uniting the domain world
with digital identifiers
annual report
2018
Minds + Machines Group Limited (“MMX” or the “Company” or the “Group”)
is a BVI incorporated company, which is traded on the AIM Market
operated by the London Stock Exchange (“AIM”). MMX is the owner of a
world class portfolio of 32 ICANN approved top-level domains (gTLDs).
The Company generates revenues through the registration and annual
renewal of names by organisations and individuals within each of its
top-level domains, sales being processed through the Group’s network
of global registrar and distribution partners.
The MMX portfolio is currently focused around generic names (e.g. .work,
.vip), consumer interest (e.g. .fashion, .wedding), lifestyle (e.g. .fit, .surf,
.yoga), professional occupations (e.g. .law), and geographic domains (e.g.
.london, .boston, .miami, .bayern). In 2018, the Company completed its first
acquisition, the ICM portfolio, and recently launched its first innovation
based project, .luxe, which combines the strengths of the World Wide
Web’s naming system with that of blockchain. For more information on
MMX and its rapidly growing renewal base, please visit www.mmx.co.
contents
strategic report
governance
1
2
8
overview and highlights
executive summary
strategic report
11
14
18
20
directors’ report
corporate governance
audit committee report
remuneration committee
report
21
directors’ biographies
financial statements
22
independent auditor’s
report
33
company cash flow
statement
26 group statement of
comprehensive income
34 group statement of
changes in equity
28
company statement of
comprehensive income
29 group statement of
financial position
31
company statement of
financial position
32 group cash flow
statement
35
36
company statement of
changes in equity
notes to the financial
statements
75
corporate information
Minds + Machines Group LimitedAnnual Report 2018 financial highlights
a year of growth
accounting renwals
+ 97% (2017: 4.7m)
domains under management
+ 37% (2017: 1.32m)
9.4m
1.81m
$5.5m operating expenses
$15.1m group revenue
23%
$3.6m operating EBITDA (net of contested application revenue)
cost of sales as a % of group revenue
(2017: 24%)
+ 13% (2017: $3.2m)
+ 5% (2017: $14.3m)
+ 4% (2017: $5.3m)
operational highlights
key regions
57%
United States
% of revenue (2017: 32%)
14%
Europe
% of revenue (2017: 15%)
29%
China
% of revenue (2017: 53%)
01
GOVERNANCEFINANCIAL STATEMENTSSTRATEGIC REPORT executive summary
• Provisions of $13.4m made including a bad debt provision of
$2.1m, onerous contract provision of $7.2m and impairment
of the underlying asset of $4.1m, leading to an overall
accounting loss of $12.6m
Operational Review
As outlined in the 2017 Report and Accounts, management’s
strategy for delivering value to shareholders is based on three
core principles:
1. driving profitable growth through organic business
development and operational efficiencies in each of our key
geographic regions: US, Europe and China;
2. accelerating scale and earnings through targeted acquisitions;
and
innovation.
3.
Organic Growth
The registry industry is rare in that a large amount of data
is publicly available on the entire industry in terms of daily
registration volumes, pricing, and promotional activities.
As such, it is an industry where both data mining and data analysis
can provide genuine insight and competitive advantage across
multiple areas of the business.
A key characteristic of MMX’s development in 2018 has therefore
been an increasing use of data-driven insights to better:
1. shape management’s strategic priorities and associated
product development;
2. set relevant targets for sales teams;
3. provide more relevant data-sets for sales teams to better
leverage their discussions across the existing registrar
channel, as well as identify relevant new distribution partners;
and
improve internal operational efficiencies.
4.
The success of this approach, combined with the ongoing
streamlining of our sales teams to improve accountability, is best
evidenced by analyzing the performance of the original MMX
portfolio (ie. net of the ICM contribution) which again significantly
exceeded the industry norm of 3 – 4% annual registration growth
with registrations up 23% to 1.63m, renewal revenue up 19% to
$5.7m, and an underlying improvement in cash collections with
cash collected on brokered sales outside of the registrar channel
improved by an impressive 243% to $2.3m. The improvement
in collected cash on brokered sales followed the decision by
the Company to withdraw the provision of extended payment
programs that were introduced in H2 2017, in-line with industry
practices at that time, and which were subsequently provisioned
for at the half year in accordance with IFRS 9 and which is
discussed in greater length in the Financial Review below.
Toby Hall
Chief Executive Officer
Michael Salazar
Chief Financial Officer
Overview
2018 has been a transformational year for our Company:
the acquisition in June of ICM; the growth in our headline
registrations that for the third consecutive year has outperformed
the wider registry market; and, most importantly, the significant
increase in the level of predictable recurring revenues that now
underpin the business’s forward momentum in place of the one-
off revenues that previously had enabled management to take
the business to maiden operating profits in the prior 24 months.
In addition to driving profitable growth from our library of TLDs
through traditional DNS based activity on the World Wide
Web, 2018 also saw MMX launch its first R&D project, .luxe, the
purpose of our Innovation based activity being to explore new
avenues relating to broader Internet-based naming protocols
that can potentially unlock meaningful new revenue opportunities
for MMX. As disclosed in the Interims, the period was also used
to address the underperformance of certain historic contracts,
including those inherited by current management, which led to
the one-off accounting losses indicated at the half-year and will
enable a clearer picture of the Company’s ongoing progress to be
presented in future periods. The impact of the adjustments on the
full-year are discussed in full in the financial review.
2018 Highlights
• Acquisition of ICM for $30.6m
• Domains under management up 37% to over 1.81m
(2017: 1.32m)
• Group revenue up 5% to $15.1m (2017: $14.3m) net
of the impact of reversing $586k of revenues recognized
in prior periods
• Cash collections on normal operations (i.e. net of contested
domain resolution revenue/other income) up 30% to $16.1m
(2017: $12.3m)
• Renewal revenue up 97% to $9.4m (2017: $4.8m)
• Regional split of revenues significantly improved, revenues
from the US sales teams increased to 57% (2017: 32%), China
reduced to 29% (2017: 53%), with Europe remaining broadly
flat at 14% (2017: 15%)
.luxe launched to provide a common naming approach across
multiple leading blockchains and the World Wide Web
•
02
Minds + Machines Group LimitedAnnual Report 2018 2018 has been a transformational
year for our Company: the acquisition
in June of ICM; the growth in our
headline registrations that for the third
consecutive year has outperformed
the wider registry market;
For the US sales team, data-driven insights directly influenced
the introduction and structure of highly successful first year
discount based initiatives for certain generic TLD’s, notably .work
in Japan and .vip outside of China, which led to year-on-year new
registration growth of 262% and 109% respectively and renewal
rates five times greater than typically seen for aggressive discount
based promotions in the industry. Data based insights also led to
the identification and introduction of a key distribution partner
for the vertical sector property in the US, .wedding, and likewise
the subsequent campaign structure which led to a near doubling
of new registrations in the year for that domain. The US business
development team is now looking to leverage this knowledge and
apply it to other generic and vertical properties.
In China, the growth of channel related sales in the year has also
benefited from the use of analytics to better structure relevant
promotions with lead registrar partners. Separately, an important
part of the ongoing development of the Chinese market has been
the identification and selection of partners for new initiatives –
notably .gouwu, .luxe and .law. Sales from .gouwu and .luxe in their
early launch phases in 2018 exceeded $1m, with healthy billings
achieved in Q1 2019 for .law.
In Europe, MMX’s activities in 2018 were primarily focused on
its geographic TLDs, our German properties firmly establishing
themselves within the industry as the model by which geo
based TLDs can succeed. Key components that have led to the
steady year-on-year registration growth, and renewal rates
exceeding 90%, included: an appropriate commercial structure
with the municipality; the active support and promotion of the
properties by the respective governing bodies coupled with the
channel relationships; and guidance by MMX on those marketing
initiatives that can return value. Meanwhile, .london sales declined
in spite of significant marketing investment.
To support the increased emphasis on data analytics the Company
has specifically targeted the recruitment of individuals with
exceptionally strong skills in data analysis. These hires have come
from both from within as well as from outside the industry and
have directly contributed to helping the Company achieve a better
balance of revenues across its main geographic markets. Within
the MMX part of the portfolio (ie. excluding the ICM properties),
revenues from China were reduced to 39%, and those from the
US and Europe increased to 42% and 19% respectively. Post the
ICM integration, this regional balance was further improved, sales
generated by the US team at the year-end for the enlarged group
accounting for 57% of total revenue (2017: 32%), China reducing
to 29% (2017: 53%), and Europe remaining broadly flat at 14%
(2017: 15%).
Accelerating scale
The key drivers for the ICM acquisition were:
1. to reduce the Group’s overall exposure to China;
2. accelerate the growth of our renewal revenue base;
3. use the insights gained by the MMX team to re-invigorate new
registrations within the mature ICM portfolio where overall
registrations have declined year-on-year over the last three
years; and
4. strengthening MMX’s operational team.
I am pleased to report that across the board, the ICM acquisition
has been an overwhelming success, its maiden contribution
accelerating the Group’s key metrics: domains under management
increased 37% on a year-on-year basis to over 1.81m; cash
collections on normal operations (i.e. net of contested domain
resolution revenue/other income) up 30% to $16.1m (2017:
$12.3m); and renewal revenue up by 97% to $9.4m, now
representing 62% (2017: 34%) of the Group’s total revenues.
Importantly, one-off revenue from brokered sales was reduced to
under 15% of total revenues (2017: 38%). As already indicated
above, the acquisition has also accelerated the balancing of
revenues across the three main regions of the business’s activities.
The integration of the ICM team into MMX has likewise
progressed well. The initiatives put in place in H2 to re-introduce
growth into the ICM portfolio are proceeding better than
expected with renewal rates in Q4 across the ICM portfolio at
90% and new registration growth now trending ahead of the same
period last year.
The acquisition has also strengthened the Group’s senior
management, as well as enabled the business to further upgrade
its staff by being able to attract a higher calibre of professionals
without negatively impacting overall operating expenses (“OPEX”).
In 2018, OPEX increased by less than 4% to $5.5m (2017: $5.3m),
well within the $6m cap originally set by management in 2016 when
restructuring the business, in spite of taking on certain overhead
associated with the ICM acquisition and making further hires.
03
GOVERNANCEFINANCIAL STATEMENTSSTRATEGIC REPORT executive summary
continued
Product innovation
Separately, as part of the longer-term development plan for the
business, the management team launched its first Innovation led
R&D project, .luxe, in November 2018. The goal of the project is
to establish a common naming approach across multiple leading
blockchains and the World Wide Web. Currently blockchain
addresses are typically long alphanumeric strings, useable only
within the specific blockchain where they were generated, with
no interoperability with other blockchains or the World Wide
Web. The first blockchain to participate in the .luxe initiative was
Ethereum, the project gathering significant interest from both
the traditional DNS community as well as blockchain community,
notably in China, where twelve distribution partners from the
blockchain industry are now supporting the project.
Post year-end, the project gained further momentum, as the
Company announced the appointment of its development
partner for integrating .luxe into the Bitcoin ecosystem and has
now selected its development partner for integrating into the
EOS blockchain. Further updates on the progress of .luxe and
Innovation based initiatives are provided in the Current trading
and Outlook section.
2018 KPI’s
The 2018 KPI’s very much reflect the operational priorities of
the year:
•
renewal revenue grown for a third year running to $9.4m
(2017: $4.7m), helped by the acquisition of ICM – importantly,
the Group was able to achieve a core milestone of renewal
revenue surpassing Cost of Sales and Fixed Overheads for the
first time in the year;
• domains under management increased 37% to 1.81m
(2017: 1.32m) reflecting the increased internal focus on new
standard sales activity and renewals plus the inclusion of ICM
registrations;
• fixed overheads only slightly increased by less than 4% to
$5.5m from $5.3m on a like-for-like basis, in spite of the added
operational costs from operating ICM for 6.5 months;
• Cost of Sales reduced from 24% to 23% of gross revenue
reflecting the containment of Cost of Sales at $3.5m (2017:
$3.4m) in spite of the broadened portfolio, and increased
revenues.
However, gross revenue and Operating EBITDA, net of contested
application revenue, only reflect 5% and 12.5% improvements
respectively following the reversing $586k of revenues
recognized in prior periods.
04
KPI
Accounting Renewals - $ 000’s
2018
9,400
2017 % Change
4,700
97%
37%
4%
5%
3%
N/A
13%
120%
100%
80%
60%
40%
20%
0%
Domains under management - #
1,810,000 1,320,000
Operating expenses - $ 000’s
Group revenue - $ 000’s
Cost of Sales - $ 000’s
Cost of Sales as a % of Group revenue - %
Operating EBITDA - $ 000’s
(net of contested application revenue)
5,500
5,300
15,100
14,300
3,500
23%
3,600
3,400
24%
3,200
Accounting Renewals
10,000
8,000
6,000
4,000
2,000
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COS + OPEX % of Renewals
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40%
20%
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Minds + Machines Group LimitedAnnual Report 2018
Gross Accounting Revenue
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Cost of Sales as a % of Renewal Revenue
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Revenue Split
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2018
Renewals
New Registrations
Management likewise addressed certain difficult legacy contracts
in the period which is discussed in full in the One-off items of the
Financial Review below.
Financial Review
Profit & Loss
Top-line revenue continues to trend positively. Group revenue,
net of the impact of reversing $586k of revenues recognized
in prior periods, grew overall by 5% to $15.1m (2017: $14.3m)
with a significant growth in renewal revenue, up 97% to $9.4m
resulting in renewals accounting for 62% of total revenue in the
calendar year. Renewal revenue now covers the combined Cost
of Sales ($3.5m) and Operating Expenditures ($5.5m), which is
ahead of Management’s target of achieving this milestone by year
end 2019.
Meanwhile Cost of Sales remained relatively flat at $3.5m (2017:
$3.4 million) despite the Group onboarding four established
top-level domains from the ICM acquisition. Management
continues to review its overall Cost of Sales and in 2018 made
managing marketing expenditures a specific focus to ensure
efficient and effective spend as it is clear that marketing expenses
can balloon quickly with little return on investment if proper
controls are not maintained.
To that end, marketing expenditures in 2018 were managed down
to $1.3m compared to $1.5m in 2017 in spite of taking on four
new properties, and launching two in China, while other costs
(such as registry service provider and ICANN fees) increased to
$2.2m in FY 2018 (FY 2017: $1.9m) reflecting the underlying
growth of the business. Management believes there is a clear
need for marketing and will continue to be opportunistic as it
looks for ways to support sales within its top-level domains.
Management will also seek to streamline other Costs of Sale as
the ICM portfolio is fully integrated.
In the year under review, overall Cost of Sales were reduced
down to 23% of Group revenue and 22% of cash collections in
2018 (2017: 24% of gross revenue and 28% of cash collections).
However, while exceeding the Management KPI goal of 20% gross
revenue, Cost of Sales are trending in the right direction and will
benefit from the negotiation post year-end of certain underlying
contracts in future periods.
As a result of efficient marketing and Cost of Sales spend in the
year under review, the Group saw its Gross Profit percentage
increase to 72% (2017: 71%).
Operating expenditures have increased marginally to $5.5m
in 2018 (2017: $5.3m) however they remain below the $6m
target set in 2016. The net change from 2017 is a result of
Management’s continued review of the existing cost base while
onboarding senior resources from the acquisition of ICM, as well
as bringing onboard experienced, senior resources to drive the
growth of the business further. Consolidation of certain activities
will continue as the ICM integration nears completion.
05
GOVERNANCEFINANCIAL STATEMENTSSTRATEGIC REPORT
executive summary
continued
Management believes that overall operating expenditure will
remain within the $6m target for the foreseeable future.
One-off items
As highlighted in the 2018 interims, certain one-off costs were
accounted for during the year. These related to:
• a change in accounting policies as a result of new International
Financial Reporting Standards (IFRS);
• a revenue adjustment identified during the Company’s review
•
of IFRS 15;
the provision for an onerous contract inherited by
management; and
• one-off costs from the Strategic review completed in
April 2018.
Change in Accounting Policies
In accordance with new accounting standards, the Company has
reviewed both its provisions for the possibility of not collecting
the full amounts due to the Company on long term arrangements
(under IFRS 9) as well as accounting practices on revenue
recognition (under IFRS 15). Under IFRS 9 there is a requirement
to review for the provision of bad debt in the event that
management believes that there is a possibility of not collecting
full amounts due based on facts and circumstances. The Company
has never had any bad debts since it began generating operational
revenue in 2014 and its long-term debtors have historically
been diligent in fulfilling their obligations to date. Nevertheless,
following the extension of payment time-frames on certain
contracts, the Company believes that it is prudent to provision
$2.1m against the possibility of bad debt based on fluctuations in
market conditions and possible changes in circumstances related
to certain existing partners in the US and China. It should be
noted that the Company continues to work with its partners and
underlying counterparties to collect on monies due with receipts
of over $510k currently in process on long-term outstanding
receivables from China reflecting an underlying improvement in
that region beginning Q1 2019.
Revenue adjustment
As highlighted in the interims, during the IFRS 15 adoption review
we identified the need for an adjustment of $586,000 against a
contract signed in 2016 to properly reflect revenue. On grounds
of lack of materiality, the adjustment is being made to current year
2018 revenue instead of a prior period adjustment to 2016 as
indicated in the Interims. As previously disclosed, the contract had
a variable component that was recognized as 2016 revenue.
06
Onerous Contract Provision
In 2016, Management successfully renegotiated certain aspects of
a partnership agreement to reduce the then marketing obligations
of $10.8m to nearly half this amount under the condition that
those marketing funds be provided directly to the commercial
partner to manage. In addition, Management negotiated that
the runway on its 2017 minimum guaranteed commitment be
extended from 12 months to 17 months to allow the revised
marketing strategy to come into effect. Unfortunately, to date,
a significant portion of that marketing budget has been spent
with minimal impact on registrations and revenues in the current
year and no expectation of any material uplift in future periods.
Accordingly, given recent performance, and expected future
performance, the Company has, as indicated at the time of the
Interims, impaired the intangible asset ($4.1m) and has provided
for a one-time Onerous Contract Provision in the amount of
$7.2m, subject to foreign exchange rate gains/losses. The Provision
is based on Management’s assessment of future earnings against
future obligations (i.e., projected annual revenue less minimum
annual revenue guarantees), which covers the period from 2018
through August 2021 when the contract ends. $1.1m of the
provision has been utilized in FY 2018, leaving a balance of $5.8m.
The Company is currently seeking to renegotiate a more equitable
settlement given the losses incurred on this asset, which now stand
at c. $13.7m since the start of the contract.
Strategic Review
Costs for the Strategic Review totalled nearly $1.4m which
consisted of amounts paid to restructure certain existing
contracts and professional fees paid to advisers in relation to the
acquisition of ICM.
Balance sheet
As a result of corporate activity and the onerous contract
provision, intangible assets have increased from $46.2m at the
end of FY 2017 to $81.5m at the end of 2018. The change reflects
the acquisition of ICM at $39.6m which is based on consideration
of $30.6m ($10m cash and 225million in MMX shares), the value
of deferred revenue ($9.5m and net assets taken on board of
$0.5m less the impairment of intangible assets ($4.1m) as a result
of the onerous contract, and amortization of $0.2m.
Trade receivables (before taking into account bad debt provisions)
decreased to $6.7m at the end of FY 2018 from $7.3m at the end
of FY 2017 due to the revenue adjustment highlighted above.
Cash and cash equivalents have reduced from $15.9m at the end
of FY 2017 to $10.4m at the end of FY 2018. The primary reason
for the reduction in cash is the $10m paid to acquire ICM. During
the period the Company has moved restricted cash of $2.2million
from Other Long-Term Assets to Cash and Cash Equivalents.
Current liabilities increased from $12.7m at the end of FY 2017 to
$27.3m at end of FY 2018. The increase in 2018 primarily relates
Minds + Machines Group LimitedAnnual Report 2018 Meanwhile, in the US and Europe our next Innovation initiative
is a high-value defensive registration product for corporate
registrars to offer to their corporate customers. This is expected
to launch Q3.
We are also pleased to announce today the appointment of an
independent non-executive director, Bryan Disher, to the Board.
Bryan Disher trained as a Chartered Accountant in Canada
and enjoyed a successful career spanning over 37 years at
PricewaterhouseCoopers (PwC), which he joined in 1978 and
where he was appointed as a Partner in 1991. He held a number
of senior positions in PwC Canada where he was Chair of the
Partnership Board, and Chair of each of the Finance Committee,
Governance Committee and Admissions Committee of the Board.
He was also Managing Partner of PwC’s Ottawa office (2001 –
2008) and Ottawa Audit and Assurance Leader (1995 – 2001).
His final role at PwC was Managing Partner of its Ukrainian
practice between 2012 and 2015. He will chair the Audit
Committee moving forward. Further details of his appointment
can be found in today’s announcement.
Looking ahead into H2 and 2020, management also looks forward
to the benefits derived from the renegotiation of certain key
underlying contracts impacting the Company’s performance.
In summary, the strong underlying performance of the
business and cash collections was tempered by the provisions
and restructuring costs affecting the reported profitability.
Notwithstanding this, we have a robust operating platform and
methodology which will enable us to continue to monetize our
portfolio. We believe the business is now well positioned for
future growth.
Toby Hall
Chief Executive Officer
2 April 2019
Michael Salazar
Chief Financial Officer
2 April 2019
to an increase in deferred revenue due to the acquisition of ICM
($8.3m), registrar deposits ($1.4m), onerous contract provision
($2.9m) and drawing down on the working capital facility ($3m)
which has subsequently been repaid in Q1 2019, and paying down
of trade and other payables ($1m). Importantly, during the period,
the Company paid down liabilities, including taxes, in the amount
of $1.1m. However, overall liabilities have increased primarily
due to an increase in registrar deposits of $1.4m, the inclusion
of deferred revenue from ICM, the onerous contract provision,
which currently stands at $5.8m of which $2.9m is current, and
a $3m working capital facility to support future innovation and
acquisition orientated activity by the Company.
Cash-flow
Overall, cash and cash equivalents decreased by $5.5m to $10.4m
at the end of FY 2018. Cash inflows comprise of cash from
operations of $3.2m, net of one-off costs, $3.0m in funds received
from a working capital facility and cash acquired as a result of
the acquisition of $0.9m. Major cash outflows comprise the
acquisition of ICM of $10m, one-off costs paid of $1.4m, paying
down of 2016 restructured liabilities of $0.8m, acquisition of
FF&E and intangibles of $0.1m and interest expense of $0.2m.
Restricted cash of $2.2m previously classed as a long-term asset
is now reclassified to cash and cash equivalents.
Post year-end the London & Capital facility of $3m has been
repaid in full. This has been made possible by a strong renewal
season on ICM’s lead property, healthy ongoing sales, and
resolution of two contested TLD applications, .cpa and .gay.
Current trading & Outlook
2019 has started well with domain registrations up to 1.87m
from 1.81m at the year-end. Importantly, billings are up 246% for
Q1 due to a combination of the first time ICM contribution and a
significant increase in billings from China, up more than three-fold
for the first quarter, greatly helped by .law registrations where
sales of approximately $500k were recorded in March, in addition
to healthy ongoing .vip sales. Meanwhile, MMX’s US and German
portfolios continue to grow, 7% up over the same period last year.
We are also watching .luxe developments in China with much
interest as limited testing programmes for activating existing
Ethereum users by our partners are now being undertaken which
has already resulted in some 2000 new activations in recent
weeks. Separately, a direct outreach programme to introduce
.luxe to SME’s is also being piloted in the Beijing area. Importantly,
the Company has additionally identified its development partner
for the integration of .luxe into its third crypto blockchain, EOS,
and expects this integration, along with the Bitcoin integration
announced last month, to occur in H2. These roll-outs will be
initially focused on the Asia market.
07
GOVERNANCEFINANCIAL STATEMENTSSTRATEGIC REPORT strategic report
to the members of Minds + Machines Group Limited
Cautionary statement
This Strategic Report has been prepared solely to provide
additional information to shareholders to assess the Group’s
strategies and the potential for those strategies to succeed.
This Strategic Report contains certain forward-looking
statements. These statements are made by the directors in good
faith based on the information available to them up to the time
of their approval of this report and such statements should be
treated with caution due to the inherent uncertainties, including
both economic and business risk factors, underlying any such
forward-looking information.
required by ICANN, a registry must wholesale SLDs to all ICANN-
accredited registrars on the same pricing, terms, and conditions.
Pricing for each SLD is based on the Group’s determination
of whether it is a geographical gTLD, a defined and restricted
market (e.g. .law), a niche market (e.g. .yoga), or a generic market
(e.g. .work). Pricing is further adjusted by other factors such as
the pricing of other SLDs in other new gTLDs that end-users are
likely to view as being comparable (e.g. .site vs. .web vs. .website),
or pricing to match the targeted market of the gTLD (for instance
.luxe focuses on the luxury market which demands premium
prices). Further, some SLDs are considered premium names (e.g.
hotel.TLD) which command a higher annual price.
This Strategic Report has been prepared for the Group as a whole
and therefore gives greater emphasis to those matters, which are
significant to MMX and its subsidiary undertakings when viewed
as a whole.
The Group shares wholesale revenues from certain gTLDs
(including its geographic gTLDs) and retains all the wholesale
revenue for its other wholly-owned gTLDs.
Review of the Group’s Business
The Business Model
Minds + Machines Group Limited operates in the domain name
industry and provides end-to-end domain services generating
revenues across multiple business lines.
In 2018 the group completed its first acquisition as noted in the
executive summary, through this acquisition the Groups portfolio
grew by a further four gTLDs.
In total, 30 of the 32 uncontested domains in which the Group has
a commercial interest have entered General Availability, resulting
in the Group having over 1,810,000 domains under management
at the year end.
The Group currently has an interest in 3 contested generic top-
level domains (gTLDs). The Group:
•
•
Wholly-owns, or majority owns, 2 contested gTLDs; and
Is in partnership for 1 gTLD.
Registry Business
A registry is the authoritative master database of all Domain
Names registered for each Top Level Domain (“TLD”) operated
by a Registry. The registry allows the Domain Name System to
route internet traffic to and from connected devices anywhere
in the world.
The registry generates revenue by selling domain names to
registrars on a recurring subscription basis. Registrars in turn sell
domain names directly to consumers. Prices from the registry to
the registrar are considered wholesale prices, which are set by the
registry. Each registration, known as a second level domain (SLD),
has a registration period from 1 to 10 years. At the end of each
registration period, in order for the SLD to continue working, the
consumer must renew it by paying a registration renewal fee. As
08
Registry Service Provider
Minds + Machines Group currently has legacy Registry Service
Provider clients however, the systems and processes necessary to
manage this function have been outsourced to Nominet. Minds
+ Machines still maintains a small revenue stream from its two
clients to manage Nominet on their behalf.
Reseller Registrar Business
The Group discontinued its previous retail registrar business
in 2016. The Group continues to provide ‘Reseller’ services for
.law and .abogado second level domain names, however it has
outsourced the back-end platform to a third-party provider, Instra.
Future developments, strategy and objectives
Please see the Executive Summary.
Key performance indicators
We track several Key Performance Indicators (KPI) against
set KPI targets to help the Board and management evaluate the
performance of our overall business. Please refer to the
Executive Summary.
Principal risks and uncertainties
There are a number of potential risks and uncertainties,
which could have a material impact on the Group’s long-term
performance and could cause actual results to differ materially
from expected and historical results. The Group’s risk
management policies and procedures are also discussed in the
Corporate Governance Statement.
Minds + Machines Group LimitedAnnual Report 2018 The market for gTLDs is uncertain, the Group may
fail to attract sufficient new customers
The level of demand for new second level domain names for those
gTLDs in respect of which the Group either provides registry
services or has an economic interest as the gTLD applicant may
be less than expected or the new gTLDs may not generate the
levels of second level domain name sales anticipated by the
Board in which case the Group’s revenues and profitability may
be adversely affected leading to a potential impairment to the
Groups gTLD assets.
The Group closely monitors the industry to judge the level of
interest and potential revenue and acts accordingly to ensure that
it retains sufficient capital to operate.
The Group has entities that are based in
jurisdictions that may be subject to additional
compliance requirements
The British Virgin Islands recently passed legislation regarding
economic substance requirements where certain entities that are
conducting relevant activities must establish that they perform
adequate substantive activities in that jurisdiction.
The Company anticipates having to comply with the requirements
and is working towards implementing those activities within the
timeframe established by the BVI.
The new legislation takes effect 30 June 2019 with detailed
guidance anticipated to be published by late April 2019.
Such new regulatory requirements may require the Group to
incur additional operational changes and expenses.
The Group derives revenue from regions that are
subject to additional compliance requirements
The Group derives significant revenue from China, where as a
registry, it is subject to strict reporting requirements and where
its customers may be subject to certain currency restrictions.
These requirements could impact the Group’s ability to pursue
business opportunities in the region.
The Group maintains a strong presence in the region with an
office in Xiamen and employs highly qualified and well connected
personnel. In addition, the Group has forged strong relationships
with several Chinese based business partners to ensure that
opportunities are taken advantage of as presented.
The Group has acquired additional assets in 2018 that may be
subject to certain regulatory requirements that could impact the
Group’s operations.
The Group and / or its customers may fail to meet
certain contractual obligations
The Group currently has certain contractual commitments for
specific TLDs that provide for minimum revenue guarantees.
If total revenues from those specific TLDs do not reach the
minimum annual revenue targets the Group must reallocate
revenues from other areas of its portfolio to ensure appropriate
payment of such commitments. Further, the commitments may
create a significant barrier to achieving overall profitability and
could result in certain impairments to future financial statements.
In 2017 the industry adopted a new approach on the sale of
certain high value ‘premium’ names by extending credit terms. The
group followed such industry practices and extended credit terms
to certain customers in 2017. In any extension of credit there is
an inherent risk that payments may not be collected. The Group
recognizes the risk of extended payment plans and under the
requirements of IFRS 9 Financial Instruments has accounted for a
bad debt provision.
The Group determines the credit worthiness of certain customers
prior to extending credit and continually monitors outstanding
balances due.
The Group depends on technology and advanced
information systems, which may fail or be subject
to disruption
As a registry, the Group is dependent on the performance of
software registry system and underlying databases, together with
its back-up systems and disaster recovery plans, to ensure that
critical registry functions are available to end users, registrars
and other parties that must have access to those functions
in the event any circumstance arises that materially impacts
the operation of the primary registry system. The integrity,
reliability and operational performance of the Group’s IT systems,
whether in-house or outsourced, are therefore critical to the
Group’s operations. The Group’s IT systems may be damaged or
interrupted by increases in usage, human error, unauthorized
access, natural hazards or disasters or similarly disruptive events.
Furthermore, Group’s current systems may be unable to support
a significant increase in online traffic or increased customer
numbers, whether as a result of organic or inorganic growth of
the business. Any failure of the Group’s IT infrastructure or the
telecommunications and/or other third party infrastructure on
09
GOVERNANCEFINANCIAL STATEMENTSSTRATEGIC REPORT strategic report
to the members of Minds + Machines Group Limited
(continued)
The Group puts in place contracts with certain key clients
to ensure continued business relationships. The Group also
meets with individual management from our strategic partners
periodically throughout the year to ensure the continued
alignment of business goals and objectives.
Going concern basis
The Group’s forecasts and projections, taking account of the
gTLD program show that the Group should be able to operate
within the level of its current funding. At the year end, the Group
had net current liabilities of $7.8m which includes $14.8m of
deferred revenue. Excluding deferred revenue, the Group had
net current assets of $7m including $10.4 million held as cash
and cash equivalents. The Group will use these resources to both
fund operations, to secure additional gTLD assets and where
appropriate return cash to shareholders.
The Directors have a reasonable expectation that the Company
and the Group have adequate resources to continue operational
existence for the foreseeable future. Thus, they continue to adopt
the going concern basis of accounting in preparing the annual
financial statements.
Approval
This report was approved by the Board of Directors on 2 April
2019 and signed on its behalf by:
Michael Salazar
Chief Financial Officer
2 April 2019
which such infrastructure relies could lead to significant costs and
disruptions that could reduce revenue, harm the Group’s business
reputation and have a material adverse effect on the operations,
financial performance and prospects of the Group. The Group
has in place business continuity procedures, disaster recovery
systems and security measures to protect against network or IT
failure or disruption. However, those procedures and measures
may not be effective to ensure that the Group is able to carry on
its business in the ordinary course if they fail or are disrupted,
and they may not ensure the Group can anticipate, prevent or
mitigate a material adverse effect on the Group’s operations,
financial performance and prospects resulting from such failure
or disruption. In addition, the Group’s controls may not be
effective in detecting any intrusion or other security breaches, or
safeguarding against sabotage, hackers, viruses and cybercrime.
The Group has invested and continues to invest in ensuring that
its technology and advanced information systems, whether in-
house or outsourced, are performing as expected and can support
growth of the business.
Dependence on key personnel
The Group has a small management team and the loss of any key
individual or the inability to attract appropriate personnel could
adversely impact upon the Group’s future performance.
The Group offers competitive compensation packages including
share options to retain and attract key personnel.
The Group depends on a number of third parties
for the operation of its business
The Group relies on cloud-based services from third party
suppliers in order to provide its registry and RSP services
which, if faulty and thereby causes errors or a service failure,
could adversely affect the Group’s operating results or harm
its reputation. Furthermore, the Group has key contractual
relationships with a number of third parties including suppliers,
partners, banks and payment processors. In particular, the
Group relies on key suppliers in order to carry on its operations
including, but not limited to, Domain Name System (DNS)
services, co-location facilities, Distributed Denial of Services
(DDoS) mitigation services, security vulnerability assessment
services, site and data escrow. The failure of one or more of these
third parties may have an adverse impact on the financial and
operational performance of the Group. Similarly, the failure of
one or more of these third parties to fulfill its obligations to the
Group for any other reason may also cause significant disruption
and have a material adverse effect on its operations, financial
performance and prospects.
10
Minds + Machines Group LimitedAnnual Report 2018 directors’ report
The Directors present their annual report on the affairs of the
Group, including the financial statements and auditor’s report, for
the year ended 31 December 2018. The Corporate Governance
Statement set out on pages 14 to 17 forms part of this report.
Details of significant events since the balance sheet date are
contained in note 33 to the financial statements. An indication
of likely future developments in the business are included in the
Strategic Report.
Information about the use of financial instruments by the
company and its subsidiaries is given in note 30 to the financial
statements.
Dividend
The Directors do not recommend payment of a dividend as a
result of the financial performance for the year ended 2018
(2017: Nil).
Capital Structure
Details of the issued share capital is shown in note 28. The
Company has one class of ordinary shares, which carry no right to
fixed income. Each share carries the right to one vote at general
meetings of the Company.
There are no specific restrictions on the size of a holding nor on
the transfer of shares, which are both governed by the general
provisions of the Articles of Association and prevailing legislation.
The directors are not aware of any agreement between holders
of the Company’s shares that may result in restrictions on the
transfer of securities or on voting rights.
Details of employee share schemes are set out in note 29.
No person has any special rights of control over the Company’s
share capital.
With regard to the appointment and replacement of directors,
the Company is governed by its Articles of Association, the BVI
Companies Act and related legislation.
Directors
The Directors who served during the period and since year end
are set out below:
Executive Directors
Toby Hall
Michael Salazar
Non-Executive Directors
Guy Elliott
Henry Turcan
Directors’ Remuneration
Directors’ emoluments
Fees /
Basic Salary
$ 000’s
Benefits
in kind
$ 000’s
Bonus
$ 000’s
2018
Total
$ 000’s
2017
Total
$ 000’s
Executive Directors
Toby Hall
Michael Salazar
Non-Executive Directors
Guy Elliott
Henry Turcan
Total
300
300
100
58
758
12
32
-
-
150
75
-
-
462
407
100
58
44
225
1,027
355
349
100
58
862
Directors’ share options
Aggregate emoluments disclosed above do not include any
amounts for the value of options to acquire ordinary shares in the
company granted to or held by the directors. Details of directors’
options are as follows:
1 Jan 2018 Granted Forfeited Exercised Expired 31 Dec 2018
000’s
000’s
000’s
000’s
000’s
000’s
Michael Salazar (1)
10,500
5,000
Toby Hall (2)
10,500
5,000
Total
21,000 10,000
-
-
-
-
-
-
-
-
-
15,500
15,500
31,000
1.
2.
At the beginning of the year 10,500,000 options - Exercise
price – Nil, of which 7,500,000 are exercisable on the
publication of the 2018 financial statements (will vest on a
straight line basis, from a base share price of 8p up to full
vesting of 16p) and 3,000,000 exercisable on the publication
of the 2019 financial statements (will vest on a straight line
basis, from a base share price of 9.375p up to full vesting
of 18.75p). During the year, a further grant of 5,000,000
options were awarded – Nil exercise price – exercisable on
the publication of the 2020 financial statements (will vest on
a straight-line basis, from a base share price of 7p up to full
vesting of 14p).
At the beginning of the year 10,500,000 options - Exercise
price – Nil, of which 7,500,000 are exercisable on the
publication of the 2018 financial statements (will vest on a
straight line basis, from a base share price of 8p up to full
vesting of 16p) and 3,000,000 exercisable on the publication
of the 2019 financial statements (will vest on a straight line
basis, from a base share price of 9.375p up to full vesting
of 18.75p). During the year, a further grant of 5,000,000
options were awarded – Nil exercise price – exercisable on
the publication of the 2020 financial statements (will vest on
a straight-line basis, from a base share price of 7p up to full
vesting of 14p).
There have been no variations to the terms and conditions or
performance criteria for share options during the financial year.
11
STRATEGIC REPORTFINANCIAL STATEMENTSGOVERNANCE
directors’ report
(continued)
The Group remunerates non-executive Directors to attract
the highest calibre of talent beneficial to the Group and its
shareholders.
Directors’ Interests
The total beneficial interests of the serving Directors at the
year end in the shares and options of the Company during the
period to 31 December 2018 were as follows:
Director
31 December 2018
Options*
Shares
31 December 2017
Options*
Shares
Toby Hall
500,000 15,500,000
500,000 10,500,000
Michael Salazar
1,975,050 15,500,000
1,925,050 10,500,000
Guy Elliott
Henry Turcan
20,750,000
-
- 23,300,000
-
-
-
-
* Terms of the options have been disclosed in Directors’ remuneration report.
Directors’ Indemnities
The company has made qualifying third-party indemnity
provisions for the benefit of its Directors, which were made
during the year and remain in force at the date of this report.
Corporate Governance
A statement on Corporate Governance is set out on pages 14 to 17.
Environmental Responsibility
The Company is aware of the potential impact that it and
its subsidiary companies may have on the environment. The
Company ensures that it, and its subsidiaries, at a minimum
comply with the local regulatory requirements and the revised
Equator Principles with regard to the environment.
Employment Policies
The Group is committed to promoting policies which ensure that
high-caliber employees are attracted, retained and motivated, to
ensure the ongoing success for the business. Employees and those
who seek to work within the Group are treated equally regardless
of sex, sexual orientation, marital status, creed, color, race or
ethnic origin.
Health and Safety
The Group’s aim is to achieve and maintain a high standard of
workplace safety. In order to achieve this objective, the Group
will provide training and support to employees and set demanding
standards for workplace safety.
Annual General Meeting (“AGM”)
This report and financial statements will be presented to
shareholders for their approval at the AGM. The Notice of the
AGM will be distributed to shareholders together with the
Annual Report.
Statement of disclosure of information to auditor
As at the date of this report the serving directors confirm that:
• So far as each director is aware, there is no relevant audit
•
information of which the Company’s auditor is unaware, and
they have taken all the steps that they ought to have taken as
directors in order to make themselves aware of any relevant
audit information and to establish that the Company’s auditor
is aware of that information.
Auditor
Mazars LLP have expressed their willingness to continue in office
as auditor and a resolution to reappoint them will be proposed at
the forthcoming Annual General Meeting.
Statement of Directors’ Responsibilities
The Directors are responsible for preparing the Directors’
Report and the financial statements in accordance with applicable
law and regulations.
The Directors are required to prepare financial statements for
each financial year. 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 Company and of the
profit or loss of the Group and Company for that period.
In preparing these financial statements, the directors are required to:
•
•
•
•
•
select suitable accounting policies and then apply them
consistently;
make judgments and accounting estimates that are
reasonable and prudent;
state whether IFRS has been followed, subject to any
material departures disclosed and explained in the financial
statements;
provide additional disclosures when compliance with specific
requirements in IFRS is insufficient to enable users to
understand the impact of particular transactions, and other
events and conditions on the Group and Company’s financial
position and financial performance; and
prepare the financial statements on the going concern basis
unless it is inappropriate to presume that the Company will
continue in business
The Directors are responsible for keeping adequate accounting
records that are sufficient to show and explain the Company’s
transactions and disclose with reasonable accuracy at any time
the financial position of the Company and enable them to ensure
that the financial statements comply with applicable law. They
are also responsible for safeguarding the assets of the Company
and hence for taking reasonable steps for the prevention and
detection of fraud and other irregularities.
12
Minds + Machines Group LimitedAnnual Report 2018
Electronic communication
The maintenance and integrity of the Company’s website is
the responsibility of the Directors. The work carried out by the
auditor does not involve consideration of these matters and,
accordingly, the auditor accepts no responsibility for any changes
that may have occurred to the financial statements since they
were initially presented on the website.
The Company’s website is maintained in accordance with AIM
Rule 26. Legislation in the British Virgin Islands governing the
preparation and dissemination of the financial statements may
differ from legislation in other jurisdictions.
On behalf of the board:
Michael Salazar
Chief Financial Officer
2 April 2019
13
STRATEGIC REPORTFINANCIAL STATEMENTSGOVERNANCE corporate governance
As Chairman of the Board of Directors of Minds and Machines
Group Limited (MMX), it is my responsibility to ensure that
MMX has both sound corporate governance and an effective
Board. As Chairman of the Company, my responsibilities
include leading the Board effectively, overseeing the Company’s
corporate governance model, communicating with shareholders,
and ensuring that good information flows freely between the
Executive and Non-Executives Directors in a timely manner.
It is the Board’s job to ensure that MMX is managed for the
long-term benefit of all shareholders, with effective and efficient
decision-making. Corporate governance is an important part of
that role, reducing risk and adding value to our business.
The Directors of MMX recognize the value of good corporate
governance in every part of its business. MMX is required to
adopt a recognized corporate governance code and disclose how
it complies with that code, and to the extent the Company departs
from the corporate governance provisions outlined by that code, it
must explain its reasons for doing so. The Directors have resolved
to adopt the Quoted Companies Alliance Corporate Governance
Code (QCA Code), which we believe is the most appropriate for a
company the size and stage of development of MMX.
The Board will provide annual updates on our compliance with
the QCA Code and note that there have been no changes to the
Company’s key corporate governance arrangements over the
past year. An explanatory report of how we have applied the QCA
Code guidance, and disclosures of any areas of non-compliance,
can be found on our website at: www.mmx.com.
The Board considers that the Group complies with the QCA
Code so far as it is practicable having regard to the size, nature
and current stage of development of the Company. The Board
understands that the application of the QCA Code supports the
Group’s medium to long-term success whilst simultaneously
managing risks and provides an underlying framework of
commitment and transparent communications with stakeholders.
Strategy and Business Model
The Board believes that long-term value can be delivered to its
shareholders through a process that has three key tenets:
• To continue to drive profitable growth through operational
efficiencies and organic business development initiatives
within the current TLD portfolio;
• To accelerate scale and earnings through strategic
acquisitions; and
Innovation.
•
A detailed description of the Company’s business model and
strategy can be found on page 8. Further challenges to MMX’s
strategy and long-term goals are highlighted in Principal Risks and
Uncertainties on page 8.
Risk Management
The Board recognizes the need for an effective and well-defined
risk management process, and it oversees and regularly reviews
the current risk management and internal control mechanisms.
The Board considers risk assessment to be important in
achieving its strategic objectives. There is a process of evaluation
of performance targets through regular reviews by senior
management to forecasts. Project milestones and timelines are
regularly reviewed.
The Board has overall responsibility for identifying, monitoring
and reviewing the Company’s risks, and assessing the systems
of external control for effectiveness. The Executive Directors
report on any new or changed risks, and any changes in risk
management/control to the Board. The Board discusses all
business matters having regard to the risks for the Group,
and to the extent that risks inherent in a particular activity are
considered significant, appropriate action is taken and steps taken
to mitigate the issue.
The Board considers that in light of the control environment
described above, an internal audit function is not considered
necessary or practical due to the size of the Company and the day
to day control exercised by the Executive Directors. However,
the Board will monitor the need for an internal audit function.
The Board has established appropriate reporting and control
mechanisms to ensure the effectiveness of its control systems.
The Board regularly reviews the mechanisms of internal control it
has implemented, assessing for effectiveness.
The Company’s key risks are highlighted under Principal Risks and
Uncertainties on page 8.
The Board
The Board, as a whole, is responsible for the overall management
of the Group and for its strategic direction, including approval
of the Group’s strategy, its annual business plans and budgets,
the interim and full year financial statements and reports, any
dividend proposals, the accounting policies, major capital projects,
any investments or disposals, its succession plans and the
monitoring of financial performance against budget and forecast
and the formulation of the Group’s risk appetite including the
identification, assessment and monitoring of MMX’s principal risks.
At the date of this Report, the Board has four members, whose
biographies are set out on page 21 and whose roles are set
out below:
14
Minds + Machines Group LimitedAnnual Report 2018 Position(s)
Executive Director
Group Chief Executive Officer
Executive Director
Chief Financial Officer
Non-Executives. The Board will take this into account when
considering future appointments. However, all Directors are
encouraged to use their judgement and to challenge matters,
whether strategic or operational, enabling the Board to discharge
its duties and responsibilities effectively.
Director’ Name
Toby Hall
Michael Salazar
Guy Elliott
Henry Turcan
Non-Executive Chairman
member and chair of the Remuneration Committee
Non-Executive Director
member and chair of the Audit Committee
The Board meets regularly throughout the year and a calendar
of meetings and principal matters to be discussed is agreed at
the beginning of each year. In order to be efficient, the Directors
meet formally and informally both in person and by telephone.
Board document authors are made aware of proposed deadlines,
allowing board papers to be collated, compiled into a Board Pack,
and circulated with sufficient time prior to each meeting, thus
allowing time for full consideration and necessary clarifications
before the meeting. Management supply the Board with
appropriate and timely information and the Directors are free to
seek any further information they consider necessary.
In 2018 there were 3 official Board meetings, all of which were
attended by all Directors in addition to other periodic meetings to
update the Board on managements’ progress.
The Board comprises the CEO, Toby Hall, the CFO, Michael
Salazar, and two Non-Independent Non-Executives, Guy Elliott
and Henry Turcan. Guy Elliott is the Company’s Chair. Guy Elliott
and Henry Turcan, as significant shareholders and representatives
respectively, are not considered to be independent. The letters
of appointment of all Directors are available for inspection at the
Company’s registered office during normal business hours. The
Non-Executive Directors are expected to dedicate 18 days per
annum to the Company. The Executive Directors work full time for
the Company.
The Board, given the lack of independent Non-Executives,
recognizes that the Board does not have a balance as
recommended by the QCA. There is also currently a lack of
diversity on the Board. The Board will consider imbalances
for future nominations, including Board independence and
gender balance. The Board has moved forward with appointing
an Independent Non-Executive Director, Bryan Disher, as
highlighted in the Executive Summary. Bryan Disher will chair the
Company’s Audit Committee.
The Board recognizes the long-term need for an independent
Non-Executive Chair and shall continue to review this as the
scale and complexity of the Company grows in the future and
in proportion to costs. The Board also notes that the QCA
recommends a balance between Executive and Non-Executive
Directors and recommends that there be two Independent
The Non-Executive Directors have both a breadth and depth of
skills and experience to fulfil their roles. The Company believes
that the current balance of skills in the Board as a whole reflects
a very broad range of personal, commercial and professional
skills, and notes the range of financial and managerial skills. The
Non-Executive Directors meet without the presence of the
Executive Directors during the year, and also maintain ongoing
communications with Executives between formal Board meetings.
Meetings are open and constructive, with every Director
participating fully. Senior management can also be invited to
meetings, providing the Board with a thorough overview of the
Company.
In addition to their general Board responsibilities, Non-Executive
Directors are encouraged to be involved in specific workshops
or meetings, in line with their individual areas of expertise. The
Board is kept abreast of developments of governance and AIM
regulations. ONE Advisory provides updates on governance
issues, and the Company’s NOMAD provides annual Board AIM
Rules refresher training as well as the initial training as part of a
new director’s on-boarding.
The Board shall review annually the appropriateness and
opportunity for continuing professional development, whether
formal or informal.
Board Committees
The Board has established the following committees, each which
has its own terms of reference:
Audit Committee
The Audit Committee considers the Group’s financial reporting
(including accounting policies) and internal financial controls.
The Audit Committee comprises two Non-Executive Directors,
Henry Turcan (Chairman) and Guy Elliott. The Audit Committee
is responsible for ensuring that the financial performance of the
Group is properly monitored and reported on.
During 2018, the Committee met three times with both Directors
present at all meetings.
15
STRATEGIC REPORTFINANCIAL STATEMENTSGOVERNANCE
corporate governance
(continued)
Remuneration Committee
The Remuneration Committee is responsible for making
recommendations to the Board on Directors’ and senior
executives’ remuneration. It comprises two Non-Executive
Directors, Guy Elliott (Chairman), and Henry Turcan. Non-
Executive Directors’ remuneration and conditions are considered
and agreed by the Board. Financial packages for Executive
Directors are established by reference to those prevailing in
the employment market for executives of equivalent status
both in terms of level of responsibility of the position and their
achievement of recognized job qualifications and skills. The
Committee will also have regard to the terms, which may be
required to attract an equivalent experienced executive to join the
Board from another company.
During 2018, the Committee met once with both Directors
present at the meeting.
Advisers
The Directors have access to the Company’s NOMAD, lawyers
and auditors as and when required and are able to obtain advice
from other external bodies when necessary. All Directors have
access to advice from the Company Secretary and independent
professionals at the Company’s expense. Further details of the
Company’ advisers can be found on page 75.
The Company has employed the services of Liam O’Donoghue of
ONE Advisory Limited to act as the Company Secretary, who is
responsible for ensuring that Board procedures are followed and
that the Company complies with all applicable rules, regulations
and obligations governing its operation, as well as helping the
Chairman maintain excellent standards of corporate governance.
If required, the Directors are entitled to take independent legal
advice and if the Board is informed in advance, the cost of the
advice will be reimbursed by the Company.
Board Evaluation
The Directors consider that the Company and Board are not yet
of a sufficient size for a full Board evaluation to make commercial
and practical sense. In the frequent Board meetings/calls, the
Directors can discuss any areas where they feel a change would
benefit the Company, and the Company Secretary remains on
hand to provide impartial advice. As the Company grows, it
expects to expand the Board and with the Board expansion, re-
consider the need for Board evaluation.
Culture
The Board recognizes that its decisions regarding strategy and
risk will impact the corporate culture of the Company as a whole
and that this will impact the performance of the Company. The
Board is aware that the tone and culture set by the Board will
greatly impact all aspects of the Company as a whole and the way
that employees behave. The corporate governance arrangements
that the Board has adopted are designed to ensure that the
Company delivers long term value to its shareholders, and that
shareholders have the opportunity to express their views and
expectations for the Company in a manner that encourages open
dialogue with the Board.
A large part of the Company’s activities are centered upon
an open and respectful dialogue with employees, clients and
other stakeholders. Therefore, the importance of sound ethical
values and behaviors is crucial to the ability of the Company to
successfully achieve its corporate objectives. The Board places
great importance on this aspect of corporate life and seeks
to ensure that this flows through all that the Company does.
The Directors consider that the Company has an open culture
facilitating comprehensive dialogue and feedback and enabling
positive and constructive challenge.
The Group operates a whistleblowing policy to facilitate the
reporting by employees of suspected misconduct, illegal acts
or failure to act within the Group. The aim of this Policy is to
encourage employees and others who have serious concerns
about any aspect of the Group’s work to come forward and voice
those concerns. The Group also promotes employee engagement
and receives feedback from employees through employee
commentary and reviews.
A large part of the Company’s activities is centered upon an
open and respectful dialogue with employees, clients and
other stakeholders. Therefore, the importance of sound ethical
values and behaviors is crucial to the ability of the Company
to successfully achieve its corporate objectives. The Directors
consider that the Company has an open culture facilitating
comprehensive dialogue and feedback and enabling positive
and constructive challenge. The Company has adopted a code
for Directors’ and employees’ dealings in securities which is
appropriate for a company whose securities are traded on AIM
and is in accordance with the requirements of the Market Abuse
Regulation which came into effect in 2016. The Directors seek to
align their interests with shareholders.
Internal controls
The Board is responsible for ensuring that the Group maintains a
system of internal financial controls including suitable monitoring
procedures. The objective of the system is to safeguard Group
assets, ensure proper accounting records are maintained and
that the financial information used within the business and for
publication is reliable.
Internal financial control monitoring procedures undertaken by
the Board include the review of monthly financial reports and
monitoring of performance, setting of annual budgets and monthly
forecasts and the prior approval of all significant expenditure.
16
Minds + Machines Group LimitedAnnual Report 2018 Going concern
After making appropriate enquiries, the Directors have a
reasonable expectation that the Group and the Company have
adequate resources to continue in operational existence for the
foreseeable future. For this reason, they continue to adopt the
going concern basis in preparing the Group accounts.
Treasury Policy
The Group finances its operations through equity and in 2018
drew down $3million from its working capital facility. The Group
holds its cash as a liquid resource to fund the obligations of the
Group. The Board approves decisions regarding the management
of these assets. Refer to Note 30 for further information.
Securities Trading
The Board has adopted a Share Dealing Code that applies to
Directors, senior management and any employee or consultant
who is in possession of inside information. All such persons are
prohibited from trading in the Company’s securities if they are
in possession of inside information. Subject to this condition and
trading prohibitions applying to certain other periods, trading
can occur provided the relevant individual has received the
appropriate prescribed clearance.
Relations with Shareholders
The Board is committed to providing effective communication
with the shareholders of the Company. Significant developments
are disseminated through stock exchange announcements and
regular updates of the Company website. The Board views the
AGM as a forum for communication between the Company and its
shareholders and encourages their participation in its agenda.
The Directors meet regularly with the Company’s institutional
and other major shareholders in order to communicate mutual
understanding of objectives. The Company intends at its AGMs
to communicate with private investors and encourage their
participation.
Each year shareholders receive a full annual report and an
interim report.
Guy Elliott
Chairman
2 April 2019
17
STRATEGIC REPORTFINANCIAL STATEMENTSGOVERNANCE audit committee report
As the Chairman of MMX’s Audit Committee, I present my
first Audit Committee Report for the year ended 31 December
2018, which has been prepared by the Committee and approved
by the Board.
The Audit Committee recognizes the importance of ensuring the
independence of the Company’s independent Auditor both in
fact and appearance. Each year the Audit Committee reviews and
assesses the quality and efficiency of the service provided.
The audit committee currently consists of Henry Turcan as
Chairman and Guy Elliott. Henry Turcan has the recommended
qualifications and experience to act as Chairman of the audit
committee.
Roles and Responsibilities
The main role and responsibilities of the Audit Committee are to:
• monitor the integrity of the Financial Statements and any
formal announcements relating to financial performance;
review the internal financial controls and the Company’s
internal control and risk management systems;
•
• make recommendations to the Board in relation to the
appointment, reappointment or removal of the external
auditor and approve remuneration and terms of engagement
of the auditor;
review the External Auditor’s independence and objectivity;
and
•
• develop and implement the non-audit services policy.
Achieve of its Roles and Responsibilities
The audit committee met formally three times this year to
consider half-year Interim Results, the Audit Plan for the Annual
Audit and the Full Year Financial Statements. Additional meetings
are held as necessary during the year to monitor progress of
external audits and reviews, together with any unexpected
corporate issues.
The meetings of the Audit Committee are designed to facilitate
and encourage communication among the Audit Committee
members, the Company’s staff and the Company’s External
Independent Auditor, Mazars LLP.
Members of the Committee meet the Independent Auditor
regularly throughout the year (with and without Management
present) to discuss the results of their examinations, the overall
quality of the Company’s financial reporting, and discuss the
Company’s internal control environment (including internal
control over financial reporting). In addition, the Audit Committee
receives and reviews the Independent Auditor’s annual ‘Audit
Completion Report’.
The Company does not have an Internal Audit function. This,
the Committee believes, is consistent with the Company’s stage
of development. The need for the establishment of an Internal
Audit function is monitored and discussed regularly and it will be
established when it is believed to be appropriate.
This is the seventh year that Mazars have acted as Independent
Auditor, having been appointed in 2012.
The Company has in place a whistle-blowing procedure to
allow staff to raise, in confidence, any concerns about business
practices. This procedure complements established internal
reporting processes.
It is the Company’s policy to conduct all of its business in an
honest and ethical manner, and it has adopted a zero-tolerance
approach to bribery and corruption. The Company is committed
to acting professionally, fairly, and with integrity in business
dealings and relationships. The Company’s anti-bribery and
corruption procedures incorporate appropriate provisions to
meet its obligations under the UK Bribery Act 2010.
With regard to the Company’s financial statements, the Audit
Committee reviews:
•
•
the quality and acceptability of accounting policies and
practices;
the clarity of the disclosures and compliance with financial
reporting standards and relevant financial and governance
reporting requirements;
• material areas in which significant judgements have been applied
or there has been discussion with the external auditor, and
• whether the Annual Report and Financial Statements, taken
as a whole, present a fair, balanced and understandable
body of information that provides the data necessary for
shareholders to assess the Company’s performance, business
model and strategy.
The Audit Committee, through the Board, receives financial
updates at each Board Meeting as well as regular financial reports
throughout the year. The Board also carries out a detailed budget
planning and review before the start of each financial year. This is
monitored in conjunction with each Board financial review.
2018 Financial Statements
During 2018, the Committee:
• met with the External Auditors to review and approve the
annual audit plan and receive their findings and report on the
annual audit;
• considered significant issues and areas of judgement with the
potential to have a material impact on the financial statements;
18
Minds + Machines Group LimitedAnnual Report 2018 • considered the integrity of the published financial information
and whether the Annual Report and Accounts taken as a
whole are fair, balanced and understandable and provide the
information necessary to assess the Group’s position and
performance, business model and strategy; and
reviewed and approved the interim and year end results
and accounts.
•
Audit Committee Report
This is the first year the Group has presented an Audit Committee
Report. Over the coming years, the content and detail of the
Audit Committee Report will be expanded, and formal procedures
will be put in place to assess the effectiveness of the Audit
Committee’s role.
Henry Turcan
Chairman of the Audit Committee
2 April 2019
19
STRATEGIC REPORTFINANCIAL STATEMENTSGOVERNANCE remuneration committee report
Dear shareholder,
As the Chairman of MMX’s Remuneration Committee, I present my first Remuneration Committee Report for the year ended 31
December 2018, which has been prepared by the Committee and approved by the Board.
Roles and Responsibilities
The Remuneration Committee is responsible for determining the remuneration policy for the Company’s Executive Directors and for
overseeing the Company’s long-term incentive plans and to ensure that the company attracts and retains the necessary talent and rewards
commensurate with the delivery of shareholder value.
The Board as a whole is responsible for determining Non-Executive Directors’ remuneration.
The Committee will continue to monitor market trends and developments in order to assess those relevant for the Group’s future
remuneration policy.
Governance Process
The Committee meets at least once a year and such other times as the Chair or any member of the Committee requests.
Main Activities
• 2017 Executive Director Bonuses based upon achieved KPIs and targets.
• Long Term Incentive Plan vesting criteria and awards for 2018.
• CEO and CFO remuneration packages.
2019 Focus
• Assessment of achieved 2018 KPI’s to determine 2019 bonus awards.
• Recommendation as to the 2019 KPI’s.
• Determination of LTIP awards and performance criteria.
• Continued monitoring of effectiveness of the current plans in delivering shareholder value and adequate incentive for performance.
Guy Elliott
Chairman of the Remuneration Committee
2 April 2019
20
Minds + Machines Group LimitedAnnual Report 2018 directors’ biographies
Guy Elliott
Non-Executive Chairman
Toby Hall
Chief Executive Officer
Guy Elliott is an independent investor, corporate finance advisor
and entrepreneur specializing in natural resources and Internet
technologies. From 1993 to 2001 Mr. Elliott was a co-founder
of Croesus Capital Management, a multi-strategy hedge fund
manager with $1billion under management. Since 2001, Mr.
Elliott has been a co-founder of F3 Capital management, an
alternative investments advisory that has specialized in early
stage financings of resources and Internet technology companies.
Mr. Elliott was a co-founder shareholder or Series A investor in
many companies during the past 15 years including the following:
Iwin, Tagworld, TLDH/Minds + Machines/MMX, Marathon PGM,
Uramin, Royal Nickel, CDC/CRC, Polo Resources, Get Pager, Trax
Retail and Collinear Networks.
Toby Hall is a highly experienced marketeer who has supported
a series of fast growth public and private businesses in the
Internet and natural resources sector over the last twenty
years. In this capacity, he has been a strategic adviser to Minds +
Machines Group Limited (MMX) since its inception. Following the
successful launches of .miami and .law, Toby formally took over
the responsibilities of Chief Marketing Officer for the Group in
January 2016. On 22 February 2016, Toby was appointed Chief
Executive Officer and has led the Group as it restructured into a
pure-play registry and successfully opened up the China market
through the launch of .vip which received Chinese Government
MIIT approval in December 2016. He divides his time between
the US, UK, Europe and Asia.
Michael Salazar
Chief Financial Officer
Henry Turcan
Non-Executive Director
Prior to joining MMX in December 2012, Michael was the
gTLD Program Director at ICANN. He was responsible for
developing the new department within ICANN to implement
the gTLD operations programme and manage the execution of
all operations. Prior to ICANN, Michael worked at KPMG for 16
years, where he was a partner in the Advisory Services Group,
responsible for the overall quality and execution of internal
audit and advisory engagements for a diverse group of clients
across a number of industries, including technology, media and
entertainment, consumer products and manufacturing. He co-
managed KPMG’s IT Advisory Services group within Los Angeles
and Orange County. Prior to working in the Advisory Services
Group, Michael spent considerable time working in KPMG’s
International Tax practice.
Henry has worked in financial services since 1996, with a focus
on equity capital markets. Having spent the majority of his
career advising growth companies within investment banking, he
switched to investment management when he joined Henderson
Global Investors in 2015. In 2017, the funds managed by Volantis
were transferred by Henderson to Lombard Odier Investment
Management. Henry graduated with an MA (Hons) in Modern
Languages from Edinburgh University and is a Member of the
Securities Institute. Henry is a representative of the funds
managed or sub-advised by Lombard Odier Investments Manager
group entities, collectively one of the Company’s
largest shareholders.
21
STRATEGIC REPORTFINANCIAL STATEMENTSGOVERNANCE independent auditor’s report
to the members of Minds + Machines Group Limited
Opinion
We have audited the financial statements of Minds + Machines Group Limited (the ‘parent company’) and its subsidiaries (the ‘group’) for
the year ended 31 December 2018 which comprise the Group and Company Statements of Comprehensive Income, Group and Company
Statements of Financial Position, Group and Company Cash Flow Statements, the Group and Company Statements of Changes in Equity
and notes to the financial statements, including a summary of significant accounting policies. The financial reporting framework that has
been applied in their preparation is applicable law and International Financial Reporting Standards (IFRSs).
In our opinion, the financial statements:
• give a true and fair view of the state of the group’s and of the parent company’s affairs as at 31 December 2018 and of the group’s and
the parent company’s loss for the year then ended; and
• have been properly prepared in accordance with IFRSs.
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 company in accordance with the ethical requirements that are relevant to our audit of the financial statements in the
UK, including the FRC’s Ethical Standard as applied to SME listed entities and we have fulfilled our other ethical responsibilities in accordance
with these requirements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion.
Conclusions relating to going concern
We have nothing to report in respect of the following matters in relation to which the ISAs (UK) require us to report to you where:
•
•
the directors’ use of the going concern basis of accounting in the 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 parent 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 authorized for issue.
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) we identified,
including those which had the greatest effect on:
•
the overall audit strategy,
the allocation of resources in the audit; and
•
• directing the efforts of the engagement team.
These matters were addressed in the context of our audit of the financial statements as a whole, and in forming our opinion thereon, and
we do not provide a separate opinion on these matters.
Revenue recognition
Key audit matter:
The group’s accounting policy in respect of revenue recognition is set out in note 1(j) ‘Revenue Recognition’ on page 41.
There is a risk of fraud in revenue recognition due to the potential to inappropriately shift the timing and basis of revenue recognition as well
as the potential to record fictitious revenues or fail to record actual revenues. For the group, we consider this significant risk to arise as follows:
• The group records revenue immediately for the initial premium arising on the sale of certain domain names, while recurring fees are
recognized over the period covered by the fee. There is a risk that inappropriate allocation of fees between the initial premium and
recurring leading to inappropriate revenue recognition;
• The group recognizes domain registry service revenue evenly over the relevant registration period. There is a risk that revenue relating
to future periods is not appropriately deferred; and
• The group enters into complex contractual arrangements that include key terms including, for example, provisions for marketing
22
support or for revenue sharing. There is a risk that revenue might not be appropriately recognized in accordance with the contractual
terms of these arrangements.
Minds + Machines Group LimitedAnnual Report 2018 Our response:
Our audit procedures included, but were not limited to:
• on a sample basis, testing the split of revenue between the initial premium arising on sale of the domain name and the ongoing registry
service;
• on a sample basis, testing domain registry service revenue recognized in the period and revenue deferred at the year end by reference
to the registration period covered by the contractual terms of service; and
reviewing the terms of complex contractual arrangements and assessing the basis of accounting for revenue under those arrangements.
•
Our findings:
Based on the procedures performed, we did not identify evidence of misstatements in recognized revenue during the period.
Valuation of intangible assets
Key audit matter:
The group’s accounting policies in respect of intangible assets are set out in note 1(h) ‘Goodwill’ on page 40, note 1(m) ‘Intangible assets’
on page 43 and note 1(n) ‘De-recognition of intangible assets’ on page 43 and note 1(p) Impairment of fixtures & equipment and intangible
assets excluding goodwill’ on page 44.
Non-current intangible assets include capitalized fees paid to the Internet Corporation for Assigned Names and Numbers (ICANN) for
applications for top-level domain assets (gTLDs) and amounts paid at auction to acquire rights over gTLDs. Following the renegotiation
of the Dot London partnering arrangements in 2016, an additional intangible asset has been recorded relating to the capitalization of the
consideration payable on renegotiation. During the year, additional gTLD assets were acquired through the acquisition of ICM registry LLC
which is summarized in note 16 ‘Business Combinations’ on page 56.
The directors are required to perform an impairment review in respect of intangible assets on an annual basis. In performing their review,
the directors are required to assess the fair value of the intangible assets, being the higher of their market value and their value in use,
within each identified Cash Generating Unit (CGU). In the absence of a readily available indicator of market value, the directors have based
their impairment review on calculations of the value in use of each CGU, based on projected future cash flows.
The significance of the judgements and estimates made in calculating the value in use of each CGU gives rise to a risk that the value in use
is overstated, and that intangible assets may be impaired below their carrying value in the financial statements. The directors’ commentary
on the judgements and estimates involved in the value in use calculations is set out in note 2 on page 48. Key estimates in the value in use
calculations include projected revenue growth and the discount rate used to calculate the present value of projected future cash flows. In
addition to these estimates, a key judgement made by the directors is the determination of CGUs, being the smallest identifiable group of
assets that generates cash inflows that are largely independent of the cash inflows from other assets or groups of assets. The group has
determined that it is appropriate to include multiple gTLDs within certain CGUs.
Our response:
Our audit procedures included, but were not limited to:
review and challenge management’s basis for the inclusion of multiple gTLDs within CGUs;
•
• considering the appropriateness of the key estimates of revenue growth and discount rate used in the value in use calculations; and
• performing sensitivity analysis to assess the impact of reasonable variations in the estimates of projected revenue growth and the
discount rate used.
Our findings:
The group’s inclusion of multiple gTLDs into certain CGUs is considered appropriate based on the information and explanations provided
by management.
We found that the estimates used in the value in use calculations are reasonable in the circumstances. Based on our audit procedures,
directors’ conclusion that there is no requirement for further impairment of intangible assets is reasonable.
23
STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS independent auditor’s report
to the members of Minds + Machines Group Limited
(continued)
Our application of materiality
The scope of our audit was influenced by our application of materiality. We set certain quantitative thresholds for materiality. These,
together with qualitative considerations, helped us to determine the scope of our audit and the nature, timing and extent of our audit
procedures on the individual financial statement line items and disclosures and in evaluating the effect of misstatements, both individually
and on the financial statements as a whole. Based on our professional judgement, we determined materiality for the financial statements as
a whole as follows:
Group and parent company materiality
$1.3m
How we determined materiality
The group’s strategy is to generate increasing revenues through exploitation of its asset base, which largely comprises intangible assets
in the form of gTLDs. We therefore consider the group total asset value to be an appropriate basis for determining materiality.
Rationale for benchmark applied
Having considered factors such as the group’s AIM listing and the limited external debt, we determined materiality at 1.25% of the group
total asset value.
Performance materiality – group and parent company
We performed our audit procedures using a lower level of materiality – termed ‘performance materiality’ – which is
set to reduce to an appropriate level the probability that the aggregate of uncorrected misstatements in the financial
statements exceeds materiality for the financial statements as a whole. Having considered factors such as the group’s
control environment, we set performance materiality at 65% or overall materiality.
Reporting threshold – group and parent company
We agreed with the audit committee that we would report to that committee all identified corrected and uncorrected
misstatements in excess of this level, together with differences below that level that, in our view, warranted reporting
on qualitative grounds.
$0.9m
$0.04m
An overview of the scope of our audit
As part of designing our audit, we determined materiality and assessed the risk of material misstatement in the financial statements. In
particular, we looked at where the directors made subjective judgements such as making assumptions on significant accounting estimates.
We gained an understanding of the legal and regulatory framework applicable to the group and parent company, the structure of the group
and the parent company and the industry in which it operates. We considered the risk of acts by the company which were contrary to the
applicable laws and regulations including fraud. We designed our audit procedures to respond to those identified risks, including non-
compliance with laws and regulations (irregularities) that are material to the financial statements. We focused on laws and regulations that
could give rise to a material misstatement in the financial statements.
We tailored the scope of our group audit to ensure that we performed sufficient work to be able to give an opinion on the financial
statements as a whole. We used the outputs of a risk assessment, our understanding of the parent company’s and group’s accounting
processes and controls and its environment and considered qualitative factors in order to ensure that we obtained sufficient coverage
across all financial statement line items.
Our tests included, but were not limited to, obtaining evidence about the amounts and disclosures in the financial statements sufficient to
give reasonable assurance that the financial statements are free from material misstatement, whether caused by irregularities including
fraud, review of minutes of directors’ meetings in the year and enquiries of management. As a result of our procedures, we did not identify
any additional key audit matters relating specifically to irregularities, including fraud.
The risks of material misstatement that had the greatest effect on our audit, including the allocation of our resources and effort, are
discussed under “Key audit matters” within this report.
Our group audit scope included an audit of the group and parent financial statements of Minds + Machines Group Limited. Based on our
risk assessment, all entities within the group were subject to full scope audit performed by the group audit team. The group was considered
to be a single component for the purposes of determining materiality, as all of the entities are engaged in the same business and use the
same systems, processes and controls. All group entities, including the parent company, were therefore audited to the group materiality
thresholds set out in “Our application of materiality” above. The group engagement team also tested the consolidation process.
24
Minds + Machines Group LimitedAnnual Report 2018 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.
We have nothing to report in this regard.
Responsibilities of directors
As explained more fully in the directors’ responsibilities statement set out on page 11, 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 parent company’s ability to continue
as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless the
directors either intend to liquidate the group or the parent company or to cease operations, or have no realistic alternative but to do so.
Auditor’s responsibilities for the audit of the financial statements
Our objectives are to obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement,
whether due to fraud or error, and to issue an auditor’s report that includes our opinion. Reasonable assurance is a high level of assurance
but is not a guarantee that an audit conducted in accordance with ISAs (UK) will always detect a material misstatement when it exists.
Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be
expected to influence the economic decisions of users taken on the basis of these financial statements.
A further description of our responsibilities for the audit of the financial statements is located on the Financial Reporting Council’s website
at www.frc.org.uk/auditorsresponsibilities. This description forms part of our auditor’s report.
Use of the audit report
This report is made solely to the company’s members as a body in accordance with our engagement letter. 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.
Mazars LLP
Chartered Accountants
Tower Bridge House
St Katharine’s Way
London
E1W 1DD
2 April 2019
25
STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS group statement of comprehensive income
for the year ended 31 December 2018
Notes
4
5
23
6
7
8
25
18
27
29
22
9
18/19
11
12
13
Year Ended
31 Dec 2018
$ 000’s
15,094
Year Ended
31 Dec 2017
$ 000’s
14,315
(2,520)
12,574
(3,481)
9,093
72%
480
(5,526)
4,047
(110)
(595)
(743)
(2,112)
(4,145)
(7,154)
(342)
(12)
(1,153)
4
(12,315)
(211)
16
(180)
(12,690)
54
(12,636)
(2,364)
11,951
(3,440)
8,511
71%
2,108
(5,285)
5,334
(301)
-
-
-
-
-
(45)
4
(1,002)
9
3,999
(187)
21
-
3,833
(19)
3,814
Revenue
Less: Partner payments
Revenue less partner payments
Cost of sales
Gross Profit
Gross Profit Margin %
Profit on contested gTLD applications
Operating expenses
Operating earnings before interest, taxation,
depreciation and amortisation (Operating EBITDA)
Strategic review costs
Acquisition costs
Restructuring costs
Bad debt provision
Impairment loss on intangible assets
Onerous contract provision
Foreign exchange loss
(Loss) / profit on disposal of fixed assets
Share based payments
Share of results of joint ventures
(Loss) / earnings before interest, taxation,
depreciation, and amortisation (EBITDA)
Depreciation and amortisation charge
Finance revenue
Finance costs
(Loss) / profit before taxation
Income tax
(Loss) / profit for the year
26
Minds + Machines Group LimitedAnnual Report 2018
Other comprehensive income
Items that may be reclassified subsequently to profit or loss:
Currency translation differences
Items that will not be reclassified to profit or loss:
Loss on fair value through other comprehensive income financial assets
Other comprehensive income for the year net of taxation
Total comprehensive (loss) / income for the year
Retained (loss) / profit for the year attributable to:
Equity holders of the parent
Non-controlling interests
Total comprehensive income for the year attributable to:
Equity holders of the parent
Non-controlling interests
(Loss) / earnings per share (cents) From continuing operations
Basic
Diluted
All operations are considered to be continuing.
The notes set out on pages 36 to 74 form an integral part of these financial statements.
Notes
Year Ended
31 Dec 2018
$ 000’s
Year Ended
31 Dec 2017
$ 000’s
387
(443)
(56)
455
-
455
(12,692)
4,269
(12,652)
16
(12,636)
(12,708)
16
(12,692)
3,859
(45)
3,814
4,314
(45)
4,269
15
15
(1.68)
(1.68)
0.55
0.52
27
STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS
company statement of comprehensive
income
for the year ended 31 December 2018
Notes
Year Ended
31 Dec 2018
$ 000’s
8,395
Year Ended
31 Dec 2017
$ 000’s
11,689
4
5
23
6
7
8
25
20
29
9
18/19
11
12
13
(1,013)
7,382
(2,274)
5,108
69%
480
(4,404)
1,184
(110)
(595)
(743)
(1,821)
(391)
(25,883)
(1,090)
(29,449)
(17)
16
(180)
(29,630)
-
(29,630)
(1,154)
10,535
(2,382)
8,153
77%
2,108
(4,603)
5,658
(258)
-
-
-
223
-
(1,000)
4,623
(17)
21
-
4,627
-
4,627
(443)
(443)
-
-
(30,073)
4,627
Revenue
Less: Partner payments
Revenue less partner payments
Cost of sales
Gross Profit
Gross Profit Margin %
Profit on contested gTLD applications
Operating expenses
Operating earnings before interest, taxation,
depreciation and amortisation (Operating EBITDA)
Strategic review costs
Acquisition costs
Restructuring costs
Bad debt provision
Foreign exchange loss
Impairment of investment in subsidiaries
Share based payments
(Loss) / earnings before interest, taxation,
depreciation, and amortisation (EBITDA)
Depreciation and amortisation charge
Finance revenue
Finance costs
(Loss) / profit before taxation
Income tax
(Loss) / profit for the year
Other comprehensive income
Loss on fair value through other comprehensive income financial assets
Other comprehensive income for the year net of taxation
Total comprehensive (loss) / profit for the year
All operations are considered to be continuing.
The notes set out on pages 36 to 74 form an integral part of these financial statements.
28
Minds + Machines Group LimitedAnnual Report 2018
group statement of financial position
as at 31 December 2018
ASSETS
Non-current assets
Goodwill
Intangible assets
Fixtures & equipment
Investments
Interest in joint ventures
Other long-term assets
Total non-current assets
Current assets
Trade and other receivables
Cash and cash equivalents
Total current assets
TOTAL ASSETS
LIABILITIES
Current liabilities
Trade and other payables
Deferred revenue
Onerous contract provision
Total current liabilities
Net current (liabilities) / assets
Non-current liabilities
Onerous contract provision
Total non-current liabilities
Total liabilities
NET ASSETS
Notes
31 Dec 2018
$ 000’s
31 Dec 2017
$ 000’s
17
18
19
21
22
23
25
24
26
26
27
27
2,828
81,458
59
57
432
435
85,269
9,129
10,367
19,496
2,828
46,182
80
500
428
2,957
52,975
9,419
15,868
25,287
104,765
78,262
(9,629)
(14,761)
(2,914)
(27,304)
(6,236)
(6,472)
-
(12,708)
(7,808)
12,579
(2,860)
(2,860)
-
-
(30,164)
(12,708)
74,601
65,554
29
STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS
group statement of financial position
as at 31 December 2018
(continued)
EQUITY
Share capital
Share premium
Shares to be issued
Other reserves
Foreign exchange reserve
Retained earnings
Non-controlling interests
TOTAL EQUITY
Notes
31 Dec 2018
$ 000’s
31 Dec 2017
$ 000’s
28
28
28
-
68,912
11,745
(443)
1,584
(6,871)
74,927
(326)
74,601
-
60,060
-
-
1,197
4,367
65,624
(70)
65,554
The notes set out on pages 36 to 74 form an integral part of these financial statements.
These financial statements were approved by the Board of Directors on 2 April 2019 and signed on its behalf by:
Toby Hall
Chief Executive Officer
Michael Salazar
Chief Financial Officer
30
Minds + Machines Group LimitedAnnual Report 2018
company statement of financial position
as at 31 December 2018
ASSETS
Non-current assets
Intangible assets
Investment in subsidiaries
Investments
Interest in joint ventures
Other-long term assets
Total non-current assets
Current assets
Trade and other receivables
Cash and cash equivalents
Total current assets
TOTAL ASSETS
LIABILITIES
Current liabilities
Trade and other payables
Deferred revenue
Total current liabilities
Net current assets
NET ASSETS
EQUITY
Share capital
Share premium
Shares to be issued
Other reserves
Retained earnings
TOTAL EQUITY
Notes
31 Dec 2018
$ 000’s
31 Dec 2017
$ 000’s
18
20
21
22
23
25
24
26
26
28
28
39,407
44,269
57
520
435
84,688
11,892
5,397
17,289
39,424
39,503
500
520
2,957
82,904
13,550
12,454
26,004
101,977
108,908
(12,730)
(4,222)
(16,952)
(11,253)
(4,296)
(15,549)
337
10,455
85,025
93,359
-
68,912
11,745
(443)
4,811
85,025
-
60,060
-
-
33,299
93,359
The notes set out on pages 36 to 74 form an integral part of these financial statements.
These financial statements were approved by the Board of Directors on 2 April 2019 and signed on its behalf by:
Toby Hall
Chief Executive Officer
Michael Salazar
Chief Financial Officer
31
STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS
group cash flow statement
for the year ended 31 December 2018
Cash flows from operations
Operating EBITDA
Adjustments for:
Restructuring costs
Strategic review costs
Decrease / (increase) in trade and other receivables and
reclassification of restricted cash from other long-term assets
(Decrease) / increase in trade and other payables
Withdrawal of gTLD applications
Foreign exchange loss
Net cash flow from operating activities
Cash flows from investing activities
Interest received
Payments towards restructuring of contracts
Payments to acquire intangible assets
Payments to acquire fixtures & equipment
Receipts from the disposal of tangible assets
Acquisition of subsidiary, net of cash acquired
Acquisition costs
Increase in investment in a subsidiary
Payments to acquire investments
Net cash flow from investing activities
Cash flows from financing activities
Interest paid
Proceeds from borrowings
Repurchase of vested equity instruments
Net cash flow from financing activities
Notes
Year Ended
31 Dec 2018
$ 000’s
Year Ended
31 Dec 2017
$ 000’s
4,047
5,334
8
6
11
18
19
16
7
20
21
12
26
(743)
(110)
97
(1,241)
120
152
2,322
16
(811)
(99)
(20)
2
(9,136)
(595)
-
-
(10,643)
(180)
3,000
-
2,820
-
(301)
(1,096)
430
240
20
4,627
21
(3,105)
(235)
(31)
4
-
-
(155)
(500)
(4,001)
-
-
(33)
(33)
Net (decrease) / increase in cash and cash equivalents
(5,501)
593
Cash and cash equivalents at beginning of period
Cash and cash equivalents at end of period
24
15,868
10,367
15,275
15,868
The notes set out on pages 36 to 74 form an integral part of these financial statements
32
Minds + Machines Group LimitedAnnual Report 2018
company cash flow statement
for the year ended 31 December 2018
Cash flows from operations
Operating EBITDA
Adjustments for:
Restructuring costs
Strategic review costs
Decrease / (increase) in trade and other receivables and
reclassification of restricted cash from other long-term assets
(Decrease) / increase in trade and other payables
Withdrawal of gTLD applications
Foreign exchange loss
Net cash flow from operating activities
Interest received
Payments to acquire intangible assets
Acquisition of subsidiary
Acquisition Costs
Increase in investment in a subsidiary
Payments to acquire investments
Net cash flow from investing activities
Cash flows from financing activities
Proceeds from borrowings
Interest paid
Net cash flow from financing activities
Net (decrease) / increase in cash and cash equivalents
Cash and cash equivalents at beginning of period
Cash and cash equivalents at end of period
The notes set out on pages 36 to 74 form an integral part of these financial statements
Notes
Year Ended
31 Dec 2018
$ 000’s
Year Ended
31 Dec 2017
$ 000’s
1,184
5,658
8
6
11
18
16
7
20
21
26
12
24
(743)
(110)
1,341
(1,105)
120
(75)
702
16
-
(10,000)
(595)
-
-
(10,579)
3,000
(180)
2,820
-
(258)
(4,663)
1,675
-
184
2,596
21
(52)
-
-
(155)
(500)
(686)
-
-
-
(7,057)
1,910
12,454
5,397
10,544
12,454
33
STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS
group statement of changes in equity
for the year ended 31 December 2018
Share
Capital
$ 000’s
-
Share
premium
reserve
$ 000’s
60,060
Shares
to be
issued
$ 000’s
-
Other
reserves
$ 000’s
-
At 1 January 2017
Profit for the period
Other comprehensive income
Total comprehensive (loss) / income
Credit to equity for equity-settled
share-based payments
Share based payments
(repurchase of vested equity instruments)
Adjustments arising from change
in non-controlling interest
As at 31 December 2017
Loss for the period
Other comprehensive income
Total comprehensive (loss) / income
Additions to share premium
Shares to be issued
Credit to equity for equity-settled
share-based payments
Adjustments arising from change
in non-controlling interest
As at 31 December 2018
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
60,060
-
-
-
8,852
-
-
-
-
-
-
-
-
-
-
-
-
-
-
11,745
-
-
Foreign
currency
reserve
$ 000’s
742
-
455
455
Retained
earnings
$ 000’s
4
3,859
-
3,859
Total
$ 000’s
60,806
3,859
455
4,314
997
997
(33)
(33)
-
-
-
Non-
controlling
interest
$ 000’s
(330)
(45)
-
(45)
-
-
Total
equity
$ 000’s
60,476
3,814
455
4,269
997
(33)
(460)
(460)
305
(155)
1,197
4,367
65,624
(70)
65,554
-
-
-
-
-
-
-
-
-
(12,652)
(12,652)
(443)
(443)
387
387
-
(12,652)
(56)
(12,708)
-
-
-
-
-
-
-
-
-
-
1,150
8,852
11,745
1,150
16
-
16
-
-
-
(12,636)
(56)
(12,692)
8,852
11,745
1,150
264
264
(272)
(8)
68,912
11,745
(443)
1,584
(6,871)
74,927
(326)
74,601
• Share premium – This reserve includes any premiums received on issue of share capital. Any transaction costs associated with the issue
of shares are deducted from share premium
• Shares to be issued – This reserve represents shares to issued arising from the acquisition of ICM Registry, LLC.
• Other reserves – This reserve represents the gains and losses arising from assets held for sale designated at fair value through OCI.
• Foreign currency reserve – This reserve represents gains and losses arising on the translation of foreign operations into the Group’s
presentational currency.
• Retained earnings – This reserve represents the cumulative profits and losses of the Group.
• Non-controlling interests reserve – This reserve represents the share of the interest held by the non-controlling shareholders of the
subsidiary undertakings.
The notes set out on pages 36 to 74 form an integral part of these financial statements.
34
Minds + Machines Group LimitedAnnual Report 2018
company statement of changes in equity
for the year ended 31 December 2018
At 1 January 2017
Profit for the period
Other comprehensive income
Total comprehensive income
Credit to equity for equity-settled share-based payments
As at 31 December 2017
Loss for the period
Other comprehensive income
Total comprehensive (loss) / income
Additions to share premium
Shares to be issued
Credit to equity for equity-settled share based payments
As at 31 December 2018
Share
capital
$ 000’s
-
-
-
-
-
-
-
-
-
-
-
-
-
Share
premium
reserve
$ 000’s
60,060
-
-
-
-
60,060
-
-
-
8,852
-
-
68,912
Shares
to be
issued
$ 000’s
-
Other
reserves
$ 000’s
-
-
-
-
-
-
-
-
-
-
11,745
-
11,745
-
-
-
-
-
-
(443)
(443)
-
-
-
(443)
Retained
earnings
$ 000’s
27,708
4,627
-
4,627
Total
$ 000’s
87,768
4,627
-
4,627
964
33,299
964
93,359
(29,630)
-
(29,630)
(29,630)
(443)
(30,073)
-
-
1,142
4,811
8,852
11,745
1,142
85,025
• Share premium – This reserve includes any premiums received on issue of share capital. Any transaction costs associated with the issue
of shares are deducted from share premium
• Shares to be issued – This reserve represents shares to issued arising from the acquisition of ICM Registry, LLC.
• Other reserves – This reserve represents the gains and losses arising from assets held for sale designated at fair value through OCI.
• Retained earnings – This reserve represents the cumulative profits and losses of the Company.
The notes set out on pages 36 to 74 form an integral part of these financial statements.
35
STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS
notes to financial statements
for the year ended 31 December 2018
1 Summary of Significant Accounting Policies
(a) General information
Minds + Machines Group Limited is a company registered in the British Virgin Islands under the BVI Business Companies Act 2004
with registered number 1412814. The Company’s ordinary shares are traded on the AIM market operated by the London Stock
Exchange. The nature of the Group’s operations and its principal activities are set out in note 3 and in the Strategic Report on pages 8
to 10.
These financial statements are presented in US Dollars and rounded to the nearest thousand.
Foreign operations are included in accordance with the policies set out in note 1(l).
(b) Statement of compliance with IFRS
The Group’s and Company’s financial statements have been prepared in accordance with International Financial Reporting Standards
(IFRS) as issued by the International Accounting Standards Board (IASB).
Adoption of new standards
The Group’s and Company’s financial statements have been prepared on the basis of accounting policies consistent with those applied
in the financial statements for the year ended 31 December 2017 except for the implementation of a number of standards issued
which applied for the first time in 2018:
IFRS 9
IFRS 9 Financial Instruments. This standard includes a single approach for the classification of financial assets, based on
cash flow characteristics and the entity’s business model, which requires expected losses to be recognized when financial
instruments are first recognized. The standard amends the rules on hedge accounting to align the accounting treatment
with the risk management practices of an entity.
The Group has applied IFRS 9 from the 1 January 2018. The Group elected not to restate comparatives on initial
application of IFRS 9. The Group performed an assessment of the impact of adopting IFRS 9 based on the financial
instruments and hedging relationships as at the date of initial application of IFRS 9 (1 January 2018).
Classification and measurement
With respect to the classification and measurement of financial assets, the number of categories of financial assets under
IFRS 9 has been reduced compared to IAS 39. Under IFRS 9 the classification of financial assets is based both on the
business model within which the asset is held and the contractual cash flow characteristics of the asset. There are three
principal classification categories for financial assets that are debt instruments (i) amortized cost, (ii) fair value through
other comprehensive income (FVTOCI) and (iii) fair value through profit or loss (FVTPL). Equity investments in scope of
IFRS 9 are measured at fair value with gains and losses recognized in profit or loss unless an irrevocable election is made
to recognize gains and losses in other comprehensive income. Under IFRS 9, derivatives embedded in financial assets are
not bifurcated but instead the whole hybrid contract is assessed for classification.
Under IFRS 9, financial assets can be designated as FVTPL to mitigate an accounting mismatch.
In respect to classification and measurement of financial liabilities changes in the fair value of a financial liability
designated as at FVTPL due to credit risk is presented in other comprehensive income unless such presentation would
create or enlarge an accounting mismatch in profit or loss.
Based on the Group’s assessment, there will be no impact on the classification and measurement of the following
financial assets held by the Group: cash and bank balances, financial assets at amortized cost and investments in equity
instruments designated as at FVTOCI as amounts that will not be subsequently reclassified to profit or loss. There
is also no change in the accounting for any other financial liabilities. Please refer to note 30 for further details on
financial instruments.
36
Minds + Machines Group LimitedAnnual Report 2018notes to financial statementsfor the year ended 31 December 2018 The impairment model under IFRS 9 reflects expected credit losses, as opposed to only incurred credit losses under IAS
39. Under the impairment approach in IFRS 9, it is not necessary for a credit event to have occurred before credit losses
are recognized. Instead, an entity always accounts for expected credit losses and changes in those expected credit losses.
The amount of expected credit losses should be updated at each reporting date.
The Group has applied the simplified approach to recognize lifetime expected credit losses for its trade receivables as
required or permitted by IFRS 9. Please refer to note 25 on trade receivables for further details on the recognition of
losses on trade receivable balances.
IFRS 15
IFRS 15 Revenue from Contracts with Customers. The core principle of IFRS 15 is that an entity recognizes revenue to
depict the transfer to promised goods or services when control of the goods or services passes to customers. The amount
of revenue recognized should reflect the consideration to which the entity expects to be entitled in exchange for those
goods or services. A modified transitional approach is permitted under which a transitional adjustment is recognized in
retained earnings at the date of implementation of the standard without adjustment of comparatives. The new standard
has only been applied to contracts that are not completed at that date.
IFRS 15 establishes a single comprehensive model for entities to use in accounting for revenue arising from contracts
with customers. IFRS 15 has superseded the prior revenue recognition guidance including IAS 18 Revenue and related
interpretations when it became effective for accounting periods beginning on or after 1 January 2016. The group
has adopted IFRS 15 beginning 1 January 2018 and has adopted the modified retrospective approach without the
restatement of comparatives.
The core principal of IFRS 15 is that an entity should recognize revenue to depict the transfer of promised goods or
services to customers in an amount that reflects the consideration of which the entity expects to be entitled in exchange
for those goods or services. Specifically, the Standard introduces a 5-step approach to revenue recognition:
• Step 1: Identify the contract(s) with a customer
• Step 2: Identify the performance obligations in the contract
• Step 3: Determine the transaction price
• Step 4: Allocate the transaction price to the performance obligations in the contract
• Step 5: Recognize revenue when (or as) the entity satisfies a performance obligation
Under IFRS 15, an entity recognizes revenue when (or as) a performance obligation is satisfied i.e. when ‘control’ of the
goods or services underlying the particular performance obligation is transferred to the customer. The Directors of the
company concluded that there is no material impact on the adoption of IFRS 15.
Adoption of revised standards
At the date of authorization of these financial statements, the following Standard was in effect but not mandatory until the
1 January 2019:
IFRS 16
IFRS 16 Leases. Under the new standard, a lessee is in essence required to:
a) Recognize all lease assets and liabilities (including those currently classed as operating leases) on the balance sheet,
initially measured at the present value of unavoidable lease payments;
b) Recognize amortization of lease assets and interest on lease liabilities in the income statement over the lease term; and
c) Separate the total amount of cash paid into a principal portion (presented within financial activities) and interest
(which companies can choose to present within operating or financing activities consistent with presentation of any
other interest paid) in the cash flow statement.
IFRS 16 introduces a comprehensive model for the identification of lease arrangements and accounting treatments for
both lessors and lessees. IFRS 16 will supersede the current lease guidance including the IAS 17 Leases and the related
interpretations when it becomes effective for accounting periods beginning on or after 1 January 2019. The group
currently expects to adopt IFRS 16 for the year ending 31 December 2019.
37
STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS IFRS 16 distinguishes leases and service contracts on the basis of whether an identified asset is controlled by a customer.
Distinctions of operating leases (off balance sheet) and finance leases (on balance sheet) are removed for lessee
accounting, and is replaced by a model where a right-of-use asset and corresponding liability have to be recognized for all
leases by lessees (i.e. all on balance sheet) except for short-term leases and leases of low value assets.
The right-of-use asset is initially measured at cost and subsequently measured at cost (subject to certain exceptions)
less accumulated depreciation and impairment losses, adjusted for any remeasurement of the lease liability. The lease
liability is initially measured at the present value of the lease payments that are not paid at that date. Subsequently, the
lease liability is adjusted for interest and lease payments, as well as the impact of lease modifications, amongst others.
Furthermore, the classification of cash flows will also be affected because the operating lease payments under IAS 17 are
presented as operating cash flows; whereas under the IFRS 16 model, the lease payments will be split into a principal and
an interest portion which will be presented as financing and operating cash flows respectively.
In contrast to lessee accounting, IFRS 16 substantially carries forward the lessor accounting requirements in IAS 17, and
continues to require a lessor to classify a lease either as an operating lease or finance lease.
Furthermore, extensive disclosures are required by IFRS 16.
As at 31 December 18, the Group has non-cancellable operating lease commitments of $1,903k. IAS 17 does not
require the recognition of any right-of-use asset of liability for future payments for leases; instead, certain information
is disclosed as operating lease commitments in note 31. A preliminary assessment indicates that these arrangements
will meet the definition of a lease under IFRS 16, and hence the Group will recognize a right-of-use asset and a related
lease liability and is expected to have a significant impact on the amounts recognized in the Group’s consolidated financial
statements.
IFRS 16 is mandatory for accounting periods beginning 1 January 2019. The Directors have decided to implement the
new standard as of this date using the modified approach (i.e. not retrospectively). Based on the leases in place at the year
end, as of the 1 January 2019 the Group will recognize an opening right of use (ROU) asset of approximately $2,500k
and a corresponding liability of approximately $3,600k, with the differential accounted for in equity.
The ROU asset will be depreciated over its useful life with the liability extinguished as payments are made and an interest
charge recognized as time lapses.
Any new leases entered by the group in 2019 will be assessed and accounted for on a case by case basis.
(c) Basis of accounting
The consolidated financial statements have been prepared on the historical cost basis, except for investments in equity instruments
which are designated at FVTOCI.
(d) Basis of consolidation
The consolidated financial information incorporates the results of the Company and entities controlled by the Company (its
subsidiaries) (the “Group”) made up to 31 December each year. Control is achieved when the Company:
• has the power over the investee;
• is exposed or has rights, to variable return from its involvement with the investee; and
• has the ability to use its power to affect its returns.
The Company reassesses whether or not it controls an investee if facts and circumstances indicate that there are changes to one or
more of the three elements of control listed above.
Consolidation of a subsidiary begins when the Company obtains control over the subsidiary and ceases when the Company
losses control of the subsidiary. Specifically, the results of subsidiaries acquired or disposed of during the year are included in the
consolidated income statement from the date the Company gains control until the date when the Company ceases to control
the subsidiary.
38
Minds + Machines Group LimitedAnnual Report 2018notes to financial statementsfor the year ended 31 December 2018(continued) Profit or loss and each component of other comprehensive income are attributed to the owners of the Company and to the non-
controlling interests. Total comprehensive income of the subsidiaries is attributed to the owners of the Company and to the non-
controlling interests even if this results in the non-controlling interests having a deficit balance.
Where necessary, adjustments are made to the financial statements of subsidiaries to bring the accounting policies used into line with
the Group’s accounting policies.
All intragroup assets and liabilities, equity, income, expenses and cash flows relating to transactions between the members of the
Group are eliminated on consolidation.
Non-controlling interests in subsidiaries are identified separately from the Group’s equity therein. Those interests of non-controlling
shareholders that are present ownership interests entitling their holders to a proportionate share of net assets upon liquidation may
initially be measured at fair value or at the non-controlling interests’ proportionate share of the fair value of the acquiree’s identifiable
net assets. The choice of measurement is made on an acquisition-by-acquisition basis. Other non-controlling interests are initially
measured at fair value. Subsequent to acquisition, the carrying amount of non-controlling interests is the amount of those interests at
initial recognition plus the non-controlling interests’ share of subsequent changes in equity. Total comprehensive income is attributed
to non-controlling interests even if this results in the non-controlling interests having a deficit balance.
Changes in the Group’s interests in subsidiaries that do not result in a loss of control are accounted for as equity transactions. The
carrying amount of the Group’s interests and the non-controlling interests are adjusted to reflect the changes in their relative
interests in the subsidiaries. Any difference between the amounts by which the non-controlling interests are adjusted and the fair
value of the consideration paid or received is recognized directly in equity and attributable to the owners of the Company.
When the Group loses control of a subsidiary, the gain or loss on disposal recognized in profit or loss is calculated as the difference
between the aggregate of the fair value of the consideration received and the fair value of any retained interest and the previous
carrying amount of the assets (including goodwill), less liabilities of the subsidiary and any non-controlling interests. All amounts
previously recognized in other comprehensive income in relation to that subsidiary are accounted for as if the Group had directly
disposed of the related assets or liabilities of the subsidiary (i.e. reclassified to profit or loss or transferred to another category of
equity as specified / permitted by applicable IFRS). The fair value of any investment retained in the former subsidiary at the date
when control is lost is regarded as the fair value on initial recognition for subsequent accounting under IAS 39 Financial Instruments:
Recognition and Measurement or, when applicable, the costs on initial recognition of an investment in an associate or jointly
controlled entity.
When a separate identifiable segment meets the definition of Discontinued Operations (i.e. when agreement has either been reached
to sell a component of the Group’s business or the sale has taken place in the reporting period), results of that segment are accounted
for, in line with those applicable accounting standards, as discontinued operations on the Group Statement of Total Comprehensive
Income. Prior period results are also disclosed on a like for like basis. Any assets in still held by the Group at the end of the reporting
period are in respect of these discontinued operations are classified as held for sale in the Group Statement of Financial Position.
(e) Going concern
The directors have, at the time of approving the financial statements, a reasonable expectation that the Company and the Group
have adequate resources to continue in operational existence for the foreseeable future. At the year end, the Group had net current
liabilities of $7.8m which includes $14.8m of deferred revenue. Excluding deferred revenue, the Group has net current assets of $7m
including $10.4m held as cash and cash equivalents. Thus, they continue to adopt the going concern basis of accounting in preparing
the financial statements. Further detail is contained in the Strategic Report on page 8 to 10.
39
STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS (f) Business combinations
Acquisition of subsidiaries and businesses are accounted for using the acquisition method. The consideration transferred in a business
combination is measured at fair value, which is calculated as the sum of the acquisition-date fair values of assets transferred by the
Group, liabilities incurred by the Group to the former owners of the acquiree and the equity interest issued by the Group in exchange
for control of the acquire. Acquisition-related costs are recognized in profit or loss as incurred.
At the acquisition date, the identifiable assets acquired, and the liabilities assumed are recognized at their fair value at the acquisition
date, except that:
• deferred tax assets of liabilities and assets or liabilities related to employee benefits arrangement are recognized and measured in
accordance with IAS 12 Income Taxes and IAS 19 Employee Benefits respectively; and
• assets (or disposal groups) that are classified as held for sale in accordance with IFRS 5 Non-current Assets Held for Sale and
Discontinued Operations are measured in accordance with that Standard.
Goodwill is measured as the excess of the sum of the consideration transferred, the amount of any non-controlling interests in the
acquiree, and the fair value of the acquirer’s previously held equity interest in the acquiree (if any) over the net of the acquisition-date
amounts of the identifiable assets acquired and liabilities assumed.
(g) Joint ventures
A joint venture is an entity where the Group has joint control and has rights to the net assets of the arrangement. The Group has
interests in joint ventures, which are jointly controlled entities, whereby the ventures have a contractual arrangement that establishes
joint control over the economic activities of the entity. The contractual agreement requires unanimous agreement for financial and
operating decisions among ventures.
The Group’s interests in jointly controlled entities are accounted for by using the equity method. Under the equity method, the
investment in the joint ventures is carried in the statement of financial position at cost plus post acquisition changes in the Group’s
share of net assets of the joint venture. The income statement reflects the share of the results of operations of the joint venture.
The financial statements of the joint venture are prepared for the same reporting period as the Group. Adjustments are made where
necessary to bring the accounting policies in line with those of the Group.
Losses on transactions are recognized immediately if the loss provides evidence of a reduction in the net realizable value of current
assets or an impairment loss. The joint venture is accounted for using the equity method until the date on which the Group ceases to
have joint control over the joint venture.
Upon loss of joint control, the Group measures and recognizes its remaining investment at its fair value. Any difference between the
carrying amount of the former jointly controlled entity upon loss of joint control and the fair value of the remaining investment and
proceeds on disposal are recognized in profit or loss. When the remaining investment constitutes significant influence, it is accounted
for as investment in an associate.
(h) Goodwill
Goodwill is initially recognized and measured as set out in note 1(f).
Goodwill is not amortized but is reviewed for impairment at least annually. For the purpose of impairment testing, goodwill is
allocated to each of the Group’s cash-generating units expected to benefit from the synergies of the combination. Cash-generating
units to which goodwill has been allocated are tested for impairment annually, or more frequently when there is an indication that
the unit may be impaired. If the recoverable amount of the cash-generating unit is less than the carrying amount of the unit, the
impairment loss is allocated first to reduce the carrying amount of any goodwill allocated to the unit and then to other assets of the
unit pro-rata on the basis of the carrying amount of each asset in the unit. An impairment loss recognized for goodwill is not reversed
in a subsequent period.
On disposal of a subsidiary, the attributable amount of goodwill is included in the determination of the profit or loss on disposal.
40
Minds + Machines Group LimitedAnnual Report 2018notes to financial statementsfor the year ended 31 December 2018(continued) (i) Leases (the group as a lessee)
Leases are classified as finance leases whenever the terms of the lease transfer substantially all the risks and rewards of ownership to
the lessee. All other leases are classified as operating leases.
Assets held under finance leases are recognized as assets of the group at their fair value or, if lower, at the present value of the
minimum lease payments, each determined at the inception of the lease. The corresponding liability to the lessor is included in the
balance sheet as a finance lease obligation.
Lease payments are apportioned between finance expenses and reduction of the lease obligation so as to achieve a constant rate of
interest on the remaining balance of the liability. Finance expenses are recognized immediately in profit or loss.
Rentals payable under operating leases are charged to income on a straight-line basis over the term of the relevant lease except
where another more systematic basis is more representative of the time pattern in which economic benefits from the lease assets are
consumed. Contingent rentals arising under operating leases are recognized as an expense in the period in which they are incurred.
In the event that lease incentives are received to enter into operating leases, such incentives are recognized as a liability. The
aggregate benefit of incentives is recognized as a reduction of rental expense on a straight-line basis over the lease term, except where
another systematic basis is more representative of the time pattern in which economic benefits from the leased assets are consumed.
(j) Revenue recognition
The Group and Company recognizes revenue to depict the transfer of promised goods or services to customers is an amount that
reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. Specifically, the Group and
Company follow these steps;
Identify the contract(s) with a customer
Identify the performance obligations in the contract
1.
2.
3. Determine the transaction price
4. Allocate the transaction price to the performance obligations in the contract
Recognize revenue when (or as) the entity satisfies a performance obligation
5.
Registry revenue
Registry revenue primarily arise from fixed fees charged to registrars for the initial registration or renewal of domain names.
Where the fee from the initial registration matches the fee from the renewal, the fee from both the initial registration and renewal is
recognized on a straight-line basis over the registration term.
Where the fee from the initial registration is higher than the renewal fee (arising mainly from ‘premium name’), the ‘premium’ (the
difference between the first-year fee and ongoing renewal fee) is recognized as revenue immediately with the balance recognized on a
straight-line basis over the registration period. The renewal fee carries on to be recognized on a straight line basis as well.
Fees from renewals are deferred until the new incremental period commences.
Rendering of services (Registry service provider (“RSP”) revenue and consultancy services)
Revenue is generated by providing RSP and consultancy services over a period of time. Fees for these services are deferred and / or
accrued and recognized as performance occurs, typically on a straight-line basis over that period.
41
STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS (k) Partner payments
Partner payments represents the expense relating to certain TLDs where royalty and similar payments are required to be made,
including any minimum revenue guarantees.
Such payments are based on the Group’s and Company’s billing and are deferred in line with accounting revenue.
(l) Foreign currencies
Functional and presentation currency
The individual financial statements of each Group company are presented in the currency of the primary economic environment in
which it operates (its functional currency). For the purpose of the consolidated financial statements, the results and financial position
of each Group company are expressed in US Dollars, which is the presentation currency for the consolidated financial statements. The
Company’s functional currency is US Dollars.
Transactions and balances
In preparing the financial statements of the individual companies, transactions in currencies other than the entity’s functional currency
(foreign currencies) are recognized at the rates of exchange prevailing on the dates of transactions. At each balance sheet date,
monetary assets and liabilities that are denominated in foreign currencies are retranslated at the rate prevailing at that date. Non-
monetary items carried at fair value that are denominated in foreign currencies are translated at the rates prevailing at the date when
the fair value was determined. Non-monetary items that are measured at historical cost in foreign currencies are not retranslated.
Exchange differences are recognized in profit and loss in the period in which they arise.
For the purpose of presenting consolidated financial statements, the assets and liabilities of the Group’s foreign operations are
translated at exchange rates prevailing on the balance sheet date. Income and expense items are translated at the average exchange
rates for the period, unless exchange rates fluctuate significantly during that period, in which case the exchange rates at the date of the
transactions are used. Exchange differences arising, if any, are recognized in other comprehensive income and accumulated in equity
(attributed to non-controlling interests as appropriate).
On the disposal of a foreign operation (i.e. a disposal of the Group’s entire interest in a foreign operation, or a disposal involving
loss of control over a subsidiary that includes a foreign operation, loss of joint control over a jointly controlled entity that includes a
foreign operation, or loss of significant influence over an associate that includes a foreign operation), all of the accumulated exchange
differences in respect of that operation attributable to the Group are reclassified to profit or loss.
In addition, in relation to a partial disposal of a subsidiary that includes a foreign operation that does not result in the Group losing
control over the subsidiary, the proportionate share of accumulated exchange differences are re-attributed to non-controlling
interests and are not recognized in profit or loss. For all other partial disposals (i.e. partial disposals of associates or joint arrangements
that do not result in the Group losing significant influence or joint control), the proportionate share of the accumulated exchange
differences is reclassified to profit or loss.
42
Minds + Machines Group LimitedAnnual Report 2018notes to financial statementsfor the year ended 31 December 2018(continued) (m) Intangible assets
Intangible assets acquired separately
Intangible assets with finite useful lives that are acquired separately are carried at cost less accumulated amortization and
accumulated impairment losses. Amortization is recognized on a straight-line basis over their estimated useful lives. The estimated
useful life and amortization method are reviewed at the end of each reporting period, with the effect of any changes in estimate being
accounted for on a prospective basis. Intangible assets with indefinite useful lives that are acquired separately are carried at cost less
accumulated impairment loss.
Internally generated intangible assets–research and development expenditure
Expenditure on research activities is recognized as an expense in the period in which it is incurred.
An internally generated intangible asset arising from the development (or from the development phase) of an internal project is
recognized if, and only if all of the following conditions have been demonstrated:
• the technical feasibility of completing the intangible asset so that it will be available for use or sale;
• the intention to complete the intangible asset and use or sell it;
• the ability to use or sell the intangible asset;
• how the intangible asset will generate probable future economic benefits;
• the availability of adequate technical, financial and other resources to complete the development and to use or sell the intangible
asset; and
• the ability to measure reliably the expenditure attributable to the intangible asset during its development.
The amount initially recognized for internally generated intangible assets is the sum of the expenditure incurred from the date when
the intangible asset first meets the recognition criteria listed above. Where no internally generated intangible asset can be recognized,
development expenditure is recognized in profit or loss in the period in which it is incurred.
Subsequent to initial recognition, internally generated intangible assets are reported at cost less accumulated amortization and
accumulated impairment losses, on the same basis as intangible assets that are acquired separately.
Useful live and amortisation
Amortization is recognized so as to write off the cost of assets less their residual values over their useful lives, using the straight-line
method, on the following basis.
• Generic Top Level Domains – indefinite life (not amortized)
• Contractual based intangible assets – indefinite life (not amortized)
• Software and development costs – over 3 or over its useful life (as below)
Software and development costs are amortized over their useful economic life. The amortization period and the amortization method
for an intangible asset with a finite useful life are reviewed when circumstances indicate a change to its useful life. Changes in the
expected useful life are accounted for by charging the amortization period and treated as a change in accounting estimate.
(n) De-recognition of intangible assets
An intangible asset is de-recognized on disposal, or when no future economic benefits are expected from use or disposal. Gains and
losses arising from de-recognition of an intangible asset, measured as the difference between the net disposal proceeds and the
carrying amount of the asset, are recognized in profit or loss when the asset is de-recognized.
(o) Fixtures & equipment
Fixtures & equipment is stated at cost less accumulated depreciation and any accumulated impairment losses. Depreciation is
recognized so as to write off the cost or valuation of assets less their residual values over their useful lives, using the straight line
method, on the following basis.
• Fixtures & equipment – over 3 to 5 years
43
STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS (p) Impairment of fixtures & equipment and intangible assets excluding goodwill
At each balance sheet date, the Group reviews the carrying amounts of its tangible and intangible assets to determine whether
there is any indication that those assets have suffered an impairment loss. If any such indication exists, the recoverable amount of
the asset is estimated to determine the extent of the impairment loss (if any). Where the asset does not generate cash flows that
are independent from other assets, the group estimates the recoverable amount of the cash-generating unit to which the asset
belongs. When a reasonable and consistent basis of allocation can be identified, corporate assets are also allocated to individual cash-
generating units, or otherwise they are allocated to the smallest group of cash-generating units for which a reasonable and consistent
allocation basis can be identified.
Recoverable amount is the higher of fair value less cost to sell and value in use. In assessing value in use, the estimated future cash
flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of
money and the risks specific to the asset for which estimates of future cash flows have not been adjusted.
If the recoverable amount of an asset (or cash-generating unit) is estimated to be less that its carrying amount, the carrying amount of
the asset (or cash-generating unit) is reduced to its recoverable amount. An impairment loss is recognized immediately in profit or loss.
Where an impairment loss subsequently reverses, the carrying amount of the asset (or cash-generating unit) is increased to the
revised estimate of its recoverable amount, but so that the increased carrying amount does not exceed the carrying amount that
would have been determined had no impairment loss been recognized for the asset (or cash-generating unit) in prior years. A reversal
of an impairment loss is being recognized immediately in profit or loss.
(q) Finance costs/revenue
Interest expenses are recognized using the effective interest method.
Finance revenue is recognized using the effective interest method.
(r) Financial instruments
The Group has adopted IFRS 9 Financial Instruments from the 1 January 2018. IFRS 9 contains three principal classification
categories for financial assets: measured at amortized cost, FVOCI and FVTPL. The classification of financial assets under IFRS 9
is generally based on the business model in which a financial asset is managed and its contractual cash flow characteristics. IFRS 9
eliminates the previous IAS 39 categories of held to maturity, loans and receivables and available for sale investments.
The adoption of IFRS 9 has not had a significant effect on the Group’s accounting policies for financial instruments.
Financial assets and financial liabilities are recognized in the Group’s balance sheet when the Group becomes party to the contractual
provision of the instrument.
Financial assets and financial liabilities are initially measured at fair value. Transaction costs that are directly attributable to the
acquisition or issue of financial assets and financial liabilities (other than financial assets and financial liabilities at fair value through
profit or loss) are added to or deducted from the fair value of the financial assets or liabilities, as appropriate, on initial recognition.
Transaction costs directly attributable to the acquisition of financial assets or financial liabilities at fair value through profit of loss are
recognized immediately in profit or loss.
Financial assets
All financial assets are recognized and derecognized on a trade date where the purchase or sale of a financial asset is under a contract
whose terms require delivery of the financial assets within the timeframe established by the market concerned, and are initially
measured at fair value, plus transaction costs, except for those financial assets classified as at fair value through profit or loss, which
are initially measured at fair value.
Financial assets are classified into the following specified categories: ‘investments in equity instruments designated at FVTOCI’ and
‘financial assets at amortized cost’. The classification depends on the nature and purpose of the financial assets and is determined at
the time of initial recognition.
44
Minds + Machines Group LimitedAnnual Report 2018notes to financial statementsfor the year ended 31 December 2018(continued) Effective interest method
The effective interest method is a method of calculating the amortized cost of a debt instrument and of allocating interest income
over the relevant period. The effective interest rate is the rate that exactly discounts estimates future cash receipts (including
all fees and points paid or received that form an integral part of the effective interest rate, transaction costs and other premium or
discounts) through the expected life of the debt instrument, or, where appropriate, a shorter period, to the net carrying amount on
initial recognition.
Income is recognized on an effective interest basis for debt instrument.
Financial assets at amortize cost
Trade receivables, loans and other receivables that have fixed or determinable payments that are not quoted in an active market are
classified as ‘financial assets at amortized cost’. These assets are measured at amortized cost using the effective interest method, less
Impairment. Interest income is recognized by applying the effective interest rate, except for short-term receivables when recognition
of interest would not be material.
Financial assets at amortize cost include cash and cash equivalents. Cash and short-term deposits in the balance sheet comprise cash
at bank and in hand and short-term deposits with an original maturity of three months or less. For the purposes of the Cash Flow
Statement, cash and cash equivalents consist of cash and cash equivalents as defined above, net of outstanding bank overdrafts.
Investments in equity instruments designated at FVTOCI
Investments in equity instruments designated at FVTOCI are non-derivatives that are designated as FVTOCI. Changes to the value of
investments in equity instruments are accounted for through OCI.
Listed shares held by the Group that are traded in an active market are classified as being investments in equity instruments and
are stated at fair value. Gains and losses arising from changes in fair value are recognized in other comprehensive income and
accumulated in the investments revaluation reserve. Dividends from investments in equity instruments are recognized in profit or loss
when the Group’s right to receive the dividends is established.
Impairment of financial asset
Financial assets are assessed for indicators of impairment at each balance sheet date. Financial assets are impaired where there is
objective evidence that, as a result of one or more events that occurred after the initial recognition of the financial asset, the estimated
future cash flows of the investment have been affected.
For all other financial assets objective evidence of impairment could include:
• significant financial difficulty of the issuer or counterparty; or
• default of delinquency in interest or principal payments; or
• it becoming probable that the borrower will enter bankrupt or financial re-organization.
For Financial assets carried at amortized cost, the amount of the impairment is the difference between the asset’s carrying amount
and the present value of estimated future cash flows, discounted at the financial asset’s original effective rate.
The carrying amount of the financial asset is reduced by the impairment loss directly for all financial assets with the exception of trade
receivables, where the carrying amount is reduced through the use of an allowance account. When a trade receivable is considered
uncollectible, it is written off against the allowance account. Changes in the carrying amount of the allowance account are recognized
in profit and loss.
With the exception of investments in equity instruments designated at FVTOCI, if, in a subsequent period, the amount of
the impairment loss decreases and the decrease can be related objectively to an event occurring after the impairment was
recognized, the previously recognized impairment loss is reversed through profit or loss to the extent that the carrying amount of the
investment at the date the impairment is reversed does not exceed what the amortized cost would have been had the impairment not
been recognized.
45
STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS De-recognition of financial assets
The Group derecognizes a financial asset only when the contractual rights to the cash flows from the asset expire, or when it transfers
the financial asset and substantially all the risks and rewards of ownership of the asset to another entity. If the Group neither transfers
nor retains substantially all the risks and rewards of ownership and continues to control the transferred asset, the Group recognizes
its retained interest in the asset and an associated liability for amounts it may have to pay. If the Group retains substantially all
the risks and rewards of ownership of a transferred financial asset, the Group continues to recognize the financial asset and also
recognizes a collateralized borrowing for the proceeds received.
On de-recognition of a financial asset in its entirety, the difference between the asset’s carrying amount and the sum of the
consideration received and receivable and the cumulative gain or loss that had been recognized in other comprehensive income and
accumulated in equity is recognized in profit or loss.
Financial liabilities and equity
Debt and equity instruments are classified as either financial liabilities or as equity in accordance with the substance of the contractual
arrangement.
Equity instruments
An equity instrument is any contract that evidences a residual interest in the assets of an entity after deducting all of its liabilities.
Equity instruments issued by the Group are recognized at the proceeds received net of direct issue costs.
Financial liabilities
Financial liabilities are classified as trade and other payables.
Trade and other payables
Trade and other payables, including borrowings, are initially measured at fair value, net of transaction costs.
Trade and other payables are subsequently measured at amortized costs using the effective interest method, with interest expense
recognized on an effective yield basis.
The effective interest method is a method of calculating the amortized costs of a financial liability and of allocating interest expense
over the relevant period. The effective interest rate is the rate that exactly discounts estimated future cash payments through the
expected life of the financial liability, or, where appropriate, a shorter period, to the net carrying amount on initial recognition.
De-recognition of financial liabilities
The Group de-recognizes financial liabilities when, and only when, the Group’s obligations are discharged, cancelled or they expire.
(s) Taxation
The tax expense represents the sum of the tax currently payable and deferred tax.
Current tax
The tax currently payable is based on taxable profit for the year. Taxable profit differs from net profit as reported in the income
statement because it excludes items of income or expense that are taxable or deductible in other years and it further excludes items
that are never taxable or deductible. The Group’s liability for the current year is calculated using jurisdictional tax rates that have been
enacted or substantively enacted by the balance sheet date.
Deferred tax
Deferred tax is the tax expected to be payable or recoverable on differences between the carrying amounts of assets and liabilities in the
financial statements and the corresponding tax bases used in the tax computations and is accounted for using the balance sheet liability
method. Deferred tax liabilities are generally recognized for all taxable temporary differences and deferred tax assets are recognized to
the extent that it is probable that taxable profits will be available against which deductible temporary differences can be utilized.
Deferred tax is calculated at the tax rates that are expected to apply in the period when the liability is settled, or the asset is realized.
Deferred tax is charged or credited in the income statement, except when it relates to items charged or credited directly to equity, in
which case it is also dealt with in equity.
46
Minds + Machines Group LimitedAnnual Report 2018notes to financial statementsfor the year ended 31 December 2018(continued) Current and deferred tax for the year
Current and deferred tax are recognized in profit of loss, except when they relate to items that are recognized in other comprehensive
income or directly in equity, in which case, the current and deferred tax are also recognized on other comprehensive income or
directly inequity respectively.
(t) Provisions
Provisions are recognized when the Group has a present obligation (legal or constructive) as a result of a past event, it is probable that an
outflow of resources embodying economic benefits will be required to settle the obligation and a reliable estimate can be made of the amount
of the obligation.
The amount recognized as a provision is the best estimate of the consideration required to settle the present obligation at the balance
sheet date, taking into account the risks and uncertainties surrounding the obligation. Where a provision is measured using the cash flows
estimates to settle the present obligation, its carrying amount is the present value of those cash flows (when the effect of the time value of
money is material).
When some or all of the economic benefits required to settle a provision are expected to be recovered from a third party, a receivable is
recognized as an asset if it is virtually certain that reimbursement will be received, and the amount of the receivable can be measured reliably.
(u) Share-based payment transactions
Equity-settled share-based payments to employees are measured at the fair value of the equity instrument at the grant date. The fair
value excludes the effect of non market-based vesting conditions. The fair value is determined by using the Black-Scholes model. Details
regarding the determination of the fair value of equity-settled share-based transactions are set out in Note 29.
The fair value determined at the grant date of the equity-settled shared-based payments is expensed on a straight-line basis over the
vesting period, based on the Group’s estimate of the equity instruments that will eventually vest. At each balance sheet date, the Group
revises its estimate of the number of equity instruments expected to vest as a result of the effect of non market-based vesting conditions.
The impact or the revision of the original estimates, if any, is recognized in profit or loss such that the cumulative expense reflects the
revised estimate, with a corresponding adjustment to equity reserves.
The dilutive effect, if any, of outstanding options is reflected as additional share dilution in the computation of earnings per share
(see Note 15).
(v) Investment in subsidiary undertakings
In the parent company financial statements, fixed asset investment in subsidiaries and joint ventures are shown at cost less provision
for impairment.
47
STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS 2 Significant accounting judgements, estimates and assumptions
The preparation of the Group’s consolidated financial statements requires management to make judgements, estimates and
assumptions that affect the reported amounts of revenues, expenses, assets and liabilities, and the accompanying disclosures.
Uncertainty about these assumptions and estimates could result in outcomes that require a material adjustment to the carrying
amount of assets or liabilities affected in future periods.
Other disclosures relating to the Group’s exposure to risks and uncertainties includes:
• Financial instruments risk management and policies
• Sensitivity analysis
Note 30
Note 30
Judgements
In the process of applying the Group’s accounting policies, management has made the following judgements, which have the most
significant effect on the amounts recognized in the consolidated financial statements:
Intangible Assets
Within intangible assets are assets classified as gTLD assets and contract based intangible assets.
Under the requirements of IAS 38 Intangible Assets and the Group’s assessment thereof, the Group has determined that gTLD assets
and contract based intangible assets have an indefinite life as the Group has an automatic right to renew the asset every ten years.
Determining whether intangible assets are impaired requires an estimation of the value in use of the cash-generating units to those
assets have been allocated. The value in use calculation requires the entity to estimate the future cash flows expected to arise from
the cash-generating unit and a suitable discount rate in order to calculate present value.
The most significant judgement involved in the impairment review of intangible assets is the determination of cash-generating units,
and this judgement has a significant impact on the outcome of the impairment review. The directors have grouped gTLDs with similar
characteristics to form a single cash-generating unit. The cash generating units have been identified in note 18.
Goodwill and gTLD assets have not been impaired in the current year. Contract based intangible assets have been impaired in the
current year. Details of goodwill and intangible assets are set out in note 17 and 18 respectively.
Estimates and assumptions
The key assumptions concerning the future and other key sources of estimation uncertainty at the reporting date, that have a
significant risk of causing a material adjustment to the carrying amounts of assets and liabilities in future financial years, are described
below. The Group based its assumptions and estimates on parameters available when the consolidated financial statements were
prepared. Existing circumstances and assumptions about future developments, however, may change due to market changes or
circumstances arising that are beyond the control of the Group. Such changes are reflected in the assumptions when they occur.
Impairment of non-financial assets
Impairment exists when the carrying value of an asset or cash generating unit exceeds its recoverable amount, which is the higher
of its fair value less costs of disposal and its value in use. In the absence of available data from similar transactions, the recoverable
amount has been assessed by reference to value in use. The value in use calculation is based on a discounted cash flow (“DCF”) model.
The cash flows are derived from the budget for the three years. The recoverable amount is sensitive to the discount rate used for
the DCF model as well as the expected future cash-inflows and the growth rate used for extrapolation purposes. These estimates
are most relevant to goodwill and other intangibles with indefinite useful lives recognized by the Group. The key assumptions used
to determine the recoverable amount for the different CGUs, including a sensitivity analysis, are disclosed and further explained in
Note 17 and Note 18.
Taxes
Deferred tax assets are recognized for unused tax losses to the extent that it is probable that taxable profit will be available against
which the losses can be utilized. Significant management judgement is required to determine the amount of deferred tax assets that
can be recognized, based upon the likely timing and the level of future taxable profits, together with future tax planning strategies.
The Group has $30.6m (2017: $30.2m) of tax losses carried forward. These losses relate to subsidiaries that have a history of losses,
48
Minds + Machines Group LimitedAnnual Report 2018notes to financial statementsfor the year ended 31 December 2018(continued)
do not expire, and may not be used to offset taxable income elsewhere in the Group. There is uncertainty over the utilization of these
tax losses in future periods and on that basis, the Group has determined that it cannot recognize deferred tax assets on the tax losses
carried forward. If the Group was able to recognize all unrecognized deferred tax assets, profit and equity would have increased
by $5,594k. Further details on taxes are disclosed in Note 13.
Fair value measurement of financial instruments
Financial assets relate to cash and bank balances, loans, receivables and investments in equity instruments designated as at fair value
through OCI, financial liabilities relate to trade and other payables. When the fair values of financial assets and financial liabilities
recorded in the statement of financial position cannot be measured based on quoted prices in active markets, their fair value is
measured using valuation techniques including the DCF model. The inputs to these models are taken from observable markets
where possible, but where this is not feasible, a degree of judgement is required in establishing fair values. Judgements include
considerations of inputs such as liquidity risk, credit risk and volatility. Changes in assumptions relating to these factors could affect
the reported fair value of financial instruments. See Note 30 for further disclosures.
Credit losses
During 2018 the Directors of the Group re-evaluated the amounts due to it from customers on long term payment plans, it was
estimated that a bad debt provision of $2,112k should be made.
In determining the recoverability of a trade receivable, the Group considers any change in the credit quality of the trade receivable
from the date credit was initially granted up to the reporting date. The bad debt provision consists of individually impaired trade
receivables due from companies. The bad debt provision represents the difference between the carrying amount of these trade
receivables and the value of the expected proceeds.
Revenue recognition
Revenue is primarily driven from fixed fees charged to registrars for initial registrations or renewal of domain names.
Where the fee from the initial registration matches the fee from the renewal, the fee from both the initial registration and renewal is
recognized on a straight-line basis over the registration term.
Where the fee from the initial registration is higher than the renewal fee (arising mainly from ‘premium name’), the ‘premium’ (the
difference between the first-year fee and ongoing renewal fee) is recognized as revenue immediately with the balance recognized on a
straight-line basis over the registration period. The renewal fee carries on to be recognized on a straight line basis as well.
Fees from renewals are deferred until the new incremental period commences.
Any fees charges on a variable basis is not recognized as revenue until each parties performance obligations are met.
49
STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS 3 Operating segments – Group
Information reported to the Group’s management and internal reporting structure (including the Group’s Chief Executive Officer) for
the purpose of resources allocation and assessment of segment performance is focused on the category for each type of activity. The
principal categories (and the Group’s segments under IFRS 8) are:
• Registry ownership (‘Registry’) – applicant of top level domain name from ICANN and wholesaler of domain names of those top
level domain names
• Registry service provider (‘RSP’) and consulting services – back end service provider for a registry
Segment revenues and results
2018
Revenue
External sales
Total Revenue
Operating EBITDA
Strategic Review Costs
Acquisition costs
Restructuring costs
Bad debt provision
Impairment loss on intangible assets
Onerous lease provision
Foreign exchange loss
Profit on disposal of tangible assets
Share based payment expense
Share of profit of joint venture
EBITDA
Amortisation and depreciation
Finance revenue
Finance costs
Profit before tax
Income tax
Profit after tax
-
Registry
$ 000’s
RSP
$ 000’s
Unallocated
$ 000’s
Total
$ 000’s
14,250
14,250
4,052
-
(595)
(743)
(2,112)
-
-
-
-
-
-
844
844
(5)
(110)
-
-
-
(4,145)
(7,154)
-
-
-
-
-
-
-
(110)
-
-
-
-
-
(342)
(12)
15,094
15,094
4,047
(595)
(743)
(2,112)
(4,145)
(7,154)
(342)
(12)
(1,153)
(1,153)
4
4
602
(11,304)
(1,613)
(12,315)
(211)
16
(180)
(12,690)
54
(12,636)
50
Minds + Machines Group LimitedAnnual Report 2018notes to financial statementsfor the year ended 31 December 2018(continued)
2017
Revenue
External sales
Total Revenue
Operating EBITDA
Strategic Review Costs
Foreign exchange loss
Profit on disposal of tangible assets
Share based payment expense
Share of profit of joint venture
EBITDA
Amortisation and depreciation
Finance revenue
Profit before tax
Income tax
Profit after tax
Registry
$ 000’s
RSP
$ 000’s
Unallocated
$ 000’s
Total
$ 000’s
13,265
13,265
1,050
1,050
5,645
(311)
-
-
-
-
-
-
-
-
-
-
-
-
-
(301)
(45)
4
14,315
14,315
5,334
(301)
(45)
4
(1,002)
(1,002)
9
5,645
(311)
(1,335)
9
3,999
(187)
21
3,833
(19)
3,814
*Included within Operating EBITDA is profit on gTLD auctions of $480k (2017: $2,108k) allocated to the Registry segment.
Other segment information
Registry
RSP
Total
Segment assets
Depreciation and amortization
2018
$ 000’s
103,136
1,629
104,765
2017
$ 000’s
60,349
17,913
78,262
2018
$ 000’s
144
67
211
2017
$ 000’s
104
83
187
For the purpose of monitoring segment performance and allocating resources between segments, the Group’s Chief Executive Officer
monitors the tangible, intangible and financial assets attributable to each segment. All assets are allocated to reportable segments
with the exception of interest in joint ventures. Goodwill has been allocated to reportable segments as described in note 17.
51
STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS
Geographical information
The Group’s information about its segments by geographic location of assets is detailed below.
British Virgin Islands
Ireland
United Kingdom
Germany
Hungary
USA
China
Total
Revenue from external customers
Non-current assets
Additions to Non-current assets
2018
$ 000’s
8,395
3
844
1,229
-
4,623
-
2017
$ 000’s
11,685
-
1,054
1,082
-
494
-
2018
$ 000’s
43,036
146
-
381
189
41,514
3
15,094
14,315
85,269
2017
$ 000’s
46,138
125
4,206
459
198
1,844
5
52,975
2018
$ 000’s
-
98
-
-
-
39,625
-
39,723
2017
$ 000’s
553
116
-
5
-
88
4
766
Included in revenues arising from the Registry segment are revenues of $1,596k (2017: $4,001k), which arose from sales to the
Group’s largest customer.
Revenue for the Company is all derived from the Registry segment from assets located in the British Virgin Islands.
Revenue primarily arises from fixed fees charged to registrars for the initial registration or renewal of domain names. Where the fee
from the initial registration matches the fee from the renewal, the fee from both the initial registration and renewal is recognized on a
straight-line basis over the registration terms.
Where the fee from the initial registration is higher than the renewal fee (arising mainly from ‘premium name’), the ‘premium’ (the
difference between the first-year fee and ongoing renewal fee) is recognized as revenue immediately with the balance recognized on a
straight-line basis over the registration period. The renewal fee carries on to be recognized on a straight line basis as well.
Fees from renewals are deferred until the new incremental period commences.
The timing of revenue recognition is detailed below:
Timing of revenue recognition
At a point in time (i.e. ‘premium name revenue’)
Over time
Total
2018
$ 000’s
3,283
11,811
15,094
Group
2017
$ 000’s
7,068
7,247
14,315
2018
$ 000’s
3,037
5,358
8,395
Company
2017
$ 000’s
6,588
5,101
11,689
FY 2016 revenue adjustment
In the year under review, the Directors of the company reviewed revenue contracts from prior years. A contract which was fully
recognized as revenue in the 2016 financial statements consisted of two elements, a fixed portion and a portion contingent on certain
events occurring which the Directors’ believed had occurred. $586k, the portion contingent on certain events occurring, that was
recognized as revenue in the 2016 financial statements. However, the events, as indicated in the interims, did not occur as anticipated
and has resulted in the reversal of $586k from Group’s and Company’s current year revenue rather than a prior period adjustment on
the basis of a lack of materiality.
The Directors will report revenue from the variable component as it is realized.
52
Minds + Machines Group LimitedAnnual Report 2018notes to financial statementsfor the year ended 31 December 2018(continued)
4 Partner payments
Partner payments
2018
$ 000’s
2,520
Group
2017
$ 000’s
2,364
2018
$ 000’s
1,013
Company
2017
$ 000’s
1,154
Partner payments represents the expense relating to certain TLDs where royalty and similar payments are required to be made. Such
payments are based on the Group’s and Company’s billing and are deferred in line with accounting revenue.
5 Cost of sales
Third Party Fees
ICANN Fees
Marketing
Other
Total
2018
$ 000’s
736
967
1,317
461
3,481
Group
2017
$ 000’s
571
949
1,495
425
3,440
2018
$ 000’s
258
795
1,183
38
2,274
Company
2017
$ 000’s
368
775
1,109
130
2,382
6 Strategic review costs
The Group concluded its strategic review resulting in the acquisition of ICM Registry, LLC (see note 16 and the Executive Summary
for further details). Strategic review costs of $110k (2017: $301k) were incurred. The company incurred $110k (2017: $258k) in
strategic review costs.
7 Acquisition costs
The Group and Company acquired ICM Registry, LLC in the period (see note 16 and Executive Summary for further details) and
incurred acquisition costs, consisting of legal and professional fees as well as certain internal costs which totalled $595k (2017: $nil).
8 Restructuring costs
The Group and Company incurred restructuring costs of $743k (2017: $Nil) relates to costs incurred to re-negotiate certain legacy
registry contracts.
9 EBITDA
EBITDA is arrived at after charging:
Auditors’ remuneration – current year auditors
- Audit of these financial statements
- Audit of the financial statements of subsidiaries
- Tax compliance
- Other services
Directors’ emoluments – fees and salaries
Operating lease rentals
Foreign exchange loss / (gain)
2018
$ 000’s
83
5
11
1
1,027
818
342
Group
2017
$ 000’s
2018
$ 000’s
Company
2017
$ 000’s
63
15
19
2
862
623
(45)
83
-
-
-
619
-
391
63
-
-
-
513
-
(223)
53
STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS
2018
$ 000’s
Company
2017
$ 000’s
10 Employee information (excluding directors)
Staff costs comprise:
Wages and salaries
Monthly average number of employees:
Back office (Administration, Finance and Other)
Sales & Marketing
Engineering
Total average
11 Finance revenue
Bank interest
2018
$ 000’s
2,065
15
6
2
23
2018
$ 000’s
16
Group
2017
$ 000’s
1,763
12
8
-
20
Group
2017
$ 000’s
21
Finance revenues relate to assets classified as cash and cash equivalents and assets measured at amortized cost.
12 Finance costs
Loan interest
2018
$ 000’s
180
Group
2017
$ 000’s
-
-
-
-
-
-
2018
$ 000’s
16
2018
$ 000’s
180
Finance costs relate to interest on borrowings made during the year of $3million (2017: Nil) see note 26 for further details.
13 Income tax expense - Group
The charge for the current year can be reconciled to the loss per the Group statement of comprehensive income as follows:
Current tax credit / (charge)
Deferred tax
Profit / (loss) before tax
Tax at the BVI tax rate of 0%
Research and development tax credit
Income tax
54
2018
$ 000's
54
-
54
2018
$ 000’s
(12,690)
-
54
-
54
-
-
-
-
-
Company
2017
$ 000’s
21
Company
2017
$ 000’s
-
2017
$ 000's
(19)
-
(19)
2017
$ 000’s
3,833
-
-
(19)
(19)
Minds + Machines Group LimitedAnnual Report 2018notes to financial statementsfor the year ended 31 December 2018(continued)
Company
The charge for the current year can be reconciled to the loss per the Company statement of comprehensive income as follows:
Current tax
Deferred tax
Profit / (loss) before tax on continuing operations
Tax at the BVI tax rate of 0%
2018
$ 000’s
2017
$ 000’s
-
-
-
2018
$ 000’s
(29,630)
-
-
-
-
-
2017
$ 000’s
4,623
-
-
The British Virgin Islands under the IBC (international business company) imposes no corporate taxes or capital gains. However, the
Company may be liable for taxes in the jurisdictions where it is operating.
No deferred tax asset has been recognized because there is insufficient evidence of the timing of suitable future profits against which
they can be recovered. Tax losses carried forward, which may be utilized indefinitely against future taxable profits amount to $12.5m
(2017: $12.4m) in the USA, $1.8m (2017: $2m) in Germany, $5.7m (2017: $5.8m) in Ireland, $10.4m (2017: $9.8m) in the United
Kingdom, $122k (2017: $97k) in Hungary and $Nil (2017: $3k) in China.
14 Dividends
No dividends were paid or proposed by the Directors (2017: $Nil).
15 Earnings per share
The calculation of earnings per share is based on the profit / (loss) after taxation divided by the weighted average number of shares in
issue during the period.
Profit / (Loss) for the purpose of the basic and diluted earnings per share
Profit / (Loss) from continuing operations - excluding non-controlling interests
Total profit / (loss) for the year
Number of shares
Weighted average number of ordinary shares used in calculating basic loss per share
Effect of dilutive potential ordinary shares – share options and warrants
Weighted average number of ordinary shares for the purpose of diluted earnings per share
(Loss) / profit per share from continuing operations
Basic
Diluted
2018
$ 000’s
2017
$ 000’s
(12,652)
(12,652)
2018
million
752.58
-
752.58
2018
cent
(1.68)
(1.68)
3,814
3,814
2017
million
699.86
32.43
732.29
2017
cent
0.55
0.52
For the purpose of calculating loss per share, all potential shares were anti-dilutive due to the losses reported. The number of potential
dilutive ordinary shares is 107.19 million.
55
STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS
16 Business Combinations
On 2 April 2018, MMX entered into an agreement to acquire the entire membership interest of ICM Registry, LLC (“ICM”). The
acquisition was completed on 16 June 2018.
The consideration for the acquisition was split into a cash payment of $10m and 225,000,000 new MMX ordinary shares with a value
of $20,597k based on the share price of MMX on the date of the acquisition (9.2c/6.9p).
Of the 225,000,000 new MMX ordinary shares 96,699,235 shares ($8,852k) were issued on the date of the acquisition with the
remaining 128,300,765 shares ($11,745k) deferred and to be issued on 4 January 2019.
ICM, a Florida based company, is the owner of four high value, niche TLDs and enhances MMX’s already strong TLD portfolio by
increasing ongoing renewal revenue and minimizing exposure to any one geographic region.
Assets acquired and liabilities assumed
The fair values of the identifiable assets and liabilities of ICM Registry, LLC at the date of acquisition were:
Fair value recognized on acquisition
Assets
Intangible assets
Cash and cash equivalents
Trade and other receivables
Liabilities
Accounts and other payables
Deferred revenue
Total identifiable net assets at fair value
Purchase consideration transferred
Satisfied by:
Cash
225,000,000 ordinary shares of parent company
Total consideration transferred
$ 000’s
39,603
864
398
40,865
(784)
(9,484)
(10,268)
30,597
30,597
10,000
20,597
30,597
There were no acquisitions in the year ended 31 December 2017.
ICM Registry, LLC contributed revenues of $3,921k and EBITDA of $1,989k for the period from 16 June 2018 to 31 December 2018.
If the acquisition had occurred on 1 January 2018, consolidated pro-forma revenue and EBITDA for the year ended 31 December
2018 would have been $6,923k and $3,453k respectively.
Please refer to note 7 for further details on acquisition costs.
Analysis of cash flows on acquisition
Cash paid upon acquisition of ICM
Net cash acquired with the acquisition
Net cash outflow on acquisition
56
$ 000’s
(10,000)
864
(9,136)
Minds + Machines Group LimitedAnnual Report 2018notes to financial statementsfor the year ended 31 December 2018(continued)
Analysis of cash flows at reporting date relating to ICM Registry, LLC
Cash flows from operating activities
EBITDA
Adjustments for:
Decrease in trade and other receivables including long term receivables
Decrease in trade and other payables
Net cash flow from operating activities
Cash flows from investing activities
Cash paid upon acquisition of ICM
Net cash acquired with the acquisition
Net cash flow from investing activities
Net decrease in cash and cash equivalents
17 Goodwill
Cost
31 December 2018 and 31 December 2017
$ 000’s
1,989
116
(158)
1,947
(10,000)
864
(9,136)
(7,190)
Group
$ 000's
2,828
Goodwill acquired in a business combination is allocated, at acquisition, to the cash generating units that are expected to benefit from
that business combination as a result of expected synergies from combined operations. Goodwill has been allocated to the ‘Registry’
segment (a single ‘CGU’).
Impairment review
The Group tests goodwill annually for impairment, or more frequently if there are indicators that goodwill might be impaired.
At 31 December 2018, the Directors have carried out an impairment review and have concluded that no impairment is required.
The recoverable amount of the CGU is determined from value in use calculations. The key assumptions for the value in use
calculations are those regarding the discount rates, growth rates and expected changes to selling prices and direct costs. Management
estimate discount rates using pre-tax rates that reflect current market assessments of the time value of money and the risks specific to
the CGU.
The Group prepares cash flow forecasts derived from the most recent financial budgets approved by management for the next three
years and extrapolates cash flows into perpetuity based on an estimated growth rate of 5% (2017: 10%) for seven years thereafter
and 4% (2017: 4%) into perpetuity. The growth rate is appropriate to the new gTLD market that the Group operates in. The rate used
to discount the forecast cash flows is 11.5% (2017: 11.5%).
The Group has carried out sensitivity analysis on the impairment test of the CGU. The Directors believe that any reasonable possible
change in the key assumptions on which the recoverable amount of the CGU would not cause the aggregate carrying amount to
exceed the aggregate recoverable amount of the cash generating unit. A 1% decrease in the growth rate and an increase of 0.5% in the
discount rate are considered reasonably possible.
57
STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS
18 Intangible assets
Group
Cost
At 1 January 2017
Additions
Exchange differences
At 31 December 2017
Additions – acquisition of ICM
Additions - other
Exchange differences
At 31 December 2018
Accumulated Amortization and Impairment charges
At 1 January 2017
Amortisation charge for the year
Exchange differences
At 31 December 2017
Amortisation charge for the year
Impairment charge for the year
Exchange differences
At 31 December 2018
Carrying amount
At 31 December 2018
At 31 December 2017
generic
Top Level
Domains
$ 000’s
Software &
development
costs
$ 000’s
Contract
based
intangible
assets
$ 000’s
41,561
-
68
41,629
39,603
-
(22)
2,297
235
138
2,670
-
99
(62)
3,815
-
391
4,206
-
-
-
Other
$ 000’s
Total
$ 000’s
170
47,843
-
-
235
597
170
48,675
-
-
-
39,603
99
(84)
81,210
2,707
4,206
170
88,293
-
-
-
-
-
-
-
-
(2,070)
(140)
(113)
(2,323)
(185)
-
49
(2,459)
-
-
-
-
-
(4,145)
(61)
(4,206)
(170)
(2,240)
-
-
(140)
(113)
(170)
(2,493)
-
-
-
(170)
(185)
(4,145)
(12)
(6,835)
81,210
41,629
248
347
-
4,206
-
-
81,458
46,182
58
Minds + Machines Group LimitedAnnual Report 2018notes to financial statementsfor the year ended 31 December 2018(continued)
Company
Cost
At 1 January 2017
Additions
At 31 December 2017
Additions
At 31 December 2018
Accumulated amortization
At 1 January 2017
Amortisation charge for the year
At 31 December 2017
Amortisation charge for the year
At 31 December 2018
Carrying amount
At 31 December 2018
At 31 December 2017
generic
Top Level
Domains
$ 000’s
Software &
development
costs
$ 000’s
Other
$ 000’s
Total
$ 000’s
39,379
-
39,379
-
39,379
-
-
-
-
-
39,379
39,379
54
52
106
-
106
(44)
(17)
(61)
(17)
(78)
28
45
99
99
-
99
(99)
-
(99)
-
(99)
39,532
52
39,584
-
39,584
(143)
(17)
(160)
(17)
(177)
-
-
39,407
39,424
generic Top Level Domains
In 2012, the Group applied for new generic Top Level Domains to the Internet Corporation for Assigned Names and Numbers
(ICANN), see note 23 for further details. Successful applications are transferred from other long-term assets to Intangible assets. The
Group capitalizes the full cost incurred to pursue the rights to operate generic Top Level Domains including amounts paid at auction to
gain this right where there is more than one applicant to ICANN for the same generic Top Level Domain.
This class of intangible assets is assessed to have an indefinite life as it is deemed that the application fee and amounts paid at auction
give the Group indefinite right to this generic Top Level Domain.
In 2018 the group completed the acquisition of ICM Registry, LLC through that acquisition the group acquired a further four gTLDs
onto their portfolio with a value of $39,606k (2017: Nil).
The Group tests intangible assets with an indefinite life (generic Top Level Domains) annually for impairment, or more frequently if
there are indicators that the asset might be impaired.
Impairment review of intangible assets
During 2018 the Group impaired its contract based intangible asset following on from the onerous contract provision as disclosed in
Note 27. The total value of the impairment was $4,057k allocated to the RSP CGU.
As at 31 December 2018, the directors carried out an impairment review of the other intangible assets in their portfolio and
concluded that no further impairments were required. The recoverable amounts of each group of generic Top Level Domains (the
grouping of generic Top Level Domains is based on its characteristics), software, and other intangible assets are determined from
value in use calculations. The key assumptions for the value in use calculations are those regarding the discount rates, growth rates
and expected changes to the selling process and direct costs. Management estimate discount rates using pre-tax rates that reflect
current market assessments of the time value of money and the risk specific to the asset.
59
STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS
gTLD assets with indefinite lives are allocated to CGUs, which fall under the Registry operating segment. The carrying values of the
CGUs are $28,544k (2017:$28,716k) for consumer lifestyle, $321k (2017:$365k) for geographic gTLDs, $9,177k (2017:$9,177k)
for professional occupations, $39,606 (2017: $Nil) for adult themed and $3,556k (2017: $3,371k) for other generic names.
The Group prepares cash flow forecasts derived from the most recent financial budgets approved by management for the next three
years and extrapolates cash flows into perpetuity based on an estimated growth rate of 5% for seven years thereafter and 4% (2017:
10%) into perpetuity. The rate used to discount the forecast cash flow is 11.5% (2017: 11.5%).
The Group has carried out sensitivity analysis on the impairment test of each CGU. The Directors believe that any reasonable possible
change in the key assumptions on which the recoverable amount of Goodwill in the CGUs would not cause the aggregate carrying
amount to exceed the aggregate recoverable amount of the cash generating unit. A 1% decrease in the growth rate and an increase of
0.5% in the discount rate are considered reasonably possible.
19 Fixtures and equipment - Group
Fixtures & equipment
$000’s
Cost
At 1 January 2017
Additions
Exchange differences
At 31 December 2017
Additions
Disposals
Exchange differences
At 31 December 2018
Depreciation
At 1 January 2017
Depreciation charge for the period
Disposal
Exchange differences
At 31 December 2017
Depreciation charge for the period
Disposals
Exchange differences
At 31 December 2018
Carrying amount
At 31 December 2018
At 31 December 2017
60
310
31
24
365
20
(9)
15
391
(221)
(47)
-
(17)
(285)
(26)
11
(32)
(332)
59
80
Minds + Machines Group LimitedAnnual Report 2018notes to financial statementsfor the year ended 31 December 2018(continued)
20 Investment in subsidiaries
Investments in subsidiary undertakings of the Company
Cost
At the beginning of the year
Movement in the year
Impairment charge
At 31 December
2018
$ 000’s
39,503
30,649
(25,883)
44,269
Company
2017
$ 000’s
39,384
119
-
39,503
The movement in the year includes investment in ICM Registry, LLC of $30,597k (see business combinations note 16 for further
details) and $52k of share option expense attributable to subsidiaries.
The impairment during the year of $25,883k (2017: $Nil) relates to the impairment of the Company’s subsidiaries: Minds + Machines
Limited (Ireland); Minds + Machines LLC; and Minds and Machines Ltd (UK). Of the impairment charge of $25,883k, $22,068k was
allocated to the registry CGU and $3,815k was allocated to RSP CGU.
As a result of Group restructuring activities including the outsourcing of back-end services, Minds + Machiches Limited (Ireland) and
Minds + Machines LLC’s operations have been reduced. As such the investment in these subsidiaries has been impaired to reflect the
recoverable amounts (being their net asset positions).
Minds and Machines Limited (UK) has been fully impaired due to the recognition of an onerous contract provision relating to its
business, see note 27 for further details.
Details of the Company’s subsidiaries are as follows:
Name
Minds + Machines US, Inc. (DE)
Minds + Machines LLC (1)
Minds + Machines LLC (FL) (1)
Bayern Connect GmbH
Minds and Machines GmbH
Minds + Machines Ltd (Ireland)
Minds and Machines Ltd (UK)
Minds + Machines Registrar Ltd (IE) (2)
Place of
Incorporation
(or registration)
and operation
US
US
US
Germany
Germany
Ireland
England & Wales
Ireland
Minds and Machines Registrar UK Ltd
England & Wales
Minds + Machines Hungary
Emerald Names Inc
Boston TLD Management LLC
Dot Law Inc
LW TLD Ltd
Beijing MMX Tech Co. Ltd
ICM Registry, LLC (3)
ICM Registry AD, LLC (3)
ICM Registry PN, LLC (3)
ICM Registry SX, LLC (3)
Hungary
US
US
US
BVI
China
US
US
US
US
Principal
activity
Holding company
Registry
Registry
Registry
Registry
RSP
RSP
Dormant
Dormant
Registry
Registry
Registry
Registrar
Registry
Registry
Registry
Registry
Registry
Registry
Proportion of
ownership
interest
(%)
Proportion of
voting power
(%)
100
100
100
100
100
100
100
100
100
100
100
99
51
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
99
90
100
100
100
100
100
100
(1) Minds + Machines LLC (CA), Minds + Machines LLC (FL) and Dot Law, Inc. are direct subsidiaries of Minds + Machines US, Inc (DE).
(2) Minds + Machines Registrar Limited (Ireland) is a direct subsidiary of Minds + Machines Ltd (Ireland).
(3) On the 16 June 2018, these subsidiaries were acquired by the parent entity Minds + Machines Group Limited, (see business
61
combinations note 16 for further details)
STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS
21 Investments
Investments in equity instruments carried at fair value
Shares
Group and Company
2018
$ 000’s
2017
$ 000’s
57
500
The investment in ordinary shares issued are in Digital Town Inc. This represents an investment into an early stage company looking
to innovate local online search that have particular relevance to the Group’s gTLD portfolio, especially those with a geographic or
vertical focus.
Level one of the fair-value hierarchy, as defined by IFRS 13, has been used in the fair-value measurement of this investment. The
Group and Company has elected to present changes to fair value through the other comprehensive income.
22 Interest in joint ventures
During 2018, the group had a 50% interest in 2 joint ventures; Entertainment Names Inc and Dot Country LLC. These joint ventures
were formed to sell second-level domain names to registrars.
Share of interest in assets / (liabilities)
Assets
- Non-current
- Current
Liabilities
- Current
Share of interest in net assets
- Revenue
- Cost of sales
- Expenses
Profit / (loss) after income tax
There are no commitments arising in the joint ventures.
2018
$ 000’s
152
292
444
Group
2017
$ 000’s
152
288
440
(12)
(12)
432
428
18
(12)
(2)
4
24
(14)
(1)
9
There are no contingent liabilities relating the Group’s interest in the joint ventures, and no contingent liabilities of the venture itself.
Each joint venture is individually immaterial.
The principal place of business for Entertainment Names Inc. is the British Virgin Islands. The principal place of business for Dot
Country LLC, is the Cayman Islands.
Company
Interests in joint ventures are accounted for at cost of $520k (2017: $520k) in the Company financial statements.
62
Minds + Machines Group LimitedAnnual Report 2018notes to financial statementsfor the year ended 31 December 2018(continued)
23 Other long-term assets
Restricted cash
Other long-term assets
Total
Group and Company
2018
$ 000’s
-
435
435
2017
$ 000’s
2,217
740
2,957
The Group capitalizes the costs incurred to pursue the rights to operate certain gTLD strings as these are deemed to provide probable
future economic benefit.
During the application process capitalized payments for gTLD applications are included in other long term assets as other long term
receivables. While there is no assurance that MMX will be awarded any gTLDs, long-term assets are receivables and payments will be
reclassified as intangible assets once the gTLD strings are available for their intended use, which is expected to occur following the
delegation of gTLD strings by ICANN. In general, MMX does not expect to withdraw any of its applications unless the application has
not passed the evaluation process and there is no further recourse or there is an agreement to sell or dispose of its interest in certain
applications.
During the 2012 financial period, the Group paid U$13.5 million in application fees to the Internet Corporation for assigned Names
and Numbers (ICANN) under ICANN’s New generic Top Level Domain (gTLD) Program and deposited $3.6 million to fund the letters
of credit required by ICANN. Since then, to 2015, 41 applications were withdrawn either as a result of participation in auctions,
management decision, or transfer to a joint venture. As a result, application fees paid to ICANN as at 31 December 2015 amounted to
$1,295k and deposits to fund letters of credit decreased to $2,153k.
In 2016, one further application was withdrawn due to management decision. As a result, application fees paid to ICANN as at 31
December 2016 amounts to $1,110k and deposits to fund letters of credit increased to $2,217k due to the funding of Boston.
Deposits to fund letters of credit increased to $2,217k due to additional funding required for a TLD.
In 2016, of the application, which was withdrawn, $37k of the application fee is recoverable. The amount not received from ICANN as
a result of such withdrawals are accounted for on the profit and loss account as Loss in withdrawal of gTLD applications and amounted
to $148k.
In 2017, two further applications were withdrawn as a result of participation in auctions. Private auction proceeds net of refunds from
ICANN amounted to $2,108k.
Application fees paid to ICANN as at 31 December 2017 amounts to $740k. Deposits to fund letters of credit remained at $2,217k, of
which $36k was released back to the Group after the year end.
In 2018, one application was withdrawn by mutual agreement with the other interested parties, proceeds net of refunds from ICANN
amounted to $480k.
Application fees paid to ICANN as at 31 December 2018 reduced to $435k as a result of management decision to withdraw its
application with ICANN, in some cases due to participation in auctions. Where MMX receives a partial cash refund for certain gTLD
applications and/or to the extent the Group elects to sell or dispose of its interest in certain gTLD applications throughout the process,
it may incur gains or losses on amounts invested. In such cases the application fee will be reclassified from a long-term asset. Refunds
received will be properly recorded when received, gains on the sale of the Group’s interest in gTLD applications will be recognized
when realized, and losses will be recognized when deemed probable. Other costs incurred by MMX as part of its gTLD initiative not
directly attributable to the acquisition of gTLD operator rights are expensed as incurred.
Restricted cash has increased to $2,221k (2017: $2,217k) as a result of the combined effect of the acquisition of ICM (see note 16)
and withdrawal of applications with ICANN. In the period, to better reflect the Group’s cash balances (note 24), restricted cash is
reflected as cash and cash equivalents.
63
STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS
Where MMX receives a partial cash refund for certain gTLD applications and/or to the extent the Group elects to sell or dispose of
its interest in certain gTLD applications throughout the process, it may incur gains or losses on amounts invested. In such cases the
application fee will be reclassified from a long-term asset. Refunds received will be properly recorded when received, gains on the sale
of the Group’s interest in gTLD applications will be recognized when realized, and losses will be recognized when deemed probable.
Other costs incurred by MMX as part of its gTLD initiative not directly attributable to the acquisition of gTLD operator rights are
expensed as incurred.
Restricted cash is interest bearing and is therefore stated at fair value. Other long-term receivables are stated at amortized cost.
24 Cash and cash equivalents
Restricted cash
MMX has total cash balances of $10,367k (2017: $15,868k), Company’s cash balance are $5,397k (2017: $12,454k).
Of the Group’s total cash balances $3,221k (2017: $1million) are restricted funds. $2,221k of the restricted funds has been
reclassified (note 23) in the year from Other long-term assets to Cash and Cash equivalents. These amounts are held to fund letters of
credit required by ICANN and $1,000k (2017: $1,000k) is held in escrow to satisfy certain vendor requirements, both of which will be
released back to the Group.
25 Trade and other receivables
Trade receivables
Allowance for doubtful debts
Other receivables
Prepayments
Accrued revenue
Balances due from subsidiaries
Due from joint ventures
Total
2018
$ 000’s
6,721
(2,107)
4,614
735
3,621
109
-
50
Group
2017
$ 000’s
7,300
-
7,300
569
1,489
11
-
50
2018
$ 000’s
4,952
(1,821)
3,131
662
2,510
109
5,430
50
Company
2017
$ 000’s
7,756
-
7,756
396
1,147
11
4,190
50
9,129
9,419
11,892
13,550
During 2017 the Group extended credit terms over its standard 30 day payment terms on the sale of certain domain name inventory.
Such extended terms were typically over high value “premium” names for a period of 12 months (and in some cases longer) to known
parties after careful assessment of the counter parties ability to meet such payment terms. In accordance with IFRS 9 Financial
Instruments a bad debt provision has been accounted for based on an assessment of the recoverability of trade receivables.
The loans to subsidiaries are interest free and have no fixed repayment date. The loans have been classified to current receivables in
the current year as the directors assess these balances to be recoverable in 2019. The difference between the carrying value and the
fair value of the loan at the reporting date is deemed to be immaterial.
Group
Trade receivables disclosed above are measured at amortized cost.
Ageing of receivables:
0 – 30 days
31 – 60 days
61 – 90 days
91 days and over
Total
64
2018
$ 000’s
1,944
266
369
4,142
6,721
2017
$ 000’s
5,373
422
41
1,464
7,300
Minds + Machines Group LimitedAnnual Report 2018notes to financial statementsfor the year ended 31 December 2018(continued)
Company
Trade receivables disclosed above are classified as loans and receivables and are therefore measured at amortized cost.
Ageing of receivables:
0 – 30 days
31 – 60 days
61 – 90 days
91 days and over
Total
2018
$ 000’s
958
68
35
3,891
4,952
Included in the Company’s trade receivables in 2018 are balances due from its subsidiary reseller of $Nil (2017: $2,652k).
26 Trade and other payables
Trade payables
Registrar prepayments (payments in advance)
Other liabilities
Borrowings
Taxation liabilities
Accruals
Due to joint ventures
Due to subsidiaries
Trade and other payables
Deferred revenue
Trade and other payables including deferred revenue
2018
$ 000’s
92
1,623
2,081
3,000
8
2,755
70
-
9,629
Group
2017
$ 000’s
116
223
2,959
-
217
2,617
104
-
6,236
14,761
24,390
6,472
12,708
2018
$ 000’s
174
484
33
3,000
-
828
66
8,145
12,730
4,222
16,952
2017
$ 000’s
4,336
445
599
2,376
7,756
Company
2017
$ 000’s
160
197
30
-
-
1,121
66
9,679
11,253
4,296
15,549
Included within other liabilities are liabilities incurred as a result of the restructuring of a certain contract in 2016. In the year, $923k
of this liability was paid down and the balance still due at the year end is $2,032k (2017: $2,955k).
MMX entered into a Facility Agreement with London and Capital Assets Management Limited, a shareholder. The facility provides
$3 million of working capital to support future innovation and acquisition orientated activity by the Company. The facility is due to be
repaid within a year of issue with a monthly interest rate of 1%.
Deferred revenue has increased by $8,289k mostly as a result of its ongoing obligations associated with the acquisition of ICM.
Deferred revenue references the transaction price allocated to unsatisfied performance obligation.). Management expects that 61%
of the transaction price allocated to the unsatisfied contracts as of the year ended 2018 will be recognised as revenue in the next
reporting period ($9.1m). The remaining 39% ($5.7m) will be recognised in the year ended 2020 and beyond.
All trade and other payables (other than deferred revenue as disclosed above) are due within one year and approximate their
fair value.
65
STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS
27 Provisions
Onerous contract provision
Current
Non-current
At 1 January 2018
Provision in the year
Utilisation of provision
Foreign exchange
At 31 December 2018
2018
$ 000’s
5,774
5,774
2,914
2,860
5,774
2017
$ 000’s
-
-
-
-
-
Onerous contract provisions
$ 000’s
7,154
(1,147)
(233)
5,774
Under IAS 37 Provisions, Contingent Liabilities and Contingent Assets, an onerous contract provision has been created as a result
of Management’s assessment of future earnings against future obligations associated with a specific agreement. The terms of the
agreement provide for an annual minimum revenue guarantee to the business partner. The directors believe that over the term of the
agreement the net loss to the Group, which is reflective of the gap between the minimum revenue guarantee payable to the business
partner and the expected revenue earned by the intangible asset, is $7,154k. As a result, the asset has been fully impaired
(see Note 18).
The onerous contract provision represents management’s best estimate of the revenues and expenses associated with this
agreement, where revenues have been estimated to be relatively stagnant resulting in losses to meet the annual minimum revenue
guarantees to the business partner.
The impact of any net present value calculations on the onerous contract provision is not material.
28 Share capital and premium
Called up, allotted, issued and fully paid ordinary shares of no par value
Note
Number of shares
As at 1 January 2017
Shares issued:
699,857,562
Price per share
(cents/pence)
Total
$ 000’s
60,060
Issued on the 15 June 2018 for acquisition of ICM Registry, LLC
17
96,699,235
9,2c/6.9p
8,852
31 December 2018
796,556,797
68,912
On the 4 January 2019 a further 128,300,765 ordinary shares ($11,745k) will be issued as part of the consideration for the
acquisition of ICM Registry, LLC, see note 16 for further details.
66
Minds + Machines Group LimitedAnnual Report 2018notes to financial statementsfor the year ended 31 December 2018(continued)
29 Share-based payments
Share-based payment expense
Equity settled share based payments
Expense as a result of modification of equity settled share based payments
Total
2018
$ 000’s
1,150
3
1,153
2017
$ 000’s
997
5
1,002
In the year, 5,800,000 options and 7,750,000 Restricted Stock Units (“RSU’s) were issued to the Executive team and key employees.
This resulted in an increase in the share based payment expense (non-cash) in 2018. The valuation of the issued options is based on
the Black-Sholes method as described below.
The Company has the following share option schemes in place:
• Directors and Employees Share Option Scheme – Directors and certain senior executives are enrolled in a ‘Restricted Share Option’
(RSU) scheme (see below).
• Restricted Share Option (‘RSU’) scheme – new scheme introduced on the 6 August 2018 for Senior Management.
Directors and Employees Share Option Scheme
Number of share
options
Weighted average
exercise price
(cents /pence)
Number of
share options
Weighted average
exercise price
(cents /pence)
2018
2017
Outstanding at the beginning of the year
37,150,000
5.5/4.1
29,812,500
Granted during the year
Forfeited during the year
Exercised during the year
Expired during the year
Outstanding at the end of the year
Exercisable at the end of the year
5,800,000
-
-
-
Nil
N/A
N/A
N/A
8,000,000
(662,500)
-
-
42,950,000
-
37,150,000
14,222,727
11.8/9.3
12,483,333
8.3/6.1
3.2/2.3
9.3/6.9
N/A
N/A
5.5/4.1
12.2/9.1
1. No share options were forfeited 31 December 2018, Included within the number of share options forfeited in 2017 were 662,500
unexercised share options.
2. No share options were exercised in 2018 (2017: $Nil).
The weighted average contractual life of outstanding options at the end of the year is 0.76 years (2017: 0.61 years). There were
5,800,000 options granted in 2018 (2017: 8,000,000). The aggregate of the estimated fair values of the options granted under
this scheme during 2018 is $530k (2017: $793k). The weighted average fair value of the options granted is $0.09/£0.07 (2017:
$0.10/£0.08).
The general terms of the share options, under the company share options scheme, vest over 3 years (quarterly vesting, 1/12th of
options vest every quarter) and are exercisable over ten years from the date of grant if the employee remains within the company. The
outstanding share options at the year end range from $0.07/£0.05 to $0.17 / £0.12 (2017: $0.07/£0.05 to $0.15/£0.12).
Directors and employee share option scheme – share options granted in the year:
Weighted average share price (cents/pence)
Weighted average exercise price (cents/pence)
Expected volatility
Expected life
Risk-free rate
Expected dividend yield
2018
9.0/7.1
Nil
40.79%
3 years
2%
Nil
2017
13/9.6
3.2/2.3
42.46%
3 years
2%
Nil
67
STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS
Expected volatility was determined by calculating the historic volatility of the Group’s share price over the previous year. Volatility
over earlier years is not representative as operations had not commenced and has therefore not been used to calculated volatility. The
expected life used in the model has been adjusted, based on management’s best estimate.
Restricted Share Option Scheme
Outstanding at the beginning of the period
Granted during the period
Forfeited during the period
Exercised during the period
Expired during the period
Outstanding at the end of the period
Exercisable at the end of the period
Weighted average
Weighted average
Number of share
options
exercise price Number of share
options
(cents /pence)
exercise price
(cents /pence)
2018
2017
166,668
7,750,000
(100,000)
(66,668)
-
7,750,000
250,000
-
-
-
-
-
-
-
800,001
-
(358,333)
(275,000)
-
166,668
166,668
-
-
-
-
-
-
-
* All share options exercised during the year under the Restricted Shared Option Scheme were settled in cash. This change was treated as a
modification of a share based payment from equity settled to cash settled. The amount payable under this settlement amounted to $11k,
of which $3k had been recognized as a share based expense in prior years and therefore reduced from equity in the current year as a
repurchase of equity instrument. The balance of $8k was expensed.
The aggregate of the estimate of the fair value of the options granted is $708k (2017: N/A). The weighted average fair value of the
options granted is $0.09/£0.07 (2017: N/A).
The weighted average contractual life of outstanding options at the end of the year is 2.25 years (2017: Nil years).
The general terms of the share options, under the RSU scheme, vest over 3 years (quarterly vesting, 1/12th of options vest every
quarter) and are exercisable over three years from the date of grant if the employee remains within the company, at a nil exercise price.
Restricted Share Option Scheme – share options granted in the year:
Under the restricted share option scheme 7,750,000 were granted in 2018 (2017: Nil).
The market price of the ordinary shares at 31 December 2018 was $0.0.8/£0.06 (2017: $0.11/£0.08) and the range during the year
was $0.0.7/£0.05 to $0.14/£0.11.
Total warrants outstanding
As at 31 December 2018 the outstanding unexercised warrants in issue were:
Exercise Price
10p
13p
15p
No warrants were exercised in 2018 (2017: $Nil).
As at the 31 December 2017 the outstanding unexercised warrants in issue were:
Exercise Price
10p
13p
15p
68
Expiry Date
Number of warrants
06 May 2019
31 October 2019
18 March 2021
8,000,000
2,500,000
650,000
Expiry Date
Number of warrants
06 May 2019
31 October 2019
18 March 2021
8,000,000
2,500,000
650,000
Minds + Machines Group LimitedAnnual Report 2018notes to financial statementsfor the year ended 31 December 2018(continued)
30 Financial instruments
Capital risk management
The Group and Company manages its capital to ensure that entities in the Group will be able to continue as going concerns while
maximizing the return to stakeholders through the optimization of the debt and equity balance. On the 7 June 2018, the Group
drew down on a facility of $3million in order to support the Group’s operations, otherwise the Group and Company’s overall strategy
remains unchanged since 2017.
The capital structure of the Group and Company consists of cash and cash equivalents and equity attributable to equity holders of the
parent, comprising of issued capital, reserves, and retained earnings.
The Group and Company are not subject to any externally imposed capital requirements.
The Group and Company’s strategy is to ensure availability of capital and match the profile of the Group and Company’s expenditures.
To date the Group has relied upon equity and debt funding to finance operations. The Directors are confident that adequate cash
resources exist to finance operations to commercial exploitation, but controls over expenditure are carefully managed.
The Group and Company has a policy of not using derivative financial instruments for hedging purposes and therefore is exposed
to changes in market rates in respect of foreign exchange risk, However, it does review its currency exposures on an ad hoc basis.
Currency exposures relating to monetary assets held by foreign operations are included within the foreign exchange reserve in the
Group Balance Sheet.
Categories of financial instruments
Group
Financial Instruments
Cash and bank balances
Financial assets at amortized cost
Investments in equity instruments at FVTOCI
Financial liabilities
Financial liabilities at amortized cost
Company
Financial Instruments
Cash and bank balances
Financial assets at amortized cost
Investments in equity instruments at FVTOCI
Financial liabilities
Financial liabilities at amortized cost
2018
$ 000’s
10,367
7,890
57
2017
$ 000’s
15,868
11,353
500
6,783
3,330
2018
$ 000’s
5,397
11,476
57
2017
$ 000’
12,454
15,889
500
11,837
10,069
There are no material differences between the book values of financial instruments and their market values.
Financial risk management objectives
The Group and Company’s Finance function provides services to the business, co-ordinates access to domestic and international
financial markets, monitors and manages financial risks related to the operations of the Group and Company through internal risk
reports, which analyses exposures by degree and magnitude of risks.
It is, and has been throughout 2018 and 2017, the policy of both the Group and the Company that no trading derivatives
are contracted.
The main risks arising from the Group and the Company’s financial instruments are foreign currency risk, credit risk, liquidity
risk, interest rate risk and capital risk. Management reviews and agrees policies for mitigating each of these risks, which are
summarized below.
69
STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS
Market risk
The Group and Company’s activities expose it primarily to the financial risks of changes in foreign currency exchange rates and
interest rates. The risk is managed by the Group and Company by maintaining an appropriate mix of cash and cash equivalents in the
foreign currencies it operates in. The Group and Company’s management did not set up any financial instruments policy to manage its
exposure to interest rates and foreign currency risk.
Foreign currency risk
The Group and Company undertakes transactions denominated in foreign currencies; consequently, exposures to exchange rate
fluctuations arise. The Group and Company evaluates exchange rate fluctuations on a periodic basis to take advantage of favorable
rates when transferring funds between accounts denominated in different currencies.
The carrying amount of the Group and Company’s foreign currency denominated monetary assets and monetary liabilities at the
reporting date is as follows
Group
Sterling
USD
Euro
As at 31 December
Company
Sterling
USD
Euro
As at 31 December
2018
$ 000’s
2,031
4,710
42
6,783
2018
$ 000’s
-
10,176
1,661
11,837
Liabilities
2017
$ 000’s
2,956
23
351
3,330
Liabilities
2017
$ 000’s
-
8,309
1,760
10,069
2018
$ 000’s
1,335
16,045
934
18,314
2018
$ 000’s
3,822
11,723
1,385
16,930
Assets
2017
$ 000’s
1,836
23,892
1,993
27,721
Assets
2017
$ 000’s
2,908
25,932
3
28,843
70
Minds + Machines Group LimitedAnnual Report 2018notes to financial statementsfor the year ended 31 December 2018(continued)
Foreign currency sensitivity analysis
The following table details the Group and Company’s sensitivity to a 10% increase and decrease in the functional currency against the
relevant foreign currencies. 10% represents management’s assessment of the reasonably possible change in foreign exchange rates.
The sensitivity analysis includes only outstanding foreign currency denominated financial instruments and adjusts their translation
at the period end for a 10% change in foreign currency rates. The following table sets out the potential exposure, where a positive
number below indicates an increase in profit or loss and other equity where the US Dollar strengthens 10% against the relevant
currency. For a 10% weakening of the US Dollar against the relevant currency, there would be a comparable impact on the profit or
loss and other equity, and the balances below would be positive.
Group
Profit or loss (i)
Other equity (ii)
Company
Profit or loss (i)
Other equity
Pound Sterling impact
Euro impact
2018
$ 000’s
(337)
-
(337)
2017
$ 000’s
(479)
-
(479)
2018
$ 000’s
(98)
-
(98)
2017
$ 000’s
(234)
-
(234)
Pound Sterling impact
Euro impact
2018
$ 000’s
(382)
-
(382)
2017
$ 000’s
(291)
-
(291)
2018
$ 000’s
(305)
-
(305)
2017
$ 000’s
(176)
-
(176)
• The main attributable to the exposure outstanding on Pound Sterling and Euro is receivables and payables at the balance sheet date.
• There is no impact on other equity, as the Group does not hold derivative instruments designated as cash flow hedges and net
investments hedges.
In management’s opinion, the sensitivity analysis is unrepresentative of the inherent foreign exchange risk as the year end exposure
does not reflect the exposure during the year. Whilst the group operates across Europe and North America, operations are managed
in US dollar and these financial statements are presented in US Dollars.
Interest rate risk
The Group and Company’s exposure to interest rate risk is limited to cash and cash equivalents held in interest-bearing accounts and
borrowings at a fixed interest rate.
Interest rate sensitivity analysis
The impact of interest rate fluctuations is not material to the Group and Company accounts.
Credit risk management
Credit risk refers to the risk that a counterparty will default on its contractual obligations resulting in financial loss to the Group and
Company. The Group and the Company’s financial assets comprise of receivables, cash, and cash equivalents, and other long-term assets.
The credit risk on cash and cash equivalents is limited as the counterparties are banks with high credit-ratings as determined by
international credit-rating agencies.
The credit risk on other long-term assets is limited as the total amount represents two components: deposits for the right to secure
a revenue-generating asset and restricted cash. The deposits for the right to secure revenue-generating assets are maintained
by a government sponsored global organization that is contractually required to return a portion of these deposits if requested.
Furthermore, the agency, a not-for-profit organization, is well funded by its member organizations and is not a risk to cease operations.
The restricted cash is deposited with banks with a high-credit rating as determined by international credit-rating agencies.
71
STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS
The exposure of the Group and the Company to credit risk arises from default of its counterparty, with maximum exposure equal to
the carrying amount of receivables (excluding prepaid income), cash and cash equivalents, and other long term assets in the Group and
Company statements of financial position.
In the current year, the group applied IFRS 9 Financial Instruments, this standard introduces new requirements for (1) the
classification and measurement of financial assets and financial liabilities and (2) impairment for financial assets.
As at 1 January 2018, the directors of the Company reviewed and assessed the Group’s existing financial assets and amounts
due from customers for impairment using reasonable and supportable information that is available without undue cost or effort
in accordance with the requirements of IFRS 9 to determine the credit risk of the respective items at the date they were initially
recognized. See note 25 for further details on the Group and Company’s bad debt provision.
The Group and Company do not hold any collateral as security.
Liquidity risk management
Ultimate responsibility for liquidity risk management rests with the Board of Directors, which has established an appropriate liquidity
risk management framework for the management of the Group and Company’s short, medium, and long-term funding and liquidity
management requirements. The Group and Company manages liquidity risk by maintaining adequate reserves, banking facilities
and reserve borrowing facilities, by continuously monitoring forecast and actual cash flows, and by matching the maturity profiles of
financial assets and liabilities.
Cash forecasts are regularly produced to identify the liquidity requirement for the Group and Company. To date, the Group has relied
on the issuance of stock warrants and shares to finance its operations. The Group borrowed $3 million in 2018 (2017: $Nil).
The Group’s and Company’s remaining contractual maturity for its non-derivate financial liabilities with agreed repayment periods are:
31 December 2018
Non-interest bearing:
Trade and other payables
31 December 2017
Non-interest bearing:
Trade and other payables
Weighted average
Within 1 year
1 – 5 years
Within 1 year
effective interest rate
$ 000’s
$ 000’s
$ 000’s
Group
5,033
5,033
3,000
3,000
-
-
Group
Weighted average
Within 1 year
1 – 5 years
Within 1 year
effective interest rate
$ 000’s
$ 000’s
$ 000’s
Company
1 – 5 years
$ 000’s
-
-
Company
1 – 5 years
$ 000’s
802
802
2,496
2,496
357
357
-
-
Other Group and Company’s non-derivative financial liabilities mature within one year.
The Group and Company had no derivative financial instruments as at 31 December 2018 and at 31 December 2017.
72
Minds + Machines Group LimitedAnnual Report 2018notes to financial statementsfor the year ended 31 December 2018(continued)
31 Commitments
The group as a lessee
Lease payments recognized under operating leases recognized as an expense in the year
2018
$ 000’s
895
At the balance sheet date, the Group had outstanding commitments for future minimum lease payments under non-cancellable
operating leases, which fall due as follows:
Within one year
In the second to fifth years inclusive
2018
$ 000’s
1,041
1,328
2,369
2017
$ 000’s
649
2017
$ 000’s
542
1,665
2,207
Operating lease payments represent amounts payable by the group for its office properties and outsourcing registry operations.
Leases in relation to office properties are negotiated for an average period of three years with fixed rentals with leases having the
option to extend at a fixed rental. Leases in relation to outsourcing registry operations are negotiated for a period of three to five years
with fixed commitments.
As at 31 December 2018 and 31 December 2017, the Group has no capital commitments.
As at 31 December 2018 and 31 December 2017, the Company had no lease or capital commitments.
32 Related party transactions - Group
Balances and transactions between the company and its subsidiaries, which are related parties, have been eliminated on
consolidation. Transactions between the Group and its associates are disclosed below. Transactions between Group and its
subsidiaries are disclosed below.
Joint ventures
During the year, the Group entered into transactions with its Joint Ventures that resulted in amounts owed to or due from the Joint
Ventures. The balances at the year end were due to financial and equity requirements across the Joint Ventures. The balances have no
fixed repayment and no interest is received or charged on these balances.
Due to Entertainment Names Inc
Due to Dot Country LLC
2018
$ 000’s
45
(66)
2017
$ 000’s
45
(70)
Remuneration of Key Management Personnel
The remuneration of the Executive Directors, who are the key management personnel of the Group, is set out in the Directors’
remuneration report.
Related party transactions - Company
Transactions between the Company and its subsidiaries and subsidiaries are disclosed below.
Subsidiaries
During the year, the Company’s subsidiaries have provided certain services to the Company (RSP services) and recharged certain
costs to the Company. Details of these transactions are shown below
Recharged costs and services from
Minds and Machines LLC
Minds + Machines Limited (IE)
2018
$ 000’s
2,949
784
2017
$ 000’s
2,521
709
In addition, during the year, the Company has provided financing to its subsidiaries. The net balances due to the Company / (to its
subsidiaries) are detailed below. The balances have no fixed repayment terms and no interest is charged on these balances.
73
STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS
Company
Minds and Machines LLC
Bayern Connect GmbH
Minds and Machines GmbH
Minds + Machines Limited (IE)
Minds + Machines Registrar Limited (IE)
Minds and Machines Limited (UK)
Minds and Machines Registrar UK Limited
Emerald Names, Inc
Minds + Machines (FL)
Minds + Machines, Inc.
Minds + Machines Hungary
Dot Law, Inc.
Boston TLD Management LLC
Beijing MMX Tech Co. Ltd
ICM Registry, LLC
ICM Registry AD, LLC
ICM Registry PN, LLC
ICM Registry SX, LLC
2018
$ 000’s
(5,245)
443
630
(1,661)
-
2,155
9
86
(566)
5
311
(673)
1,557
209
8
6
6
6
2017
$ 000’s
(2,751)
1,146
747
(1,760)
5
197
-
95
(400)
5
300
(2,247)
1,519
176
-
-
-
-
The Company also sold second level domain names to its subsidiary, Dot Law, Inc (DLI). DLI owns and operates join.law, a reseller of
second level domain names. Any secondary domain names sold to DLI are to fulfil third-party orders from end users. Second level
domain names sales and trade receivable balances outstanding at the year end are:
Company
Dot Law, Inc.
Second level sale of domains
Trade receivable outstanding
2018
$ 000’s
785
2017
$ 000’s
1,250
2018
$ 000’s
-
2017
$ 000’s
1,868
Joint ventures
During the year, the Company entered into transactions with its Joint Ventures that resulted in amounts owed to or due from the
Joint Ventures. The balances at the year end were due to financial and equity requirements across the joint ventures. The balances
have no fixed repayment and no interest is received or charged on these balances.
Due from Entertainment Names Inc
Due to Dot Country LLC
2018
$ 000’s
50
(33)
2017
$ 000’s
49
(33)
Remuneration of Key Management Personnel
The remuneration of the Executive Directors, who are the key management personnel of the Group, is set out in Directors’
remuneration report along with the share options issued.
33 Post Balance Sheet Events
On the 4 January 2019 128,300,765 ordinary shares were issued as part of the consideration for the acquisition of ICM Registry, LLC,
see note 16 for further details.
74
Minds + Machines Group LimitedAnnual Report 2018notes to financial statementsfor the year ended 31 December 2018(continued)
corporate information
Registered number
1412814 registered in
British Virgin Islands
Directors
Toby Hall
Chief Executive Officer
Michael Salazar
Chief Finance Officer
Guy Elliott
Non Executive Chairman
Henry Turcan
Non Executive Director
Company Secretary
One Advisory
201 Temple Chambers
3-7 Temple Avenue
London EC4Y 0DT
United Kingdom
Registered Office
Craigmuir Chambers
Road Town, Tortola
British Virgin Islands VG 1110
Website
www.mmx.co/about/overview
Auditor
Mazars LLP
Tower Bridge House
St. Katharine’s Way
London E1W 1DD
United Kingdom
Solicitors
Hill Dickinson LLP
The Broadgate Tower
20 Primrose Street
London EC2A 2EW
United Kingdom
Nominated Advisor
and Broker
finnCap
60 New Broad Street
London
England
EC2M 1JJ
Registrars
Computershare Investor Services
(Channel Islands) Ltd
PO Box 83
Ordnance House, 31 Pier Road
St Helier JE4 8PW
Channel Islands
Principal Bankers
Silicon Valley Bank
15260 Ventura Blvd #1800
Sherman Oaks, CA 91403
United States of America
Bank of Ireland
40 Mespil Road
Dublin 4
Ireland
Designed and produced by Mediasterling:
www.mediasterling.com
Minds + Machines Group Limited
220 W Mercer St
Suite 250
Seattle, WA 98119
investors@mmx.co