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First Derivatives plc
Annual report and accounts 2020
Our world-leading Kx streaming analytics
technology combined with our data expertise
is a game changer for our clients, helping
them to generate more revenue and increase
their operational efficiency.
Kx is straightforward to manage and powerful
enough to cope with any data challenge,
producing faster results using less hardware
and energy, than any of its competitors.
Read more on page 13 about how First Derivatives Changes the Game:
IN FINTECH
IN MARTECH
IN INDUSTRY
Highlights
FINANCIAL HIGHLIGHTS
STRATEGIC REPORT
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Revenue £m
£237.8m
Adjusted EBITDA £m
£45.5m
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Highlights
At a glance
Chairman’s review
Business model
Strategy
Key performance indicators
Stakeholder engagement
Business review
Financial review
23 Principal risks and uncertainties
26 Corporate responsibility
CORPORATE GOVERNANCE
30 Board of Directors
33 Chairman’s governance statement
34 Governance framework
36 Report of the Audit Committee
39 Report of the Nomination Committee
41
Report of the Remuneration Committee
18
19
20
18
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45 Directors’ report
Operating profit £m
£21.7m
Diluted earnings per share p
54.2p
OPERATIONAL HIGHLIGHTS
• Software revenue up 13% to £148.4m (2019: £130.9m), driven
by 23% growth in recurring software license revenue
• Significant contract wins in our core FinTech market and
progress in our drive to achieve market leadership by building
out the capabilities of our solutions
• Partner agreements and contract wins across our target
markets of automotive, manufacturing and energy as we focus
on those markets where Kx provides the greatest competitive
advantage, including a global Kx partnership agreement with
Tata Consultancy Services (TCS)
• MRP Prelytix subscription revenue up 33% to £25.6m (2019: £19.3m)
as we increase the platform’s functionality and it becomes
recognised as a leader in its market
• Managed services and consulting revenue up 3% to £89.4m
(2019: £86.5m), with strong order intake in H2 but lower growth
due to a delayed start to two multi-year contracts
• Finalisation of the acquisition of the minority shareholdings in Kx
Systems, taking 100% ownership, funded by new financing facilities
which provide flexibility to support the Group’s growth plans
• Launch of Kx 4.0 with increased performance, security,
visualisation and machine learning capabilities to spearhead
our push to wide adoption of Kx across industries
• Appointments of Seamus Keating as Chief Executive Officer
and Donna Troy as Chairman in January 2020
Read more on pages 14–17
47
Statement of Directors’ responsibilities
FINANCIAL STATEMENTS
48
Independent auditor’s report
56 Consolidated statement of comprehensive
income
58 Consolidated balance sheet
59 Company balance sheet
60 Consolidated statement of changes in equity
62 Company statement of changes in equity
64 Consolidated cash flow statement
65 Company cash flow statement
66 Notes
119 Directors and advisers
120 Global directory
Read more at
firstderivatives.com
and kx.com
firstderivatives.com
1
At a glance
Focused on performance
OUR BUSINESS
First Derivatives (FD) is a software and services company with world-leading intellectual property
in ultra-high-performance analytics (Kx) across industries, with extensive domain expertise and
capabilities in capital markets systems and technology (managed services and consulting).
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 generated
by markets and machines are increasing exponentially, and existing
technologies fail due to technological or commercial limitations.
Kx is widely adopted throughout the financial industry, at banks,
hedge funds and exchanges, where it is employed across a range
of data-intensive arenas, from high-frequency trading to regulatory
compliance. Kx also powers our MRP Prelytix digital marketing
platform, enabling subscribers to identify and engage with potential
customers earlier and more effectively, using predictive analytics.
With this pedigree, Kx is expanding into other industries, such
as manufacturing, automotive and energy, which are challenged
by the increase in data 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.
2
First Derivatives plc Annual Report 2020
STRATEGIC REPORT What sets us apart
1
2
3
4
5
KX STREAMING ANALYTICS –
SIMPLEST, FASTEST, GREENEST
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 streaming and
historical datasets in real time. Deployable from chip to edge to cloud, the Kx
platform is helping disrupt industries by providing immense analytic power
on a smaller and lower energy-consuming footprint than competing solutions.
EXPERTISE AND KNOWLEDGE
We recruit and train our own domain and technical
experts through our award-winning training programmes.
Our foundations are rooted in academic excellence,
entrepreneurship, customer centricity, agility
and teamwork.
Combined with a constant challenge to embrace
responsibility and grow, supported by training and a
career framework, delivers a highly skilled and motivated
workforce that drives our growth and changes the game
for our customers.
OUR GLOBAL REACH
15 LOCATIONS
4 CONTINENTS
2,400+ PEOPLE
STRONG MARKET POSITION
The Group provides a suite of software products and
services to its clients in the capital markets sector
across the world.
Kx was initially developed for the capture and analysis
of market data. In recent years the Group has launched
a broad range of capital markets applications, including
market and trading surveillance, pre-trade decision
making, post-trade reporting and liquidity management.
In addition to new sales prospects and the potential to
develop new applications, there are considerable cross and
upselling opportunities within our existing customer base.
In managed services and consulting, the Group provides
a suite of services to its global client base in the capital
markets sector, focused on supporting mission-critical
systems as well as helping them to achieve and maintain
regulatory compliance. As the Group scales, there is
considerable scope for further growth in capital markets.
Although financial services will 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.
OPPORTUNITIES FOR GROWTH
The Group’s strategy seeks continued growth across its software and services operations.
The Group has identified digital marketing (MarTech), automotive, energy and manufacturing
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 to accelerate its growth.
Digital
marketing
Manufacturing
Energy
Automotive
firstderivatives.com
3
Chairman’s review
A watershed year
Our goal is to change the game for our customers, partners
and employees by delivering world-class products, services
and career opportunities.”
The past year has been one of, if not the, most significant in the
Company’s history. We had to cope with the sudden loss of our CEO
and founder, Brian Conlon*, whose entrepreneurial skill and drive
have provided the platform from which the Board continues to see
enormous opportunity for growth. In the report of the Nomination
Committee I have detailed the process which led to the appointment
of Seamus Keating as CEO towards the end of the financial year. The
Board is grateful to Seamus for the commitment he displayed during
his period as Executive Chairman and confident in his ability to
execute our strategy.
We also had to deal with some business challenges as we geared
for growth in our managed services and consulting business, while
managing the perennial conflict of achieving growth in profitability
while making the investments in Kx that are necessary to ensure
we deliver on the immense opportunities we see for our technology.
During the year that investment included taking full ownership
of Kx, in itself a landmark achievement.
Towards the end of our financial year, COVID-19 created challenges
not just for the Group but the world. I am proud of the way our
business has pulled together to address it, working as one to
support our clients in their business-critical operations while
adapting quickly to the new normal. While we have seen no material
short-term financial impact from COVID-19, we have taken measures
to ensure the long-term viability of the business should there be
an extended period of macroeconomic disruption. We are confident
our business will emerge from this period with vigour.
Notwithstanding these challenges, the Group has never been
so well positioned strategically. Our clients tell us that the
world-class technology and services we provide enable them to
achieve things they often did not believe possible, while offering
a return on investment that serves to make them compelling.
In short, we change the game for them, delivering new revenue
streams and increasing their operational efficiency. Our challenge
is to provide the routes to market and delivery capability to capitalise
on this enviable position, while enhancing our technology leadership.
In our favour are market dynamics. It is almost a cliché now to talk
about how vital data analytics is to every part of our business and
personal lives; as the volume of data and the use cases for it grow,
Kx has a pivotal role to play. Our goal is for Kx to become the streaming
analytics platform of choice. We are already well positioned
to achieve this in FinTech and MarTech, and the scale of the
opportunities in manufacturing, automotive and utilities mean
that we have an addressable market that can generate meaningful
returns for all our stakeholders.
4
First Derivatives plc Annual Report 2020
Having accepted the role of Chairman, I feel a great sense of pride in all
my colleagues throughout the Group that we were able to navigate the
challenges and I am delighted with the strength and resilience of our
business. We have set ourselves some demanding goals and I firmly
believe we have the best technology and people to achieve them. I look
forward to reporting to all our stakeholders on the progress we make.
GOVERNANCE
The Group has adopted the 2018 UK Corporate Governance Code
(the "Code") as its recognised regulatory framework, which is
available for download from the Financial Reporting Council website
(www.frc.org.uk). In this Annual Report we have increased disclosure
around our governance policies, both within the Corporate Governance
section and the Strategic Report. This report also includes a
separate section dealing with how we engage with stakeholders,
recognising that the journey we are on cannot be taken alone but
needs the support of employees, customers, partners and others.
The Board is committed to best practice in how it interacts with
all its stakeholders.
The Group has a strong and experienced Board with a mix of skills,
tenure and gender. Following the passing of Brian Conlon in July 2019,
Seamus Keating was appointed Executive Chairman and then CEO in
January 2020, alongside which I was appointed Chairman. The Board
is engaged in a process to recruit additional Directors with skills and
experience that will assist the Group to achieve its strategic objectives.
During the past year the Board conducted a review to evaluate
its effectiveness and implemented the principal recommendation
of the review. We intend to further develop the review process
in the future.
SUMMARY AND OUTLOOK
The Board would like to express its sincere thanks to the 2,400+
people who work across its global operations for their hard work,
dedication and enthusiasm during what was a busy and eventful
year. Thanks to our combined efforts, FD has an exciting future as
a world-class technology provider helping to change the game
for our clients. Our technology and expertise are in high demand
and the investments we have made in recent years leave us well
positioned to capitalise on the opportunities at hand.
Donna Troy
Chairman
18 May 2020
* See In memoriam on page 32.
STRATEGIC REPORT Q&A WITH THE CHAIRMAN
Why did you agree to take on the role of Chairman of FD?
FD has a disruptive, world-class technology with an
opportunity to become a global leader, combined with
a culture that is inspiring to be part of. I believed when
I joined the Board that my skills and experience, working
with start-up to global technology companies that have
been through that journey, particularly on the go-to-market
strategy, would be of value. I believe that at this stage of
our journey that has never been truer and I am excited
by the opportunities currently in front of us.
What do you see as the major challenges facing
the business?
The principal challenges are around the management
of growth, the execution of strategy, identifying and
responding to risks and ensuring that the competitive
advantages of our software and services are maintained
and enhanced. In addition, we constantly challenge
ourselves to innovate and create disruptive value for
our customers. These are the areas that the Board
devotes most of its effort towards, together with
ensuring we attract and retain the right people to
deliver our growth plans.
What are your priorities for the coming year?
In recent years we have been positioning ourselves to
be able to deliver our streaming analytics capability –
real-time, mission-critical systems that provide high
return on investment in large addressable markets – in
areas where we were confident demand would emerge
for a world-class technology such as Kx. We are
leveraging our success in our core markets of FinTech
and MarTech by creating beach heads in markets such
as utilities, automotive and Industrial IoT. Our priority
now is to accelerate our growth by taking Kx to mass
market, in many cases with the assistance of partners
which bring specific industry and domain expertise.
What is your longer-term outlook for the Group?
Kx has an enviable market position as a horizontal
technology enabling organisations to deploy
ultra-high-performance analytics simply and with a high
return on investment. We have the right people in place
to capitalise on that massive addressable market and
make Kx the platform of choice for streaming analytics.
If we maintain our focus, I am confident FD can become
a global technology leader in the medium term.
firstderivatives.com
5
Business model
Creating value by helping solve
our clients’ toughest challenges
WORLD-LEADING STREAMING
ANALYTICS TECHNOLOGY
OUR COMPETITIVE ADVANTAGE
• The world’s best performing in-memory,
time-series database1
• Designed for rapid and efficient analysis of enormous
volumes of data, particularly streaming data
• Supported by a unique enterprise platform for rapid
and flexible deployment and management
• Applications that solve data challenges in multiple
vertical markets
• Many times faster than competing solutions,
increasing productivity
• Significantly lower computing infrastructure is
required compared to other solutions, reducing
total cost of ownership
CREATING VALUE FOR OUR BUSINESS
License fee income from sales of Kx technology
•
• Subscription-based licensing model to build
•
recurring revenues
Implementation, development and support services
that optimise the performance of Kx
• A multi-component sales strategy including lead
generation, business development, proof of concept
and sales engineering teams
• Development and partnership arrangements with
academic, research and OEM agreements
• Collaboration with leading commercial organisations
•
to bring new products to market
Technology domain partnerships where companies
incorporate Kx within their solutions to disrupt a
particular market
KNOWLEDGE
TRANSFER
PEOPLE
TECHNOLOGY
PROCESSES
PRODUCT
S
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PEOPL
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TECHNOLO
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PROC
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PRODUC
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DISTINCT BUT
INTERRELATED MARKETS
MARKET OPPORTUNITIES UNDERPIN
OUR BUSINESS
$71bn
database addressable
market in 20202
$100bn
banking industry software
application spend in 20193
6
First Derivatives plc Annual Report 2020
STRATEGIC REPORT
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.
KNOWLEDGE
TRANSFER
PEOPLE
TECHNOLOGY
PROCESSES
PRODUCT
S
N
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C
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U
F
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R
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P
P
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L
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N
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S
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IS
TS
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P
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LICIES
DISTINCT BUT
INTERRELATED MARKETS
MORE THAN 20 YEARS OF MANAGED
SERVICES AND CONSULTING EXPERTISE
OUR COMPETITIVE ADVANTAGE
• Domain expertise in capital markets
• Expertise of FD’s consultants in working with the
technology solutions prevalent in the industry
• Multi-year training programme, through which
PEOPL
E
all FD graduate recruits pass
• A customer-first ethos that helps enable
TECHNOLO
GY
PROC
ESSES
PRODUC
T
consistent growth
• Commitment and flexibility in working with
customers to ensure their success
• Develop and deploy FD intellectual property
to support our professional services
CREATING VALUE FOR OUR BUSINESS
• Services that support our customers’
business-critical applications
Implementation of technology solutions
•
• Ongoing support post-installation
• Repeat revenue, typically for many years
• Primarily a direct sales model through Master Service
•
Agreements with leading banks globally
Increased revenue visibility from near-shore contracts
with clients, providing support for applications under
multi-year contracts from FD’s own premises
$520bn
IoT market value by 20214
$232bn
IT services spend by banks
in 20193
1
As independently evaluated by the Securities
Technology Analysis Center (STAC).
2
IDC estimate.
3 Gartner estimate.
4 Bain estimate.
firstderivatives.com
7
Business model continued
Business environment
and market potential
Our Kx technology comprises a database (kdb+) and enterprise
management layer that are data agnostic and can be deployed
across industries to meet analytics challenges, together with
applications targeted at specific industries and use cases.
STRATEGIC OBJECTIVES
The Group’s strategy is: (i) to build on Kx’s leading position
in capital markets software; and (ii) to use Kx’s performance
advantages to target other markets.
Kx is independently verified as the world’s best-performing
in-memory, time-series database, originally developed to
enable the financial industry to capture and analyse vast
quantities of market data. The Group has succeeded in
building a client list that contains all of the world’s top ten
investment banks and many leading finance institutions for
both its database and applications. In recent years FD has
sought to extend its presence into other markets that are
challenged by large and increasing amounts of streaming
data, particularly real-time data from sensors.
Due to its small code footprint, Kx can run seamlessly at
the edge, on-premise or in the cloud. There are also flexible
development options, ranging from the customer building
everything from the kdb+ database upwards to the use of
an application where the Group is fully responsible for its
development and support.
Within capital markets the kdb+ database is widely deployed
across banks, many of which have developed applications that
utilise the data captured and analysed by our technology. The
Group has also built a range of applications, such as surveillance,
foreign exchange platforms and regulatory reporting. We see
considerable potential to cross and upsell these applications
and to develop new applications that will resonate with clients.
In digital marketing our MRP Prelytix platform is gaining
increasing traction as we increase its functionality and the
return on investment it demonstrates is compelling. We continue
to increase the platform’s capabilities as we seek to drive
growth in high-quality subscription revenue.
In other markets the Group is at an early stage of
commercialisation of its technology and has identified
automotive, utilities and Industrial IOT as markets that are
both high value and have a pressing need for the ultra-high
performance Kx delivers. Recognising its lack of domain
MANAGED SERVICES AND CONSULTING
FD recruits and trains its own consultants, providing them
with a combination of technical and domain skills in capital
markets that enables us to help our financial services clients
build and manage mission-critical systems. We operate a
number of practices, including third-party system deployment
and support, managed system services, regulatory sand
compliance services and programme support. Our consultants
typically work on site with our clients or from a remote
location such as our headquarters.
STRATEGIC OBJECTIVES
The Group’s strategic objective is to become a leading capital
markets practice.
ADDRESSABLE MARKET
In managed services and consulting, Gartner estimates the
total spend on IT services in banking in 2019 was $232 billion.
In addition, Gartner states that banks spent a further
$102 billion on internal services, which represents an
additional addressable market as the banks outsource
application 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 FD recruited during the year, there were
in excess of 20 suitably qualified applicants.
8
First Derivatives plc Annual Report 2020
STRATEGIC REPORT The Group operates in several large addressable markets and is involved
in many of the leading developments within the technology sector.
expertise outside capital markets, as well as direct sales into
these markets to create a beach head, the Group works with
partners (both independent software vendors and systems
integrators) to target the market opportunities.
The market outside finance in which Kx has enjoyed the greatest
success to date is digital marketing, where we have developed a
Software as a Service platform that enables clients to dynamically
activate a range of sales and marketing techniques based on
predictive analytics derived from billions of data points. This
approach is rapidly becoming a mainstream element of sales
and marketing efforts of global organisations.
ADDRESSABLE MARKET
The addressable market opportunity for Kx is the combination
of the database market together with the market for applications
built upon it across the markets which Kx is targeting.
IDC, an industry analyst, estimates that in 2020 the
database addressable market will be $71 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 estimated that banks would 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,
which intensively leverages data, is estimated to reach
$12.4 billion by 2022. HTF Market Analytics estimates that the
market for analytics in manufacturing will reach $24 billion by
2025, with a compound annual growth rate of 28%. A range of
other vertical markets such as automotive, utilities, pharma
and telecoms are also increasing their use of data analytics and
each represents 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 enormous
volumes of data in real time. 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 provide both
opportunity for growth and the potential to diversify the Group’s
revenue base.
SUMMARY
Combined, the addressable markets for the Group’s software
and services total hundreds of billions of dollars. 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.
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.’’
firstderivatives.com
9
MANAGED SERVICES AND CONSULTING
Strategy
Measuring our progress
FD’s strategy has been consistent – to position its software and services for continued and
sustainable growth in the very large markets it addresses. These strategic priorities have
been in place since 2014 and to meet them FD has to strike a balance between making the
investment necessary to deliver them whilst also delivering the growth in profitability
expected by its shareholders.
1
BUILD ON KX TECHNOLOGY’S LEADING POSITION IN FINTECH AND MARTECH
What this means
How we do it
Core markets with enormous
growth potential and providing
strategic solutions for our
growing client base of banks,
hedge funds, exchanges
and regulators
BUILD AND CONVERT SOFTWARE PIPELINE
• Ensure high levels of client satisfaction to create market
leading reference sites
• Increase penetration within existing clients across asset
classes and geographies
• Work to increase routes to market and global reach
Progress
• Increased functionality
in our applications and
signed multiple new
multi-year contracts
2
USE KX’S PERFORMANCE ADVANTAGES TO PENETRATE OTHER MARKETS
What this means
How we do it
Develop and commercialise
solutions providing
competitive advantage to
clients across multiple
industries, utilising Kx’s
performance and total cost
of ownership advantages
INCREASE ROUTES TO MARKET
• Identify use cases across specific, high-value markets
• Work with customers and partners to develop compelling
solutions
• Continue to invest in R&D, sales and marketing to deliver
on significant opportunities
• Develop additional channels to market via systems integrators
and OEM partnerships
Progress
• Added new systems
integrators and OEM
relationships
• Hosted Kx Innovation Day
in conjunction with major
partners and customers
• Signed enterprise license
agreements with major new
name accounts
3
BECOME A LEADING GLOBAL CAPITAL MARKETS PRACTICE
What this means
How we do it
Provides vital support and
enabling role for our Kx
technology operations
through FinTech domain
expertise and data scientist
resource pool
GROW KEY ACCOUNTS AND MANAGED SERVICES
• Leverage our unique combination of domain and technical skills
• Use our growing scale and reputation to increase our client base
• Exploit our near shore capabilities to deepen our relationships
with key clients
Progress
• Key multi-year contract
wins across our core areas
of expertise – trading
systems, regulatory reform
and back-office efficiency
10
First Derivatives plc Annual Report 2020
STRATEGIC REPORT Key performance indicators
The first three KPIs relating to revenue growth all align with the strategy pillars.
.
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18
19
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20
GROWTH IN FINTECH
SOFTWARE REVENUE
GROWTH IN SOFTWARE REVENUE
IN MARKETS OUTSIDE FINTECH
GROWTH IN MANAGED SERVICES
AND CONSULTING REVENUE
Strategic alignment
1
2
3
Strategic alignment
1
2
3
Strategic alignment
1
2
3
FinTech is the original market for Kx, where
our brand is strong and the technology
has been used for many years. However,
we continue to believe we can use Kx’s
performance capabilities and brand
awareness to generate accelerating growth,
particularly through licensing applications
that use the power of Kx to deliver additional
value for our clients. We continued to grow
rapidly during the year, including a flagship
win to provide a next generation e-FX platform
for Sumitomo Mitsui Banking Corporation.
The Board recognises that this KPI is
likely to be the least predictable of those
it monitors, as it is starting from a low base
and can be subject to differences around
the timing of contract signature. However,
over time the Board is increasingly convinced
that the Group can generate meaningful
returns for stakeholders from the investment
it has made in multiple industries. In recent
years FD has invested heavily in enabling
the adoption of Kx across sectors and in its
sales and marketing functions and expects
to see accelerating growth as a result.
Our managed services and consulting revenue
is derived from the FinTech market, principally
from providing services requiring deep
domain skills to large investment banks.
We made good progress in our strategy
during the year, winning a number of
multi-year contracts with European clients
that began to contribute to revenue in the
second half of our financial year. Revenue
delivered in the year grew to £89.4m,
despite the impact of slower decision making
within the UK market during the year.
The Board uses the following measures to assess growth and value delivered to stakeholders.
.
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GROWTH IN RECURRING
SOFTWARE REVENUE
FD prioritises recurring software sales
under either pure Software as a Service
contracts, where the service is provided
remotely by FD to the client, or under annual
licensing terms. This enables greater
predictability of revenue and increases
the Board’s confidence to invest for future
growth. During the year the Group had
another strong performance in generating
recurring revenue, with all of its software
activities contributing to the result.
GROWTH IN GROSS PROFIT
ADJUSTED EBITDA GROWTH
To deliver on its strategic growth
ambitions, FD has invested heavily across
its operations, including delivery capability
as well as research and development and
sales and marketing. To continue to do so
while also delivering growth in profitability
measures requires strong growth in gross
profit, and FY 2020 provided further
progress in that regard.
The Board’s strategy is to invest in a
disciplined way that continues to deliver
growth in profitability for stakeholders.
Adjusted EBITDA is considered the best
measure of underlying performance,
stripping out costs that are considered to
be non-operational in nature and to enable
the Board and investors to most easily
determine the impact of the Group’s
strategy on performance.
firstderivatives.com
11
Stakeholder engagement
Engaging our stakeholders
To deliver our strategy requires engagement with, and the support
of, a range of stakeholders relevant to the Group. To enable the Board
to understand and thereby properly consider the views of these
stakeholders as part of its decision-making processes it employs
a range of strategies, as outlined below.
When making its decisions the Board takes into account the views
and interests of its stakeholders, which are established by the means
outlined in this section of the report.
The input gathered through this approach helped inform Board
decisions through the year. Examples of decisions taken during the
year and how stakeholder views were taken into account include:
1.
2.
Appointment of Seamus Keating as CEO. The Board was mindful
that for customers and employees the Group’s culture and values,
including academic excellence, entrepreneurship, customer
centricity and agility were vital. Similarly, the Group’s investors value
the clear strategic vision laid out by the business and were keen that
the strategy should be maintained. In appointing Seamus, who has
been a Director since 2012, it was clear that maintaining both culture
and strategy would be among his priorities.
Response to COVID-19. The Board’s top priorities were the health
and wellbeing of its employees and supporting customers. When it
became likely that COVID-19 would develop into a global pandemic
affecting the geographies in which we operate, the Directors,
working with Group management, developed and implemented
a response that took into account the interests of employees but
also ensured that the Group continued to meet the needs of its
customers particularly in relation to mission-critical operations.
This ensured consistent and fair treatment of our stakeholders
and prompt resolution of challenges as they arose, enabling us
to continue to support the essential operations of our customers,
many of whom have congratulated us on our response.
PARTNERS
A key element of the Group’s focus is working with partners,
particularly where it seeks to enter new markets where the partner
can provide domain expertise. We engage actively with these partners
to understand both the opportunities available to the Group and to
support the partner’s engagement with end customers, with the
feedback from partners regarding our technology and working
practices provided to the Board to better inform strategy:
1.
2.
Identifying and working with potential new partners to explain the
performance advantages of our technology and, where appropriate,
to integrate Kx with the partner’s technology, ensuring the offer to
end clients is comprehensive and compelling.
Working with existing partners to identify and respond to market
and customer-specific opportunities, including Proof of Concept
work, ensuring that our commercial models are aligned to
maximise the potential for success.
EMPLOYEES
Our employees play a crucial role in helping us pursue our strategic
goals and uphold the core values that underpin our organisation. We
engage, equip and support them to achieve their full potential while
building our business. Throughout the year we encouraged open
dialogue across the business with the focus on improving working
environments and processes for the benefit of all employees.
Some of the initiatives to drive this change included:
12
First Derivatives plc Annual Report 2020
1.
2.
During the year we ran well-attended "Meet the Board" events
which gave our Non-Executive Directors and Chairman the
opportunity to engage with our employees across the UK, the US,
Ireland and Canada. This was a key initiative as the Board was keen
to meet with employees and hear what they think and use this
feedback to influence change across the organisation.
This year there was a focus on enhancing employee
communication at all levels across the business. We introduced
CEO video updates to all staff and held townhalls across all our
major locations. The Board received regular updates from the HR
Director following employee engagement events such as townhalls
and "Meet the Board" events.
3.
Our inaugural employee engagement survey provided valuable
insight on the issues that matter to our employees and our culture.
For more information see the Corporate responsibility report.
CUSTOMERS
In addition to working with partners, the Group employs a direct sales
model and provides professional services including implementation,
development, support and managed services to its customers. These
activities provide deep engagement with our customers and support
our strategy to have high levels of repeat and recurring revenue, with
feedback incorporated into Board reports and strategic planning.
1.
2.
We have dedicated sales teams across industries and regions that
regularly interact to understand existing needs and how they may
change in future and how FD can support their plans.
We run events for customers throughout the year, including regular
meetups in major cities around the world, where customers can
meet and share their own ideas and feedback. This includes an
annual customer meeting and during the past year an Innovation
Day at which customers and partners explained how they were
using Kx to change the game.
INVESTORS
The Group maintains regular and constructive dialogue with
institutional investors, both those who already hold a stake in the
Company and those who are potential shareholders. During the past
year this interaction included:
1.
2.
The CEO, the CFO and Board and executive team members have all
taken part in one-to-one meetings with investors and potential
investors to communicate the Group’s investment case.
The Company has attended multiple investor conferences and
has conducted roadshows in the UK, continental Europe and
North America.
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.
FD regularly interacts with these stakeholders to understand their views
and communicate the Group’s strategy and policies.
STRATEGIC REPORT Change the Game
Our clients tell us that Kx enables them to generate new revenue streams,
provide competitive advantage, increase their operational efficiency and meet
the requirements of industry regulators. Across industries, our technology
and data science expertise change the game.
FINTECH
Sumitomo Mitsui Banking Corporation (SMBC)
committed to build its next generation foreign
exchange trading platform on Kx, to deliver superior
electronic execution, algorithmic trading and
effective risk management, supported by advanced
real-time pre- and post-trade analytics. Phase 1 of
the project is live and SMBC’s clients are already
benefiting from tighter spreads, deeper liquidity
and higher fill rates.
MARTECH
Thomson Reuters engaged MRP for its advanced data
insights and omnichannel Account-Based Marketing
capabilities. Tapping into nearly 1.5 trillion data signals per
month, MRP, powered by Kx, monitored 1,500 topic streams
for 4,300 of their top target accounts. These data insights
fuelled interaction across those targets, engaging them
across a range of marketing channels, and resulted in nearly
30% of them advancing into sales pipeline opportunities.
INDUSTRY
A world-leading oilfield services company
selected Kx to provide a new system able to
analyse sensor data in remote locations, where
compute resources are limited. Doing so
provides actionable intelligence that enables
them to increase the efficiency of their
operations, giving them competitive advantage.
firstderivatives.com
13
Business review
A year of solid execution
The Group has delivered another year of solid growth, in which
revenue increased by 9% to £237.8m and adjusted EBITDA
increased by 17% to £45.5m. This growth was driven by good
progress in the execution of our strategy, although we also faced
challenges, including the loss of our CEO and founder, Brian
Conlon, and dealing with the impact of COVID-19.
In line with our continuity planning Seamus Keating was
appointed as Executive Chairman in July 2019 and, following
a selection process, as Chief Executive Officer in January 2020.
Donna Troy, previously a Non-Executive Director, was appointed
Chairman in January 2020. Throughout the year, our strategy has
remained unchanged while our execution has evolved to focus
more sharply on the most compelling commercial opportunities
across the business. These include:
• In FinTech, by combining the performance of Kx with our
domain expertise to focus on achieving market leadership for
our core solutions. This includes, for example, building out the
capabilities of our surveillance platform to cover multiple asset
classes in a single platform.
• In software markets outside FinTech, by focusing on those markets
where Kx provides the greatest competitive advantage. This
typically means enabling streaming analysis of data from
machines, including at the edge.
• In managed services and consulting, by focusing on
commercialising our expertise in middle and front-office
trading systems, risk and regulatory reform and back-office
efficiency programmes.
Across our business, as our customers increasingly pivot to the
cloud, we are directing our efforts to ensure that Kx and our data
expertise are in pole position to help them obtain the benefits of
agility and flexibility by enabling easy access to the competitive
advantages Kx provides. The recent launch of serverless kdb+ is
an important initiative to accelerate this process.
Kx streaming analytics is a game changer, enabling new ways
of working that deliver operational efficiency and generate new
revenue streams for our clients. Examples include analysing
streaming data from machines in precision manufacturing to
improve yields and reduce waste; mining vast volumes of intent
data to deliver sales leads that convert at higher rates than
competing methods; and streaming analytics on F1 cars to
increase safety and improve lap times.
We are harnessing all of our R&D and sales and marketing efforts
to support our focus on these key areas, which represent enormous
market opportunities. Our aim over the medium term is to ensure
that our targeted investment in these areas enables us to scale
our business and create value for all stakeholders.
14
First Derivatives plc Annual Report 2020
KX STREAMING ANALYTICS
Kx enables the analysis of vast quantities of data, both streaming
and historical, at cost and performance levels unmatched by
competing solutions. At its core, the technology comprises the kdb+
database, with its highly efficient 800kb footprint, and an enterprise
layer designed to maximise analytic performance while providing
vital functions such as security, control and visualisation.
Kx streaming analytics delivers considerable competitive
advantage. In addition to being orders of magnitude faster than
competing solutions, Kx delivers hardware, space, cooling and
power savings of 80–90%, based on the results of head-to-head
testing during proof of concept projects with potential clients.
Flexibility is another differentiator, with the ability to deploy at the
edge, on-premise, and in any cloud architecture. The stability of
our platform, which is tried and tested across some of the most
demanding industries in the world, is also important to clients,
providing competitive advantage against emerging technologies
that cannot demonstrate the resilience achieved by Kx.
To harness the power of Kx, the Group has developed a number of
applications specific to FinTech and MarTech, while third parties,
such as an OEM partner or a direct customer, have integrated
Kx into their own solutions and built new applications using our
development tools. This approach enables these third parties to
deliver a solution that meets their specific business needs while
benefiting from Kx’s performance advantages.
RESEARCH AND DEVELOPMENT
Our R&D initiatives are designed to further our strategy, by building
on our leading position in FinTech and by enabling Kx to penetrate
other target markets. We also continue our ongoing focus to
ensure that the significant performance advantages Kx holds over
competing solutions are maintained, if not enhanced. Taken together,
our R&D efforts are crucial to our ability to change the game for
customers and therefore for our long-term competitiveness.
Over the course of the past year we picked up the pace of our
technology development, adopting an agile product development
strategy that resulted in major improvements to Kx’s performance
and over 250 separate features across our platform and application
products. We also increased support for Kafka and Python, aiding
our push to make Kx a leading platform for machine learning and AI.
We also set a roadmap for Kx streaming analytics which we
believe will further enhance our market position in FinTech and
provides the foundation for growth across our target markets.
Building on our leading position in FinTech. Our enterprise
customers across financial services use our technology for its
performance, enabling them to capture, store and analyse millions
of data points per second in streaming market data and enormous
volumes of historical data. We augmented this capability with
improved real-time visualisation functionality, enhanced security
features and by making our developer tools available to our
enterprise customers as part of their existing license agreements.
STRATEGIC REPORT Penetrating other target markets using the performance
advantages of Kx. To increase awareness and promote our
technology we released a number of our software tools as free and
open source versions, including tools that make it easier to integrate
Kx with other enterprise technology platforms as well as tools
aimed at the developer community at large. Our aim is to increase
adoption of Kx and enable as wide a community as possible to
understand its potential to solve the toughest data challenges.
Another key focus of our recent R&D work has been on boosting
Kx’s performance and ability to operate in cloud environments:
• The recent launch of version 4.0 delivers major performance
improvements by taking advantage of all the processing
capability inherent in modern computing systems, which
builds on the work we have done over the years with partners
such as Intel. We anticipate that 4.0 will set new benchmarks
that will further extend Kx’s performance leadership.
• Kx has long been able to run in the cloud, whether public,
private or hybrid, and we are extending that capability to deliver
serverless kdb+, removing the need for users to run and manage
physical infrastructure. This approach significantly accelerates
development effort and allows users to pay only for the time
they use for functional workloads. This reduces the operational
cost of Kx solutions and as a result broadens the addressable
market for our technology. The initial launch of serverless Kx
will be on the Amazon Web Services Lambda platform.
• Kx is the only database that offers native support for Intel’s
Optane, a high-performance storage and memory technology
that Amazon and Google are deploying across their data centres.
Taken together, our R&D initiatives are supporting our strategy
by boosting our technology’s performance, enabling us to
increase our total addressable market and ease the adoption and
integration of Kx within our clients’ technology infrastructure,
with the goal of driving revenue and profit growth.
BUSINESS DEVELOPMENT
FinTech
FinTech software continued to deliver strong growth, with revenue
up by 11% to £89.4m (2019: £80.2m). This growth was driven by
continued demand for solutions such as regulatory and risk
reporting, market surveillance and trade analytics. Combining the
power of our Kx platform with our domain expertise within capital
markets enables us to develop applications that have both the
power and functionality to lead the market.
During the year we signed several new multi-year contracts, including:
• One of our largest ever deals, developing a next generation
FX trading platform for SMBC Bank, where Kx will become
an integral component of the bank’s global FX trading.
• A multi-asset class surveillance solution for
a North American bank.
• A contract for Kx to power an AI-based pricing engine and trading
platform, using our data refinery product for rapid deployment.
• The displacement of a competitor at a European bank for the
capture of fixed income and FX data.
We are well positioned to continue to grow our solution revenue
as market trends move increasingly in favour of our technology.
The introduction of serverless kdb+ comes at a time when banks
are accelerating their plans to move their data and applications to
the cloud, driven by development agility and business flexibility
demands. We expect this will be a multi-year structural shift that
will drive growth across our business, as banks seek to
standardise on best-in-class technologies.
We also see an increase in regulatory demands, leading banks to
implement powerful solutions to demonstrate compliance to their
industry regulators across asset classes. Given this backdrop we have
enhanced our powerful and flexible trade surveillance software, to
enable banks to achieve a holistic solution. This encompasses
communications surveillance, launched during the year with a
reference customer, and multi-asset class surveillance within a single
platform. This is a unique offering that simplifies the process of
surveillance and enables new insights across the bank’s activities.
We have a growing base of recurring revenue within FinTech and a
pipeline of opportunities across our solutions and the geographies
in which we operate.
MarTech
Revenue from MarTech increased by 14% to £47.3m (2019: £41.4m).
Our solution, powered by Kx and branded as MRP Prelytix, changes
the game for organisations by enabling them to identify and engage
potential customers earlier and more effectively, driving greater
revenue and market share. It does so using predictive analytics derived
from billions of data points, enabling clients to dynamically activate
a wide range of sales and marketing tactics informed by real-time
insights, in an approach known as Account Based Marketing (ABM).
Industry analyst Forrester recently forecast that by 2025 ABM
would become the mainstream approach for business-to-business
marketing, as organisations adopt an account-centric view to identify,
plan, manage and measure their activities. In its report Forrester
recognised MRP Prelytix as a "leading, established" ABM vendor.
We provide our platform on a subscription basis, supported by
engagement services to assist lead management and conversion.
Our clients report that we generate a return on investment for
them that is considerably higher than competing solutions. Global
technology companies currently form the core of our client base,
as exemplified through significant new client wins during the year
including Advanced Micro Devices, a cloud-based communications
provider and several leading hardware providers. We continue to
seek to diversify our MRP Prelytix client base, with financial services
and management consultancy representing particularly attractive
markets that delivered important new clients in the year.
firstderivatives.com
15
Business review continued
KX STREAMING ANALYTICS CONTINUED
BUSINESS DEVELOPMENT CONTINUED
MarTech continued
During the year we continued to add new functionality to extend
our market leadership. We increased the advanced analytics
available in our platform, enabling our customers to build their own
AI-driven models to optimise results, and delivered a new configurable
dashboard that provides a single view of the customer using all the
available data. We also introduced content syndication, which
extends our reach deeper into clients by working with their agency
partners to capture more of their total sales and marketing spend.
The unique insights provided by MRP Prelytix and our constant
technical innovation resulted in growing industry recognition.
In addition to securing ‘Best Overall ABM Solution’ at the 2019
MarTech Breakthrough Awards, analyst Research in Action
categorised our solution as ‘Market Leader’ and noted that it
scored highest in customer satisfaction in its market review.
We ended the year with good momentum in MarTech, as our
investment in innovation drives industry recognition and
increasing use of MRP Prelytix is proving the value it delivers
for customers. Our priorities for the current year are to further
differentiate our platform by building on its functionality, to drive
awareness of our platform to generate new direct and agency
customers, and to penetrate deeper within our existing customers
by demonstrating the return on investment we generate for them.
Industry
Revenue from industry grew by 26% to £11.7m (2019: £9.3m).
The performance of Kx streaming analytics and the operational
efficiency it enables make it of considerable interest across
multiple high-value markets where the volume and velocity
of data present significant challenges. Having evaluated these
opportunities, we are focusing on the markets where our
competitive advantage is most compelling in terms of the
return on investment it delivers for our customers. These are:
• Automotive – The initial deployments of Kx in automotive were
in F1, notably with Aston Martin Red Bull Racing where in our
role as Innovation Partner we provide analytics both in the wind
tunnel and in-race telemetry through streaming analytics on
sensor data. We have added further contract wins with F1 teams
for similar applications of Kx and we have a growing pipeline
of opportunities across motor sport. Our capabilities have
attracted the attention of global automotive companies and
we are engaged with them on different initiatives around the
design and production of vehicles. We are also engaged with
vendors in the connected car ecosystem, where the capability
of Kx to operate at the edge and in real time is particularly
attractive. We see a growing opportunity for Kx streaming
analytics to be a key element of the automotive ecosystem.
16
First Derivatives plc Annual Report 2020
• Energy – Analysing data from the vast number of smart
meters and sensors attached to production, transmission
and distribution systems is increasingly challenging for energy
market participants. Based on working with a range of partners
and customers we believe Kx is the ideal platform for use cases
across efficiency, regulation, and innovative services. Working
alongside our partner CGI, which counts many of the world’s
leading utilities as customers, we are on track to deliver a next
generation electricity information exchange for Fingrid, the
transmission system operator for Finland. We expect this to act
as a reference site, with numerous utilities due to upgrade their
systems in the coming years. In February 2020 we signed an
agreement with a global oilfield services company to provide
operational intelligence at the edge, where compute resources
are limited, while aggregating data centrally. These use cases
are illustrations of the many ways in which Kx can provide high
returns on investment across the energy market.
• Manufacturing – Maximising yield and reducing waste are key
goals for manufacturers and Kx has demonstrated its ability
in both these areas through multiple contract wins and partner
agreements. During the year we announced a partnership
agreement with Keysight Technologies, to integrate Kx within
its PathWave Manufacturing Analytics platform, adding to prior
agreements with global semiconductor manufacturing companies
including BISTel and a Fortune 500 company that are expected
to contribute to our growth in this market. After the year-end we
signed a global partnership agreement with Tata Consultancy
Services (TCS) under which it will develop and deploy solutions
based on Kx streaming analytics, targeted at its customer base
across multiple industries. We see manufacturing as a very
large and attractive market and expect to continue to sign
customer and partnership agreements.
Our strategy is to seek predictable, long-term revenue streams,
such as OEM and revenue share agreements, while securing
direct sales that establish a beach head in these markets. We
are pleased with the high level of interest we are seeing across
industries in the adoption of our software, from both potential
customers and partners. We also have a significant pipeline of
direct sales opportunities across these markets.
MANAGED SERVICES AND CONSULTING
Revenue from managed services and consulting was £89.4m,
an increase of 3% on the prior year (2019: £86.5m). 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
technology skill sets and domain expertise within capital markets.
Our strategy is to become a leading global capital markets practice
and to achieve that we are focused on building out and scaling up
the services we provide supporting middle and front-office trading
systems, delivering risk and regulatory reform programs, and using
AI and automation to increase efficiency in back-office systems. Our
clients tell us that our highly skilled and motivated consultants
change the game for them – they set the pace, direct others in their
organisation and challenge the ways things are done.
STRATEGIC REPORT We seek long-term relationships with our clients, working as a
trusted partner to deliver under managed services contracts and
multi-year assignments. This approach provides high levels of
revenue visibility, with a typical expectation that at any point in time
at least 80% of current revenue will repeat during the next 12 months.
Growth during the period, while ahead of the market in which we
operate, was below that delivered in recent years. This was due to
a combination of slower client decision making throughout the
year and timing issues relating to roll-on and roll-off on several
third-party vendor implementation projects. Despite this we
believe that we have made good progress in delivering our
strategic objective during the year, with important new multi-year
contract wins across our target markets including:
• A European bank selected us to deliver the multi-year
implementation of a third-party trading and risk management
system, which will transition to support and development
when the implementation is complete.
• A North American bank selected us to deliver a programme of
regulatory-driven projects coupled with an application upgrade.
• A Japanese bank selected us to implement Robotic Process
Automation for recurring back-office tasks.
• A UK financial institution selected us to assist with its
cloud strategy.
LEADERSHIP AND PEOPLE
FD founder and CEO Brian Conlon passed away in July 2019. Brian
stamped his culture and values throughout FD, and this will ensure
his legacy will live on, even though Brian will be sorely missed.
Under the Group’s succession planning, Non-Executive Chairman
Seamus Keating was appointed Executive Chairman in July 2019
and, following a search process led by the Non-Executive Directors,
appointed Chief Executive Officer in January 2020. Seamus has
extensive leadership expertise in the global technology sector,
including executive roles in both finance and operations within
multi-national technology companies, notably at Logica, and is
a qualified accountant.
Donna Troy, who has been a Non-Executive Director since January
2018, was appointed Non-Executive Chairman in January 2020.
She 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.
More than 2,400 people work for FD, broadly unchanged from last
year as we have focused on consolidating our position following
record levels of recruitment in recent years. We provide outstanding
career opportunities, driven by our graduate recruitment process
that attracts motivated, high-achieving individuals and our training
programme that equips them with high levels of in-demand skills.
During the year we recruited 291 graduates, while retention rates
remain in line with prior periods and are significantly higher than
the industry average. We are committed to providing our employees
with continued training and development programmes, a rewarding
career path and a fair remuneration and reward system.
The past year has seen considerable change and challenge,
including new leadership and the current COVID-19 pandemic
towards the end of our financial year. The talent and work ethic
of FD employees has been a key driver of the Group’s success
over the years and their flexibility and determination has ensured
another period of success. The Board would like to thank them
all for their efforts.
POST YEAR-END EVENT: COVID-19
Towards the end of our financial year, we successfully implemented our
pandemic plan in response to COVID-19, protecting the health and
wellbeing of our employees and supporting our customers. The Group
issued a trading statement on 9 April 2020 relating to the impact of
COVID-19 and the mitigating actions it has taken to maintain
productivity and ensure financial liquidity.
In summary, by transitioning employees to remote working the Group
has not seen any material financial impact on revenue to date. Sales
cycles across the Group have lengthened, and we continue to
monitor the impact of this on the likely financial performance for
the current year. We have conducted a scenario testing exercise
with a range of assumptions including a severe, extended
downturn in economic activity which showed that even in this
scenario the Group remains profitable and cash generative.
Notwithstanding the comfort provided by our scenario testing,
the Group has acted to mitigate any future potential impact of
COVID-19, including suspending non-essential business travel and
deferral of the summer graduate intake. The Executive Directors
will not receive a bonus payment relating to the financial year to
29 February 2020 and as noted above, the Board has determined
not to recommend a final dividend payment for the year. To ensure
liquidity, on 24 March 2020 we drew down £35m from our available
finance facility. These funds have been placed on deposit and the
Group has significant headroom on its covenants, with a further
£15m of undrawn revolving credit facilities available to it.
CURRENT TRADING AND OUTLOOK
We entered the current financial year with a strong pipeline,
good momentum and a clear strategy that provided confidence
in delivering a year of strong growth. While COVID-19 has had no
material financial impact to date, we have seen a lengthening
of sales cycles, although it remains too early to determine the
probable impact on our full year performance. We have a robust
balance sheet and high levels of financial liquidity which leave us
well positioned to weather the challenge and continue to invest
and grow the business.
In the short term, our high levels of repeat and recurring revenue
provide some mitigation from the impact of COVID-19. In the longer
term, FD remains confident in its strategy and the growing demand
for its world-class Kx streaming analytics from both potential
customers and partners.
firstderivatives.com
17
Financial review
The table below details revenue growth by vertical market along with an analysis of gross profit and adjusted EBITDA.
REVENUE AND GROSS MARGIN ANALYSIS (£M)
2020
2019 Growth
2020
2019 Growth
2020
2019 Growth
2020
2019 Growth
Software by sector
Total software
FinTech revenue
MarTech revenue
Industry
7.8
31.4
9.7
27.7
(19%)
13%
—
—
—
25.6
19.3
33%
4.0
2.8
3.7
1.6
11% Perpetual
77% Recurring/
11.9
59.8
13.3
48.6
(11%)
23%
subscription
39.2
37.4
5%
25.6
19.3
33%
6.8
5.2
31% Licenses
71.6
62.0
Cost of sales
(12.1)
(10.6)
50.2
42.8
17%
21.7
22.0
(2%)
4.9
4.1
20% Services
Gross profit
Gross margin
59.6
83%
76.8
51.4
83%
68.9
Cost of sales
(55.1)
(48.9)
89.4
80.2
11%
47.3
41.4
14%
11.7
9.3
26% Revenue
Gross profit
Gross margin
21.7
28%
20.0
29%
148.4
130.9
Cost of sales
(67.2)
(59.5)
Gross profit
Gross margin
81.2
55%
71.4
55%
16%
14%
16%
—
11%
13%
8%
(1%)
13%
13%
14%
—
Managed services and consulting by sector
Total managed services and consulting
FinTech revenue
MarTech revenue
Industry
89.4
86.5
3%
—
—
—
—
—
— Revenue
89.4
86.5
Cost of sales
(69.5)
(66.6)
Gross profit
Gross margin
19.9
22%
19.9
23%
FinTech revenue
MarTech revenue
Industry
Sector totals
178.8
166.7
7%
47.3
41.4
14%
11.7
9.3
26% Revenue
237.8
217.4
Cost of sales
(136.6)
(126.1)
Gross profit
Gross margin
101.1
43%
91.3
42%
R&D
(13.1)
(10.7)
Sales expense
(35.4)
(32.3)
Adjusted
operating expense
Adj. EBITDA ex cap
Capitalised R&D
Adj. EBITDA
Adj. EBITDA margin
(17.5)
(18.0)
35.1
10.4
45.5
19%
30.3
8.6
38.9
18%
EBITDA and net margin profit analysis
18
First Derivatives plc Annual Report 2020
3%
4%
—
(1%)
9%
8%
11%
1%
23%
10%
(3%)
16%
22%
17%
1%
STRATEGIC REPORT Software revenue from Industry increased by 26% to £11.7m
(2019: £9.3m). Of note was the increasing proportion of recurring
revenue in this segment, which now represents 24% of the total
(2019: 17%). While perpetual license revenue represents 35% of the
total, increasingly it is delivered via partner relationships with a
growing pipeline of opportunities. We continue to add to our OEM
and systems integrator partnerships and see their domain
expertise as important to deliver solutions to customers with
"Kx inside".
Software gross margin was maintained at 55%, with a significant
weighting to H2 (57%) compared to H1 (52%) due to the higher
proportion of license revenue in H2.
MANAGED SERVICES AND CONSULTING
Managed services and consulting revenue increased by 3% to
£89.4m (2019: £86.5m) while delivering gross margins of 22%,
down from 23% in the prior period. A number of factors impacted
revenue and profitability, including slower client decision making
through the year. During H2 we achieved several important
contract wins, as discussed in the Business review; however, the
start of two of these multi-year projects were delayed by several
months, in each case for client-specific reasons, impacting both
revenue and profit for the year. These projects are now underway.
REVENUE AND MARGINS
Group revenue increased organically by 9% to £237.8m
(2019: £217.4m) with software revenue increasing by 13% and
managed services and consulting revenue by 3%. Software growth
was led by growth in recurring and subscription license revenue,
balanced by a reduction in perpetual license revenue. Gross margin
increased slightly to 43% (2019: 42%) as growth was weighted to
higher margin software revenue.
Our continued investment in the Group’s operations resulted in
an increase in R&D cost of 23% as we accelerated the pace of our
development work. Sales and marketing costs increased by 10%
as we added new sales and pre-sales staff to expand our market
reach. Adjusted operating expense, reflecting the underlying
operating cost of our business, fell by 3% reflecting continued
control over these costs.
SOFTWARE
Total software revenue increased by 13% to £148.4m (2019: £130.9m)
and represented 62% of Group revenue (2019: 60%). Software license
and subscription revenue increased by 16%, reflecting an 11% fall in
perpetual license revenue and a 23% increase in recurring license
and subscription revenue as we focused on growing this high-quality
revenue. Perpetual license revenue grew by 29% in H2 against the
prior year period after a weak H1; however, it remains lumpy and
difficult to predict. Software services revenue increased by 11% as
our implementation, development and managed services continue
to experience high demand as customers engage our technology
services to maximise the value that Kx delivers across industries.
Software revenue from FinTech increased by 11% to £89.4m
(2019: £80.2m), reflecting a 5% increase in license revenue
(13% increase in recurring license revenue offset by a 19% decrease
in perpetual licenses) and 17% growth in services revenue. Total
revenue from MarTech was up by 14% to £47.3m (2019: £41.4m),
driven by continued growth in subscription revenue, which was up
by 33% to £25.6m (2019: £19.3m), and a 2% decline in services revenue
as we focus on the utilisation by customers of our platform MRP
Prelytix. Subscription represented 54% of MarTech revenue, up
from 47% in 2019.
firstderivatives.com
19
Financial review continued
PROFIT BEFORE TAX
Reported profit before tax increased by 9% to £18.3m (2019: £16.7m) and adjusted profit before tax decreased by 6% to £25.9m (2019: £27.5m).
Both were held back by an increase of £2.2m in interest charges following the completion of the acquisition of the minority interest in
Kx Systems Inc., with a further £1.0m of additional interest relating to IFRS 16 lease costs. The calculation of adjusted profit before tax
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
(Profit)/loss on foreign currency translation
Share of profit of associate
Adjusted profit before tax
2020
£m
18.3
3.7
3.1
2.0
(1.0)
(0.1)
2019
£m
16.7
3.8
2.4
4.0
0.6
—
25.9
27.5
The Group continued to invest in research and development to maintain its technology lead, with total R&D up 23% to £13.1m.
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
IFRS 16
2020
£m
2.7
10.4
13.1
(8.7)
1.7
2019
£m
2.1
8.6
10.7
(7.2)
1.4
Movement
29%
22%
23%
21%
28%
The Group implemented IFRS 16, the accounting standard dealing with leases, using the cumulative catch-up method applied from
1 March 2019. The impact of the new standard is to move the charge on the income statement for operating leases from operating costs
to depreciation and interest, while on the balance sheet there is an asset recognising the right-of-use and a future lease liability within
both current and non-current liabilities.
EARNINGS PER SHARE
Reported profit after tax increased by 13% to £14.9m (2019: £13.2m) and reported diluted earnings per share also increased by 13% to 54.2p
per share (2019: 47.9p).
The adjusted profit after tax for the year was £21.3m (2019: £22.9m), a decrease of 7%. The major factors impacting earnings per share
were the higher interest charge referred to above and an increase in the Group’s adjusted tax rate to 17.8% (2019: 16.8%).
20
First Derivatives plc Annual Report 2020
STRATEGIC REPORT 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)
2020
£m
14.9
7.6
(1.3)
21.3
2019
£m
13.2
10.8
(1.1)
22.9
27.5m
77.4p
27.5m
83.2p
The fully diluted average number of shares in issue was maintained at 27.5m resulting in adjusted fully diluted earnings per share
of 77.4p, representing a decrease of 7% for the year (2019: 83.2p).
BALANCE SHEET
Total assets increased by 21% to £335.8m (2019: £277.8m). The purchase of the non-controlling interest (NCI) in Kx Systems for $53.8m in
cash in June 2019 impacted the balance sheet following settlement of the NCI forward liability. The result of this transaction saw interest
costs increase in the period as new loans were drawn in US dollars. This transaction, along with the implementation of IFRS 16, saw an
increase in non-current loans and borrowings of £94.0m.
Other financial assets, which includes equity investments, increased to £15.8m (2019: £13.7m).
Deferred revenue at the period end was up 11% at £21.8m (2019: £19.5m), arising from the continued focus on growing our recurring revenue.
CASH GENERATION AND NET DEBT
The Group generated £34.4m of cash from operating activities before taxes paid (2019: £27.3m) representing 75% conversion of adjusted
EBITDA (2019: 84%).
At the period end, net debt (excluding finance leases) was £49.4m (2019: £16.5m). The factors impacting the movement in net debt are
summarised in the table below:
Opening net debt (excluding lease liabilities)
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
Settlement of NCI forward
Investments
Issue of new shares
Interest, foreign exchange and other
2020
£m
(16.5)
34.4
—
34.4
(3.0)
(7.4)
(2.3)
(11.0)
—
—
(42.9)
(1.6)
10.1
(9.2)
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)
Closing net debt (excluding lease liabilities)
(49.4)
(16.5)
firstderivatives.com
21
Financial review continued
CASH GENERATION AND NET DEBT CONTINUED
The Group assists innovative start-up and scale-up businesses seeking to use the power of Kx to change the game, in return for a
revenue share. In some cases, we inject seed capital to help launch the business and bring solutions to market quickly. The table below
summarises the investments made in such companies to date as well as the maximum future commitment and the revenue generated
for the Group. Future commitments to these businesses are typically payable only if certain pre-determined challenging performance
milestones are achieved. In 2020 the Group advanced £2.3m in equity and loans to its new and existing venture agreement companies
with a maximum further commitment of up to £1.8m across all 27 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)
DIVIDEND
2020
2019
Total to date
9
2.3
1.8
9
2.8
0.8
9
7.8
2.3
9
2.1
0.4
27
18.9
20
8.0
1.5
The Board has determined not to recommend a final dividend for the year, as communicated in the trading update issued on 9 April 2020.
As a result, the total distribution relating to the year is the interim dividend of 8.50p per share (2019 total dividend: 27.00p per share).
22
First Derivatives plc Annual Report 2020
STRATEGIC REPORT Principal risks and uncertainties
Managing risk
Effective risk management is a key factor in the successful delivery of the
Group’s strategy. The Board, advised by the Audit Committee, is responsible
for assessing and managing risk and setting policies and procedures to
monitor and mitigate against the Group’s exposure to it.
The Group operates in a constantly changing economic and technological environment and as a result is exposed to a spectrum
of risks and uncertainties. The risks discussed below could have a material effect separately, or in combination, on our day-to-day
operations and our earnings, cash flows and financial position. Accordingly, investors should carefully consider these risks. The Board’s
responsibility for identifying, evaluating and managing these risks and the measures in place to monitor and mitigate against them are
assessed regularly by the Audit Committee and formally reviewed by the Board. The framework supporting this process and the major
risks as currently identified are discussed in more detail below.
RISK FRAMEWORK
The Group seeks to mitigate exposure to all forms of strategic, financial and operational risk, both external and internal. There is a structure in
place to achieve this, as well as identify emerging risks and assess and mitigate their impact. The risk framework structure is outlined below:
BOARD
Responsible for the oversight and effectiveness of the Group’s
risk management and financial control systems in line with risk appetite
LEADERSHIP TEAM
AUDIT COMMITTEE
Manages risk on a day-to-
day basis, implements and
monitors risk management
processes and identifies
emerging risks
Supports the Board in
assessing and managing
risk and setting policies
and procedures to
monitor and mitigate
against its impact
REMUNERATION
COMMITTEE
Ensures the remuneration
strategy is aligned to the
management of risk and
the Group’s strategic
objectives
SENIOR AND MIDDLE MANAGEMENT
Assists the Executive Committee and the Board through the design, implementation
and operation of risk management systems and processes; and promulgates the risk
awareness and safety culture to ensure it is ingrained throughout the business
STRATEGIC
Define risk appetite, set
policies and implement
risk mitigants in
accordance with
that appetite
OPERATIONAL
Monitor and report on
identified risk and assess
emerging risk at the
operational level
firstderivatives.com
23
Principal risks and uncertainties continued
RISK FACTORS
Risk
Potential impact
Mitigation
ATTRACTING AND
RETAINING TALENT
IN A COMPETITIVE
ENVIRONMENT
As a software and consultancy
provider, the Group is dependent
on the skill, experience and
commitment of its employees,
particularly on the recruitment
and retention of key staff.
The long-term performance of
the Group would be adversely
affected if the required staffing
levels of sufficient calibre are
not achieved and sustained.
There is also the potential for
short-term revenue impact
if staffing levels fall below
the level required to service
customer demand.
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 excess staff levels,
reducing profitability in the
short term, or underinvestment,
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.
PANDEMIC
A global health issue has the
potential to disrupt current
contract delivery and business
generation activity.
The financial performance of
the Group in the short term
could be impacted, while
prolonged impact could lower
future growth rates due to an
inability to effectively implement
sales and marketing activities.
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. It also has systems in place
that have operated successfully over many years to forecast
demand requirements and the level of recruitment required
to meet them, which provides assurance against short-term
impacts. Should a mismatch occur, the Group has plans
to take mitigating steps that would cover the period until
sufficient additional staff could be recruited and trained.
Change over prior year: unchanged
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.
Change over prior year: unchanged
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.
Change over prior year: unchanged
The Group has a pandemic policy which was first initiated
in early February 2020 as the COVID-19 virus showed signs
of developing into a pandemic. The policy requires measures
to be implemented across the Group to protect our employees,
customers and partners in accordance with official government
advice in the regions in which we operate. It also ensures that
we communicate that the policy is in effect to customers and
employees and put in place mitigating measures, including
self-isolation for at-risk employees and remote working where
required. During a pandemic, a global team representing the
Group’s operations forms two-way communication from and to
employees across the Group and co-ordinates the response
across the business.
Change over prior year: New risk
24
First Derivatives plc Annual Report 2020
STRATEGIC REPORT Risk
BREXIT
There is potential for disruption
caused by legislation or new
working practices resulting from
the UK exiting the European Union
including the possibility that
no new trade deal is secured.
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 clients. A small number of
these are particularly important
to the success of the Group.
Potential impact
Mitigation
Depending on (a) the final form
of any trade agreement between
the UK and the EU and (b)
whether such agreement can
be concluded during 2020,
Brexit could result in temporary
and/or enduring adverse
impacts for the Group because
of its impact on the business
activities of our customers,
on our ability to recruit non-UK
nationals to work in the UK and
on the staffing and conduct of
long-term customer projects
in the EU by UK-based staff.
Events outside of the Group’s
control such as changes in
ownership or business priorities
could adversely affect future
revenues from existing
client relationships.
FD is a global company with operating subsidiaries based
around the world, and as such seeks growth in those
geographical markets where its technology and consultancy
services are most in demand. The impact of Brexit has been
assessed and considered by the Board and is currently not
deemed to be a significant issue. The Group produces no
physical goods, nor does it rely on suppliers that may be subject
to disruption. Within its consultancy business FD has assisted
many of its capital markets clients with their Brexit preparations
and in doing so has assisted in developing best practice. As well
as being a threat, Brexit could be an opportunity as we assist
our customers to deal with its consequences for their business.
The Group is confident that it has the flexibility in its operations
to mitigate the impact of Brexit and is continually monitoring
and preparing for potential changes to the UK’s relationship
with the European Union.
Change over prior year: unchanged
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. The Group continues to increase those markets in which it
operates, for example in manufacturing, utilities and automotive,
which is helping to reduce customer concentration. This has
reduced the potential impact of the loss of an individual key client.
Change over prior year: decreased
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.
Change over prior year: unchanged
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 cybersecurity 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 IT security
controls covering some of our hosted trading products such as Kx
for Flow. The latest SSAE 18 SOC1 audit report covering the year to
March 2019 found that the Kx for Flow systems were fully compliant
for the 28 separate IT security controls it has in place.
Change over prior year: unchanged
firstderivatives.com
25
Corporate responsibility
Focused on responsibility
Responsibility is at the heart of everything we
do. The Board has endorsed ambitious targets
for continuous improvement in relation to our
operations which is good for the Company, for
our employees and for the environment. I am
very pleased to support these efforts, working
with colleagues across the Group.”
Keith MacDonald
Non-Executive Director
At FD we believe that acting responsibly is key to delivering
long-term success. It goes right to the heart of our values and
culture as an organisation – for example, our people strategy,
which is centred around health, fair rewards, diversity and
inclusion, is critical to attract, develop and retain the best talent.
As the Director appointed to ensure the views of our employees
are taken into account, I am particularly conscious of the need
to ensure we build on our strong record of engagement.
We are also acutely conscious of the importance of safeguarding
the environment to protect our planet and we are committed to
augmenting the efforts below to ensure we adopt best practices
across the entire spectrum of our activities.
Delivering on these matters means developing and executing
policies that empower and develop our people, ensure we operate
responsibly, protect the environment and safeguard data.
These aims are baked into our operations through a range of
policies that are set and monitored by the Board to ensure not just
that we comply with the relevant legislation but that we go beyond
that to assure all our stakeholders that we are acting with their
long-term interests at heart.
OUR PRIORITIES
Our people
Privacy and security
• Training, development
and recruitment
• Diversity and inclusion
• Policies
• Training
Read on page 27
Read on page 28
Responsible operations
• Policies
Environment
• Innovation
• Code of conduct
• Carbon reduction
initiatives
Read on page 28
Read on page 29
Keith MacDonald
Non-Executive Director
18 May 2020
26
First Derivatives plc Annual Report 2020
STRATEGIC REPORT Our priorities
OUR PEOPLE
Given the nature of our activities, people are 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. We
continue to seek ways to improve and during the year we initiated our
first employee engagement survey, with the aim of identifying ways
to increase our employee satisfaction and retention. We are in the
process of using the results of the survey to further enhance our
people strategy and the way we communicate with employees.
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 8,880 people applying for a job with FD
during the year. From these applications, we selected 446 people
to commence employment with us during the year, of which 291 were
new employees at graduate level and 155 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 35 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 8,780 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 also 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. During the year
10,519 training courses were completed by 1,899 staff across all the
geographies in which we operate. Across the Group we invested
£0.5m in the provision of our training and development programmes
and provided 93,120 hours of training.
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. Our
reward system is intended to be competitive in the market to assist
recruitment and retention and all employees benefit from healthcare,
pension and life assurance. Over the past year FD has extended its
family-friendly policies to cover maternity, paternity and adoption pay
and has supported employees through flexible working arrangements.
The benefits package is designed to underpin our collegiate culture,
and all benefits help support and care for employees and their families.
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
and we provide complementary healthcare plans and private
health insurance. During the year we launched an enhanced health
and wellbeing strategy, with a particular focus on mental health.
This incorporated support of global awareness days, a calendar
of events in locations globally which allowed employees to engage
proactively in the programmes and our first mental health
awareness campaign entitled #MindMatters. The #MindMatters
initiative involved sharing key information and resources on
various factors that have an impact on mental health wellbeing
and, uniquely, employees shared personal stories on coping with
mental health illnesses. In addition, we embedded our Employee
Assistance Programme (EAP) in each location which enables our
employees to benefit from many health and personal wellbeing
services provided by external professionals. Utilisation of EAP
was positive and was the support underpinning our #MindMatters
campaign on mental health. In April 2019 we ran a training
seminar on mental health first aid for line managers. We also
partnered with a health care provider to host practical sessions
assigning mental health first aid contacts across the business.
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 people with physical disabilities. Our employees have embraced
these networks enthusiastically and we look forward to continuing
to influence the FD culture going forward. At 29 February 2020, 72%
of our employees were male and 28% female, with those identified
at Manager level or above split 80% male/20% female. Of our
graduate intake in the year, 42% were female and 58% male.
EMPLOYEE ENGAGEMENT
In 2019 the Board approved the launch of FD’s inaugural employee
engagement survey.
The survey was conducted with the assistance of Willis Towers
Watson (WTW), an independent organisation providing broking,
advisory and technology solutions to clients worldwide. We worked
closely with it to design and implement a bespoke survey, utilising
its engaging, confidential and user-friendly online survey.
With 13 separate categories identified, we developed a robust set of
survey questions to capture valuable feedback. Survey confidentiality
was a key requirement and we maintained the anonymity of
employee survey results via WTW’s end-to-end platform.
firstderivatives.com
27
Corporate responsibility continued
OUR PEOPLE CONTINUED
EMPLOYEE ENGAGEMENT CONTINUED
In September 2019 the survey was issued to all permanent
employees across the globe. We achieved a 66% participation rate,
which according to WTW research is above the average for UK
organisations. This provided a statistically robust dataset upon
which to base our decision making.
The global participation rate and initial survey results were
announced to all employees by our CEO, Seamus Keating. Our
business leaders then led the dissemination of results and feedback
for each part of the organisation. We are pleased that employee
engagement was a top scoring category with 78% favourable. Our top
scoring question was "The people I work with usually get along well
together" with a remarkable 92% favourable. The survey confirmed
top scoring results in the following three categories:
Category
Employee engagement
Work organisation and conditions
Innovation and quality
Favourable
78%
77%
71%
The three categories the survey identified that we must improve are:
Category
Reward and benefit
Senior leadership
Performance management
Favourable
54%
50%
50%
The survey results helped us understand what employees’ value
most in the workplace and provided invaluable data to inform our
decision making.
Employee engagement continues to be a priority for the executive
team and is a cornerstone of our people strategy. Following the
dissemination of results, a Survey Actions Working Group was
formed with leaders drawn from each of our business divisions.
The Group is meeting regularly to implement a programme of
change across the Group.
PRIVACY AND SECURITY
The Group is committed to the highest standards of security and
privacy, and is conscious that these matters are of great importance
to stakeholders such as customers, employees and partners.
SECURITY
We work with many large organisations that manage sensitive
and confidential data and as such our adherence to high levels
of IT and cybersecurity is essential. All of our employees receive
training on IT security and are provided with a copy of the Group’s
IT security policy, which is multi-layered to cover 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.
28
First Derivatives plc Annual Report 2020
The Group operates a cybersecurity awareness programme
to help to establish a security-conscious culture, making sure
users understand what cyber threats are, the potential impact
a cyber-attack could have and the steps required to reduce risk
and prevent cyber-crime infiltration.
As well as cybersecurity training it is mandatory for each
employee to complete the following courses: Anti-Money
Laundering and Counter-Terrorist Financing, Anti-Bribery and
Anti-Corruption, General Data Protection Regulation (GDPR) and
FD’s Global Code of Conduct.
PRIVACY
The Group operates a privacy policy, which includes ensuring
compliance with the GDPR, to protect the personal information
held by the Group relating to stakeholders including clients,
partners, prospective employees and digital/mobile visitors.
Such information is only collected and used when the individuals
have provided their consent and only for the purposes for which
that consent was provided. Such information is kept confidential
and access is limited to those required to process it or provide a
product or service, and FD does not sell or trade such information.
Information held is reviewed annually and only retained if required
unless legal or regulatory requirements dictate a longer
holding period.
FD is a "Data Processor" under GDPR. This means that FD is
responsible for processing data on behalf of a "Data Controller"
e.g. a client of the Group. FD adheres to the six key principles of
data processing under the legislation and all staff or others who
process or use any personal data must ensure that they follow
these principles at all times.
The Group also has an appointed Privacy Officer to whom all
queries on the operation of our privacy policy can be addressed.
Any individual can contact the FD Privacy Officer with a request to
view or edit their personal information and FD will respond to that
request within ten days from receipt of the request.
RESPONSIBLE OPERATIONS
The Group takes seriously its responsibilities to operate ethically
and responsibly and to ensure it has a range of policies in place,
with further details provided below.
MODERN SLAVERY POLICY
Our statement on modern slavery is available on the Group website
here: https://www.firstderivatives.com/modern-slavery-statement.
We believe our risk of encountering modern slavery is low, but our
policy is designed to prevent it occurring, reflecting our commitment
to acting ethically and with integrity in all our business relationships.
We choose suppliers and contractors who we believe share our
commitment. We comply with all applicable employment legislation
and we invest heavily in the health and wellbeing of our employees,
and provide modern slavery awareness training for our procurement,
human resources, finance, legal and facilities teams along with
other individuals.
STRATEGIC REPORT 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.
COMMUNITY SUPPORT
The Group does not make charitable donations directly but
actively encourages its staff to become involved in charitable
pursuits. To co-ordinate these activities, it has established a
charity policy with the aim of being a good neighbour in the
communities in which it operates and to use the energies and
talents of its employees in charitable fundraising activities.
A team comprising employees from across the Group has been
formed to co-ordinate these activities.
Employee-organised charitable events during the year raised
more than £21,000 for more than 30 separate charities, with
a further 15 charities supported globally through the donation
of goods and services. Employees participated in volunteering
activities including "green" community clean-up campaigns in
New York and Newry. Investment in our youth has been continually
supported via employees providing mentoring, careers advice and
student seminars on careers in business, finance and technology.
In addition to fundraising events, the Group also encourages
individual employees to contribute to charities of their choice
through a payroll giving scheme under which donations are taken
tax free from their monthly salary.
The Group also engages with its local communities by supporting
initiatives to train and develop talent. Examples include support
at both school and University level to assist developing business
and technology skills and to shape curricula to ensure they are
relevant to modern business requirements.
ENVIRONMENT
FD is committed to minimising the impact of its operations on
the environment and the importance of reporting on that impact
through recognised corporate responsibility standards.
ENVIRONMENTAL IMPACT
As a provider of software and professional services, the Group’s
direct operations have minimal impact on the environment, broadly
limited to its own energy use. The Group does not manufacture
or mine and does not transport goods and so consequently its
operations have no impact in terms of land, water or air emissions.
The Group does not provide company vehicles to employees or
Directors and does not operate its own datacentres. Nonetheless
the Group does seek to minimise the limited impact its operations
have on the environment through a range of policies focused on
environmental, corporate social responsibility and ethical and
sustainable business.
Our environmental policy details measures that we take to
minimise our impact on the environment, while encouraging
suppliers and customers to do the same. They include compliance
with the letter and spirit of environmental regulations in the
geographies in which we operate; continuous monitoring to improve
our environmental performance; evaluating the environmental
impact of business decisions; measures to reduce waste produced
and recycle where possible; incorporating energy efficiency measures
in our buildings to reduce electricity consumption; participation in
initiatives such as Cycle to Work; employee training and awareness;
and other ad hoc measures.
We continue to put in place measures designed to minimise
our impact on the environment. For example, within the past year
within our offices we have installed advanced heating and cooling
systems, banned the use of disposable coffee cups and optimised
our business travel policy to eliminate unnecessary travel and
minimise the environmental impact of necessary travel.
KX TECHNOLOGY
We are also proud of the undoubted environmental benefits that
our Kx technology delivers through its energy and environmental
efficiency. The International Energy Agency (IEA) reports that
datacentres alone currently account for 1% of the world’s electricity
consumption. We believe that Kx has a part to play in ensuring
that the explosion in data widely predicted to occur in the coming
years does not lead to a rapid increase in this electricity requirement.
The environmental benefits in terms of power consumption,
cooling, space and hardware requirements delivered by Kx are
key messages to existing and potential customers. Currently,
there are no independent benchmarks that measure these
impacts definitively; however in conjunction with potential
customers we conduct head-to-head comparisons against other
streaming analytics technologies in which we have demonstrated
reductions in electricity, cooling, space and hardware
requirements in the range of 80–90% when compared to
competing solutions.
ENERGY USE AND EMISSIONS
FD is required to report its energy use and impact under the
Streamlined Energy and Carbon Reporting (SECR) regulations.
For the year ended 29 February 2020 the UK energy used was
1,130,686 kWh. Using the UK government’s 2019 GHG Conversion
Factors Guidance to calculate the quantity of emissions provides
scope 2 emissions of 287 tonnes of carbon dioxide equivalent. The
SECR regulations require a statement of relevant intensity ratios,
which are an expression of the quantity of emissions in relation to
a quantifiable factor of the business activity. FD has identified two
such intensity ratios, set out below.
Intensity ratios for the year to 29 February 2020
(tonnes of CO2e per unit)
Total revenue
0.00
Employees
0.12
firstderivatives.com
29
Board of Directors
DONNA TROY
Chairman
SEAMUS KEATING
Chief Executive Officer
GRAHAM FERGUSON
Chief Financial Officer
Committee membership
Committee membership
Committee membership
N
R
Donna joined the Board of FD in January
2018 and was appointed Chairman
in January 2020. She 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 TIBCO, Aptean and Curvature.
Skills matrix
Technology industry, strategy,
listed company executive,
international experience
Seamus was appointed as CEO in January
2020. He was first appointed to the Board
as an independent Non-Executive Director
in December 2012 and was appointed
Non-Executive Chairman in 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 a non-executive
director of BGL (Holdings) Limited. He is
a non-executive director of Sionnach Ltd,
where he has indicated his intention to
resign on the appointment of a
successor during 2020.
Skills matrix
Technology industry, finance industry,
strategy, listed company executive,
accounting qualifications,
international experience
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.
Skills matrix
Technology industry, strategy, listed
company executive, accounting
qualifications
KEY TO COMMITTEE MEMBERSHIP
A
Audit Committee
N
Nomination Committee
R
Remuneration Committee
Committee chair
Independent
30
First Derivatives plc Annual Report 2019
CORPORATE GOVERNANCE SKILLS MATRIX
Technology industry: 60%
Finance industry: 60%
Strategy: 100%
Listed company executive: 80%
Accounting qualifications: 60%
International experience: 80%
KEITH MACDONALD
Senior Independent Director, Designated
Workforce Engagement Director
VIRGINIA GAMBALE
Non-Executive Director
Committee membership
Committee membership
A
N
A
N
R
BOARD COMPOSITION
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.
Skills matrix
Finance industry, strategy, listed
company executive, accounting
qualifications, international experience
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, Virtu Financial and
Regis Corporation, and is chair of the
executive advisory board for Nutanix
(a public company and leading cloud
computing provider).
Skills matrix
Finance industry, strategy,
international experience
20+
60+
40+
Male: 60%
1–3 years: 20%
9 years+: 20%
7–9 years: 40%
4–6 years: 20%
N Length of tenure
N Gender diversity
N Balance of Executive/
Executive: 40%
Non-Executive
Female: 40%
Non-Executive: 60%
firstderivatives.com
31
20
+
40
+
20
+
40
+
60
+
In memoriam
Brian Conlon
CEO AND FOUNDER
1966–2019
FD is committed to honouring Brian’s legacy in a
tangible way. We will be naming our headquarters
in Newry after Brian and will have multiple events
starting in 2020 (which will run annually), across
the themes that he personified – investment in youth,
sport, charity and entrepreneurship. Possibly the most
fitting memorial will be the newly initiated "Spirit
of Brian Conlon" staff awards, rewarding employees
across the Company whose actions, behaviours
and attitude most reflect the values he instilled.
For more than 20 years Brian was a trailblazer for
FinTech, taking FD from formation in his home town
of Newry to the global business it is today. His ability
to spot market opportunities and focus on ensuring
customer success delivered rapid growth over a
sustained period, while his inspiring management
style commanded the respect of employees,
customers and partners alike.
Brian’s background was in the capital markets sector
where, following training with KPMG, he joined the risk
management team in Morgan Stanley International,
London and then SunGard, a major global derivatives
software house. Having spotted a niche in the market,
Brian brought his expertise, ambition and entrepreneurial
flair to launch FD in 1996. From there his drive and
determination built a global technology business that
he set on track to become an industry leader.
Brian stamped his culture and values throughout the
organisation and this will ensure his legacy will live
on, even though Brian will be sorely missed. Despite
numerous awards recognising his success, Brian was a
humble, private man who thought little of the trappings
of his success and enjoyed nothing more than spending
time with his family and closest friends.
32
First Derivatives plc Annual Report 2020
CORPORATE GOVERNANCE Chairman’s governance statement
Meeting our objectives
We have set high goals for the Group;
it is my firm belief that achieving these
goals requires the highest standards
of governance and culture.”
Donna Troy
Chairman
On behalf of the Board, I am pleased to present FD’s Corporate
Governance Report for the year ended 29 February 2020. 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. As I outlined in my review
earlier in this report, we have set high goals for the Group; it is
my firm belief that achieving these goals requires the highest
standards of governance and culture. In my role I seek to
demonstrate objective judgement and promote constructive
relations between Board members, while ensuring that Directors
continue to receive accurate, timely and clear information that
enables them to perform their roles effectively.
The year has seen significant changes to the Board in light
of the illness and subsequent passing of Brian Conlon, the
Group’s Founder and CEO, in July 2019. I am grateful to my Board
colleagues, and all FD employees, for the commitment and
fortitude they have shown during this period. Brian stamped
his culture and values on the Group and this has enabled the
business to grow to become a global technology leader.
The Board considers the culture of the business to be a key
strength and is mindful of the need to protect it. During the year
we initiated an annual employee engagement survey (for details
see page 27) which assists the Board to assess and monitor the
culture of the business and impact on employees.
STRATEGY
The Board has outlined its strategy for the business within this
Annual Report and during the year has debated its appropriateness
and effectiveness, taking into account views from across its
stakeholders. The Board continues to exercise 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 continues
to believe that the Group’s strategy is proving effective.
FD is a dynamic business which provides stimulating careers
for its employees. The Group continues to grow 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
adopted the 2018 UK Corporate Governance Code (the "Code")
as its governance framework and has put in place procedures
and policies to comply.
During the year, 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. Instead, the Group has in place a range of measures
that provide the necessary assurance to the Board that its
internal controls and risk management strategies are effective.
firstderivatives.com
33
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. The Board
is acutely aware that good governance is a pre-requisite to
successful execution of Group strategy on a sustained basis and
constantly strives to ensure that its policies and practices in this
area are regularly reviewed and, where necessary, updated to
reflect the evolution of the Group’s operations. This has been
particularly important in recent years as the range of customers
we serve, the scale of our operations and the number of business
locations have increased significantly.
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 CEO 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.
34
First Derivatives plc Annual Report 2019
These matters are discussed more fully in the report of the
Nomination Committee, which details the changes to Board
composition during the year. Board composition is regularly
reviewed to ensure the requisite mix of skills and business
experience is maintained and to ensure the proper functioning
of the Board. A search has been initiated for additional
Non-Executive Directors with the skills and experience
to support the Group’s growth strategy.
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.
ROLE OF THE SENIOR INDEPENDENT DIRECTOR
The Senior Independent Director:
• provides support to the Chairman on governance issues;
• works with the Chairman and other Directors to resolve
significant issues should they arise, particularly where
stakeholders have concerns that are not being addressed
by the Chairman or Chief Executive; and
• takes the lead in evaluating the performance of the Chairman
and serve as an intermediary and sounding board for Directors.
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 rotates the venue for its meetings
between the major operating centres of the Group to encourage
two-way communication between the Board and employees
across its operations.
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 is also monitored by the Board
on a regular basis.
CORPORATE GOVERNANCE 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.
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.
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 CEO’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 CEO; and (ii) proposals to
restructure the Executive Committee, should the need arise.
CONFLICTS OF INTEREST
In order to identify and manage conflicts of interest, all members
of the Board are required to promptly notify the Chairman and
Company Secretary in advance of any matters where there is a
reasonable likelihood that such matter could give rise to an actual
or perceived conflict of interest. This would include, but is not
limited to, other executive roles and directorships, material
shareholdings in companies that may compete with FD or which may
have a customer or supplier relationship with the Group or which
may benefit from investment by the Group. In such circumstances,
Board members would withdraw from any consideration of the
matter by the Board and, in the event that the matter related to
competition, may be required to resign from the Board. In the year
in question, as set out in note 30, the only such matter related to
rental payments to the Company’s former CEO, the late Brian Conlon,
and subsequently to his estate and independent verification of the
arm’s-length nature of the rental level was obtained.
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. The Board is also responsible for maintaining a sound
system of risk management and internal control that is sufficient
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, which has been in place for the year
under review and up to the date of approval of the Annual Report
and Accounts. It is regularly reviewed by the Board and is in
accordance with the guidance included in the FRC’s "Guidance
on Risk Management, Internal Control and Related Financial
and Business Reporting". Further information can be found in
the Risk Management report.
The Board confirms that it is not aware of any significant failings
or weaknesses in the Group’s system of internal controls.
BOARD EFFECTIVENESS REVIEW
In order to evaluate its effectiveness, the Board developed a series
of criteria based on the Code and generally accepted views of the
role and responsibilities of a Board, assessed its behaviour and
performance against these criteria and has implemented changes
based on these findings. This is an iterative process that will be
developed further in the future.
MEETING ATTENDANCE
S Keating
K MacDonald
V Gambale
D Troy
B G Conlon
R G Ferguson
Number of meetings
Board
Audit
Committee
Remuneration
Committee
Nomination
Committee
6
6
6
6
3
6
6
1*
3
3
—
—
—
3
1*
—
3
3
—
—
3
1*
—
2
2
—
—
2
Total
9*
9
14
11
3
6
14
* Seamus Keating was appointed Executive Chairman on 29 July 2019 and ceased to be a member of the Board Committees from that date.
firstderivatives.com
35
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.
Keith MacDonald
Non-Executive Director
18 May 2020
Both members of the
Committee have significant
experience of financial matters
through their past and present
business careers.”
COMPOSITION
GOVERNANCE
The composition of the Audit Committee changed during the year
as a result of the Board changes discussed in this report. It is
chaired by Keith MacDonald, who is both a Chartered Director and
a Chartered Accountant and who has held senior management
positions within global financial services companies including
Lloyds Banking Group and Citigroup. The other Committee
member is Virginia Gambale, who has previously held senior
management positions at firms including Deutsche Bank and
Merrill Lynch. Both members of the Committee have significant
experience of financial matters developed during their past and
current business careers. The composition of the Committee is
reviewed on an annual basis and it is expected that an additional
Non-Executive Director will be added to the Audit Committee
during the year to 28 February 2021.
ROLE AND ACTIVITIES
The Committee is responsible for reviewing the Group’s financial
reporting activities, including monitoring changes to reporting
requirements in order to assess their applicability and impact on
the Group. It is also responsible for ensuring there are appropriate
internal control and risk management policies and procedures in
place, for overseeing the relationship with the external auditor and
making recommendations to the Board on auditor appointments.
The Committee meets regularly to consider the matters under its
remit, including meeting prior to the release of both the interim
and full year financial reports.
RISK MANAGEMENT FRAMEWORK
The Audit Committee is responsible to the Board for ensuring
the Company has appropriate systems and procedures for the
identification and monitoring of risk. Further details are provided
in the report on operating risks on page 23 of this report.
The Committee sets its own agenda in line with best practice and
although only Committee members have the right to attend its
meetings, the Committee has from time to time invited 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:
Subject: Change in IFRS accounting standards
See note 1a to the financial statements.
Issue: Impact of IFRS 16
During the year the Group adopted IFRS 16, replacing IAS 17, on
accounting for leases. Under IFRS 16, an asset comprising the right
to use the leased item and a liability for future lease payments is
recognised for all leases, subject to exemptions for short-term leases
and low-value lease assets.
How the Audit Committee addressed the issue:
The Committee reviewed an analysis prepared by the CFO
on the implications for the reported results and considered
the options on how to report the impact in the Group’s interim
and full year financial statements. It was resolved to use 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 2019.
Subject: Investments
Ensuring the appropriate carrying value of investments made
by the Group.
36
First Derivatives plc Annual Report 2019
CORPORATE GOVERNANCE Issue: Unlisted investments
Within its Kx Ventures activities, the Group promotes the use of
its Kx technology by start-up and scale-up businesses and can
choose to assist these partners by providing debt and equity
funding to accelerate their growth.
How the Audit Committee addressed the issue:
The Committee members receive regular reports on any proposed
new or incremental investments, the progress of the investee
companies and any revaluation exercises as they occur. It was
noted that the rate of new investments made during the year had
decreased and that no revaluations were required during the period.
Subject: Capital structure
Ensuring that the Group has an appropriate capital structure.
Issue: Finance facilities
The Audit Committee monitors the financial position of the Group
and ensures it has sufficient access to funding and has the
requisite financing flexibility to execute its strategy.
How the Audit Committee addressed the issue:
The Committee noted that new financing facilities were drawn
down in March 2019 to replace the Group’s prior loans, with
a further drawdown to complete the acquisition of Kx Systems Inc.
in June 2019. There is considerable headroom in the available
facilities and the Committee resolved to continue to monitor
the level of excess facility to ensure it was appropriate.
OTHER BUSINESS
INSURANCE
The Group is required to have sufficient insurance in place to
protect its operations against the impact of insurable events.
Where possible and cost effective, the Group seeks to insure
itself against the risks it faces.
REVIEW OF EFFECTIVENESS
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 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, reviewed the effectiveness of
these risk management and internal control systems during the
year. 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 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.
INTERNAL AUDIT FUNCTION
As noted in the Chairman’s Governance Statement, the Group
does not comply with the UK Code in respect of the requirement
for an internal audit function. Instead, the Group has policies and
procedures in place to ensure the integrity of its systems, which
it believes to be appropriate and which provide the necessary
assurances to satisfy the Board of this integrity:
• 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 relevant
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.
Both the risks and the insurance in place to mitigate their effects
where possible were reviewed by the Audit Committee during the
year. The Committee reviewed the Group’s insurance cover in light
of the continued increasing scale of its operations. It received a
report with recommendations following a review with the Group’s
insurance brokers and noted that the Group is continuing
discussions with its brokers on the most appropriate level of cover
for its next policy renewal.
• 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 assessment 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.
RISK IDENTIFICATION
A report on the key ongoing and emerging risks identified for the
Group was provided to the Committee, which discussed these risks
and the processes that were in place to mitigate them. A more
detailed discussion was held on the IT and information security risks
with a view to gaining ISO accreditation for the Group in these areas.
• 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 examined 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 again considered during the year
whether the establishment of an internal audit function was
desirable and concluded it was not; the Committee will continue
to evaluate and report accordingly to the Board.
firstderivatives.com
37
In addition to considering the above, the Group also monitors
performance against pre-defined budget expectations and risk
indicators, which included this year assessing the potential impact
of COVID-19. Along with strategic progress updates, which provide
early warning to the Board, allows management action to be taken
where required including the assessment of new opportunities.
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 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 appropriate capitalisation
of internally developed software. The results of the audit provided
the Committee with confidence with regard to the overall quality
of the audit. In addition, feedback on the audit was obtained from
management and the finance team.
At the Annual General Meeting in June 2019 shareholders approved
the Board’s recommendation to appoint Deloitte (NI) Limited as its
auditor, replacing KPMG, the prior external auditor. This change of
auditor was primarily in recognition of the benefits derived from a
periodic change in auditor rather than any disagreements or other
issues between the Company and KPMG. The fees paid to the external
auditor during the year are detailed in note 8. The Committee
received confirmation from the auditor that it is independent
of the Group under the requirements of the Financial Reporting
Council’s Ethical Standards for Auditors.
Report of the Audit Committee continued
REVIEW OF EFFECTIVENESS CONTINUED
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.
In response to COVID-19, we have conducted a scenario testing
exercise with a range of assumptions including a severe, extended
downturn in economic activity which showed that even in this
scenario the Group remains profitable and cash generative.
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.
Given the technology-based nature of the Group’s business, 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.
38
First Derivatives plc Annual Report 2019
CORPORATE GOVERNANCE 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 CEO’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 CEO; 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.
Virginia Gambale
Non-Executive Director
18 May 2020
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.”
COMPOSITION
GOVERNANCE
The Committee is chaired by Virginia Gambale, following a number
of Board changes this year, and all of the Non-Executive Directors
are members of the Committee.
ROLE AND ACTIVITIES
The Nomination Committee has responsibility for ensuring that
the Board has a diversity of skills, background and personal
strengths and that succession planning supports the progressive
refreshing of the Board. It has been a busy and productive year for
the Nomination Committee.
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 CEO on
succession and development planning for the Executive Committee.
The Committee meets at least three times a year to consider the
matters under its remit.
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.
BUSINESS DURING THE YEAR
The key focus was appointing a successor to Brian Conlon,
who sadly passed away in July 2019. Seamus Keating was initially
appointed to the role of Executive Chairman to lead the Group
during the search for a new CEO, in line with the Group’s
succession planning.
APPOINTMENT OF A NEW CHIEF
EXECUTIVE OFFICER
The Nomination Committee led the search and selection process
for a new CEO, working with an external executive search consultant,
Heidrich & Struggles. A number of candidates were interviewed
and during this process Seamus Keating, Executive Chairman,
indicated he would like to be considered for the role. A shortlist
of potential candidates was produced and following this process
the Nomination Committee agreed that Seamus was the most
suitable candidate. His appointment as CEO was announced
with effect from 15 January 2020.
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39
INCLUSION AND DIVERSITY
The Nomination Committee is committed to achieving diversity
in its broadest sense in the composition of the Board and senior
management. Our approach to inclusion and diversity on the
Board is set out in the Board’s diversity policy which is reviewed
annually by the Committee.
As we embarked on a search for new NEDs we discussed the
Board’s policy with the external search consultancies to ensure
that diversity of gender, social and ethnic backgrounds, and
cognitive and personal strengths were promoted in the selection
of candidates. With Donna Troy’s appointment as Chairman on 15
January 2020 and Virginia Gambale’s appointment as Nomination
Committee Chair, 40% of the plc Board roles are held by women.
The Nomination Committee is also responsible for overseeing
the inclusion and diversity strategies across the Group. We are
developing our senior talent pipeline and culture to support
career progression and improve the representation of women,
specifically in senior management positions. We have been
encouraged by the enthusiasm and progress made during the
year. The Committee looks forward to taking on a more active role
in setting and meeting diversity objectives and strategies for the
wider Group, and in monitoring the impact of such initiatives,
as is required by the 2018 Code.
GENDER PAY GAP
In April 2020, we published our gender pay gap data which detailed
the Group’s commitment to gender equality and that its gender pay
gap was significantly lower than the industries in which we operate.
More information on the gender pay gap analysis results is
available on our website. The Committee’s role was to review the
results and also review the strategies underway to improve the
representation of women throughout our business and narrow
the gender pay gap.
LEADERSHIP AND TALENT PIPELINE
A key area of focus for the Committee has been ensuring the
Group has a diverse leadership and talent pipeline. Our Graduate
Options Programme, now in its eleventh year, is an important way
of introducing talent into the business and the Committee tracks
the diversity of all graduate entrants. The Committee recognises
that, in addition to developing our own people, identifying external
talent fulfils a vital role in improving organisational effectiveness
and it is important that we continue to attract high-calibre and
diverse talent into senior roles both in the UK and internationally.
Report of the Nomination Committee continued
APPOINTMENT OF A NEW CHIEF
EXECUTIVE OFFICER CONTINUED
Seamus has extensive leadership expertise in the global
technology sector, including executive roles in both finance and
operations in multi-national technology companies. A qualified
accountant, Seamus held a number of senior roles at Logica plc
until its acquisition in 2012 by CGI Group, including chief financial
officer, chief operating officer, president of the Benelux region and
chair of its worldwide Financial Services practice. Since 2012 he
has worked with a number of growing technology businesses in
the private and public markets as chairman and non-executive
director. He was appointed a Non-Executive Director of FD in
December 2012 and Chairman in July 2013.
Following his appointment as CEO, Seamus Keating has stepped
down from the Board Committees of which he was a member
and resigned from all except one external directorship.
APPOINTMENT OF A NEW CHAIRMAN
The appointment of Seamus Keating as CEO created a vacancy
for the role of Chairman, and in January 2020 we announced that
Non-Executive Director Donna Troy had been appointed Chairman
of the Group.
Donna has a depth of experience in both senior executive and
non-executive roles within multi-national technology companies.
She 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.
She currently holds non-executive roles at TIBCO, Aptean and
Curvature and was appointed a Non-Executive Director of FD
in January 2018.
TIME COMMITMENTS AND INDEPENDENCE
The Committee has reviewed the time commitments for the
Chairman and received assurance that she has the capacity to
fulfil her role. It has also been established that there are no
conflicts of interest. The Committee also reviews the time
commitment of each Non-Executive Director on at least an annual
basis. This is to ensure that they have sufficient time to fulfil their
responsibilities and are able to be fully engaged and actively
involved with the Group’s business throughout the year. The
Committee is satisfied that all Non-Executive Directors are
independent Non-Executive Directors in accordance with the UK
Corporate Governance Code’s recommendations.
NON-EXECUTIVE DIRECTOR SEARCH
A search has been initiated for additional Non-Executive Directors
with the skills and experience to support the Group’s growth
strategy. A key focus of the Nomination Committee is to ensure
that we have the appropriate balance of skills, experience,
diversity and capability on the Board. To ensure this, we have
worked with independent consultants to develop a skills matrix,
mapping the skills required to align with our strategy and future
market needs.
40
First Derivatives plc Annual Report 2019
CORPORATE GOVERNANCE 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 Chairman
18 May 2020
COMPOSITION
The Remuneration Committee is chaired by Donna Troy,
following a number of Board changes this year. The other
member is Non-Executive Director Virginia Gambale.
REMUNERATION POLICY
The Group’s remuneration policy is outlined below. The policy is
designed to provide levels of remuneration to attract, retain and
motivate Directors and key staff. The remuneration packages are
designed to be competitive in value to those offered at 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 reward performance, encourage
retention and deliver the strategic objectives of the Group over
the longer term.
The components of the Executive Directors’ remuneration
packages are basic salary, bonus, money purchase pension
contributions and other benefits and participation in the Share
Option Plan. The Non-Executive Directors’ remuneration packages
do not include bonus or share option elements.
A key element of the Group’s policy
is to align the interests of managers
with those of shareholders through
the total compensation package.”
EXECUTIVE DIRECTORS
BASIC SALARY
Basic salary is set by the Committee and reviewed annually. Salary
levels, which are benchmarked to market rates for roles of similar
scope in comparable listed companies, 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.
PENSION AND OTHER BENEFITS
The Group operates a defined contribution scheme for Executive
Directors and provides private health care insurance and life
assurance which are treated as benefits in kind, in line with those
offered to the workforce generally. The CFO receives a Company
pension contribution equal to 10% of his base salary, while the
CEO does not receive a Company pension contribution.
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 in the range of 50%–70% of basic salary
with a maximum of up to 100% being achievable. Performance
targets are calibrated to be challenging and 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.
firstderivatives.com
41
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.
NON-EXECUTIVE DIRECTOR REMUNERATION
The Committee reviewed a benchmarking report by Pearl Meyer
on remuneration of the Non-Executive Directors. It was noted that
while awarding equity to Non-Executive Directors in the US was
extremely common, this was not a widespread practice in the UK.
It was noted that FD’s Non-Executive remuneration was broadly
in line with the median of a blended peer group; however, evidence
was presented that the Committee should consider moving
towards the median of upper quartile and US software companies.
Accordingly, the Committee resolved to recommend, and the
Board subsequently approved, an amendment to the terms of the
Non-Executive Directors total annual reward such that the Chairman’s
total annual reward is £200,000 per annum while Non-Executive
Directors receive £150,000, effective from 1 September 2019. Total
rewards comprise a cash payment (67%), with the remainder in FD
shares. 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.
SENIOR EXECUTIVE REMUNERATION
The Committee also examined compensation levels of members of
the existing senior executive team, particularly those who received
promotions and took on additional roles and responsibilities,
together with new senior hires recruited during the year. The
Committee discussed and set levels of remuneration considered
necessary to attract, retain and reward.
Report of the Remuneration Committee continued
REMUNERATION POLICY CONTINUED
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, with exercise
permitted not less than three years from the date of award and with
performance conditions attached to them that are relevant to their
impact on the Group’s strategy.
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% on absolute TSR and 50% on growth in earnings
per share.
FY 2020 REMUNERATION REPORT
Given the growth and increasing complexity of the Group, the
Remuneration Committee initiated a review of its compensation
structures across Executive, Non-Executive and senior
management roles, with the assistance of independent external
consultant Pearl Meyer.
CEO AND CFO REMUNERATION
Pearl Meyer provided recommendations of appropriate
remuneration packages which reflected that the remuneration
packages were below those offered by a selection of comparable
peer companies. As a result, the Committee concluded:
1.
2.
To increase the base salary of the CFO from £200,000 per
annum to £250,000 per annum, effective 1 September 2019.
That performance conditions attaching to the vesting of share
option awards made to the CEO and CFO continue to be of equal
weight: growth in earnings per share and total shareholder return.
On appointment of Seamus Keating as Executive Chairman
the Committee recommended and the Board approved his
remuneration package, based on a CEO benchmarking review
conducted earlier in the year by compensation specialists Pearl
Meyer. Effective from 1 August 2019, his base salary was set at
£450,000 per annum with participation in the Company
healthcare and life assurance schemes but no entitlement to cash
bonus. Upon appointment as CEO on 15 January 2020 the base
salary was maintained, with participation in the bonus scheme
possible in FY 2021 under the criteria laid out above. Upon
appointment the CEO elected not to participate in the Group
pension scheme. No discretion has been applied to remuneration
outcomes during the year under review.
42
First Derivatives plc Annual Report 2019
CORPORATE GOVERNANCE 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
S Keating
Non-Executive Directors
K MacDonald
D Troy
V Gambale
S Keating
Total
2020
2019
2020
2019
2020
2019
2020
2019
2020
2019
2020
2019
2020
2019
2020
2019
163
332
225
200
263
—
80
60
92
45
77
49
42
100
942
786
1
—
1
—
—
—
—
—
—
—
—
—
—
—
2
—
—
177
—
100
—
—
—
—
—
—
—
—
—
—
—
277
—
—
193
193
—
—
25
—
48
30
39
27
—
—
305
250
8
33
23
20
—
—
—
—
—
—
—
—
—
—
31
53
172
542
442
513
263
—
105
60
140
75
116
76
42
100
1,280
1,366
* Details in the above table reflect the passing of Brian Conlon and the appointment of Seamus Keating as an Executive Director in July 2019.
No bonus payments were made to the Executive Directors in line with the trading update issued on 9 April 2020.
The Executive Directors did not receive any award of share options during the year, and there was no exercise of existing share options
awarded in prior years.
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:
S Keating
R G Ferguson
V Gambale
K MacDonald
D Troy
Number of ordinary shares
29 February
2020
28 February
2019
25,314
100,000
7,717
45,741
1,289
25,314
100,000
13,831
45,741
90
firstderivatives.com
43
Report of the Remuneration Committee continued
SHARE OPTIONS
There were no share option awards to Directors during the year. The awards currently outstanding to Directors are as follows:
R G Ferguson
1 March
2019
200,000
Granted
during
the year
Vested
during
the year
—
194,000
Lapsed
during
the year
6,000
Exercised
during
the year
29 February
2020
—
194,000
The Remuneration Committee set TSR performance conditions for the share options granted to Graham Ferguson on 18 July 2016. In line
with these targets, 194,000 options vested and 6,000 lapsed during the year.
The Company recognised total expenses of £1,645k (2019: £1,452k) related to equity-settled share-based payment transactions during
the year. Expenses of £193k (2019: £193k) related to share options granted to the Directors. There were no share options exercised by the
Directors during the year (2019: nil).
TRANSACTIONS WITH DIRECTORS
The Directors’ interests in contracts with the Company are disclosed in note 30.
PERFORMANCE GRAPH
The chart below shows the Group’s TSR performance over the past ten years compared to the AIM 100, an index of which the Group
is a constituent.
2,000
1,500
1,000
500
0
March ‘10 March ‘11 March ‘12 March ‘13 March ‘14 March ‘15 March ‘16 March ‘17 March ‘18 March ‘19 March ‘20
FDP
AIM 100
CEO REMUNERATION
The table below shows the total remuneration and annual bonus for the Chief Executive Officer over the past nine years. During this
period the CEO has not received any long-term incentive remuneration.
Total remuneration (£'000)
Annual bonus as a % of maximum opportunity
Long-term incentives as a % of maximum opportunity
231
40%
n/a
277
62%
n/a
276
63%
n/a
165
—
n/a
311
657
693
97% 100% 100%
n/a
n/a
n/a
542
53%
n/a
435
—
n/a
2012
2013
2014
2015
2016
2017
2018
2019
2020
The 2020 CEO remuneration figure is the total of the remuneration paid to Brian Conlon and also remuneration paid to Seamus Keating
for the period in which he was an Executive Director.
The Group is also required to report on its CEO pay gap ratio, which is detailed in the table below.
Financial year
Method
25th percentile pay ratio
Median pay ratio
75th percentile pay ratio
2020 CEO total remuneration
2020 CEO base salary
Option A
Option A
10.0
9.8
17.3
17.0
33.7
33.1
Option A was selected as the basis for the calculations above as it was considered to be the most accurate. The total remuneration for all
of the Company’s UK employees was calculated, and those employees were then ranked from high to low, based on their total remuneration,
with the employees whose remuneration places them at the 25th, 50th and 75th percentile points identified. The date by which these
calculations were made was 29 February 2020 and no component of pay has been omitted from the calculations.
44
First Derivatives plc Annual Report 2019
CORPORATE GOVERNANCE 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 29 February 2020.
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:
RESULTS AND DIVIDEND
The Group’s profit after taxation attributable to shareholders for
the year to 29 February 2020 was was £14,893k (2019: £13,175k).
The Directors do not propose the payment of a final dividend
for the year, as communicated in the trading update issued
on 9 April 2020. As a result, the total distribution relating to
the year is the interim dividend of 8.50p per share (2019 total
dividend: 27.00p) per share.
Dividends paid during the year comprised a final dividend of
19.30p per share for the year ended 28 February 2019 and an
interim dividend of 8.50p per share for the six months ended
31 August 2019.
The price of the Company’s shares at close of business on
29 February 2020 was £27.65 (2019: £21.90) and the high and
low share prices during the year were £35.55 (2019: £48.00) and
£21.00 (2019: £20.10) respectively. The average share price during
the year was £27.17 (2019: £33.96).
DIRECTORS
The Directors who held office during the year were as follows:
B G Conlon (until 28 July 2019)
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 Juliana Conlon (23.7%),
Kabouter Management (8.2%), Columbia Threadneedle Investments
(7.3%), T Rowe Price (6.9%), Aberdeen Standard Investments (6.8%),
Baillie Gifford & Co (4.8%), Octopus Investments (5.8%), Invesco
(4.4%) and Metzler Asset Management (3.0%).
RESEARCH AND DEVELOPMENT
The Group’s policy is to invest in product innovation and engage
in research and development activities geared towards the
enhancement of its software products. During the year costs of
£10,431k (2019: £8,573k) 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 £2,701k (2019: £2,089k) were expensed during the year.
• 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. AIM Rule 26 also requires the Company to adopt
a corporate governance code and it has chosen the UK Corporate
Governance Code 2018, against which the Directors are
responsible for reporting the Company’s compliance.
SECTION 172 COMPLIANCE STATEMENT
The Directors have acted in good faith to promote the success of
the Company for the benefit of its members as a whole. In doing
so, they have given regard, amongst other matters, to the
following matters set out in Section 172(1)(a) to (f) of the
Companies Act 2006:
a) The likely consequences of any decision in the long term
b) The interests of the Company’s employees
c)
The need to foster the Company’s business relationships
with suppliers, customers and others
d)
The impact of the Company’s operations on the community
and the environment
e)
The desirability of the Company maintaining a reputation
for high standards of business conduct
f) The need to act fairly as between members of the Company
An explanation of how the views of stakeholders have been taken
into account in the Board’s decision making during the year is
provided in the stakeholder engagement section of this report.
firstderivatives.com
45
Directors’ report continued
FAIR, BALANCED, UNDERSTANDABLE
POLITICAL DONATIONS
The Group and Company made no political donations during the
year (2019: £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.
The Group has adapted its working practices in order to deal as
effectively as possible with COVID-19. Within this report details
are provided on these actions which affect all its stakeholders.
The Board is continuously monitoring the situation and is ready
to act to meet changing requirements as they arise. Further
information is contained in the Financial review.
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 reappointment of Deloitte (NI)
Limited and a resolution to that effect 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, the Business
Review and the Financial Review.
By order of the Board
J J Kearns
Secretary
18 May 2020
The Board of Directors has combined the knowledge and
experience derived by each of them from other board positions
with a review of the annual reports of other similar enterprises
in order to satisfy themselves 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.
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. A Group-wide
employee satisfaction review was recently conducted by an
independent third-party organisation, as detailed in the Corporate
responsibility section, with the results being utilised to inform the
Group’s push to make it an employer of choice in the sector.
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.
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) Prelytix Inc. and Kx Systems Inc., the Group
achieved a net investment hedge against a significant portion of its
translation exposure on the net assets of its foreign operations.
46
First Derivatives plc Annual Report 2019
CORPORATE GOVERNANCE 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. This reporting framework is also consistent with
the requirements of the Irish Stock Exchange, trading as Euronext
Dublin, where the Company’s shares are also listed.
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;
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 comply 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.
• state whether they have been prepared in accordance with
IFRSs as adopted by the EU;
On behalf of the Board
• 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.
J J Kearns
Secretary
18 May 2020
firstderivatives.com
47
Independent auditor’s report
To the members of First Derivatives plc
REPORT ON THE AUDIT OF THE FINANCIAL STATEMENTS
1. OPINION
In our opinion:
• the financial statements of First Derivatives plc (the ‘Company’) and its subsidiaries (the ‘Group’) give a true and fair view of the state
of the Group’s and of the Company’s affairs as at 29 February 2020 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 (IFRSs)
as adopted by the European Union;
• the Company financial statements have been properly prepared in accordance with IFRSs as adopted by the European Union 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.
We have audited the financial statements which comprise:
• the Consolidated statement of comprehensive income;
• the Consolidated and Company balance sheets;
• the Consolidated and Company statements of changes in equity;
• the Consolidated and Company cash flow statements; and
• the related notes 1 to 35.
The financial reporting framework that has been applied in their preparation is applicable law and IFRSs as adopted by the European
Union and, as regards the Company financial statements, as applied in accordance with the provisions of the Companies Act 2006.
2. BASIS FOR OPINION
We conducted our audit in accordance with International Standards on Auditing (UK) (ISAs (UK)) and applicable law. Our responsibilities
under those standards are further described in the auditor’s responsibilities for the audit of the financial statements section of our report.
We are independent of the Group and the Company in accordance with the ethical requirements that are relevant to our audit of the
financial statements in the UK, including the Financial Reporting Council’s (the ‘FRC’s’) Ethical Standard as applied to listed entities, and
we have fulfilled our other ethical responsibilities in accordance with these requirements.
We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion.
3. SUMMARY OF OUR AUDIT APPROACH
First Year Audit
Transition and Key
audit matters
This is the first year we have been appointed as auditors to the Group. We undertook a number of transitional
procedures to prepare for the audit. Before we commenced our audit, we established our independence of the
Group. We used the time prior to commencing our audit to meet key members of management to gain an
understanding of the business, its challenges and the environment in which it operates.
The key audit matters that we identified in the current year were:
• Revenue recognition relating to accrued and deferred income;
• Carrying value of goodwill; and
• Capitalisation of internally developed software costs
Key audit matters considered by the Group’s predecessor auditor in the prior year were broadly aligned with the
items identified above. The Key audit matter presented by the predecessor auditor relating to the ‘Assessment of
Fair Value and Accounting of Investments’ has been removed based on our independent assessment of the most
significant assessed risks of material misstatement.
Materiality
The materiality that we used for the Group financial statements in the current year was £912k which was
determined on the basis of 5% of profit before taxation. In 2019, the predecessor auditor determined materiality at
£775k based on 5% of profit before taxation.
The materiality for the Company that we used in the current year was £744k based on a percentage of revenue but
capped at approximately 80% of Group materiality. In 2019, the predecessor auditor determined materiality at
£500k, on the basis of 5% of Company profit before tax.
48
First Derivatives plc Annual Report 2020
FINANCIAL STATEMENTS 3. SUMMARY OF OUR AUDIT APPROACH CONTINUED
Scoping
We determined the scope of our Group audit by obtaining an understanding of the Group and its environment and
assessing the risks of material misstatement at the Group level.
Our audit scoping provides full scope audit coverage of 99% of revenue, 98% of profit before tax and 99% of
total assets.
In 2019, audits for Group reporting purposes were performed based on identified key reporting components which
represented principal activities of the Group. The predecessor auditors scoping for Group reporting purposes was
97% of revenue, 97% of profit before tax and 98% of total assets.
4. CONCLUSIONS RELATING TO GOING CONCERN, PRINCIPAL RISKS AND VIABILITY STATEMENT
4.1. GOING CONCERN
We are required by ISAs (UK) to report in respect of the following matters where:
• the directors’ use of the going concern basis of accounting in preparation of the financial
statements is not appropriate; or
• the directors have not disclosed in the financial statements any identified material
uncertainties that may cast significant doubt about the Group’s or the Company’s ability to
continue to adopt the going concern basis of accounting for a period of at least twelve
months from the date when the financial statements are authorised for issue.
We are required to state whether we have anything material to add or draw attention to in
relation to that statement required by Listing Rule 9.8.6R(3) and report if the statement is
materially inconsistent with our knowledge obtained in the audit.
Going concern is the basis of
preparation of the financial
statements that assumes an entity
will remain in operation for a period of
at least 12 months from the date of
approval of the financial statements.
We confirm that we have nothing
material to report, add or draw attention
to in respect of these matters.
4.2. PRINCIPAL RISKS AND VIABILITY STATEMENT
Based solely on reading the directors’ statements and considering whether they were
consistent with the knowledge we obtained in the course of the audit, including the knowledge
obtained in the evaluation of the directors’ assessment of the Group’s and the Company’s
ability to continue as a going concern, we are required to state whether we have anything
material to add or draw attention to in relation to:
• the disclosures on pages 24 and 25 that describe the principal risks, procedures to identify
emerging risks, and an explanation of how these are being managed or mitigated;
Viability means the ability of the
Group to continue over the time
horizon considered appropriate by
the directors.
We confirm that we have nothing
material to report, add or draw attention
to in respect of these matters.
• the directors’ confirmation on page 17 that they have carried out a robust assessment of
the principal and emerging risks facing the Group, including those that would threaten its
business model, future performance, solvency or liquidity; or
• the directors’ explanation on page 38 as to how they have assessed the prospects of the
Group, over what period they have done so and why they consider 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.
We are also required to report whether the directors’ statement relating to the prospects of the
group required by Listing Rule 9.8.6R(3) is materially inconsistent with our knowledge obtained
in the audit.
5. KEY AUDIT MATTERS
Key audit matters are those matters that, in our professional judgement, were of most significance in our audit of the financial
statements of the current period and include the most significant assessed risks of material misstatement (whether or not due to fraud)
that we identified. These matters included 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.
firstderivatives.com
49
Independent auditor’s report continued
To the members of First Derivatives plc
5. KEY AUDIT MATTERS CONTINUED
5.1. REVENUE RECOGNITION RELATING TO ACCRUED AND DEFERRED INCOME
Key audit matter
description
The Group has £12.1m of accrued revenue and £21.8m of deferred revenue at 29 February 2020 (2019 £7.2m and
£19.5m respectively) with £237.8m of revenue recognised in the year (2019: £217.4m)
How the scope of our
audit responded to
the key audit matter
The delivery of licensing or service revenue may occur over multiple accounting periods such that revenue is
misstated at the balance sheet date due to incorrect recognition of accrued or deferred revenue.
• Revenue could be misstated where the correct revenue recognition policies may not have been applied to
contracts primarily due to the following factors;
• Multi-element contracts may not have been correctly unbundled where they contain separable deliverables;
• Accrued income balances recorded at year end may not reflect the appropriate level of revenue to be
recognised at the balance sheet date.
• Revenue may not be deferred over the appropriate period for services contracts or where the related billed
service has not yet been performed.
This key audit matter is also discussed on page 36 in the Report of the Audit Committee and is disclosed in the
significant accounting policies as an area where critical judgement has been applied in accounting policies in
note 1 and in the significant accounting policies on page 66.
In order to address the key audit matter, we performed the following procedures:
• obtained an understanding of the process and relevant controls for ensuring appropriate recognition of
revenue and evaluated the design and determined the implementation of the controls relating to accrued and
deferred revenue;
• carried out a review of the appropriateness of revenue recognition policies adopted under IFRS including
disclosures in the financial statements;
• evaluated a sample of contracts including a recalculation of revenue to be recognised based on the contract
terms and comparing this to actual revenue, with each contractual element reviewed to challenge the
appropriateness of revenue recognition;
• evaluated accrued income and deferred income to challenge the appropriateness of accrued or deferred
revenue as at the balance sheet date; and
• evaluated fixed price contracts to assess whether the revenues recognised to date were appropriate; this work
included reviewing stage of completion by reference to post year end data and understanding budget versus
actual variances where applicable and the impact on revenue to be recognised by reference to the stage
of completion.
Key observations
Based on the evidence obtained, we consider the recognition of accrued and deferred revenue at year-end to be
appropriate.
50
First Derivatives plc Annual Report 2020
FINANCIAL STATEMENTS 5. KEY AUDIT MATTERS CONTINUED
5.2. CARRYING VALUE OF GOODWILL
Key audit matter
description
The carrying value of goodwill at 29 February 2020 was £110.6m (2019: £107.4m), representing 68% of consolidated
net assets.
Goodwill requires significant management judgements in assessing the carrying value of the asset, as an impairment
review must be undertaken annually, using forecasted discounted future cash flows, at a cash generating unit
level. This requires various assumptions and estimates, which can be complex and subjective to determine.
Management have determined the recoverable amount based on a value-in-use model calculated from cash flow
projections based on management’s assumptions and estimates of future trading performance.
Estimating a value-in-use is inherently judgemental, and a range of assumptions can reasonably be applied in
determining the estimates applied therein. The key judgements in assessing goodwill for impairment are the
discount rate, long-term growth rate, and the short-term projected cash flows. The value-in-use model is
sensitive to changes in these estimates, all of which must reflect a long-term view of underlying growth in the
respective economies within which these businesses operate and the reasonableness of projected cash flows.
This key audit matter is also disclosed in the significant accounting policies as a key source of estimation
uncertainty in note 1 and in the significant accounting policies on page 72. Information on the Group’s
assessment of carrying value of goodwill is included in note 16.
In order to address the key audit matter, we performed the following procedures:
• We evaluated the design and determined the implementation of the relevant controls in place for ensuring
impairment reviews are prepared appropriately
• We challenged the underlying assumptions and obtained audit evidence to test those assumptions within the
Group’s impairment model, including cash flow projections, discount rates and growth rates, which we compared
to relevant industry data. We performed a sensitivity analysis on the underlying assumptions noted above to
determine if there were any scenarios whereby a reasonably possible expectation of impairment could be present.
• We considered the adequacy of the disclosures in relation to goodwill and whether they meet the requirements
of the relevant accounting standards.
How the scope
of our audit
responded to the
key audit matter
Key observations We have no observations that impact on our audit in respect of the carrying value of goodwill.
5.3. CAPITALISATION OF INTERNALLY DEVELOPED SOFTWARE COSTS
Key audit matter
description
At 29 February 2020, the Group held internally developed software costs with a net book value of £31.9m (2019:
£29.9m). Costs in relation to internally generated intangible assets are capitalised when all of the criteria as set
out in IAS 38 "Intangible Assets" are met.
How the scope
of our audit
responded to the
key audit matter
There is a risk that additions are made to capitalised development costs before all the required capitalisation
criteria are met. Expenditure is capitalised from the date when the intangible asset first meets the recognition
criteria and in determining the amount to be capitalised, management make judgements regarding expected
future cash generation of the asset.
This key audit matter is also disclosed in the significant accounting policies on page 72.
In order to address the key audit matter, we performed the following procedures:
• We obtained an understanding of the process and related controls for ensuring appropriate capitalisation of
development costs.
• We evaluated the design and determined the implementation of the relevant controls in place to separately
identify when development activities meet recognition criteria.
• We reviewed the capitalised project register and completed procedures to determine whether the expenditure
was recorded accurately and whether it met the required capitalisation criteria in accordance with IAS 38.
• We agreed the amount of development costs capitalised to underlying documentation detailing cost per
project, including timesheet data.
Key observations We have no observations that impact on our audit in respect of the capitalisation of internally developed software costs.
firstderivatives.com
51
Independent auditor’s report continued
To the members of First Derivatives plc
6. OUR APPLICATION OF MATERIALITY
6.1. MATERIALITY
We define materiality as the magnitude of misstatement in the financial statements that makes it probable that the economic decisions
of a reasonably knowledgeable person would be changed or influenced. We use materiality both in planning the scope of our audit work
and in evaluating the results of our work.
Based on our professional judgement, we determined materiality for the financial statements as a whole as follows:
Group financial statements
Company financial statements
Materiality
£912k (2019: £775k)
£744k (2019: £500k)
Basis for
determining
materiality
5% of profit before tax. In 2019, the predecessor auditor
determined materiality at £775k, on the basis of 5% of
Group profit before tax.
Rationale for the
benchmark applied
Profit before tax is a key performance measure for
management, investors and the analyst community.
This metric is important to the users of the financial
statements (investors and analysts being the key
users for a listed entity) because it portrays the
performance of the business and hence its ability to
pay a return on investment to the investors.
Company materiality equates to 0.3% of revenue and is
capped at approximately 80% of Group materiality. In
2019, the predecessor auditor determined materiality at
£500k, on the basis of 5% of Company profit before tax.
Revenue was considered to the most appropriate
measure for the Company given it is a key performance
measure for management and the analyst community
as a trading company. As this was higher than Group
materiality, we capped Company materiality at 85% of
Group materiality.
PBT
£18,250
95+5+
PBT
Materiality: £912k
Component materiality range £744k to £24k
Audit Committee Reporting Threshold: £45.6k
Group materiality
6.2. ERROR REPORTING THRESHOLD
We agreed with the Audit Committee that we would report to the Committee all audit differences in excess of £45.6k (2019: £39k), as well
as differences below that threshold that, in our view, warranted reporting on qualitative grounds. We also report to the Audit Committee
on disclosure matters that we identified when assessing the overall presentation of the financial statements.
7. AN OVERVIEW OF THE SCOPE OF OUR AUDIT
7.1. IDENTIFICATION AND SCOPING OF COMPONENTS
The Group operates in 15 locations across 4 continents with the largest footprint being in North America and Europe. We determined the
scope of our Group audit by obtaining an understanding of the Group and its environment, including Group-wide controls, and assessing
the risks of material misstatement at the Group and component level. Based on that assessment, we focused our Group audit scope on
the audit work at the Newry location, where the Group entities finance functions are centrally managed.
There were no component audit teams, with the entire audit including the testing of the consolidation being conducted by one central
audit team.
Of the Group’s 25 components, we subjected 10 of the Group entities to full audit scope and specified audit procedures were undertaken
on a further three components. Our full scope and specified audit procedures covered 99% of total Group revenue; 98% of Group profit
before tax and 99% total Group assets.
52
First Derivatives plc Annual Report 2020
FINANCIAL STATEMENTS 7. AN OVERVIEW OF THE SCOPE OF OUR AUDIT CONTINUED
7.1. IDENTIFICATION AND SCOPING OF COMPONENTS CONTINUED
In 2019, the predecessor auditor subjected 8 components to a full audit and 1 component was subject to specified audit procedures. The
audits for Group reporting purposes were performed based on identified key reporting components which represented principal
activities of the Group. The predecessor auditors scoping for Group reporting purposes was 97% of revenue, 97% of profit before tax and
98% of total assets.
These components were selected based on the level of coverage achieved and to provide an appropriate basis for undertaking audit work
to address the risks of material misstatement identified above. Our audit work for all components was executed at levels of materiality
applicable to each individual unit which were lower than Group materiality and ranged from £24k to £744k.
At the Group level, we also tested the consolidation process and carried out analytical procedures to confirm our conclusion that there
were no significant risks of material misstatement of the aggregated financial information of the remaining components not subject to a
full audit.
Revenue
98+
N 96+
Profit
before tax
N 98+
Total
assets
Full audit scope: 98%
Full audit scope: 96%
Full audit scope: 98%
Specified audit procedures: 1%
Specified audit procedures: 2%
Specified audit procedures: 1%
Review at group level: 1%
Review at group level: 2%
Review at group level: 1%
8. OTHER INFORMATION
The directors are responsible for the other information. The other information comprises the information included in the annual report,
other than the financial statements and our auditor’s report thereon.
Our opinion on the financial statements does not cover the other information and, except to the extent otherwise explicitly stated in our
report, we do not express any form of assurance conclusion thereon.
In connection with our audit of the financial statements, our responsibility is to read the other information and, in doing so, consider
whether the other information is materially inconsistent with the financial statements or our knowledge obtained in the audit or
otherwise appears to be materially misstated.
If we identify such material inconsistencies or apparent material misstatements, we are required to determine whether there is a
material misstatement in the financial statements or a material misstatement of the other information. If, based on the work we have
performed, we conclude that there is a material misstatement of this other information, we are required to report that fact.
In this context, matters that we are specifically required to report to you as uncorrected material misstatements of the other information
include where we conclude that:
• Fair, balanced and understandable – the statement given by the directors that they 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, is materially inconsistent with our knowledge obtained in the
audit; or
• Audit committee reporting – the section describing the work of the audit committee does not appropriately address matters
communicated by us to the audit committee; or
• Directors’ statement of compliance with the UK Corporate Governance Code – the parts of the directors’ statement required under
the Listing Rules relating to the Company’s compliance with the UK Corporate Governance Code containing provisions specified for
review by the auditor in accordance with Listing Rule 9.8.10R(2) do not properly disclose a departure from a relevant provision of the
UK Corporate Governance Code.
We have nothing to report in respect of these matters.
firstderivatives.com
53
1
+
1
+
2
+
2
+
1
+
1
+
N
Independent auditor’s report continued
To the members of First Derivatives plc
9. RESPONSIBILITIES OF DIRECTORS
As explained more fully in the directors’ responsibilities statement, the directors are responsible for the preparation of the financial
statements and for being satisfied that they give a true and fair view, and for such internal control as the directors determine is
necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error.
In preparing the financial statements, the directors are responsible for assessing the Group’s and the Company’s ability to continue
as a going concern, disclosing as applicable, matters related to going concern and using the going concern basis of accounting unless
the directors either intend to liquidate the Group or the Company or to cease operations, or have no realistic alternative but to do so.
10. AUDITOR’S RESPONSIBILITIES FOR THE AUDIT OF THE FINANCIAL STATEMENTS
Our objectives are to obtain reasonable assurance about whether the financial statements as a whole are free from material
misstatement, whether due to fraud or error, and to issue an auditor’s report that includes our opinion. Reasonable assurance is a high
level of assurance but is not a guarantee that an audit conducted in accordance with ISAs (UK) will always detect a material misstatement
when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could
reasonably be expected to influence the economic decisions of users taken on the basis of these financial statements.
Details of the extent to which the audit was considered capable of detecting irregularities, including fraud and non-compliance with laws
and regulations are set out below.
As part of an audit in accordance with ISAs (UK), we exercise professional judgement and maintain professional scepticism throughout
the audit. We also:
• Identify and assess the risks of material misstatement of the financial statements, whether due to fraud or error, design and perform
audit procedures responsive to those risks, and obtain audit evidence that is sufficient and appropriate to provide a basis for our
opinion. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud
may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control.
• Obtain an understanding of internal control relevant to the audit in order to design audit procedures that are appropriate in the
circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Group and Company’s internal control.
• Evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related disclosures
made by the directors.
• Conclude on the appropriateness of the directors’ use of the going concern basis of accounting and, based on the audit evidence
obtained, whether a material uncertainty exists related to events or conditions that may cast significant doubt on the Group’s and
Company’s ability to continue as a going concern. If we conclude that a material uncertainty exists, we are required to draw attention
in our report to the related disclosures in the financial statements or, if such disclosures are inadequate, to modify our opinion. Our
conclusion is based on the audit evidence obtained up to the date of the auditor’s report. However, future events or conditions may
cause the entity (or where relevant, the Group) to cease to continue as a going concern.
• Evaluate the overall presentation, structure and content of the financial statements, including the disclosures, and whether the
financial statements represent the underlying transactions and events in a manner that achieves fair presentation (i.e. gives a true
and fair view).
• Obtain sufficient appropriate audit evidence regarding the financial information of the business activities within the Group to express
an opinion on the consolidated financial statements. The Group auditor is responsible for the direction, supervision and performance
of the Group audit. The Group auditor remains solely responsible for the audit opinion.
We communicate with those charged with governance regarding, among other matters, the planned scope and timing of the audit and
significant audit findings, including any significant deficiencies in internal control that we identify during the audit.
For listed entities and public entities, the auditor also provides those charged with governance with a statement that the auditor has
complied with relevant ethical requirements regarding independence, including the FRC’s Ethical Standard, and communicate with them
all relationships and other matters that may reasonably be thought to bear on our independence, and where applicable, related safeguards.
Where the auditor is required to report on key audit matters, from the matters communicated with those charged with governance, the
auditor determines those matters that were of most significance in the audit of the financial statements of the current period and are
therefore the key audit matters. The auditor describes these matters in the auditor’s report unless law or regulation precludes public
disclosure about the matter or when, in extremely rare circumstances, the auditor determines that a matter should not be
communicated in the auditor’s report because the adverse consequences of doing so would reasonably be expected to outweigh the
public interest benefits of such communication.
Report on other legal and regulatory requirements.
54
First Derivatives plc Annual Report 2020
FINANCIAL STATEMENTS 11. OPINIONS ON OTHER MATTERS PRESCRIBED BY THE COMPANIES ACT 2006
In our opinion, based on the work undertaken in the course of the audit:
• the information given in the strategic report and the directors’ report for the financial year for which the financial statements are
prepared is consistent with the financial statements; and
• the strategic report and the directors’ report have been prepared in accordance with applicable legal requirements.
In the light of the knowledge and understanding of the Group and the Company and their environment obtained in the course of the
audit, we have not identified any material misstatements in the strategic report or the directors’ report.
12. MATTERS ON WHICH WE ARE REQUIRED TO REPORT BY EXCEPTION
12.1. ADEQUACY OF EXPLANATIONS RECEIVED AND ACCOUNTING RECORDS
Under the Companies Act 2006 we are required to report to you if, in our opinion:
• we have not received all the information and explanations we require for our audit; or
• 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 statements are not in agreement with the accounting records and returns.
We have nothing to report in respect of these matters.
12.2. DIRECTORS’ REMUNERATION
Under the Companies Act 2006 we are also required to report if in our opinion certain disclosures of directors’ remuneration have not
been made.
We have nothing to report in respect of this matter.
13. USE OF OUR REPORT
This report is made solely to the Company’s members, as a body, in accordance with Chapter 3 of Part 16 of the Companies Act 2006. Our
audit work has been undertaken so that we might state to the Company’s members those matters we are required to state to them in an
auditor’s report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone
other than the Company and the Company’s members as a body, for our audit work, for this report, or for the opinions we have formed.
Richard Howard (Senior Statutory Auditor)
for and on behalf of Deloitte (NI) Limited, Statutory Auditor
Chartered Accountants
19 Bedford Street
Belfast
BT2 7EJ
18 May 2020
firstderivatives.com
55
Note
3 & 4
3 & 4
2020
£’000
2019
£’000
148,401
89,389
130,888
86,463
237,790
217,351
3
3
(67,184)
(69,458)
(59,465)
(66,594)
(136,642)
(126,059)
101,148
91,292
6
7
31
5
7
32
15 & 16
16
10
10
10
17
11
(13,132)
10,431
(35,399)
(41,818)
336
179
(10,662)
8,573
(32,273)
(38,455)
(19)
277
(79,403)
(72,559)
21,745
1,990
3,119
14,984
3,684
18,733
3,975
2,473
9,958
3,799
45,522
38,938
26
(4,666)
1,019
(3,621)
126
18,250
(3,357)
14,893
37
(1,478)
(592)
(2,033)
(23)
16,677
(3,502)
13,175
Consolidated statement of comprehensive income
Year ended 29 February 2020
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 gain/(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
Gain/(loss) on foreign currency translation
Net finance costs
Share of gain/(loss) of associate, net of tax
Profit before taxation
Income tax expense
Profit for the year
56
First Derivatives plc Annual Report 2020
FINANCIAL STATEMENTS Consolidated statement of comprehensive income continued
Year ended 29 February 2020
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 on net investment in foreign subsidiaries
Net (loss) 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
All profits are attributable to the owners of the Company and relate to continuing activities.
2020
£’000
14,893
2019
£’000
13,175
—
3,587
1,394
(2,920)
(1,526)
(1,526)
13,367
2,958
(728)
2,230
5,817
18,992
Note
Pence
Pence
14a
14a
55.9
54.2
50.9
47.9
firstderivatives.com
57
Consolidated balance sheet
As at 29 February 2020
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
2020
£’000
2019
£’000
15
16
17
18
19
24
19
25
20
21
22
23
24
22
23
25
26
27
37,143
154,416
2,937
15,750
5,000
14,982
230,228
76,330
3,142
26,068
105,540
10,162
151,965
2,711
13,706
5,720
15,352
199,616
57,915
1,461
18,798
78,174
335,768
277,790
136
91,002
8,118
13,775
3,587
2,418
44,125
163,161
94,311
2,610
10,585
107,506
10,868
47,719
312
6,202
—
131
79,726
8,118
10,744
3,587
3,944
36,560
142,810
289
3,300
10,827
14,416
34,998
77,546
1,004
5,945
1,071
65,101
120,564
172,607
134,980
335,768
277,790
These financial statements were approved by the Board of Directors on 18 May 2020.
Donna Troy
Chairman
Seamus Keating
Chief Executive Officer
Graham Ferguson
Chief Financial Officer
58
First Derivatives plc Annual Report 2020
FINANCIAL STATEMENTS Company balance sheet
As at 29 February 2020
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
2020
£’000
2019
£’000
15
16
17
18
19
24
19
25
20
21
22
23
24
22
23
26
27
16,492
26,394
133,464
12,914
34,902
8,541
4,726
23,994
133,464
12,776
21,658
8,484
232,707
205,102
62,910
1,826
21,656
86,392
319,099
136
91,002
8,118
13,866
3,733
24,094
52,942
1,337
14,760
69,039
274,141
131
79,726
8,118
10,898
3,733
28,046
140,949
130,652
80,254
1,779
4,473
86,506
8,151
78,143
5,350
—
—
1,527
4,406
5,933
34,909
96,457
5,119
1,071
91,644
137,556
178,150
143,489
319,099
274,141
The Company’s profit for the year ended 29 February 2020 was £3,376k (2019: £8,779k).
These financial statements were approved by the Board of Directors on 18 May 2020.
Donna Troy
Chairman
Seamus Keating
Chief Executive Officer
Graham Ferguson
Chief Financial Officer
firstderivatives.com
59
Consolidated statement of changes in equity
Year ended 29 February 2020
Share
capital
£’000
Share
premium
£’000
Merger
reserve
£’000
Share
option
reserve
£’000
Fair value
reserve
£’000
Currency
translation
adjustment
£’000
Retained
earnings
£’000
Total
equity
£’000
Balance at 1 March 2019
131
79,726
8,118
10,744
3,587
3,944
36,560
142,810
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
Total comprehensive income
for the year
Transactions with owners
of the Company
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
—
—
—
—
—
4
—
1
—
—
—
—
—
—
—
—
10,123
58
1,095
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
1,411
—
—
—
1,645
(25)
—
—
—
—
—
—
—
—
—
—
—
—
—
14,893
14,893
1,394
(2,920)
—
—
1,394
(2,920)
(1,526)
14,893
13,367
—
—
—
—
—
—
—
—
—
—
—
—
25
1,411
10,127
58
1,096
1,645
—
(7,353)
(7,353)
Balance at 29 February 2020
136
91,002
8,118
13,775
3,587
2,418
44,125
163,161
60
First Derivatives plc Annual Report 2020
FINANCIAL STATEMENTS Consolidated statement of changes in equity continued
Year ended 28 February 2019
Share
capital
£’000
Share
premium
£’000
Merger
reserve
£’000
Share
option
reserve
£’000
Fair value
reserve
£’000
Currency
translation
adjustment
£’000
Retained
earnings
£’000
Total
equity
£’000
Balance at 1 March 2018
128
73,168
8,118
14,341
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
—
—
—
—
—
—
2
—
—
1
—
—
—
—
—
—
—
—
—
—
3,829
—
29
2,700
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
(4,292)
(684)
—
—
—
1,452
(73)
—
—
—
—
—
—
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
firstderivatives.com
61
Company statement of changes in equity
Year ended 29 February 2020
Balance at 1 March 2019
131
79,726
8,118
10,898
3,733
28,046
130,652
Share
capital
£’000
Share
premium
£’000
Merger
reserve
£’000
Share
option
reserve
£’000
Fair value
reserve
£’000
Retained
earnings
£’000
Total
equity
£’000
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
—
—
—
—
4
—
1
—
—
—
—
—
—
—
10,123
58
1,095
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
1,348
—
—
—
1,645
(25)
—
—
—
—
—
—
—
—
—
—
—
3,376
3,376
—
—
3,376
3,376
—
—
—
—
—
25
1,348
10,127
58
1,096
1,645
—
(7,353)
(7,353)
Balance at 29 February 2020
136
91,002
8,118
13,866
3,733
24,094
140,949
62
First Derivatives plc Annual Report 2020
FINANCIAL STATEMENTS Company statement of changes in equity continued
Year ended 28 February 2019
Balance at 1 March 2018
128
73,168
8,118
14,070
146
25,578
121,208
Share
capital
£’000
Share
premium
£’000
Merger
reserve
£’000
Share
option
reserve
£’000
Fair value
reserve
£’000
Retained
earnings
£’000
Total
equity
£’000
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
—
—
—
—
2
—
1
—
—
—
—
—
—
—
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)
Adjusted balance at 28 February 2019
131
79,726
8,118
10,898
3,733
28,046
130,652
firstderivatives.com
63
Consolidated cash flow statement
Year ended 29 February 2020
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
Settlement of NCI forward
Acquisition of other investments and associates
Acquisition of property, plant and equipment
Acquisition of intangible assets
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 lease liabilities (2019: finance lease liabilities)
Interest paid
Dividends paid
Net cash generated in financing activities
Net increase 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
64
First Derivatives plc Annual Report 2020
2020
£’000
2019
£’000
14,893
13,175
3,621
6,291
12,377
—
1,645
(179)
(126)
—
3,357
41,879
(18,869)
11,340
34,350
(2,957)
2,033
2,744
11,013
3,230
1,452
(277)
23
(5,317)
3,502
31,578
(6,468)
2,230
27,340
(3,462)
31,393
23,878
26
(604)
—
(42,874)
(1,044)
(2,295)
(10,972)
37
(1,944)
(591)
—
(2,652)
(4,105)
(9,238)
(57,763)
(18,493)
10,127
76,933
(36,751)
(4,531)
(3,482)
(7,397)
34,899
8,529
18,798
(1,259)
26,068
3,147
8,900
(3,558)
(48)
(1,457)
(6,336)
648
6,033
12,365
400
18,798
FINANCIAL STATEMENTS Company cash flow statement
Year ended 29 February 2020
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
Interest received
Acquisition of subsidiaries
Settlement of NCI forward
Increase in loans to other investments
Acquisition of other investments
Acquisition of property, plant and equipment
Acquisition of intangible assets
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 from financing activities
Net increase 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 29 February
2020
£’000
2019
£’000
3,376
8,779
6,826
2,756
6,074
2,956
1,093
5,161
(1,308)
(8,000)
1,645
(179)
1,781
1,452
(300)
368
20,971
11,509
(21,746)
22,582
21,807
(2)
21,805
24
—
(42,874)
(220)
(138)
(318)
(8,474)
(52,000)
10,127
76,933
(36,751)
(1,824)
(3,006)
(7,397)
38,082
7,887
14,760
(991)
21,656
(8,187)
17,378
20,700
432
21,132
—
(762)
—
(338)
(1,844)
(2,055)
(6,579)
(11,578)
3,147
8,900
(3,558)
—
(1,457)
(6,336)
696
10,250
4,013
497
14,760
firstderivatives.com
65
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 18 May 2020.
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 2019 and
these have been adopted in the Group and Company financial statements where relevant:
• IFRS 16 Leases
• IFRIC 23 Uncertainty over Income Tax Treatments
• Long-term Interests in Associates and Joint Ventures (Amendments to IAS 28)
• Plan Amendments, Curtailment or Settlement (Amendments to IAS 19)
• Annual Improvements to IFRSs 2015 – 2017 Cycle Prepayment features with Negative Compensation (Amendments to IFRS 9)
The effects of applying IFRS 16 is described in further detail below. The other changes listed above did not result in material changes
to the Group and Company financial statements.
IFRS 16 Leases
The Group adopted IFRS 16 from 1 March 2019 using the cumulative catch-up method with the effect of initially applying the standard
reflected as an adjustment to the opening balance of retained earnings as of 1 March 2019. As such, comparative information has not
been restated to reflect the new requirements.
IFRS 16 changed lease accounting mainly for lessees and replaced the existing standard IAS 17. An asset for the right to use the leased
item and a liability for future lease payments is recognised for all leases, subject to limited exemptions for short-term leases and
low-value lease assets. The costs of leases are 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 accounting for finance leases under IAS 17, but substantively different to the accounting
treatment for operating leases under which no lease asset or lease liability was 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.
66
First Derivatives plc Annual Report 2020
FINANCIAL STATEMENTS 1. SIGNIFICANT ACCOUNTING POLICIES CONTINUED
A) BASIS OF PREPARATION CONTINUED
Changes in accounting policies continued
IFRS 16 Leases continued
The standard primarily affected the accounting for the Group as a lessee under operating leases. The application of IFRS 16 resulted
in the recognition of additional assets and liabilities in the Group balance sheet and in the consolidated statement of comprehensive
income and it replaced 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 availed of the recognition exemption for short-term and low-value leases. The Group also
elected to use the following practical expedients available on transition to IFRS 16:
• not to reassess whether a contract is or contains a lease. Accordingly, the definition of a lease in accordance with IAS 17 and IFRIC 4
will continue to be applied to those leases entered into or modified before 1 March 2019;
• use hindsight in determining the lease term;
• apply a single discount rate to portfolios of leases with reasonably similar characteristics; and
• not to separate non-lease components, instead accounting for any lease and associated non-lease components as a single arrangement.
All right-of-use assets were measured at the amount of the lease liability on adoption. The Group’s weighted average incremental
borrowing rate applied to lease liabilities as at 1 March 2019 is 3.75%.
Impact of conversion
The following table summarises the impact of transition to IFRS 16 on retained earnings at 1 March 2019.
Retained earnings
a Property, plant and equipment: Recognition of property, plant and equipment
b Trade and other payables: Rent accruals adjustment
c Loan and borrowings non-current: Recognition of long-term lease liability
c Loan and borrowings current: Recognition of short-term lease liability
Impact at 1 March 2019
Impact of adopting
IFRS 16 at 1 March 2019
Group
£’000
24,964
1,109
(22,906)
(3,167)
Company
£’000
14,204
—
(12,945)
(1,259)
—
—
When measuring lease liabilities for leases that were classified as operating leases, the Group and Company discounted lease payments
using its incremental borrowing rate at 1 March 2019. The weighted-average rate applied is 3.75% for Group and 3.75% for Company.
Operating lease commitments as at 28 February 2019 adjusted to include service charges as disclosed
under IAS 17 in the financial statements
Discounted using the incremental borrowing rate at 1 March 2019
Lease incentives recognised as at 01 March 2019
Lease liabilities recognised at 1 March 2019
1 March 2019
Group
£’000
Company
£’000
30,453
(5,489)
1,109
17,484
(3,280)
—
(26,073)
(14,204)
The adoption of IFRS 16 has also impacted the classification of associated cash flows in the consolidated cash flow statement – lease
cash flows previously presented as operating cash flows are presented as financing cash flows split into payments of principal and
interest (payment of finance lease liabilities and interest paid respectively).
firstderivatives.com
67
Notes continued
1. SIGNIFICANT ACCOUNTING POLICIES CONTINUED
A) BASIS OF PREPARATION CONTINUED
IFRSs not yet effective
A number of new standards, amendments to standards and interpretations are effective for annual periods beginning after 1 March 2019
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:
Amendments to References to Conceptual Framework in IFRS Standards
Definition of a Business (Amendments to IFRS 3)
Definition of Material (Amendments to IAS 1 and IAS 8)
Amendments to IFRS 9, IAS 39 and IFRS 7: Interest Rate Benchmark Reform
IFRS 17 Insurance Contracts
Amendments to IAS 1 Presentation of Financial Statements: Classification of Liabilities as Current Non-Current
1 January 2020
1 January 2020
1 January 2020
1 January 2020
1 January 2021
1 January 2022
There are no other IFRS standards or interpretations that are not yet effective that would be expected to have a material impact on the
Group. The Group has not early adopted any standard, interpretation or amendment that has been issued but is not yet effective.
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 financial statements are prepared on a going concern basis. The Directors consider the Group to have a resilient business model and
has considerable financial resources. It meets its day-to-day working capital requirements through cash generated from its trading
activities and has long term loan facilities that were agreed in February 2019. The Group’s forecasts and projections, taking account of
extreme downside conditions considered reasonably possible in changes in trading performance due to the impact of COVID-19 and in
line with FRC guidance issued on 26 March 2020, show that the Group should be able to meet all obligations as they fall due and operate
within the level of its facilities even in such conditions.
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 22. 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.
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:
• Development costs are capitalised in accordance with accounting policies in note 1 for assets which the Group considers positive
future cash generation will occur.
• 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.
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First Derivatives plc Annual Report 2020
FINANCIAL STATEMENTS 1. SIGNIFICANT ACCOUNTING POLICIES CONTINUED
A) BASIS OF PREPARATION CONTINUED
Critical accounting estimates and judgements continued
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.
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 31 – financial instruments; and
• note 32 – share based payment arrangements.
firstderivatives.com
69
Notes continued
1. SIGNIFICANT ACCOUNTING POLICIES CONTINUED
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.
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.
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First Derivatives plc Annual Report 2020
FINANCIAL STATEMENTS 1. SIGNIFICANT ACCOUNTING POLICIES CONTINUED
B) BASIS OF CONSOLIDATION CONTINUED
iii) Non-controlling interests (NCI) continued
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 other comprehensive income (OCI) in the Group’s financial statements; and
• differences arising from the retranslation of an interest in equity securities designated at FVOCI which are recognised in OCI.
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.
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71
Notes continued
1. SIGNIFICANT ACCOUNTING POLICIES CONTINUED
C) FOREIGN CURRENCY CONTINUED
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) 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.
iii) 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
Plant and equipment
Buildings – long leasehold and freehold
Right-of-use assets
— 25%
— 25 – 50%
— 2%
— 6 – 50%
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.
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First Derivatives plc Annual Report 2020
FINANCIAL STATEMENTS 1. SIGNIFICANT ACCOUNTING POLICIES CONTINUED
E) INTANGIBLE ASSETS AND GOODWILL CONTINUED
ii) Research and development continued
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
Acquired software
Brands
Developed software
— 12.5%
— 12.5%
— 12.5%
— 12.5 – 20.0%
Amortisation methods, useful lives and residual values are reviewed at each reporting date and adjusted if appropriate.
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.
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Notes continued
1. SIGNIFICANT ACCOUNTING POLICIES CONTINUED
F) FINANCIAL INSTRUMENTS CONTINUED
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.
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.
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.
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First Derivatives plc Annual Report 2020
FINANCIAL STATEMENTS 1. SIGNIFICANT ACCOUNTING POLICIES CONTINUED
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-settled 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.
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.
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Notes continued
1. SIGNIFICANT ACCOUNTING POLICIES CONTINUED
I) REVENUE CONTINUED
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.
J) LEASES
At inception of an arrangement, the Group determines whether such an arrangement is or contains a lease. A lease conveys a right
to control the use of an identified asset for a period of time in exchange for consideration. At inception or upon reassessment of the
arrangement, the Group allocates the consideration for lease and non-lease components on the basis of their relative fair values.
However, for certain leases of properties the Group has elected not to separate non-lease components and instead accounts for the
lease and non-lease components as a single arrangement. The Group recognises a right-of-use asset and a corresponding lease liability
with respect to all lease arrangements in which it is the lessee, except for short-term leases (defined as leases with a lease term of
12 months or less) and leases of low-value assets.
The lease liability is initially measured at the present value of the lease payments that are not paid at the commencement date,
discounted by using the rate implicit in the lease. If this rate cannot be readily determined, the Group uses its incremental borrowing
rate. Generally, the Group uses its incremental borrowing rate as the discount rate. The lease liability is subsequently measured by
increasing the carrying amount to reflect interest on the lease liability and by reducing the carrying amount to reflect the lease
payments made. It is remeasured, with a corresponding adjustment to the right-of-use asset, when there is a change in the future
lease payments. The lease liability is presented within loans and borrowings in the consolidated balance sheet.
The right-of-use assets are initially measured at cost, comprising the initial measurement of the corresponding lease liability, any lease
payments made at or before the commencement day and any initial direct costs. They are subsequently measured at cost less accumulated
depreciation and impairment losses. Right-of-use assets are depreciated on a straight-line basis over the shorter of the lease term and
useful life of the underlying asset. The depreciation starts at the commencement date of the lease. The right-of-use asset is tested for
impairment if there are any indicators of impairment. The right-of-use assets are presented within the same line item as that within
which the corresponding underlying assets would be presented if they were owned – for the Group this is property, plant and equipment.
For short-term leases and leases of low-value assets lease payments are recognised in profit or loss on a straight-line basis over the
term of the lease unless another systematic basis is more representative of the time pattern in which economic benefits from the leased
assets are consumed. This expense is presented within other operating expenses in the consolidated statement of comprehensive income.
Prior to 1 March 2019 the policy was as follows:
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.
76
First Derivatives plc Annual Report 2020
FINANCIAL STATEMENTS 1. SIGNIFICANT ACCOUNTING POLICIES CONTINUED
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.
A provision is recognised for those matters for which the tax determination is uncertain but it is considered probable that there will be a
future outflow of funds to a tax authority. The provisions are measured at the best estimate of the amount expected to become payable.
The assessment is based on the judgement of tax professionals within the Group supported by previous experience in respect of such
activities and in certain cases based on specialist independent tax advice.
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.
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)
b)
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
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.
firstderivatives.com
77
Notes continued
1. SIGNIFICANT ACCOUNTING POLICIES CONTINUED
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.
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 31.
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.
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First Derivatives plc Annual Report 2020
FINANCIAL STATEMENTS 2. FINANCIAL RISK MANAGEMENT CONTINUED
MARKET RISK CONTINUED
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 31 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 22 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 32 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.
3. 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 4.
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
2020
£’000
2019
£’000
Software
2020
£’000
2019
£’000
Total
2020
£’000
2019
£’000
89,389
(69,458)
86,463
(66,594)
148,401
(67,184)
130,888
237,790
217,351
(59,465)
(136,642)
(126,059)
19,931
19,869
81,217
71,423
101,148
91,292
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Notes continued
3. OPERATING AND BUSINESS SEGMENTS CONTINUED
GEOGRAPHICAL LOCATION ANALYSIS
UK
Rest of Europe
North America
Australasia
Total
Revenues
Non-current assets
2020
£’000
66,878
42,862
100,596
27,454
2019
£’000
63,309
38,090
94,511
21,441
2020
£’000
56,485
15,218
142,476
1,067
2019
£’000
42,800
11,739
129,584
141
237,790
217,351
215,246
184,264
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 2020 or 2019.
4. REVENUE
DISAGGREGATION OF REVENUE
Revenue by industry
FinTech
MarTech
Industry
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
5. OTHER INCOME
Government grants
2019
£’000
166,702
41,355
9,294
217,351
13,348
48,615
155,388
217,351
Managed services
and consulting
2020
£’000
2019
£’000
Software
2020
£’000
89,389
86,463
—
—
—
—
89,398
47,299
11,704
2019
£’000
80,239
41,355
9,294
Total
2020
£’000
178,787
47,299
11,704
89,389
86,463
148,401
130,888
237,790
—
—
89,389
89,389
—
89,389
89,389
—
—
86,463
86,463
—
86,463
86,463
11,856
59,789
76,756
13,348
48,615
68,925
11,856
59,789
166,145
148,401
130,888
237,790
11,856
136,545
13,348
117,540
11,856
225,934
13,348
204,003
148,401
130,888
237,790
217,351
2020
£’000
179
2019
£’000
277
During the prior year the Group was in receipt of a government grant amounting to £3,880k, awarded in June 2014. The grant is conditional on
the recruitment of additional staff for the period to 31 December 2019. No income was recognised on this grant in FY 2020. In December 2018,
the Group was awarded a government grant amounting to £1,268k under the Skills Growth Programme. The grant is to be drawn down on
the occurrence of approved training expenditure, for the period to June 2021. The income is recognised as the costs are incurred.
6. SALES AND MARKETING EXPENSES
Payroll costs
Travel and subsistence
Marketing expenses
80
First Derivatives plc Annual Report 2020
2020
£’000
28,916
2,515
3,968
35,399
2019
£’000
27,453
1,796
3,024
32,273
FINANCIAL STATEMENTS 7. 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
Changes to contingent deferred consideration (note 27)
Other acquisition-related costs
Acquisition-related costs and changes to contingent deferred consideration
8. 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
2020
£’000
2,898
781
1,579
18,668
13,320
(1,312)
314
632
1,259
1,990
1,689
2019
£’000
6,420
745
1,569
13,757
10,742
(995)
270
489
923
3,975
560
41,818
38,455
2020
£’000
—
1,990
1,990
2020
£’000
—
2,701
80
50
—
—
—
2
132
2019
£’000
3,230
745
3,975
2019
£’000
3,528
2,089
77
61
5
82
78
12
315
9. 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
2020
£’000
Average no.
2019
£’000
Average no.
234
317
1,791
2,342
221
311
1,783
2,315
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Notes continued
9. 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 32)
Less capitalised development costs
Disclosed as:
Cost of sales
Sales and marketing costs
Administrative expenses
10. FINANCE INCOME AND EXPENSE
Interest income
Finance income
Gain/(loss) on foreign currency translation of monetary assets
Change in fair value of NCI forward
Gain/(loss) on foreign currency translation
Financial liabilities measured at amortised costs
– interest expense
– lease expense
Finance expense
Net finance expense recognised in profit or loss
2020
£’000
119,395
11,458
4,733
1,645
(10,972)
2019
£’000
112,855
10,390
4,065
1,452
(8,573)
126,259
120,189
84,023
28,916
13,320
81,994
27,453
10,742
126,259
120,189
2020
£’000
26
26
1,019
—
1,019
(3,649)
(1,017)
(4,666)
(3,621)
2019
£’000
37
37
(469)
(123)
(592)
(1,478)
—
(1,478)
(2,033)
Exchange gains and losses on net investments in foreign subsidiaries and related effective hedges are recognised in the foreign currency
translation reserve.
11. 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
82
First Derivatives plc Annual Report 2020
2020
£’000
3,514
(19)
3,495
2019
£’000
4,547
(111)
4,436
(448)
(1,091)
310
—
(138)
3,357
157
—
(934)
3,502
FINANCIAL STATEMENTS 11. 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
Current tax impact of movement on hedge
Foreign currency translation differences
C) AMOUNTS RECOGNISED IN EQUITY
2020
Tax expense/
(benefit)
£’000
Before tax
£’000
After tax
£’000
Before tax
£’000
2019
Tax expense/
(benefit)
£’000
After tax
£’000
—
—
—
(4,322)
735
(3,587)
3,518
(1,246)
2,272
2,272
(598)
(148)
(746)
(746)
2,920
(1,394)
1,526
1,526
876
(3,077)
(2,201)
(6,523)
(148)
119
(29)
706
728
(2,958)
(2,230)
(5,817)
2020
Tax expense/
(benefit)
£’000
Before tax
£’000
2019
After tax
£’000
Before tax
£’000
Tax benefit
£’000
After tax
£’000
Deferred tax on share based payments
Deferred tax on losses
Current tax on losses
—
—
—
—
(39)
157
(1,529)
(1,411)
(39)
157
(1,529)
(1,411)
—
—
—
—
Reconciliation of effective tax rate
Profit excluding income tax
Income tax using the Company’s domestic tax rate of 19.0% (2019: 19.0%)
Tax exempt income
Expenses not deductible for tax purposes
Adjustments for prior years
Other differences
Foreign tax rate differences
Unrelieved overseas taxes
Total tax expense
5,483
(1,063)
(128)
4,292
2020
£’000
18,250
3,467
(1,052)
554
291
(743)
359
481
5,483
(1,063)
(128)
4,292
2019
£’000
16,677
3,169
(1,650)
1,117
46
210
513
97
3,357
3,502
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 11 March 2020 the UK Government announced legislation in Finance Bill 2020 will set the UK corporation tax rate at 19% for the
financial year beginning 1 April 2020, rather than the previously enacted reduction to 17%. Additionally, legislation will also be introduced
in the Finance Bill 2020 to set the corporation tax rate to 19% for the financial year beginning 1 April 2021. The Finance Bill 2020 was
substantively enacted on 17 March 2020. Deferred tax has been calculated at 17% as the increased rate of 19% was not enacted at the
balance sheet date.
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Notes continued
11. TAX EXPENSE CONTINUED
C) AMOUNTS RECOGNISED IN EQUITY 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). Parliament ratified the withdrawal agreement and the UK left the EU on 31 January 2020. This
began a transition period which is set to end on 31 December 2020, during which the UK and EU will negotiate their future relationship.
At this stage, there remains significant uncertainty about the outcome of the negotiations about the future arrangements between the
UK and the EU. As a result, there is significant uncertainty as which EU 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.
12. REMUNERATION OF DIRECTORS
The remuneration paid to the Directors was:
Aggregate emoluments (including benefits in kind)
Company pension contributions
Share based payment
2020
£’000
944
31
305
1,280
2019
£’000
1,063
53
250
1,366
During the period there were two Directors accruing benefits under a defined contribution pension scheme (2019: two).
The aggregate emoluments and Company pension contributions of the highest paid Director (excluding fees paid for provision
of services) amounted to £419k and £23k respectively during the year (2019: £509k 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.
13. DIVIDENDS
Dividends paid to the owners of the parent
Final dividend relating to the prior year
Interim dividend paid
2020
£’000
5,084
2,269
7,353
2019
£’000
4,383
2,001
6,384
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 19.30p (previous year: 17.00p) per share and the interim dividend paid during the
year amounted to 8.50p (previous year: 7.70p) per share. The cumulative dividend paid during the year amounted to 27.80p (previous year:
24.70p) 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.
Nil p per ordinary share (2019: 19.3p)
2020
£’000
—
2019
£’000
5,049
84
First Derivatives plc Annual Report 2020
FINANCIAL STATEMENTS 14. A) EARNINGS PER ORDINARY SHARE
BASIC
The calculation of basic earnings per share at 29 February 2020 was based on the profit attributable to ordinary shareholders of 14,893k
(2019: £13,175k), and a weighted average number of ordinary shares in issue of 26,628k (2019: 25,909k).
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
2020
Pence
per share
2019
Pence
per share
55.9
50.9
2020
Number
’000
26,162
437
27
2
2019
Number
’000
25,641
243
24
1
Weighted average number of ordinary shares at 29 February
26,628
25,909
DILUTED
The calculation of diluted earnings per share at 29 February 2020 was based on the profit attributable to ordinary shareholders of
14,893k (2019: £13,175k) and a weighted average number of ordinary shares after adjustment for the effects of all dilutive potential
ordinary shares of 27,502k (2019: 27,523k).
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 29 February
2020
Pence
per share
2019
Pence
per share
54.2
47.9
2020
Number
’000
26,628
874
27,502
2019
Number
’000
25,909
1,614
27,523
At 29 February 2020 18,885 shares (2019: 75) were excluded from the diluted weighted average number of ordinary shares calculation as
their effect would have been anti-dilutive. 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.
14. B) EARNINGS BEFORE TAX PER ORDINARY SHARE
Earnings before tax per share are based on profit before taxation of £18,250k (2019: £16,677k). 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
2020
Pence
per share
68.5
66.4
2019
Pence
per share
64.4
60.6
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Notes continued
14. B) EARNINGS BEFORE TAX PER ORDINARY SHARE CONTINUED
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
2020
Pence
per share
2019
Pence
per share
55.9
12.6
68.5
54.2
12.2
66.4
50.9
13.5
64.4
47.9
12.7
60.6
Earnings before tax per share is presented to facilitate pre-tax comparison returns on comparable investments.
14. C) ADJUSTED EARNINGS AFTER TAX PER ORDINARY SHARE
Adjusted earnings after tax per share is based on an adjusted profit after taxation of £21,283k (2019: £22,912k). The adjusted profit after
tax has been calculated by adjusting for the amortisation of acquired intangibles after tax effect of £3,155k (2019: £3,370k), share based
payment and related charges after tax effect of £2,526k (2019: £2,003k), acquisition costs after tax effect of £1,635k (2019: £3,838k),
share of profit of associate after tax effect of £126k (2019: loss £23k), the gain on foreign currency translation after tax effect of £802k
(2019: loss £503k). The number of shares used in this calculation is consistent with note 14(a) above.
Adjusted basic earnings after tax per ordinary share
Adjusted diluted earnings after tax per ordinary share
15. PROPERTY, PLANT AND EQUIPMENT
GROUP
Cost
At 1 March 2019
Recognition of right-of-use asset on initial application of IFRS 16
Additions
Exchange adjustments
At 29 February 2020
Depreciation
At 1 March 2019
Charge for the year
Exchange adjustments
At 29 February 2020
2020
Pence
per share
2019
Pence
per share
79.9
77.4
88.4
83.2
Leasehold
improvements
£’000
Plant and
equipment
£’000
Office
furniture
£’000
Right-of-use
assets
£’000
5,092
—
124
742
16,151
—
1,767
(755)
1,201
—
404
158
—
24,964
5,612
338
Total
£’000
22,444
24,964
7,907
483
5,958
17,163
1,763
30,914
55,798
2,099
657
95
2,851
9,425
1,848
(45)
758
288
50
—
3,498
(18)
11,228
1,096
3,480
12,282
6,291
82
18,655
86
First Derivatives plc Annual Report 2020
FINANCIAL STATEMENTS 15. PROPERTY, PLANT AND EQUIPMENT CONTINUED
GROUP CONTINUED
Leasehold
improvements
£’000
Plant and
equipment
£’000
Office
furniture
£’000
Right-of-use
assets
£’000
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
Carrying amounts
At 1 March 2018
At 28 February 2019
At 29 February 2020
3,622
1,470
—
5,092
1,696
419
(16)
2,099
1,926
2,993
3,107
12,840
3,378
(67)
16,151
7,357
2,132
(64)
9,425
5,483
6,726
5,935
869
331
1
1,201
564
193
1
758
305
443
667
Total
£’000
17,331
5,179
(66)
22,444
9,617
2,744
(79)
12,282
7,714
10,162
—
—
—
—
—
—
—
—
—
—
27,434
37,143
The basis by which depreciation is calculated is stated in note 1.
Property, plant and equipment includes right-of-use assets of £27,434k related to leased properties that do not meet the definition of
investment property.
Leased equipment (classified as finance leases under IAS 17) – At 28 February 2019, the net carrying amount of plant and office
equipment held under finance leases was £378k. During 2019, the Group did not acquire any equipment under a finance lease.
Details of security provided for borrowing in respect of property, plant and equipment are disclosed in note 22.
COMPANY
Cost
At 1 March 2019
Recognition of right-of-use asset on initial application of IFRS 16
Additions
At 29 February 2020
Depreciation
At 1 March 2019
Charge for the year
At 29 February 2020
Leasehold
improvements
£’000
Plant and
equipment
£’000
Office
furniture
£’000
Right-of-use
assets
£’000
3,814
—
36
3,850
1,193
345
1,538
4,293
—
238
4,531
2,662
648
3,310
945
—
44
989
471
206
677
—
14,204
—
14,204
—
1,557
1,557
Total
£’000
9,052
14,204
318
23,574
4,326
2,756
7,082
firstderivatives.com
87
Notes continued
15. PROPERTY, PLANT AND EQUIPMENT CONTINUED
COMPANY CONTINUED
Leasehold
improvements
£’000
Plant and
equipment
£’000
Office
furniture
£’000
Right-of-use
assets
£’000
Cost
At 1 March 2018
Additions
At 28 February 2019
Depreciation
At 1 March 2018
Charge for the year
At 28 February 2019
Carrying amounts
At 1 March 2018
At 28 February 2019
At 29 February 2020
2,462
1,352
3,814
958
235
1,193
1,504
2,621
2,312
3,918
375
4,293
1,969
693
2,662
1,949
1,631
1,221
617
328
945
306
165
471
311
474
312
Total
£’000
6,997
2,055
9,052
3,233
1,093
4,326
3,764
4,726
—
—
—
—
—
—
—
—
12,647
16,492
The basis by which depreciation is calculated is stated in note 1.
Property, plant and equipment includes right-of-use assets of £12,647k related to leased properties that do not meet the definition of
investment property.
16. INTANGIBLE ASSETS AND GOODWILL
GROUP
Cost
Balance at 1 March 2019
Development costs
Additions
Exchange adjustments
At 29 February 2020
Amortisation
Balance at 1 March 2019
Amortisation for the year
Exchange adjustment
At 29 February 2020
Goodwill
£’000
Customer
lists
£’000
Acquired
software
£’000
107,390
12,897
28,668
—
—
3,249
—
—
362
541
—
699
Brand
name
£’000
Internally
developed
software
£’000
751
—
—
18
59,559
10,431
—
290
Total
£’000
209,265
10,972
—
4,618
110,639
13,259
29,908
769
70,280
224,855
—
—
—
—
8,303
1,315
230
9,848
18,818
2,315
423
21,556
566
54
13
633
29,613
8,693
96
57,300
12,377
762
38,402
70,439
88
First Derivatives plc Annual Report 2020
FINANCIAL STATEMENTS 16. INTANGIBLE ASSETS AND GOODWILL CONTINUED
GROUP CONTINUED
Goodwill
£’000
Customer
lists
£’000
Acquired
software
£’000
Brand
name
£’000
Internally
developed
software
£’000
Cost
Balance at 1 March 2018
Development costs
Additions
Exchange adjustments
At 28 February 2019
Amortisation
Balance at 1 March 2018
Amortisation for the year
Exchange adjustment
At 28 February 2019
Carrying amounts
At 1 March 2018
At 28 February 2019
At 29 February 2020
103,903
12,539
27,375
—
—
3,487
—
—
358
—
665
628
107,390
12,897
28,668
—
—
—
—
103,903
107,390
110,639
6,783
1,308
212
8,303
5,756
4,594
3,411
16,186
2,437
195
18,818
11,189
9,850
8,352
738
—
—
13
751
505
54
7
566
233
185
136
Total
£’000
195,848
8,573
665
4,179
51,293
8,573
—
(307)
59,559
209,265
22,630
7,214
(231)
29,613
28,663
29,946
31,878
46,104
11,013
183
57,300
149,744
151,965
154,416
Leased intangible assets
At 1 March 2019 the Group had no assets held under finance leases.
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 £10,485k (2019: £8,573k) of capitalised employee costs for the year.
Developed software includes £4,264k (2019: £5,774k) of software under development at 29 February 2020 not yet commissioned.
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
2020
£’000
11,811
6,044
76,618
94,473
16,166
2019
£’000
11,389
5,827
74,106
91,322
16,068
110,639
107,390
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%
(2019: 5–10%) is applied for years two to five, followed by a growth rate of 2% (2019: 2%) thereafter. The pre-tax discount rates applied to
cash flow projections of the CGUs was 12–17% (2019: 12–17%).
firstderivatives.com
89
Notes continued
16. INTANGIBLE ASSETS AND GOODWILL CONTINUED
GROUP CONTINUED
Impairment testing of goodwill continued
The key assumptions used in the estimation of the recoverable amount for significant CGUs are summarised as follows:
Discount rate
Terminal value growth rate
Early growth rate
2020
2019
Market
Resource
Partners LLC
14%
2%
10%
Prelytix LLC
Kx Systems Inc.
17%
2%
7%
15%
2%
9%
Market
Resource
Partners LLC
14%
2%
10%
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
Excess over carrying amount
2020
£’000
33,887
38,343
132,620
2019
£’000
24,428
34,329
116,713
2020
£’000
22,076
28,571
47,927
2019
£’000
11,098
24,772
32,093
Sensitivity analysis
There was no impairment charge for the year ended 29 February 2020 (2019: £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.
Change required for carrying value to equal recoverable amount
Market Resource Partners LLC
Prelytix LLC
Kx Systems Inc.
Discount rate
Budgeted EBITDA growth rate
2020
%
34.0
52.0
21.8
2019
%
7.4
53.9
4.6
2020
%
(59.0)
(108.0)
(43.0)
2019
%
(11.0)
(71.6)
(26.1)
90
First Derivatives plc Annual Report 2020
FINANCIAL STATEMENTS 16. INTANGIBLE ASSETS AND GOODWILL CONTINUED
COMPANY
Goodwill
£’000
Acquired
software
£’000
Internally
developed
software
£’000
Cost
Balance at 1 March 2019
Development costs
Balance at 29 February 2020
Amortisation and impairment losses
Balance at 1 March 2019
Amortisation for the year
Balance at 29 February 2020
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
Carrying amounts
At 1 March 2018
At 28 February 2019
At 29 February 2020
Leased intangible assets
No assets are held under leases.
1,947
—
1,947
—
—
—
—
—
1,947
1,947
—
—
—
—
1,947
1,947
482
—
482
211
60
271
482
—
—
482
151
60
211
331
271
211
Total
£’000
45,046
8,474
53,520
21,052
6,074
27,126
36,520
6,579
1,947
45,046
15,891
5,161
21,052
20,629
23,994
42,617
8,474
51,091
20,841
6,014
26,855
36,038
6,579
—
42,617
15,740
5,101
20,841
20,298
21,776
24,236
26,394
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 £8,474k (2019: £6,579k) of capitalised employee costs. Developed software
includes £3,538k (2019: £4,592k) of software under development at 29 February 2020 not yet commissioned.
Impairment testing of goodwill
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% (2019: 5–10%) is applied for years two to five, followed by a growth rate of 2% (2019: 2%) thereafter. The pre-tax discount rates
applied to cash flow projections of the goodwill was 12% (2019: 12%). There was no impairment charge for the year ended 29 February 2020
(2019: £nil).
firstderivatives.com
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Notes continued
17. INVESTMENT IN SUBSIDIARIES AND ASSOCIATE
The subsidiaries of the Group and Company are detailed as follows:
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.
Unlisted investments in subsidiaries at cost
At 1 March
Additions
Transfers to Company goodwill
At end of period
Address of
registered office
Class of
share held
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
Ownership
2020
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
2019
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%
Company
2020
£’000
133,464
—
—
2019
£’000
95,329
40,082
(1,947)
133,464
133,464
On 18 June 2019 the Company settled the put exercised by the NCI shareholders in the prior year. During the prior year the Company’s
investment had increased by £39,911k following the NCI’s shareholders’ exercise of the NCI put which was to be settled by 29 June 2019.
The NCI shareholders were considered to have in substance ceased to be shareholders of the subsidiary. In the prior year the Company
had also recognised the fair value of the exercise price as a liability as detailed in note 23 which has now been settled.
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First Derivatives plc Annual Report 2020
FINANCIAL STATEMENTS 17. INVESTMENT IN SUBSIDIARIES AND ASSOCIATE CONTINUED
ASSOCIATE
Group
Investment in associate
At 29 February 2020, the Group had the following investment in an associate:
2020
£’000
2,937
2019
£’000
2,711
RxDataScience Inc.
United States
Ordinary
36.66%
Country of incorporation
Class of share held
Ownership at 29 February 2020
The Group’s share of gain in associates for the period to 29 February 2020 was £126k (2019: Loss £23k).
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.
Percentage ownership interest
Non-current assets
Current assets
Non-current liabilities
Current liabilities
Net assets (100%)
Group’s share of net assets (36.66%) (2019: 36.66%)
Goodwill
Exchange adjustments
Carrying amount of interest in associate
Revenue
Profit/(Loss) from continuing operations (100%)
Other comprehensive income (100%)
Total comprehensive income (100%)
Total comprehensive income (36.66%)
2020
£’000
36.66%
2,195
847
—
(146)
2,896
1,062
1,709
166
2,937
2020
£’000
3,708
344
—
344
126
2019
£’000
36.66%
2,253
332
—
(134)
2,451
899
1,709
103
2,711
2019
£’000
863
(63)
—
(63)
(23)
At the year end the Group holds 56,142 (2019: 56,142) warrants which are exercisable on the occurrence of an exit event at an exercise
price of $0.01 per warrant.
18. OTHER FINANCIAL ASSETS
Non-current investments
Equity securities at FVOCI
Group
2020
£’000
15,750
15,750
2019
£’000
13,706
13,706
Company
2020
£’000
12,914
12,914
2019
£’000
12,776
12,776
Information about the Group and Company’s exposure to market risk and fair value measurement is disclosed in note 31(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.
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Notes continued
18. OTHER FINANCIAL ASSETS CONTINUED
EQUITY SECURITIES DESIGNATED AT FVOCI
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.
Group
fair value
£’000
Company
fair value
£’000
Investment in Quantile Technologies Ltd
Investment in Copa Fin
Other investments not individually significant
9,500
3,276
2,974
15,750
The Group and Company have not recognised dividend income from their investments (2019: £nil).
19. 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
9,500
3,276
138
12,914
2019
£’000
24,368
19,643
—
2,523
1,047
5,060
301
Group
2020
£’000
2019
£’000
Company
2020
£’000
49,860
38,519
—
2,087
2,415
12,120
8,553
1,295
—
2,087
2,751
7,234
5,993
1,331
28,477
18,517
—
2,238
5,701
7,625
352
76,330
57,915
62,910
52,942
2020
£’000
—
1,360
1,188
2,407
45
5,000
2019
£’000
—
1,376
942
3,357
45
5,720
2020
£’000
31,109
431
954
2,408
—
2019
£’000
17,163
376
762
3,357
—
34,902
21,658
1 The repayment terms of the receivable from certain subsidiaries have been agreed as falling due after more than one year.
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 31.
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 31.
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First Derivatives plc Annual Report 2020
FINANCIAL STATEMENTS 20. CASH AND CASH EQUIVALENTS
Bank balances
See note 31 for discussion of interest rate risk and sensitivity analysis.
21. SHARE CAPITAL
In issue at 1 March
Exercise of share options (note 32)
Issued for settlement of contingent deferred consideration
Issued as remuneration
In issue at year end – fully paid
Group
Company
2020
£’000
26,068
2019
£’000
18,798
2020
£’000
21,656
2019
£’000
14,760
Ordinary shares
2020
Number
2019
Number
26,162,258
25,641,015
949,993
35,694
2,248
393,100
127,400
743
27,150,193
26,162,258
Equity shares
Issued, allotted and fully paid
Ordinary shares of £0.005 each
2020
Number
2020
£’000
2019
Number
2019
£’000
27,150,193
136
26,162,258
131
Shares increased in the year due to the exercise of 949,993 share options (2019: 393,100) for cash consideration of £10,127k (2019: £3,147k)
together with an associated transfer from the share option reserve of £nil (2019: £684k), the issue of 35,694 shares (2019: 127,400)
at £1,096k (2019: £2,701k) as settlement of contingent deferred purchase consideration and the issue of 2,248 shares (2019: 743) as
remuneration of £58k (2019: £29k).
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.
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.
firstderivatives.com
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Notes continued
22. 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 31.
Group
2020
£’000
6,337
4,531
10,868
69,156
25,155
94,311
2019
£’000
34,909
89
34,998
—
289
289
Company
2020
£’000
6,337
1,814
8,151
69,156
11,098
80,254
2019
£’000
34,909
—
34,909
—
—
—
Current liabilities
Secured bank loans
Lease liabilities (2019: Finance lease liabilities)
Non-current liabilities
Secured bank loans
Lease liabilities (2019: Finance lease liabilities)
TERMS AND REPAYMENT SCHEDULE
The Group had the following loan facilities at the end of the year:
• £65,000k multi-currency loan (term loan); and
• £65,000k revolving cash loan (revolving loan).
The terms and conditions of outstanding loans were as follows:
Facility 1
Facility 2
Facility 3
Bank overdraft
Term loan
Revolving loan
Lease liabilities
Total interest bearing
2020
2019
Currency
Nominal
interest rate
Year of
maturity
Face value
£’000
GBP
2.25%+LIBOR
Multi
2.25%+LIBOR
GBP
GBP
2.25%+LIBOR
2.25%+LIBOR
Multi
2.75%+LIBOR1
Multi
2.75%+LIBOR1
2019
2020
2019
2019
2024
2024
USD
3.78%
2020–2035
—
—
—
—
63,996
12,432
29,686
106,114
Carrying
amount
£’000
—
—
—
—
63,529
11,964
29,686
105,179
Face value
£’000
339
20,370
14,200
—
—
—
378
Carrying
amount
£’000
339
20,370
14,200
—
—
—
378
35,287
35,287
1
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 2.75%+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.
FINANCE LEASE LIABILITIES
Finance lease liabilities are payable as follows:
Group
Less than one year
Between one and five years
More than five years
96
First Derivatives plc Annual Report 2020
2019
Minimum lease
payments
£’000
Interest
£’000
Principal
£’000
103
335
—
438
14
46
—
60
89
289
—
378
FINANCIAL STATEMENTS 22. LOANS AND BORROWINGS CONTINUED
RECONCILIATION OF MOVEMENTS OF LIABILITIES TO CASH FLOWS ARISING FROM FINANCING ACTIVITIES
2019
£’000
34,909
378
35,287
2019
£’000
34,909
—
34,909
Recognition of
lease liabilities
on initial
application of
IFRS 16
£’000
—
26,073
26,073
2018
£’000
28,544
7
28,551
Recognition of
lease liabilities
on initial
application of
IFRS 16
£’000
—
14,204
14,204
2018
£’000
28,544
—
28,544
Group
Secured bank loans
Lease liabilities
Total liabilities from financing activities
Secured bank loans
Lease liabilities
Total liabilities from financing activities
Company
Secured bank loans
Lease liabilities
Total liabilities from financing activities
Secured bank loans
Lease liabilities
Total liabilities from financing activities
23. TRADE AND OTHER PAYABLES
CURRENT LIABILITIES
Trade payables
Other payables
Accruals
Deferred income
Government grants
Payables to subsidiaries
NCI forward
New
leases
£’000
—
5,612
5,612
New
leases
£’000
—
419
419
New
leases
£’000
—
—
—
Cash flows
£’000
Non-cash
movement
£’000
40,267
(4,531)
35,736
317
2,154
2,471
Cash flows
£’000
Non-cash
movement
£’000
5,342
(48)
5,294
1,023
—
1,023
Cash flows
£’000
40,267
(1,824)
38,443
Non-cash
movement
£’000
317
532
849
New
leases
£’000
Cash flows
£’000
Non-cash
movement
£’000
—
—
—
5,342
—
5,342
1,023
—
1,023
Group
Company
2020
£’000
7,725
9,235
8,684
21,778
297
—
—
47,719
2019
£’000
6,638
10,191
699
19,537
390
—
40,091
77,546
2020
£’000
4,749
6,620
8,206
8,012
136
50,420
—
78,143
2020
£’000
75,493
29,686
105,179
2019
£’000
34,909
378
35,287
2020
£’000
75,493
12,912
88,405
2019
£’000
34,909
—
34,909
2019
£’000
4,727
8,326
661
6,186
248
36,218
40,091
96,457
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97
Notes continued
23. TRADE AND OTHER PAYABLES CONTINUED
NON-CURRENT LIABILITIES
Government grants
Accruals
Group
Company
2020
£’000
2,610
—
2,610
2019
£’000
2,597
703
3,300
2020
£’000
1,779
—
1,779
2019
£’000
1,527
—
1,527
The Group and Company held an NCI forward for the remaining NCI of 34.8% of Kx Systems Inc. which was settled in the current year.
The Company previously held an NCI put 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 denominated in US Dollars up to 31 October 2021 for cash with a notice
period of 366 days. During the prior 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 was subsequently
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 Group and
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 accounted 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 31.
24. 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)
Movement in deferred tax balances during the year:
Assets
Liabilities
2020
£’000
—
1,936
10,926
58
152
1,634
276
14,982
—
14,982
2019
£’000
—
1,806
11,311
58
243
1,699
235
2020
£’000
(767)
—
—
(793)
(9,025)
—
—
2019
£’000
(770)
—
—
(793)
(9,264)
—
—
15,352
(10,585)
(10,827)
—
—
—
15,352
(10,585)
(10,827)
Property, plant and equipment
Share based payments
Trading losses
Other financial assets at fair value
Intangible assets
Short-term temporary differences
Other
Balance at
1 March 2019
£’000
Impact of
change in
accounting
policy
£’000
Recognised
in income
£’000
Recognised
in equity
£’000
Recognised
in OCI
£’000
Balance at
29 February
2020
£’000
(770)
1,806
11,311
(735)
(9,021)
1,699
235
4,525
—
—
—
—
—
—
—
—
40
91
(342)
—
343
(100)
106
138
—
39
(157)
—
—
—
—
(118)
(36)
—
113
—
(196)
35
(65)
(148)
(766)
1,936
10,926
(735)
(8,874)
1,634
276
4,397
98
First Derivatives plc Annual Report 2020
FINANCIAL STATEMENTS 24. DEFERRED TAXATION CONTINUED
GROUP CONTINUED
Property, plant and equipment
Share based payments
Trading losses
Other financial assets at fair value
Intangible assets
Short-term temporary differences
Other
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
(628)
7,269
9,345
—
(8,842)
1,461
260
8,865
—
—
—
—
—
—
—
—
(70)
20
905
—
(72)
187
(36)
934
—
(5,483)
1,063
—
—
—
—
(72)
—
(2)
(735)
(107)
51
11
(4,420)
(854)
(770)
1,806
11,311
(735)
(9,021)
1,699
235
4,525
The basis by which taxation is calculated is stated in note 1.
As at 29 February 2020, the Group has losses carried forward generated in the United Kingdom, Ireland, Canada, Australia, and Spain
which total £40m and have no expiration period.
The Group also has US federal and state income tax net operating loss (NOL) carry forwards of £18.9m and £15.7m which will expire, if not
utilised, in the tax years 2030–2040.
No deferred tax liability is recognised on temporary differences of £520k (2019: £805k) relating to the unremitted earnings of overseas
subsidiaries as the Group is able to control the timings of the reversal of these temporary differences and it is probable that they will not
reverse in the foreseeable future. Temporary differences arising in connection with interests in associates are insignificant.
The Group has carry forward losses in a Hong Kong entity of £153k (2019: £153k) 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.
COMPANY
Deferred tax assets and liabilities are attributable to the following:
Intangible assets
Share based payments
Trading losses
Other financial assets at fair value
Other
Tax assets/(liabilities) before set-off
Set-off of tax
Net tax assets/(liabilities)
Assets
Liabilities
2020
£’000
—
1,860
6,079
58
544
8,541
—
8,541
2019
£’000
—
1,736
6,360
58
330
8,484
—
8,484
2020
£’000
(3,648)
—
—
(825)
—
2019
£’000
(3,581)
—
—
(825)
—
(4,473)
(4,406)
—
—
(4,473)
(4,406)
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Notes continued
24. DEFERRED TAXATION CONTINUED
COMPANY CONTINUED
Movement in deferred tax balances during the year:
Balance at
1 March 2019
£’000
Impact of
change in
accounting
policy
£’000
Recognised
in profit
and loss
£’000
Recognised
in equity
£’000
Recognised
in OCI
£’000
Balance at
29 February
2020
£’000
Intangible assets
Share based payments
Trading losses
Other financial assets at fair value
Other
Intangible assets
Share based payments
Trading losses
Other financial assets at fair value
Other
(3,581)
1,736
6,360
(767)
330
4,078
—
—
—
—
—
—
Balance at
1 March 2018
£’000
(3,326)
6,888
5,161
(32)
308
8,999
(67)
91
—
—
137
161
Recognised
in profit
and loss
£’000
(255)
34
—
—
22
—
33
(281)
—
77
(171)
—
—
—
—
—
—
(3,648)
1,860
6,079
(767)
544
4,068
Recognised
in equity
£’000
Recognised
in OCI
£’000
Balance at
28 February
2019
£’000
—
(5,186)
1,199
—
—
—
—
—
(735)
—
(735)
(199)
(3,987)
The basis by which taxation is calculated is stated in note 1. There are no unprovided or unrecognised deferred tax balances.
25. CURRENT TAX
Current tax receivable
Current tax payable
26. EMPLOYEE BENEFITS
Accrued holiday pay
Employee taxes
Group
Company
2020
£’000
3,142
312
2019
£’000
1,461
1,004
2020
£’000
1,826
—
Group
Company
2020
£’000
1,391
4,811
6,202
2019
£’000
1,825
4,120
5,945
2020
£’000
903
4,447
5,350
100
First Derivatives plc Annual Report 2020
(3,581)
1,736
6,360
(767)
330
4,078
2019
£’000
1,337
—
2019
£’000
1,476
3,643
5,119
FINANCIAL STATEMENTS 27. 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
Company
2020
£’000
1,071
—
2019
£’000
5,688
3,230
2020
£’000
1,071
—
2019
£’000
1,038
3,289
(1,096)
(8,018)
(1,096)
(3,259)
25
—
171
1,071
25
—
3
1,071
During the year the remaining contingent deferred consideration, for which the earn-out period ended during the prior year, was settled.
During the prior year 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.
Within one year
More than one year
Group
2020
£’000
—
—
—
2019
£’000
1,071
—
1,071
Company
2020
£’000
—
—
—
2019
£’000
1,071
—
1,071
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% (2019: 0%) and shares 100% (2019: 100%).
28. COMMITMENTS
The adoption of IFRS 16 on 1 March 2019, resulted in the Group recognising right of use assets of £24,964k and corresponding lease
liabilities of £26,073k on that date. The maturity analysis of these lease liabilities as at 29 February 2020 is as follows:
Current lease liabilities
Non-current lease liabilities
Maturity Analysis:
Year 1
Year 2
Year 3
Year 4
Year 5
Onwards
Group
Company
2020
£’000
4,531
25,155
29,686
2019
£’000
—
—
—
2020
£’000
1,814
11,099
12,912
2019
£’000
—
—
—
Group
2020
£’000
4,531
3,895
3,774
3,268
3,295
10,924
29,686
As at 28 February 2019 the Group had non-cancellable operating lease rentals payable as follows (see note 1a for conversion under IFRS 16).
firstderivatives.com
101
Notes continued
28. COMMITMENTS CONTINUED
Less than one year
Between one and five years
More than five year
Group
2019
£’000
3,288
12,898
14,267
30,453
Company
2019
£’000
1,805
7,344
8,335
17,484
As at 28 February 2019 the Group leased 17 premises under operating lease arrangements.
The Group has restated 2019 disclosures to include service charges in line with accounting policy. This has resulted in an increase from
£27.4m to £30.5m.
The Group previously entered into a contingent loan commitment with an associate of up to £1.1m. As at 29 February 2020 this was
settled in full (2019: £1.1m).
The Group does not face a significant liquidity risk with regard to its lease liabilities. Lease liabilities are monitored within the Group’s
treasury function.
29. PENSION CONTRIBUTIONS
The Group makes contributions to the personal pension schemes of certain employees. The pension charge for the year amounted to
£4,733k (2019: £4,065k). Contributions amounting to £564k (2019: £584k) were payable to the schemes at the year end and are included
in creditors.
30. 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 12.
The Group was charged rent monthly for the business use of apartments located in London, Belfast and Rostrevor owned by Brian Conlon.
The charge incurred during the financial year amounted to £33k (2019: £55k). Rent deposits of £28k (2019: £26k) had been paid to Brian
Conlon in respect of these apartments. The balance owed to Brian Conlon at 28 July 2019 was £nil (28 February 2019: £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 was a partner. A £76k (2019: £148k) rental charge was incurred in the year. The balance owed to Oncon
Properties at 28 July 2019 was £nil (28 February 2019: £nil) and an amount of £168k (2019: £168k) had been prepaid.
A 15-year lease was previously 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 was a director. A £98k (2019: £199k) rental charge was incurred in the year. The
balance owed to Marcus Square Developments Limited at 28 July 2019 was £nil (28 February 2018: £nil).
A 15-year lease was previously entered into for the rental of office space in Belfast. The lessor is Armagh House Limited, a private limited
company in which Brian Conlon was a director and was acquired by Marcus Square Developments Limited during the prior year. A £211k
(2019: £405k) rental charge was incurred in the year. The balance owed to Armagh House Limited at 28 July 2019 was £nil (28 February
2018: £nil) and an amount of £567k (28 February 2018: £567k) had been prepaid.
During the financial year the Group generated revenues of £553k from Nutanix for which Virginia Gambale is the chair of the executive
advisory board. At the 29 February 2020 a trade debtor balance of £33k was due. All transactions were carried out at arms-length.
The Group holds an interest in an associate, together with other instruments as disclosed in note 18.
102
First Derivatives plc Annual Report 2020
FINANCIAL STATEMENTS 30. RELATED PARTY TRANSACTIONS CONTINUED
COMPANY
Other related party transactions
Subsidiaries
Subsidiaries
Sales to subsidiaries
Costs charged by subsidiaries
2020
£’000
22,874
2019
£’000
13,709
2020
£’000
30,068
2019
£’000
29,462
Receivables outstanding
Payables outstanding
2020
£’000
2019
£’000
49,626
36,806
2020
£’000
50,079
2019
£’000
36,218
Development costs of £2,768k (2019: £419k) 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
2020
£’000
1,516
28
13
7
4
—
2019
£’000
1,940
25
11
6
3
—
1,568
1,985
firstderivatives.com
103
Notes continued
31. 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. Furthermore, for the current
year, the fair value disclosure of lease liabilities is also not required.
29 February 2020
Financial assets measured
at fair value
Equity securities
Warrants in associate2
Convertible loans
Financial assets not
measured at fair value
Trade and other receivables
Cash and cash equivalents
Financial liabilities
measured at fair value
Other derivatives2
Financial liabilities not
measured at fair value
Secured bank loans
Trade, accruals and
other payables
Employee benefits
FVTPL
£’000
FVOCI
£’000
—
—
3,447
3,447
15,750
—
—
15,750
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
Carrying value
Financial
assets at
amortised
cost
£’000
Other
financial
liabilities
£’000
Total
£’000
Fair value
£’000
Level
—
—
—
—
69,330
26,068
95,398
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
15,750
—
3,447
19,197
69,330
26,068
95,398
—
—
(75,493)
(47,422)
(75,493)
(47,422)
(1,391)
(1,391)
(124,306)
(124,306)
15,750
—
3,447
19,197
3
3
1
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.
104
First Derivatives plc Annual Report 2020
FINANCIAL STATEMENTS
31. FINANCIAL INSTRUMENTS CONTINUED
FAIR VALUES CONTINUED
a) Accounting classifications and fair values continued
Group continued
Carrying value
Financial
assets at
amortised
cost
£’000
Other
financial
liabilities
£’000
FVTPL
£’000
FVOCI
£’000
28 February 2019
Financial assets measured
at fair value
Equity securities
Warrants in associate2
Convertible loans
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
—
—
3,463
3,463
—
—
—
(1,071)
—
(1,071)
—
—
—
—
—
13,706
—
—
13,706
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
54,179
18,798
72,977
—
—
—
—
—
—
—
—
Total
£’000
Fair value
£’000
Level
3
3
13,706
—
3,463
17,169
1
1
13,706
—
3,463
17,169
54,179
18,798
72,977
(1,071)
(1,071)
2
—
(1,071)
(1,071)
—
—
—
—
—
—
—
—
—
—
(34,909)
(34,909)
(378)
(378)
(58,322)
(58,322)
(1,825)
(1,825)
(95,434)
(95,434)
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.
firstderivatives.com
105
Notes continued
31. 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.
29 February 2020
Financial assets measured
at fair value
Equity securities
Convertible loans
Financial assets not
measured at fair value
Trade and other receivables
Cash and cash equivalents
Financial liabilities
measured at fair value
Derivatives2
Financial liabilities not
measured at fair value
Secured bank loans
Trade, accruals and other
payables
Employee benefits
FVTPL
£’000
FVOCI
£’000
—
431
431
12,914
—
12,914
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
Carrying value
Financial
assets at
amortised
cost
£’000
Other
financial
liabilities
£’000
Total
£’000
Fair value
£’000
Level
—
—
—
90,187
21,656
111,843
—
—
—
—
—
—
—
—
—
—
—
—
—
—
12,914
431
13,345
90,187
21,656
111,843
—
—
(75,493)
(78,007)
(75,493)
(78,007)
(903)
(903)
(154,403)
(154,403)
12,914
431
13,345
3
3
1
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.
106
First Derivatives plc Annual Report 2020
FINANCIAL STATEMENTS
31. FINANCIAL INSTRUMENTS CONTINUED
FAIR VALUES CONTINUED
a) Accounting classifications and fair values continued
Company continued
Carrying value
Financial
assets at
amortised
cost
£’000
Other
financial
liabilities
£’000
FVTPL
£’000
FVOCI
£’000
28 February 2019
Financial assets measured
at fair value
Equity securities
Convertible loans
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
—
376
376
—
—
—
(1,071)
—
(1,071)
—
—
—
—
12,776
—
12,776
—
—
—
—
—
—
—
—
—
—
—
—
—
69,164
14,760
83,924
—
—
—
—
—
—
—
Total
£’000
Fair value
£’000
Level
3
3
12,776
376
13,152
69,164
14,760
83,924
12,776
376
13,152
1
1
(1,071)
(1,071)
2
—
—
(1,071)
(1,071)
—
—
—
—
—
—
—
—
—
(34,909)
(90,023)
(34,909)
(90,023)
(1,476)
(1,476)
(126,408)
(126,408)
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.
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
Forecast annual revenues – with adjustments
applied to Company forecasts
Range in inputs
Change in input
Impact on fair value
2020
2019
2020
£’000
2019
£’000
10–50%
10–50%
+/(-)15% 3,533/(3,534)
3,180/(3,184)
Risk-adjusted discount rate
Market multiple exit values – revenue
30–55%
2.5–6x
30–50%
2.5–5x
-/(+)5% 3,696/(2,985) 3,381/(2,695)
+/(-)15% 2,455/(2,455)
1,967/(1,967)
firstderivatives.com
107
Notes continued
31. 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 29 February 2020 and 28 February 2019 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 2019
Purchases
Conversion of loan to equity
Advances
Foreign exchange gain
Balance at 29 February 2020
Balance at 1 March 2019
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 29 February 2020
Convertible
loans
£’000
Unquoted
equities
£’000
Contingent
consideration
£’000
3,463
—
(1,000)
961
23
13,706
1,044
1,000
—
—
3,447
15,750
—
—
—
—
—
—
Convertible
loans
£’000
Unquoted
equities
£’000
Contingent
consideration
£’000
1,944
—
1,505
—
—
—
14
—
3,433
5,951
—
—
—
4,322
—
—
3,463
13,706
(5,688)
—
—
8,018
(3,230)
—
(171)
1,071
—
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.
108
First Derivatives plc Annual Report 2020
FINANCIAL STATEMENTS 31. FINANCIAL INSTRUMENTS CONTINUED
FAIR VALUES CONTINUED
b) Measurement of fair values continued
Company
Balance at 1 March 2019
Advances
Balance at 29 February 2020
Balance at 1 March 2019
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 29 February 2020
Convertible
loans
£’000
Unquoted
equities
£’000
Contingent
consideration
£’000
376
55
431
12,776
138
12,914
—
—
—
Convertible
loans
£’000
Unquoted
equities
£’000
Contingent
consideration
£’000
323
—
39
—
—
—
14
—
3,308
5,146
—
—
—
4,322
—
—
376
12,776
(1,038)
—
—
3,259
(3,289)
—
(3)
1,071
—
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
2020
£’000
69,329
26,068
3,447
98,844
2019
£’000
54,179
18,798
3,463
2020
£’000
90,187
21,656
431
2019
£’000
69,164
14,760
376
76,440
112,274
84,300
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
2020
£’000
9,502
33,805
27,061
2,409
72,777
2019
£’000
8,630
24,240
23,021
1,751
57,642
2020
£’000
6,983
51,196
31,905
534
90,618
2019
£’000
5,366
35,691
25,584
2,899
69,540
firstderivatives.com
109
Notes continued
31. 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 type of counterparty:
End-user customer
Convertible and other loans
Other
Group
Company
2020
£’000
63,256
4,643
4,878
72,777
2019
£’000
48,883
4,405
4,354
57,642
2020
£’000
36,587
1,383
52,648
90,618
2019
£’000
28,771
1,138
39,631
69,540
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
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 366 days +
Total
110
First Derivatives plc Annual Report 2020
Weighted
average
loss rate
2020
%
0.41
0.99
7.43
40.05
54.13
93.54
Weighted
average
loss rate
2019
%
0.96
3.90
18.18
39.79
52.78
93.76
Weighted
average
loss rate
2020
%
0.25
—
7.18
25.67
56.49
100.00
Gross
carrying
amount
2020
£’000
58,285
1,029
3,094
985
1,193
1,033
Loss
allowance
2020
£’000
237
10
230
395
646
967
65,619
2,485
Gross
carrying
amount
2019
£’000
41,259
3,025
1,451
568
638
2,468
49,409
Gross
carrying
amount
2020
£’000
32,586
—
1,542
417
727
134
35,406
Loss
allowance
2019
£’000
396
118
264
226
337
2,315
3,656
Loss
allowance
2020
£’000
82
—
111
107
411
134
845
FINANCIAL STATEMENTS Loss
allowance
2019
£’000
121
31
67
82
260
1,071
1,632
2019
£’000
2,318
(196)
—
(490)
1,632
31. FINANCIAL INSTRUMENTS CONTINUED
EXPOSURE TO CREDIT RISK CONTINUED
Impairment losses continued
Trade receivables and accrued income continued
Expected credit loss assessment continued
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 366 days +
Total
Weighted
average
loss rate
2019
%
0.53
2.84
7.74
19.25
46.10
91.11
Gross
carrying
amount
2019
£’000
22,915
1,105
860
428
564
1,175
27,047
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
Net remeasurement of loss allowance
Foreign exchange impact
Amounts written off
Closing balance
Group
Company
2020
£’000
3,656
(253)
(36)
(882)
2,485
2019
£’000
4,146
12
(12)
(490)
3,656
2020
£’000
1,632
(224)
(5)
(558)
845
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.
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
• Current trade receivables increased £12.4m and accrued income by £6.4m year on year, due to the timing of new software deals being
completed in Q4, increased quarterly in arrear billings for Managed Services and an increase in annual sales.
• Improved debt collection has resulted in a decrease in past due debt year on year resulting in an ECL gain of £253k on Trade
Receivables and accrued income. Debtor days have increased from 64 to 68 at year end due to the timing of software deals being
completed in Q4.
firstderivatives.com
111
Notes continued
31. FINANCIAL INSTRUMENTS CONTINUED
EXPOSURE TO CREDIT RISK CONTINUED
Company
• Current trade receivables increased £4.4m and accrued income by £4.7m year on year, due to the timing of new software deals being
completed in Q4, increased quarterly in arrear billings for Managed Services and an increase in annual sales.
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
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
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-
BB+ to B-
Equivalent to
external credit
rating (S&P)
A+ to BBB-
A+ to BBB-
Equivalent to
external credit
rating (S&P)
A+ to BBB-
A+ to BBB-
Weighted
average
loss rate
2020
%
1.90
3.85
3.85
Weighted
average
loss rate
2019
%
3.73
3.85
1.09
Weighted
average
loss rate
2020
%
1.90
3.85
Weighted
average
loss rate
2019
%
3.73
3.85
Gross
carrying
amount
2020
£’000
2,454
992
244
3,690
Gross
carrying
amount
2019
£’000
3,487
793
187
4,467
Loss
allowance
2020
£’000
47
38
9
94
Loss
allowance
2019
£’000
130
31
7
168
Gross carrying
amount
2020
£’000
Loss
allowance
2020
£’000
2,454
992
3,446
47
38
85
Gross carrying
amount
2019
£’000
Loss
allowance
2019
£’000
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 29 February 2020 (2019: £nil).
112
First Derivatives plc Annual Report 2020
FINANCIAL STATEMENTS 31. FINANCIAL INSTRUMENTS CONTINUED
EXPOSURE TO CREDIT RISK CONTINUED
Company continued
Expected credit loss assessment
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
Net remeasurement of loss allowance
Closing balance
Group
2020
£’000
168
(83)
85
2019
£’000
161
7
168
Company
2020
£’000
161
(83)
78
2019
£’000
161
—
161
Receivables from subsidiaries
Company
The Company has intercompany receivable balances totalling £49,623k 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 0.64% to the entire balance, a provision of £320k has been recognised as
at 29 February 2020 (2019: £324k).
Government grants
At the year end £362k (2019: £311k) for the Group and £352k (2019: £301k) for the Company are receivable from Invest Northern Ireland in
respect of grants receivable and £977k (2019: £1,065k) 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 £26,068k (2019: £18,798k) and £21,656k (2019: £14,760k) respectively at
29 February 2020 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.
29 February 2020
Secured bank loans
Lease liabilities
Trade and other payables
Commitment to associate
Carrying
amount
£’000
(75,493)
(29,686)
(47,422)
—
Contractual
cash flows
£’000
6 months
or less
£’000
(83,442)
(35,018)
(47,422)
(1,091)
(3,765)
(2,584)
(47,422)
(600)
6–12 months
£’000
1–2 years
£’000
2–5 years
£’000
(4,073)
(2,584)
—
(491)
(8,076)
(4,510)
(67,528)
(12,067)
—
—
—
—
More than
5 years
£’000
—
(13,273)
—
—
(152,601)
(166,973)
(54,371)
(7,148)
(12,586)
(79,595)
(13,273)
28 February 2019
Secured bank loans
Finance leases
Carrying
amount
£’000
(34,909)
(378)
Contractual
cash flows
£’000
(35,591)
(438)
6 months
or less
£’000
(20,700)
(51)
Trade and other payables
(58,322)
(58,683)
(58,683)
Contingent deferred
consideration
(1,071)
(1,071)
(1,071)
6–12 months
£’000
1–2 years
£’000
2–5 years
£’000
More than
5 years
£’000
(14,891)
(52)
—
—
—
(103)
—
—
—
—
(232)
—
—
—
—
—
—
—
—
—
Commitment to associate
—
(1,053)
(579)
(474)
(94,680)
(96,836)
(81,084)
(15,417)
(103)
(232)
The above contracted cash flows include interest on secured bank loans, the terms of which are set out in note 22.
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Notes continued
31. FINANCIAL INSTRUMENTS CONTINUED
EXPOSURE TO CREDIT RISK CONTINUED
Company continued
Liquidity risk continued
Company
The following are contractual maturities of financial liabilities, including estimated interest payments.
29 February 2020
Secured bank loans
Lease liabilities
Trade and other payables
28 February 2019
Secured bank loans
Trade and other payables
Contingent deferred
consideration
Carrying
amount
£’000
Contractual
cash flows
£’000
(75,493)
(12,912)
(78,007)
(83,442)
(15,878)
(78,007)
6 months
or less
£’000
(3,765)
(1,064)
(78,007)
6–12 months
£’000
1–2 years
£’000
2–5 years
£’000
(4,073)
(1,064)
—
(8,076)
(1,882)
—
(67,528)
(5,232)
—
More than
5 years
£’000
—
(6,636)
—
(166,412)
(177,327)
(82,836)
(5,137)
(9,958)
(72,760)
(6,636)
Carrying
amount
£’000
(34,909)
(90,023)
(1,071)
Contractual
cash flows
£’000
(35,591)
(90,384)
(1,071)
6 months
or less
£’000
(20,700)
(90,384)
(1,071)
(14,891)
—
—
(126,003)
(127,046)
(112,155)
(14,891)
6–12 months
£’000
1–2 years
£’000
2–5 years
£’000
More than
5 years
£’000
—
—
—
—
—
—
—
—
—
—
—
—
The above contracted cash flows include interest on secured bank loans, the terms of which are set out in note 22.
Currency risk
Group
The Group’s exposure to currency risk was as follows:
Trade receivables
Trade and other payables
Net balance sheet exposure
29 February 2020
28 February 2019
CAD
£’000
105
(8)
97
EUR
£’000
4,161
(881)
3,280
USD
£’000
13,277
(746)
12,531
CAD
£’000
220
(50)
170
EUR
£’000
4,742
(844)
USD
£’000
12,934
(41,506)
3,898
(28,572)
The secure bank loan above excludes bank loans designated in a net investment hedge of £55,252k (2019: £19,819k).
Company
The Company’s exposure to currency risk was as follows:
Trade receivables
Secured bank loans
Trade and other payables
Net balance sheet exposure
29 February 2020
28 February 2019
CAD
£’000
105
—
(8)
97
EUR
£’000
4,126
—
(773)
USD
£’000
12,203
(55,252)
(660)
3,353
(43,709)
CAD
£’000
220
—
(50)
170
EUR
£’000
4,718
—
(643)
4,075
USD
£’000
12,460
(19,819)
(41,303)
(48,662)
The following significant exchange rates applied during the year:
USD 1
EUR 1
CAD 1
114
First Derivatives plc Annual Report 2020
Average rate
Reporting date spot rate
2020
1.28
1.15
1.69
2019
1.32
1.13
1.73
2020
1.28
1.16
1.72
2019
1.33
1.17
1.75
FINANCIAL STATEMENTS 31. FINANCIAL INSTRUMENTS CONTINUED
EXPOSURE TO CREDIT RISK CONTINUED
Company 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 £1,591k (2019:
£2,450k). A 10% weakening of sterling against the above currencies at the end of the period would increase Group profit or loss by £1,431k
(2019: £2,205k). 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
£4,025k (2019: £4,442k). A 10% weakening of sterling against the above currencies at the end of the period would increase Company profit
or loss by approximately £3,623k (2019: £3,997k). 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
2020
£’000
2019
£’000
Company
2020
£’000
2019
£’000
26,068
18,798
21,656
14,760
(75,493)
(34,909)
(75,493)
(34,909)
(49,425)
(16,111)
(53,837)
(20,149)
3,447
(29,686)
3,463
(378)
431
(12,912)
(26,239)
3,085
(12,481)
376
—
376
A 10% reduction in interest rates at the end of the period would increase Group equity and profit and loss by approximately £294k
(2019: £103k). A 10% increase in interest rates at the end of the period would decrease Group equity and profit or loss by approximately
£316k (2019: £113k). This analysis assumes that all other variables remain constant.
32. 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
2020
1.21
—
1.21
—
—
—
Number
of options
2020
49,000
—
(49,000)
—
—
—
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
The options in this range have been fully exercised in the year. During the prior year the outstanding options has an exercise price of £1.21
and a weighted average contractual life of 0.01 years.
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115
Notes continued
32. 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
2020
2.27
2.27
2.27
—
2.27
2.27
Number
of options
2020
38,584
(1)
(26,583)
—
12,000
12,000
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
The options outstanding at 29 February 2020 above have an exercise price of £2.27 (2019: £2.27) and a weighted average contractual life
of 0.01 years (2019: 1.0 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
2020
6.77
—
6.08
—
7.62
7.62
Number
of options
2020
693,334
—
(383,750)
—
309,584
309,584
Weighted
average
exercise
price
2019
6.77
—
6.81
—
6.77
6.77
Number
of options
2019
909,667
—
(216,333)
—
693,334
693,334
The options outstanding at 29 February 2020 above have an exercise price in the range of £4.27 to £9.00 (2019: £4.27 to £9.00) and a
weighted average contractual life of 3.2 years (2019: 3.8 years).
Range of exercise price: £12.28–22.35
Maximum options outstanding at beginning of period
Modification – impact on weighted average exercise price
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
2020
17.40
(0.44)
16.71
15.64
22.35
18.19
14.75
Number
of options
2020
1,702,736
—
(9,500)
(490,660)
198,300
1,400,876
826,596
Weighted
average
exercise
price
2019
16.70
—
14.39
13.12
22.20
17.40
14.87
Number
of options
2019
1,727,336
—
(24,333)
(125,267)
125,000
1,702,736
572,243
During the year the company modified the exercise price of a tranche of share options previous issued from £25.37 to £22.35. This did not
impact the fair value of the option granted.
The options outstanding at 29 February 2020 above have an exercise price in the range of £12.28 to £22.35 (2019: £12.28 to £25.37)
and a weighted average contractual life of 6.7 years (2019: 7.2 years).
The weighted average share price at the date of exercise for share options exercised for the year ended 29 February 2020 was
£28.25 per share (2019: £39.86).
116
First Derivatives plc Annual Report 2020
FINANCIAL STATEMENTS
32. 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 29 February 2020
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 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)
16/08/19
6.75
22.35
22.35
198,300
30.0%
4.0 years
0.1%
3.0%
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%
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 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
Share options granted in 2019/20
2020
£’000
2019
£’000
42
233
527
489
202
152
40
188
718
455
51
—
Total amount recognised as employee benefit expense in share based payment reserve
1,645
1,452
Total expense recognised as employee benefit expense
National Insurance contributions on employee benefit expense
Employee share based payment and related costs
2020
£’000
1,645
1,474
3,119
2019
£’000
1,452
1,021
2,473
Shares to the value of £58k were given to non-executive directors as part of their remuneration. The value of shares was based on the
average closing mid-market share price over the 90 business days prior to the release of the Group’s preliminary results.
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Notes continued
33. 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.
34. LEASES
The Group leases office properties. The leases typically run for a period of 10 years, with an option to renew the lease after that date. Lease
payments are renegotiated every five years to reflect market rentals. For certain leases, the Group is restricted from entering into any
sub-lease arrangements.
The Group leases IT equipment with contract terms of one to three years. These leases are short-term and/or leases of low-value items.
The Group has elected not to recognise right-of-use assets and lease liabilities for these leases.
Information about leases for which the Group is a lessee is presented below.
I. RIGHT-OF-USE ASSETS
Right-of-use assets related to leased properties that do not meet the definition of investment property are presented as right-of-use
assets (see Note 15).
II. AMOUNTS RECOGNISED IN PROFIT OR LOSS
2020 – Leases under IFRS 16
Interest on lease liabilities
2019 – Leases under IAS 17
Lease expense
III. AMOUNTS RECOGNISED IN STATEMENT OF CASH FLOWS
Total cash outflow for leases
35. SUBSEQUENT EVENTS
Group
£’000
Company
£’000
1,017
533
Group
£’000
Company
£’000
3,528
1,457
Group
£’000
4,531
Company
£’000
1,824
On 24 March 2020 the Group drew down £35m from its available finance facility. These funds have been placed on deposit with a further
£15m of undrawn revolving credit facilities available.
118
First Derivatives plc Annual Report 2020
FINANCIAL STATEMENTS 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
Directors and advisers
DIRECTORS
D Troy
–
Non-Executive Chairman^+
S Keating
– Chief Executive Officer
R G Ferguson
– Chief Financial Officer
K MacDonald
–
Non-Executive Director^*
V Gambale
–
Non-Executive Director*^+
* Member of the Audit Committee.
^ Member of the Nomination Committee.
+ Member of the Remuneration Committee.
SECRETARY
JJ Kearns
REGISTERED OFFICE
3 Canal Quay
Newry
Co. Down
BT35 6BP
AUDITOR
DELOITTE (NI) LIMITED
19 Bedford Street
Belfast
BT2 7EJ
N. Ireland
SOLICITORS
MILLS SELIG
21 Arthur Street
Belfast
BT1 4GA
BANKERS
BANK OF IRELAND
Corporate Headquarters
1 Donegall Square South
Belfast
BT1 5LR
firstderivatives.com
119
Global directory
EUROPE, MIDDLE EAST AND AFRICA
HEAD OFFICE
First Derivatives plc
3 Canal Quay
Newry
Co. Down
N. Ireland
BT35 6BP
Telephone: +44 28 3025 2242
Fax: +44 28 3025 2060
BELFAST
The Weaving Works
Ormeau Avenue
Belfast
Co. Antrim
N. Ireland
BT2 8HD
LONDON
Fifth Floor
Cannon Green Building
27 Bush Lane
London
EC4R 0AN
UK
DUBLIN
6th Floor
Block A
1 George’s Quay Plaza
Dublin 2
D02 Y098
Ireland
MUNICH
Mindspace
Viktualienmarkt 8
80331 Munich
Germany
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
20F Shin-Marunouchi
Center Building
1-6-2 Marunouchi
Chiyoda-ku
Tokyo
Japan 100-0005
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
Level 8
7 Teheran-ro 5-gil
Gangnam-gu
Seoul 06134
South Korea
120
First Derivatives plc Annual Report 2020
CBP003597
First Derivatives plc’s 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
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