First Derivatives plc
Annual report and accounts 2019
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AT THE CORE
OF DATA SCIENCE
FD’s world-leading analytics
technology and data science
expertise are disrupting industries,
helping our clients to generate
more revenue and increase their
operational efficiency
See more online at: firstderivatives.com and kx.com
STRATEGIC REPORT
01 Highlights
02 At a glance
04 Chairman’s review
06 Business model
08 Business review
14 Strategy
15
20 Principal risks and uncertainties
22 People strategy
Financial review
CORPORATE GOVERNANCE
24 Board of Directors
26 Chairman’s governance
statement
27 Governance framework
29 Report of the Audit Committee
32 Report of the Nomination
Committee
FINANCIAL STATEMENTS
41
47 Consolidated statement
Independent auditor’s report
of comprehensive income
49 Consolidated balance sheet
50 Company balance sheet
51 Consolidated statement
of changes in equity
34 Report of the Remuneration
53 Company statement of changes
Committee
38 Directors’ report
40 Statement of Directors’
responsibilities
in equity
55 Consolidated cash flow
statement
56 Company cash flow statement
57 Notes
116 Directors and advisers
IBC Global directory
Highlights
FINANCIAL HIGHLIGHTS
Revenue £m
£217.4m
.
4
7
1
2
.
0
6
8
1
7
.
1
5
1
Operating profit £m
£18.7m
.
7
8
1
.
7
4
1
2
.
2
1
2017
2018
2019
2017
2018
2019
Adjusted diluted EPS p
Net debt £m
83.2p
.
2
3
8
2
.
2
7
3
.
1
6
£16.5m
.
2
6
1
.
5
6
1
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5
3
1
2017
2018
2019
2017
2018
2019
OPERATIONAL HIGHLIGHTS
• FinTech revenue up 17% to £166.7m (2018: £142.9m),
driven by an expansion of services provided to
clients and new client wins with the Canadian
Securities Administrators, BitMEX and a major
Japanese bank
• High-profile new client wins across markets including
Fingrid, BISTel and Survalent
• Significant contract expansion and appointment as
Innovation Partner with Aston Martin Red Bull Racing
• Enhanced partnership and collaboration activity
including with Amazon Web Services, Google,
H20.ai and CGI
• MarTech revenue up 8% to £41.4m (2018: £38.2m),
driven by 25% growth in subscriptions for our
Marketing Cloud platform, powered by Kx
• Revenue from other markets increased by 85% to
£9.3m (2018: £5.0m), further evidencing the initial
success of our strategy to penetrate high-value
markets such as Industrial Internet of Things (IoT),
automotive and precision manufacturing
Business Review and Financial Review pages 08 to 19
firstderivatives.com
01
Strategic ReportCorporate GovernanceFinancial Statements At a glance
OUR BUSINESS
First Derivatives (FD) is a software and services company with world-leading intellectual property
in ultra-high-performance analytics (Kx) and extensive domain knowledge and capabilities in capital
markets systems and technology.
Kx technology addresses one of the largest and most
demanding challenges in analytics, namely how to
capture and analyse data to make real-time decisions
in a world where data volumes are increasing
exponentially, and existing technologies fail due
to technological or commercial limitations.
Kx technology is widely adopted throughout the global
financial industry, at banks, hedge funds and exchanges,
and is employed across a range of data-intensive arenas,
from high-frequency trading to market data storage
and analysis. With this pedigree, Kx is now expanding
across multiple sectors challenged by increasing data
volumes and the need to make rapid, informed
operational decisions.
Managed services
and consulting
FD provides a range of services worldwide to its
clients in the capital markets sector, focused on
supporting mission-critical systems as well as
helping them to achieve and maintain regulatory
compliance. These services can be delivered by
operating either from the client site or on a
near-shore basis (or adopting a hybrid approach).
Clients include many of the world’s leading banks
with FD supporting their activities across a range
of operations including credit, interest rate, foreign
exchange, equity, cash and derivatives markets.
For more than 20 years FD has built a reputation for
client-centric delivery that has enabled consistent
growth from a growing base of repeat revenue.
OUR Kx PLATFORM
As well as its world-leading performance, Kx also stands
out for the fact that it provides a single integrated platform
to efficiently analyse vast datasets. Deployable from chip
to edge to cloud, the power of the Kx platform has the
capacity to disrupt industries, providing both high
performance and low total cost of ownership.
OUR JOURNEY SO FAR
1996
2002
2009
2014
2015
2016
2018
2019
Corporate
First
Derivatives
founded
IPO
on AIM
Acquisition of
control of
Kx Systems
Software
Software
division
formed
MarTech
Software
launched
Kx for Sensors
launched
Kx for Machine
Learning
launched
Managed services
and consulting
Vendor
Services and
Managed Services
launched
Regulatory
& Compliance
Practice
launched
02
First Derivatives plc Annual Report 2019
Strategic Report OUR GLOBAL REACH
15
4
LOCATIONS
CONTINENTS
2,400+
EMPLOYEES
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CURRENT MARKETS AND OPPORTUNITIES FOR GROWTH
Finance
Digital marketing
Manufacturing
Utilities
Internet
of Things
Energy
Automotive
Industrial
Telecoms
Precision
manufacturing
Kx has been deployed for numerous use cases, initially based
on the capture and analysis of market data. In recent years a
broad range of capital markets applications has been developed,
including market and trading surveillance, pre-trade decision
making, post-trade reporting and liquidity management.
The Group provides a suite of services to its clients in the
capital markets sector across the world, focused on supporting
mission-critical systems as well as helping them to achieve
and maintain regulatory compliance. There is considerable
scope for further growth in capital markets, both from gaining
new clients and providing additional software and services to
the existing client base.
Although financial services will to remain the dominant
client sector in the medium term, the Group increasingly
sees opportunities for its Kx technology, and applications
built on the platform, in new markets outside finance.
The Group has identified digital marketing (MarTech),
utilities, precision manufacturing, automotive, telecoms
and the Industrial Internet of Things as markets that are
particularly attractive. It has therefore invested in sales,
engineering and R&D to target these markets, as well
as forming partnerships and making acquisitions
where appropriate.
firstderivatives.com
03
Chairman’s review
Another year of progress
During the past year FD has continued to make
progress on our journey to become a leader in
ultra-high-performance analytics.
Our investment across the business, particularly in our
people, has continued to deliver results with Group revenue
increasing by 17% to £217m. This performance reflects
solid execution of the Board’s strategy. In addition to the
achievements in our established field of capital markets,
the operational progress achieved during the year in new
industry sectors, which is only beginning to be reflected
in financial performance, gives confidence that the Group
can continue to deliver strong organic growth.
The Group’s strategy has three intertwined strands:
to become a leading global capital markets consulting
practice; to build on the leading position of the Group’s
Kx technology in capital markets; and to leverage Kx’s
performance advantages to penetrate new markets.
During the year, we delivered continued growth in our
managed services and consulting business, with revenue
increasing by 17% to £86m as opportunities to build on our
core competencies presented themselves. In particular we
invested in our vendor services practice in North America
and the successful delivery of a number of contracts in
the region provides confidence in our growth potential
in future years.
In total, software revenues increased by 17% to £131m.
Looking at these figures in more detail, our FinTech software
revenues continue to grow strongly as structural changes
affecting our customer base are playing to Kx’s strengths
– greater regulation and increasing cloud adoption are
both driving strategic conversations around greater use
of our technology.
We remain excited by the potential of our technology in other
markets. Our MarTech offering continues to showcase this
potential, with investment in the functionality of the product
and our sales capability resulting in continued rapid growth,
particularly in subscription revenue.
The operational progress achieved
during the year in new industry
sectors, which is only beginning
to be reflected in financial
performance, gives confidence
that the Group can continue to
deliver strong organic growth.’’
04
First Derivatives plc Annual Report 2019
Strategic Report Group revenue
£217m
+17%
Managed services
and consulting revenue
£86m
+17%
Kx revenue
£131m
+17%
In other markets, we made good progress during the year in
building out the infrastructure needed to deliver significant
future revenues in a number of diverse industry sectors. We
made substantial investments in R&D, sales and marketing,
strengthening our domain expertise and building our global
presence. These initiatives enabled us to grow our direct
sales pipeline while also signing OEM and partnership
agreements. As across the rest of our business, we continue
to prioritise revenue visibility and sustainability.
Looking forward, our strategy remains sound and our
technology is increasingly well positioned, and consequently
the Board expects another year of strong organic growth.
We will continue to invest in our strategic objectives to
optimise shareholder returns over the medium term.
During the year the Group agreed new financing facilities
on improved terms and we are pleased with the continued
support of our banks. This is particularly relevant as we move
to 100% ownership of Kx Systems, with the acquisition of
the minority stake scheduled for completion in June 2019.
Governance
In September 2018 the Group adopted the 2016 UK
Corporate Governance Code (the ‘‘Code’’) as its recognised
regulatory framework. There were no changes to Board
composition during the year.
Last year the Group reported on its gender pay gap for
the first time and, although performing better than its
peers, I noted that more remained to be done. I am
therefore pleased to report that the action steps put in
place helped deliver a significant reduction in this year’s
gender pay gap. These were part of a multi-year programme
whose aims include an increase in the proportion of
women in senior management roles through career
development and mentoring. I am encouraged by the
progress to date.
The Board recognises the talent and hard work of all
employees who have helped deliver another successful
year. The focus across the Group is on driving further
growth, in line with our strategic objectives, for the benefit
of all our clients, partners, colleagues and shareholders.
Seamus Keating
Chairman
20 May 2019
firstderivatives.com
05
Strategic ReportCorporate GovernanceFinancial Statements Business model
Creating value by enabling
new ways of working
FD operates in two distinct but interrelated markets, providing Kx
software across a range of industries while also providing managed
services and consulting to the capital markets sector.
World-leading
analytics technology
Competitive advantage
y The world’s best performing in-memory,
time-series database1
y Designed for rapid and efficient analysis
of enormous volumes of data, particularly
streaming data
y Supported by a unique enterprise platform for
rapid and flexible deployment and management
y Applications that solve data challenges in
multiple vertical markets
y Many times faster than competing solutions,
increasing productivity
y Significantly lower computing infrastructure
is required compared to other solutions,
reducing total cost of ownership
How it creates value
y License fee income from sales of Kx technology
y Subscription-based licensing model to build
recurring revenues
y A multi-component sales strategy including
lead generation, business development, proof
of concept and sales engineering teams
y Development and partnership arrangements
with academic, research and OEM agreements
y Collaboration with leading commercial
organisations to bring new products to market
y Technology domain partnerships where
companies incorporate Kx within their
solutions to disrupt a particular market
1
As independently evaluated by the Securities Technology
Analysis Center (STAC).
Market opportunities
underpin our business
06
First Derivatives plc Annual Report 2019
Knowledge transfer
r a l
t
n
e
C
s u pport functio
n
s
People
Technology
Processes
Product
Data scientists
People
Technology
Processes
Product
C
o
m
mon systems a n d p o li c ie s
Distinct but interrelated markets
$59bn
$100bn
database addressable
market in 20182
banking industry software
application spend in 20193
$520bn
IoT market value by 20214
2 IDC estimate.
3 Gartner estimate.
4 Bain estimate.
Strategic Report More than 20 years of consulting
and managed services expertise
Competitive advantage
y Domain expertise in capital markets
y Expertise of FD’s consultants in working
with the technology solutions prevalent
in the industry
y Multi-year training programme, through
which all FD graduate recruits pass
y A customer-first ethos that helps enable
consistent growth
y Commitment and flexibility in working
with customers to ensure their success
y Develop and deploy FD intellectual property
to support our professional services
How it creates value
y Services provided primarily on a time
and materials basis
y Implementation of technology solutions
y Ongoing support post-installation
y Repeat revenue, typically for many years
y Primarily a direct sales model through
Master Service Agreements with leading
banks globally
y Increased revenue visibility from near-shore
contracts with clients, providing support for
applications under multi-year contracts
from FD’s own premises
People
Technology
Processes
Product
$221bn
IT services
spend by banks in 20183
BUSINESS ENVIRONMENT
AND MARKET POTENTIAL
The Group operates in several large addressable markets and is involved
in many of the leading developments within the technology sector.
Kx technology can be deployed in a number of flexible options, ranging
from the customer building everything from the kdb+ database upwards
to the use of an application where the Group is responsible for its
development and support. The addressable market opportunity for
Kx is the combination of the database platform market together with
the market for applications built upon it.
IDC, industry analysts, estimate that in 2018 the database addressable
market was $59 billion. The market for applications is considerably larger,
as the potential use cases of Kx technology are wide and far-ranging.
For example, industry analyst Gartner estimates that banks will spend
$100 billion on software applications in 2019, encompassing areas such
as regulatory reporting, surveillance, trading and real-time risk where
Kx solutions are building market share.
In MarTech, the addressable market for predictive analytics is estimated
at $12.4 billion by 2022, while vertical market opportunities such as
automotive, utilities, pharma, retail, manufacturing, telecoms and
others each represent tens of billions of dollars of annual opportunity.
The largest emerging opportunity for Kx technology is in the analysis
of sensor data, particularly where dealing with real-time and large
volumes of data. Bain estimates that the IoT market alone will be valued
at $520 billion by 2021, with analytics the fastest growing component
accounting for more than a quarter of spending.
In summary, the total addressable market for Kx can be measured
in the hundreds of billions of dollars per annum, covering a range
of markets and use cases that provides both opportunity for growth
and the potential to diversify the Group’s revenue base.
In managed services and consulting, Gartner estimates the total spend
on IT services in banking in 2018 was $221 billion. In addition, Gartner
states that banks currently spend $100 billion on internal services,
which represents an additional addressable market as the banks
outsource technology support. The size of these opportunities provides
vast potential for the Group to grow its revenues. The capability to exploit
these opportunities is not constrained by the Group’s ability to recruit
and train suitable staff – for every graduate recruited during 2018, there
were in excess of 28 suitably qualified applicants.
Given the growth in its markets, the Group devotes considerable resources
to ensuring its software remains at the forefront of emerging technology
trends. During the past year the Group’s R&D has focused on increasing
the use cases for Kx, for example by supporting unstructured data within
our database and by ensuring Kx is interoperable with the industry’s
leading technologies, such as Python for machine learning. We also
formed new teams dedicated to cybersecurity and telecoms.
Given the enormous potential demand for both its managed services
and consulting propositions and its world-leading technology, the
Group believes it remains in the early stages of commercial exploitation
of these opportunities. It remains committed to a financially disciplined
approach to expansion which strives to provide the optimum balance
between risk and reward for shareholders.
firstderivatives.com
07
Strategic ReportCorporate GovernanceFinancial Statements Business review
Delivering on strategy
with solid growth
Becoming a leading global capital markets practice.
Our managed services and consulting business had a
strong year of growth, opening up additional markets
and developing new capabilities. We increased our presence
and brand recognition in North America where we gained
multiple new customers and assisted our clients with third
party systems implementation and regulatory reporting.
We also added to our capabilities in areas such as automated
testing and development as a service. Our services remain in
high demand and we start the new year with good momentum.
To facilitate our strategy we have a diverse, talented
pool of more than 2,000 data scientists, R&D engineers
and domain experts. Their combined talents are directed
at serving our existing and potential clients and delivering
growth by developing new intellectual property. We work
with some of the world’s leading companies to improve
the performance of existing systems and develop new
solutions that have the potential to provide significant
competitive advantage and operational efficiency.
Our R&D activity has enabled a further increase in our
addressable market as we extend the performance and use
cases for which our technology is applicable. We are excited
by the potential within our pipeline and increasingly advanced
in those markets in which we seek to establish ourselves.
Kx software
Our platform, branded as Kx technology (Kx), sets
performance benchmarks for the analysis of vast quantities
of data, both real-time and historic. Kx comprises the kdb+
database, with its highly efficient 600kb footprint, and an
enterprise layer designed to maximise analytic performance
while providing vital functions such as security, control and
visualisation. This platform enables the rapid development
of applications, either by FD or our customers or partners.
Some of the key benefits to customers resulting from our
performance capabilities are efficiency (including lower
hardware and power costs), flexibility (with deployment options
ranging from the edge, to on-premise, cloud and hybrid
architectures) and the ability to handle the most demanding
data challenges within acceptable timeframes; we are typically
orders of magnitude faster than competing solutions.
The financial year saw the delivery of solid growth and
execution of our strategy. Revenue increased by 17% to
£217m which enabled reinvestment in R&D and sales and
marketing while also delivering an increase in adjusted
EBITDA of 14% to £38.9m.
During the year, Kx continued to gain traction across
the industries we are targeting as its power and efficiency
continue to resonate with existing and potential clients.
To further enhance the proven performance and high return on
investment provided by Kx, we increased our AI and machine
learning capabilities and increased our interoperability
by adding to the growing range of open interfaces to the
technology industry’s leading development tools, as well
as further enhancing our core platform. These initiatives
are assisting in our drive to make Kx the answer to the
most demanding data challenges that organisations face.
Our strategy remains unchanged: to build on Kx technology’s
leading position in capital markets software; to use Kx’s
performance advantages to penetrate other markets; and to
become a leading global capital markets practice. We are
making good progress in all three areas.
Building on Kx’s leading position in capital markets
software. Our FinTech software revenue continued to grow
strongly. FinTech is our core market yet we continue to see
additional opportunities for continued growth, particularly
from our solutions that address regulatory initiatives and
from the strategic move to the cloud within our customer base
that includes many of the world’s leading banks, exchanges
and regulators, providing significant upsell opportunities.
Using Kx’s performance advantages to penetrate new
markets. Our strategy seeks to extend Kx’s presence into
multiple other industries challenged by increasing volume
and velocity of sensor and other data. The validity of our
strategy has been showcased in MarTech, where our solution
is establishing itself as a leader in predictive analytics for
customer acquisition, delivering high return on investment
for our clients and generating recurring revenues with
considerable potential for growth. We achieved significant
progress in other new markets during the year, with
high-profile customer wins and OEM agreements across
sectors including automotive (Aston Martin Red Bull
Racing), utilities (Fingrid and Survalent), manufacturing
(BISTel) and smart cities (Urban Institute). We have received
significant inbound interest from additional potential
clients within these industries in the wake of these wins
and are excited by our pipeline of opportunities.
08
First Derivatives plc Annual Report 2019
Strategic Report Ease of adoption. We extended the availability of our
technology on the public cloud with the launch of Kx on
demand on both the Amazon Web Services Marketplace
and Google Cloud Launcher. We were particularly pleased
with the results of independent STAC testing that set new
performance benchmarks for cloud analytics on the Google
cloud platform. We also continue our efforts to enable Kx to
integrate seamlessly with popular third-party technologies,
both to ease adoption and to augment their performance.
These interfaces include Kafka, Java, Python, R and Jupyter.
Combined, these initiatives are enabling us to increase
our total addressable market and ease the adoption and
integration of Kx within our clients’ technology infrastructure,
thereby driving revenue and profit growth.
Sales
FinTech
FinTech software continued to deliver strong growth,
with revenue up by 17% to £80.2m. This growth resulted
from demand across the range of solutions we provide,
driven by Kx technology’s unrivalled ability to analyse vast
quantities of streaming and historical data for purposes
such as regulatory and risk reporting, market surveillance
and trading analytics.
Our R&D activity has enabled a
further increase in our addressable
market as we extend the
performance and use cases for
which our technology is applicable.’’
The market opportunity for our platform and applications
is extensive, totalling hundreds of billions of dollars across
the areas our applications address. According to IDC, the
database system market alone will reach $84 billion in
2022. However, the addressable market for Kx extends far
beyond that, into applications with Kx at their core, such as
in FinTech and MarTech where Kx-based applications are
well established. When we add in markets where Kx is well
placed to succeed, including the IoT, automotive and
precision manufacturing, and horizontal markets such as
cybersecurity and AI, the enormous potential demand for
our technology means our opportunity for growth is
effectively unlimited.
Research and development
Our R&D activity focuses around three key themes –
improving the performance of our technology, growing
its addressable market and making it easier to adopt.
We made progress in all three areas during the year.
Improving performance. We released new versions of our
platform which again delivered improvements in processing
power and scalability. This continues our track record of
delivering incremental performance improvements and
helped scale the real-world capabilities of our technology.
For instance, we continue to raise the bar in terms of the
volume of data Kx can handle.
Growing addressable market. We added a number of new
features including anymap, which provides the ability to
combine structured and unstructured data and analyse them
both with the record-breaking speed that we are known for.
This enables more of our clients’ data to be held in Kx
and increases the applicable use cases for our technology.
In addition, we continue to strive to put our technology
at the heart of AI and machine learning, by increasing our
R&D resources, collaborating with domain specialists such
as Brainpool and H20.ai and working with clients to develop
solutions that harness Kx’s unique capabilities.
firstderivatives.com
09
Strategic ReportCorporate GovernanceFinancial StatementsOEM AGREEMENT WITH BISTelKx will be used as the technology to store and analyse massive volumes of sensor data within BISTel’s real-time, adaptive intelligence applications for smart manufacturing. The OEM agreement was reached after a number of proofs of concept, including direct comparisons with potential competing solutions, during which Kx technology proved to be an order of magnitude faster than these alternative products. It delivers predictive analytics derived from billions of data
points, ingested in real-time, to provide clients the power to
scale their ABM programmes globally. MRP Prelytix’s real-time
intelligence can be integrated with industry-standard
marketing automation and CRM systems, allowing our clients
to activate the intelligence within their own infrastructure.
Many clients also depend on our concierge service – ABM
Managed Services – to engage, nurture and qualify the targets
identified by MRP Prelytix.
We continue to develop the solution, with a significant
number of new capabilities added during the year to increase
its effectiveness. These include allowing subscribers to
target potential customers with customised content and
tactics based on specific product interest and stage of the
buying process and customisable pipeline classification
criteria that enable the visualisation of a client’s entire
sales pipeline in a single ‘‘waterfall’’ screen.
The unique insights provided by MRP Prelytix and our constant
technical innovation of the platform, built on the power of
Kx, is generating high return on investment for our clients
and driving interest from new clients and industry partners.
During the year our importance to our clients was illustrated
by record levels of pipeline delivered through our platform
and one of our major customers inviting us to address their
global partner event. We also signed a collaboration agreement
with Oracle Marketing Cloud and became one of only five
marketing platforms approved by LinkedIn to access
matched audience data.
While technology companies continue to form the core
of our client base in MarTech, our platform is applicable
to a wide range of industries and we expect our growth to
be generated by a combination of increasing spend from
existing clients, the addition of new technology industry
clients and continued expansion of the target client base.
During the year we won new deals with clients operating
in information services, media, healthcare, financial
services and online education.
Business review continued
The move to the cloud also offers
the potential for additional Kx
license sales and assistance
with innovation such as machine
learning. We believe that cloud
transition has the potential to
drive significant growth in our
FinTech software revenue.’’
Kx software continued
Sales continued
FinTech continued
We have an extensive client base, including the top
20 global investment banks and numerous regulators
and exchanges, and see considerable scope for growth
within both new and existing clients. Our solutions assist
them to improve the quality and integrity of their market,
transaction and reference data and to meet regulatory
scrutiny in a timely and cost-effective manner.
In recent periods we have seen our clients increase their
preparation to move their data operations to the public
cloud, attracted by opportunities for development agility
and innovation and the ability to cope with peaks in compute
resource demands. FD is well placed to assist with this
strategic transformation, with an enterprise platform that
normalises data and automates its management, professional
services that support the transition from on-premise to cloud
and managed services to support their new environment.
The move to the cloud also offers the potential for additional
Kx license sales and assistance with innovation such as
machine learning. We believe that cloud transition has
the potential to drive significant growth in our FinTech
software revenue.
During the year we signed significant new contracts across
the portfolio of our applications, including with a major
Japanese bank, where we were selected to build and manage
its next generation e-FX platform; BitMEX, a leading
cryptocurrency derivatives exchange, where its expanded
use of Kx underpins its increasing trading volumes and
growth in new products; and CSA, the securities regulator
for Canada’s provinces and territories, to build and manage
a next generation market analytics platform.
MarTech
Revenue from MarTech increased by 8% to £41.4m with
47% of this revenue derived from subscription contracts
(2018: 41%). Our solution, powered by Kx and branded as
MRP Prelytix, is one of the leading enterprise-class B2B
Account-Based Marketing (ABM) platforms in the market.
10
First Derivatives plc Annual Report 2019
Strategic ReportINNOVATION PARTNER TO LEADING F1 TEAMFollowing the successful use of Kx to analyse wind tunnel data for Aston Martin Red Bull Racing, we signed an extended deal and were appointed Innovation Partner to the leading F1 team. This will see Kx deployed across its operations, accelerating the competitive advantage the use of Kx has delivered to date by applying it more widely within F1 and also to commercial solutions for its customers across industries. We have built a strong product offering in MarTech while
our global footprint and strong technology background
differentiate us from competitors and further strengthen
our position within a large addressable market. We are
optimistic regarding growth in the current financial year.
Other markets
We made significant progress with our strategy to establish
Kx in other markets that are challenged by data volumes
and velocity and where our technology is able to demonstrate
superior performance and return on investment. During the
period, revenue from these other markets increased by 85%
to £9.3m. We are pleased with the results of the investment
we have made in internal domain expertise and in progress
with partnerships and OEM agreements, which lay the
foundation for growth in the years to come. We are particularly
excited by the potential relating to the analysis of sensor
data, where we believe our performance advantage sets
our capabilities apart from competitors.
We continue to seek predictable, long-term revenue
streams, such as OEM and revenue share agreements.
Notable contracts secured during the year include:
• Automotive – We were appointed Innovation Partner to
Aston Martin Red Bull Racing (AMRBR), acknowledging
the success of our initial engagement with the leading
F1 team and extending the application of Kx into areas
including in-race performance and machine learning.
The relationship with AMRBR is generating significant
interest across the automotive industry and we have
a pipeline of opportunities across engineering, design,
telemetry and connected cars.
• Utilities – We announced that, working alongside
our partner CGI, Kx had been selected to deliver a
next-generation electricity information exchange
for Fingrid, the transmission system operator for
Finland. The implementation is proceeding to plan
and opens opportunities to showcase the power of Kx
at a time when numerous utility market participants are
seeking to upgrade their systems to provide additional
services and to cope with more demanding regulations.
• Smart manufacturing – We announced an OEM agreement
with BISTel, a leading South Korean provider of smart
manufacturing solutions, for the use of Kx for Sensors
and kdb+ in its product line. The first deployments are
expected in the first half of 2019 and the announcement
of the OEM agreement has generated interest within
BISTel’s client base regarding early adoption.
• Sensor analytics – We signed an OEM agreement with
Survalent, one of the world’s leading providers of SCADA
control systems to utilities, providing the ability for its
customers to access advanced analytics on sensor data.
The integration work to embed Kx in Survalent’s product
has now been completed and pilot customers identified
ahead of an expected launch in the first half of 2019.
We continue to progress opportunities across a spectrum
of markets, including a number of high-value potential
contracts where the sales cycle is lengthy and which require
the deployment of resource by the Group at an early stage
to demonstrate the potential and power of Kx, often through
proofs of concept (POCs). While this requires investment
by the Group, we remain confident that it will result in FD
becoming a business of considerably greater scale in industry.
Our confidence is driven by the results we are able to
demonstrate in the POC studies we have conducted to
date and positive feedback from early adopters of our
technology in new markets.
Business development
To increase awareness of our technology we have introduced
a range of initiatives to promote Kx at grassroots developer
level, to improve mindshare in the tech community and
to showcase the disruptive power of our technology by
collaborating with innovators in different fields of scientific
endeavour. The overarching aim of these initiatives is to drive
long-term, high-margin software revenues by promoting
Kx as a disruptive technology across multiple industries.
Our business development strategies include:
Academic and research partnerships
This consists of a range of initiatives designed to showcase
our technology. We operate an academic license programme
and work with universities such as Princeton and Berkeley
in the US to assist their students to use the power of Kx to
drive innovation. We have collaborated with NASA FDL (space
weather and the search for exoplanets), the Earlham Institute
(crop research) and leading technology providers such as
Intel, Samsung, EMC, Google and Dell to demonstrate the
leading performance of our respective technologies.
OEM agreements
We are building strong alliances with key industry players
through OEM agreements that allow us to leverage their
brand and global sales reach. We have been working with
Thomson Reuters for a number of years in FinTech, and we
have extended this approach to other markets with OEM
partners such as a Fortune 500 company for sensor data
management and Utilismart for smart meter analytics.
During the year we signed new OEM agreements with
BISTel for smart manufacturing, Survalent for network
data analytics, Urban Institute for smart cities and H20.ai
and App Orchid for machine learning.
Commercial partnerships and collaborations
We are working in partnership with leading organisations
to provide innovative new commercial services and
products across our business. For example, in FinTech
we were pleased to be recognised as Google Cloud Global
Technology Partner – Financial Services for 2018, while
we also worked closely with CGI to win an energy market
contract with Fingrid.
firstderivatives.com
11
Strategic ReportCorporate GovernanceFinancial Statements Business review continued
Kx software continued
Business development continued
Commercial partnerships and collaborations
continued
We are now jointly pitching this solution in other energy
markets around the world and have extended our
partnership with CGI to look at opportunities across other
markets. We are currently in discussions with a number of
large companies with domain expertise where we can work
together to provide disruptive solutions to our partners’
customer base.
Tech/domain partnerships
Many inbound enquiries for the use of our technology
come from innovative start-up and scale-up businesses.
In February 2017 we formally launched an initiative to
license our technology to these firms on a revenue share
basis. In some cases, we inject seed capital to help bring
solutions to market quickly, rather than having them forfeit
valuable time raising capital. This approach allows FD to enter
new markets rapidly and helps showcase our technology.
During the year, nine venture agreements have been added,
bringing the total to 18, including companies operating in
areas as diverse as 3D Earth observation, detection of
cognitive diseases, quantum computing and cybersecurity.
Taken together, these initiatives are helping to establish Kx
as a disruptive technology and create innovative IP in new
markets and will provide FD with significant long-term royalty
revenue streams.
Managed services and consulting
Revenue from managed services and consulting was
£86.5m, an increase of 17% on the prior year (2018: £74.1m).
FD has more than 20 years of experience providing services
to leading capital markets firms, training and developing
our consultants in-house through industry-recognised
programmes to equip them with both data science skill
sets and an understanding of how capital markets firms
use technology to underpin their business. We provide
support for mission-critical systems, assist clients with
regulatory change initiatives and assist in the delivery
of both ‘‘run-the-bank’’ and ‘‘change-the-bank’’ projects
across our client base.
These activities typically result in long-term assignments
and our customer-centric approach means that our services
are in high demand, delivering long-term, high-quality
customer relationships. A key driver of growth in recent
years has been the increasingly strategic nature of our
client engagements, enabling conversations with them
regarding their future requirements. This has developed
from a combination of the increasing depth and breadth
of services we can provide and our key account management
approach, which has also increased our ability to cross-sell
our capabilities.
12
First Derivatives plc Annual Report 2019
During the year, our managed services and consulting
business performed strongly. The driver for this growth
was ongoing demand across a range of capital markets
activities, including vendor system management, regulatory
remediation and application support, together with
geographic expansion, particularly in North America.
To support this growth, we invested in the period to extend
our vendor services capabilities, particularly relating to
Calypso and Murex. This investment resulted in FD being
awarded notable managed services engagements with both
Calypso and Murex clients covering the ongoing support of
the system as well as development, upgrades, automated
testing and implementation services. Most notable are
contract wins where we are upgrading our clients to the
latest versions of these software platforms, supported by
automated testing. During the year we assisted our clients
in the successful delivery of a number of strategic projects
including the high-profile go-live of a key cross-asset
roll-out of Murex front-to-back and a well-known cross-
asset front-to-back Calypso treasury client successfully
upgraded to the latest version.
We also supported our clients as they undertook a
wide range of regulatory initiatives including technology
development tasks relating to regulatory remediation
and audit projects, Know Your Client outreach and customer
due diligence. These included a major global financial
institution where we supported the redevelopment and
issue resolution of one of their key European transaction
reporting requirements. Throughout this engagement
we provided programme management, business analysis
and end solution technology development on the client’s
internal platform and will be involved in the ongoing
support and maintenance following the go-live.
Our brand has become more recognised in the US where
we gained Master Service Agreements (MSAs) with multiple
new key sell-side banks, particularly in New York, Boston
and Chicago. These clients have engaged our programme
and project management capabilities to assist them in
delivering their key initiatives across their front-to-back
portfolios, together with meeting milestones for their
regulatory reform projects as well as the ongoing
management of these systems in future years.
During the year we developed particular market-leading
capabilities across a number of key areas for our clients:
• the development of automated test services where we
are gaining recognition for our ability to rapidly accelerate
our clients’ time to market for system upgrades;
• the provision of development as a service, with key
new clients being added to support their digitisation
initiatives, especially from a front-end trading
application perspective; and
Strategic Report We continue to expand our office presence around the
world which also assists our reach into leading universities,
now totalling more than 100 institutions, as we seek to
attract ambitious graduates. We received job applications
from 10,687 people which resulted in 538 new hires, of
which 374 were new graduates and 164 were experienced
hires. Retention rates remain significantly higher than
industry average, driven by the provision of market-leading
training and development programmes, a rewarding career
path and a fair remuneration and reward system.
During the year we have enrolled hundreds of our data
scientists in machine learning nano degrees and have
partnered with the University of Ulster to launch a four-year
distance learning Masters in Capital Markets for our staff.
We believe our success to date and future ability to realise
the opportunities across our software and managed services
and consulting businesses will be led by our investment in
talent. A measure of the success of the programme can be
seen from the increasing number of employees who have
been promoted to senior positions within FD and are
helping to drive growth.
The quality of our people and technology was recognised by
three awards, namely Best Technology at the 2018 AIM Awards,
Most Innovative Third-Party Technology Vendor (Infrastructure)
at the 2018 American Technology Financial Awards and, just
after the year end, Google Cloud Global Technology Partner
– Financial Services. These awards reflect the hard work
and talent of our staff and I would like to thank them all
for another year of success.
Current trading and outlook
The new financial year has started strongly with good
momentum across the business. The investment programme
in recent years has delivered a number of important new
contract wins and OEM and partnership agreements during
the year that provide a platform for growth in the years to
come. We are excited by the pipeline across our business,
which is at record levels, and are confident of achieving
another year of strong organic growth.
The investment programme in
recent years has delivered a number
of important new contract wins and
OEM and partnership agreements
during the year that provide a
platform for growth in the years
to come.’’
• the addition of test automation services to our
application support capability, which has enabled
further growth in near-shore engagements for our
KPI-governed managed services.
Through our knowledge and alliances with the major
third-party capital markets trading technologies, we have
seen a trend by our clients to engage us earlier in their
decision-making processes regarding transformation
initiatives. We have helped a number of clients with
independent system selections and with our guidance
they have been able to choose the best technology solution
based upon their current and future business objectives.
We have recently launched a major initiative to train our
consulting workforce as cloud architects to support the
transition from enterprise to public cloud enabled application
management and monitoring. This initiative combines our
capital markets domain expertise alongside our experience
in managing third-party trading technologies and we envisage
our cloud services as a major value add for our clients. We
continue to be supported in this initiative by the major public
cloud providers, which see our capabilities as central to
ensuring that our clients make a successful transition
to the cloud.
We have developed a multi-year track record of growth
in our managed services and consulting business.
Through our commitment to quality and excellence in
our financial services, vendor services, regulatory and
managed services practices we are confident that we
are well placed for further growth in the coming years.
People
The Group now employs more than 2,400 people, up from
over 2,200 at the same time last year. Our award-winning
graduate recruitment and training programme continues
to attract new talent for the Group to enable us to provide
software and services that exceed the expectations of
our clients.
firstderivatives.com
13
Strategic ReportCorporate GovernanceFinancial Statements Strategy
How we plan to grow
FD’s strategy has been consistent - to position its software and services for
continued and sustainable growth in the very large markets it addresses
Become a leading
global capital
markets practice
Strategic
Outcome
Deliver sustainable,
high margin revenue
growth into enormous
addressable markets
Build on Kx
technology’s
leading position
in capital markets
software
Use Kx’s
performance
advantages to
penetrate other
markets
MS&C practice
Provides vital support and
enabling role for our Kx technology
operations through FinTech
domain expertise and data
scientist resource pool
Kx in FinTech
Core market with enormous
growth potential and providing
strategic solutions for our growing
client base of banks, hedge funds,
exchanges and regulators
Kx in other markets
Develop and commercialise
solutions providing competitive
advantage to clients across
multiple industries, utilising Kx’s
performance and Total Cost of
Ownership advantages
HOW WE DO IT:
HOW WE DO IT:
HOW WE DO IT:
Grow key accounts
and managed services
• Leverage our unique
combination of domain
and technical skills
Build and convert
software pipeline
• Ensure high levels of
client satisfaction to create
market-leading reference sites
• Use our growing scale
and reputation to increase
our client base
• Increase penetration within
existing clients across asset
classes and geographies
• Exploit our near shore
• Work with partners to
capabilities to deepen our
relationships with key clients
increase routes to market
and global reach
2019 KPI: Revenue growth 17%
2019 KPI: Software license revenue
growth 28%
14
First Derivatives plc Annual Report 2019
Increase routes to market
• Define use cases across
multiple, high-value markets
• Use internal and external
domain experts to develop
compelling solutions
• Continue to invest in R&D, sales
and marketing to deliver on
significant opportunities
• Develop additional channels
to market via partnerships,
JVs and other routes
2019 KPI: Revenue growth 85%
Strategic Report Financial review
The table below highlights the components of revenue growth across the Group along with an analysis of gross profit.
The analysis also shows our revenue and growth by vertical market. The Board has reviewed the presentation of the
Consolidated statement of comprehensive income and has provided additional information relating to the categorisation of
revenue, and reclassified certain costs. The purpose of these changes is to enable easier comparison with the Group’s peers.
The comparative amounts for the year ended 28 February 2018 have been presented on the same basis to enable comparability.
Revenue and gross margin analysis (£m)
2019
2018 Growth
2019
2018 Growth
2019
2018 Growth
2019
2018 Growth
Software by sector
Total software
FinTech revenue
MarTech revenue
Other revenue
9.7
27.7
37.4
7.0
24.7
31.7
38%
12%
18%
—
19.3
19.3
—
15.5
15.5
—
25%
25%
3.7
1.6
5.3
0.3 1,254% Perpetual
1.1
1.4
45% Recurring
285% Licenses
13.3
48.6
7.3
41.2
62.0
48.5
Cost of sales
(10.6)
(10.0)
42.8
37.1
16%
22.0
22.7
(3%)
4.1
3.7
11% Services
Gross profit
Gross margin
51.4
83%
68.9
38.5
79%
63.4
Cost of sales
(48.9)
(43.1)
80.2
68.7
17%
41.4
38.2
8%
9.3
5.0
85% Revenue
Gross profit
Gross margin
20.0
29%
130.9
20.3
32%
111.9
Cost of sales
(59.5)
(53.1)
Gross profit
Gross margin
71.4
55%
58.8
53%
83%
18%
28%
6%
33%
4%
9%
13%
(1%)
(9%)
17%
12%
21%
4%
Managed services and consulting by sector
Total managed services and consulting
FinTech revenue
MarTech revenue
Other revenue
86.5
74.1
17%
—
—
—
—
—
— Revenue
86.5
74.1
Cost of sales
(66.6)
(54.5)
Gross profit
Gross margin
19.9
23%
19.7
27% (13%)
17%
22%
1%
FinTech revenue
MarTech revenue
Other revenue
Sector totals
166.7
142.9
17%
41.4
38.2
8%
9.3
5.0
85% Revenue
217.4 186.0
EBITDA and net margin profit analysis
Cost of sales
(126.1) (107.6)
Gross profit
Gross margin
91.3
42%
78.5
42%
R&D
(10.7)
(9.3)
Sales expense
(32.3)
(26.6)
Other operating
expense
(18.0)
(15.9)
Adj. EBITDA ex cap
30.3
26.6
Capitalised
Adj. EBITDA
Adj. EBITDA margin
8.6
38.9
18%
7.5
34.1
18%
firstderivatives.com
17%
17%
16%
—
15%
21%
13%
14%
15%
14%
—
15
Strategic ReportCorporate GovernanceFinancial Statements Financial review continued
Strong revenue growth
and fiscal discipline
Revenue and margins
Group revenue increased organically by 17% to £217.4m
(2018: £186.0m) driven by continued strong growth across
both software and managed services and consulting.
This strong revenue performance represented our 22nd
consecutive year of double-digit revenue growth. Gross
margin was maintained at 42% despite reinvestment in
resources, delivery capability and expertise.
Our investment in the Group’s operations resulted in an
increase in sales and marketing cost of 21%, building on
the 63% increase seen in FY 2018, as we added new sales
and pre-sales staff to expand our market reach. Research
and development costs increased by 15%, in line with recent
periods, as we continued to deliver improvements in our
software’s performance and interoperability for the benefit
of our growing client base. Other operating expenses increased
by 13% reflecting the Group’s fiscal discipline. Strong debtor
collection and the subsequent improvement in debt profile
resulted in a £19k charge for impairment loss for the year
ended 28 February 2019 (2018: £1.4m).
Software
Total software revenues increased by 17% to £130.9m
and represent 60% of total Group revenue (2018: 60%)
driven by a 28% increase in software license revenue,
tempered by 9% growth in services revenue.
Software revenue from FinTech increased by 17% to £80.2m,
reflecting 18% growth in license revenue and 16% growth in
services revenue as Kx continues to win market share in our
largest market. Our Kx platform continues to be seen as a
key component of our clients’ long-term infrastructure as
the number of clients electing to contract under a perpetual
license model grew (2019: £13.3m; 2018: £7.3m). The wider
adoption of the Kx platform within these clients as their
core platform is pleasing as it will provide opportunities to
upsell our recurring revenue applications in future periods.
Total revenue from MarTech was £41.4m, up by 8% driven
by the continued strong increase in subscription revenue,
which was up by 25% to £19.3m, offset by a 3% reduction
in services revenue. The impact of GDPR saw a slowdown
in MarTech services revenue in Europe in H1, followed by
a return to growth in H2 in line with our expectations.
This strong revenue performance
represented our 22nd consecutive
year of double-digit revenue growth.’’
Our recurring revenue was up 25% on the prior year but broadly
flat in H2 compared to H1, due to a corporate restructuring
at one of our major clients which deferred the completion
of its annual renewal until after the year end. We continue
to expect MarTech growth to be led by subscription revenue
and see potential for overall revenue growth rates to
accelerate in 2020 compared to those in 2019.
Software revenue from other markets increased by 85% to
£9.3m, reflecting early success as we penetrate a number
of high-value markets where the performance and capabilities
of our technology differentiate us from the competition.
Our approach of obtaining OEM/revenue share license
agreements, while slower to generate revenue in early
periods, will result in larger ongoing royalty style payments
to the Group in future periods as products and solutions
with ‘‘Kx Inside’’ are brought to market by our clients and
partners. Recurring revenue in other markets was £1.6m,
up 45% on 2018.
Software gross margin increased to 55% from 53%, driven
by growth in high-margin license revenue and ongoing cost
control, particularly with regard to efficiencies around data
collection and management costs in MarTech, which offset
increments in other line items. Software license gross margin
increased to 83% (2018: 79%) and license revenue was 47%
of total software revenue (2018: 43%).
Software services gross margin was 29% (2018: 32%).
We increased the Kx services team in H1 to support the
expansion of Kx within our core markets and other verticals,
which caused a drag to profitability in the short term.
Margins increased in H2 and this investment allows us to
meet the growing needs of existing clients as well as the
delivery demands of new clients. Gross margins were also
impacted by the lower level of MarTech services revenue,
again with H2 showing an improvement on H1.
16
First Derivatives plc Annual Report 2019
Strategic Report Managed Services and Consulting
Managed services and consulting revenue increased by 17% to £86.5m while delivering gross margins of 23% (2018: 27%).
This represents another strong performance delivering market share gains in the large addressable market for FinTech
services.
Gross margins are dependent on utilisation, the level of investment in personnel and the timing of projects commencing
with our clients. In H1 we experienced a drag effect from the record graduate intake last year, while we also invested to meet
client demand in our vendor managed services practice in North America, growing our core capabilities in the region to
allow the Group to successfully deliver two large assignments. This resulted in a H1 gross margin of 22%, while H2 was
stronger at 24% as we started to generate revenues from these investments.
Profit before tax
Reported profit before tax increased by 38% to £16.7m (2018: £12.1m). Adjusted profit before tax increased by 12% to £27.5m
(2018: £24.5m), the calculation of which is detailed below.
Reported profit before tax
Adjustments for:
Amortisation of acquired intangibles
Share-based payment and related costs
Acquisition costs, associate disposal costs and changes in deferred consideration
Loss on foreign currency translation
Share of loss of associate
Adjusted profit before tax
2019
£m
16.7
3.8
2.4
4.0
0.6
—
2018
£m
12.1
4.7
2.7
3.6
1.4
—
27.5
24.5
Other income, which relates mostly to employment and training incentive grants, was £0.3m for the year. This represents a
reduction of £1.1m on the prior year, as these grants come to an end.
As previously noted, the Group continued to invest in research and development to maintain its technology lead, with total
R&D up 15% to £10.7m. Net capitalisation of R&D was up 8% in the period, as detailed below:
Research and development costs:
Expensed during the period
Capitalisation of product development costs
Total research and development
Amortisation of R&D
Net capitalisation of R&D
2019
£m
2.1
8.6
10.7
(7.2)
1.4
2018
£m
1.8
7.5
9.3
(6.2)
1.3
Increase
16%
15%
15%
16%
8%
firstderivatives.com
17
Strategic ReportCorporate GovernanceFinancial Statements Financial review continued
Earnings per share
Reported profit after tax increased by 29% to £13.2m (2018: £10.2m) and reported basic earnings per share increased by
26% to 50.9p per share (2018: 40.4p).
The adjusted profit after tax for the period of £22.9m (2018: £19.5m) represented growth of 17%. The Group’s adjusted tax rate
was 17% (2018: 20%), the reduction being predominantly attributable to the full year impact of US tax reform.
The calculation of adjusted profit after tax is detailed below:
Reported profit after tax
Adjustments from profit before tax
Tax effect of adjustments and US tax reform
Adjusted profit after tax
Weighted average number of ordinary shares (diluted)
Adjusted EPS (fully diluted)
2019
£m
13.2
10.8
(1.1)
22.9
2018
£m
10.2
12.4
(3.1)
19.5
27.5m
83.2p
27.0m
72.2p
The fully diluted average number of shares in issue increased to 27.5m (2018: 27.0m) due to payment of deferred consideration
for prior acquisitions and as additional existing share options were exercised. This resulted in adjusted fully diluted earnings
per share of 83.2p, representing growth of 15% for the period (2018: 72.2p).
Balance sheet
Total assets increased by 9% to £277.8m (2018: £254.6m). Other financial assets, which includes equity investments,
increased to £13.7m (2018: £3.4m) as a result of an increase in fair value of £4.3m, new equity investment of £2.7m and
the conversion of £3.3m of loans to Quantile Technologies Limited (Quantile) into equity. The loan to equity conversion
was undertaken as a result of Quantile’s continued strong operational progress.
Deferred revenue at the period end was up 31% at £19.5m (2018: £14.9m), arising from the continued growth in recurring
license revenue in the year. Deferred tax assets decreased by 16% to £15.4m (2018: £18.4m) due to the reduced tax
deduction for share options following the decrease in the share price.
On 6 February 2019 the Group announced that it had agreed new financing facilities comprising a term loan of £65m and
a revolving loan facility of a further £65m, replacing the existing facilities on improved terms. The timing of the Group’s
new financing facilities at the balance sheet date resulted in changes to the profile of the Group’s loans and borrowings.
Non-current loans and borrowings decreased from £25.2m to £0.3m while current loans and borrowings increased from
£3.3m to £35.0m. This will effectively reverse next year under the new financing facilities as our borrowing reverts to a
long-term repayment profile.
On 2 July 2018 the Group announced it had reached agreement with the minority shareholders of Kx Systems to acquire
their shareholding, taking the Group to 100% ownership by 29 June 2019 for consideration of $53.8m. The balance sheet
reflects the movement of the liability for the NCI put from within non-current trade and other payables to current trade
and other payables. The settlement of this liability will be provided from the Group’s financing facilities referred to above
when the new facility is drawn for payment in June 2019.
Cash generation and net debt
The Group generated £27.3m of cash from operating activities before taxes paid (2018: £25.3m). This is after cash payment
of £5.3m (2018: £nil) relating to deferred contingent consideration paid for prior acquisitions. Under IAS 7 these payments
are classified in operating activities as the conditions attached to them related to the fulfilment of service agreements by
the principles of the companies acquired. Excluding this deferred contingent consideration, cash generated from operating
activities was £32.7m, representing an 84% conversation of adjusted EBITDA (2018: 74%). Given the Group’s working capital
profile, continued strong revenue growth will typically result in conversion rates below 100%.
18
First Derivatives plc Annual Report 2019
Strategic Report At the period end, net debt was £16.5m (H1 2019: £24.2m; 2018: £16.2m). The factors impacting the movement in net debt
are summarised in the table below:
Opening net debt
Operating cash flow
Deferred consideration paid (IAS 19 remuneration)
Operating cash flow before impact of IAS 7 for deferred consideration paid
Taxes paid
Dividends paid
Capital expenditure: property, plant and equipment
Capital expenditure: intangible assets
Deferred consideration paid
Acquisition of subsidiaries
Investments
Issue of new shares
Foreign exchange and other
Closing net debt
2019
£m
(16.2)
27.3
5.3
32.7
(3.5)
(6.3)
(4.1)
(9.2)
(5.3)
(0.6)
(4.6)
3.2
(2.5)
2018
£m
(13.5)
25.3
—
25.3
(5.7)
(8.3)
(3.4)
(8.2)
(0.9)
(0.1)
(7.7)
7.1
(0.8)
(16.5)
(16.2)
Deferred consideration payments relate to payments made for prior period acquisitions as contracted earn-out targets are
met. These payments predominantly relate to payments made for Affinity Systems Inc. and Prelytix Inc. which were acquired
in 2015. The integration of the associated domain expertise has been instrumental in our successful push into the Industrial
IoT market and MarTech market respectively. Investment payments relate to the entry of Kx technology into other markets
where we have signed OEM or revenue share agreements as we seek to capitalise on external knowledge and domain expertise.
The table below summarises the investments made in companies to date as well as the maximum future commitment
and the revenue generated for the Group to date. Future commitments are typically payable only if certain pre-determined
challenging performance milestones are achieved by the venture. In 2019 the Group advanced £7.8m in equity and loans
to its new and existing venture agreement companies with a maximum further commitment of up to £2.3m across all
18 venture agreements.
Number of venture agreements in period
Equity and loans advanced (£m)
Outstanding commitment (£m)
Revenue share agreements
Revenue recognised for software services (£m)
Licenses recognised under revenue share agreements (£m)
2019
9
7.8
2.3
9
2.1
0.4
2018
Total to date
5
6.9
4.0
4
2.7
0.3
18
16.6
16
5.2
0.7
Dividend
The Board has recommend payment of a final dividend of 19.3p per share (2018: 17.00p per share) which, together with the
interim dividend of 7.7p paid in December 2018, gives a total dividend for the year of 27.0p per share, an increase of 13%
compared to the prior year. The final dividend, if approved at the AGM on 27 June 2019, will be paid on 19 July 2019 to those
shareholders on the register on 21 June 2019.
firstderivatives.com
19
Strategic ReportCorporate GovernanceFinancial Statements Principal risks and uncertainties
Risk management report
The Group operates in a changing economic and technological environment
and as a result is exposed to a spectrum of risks and uncertainties. Risks are
formally reviewed by the Board and appropriate processes put in place to
monitor and mitigate them. These risks, their potential impact on the Group
and the measures in place to mitigate them are discussed below.
Risk
Potential impact
Mitigation
The performance of the Group
would be adversely affected
if the required staffing levels
of sufficient calibre are
not achieved.
The Group seeks to mitigate this risk by offering a
rewarding work environment geared towards continuing
development. This includes competitive reward
packages and a strong commitment to training and
career progression. The Group consistently achieves
attrition rates below industry levels, attesting to the
effectiveness of these policies.
Attracting and retaining
talent in a competitive
environment
As a software and
consultancy provider, FD
is dependent on the skill,
experience and commitment
of its employees, particularly
on the recruitment and
retention of key staff.
Market risk
The Group operates in a
competitive and cyclical
market environment which
makes it more difficult to
forecast future demand
from clients.
The Group’s resourcing
decisions could lead to
over-investment, reducing
profitability in the short
term, or under-investment,
leading to missed commercial
opportunities and/or
client dissatisfaction.
Technological change
Technology in the software
industry can change rapidly,
resulting in potential
obsolescence or
increased competition.
In order to remain competitive,
it is essential that the Group’s
products remain up to date
and that its development
plans are flexible.
20
First Derivatives plc Annual Report 2019
The Group addresses this risk by seeking to increase
the certainty and diversity of its revenues and through
seeking, wherever possible, to secure long-term client
engagements. It does this by targeting consulting
assignments which have the potential to be multi-year
assignments; by seeking annual license agreements for
software contracts; and by expanding and diversifying
its portfolio of software and services offerings.
In particular, the Group’s expansion into new industries
reduces its exposure to sector-specific impacts.
Significant ongoing investment is made in research
and development to proactively develop new and
enhanced capabilities within our software. This process
also allows for the identification of, and adaptation to,
any technological changes that do occur externally,
thereby ensuring that the Group’s products continue to
meet the demands of its clients. In addition to its central
R&D team, the Company formed Kx Labs in 2015, which
is tasked with identifying technology trends and new
software product opportunities to further mitigate
this risk.
Strategic Report Risk
Potential impact
Mitigation
Events outside of the Group’s
control such as changes in
ownership or business priorities
could adversely affect future
revenues from existing
client relationships.
This risk is mitigated in several ways including
increasing the number of clients, diversification
into new industry verticals, a growing presence in
geographic regions outside of the UK and US plus
long-term contracts wherever possible. A low level
of client attrition is evidence of the Group’s success
in limiting this risk.
Retention of key client
relationships
Through its world-class
software products and
associated services coupled
with high-calibre managed
services and consulting, FD
strives to maintain successful
relationships with all of its
clients. A small number
of these are particularly
important to the success
of the Group.
Management of growth
The Group has experienced
several years of strong growth
which it expects to continue
and therefore needs to manage
this growth effectively.
If the correct level of investment
in people and technology is not
maintained it is possible that
the quality of the Group’s client
offering will drop and/or cost
control and operational
effectiveness will deteriorate.
The Group has a programme of continual improvement
in operational, financial and management controls,
in reporting systems and procedures, and in training
programmes to motivate, manage and develop
employees. Increasing levels of investment are made
in each of these areas every year to improve and augment
existing functions that will continue to manage the
Group’s growth.
These risks have implications
in terms of potential litigation
and regulatory action as well
as commercial implications
as a result of loss of customer
confidence and negative publicity.
Management
of information
technology security
The Group is at risk
of financial loss and
reputational damage
relating to breaches of IT
security policy, including
unauthorised access to
confidential data or technology
disruption undertaken by
third parties.
As a provider of software to leading financial services
organisations around the world, FD is required to
operate stringent IT and cyber security practices.
The Group has extensive documented policies to
mitigate risk in these domains covering areas such
as access control, environmental controls, IT system
architecture, remote access policies, password
protection policies, data communication protocols,
back-up policies, quality assurance, application change
controls and system support. To provide assurance on
the effectiveness of these policies, the Group has adopted
SSAE 18 SOC1, a standard from the American Institute
of Certified Public Accountants, on the effectiveness
of the Group’s IT security controls. The latest SSAE 18
SOC1 audit report covering the year to March 2018
found the Group was fully compliant as a result of
the 28 separate IT security controls it has in place.
firstderivatives.com
21
Strategic ReportCorporate GovernanceFinancial Statements People strategy
Retaining the best talent
Given the nature of our activities, people are especially vital to the success of
our business. We are proud of our track record of attracting and retaining the
best talent and of our industry-leading training and development programmes,
both of which enable the Group to develop and deliver software and services
that exceed the expectations of our clients.
Recruitment
The HR team at FD is tasked with attracting and retaining
the best people. As well as an extensive engagement
programme which encompasses more than 100 universities,
we also have a successful employee referral programme
which, together with our increasing brand awareness, led
to 10,687 people applying for a job with FD during the year.
From these applications, we selected 538 people to
commence employment with us during the year, of which
374 were new employees at the graduate level and 164 were
experienced hires.
Development
We equip our people with the right skills. We expanded
our investment in external training during the past year,
which included 150 employees pursuing a machine
learning qualification and 250 employees studying for a risk
management certification. Internally we have 713 employees
currently participating in our industry-recognised, two-year
Capital Markets Training Programme (CMTP). These employees
have already completed 11,207 modules across finance,
technical and consulting streams. The CMTP is primarily
designed for, and focused on, our graduate intakes but many
of those joining us as experienced hires have benefited from
the extensive knowledge base we have developed. This year
we also partnered with Thomson Reuters to enhance our
compliance training for all staff and to provide access to
a library of over 400 training courses which all employees
can access.
Reward
At FD we value effort and excellence. We recognise that
we have an exceptionally talented and diligent team, which
cares passionately about the work it does and the service
it provides to clients. We have a generous and balanced reward
system in place to ensure that this excellence is valued.
713
employees currently participating
in our industry-recognised, two-year
Capital Markets Training Programme
10,687
people applied for jobs at FD in 2019
Support
We care about the people who work for us. We have a
24-hour, 365-day employee assistance programme in place
for all employees. During the year we launched an enhanced
health and wellbeing initiative, with a particular focus on
mental health, and we provide complementary healthcare
plans and private health insurance.
Diversity
At FD we are proud of the diverse, inclusive and vibrant team
that we have built. Our success to date has been built on
bringing together high-performing teams of talent from
across the globe to service our client base. We continue
to diversify our business and create a culture of inclusion,
mutual respect and equal opportunity which contributes to
improved employee wellbeing and engagement and increases
the quality of our service to clients. During the year we
launched both FD Pride, our LGBT+ network, and FDWN,
our women’s network. We also constantly strive to offer
employment opportunities to persons with physical
disabilities. Our employees have embraced these networks
enthusiastically and we look forward to continuing to
influence the FD culture going forward.
22
First Derivatives plc Annual Report 2019
Strategic Report CORPORATE GOVERNANCE
24 Board of Directors
26 Chairman’s governance statement
27 Governance framework
29 Report of the Audit Committee
32 Report of the Nomination Committee
34 Report of the Remuneration Committee
38 Directors’ report
40 Statement of Directors’ responsibilities
Independent auditor’s report
FINANCIAL STATEMENTS
41
47 Consolidated statement of comprehensive income
49 Consolidated balance sheet
50 Company balance sheet
51 Consolidated statement of changes in equity
53 Company statement of changes in equity
55 Consolidated cash flow statement
56 Company cash flow statement
57 Notes
116 Directors and advisers
IBC Global directory
firstderivatives.com
23
Board of Directors
Seamus Keating
Chairman
Brian Conlon
Chief Executive Officer
Graham Ferguson
Chief Financial Officer
Committee membership
Committee membership
Committee membership
Brian founded FD in 1996 and has
led its development ever since.
His background is in the capital
markets sector where, following
training with KPMG, he joined the
risk management team in Morgan
Stanley International, London.
He was a capital markets consultant
with SunGard, a major global
derivatives software house, during
which time he worked with more
than 60 financial institutions
worldwide. He left in 1996 to set
up FD.
Other appointments
None.
Graham joined the Board of
FD in September 2008 and has
responsibility for the Group’s
financial operations. During his
career he has worked on numerous
corporate acquisitions and
restructuring projects and has
experience in business and
acquisition finance.
He formerly held senior roles with
KPMG, Bank of Ireland and Silverwood
Property Developments Limited and
is a qualified Chartered Accountant.
Other appointments
None.
A N R
Seamus was appointed as an
independent Non-Executive Director
of FD on 10 December 2012 and was
appointed Non-Executive Chairman
on 18 July 2013. He has over 20 years’
experience in the global technology
sector in finance and operational
roles and has held a number of
non-executive roles since 2012.
He was chief financial officer
of Logica plc from 2002 until 2010
when he became chief operating
officer and head of its Benelux
operations. Prior to his role at Logica
plc, he worked for the Olivetti Group
in senior finance roles in the UK
and Italy.
Other appointments
Seamus is currently chairman of
Sionnach Ltd, the holding company
of Version1 Ltd, a technology services
group, a non-executive director of
BGL Group Limited, a non-executive
director of Mediclinic International
plc and a non-executive director of
Mi-pay Group plc.
Key to Committee membership
A Audit Committee
R Remuneration Committee
N Nomination Committee
Committee Chair
Independent
24
First Derivatives plc Annual Report 2019
Corporate Governance
Virginia Gambale
Non-Executive Director
Keith MacDonald
Non-Executive Director
Donna Troy
Non-Executive Director
Committee membership
Committee membership
Committee membership
A N R
A N
N R
Virginia joined the Board of FD
in March 2015. A US citizen, she
is managing partner of Azimuth
Partners LLC, which assists its
clients in the development
of strategies for growth, innovation
and international expansion.
Prior to forming Azimuth, Virginia
was a partner at Deutsche Bank
Capital Partners and has also held
senior management positions
such as CIO at Merrill Lynch,
Bankers Trust, Deutsche Bank and
Marsh & McLennan Companies, Inc.
Other appointments
Virginia is currently a director
of JetBlue Airways Corporation and
the public company Regis Corporation,
and is a member of the advisory
board for Chicago Trading Company
and chair of the executive advisory
board for Nutanix (a public company
and leading cloud computing provider).
Keith has been a Director of FD
since June 2012. He is a Chartered
Director, a fellow of the Institute
of Chartered Accountants in Ireland
and an Associate of the Irish
Taxation Institute.
Keith was formerly the global head
of structured corporate finance
for Lloyds Banking Group and
possesses a wealth of knowledge
of capital markets. Prior to joining
Lloyds Banking Group, Keith had a
16-year career with Citigroup during
which time he held a variety of
senior positions in Europe and Asia
including being Asia-Pacific head
of structured corporate finance.
Other appointments
Keith is a director of several
other listed and private companies
across a number of industries and
geographies including the NYSE-listed
Seadrill Partners, Unit DX Ltd, which
is a UK science incubator, and the
MAPS Group of aircraft leasing entities.
Donna joined the Board of FD
in January 2018 and has extensive
experience in both senior executive
and non-executive roles within
multi-national technology
companies. She is based in
Austin, Texas.
Donna has held CEO, division
general management and sales
leadership roles in organisations
including IBM, Partnerware, McAfee,
SAP, Dell and Epicor, delivering revenue
and margin growth and implementing
global go-to-market strategies.
Other appointments
Donna is currently on the board of
directors at Pivot3, TIBCO, Aptean
and Curvature. She is an advisory
board member of Kony Software
and Riverside Partners.
firstderivatives.com
25
Strategic ReportCorporate GovernanceFinancial Statements
Chairman’s governance statement
On behalf of the Board, I am pleased to
present the Corporate Governance Report
for the year ended 28 February 2019.
The Board is responsible for setting and
ensuring delivery of the Group’s strategic
objectives and it is my responsibility to
ensure that the Board operates effectively
and that it sets and upholds high
standards of corporate governance.
Strategy
The Board has outlined its strategy for the business
within this Annual Report and during the year has debated
its appropriateness and effectiveness. The Board also
exercises its judgement to determine appropriate levels
of resource allocation to achieve these strategic objectives,
while also ensuring processes are in place to identify and
manage risk. Having debated these issues regularly in our
meetings during the year, the Board believes that the Group’s
strategy is proving effective.
Culture
FD is a dynamic business which provides stimulating
careers for its employees. The Group continues to upscale
rapidly, primarily through organic growth that requires
detailed planning and strong execution to deliver. In the
management of this environment we adopt a disciplined
approach towards our operations, structures and resources.
Compliance with the UK Corporate
Governance Code
The Company is listed on AIM and is committed to ensuring
the operation of high standards of corporate governance.
It has elected to adopt the 2016 UK Corporate Governance
Code (the ‘‘Code’’) as its governance framework and has put
in place procedures and policies to comply.
Since the adoption of the Code in September 2018, the
Company has complied with all of the provisions of the
Code except that, as discussed in the Report of the Audit
Committee, it does not have a formal internal audit function.
S Keating
K MacDonald
V Gambale
D Troy
B G Conlon
G R Ferguson
Number of meetings
Meeting attendance
Board
Audit
Committee
Remuneration
Committee
Nomination
Committee
Total
6
6
6
6
6
6
6
3
3
3
—
—
2*
3
3
—
3
3
—
—
3
2
2
2
2
—
—
2
14
11
14
11
6
8
14
* Graham Ferguson was invited to attend two Audit Committee meetings.
26
First Derivatives plc Annual Report 2019
Corporate Governance Governance framework
The Board
Led by the Chairman, the Board’s principal responsibilities are:
• to establish the vision, mission and values of the Group;
• to set strategic objectives and provide the leadership to
put them into effect;
• to monitor and assess financial performance;
• to embed a framework of controls which allow for the
identification, assessment and management of risk; and
• to ensure the Group fulfils its obligations to shareholders,
employees, clients and other stakeholders.
The effective discharge of these responsibilities is intended
to achieve high standards of governance within the Group.
Matters reserved for a decision of the Board include approval
of the Group’s commercial strategy, annual operating and
capital expenditure budgets, business plans, acquisitions,
oversight of the recruitment of key executives, significant
contracts, annual reports and interim statements and any
substantial funding and capital expenditure plans.
The Board meets regularly to discuss and agree on the
various matters brought before it, including trading results,
key personnel matters and significant investments. FD has
a highly committed and experienced Board, supported by
the senior management team, with the qualifications and
experience necessary for the effective running of the Group.
In addition to the Board meetings, there is regular
communication between Executive and Non-Executive
Directors to update the Non-Executive Directors on
matters requiring attention prior to the next Board
meeting. In addition, the Chairman meets separately
with the Non-Executive Directors.
Responsibilities of the Chairman
and Chief Executive Officer
The Chairman is responsible for the leadership of the Board,
ensuring the efficient discharge of its principal responsibilities
described above. The Chief Executive Officer is responsible
for implementing the Group’s strategy and for the financial
performance, risk management, people development and
other key components of ongoing operations.
Composition of the Board
The Code requires that the Board should contain a balance
of skills, experience, independence and knowledge of the
Company. It should also include an appropriate combination
of Executive and Non-Executive Directors and that there
should be a formal, rigorous and transparent procedure
when appointing new Directors to the Board.
The Board considers that its composition, including the
balance between Executive and Non-Executive Directors,
is appropriate in view of the size and requirements of the
Group’s business and the need to maintain a practical
balance between Executive and Non-Executive Directors.
Board composition is kept under review to ensure
the requisite mix of skills and business experience is
maintained and to ensure the proper functioning of the
Board. When a new appointment to the Board is proposed,
consideration is given to the capabilities, knowledge
and experience that a potential new member could
add to the existing Board composition.
Before the appointment of a Non-Executive Director is
confirmed, the Chairman establishes that the prospective
Director can commit the time and effort necessary to fulfil
their duties, in terms of availability both to prepare for and
attend meetings and to discuss matters at other times.
Board information and development
Both at its periodic meetings and in separate briefing
sessions between Non-Executive Directors and senior
management (including Executive Directors), the Board
is kept fully apprised of all material commercial and
technological developments likely to affect the Group’s
performance and prospects.
Updates dealing with changes in legislation and regulation
relevant to the Group’s business are provided to the Board
by the Company Secretary/Chief Financial Officer and
through the Board Committees.
The Board recognises its overall responsibility for the
Group’s system of internal control and for monitoring
its effectiveness. All activity is organised within a defined
structure with formal lines of responsibility and delegation
of authority. The Group produces information packs on
a weekly and monthly basis detailing key financial and
marketplace information. The Group also produces regular
information packs which are distributed to Directors to
enable the Board to monitor operational performance
and the cash position and as a result allocate the
Group’s resources.
Adherence to high standards in the areas of health
and safety and corporate social responsibility are also
monitored by the Board on a regular basis.
Re-election
Under the Code, Directors should offer themselves for
re-election at regular intervals. The Board has decided that
all Directors will offer themselves for re-election annually.
During the period under review, there were no
appointments to or resignations from the Board.
Board Committees
The Group has an Audit Committee, a Remuneration
Committee and a Nomination Committee. These Committees
consist of Non-Executive Directors and have written
constitutions and terms of reference which can be found
on the Group’s website.
firstderivatives.com
27
Strategic ReportCorporate GovernanceFinancial Statements Governance framework continued
Board Committees continued
The Audit Committee’s role is to assist the Board with
the discharge of its responsibilities in relation to internal
controls and external audits particularly with respect to
the integrity, reliability and transparency of published
financial information. The Audit Committee has formal
meetings prior to the publication of the interim and final
results and additional meetings on an ad hoc basis as and
when required. The auditor attends the Audit Committee
meeting prior to the publication of the final results.
All members of the Audit Committee have directorship
experience of other publicly quoted companies either
currently or in the recent past.
The Remuneration Committee meets periodically to determine
the remuneration of the senior executives. Remuneration
levels are set in order to attract and retain the senior
executives needed to run the Company based on objective
comparable market data. In addition, the Remuneration
Committee provides guidance and direction into all major
compensation-related policy decisions by the Group.
The Nomination Committee ensures that there is an
appropriate balance of skills, experience, diversity,
independence and knowledge on the Board and its
Committees, reviews the size and composition of the Board
and makes recommendations to the Board. The Committee
receives reports from and provides input on the Chief
Executive’s plans for executive succession and development.
The Committee also considers and agrees (i) appointments
to and removals from the Executive Committee and changes
in other executive direct reports to the Chief Executive; and
(ii) proposals to restructure the Executive Committee.
Internal control
The Board has overall responsibility to ensure that the
Group’s internal control system is comprehensive, coherent
and responsive to the evolving environment in which the
Group operates.
Recognising that no system of internal control can provide
absolute assurance against the risk of misstatement or
loss, the Group’s systems are nevertheless designed to
meet its business objectives whilst effectively reducing
risks to an acceptable level.
The Group has built a robust framework of internal control
around risk identification, impact assessment, probability
of occurrence and mitigation strategies. Further information
on these controls can be found in the Report of the
Audit Committee.
The Board confirms that it is not aware of any significant
failings or weaknesses in the Group’s system of
internal controls.
Relations with stakeholders
The Board recognises that it is primarily accountable to the
Company’s shareholders and, at the same time, seeks to
consider the interests of all of the Company’s stakeholders
including clients, suppliers and subcontractors, employees,
as well as the local community and the environment in
which it operates.
28
First Derivatives plc Annual Report 2019
The Group maintains core values of honesty, integrity,
hard work, service and quality and actively promotes these
values in all activities undertaken on behalf of the Group.
Shareholders
The Chief Executive Officer and Chief Financial Officer
have regular dialogue with shareholders and analysts to
discuss strategic and other issues including the Group’s
financial results.
The Company engages in full and open communication
with both institutional and private investors and responds
promptly to all queries received. In conjunction with the
Company’s brokers and other financial advisers all relevant
news is distributed in a timely fashion through appropriate
channels to ensure shareholders can access material
information on the Company’s progress. The Company’s
website has a section for investors, which contains all publicly
available financial information and news on the Company.
During the year a capital markets event was held at which
several members of the executive team presented details
of the Group’s operations to investors, with the presentations
available for all investors to view on the Group’s website.
Employees
The Group is committed to attracting and retaining the
highest level of talent within its personnel. It is an equal
opportunities employer, with a policy to ensure that no job
applicant or employee receives less favourable treatment
on the grounds of gender, race, disability, ethnic or national
origin, marital status, sexuality, religion or belief, trade
union affiliation or age.
The Group applies high standards in recruitment and
invests considerable time and resource to ensure good
communication in relationships with its staff.
The importance of staff retention to the performance
of the Group is recognised through the provision of training
and development and by ensuring that there are ample
opportunities for career progression, determined solely
by ability and achievement. A number of employees have
a direct financial interest in the growth of the business
through the ownership of share options with a wider pool
of employees participating in the Group bonus scheme.
Clients
The Group is committed to achieving the highest levels
of client service and satisfaction in line with delivering
high-quality products and services. It seeks to be honest
and fair in all relationships with clients.
Other stakeholders
The Group recognises that it plays an important role in
relation to many other stakeholders including suppliers,
local communities, governmental agencies and the wider
public who benefit directly or indirectly from its products
and services. As one of the largest private sector enterprises
headquartered in Northern Ireland, it is particularly aware
of its responsibilities to maintain high standards in all
aspects of its business.
Corporate Governance Report of the Audit Committee
Dear shareholders
This report is intended to provide an insight
into the role and responsibilities of the
Committee and to demonstrate how it has
carried out this work. The Committee is
appointed by, and reports to, the Board
with its principal role being oversight
of financial reporting, internal control
and risk monitoring.
Virginia Gambale
Non-Executive Director
20 May 2019
Each member of the
Committee has significant
experience of financial
matters through their
past and present
business careers.’’
Composition
The Audit Committee is chaired by Virginia Gambale, who
was previously a partner at Deutsche Bank and held senior
management positions at firms including Merrill Lynch.
The other members of the Committee are Keith MacDonald,
who is a Chartered Accountant, and Seamus Keating, FCMA.
Each member of the Committee has significant experience
of financial matters through their past and present business
careers. The composition of the Committee is reviewed on
an annual basis.
Role and activities
The Committee is responsible for reviewing the Group’s
financial reporting, including monitoring changes to
reporting requirements to assess their applicability and
impact on the Group. It is also responsible for ensuring
there are appropriate internal control and risk management
procedures in place and for overseeing the relationship
with the external auditor and making recommendations
to the Board on its appointment. The Committee meets
regularly to consider the matters under its remit, including
before both the interim and full year financial reports.
Governance
The Committee sets its own agenda and while only the
members of the Committee have the right to attend its
meetings, the Committee may from time to time invite
other parties to attend. On several occasions during the
year the Committee has interacted with the external
auditor and senior financial management of the Group
to review matters under its remit.
Business during the year
Issues considered by the Committee during the year
that are considered to be significant include:
Revenue recognition
Revenue recognition is considered formally by the
Committee and following a review, including the adoption
of IFRS 15 Revenue from Contracts with Customers, it was
found to be in line with the Group’s stated accounting
policies. New software contracts are carefully reviewed,
and elements are broken down, where necessary, to separate
implementation and license revenues. On larger contracts
revenue is invoiced in line with the terms of the contract
with revenue recognition occurring on acceptance or the
achievement of non-refundable milestones.
firstderivatives.com
29
Strategic ReportCorporate GovernanceFinancial Statements Report of the Audit Committee continued
Business during the year continued
Goodwill and intangible assets
The Committee examined the Group’s policies on goodwill
and intangible assets and reviewed the application of its
accounting policies, which are detailed in note 17 to the
financial statements. The Committee considered the
methodology applied and the key assumptions used in
the impairment assessment of goodwill and intangible
assets. Amortisation of intangible assets was found to
have been recorded in accordance with the Group’s
accounting policies. The Group continues to capitalise
internal software development costs in accordance with
IAS 38 with amortisation policies continuing to be deemed
appropriate based on historical experience.
Investments
During the period the Group has invested in a number
of businesses which are seeking to use Kx technology in
verticals principally outside of capital markets. Under IFRS
reporting investments are to be carried at fair value. A fair
value review was performed as at 28 February 2019. The
methodology applied, including the significant inputs to
the assessment of fair value of investments, is detailed in
note 32.
Trade receivables
The Committee assessed the impact of IFRS 9 when
completing the evaluation of the adequacy of the bad debt
provisions. A retrospective review of bad debt provisions at
28 February 2018 was also carried out in order to note any
indication of management bias within the provisions and
none was noted. The Committee was satisfied that such
judgements were appropriate and the risk had been
adequately addressed.
Share based payments
The value of options issued by the Group is required to be
calculated and is prepared using the adjusted Black-Scholes
model which is subjective in nature. Following a detailed
review, the assumptions utilised for grants awarded in the
year to 28 February 2019 are deemed to be reasonable.
Reclassifications
In early 2019 the Financial Reporting Council (FRC) submitted
a request for further information based solely on their review
of the annual accounts on certain aspects of the Group’s
Annual Report for the year to 28 February 2018. FD responded
fully to the matters raised and as a result of the FRC’s
enquiry, the Group has restated certain items in its other
comprehensive income and reserves reported in the 2018
Annual Report, as detailed in note 33. The FRC’s enquiry did
not result in any change to reported profit, earnings per
share, assets, liabilities or the cash flows reported in
respect of the 2018 financial year.
30
First Derivatives plc Annual Report 2019
Review of effectiveness
The Board confirms that FD has established systems,
procedures and controls designed to establish an ongoing
process for identifying, evaluating and managing the principal
risks faced by the Group and that they have been in place
for the period under review and up to the date of approval
of the Annual Report. The effectiveness of those systems,
procedures and controls are regularly reviewed by the Board,
which, through the Audit Committee, has reviewed the
effectiveness of these risk management and internal control
systems. It was considered that the procedures in place to
identify and manage risk were appropriate and that the
Group’s plans to mitigate these risks remain effective.
The Committee noted that the Group addresses the
management of risk explicitly through a number of formal
policies. For example, regular management meetings have
a standing agenda item where managers and staff are
encouraged to report and discuss any risk-related items.
There are detailed policies in place around business continuity,
client engagement and cybersecurity. Where possible and
cost effective, the Group seeks to insure itself against the
risks it faces.
While the Group has policies and procedures in place
to ensure the integrity of its systems, it does not have
an internal audit function. Instead:
• The Group operates an audit programme which forms
part of its information security certification. As part
of this process FD undergoes a biannual assessment to
ensure that all of its controls are robust and assets are
appropriately protected. Information security risks are
assessed and reviewed regularly in IT steering meetings
with the Group’s senior management.
• FD also participates in additional third-party assessments
for private sector customers to ensure that associated
security controls are effective and address any related
risks. Through the various external audit activities and
the close control of operations exercised by the Executive
Directors as well as the centralisation of financial management
in Newry, the Group does not require these activities to
be separated into a standalone audit function.
• The Audit Committee reviews enterprise risk on an annual
basis and reviews the internal control framework and
procedures on an ongoing basis, giving consideration to
whether certain areas should be looked at more closely.
Taking all the above factors into consideration, the Audit
Committee believes that management is able to derive
assurance as to the adequacy and effectiveness of internal
controls and risk management procedures, without the
need for an internal audit function. The Audit Committee
will continue to monitor whether there is a requirement for
a dedicated internal audit function and report accordingly
to the Board.
Corporate Governance Going concern
The Group’s business activities, strategy and operational
review are set out in the Strategic Report, while its financial
position, including cash flows, liquidity position and
borrowing facilities (including the new finance facilities
announced in February 2019) are detailed in the financial
statements. Having undertaken a rigorous assessment of
the Group’s financial forecasts as detailed in the viability
statement, the Board has concluded that the Group will
continue to have adequate financial resources to realise
its assets and discharge its liabilities as they fall due.
Having given due consideration to all of these matters and
the nature of the Group’s business, the Directors consider
that the Company and the Group are going concerns and
the financial statements are prepared on that basis.
This treatment reflects the reasonable expectation that
the Group has adequate resources to continue in business
for the foreseeable future and the consideration of the
various risks set out in this Annual Report.
Viability statement
In accordance with the UK Corporate Governance Code,
the Directors have considered the Group’s current financial
position and future prospects and have a reasonable
expectation that the Group will be able to continue in operation
and meet its liabilities as they fall due over the period
of the assessment.
In reaching this conclusion, considerations that impact
this assessment include the Group’s current financial
position and available financial resources, the Group’s
business model as outlined in this Annual Report and
budgetary projections presented to the Board.
The annual budget process involves input from all relevant
business heads on a region-by-region basis and the impact
of strategic initiatives, together with consideration of key
risks. This results in a detailed twelve-month outlook which
includes cash flow projections and capital expenditure
requirements. The budget is reviewed and approved by the
Board on an annual basis and performance against budget
is reviewed throughout the year, including at each Board
meeting. In addition to the detailed twelve-month budget,
a three-year forecast is prepared using assumptions of
future growth and the costs required to support the
Group’s strategy through this period.
The Directors consider that three years is an appropriate
period over which to provide a viability statement and believe
this provides the readers of the Annual Report with a reasonable
degree of confidence. The Directors have no reason to believe
that the Group will not be viable over a longer period.
In addition to considering the above, the Group also
monitors performance against pre-defined budget
expectations and risk indicators, along with strategic
progress updates, which provide early warning to the
Board, allowing management action to be taken where
required including the assessment of new opportunities.
Anti-bribery and corruption policy
As well as meeting its obligations under the Bribery Act 2010,
the Group operates an Ethics Code of Conduct which includes,
inter alia, requirements relating to anti-bribery and corruption.
This policy is supplied to all employees.
Whistleblowing
The Group has a whistleblowing policy that enables
employees to confidentially report matters of concern to
an independent third party. The details of any such reports
are communicated to the Non-Executive Directors. No such
matters arose during the year in question.
External auditor effectiveness,
independence and appointment
The Committee reviews and makes recommendations
regarding the appointment of the external auditor.
In making these recommendations the Committee reviews
the performance, effectiveness and independence of the
external auditor. The Committee holds regular meetings
with the external auditor to review matters of interest.
The Committee assessed the effectiveness of the external
audit process at its meeting in May 2018. The external
auditor performs testing of operating effectiveness of key
controls together with substantive testing, focusing on the
most significant assessed risks for material misstatement
including revenue recognition, the valuation of goodwill
and intangible assets and the assessment of the fair value
and accounting of investments. The results of the audit
provided the Committee with confidence with regard to
the overall quality of the audit. The Committee also asked
the external auditor to report on control findings arising
from the audit as part of the year end process. In addition,
feedback on the audit was obtained from management
and the finance team.
The fees paid to the external auditor during the year are
detailed in note 9. In addition to the audit services it performed,
KPMG provided taxation and related services to the Group
as detailed in the note. The Committee received confirmation
from the auditors that they are independent of the Group
under the requirements of the Financial Reporting Council’s
ethical standards for Auditors.
During the financial year the Group elected for voluntary
adoption of the 2016 UK Corporate Governance Code, which
contains recommendations relating to auditor rotation.
As a result, the Audit Committee conducted a tender
process following which it recommended to the Board
that Deloitte LLP be appointed to replace KPMG, which
has been the external auditor since 2000, since when
no tender process has been undertaken. The Board has
agreed to recommend the appointment of Deloitte LLP,
subject to shareholder approval at the AGM.
firstderivatives.com
31
Strategic ReportCorporate GovernanceFinancial Statements Composition
The Committee is chaired by Seamus Keating, and all of the
Non-Executive Directors are members of the Committee.
Role and activities
The Committee fulfils a number of duties concerning
the nomination and appointment of Board and executive
positions. In particular, it is responsible for reviewing
regularly the size and composition of the Board and its
Committees in order to ensure an appropriate balance
of skills, experience, diversity, independence and knowledge
of the Group. It prepares a description of the specific
experience and abilities needed for each appointment
and reviews conflicts or potential conflicts of interest
prior to appointment and annually thereafter.
The Group is proud of its track record on diversity, including
gender, ethnicity, nationality, skills and experience, which
has resulted in the formation of a diverse, inclusive and
vibrant team. While not in favour of setting specific targets,
in the event that a Board position requires filling, during
succession planning it will proactively ensure that the
search process is sufficiently inclusive to encourage
applications from diverse candidates with relevant skills,
experience and knowledge, and that the selection process
is fair and transparent.
The Committee also advises the Board on succession
planning for all Board members, taking into account the
skills and experience needed on the Board, and receives
reports from the Chief Executive Officer on succession
and development planning for the Executive Committee.
The Committee meets at least twice a year to consider the
matters under its remit.
Governance
The Committee sets its own agenda and while only the
members of the Committee have the right to attend its
meetings, the Committee may from time to time invite
third parties to attend. For matters to do with the succession
of the chairmanship of the Board, the Committee is chaired
by the Senior Independent Director. The composition of the
Committee is reviewed on an annual basis.
Report of the Nomination Committee
Dear shareholders
The Nomination Committee (the ‘‘Committee’’)
ensures that there is an appropriate balance
of skills, experience, diversity, independence
and knowledge on the Board and its Committees,
reviews the size and composition of the Board
and makes recommendations to the Board.
The Committee receives reports from, and
provides input on, the Chief Executive’s plans
for executive succession and development.
The Committee also considers and agrees:
(i) appointments to and removals from the
Executive Committee and changes in other
executive direct reports to the Chief Executive;
and (ii) proposals regarding the composition
and structure of the Executive Committee.
The Committee oversees and monitors
the Group’s governance framework,
endorses governance policies and
makes recommendations to the Board.
Seamus Keating
Chairman
20 May 2019
During the year the
Committee reviewed
succession plans for key
executives in the business.
The outcome of this review
identified a number
of actions which the
executive management
is in the process
of implementing.’’
32
First Derivatives plc Annual Report 2019
Corporate Governance Business during the year
Issues considered by the Committee during the year that
are considered to be significant include:
Board evaluation
During the year, a Board effectiveness review was conducted,
led by one of the Non-Executive Directors. This review
considered the operation and effectiveness of the Board
from a number of different perspectives including the timing
and frequency of meetings, the recurring and special agenda
matters, the quality of Board materials, the depth and extent
of Board discussion and debate as well as the composition
of the Board, succession planning and other relevant items.
The review did not identify any significant shortcomings
in the operation and effectiveness of the Board and its
recommendations have been universally adopted for
implementation in the current financial year.
Executive succession planning
During the year the Committee reviewed succession plans
for key executives in the business. The outcome of this
review identified a number of actions which the executive
management is in the process of implementing.
firstderivatives.com
33
Strategic ReportCorporate GovernanceFinancial Statements Report of the Remuneration Committee
Dear shareholders
This report is intended to provide insight
into the roles and responsibilities of the
Committee and to demonstrate how it has
carried out this work. The Committee is
constituted by the Board to assist it in
meeting its responsibilities regarding the
determination and implementation of the
Group’s remuneration policy, including the
remuneration of the Chairman, Executive
Directors and senior management, as well
as overseeing the arrangements for the
wider workforce.
Donna Troy
Non-Executive Director
20 May 2019
A key element of the
Group’s policy is to align
the interests of managers
with those of shareholders
through the total
compensation package.’’
34
First Derivatives plc Annual Report 2019
Composition
The Remuneration Committee is chaired by Donna Troy.
The other members are Seamus Keating and Virginia Gambale.
Remuneration policy
The Group’s remuneration policy is detailed below and is
designed to provide levels of remuneration to attract, retain
and motivate Directors and key staff. The packages are
designed to be competitive in value to those offered to the
Directors of similarly sized public companies in related sectors.
A key element of the Group’s policy is to align the interests
of managers with those of shareholders through the total
compensation package including the grant of options under
the Group’s Share Option Plan. These incentives are structured
to encourage retention and deliver the strategic objectives
of the Group over the longer term.
The components of the Executive Directors’ remuneration
packages are a basic salary, bonus, money purchase pension
contributions and participation in the Share Option Plan.
The Non-Executive Directors’ remuneration packages do
not include variable or long-term elements.
Executive Directors
Basic salary
Basic salary is set by the Committee and reviewed annually.
Salary levels take into account a range of factors which include
the Director’s role and responsibilities; their skills, experience
and performance; and pay and conditions elsewhere in the
Group. In addition, the salaries paid to Directors performing
roles of similar scope in comparable listed companies
are considered.
Pension and healthcare
The Group operates a defined contribution scheme
for Executive Directors which entitles participants to a
Company pension contribution equal to 10% of their base
salary. Executive Directors are also eligible for private health
care insurance which is treated as a benefit in kind.
Cash bonus
Bonus awards, which are not pensionable, are made to
the Executive Directors based on achieving performance
criteria set out by the Committee. The bonus plan for the
Executive Directors includes an on-target bonus of 50% of
basic salary with a maximum of up to 100% being achievable.
The criteria are reviewed annually and aligned to the key
financial and strategic objectives of the Group. The Committee
has discretion to amend the pay-out should any formulaic
outcome not reflect its assessment of overall performance;
however, the exercise of any such discretion shall not result
in a bonus payment in excess of 100% of basic salary.
Share Option Plan
The Directors believe it is important to incentivise key
management and employees and accordingly the Executive
Directors are able to participate in the Company’s Share Option
Plan. Any awards made under this plan will be granted on a
conditional basis and subject to the achievement of specified
performance conditions, with exercise permitted not less
than three years from the date of award.
Corporate Governance Executive Directors continued
Share Option Plan continued
The outstanding options granted to Executive Directors had a performance condition solely related to absolute total
shareholder return (TSR). The Committee has agreed that future awards will be based 50% absolute TSR and 50% on
growth in earnings per share.
Non-Executive Directors
The Board, based on a recommendation by the Chairman of the Remuneration Committee or, in the case of the Chairman,
the remainder of the Board, determines the remuneration of the Non-Executive Directors. The Non-Executive Directors are
not eligible to join the Group’s pension scheme nor do they receive share options or cash bonuses. Non-Executive Directors
may elect to receive payment in their home currency if based outside the UK and receive part payment of their remuneration
in Group shares. In such circumstances, the number of shares to be issued will be based on the average closing mid-market
share price over the 90 business days prior to the release of the Group’s preliminary results.
FY 2019 Remuneration Report
During the year the Committee reviewed how the implementation of the Group’s remuneration policy impacted on performance
and determined that the policy was operating effectively. However, given the growth and increasing complexity of the business,
it was decided that measures should be taken to ensure that the policy remained effective in future years. Therefore, during
the year the Remuneration Committee instructed external consultants to conduct a benchmarking exercise for Director
salaries and the results of this exercise will be taken into consideration in the next salary review. The Committee determined
that Directors should not receive an increase in basic salary for the 2019 financial year and, pending the results of the
salary review, have also determined that there will be no increase in basic salary for the 2020 financial year.
Alignment of remuneration and performance
The Committee believes the historical growth performance of the business is reflective of the Group’s effective remuneration
policy. The Committee is committed to an open and transparent dialogue with shareholders and where appropriate will
engage with shareholders and their representative bodies, seeking views which it may take into account when setting
remuneration policy.
Details of each Director’s remuneration is set out in the table below (audited).
Salary
and fees
£000
Benefits
£000
Annual
bonus
£000
Share based
payment
£000
Pension
£000
Total
remuneration
£000
Executive Directors
B G Conlon
R G Ferguson
Non-Executive Directors
K MacDonald
D Troy
V Gambale
S Keating
J Robson*
Total
2019
2018
2019
2018
2019
2018
2019
2018
2019
2018
2019
2018
2019
2018
2019
2018
332
330
200
200
60
45
45
6
49
50
100
100
—
73
786
804
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
177
330
100
150
—
—
—
—
—
—
—
—
—
—
277
480
—
—
193
135
—
—
30
—
27
28
—
—
—
—
250
163
33
33
20
20
—
—
—
—
—
—
—
—
—
—
53
53
542
693
513
505
60
45
75
6
76
78
100
100
—
73
1,366
1,500
* Details in the above table reflect the Director’s remuneration up to the date of resignation on 15 May 2017.
firstderivatives.com
35
Strategic ReportCorporate GovernanceFinancial Statements Report of the Remuneration Committee continued
Alignment of remuneration and performance continued
Bonus payments were made to the Executive Directors in line with the targets set for the year, with no discretion exercised
by the Committee. During the year these targets were weighted 70% on Group revenue, adjusted EBITDA and adjusted earnings
per share targets and 30% on growth in software revenue. Achievement of these targets resulted in the payments as detailed
in the table above.
The Executive Directors did not receive any award of share options during the year, and there was no vesting or exercise
of existing share options awarded in prior years.
Non-Executive Directors Virginia Gambale and Donna Troy, both US citizens, are remunerated in US dollars and the salary
and fees detailed in the table reflect the sterling translation of payments made during the period. Ms Gambale and Ms Troy
are additionally entitled to receive payment of approximately £30,000 in FD shares, issued and allotted on the business day
following publication of the Group’s Annual Report under the terms of the Group’s remuneration policy.
Service contracts
The Executive Directors have entered into service contracts with the Group that are terminable by either party on not less
than six months’ prior notice.
Directors’ interests in shares (audited)
The interests held in shares of the Company by the Directors who held office at the end of the financial year, all of which
are beneficial holdings, were as follows:
B G Conlon
R G Ferguson
V Gambale
S Keating
K MacDonald
D Troy
Number of ordinary shares
28 February
2019
28 February
2018
7,853,953
7,853,953
100,000
100,000
10,706
25,314
45,741
90
10,053
25,314
45,741
—
Share options
Share options awarded to Executive Directors over ordinary £0.005 shares in the Company are set out in the table below:
R G Ferguson
1 March
2018
200,000
Granted
during
the year
—
Exercised
during
the year
28 February
2019
Exercise
price
£
Exercise
period
—
200,000
17.25
2019–2026
The Remuneration Committee has set TSR performance conditions for the share options granted to Graham Ferguson
on 18 July 2016. These vest on a sliding scale based on achieving a minimum of 50% and up to 100% absolute TSR over
the three-year period from grant.
The Company recognised total expenses of £1,452k (2018: £1,586k) related to equity-settled share-based payment transactions
during the year. Expenses of £250k (2018: £163k) related to share options granted to the Directors. There were no share options
exercised by the Directors during the year (2018: nil).
Transactions with Directors
The Directors’ interests in contracts with the Company are disclosed in note 31.
36
First Derivatives plc Annual Report 2019
Corporate Governance Performance graph and CEO remuneration
The chart below shows the Group’s total shareholder return performance over the past ten years compared to the AIM 100,
an index of which the Group is a constituent.
2,500
2,000
1,500
1,000
500
0
April ‘09
April ‘10
April ‘11
April ‘12
April ‘13
April ‘14
April ‘15
April ‘16
April ‘17
April ‘18
April ‘19
FDP
AIM 100
The table below shows the total remuneration and annual bonus for the Chief Executive Officer over the same period.
During this period the CEO has not received any long-term incentive remuneration.
2012
2018
2013
2016
2015
2014
2017
Total remuneration (£’000)
231
277
276
165
311
657
693
2019
542
Annual bonus as a % of
maximum opportunity
Long-term incentives as a %
of maximum opportunity
40%
62%
63%
—
97%
100%
100%
53%
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
firstderivatives.com
37
Strategic ReportCorporate GovernanceFinancial Statements Directors’ report
The Directors have pleasure in submitting to the shareholders
their annual report and the audited financial statements of
the Group and Company for the year ended 28 February 2019.
Results and dividend
The Group’s profit after taxation attributable to shareholders
for the year to 28 February 2019 was £13,175k (2018: £10,208k).
The Directors propose the payment of a final dividend of
19.30 pence (2018: 17.00 pence) per share which, together
with the interim dividend of 7.70 pence (2018: 7.00 pence)
per share, totals 27.00 pence (2018: 24.00 pence) per share.
The final dividend has not been included in payables as it
was not approved before the year end.
Dividends paid during the year comprised a final dividend
of 17.00 pence per share for the year ended 28 February 2018
and an interim dividend of 7.70 pence per share for the six
months ended 31 August 2018.
The price of the Company’s shares at close of business on
28 February 2019 was £21.90 (2018: £38.00) and the high
and low share prices during the year were £48.00 (2018: £43.80)
and £20.10 (2018: £22.88) respectively. The average share
price during the year was £33.96 (2018: £31.70).
Directors
The Directors who held office during the year were as follows:
B G Conlon
R G Ferguson
V Gambale
S Keating
K MacDonald
D Troy
Directors and their interests
The interests of the Directors in shares during the year are
set out in the Report of the Remuneration Committee and
the information is incorporated into the Directors’ Report
by reference.
Substantial shareholdings
At 20 May 2019, the Group had received notification
of interests in 3% or more of the ordinary share capital
from B G Conlon (30.0%), Standard Life Aberdeen (10.1%),
T Rowe Price (7.4%), Baillie Gifford & Co (4.7%), Oppenheimer
(4.6%) and Octopus Investments (4.5%).
Research and development
The Group’s policy is to invest in product innovation
and engage in research and development activities geared
toward the enhancement of its software products. During the
year costs of £8,573k (2018: £7,486k) were capitalised in
respect of activities which were deemed to be development
activities in accordance with the Group’s accounting
policies. Research and development costs of £2,089k
(2018: £1,807k) were expensed during the year.
AIM Rule Compliance Report
First Derivatives plc is quoted on AIM and as a result the
Company has complied with AIM Rule 31 which requires
the following:
• have in place sufficient procedures, resources and
controls to enable its compliance with the AIM Rules;
• seek advice from its nominated adviser regarding its
compliance with the Rules whenever appropriate and
take that advice into account;
• provide its nominated adviser with any information it
reasonably requests in order for the nominated adviser
to carry out its responsibilities under the AIM Rules for
Nominated Advisers, including any proposed changes to
the Board of Directors and provision of draft notifications
in advance of publication;
• ensure that each of the Company’s Directors accepts full
responsibility, collectively and individually, for compliance
with the AIM Rules; and
• ensure that each Director discloses without delay
all information which the Company needs in order to
comply with AIM Rule 17 (Disclosure of Miscellaneous
Information) insofar as that information is known to
the Director or could with reasonable diligence be
ascertained by the Director.
In addition, the Company maintains compliance with AIM
Rule 26, which lists a range of information that the Company
is required to make available.
Employee opportunities
The Group’s policy on employees remains to adopt a very
open management style, keeping employees informed
of all matters affecting them as employees including key
financial and economic factors affecting the Group’s
performance. This is achieved through meetings and
informal consultation at all levels.
It is the Group’s policy to ensure that equal opportunity is
given for the employment, training and career development
of disabled persons, including persons who become disabled
whilst in the Group’s employment.
38
First Derivatives plc Annual Report 2019
Corporate Governance Financial instruments
The Group’s financial risk management objective is broadly
to seek to make neither a profit nor loss from exposure to
currency or interest rate risk. The policy is to finance working
capital and the acquisitions of property, plant and equipment
through retained earnings and through borrowings at
prevailing market interest rates.
The Group does not use derivatives to manage its financial
risks. The main cash flow, credit and liquidity risks are those
associated with selling on credit. However, the vast majority
of the Group’s clients are substantial enterprises which
reduces the risk of default. The Group is also exposed to the
impact of fluctuations in exchange rates as it generates
income and incurs expenses in currencies other than sterling
(GBP). The Group’s main exposure is to the US dollar (USD),
euro (EUR), Australian dollar (AUD) and Canadian dollar
(CAD). However, because it has both income and expenses
denominated in foreign currency, its net exposures are
substantially lower than the gross balances.
In addition, the Group has financial risk exposure as a result
of debt financing for asset purchases, trade receivables and
activities carried on by subsidiary undertakings, as well as
exposure to movements in fair value of equity investments
and convertible loans. The Group’s financial position is
structured to take advantage of a natural foreign currency
hedge using excess cash generated from operations to
repay the associated capital and interest on US dollar
borrowings. Furthermore, by funding in US dollars the
acquisitions of Market Resource Partners LLC (MRP),
Reference Data Factory Inc (RDF) and Prelytix Inc. and the
acquisition of control of Kx Systems, the Group achieved a
net investment hedge against a significant portion of its
translation exposure on the net assets of its foreign operations.
Political donations
The Group and Company made no political donations
during the year (2018: £nil).
Future developments
As highlighted in the Chairman’s Review and the Business
Review, the Group focuses on the sale of software and
consulting services. It remains the key strategy of the
Group to increase its share in its expanding range of target
market segments through a combination of organic growth
and selective acquisitions. No material change to this
approach is currently contemplated.
Disclosure of information to auditor
The Directors who held office at the date of approval of this
Directors’ Report confirm that, so far as they are each aware,
there is no relevant audit information of which the Company’s
auditor is unaware; and each Director has taken all the steps
that they ought to have taken as a Director to become aware
of any relevant audit information and to establish that the
Company’s auditor is aware of that information.
Auditor
The Board has recommended the appointment of Deloitte LLP
to replace KPMG as auditor and a resolution to appoint them
will be proposed at the forthcoming Annual General Meeting.
Other information
The other information required under Section 414C (ii) of
the Companies Act 2006 to be disclosed in respect of the
review of the Group’s business is given in the Chairman’s
Review, Business Review and the Financial Review.
By order of the Board
JJ Kearns
Secretary
20 May 2019
firstderivatives.com
39
Strategic ReportCorporate GovernanceFinancial Statements Statement of Directors’ responsibilities in respect of the Strategic Report,
the Directors’ Report and the financial statements
The Directors are responsible for preparing the Annual 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.
Under the AIM Rules of the London Stock Exchange they are
required to prepare the Group financial statements in
accordance with International Financial Reporting Standards
as adopted by the European Union (IFRSs as adopted by the
EU) and applicable law and they have elected to prepare the
parent Company financial statements on the same basis.
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,
relevant and reliable;
• state whether they have been prepared in accordance
with IFRSs as adopted by the EU;
• assess the Group and parent Company’s ability to
continue as a going concern, disclosing, as applicable,
matters related to going concern; and
• use the going concern basis of accounting unless
they either intend to liquidate the Group or the parent
Company or to cease operations, or have no realistic
alternative but to do so.
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 are
responsible for such internal control as they determine is
necessary to enable the preparation of financial statements
that are free from material misstatement, whether due to
fraud or error, and 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.
Under applicable law and regulations, the Directors are also
responsible for preparing a Strategic Report and a Directors’
Report that complies with that law and those regulations.
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.
We consider the Annual Report and financial statements,
taken as a whole, is fair, balanced and understandable
and provides the information necessary for shareholders
to assess the Group’s position and performance, business
model and strategy.
On behalf of the Board
JJ Kearns
Secretary
20 May 2019
40
First Derivatives plc Annual Report 2019
Corporate Governance Independent
auditor’s report
to the members of First Derivatives plc
1. Our opinion is unmodified
We have audited the financial statements of First
Derivatives plc (“the Company”) for the year ended
28 February 2019 which comprise the consolidated
statement of comprehensive income, the
consolidated and Company balance sheets, the
consolidated and Company statement of changes in
equity, the consolidated and Company cash flow
statements and the related notes, including the
accounting policies in note 1. The financial reporting
framework that has been applied in their
preparation is UK Law and International Financial
Reporting Standards (IFRS) as adopted by the
European Union (EU) and, as regards the Company
financial statements, as applied in accordance with
the provisions of the Companies Act 2006.
In our opinion:
— the financial statements give a true and fair
view of the state of the Group’s and of the
Company’s affairs as at 28 February 2019 and of
the Group’s profit for the year then ended;
— the Group financial statements have been
properly prepared in accordance with
International Financial Reporting Standards as
adopted by the European Union (IFRSs as
adopted by the EU);
— the Company financial statements have been
properly prepared in accordance with IFRSs as
adopted by the EU and as applied in accordance
with the provisions of the Companies Act 2006;
and
— the financial statements have been prepared in
accordance with the requirements of the
Companies Act 2006.
Basis for opinion
We conducted our audit in accordance with
International Standards on Auditing (UK) (“ISAs
(UK)”) and applicable law. Our responsibilities are
further described in the Auditor’s Responsibilities
section of our report. We have fulfilled our ethical
responsibilities under, and we remained
independent of the Group in accordance with, UK
ethical requirements including the FRC Ethical
Standard as applied to listed entities. We believe
that the audit evidence we have obtained is a
sufficient and appropriate basis for our opinion.
Overview
Materiality:
Group financial
statements as a
whole
Coverage
£775k (2018: £650k)
5% (2018: 5%) of Group
profit before tax
97% (2018: 95%) of Group
profit before tax
Key audit matters
vs 2018
Recurring risks
for the Group
Revenue recognition
Valuation of goodwill
and intangible assets
Assessment of fair
value and accounting
of investments
◄►
◄►
▲
Recurring risks
for the
Company
Revenue recognition
◄►
Assessment of fair
value and accounting
of investments
▲
firstderivatives.com
41
Strategic ReportCorporate GovernanceFinancial Statements Independent auditor’s report to the members of First Derivatives plc (continued)
2. Key audit matters: our assessment of risks of material misstatement
Key audit matters are those matters that, in our professional judgment, were of most significance in the audit of the financial
statements and include the most significant assessed risks of material misstatement (whether or not due to fraud) identified by
us, including those which had the greatest effect on: the overall audit strategy; the allocation of resources in the audit; and
directing the efforts of the engagement team. These matters were addressed in the context of our audit of the financial
statements as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters.
In arriving at our audit opinion above, the key audit matters, in decreasing order of audit significance, were as follows
(unchanged from 2018):
The risk
Our response
Revenue recognition
Revenue: £217.4 million
(2018: £186.0 million).
Refer to page 29 (Audit
Committee Report),
page 69 (accounting
policy) and page 75
(financial disclosures).
The Group and Company have a
range of revenue streams across
their components, including
software sales, consulting services,
data management, hosting and
transactional activities.
There is a risk that revenue may be
recorded on an inconsistent basis
with the contractual terms agreed
with the customer or not in
accordance with the Group and
Company’s accounting policy
regarding revenue recognition or
revenue may not be recognised in
the correct year.
Our procedures included, amongst others:
— Control operation: We tested the operating effectiveness
of internal controls regarding the recognition of revenue.
— Tests of detail: We examined a sample of contracts to
assess revenue recognition in accordance with the terms of
the contracts and the Group and Company’s accounting
policy on revenue recognition.
— We considered the Group and Company’s revenue
accounting policies in accordance with the requirements of
IFRS 15.
— We assessed customer relationships and contracts to
determine if any goods or services were bundled in respect
of contracts comprising software sales and consulting
services, including assessing the appropriateness of the
allocation of contract revenue to multiple element
deliverables.
— We performed testing for a sample of revenue items
booked either side of the year end to ensure that revenue
was recognised in the correct period.
— We assessed the level of deferred revenue and accrued
revenue recognised at the year end and performed testing
on a sample of deferred revenue and accrued revenue
items to ensure they were in accordance with the Group
and Company’s accounting policy in respect of revenue
recognition.
— Disclosures: We assessed the disclosures presented to
explain revenue recognition policies and the key judgments
being applied.
— Our findings: The results of our testing were satisfactory
and we found the amount of revenue recognised to be
acceptable (2018: acceptable).
42
First Derivatives plc Annual Report 2019
Financial Statements Independent auditor’s report to the members of First Derivatives plc (continued)
Independent auditor’s report to the members of First Derivatives plc (continued)
Independent auditor’s report to the members of First Derivatives plc (continued)
2. Key audit matters: our assessment of risks of material misstatement (continued)
2. Key audit matters: our assessment of risks of material misstatement (continued)
2. Key audit matters: our assessment of risks of material misstatement (continued)
Valuation of goodwill
Valuation of goodwill
and intangible assets
Valuation of goodwill
and intangible assets
and intangible assets
Goodwill:
Goodwill:
£107.4 million
Goodwill:
£107.4 million
(2018: £103.9 million).
£107.4 million
(2018: £103.9 million).
(2018: £103.9 million).
Intangible assets:
Intangible assets:
£44.6 million
Intangible assets:
£44.6 million
(2018: £45.8 million).
£44.6 million
(2018: £45.8 million).
(2018: £45.8 million).
Refer to page 30 (Audit
Refer to page 30 (Audit
Committee Report),
Refer to page 30 (Audit
Committee Report),
pages 65 and 68
Committee Report),
pages 65 and 68
(accounting policy) and
pages 65 and 68
(accounting policy) and
pages 84 to 87 (financial
(accounting policy) and
pages 84 to 87 (financial
disclosures).
pages 84 to 87 (financial
disclosures).
disclosures).
The risk
The risk
The risk
We consider the carrying value of
We consider the carrying value of
goodwill and intangible assets and
We consider the carrying value of
goodwill and intangible assets and
the risk over potential impairment
goodwill and intangible assets and
the risk over potential impairment
to be a significant audit risk
the risk over potential impairment
to be a significant audit risk
because of the inherent uncertainty
to be a significant audit risk
because of the inherent uncertainty
involved in forecasting and
because of the inherent uncertainty
involved in forecasting and
discounting future cash flows,
involved in forecasting and
discounting future cash flows,
which are the basis of the
discounting future cash flows,
which are the basis of the
assessment of recoverability.
which are the basis of the
assessment of recoverability.
assessment of recoverability.
Management test the Group’s
Management test the Group’s
goodwill for impairment annually
Management test the Group’s
goodwill for impairment annually
and definite life intangible assets if
goodwill for impairment annually
and definite life intangible assets if
there is an indication of
and definite life intangible assets if
there is an indication of
impairment. There is significant
there is an indication of
impairment. There is significant
judgment involved in preparing
impairment. There is significant
judgment involved in preparing
forecasts and discounted cash flow
judgment involved in preparing
forecasts and discounted cash flow
projections for this purpose in
forecasts and discounted cash flow
projections for this purpose in
relation to the various assumptions
projections for this purpose in
relation to the various assumptions
used as set out in the note on
relation to the various assumptions
used as set out in the note on
goodwill on page 85.
used as set out in the note on
goodwill on page 85.
goodwill on page 85.
Our response
Our response
Our response
Our procedures included, amongst others:
Our procedures included, amongst others:
Our procedures included, amongst others:
— Control operation: We tested the principles and integrity
— Control operation: We tested the principles and integrity
— Control operation: We tested the principles and integrity
— Test of detail: We evaluated the assumptions and
— Test of detail: We evaluated the assumptions and
— Test of detail: We evaluated the assumptions and
of the Group’s discounted cash flow model.
of the Group’s discounted cash flow model.
of the Group’s discounted cash flow model.
methodologies used in the Group’s goodwill impairment
methodologies used in the Group’s goodwill impairment
model, with support from our internal valuation specialist. In
methodologies used in the Group’s goodwill impairment
model, with support from our internal valuation specialist. In
particular we evaluated those relating to future growth
model, with support from our internal valuation specialist. In
particular we evaluated those relating to future growth
assumptions, the discount rate and terminal growth rate
particular we evaluated those relating to future growth
assumptions, the discount rate and terminal growth rate
applied to the forecasted cash flows in the model.
assumptions, the discount rate and terminal growth rate
applied to the forecasted cash flows in the model.
applied to the forecasted cash flows in the model.
— We evaluated the historical accuracy of the Group’s
— We evaluated the historical accuracy of the Group’s
forecasts by comparing actual to budgeted results.
— We evaluated the historical accuracy of the Group’s
forecasts by comparing actual to budgeted results.
forecasts by comparing actual to budgeted results.
— Sensitivity analysis: We examined sensitivity analysis over
— Sensitivity analysis: We examined sensitivity analysis over
key assumptions and discount rates used to assess the
— Sensitivity analysis: We examined sensitivity analysis over
key assumptions and discount rates used to assess the
impact on recoverability of the assets.
key assumptions and discount rates used to assess the
impact on recoverability of the assets.
impact on recoverability of the assets.
— Comparing valuations: We compared the Group’s market
— Comparing valuations: We compared the Group’s market
capitalisation to the book value of the Group’s net assets
— Comparing valuations: We compared the Group’s market
capitalisation to the book value of the Group’s net assets
which indicated that the market capitalisation exceeded the
capitalisation to the book value of the Group’s net assets
which indicated that the market capitalisation exceeded the
book value by £430.1 million as at 28 February 2019.
which indicated that the market capitalisation exceeded the
book value by £430.1 million as at 28 February 2019.
book value by £430.1 million as at 28 February 2019.
— Our findings: We found the resulting estimate of the
— Our findings: We found the resulting estimate of the
recoverable amount of goodwill and intangible assets to be
— Our findings: We found the resulting estimate of the
recoverable amount of goodwill and intangible assets to be
acceptable (2018: acceptable).
recoverable amount of goodwill and intangible assets to be
acceptable (2018: acceptable).
acceptable (2018: acceptable).
Assessment of fair
Assessment of fair
value and accounting
Assessment of fair
value and accounting
of investments
value and accounting
of investments
of investments
Group £13.7 million
Group £13.7 million
(2018: £3.4 million).
Group £13.7 million
(2018: £3.4 million).
(2018: £3.4 million).
Company £12.8 million
Company £12.8 million
(2018: £3.3 million).
Company £12.8 million
(2018: £3.3 million).
(2018: £3.3 million).
Refer to page 30 (Audit
Refer to page 30 (Audit
Committee Report),
Refer to page 30 (Audit
Committee Report),
page 66 (accounting
Committee Report),
page 66 (accounting
policy) and pages 89 and
page 66 (accounting
policy) and pages 89 and
102 to 104 (financial
policy) and pages 89 and
102 to 104 (financial
disclosures).
102 to 104 (financial
disclosures).
disclosures).
The Group and Company has a
The Group and Company has a
number of equity investments in
The Group and Company has a
number of equity investments in
unlisted companies, which are
number of equity investments in
unlisted companies, which are
measured at fair value. Where
unlisted companies, which are
measured at fair value. Where
investments are not publicly traded
measured at fair value. Where
investments are not publicly traded
this involves valuation techniques
investments are not publicly traded
this involves valuation techniques
using unobservable inputs, which
this involves valuation techniques
using unobservable inputs, which
can have a significant effect on the
using unobservable inputs, which
can have a significant effect on the
asset’s valuation.
can have a significant effect on the
asset’s valuation.
asset’s valuation.
We have identified a risk in the
We have identified a risk in the
assessment of the valuation of
We have identified a risk in the
assessment of the valuation of
these investments and the ongoing
assessment of the valuation of
these investments and the ongoing
judgment that the investments
these investments and the ongoing
judgment that the investments
should be accounted for as
judgment that the investments
should be accounted for as
investments in the scope of IFRS 9
should be accounted for as
investments in the scope of IFRS 9
rather than as associates on the
investments in the scope of IFRS 9
rather than as associates on the
basis that the Group and Company
rather than as associates on the
basis that the Group and Company
does not have significant influence.
basis that the Group and Company
does not have significant influence.
does not have significant influence.
Our procedures included, amongst others:
Our procedures included, amongst others:
Our procedures included, amongst others:
— Control operation: We evaluated the process and models
— Control operation: We evaluated the process and models
used by management in its assessment of the fair value
— Control operation: We evaluated the process and models
used by management in its assessment of the fair value
of investments.
used by management in its assessment of the fair value
of investments.
of investments.
— Tests of detail: We assessed the appropriateness of
— Tests of detail: We assessed the appropriateness of
assumptions adopted to determine the fair value of
— Tests of detail: We assessed the appropriateness of
assumptions adopted to determine the fair value of
investments including involving our internal valuation
assumptions adopted to determine the fair value of
investments including involving our internal valuation
specialists to challenge judgments affecting investee
investments including involving our internal valuation
specialists to challenge judgments affecting investee
company valuations, such as discount factors and earnings
specialists to challenge judgments affecting investee
company valuations, such as discount factors and earnings
multiples.
company valuations, such as discount factors and earnings
multiples.
multiples.
— Comparing valuations: Where a recent transaction has
— Comparing valuations: Where a recent transaction has
been used to value any holding, we obtained an
— Comparing valuations: Where a recent transaction has
been used to value any holding, we obtained an
understanding of the circumstances surrounding the
been used to value any holding, we obtained an
understanding of the circumstances surrounding the
transaction and whether it was considered to be on an
understanding of the circumstances surrounding the
transaction and whether it was considered to be on an
arm’s-length basis and suitable as an input into a valuation.
transaction and whether it was considered to be on an
arm’s-length basis and suitable as an input into a valuation.
arm’s-length basis and suitable as an input into a valuation.
— We assessed the accounting categorisation of each interest
— We assessed the accounting categorisation of each interest
as an investment or an associate based on ability to exert
— We assessed the accounting categorisation of each interest
as an investment or an associate based on ability to exert
significant influence.
as an investment or an associate based on ability to exert
significant influence.
significant influence.
— Disclosures: We considered the adequacy of the Group
— Disclosures: We considered the adequacy of the Group
and Company’s disclosures in respect of investments.
— Disclosures: We considered the adequacy of the Group
and Company’s disclosures in respect of investments.
and Company’s disclosures in respect of investments.
— Our findings: The results of our testing were satisfactory
— Our findings: The results of our testing were satisfactory
and we found that the assessed fair value and accounting
— Our findings: The results of our testing were satisfactory
and we found that the assessed fair value and accounting
of investments to be acceptable (2018: acceptable).
and we found that the assessed fair value and accounting
of investments to be acceptable (2018: acceptable).
of investments to be acceptable (2018: acceptable).
firstderivatives.com
43
Strategic ReportCorporate GovernanceFinancial Statements Independent auditor’s report to the members of First Derivatives plc (continued)
3. Our application of materiality and an overview of the
scope of our audit
Materiality for the Group financial statements as a whole
was set at £775k (2018: £650k), determined with reference
to a benchmark of Group profit before tax of which it
represents 5% (2018: 5%).
Materiality for the Company financial statements as a whole
was set at £500k (2018: £375k), determined with reference
to a benchmark of Company profit before tax of which it
represents 5% (2018: 5%).
We agreed to report to the Audit Committee any corrected
or uncorrected identified misstatements exceeding £39k, in
addition to other identified misstatements that warranted
reporting on qualitative grounds.
Of the Group’s 24 (2018: 23) components, we subjected 8
(2018: 8), which represent the principal activities of the
Group, to full scope audits for Group purposes and 1 (2018:
2) to review to component materiality by the same audit
team. The latter was not individually financially significant
enough to require a full scope audit for Group purposes, but
did present specific individual risks that needed to be
addressed. Audits for Group reporting purposes were
performed for the majority of reporting components in the
following countries: UK, Ireland and US. The combination of
this work covered 97% (2018: 99%) of total Group revenue;
97% (2018: 95%) of the total profits and losses that make
up Group profit before tax and 98% (2018: 98%) of total
Group assets.
For the remaining components, we performed analysis at
an aggregated Group level to re-examine our assessment
that there were no significant risks of material
misstatement within them.
For each component in our audit scope, we allocated a
materiality that is less than our overall Group materiality.
The range of materiality allocated across components was
between £32k and £500k.
Group profit before tax
£16.9 million
(2018: £12.1 million)
Group materiality
£775k (2018: £650k)
£775k
Whole financial
statements materiality
(2018: £650k).
£500k
Range of materiality at 25
components (£32k to £500k)
(2018: £3k to £390k).
Group profit before tax
Group materiality
£39k
Misstatements reported to the
audit committee (2018: £33k).
Group revenue
Group profit/losses
before tax
7.7
5.3
97%
(2018: 95%)
89.4
88.8
9.4
4.6
97%
(2018: 99%)
94.2
87.7
Group total assets
1.0
1.4
98%
(2018: 98%)
96.8
97.1
Key:
Full scope for group audit purposes 2019
Specified risk-focused audit procedures 2019
Full scope for group audit purposes 2018
Specified risk-focused audit procedures 2018
Residual components
44
First Derivatives plc Annual Report 2019
Financial Statements Independent auditor’s report to the members of First Derivatives plc (continued)
4. We have nothing to report on going concern
Strategic Report and Directors’ Report
The Directors have prepared the financial statements on the
going concern basis as they do not intend to liquidate the
Company or the Group or to cease their operations, and as
they have concluded that the Company’s and the Group’s
financial position means that this is realistic. They have also
concluded that there are no material uncertainties that
could have cast significant doubt over their ability to
continue as a going concern for at least a year from the
date of approval of the financial statements (“the going
concern period”).
Our responsibility is to conclude on the appropriateness of
the Directors’ conclusions and, had there been a material
uncertainty related to going concern, to make reference to
that in this audit report. However, as we cannot predict all
future events or conditions and as subsequent events may
result in outcomes that are inconsistent with judgments
that were reasonable at the time they were made, the
absence of reference to a material uncertainty in this
auditor's report is not a guarantee that the Group and the
Company will continue in operation.
In our evaluation of the Directors’ conclusions, we
considered the inherent risks to the Group and Company’s
business model, including the impact of Brexit, and
analysed how those risks might affect the Group and
Company’s financial resources or ability to continue
operations over the going concern period. We evaluated
those risks and concluded that they were not significant
enough to require us to perform additional audit
procedures.
Based on this work, we are required to report to you if we
have anything material to add or draw attention to in
relation to the Directors’ statement in Note 1 to the
financial statements on the use of the going concern basis
of accounting with no material uncertainties that may cast
significant doubt over the Group and Company’s use of that
basis for a period of at least twelve months from the date
of approval of the financial statements.
We have nothing to report in these respects, and we did
not identify going concern as a key audit matter.
5. We have nothing to report on the other information in
the Annual Report
The Directors are responsible for the other information
presented in the Annual Report together with the financial
statements. Our opinion on the financial statements does
not cover the other information and, accordingly, we do not
express an audit opinion or, except as explicitly stated
below, any form of assurance conclusion thereon.
Our responsibility is to read the other information and, in
doing so, consider whether, based on our financial
statements audit work, the information therein is materially
misstated or inconsistent with the financial statements or
our audit knowledge. Based solely on that work we have
not identified material misstatements in the other
information.
Based solely on our work on the other information:
— we have not identified material misstatements in the
Strategic Report and the Directors’ Report;
— in our opinion the information given in those reports for
the financial year is consistent with the financial
statements; and
— in our opinion those reports have been prepared in
accordance with the Companies Act 2006.
Disclosures of principal risks and longer-term viability
Based on the knowledge we acquired during our financial
statements audit, we have nothing material to add or draw
attention to in relation to:
— the Directors’ confirmation within the Viability
Statement (page 31) that they have carried out a robust
assessment of the principal risks facing the Group,
including those that would threaten its business model,
future performance, solvency and liquidity;
— the Principal Risks and Uncertainties disclosures
describing these risks and explaining how they are
being managed and mitigated; and
— the Directors’ explanation in the Viability Statement of
how they have assessed the prospects of the Group,
over what period they have done so and why they
considered that period to be appropriate, and their
statement as to whether they have a reasonable
expectation that the Group will be able to continue in
operation and meet its liabilities as they fall due over the
period of their assessment, including any related
disclosures drawing attention to any necessary
qualifications or assumptions.
Our work is limited to assessing these matters in the
context of only the knowledge acquired during our financial
statements audit. As we cannot predict all future events or
conditions and as subsequent events may result in
outcomes that are inconsistent with judgments that were
reasonable at the time they were made, the absence of
anything to report on these statements is not a guarantee
as to the Group and Company’s longer-term viability.
Corporate governance disclosures
We are required to report to you if:
— we have identified material inconsistencies between the
knowledge we acquired during our financial statements
audit and the Directors’ statement that they consider
that the Annual Report and financial statements taken
as a whole is fair, balanced and understandable and
provides the information necessary for shareholders to
assess the Group’s position and performance, business
model and strategy; or
— the section of the Annual Report describing the work of
the Audit Committee does not appropriately address
matters communicated by us to the Audit Committee.
We have nothing to report in these respects.
firstderivatives.com
45
Strategic ReportCorporate GovernanceFinancial Statements Independent auditor’s report to the members of First Derivatives plc (continued)
6. We have nothing to report on the other matters on
Auditor’s responsibilities
which we are required to report by exception
Under the Companies Act 2006, we are required to report
to you if, in our opinion:
— adequate accounting records have not been kept by the
Company, or returns adequate for our audit have not
been received from branches not visited by us; or
— the Company financial 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.
We have nothing to report in these respects.
Our objectives are to obtain reasonable assurance about
whether the financial statements as a whole are free from
material misstatement, whether due to fraud or error, and
to issue our opinion in an auditor’s report. Reasonable
assurance is a high level of assurance, but does not
guarantee that an audit conducted in accordance with ISAs
(UK) will always detect a material misstatement when it
exists. Misstatements can arise from fraud or error and are
considered material if, individually or in aggregate, they
could reasonably be expected to influence the economic
decisions of users taken on the basis of the financial
statements.
A fuller description of our responsibilities is provided on the
FRC’s website at www.frc.org.uk/auditorsresponsibilities.
7. Respective responsibilities
Directors’ responsibilities
As explained more fully in the Statement of Directors’
responsibilities, the Directors are responsible for: the
preparation of the financial statements including being
satisfied that they give a true and fair view; such internal
control as they determine is necessary to enable the
preparation of financial statements that are free from
material misstatement, whether due to fraud or error;
assessing the Group and Company’s ability to continue as a
going concern, disclosing, as applicable, matters related to
going concern; and using the going concern basis of
accounting unless they either intend to liquidate the Group
or the Company or to cease operations, or have no realistic
alternative but to do so.
8. The purpose of our audit work and to whom we owe
our responsibilities
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.
John Poole (Senior Statutory Auditor)
for and on behalf of KPMG, Statutory Auditor
Chartered Accountants
The Soloist Building
1 Lanyon Place
Belfast
BT1 3LP
20 May 2019
46
First Derivatives plc Annual Report 2019
Financial Statements Consolidated statement of comprehensive income
Year ended 28 February 2019
Revenue
Software licenses and services
Managed services and consulting
Total revenue
Cost of sales
Software licenses and services
Managed services and consulting
Total cost of sales
Gross profit
Operating costs
Research and development costs
– Of which capitalised
Sales and marketing costs
Administrative expenses
Impairment loss on trade and other receivables
Other income
Total operating costs
Operating profit
Acquisition costs and changes in contingent deferred consideration
Share based payment and related costs
Depreciation and amortisation
Amortisation of acquired intangible assets
Adjusted EBITDA
Finance income
Finance expense
Loss on foreign currency translation
Net finance costs
Share of loss of associate, net of tax
Profit before taxation
Income tax expense
Profit for the year
Note
4 & 5
4 & 5
2019
£’000
2018
Restated 1
£’000
130,888
86,463
111,912
74,130
217,351
186,042
4
4
(59,465)
(66,594)
(53,124)
(54,457)
(126,059)
(107,581)
91,292
78,461
7
8
32
6
8
34
16 & 17
17
11
11
11
18
12
(10,662)
8,573
(9,293)
7,486
(32,273)
(26,635)
(38,455)
(35,319)
(19)
277
(1,380)
1,382
(72,559)
(63,759)
18,733
14,702
3,975
2,473
9,958
3,799
3,570
2,710
8,460
4,684
38,938
34,126
37
(1,478)
(592)
1
(1,150)
(1,386)
(2,033)
(2,535)
(23)
(70)
16,677
(3,502)
12,097
(1,889)
13,175
10,208
1 See note 37 for details of restatement. The Group has also initially applied IFRS 15 and IFRS 9 at 1 March 2018. Under the transition method chosen
comparative information has not been restated; see note 1a.
firstderivatives.com
47
Strategic ReportCorporate GovernanceFinancial Statements
Consolidated statement of comprehensive income continued
Year ended 28 February 2019
Profit for the year
Other comprehensive income
Items that will not be reclassified subsequently to profit or loss
Equity investments at FVOCI – net change in fair value
Items that will or may be reclassified subsequently to profit or loss
Net exchange gain/(loss) on net investment in foreign subsidiaries
Net (loss)/gain on hedge of net investment in foreign subsidiaries
Other comprehensive income for the period, net of tax
Total comprehensive income for the period attributable to owners of the parent
Earnings per share
Basic
Diluted
2019
£’000
13,175
2018
Restated 1
£’000
10,208
3,587
—
2,958
(728)
2,230
5,817
18,992
(13,741)
1,570
(12,171)
(12,171)
(1,963)
Note
Pence
Pence
15a
15a
50.9
47.9
40.4
37.8
1
See note 33 for details of restatement. The Group has also initially applied IFRS 15 and IFRS 9 at 1 March 2018. Under the transition method chosen
comparative information has not been restated; see note 1a.
All profits are attributable to the owners of the Company and relate to continuing activities.
48
First Derivatives plc Annual Report 2019
Financial Statements
Consolidated balance sheet
As at 28 February 2019
Registered company number: NI 30731
Assets
Property, plant and equipment
Intangible assets and goodwill
Equity accounted investee
Other financial assets
Trade and other receivables
Deferred tax assets
Non-current assets
Trade and other receivables
Current tax receivable
Cash and cash equivalents
Current assets
Total assets
Equity
Share capital
Share premium
Merger reserve
Share option reserve
Fair value reserve
Currency translation adjustment reserve
Retained earnings
Equity attributable to owners of the Company
Liabilities
Loans and borrowings
Trade and other payables
Deferred tax liabilities
Non-current liabilities
Loans and borrowings
Trade and other payables
Current tax payable
Employee benefits
Contingent deferred consideration
Current liabilities
Total liabilities
Total equity and liabilities
Note
2019
£’000
16
17
18
19
20
25
20
26
21
22
23
24
25
23
24
26
27
28
2018
Restated 1
£’000
7,714
149,744
2,631
3,433
6,594
18,353
10,162
151,965
2,711
13,706
5,720
15,352
199,616
188,469
57,915
1,461
18,798
52,846
872
12,365
78,174
66,083
277,790
254,552
131
79,726
8,118
10,744
3,587
3,944
128
73,168
8,118
14,341
—
1,714
36,560
40,630
142,810
138,099
289
3,300
10,827
14,416
34,998
77,546
1,004
5,945
1,071
25,205
32,127
9,811
67,143
3,346
34,070
1,195
5,011
5,688
120,564
49,310
134,980
116,453
277,790
254,552
1
See note 33 for details of restatement. The Group has also initially applied IFRS 15 and IFRS 9 at 1 March 2018. Under the transition method chosen
comparative information has not been restated; see note 1a.
These financial statements were approved by the Board of Directors on 20 May 2019.
Seamus Keating
Chairman
Brian Conlon
Chief Executive Officer
Graham Ferguson
Chief Financial Officer
firstderivatives.com
49
Strategic ReportCorporate GovernanceFinancial Statements Company balance sheet
As at 28 February 2019
Registered company number: NI 30731
Assets
Property, plant and equipment
Intangible assets and goodwill
Investment in subsidiaries
Other financial assets
Trade and other receivables
Deferred tax assets
Non-current assets
Trade and other receivables
Current tax receivable
Cash and cash equivalents
Current assets
Total assets
Equity
Share capital
Share premium
Merger reserve
Share option reserve
Fair value reserve
Retained earnings
Equity attributable to shareholders
Liabilities
Loans and borrowings
Trade and other payables
Deferred tax liabilities
Non-current liabilities
Loans and borrowings
Trade and other payables
Employee benefits
Contingent deferred consideration
Current liabilities
Total liabilities
Total equity and liabilities
Note
2019
£’000
16
17
18
19
20
25
20
26
21
22
23
24
25
23
24
27
28
2018
Restated 1
£’000
3,764
20,629
95,329
3,308
13,579
12,268
4,726
23,994
133,464
12,776
21,658
8,484
205,102
148,877
52,942
1,337
14,760
43,247
872
4,013
69,039
48,132
274,141
197,009
131
79,726
8,118
10,898
3,733
28,046
128
73,168
8,118
14,070
146
26,052
130,652
121,682
—
25,205
1,527
4,406
5,933
34,909
96,457
5,119
1,071
1,071
3,358
29,634
3,339
37,017
4,299
1,038
137,556
45,693
143,489
75,327
274,141
197,009
1
See note 33 for details of restatement. The Group has also initially applied IFRS 15 and IFRS 9 at 1 March 2018. Under the transition method chosen
comparative information has not been restated; see note 1a.
The Company’s profit for the year ended 28 February 2019 was £8,779k (2018: £7,289k).
These financial statements were approved by the Board of Directors on 20 May 2019.
Seamus Keating
Chairman
Brian Conlon
Chief Executive Officer
Graham Ferguson
Chief Financial Officer
50
First Derivatives plc Annual Report 2019
Financial Statements
Consolidated statement of changes in equity
Year ended 28 February 2019
Adjusted balance at 1 March 2018
128
73,168
Share
capital
£’000
Share
premium
£’000
Merger
reserve
£’000
8,118
Share
option
reserve
£’000
14,341
Impact of changes in accounting
policy – see note 1a
—
—
—
—
Restated balance
at 1 March 2018
Total comprehensive income
for the year
Profit for the year
Other comprehensive income
Net exchange gain on net
investment in foreign subsidiaries
Net exchange loss on hedge of net
investment in foreign subsidiaries
Net change in fair value of equity
investments at FVOCI
Total comprehensive income
for the year
Transactions with owners
of the Company
Tax relating to share options
Exercise of share options
Change in measurement of NCI put
Issue of shares
Issue of shares as contingent
deferred consideration
Share based payment charge
Transfer on forfeit of share options
Dividends to owners
of the Company
Dividends to NCI
128
73,168
8,118
14,341
—
—
—
—
—
—
2
—
—
1
—
—
—
—
—
—
—
—
—
—
3,829
—
29
2,700
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
(4,292)
(684)
—
—
—
1,452
(73)
—
—
—
—
—
—
—
—
Fair value
reserve
£’000
Currency
translation
adjustment
£’000
Retained
earnings
£’000
Total
equity
£’000
1,714
40,630
138,099
—
(1,002)
(1,002)
1,714
39,628
137,097
—
13,175
13,175
2,958
(728)
3,587
—
—
—
—
2,958
(728)
3,587
3,587
2,230
13,175
18,992
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
(4,292)
3,147
(9,932)
(9,932)
—
—
—
73
29
2,701
1,452
—
(6,384)
(6,384)
—
—
Balance at 28 February 2019
131
79,726
8,118
10,744
3,587
3,944
36,560
142,810
The Group has initially applied IFRS 15 and IFRS 9 at 1 March 2018. Under the transition method chosen comparative
information has not been restated; see note 1a.
firstderivatives.com
51
Strategic ReportCorporate GovernanceFinancial Statements Consolidated statement of changes in equity continued
Year ended 28 February 2018
Share
capital
£’000
Share
premium
£’000
Merger
reserve
£’000
Share
option
reserve
£’000
Currency
translation
adjustment
£’000
Retained
earnings
£’000
Total
equity
£’000
124
72,275
—
10,225
8,335
40,772
131,731
Balance at 1 March 2017,
as previously reported
Impact of correction of reserves
classification – see note 33
Restated balance at 1 March 2017
124
64,598
—
(7,677)
7,677
7,677
—
5,550
(5,550)
—
10,225
13,885
35,222
131,731
Total comprehensive income
for the year (restated)
Profit for the year
Other comprehensive income
Net exchange loss on net investment
in foreign subsidiaries
Net exchange gain on hedge of net
investment in foreign subsidiaries
Total comprehensive income
for the year (restated)
Transactions with owners of the Company
Tax relating to share options
Exercise of share options
Change in measurement of NCI put
Issue of shares
Issue of shares as purchase consideration
Share based payment charge
Transfer on forfeit of share options
Dividends to owners of the Company
Dividends to NCI
—
—
—
—
—
4
—
—
—
—
—
—
—
—
—
—
—
—
8,542
—
28
—
—
—
—
—
—
—
—
—
—
—
—
—
441
—
—
—
—
—
—
—
—
3,910
(1,427)
—
—
—
1,586
47
—
—
—
10,208
10,208
(13,741)
1,570
—
—
(13,741)
1,570
(12,171)
10,208
(1,963)
—
—
—
—
—
—
—
—
—
—
—
3,557
—
—
—
(47)
3,910
7,119
3,557
28
441
1,586
—
(5,272)
(5,272)
(3,038)
(3,038)
Adjusted balance at 28 February 2018
128
73,168
8,118
14,341
1,714
40,630
138,099
See note 33 for details of restatement. The Group has also initially applied IFRS 15 and IFRS 9 at 1 March 2018. Under the
transition method chosen comparative information has not been restated; see note 1a.
52
First Derivatives plc Annual Report 2019
Financial Statements Company statement of changes in equity
Year ended 28 February 2019
Adjusted balance at 1 March 2018
Impact of changes in accounting policy
– see note 1a
Restated balance at 1 March 2018
Total comprehensive income for the year
Profit for the year
Other comprehensive income
Net change in fair value of equity
investments at FVOCI
Total comprehensive income for the year
Transactions with owners of the Company
Income tax relating to share options
Exercise of share options
Issue of shares
Issue of shares as contingent
deferred consideration
Share based payment charge
Transfer on forfeit of share options
Dividends to owners of the Company
Share
capital
£’000
Share
premium
£’000
128
73,168
Merger
reserve
£’000
8,118
Share
option
reserve
£’000
14,070
Fair value
reserve
£’000
Retained
earnings
£’000
Total
equity
£’000
146
26,052
121,682
—
128
—
—
—
—
2
—
1
—
—
—
—
—
—
—
(474)
(474)
73,168
8,118
14,070
146
25,578
121,208
—
—
—
—
3,829
29
2,700
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
(3,867)
(684)
—
—
1,452
(73)
—
—
8,779
8,779
3,587
3,587
—
3,587
8,779
12,366
—
—
—
—
—
—
—
—
—
—
—
—
73
(3,867)
3,147
29
2,701
1,452
—
(6,384)
(6,384)
Balance at 28 February 2019
131
79,726
8,118
10,898
3,733
28,046
130,652
The Group has initially applied IFRS 15 and IFRS 9 at 1 March 2018. Under the transition method chosen comparative
information has not been restated; see note 1a.
firstderivatives.com
53
Strategic ReportCorporate GovernanceFinancial Statements Company statement of changes in equity continued
Year ended 28 February 2018
Share
capital
£’000
Share
premium
£’000
Merger
reserve
£’000
Share option
reserve
£’000
Fair value
reserve
£’000
Retained
earnings
£’000
Total
equity
£’000
124
72,275
—
9,713
146
24,082
106,340
Balance at 1 March 2017,
as previously reported
Impact of correction of reserves
classification – see note 33
Restated balance at 1 March 2017
124
64,598
—
(7,677)
7,677
7,677
—
9,713
—
—
—
146
24,082
106,340
Total comprehensive income for the year
Profit for the year
Total comprehensive income for the year
Transactions with owners of the Company
Income tax relating to share options
Exercise of share options
Issue of shares
Issue of shares as purchase consideration
Share based payment charge
Transfer on forfeit of share options
Dividends to owners of the Company
—
—
—
4
—
—
—
—
—
—
—
—
8,542
28
—
—
—
—
—
—
—
—
—
441
—
—
—
—
—
4,151
(1,427)
—
—
1,586
47
—
—
—
—
—
—
—
—
—
—
7,289
7,289
—
—
—
—
—
(47)
7,289
7,289
4,151
7,119
28
441
1,586
—
(5,272)
(5,272)
Adjusted balance at 28 February 2018
128
73,168
8,118
14,070
146
26,052
121,682
See note 33 for details of restatement. The Group has initially applied IFRS 15 and IFRS 9 at 1 March 2018. Under the transition
method chosen comparative information has not been restated; see note 1a.
54
First Derivatives plc Annual Report 2019
Financial Statements Consolidated cash flow statement
Year ended 28 February 2019
Cash flows from operating activities
Profit for the year
Adjustments for:
Net finance costs
Depreciation of property, plant and equipment
Amortisation of intangible assets
Increase in deferred consideration
Equity-settled share based payment transactions
Grant income
Share of loss of associate
Deferred consideration paid (IAS 19 remuneration)
Tax expense
Changes in:
Trade and other receivables
Trade and other payables
Cash generated from operating activities
Taxes paid
Net cash from operating activities
Cash flows from investing activities
Interest received
Increase in loans to other investments
Acquisition of subsidiaries, net of cash acquired
Acquisition of other investments and associates
Acquisition of property, plant and equipment
Acquisition of intangible assets
Deferred consideration paid (IFRS 3 purchase consideration)
Net cash used in investing activities
Cash flows from financing activities
Proceeds from issue of share capital
Drawdown of loans and borrowings
Repayment of borrowings
Payment of finance lease liabilities
Interest paid
Dividends paid
Net cash generated/(used) in financing activities
Net increase/(decrease) in cash and cash equivalents
Cash and cash equivalents at 1 March
Effects of exchange rate changes on cash held
Cash and cash equivalents at 28 February
2019
£’000
2018
£’000
13,175
10,208
2,033
2,744
11,013
3,230
1,452
(277)
23
(5,317)
3,502
2,535
2,246
10,898
2,980
1,586
(1,382)
70
—
1,889
31,578
31,030
(6,468)
2,230
27,340
(3,462)
(8,711)
2,992
25,311
(5,733)
23,878
19,578
37
(1,944)
(591)
(2,652)
(4,105)
(9,238)
—
1
(5,805)
(114)
(1,865)
(3,443)
(8,246)
(897)
(18,493)
(20,369)
3,147
8,900
7,119
5,300
(3,558)
(3,750)
(48)
(1,457)
(6,336)
648
6,033
12,365
400
18,798
(62)
(1,143)
(8,310)
(846)
(1,637)
16,250
(2,248)
12,365
The Group has also initially applied IFRS 15 and IFRS 9 at 1 March 2018. Under the transition method chosen comparative
information has not been restated; see note 1a.
firstderivatives.com
55
Strategic ReportCorporate GovernanceFinancial Statements Company cash flow statement
Year ended 28 February 2019
Cash flows from operating activities
Profit for the year
Adjustments for:
Finance expense and foreign exchange loss
Depreciation of property, plant and equipment
Amortisation of intangible assets
Dividends from associate and subsidiary
Equity-settled share based payment transactions
Grant income
Tax expense
Changes in:
Trade and other receivables
Trade and other payables
Cash generated from operating activities
Taxes paid
Net cash from operating activities
Cash flows from investing activities
Acquisition of subsidiaries
Increase in loans to other investments
Acquisition of other investments
Acquisition of property, plant and equipment
Acquisition of intangible assets
Deferred consideration paid (IFRS 3 purchase consideration)
Dividends received from associate and subsidiary
Net cash used in investing activities
Cash flows from financing activities
Proceeds from issue of share capital
Drawdown of loans and borrowings
Repayment of borrowings
Interest paid
Dividends paid
Net cash generated from financing activities
Net increase/(decrease) in cash and cash equivalents
Cash and cash equivalents at 1 March
Effects of exchange rate changes on cash held
Cash and cash equivalents at 28 February
2019
£’000
20181
£’000
8,779
7,289
2,956
1,093
5,161
(8,000)
1,452
(300)
368
11,509
(8,187)
17,378
20,700
432
21,132
(762)
(338)
(1,844)
(2,055)
(6,579)
—
—
843
906
4,328
(5,411)
1,586
(1,242)
397
8,696
(12,176)
502
(2,978)
(263)
(3,241)
(645)
—
(187)
(1,475)
(5,914)
(500)
5,411
(11,578)
(3,310)
3,147
8,900
(3,558)
(1,457)
(6,336)
696
10,250
4,013
497
14,760
7,119
5,300
(3,750)
(1,521)
(5,272)
1,876
(4,675)
9,499
(811)
4,013
The Group has also initially applied IFRS 15 and IFRS 9 at 1 March 2018. Under the transition method chosen comparative
information has not been restated; see note 1a.
56
First Derivatives plc Annual Report 2019
Financial Statements Notes
1. Significant accounting policies
First Derivatives plc (FDP or the ‘‘Company’’) is a public limited company incorporated and domiciled in Northern Ireland.
The Company’s registered office is 3 Canal Quay, Newry BT35 6BP. The consolidated financial statements consolidate those of
the Company and its subsidiaries (together referred to as the ‘‘Group’’) and equity accounts for the Group’s interest in its
associate. The Company financial statements present information about the Company as a separate entity and not about
the Group.
The Group is primarily involved in the provision of a range of software and consulting services, particularly to finance,
technology, retail, pharma, manufacturing and energy institutions.
The financial statements were authorised by the Board of Directors for issuance on 20 May 2019.
a) Basis of preparation
The consolidated financial statements and the Company financial statements have been prepared and approved by
the Directors in accordance with International Financial Reporting Standards as adopted by the EU (IFRS) and with
the Companies Act 2006. On publishing the Group financial statements together with the Company financial statements,
the Company is taking advantage of the exemption in Section 408 of the Companies Act 2006 not to present its individual
income statement and related notes that form a part of those approved financial statements.
The Group and Company financial statements are prepared on a historical cost basis except for the following items which
are measured at fair value or grant date fair value:
• share based payment arrangements;
• contingent deferred consideration;
• derivative financial instruments; and
• equity investments that are in the scope of IFRS 9.
The accounting policies set out below have, unless otherwise stated, been applied consistently to all periods presented in
these consolidated financial statements and have been applied consistently by the Group and Company other than those
detailed in changes in accounting policies.
Changes in accounting policies
The following standards, amendments and interpretations were effective for accounting periods beginning on or after
1 March 2018 and these have been adopted in the Group and Company financial statements where relevant:
• IFRS 15 Revenue from Contracts with Customers including Amendments to IFRS 15: Effective Date of IFRS 15
and Clarifications to IFRS 15 Revenue from Contracts with Customers;
• IFRS 9 Financial Instruments;
• IFRIC 22 Foreign Currency Transactions and Advance Consideration;
• Amendments to IFRS 2: Classification and Measurement of Share Based Payment Transactions; and
• Annual Improvements to IFRS Standards 2014–2016.
The effects of applying IFRS 9 and IFRS 15 are described in further detail below. The other changes listed above did not
result in material changes to the Group and Company financial statements.
IFRS 9 Financial Instruments
The Group adopted IFRS 9 from 1 March 2018 with the practical expedients permitted under the standard. Comparative
information has not been restated to reflect the new requirements.
IFRS 9 replaced the requirements of IAS 39 Financial Instruments: Recognition and Measurement. The main changes
introduced by the new standard are new classification and measurement requirements for certain financial assets, a new
expected loss model for the impairment of financial assets, and optional revisions to hedge accounting. IFRS 9 largely retains
the requirements of IAS 39 for the classification and measurement of financial liabilities.
firstderivatives.com
57
Strategic ReportCorporate GovernanceFinancial Statements Notes continued
1. Significant accounting policies continued
a) Basis of preparation continued
Changes in accounting policies continued
IFRS 9 Financial Instruments continued
Classification and measurement of financial assets and financial liabilities
IFRS 9 replaces the previous IAS 39 categories for financial assets with new categories. The measurement categories
under IAS 39 and the new measurement categories under IFRS 9 for each class of the Group’s financial assets and
financial liabilities at 1 March 2018 are as follows:
Classification
under IAS 39
Classification
under IFRS 9
Group
Company
Carrying
amount under
IAS 39
£’000
Carrying
amount under
IFRS 9
£’000
Carrying
amount under
IAS 39
£’000
Carrying
amount under
IFRS 9
£’000
Financial assets
Equity securities
Available for sale
Warrants
FVTPL
FVOCI
FVTPL
3,433
—
3,433
—
3,308
—
3,308
—
Trade and other receivables
Loans and
receivables
Financial assets at
amortised cost
48,778
47,614
47,965
47,563
Convertible loans
Other loans and
receivables
Cash and cash equivalents
Loans and
receivables 1
FVTPL
1,944
1,944
323
323
Loans and
receivables
Financial assets at
amortised cost
Loans and
receivables
Financial assets at
amortised cost
4,299
4,138
4,299
4,138
12,365
12,365
4,013
4,013
Financial liabilities
Contingent deferred
consideration
Derivatives
Other derivatives
Secured bank loans
Trade, accruals
and other payables
Employee benefits
FVTPL
FVOCI 2
FVTPL
FVTPL
FVOCI2
FVTPL
(5,688)
(5,688)
(1,038)
(1,038)
—
—
—
—
—
—
—
—
Liabilities at
amortised cost
Liabilities at
amortised cost
Liabilities at
amortised cost
Other financial
liabilities
Other financial
liabilities
Other financial
liabilities
(28,544)
(28,544)
(28,544)
(28,544)
(48,892)
(48,892)
(32,420)
(32,420)
(1,832)
(1,832)
(1,448)
(1,448)
1 Under IAS 39 the conversion feature was a derivative which was recognised FVTPL and as at 28 February 2018 was assessed as having minimal value.
2 NCI put – accounting policy choice to account for remeasurements in equity.
Equity securities represent investments that the Group intends to hold for the long term for strategic purposes. As permitted
by IFRS 9, the Group has designated each of these investments at the date of initial application of IFRS 9 at FVOCI. Under IFRS
9 gains and losses realised on the derecognition of financial assets at FVOCI will be reclassified to retained earnings rather
than transferred to profit or loss as under IAS 39.
58
First Derivatives plc Annual Report 2019
Financial Statements 1. Significant accounting policies continued
a) Basis of preparation continued
Changes in accounting policies continued
IFRS 9 Financial Instruments continued
Impairment of financial assets
IFRS 9 has introduced a new impairment model for financial assets classified at amortised cost which required the
recognition of impairment provisions based on expected credit losses (ECLs) rather than incurred credit losses as under
IAS 39. For trade receivables and accrued income (contract asset), the Group applies the IFRS 9 simplified approach to
measure expected credit losses which uses a lifetime expected loss allowance. For other loans and receivables the Group
measures loss allowance at twelve-month ECLs. On adoption of IFRS 9 the provision for trade and other receivables, net of
tax effect, for the Group increased by £1,002k and £474k (tax effect of £323k and £89k respectively) for the Company; there
was a corresponding decrease in retained earnings.
For assets in scope of IFRS 9 impairment model, the Group and Company have determined that the application of IFRS 9
impairment requirements at 1 March 2018 results in an additional allowance for impairment as follows:
Loss allowance at 28 February 2018 under IAS 39
Additional impairment recognised at 1 March 2018
– Trade and accrued income
– Other loans
Loss allowance at 1 March 2018 under IFRS 9
Group
£’000
2,982
1,164
161
4,307
Company
£’000
1,916
402
161
2,479
Hedge accounting
The Group holds foreign currency loans designated as a hedge of net investments in a foreign operation. Foreign currency
differences arising on retranslation are recognised in other comprehensive income to the extent the hedge is effective and
are presented in the currency translation adjustment reserve. To the extent that the hedge is ineffective, such differences
are recognised in profit or loss. There has been no change in treatment under IFRS 9 compared to IAS 39. On transition to
IFRS 9, the Group has elected to continue to apply the hedge accounting requirements of IAS 39 instead of applying the new
requirements in IFRS 9.
IFRS 15 Revenue Recognition
The Group adopted IFRS 15 from 1 March 2018 using the modified retrospective method with the cumulative effect of initially
applying the standard reflected as an adjustment to the opening balance of retained earnings as of 1 March 2018; as such,
comparative information has not been restated to reflect the new requirements.
Accounting for revenue
Under IFRS 15, revenue earned from contracts with customers is recognised based on a five-step model which requires
the transaction price for each identified contract to be apportioned to separate performance obligations arising under
the contract and recognised either when the performance obligation in the contract has been performed (point in time
recognition) or over time as control of the performance obligation is transferred to the customer.
The Group used the five-step model to assess the impact of IFRS 15 on the Group’s revenue transactions. The adoption
of IFRS 15 did not impact on how revenue is accounted for. Contracts with customers can be readily identified and are
considered to include a single performance obligation to which the transaction price is allocated. Revenue is recognised
when the performance obligation is satisfied and control is transferred to the customer.
Accounting for costs
Under IFRS 15, costs incurred on the commission paid to employees relating to software sales are recognised as an expense
consistent with the transfer of the related goods or services to the customer and are amortised over the term of the contract.
The impact of adopting IFRS 15 on our consolidated financial statements was not material for the Group and there was no
adjustment to retained earnings on application at 1 March 2018.
firstderivatives.com
59
Strategic ReportCorporate GovernanceFinancial Statements Notes continued
1. Significant accounting policies continued
a) Basis of preparation continued
New standards and interpretations not adopted
A number of new standards, amendments to standards and interpretations are effective for annual periods beginning
after 1 March 2018 and have not been applied in preparing these financial statements. The relevant standards and
interpretations not adopted are outlined below and will be applied when mandatory:
• IFRS 16 Leases (mandatory for the year commencing on or after 1 January 2019);
• Amendments to IAS 28: Long-term Interests in Associates and Joint Ventures (mandatory for the year commencing on
or after 1 January 2019);
• Annual Improvements to IFRS Standards 2015–2017 Cycle (mandatory for the year commencing on or after 1 January 2019);
• Amendments to Preferences of Conceptual Framework in IFRS Standards (mandatory for the year commencing on or
after 1 January 2020);
• Amendments to IFRS 3: Definition of a Business (mandatory for the year commencing on or after 1 January 2020); and
• IFRIC 23 Uncertainty over Income Tax Treatment (mandatory for the year commencing on or after 1 January 2019).
With the exception of IFRS 16, the Directors do not expect that the adoption of the standards and interpretations listed
above will have material impact on the Group and Company financial statements.
IFRS 16 will change lease accounting mainly for lessees, and will replace the existing standard IAS 17. An asset for the right
to use the leased item and a liability for future lease payments will be recognised for all leases, subject to limited exemptions
for short-term leases and low-value lease assets. The costs of leases will be recognised in profit or loss split between
depreciation of the lease asset and a finance charge on the lease liability. This is similar to the existing accounting for
finance leases, but substantively different to the existing accounting treatment for operating leases under which no lease
asset or lease liability is recognised. IFRS 16 also includes an election which permits a lessee not to separate non-lease
components (e.g. maintenance) from lease components and instead capitalise both the lease cost and associated
non-lease costs.
The standard will primarily affect the accounting for the Group and Company as a lessee under operating leases. The
application of IFRS 16 will result in the recognition of additional assets and liabilities in the Group and Company’s balance
sheet and in the consolidated statement of comprehensive income and it will replace the straight-line operating lease
expense with a depreciation charge for the right-of-use asset and an interest expense on the lease liabilities. The Group
and Company will apply IFRS 16 from 1 March 2019 using the modified retrospective approach and will avail of the recognition
exemption for short-term and low-value leases. All right-of-use assets will be measured at the amount of the lease liability
on adoption. The Group and Company’s non-cancellable operating lease commitments on an undiscounted basis at
28 February 2019 are detailed in note 29 and provide an indication of the scale of leases held by the Group. The Group has
completed an initial assessment of the potential impact of IFRS 16; the standard is expected to increase property, plant
and equipment by £24.7m, increase loans and borrowings by £24.7m and increase EBITDA by £4.2m, of which £3.7m relates
to depreciation and £0.5m relates to finance charges.
Functional and presentational currency
The financial statements are presented in GBP, rounded to the nearest thousand, which is also the Company’s functional
currency as its cost base is predominantly in this currency.
Going concern
The Group has considerable financial resources and meets its day-to-day working capital requirements through generated
cash flows and new five-year loan facilities were agreed in the current year. The Group’s forecasts and projections, taking
account of reasonably possible changes in trading performance, show that the Group should be able to operate within the
level of its facilities. As a result the Directors believe that the Group is well placed to manage its business risks successfully.
The Directors have a reasonable expectation that the Company and the Group have adequate resources to continue in
operational existence for the foreseeable future. Accordingly, they continue to adopt the going concern basis in preparing
the Annual Report and financial statements.
Further information regarding the Group and Company’s loan facilities are discussed in note 23. Additionally note 2 to
the financial statements includes the Group and Company’s objectives, policies and processes for managing its capital,
financial risk management objectives and exposure to credit risk and liquidity risk.
60
First Derivatives plc Annual Report 2019
Financial Statements 1. Significant accounting policies continued
a) Basis of preparation continued
Critical accounting estimates and judgements
The preparation of financial statements in conformity with IFRSs requires management to make judgements, estimates
and assumptions that affect the application of policies and reported amounts of assets and liabilities, income and
expenses. Actual results may differ from these estimates.
Estimates and underlying assumptions are reviewed and revised on an ongoing basis. Revisions to accounting estimates
are recognised in the period in which the estimates are revised and in any future periods affected.
Information about critical judgements in applying accounting policies that have the most significant impact on the
amounts recognised in the financial statements are as follows:
• It is noted that management has assessed that all residences owned by the Group are held for use within the business
and as such are classified as property, plant and equipment, rather than as investment properties.
• Management has assessed that in respect of equity investments, the Group does not hold significant influence over the
investees’ financial and operating policies.
• Management applies judgement in the recognition of revenue, determining when performance obligations are satisfied
and control transferred. In particular, for software products provided as an annual license, including the right to regular
upgrades, judgement is required when assessing whether the annual license is a separate performance obligation from
the provision of upgrades to the customer. Management has assessed that the ongoing updates and upgrades to the
software are fundamental to the value of the software and that without these updates the value of the software will
substantially deteriorate over time. Therefore, the annual license and the updates and upgrades are combined as one
performance obligation and revenue is recognised over the life of the license as the service is delivered.
Information about assumptions and estimation uncertainties that have a significant risk of resulting in a material
adjustment to the carrying amounts of assets and liabilities are as follows:
• Under IFRS goodwill on acquisitions is not amortised, but is tested for impairment on an annual basis. Management has
assessed goodwill for impairment based on the projected profitability of the individual cash-generating unit to which
the goodwill relates. No impairments have been identified. Other intangibles are being amortised and tested for
impairment if an indicator of impairment is identified.
• Management has estimated the fair value of equity investments and convertible loans. Management has reviewed
recent market activity and has applied a discounted cash flow valuation technique to assess the fair value of the assets
as at year end considering the forecast revenue and EBITDA, together with forecast exit value applying market multiples,
discounted using a risk-adjusted discount rate.
• For financial assets held at amortised cost, management has estimated an expected credit loss allowance on a
forward-looking basis. Loss rates for trade receivables and accrued income (contract assets) are based on; historical
payment behaviours, current economic circumstances of customers and type of product purchased. For non-convertible
loans and other receivables the Group allocates each exposure to a credit risk grade based on data that is determined
to be predictive of the risk of loss (including but not limited to external ratings, audited financial statements, management
accounts and cash flow projections and available press information) and applying experienced credit judgement.
Management has assessed that there are no other estimates or judgements that have a significant risk of causing
a material adjustment to the carrying amounts of assets and liabilities recognised in the financial statements.
Measurement of fair values
A number of the Group’s and Company’s accounting policies and disclosures require the measurement at fair values of
both financial and non-financial assets and liabilities.
Management has established a control framework with respect to the measurement of fair values and regularly reviews
significant unobservable inputs and valuation adjustments. If third-party information is used to measure fair values, then
management assesses the evidence obtained from the third parties to support the conclusion that such valuations meet
the requirements of IFRS, including the level in the fair value hierarchy in which such valuations should be classified.
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61
Strategic ReportCorporate GovernanceFinancial Statements Notes continued
1. Significant accounting policies continued
a) Basis of preparation continued
Measurement of fair values continued
When measuring the fair value of an asset or a liability, the Group and Company use market observable data as far as
possible. Fair values are categorised into different levels in a fair value hierarchy based on the inputs used in the valuation
techniques as follows:
• Level 1: quoted prices (unadjusted) in active markets for identical assets or liabilities.
• Level 2: inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly
(i.e. as prices) or indirectly (i.e. derived from prices).
• Level 3: inputs for the asset or liability that are not based on observable market data (unobservable inputs).
If the inputs used to measure the fair value of an asset or a liability are categorised in different levels of the fair value
hierarchy, then the fair value measurement is categorised in its entirety in the same level of the fair value hierarchy as
the lowest level input that is significant to the entire measurement.
The Group recognises transfers between levels of the fair value hierarchy at the end of the reporting period during which
the change has occurred.
Further information about the assumptions made in measuring fair values is included in the following notes:
• note 32 – financial instruments; and
• note 34 – share based payment arrangements.
b) Basis of consolidation
i) Business combinations
Business combinations are accounted for using the acquisition method as at the acquisition date, which is the date on
which control is transferred to the Group. The Group measures goodwill at the acquisition date as:
• 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 existing equity interest in the acquiree; less
• the net recognised amount (generally fair value) of the identifiable assets acquired and liabilities assumed. Identifiable
intangibles are those which can be sold separately or which arise from contractual or legal rights regardless of whether
those rights are separable.
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 a pre-existing relationship. Such
amounts are generally recognised in profit or loss.
Transaction 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.
The fair value of customer relationships acquired in a business combination is determined using the multi-period excess
earnings method, whereby the subject asset is valued after deducting a fair return of all other assets that are part of creating
the related cash flows. The fair value of other intangible assets acquired in a business combination is based on the discounted
cash flows expected to be derived from the use and eventual sale of the assets.
Deferred and contingent consideration arrangements in a business combination are assessed to determine if the amounts
payable are consideration for the business or are payable for post-combination employee services. When arrangements
are assessed as being consideration in a business combination, deferred and contingent consideration payable is recognised
at fair value at the acquisition date. If the contingent consideration is classified as equity, it is not remeasured and settlement
is accounted for within equity. Otherwise, contingent consideration is remeasured at fair value at each reporting date and
subsequent changes in the fair value of the contingent consideration are recognised in profit or loss. Deferred and contingent
consideration that is assessed as being payment for post-combination services (remuneration) is expensed as incurred in
the post-combination period.
Payments to settle deferred and contingent consideration payable are recognised in the cash flow statement within investing
activities if they relate to an arrangement assessed as being consideration in a business combination. Payments to settle
arrangements assessed as being post-combination services are recognised in the cash flow statement within
operating activities.
62
First Derivatives plc Annual Report 2019
Financial Statements 1. Significant accounting policies continued
b) Basis of consolidation continued
ii) Subsidiaries
Subsidiaries are entities controlled by the Group. The Group controls an entity when it is exposed to, or has rights to,
variable returns from its involvement with the entity and has the ability to affect those returns through its power over
the entity. The financial statements of subsidiaries are included in the consolidated financial statements from the date
on which control commences until the date on which control ceases. In the Company’s financial statements, investments
in subsidiaries are carried at cost less any provision made for impairment.
iii) Non-controlling interests (NCI)
NCI are measured at their proportionate share of the acquiree’s identifiable net assets at the date of acquisition. Changes in
the Group’s interest in a subsidiary that do not result in a loss of control are accounted for as equity transactions. If a put
option is held by NCI in a subsidiary undertaking, whereby the holder of the option can require the Group to acquire the NCI’s
shareholding in the subsidiary at a future date, the Group examines the nature of such a put option. The Group assesses
whether the NCI continues to have a present ownership interest in the shares subject to the put option. Where the NCI does
not have present ownership rights from the put option then the transaction is accounted for as if the Group had acquired
the NCI at the date of entering into the put option and undertake what is referred to as the anticipated acquisition method.
The acquisition of Kx Systems Inc and the associated put option held by NCI are accounted for under the anticipated
acquisition method.
The Group accounts for any put option on the shares of its subsidiary held by NCI shareholders that obliges the Group to
purchase the shares for cash or another financial instrument (NCI put) at fair value on initial recognition. Any subsequent
changes in the fair value of the NCI put, including changes due to foreign exchange movements, are recognised directly in
equity. Following the exercise of the NCI put, the Group and Company account for the instrument as a forward contract with
any subsequent changes in the fair value, including changes due to foreign exchange movements, recognised in finance
income or expense.
iv) Investments in associates (equity accounted investees)
Associates are those entities in which the Group has significant influence, but not control, over the financial and operating
policies. Significant influence is presumed to exist when the Group holds between 20% and 50% of the voting power of
another entity.
Associates are accounted for using the equity method (equity accounted investees) and are initially recognised at cost.
This includes goodwill identified on acquisition and fair value of intangibles (these amounts are not recognised separately
in the consolidated financial statements but included in the Group’s net investment in the associate). The consolidated
financial statements include the Group’s share of the profit or loss and other comprehensive income, after adjustments
to align the accounting policies with those of the Group, from the date that significant influence commences until the
date that significant influence ceases net of any impairment on the investment. In the Company’s financial statements,
investments in associates are carried at cost less any provision made for impairment.
v) 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.
c) Foreign currency
i) Foreign currency transactions
Transactions in foreign currencies are translated to the respective functional currency of the Group entities at the exchange
rate ruling at the date of the transactions. Monetary assets and liabilities denominated in foreign currencies at the reporting
date are retranslated to the functional currency at the exchange rate at that date. Monetary liabilities designated as a hedge
of net investments are treated as set out in note 1(c) (iii). Non-monetary assets and liabilities denominated in foreign
currencies that are measured at historical cost are translated using the exchange rate ruling at the date of the transaction.
Non-monetary assets and liabilities denominated in foreign currencies that are measured at fair value are translated to
the functional currency at the exchange rate ruling at the date the fair value was determined. Foreign exchange differences
arising on retranslation are generally recognised in profit or loss, except for:
• differences arising on the retranslation of a financial liability designated as a hedge of the net investment in a foreign
operation to the extent that the hedge is effective, which is recognised in OCI in the Group’s financial statements; and
• differences arising from the retranslation of an interest in equity securities designated at FVOCI (2018: available for sale
equity investments (except on impairment)) which are recognised in OCI.
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63
Strategic ReportCorporate GovernanceFinancial Statements Notes continued
1. Significant accounting policies continued
c) Foreign currency continued
i) Foreign currency transactions continued
Gains or losses arising on the retranslation of foreign currency denominated deferred and contingent consideration estimated
as payable at the year end on acquisitions prior to 1 March 2013 are accounted as an adjustment to goodwill. On acquisitions
on or after 1 March 2013 the retranslation gain or loss is accounted for in profit or loss separately for deferred consideration
and as part of the fair value movement on contingent deferred consideration.
ii) Foreign operations
The assets and liabilities of foreign subsidiaries, including goodwill and fair value adjustments arising on consolidation,
are translated to GBP at foreign exchange rates ruling at the balance sheet date. The revenues and expenses of foreign
operations are translated to GBP at the foreign exchange rates ruling at the dates of the transactions. Foreign currency
differences are recognised in other comprehensive income and presented in the currency translation adjustment reserve
in equity.
When a foreign operation is disposed of, such that control or significant influence is lost, the cumulative amount in the
translation reserve related to that foreign operation is reclassified to profit or loss as part of the gain or loss on disposal.
When the Group disposes of only part of its interest in a subsidiary that includes a foreign operation while retaining
control, the relevant proportion of the cumulative amount is reattributed to non-controlling interests. When the Group
disposes of only part of its investment in an associate that includes a foreign operation while retaining significant
influence, the relevant proportion of the cumulative amount is reclassified to profit or loss.
Certain exchange differences arising from monetary items receivable from or payable to a foreign operation, the settlement
of which is neither planned nor likely in the foreseeable future, are considered to form part of a net investment in a foreign
operation and are recognised in other comprehensive income and presented in the currency translation adjustment
reserve in equity.
iii) Hedge of net investment in foreign operation
Foreign currency differences arising on the retranslation of foreign currency loans designated as a hedge of net investments
in a foreign operation are recognised in other comprehensive income to the extent the hedge is effective and are presented in
the currency translation adjustment reserve. To the extent that the hedge is ineffective, such differences are recognised in
profit or loss. When the hedged part of a net investment is disposed of, the associated cumulative amount in equity is
transferred to profit or loss as an adjustment to the profit or loss on disposal.
d) Property, plant and equipment
i) Owned assets
Property, plant and equipment is reported at cost less accumulated depreciation and accumulated impairment losses.
Cost includes expenditure that is directly attributable to the acquisition of the asset. When parts of an item of property,
plant and equipment have different useful lives, those components are accounted for as separate items of property,
plant and equipment.
Any gain or loss on disposal of an item of property, plant and equipment is determined by comparing the proceeds from
disposal with the carrying amount of the property, plant and equipment and is recognised net within other administrative
expenses in profit or loss.
ii) Leased assets
Leases where the Group assumes substantially all the risks and rewards of ownership are classified as finance leases.
Upon initial recognition the leased asset is measured at an amount equal to the lower of its fair value and the present
value of the minimum lease payments. Subsequent to initial recognition, the asset is accounted for in accordance with
the accounting policy applicable to that asset. Assets held under other leases are classified as operating leases and are
not recognised in the Group’s statement of financial position.
iii) Subsequent costs
The Group recognises in the carrying amount of an item of property, plant and equipment the cost of replacing part of
such an item when that cost is incurred if it is probable that the future economic benefits embodied within the item will
flow to the Group and the cost of the item can be measured reliably. All other costs are recognised in profit or loss as an
expense as incurred.
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First Derivatives plc Annual Report 2019
Financial Statements 1. Significant accounting policies continued
d) Property, plant and equipment continued
iv) Depreciation
Depreciation is calculated to write down the costs of parts of items to their estimated residual values and is charged to
profit or loss on a straight-line basis over the estimated useful lives of each part of an item of property, plant and equipment.
Leased assets are depreciated over the shorter of the lease term and their useful lives unless it is reasonably certain that
the Group will obtain ownership by the end of the lease term. Depreciation is calculated using the following annual rates:
Office furniture and equipment
— 25%
Plant and equipment
— 25–50%
Buildings – long leasehold and freehold — 2%
Items of property, plant and equipment are depreciated from the date that the asset is completed and ready for use.
Depreciation methods, useful lives and residual values are reviewed at each reporting date and adjusted if appropriate.
e) Intangible assets and goodwill
i) Goodwill
Goodwill that arises on the acquisition of subsidiaries is presented with intangible assets on the balance sheet. For the
measurement of goodwill at initial recognition see note 1(b).
Goodwill is measured at cost less any accumulated impairment losses. Goodwill arising on acquisitions is not amortised.
Goodwill is allocated to cash-generating units and is tested annually for impairment. In respect of equity accounted
investees, the carrying amount of goodwill is included in the carrying amount of the investment in the investee.
Negative goodwill arising on an acquisition is recognised immediately in profit or loss.
ii) Research and development
Expenditure on research activities undertaken with the prospect of gaining new technical knowledge and understanding
is recognised in profit or loss as an expense as incurred.
Expenditure on development activities, whereby research findings are applied to a plan or design for the production of new
or substantially improved products and processes, is capitalised only if development costs can be measured reliably, the
product or process is technically and commercially feasible, future economic benefits are probable and the Group intends
to and has sufficient resources to complete development and to use or sell the asset.
The expenditure capitalised in respect of software assets includes the cost of materials, direct labour and an appropriate
proportion of overheads that are directly attributable to preparing the asset for its intended use. Other development expenditure
is recognised through profit and loss as an expense as incurred. Capitalised development expenditure is measured at cost
less accumulated amortisation and impairment losses.
Tax credits for research and development are recognised at their fair value based on amounts recoverable from the tax
authorities in current and future years. A credit is recognised in the income statement against the related expense or
recognised in the period in which the expenditure is amortised where the related expenditure is capitalised.
iii) Other intangible assets
Intangible assets that are acquired by the Group are stated at cost less accumulated amortisation and impairment losses.
iv) Subsequent expenditure
Subsequent expenditure on capitalised intangible assets is capitalised only when it increases the future economic
benefits embodied in the specific asset to which it relates. All other expenditure is recognised in profit or loss as incurred.
v) Amortisation
Except for goodwill, intangible assets are amortised based on the cost of an asset less its residual value. Amortisation is
charged to the income statement on a straight-line basis over the estimated useful lives of intangible assets, from the
date that the asset is available for use as follows:
Customer lists
— 12.5%
Acquired software
— 12.5%
Brands
— 12.5%
Developed software — 12.5–20.0%
Amortisation methods, useful lives and residual values are reviewed at each reporting date and adjusted if appropriate.
firstderivatives.com
65
Strategic ReportCorporate GovernanceFinancial Statements Notes continued
1. Significant accounting policies continued
f) Financial instruments
Trade receivables are initially recognised when they are originated. All other financial instruments are recognised when the
Group becomes a party to its contractual provisions.
On initial recognition a financial asset is classified as measured at: amortised cost; FVOCI; or FVTPL. The classification is
based on the business model for managing the financial assets and the contractual terms of the cash flows. Only when
the business model for managing the assets changes reclassification is required. The Group derecognises a financial
asset when the contractual rights to the cash flows from the financial asset expire or are transferred to a third party.
Financial liabilities are classified as measured at amortised cost or FVTPL. The Group derecognises a financial liability
when its contractual obligations are discharged or cancelled or expire. The Group also derecognises a financial liability
when its terms are modified and the cash flows of the modified liability are substantially different, in which case a new
financial liability based on the modified terms is recognised at fair value. On derecognition of a financial liability, the
difference between the carrying amount extinguished and the consideration paid is recognised in profit or loss.
Trade and other receivables
Trade and other receivables in a held to collect business model are initially measured at fair value plus any directly
attributable transaction costs. Short-term receivables with no stated interest rate are measured at the original invoice
amount if the effect of discounting is immaterial. Trade and other receivables are subsequently stated at amortised cost
less expected credit losses (see note 1(g)(i).
Trade and other receivables not measured at amortised cost, as described above, are measured at FVTPL. This includes
convertible loans.
Cash and cash equivalents
Cash and cash equivalents comprise cash balances and call deposits with an original maturity of three months or less and
are measured at amortised cost. Bank overdrafts that are repayable on demand and form an integral part of the Group’s
cash management are included as a component of cash and cash equivalents for the purpose of the statement of cash flows.
Equity investments
Equity investments are recognised initially at fair value plus attributable transaction costs. On initial recognition of an equity
investment that is not held for trading, the Group may irrevocably elect to present subsequent changes in the investment’s
fair value in OCI and accumulated in the fair value reserve. This election is made on an investment-by-investment basis.
When an investment is sold, the cumulative gain or loss in equity is transferred to retained earnings. Dividends from
equity investments are recognised in profit or loss when the Group’s right to receive payment is established.
Derivative financial instruments
Derivatives are initially measured at fair value with any directly attributable transaction costs being recognised
immediately in profit or loss. Subsequent to initial recognition, derivatives are measured at fair value and changes therein
are recognised in profit or loss.
Trade and other payables
Trade and other payables are initially measured at fair value less any directly attributable transaction costs. Trade and
other payables are subsequently measured at amortised cost.
Loans and borrowings
Loans and borrowings are recognised initially at fair value less attributable transaction costs. Subsequent to initial
recognition, loans and borrowings are stated at amortised cost with any difference between cost and redemption value
being recognised in profit or loss over the period of the borrowings on an effective interest basis.
Prior to 1 March 2018 the policy was as follows:
On initial recognition a financial asset was classified as: loans and receivables; available for sale; or at FVTPL. The financial
instruments accounting policies above applied in the prior year, with the exception of:
Available for sale financial assets
The Group’s investments in unquoted equity instruments are classified as available for sale financial assets. These assets
are initially measured at fair value plus any directly attributable transaction costs. Subsequent to initial recognition, they
are measured at fair value and changes therein, other than impairment losses and foreign exchange gains and losses on
available for sale monetary items, are recognised in other comprehensive income (OCI) and accumulated in the fair value
reserve. When an investment is sold, the cumulative gain or loss in equity is transferred to profit or loss. Investments in
unquoted equity instruments held by the Company are classified as being available for sale and are held at fair value
unless the fair value of these assets cannot be measured reliably, in which case they are measured at cost, subject to
impairment testing.
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First Derivatives plc Annual Report 2019
Financial Statements 1. Significant accounting policies continued
f) Financial instruments continued
Prior to 1 March 2018 the policy was as follows continued:
Trade and other receivables
Trade and other receivables are initially measured at fair value plus any directly attributable transaction costs. Short-term
receivables with no stated interest rate are measured at the original invoice amount if the effect of discounting is
immaterial. Trade and other receivables are subsequently stated at amortised cost less impairment losses on incurred
loss model.
g) Impairment
i) Financial assets
The Group recognises loss allowances for expected credit losses (ECLs) on financial assets measured at amortised cost.
The Group measures loss allowances on a forward-looking basis, at an amount equal to lifetime ECLs.
The Group uses an allowance matrix to measure the ECLs of trade receivables and accrued income (contract assets).
Loss rates are calculated using a roll rate method based on the probability of a receivable progressing through successive
stages of delinquency to write-off. Roll rates are calculated separately for exposures in different business units based on
the following common credit characteristics – historical payment behaviours, current economic circumstances of
customers and type of product purchased.
For non-convertible loans and other receivables the Group measures loss allowances at twelve-month ECLs. The Group
allocates each exposure to a credit risk grade based on data that is determined to be predictive of the risk of loss
(including but not limited to external ratings, audited financial statements, management accounts and cash flow
projections and available press information) and applying experienced credit judgement. Credit risk grades are defined
using qualitative and quantitative factors that are indicative of the risk of default and are aligned to external credit rating
definitions for agencies (Standard & Poor’s). Exposures within each credit risk grade are segmented by industry
classification. An ECL rate is calculated for each segment based on delinquency status and actual credit loss experience.
For the Company’s intercompany receivable balances management has assessed the ECL as low risk based on the
cash-generating ability of the relevant subsidiaries and latest forecasts and applies a twelve-month ECL model in
calculating the estimated credit provision.
Loss allowances for financial assets measured at amortised cost are deducted from the gross carrying amount of the assets.
The gross carrying amount of a financial asset is written off when the Group has no reasonable expectation of recovering a
financial asset in its entirety or a portion thereof. The Group individually makes an assessment with respect to the timing
and amount of write-off based on whether this is a reasonable expectation of recovery.
Prior to 1 March 2018 the policy was as follows:
A financial asset not carried at fair value through profit or loss is assessed at each reporting date to determine whether
there is any objective evidence that it is impaired. A financial asset is considered to be impaired if objective evidence
indicates that a loss event has occurred after the initial recognition of the assets and the loss event had a negative effect
on the estimated future cash flows of that asset that can be estimated reliably.
Objective evidence that financial assets are impaired can include default or delinquency by a debtor, restructuring of an
amount due to the Group on terms that the Group would not consider otherwise, indications that a debtor or issuer will
enter bankruptcy, adverse changes in the payment status of borrowers or issuers in the Group, economic conditions that
correlate with defaults or the disappearance of an active market for a security. In addition, for an investment in an equity
security, a significant or prolonged decline in its fair value below its cost is objective evidence of impairment.
The Group considers evidence of impairment for loans and receivables at a specific asset level. All individually significant
receivables are assessed for specific impairment. All individually significant loans and receivables found not to be
specifically impaired are then collectively assessed for any impairment that has been incurred but not yet identified.
Loans and receivables that are not individually significant are collectively assessed for impairment by grouping together
loans and receivables with similar risk characteristics.
In assessing collective impairment the Group uses historical trends of the probability of default, the timing of recoveries
and the amount of loss incurred, adjusted for management’s judgement as to whether current economic and credit
conditions are such that the actual losses are likely to be greater or less than suggested by historical trends.
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Strategic ReportCorporate GovernanceFinancial Statements Notes continued
1. Significant accounting policies continued
g) Impairment continued
ii) Non-financial assets
The carrying amounts of the Group’s non-financial assets, other than deferred tax assets, are reviewed at each reporting
date to determine whether there is any indication of impairment. If any such indication exists, then the asset’s recoverable
amount is estimated.
For goodwill and assets that are not yet available for use, the recoverable amount is estimated at each reporting date.
An impairment loss is recognised if the carrying amount of an asset or its related cash-generating unit (CGU) exceeds
its estimated recoverable amount.
The recoverable amount of an asset or CGU is the greater of its value in use and its fair value less costs to sell. In assessing
value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects
current market assessments of the time value of money and the risks specific to the asset or CGU. For the purpose of
impairment testing, assets are grouped together into the smallest group of assets that generates cash inflows from
continuing use that are largely independent of the cash inflows of other assets or CGUs. Goodwill acquired in a business
combination is allocated to the legal entity or business that has been acquired in a business combination, which reflects
the lowest level at which goodwill is monitored for internal reporting purposes.
Impairment losses are recognised in profit or loss. Impairment losses recognised in respect of CGUs are allocated first to
reduce the carrying amount of any goodwill allocated to the CGU and then to reduce the carrying amount of the other
assets in the CGU on a pro rata basis.
An impairment loss in respect of goodwill is not reversed. In respect of other assets, impairment losses recognised in prior
periods are assessed at each reporting date for any indications that the loss has decreased or no longer exists. An impairment
loss is reversed if there has been a change in the estimates used to determine the recoverable amount. An impairment
loss is reversed only to the extent that the asset’s carrying amount does not exceed the carrying amount that would have
been determined, net of depreciation or amortisation, if no impairment loss had been recognised.
h) Employee benefits
i) Defined contribution plans
The Group operates a defined contribution (pension) plan for employees. A defined contribution plan is a post-employment
benefit plan under which the Group pays fixed contributions into a separate entity and will have no legal or constructive
obligation to pay further amounts. Obligations for contributions to defined contribution pension plans are recognised as
an expense through profit or loss as incurred.
ii) Share based payment transactions
The grant date fair value of equity share based payment arrangements granted to employees is generally recognised as an
expense with a corresponding increase in equity over the vesting period. The fair value of the options granted is measured
using an adjusted Black-Scholes model, taking into account the terms and conditions upon which the options were granted.
Measurement inputs include the share price on the measurement date, the exercise price of the instrument, expected
volatility (based on an evaluation of the Company’s historical volatility, particularly over the historical period commensurate
with the expected term and adjusted for recent volatility changes), expected term of the instruments (based on historical
experience and general option holder behaviour), expected dividends and the risk-free interest rate (based on government
bonds). Service and non-market performance conditions attached to the transactions are not taken into account in
determining fair value. The amount recognised as an expense is adjusted to reflect the actual number of share options
that vest. On the lapse of share options on the vesting date the amount recognised in shares to be issued is transferred to
retained earnings. On the exercise of share options, the amount recorded in shares to be issued is transferred to the share
premium reserve.
iii) Short-term benefits
Liabilities for employee benefits for wages, salaries and annual leave entitlements represent present obligations resulting
from employees’ services provided up to the reporting date and are calculated at undiscounted amounts based on
remuneration wage and salary rates that the Group expects to pay as at the reporting date.
A liability is recognised for the amount expected to be paid under short-term cash bonus plans if the Group has a present
legal or constructive obligation to pay this amount as a result of past service provided by the employee and the obligation
can be estimated reliably.
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First Derivatives plc Annual Report 2019
Financial Statements 1. Significant accounting policies continued
i) Revenue
i) Products and services rendered
Revenue is measured based on the transaction price allocated to the performance obligation from the sale of goods or
provision of services. Revenue is recognised either when the performance obligation in the contract has been performed
("point in time" recognition) or "over time" as control of the performance obligation is transferred to the customer.
The Group does not have contracts involving a combination of products and services.
Revenue in respect of each product or service is as follows:
• Revenue from perpetual software licensing is recognised at the point in time when control is transferred upon delivery
to the customer where there are no significant vendor obligations remaining following delivery, the client has accepted
the software and the collection of the resulting receivable is considered probable.
• Revenue from annual licensing is recognised over the period to which the service is provided to the customer.
• Revenue from consulting services is recognised in the month the service is performed, upon acceptance by the
customer and when the collection of the resulting receivable is considered probable.
• In respect of customisation of software, revenue is recognised when control is transferred upon acceptance by the
customer and when the collection of the resulting receivable is considered probable.
• Revenue from other services, including data management hosting, other hosting and transactional activities is
recognised over the period to which the contract relates or the transaction occurs which gives rise to the receivable.
In instances where a non-refundable fee is paid by the customer, a contract liability (deferred income) is recognised and
the fair value of any significant obligations is deferred and recognised over the life of the contract; the remaining balance
is recognised when control is transferred following delivery and when the resulting receivable is considered probable.
The Group recognises a contract asset (accrued income) when the value of satisfied performance obligations is in excess
of the payment due to the Group or a contract liability (deferred income) when the amount of unconditional consideration
is in excess of the value of satisfied performance obligations. Once a right to receive consideration is unconditional, that
amount is presented as a receivable.
Costs incurred on the commission paid to employees relating to software sales are capitalised as contract costs within
prepayments and recognised as an expense consistent with the transfer of the related goods or services to the customer
and amortised over the life of the initial term of the contract. The Group applies the practical expedient in paragraph 94
of IFRS 15 and recognises the incremental costs of obtaining contracts as an expense when incurred if the amortisation
period of the assets that the Group otherwise would have recognised is one year or less.
ii) Government grants
An unconditional government grant is recognised as other operating income when the grant becomes receivable. Other
government grants are initially recognised in the balance sheet as deferred income if there is reasonable assurance that
they will be received and that the Group has complied with the conditions attaching to it; they are released to the income
statement as other income on a systematic basis over the performance condition period. Grants that compensate the
Group for expenses incurred are recognised as other operating income through profit or loss on a systematic basis in
the same periods in which the expenses are incurred. Grants that compensate the Group for the cost of an asset are
recognised in the income statement as other operating income on a systematic basis over the useful life of the asset.
Prior to 1 March 2018 the policy was as follows:
Revenue from products and services rendered is measured at the fair value of the consideration received or receivable and
is recognised in profit or loss in proportion to the stage of completion of the transaction at the reporting date. No revenue
is recognised if there are significant uncertainties regarding recovery of the consideration due. Costs incurred on the
commission paid to employees is expensed in the period in which the sale is made.
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Strategic ReportCorporate GovernanceFinancial Statements Notes continued
1. Significant accounting policies continued
j) Lease payments
i) Operating lease payments
Payments made under operating leases are recognised in profit or loss on a straight-line basis over the term of the lease.
Lease incentives received are recognised in profit or loss as an integral part of the total lease expense, over the terms of
the lease.
ii) Finance lease payments
Minimum lease payments made under finance leases are apportioned between the finance charge and the reduction of
the outstanding liability. The finance expense is allocated to each period during the lease term so as to produce a constant
periodic rate of interest on the remaining balance of the liability.
iii) Determining whether an arrangement contains a lease
At inception of an arrangement, the Group determines whether such an arrangement is or contains a lease. A specific asset is
the subject of a lease if fulfilment of the arrangement is dependent on the use of that specified asset. An arrangement conveys
the right to use the asset if the arrangement conveys to the Group the right to control the use of the underlying asset.
At inception or upon reassessment of the arrangement, the Group separates payments and other consideration required
by such an arrangement into those for the lease and those for other elements on the basis of their relative fair values. If the
Group concludes for a finance lease that it is impracticable to separate the payments reliably, then an asset and a liability are
recognised at an amount equal to the fair value of the underlying asset. Subsequently the liability is reduced as payments
are made and an imputed finance charge on the liability is recognised using the Group’s incremental borrowing rate.
k) Finance income and expenses
Finance income comprises interest receivable on funds invested and dividend income. Interest income is recognised through
profit or loss as it accrues, using the effective interest method. Dividend income is recognised in profit or loss on the date
on which the Group’s right to receive payment is established. Financing expenses comprise interest payable on borrowings
calculated using the effective interest rate method, and foreign exchange gains and losses. The interest expense component
of finance lease payments is recognised through profit or loss using the effective interest rate method. Finance income
and expenses included the foreign currency gain or loss on financial assets and liabilities; the net gain or loss on financial
assets at fair value through profit or loss; the fair value loss on contingent consideration classified as a financial liability;
and hedge ineffectiveness recognised in profit or loss. The effective interest rate is the rate that exactly discounts estimated
future cash payments or receipts through the expected life of the financial instrument to the gross carrying amount of the
financial asset or the amortised cost of the financial liability.
l) Taxation
Tax expense on the profit or loss for the period presented comprises current and deferred tax. Current and deferred tax
is recognised in profit or loss except to the extent that it relates to a business combination or items recognised directly
in equity or in other comprehensive income.
i) Current tax
Current tax is the expected tax payable or receivable on the taxable income for the year, using tax rates enacted or substantively
enacted at the balance sheet date, and any adjustment to tax payable in respect of previous years.
ii) Deferred tax
Deferred tax is provided using the liability method, providing for temporary differences between the carrying amounts of
assets and liabilities for financial reporting purposes and the amounts used for taxation purposes. The following temporary
differences are not provided for: goodwill not deductible for tax purposes; those arising from the initial recognition of
assets or liabilities acquired in a transaction that is not a business combination and that affects neither accounting nor
taxable profit or loss; and differences relating to investments in subsidiaries to the extent that it is probable they will not
reverse in the foreseeable future. The amount of deferred tax provided is based on the expected manner of realisation or
settlement of the carrying amount of assets and liabilities, using tax rates enacted or substantively enacted at the
reporting date.
In determining the amount of current and deferred tax the Group takes into account the impact of uncertain tax positions
and whether additional taxes and interest may be due. The Group believes that its accruals for tax liabilities are adequate
for all open tax years based on its assessment of many factors, including interpretations of tax law and prior experience.
This assessment relies on estimates and assumptions and may involve a series of judgements about future events. New
information may become available that causes the Company to change its judgement regarding the adequacy of existing
tax liabilities; such changes to tax liabilities will impact tax expense in the period that such a determination is made.
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First Derivatives plc Annual Report 2019
Financial Statements 1. Significant accounting policies continued
l) Taxation continued
ii) Deferred tax continued
A deferred tax asset is recognised only to the extent that it is probable that future taxable profits will be available against
which the asset can be utilised. Deferred tax assets are reviewed at each reporting date and reduced to the extent that it
is no longer probable that the related tax benefit will be realised.
Deferred tax assets and liabilities are offset if there is a legally enforceable right to offset current tax liabilities and assets
and they relate to income taxes levied by the same tax authority on the same taxable entity, or on different tax entities,
but they intend to settle current tax liabilities and assets on a net basis or their tax assets and liabilities will be
realised simultaneously.
m) Classification of financial instruments issued by the Group
Financial instruments issued by the Group are treated as equity only to the extent that they meet the following two conditions:
a) they include no contractual obligations upon the Company (or Group as the case may be) to deliver cash or other
financial assets or to exchange financial assets or financial liabilities with another party under conditions that are
potentially unfavourable to the Company (or Group); and
b) where the instrument will or may be settled in the Company’s own equity instruments, it is either a non-derivative that
includes no obligation to deliver a variable number of the Company’s own equity instruments or is a derivative that will
be settled by the Company’s exchanging a fixed amount of cash or other financial asset for a fixed number of its own
equity instruments.
To the extent that this definition is not met, the proceeds of issue are classified as a financial liability. Where the instrument
so classified takes the legal form of the Company’s own shares, the amounts presented in these financial statements for
called up share capital and share premium account exclude amounts in relation to those shares.
n) Share capital
Ordinary shares are classified as equity. Incremental costs directly attributable to the issue of ordinary shares are
recognised as a deduction from equity, net of any tax effects. The nominal value of shares issued is recognised as share
capital. The value of the consideration received in excess of the nominal value is recognised as share premium unless it
relates to the fair value of the consideration given in excess of the nominal value of the ordinary shares issued on the
acquisition of subsidiaries (interest of at least 90%) on share for share exchanges.
o) Dividends
Provision is made for the amount of any dividend declared, being appropriately authorised and no longer at the discretion
of the entity, on or before the end of the financial year but not distributed at the year end. Dividends paid include any
discretionary dividends paid to the shareholders of NCI.
p) Earnings per share
The Group presents basic and diluted earnings per share (EPS) data for its ordinary shares. Basic EPS is calculated by dividing
the profit or loss attributable to ordinary shareholders of the Group by the weighted average number of ordinary shares
outstanding during the period. Diluted EPS is determined by adjusting the profit or loss attributable to ordinary shareholders
and the weighted average number of ordinary shares outstanding for the effects of all dilutive potential ordinary shares,
which comprise share options granted to employees, Executive Directors and as part of business combinations.
q) Segmental reporting
An operating segment is a component of the Group that engages in business activities from which it may earn revenues
and incur expenses, including revenues and expenses that relate to transactions with any of the Group’s other components.
The operating results are regularly reviewed by the Board and comprise one segment; however, the information provided
contains revenue and gross margin split between the various consulting and software activities. The Group makes substantial
investment in developing highly technical training which is provided to all staff so they may work in both areas of the business.
r) Adjusted EBITDA
Adjusted EBITDA is defined as results from operating activities before acquisition costs, changes in contingent deferred
consideration assessed as remuneration, share-based payments and related costs, depreciation of property, plant and
equipment and amortisation of intangible assets. The Group uses adjusted EDITDA as an underlying measure of its performance.
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Strategic ReportCorporate GovernanceFinancial Statements Notes continued
2. Financial risk management
Overview
The Group’s activities expose it to a variety of financial risks: market risk (principally foreign exchange risk and interest
rate risk), credit risk and liquidity risk.
Credit risk
The Group’s exposure to credit risk is influenced mainly by the individual characteristics of each customer. However,
management also considers the factors that may influence the credit risk of its customer base, including the default
risk associated with the industry and country in which customers operate.
Although the Group’s client base is large multinational corporations, management separately assesses each new
customer before the Group’s standard payment and delivery terms and conditions are offered. This assessment includes a
review of credit ratings, if available, financial statements, credit agency information and industry information.
Customer credit limits are managed by the Group’s credit control team and are impacted by the previous matters and
the customer historical credit characteristics. The credit control team makes regular contact with customers when debts
are overdue with follow-up procedures carried out as required. The Group establishes an allowance for impairment that
represents its estimate of expected credit losses in respect of trade and other receivables.
The Group does not require collateral in respect of trade and other receivables.
The quantitative information on trade receivables and other receivables including concentration of credit risk is detailed in
note 32.
Market risk
Market risk is the risk that changes in market prices, such as foreign exchange rates, interest rates and equity prices,
will affect the Group’s profit or loss, other comprehensive income or the value of its holdings of financial instruments.
The objective of market risk management is to manage and control market risk exposures within acceptable parameters,
while optimising the return.
The Group currently does not use derivative financial instruments to hedge its exposure to currency or interest rate risk.
All loans are currently variable rate in nature, with the terms being at prevailing market interest rates. The Group holds
derivatives in respect of warrants over an interest in an associate which provides exposure to market risk.
The level of trading and borrowings in foreign currency in respect of foreign subsidiaries produces a natural hedge of a
large proportion of the Group’s exposures to foreign currency movements on trading and investments. Certain borrowings
in foreign currencies are designated as net investment hedges of foreign operations.
The Group’s equity investments and convertible loans are being carried at their estimated fair value and the Group’s
maximum exposure to risks associated with these investments is represented by their carrying amounts. Further details
on equity investments and convertible loans are disclosed in note 32 to the financial statements.
Liquidity risk
Liquidity risk is the risk that the Group will encounter difficulty in meeting the obligations associated with its financial
liabilities that are settled by delivering cash or other financial assets. The Group’s approach to managing liquidity is to
ensure, as far as possible, that it will always have sufficient liquidity to meet its liabilities when due, under normal and
stressed conditions, without incurring unacceptable losses or risking damage to the Group’s reputation.
The Group generates positive operating cash flows and is able to meet its liabilities as they fall due. In addition the Group
has lines of credit identified in note 23 to the financial statements.
Capital management
The Board’s policy is to maintain a strong capital base so as to maintain investor, creditor and market confidence and to
sustain future development of the business (capital is defined as share capital, share premium, retained earnings and
shares to be issued). The Board of Directors monitors the return on capital as well as the level of dividends to
ordinary shareholders.
The Group is not subject to external requirements in respect of its capital, with the exception of the need to comply with
the level of ordinary shares available for trading on the AIM and ESM, with which the Group has complied in the current
year. Additional shares in the Group are made available to staff by the use of share option schemes as disclosed in note 34
to the financial statements and as purchase consideration in business combinations. The Board seeks to maintain a
balance between the higher returns that might be possible with higher level of borrowings and the advantages and
security afforded by a strong capital position.
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First Derivatives plc Annual Report 2019
Financial Statements 3. Acquisitions of subsidiary and associate
There were no acquisitions in the current year.
Acquisitions made during the year ended 28 February 2018 – acquisition of subsidiary
On 7 December 2017, the Group and Company acquired the entire share capital of Telconomics09 S.L, based in Madrid,
Spain. The acquisition will enable the Group and Company to accelerate their growth into the telecoms vertical.
In the 2.5 months to 28 February 2018, the subsidiary contributed revenue of £115k and net profit of £22k to the consolidated
net profit for the year. If the acquisition had occurred on 1 March 2017, management estimates that revenue for the Group
would have been £186,613k and net profit for the year would have been an estimated £10,304k. In determining these amounts,
management has assumed that the fair value adjustments that arose on the date of acquisition would have been the
same if the acquisition occurred on 1 March 2017.
The following summarises the major classes of consideration transferred and the recognised fair value amounts of assets
acquired and liabilities assumed at the acquisition date.
Effect of acquisition
The acquisition had the following effect on the Group’s assets and liabilities:
Recognised values
on acquisition
£’000
Acquiree’s net assets at the acquisition date:
Intangible assets
Property, plant and equipment
Deferred tax asset
Trade and other receivables
Cash and cash equivalents
Trade and other payables
Deferred tax liability
Net identifiable assets and liabilities
Goodwill on acquisition
Consideration paid, satisfied as follows:
Cash
Shares issued (12,199 shares)
Cash consideration paid
Cash (acquired)
Net cash outflow
234
6
296
327
485
(139)
(58)
1,151
480
1,631
1,190
441
1,631
599
(485)
114
Of the cash consideration £591k was outstanding at 28 February 2018; this was paid during the year ended 28 February 2019.
Shares issued
The fair value of the ordinary shares issued was based on the listed share price on 7 December 2017, the effective date
of control (3,611 pence per share).
Goodwill
Goodwill has arisen on the acquisition and reflects the future economic benefits arising from assets that are not capable
of being identified individually and recognised as separate assets. The goodwill reflects the anticipated profitability and
synergistic benefits arising from the combination. The Group has carried out an impairment review of goodwill as at
28 February 2018 and 28 February 2019 and has not identified any impairment (see note 17).
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Strategic ReportCorporate GovernanceFinancial Statements Notes continued
3. Acquisitions of subsidiary and associate continued
Acquisitions made during the year ended 28 February 2018 – acquisition of subsidiary continued
Contingent deferred purchase consideration
The Group and Company have agreed to pay an additional consideration of up to £1,600k (£1,400k) on the achievement of certain
performance targets over the three-year period post-acquisition. This consideration is conditional on future service conditions
and has been assessed as being post-acquisition remuneration. An expense of £nil (2018: £nil) has been recognised in the
current year.
Acquisition-related costs
The Group incurred acquisition-related costs of £46k related to external legal fees, due diligence costs and other acquisition
costs which have been included in the Group’s 2018 consolidated statement of comprehensive income.
Acquisitions made during the year ended 28 February 2018 – acquisition of associate
On 30 June 2016, the Group acquired a 15.30% interest in RxDataScience Inc. (RxD) and subsequently increased this to
26.49% as at 28 February 2017. RxD is not a publicly listed company.
During the year ended 28 February 2018 the Group increased its interest to 36.66% as certain milestones were met and
continues to account for its interest as an associate.
Goodwill on
acquisition
£’000
Share of identifiable
net assets
£’000
Total cash paid
£’000
Additions during year ended 28 February 2018
972
181
1,153
4. Operating and business segments
Business segments
The Group’s Board of Directors is considered to be the Chief Operating Decision Maker of the Group and reviews internal
management reports on a regular basis. The reports provided to the Board of Directors focus on Group performance.
The information provided to the Board does not report performance on a segmented income statement basis; however,
contained within the Group management accounts is a split of revenue, detailing the various client engagement consulting and
software sales and contribution figures throughout the Group. In the current year the Group management accounts also
contained cost of sales information. In this regard voluntary comparative information has been presented. Staff work in
both areas of the business with substantial investment being made by the Group in developing highly technical training
which is provided to all staff to allow them to cover both software and consulting skills.
The Group has disclosed below certain information regarding its revenue and non-current assets by geographical location.
In presenting this information, segment revenue has been based on the geographic location of customers and segment
assets were based on the geographic location of the assets. Details regarding total revenues are presented in note 5. Cost
of sales data for the year ended 28 February 2018 has been presented in line with the reclassified amounts set out in note 37.
The Group’s two revenue streams are separated as follows:
• consulting activities involves providing services to capital markets; and
• software activities which includes the license of intellectual property and related services.
Information about reportable segments
Revenue by industry
Revenue
Cost of sales
Gross profit
Managed services
and consulting
2019
£’000
2018
£’000
Software
2019
£’000
2018
£’000
Total
2019
£’000
2018
£’000
86,463
74,130
130,888
111,912
217,351
186,042
(66,594)
(54,457)
(59,465)
(53,124)
(126,059)
(107,581)
19,869
19,673
71,423
58,788
91,292
78,461
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First Derivatives plc Annual Report 2019
Financial Statements 4. Operating segments continued
Geographical location analysis
UK
Rest of Europe
North America
Australasia
Total
Revenues
2019
£’000
63,309
38,090
94,511
21,441
2018
£’000
58,054
29,824
79,673
18,491
Non-current assets
2019
£’000
42,800
11,739
2018
£’000
34,783
13,340
129,584
120,529
141
1,464
217,351
186,042
184,264
170,116
Revenue generated and non-current assets located in Northern Ireland, the Group’s country of domicile, are not material
and, as such, have not been separately disclosed for either the current or prior year.
Major customers
The Group has no key customers who generated more than 10% of Group revenue in 2019 or 2018.
5. Revenue
Disaggregation of revenue
Revenue by industry
FinTech
MarTech
Other
Type of good or service
Sale of goods – perpetual
Sale of goods – recurring
Rendering of services
Timing of revenue recognition
At a point in time
Over time
6. Other income
Government grants
Managed services
and consulting
2019
£’000
2018
£’000
Software
2019
£’000
2018
£’000
Total
2019
£’000
2018
£’000
86,463
74,130
80,239
—
—
—
—
41,355
9,294
68,727
38,154
5,031
166,702
142,857
41,355
9,294
38,154
5,031
86,463
74,130
130,888
111,912
217,351
186,042
—
—
86,463
86,463
—
86,463
86,463
—
—
74,130
13,348
48,615
68,925
7,286
41,202
63,424
13,348
48,615
7,286
41,202
155,388
137,554
74,130
130,888
111,912
217,351
186,042
—
74,130
13,348
117,540
7,286
13,348
104,626
204,003
7,286
178,756
74,130
130,888
111,912
217,351
186,042
2019
£’000
277
2018
£’000
1,382
The Group is in receipt of a government grant amounting to £3,880k, awarded in June 2014. The first element was
conditional on the recruitment of additional staff for the period to 31 August 2017. The second is conditional on the
recruitment of additional staff for the period to 31 December 2019. The grant is recognised as deferred income as
additional staff are recruited and is being amortised as the performance conditions are satisfied.
7. Sales and marketing expenses
Payroll costs
Travel and subsistence
Marketing expenses
2019
£’000
27,453
1,796
3,024
2018
£’000
24,914
436
1,285
32,273
26,635
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Strategic ReportCorporate GovernanceFinancial Statements Notes continued
8. Administrative expenses
Rent, rates and insurance
Telephone
Accountancy, audit and legal expenses
Depreciation and amortisation
Payroll costs
Research and development credit
Listing expenses
Travel and subsistence
IT expenses
Acquisition-related costs and changes to contingent deferred consideration
Other
1 See note 37 for details of reclassification.
IFRS 3 acquisition costs
Changes to contingent deferred consideration (note 28)
Other acquisition-related costs
Acquisition-related costs and changes to contingent deferred consideration
9. Expenses and auditor’s remuneration
Included in profit/loss are the following:
Rents payable in respect of operating leases
Research and development costs expensed
Auditor’s remuneration
Audit of these financial statements
Amounts receivable by auditor and its associates in respect of:
Audit of the subsidiary undertakings included in the consolidation
All other services
Taxation compliance services
Other tax advisory services
Expenses recharged
2019
£’000
6,420
745
1,569
13,757
10,742
(995)
270
489
923
3,975
560
2018
Restated 1
£’000
4,382
795
1,081
13,144
10,928
(821)
265
604
775
3,570
596
38,455
35,319
2019
£’000
—
3,230
745
3,975
2019
£’000
3,528
2,089
77
61
5
82
78
12
2018
£’000
46
2,980
544
3,570
2018
£’000
2,556
1,807
76
55
4
79
90
10
315
314
10. Personnel expenses and numbers
The average weekly number of persons (including Directors) employed by the Group during the year is set out below:
Administration
Sales
Technical
1 See note 37 for details of reclassification.
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First Derivatives plc Annual Report 2019
2019
Average no.
2018
Restated 1
Average no.
221
311
1,783
2,315
219
252
1,438
1,909
Financial Statements 10. Personnel expenses and numbers continued
The aggregate payroll costs of these persons were as follows:
Wages and salaries
Social security costs
Other pension costs
Share based payments (see note 34)
Less capitalised development costs
Disclosed as:
Cost of sales
Sales and marketing costs
Administrative expenses
1 See note 37 for details of reclassification.
11. Finance income and expense
Interest income
Finance income
Loss on foreign currency translation of monetary assets
Change in fair value of NCI forward
Loss on foreign currency translation
Interest expense on bank loans and finance lease liabilities
Finance expense
2019
£’000
112,855
10,390
4,065
1,452
2018
Restated 1
£’000
103,180
9,784
3,401
1,586
(8,573)
(7,486)
120,189
110,465
81,994
27,453
10,742
74,623
24,914
10,928
120,189
110,465
2019
£’000
37
37
(469)
(123)
(592)
(1,478)
(1,478)
2018
£’000
1
1
(1,386)
—
(1,386)
(1,150)
(1,150)
Net finance expense recognised in profit or loss
(2,033)
(2,535)
Exchange gains and losses on net investments in foreign subsidiaries and related effective hedges are recognised in the
foreign currency translation reserve.
12. Tax expense
a) Income tax recognised in the income statement
Current tax expense
Current year
Adjustment for prior years
Deferred tax expense
Origination and reversal of temporary differences
Adjustment for prior years
Change in tax rate
Total tax expense
2019
£’000
2018
£’000
4,547
(111)
4,436
(1,091)
157
—
4,450
(275)
4,175
(188)
(667)
(1,431)
(934)
(2,286)
3,502
1,889
firstderivatives.com
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Strategic ReportCorporate GovernanceFinancial Statements Notes continued
12. Tax expense continued
b) Amounts recognised in OCI
Items that will not be reclassified to profit or loss
Equity investments at FVOCI –
net change in fair value
Items that are or may be reclassified
subsequently to profit or loss
2019
Tax expense/
(benefit)
£’000
Before tax
£’000
After tax
£’000
Before tax
£’000
2018
Tax expense/
(benefit)
£’000
After tax
£’000
(4,322)
735
(3,587)
—
—
—
Current tax impact of movement on hedge
876
Foreign currency translation differences
(3,077)
(2,201)
(6,523)
(148)
119
(29)
706
728
1,202
(2,958)
(13,561)
(2,230)
(12,359)
(5,817)
(12,359)
368
(180)
188
188
1,570
(13,741)
(12,171)
(12,171)
c) Amounts recognised in equity
Deferred tax on share based payments
Deferred tax on losses
Current tax on losses
2019
Tax expense/
(benefit)
£’000
Before tax
£’000
2018
After tax
£’000
Before tax
£’000
Tax benefit
£’000
After tax
£’000
—
—
—
—
5,483
(1,063)
(128)
5,483
(1,063)
(128)
4,292
4,292
—
—
—
—
Reconciliation of effective tax rate
Profit excluding income tax
Income tax using the Company’s domestic tax rate of 19.0% (2018: 19.1%)
Tax exempt income
Expenses not deductible for tax purposes
Adjustments for prior years
Other differences
Foreign tax rate differences
Impact of change in tax rates
Unrelieved overseas taxes
Total tax expense
Reductions in the main rate of UK corporation tax to 19% (effective from 1 April 2017) and to 18% (effective 1 April 2020) were
enacted on 26 October 2015. The Finance Act 2016 further reduced the 18% rate to 17% from 1 April 2020 following
substantial enactment on 6 September 2016.
On 22 December 2017, the US Tax Cuts and Jobs Act (US Tax Act), was signed into law. The legislation significantly changes
US tax law by, among other things, lowering corporate income tax rates. The US Tax Act reduces the US corporate income
tax rate from a maximum of 35% to a flat 21% rate, effective from 1 January 2018.
Additional disclosures have been presented above, including to the prior period to separate tax reflected directly in equity
and tax reflected through OCI.
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First Derivatives plc Annual Report 2019
(3,088)
(3,088)
(823)
(114)
(823)
(114)
(4,025)
(4,025)
2019
£’000
2018
£’000
16,677
3,169
(1,650)
1,117
46
210
513
—
97
3,502
12,097
2,309
218
(34)
(942)
763
673
(1,431)
333
1,889
Financial Statements 12. Tax expense continued
On 29 March 2017, the UK government invoked Article 50 of the Treaty of Lisbon, notifying the European Council of its
intention to withdraw from the European Union (EU). There is an initial two-year timeframe for the UK and the EU to reach
an agreement on the withdrawal and the future UK and EU relationship although this timeframe has been extended. At this
stage, there remains significant uncertainty about the withdrawal process; its timeframe; and the outcome of the negotiations
about the future arrangements between the UK and the EU. As a result, there is significant uncertainty as to the period for
which the existing EU laws for member states will continue to apply to the UK and which laws will apply to the UK after an
exit. Following the negotiations between the UK and the EU, the UK’s tax status may change and this may impact the
Group. However, at this stage the level of uncertainty is such that it is impossible to determine if, how and when that tax
status will change.
The Group believes that its accruals for tax liabilities are adequate for all open tax years based on its assessment of many
factors, including interpretations of tax law and prior experience.
13. Remuneration of Directors
The remuneration paid to the Directors was:
Aggregate emoluments (including benefits in kind)
Company pension contributions
Share option expense
2019
£’000
1,063
53
250
1,366
2018
£’000
1,284
53
163
1,500
During the period there were two Directors accruing benefits under a defined contribution pension scheme (2018: two).
The aggregate emoluments and Company pension contributions of the highest paid Director (excluding fees paid for
provision of services) amounted to £509k and £33k respectively during the year (2018: £660k and £33k respectively).
The Directors are deemed to be the key management of the Group.
Disclosures in respect of Directors’ emoluments as required by AIM Rules, Directors’ interests in shares and Directors’
share options are set out in the Report of the Remuneration Committee.
14. Dividends
Dividends paid to the owners of the parent
Final dividend relating to the prior year
Interim dividend paid
Dividends paid to NCI
2019
£’000
2018
£’000
4,383
2,001
6,384
—
6,384
3,499
1,773
5,272
3,038
8,310
The dividends recorded in each financial year represent the final dividend of the preceding financial year and the interim
dividend of the current financial year.
The final dividend relating to the prior year amounted to 17.00p (previous year: 14.00p) per share and the interim dividend paid
during the year amounted to 7.70p (previous year: 7.00p) per share. The cumulative dividend paid during the year amounted
to 24.70p (previous year: 21.00p) per share.
After the respective reporting dates, the following dividends were proposed by the Directors. The dividends have not been
provided for and there are no income tax consequences.
19.3p per ordinary share (2018: 17.00p)
2019
£’000
5,049
2018
£’000
4,359
firstderivatives.com
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Strategic ReportCorporate GovernanceFinancial Statements Notes continued
15. a) Earnings per ordinary share
Basic
The calculation of basic earnings per share at 28 February 2019 was based on the profit attributable to ordinary shareholders
of £13,175k (2018: £10,208k), and a weighted average number of ordinary shares in issue of 25,909k (2018: 25,239k).
Basic earnings per share
Weighted average number of ordinary shares
Issued ordinary shares at 1 March
Effect of share options exercised
Effect of shares issued as purchase consideration
Effect of shares issued as remuneration
2019
Pence
per share
2018
Pence
per share
50.9
40.4
2019
Number
’000
25,641
243
24
1
2018
Number
’000
24,868
367
3
1
Weighted average number of ordinary shares at 28 February
25,909
25,239
Diluted
The calculation of diluted earnings per share at 28 February 2019 was based on the profit attributable to ordinary shareholders
of £13,175k (2018: £10,208k) and a weighted average number of ordinary shares after adjustment for the effects of all
dilutive potential ordinary shares of 27,523k (2018: 27,017k).
Diluted earnings per share
Weighted average number of ordinary shares (diluted)
Weighted average number of ordinary shares (basic)
Effect of dilutive share options in issue
Weighted average number of ordinary shares (diluted) at 28 February
2019
Pence
per share
47.9
2018
Pence
per share
37.8
2019
Number
’000
25,909
1,614
27,523
2018
Number
’000
25,239
1,778
27,017
At 28 February 2019 75 shares (2018: nil) were excluded from the diluted weighted average number of ordinary shares calculation
as their effect would have been anti-dilutive and in 2018 200,000 were excluded as the related conditions had not been
satisfied. The average market value of the Group’s shares for the purposes of calculating the dilutive effect of share
options was based on quoted market prices for the year during which the options were outstanding.
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First Derivatives plc Annual Report 2019
Financial Statements 15. b) Earnings before tax per ordinary share
Earnings before tax per share are based on profit before taxation of £16,677k (2018: £12,097k). The number of shares used in
this calculation is consistent with note 14(a) above.
Basic earnings before tax per ordinary share
Diluted earnings before tax per ordinary share
Reconciliation from earnings per ordinary share to earnings before tax per ordinary share:
Basic earnings per share
Impact of taxation charge
Basic earnings before tax per share
Diluted earnings per share
Impact of taxation charge
Diluted earnings before tax per share
2019
Pence
per share
2018
Pence
per share
64.4
60.6
47.9
44.8
2019
Pence
per share
2018
Pence
per share
50.9
13.5
64.4
47.9
12.7
60.6
40.4
7.5
47.9
37.8
7.0
44.8
Earnings before tax per share is presented to facilitate pre-tax comparison returns on comparable investments.
15. c) Adjusted earnings after tax per ordinary share
Adjusted earnings after tax per share is based on an adjusted profit after taxation of £22,912k (2018: £19,505k). The adjusted
profit after tax has been calculated by adjusting for the amortisation of acquired intangibles after tax effect of £3,370k
(2018: £4,266k), share based payment and related charges after tax effect of £2,003k (2018: £2,430k), acquisition costs after
tax effect of £3,838k (2018: £2,852k), share of loss of associate after tax effect of £23k (2018: £70k), the loss on foreign
currency translation after tax effect of £503k (2018: £1,110k) and in 2018 the deferred tax credit following the US Tax Reform
of £1,431k. The number of shares used in this calculation is consistent with note 15(a) above.
Adjusted basic earnings after tax per ordinary share
Adjusted diluted earnings after tax per ordinary share
2019
Pence
per share
2018
Pence
per share
88.4
83.2
77.3
72.2
firstderivatives.com
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Strategic ReportCorporate GovernanceFinancial Statements Notes continued
16. Property, plant and equipment
Group
Cost
At 1 March 2018
Additions
Exchange adjustments
At 28 February 2019
Depreciation
At 1 March 2018
Charge for the year
Exchange adjustments
At 28 February 2019
Cost
At 1 March 2017
Additions
Acquired in business combinations
Exchange adjustments
At 28 February 2018
Depreciation
At 1 March 2017
Charge for the year
Exchange adjustments
At 28 February 2018
Carrying amounts
At 1 March 2017
At 28 February 2018
At 28 February 2019
12,840
3,378
(67)
869
331
1
16,151
1,201
22,444
Leasehold
improvements
£’000
Plant and
equipment
£’000
Office
furniture
£’000
3,622
1,470
—
5,092
1,696
419
(16)
7,357
2,132
(64)
564
193
1
758
2,099
9,425
Leasehold
improvements
£’000
Plant and
equipment
£’000
Office
furniture
£’000
2,893
819
—
(90)
10,582
2,426
6
(174)
676
198
—
(5)
Total
£’000
17,331
5,179
(66)
9,617
2,744
(79)
12,282
Total
£’000
14,151
3,443
6
(269)
3,622
12,840
869
17,331
1,239
516
(59)
1,696
1,654
1,926
2,993
5,862
1,585
(90)
7,357
4,720
5,483
6,726
422
145
(3)
564
254
305
443
7,523
2,246
(152)
9,617
6,628
7,714
10,162
The basis by which depreciation is calculated is stated in note 1.
The Group leases equipment under a number of finance lease arrangements. At 28 February 2019 the carrying amount of
leased assets included in plant and equipment was £378k (2018: £nil) and related depreciation amounted to £65k (2018: £nil).
Details of security provided for borrowing in respect of property, plant and equipment are disclosed in note 23.
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First Derivatives plc Annual Report 2019
Financial Statements 16. Property, plant and equipment continued
Company
Cost
At 1 March 2018
Additions
At 28 February 2019
Depreciation
At 1 March 2018
Charge for the year
At 28 February 2019
Cost
At 1 March 2017
Additions
At 28 February 2018
Depreciation
At 1 March 2017
Charge for the year
At 28 February 2018
Carrying amounts
At 1 March 2017
At 28 February 2018
At 28 February 2019
Leasehold
improvements
£’000
Plant and
equipment
£’000
Office
furniture
£’000
2,462
1,352
3,814
958
235
1,193
3,918
375
4,293
1,969
693
2,662
617
328
945
306
165
471
Leasehold
improvements
£’000
Plant and
equipment
£’000
Office
furniture
£’000
1,984
478
2,462
652
306
958
1,332
1,504
2,621
3,119
799
3,918
1,480
489
1,969
1,639
1,949
1,631
419
198
617
195
111
306
224
311
474
Total
£’000
6,997
2,055
9,052
3,233
1,093
4,326
Total
£’000
5,522
1,475
6,997
2,327
906
3,233
3,195
3,764
4,726
The basis by which depreciation is calculated is stated in note 1.
No assets are held under finance leases.
Details of security provided for borrowing in respect of property, plant and equipment are disclosed in note 23.
firstderivatives.com
83
Strategic ReportCorporate GovernanceFinancial Statements Notes continued
17. Intangible assets and goodwill
Group
Cost
Balance at 1 March 2018
Development costs
Additions
Exchange adjustments
Goodwill
£’000
Customer
lists
£’000
Acquired
software
£’000
103,903
12,539
27,375
—
—
3,487
—
—
358
—
665
628
Brand
name
£’000
738
—
—
13
Internally
developed
software
£’000
51,293
8,573
—
(307)
Total
£’000
195,848
8,573
665
4,179
At 28 February 2019
107,390
12,897
28,668
751
59,559
209,265
Amortisation
Balance at 1 March 2018
Amortisation for the year
Exchange adjustment
At 28 February 2019
Cost
Balance at 1 March 2017
Development costs
Additions
Acquired in business combinations
—
—
—
—
6,783
1,308
212
16,186
2,437
195
8,303
18,818
Goodwill
£’000
Customer
lists
£’000
Acquired
software
£’000
113,436
13,613
28,567
—
—
480
—
—
44
—
760
182
Exchange adjustments
(10,013)
(1,118)
(2,134)
At 28 February 2018
103,903
12,539
27,375
Amortisation
Balance at 1 March 2017
Amortisation for the year
Exchange adjustment
At 28 February 2018
Carrying amounts
At 1 March 2017
At 28 February 2018
At 28 February 2019
Leased intangible assets
No assets are held under finance leases.
—
—
—
—
113,436
103,903
107,390
6,008
1,344
(569)
6,783
7,605
5,756
4,594
13,829
3,269
(912)
16,186
14,738
11,189
9,850
505
54
7
566
Brand
name
£’000
777
—
—
8
(47)
738
463
71
(29)
505
314
233
185
22,630
7,214
(231)
46,104
11,013
183
29,613
57,300
Internally
developed
software
£’000
43,578
7,486
—
—
Total
£’000
199,971
7,486
760
714
229
(13,083)
51,293
195,848
16,280
6,214
136
36,580
10,898
(1,374)
22,630
46,104
27,298
163,391
28,663
149,744
29,946
151,965
The basis by which amortisation is calculated is stated in note 1. Amortisation is recognised through profit or loss in
administration expenses.
Included within development costs capitalised in the year is £8,573k (2018: £7,486k) of capitalised employee costs for the year.
Developed software includes £5,774k (2018: £4,917k) of software under development at 28 February 2019 not yet commissioned.
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First Derivatives plc Annual Report 2019
Financial Statements 17. Intangible assets and goodwill continued
Group continued
Impairment testing of goodwill
The Group tests goodwill for impairment at each reporting date, or more frequently if there are indications that goodwill
might be impaired. For the purposes of impairment testing, goodwill is allocated to companies which represent the lowest
level within the Group at which goodwill is monitored. A summary of the goodwill allocated to each significant CGU is
presented as follows:
Subsidiaries
Market Resource Partners LLC
Prelytix LLC
Kx Systems Inc.
Multiple units without significant goodwill
2019
£’000
2018
£’000
11,389
5,827
74,106
91,322
16,068
10,899
5,575
71,194
87,668
16,235
107,390
103,903
The recoverable amount of each CGU has been determined based on a value-in-use calculation using cash flows derived
from financial projections covering a five-year period, with cash flows thereafter calculated using a terminal value methodology.
A growth rate of 5–10% (2018: 7–10%) is applied for years two to five, followed by a growth rate of 2% (2018: 2%) thereafter.
The pre-tax discount rates applied to cash flow projections of the CGUs was 12–17% (2018: 12–20%).
The key assumptions used in the estimation of the recoverable amount for significant CGUs are summarised as follows:
2019
2018
Discount rate
Terminal value growth rate
Early growth rate
Market
Resource
Partners LLC
14%
2%
10%
Prelytix LLC Kx Systems Inc.
17%
2%
7%
15%
2%
9%
Market
Resource
Partners LLC
15%
2%
8%
Prelytix LLC
Kx Systems Inc.
17%
2%
7%
15%
2%
9%
Projected cash flows are most sensitive to assumptions regarding future profitability and working capital investment.
The values applied to these key assumptions are derived from a combination of external and internal factors, based
on past experience together with management’s future expectations about business performance.
Discount rates reflect the current market assessment of the risk specific to each CGU. The discount rate was estimated
based on past experience and industry average weighted average cost of capital adjusted to reflect the current market
assessment of risks specific to each CGU for which the cash flow projections have not been adjusted.
The value in use and excess value in use over the carrying amount inclusive of significant acquired intangible assets of the
above CGUs are as follows:
Subsidiaries
Market Resource Partners LLC
Prelytix LLC
Kx Systems Inc.
Value in use
2019
£’000
Excess over carrying amount
2018
£’000
2019
£’000
2018
£’000
24,428
34,329
116,713
26,479
33,186
11,098
24,772
103,607
32,093
14,094
24,280
19,960
firstderivatives.com
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Strategic ReportCorporate GovernanceFinancial Statements Notes continued
17. Intangible assets and goodwill continued
Group continued
Sensitivity analysis
There was no impairment charge for the year ended 28 February 2019 (2018: £nil). Management has identified that a
reasonably possible change in two key assumptions could cause the carrying amount to equal the recoverable amount.
The following table shows the amounts by which these two assumptions would need to change individually for the
estimated recoverable amount to be equal to the carrying amount.
Discount rate
Budgeted EBITDA growth rate
Change required for carrying value to equal recoverable amount
Market Resource Partners LLC
Prelytix LLC
Kx Systems Inc.
Company
2019
%
7.4
53.9
4.6
2018
%
14.2
35.1
2.9
Goodwill
£’000
Acquired
software
£’000
Cost
Balance at 1 March 2018
Development costs
Addition from subsidiary
Balance at 28 February 2019
Amortisation and impairment losses
Balance at 1 March 2018
Amortisation for the year
Balance at 28 February 2019
Cost
Balance at 1 March 2017
Development costs
Balance at 28 February 2018
Amortisation and impairment losses
Balance at 1 March 2017
Amortisation for the year
Balance at 28 February 2018
Carrying amounts
At 1 March 2017
At 28 February 2018
At 28 February 2019
Leased intangible assets
No assets are held under finance leases.
—
—
1,947
1,947
—
—
—
—
—
—
—
—
—
—
—
1,947
The basis by which amortisation is calculated is stated in note 1. Amortisation is recognised through profit or loss
in administration expenses.
Included within development costs capitalised in the year is £6,579k (2018: £5,914k) of capitalised employee costs.
Developed software includes £4,592k (2018: £2,774k) of software under development at 28 February 2019 not yet commissioned.
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First Derivatives plc Annual Report 2019
2019
%
(11.0)
(71.6)
(26.1)
Internally
developed
software
£’000
36,038
6,579
—
2018
%
(18.8)
(56.3)
(15.4)
Total
£’000
36,520
6,579
1,947
482
—
—
482
42,617
45,046
151
60
211
482
—
482
90
61
151
392
331
271
15,740
5,101
15,891
5,161
20,841
21,052
30,124
5,914
30,606
5,914
36,038
36,520
11,473
4,267
15,740
11,563
4,328
15,891
18,651
19,043
20,298
20,629
21,776
23,994
Financial Statements 17. Intangible assets and goodwill continued
Company continued
Impairment testing of goodwill
Goodwill of £1,947k arose on the transfer of customer contracts for nil consideration to the Company from subsidiaries
(Cowrie Financial Limited and Redshift Horizons Limited). The Company tests goodwill for impairment at each reporting
date, or more frequently if there are indications that goodwill might be impaired. The recoverable amount of goodwill has
been determined based on a value-in-use calculation using cash flows derived from financial projections covering a five-year
period, with cash flows thereafter calculated using a terminal value methodology. A growth rate of 5–10% (2018: N/A)
is applied for years two to five, followed by a growth rate of 2% (2018: N/A) thereafter. The pre-tax discount rates applied
to cash flow projections of the goodwill was 12% (2018: N/A). There was no impairment charge for the year ended
28 February 2019 (2018: £nil).
18. Investment in subsidiaries and associate
The subsidiaries of the Group and Company are detailed as follows:
Address of
registered office
Class of
share held
Ownership
2019
Activate Clients Limited*
Cowrie Financial Limited*
First Derivatives (Exchange) Limited*
First Derivatives (Hong Kong) Limited*
First Derivatives (Ireland) Limited*
First Derivatives Canada Inc.*
First Derivatives Holdings Inc.*
First Derivatives Holdings Pty Limited*
First Derivatives I Limited
First Derivatives Investments LLP
First Derivatives Japan Co. Limited
First Derivatives Mexico Limited
First Derivatives No. 1 Inc.
First Derivatives Pte Limited*
First Derivatives Pty Limited
First Derivatives Services Limited
First Derivatives South Africa (Pty) Limited*
First Derivatives South Korea
First Derivatives US Inc
Kx Systems Inc.*
Market Resource Partners Limited*
Market Resource Partners LLC*
Prelytix LLC
QuantumKDB Inc
QuantumKDB Limited
QuantumKDB Limited*
Redshift Horizons Limited*
Reference Data Factory LLC
Telconomics09 S.L
* Owned directly by First Derivatives plc.
Ireland
United Kingdom
Ireland
Hong Kong
Ireland
Canada
United States
Australia
United Kingdom
United Kingdom
Japan
Mexico
United States
Singapore
Australia
United Kingdom
South Africa
South Korea
United States
United States
N. Ireland
United States
United States
United States
Hong Kong
United Kingdom
United Kingdom
United States
Spain
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
65.2%
100%
100%
100%
100%
100%
100%
100%
100%
100%
2018
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
—
100%
65.2%
100%
100%
100%
100%
100%
100%
100%
100%
100%
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87
Strategic ReportCorporate GovernanceFinancial Statements Notes continued
18. Investment in subsidiaries and associate continued
Unlisted investments in subsidiaries at cost
At 1 March
Additions
Transfers to Company goodwill
At end of period
Company
2019
£’000
2018
£’000
95,329
40,082
(1,947)
83,023
12,306
—
133,464
95,329
On 28 December 2018 First Derivatives South Korea was established expanding the Group’s presence in Asia.
During the year two of the Company’s subsidiaries transferred their business to the Company. Additionally, the Company’s
investment has increased by £39,911k following the NCI’s shareholders’ exercise of the NCI put which will be settled on
29 June 2019. The NCI shareholders are considered to have in substance ceased to be shareholders of the subsidiary.
The Company has also recognised the fair value of the exercise price as a liability as detailed in note 24.
During the prior year the Company increased its investment in First Derivatives Canada Inc., First Derivatives Pty Limited
and Market Resource Partners LLC by £2,490k, £3,576k and £4,563k respectively following receipt of additional ordinary
shares in exchange for settlement of a receivable from the subsidiaries of £2,490k, £3,576k and £4,563k respectively.
Associate
Group
Investment in associate
2019
£’000
2,711
2018
£’000
2,631
At 28 February 2019, the Group had the following investment in an associate:
RxDataScience Inc.
United States
Ordinary
36.66%
Country of incorporation
Class of share held
Ownership at 28 February 2019
During the prior year the Group increased its interest in RxDataScience Inc. (RxD) to 31.00% on 20 April 2017, to 35.00% on
12 October 2017 and then to 36.66% on 19 January 2018. RxD is not publicly listed.
The Group’s share of loss in associates for the period to 28 February 2019 was £23k (2018: £70k).
The following tables summarise the financial information of RxD as included in its own financial statements, adjusted for
fair value adjustments at acquisition and differences in accounting policies.
2019
£’000
36.66%
2,253
332
—
(134)
2,451
899
1,709
103
2,711
2018
£’000
36.66%
1,768
801
—
(10)
2,559
938
1,709
(16)
2,631
Percentage ownership interest
Non-current assets
Current assets
Non-current liabilities
Current liabilities
Net assets (100%)
Group’s share of net assets (36.66%) (2018: 36.66%)
Goodwill
Exchange adjustments
Carrying amount of interest in associate
88
First Derivatives plc Annual Report 2019
Financial Statements 18. Investment in subsidiaries and associate continued
Associate continued
Group continued
Revenue
Loss from continuing operations (100%)
Other comprehensive income (100%)
Total comprehensive income (100%)
Total comprehensive income (36.66%) (2018: 36.66%)
2019
£’000
863
(63)
—
(63)
(23)
2018
£’000
197
(221)
—
(221)
(70)
At the year end the Group holds 56,142 (2018: 56,142) warrants which are exercisable on the occurrence of an exit event at
an exercise price of $0.01 per warrant.
19. Other financial assets
The effect of initially applying IFRS 9 on the Group and Company financial investments is described in note 1a. Due to the
transition method chosen on applying IFRS 9, comparative information has not been restated to reflect the new requirements.
Non-current investments
Equity securities at FVOCI
Equity securities – available for sale
Group
2019
£’000
13,706
—
13,706
2018
£’000
—
3,433
3,433
Company
2019
£’000
12,776
—
12,776
2018
£’000
—
3,308
3,308
Information about the Group and Company’s exposure to market risk and fair value measurement is disclosed in note 32(b).
No strategic investments were disposed of during the current year, and there were no transfers of any cumulative gain
or loss within equity relating to these investments.
Equity securities designated at FVOCI
At 1 March 2018, the Group designated the investments shown below as equity securities at FVOCI because these equity
securities represent investments that the Group intends to hold for the long term for strategic purposes. In the prior year,
these investments were classified as available for sale.
Investment in Quantile Technologies Ltd
Investment in Copa Fin
Other investments not individually significant
The Group and Company have not recognised dividend income from their investments (2018: £nil).
Group
Fair value
£’000
Company
Fair value
£’000
9,500
3,276
930
9,500
3,276
—
13,706
12,776
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Strategic ReportCorporate GovernanceFinancial Statements Notes continued
20. Trade and other receivables
Current assets
Trade receivables
Receivables from subsidiaries
Convertible loans
Other receivables
Accrued income
Prepayments
Grant income receivable
Non-current assets
Receivables from subsidiaries1
Convertible loans
Other loans
Trade and other receivables
Grant income receivable
Group
2019
£’000
2018
£’000
Company
2019
£’000
2018
£’000
38,519
37,929
—
2,087
2,751
7,234
5,993
1,331
—
—
3,301
6,187
4,419
1,010
24,368
19,643
—
2,523
1,047
5,060
301
22,835
11,245
—
2,744
2,133
4,239
51
57,915
52,846
52,942
43,247
2019
£’000
—
1,376
942
3,357
45
5,720
2018
Restated2
£’000
2019
£’000
2018
Restated2
£’000
—
1,944
650
3,685
315
6,594
17,163
8,920
376
762
3,357
—
21,658
323
650
3,686
—
13,579
1 The repayment terms of the receivable from certain subsidiaries have been agreed as falling due after more than one year.
2 Comparative balances restated to separate convertible and other loans from trade and other receivables.
The Group’s accrued income (contract asset) balance solely relates to revenue from contracts with customers. Movements
in the accrued income balance was driven by transactions entered into by the Group within the normal course of business
in the year.
Trade receivables, accrued income, non-current other receivables and non-convertible loans are shown net of an allowance
for expected credit loss; this is disclosed in note 32.
The Group’s and Company’s exposure to credit and currency risks and impairment losses related to trade and other
receivables is disclosed in note 32.
21. Cash and cash equivalents
Bank balances
Group
2019
£’000
2018
£’000
Company
2019
£’000
18,798
12,365
14,760
2018
£’000
4,013
See note 32 for discussion of interest rate risk and sensitivity analysis.
90
First Derivatives plc Annual Report 2019
Financial Statements
22. Share capital
In issue at 1 March
Exercise of share options (note 34)
Issued in business combinations (note 3)
Issued for settlement of contingent deferred consideration
Issued as remuneration
In issue at year end – fully paid
Ordinary shares
2019
Number
2018
Number
25,641,015
24,868,379
393,100
759,297
—
127,400
743
12,199
—
1,140
26,162,258
25,641,015
Equity shares
Issued, allotted and fully paid
Ordinary shares of £0.005 each
2019
Number
2019
£’000
2018
Number
2018
£’000
26,162,258
131
25,641,015
128
Shares increased in the year due to the exercise of 393,100 share options (2018: 759,297) for cash consideration of £3,147k
(2018: £7,119k) together with an associated transfer from the share option reserve of £684k (2018: £1,427k), the issue of
127,400 shares (2018: nil) at £2,701k as settlement of contingent deferred purchase consideration and the issue of 743 shares
(2018: 1,140) as remuneration of £29k (2018: £28k). Additionally, in the prior year 12,199 ordinary shares were issued as
purchase consideration at £441k.
The holders of ordinary shares are entitled to receive dividends as declared from time to time and are entitled to one vote
per share at meetings of the Company.
Nature and purpose of reserves
Share option reserve – The share option reserve comprises the charge for unexercised share options granted to
employees and includes share options granted in consideration for the acquisition of business combinations net
of deferred tax assets relating to the tax deduction receivable when the options are exercised.
Currency translation adjustment reserve – The currency translation adjustment reserve comprises all foreign exchange
differences arising from the translation of the financial statements of foreign operations and intercompany loans that are
determined to form part of the net investment, as well as from the translation of liabilities that hedge the Group’s net
investment in a foreign subsidiary.
Fair value reserve – The fair value reserve comprises the cumulative net change in the fair value of equity securities
designated at FVOCI (2018: available for sale financial assets). Additionally, the fair value reserve of the Company relates to
the revaluation reserve which arose on revaluation of an available for sale investment at fair value relating to Kx Systems Inc.
prior to significant influence being obtained. The balance is continued to be retained as the Company continues to retain
this original investment.
Merger reserve – The merger reserve represents the fair value of the consideration given in excess of the nominal value
of the ordinary shares issued on the acquisition of subsidiaries (interest of at least 90%) on share for share exchanges.
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Strategic ReportCorporate GovernanceFinancial Statements Notes continued
23. Loans and borrowings
This note provides information about the contractual terms of the Group and Company’s interest-bearing loans and
borrowings, which are measured at amortised cost. For more information about the Group and Company’s exposure
to interest rate, foreign currency and liquidity risk arising from these loans and borrowings see note 32.
Current liabilities
Secured bank loans
Finance lease liabilities
Non-current liabilities
Secured bank loans
Finance lease liabilities
Group
2019
£’000
2018
£’000
Company
2019
£’000
34,909
3,339
34,909
89
7
—
34,998
3,346
34,909
—
289
289
25,205
—
25,205
—
—
—
2018
£’000
3,339
—
3,339
25,205
—
25,205
Terms and repayment schedule
The Group had the following loan facilities with Bank of Ireland at the end of the year:
• £339k loan (facility 1);
• £29,625k multi-currency loan (facility 2);
• £15,000k revolving cash facility (facility 3); and
• £6,000k sterling overdraft (bank overdraft).
During the current year the Group agreed bank facilities totalling £130,000k:
• £65,000k multi-currency loan (term loan); and
• £65,000k revolving cash loan (revolving loan).
These facilities were undrawn as at 28 February 2019.
The terms and conditions of outstanding loans were as follows:
2019
2018
Currency
Nominal
interest rate
Year of
maturity
Face value
£’000
Facility 1
Facility 2
Facility 3
Bank overdraft
Term loan
Revolving loan
Finance lease liabilities
Total interest bearing
GBP
2.25%+LIBOR
Multi
2.25%+LIBOR 1
GBP
GBP
Multi
Multi
USD
2.25%+LIBOR 1
2.25%+LIBOR
2.75%+LIBOR 2
2.75%+LIBOR 2
5.925%
2019
2020
2019
2019
2024
2024
2024
339
20,370
14,200
—
—
—
Carrying
amount
£’000
339
20,370
14,200
—
—
—
Face value
£’000
339
22,905
5,300
—
—
—
7
Carrying
amount
£’000
339
22,905
5,300
—
—
—
7
378
378
35,287
35,287
28,551
28,551
1
2
The nominal interest rate varies as the Group meets financial targets and these have been assessed as being closely linked to the underlying contract
with a minimum rate available of 2.25%+LIBOR.
The term loan and the revolving loan facility will have an interest rate for the first twelve months of LIBOR plus 2.75% following this; the nominal interest
rate varies as the Group meets financial targets with a minimum rate available of 2.00%+LIBOR.
Facilities 1, 2, 3 and the bank overdraft are secured by a fixed charge over the Group’s property with a carrying amount of
£2,993k (2018: £1,926k) and a debenture over the trading assets in Group companies and have interest charged at 2.25%
(2018: 2.25%) above LIBOR. The term and revolving loans are secured by a fixed charge over certain subsidiaries of the
Group and have interest charged at 2.75% above LIBOR.
92
First Derivatives plc Annual Report 2019
Financial Statements 23. Loans and borrowings continued
Finance lease liabilities
Finance lease liabilities are payable as follows:
Group
Less than one year
Between one and five years
2019
2018
Minimum lease
payments
£’000
Interest
£’000
Principal
£’000
Minimum lease
payments
£’000
Interest
£’000
Principal
£’000
103
335
438
14
46
60
89
289
378
8
—
8
1
—
1
7
—
7
The finance leases are secured over the leased equipment.
Reconciliation of movements of liabilities to cash flows arising from financing activities
Group
Secured bank loans
Lease liabilities
Total liabilities from financing activities
Secured bank loans
Lease liabilities
Total liabilities from financing activities
Company
2017
£’000
Cash flows
£’000
2018
£’000
28,544
7
28,551
2017
£’000
29,692
69
29,761
Non-cash
foreign
exchange
movement
£’000
New finance
leases
£’000
Cash flows
£’000
Non-cash
foreign
exchange
movement
£’000
2019
£’000
—
419
419
5,342
(48)
5,294
1,023
34,909
—
378
1,023
35,287
New finance
leases
£’000
Cash flows
£’000
Non-cash
foreign
exchange
movement
£’000
2018
£’000
—
—
—
1,550
(62)
1,488
(2,698)
28,544
—
7
(2,698)
28,551
2018
£’000
Cash flows
£’000
Non-cash
foreign
exchange
movement
£’000
2019
£’000
Secured bank loans
29,692
1,550
(2,698)
28,544
5,342
1,023
34,909
Total liabilities from
financing activities
29,692
1,550
(2,698)
28,544
5,342
1,023
34,909
24. Trade and other payables
Current liabilities
Trade payables
Other payables
Accruals
Deferred income
Government grants
Payables to subsidiaries
NCI forward
Group
2019
£’000
6,638
10,191
699
19,537
390
—
40,091
77,546
2018
£’000
6,444
10,445
1,967
14,928
286
—
—
Company
2019
£’000
4,727
8,326
661
6,186
248
36,218
40,091
2018
£’000
4,611
8,248
1,775
4,450
147
17,786
—
34,070
96,457
37,017
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93
Strategic ReportCorporate GovernanceFinancial Statements Notes continued
24. Trade and other payables continued
Non-current liabilities
NCI put
Government grants
Accruals
Group
2019
£’000
—
2,597
703
3,300
2018
£’000
30,036
2,091
—
32,127
Company
2019
£’000
—
1,527
—
1,527
2018
£’000
—
1,071
—
1,071
The NCI put at 28 February 2018 was the exercise price of the put (denominated in US dollars) for the remaining NCI of
34.8% of Kx Systems Inc. under which the holders could require the Company to purchase the remaining interest at a fixed
price up to 31 October 2021 for cash with a notice period of 366 days. During the current year the Company renegotiated the
agreement with the minority shareholders to include a premium of US$12m if the put was exercised before 28 June 2018.
The put was exercised on 28 June 2018 and the transaction will be completed on 29 June 2019. At the date of exercise, the
Group recognised an adjustment to remeasure the NCI put to the fair value of the exercise price with a corresponding
charge recognised directly in equity in accordance with the Group’s accounting policy. The Company recognised the
forward contract as a liability as at 28 June 2018 at the fair value of the exercise price.
Following the exercise of the NCI put, the Group and Company account for the instrument as a forward contract with any
subsequent changes in the fair value, including changes due to foreign exchange movements, recognised in finance
income or expense.
The Group’s deferred income (contract liability) balance solely relates to revenue from contracts with customers. Movements
in the deferred income balance were driven by transactions entered into by the Group within the normal course of business
in the year.
The Group and Company’s exposure to currency and liquidity risk related to trade and other payables is disclosed in note 32.
25. Deferred taxation
Group
Deferred tax assets and liabilities are attributable to the following:
Property, plant and equipment
Share based payments
Trading losses
Other financial assets at fair value
Intangible assets
Short-term temporary differences
Other
Tax assets/(liabilities) before set-off
Set-off of tax
Net tax assets/(liabilities)
Assets
2019
£’000
—
1,806
11,311
58
243
1,699
235
2018
£’000
—
7,269
9,022
—
341
1,461
260
Liabilities
2019
£’000
2018
£’000
(5,066)
(4,545)
—
—
(793)
—
—
—
(4,968)
(5,266)
—
—
—
—
15,352
18,353
(10,827)
(9,811)
—
—
—
—
15,352
18,353
(10,827)
(9,811)
94
First Derivatives plc Annual Report 2019
Financial Statements 25. Deferred taxation continued
Group continued
Movement in deferred tax balances differences during the year:
Balance at
1 March 2018
£’000
Impact of
change in
accounting
policy
£’000
Recognised
in income
£’000
Recognised
in equity
£’000
Recognised
in OCI
£’000
Balance at
28 February
2019
£’000
Property, plant and equipment
Share based payments
Trading losses
Other financial assets at fair value
Intangible assets
Short-term temporary differences
Other
(4,545)
7,269
9,022
—
(4,925)
1,461
260
8,542
—
—
323
—
—
—
—
323
(571)
20
905
—
429
187
(36)
934
—
(5,483)
1,063
—
—
—
—
50
—
(2)
(735)
(229)
51
11
(4,420)
(854)
Balance at
1 March 2017
£’000
Recognised
in income
£’000
Recognised
in equity
£’000
Recognised
in OCI
£’000
Recognised
on acquisition
£’000
Property, plant and equipment
Share based payments
Trading losses
Intangible assets
Short-term temporary differences
Other
(4,234)
4,204
6,177
(8,330)
3,906
204
1,927
(324)
(23)
1,204
1,678
(722)
473
—
3,088
823
—
—
—
2,286
3,911
13
—
522
1,785
(1,723)
(417)
180
—
—
296
(58)
—
—
(5,066)
1,806
11,311
(735)
(4,725)
1,699
235
4,525
Balance at
28 February
2018
£’000
(4,545)
7,269
9,022
(4,925)
1,461
260
238
8,542
The basis by which taxation is calculated is stated in note 1.
As at 28 February 2019, the Group has losses carried forward generated in the United Kingdom, Ireland, Canada, Australia,
South Africa and Spain which total £45m and have no expiration period.
The Group also has US federal and state income tax net operating loss (NOL) carryforwards of £14,306k and £9,631k which
will expire, if not utilised, in the tax years 2030–2039.
The Group has provided a valuation allowance of £4m on the deferred tax assets related to federal and state NOL carryforwards
in one of the US entities as it is not expected to generate taxable profits to utilise the NOLs. If there is a change and it is
determined that the entity will be able to realise these NOLs, then additional deferred tax assets and a related income tax
benefit of up to £805k could be recognised.
The Group has carryforward losses in a Hong Kong entity of £153k (2018: £nil) on which a deferred tax asset has not been
recognised as the entity is not expected to generate taxable profits to utilise these losses. If there is a change and it is
determined that the entity will be able to realise these losses, then additional deferred tax assets and a related income tax
benefit of up to £25k could be recognised.
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95
Strategic ReportCorporate GovernanceFinancial Statements Notes continued
25. Deferred taxation continued
Company
Deferred tax assets and liabilities are attributable to the following:
Property, plant and equipment
Share based payments
Net fair value movement on available for sale assets
Trading losses
Other financial assets at fair value
Other
Tax assets/(liabilities) before set-off
Set-off of tax
Net tax assets/(liabilities)
Movement in deferred tax balances during the year:
Property, plant and equipment
Share based payments
Net fair value movement on available
for sale assets
Trading losses
Other financial assets at fair value
Other
Balance at
1 March
2018
£’000
(3,326)
6,888
(32)
5,072
—
308
8,910
Impact of
change in
accounting
policy
£’000
—
—
32
89
(32)
—
89
Property, plant and equipment
Share based payments
Net fair value movement on available for sale assets
Trading losses
Other
Assets
2019
£’000
—
1,736
—
6,360
58
330
2018
£’000
—
6,888
—
5,072
—
308
Liabilities
2019
£’000
2018
£’000
(3,581)
(3,326)
—
—
—
(825)
—
—
(32)
—
—
—
8,484
12,268
(4,406)
(3,358)
—
—
—
—
8,484
12,268
(4,406)
(3,358)
Recognised
in profit
and loss
£’000
(255)
34
—
—
—
22
Recognised
in equity
£’000
Recognised
in OCI
£’000
Balance at
28 February
2019
£’000
—
(5,186)
—
1,199
—
—
—
—
—
—
(735)
—
(735)
(3,581)
1,736
—
6,360
(767)
330
4,078
(199)
(3,987)
Balance at
1 March
2017
£’000
Recognised
in profit
and loss
£’000
Recognised
in equity
£’000
Balance at
28 February
2018
£’000
(3,126)
3,649
(32)
4,268
124
4,883
(200)
(23)
—
—
184
(39)
—
3,262
—
804
—
4,066
(3,326)
6,888
(32)
5,072
308
8,910
The basis by which taxation is calculated is stated in note 1. There are no unprovided or unrecognised deferred tax balances.
26. Current tax
Current tax receivable
Current tax payable
Group
2019
£’000
1,461
1,004
2018
£’000
872
1,195
Company
2019
£’000
1,337
—
2018
£’000
872
—
96
First Derivatives plc Annual Report 2019
Financial Statements 27. Employee benefits
Accrued holiday pay
Employee taxes
28. Contingent deferred consideration
Contingent deferred consideration liabilities are payable as follows:
At 1 March
Increase in contingent deferred consideration
Settled in year
Foreign exchange impact
At end of period
Group
2019
£’000
1,825
4,120
5,945
Group
2019
£’000
5,688
3,230
(8,018)
171
1,071
2018
£’000
1,832
3,179
5,011
2018
£’000
4,028
2,980
(897)
(423)
5,688
Company
2019
£’000
1,476
3,643
5,119
2018
£’000
1,448
2,851
4,299
Company
2019
£’000
1,038
3,289
(3,259)
3
1,071
2018
£’000
500
1,038
(500)
—
1,038
The movement in contingent deferred consideration relates to the charge for the year for amounts conditional on future
service conditions, assessed as being post-acquisition remuneration, and is payable in cash and a variable number of
shares to the current value of the liability. The earn-out period for remaining contingent deferred consideration ended
during the current year and is due to be settled subsequent to year end. As at 28 February 2019 the amount payable in
respect of this was £1,071k (2018: the maximum total amount payable was £5,688k and the minimum total amount
payable was £nil).
Within one year
More than one year
Group
2019
£’000
1,071
—
1,071
2018
£’000
5,688
—
5,688
Company
2019
£’000
1,071
—
1,071
2018
£’000
1,038
—
1,038
The amount of contingent deferred consideration was variable dependent on the future performance of the relevant
subsidiary meeting specified turnover targets and is payable in cash 0% (2018: 55%) and shares 100% (2018: 45%).
29. Commitments
The Group previously entered into a contingent loan commitment with an associate of up to £1.1m. As at 28 February 2019
£1.1m remained committed (2018: £1.1m). There were no capital or other commitments at the current or prior year end.
Non-cancellable operating lease rentals are payable as follows:
Less than one year
Between one and five years
More than five years
Group
2019
£’000
3,271
11,653
12,503
27,427
2018
£’000
3,063
10,072
11,864
24,999
Company
2019
£’000
1,510
5,767
5,934
13,211
2018
£’000
1,183
4,446
6,456
12,085
The Group leases 17 premises under operating lease arrangements.
Group
During the year £3,528k was recognised as an expense in the income statement in respect of operating leases (2018: £2,556k).
Company
During the year £1,457k was recognised as an expense in the income statement in respect of operating leases (2018: £944k).
firstderivatives.com
97
Strategic ReportCorporate GovernanceFinancial Statements Notes continued
30. Pension contributions
The Group makes contributions to the personal pension schemes of certain employees. The pension charge for the year
amounted to £4,065k (2018: £3,401k). Contributions amounting to £584k (2018: £411k) were payable to the schemes at the
year end and are included in creditors.
31. Related party transactions
Parent and ultimate controlling party
There is no one party which is the ultimate controlling party of the Group and Company.
Group
Key management personnel compensation
Key management personnel have been deemed to be the Directors of the Company. The remuneration of the Directors
is set out in note 13.
The Group is charged rent monthly for the business use of apartments located in London owned by Brian Conlon. The charge
incurred during the financial year amounted to £55k (2018: £55k). Rent deposits of £26k (2018: £26k) have been paid to Brian
Conlon in respect of these apartments. The balance owed to Brian Conlon at 28 February 2019 is £nil (2018: £nil).
A 15-year lease was previously entered into for the rental of office space for the head office in Newry. The lessor is Oncon
Properties, a partnership in which Brian Conlon is a partner. A £148k (2018: £140k) rental charge was incurred in the year.
The balance owed to Oncon Properties at 28 February 2019 is £nil (2018: £nil) and an amount of £168k (2018: £168k) had
been prepaid.
During the current year, a 15-year lease was entered into for the rental of additional office space in Newry. The lessor is
Marcus Square Developments Limited, a private limited company in which Brian Conlon is a director. A £199k (2018: £nil)
rental charge was incurred in the year. The balance owed to Marcus Square Developments Limited at 28 February 2019 is
£nil (2018: £nil).
During the current year, a 15-year lease was entered into for the rental of office space in Belfast. The lessor is Armagh House
Limited, a private limited company in which Brian Conlon is a director, and was acquired by Marcus Square Developments
Limited during the year. A £405k (2018: £nil) rental charge was incurred in the year. The balance owed to Armagh House
Limited at 28 February 2019 is £nil (2018: £nil) and an amount of £567k (2018: £nil) had been prepaid.
The Group holds an interest in an associate, together with other instruments as disclosed in note 18.
Company
Other related party transactions
Subsidiaries
Subsidiaries
Sales to subsidiaries
Costs charged by subsidiaries
2019
£’000
13,709
2018
£’000
8,488
2019
£’000
2018
£’000
29,462
22,976
Receivables outstanding
Payables outstanding
2019
£’000
2018
£’000
2019
£’000
36,806
20,165
36,218
2018
£’000
17,786
Development costs of £419k (2018: £281k) were recharged from a subsidiary to the Company.
Interest is charged on intercompany loans at market rates.
Dividends paid by the Company to the Directors during the period were as follows:
B G Conlon
R G Ferguson
K MacDonald
S Keating
V Gambale
D Troy
98
First Derivatives plc Annual Report 2019
2019
£’000
1,940
25
11
6
3
—
2018
£’000
1,649
24
10
5
2
—
1,985
1,690
Financial Statements 32. Financial instruments
Fair values
a) Accounting classifications and fair values
Group
The following table shows the carrying amounts and fair values of financial assets and liabilities. The carrying amount of
all financial assets and liabilities not measured at fair value is considered to be a reasonable approximation of fair value.
28 February 2019
FVTPL
£’000
FVOCI
£’000
Financial assets measured at fair value
Equity securities
Warrants in associate2
Convertible loans
—
—
3,463
3,463
13,706
—
—
13,706
Financial assets not measured at fair value
Trade and other receivables
Cash and cash equivalents
—
—
—
Financial liabilities measured at fair value
Contingent deferred
consideration
Other derivatives2
1,071
—
1,071
Financial liabilities not measured at fair value
Secured bank loans
Finance leases
Trade, accruals
and other payables
Employee benefits
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
Carrying value
Financial
assets at
amortised
cost
£’000
Other
financial
liabilities
£’000
Total
£’000
Fair value
£’000
Level
13,706
13,706
3
3
2
—
—
—
—
54,179
18,798
72,977
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
3,463
17,169
54,179
18,798
72,977
1,071
—
1,071
34,909
34,909
378
378
58,322
58,322
1,825
1,825
95,434
95,434
—
3,463
17,169
1
1
1,071
—
1,071
1
1
1
1
1 Fair value not disclosed as the carrying amounts are considered to be a reasonable approximation of fair value.
2 Derivatives assessed as having minimal value.
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99
Strategic ReportCorporate GovernanceFinancial Statements
Notes continued
32. Financial instruments continued
Fair values continued
a) Accounting classifications and fair values continued
Group continued
28 February 2018
Financial assets measured at fair value
Equity securities – available for sale
Warrants in associate2
Financial assets not measured at fair value
Trade and other receivables
Cash and cash equivalents
Financial liabilities measured at fair value
Contingent deferred consideration
Other derivatives2
Financial liabilities not measured at fair value
Secured bank loans
Finance leases
Trade, accruals and other payables
Employee benefits
Carrying value
Liabilities at
amortised
cost
Restated *
£’000
Loans and
receivables
Restated *
£’000
Carrying
amount
Restated *
£’000
Fair value
£’000
Level
3
3,433
—
3,433
1
1
3,433
—
3,433
55,021
12,365
67,386
(5,688)
(5,688)
3
—
—
(5,688)
(5,688)
—
—
—
—
—
—
—
—
—
(28,544)
(28,544)
(7)
(7)
(48,892)
(48,892)
(1,832)
(1,832)
(79,275)
(79,275)
1
1
1
1
—
—
—
55,021
12,365
67,386
—
—
—
—
—
—
—
—
1 Fair value not disclosed as the carrying amounts are considered to be a reasonable approximation of fair value.
2 Derivatives assessed as having minimal value.
*
Comparative balances restated to exclude tax balances (trade and other receivables: £872k; employee benefits: £3,179k) as they are not in scope of
IFRS 13 and 7 disclosures.
100
First Derivatives plc Annual Report 2019
Financial Statements
32. Financial instruments continued
Fair values continued
a) Accounting classifications and fair values continued
Company
The following table shows the carrying amounts and fair values of financial assets and liabilities. The carrying amount of
all financial assets and liabilities not measured at fair value is considered to be a reasonable approximation of fair value.
28 February 2019
FVTPL
£’000
FVOCI
£’000
Financial assets measured at fair value
Equity securities
Convertible loans
—
376
376
12,776
—
12,776
Financial assets not measured at fair value
Trade and other receivables
Cash and cash equivalents
—
—
—
Financial liabilities measured at fair value
Contingent deferred
consideration
Derivatives2
1,071
—
1,071
Financial liabilities not measured at fair value
Secured bank loans
Trade, accruals
and other payables
Employee benefits
—
—
—
—
—
—
—
—
—
—
—
—
—
—
Carrying value
Financial
assets at
amortised
cost
£’000
Other
financial
liabilities
£’000
Total
£’000
Fair value
£’000
Level
3
3
2
—
—
—
69,164
14,760
83,924
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
12,776
376
13,152
69,164
14,760
83,924
1,071
—
1,071
34,909
34,909
90,023
90,023
1,476
1,476
126,408
126,408
12,776
376
13,152
1
1
1,071
—
1,071
1
1
1
1 Fair value not disclosed as the carrying amounts are considered to be a reasonable approximation of fair value.
2 Derivatives assessed as having minimal value.
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101
Strategic ReportCorporate GovernanceFinancial Statements
Notes continued
32. Financial instruments continued
Fair values continued
a) Accounting classifications and fair values continued
Company continued
28 February 2018
Financial assets measured at fair value
Equity securities – available for sale
Financial assets not measured at fair value
Trade and other receivables
Cash and cash equivalents
Financial liabilities measured at fair value
Contingent deferred consideration
Derivatives2
Financial liabilities not measured at fair value
Secured bank loans
Trade, accruals and other payables
Employee benefits
Carrying value
Liabilities at
amortised
cost
Restated *
£’000
Loans and
receivables
Restated *
£’000
Carrying
amount
Restated *
£’000
Fair value
£’000
Level
—
52,587
4,013
56,600
—
—
—
—
—
—
—
—
—
—
—
—
—
—
3,308
3,308
3
52,587
4,013
56,600
1
1
(1,038)
(1,038)
3
—
—
(1,038)
(1,038)
(28,544)
(28,544)
(32,420)
(32,420)
(1,448)
(1,448)
(62,412)
(62,412)
1
1
1
1 Fair value not disclosed as the carrying amounts are considered to be a reasonable approximation of fair value.
2
*
Balance relates to NCI put over the Group’s subsidiary which is recognised at immaterial value as the agreed price was equal to the fair value of the
underlying investment.
Comparative balances have been restated to exclude tax balances (trade and other receivables: £872k, employee benefits: £2,851k) as they are not in
scope of IFRS 13 and 7 disclosures.
b) Measurement of fair values
The following techniques have been applied in measuring Level 3 fair values, together with the significant unobservable
inputs used.
Financial instruments at fair value
Equity investments and convertible loans – The Group and Company have invested in a number of investments in unlisted
companies and a venture capital fund. The Group and Company have applied a discounted cash flow valuation technique
to assess the fair value of the unlisted companies and convertible loans as at year end.
The valuation model calculates the equity value considering the forecast revenue and costs, together with forecast exit
value after applying market multiples and discounted using a risk-adjusted discount rate.
Significant inputs
2019
2018
2019
£’000
2018
£’000
Range in inputs
Change in input
Impact on fair value
Forecast annual revenues – with adjustments
applied to Company forecasts
Risk-adjusted discount rate
Market multiple exit values – revenue
10–50%
30–50%
10–50%
40–45%
+/(-)15% 3,180/(3,184)
1,649/(1,649)
-/(+)5% 3,381/(2,695)
1,188/(897)
2.5–5x
2.5–5x
+/(-)15%
1,967/(1,967)
482/(482)
102
First Derivatives plc Annual Report 2019
Financial Statements
32. Financial instruments continued
Fair values continued
b) Measurement of fair values continued
Financial instruments at fair value continued
Warrants – The Group holds warrants in the associate. These were considered at 28 February 2019 and 28 February 2018 to
have a minimal fair value due to the contingent nature.
Contingent deferred consideration – The Group and Company have agreed to pay additional consideration dependent
on the relevant subsidiary achieving certain performance targets post-acquisition. The earn-out period for remaining
contingent deferred consideration ended during the current year with the carrying value reflecting final amounts payable.
Reconciliation of Level 3 fair value:
Group
Balance at 1 March 2017
Purchases
Settlements
Charge included in profit or loss
– Change in fair value (unrealised)
Foreign exchange loss
Balance at 28 February 2018/1 March 2018
Adjustment on initial application of IFRS 9
Balance at 1 March 2018 under IFRS 9
Purchases
Advances
Settlements
Charge included in profit or loss
– Change in fair value (unrealised)
Gain included in OCI
– Change in fair value (unrealised)
Foreign exchange gain
Transfer out of Level 3
Balance at 28 February 2019
Convertible
loans
£’000
Unquoted
equities
£’000
Contingent
consideration
£’000
3,121
312
—
—
—
(4,028)
—
897
(2,980)
423
3,433
(5,688)
—
3,433
5,951
—
—
—
4,322
—
—
—
(5,688)
—
—
8,018
(3,230)
—
(171)
1,071
—
— 1
1,944
1,944
—
1,505
—
—
—
14
—
3,463
13,706
1
Under IAS 39 the conversion feature was a derivative which was separately recognised FVTPL and as at 28 February 2018 was assessed as having
minimal value.
Transfer out of Level 3
The remaining contingent deferred consideration was transferred out of Level 3 to Level 2 fair value as the earn-out period
for remaining contingent deferred consideration ended during the current year. The carrying value reflects final amounts
payable and is due to be settled subsequent to year end.
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103
Strategic ReportCorporate GovernanceFinancial Statements Notes continued
32. Financial instruments continued
Fair values continued
b) Measurement of fair values continued
Reconciliation of Level 3 fair value continued:
Company
Balance at 1 March 2017
Purchases
Settlements
Charge included in profit or loss
– Change in fair value (unrealised)
Foreign exchange loss
Balance at 28 February 2018/1 March 2018
Adjustment on initial application of IFRS 9
Balance at 1 March 2018 under IFRS 9
Purchases
Advances
Settlements
Charge included in profit or loss
– Change in fair value (unrealised)
Gain included in OCI
– Change in fair value (unrealised)
Foreign exchange gain
Transfer out of Level 3
Balance at 28 February 2019
Convertible
loans
£’000
Unquoted
equities
£’000
Contingent
consideration
£’000
3,121
187
—
—
—
—
—
—
(1,079)
41
3,308
(1,038)
—
3,308
5,146
—
—
—
4,322
—
—
—
(1,038)
—
—
3,259
(3,289)
—
(3)
1,071
—
— 1
323
323
—
39
—
—
—
14
—
376
12,776
1
Under IAS 39 the conversion feature was a derivative which was separately recognised FVTPL and as at 28 February 2018 was assessed as having
minimal value.
Transfer out of Level 3
The remaining contingent deferred consideration was transferred out of Level 3 to Level 2 fair value as the earn-out period
for remaining contingent deferred consideration ended during the current year. The carrying value reflects final amounts
payable and is due to be settled subsequent to year end.
Exposure to credit risk
The carrying amount of financial assets represents the maximum credit exposure. The maximum exposure to credit risk
at the reporting date:
Trade and other receivables
Cash and cash equivalents
Convertible loans
Group
Carrying amount
Company
Carrying amount
2019
£’000
54,179
18,798
3,463
2018
Restated*
£’000
53,077
12,365
1,944
2019
£’000
69,164
14,760
376
2018
Restated*
£’000
52,264
4,013
323
76,440
67,386
84,300
56,600
*
Comparative balances have been restated to exclude corporation tax receivable and separate convertible and other loans from trade and other receivables.
104
First Derivatives plc Annual Report 2019
Financial Statements 32. Financial instruments continued
Exposure to credit risk continued
The maximum exposure to credit risk for trade and other receivables and convertible loans at the reporting date by
geographical region:
Europe
America
United Kingdom
Australasia
Group
Company
2019
£’000
8,630
24,240
23,021
1,751
2018
Restated *
£’000
8,653
23,867
20,310
2,191
2019
£’000
5,366
35,691
25,584
2,899
2018
Restated *
£’000
4,868
23,831
21,150
2,738
57,642
55,021
69,540
52,587
The maximum exposure to credit risk for trade and other receivables and convertible loans at the reporting date by type
of counterparty:
End-user customer
Convertible and other loans
Other
Group
Company
2019
£’000
48,883
4,405
4,354
2018
Restated *
£’000
47,136
4,538
3,347
2019
£’000
28,771
1,138
39,631
57,642
55,021
69,540
2018
Restated *
£’000
32,042
1,296
19,249
52,587
*
Comparative balances have been restated to exclude corporation tax receivable and separate convertible and other loans from trade and other receivables.
No receivable balance was in excess of 10% of the Group’s total trade and other receivables balance at the year end.
Impairment losses
Trade receivables and accrued income
Expected credit loss assessment
The expected credit loss allowance for trade receivables and accrued income at the reporting date was:
Group
Not past due
Past due 0–30 days
Past due 31–120 days
Past due 121–180 days
Past due 181–365 days
Past due 366 days +
Total
Company
Not past due
Past due 0–30 days
Past due 31–120 days
Past due 121–180 days
Past due 181–365 days
Past due 181 days +
Total
Weighted
average
loss rate
2019
%
0.96
3.90
18.18
39.79
52.78
93.76
Weighted
average
loss rate
2019
%
0.53
2.84
7.74
19.25
46.10
91.11
Gross
carrying
amount
2019
£’000
41,259
3,025
1,451
568
638
2,468
49,409
Gross
carrying
amount
2019
£’000
22,915
1,105
860
428
564
1,175
27,047
firstderivatives.com
Loss
allowance
2019
£’000
396
118
264
226
337
2,315
3,656
Loss
allowance
2019
£’000
121
31
67
82
260
1,071
1,632
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Strategic ReportCorporate GovernanceFinancial Statements Notes continued
32. Financial instruments continued
Exposure to credit risk continued
Impairment losses continued
Trade receivables and accrued income continued
Comparative information under IAS 39
The ageing of trade receivables and accrued income at the reporting date was:
Group
Not past due
Past due 0–30 days
Past due 31–120 days
Past due 121–365 days
Past due 366 days +
Total
Company
Not past due
Past due 0–30 days
Past due 31–120 days
Past due 121–365 days
Past due 366 days +
Total
Gross
2018
Restated *
£’000
26,893
4,576
7,670
4,894
3,065
47,098
Gross
2018
Restated *
£’000
13,048
2,351
5,820
3,901
1,764
26,884
Impairment
2018
£’000
—
—
—
152
2,830
2,982
Impairment
2018
£’000
—
—
—
152
1,764
1,916
* Comparative balances have been restated to include accrued income of £6,187k for Group and £2,133k for Company.
The movement in the allowance for impairment in respect of trade receivables and accrued income during the year was
as follows:
Balance at 1 March under IAS 39
Adjustment on initial application of IFRS 9
Balance at 1 March under IFRS 9
Net remeasurement of loss allowance
Foreign exchange impact
Amounts written off
Closing balance
Group
2019
£’000
2,982
1,164
4,146
12
(12)
2018
£’000
3,061
1,380
23
(490)
(1,482)
3,656
2,982
Company
2019
£’000
1,916
402
2,318
(196)
—
(490)
1,632
2018
£’000
1,045
1,412
—
(541)
1,916
The Group expects no significant recovery from the amount written off. However, financial assets that are written off could
still be subject to enforcement activities.
106
First Derivatives plc Annual Report 2019
Financial Statements 32. Financial instruments continued
Exposure to credit risk continued
Impairment losses continued
Trade receivables and accrued income continued
The following significant changes in the gross carrying amounts of trade receivables contributed to the changes in the
impairment loss allowance during the financial year:
Group
• The growth of the business resulted in increases in current trade receivables of £1.1m and accrued income by £1.0m,
growth rates which were lower than the 17% increase in Group revenue. This was achieved by improved debt collection
which resulted in a decrease in debtor days from 82 in FY18 to 75 in FY19. The 7% reduction in debtor days also
minimised the required increase in the expected credit loss provision.
Company
• The growth of the business resulted in increases in trade receivables of £1.5m with accrued income decreasing by £1.1m.
This was achieved by improved debt collection which resulted in a decrease in debtor days from 67 in FY18 to 59 in FY19.
The 11% reduction in debtor days also minimised the required increase in the expected credit loss provision.
Non-convertible loans and other receivables
Expected credit loss assessment
The following table provides information about exposure to credit risks and ECLs for non-convertible loans and other
receivables at the reporting date:
Group
Other receivables
Medium grade financial services
Non-convertible loans
Medium grade financial services
Non-convertible loans
Non-investment grade pharma
Total
Company
Other receivables
Medium grade financial services
Non-convertible loans
Medium grade financial services
Total
Equivalent to
external credit
rating (S&P)
A+ to BBB-
A+ to BBB-
BB+ to B-
Equivalent to
external credit
rating (S&P)
A+ to BBB-
A+ to BBB-
Weighted
average Gross carrying
amount
loss rate
2019
2019
£’000
%
Loss
allowance
2019
£’000
3.73
3.85
1.09
3,487
793
187
4,467
130
31
7
168
Weighted
average Gross carrying
amount
loss rate
2019
2019
£’000
%
Loss
allowance
2019
£’000
3.73
3.85
3,487
793
4,280
130
31
161
None of the balances in respect of the Group and Company are credit impaired.
The Group and Company did not have any loans and other receivables that were past due at 28 February 2019 (2018: £nil).
The movement in the allowance for impairment in respect of non-convertible loans and other receivables during the year
was as follows:
Balance at 1 March under IAS 39
Adjustment on initial application of IFRS 9
Balance at 1 March under IFRS 9
Net remeasurement of loss allowance
Closing balance
Group
2019
£’000
—
161
161
7
168
2018
£’000
—
—
—
Company
2019
£’000
—
161
161
—
161
2018
£’000
—
—
—
firstderivatives.com
107
Strategic ReportCorporate GovernanceFinancial Statements Notes continued
32. Financial instruments continued
Exposure to credit risk continued
Impairment losses continued
Receivables from subsidiaries
Company
The Company has intercompany receivable balances totalling £37,130k at year end. Management has assessed that the
estimated credit loss on such balances is low based on the cash-generating ability of the relevant subsidiaries and latest
forecasts. On this basis management determined that it is appropriate to apply a twelve-month expected credit loss
model in calculating the estimated credit provision. Applying a twelve-month probability of default rate of 0.87% to the
entire balance, a provision of £324k has been recognised as at 28 February 2019 (2018: £nil).
Government grants
At the year end £311k (2018: £164k) for the Group and £301k (2018: £51k) for the Company are receivable from Invest
Northern Ireland in respect of grants receivable and £1,065k (2018: £1,162k) for the Group is receivable from Irish Revenue
Commissioners in relation to RDEC. Both are government agencies and based on historical payment history; with all
amounts previously recognised subsequently being received; no expected credit loss is recognised in relation to this balance.
Cash and cash equivalents
The Group and Company held cash and cash equivalents of £18,798k (2018: £12,365k) and £14,760k (2018: £4,013k)
respectively at 28 February 2019 which represents their maximum exposure on the assets. The cash and cash equivalents
are held with bank and institutional counterparties which are rated AA- to AA+ based on credit agency ratings.
Liquidity risk
Group
The following are contractual maturities of financial liabilities, including estimated interest payments.
28 February 2019
Carrying
amount
£’000
Contractual
cash flows
£’000
6 months
or less
£’000
6–12 months
£’000
1–2 years
£’000
2–5 years
£’000
More than
5 years
£’000
Secured bank loans
(34,909)
(35,591)
(20,700)
(14,891)
Finance leases
(378)
(438)
(51)
(52)
—
(103)
—
(232)
Trade and other payables
(58,322)
(58,683)
(58,683)
Contingent deferred
consideration
Commitment to associate
(1,071)
—
(1,071)
(1,053)
(1,071)
(579)
—
—
(474)
—
—
—
—
—
—
(94,680)
(96,836)
(81,084)
(15,417)
(103)
(232)
—
—
—
—
—
—
28 February 2018
Carrying
amount
£’000
Contractual
cash flows
£’000
6 months
or less
£’000
6–12 months
£’000
1–2 years
£’000
2–5 years
£’000
More than
5 years
£’000
Secured bank loans
(28,544)
(29,881)
(1,958)
(2,272)
(25,651)
Finance leases
(7)
(8)
(8)
Trade and other payables
(48,892)
(48,892)
(18,856)
—
—
—
(30,036)
Contingent deferred
consideration
Commitment to associate
(5,688)
—
(5,688)
(1,007)
—
(560)
(5,688)
(447)
—
—
(83,131)
(85,476)
(21,382)
(8,407)
(55,687)
—
—
—
—
—
—
—
—
—
—
—
—
The above contracted cash flows include interest on secured bank loans, the terms of which are set out in note 23.
108
First Derivatives plc Annual Report 2019
Financial Statements 32. Financial instruments continued
Exposure to credit risk continued
Impairment losses continued
Liquidity risk continued
Company
The following are contractual maturities of financial liabilities, including estimated interest payments.
28 February 2019
Carrying
amount
£’000
Contractual
cash flows
£’000
6 months
or less
£’000
6–12 months
£’000
1–2 years
£’000
2–5 years
£’000
More than
5 years
£’000
Secured bank loans
(34,909)
(35,591)
(20,700)
(14,891)
Trade and other payables
(90,023)
(90,384)
(90,384)
Contingent deferred
consideration
(1,071)
(1,071)
(1,071)
—
—
(126,003)
(127,046)
(112,155)
(14,891)
—
—
—
—
—
—
—
—
—
—
—
—
28 February 2018
Carrying
amount
£’000
Contractual
cash flows
£’000
6 months
or less
£’000
6–12 months
£’000
1–2 years
£’000
2–5 years
£’000
More than
5 years
£’000
Secured bank loans
(28,544)
(29,881)
(1,958)
(2,272)
(25,651)
Trade and other payables
(32,420)
(32,420)
(32,420)
—
Contingent deferred
consideration
(1,038)
(1,038)
—
(1,038)
—
—
(62,002)
(63,339)
(34,378)
(3,310)
(25,651)
—
—
—
—
—
—
—
—
The above contracted cash flows include interest on secured bank loans, the terms of which are set out in note 23.
Currency risk
Group
The Group’s exposure to currency risk was as follows:
Trade receivables
Trade and other payables
Net balance sheet exposure
28 February 2019
CAD
£’000
220
(50)
170
EUR
£’000
4,742
USD
£’000
12,934
(844)
(41,506)
3,898
(28,572)
28 February 2018
EUR
£’000
3,483
(329)
CAD
£’000
230
(14)
216
USD
£’000
10,079
(31,154)
3,154
(21,075)
The above excludes bank loans designated in a net investment hedge of £19,819k (2018: £22,354k).
Company
The Company’s exposure to currency risk was as follows:
Trade receivables
Secured bank loans
Trade and other payables
Net balance sheet exposure
28 February 2019
CAD
£’000
220
—
(50)
170
EUR
£’000
4,718
—
USD
£’000
12,460
(19,819)
(643)
(41,303)
4,075
(48,662)
The following significant exchange rates applied during the year:
USD 1
EUR 1
CAD 1
Average rate
2019
1.32
1.13
1.73
28 February 2018
EUR
£’000
3,483
CAD
£’000
230
USD
£’000
9,824
—
(14)
216
2018
1.31
1.14
1.69
—
(22,354)
(250)
(997)
3,233
(13,527)
Reporting date
spot rate
2019
1.33
1.17
1.75
2018
1.39
1.13
1.77
firstderivatives.com
109
Strategic ReportCorporate GovernanceFinancial Statements Notes continued
32. Financial instruments continued
Exposure to credit risk continued
Impairment losses continued
Currency risk continued
Sensitivity analysis
A 10% strengthening of sterling against the above currencies at the end of the period would decrease Group profit or loss by
£2,450k (2018: £1,771k). A 10% weakening of sterling against the above currencies at the end of the period would increase Group
profit or loss by £2,205k (2018: £1,594k). The movement on the net investment hedge would be offset by the movement in the
net investment. This analysis assumes that all other variables, in particular interest rates, remain constant.
A 10% strengthening of sterling against the above currencies at the end of the period would decrease Company profit or
loss by approximately £4,442k (2018: £1,008k). A 10% weakening of sterling against the above currencies at the end of the
period would increase Company profit or loss by approximately £3,997k (2018: £907k). This analysis assumes that all other
variables, in particular interest rates, remain constant.
Interest rate risks
At the reporting date the interest profile of the Group’s and Company’s interest bearing financial instruments was:
Variable rate instruments
• Financial assets
• Financial liabilities
Fixed rate instruments
• Financial assets
• Financial liabilities
Group
2019
£’000
2018
£’000
Company
2019
£’000
2018
£’000
18,798
12,365
14,760
4,013
(34,909)
(28,544)
(34,909)
(28,544)
(16,111)
(16,179)
(20,149)
(24,531)
3,463
(378)
3,085
1,944
(7)
1,937
376
—
376
323
—
323
A 10% reduction in interest rates at the end of the period would increase Group equity and profit and loss by approximately
£103k (2018: £84k). A 10% increase in interest rates at the end of the period would decrease Group equity and profit or loss
by approximately £113k (2018: £93k). This analysis assumes that all other variables remain constant.
33. Impact of restatement
The Group has restated its reserves and other comprehensive income to correct:
• discretionary dividends to NCI as a deduction from retained earnings (previously this was included in the net exchange
movement in foreign subsidiaries within other comprehensive income and therefore reflected in the currency translation
adjustment reserve). The impact of this for the year ended 28 February 2018 was £3,038k and £5,550k in respect of
amounts paid prior to 1 March 2017;
• the value of consideration given in excess of the nominal value of ordinary shares issued on the acquisition of
subsidiaries (interest of at least 90%) on share for share exchanges (previously this was included in share premium)
has been transferred to a merger reserve in accordance with the requirements of Section 612 of the Companies Act
2006. The impact of this was an adjustment of £7,677k as at 1 March 2017 and £8,118k as at 1 February 2018; and
• Corporation tax receivable of £872k has also been reclassified from trade and other receivables to a separate line item
on the balance sheet. There was no impact on the balance sheet as at 1 March 2017.
The Group has restated each of the affected financial statement line items for the prior period. The following tables
summarise the impacts on the Group and Company’s financial statements.
110
First Derivatives plc Annual Report 2019
Financial Statements 33. Impact of restatement continued
Consolidated balance sheet
1 March 2017
Total assets
Total liabilities
Share premium
Merger reserve
Currency translation adjustment reserve
Retained earnings
Other reserves
Total equity
28 February 2018
Trade and other receivables
Current tax receivable
Other assets
Total assets
Total liabilities
Share premium
Merger reserve
Currency translation adjustment reserve
Retained earnings
Other reserves
Total equity
Consolidated statement of comprehensive income
28 February 2018
Profit for the year
Net exchange loss on net investment in foreign subsidiaries
Other items
Impact of reclassification
As previously
reported
£’000
Adjustments
£’000
As restated
£’000
253,165
121,434
72,275
—
8,335
40,772
10,349
131,731
—
—
253,165
121,434
(7,677)
64,598
7,677
5,550
(5,550)
—
—
7,677
13,885
35,222
10,349
131,731
Impact of reclassification
As previously
reported
£’000
Adjustments
£’000
As restated
£’000
53,718
—
200,834
254,552
116,453
81,286
—
(6,874)
49,218
14,469
138,099
(872)
872
—
—
—
52,846
872
200,834
254,552
116,453
(8,118)
73,168
8,118
8,588
(8,588)
—
—
8,118
1,714
40,630
14,469
138,099
Impact of reclassification
As previously
reported
£’000
Adjustments
£’000
As restated
£’000
10,208
(16,779)
1,570
—
3,038
—
10,208
(13,741)
1,570
Total comprehensive income for the period attributable to owner of the parent
(5,001)
3,038
(1,963)
There was no impact on the Group’s reported profit after tax, its basic or diluted earnings per share, or the total operating,
investing or financial cash flows for the year ended 28 February 2018.
firstderivatives.com
111
Strategic ReportCorporate GovernanceFinancial Statements Notes continued
33. Impact of restatement continued
Company balance sheet
1 March 2017
Total assets
Total liabilities
Share premium
Merger reserve
Other reserves
Total equity
28 February 2018
Trade and other receivables
Current tax receivable
Other assets
Total assets
Total liabilities
Share premium
Merger reserve
Other reserves
Total equity
Impact of reclassification
As previously
reported
£’000
Adjustments
£’000
As restated
£’000
179,985
73,645
72,275
—
34,065
106,340
—
—
(7,677)
7,677
—
—
179,985
73,645
64,598
7,677
34,065
106,340
Impact of reclassification
As previously
reported
£’000
Adjustments
£’000
As restated
£’000
44,119
—
152,890
197,009
75,327
81,286
—
40,396
121,682
(872)
872
—
—
—
(8,118)
8,118
—
—
43,247
872
152,890
197,009
75,327
73,168
8,118
40,396
121,682
There was no impact on the Company’s reported profit after tax, or on the total operating, investing or financial cash flows
for the year ended 28 February 2018.
34. Share based payments
Options have been granted as set out below under the Group’s equity-settled share option schemes which are open to all
Executive Directors and employees of the Group. Options that vest at annual intervals over a three or four-year period are
deemed to consist of three separate options for valuation purposes. Options with TSR conditions vesting at the end of a
three-year period are deemed to be a single option for valuation. Vested options are exercisable following the satisfaction
of the service criteria for a period not exceeding ten years from the date of grant.
Reconciliation of outstanding share options
The number and weighted average exercise prices of share options have been analysed into four exercise price ranges
as follows:
Exercise price: £1.21
Maximum options outstanding at beginning of period
Lapsed during the period
Exercised during the period
Granted during the period
Maximum options outstanding at end of period
Exercisable at end of period
Weighted
average
exercise
price
2019
1.21
—
1.21
—
1.21
1.21
Number
of options
2019
94,500
—
(45,500)
—
49,000
49,000
Weighted
average
exercise
price
2018
1.21
—
1.21
—
1.21
1.21
Number
of options
2018
105,500
—
(11,000)
—
94,500
94,500
The options outstanding at 28 February 2019 above have an exercise price of £1.21 (2018: £1.21) and a weighted average
contractual life of 0.01 years (2018: 1.0 years).
112
First Derivatives plc Annual Report 2019
Financial Statements 34. Share based payments continued
Reconciliation of outstanding share options continued
Exercise price: £2.27
Maximum options outstanding at beginning of period
Lapsed during the period
Exercised during the period
Granted during the period
Maximum options outstanding at end of period
Exercisable at end of period
Weighted
average
exercise
price
2019
2.27
—
2.27
—
2.27
2.27
Number
of options
2019
44,584
—
(6,000)
—
38,584
38,584
Weighted
average
exercise
price
2018
2.50
—
2.63
—
2.27
2.27
Number
of options
2018
120,334
—
(75,750)
—
44,584
44,584
The options outstanding at 28 February 2019 above have an exercise price of £2.27 (2018: £2.27) and a weighted average
contractual life of 1.0 years (2018: 2.0 years).
Range of exercise price: £4.27–9.00
Maximum options outstanding at beginning of period
Lapsed during the period
Exercised during the period
Granted during the period
Maximum options outstanding at end of period
Exercisable at end of period
Weighted
average
exercise
price
2019
6.77
—
Number
of options
2019
909,667
—
6.81
(216,333)
—
6.77
6.77
—
693,334
693,334
Weighted
average
exercise
price
2018
6.77
8.68
6.93
—
6.77
6.51
Number
of options
2018
1,226,550
31,000
(347,883)
—
909,667
813,088
The options outstanding at 28 February 2019 above have an exercise price in the range of £4.27 to £9.00 (2018: £4.27 to £9.00)
and a weighted average contractual life of 3.8 years (2018: 4.7 years).
Range of exercise price: £12.28–25.37
Maximum options outstanding at beginning of period
Lapsed during the period
Exercised during the period
Granted during the period
Maximum options outstanding at end of period
Exercisable at end of period
Weighted
average
exercise
price
2019
16.70
14.39
13.12
Number
of options
2019
1,727,336
(24,333)
(125,267)
22.20
125,000
17.40
14.87
1,702,736
572,243
Weighted
average
exercise
price
2018
14.70
14.69
13.84
21.76
16.70
14.67
Number
of options
2018
1,603,500
(1,500)
(324,664)
450,000
1,727,336
270,825
The options outstanding at 28 February 2019 above have an exercise price in the range of £12.28 to £25.37 (2018: £12.28 to £25.37)
and a weighted average contractual life of 7.2 years (2018: 8.0 years).
The weighted average share price at the date of exercise for share options exercised for the year ended 28 February 2019
was £39.86 per share (2018: £31.89).
firstderivatives.com
113
Strategic ReportCorporate GovernanceFinancial Statements
Notes continued
34. Share based payments continued
Measurement of fair values
The fair value of services received in return for share options granted is based on the fair value of share options granted,
measured using an adjusted Black Scholes model, with the following inputs:
Grant of options during the year ended 28 February 2019
Grant date
Fair value at grant date
Share price at grant date
Exercise price
Number of options
Expected volatility (weighted average volatility)
Option life (expected weighted average life)
Expected dividends
Risk-free interest rate (based on government bonds)
Measurement of fair values
Grant of options during the year ended 28 February 2018
Grant date
Fair value at grant date
Share price at grant date
Exercise price
Number of options
Expected volatility (weighted average volatility)
Option life (expected weighted average life)
Expected dividends
Risk-free interest rate (based on government bonds)
13/12/18
13/12/18
5.85
22.20
22.20
100,000
30.0%
6.71
22.20
22.20
25,000
30.0%
3.0 years
4.0 years
0.1%
3.0%
0.1%
3.0%
17/05/17
17/05/17
4.53
25.37
25.37
3.10
25.37
17.25 1
250,000
200,000
17.5%
17.5%
3.5 years
3.5 years
0.1%
3.0%
0.1%
3.0%
1 The share option award on 17 May 2017 with an exercise price of £17.25 was part of contractual employment arrangements.
The adjustments made to the standard Black-Scholes model are those required to reflect more clearly the Company’s
experience relating to key assumptions.
Employee expenses
Expense relating to:
Share options granted in 2013/14
Share options granted in 2014/15
Share options granted in 2015/16
Share options granted in 2016/17
Share options granted in 2017/18
Share options granted in 2018/19
Total amount recognised as employee benefit expense in share based payment reserve
Total expense recognised as employee benefit expense
National Insurance contributions on employee benefit expense
Share based payment and related costs
114
First Derivatives plc Annual Report 2019
2019
£’000
2018
£’000
—
40
188
718
455
51
1,452
2019
£’000
1,452
1,021
2,473
74
195
399
560
358
—
1,586
2018
£’000
1,586
1,124
2,710
Financial Statements
35. Contingent liabilities
Government grants
A portion of grants may become repayable should the conditions of offer cease to be met. The repayment of the employment
grant is contingent on the maintenance of employment levels to March 2020 and September 2022 in relation to the
respective grants.
36. Subsequent events
On 29 March 2019 the Group repaid its bank loans (facilities 1, 2 and 3) and drew down on the new term and revolving loans.
37. Impact of reclassification
Certain comparative amounts have been reclassified in the current year financial statements to enable comparability.
The Group has reanalysed the classification of costs in its consolidated statement of comprehensive income and has
restated this accordingly. The purpose of these changes is to enable easier comparison with the Group’s peers and to
reflect the separation of sales and marketing activities and classification thereof within operating costs. These activities
are now formally carried out by separately identifiable individuals and/or suppliers rather than being reflected in cost
of sales activities.
The following table summarises the impacts on the Group’s consolidated statement of financial position.
Consolidated statement of comprehensive income
For the year ended 28 February 2018
Revenue
Total revenue
Software licenses and services
Managed services and consulting
Cost of sales
Total cost of sales
Software licenses and services
Managed services and consulting
Gross profit
Operating costs
Research and development costs
Of which capitalised
Sales and marketing costs
Administrative expenses
Impairment loss on trade and other receivables*
Other income
Total operating costs
Operating profit
Other items
Profit for the year
Impact of reclassification
As previously
reported
£’000
Adjustments
£’000
As restated
£’000
186,042
—
186,042
—
—
111,912
74,130
111,912
74,130
(134,402)
26,821
(107,581)
—
—
(53,124)
(53,124)
(54,457)
(54,457)
51,640
26,821
78,461
—
—
—
(38,320)
—
1,382
(9,293)
(9,293)
7,486
7,486
(26,635)
(26,635)
3,001
(1,380)
—
(35,319)
(1,380)
1,382
(36,938)
(26,821)
(63,759)
14,702
(4,494)
10,208
—
—
—
14,702
(4,494)
10,208
*
For comparability the charge for impairment of trade and other receivables has been reclassified from administrative expenses to a separate line item
on the consolidated statement of comprehensive income under IAS 1 as an amendment arising on implementation of IFRS 9.
firstderivatives.com
115
Strategic ReportCorporate GovernanceFinancial Statements Directors and advisers
Directors
S Keating
– Non-Executive Chairman*+
B G Conlon
– Chief Executive Officer
R G Ferguson – Chief Financial Officer
K MacDonald – Non-Executive Director*
V Gambale
– Non-Executive Director*+
D Troy
–
Non-Executive Director+
* Member of the Audit Committee.
+ Member of the Remuneration Committee.
Nominated adviser/Euronext
Growth adviser and joint brokers
Investec Bank Plc
30 Gresham Street
London
EC2V 7QP
Goodbody Corporate Finance
Ballsbridge Park
Ballsbridge
Dublin 4
Company registration number
NI 30731
Registrar and transfer office
Neville Registrars Limited
Neville House
Steelpark Road
Halesowen
West Midlands
B62 8HD
Secretary
JJ Kearns
Registered office
3 Canal Quay
Newry
Co. Down
BT35 6BP
Auditor
KPMG
Chartered Accountants
The Soloist Building
1 Lanyon Place
Belfast
BT1 3LP
Solicitors
Mills Selig
21 Arthur Street
Belfast
BT1 4GA
Bankers
Bank of Ireland
Corporate Headquarters
1 Donegall Square South
Belfast
BT1 5LR
116
First Derivatives plc Annual Report 2019
Financial Statements Global directory
Europe, Middle East and Africa
Head office
First Derivatives plc
3 Canal Quay
Newry
Co. Down
N. Ireland
BT35 6BP
Belfast
The Weaving Works
Ormeau Avenue
Belfast
Co. Antrim
N. Ireland
BT2 8HD
Telephone: +44 28 3025 2242
Fax: +44 28 3025 2060
London
Fifth Floor
Cannon Green Building
27 Bush Lane
London
EC4R 0AN
UK
Dublin
First Floor
Fleming Court
Flemings Place
Mespil Road
Dublin 4
D04 N4X9
Ireland
Dubai
Creative Tower
Dubai
PO BOX 4422
UAE
Madrid
Avenida de la Industria, 32
28108 Alcobendas
Madrid
Spain
Philadelphia
1818 Market Street
37th Floor
Philadelphia
PA 19103
USA
Toronto
31 Lakeshore Road East
Suite 201
Mississauga
Ontario
L5G 4V5
Canada
Singapore
One Raffles Quay
North Tower
#30-03
Singapore
048583
Hong Kong
Level 66
Two Centre
99 Queens Road
Central
Hong Kong
Tokyo
Sanno Park Tower 3F
2-11-1 Nagata-cho
Chiyoda-ku
Tokyo, 100-6162
Japan
Munich
Mindspace
Viktualienmarkt 8
80331 Munich
Germany
USA and Canada
New York
45 Broadway
Twentieth Floor
New York
NY 10006
USA
Telephone: +1 212 447 6700
Asia Pacific
Sydney
Suite 201
22 Pitt Street
Sydney
NSW 2000
Australia
South Korea
Seoul Square Building
Level 14
416 Hangang-daero
Jung-gu
Seoul, 04637
South Korea
First Derivatives plc commitment to environmental issues is reflected
in this Annual Report which has been printed on Galerie Satin, an FSC®
certified material.
This document was printed by CPI Group using their environmental
print technology, which minimises the impact of printing on the
environment with 99 per cent of dry waste diverting from landfill. Both
the printer and the paper mill are registered to ISO 14001.
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First Derivatives plc
Global Headquarters
3 Canal Quay
Newry, Co. Down
BT35 6BP
+44 (0) 28 3025 2242