.5 Weighted average exercise price (pence) Number of shares (000’s) Weighted average remaining life Expected Contractual - 27,474 0.74 5.13 8.75 460 125 11.05 1,575 37.5 46.44 500 650 - - - 3.0 2.3 7.7 4.9 2.3 6.8 10.0 0.2 Weighted average exercise price (pence) Number of shares (000’s) Weighted average remaining life Expected Contractual - 27,793 5.13 8.64 513 225 11.05 1,575 - - - - 1.7 - - 1.0 - - 8.7 5.9 2.3 8.0 - - The total charge for the year relating to employee share based payment plans was £322,000 (2014: £599,000) all of which related to equity-settled share based payment transactions. ANNUAL REPORT 2015 81 Financial Review 22. Pension Commitments The Group operates a group personal pension scheme and, in addition, the subsidiary company Eckoh UK Limited operates a deﬁned contribution pension scheme. The assets of the pension schemes are held separately from those of the Group in independently administered funds. The pension charge represents contributions payable by the Group to the funds. There were no outstanding or proposed contributions at the balance sheet date. 23. Related Party Transactions Eckoh plc is the parent and ultimate controlling company of the Eckoh Group, the Consolidated Financial Statements of which include the results of the subsidiary undertakings set out in note 13. Each subsidiary is 100% owned by the Eckoh Group and is considered to be a related party. Directors and key management includes the staff costs of the Directors’ and the Management Team. Directors and other key management Wages and salaries Social security costs Pension costs Share based payments 2015 £’000 649 81 60 303 1,093 2014 £’000 632 80 53 582 1,347 The aggregate Directors’ emoluments are shown in the table below. An analysis of Directors’ emoluments is included in the Directors’ Report on page 45. Directors Aggregate emoluments Rented apartment 2015 £’000 614 614 2014 £’000 703 703 An apartment owned by Nik Philpot is rented to Eckoh Group for use by company employees when on business. The rent is paid on monthly basis and was charged at comparable market rates. The expense in the year was £10,800 (2014: £10,800). There was no amount receivable or payable at the end of the current or prior year. There were no amounts written off in the current or prior year. ANNUAL REPORT 2015 82 Financial Review 24. Operating Lease Commitments The Group had total commitments under non-cancellable operating leases as follows: Land and buildings Expiring within one year Expiring within two to ﬁve years 2015 £’000 320 401 721 2014 £’000 476 721 1,197 The Group has an operating lease for a data centre in Heathrow, London at which some of its call processing platform is located. The term of the lease covers the period to July 2017 at a cost of £320,000 per annum. Prior to its acquisition in December 2014 the Group also had an operating lease for the head ofﬁce in Hemel Hempstead for which the annual operating lease charge was £103,000 for the ground and ﬁrst ﬂoors and £52,000 for the second ﬂoor of the same building. 25. Cash Flow from Operating Activities Cash ﬂows from operating activities Proﬁt after taxation Interest income Interest payable Finance expense Finance income Taxation Increase in deferred tax Depreciation of property, plant and equipment Amortisation of intangible assets Share based payments Operating proﬁt before changes in working capital and provisions Increase in inventories Increase in trade and other receivables Decrease in trade and other payables Decrease in provisions Net cash generated in operating activities 2015 £’000 2,105 (20) 19 - (1,518) 278 (262) 690 1,710 322 3,324 (120) (3,457) 976 (43) 680 2014 £’000 298 (57) - 1,214 - 117 (1,782) 678 1,306 599 2,373 (75) (139) 2,657 - 4,816 Prior year movements in inventory, receivable and payable balances have been adjusted by balances acquired through the acquisition of Veritape Limited detailed in note 27. ANNUAL REPORT 2015 83 Financial Review 26. Legal Fees and Settlement Costs In November 2013, Eckoh received a High Court action relating to an alleged infringement and invalidity of Semafone’s UK Patent (No. GB 2,473,376). In March 2015 a conﬁdential settlement was reached to the mutual beneﬁt of both parties. Under the settlement, Semafone has granted a worldwide licence to their granted patents, trademarks and patent applications covering certain dual tone multi-frequency (“DTMF”) masking methods of taking secure payments over the phone, for the beneﬁt of Eckoh, its customers and suppliers. In consideration of the licence, Eckoh will pay Semafone royalties in respect of the patents. The costs of defending the case after deducting insurance reimbursements were £0.5m. The agreement allows Eckoh to sell its CallGuard solution anywhere in the world without threat of future litigation. 27. Acquisition of Veritape Limited On 10 June 2013, the Company acquired the entire issued share capital of Veritape Limited (“Veritape”), a provider of Payment Card Industry Data Security Standards (“PCI DSS”) compliant call recording software and on premise secure payment solutions. The initial consideration comprised £5.1m of cash funded by existing cash from the combined entity and £1.1m payable in ordinary shares of Eckoh plc. This has resulted in an increase in share capital and share premium of £1.1m during the period. Additional contingent consideration of up to £1.7m of cash and up to 16.7m ordinary shares of Eckoh plc can be earned dependent on the achievement of proﬁt before tax targets. To earn the entire contingent consideration, proﬁt before tax of £3.6m must be achieved over the ﬁrst 26 month period following 1 July 2013. The fair value calculations of contingent consideration are based on forecast proﬁts of Veritape over the 26-month assessment period and, at the date of acquisition, it was estimated having performed a weighted probability exercise that £1.5m of cash and 14.3m shares will be issued in contingent consideration. Using the share price at the date of acquisition of 15.4825p, the fair value of the equity element of the contingent consideration was valued at £2.2m. As at 31 March 2014, the weighted probability exercise was reviewed and estimated that £1.0m of cash and 9.9m shares would be issued in contingent consideration. However, the share price of Eckoh plc was 39.125p and the fair value of the equity element of the contingent consideration as at that date was therefore considered to be £3.9m. The increase in fair value of the shares from the date of acquisition to 31 March 2014 offset by a reduction in the estimated cash contingent consideration resulted in a ﬁnance expense of £1.2m being charged to the income statement in the prior period. The Company incurred acquisition-related costs of £0.2m relating to external legal fees, due diligence and valuation fees, which have been included in Administrative expenses in the Group’s consolidated statement of comprehensive income. ANNUAL REPORT 2015 84 Financial Review Analysis of assets and liabilities acquired: Intangible assets Trade and other receivables Deferred tax asset Inventories Cash and cash equivalents Trade and other payables Deferred tax liability Net assets acquired Goodwill Consideration paid Satisﬁed by Cash Shares Cash – contingent consideration Shares – contingent consideration Total purchase consideration Net cash ﬂow on acquisition Cash consideration paid Cash acquired Cash ﬂow on acquisition Book value £’000 Fair value adjustments £’000 Fair value on acquisition £’000 - 128 1 29 1,480 (342) - 1,296 6,610 (23) - - - (123) (1,321) 5,143 6,610 105 1 29 1,480 (465) (1,321) 6,439 3,418 9,857 5,079 1,098 1,472 2,208 9,857 5,079 (1,480) 3,599 Goodwill arising from the acquisition is attributable to the expected synergistic beneﬁts expected from combining the operations of Veritape and Eckoh, including the comprehensive suite of products available to enable organisation to comply with PCI DSS, as well as the workforce acquired. ANNUAL REPORT 2015 85 Financial Review On acquisition of Veritape, all assets were fair valued and appropriate intangible assets recognised following the principles of IFRS3. Management identiﬁed three material intangible assets: I. CallGuard: CallGuard is the core proposition of Veritape allowing Contact Centres to remove credit cardholder data from their call recording systems and avoiding Contact Centre agents from being able to gain access to this data. Revenue growth has been rapid with management believing the growth will continue and that the product will have a minimum useful economic life of at least ﬁve years. The value of this intangible asset at acquisition is £6.41m using the income approach. II. Call Recording Software: Although no growth is forecast in revenue from the Call Recording Software, management believe that current levels of revenue will be maintained as a requirement for Contact Centres to record calls will remain for the foreseeable future. Management believe that the Call Recording Software has a minimum useful economic life of at least ﬁve years. The value of this intangible asset at acquisition is £0.17m using the income approach. III. Haloh: Haloh is a new product which enables organisations to prevent credit cardholder data from entering their IT infrastructure. A patent has been ﬁled for the product but no revenue had been generated from the product at the date of acquisition. The value of this intangible asset at acquisition is £0.03m using the income approach. Amendment of Veritape Limited Deferred Consideration On 18 August 2014 the Company reached an agreement to amend the deferred consideration payable in respect of the acquisition of Veritape Limited (“Veritape”) originally announced on 11 June 2013. Since the acquisition of Veritape, all employees have been relocated to the Hemel Hempstead ofﬁce and the business has been largely integrated within the Eckoh organisation. Over time it has been increasingly difﬁcult to separate the activities of Eckoh and Veritape and it has become apparent that a full integration of the businesses in a shorter timeframe would be beneﬁcial. Under the original share purchase agreement, the deferred consideration was based on the ﬁnancial performance of Veritape resulting largely from the sales of their own product lines. It has been determined that it would be in the best interests of the Company to amend this agreement such that the performance element of the deferred consideration payable to the Veritape management is based on achieving goals which are aligned to the strategy of the Group as a whole. Under the original agreement, deferred consideration of up to 16,618,785 ordinary shares of 0.25 pence in the capital of the Company (“Ordinary Shares”) and cash of up to £1.7m could be paid to the former Veritape shareholders dependent on the achievement of certain proﬁt before tax targets arising from the activity of Veritape Limited. As at 31 March 2014 it was estimated that £1.0m of cash and 9.9m shares would be issued in contingent consideration. Using the share price at 31 March 2014 of 39.125p, the total liability recognised on the Statement of Financial Position amounted to £4.9m. ANNUAL REPORT 2015 86 Financial Review Under the terms of the new agreement there is no cash element and the deferred consideration of up to a maximum of 10,739,507 Ordinary Shares (£4.3m, based on the average share price for the 20 dealing days preceding 4 August 2014) was to become payable as follows: • 6,443,704 Ordinary Shares will be issued with immediate effect to the Veritape shareholders (“First Tranche”); • Up to a further 1,073,951 Ordinary Shares can be earned dependent on the achievement of a group target of $3.4m of contracted revenues from activity in the USA in the year from 1 July 2014 to 30 June 2015 (“Second Tranche”); and • Up to a further 3,221,852 Ordinary Shares can be earned dependent on the achievement of a group revenue target of $7.4m from activity in the USA in the year from 1 July 2015 to 30 June 2016 (“Final Tranche”). The shares being issued under the First Tranche are subject to lock-in periods, with the two main beneﬁciaries of the deferred consideration, the two founder Directors of Veritape, being subject to lock-in for a period of two years and the other beneﬁciaries being subject to a lock-in until September 2015. It is estimated that the targets set for the Second Tranche of Ordinary Shares will not be achieved and no Shares will be issued with respect to this Tranche. It is estimated that the probability of the target being achieved to release the Final Tranche is 50%. As a result contingent consideration of 1,610,925 Ordinary Shares has been provided for. Using the share price as at 31 March 2015 of 39.125p, the value of the contingent consideration as at 31 March 2015 is £0.6m. The net impact of the reduction in contingent consideration offset by the increase in share price has resulted in a credit of £1.5m to Finance Income in the period. 28. Events after the Statement of Financial Position Date Post year end the Directors are recommending that a ﬁnal dividend for the year ended 31 March 2015 of 0.37 pence per ordinary share be paid to the shareholders whose names appear on the register at the close of business on 2 October 2015 with payment on 30 October 2015. The ex-dividend date will be 1 October 2015. This recommendation will be put to the shareholders at the Annual General Meeting. Based on the shares in issue at the year end, this payment would amount to £0.8m. ANNUAL REPORT 2015 87 Financial Review Company Financial Statements Prepared under UK GAAP Company Balance Sheet as at 31 March 2015 Fixed Assets Investments Current assets Debtors: amounts falling due within one year Cash at bank and in hand Creditors: amounts falling due within one year Net current liabilities Total assets less current liabilities Creditors: amounts falling due after one year Net assets Capital and reserves Called up share capital ESOP Reserve Capital redemption reserve Share premium account Share based payment Currency reserve Proﬁt and loss account Total shareholders’ funds Notes 2015 £’000 2014 £’000 ii iii iv v viii, ix ix ix ix ix ix ix 16,249 16,249 15,927 15,927 14 2,503 2,517 (3,339) (822) 15,427 (636) 14,791 558 (135) 198 5,175 1,621 33 7,341 14,791 28 5,784 5,812 (7,838) (2,026) 13,901 (2,941) 10,960 540 (22) 198 2,411 1,299 - 6,534 10,960 The ﬁnancial statements were approved and authorised for issue by the Board of Directors on 24 June 2015 and signed on its behalf by: Adam Moloney Group Finance Director Company Registration Number 3435822 ANNUAL REPORT 2015 88 Financial Review Notes to the Company’s Financial Statements for the year ended 31 March 2015 Principal Accounting Policies Basis of accounting The ﬁnancial statements for the Company have been prepared on the going concern basis, under the historical cost convention and in accordance with the Companies Act 2006 and applicable Accounting Standards in the United Kingdom. Going concern Under company law, the Company’s Directors are required to consider whether it is appropriate to prepare ﬁnancial statements on the basis that the Company is a going concern. As part of its normal business practice, the Company is included within annual and longer term plans prepared by management, and, in reviewing this information, the Company’s Directors are satisﬁed that the Company has reasonable resources to enable it to continue in business for the foreseeable future. For this reason, the Company continues to adopt the going concern basis in preparing these ﬁnancial statements. The principal accounting policies adopted by the Company are described below. Investments Long-term investments, held as ﬁxed assets, are stated at cost less provision for any impairment in value. Deferred taxation Deferred taxation is recognised in respect of all timing differences that have originated but not reversed at the balance sheet date, where transactions or events that result in an obligation to pay more tax in the future or a right to pay less tax in the future have occurred at the balance sheet date. A net deferred tax asset is regarded as recoverable and therefore recognised only when, on the basis of all available evidence, it can be regarded as more likely than not that there will be suitable taxable proﬁts against which to recover carried forward tax losses and from which the future reversal of underlying timing differences can be deducted. Deferred tax is measured at the average tax rates that are expected to apply in the periods in which the timing differences are expected to reverse, based on tax rates and laws that have been enacted or substantively enacted by the balance sheet date. Deferred tax is measured on a non-discounted basis. Related party transactions FRS 8 ‘Related Party Transactions’ requires the disclosure of the details of material transactions between the reporting entity and related parties. The Company has taken advantage of exemptions under FRS 8 not to disclose transactions between wholly-owned Group companies. Own shares held by ESOP trust Transactions of the Company-sponsored Employee Share Ownership Plan (‘ESOP’) trust are treated as being those of the Company and are therefore reﬂected in the Company’s ﬁnancial statements. In particular, the trust’s purchases and sales of shares in the Company are debited and credited directly to equity. Share based payments The Company operates a share option scheme which allowed certain Group employees to acquire shares in the Company. The fair value of share options granted is recognised within the staff costs of the relevant group company with a corresponding increase in equity. The fair value is measured at grant date and spread over the period up to the date when the recipient becomes unconditionally entitled to payment. The fair value of share options was measured using either a Monte Carlo valuation model or the QCA-IRS option valuer using the Black-Scholes formula, taking into account the terms and conditions upon which the grants were made. The amount recognised as an expense is adjusted to reﬂect the actual number of share options that vest except where forfeiture is only due to share prices not achieving the threshold of vesting. The Company also operates a long term incentive plan. The fair value of the conditional awards of shares granted under the long term incentive plan determined at the date ANNUAL REPORT 2015 89 Financial Review of grant. The fair value is then expensed on a straight line basis over the vesting period based on an estimate of the number of shares that will eventually vest. At each reporting date, the non-market based performance criteria and total shareholder return deﬁned in the long term incentive plan will be reconsidered and the expense will be revised as necessary. FRS 20 has been applied to all options granted after 7 November 2002 which have not vested on or before 1 January 2006. A deferred tax adjustment is also made relating to the intrinsic value of the share options at the balance sheet date. As a result of the grant of share options since 6 April 1999 the Company will be obliged to pay employer’s National Insurance contributions on the difference between the market value of the underlying shares and their exercise price when the options are exercised. A provision is made for this liability using the value of the Company’s shares at the balance sheet date and is spread over the vesting period of the share options. The provision is held by the relevant group company who employs the share option holders. Contingent consideration Contingent consideration payable in a business combination is generally remeasured at each balance sheet date and the change in its carrying amount recognised in proﬁt or loss. Contingent consideration payable is typically dependent on performance conditions related to the future revenue or proﬁtability of the acquired business. Considerable judgement is required in assessing the likely future performance of the acquired business against such performance conditions. Dividends Final dividends are recorded in the ﬁnancial statements in the period in which they are approved by the shareholders. Interim dividends are recognised when paid. Cash ﬂow statement The cash ﬂows of the Company are included in the Consolidated Cash Flow Statement on page 55. i. Operating expenses Staff costs Details of the Directors’ emoluments are given in the Directors’ Report on page 47. The Director’s remuneration costs are borne by a subsidiary undertaking. The Company did not incur any staff costs during the year (2014: £nil). The average number of employees employed by the Company during the year was 4 (2014: 4). Services provided by the Group’s auditor Fees payable for the audit of the parent company and consolidated accounts of £15,000 (2014: £15,000) were borne by a subsidiary undertaking. ANNUAL REPORT 2015 90 Financial Review ii. Fixed asset investments At 31 March 2014 Additions At 31 March 2015 Impairment Shares in subsidiary undertakings £’000 Other investments £’000 21,579 - 21,579 1,334 322 1,656 Total £’000 22,913 322 23,235 At 1 April 2014 and 31 March 2015 (6,986) - (6,986) Net Book Value At 31 March 2015 At 31 March 2014 The following are the principal subsidiary undertakings of the Company: 14,593 14,593 1,656 1,334 16,249 15,927 Principal activities Percentage of share capital held Subsidiary undertakings Eckoh UK Limited Eckoh Projects Limited Eckoh Inc Veritape Limited Country of incorporation England and Wales England and Wales Speech Solutions Non-trading United States of America Payment Solutions England and Wales Payment Solutions 100% 100% 100% 100% The Company also holds 100% of the issued share capital of nine non-trading or dormant companies, not shown above. The details of these non-trading and dormant companies are listed at Companies House and are included in note 13 of the consolidated accounts. and concluded that no impairment triggers exist that would require the Company’s investments to be impaired. The investment in Eckoh Projects Limited has been fully returned in previous years and therefore has no current value. All trading companies have March year-ends, and the countries in which they operate are disclosed in note 4 to the consolidated accounts. On 15 November 2013, the Company incorporated Eckoh Inc in the United States of America. The Directors have assessed the carrying values of the Company’s investments in line with FRS 11 Impairment, Other investments represent additional investments in Eckoh UK Limited as a result of the share-based payments arrangements in place. As the Company grants options over its shares to employees of Eckoh UK Limited, the Company records an increase in its investment in Eckoh UK Limited, the details of which are disclosed further in note 21 of the Consolidated Financial Statements. The disclosure of these amounts has been reclassiﬁed between categories during the year. ANNUAL REPORT 2015 91 Financial Review iii. Debtors Other debtors Prepayments and accrued income Amounts due within one year iv. Creditors: amounts falling due within one year Amounts owed to group undertakings Other creditors and accruals Contingent consideration v. Creditors: amounts falling due after one year Contingent consideration 31 March 2015 £’000 31 March 2014 £’000 - 14 14 2 26 28 31 March 2015 £’000 3,330 9 - 3,339 31 March 2014 £’000 5,629 257 1,952 7,838 31 March 2015 £’000 636 636 31 March 2014 £’000 2,941 2,941 The Contingent Consideration is in respect of the acquisition of Veritape Limited detailed in note 27 to the consolidated accounts, and is payable in July 2016. Note 27 to the consolidated accounts gives further details on the estimation techniques undertaken by management in determining the level of contingent consideration. vi. Provisions for liabilities and charges Total unprovided deferred tax assets are as follows: Tax losses available Unprovided deferred tax asset 31 March 2015 £’000 31 March 2014 £’000 2,172 2,172 2,174 2,174 No deferred tax asset has been recognised on the grounds that there is insufﬁcient evidence that the asset will be recoverable. ANNUAL REPORT 2015 92 Financial Review vii. Proﬁt and loss account The Directors have taken advantage of the exemption available under section 408 of the Companies Act 2006 and have not presented a proﬁt and loss account for the Company alone. During the year ended 31 March 2015 the Company made a proﬁt of £1,527,000 (2014: loss of £1,159,000). viii. Share capital Allotted, called up and fully paid Share type Ordinary shares of 0.25p each As at 1 April 2014 Shares issued on acquisition of Veritape Limited Shares issued under the share option schemes As at 31 March 2015 ix. Share capital and reserves Number of shares Nominal Value £’000 216,084,577 6,443,704 553,000 223,081,281 540 16 2 558 Capital redemption reserve £’000 Share premium account £’000 Share based payment £’000 Currency reserve account £’000 Balance at 1 April 2014 Proﬁt for the year Dividends paid in year Shares issued on acquisition of Veritape Ltd. Shares issued under the share option schemes Shares acquired by Employee Beneﬁt Trust Currency reserve Share option charge Share capital £’000 540 ESOP reserve £’000 (22) - - 16 2 - - - - - - - (113) - - 198 2,411 1,299 - - - - - - - - - 2,722 42 - - - - - - - - - 322 Balance at 31 March 2015 558 (135) 198 5,175 1,621 Proﬁt Total share- holders’ equity £’000 and loss account £’000 6,534 10,960 1,527 1,527 (695) (695) - - 2,738 44 (25) (138) - - 33 322 7,341 14,791 - - - - - - 33 - 33 x. Share options and share based payments Share options and share based payments are disclosed in note 21 to the Consolidated Financial Statements. xi. Related party transactions The Company has taken advantage of the exemption conferred by FRS 8 that transactions between wholly owned Group companies do not need to be disclosed. ANNUAL REPORT 2015 93 Financial Review xii. Events after the balance sheet date Post year end the Directors are recommending that a ﬁnal dividend for the year ended 31 March 2015 of 0.37 pence per ordinary share be paid to the shareholders whose names appear on the register at the close of business on 2 October 2015 with payment on 30 October 2015. The ex-dividend date will be 1 October 2015. This recommendation will be put to the shareholders at the Annual General Meeting. Based on the shares in issue at the year end, this payment would amount to £0.8m. ANNUAL REPORT 2015 94 Financial Review ANNUAL REPORT 2015 95 Financial Review Shareholder information Dealings permitted on Alternative Investment Market (AIM) of the London Stock Exchange. Directors and Company Secretary C.M. Batterham – Non-executive Chairman C. Ansell – Non-executive Director N.B. Philpot – Chief Executive Ofﬁcer A.P. Moloney – Group Finance Director and Company Secretary Registered Ofﬁce Eckoh plc Telford House Corner Hall Hemel Hempstead Hertfordshire, HP3 9HN Registrar Capita Registrars The Registry 34 Beckenham Road Beckenham, Kent, BR3 4TU Nominated Advisor and Nominated Broker Nplus1 Singer Capital Markets Limited One Barthlomew Lane London, EC2N 2AX Solicitor Travers Smith 10 Snow Hill London, ECA 2AL Banker Barclays Bank plc 11 Bank Court Hemel Hempstead Hertfordshire, HP1 1BX Auditor KPMG LLP Altius House One North Fourth Street Milton Keynes, MK9 1NE Registered in England and Wales, Company number 3435822. www.eckoh.com ANNUAL REPORT 2015 96 Financial Review This report is printed on FSC® Mix material under certiﬁcate number CO-95194. FSC - Forest Stewardship Council®. Paper from well managed forests and other responsible sources. Eckoh UK plc Telford House, Corner Hall Hemel Hempstead Herts HP3 9HN 08000 630 730 tellmemore@eckoh.com www.eckoh.com A n n u a l R e p o r t 2 0 1 5

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