More annual reports from Pilbara Minerals:
2020 ReportCompany Registration No. 03958483 7digital Group plc Consolidated Report and Financial Statements for the Year to 31 December 2018 7digital Group plc Contents Chief Executive Officer’s Review Chief Financial Officer’s Review Strategic Report Board of Directors Directors’ Report Corporate Governance Statement Directors’ Remuneration Report Independent Auditors’ Report - Group Consolidated Income statement Consolidated Statement of Financial Position Consolidated Cash Flow Statement Consolidated Statement of Changes in Equity Notes to the Financial Statements Parent Company Statement of Financial Position Parent Company Statement of changes in Equity Notes to Parent Company Financial Statements General Information and Advisors 1 4 7 10 12 17 20 23 30 31 32 33 35 69 70 71 80 7digital Group plc Strategic Report Chief Executive Officer’s Review Overview 7digital has gone through a number of changes since the start of 2018 in its pursuit of growth and improved cash flows. During the year a significant amount of cost was removed from the business and a series of new commercial contracts were signed. However, given a number of these contracts were with fledgling businesses, the Company is yet to see material new revenues come through from them as they build customers and users. Furthermore, in January of 2019, 7digital was hit hard by the loss of MediaMarktSaturn (“MMS”), a major customer. Despite receiving a termination payment, in April 2019, the Company announced that it would require material further equity and/or debt funding in the immediate near-term, without which it would be unable to continue as a going concern. Late in 2018, it was recognised that a new approach was necessary if the Company was to become a success and deliver for shareholders in the long term. There was a change in senior management, with Simon Cole, CEO, Pete Downton, Deputy CEO, and David Holmwood, the Company’s interim CFO, departing in March and April. The Chairman, Donald Cruickshank, departed in June. In April 2019, Julia Hubbard and I arrived and an urgent review of the business was carried out in order to identify and implement necessary changes and develop a much more focused business strategy which would fully capitalise on the capability of 7digital’s cloud-based streaming platform. In June 2019, we welcomed onboard a new majority shareholder in the form of a consortium led by Tamir Koch and David Lazarus, who will join the company’s board of directors shortly and who are committed to making further funds available for the business. A further fundraising is needed and planned for July 2019. Having completed the partial rescue of the business to fund it beyond April 2019, the company will be well positioned to execute the new strategy assuming the July fundraising succeeds as planned. While the business has suffered in the past from a lack of focus, there is consensus that the global streaming market, which is expected to be worth $11 billion by 2020, presents a huge opportunity. With a new strategy in place and 7digital’s excellent platform, the team is now setting a course to deliver on 7digital’s vision of becoming a leading global supplier of B2B music streaming solutions. Strategy The primary outcome from the strategic review undertaken was to recognise that the Company was, foremost, a technology DRAFT company rather than a media company. Accordingly, the Company’s focus should be on winning repeatable, long-term business through the provision of a standardised product that can be provided to a wide range of enterprises as a “Platform as a Service” (“PaaS”) with the appropriate operating structure to support this model. This compares to previous strategies in which the Company implemented bespoke solutions for a diverse range of customers often with divergent needs, leading to unprofitable business at higher risk. Our vision is to become the leading supplier of B2B music streaming solutions globally. While the Company will continue to sell into and build on the “music industry” customer base that the Company has historically been able to secure and service, we intend to focus on growing other B2B markets. Expansion into new markets will be targeted through a focus on identification of specific verticals that exhibit ideal customer characteristics for the deployment of the Company’s solutions. To this end, we have identified the following market verticals in which enterprises with these characteristics reside and have determined that demand is potentially high. These include: Mobile Telecommunications – specifically Mobile Virtual Network Operators (MVNOs); Retail Loyalty Program Providers; and Automotive Systems Providers. 7digital’s primary offering would be a “turn-key”, advanced feature, music streaming platform, which enterprises can brand as their own. The Company’s platform already provides an extensive music catalogue and can be offered to the enterprise’s consumer customers as part of a loyalty and churn reduction programme to increase customer retention. In addition, to the Company’s core strategy described above, incremental revenue and competitive advantage is expected be achieved from the second half of 2020 through agreeing an arms-length commercial agreement with eMusic.com, Inc., a leading source of discovery and sales for independent music and artists, a company of which Tamir Koch is President. Synergy is expected to be created with eMusic and its blockchain infrastructure which would allow DIY artists to upload content to 7digital’s platform directly. The Directors expect this to benefit 7digital by: enabling 7digital to distribute to all music digital subscription providers; and enabling 7digital to offer unique content when selling to new music service providers. 1 7digital Group plc Strategic Report Chief Executive Officer’s Review (continued) The Company’s sales strategy will be restructured to focus on the tightly defined market verticals where the Company’s core customers operate. The Company accordingly intends to both enhance its direct sales force with experienced sales personnel and to also scale up the Company’s reach to a much wider market by creating a global partner programme. Outlook On 7 June 2019, 7digital announced a number of important developments to raise additional finance to meet the immediate working capital requirements of the Group. In summary, it was announced that: a consortium, comprising Magic Investments S.A. (a tech investment holding company) (“Magic”) and Shmuel Koch Holdings Limited (“SKH”) had conditionally agreed to subscribe for, an aggregate of, 634,132,641 Subscription Shares at 0.2 pence per share (“Issue Price”), to raise £1.3 million (before expenses); Magic had agreed to capitalise the outstanding £585,932 principal and accrued interest of the Convertible Loan Notes at the Issue Price into 332,915,704 Exchange Shares; a number of changes to the Board were proposed, conditional upon the passing of the Resolutions at the General Meeting held on 25 June 2019 The Resolutions enabling the company to issue share capital in return for £1.3m (before expenses) and convert the Convertible Loan Notes into equity were passed at the shareholders meeting on 25 June 2019. The funds were subsequently received by the company on 26 June 2019 and the Loan Notes were converted on the same date. The proposals were necessary to finance the immediate working capital requirements of the company as announced on 9 April 2019 and on 13 May 2019. The Board, however, remains of the view that equity investment in addition to the Subscription and Debt to Equity Swap is required to meet the short-term working capital requirements of the company. It was intended that, on publication of this annual report for the year ended 31 December 2018, the Company would immediately seek to raise an additional £4.5 million by way of a placing and further subscription of new Ordinary Shares with new and existing shareholders at the Issue Price. The Consortium has indicated that, acting together with its business partners and associates, it may subscribe for up to £2.5 million of this amount, subject to review of the annual report, however no assurance can be given in this respect. DRAFT However, as announced in the ‘Result of General Meeting’ on 25 June 2019, Resolution 7, which was to approve the disapplication of statutory pre-emption rights in relation to the allotment of equity securities for cash up to an aggregate nominal amount of £300,000, was not passed. The failure by Shareholders to pass this Resolution has created greater execution risk for any subsequent equity raise (a "Follow-on Financing") by the Company since further shareholder approval would now be required in order to implement this. The Directors therefore intend to engage with the relevant Shareholders, where possible, with a view to securing their support for a Follow-on Financing. However, Magic and SKH, our new majority shareholders, have indicated that they will support the necessary resolutions. As set out in the Circular to shareholders dated 7 June 2019, the Company currently believes that it still needs to raise Additional Funds of at least £4.5 million by 31 July 2019, failing which it is highly likely that the Company would need to be placed into administration. It is further noted that should the implementation of the Company’s new strategy take longer than currently expected, growth in revenue is slower or the Company is unable to reduce certain costs as anticipated then it is highly likely that the Company will be required to raise additional finance during 2020. The Company remains committed to executing the new strategy and firmly believe that 7digital has an excellent platform which, along with a strengthened team and new financing and partnerships, will enable the delivery of 7digital’s vision. On behalf of the Board, I would like to thank all of the team here at 7digital for their continued dedication. The Company will update Shareholders and the market in due course on progress. Board Changes Whilst there were no Board changes during 2018, there have been a series of changes and proposed changes since the period end as the business looked to quickly bring about necessary change. In March 2019, Pete Downton stepped down from the Board having served as COO and Deputy CEO. This was then followed by the resignation of Simon Cole as CEO. In April 2019 John Aalbers joined as CEO, bringing with him an extensive track record as a specialist in building early- and mid-stage technology companies. Julia Hubbard also joined in April 2019 as Chief Financial Officer having previously worked for a number of publicly listed companies, including AIM listed Amino Technologies plc where she partnered the CEO in a successful turnaround. Sir Donald Cruickshank stepped down as Chairman and Eric Cohen stepped down as a Non-Executive Director with effect from the completion of the subscription and debt to equity swap on 26 June 2019. 2 7digital Group plc Strategic Report Chief Executive Officer’s Review Tamir Koch will join the Board as Non-Executive Chairman and David Lazarus will join the Board as a Non-Executive Director following the publication of these annual accounts for the year ended 31 December 2018. Accordingly, until such time, Mark Foster agreed to act as interim Chairman of the Company. (continued) Following these changes, the Board will consist of six directors, with two executive directors and four non-executive directors of whom two are independent. It is anticipated that a further independent non-executive director may be appointed in due course. Anne De Kerckhove Dit Van Der Varent has agreed to remain on the Board until such time that a further independent non- executive director is appointed. Further details of the Proposed Directors are as follows: Tamir Koch, aged 47 - Proposed Non-Executive Chairman. Tamir Koch is President of eMusic.com, Inc., an online music and audiobook store and brand which started trading in 1998 and focused on discovery and sales of independent music and artists. Most recently Tamir has led the eMusic Blockchain Project, seeking to provide a decentralised approach to music distribution and rights management to facilitate the utilisation of blockchain within the music industry. Tamir has previously founded several successful start-ups including Orca Interactive and Dotomi. Orca was sold to Emblaze Systems in 2000, which then floated Orca on AIM. It was subsequently acquired by France Telecom in 2008. Dotomi was acquired by ValueClick in 2011. David Lazarus, aged 55 - Proposed Non-Executive Director. David is an industrialist and international entrepreneur. David spent six years at Lloyds of London as an accredited Lloyds Broker attending to Insurance and Re‐Insurance. David is currently an Executive Director of the RAM Hand‐to‐Hand Couriers Group, a leader in the Courier, Logistics and Express Parcel Industry in Southern Africa. The RAM Group operates from approximately 40 hubs, with approximately 1,700 vehicles and over 2,800 staff across Southern Africa. David is also a member of the Young Presidents Organisation. David has been involved in several international businesses, including having knowledge of the various investments of Magic. John Aalbers Chief Executive 28 June 2019 DRAFT 3 7digital Group plc Strategic Report Chief Financial Officer’s Review Introduction As noted in the Chief Executive’s Review, the Company raised £1.3m (net of the repayment of loan notes) on 26 June 2019 through a share issue however the Board believes that it still needs to raise Additional Funds of at least £4.5 million by 31 July 2019, failing which it is highly likely that the Company would need to be placed into administration. An initial review of the Finance function has revealed that a number of processes are unwieldy and can be made more effective, controls need to be further enhanced and KPIs and better Management Information designed and implemented quickly. Whilst some improvements were made during the period, significant enhancements are still required to the current accounting system which has been implemented poorly and thus exacerbated those control issues. On 4 January 2019, the Company announced that its largest customer, MediaMarktSaturn (“MMS”), had indicated that it may wish to change the current arrangements and this could involve 7digital taking more responsibility for certain aspects of the service or the service being closed with a resulting termination payment becoming due and payable to the Company. On 1 March 2019, 7digital announced that it had accepted settlement of, and release from, all outstanding contracts and commitments relating to the Juke music service for an immediate payment by Juke of €4,000,000. Further, Juke agreed to write off all interest payments and £250,000 of the principal amount of the convertible loan note issued to Juke (as announced on 26 October 2018). 7digital paid the balance of the convertible loan note principal amount, £500,000, from the proceeds of the Agreement. Further, on 2 May 2019, the Company announced the sale of bespoke technology from the Danish business and transfer of staff to TDC group, the largest telecommunications company in Denmark. The sale transferred control of bespoke technology, and the resources to maintain it, to TDC. Following the loss of the MMS contracts, this technology was used by only one customer and had become unprofitable for the Company to maintain. The annualised losses eliminated from the business totalled around £1.6m and the net value of the assets sold was approximately £0.9m as at December 2018. This sale meant that 7digital would focus its resources on its productised, cloud-hosted technology. The consideration was €1.375m in cash, of which €1.0m was paid to 7digital at completion. The remainder of the cash consideration was retained by TDC to cover certain potential liabilities and will be released by TDC to the Company by no later DRAFT than 31 January 2020 to the extent that it is not required to meet such liabilities and is subject to customary post-closing adjustments. The cash was used for general working capital. The loss of MMS, its associated companies and TDC, being marginally in excess of 50% of the 2018 sales, is a fundamental loss to the Company. The transfer of the Danish platform and staff to TDC will eliminate around £1.6m of annualised losses from the business. During 2018, the Group restructured its operations and the French operation and platform was closed. In addition, a number of redundancies were made in the UK, Denmark and the US. The resulting cost savings, which led to a reduction in headcount of c35% will benefit 2019. On 26 June 2019, a consortium, comprising Magic Investments S.A. (a tech investment holding company) (“Magic”) and Shmuel Koch Holdings Limited (“SKH”) subscribed for, an aggregate of, 634,132,641 shares at 0.2 pence per share, to raise £1.3 million (before expenses). On the same date, Magic agreed to capitalise the outstanding £585,932 principal and accrued interest of the Convertible Loan Notes at the Exchange Price of 0.2p into 332,915,704 shares. A number of changes to the Board were proposed, conditional upon the passing of the Resolutions at the General Meeting held on 25 June 2019. The proposals were necessary to finance the immediate working capital requirements of the Company as announced on 9 April 2019 and on 13 May 2019. The Board, however, remains of the view that equity investment in addition to the Subscription and Debt to Equity Swap is required to meet the short-term working capital requirements of the Company. The significant events during the year and since year end have had a dramatic effect on the results of the business. Other adjusting costs of £7.3m resulted largely from impairment of intangible assets relating to the French and Danish businesses following the closure of the French office, loss of MMS and subsequent sale of the Danish technology platform and the quality of the remaining licensing business which has led to full impairment of the UK technology platform. Results The Group Revenue grew by 19% in 2018 to £19.9m (2017 restated: £16.7m) and Gross profit increased by 24% to £14.7m. Our overall gross margin also increased to 74% from 71%. 4 7digital Group plc Strategic Report Chief Financial Officer’s Review (continued) The statutory operating loss for 2018 was £12.1m (2017 restated: £5.2m). The adjusted EBITDA loss for 2018 was £2.5m (2017 restated: £1.8m) and this is reconciled to the operating loss in note 6. The increase in 2018 statutory operating loss is largely due to other adjusting items of £7.3m as noted above. The Loss per share was 2.97 pence (2017 restated: 2.85 pence). Revenue and Gross Margin Shown in the table below: our high-margin business-to-business (“b2b”) Licensing revenues have increased by 13% to £13.4m compared to 2017 (£11.6m). Around two thirds of this business was derived from the two major customers which were lost in 2019. Whilst Content revenue has grown by 27% (2018: £3.9m; 2017: £3.1m), £1.7m of this revenue relates to customers from the Danish platform which will not be repeated in 2019. Revenue Licensing revenue Content Creative Total Revenues Gross Margin 2018 £’000 2017 £’000 13,410 3,933 2,569 19,912 74.0% DRAFT 11,616 3,099 2,018 16,733 70.8% Change 1,794 834 551 3,179 3.2% % 13% 27% 27% 19% Gross Margin has increased by 3.2 percentage points to 74.0% largely due to the increase in licensing revenues at higher margins. Expenditure Administrative expenses 2018 £’000 2017 £’000 Underlying Administrative Expenses Other Adjusted Administrative Expenses Total Administrative expenses 19,918 7,305 27,223 16,808 707 17,515 Change 3,110 6,598 9,708 % 18.5% 55.4% Underlying administration expenses increased by 18.5% (2018: £19.9m; 2017 restated: £16.8m) largely due to the full year effect for the Danish subsidiary which was acquired in June 2017 together with increased professional fees during 2018 resulting from the restatement of the 2017 accounts. Other adjusting items Other adjusting items for the year total £7.3m and largely comprise intangible and goodwill impairment of £2.2m resulting from the closure of the French and Danish businesses, £2.7m impairment of development costs incurred on the Danish platform which was sold to TDC in May 2019, £2.1m in respect of capitalised bespoke and other applications that were subsequently impaired. Dividend During the year, 7digital did not pay an interim or final 2018 dividend (2017: no interim or final 2016 dividend). The Board of directors is not proposing a final dividend in the current year. 5 7digital Group plc Strategic Report Chief Financial Officer’s Review (continued) Shareholder Loans On 26 October 2018 the Company signed agreements with 3 shareholders to provide an aggregate facility of £1.5 million ("Facility"). The Facility is on standard market terms and is optionally convertible into ordinary shares or redeemable at certain specified times prior to maturity in December 2019. The price at which the principal and interest under the Facility may be converted into new ordinary shares is calculated by reference to the volume weighted average price of the existing ordinary shares. The maximum number of new ordinary shares which may be issued pursuant to the Facility was 58,157,529 ordinary shares. Interest was payable on these Loan Notes at 10.438% per annum. On 8 February 2019, the Company received notice of conversion from one holder in respect of £193,858 (including interest) of the Facility at a conversion price of 1p pursuant to which 19,385,843 ordinary shares were issued. Following conversion an aggregate of £1,311,691 of the facility remained outstanding. On 1 March 2019, the Company received €4m from MMS under the MMS Settlement Agreement noted above. Of this cash settlement, £0.5m was used to fulfil MMS’s share of the Facility, being £0.75m, in full. Thus £0.25m of the Facility was waived by MMS. Following settlement of MMS’s share of the Facility an aggregate of £561,691 of the facility remained outstanding. On 11 April 2019 the Company received a notice from the holder in respect of a tranche of the Facility, due to non-payment of interest. The Notice related to outstanding Facility and interest amounting to £325,570. Following receipt of the Notice, the outstanding amount became due and payable by 3 May 2019. The remaining tranche under the Facility of £0.25m plus accrued interest remained outstanding to another loan note holder. On 13 May 2019 the remaining Facility was sold to Magic Investments S.A. (a technology investment holding company) ("Magic"). Magic entered into a standstill agreement with the Company pursuant to which it agreed not to seek early redemption or conversion of the Facility before 30 June 2019 except in certain limited circumstances (including a major equity issuance or the insolvency of the Company). DRAFT On 7 June 2019 Magic agreed to capitalise the outstanding £585,932 principal and accrued interest of the Facility held by it into 332,915,704 new Ordinary Shares (at a 12 per cent. discount to the Issue Price). This transaction was approved by shareholders in a General Meeting on 25th June 2019 and the shares were issued on 26 June 2019. Cash and cash flow At 31 December 2018, the Group had a cash balance of £0.5m (2017: £7.0m). Cash outflows in 2018 totalled £6.4m (2017: inflows £6.1m). This was largely driven from an operating cash outflow of £6.9m which was partially offset by the receipt of £1.5m cash inflow from the issuance of the Loan Facility, net of £1m cash outflow largely on platform development. In 2017 the operating cash outflow of £0.2m from operating activities was increased by an investing cash outflow of £4.3m which related mainly to assets acquired through the Denmark acquisition and offset by the issuance of share capital which resulted in a £10.6m inflow. Julia Hubbard CFO 28 June 2019 6 7digital Group plc Governance Strategic Report Strategy and Business model 7digital is a global “b2b” digital music technology company. The core of our business is the provision of robust and scalable technical infrastructure combined with extensive global music rights used to create music streaming and radio services for a diverse range of customers – including consumer brands, mobile carriers, broadcasters, automotive systems, record labels and retailers. We also offer radio production and music curation services. Our strategy is to grow revenues, profitability and shareholder returns through: • Offering productised, end to end music solutions • • • • • Increasing the number of clients we serve in targeted, well-funded market verticals Improving the financial quality of our business by driving recurring SaaS and PaaS revenues Expanding and leveraging our geographic coverage Continued investment in market leading technology to meet shifting technology trends and client needs Applying strict control of our cost base to ensure that revenue growth is quickly reflected in improved overall Group profitability Establishing and maintaining a partner channel program for scaling sales into the identified target market verticals • 7digital’s core platform provides its customers with access to cloud-based software. 7digital operates business–to–business technology and music services (Licensing revenue), business–to–consumer music services under the 7digital brand (Content revenue), and content production under the 7digital Creative brand. Licensing 7digital’s core business is to provide an API for third parties that wish to create digital music services, either standalone or bundled within their own device or product offering. 7digital’s platform simplifies access to music by offering a combination of a licensed music catalogue alongside the cloud-based technology platform and client-side software, being software hosted by 7digital’s clients. These are needed to create on-demand music streaming and download services, radio style services and other services. The 7digital platform is open, with open-source code to reduce complexity and time to market for its potential customers and can be used for building products on any type of connected device. DRAFT Going forward, the company’s revised strategy will see it aggressively target Enterprise customers with large, existing consumer bases of their own. 7digital’s primary offering to these customers would be a “turn-key”, advanced feature, music streaming platform, which enterprises can brand as their own. The Company’s platform already provides an extensive music catalogue and can be offered to the enterprise’s consumer customers as part of a loyalty and churn reduction programme to increase customer retention. Typically, customers pay a set-up fee and monthly licence fees for using the 7digital platform and 7digital will also take a revenue share of any music-based revenue generated by the service, including transaction or subscription revenues. In addition to providing an open API based platform from which third parties can build their own services 7digital has obtained music licences in many countries in regions including North America, Latin America, Europe, Asia-Pacific and Africa. These licences are obtained from hundreds of individual record labels, music publishers and music collecting societies. Music licences vary from country to country and by usage type. Content 7digital.com is a licensed digital music store available in almost 20 countries. The 7digital.com music download store offers a catalogue of high-quality digital music from the major labels and independent aggregators in Europe, North America and parts of Asia-Pacific. Users have the option to download their purchases as zip files or by using the 7digital download manager to input directly into their media player of choice. 7digital has apps for different devices as well as an HTML5, mobile optimised web store. Creative 7digital produces approximately 1,200 hours of video and audio content every year. The content companies benefit from regular commissions from BBC’s national radio networks as well as one-off commissions from other broadcasters, such as Sky Television. Key programmes include ‘Sounds of the Sixties’ and ‘Pick of the Pops’ on Radio 2, ‘Radcliffe and Maconie Show’ on Radio 6 and ‘Folk Show’ on Radio 2. Our Entertainment News content is distributed to around 150 commercial radio stations. 7 7digital Group plc Governance Strategic Report (continued) Principal risks and uncertainties The significant funding required by the Group which is discussed in The Chief Executive’s Report on page 2 above is required for the business to continue as a going concern. There is a risk that this funding may not be secured. The Group was loss making for the year. There is a risk that management will be unable to secure new contracts, that the anticipated demand for the Group’s services will not materialise or that major customers may terminate their contracts. However, with the execution of the revised strategy, the directors believe that the Group is well placed to grow the business, even with a focus on reducing costs, in order to reach profitability in the medium term. Our marketplace The market in which the Group operates continues to be fragmented and competitive. These are in the shape of failed Direct to Consumer (“d2c”) streaming services offering their technology as a co-branded offer. However, that technology is currently limited to supporting a £9.99 All-You-Can-Eat subscription service; we are not seeing huge demand in this space and neither do we believe it is where we will see growth in the streaming market. The Group is a “b2b” provider of services to customers that may be in competition with companies that are seen as industry leaders. It is possible that developments by either the direct competition, or the competitors to customers, will render the Group’s current and proposed products and services obsolete. However, 7digital’s position in the market and much strengthened relationship with the major record companies mean we have huge support to help evolve and grow the market away from the technology giants. The Company’s product roadmap is regularly evaluated against the developing marketplace to ensure that we remain competitive. The market in which the Group operates has seen a number of significant changes, such as the shift from physical sales, through to downloads, and then onto streaming. The Group’s competitors, or the competitors of the Group’s customers, may announce or develop new products, services or enhancements that better meet the needs of customers or the end consumers. Further, new competitors, or alliances among competitors, could emerge. Increased competition may cause price reductions, reduced DRAFT gross margins and loss of market share, any of which could have a material adverse effect on the Group’s business, financial condition and results of operations. The directors believe that the overall market for the Group’s products and services will continue to grow and that the company’s success will be driven by how well it can execute in the market. The Company subscribes to the leading music market research service MIDiA and holds regular meetings with their leading analyst to monitor trends in the marketplace and therefore anticipate developments. There can, however, be no assurance that growth in the market for its products and services will occur at the rate envisaged by the Group. Customer mix The Group relies on a number of key customers. The business plan produced by management assumes new and continuing revenue strands by key customers. If existing contracts were to be terminated or new revenue strands failed to materialise, this could affect the projected growth of the Group. Our Client services team is in regular contact with all the Company’s clients in order to deal promptly with any issues that arise. 7digital’s production businesses are dependent on the BBC as a key client and as such are vulnerable to the retendering process and BBC budget cuts. However, in the last twelve months, after lobbying from 7digital and others, the BBC has, in fact, announced an increased commitment to Independent Production. Failure by the BBC, as well as other key clients, to fulfil or renew existing contracts, sign up to new revenue streams, or become insolvent themselves, could have a material adverse effect on the financial condition of the Group. Suppliers The Group has a number of key suppliers of music content. The Group believe that these content rights that it has built up over a number of years are key to the success of the business and are also a significant barrier to entry to new competition within the market. There is no certainty that the rights holders will not limit or change the way or the price at which the Group is able to use the music content. Brexit The UK’s exit from the European Union creates uncertainty in some areas of the business. 7digital recently ceased operations in two Continental European locations, leaving only one staff member in the region. However, the business holds significant 8 7digital Group plc Governance Strategic Report licences with international companies. The likely effects and the Group’s mitigating actions are being closely monitored by management as the terms of Brexit are defined. (continued) Staff The Group depends on qualified and experienced employees, especially in relation to development staff, to enable it to generate and retain business. Should the Group be unable to attract new employees or retain existing employees this could have a material adverse effect on its ability to grow or maintain its business. Approved by the Board of Directors and signed on behalf of the Board, John Aalbars Director 69 Wilson Street London EC2A 2BB 28 June 2019 DRAFT 9 7digital Group plc Governance Board of Directors EXECUTIVE DIRECTORS: John Aalbers, Chief Executive Officer (appointed April 2019) John Aalbers was appointed to the role of Chief Executive Officer on 1 April 2019. John has an extensive track record, specialising in building early- and mid-stage technology companies. His most recent role was as CEO of Arts Alliance Media where he established the company as the undisputed leader in operational support software for the cinema industry, before managing the successful sale to Luxin Rio of China. Prior to that, John was in the Telecommunications sector where he held roles including CEO of Volubill and numerous senior positions with CGI and Intec Telecom Systems (now CSG International). Julia Hubbard, Chief Financial Officer (appointed April 2019) Julia joined 7digital in April 2019. She is an accomplished CFO with experience in building high-growth companies and managing strategic turnarounds. Julia has valuable expertise in business direction, financial strategy, debt and equity fundraising, investor and stakeholder relationship management, and M&A management. Julia has held senior positions throughout the TMT, travel, construction, engineering and publishing sectors, including roles at AIM-listed Amino Technologies, Lastminute.com Group, CSC Media and TV Travel Group, among others. Simon Cole, Chief Executive Officer (resigned April 2019) Simon co-founded The Unique Broadcasting Company Limited in 1989 in partnership with Tim Blackmore, having pioneered the market for national sponsored programmes whilst at Piccadilly Radio, where he was Head of Programmes. Unique floated on the London Stock Exchange as part of UBC Media Group plc with Simon as Chief Executive and in 2014, UBC merged with 7digital via a reverse takeover. Simon has been awarded a fellowship of the Radio Academy and is also a Non-executive Director at Melody VR which is a part of EVR Holdings plc. Matthew Honey, Chief Financial Officer (resigned Aug 2018) Matt, a chartered accountant, originally worked with Simon Cole at The Unique Broadcasting Company where he was the Financial Director from 1992 to 2000 and Managing Director of the technology and digital radio side of the business from 2000 to 2008. Matt was then involved with a number of other businesses across a broad range of industries from post production TV editing to international aid development consulting before re-joining 7digital in June 2016. Matt has now resigned and left the company during the year. DRAFT Pete Downton, Deputy Chief Executive Officer (resigned May 2019) Pete joined 7digital in June 2014, assuming overall responsibility for its commercial strategy. He brings over 20 years of operational and strategic experience within the heart of the nascent digital music and consumer technology businesses to the role. Prior to 7digital, Pete held key leadership roles at Imagination Technologies, including responsibility for content and consumer experiences across both the Imagination Technologies and PURE businesses. Before joining Imagination, Pete spent over a decade working for Warner Music Group, holding senior management positions in the company's International Marketing and Business Development teams. Pete has now resigned and left the company post year end. INDEPENDENT NON-EXECUTIVE DIRECTORS: Sir Donald Cruickshank, Chair (resigned 26 June 2019) Don has served as a director of Qualcomm Incorporated from June 2005 to June 2016. Don’s career has included assignments at McKinsey & Co. Inc., Times Newspapers, Virgin Group plc, Wandsworth Health Authority and the National Health Service in Scotland. He served as Director General of Oftel from 1993 to 1998. He has been chair of the following: Action 2000 (1997- 2000), SMG plc (1999-2004), The London Stock Exchange (2000-2003), Clinovia Group Limited (2004-2007), Formscape Group Limited (2003- 2006). Don was a member of the Financial Reporting Council (2001-2007). He holds an MA degree in Law and an honorary LLD degree from the University of Aberdeen and an MBA degree from Manchester Business School. Eric Cohen (resigned 26 June 2019) Eric is currently Chief Development Officer at InterDigital, Inc. Previously, he served as Senior Vice President, Corporate Development at Dolby Laboratories, Inc., where he oversaw corporate development, mergers and acquisitions activities, and corporate strategy. Prior to that, Eric was formerly a Managing Director and senior member of the technology investment banking team at Cowen and Company. Eric, held the position of Managing Director at J.P.Morgan and also worked for 11 years at Credit Suisse First Boston. Eric holds a BS degree from Brown University and an MBA degree from Stanford University. 10 7digital Group plc Governance Board of Directors (continued) Mark Foster Mark has spent much of his career in the music industry, in a succession of Marketing and International roles for all three major labels, including time in Paris as Marketing Director for Warner Music France. Returning to London as Vice President of European Marketing, Foster oversaw pan-regional marketing strategy before founding Warner Music International’s New Media Division. After leaving Warner, he launched and ran Deezer in the UK and Ireland, then was appointed CEO for Arts Alliance, a leading global player in Event Cinema. Since 2015, he has developed a portfolio of NED and chair roles for a range of businesses, including highly-respected entertainment analysts MIDiA Research, and has led the digital transformation strategy for Moat Homes, a major Housing Association. In addition, he acts as advisor and brand ambassador for a number of start-ups and scale- ups in the digital entertainment and creative industries. Anne de Kerckhove Anne has over 15 years' experience in leading some of the fastest growing technology, media and entertainment companies in Europe. Anne is currently the CEO of Freespee, the conversation platform company. Previously, Anne was CEO of Iron Group and Iron Capital an investment fund and payment enabler in the subscription economy. Before that Anne was the Managing Director EMEA for Videology, one of world’s largest ad technology platforms where she drove expansion in over 16 countries in just under 3 years. Prior to joining Videology she was Global Director of Reed Elsevier, responsible for the B2B Entertainment Division, which included leading events such as MIPCOM. From 2003 to 2009, Anne was COO and International Managing Director at Inspired Gaming Group, overseeing the company from its launch to IPO and expansion into 12 countries. Anne has a Bachelor of Commerce from McGill University and an MBA from INSEAD. Anne is an angel investor in over 20 companies, including Andela and metail. Anne also sits on the board of 888.com. Anne De Kerckhove has agreed to remain on the Board until such time that a further independent non-executive director is appointed. NON-EXECUTIVE DIRECTOR: Paul McGowan (resigned 28 Spetember 2018) Having qualified as a Chartered Accountant in Northern Ireland, Paul took up the post of Finance and Operations Director at DRAFT Jacqmar plc in London before moving on to Leslie Fay (UK). Paul managed all aspects of finance, administration, supply chain, and retail operations in fashion businesses before becoming Chief Executive at Leslie Fay. He set up Hilco Capital in 2000 in a joint venture with Hilco Trading. 11 7digital Group plc Governance Directors’ Report The Board of Directors present their annual report and the audited financial statements for the year ended 31 December 2018. The Corporate Governance Statement on pages 17 to 19 forms part of this report. Business review and future developments The Chief Executive’s Review is contained on pages 1 to 3, the Chief Financial Officer’s Review is contained on pages 4 to 6 and Governance Report on pages 7 to 9; these reviews and reports, together with the information contained within the Directors’ Report constitute the Business Review. The Business Review has been prepared solely to provide additional information to shareholders to assess the Group’s strategies and the potential for these strategies to succeed. The Business Review 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. Results and dividends The Group’s financial results for the year are shown in the Consolidated Income Statement on page 30. As in the previous year, the Board of Directors is not proposing a final dividend for the year ended 31 December 2018. Directors’ indemnities The company has made qualifying third-party indemnity provisions for the benefit of its directors that were made during the year and remain in force at the date of this report. Directors’ and officers’ indemnity insurance with an annual limit of £2 million is maintained. Substantial shareholders At 26 June 2019, notification of beneficial interests in 3% or more of the Company’s issued share capital are as follows: Number of Shares % of issued share capital % of voting rights Magic Investments S.A. Limited Shmuel Koch Holdings 24/7 Entertainment GmbH Amcomri Limited Partnership DRAFT 542,836,219 424,212,126 48,238,955 43,612,321 39.1% 30.6% 3.5% 3.2% 39.1% 30.6% 3.5% 3.2% Capital structure The Group is primarily funded through readily available cash, working capital management and derivative liabilities. Details of the authorised and issued share capital, together with details of the movements in the Company’s issued share capital during the year, are shown in note 20. Last year, the Company carried out a Capital subdivision of shares. This created two classes of share; Ordinary 1p shares that carry full voting rights; and 9p Deferred shares that carry limited voting rights. The 1p Ordinary shares carry no right to fixed income. Each Ordinary 1p share carries the right to one vote at general meetings of the Company. Details of the share capital can be found in note 20. There are no specific restrictions on the size of a holding or 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 agreements 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 25. No person has any special right of control over the Company’s share capital and all issued shares are fully paid. With regards to the appointment and replacement of directors, the Company is governed by its Articles of Association, the Companies Act 2006 and related legislation. The Articles themselves may be amended by special resolution of the shareholders. The powers of directors are described in the Main Board Terms of Reference, copies of which are available on request and the Corporate Governance Statement on pages 17 to 19. Please refer to the post balance sheet note 26 on page 65. 12 7digital Group plc Governance Directors’ Report (continued) Financial risk management Consideration of principal risks and uncertainties are included on pages 7 to 9 of the Strategic Report including the management of financial risks. These are also outlined further in note 27. Re-election of directors The directors who retire by rotation in accordance with the Articles of Association will offer themselves for re-election at the Company’s Annual General Meeting (“AGM”). The Board has considered the requirements of the QCA Corporate Governance Code in respect of these matters and believes that these members continue to be effective and to demonstrate their commitment to their role, the Board and the Group. Brief particulars of all directors can be found on pages 10 to 11. Acquisition of the Company’s own shares The company did not purchase any shares into Treasury during the year. At the end of the period, the company had no shares in Treasury (2017: nil). During the year, nil (2017: 28,336) treasury shares were issued to employees to settle the exercising of share options. Going concern Summary On 7 June 2019, 7digital announced a number of important developments to raise additional finance to meet the immediate working capital requirements of the Group. In summary, it was announced that: a consortium, comprising Magic Investments S.A. (a tech investment holding company) (“Magic”) and Shmuel Koch Holdings Limited (“SKH”) had conditionally agreed to subscribe for, an aggregate of, 634,132,641 Subscription Shares at 0.2 pence per share (“Issue Price”), to raise £1.3 million (before expenses); Magic had agreed to capitalise the outstanding £585,932 principal and accrued interest of the Convertible Loan Notes at the Exchange Price into 332,915,704 Exchange Shares; a number of changes to the Board were proposed, conditional upon the passing of the Resolutions at the General Meeting held on 25 June 2019 DRAFT The Issue Price represents a discount of 11 per cent to the closing middle market price of an Ordinary Share on 6 June 2019 (being the last dealing date prior to the publication of the announcement). The Resolutions enabling the company to issue share capital in return for £1.3m (before expenses) and convert the Convertible Loan Notes into equity were passed at the shareholders meeting on 25 June 2019. The funds were subsequently received by the company on 26 June 2019 and the Loan Notes were converted on the same date. The proposals were necessary to finance the immediate working capital requirements of the Group as announced on 9 April 2019 and on 13 May 2019. The Board, however, remains of the view that equity investment in addition to the Subscription and Debt to Equity Swap is required to meet the short-term working capital requirements of the Group. It was intended that, on publication of this annual report for the year ended 31 December 2018, the Company would immediately seek to raise an additional £4.5 million by way of a placing and further subscription of new Ordinary Shares with new and existing shareholders at the Issue Price. The Consortium has indicated that, acting together with its business partners and associates, it may subscribe for up to £2.5 million of this amount, subject to review of the annual report, however no assurance can be given in this respect. However, as announced in the ‘Result of General Meeting’ on 25 June 2019, Resolution 7, which was to approve the disapplication of statutory pre-emption rights in relation to the allotment of equity securities for cash up to an aggregate nominal amount of £300,000, was not passed. The failure by Shareholders to pass this Resolution has created greater execution risk for any subsequent equity raise (a "Follow-on Financing") by the Company since further shareholder approval would be required in order to implement this. The Directors therefore intend to engage with the relevant Shareholders, where possible, with a view to securing their support for a Follow-on Financing. However, Magic and SKH, our new majority shareholders, have indicated that they will support the necessary resolutions. As set out in the Circular to shareholders dated 7 June 2019, the Company currently believes that it still needs to raise Additional Funds of at least £4.5 million by 31 July 2019, failing which it is highly likely that the Company would need to be placed into administration. It is further noted that should the implementation of the Company’s new strategy take longer than currently expected, growth in revenue is slower or the Company is unable to reduce certain costs as anticipated then it is highly likely that the Company will be required to raise additional finance during 2020. Hence, there is a material uncertainty as to the Group’s ability to continue as a going concern. 13 7digital Group plc Governance Directors’ Report (continued) Background to the Proposals Following the appointment of John Aalbers, Chief Executive Officer, and Julia Hubbard, Chief Financial Officer, the Company announced on 9 April 2019 that under Julia Hubbard’s supervision, the Company had started work on the preparation of the accounts for the financial year ended 31 December 2018 and reviewing budgets for the current year in conjunction with John Aalbers’ review of the Company strategy. The announcement noted that the review was taking a more circumspect view of the sales pipeline and that, whilst the work was not yet concluded and no final conclusions had been reached as to quantum, the Board’s view at the time of the announcement was that the Group would require material further equity and/or debt funding in the next quarter without which the Company would be unable to continue as a going concern. Furthermore, on 11 April 2019, the Company announced that it had received a notice of redemption from a holder in respect of a tranche of the Convertible Loan Notes previously issued to certain investors, due to non-payment of interest. The Convertible Loan Notes provide for a maturity date of 31 December 2019. The notice related to outstanding Convertible Loan Notes and interest amounting to £325,570. Following initial discussions between the Consortium and the Company regarding a possible investment in the Company, on 13 May 2019, Magic agreed to purchase all of the outstanding Convertible Loan Notes and entered into the Standstill Agreement with the Company pursuant to which Magic agreed not to seek early redemption or conversion of the notes before 30 June 2019, except in certain limited circumstances (including a major equity issuance or the insolvency of the Company). As part of this arrangement, the redemption notice served by one of the loan noteholders was revoked. Working capital Assuming the Proposals complete and the Additional Funds are secure, the Company’s business plan and working capital requirement make certain assumptions as to the: • • • time to implement the Company’s new strategy set out below; growth in revenue from the new standardised product; and DRAFT timing of and ability to reduce certain costs. If the implementation of the Company’s new strategy takes longer than currently expected, growth in revenue is slower or the Company is unable to reduce certain costs as anticipated then it is highly likely that the Company will be required to raise additional finance during 2020. This additional finance is not secured and therefore there is a material uncertainty with regards to the future going concern of the company. Employee involvement The Group places considerable value on the involvement of its employees and encourages the development of employee involvement in each of its operating companies through both formal and informal meetings. It is the Group’s policy to ensure that employees are made aware of significant matters affecting the performance of the Group through information bulletins, informal meetings, team briefings, internal newsletters and the Group’s website. Employment policy The Group acknowledges the vital role that all employees play in its success through their skills, initiative and commitment. The Group endorses and supports the principles of equal opportunities and always fully considers applications by disabled persons. The policy in respect of staff that become disabled whilst employed is to train and assist them wherever practicable to continue within the Group. It is the policy of the Group to consider individuals on their merit and to make employment decisions on a non- discriminatory basis in compliance with its legal obligations. The Group’s policy is to ensure that, as far as is reasonably practicable, working environments exist which will minimise risk to the health and safety of employees. Environmental policy In appreciating the importance of good environmental practice, the Group seeks to ensure that its operations cause minimum detrimental impact on the environment. The Group’s objective is to comply with all relevant environmental legislation and to promote effective environmental management throughout its businesses. 14 7digital Group plc Governance Directors’ Report (continued) Policy and practice on payment of creditors Each Group Company is responsible for agreeing the details of terms and conditions relating to transactions with its suppliers where goods and services have been supplied in accordance with the relevant terms and conditions of the contract. Trade creditors for the Group at 31 December 2018 represented 72 days of purchases (31 December 2017: 86 days of purchases). Auditor BDO LLP were formally appointed as the company’s auditor on 6th December 2017 following the resignation of Hazlewoods LLP. BDO LLP were reappointed as the auditors for the year ended 31 December 2018. Directors’ statement as to the disclosure of information to the auditor Each of the persons who is a director at the date of approval of this annual report confirms that: so far as the directors are aware, there is no relevant audit information of which the Group’s auditor is unaware; and the directors 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 Group’s auditor is aware of that information. This confirmation is given and should be interpreted in accordance with the provisions of s418 of the Companies Act 2006. Statement of Directors’ Responsibilities The Directors are responsible for preparing the Annual Report and the financial statements in accordance with applicable law and regulations. Company law requires the directors to prepare Group and Parent Company financial statements for each financial year. Under that law, the directors are required to prepare Group financial statements in accordance with International Financial Reporting Standards (IFRS) as adopted by the European Union and Article 4 of the IAS Regulation and have elected to prepare the Parent Company financial statements in accordance with United Kingdom Generally Accepted Accounting Practice (United Kingdom Accounting Standards and applicable law). The Parent Company financial statements are required by law to give a true and fair view of the state of affairs of the Company. Under company law, the directors must not approve the financial statements unless DRAFT they are satisfied that they give a true and fair view of the state of affairs of the Company and of the profit or loss of the Company for that period. In preparing the Group financial statements, International Accounting Standard 1 requires that directors: properly select and apply accounting policies; present information, including accounting policies, in a manner that provides relevant, reliable, comparable and understandable information; provide additional disclosures when compliance with the specific requirements in IFRS are insufficient to enable users to understand the impact of particular transactions, other events and conditions on the entity's financial position and financial performance; and make an assessment of the Company’s ability to continue as a going concern. select suitable accounting policies and then apply them consistently; In preparing the Parent Company financial statements, the directors are required to: make judgements and accounting estimates that are reasonable and prudent; state whether applicable UK Accounting Standards have been followed, subject to any material departures disclosed and explained in the financial statements; prepare the financial statements on the going concern basis unless it is inappropriate to presume that the Company will continue in business. The Directors are responsible for keeping adequate accounting records that are sufficient to show and explain the Company’s 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 the Companies Act 2006. 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. 15 7digital Group plc Governance Directors’ Report (continued) The Directors are responsible for the maintenance and integrity of the corporate and financial information included on the Company's website. Legislation in the United Kingdom governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions. Approved by the Board of Directors and signed on behalf of the Board, Mark Foster Director 69 Wilson Street London EC2A 2BB 28 June 2019 DRAFT 16 7digital Group plc Governance Corporate Governance Statement For the purposes of AIM Rule 26, the recognised corporate governance code that the Board has decided to apply is the Quoted Companies Alliance Corporate Governance Code 2018 (‘QCA Code’). The Board believes the QCA Code provides the most appropriate framework of governance arrangements for the Company, considering the size and stage of development of the Company’s business. The following information is provided to explain how the Company complies with the QCA Code. The Board supports the principles and aims of the Code and intends to ensure that the Group observes the provisions of the Code as it grows, as far as is practical. Board Composition The Company is controlled through a Board of Directors, which at 31 December 2018 comprised seven directors: two executive directors, four independent non-executive directors including the Chair, and one non-executive director. Short biographies of each director are set out on page 10. The role of the Chair and that of the Chief Executive are separate. E Cohen, A de Kerckhove and M Foster are considered independent by the Board. D Cruickshank was considered by the Board to be independent on the date of his appointment as Chair of the Board. P McGowan is not considered by the Board to be independent by virtue of the fact that he is Executive Chair of Hilco UK, which is a substantial shareholder. Board Role The chair is responsible for the leadership of the Board, ensuring its effectiveness in all aspects of its role and setting its agenda. The chair also ensures that the directors receive accurate, timely and clear information and that there is effective communication with shareholders. The chair also facilitates the effective contribution of the other non-executive directors and ensures constructive relations between executive and non-executive directors. The Chief Executive’s responsibilities are concerned with managing the Group’s business and implementing Group strategy. The Board’s role is to provide entrepreneurial leadership of 7digital within the framework of prudent and effective controls that enable risk to be assessed and managed. The Board is responsible for setting the Company’s strategic aims and for ensuring the financial and human resources are in place for the Company to meet its objectives and to review management performance. The Board is also responsible for setting the Company’s values and standards and ensuring that its obligations to its shareholders are understood and met. The Board dispatches its role by holding regular meetings, at which: the monthly management accounts, including budgets and prior year comparatives, are reviewed; strategy is set and policy is debated; all significant investment and acquisition opportunities are reviewed and, if appropriate, approval is given; and any proposed changes to internal control and operating policies are debated. Skills and Expertise The non-executive directors bring a wide range of experience and expertise to the Group’s affairs, which allow them to constructively challenge and help develop proposals and strategy, scrutinise performance and controls and take decisions objectively in the interests of the Group. Strategy and Corporate Governance An updated description of the Company’s business model is provided in the strategic report and is included in this report at pages 8 to 9. The Company’s Board composition and the areas of skill and expertise detailed above have been designed to support the Company’s next stage of growth. The Board is responsible for maintaining a sound system of internal control to safeguard shareholders’ investments and the Company’s assets. Such a system is designed to manage rather than eliminate the risk of failure to achieve business objectives and can provide only reasonable and not absolute assurance against material misstatement or loss. The Board has considered the need for an internal audit function and has concluded that the internal control systems in place are appropriate for the size and complexity of the Company. The Board is also responsible for the identification and evaluation of major risks faced by the Group and for determining the appropriate course of action to manage those risks. The Board has put in place the procedures necessary to implement and comply with the guidance; Internal Control: Guidance for Directors as issued by the Financial Reporting Council (Revised). The directors performed an informal review of the Group’s control systems during the financial year. The Group carries insurance to indemnify directors for claims made against them in relation to their duties, with the exception of any losses incurred as a result of their wilful negligence. Cover with an annual limit of £2 million is maintained. 17 7digital Group plc Governance Corporate Governance Statement (continued) Board Evaluation and Re-election Procedures around performance evaluation of the Board are conducted informally while individual director evaluation is conducted formally by the chair. The Board continues to evaluate the current balance of skills and determine whether the Board composition is appropriate for the business, and in order to propel the Company to further growth as anticipated. Progress as to this process will be reported in due course to shareholders, and further updates provided. One-third of the directors must retire from office by rotation at each annual general meeting (AGM) and all directors appointed since the date of the last AGM must put themselves forward for re-election. Meeting Frequency During the year, the total number of formal meetings of the Board of 7digital Group plc was nine. The attendance at formal scheduled meetings of the Board was as follows: Number Meetings attended of Board Number Meetings of eligible Board S Cole M Honey D Holmwood D Cruickshank E Cohen P McGowan A de Kerckhove M Foster P Downton 9 3 3 9 8 2 7 8 8 9 Resigned April 2019 5 Resigned August 2018 3 Resigned April 2019 9 9 3 Resigned September 2018 9 9 9 Resigned May 2019 In addition, there were a number of informal meetings of the Board. The Company has adopted the Market Abuse Regulation for Directors’ dealings as applicable to AIM companies. The Executive Directors are full time employees and the Non-Executive Directors are required to devote sufficient time to discharge the duties of their office. Financial reporting The Board places considerable emphasis on ensuring that all communications with shareholders present a balanced and transparent assessment of the Group’s position and prospects. The Board or a subcommittee of the Board reviews and approves results announcements, interim reports, annual reports, the chair’s AGM statement and trading updates prior to their release. The Statement of Directors’ Responsibility in respect of the preparation of financial statements is set out on page 15 and the auditor’s statement on the respective responsibilities of directors and the auditor is included within their report on pages 23 to 29. Committees of the Board The Board has two standing committees, being the Audit Committee and the Remuneration Committee each of which operates within defined terms of reference. Audit Committee The Audit Committee consists of D Cruickshank (resigned 26 June 2019) as chair, E Cohen (resigned 26 June 2019) and M Foster. The Audit Committee has primary responsibility for monitoring the integrity of the financial statements of the Group; reviewing the Group’s internal financial controls; ensuring that the financial performance of the Group is properly measured and reported on; and for reviewing reports from the Group’s auditor relating to the Group’s accounting and internal financial controls. The Chief Financial Officer and other senior management also attend committee meetings by invitation. The Committee has unrestricted access to the Company’s auditor. The Audit Committee met formally four times during the period. The Committee reviews arrangements by which staff of the Company may raise in confidence concerns about improprieties in matters of financial reporting or other matters and investigates appropriate follow-up action. 18 7digital Group plc Governance Corporate Governance Statement (continued) The Audit Committee recommends to the Board the appointment, re-appointment or removal of the external auditor. During 2018 the Audit Committee made the decision to re-engage BDO for a second year of service. Remuneration Committee The Remuneration Committee consists of D Cruickshank as chairman, E Cohen and A de Kerckhove. Further details of the Committee’s remit are contained in the Directors’ Remuneration Report on page 20. The Remuneration Committee formally met four times during the period. Relations with shareholders The Company recognises that shareholder support is instrumental in the future growth of the Company. The Board is committed to maintaining and further developing communications with shareholders. The Chief Executive and Chairman maintained a regular dialogue with institutional shareholders throughout the year, with further opportunities for shareholder contact during the presentation rounds prior to the cash fundraise. In addition, the executive directors give presentations to analysts and hold one-to-one formal meetings with the Group’s key shareholders immediately following the announcement of the Group’s full year and interim results. The Group obtains independent feedback on these meetings through its corporate brokers, and this feedback is disclosed to the Board. The Company responds formally to all queries and requests for information from existing and prospective shareholders. In addition, the non-executive directors are available to shareholders to ensure that any potential concerns can be raised directly. The Group’s Annual Report and Accounts, final and interim announcements, trading statements and press releases are available on its website at about.7digital.com. Further, the Company has invested in shareholder analysis by analysts Argus Vickers to enable further shareholder outreach and dialogue. Constructive use of the AGM The Board uses the Annual General Meeting to communicate with both institutional and private shareholders. Resolutions are proposed on each substantially separate issue and the agenda includes a resolution to adopt the Group’s Annual Report and Accounts. Details of the proxy votes for and against each resolution are announced after the result of the hand votes is known. Before the formal business of the AGM is undertaken, the Chair invites shareholders’ questions to the Board. 19 7digital Group plc Governance Directors’ Remuneration Report As an AIM-listed company, 7digital Group plc is not required to disclose a Directors’ Remuneration Report; however, the Company has opted to make a voluntary disclosure. Remuneration Committee The Board has established a Remuneration Committee with formally delegated duties and responsibilities. The Remuneration Committee consists of D Cruickshank as chairman, E Cohen and A de Kerckhove. The provisions of the QCA Code recommend that as Company Chairman, D Cruickshank should not be a member of the Committee. However, it was considered that D Cruickshank’s experience and knowledge is of considerable value to the Committee and as a result he has been appointed a member of the Committee. The Remuneration Committee has responsibility for determining executive directors’ terms and conditions of service, including remuneration and grant of options under the Share Option Schemes. Remuneration policy for executive directors The Company’s policy on executive director remuneration is to: Attract and retain high-quality executives by paying competitive remuneration packages relevant to each director’s role, experience and the external market; and Incentivise directors to maximise shareholder value through share options and the payment of an annual bonus The remuneration of each of the directors (as audited) for the year ended 31 December 2018 for the 7digital Group was as follows: Salary & Fees £'000 Salary & Fees Payable in Shares £’000 Gain on exercise of share options £’000 Bonus £'000 Taxable benefits £'000 Pension contribution £'000 Total 2018 £'000 Total 2017 £'000 Executive S.A. Cole P Downton M Honey Non-executive D Cruickshank (1) E Cohen (2) A de Kerckhove (3) M Foster (4) P McGowan (5) Total 212 160 96 54 8 40 28 - 598 25 - - - - - - - 25 - 7 14 - - - - - 21 14 10 - - - - - - 24 251 177 110 79 33 45 33 25 753 228 157 188 74 25 38 30 25 765 25 25 5 5 25 85 - - (1) D Cruickshank received a fee of £54,250 per annum. He is owed a fee payable in shares of £25,000 which has been accrued at year end. On 29 August 2018, he was granted 1,000,000 share options with an exercise date of 29 August 2021. On the day of grant, the mid-market price was 5.85p. (2) E Cohen receives a fee of £8,125 per annum. During the year he received £12,187 (267,857 shares) in the form of shares issued on 7 December 2018. He is owed a fee payable in shares of £12,813 (274,725 shares) which has been accrued at the end of the year. (3) A de Kerckhove receives fees of £32,500 per annum. In addition to the non-executive fee, A de Kerckhove receives £7,800 per annum for her role as President of 7digital SAS. She is owed £5,000 (109,890 shares) in the form of shares which has been accrued at the end of the year. (4) M Foster receives fees of £30,000 per annum. £5,000 of this fee is payable in shares at the end of each 6-month period based on the share price at the end of each period. During the year he received £2,500 in the form of shares (54,945 shares) issued on 7 December 2018. He is owed a fee payable in shares of £2,500 (54,945 shares) which has been accrued at the end of the year. Instead of a fee being paid personally, Amcomri Asset Management Limited receives a fee of £32,500 per annum. This fee is payable in shares at the end of each 6-month period based on the share price at the end of each period. During the year he received £16,250 in the form of shares (357,143 shares) issued on 7 December 2018. He is owed a fee payable in shares of £8,750 for the period 1 July to 30 September 2018 which has been accrued at the end of the year. (5) Total employer national insurance contributions relating to remuneration paid to Directors’ were £74,826.20 (2017: £100,669) 20 7digital Group plc Governance Directors’ Remuneration Report (continued) Directors and their interests The names of the directors serving during the year and their interests at 31 December 2018 were as follows: S A Cole P Downton M Honey D Cruickshank E Cohen A de Kerckhove M Foster P McGowan 2018 2017 Number of ordinary shares 3,481,046 53,319 603,847 4,718,605 1,638,251 160,747 587,943 Ordinary shares under options 5,131,169 2,950,810 100,000 1,000,000 - - - Number of ordinary shares 3,481,046 53,319 603,847 4,718,605 1,208,489 134,557 500,617 Ordinary shares under options 776,222 593,177 400,000 - - - - 5,205,145 - 4,686,097 - At 31 December 2018, the following directors’ interests were also noted: 1. Of the ordinary shares shown as beneficially held by S A Cole, 3,633,631 were held by two nominees. 2. All of the shares shown as beneficially held by M Honey were held by a nominee account 3. Of the ordinary shares shown as beneficially held by D Cruickshank, 2,962,231 were held by a nominee account. 4. All of the shares shown as beneficially held by E Cohen were held by a nominee account 5. Of the ordinary shares shown as beneficially held by M Foster, 403,847 were held by a nominee account. 6. All of the ordinary shares shown as beneficially held by P McGowan were held by a nominee account. 7. P McGowan is the Executive Chair of Hilco UK that indirectly holds 24,226,478 ordinary shares. During the year shares were issued to Non-executive Directors in lieu of remuneration. The shares issued are included in the table above. At 31st December 2018 1,167,582 (2017: 571,428) shares are due to be issued. Accrued gross number of ordinary shares due at 31 Dec 2017 - 47,619 47,619 238,095 238,095 571,428 Shares issued during year in lieu of remuneration - 26,190 87,326 429,762 519,048 1,062,326 Shares forfeited during year in lieu of tax payable - 21,429 15,238 76,190 76,190 189,047 Shares accrued during the year in lieu of remuneration 549,451 109,890 109,890 542,582 535,714 1,847,527 Accrued gross number of ordinary shares remaining due at 31 Dec 2018 549,451 109,890 54,945 274,725 178,571 1,167,582 D Cruickshank A de Kerckhove M Foster E Cohen P McGowan Total The Company has established a tax efficient EMI option scheme, an “unapproved” share option scheme and a French Share Award Scheme pursuant to which the CEO, CFO, Deputy CEO and other members of staff have been or may be granted share options. Options granted under these schemes have a vesting schedule and for Senior Management, performance criteria are defined. The number, exercise price and earliest and latest dates of exercise of options over ordinary shares in the Company held by Directors at the end of the year were as follows: Simon Cole Matthew Honey Pete Downton Don Cruikshank Share Options 5,131,169 100,000 2,950,810 1,000,000 Currently Exercisable 0 0 0 0 Exercise price 0.0p 0.0p 0.0p 0.0p Earliest exercise date 12 Mar 2018 04 Aug 2020 12 Mar 2018 29 Aug 2021 Latest exercise date 29 Aug 2022 04 Aug 2021 29 Aug 2022 29 Aug 2022 21 7digital Group plc Governance Directors’ Remuneration Report (continued) There are a number of performance conditions relating to the financial periods ending December 2015, 2016, 2017, 2018 and 2019 attached to these options. Of these options granted, the table below shows the options issued, exercised, lapsed or forfeited during 2018: Simon Cole Matthew Honey Pete Downton Don Cruikshank Share Options held at 1 January 2018 776.222 400,000 593.177 - Issued Forfeited Lapsed 4,800,000 - 2,650,000 1,000,000 223,333 300,000 292,367 - 222,222 - - - Share Options held at 31 December 2018 5,131,167 100,000 2,950,810 1,000,000 22 7digital Group plc Independent Auditor’s Report to the members of 7digital Group plc Opinion We have audited the financial statements of 7digital Group PLC (the ‘parent company’) and its subsidiaries (the ‘group’) for the year ended 31 December 2018 which comprise the consolidated income statement, the consolidated statement of comprehensive income, the consolidated statement of financial position, the consolidated cash flow statement, the consolidated statement of changes in equity, the parent company statement of financial position, the parent company statement 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 the preparation of the group financial statements is applicable law and International Financial Reporting Standards (IFRSs) as adopted by the European Union. The financial reporting framework that has been applied in the preparation of the parent company financial statements is applicable law and United Kingdom Accounting Standards, including Financial Reporting Standard 101 Reduced Disclosure Framework (United Kingdom Generally Accepted Accounting Practice). 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 loss for the year then ended; the group financial statements have been properly prepared in accordance with IFRSs as adopted by the European Union; the parent company financial statements have been properly prepared in accordance with United Kingdom Generally Accepted Accounting Practice; and the financial statements have been prepared in accordance with the requirements of the Companies Act 2006. Basis for opinion We conducted our audit in accordance with International Standards on Auditing (UK) (ISAs (UK)) and applicable law. Our responsibilities under those standards are further described in the Auditor’s responsibilities for the audit of the financial statements section of our report. We are independent of the group and the parent 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 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. Material uncertainty related to going concern We draw attention to Note 1 to the financial statements which explains that the group and parent company is reliant on securing additional funding to sustain its immediate working capital requirements. The parent company has raised £1.3m through a consortium by way of a subscription of shares dated 26 June 2019. Further, the group and parent company is seeking to raise additional funds of £4.5 million by way of a further subscription of shares with its new and existing shareholders to secure the business for the next 12 months. As explained in note 1, the consortium has indicated that, acting together with its business partners and associates, it may subscribe for up to £2.5 million of this amount, subject to review of the annual report, however no assurance can be given in this respect. If the additional funds of at least £4.5 million are not raised by 31 July 2019, it is highly likely that the group would need to be placed into administration. In addition, if the implementation of the group’s new strategy takes longer than currently expected, growth in revenue is slower and the group is unable to reduce certain costs, then it is highly likely that the company will be required to raise additional finance during 2020. The requirement for further finance of £4.5m, which at the date of this audit report had not been secured, along with the challenge of potential additional finance being required if the company is not able to implement its business plan and forecast and the further matters explained in Note 1 indicates that a material uncertainty exists that may cast significant doubt on the group and parent’s ability to continue as a going concern. Our opinion is not modified in respect of this matter. Given the judgements involved in forecasting cash flows of the group, we considered going concern to be a Key Audit Matter. We performed the following work in response to this key audit matter. Our response We obtained an understanding of management’s working capital management strategy from discussion with management. Our specific audit testing relating to going concern included: • We reviewed the terms of the Subscription and debt for equity swap to understand the conditions attached to it and verified that cash of £1.15 million (£1.3 million net of transaction fees) was received on 26 June 2019. 23 7digital Group plc Independent Auditor’s Report to the members of 7digital Group plc • • • Performed a detailed review of the group’s cash flow forecast for the period of 12 months from the date of signing this audit report to assess the reasonableness of the forecasts based on our understanding of the group’s historical performance and future plans. The cashflow forecasts are dependent on the Group receiving the additional financing of £4.5 million, as detailed above; Sensitised the cash flow forecast prepared by management; Checked the integrity of the cash flow model and confirmed the opening cash balance. • We reviewed and challenged the Directors forecast used to assess the group’s and parent company’s ability to meet its financial obligations as they fall due, based on our knowledge and experience of the group, for a period of 12 months from the date of approval of the financial statements. The Directors forecast includes the additional funding expected to be received amounting to £4.5m, which has not yet been secured. • Reviewed the appropriateness of the going concern disclosures made within the financial statements. Key audit matters In addition to the matter described in the material uncertainty related to going concern section, key audit matters are those matters that, in our professional judgment, 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. Key audit matter Revenue Recognition See accounting policy in note 1 and revenue from contract with customers in note 2 As required, the Directors have adopted IFRS 15 for the first time within these financial statements. As set out in note 1 the new requirements of IFRS 15 had a limited impact on the accounting policies and resulted in an adjustment to opening retained earnings of £343k, increasing the losses brought forward. Due to the different elements of the contracts entered into by the group and the length of those contracts also varying, the key risk of material misstatement arises both from the recognition of set up fees, revenue around the year end (cut-off) and the revenue recognition policy itself, as detailed within note 1 of these financial statements, ensuring it has been recognised in accordance with IFRS as adopted by the European Union. Cut-off risk arises around the correct apportionment of revenue to the correct accounting period and subsequent amount accrued or deferred at the year end. How we addressed the key audit matter in the audit audit included assessing procedures Our the appropriateness of the revenue recognition policies implemented to ensure that they were in compliance with IFRS 15, given its implementation in the year. We considered the different revenue streams, being content, licensing and creative. We covered all revenue streams via a sample of key contracts which were selected for testing, assessing whether the revenue recognised was in line with the contractual terms, the group’s recognition policy and in accordance with IFRS 15. Through analysing a sample of contracts entered into during both the current and prior periods a revenue expectation was calculated and compared to the revenue recognised by the group. For any contracts spanning the year end, the accrued and deferred revenue elements of the contract were recalculated. Contracts which include set-up fees were reviewed to ensure that the revenue had been appropriately recognised in accordance with IFRS 15 as denoted in note 1 / 2 and that the new standard had been appropriately implemented. 24 7digital Group plc Independent Auditor’s Report to the members of 7digital Group plc Capitalisation of development costs See accounting policy in note 1 and intangible assets note 12. IAS 38, management’s policy The group capitalises costs in relation to the development and enhancement of the software utilised in the offering of the service to the group’s customers. In accordance is to capitalise with development expenditure on internally developed software products if the costs can be measured reliably and the resulting asset meets the relevant criteria. Development costs not satisfying the relevant criteria and expenditure on the research phase or maintenance of internal projects are recognised in the income statement as incurred. There is a risk that the judgemental criteria outlined under IAS 38 are not met and therefore development costs are incorrectly capitalised. There is also a risk that certain capitalised development costs are impaired at year end due to the sale of specific identified in relation to a software platform which was disposed of subsequent to the year end. internally capitalised development costs the Our procedures included considering whether development costs capitalised met the criteria for capitalisation under IAS 38 and subsequently whether the process capturing time spent on each project operated accurately over the period. Through the review of supporting documentation, in the form of salary and time information, we have tested these mechanics. A sample of capitalised projects during the year were discussed with the development team to gain an understanding of the project, conclude on the stage of development and the ability for the asset to generate future economic benefits for the business, by reviewing the cash flow forecasts of the group. For each intangible asset substantively sampled the related capitalised costs were agreed back to supporting documentation and assessed against the relevant criteria for capitalisation under IAS38, obtaining support for the asset created. Where external consultants were utilised in developing an intangible asset, a sample of these costs were traced back to supporting documentation, in the form of purchase invoices. We reviewed the sales proceeds received after the year end following the disposal of a certain software platform which had been internally generated. We ensured that the carrying value at the year end was appropriately impaired. 25 7digital Group plc Independent Auditor’s Report to the members of 7digital Group plc Impairment of Investments and of intangibles (including Goodwill) See accounting policy in note 1 and intangible assets in note 12. Parent company In the parent company accounts there is a risk that the carrying value of the investment in the acquired and legacy subsidiary companies is too high, and thus should be impaired. impairment of the In relation to the investments, intangible assets and goodwill balances recognised in both the group and the parent company accounts, our procedures included analysing the detailed impairment review performed by management and reviewing the the discounted cashflow underlying calculations of through testing the inputs of the calculation. The main areas of focus were: Group cashflow forecast - ensuring that the short and long term revenue and cost growth rates used were consistent with the 2018 trading activity, whilst performing an analysis over budget vs actuals for 2019; The discount rate - reviewed against the weighted average cost of capital (“WACC”) rates utilised by comparable firms; Sensitised forecasts to ensure that there was sufficient headroom in the calculations. Where impairments were identified in relation to the investment carrying values in the parent company and in relation to the goodwill and intangible assets in the group, we ensured that the necessary impairments were accounted for appropriately. Group On consolidation the group holds goodwill and intangible assets of £688,000 and £509,000 respectively arising from the acquisition of 24-7 Entertainment ApS in 2017 and the acquisition of Snowite SAS in 2016. Goodwill, where applicable, should be allocated to each of the group’s cash generating units (“CGU’s”). Further, an annual impairment review is required by management to ensure the level of goodwill is supported by the performance and position of the underlying CGU where impairment indicators exist. At year-end there are risks present over both the intangible assets and goodwill: • Intangible assets – risk over the valuation of the separately identified intangibles and the subsequent risk at year end as to whether any impairment indicators exist; • Goodwill – risk that the recoverable amount of goodwill is lower than its year end carrying amount. Convertible Loan Notes issued to shareholders See accounting policy in note 1 and financial liabilities in note 17 During the year the parent company issued convertible loan notes to its shareholders. The convertible loan notes do not meet the fixed-for-fixed test as the number of shares to be issued is not fixed. IFRS 9 requires that an embedded derivative be separated from its host contract and accounted for as a derivative when the conditions in IFRS 9 (retained from IAS 39) are met. Accordingly, the fair value of the embedded derivate was calculated at £257,129 and the residual value was assigned to the debt host liability component. IFRS 9, being complex that We have obtained the loan note agreements, ensuring the loan notes are accounted for in accordance with the requirements of financial the method and instruments. We ensured assumptions used in calculating the embedded derivate were correct and accurate, with a review being completed by our internal valuation experts. Further in accordance with IFRS 9, we have ensured that the host liability recorded on the balance sheet has been correctly accounted for at amortised cost. The risks relates to the convertible loan note in accordance with IFRS 9 incorrect valuation of the 26 7digital Group plc Independent Auditor’s Report to the members of 7digital Group plc (continued) Our application of materiality We apply the concept of materiality both in planning and performing our audit, and in evaluating the effect of misstatements. For planning, we consider materiality to be the magnitude by which misstatements, including omissions, could influence the economic decisions of reasonable users that are taken on the basis of the financial statements. In order to reduce to an appropriately low level the probability that any misstatements exceed materiality, we use a lower materiality, performance materiality, to determine the extent of testing needed. Importantly, misstatements below these levels will not necessarily be evaluated as immaterial as we also take account of the nature of identified misstatements, and the particular circumstances of their occurrence, when evaluating their effect on the financial statements as a whole. Materiality Materiality for the group as a whole was set at £198k (2017: £259k), which represents 1% (2017:1.5%) of group revenue. Materiality for the parent company was set at £46k (2017: £53k), which represents 1% (2017: 1.5%) of the parent company revenue. Revenue provides a consistent year on year basis for determining materiality due to the group making losses each year and has been concluded as the most relevant performance measure to the stakeholders of the group. As a consequence of the risks identified within the group audit, the materiality percentage has been reduced when compared to the prior year. Performance Materiality In considering individual account balances and classes of transactions we apply a lower level of materiality (performance materiality) in order reduce to an appropriately low level the probability that the aggregate of uncorrected and undetected misstatements exceeds materiality. Based upon our assessment of the risks within the group and the group’s control environment, performance materiality for the financial statements was set at £139k (2017: £ 181k), being 70% (2017: 70%) of materiality. Performance materiality levels used for the key components identified within the group were based upon the same benchmarks and percentages detailed for the group, due to each component being consistent in both nature, audit risks identified and control environment to the group as a whole. Although not strictly required to be disclosed, in the current year, for the UK components, each of which is subject to individual statutory audit procedures, the materiality levels applied ranged from £1,198 to £114k (2017: £2k to £138k). The materiality applied to non-UK components was £148k (2017: £194k). Reporting Threshold The reporting threshold is the amount below which identified misstatements are considered as being clearly trivial. We agreed with the Audit Committee that we would report to them all uncorrected audit differences in excess of £8k (2017: £12.5k), which is 4% (2017: 5%) of materiality, as well as differences below that threshold that, in our view, warranted reporting on qualitative grounds. We evaluate any uncorrected misstatements against both the quantitative measures of materiality discussed above and in light of other relevant qualitative considerations in forming our opinion. An overview of the scope of our audit Our group audit was scoped by obtaining an understanding of the group and its environment, including the group’s system of internal control, and assessing the risks of material misstatement in the financial statements at the group level. In determining the scope of our audit we considered the size and nature of each component within the group to determine the level of work to be performed at each in order to ensure sufficient assurance was gained to allow us to express an opinion on the financial statements of the group as a whole. We obtained an understanding of the internal control environment related to the financial reporting process and assessed the appropriateness, completeness and accuracy of group journals and other adjustments performed on consolidation. The group consists of eleven active entities based in Europe and the US, with the majority of trade arising within the UK entities. Eight of the group entities are based in the UK, one being the holding company. Further to this there are trading entities within the US, France and Denmark Classification of component Due to eight of the active entities being based in the UK and thus requiring a statutory audit, a lower level of materiality has been utilised for these entities, therefore reducing the aggregation risk on consolidation. Testing has been performed over the consolidation process including a review of consolidation adjustment and journals and analysis of all key judgements areas. Further analytical procedures were performed to confirm our conclusion that there were no significant risks of material misstatement of the aggregated financial information arising in the remaining components not subject to audit being the US, Denmark and France where limited procedures have been performed. The significant UK components audited for the group reporting purposes accounted for 95% of the group’s revenue and 92% of the group’s total assets. 27 7digital Group plc Independent Auditor’s Report to the members of 7digital Group plc (continued) 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. Opinions on other matters prescribed by the Companies Act 2006 In our opinion, based on the work undertaken in the course of the audit: • • the information given in the strategic report and the directors’ report for the financial year for which the financial statements are prepared is consistent with the financial statements; and the strategic report and the directors’ report have been prepared in accordance with applicable legal requirements. Matters on which we are required to report by exception In the light of the knowledge and understanding of the group and the parent company and its environment obtained in the course of the audit, we have not identified material misstatements in the strategic report or the directors’ report. We have nothing to report in respect of the following matters in relation to which the Companies Act 2006 requires us to report to you if, in our opinion: • • • adequate accounting records have not been kept by the parent company, or returns adequate for our audit have not been received from branches not visited by us; or the parent company financial statements are not in agreement with the accounting records and returns; or certain disclosures of directors’ remuneration specified by law are not made; or • we have not received all the information and explanations we require for our audit. Responsibilities of directors As explained more fully in the directors’ responsibilities statement, the directors are responsible for the preparation of the financial statements and for being satisfied that they give a true and fair view, and for such internal control as the directors determine is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error. In preparing the financial statements, the directors are responsible for assessing the group’s and the 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. 28 7digital Group plc Independent Auditor’s Report to the members of 7digital Group plc (continued) Use of our report This report is made solely to the parent company’s members, as a body, in accordance with Chapter 3 of Part 16 of the Companies Act 2006. Our audit work has been undertaken so that we might state to the parent 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 parent company and the parent company’s members as a body, for our audit work, for this report, or for the opinions we have formed. Nicole Martin (Senior Statutory Auditor) For and on behalf of BDO LLP, Statutory Auditor London 28 June 2019 BDO LLP is a limited liability partnership registered in England and Wales (with registered number OC305127). 29 7digital Group plc Consolidated Income Statement Year ended 31 December 2018 Continuing operations Revenue Cost of sales Gross profit Other Income Administrative expenses Adjusted operating loss - Share based payments - Foreign exchange - Other adjusting items Operating loss Finance income Finance cost Loss before tax Taxation on continuing operations Loss for the year attributable to owners of the parent company DRAFT Loss per share (pence) Basic and diluted Year to 31 Dec 2018 Year to 31 Dec 2017 Restated £’000 19,912 (5,185) 14,727 371 (27,223) (4,599) (173) (48) (7,305) (12,125) 31 (101) (12,195) 334 (11,861) £'000 16,733 (4,878) 11,855 509 (17,515) (3,941) (86) (417) (707) (5,151) 1 (56) (5,206) 380 (4,826) (2.97) (2.85) Notes 2 5 6 25 3 4 9 9 10 11 Consolidated Statement of Comprehensive Income Notes Loss for the year Items that may be reclassified subsequently to profit or loss: Exchange differences on translation of foreign operations Other comprehensive income 21 Year to 31 Dec 2018 Year to 31 Dec 2017 £’000 (11,861) (43) (11,904) £'000 (4,826) 43 (4,783) Total comprehensive loss attributable to owners of the parent company (11,904) (4,783) The notes from pages 35 to 68 form part of the financial statements. 30 7digital Group plc Consolidated Statement of Financial Position 31 December 2018 2018 2017 Restated 2016 Restated Notes £'000 £'000 £'000 Assets Non-current assets Intangible assets Property, plant and equipment Current assets Trade and other receivables Cash and cash equivalents Total assets Current liabilities Trade and other payables Loans and borrowings Derivative liabilities Provisions for liabilities and charges Net current (liabilities)/assets Non-current liabilities Other payables Deferred tax liability Provisions for liabilities and charges Total liabilities Net (liabilities)/assets Equity Share capital Share premium account Treasury reserve Other reserves Retained earnings Total equity 12 13 15 16 17 17 18 16 19 18 20 21 21 1,175 128 1,303 6,242 461 6,703 8,006 (10,888) (1,306) (257) (303) (12,754) (6,051) DRAFT (1,207) - (125) (1,332) (14,086) (6,080) 14,420 8,294 - (3,268) (25,526) (6,080) 6,157 324 6,481 6,934 6,978 13,912 20,393 (12,333) - - (34) (12,367) 1,545 (1,367) (308) (403) (2,078) (14,445) 5,948 14,404 8,232 - (3,367) (13,321) 5,948 2,201 475 2,676 3,826 838 4,664 7,340 (6,384) - - (143) (6,527) (1,863) (1,511) (546) - (2,057) (8,584) (1,244) 11,575 - (5) (4,301) (8,513) (1,244) These financial statements for company registration number 03958483, which comprise the Consolidated Statement of Comprehensive Income, the Consolidated Statement of Financial Position, the Consolidated Statement of Cash Flow, the Consolidated Statement of Changes in Equity and related Notes 1 to 28 were approved by the Board of Directors on 28 June 2019 and were signed on its behalf by: 28 June 2019 Director The notes from pages 35 to 68 form part of the financial statements. 31 7digital Group plc Consolidated Cashflow Statement Year ended 31 December 2018 Notes 10 9 9 4 12 13 12 13 25 18 10 9 9 Loss for the year Adjustments for: Taxation Finance Cost (net) Profit on sale of fixed assets Foreign exchange Amortisation of intangible assets Depreciation of fixed assets Impairment of intangible fixed assets Impairment of tangible fixed assets Share based payments Increase in provisions (Decrease)/increase in accruals and deferred income Decrease/(increase) in trade and other receivables Increase in trade and other payables Cash flows used in operating activities Taxation Interest income received Interest expense paid Net cash used in operating activities DRAFT Investing activities Purchase of property, plant and equipment, and intangible assets Net cash inflow on acquisition of a subsidiary Proceeds from sale of fixed assets Net cash used in investing activities Financing activities Proceeds from issuance of share capital Proceeds from issuance of shareholder loans Net cash generated from financing activities Net (decrease)/ increase in cash and cash equivalents Cash and cash equivalents at beginning period Effect of foreign exchange rate changes Cash and cash equivalents at end of year The notes from pages 35 to 68 form part of the financial statements. Year to 31 Dec 2018 Year to 31 Dec 2017 restated £'000 (11,861) (334) 101 (11) 48 1,839 251 3,946 131 173 (9) (3,639) 778 1,732 (6,855) (44) 1 (39) (6,937) (1,000) - 11 (989) - 1,500 1,500 (6,426) 6,978 (91) 461 £'000 (4,826) (380) 55 417 1,738 415 - - 86 294 4,505 (2,674) 222 (148) - 1 (56) (203) (4,575) 297 - (4,278) 10,599 - 10,599 6,118 838 22 6,978 32 7digital Group plc Consolidated Statement of Changes in Equity Year ended 31 December 2018 Notes Share capital £'000 Share premium account £'000 Reverse acquisition reserve (note 21) £'000 Foreign exchange translation reserve (note 21) £'000 Merger reserve (note 21) £'000 Shares to be issued (note 21) £'000 Retained earnings £'000 At 31 December 2017 as previously stated 14,404 8,232 (4,430) Adjustment on the adoption of IFRS 15 Prior year adjustments – “PYA” (see page 46) 1 January 2018 as restated 1 - - - - 14,404 8,232 Comprehensive income for the year Loss for the year Other comprehensive income Total comprehensive income for the year Contributions by and distributions to owners Share issued Shares based payments Total contributions by and distributions to owners 20 25 - - - 16 - 16 - - - 62 - 62 - - (4,430) DRAFT - - - - - - 78 - - 78 - (43) (43) - - - 959 - - 959 - - - - - - At 31 December 2018 14,420 8,294 (4,430) 35 959 The notes from pages 35 to 68 form part of the financial statements. Total £'000 6,432 (344) (484) 5,604 (11,861) (43) (11,904) 78 142 220 26 (12,837) (344) (484) (13,665) (11,861) - (11,861) - - - - - - 26 - - - - 142 142 168 (25,526) (6,080) 33 7digital Group plc Consolidated Statement of Changes in Equity Year ended 31 December 2018 Notes 20 At 1 January 2017 PYA – Content accrual (see page 46) At 1 January 2017 – restated Comprehensive income for the year Loss for the year – restated Other comprehensive income Total comprehensive income for the year Contributions by and distributions to owners Transfer from Treasury Share based payments Other Cost of capital raises Issue of share capital Total contributions by and distributions to owners Share capital £'000 11,575 - 11,575 - - - - - - - 2,829 2,829 Share premium account £'000 - - - - - - - - - (678) 8,910 8,232 At 31 December 2017 14,404 8,232 The notes from pages 35 to 68 form part of the financial statements. Reverse acquisition reserve (note 21) £'000 (4,430) - (4,430) Treasury reserves £'000 (5) - (5) Foreign exchange translation reserve (note 21) £'000 Merger reserve (note 21) £'000 Shares to be issued (note 21) £'000 35 - 35 - 43 43 - - - - - - (82) - (82) - - - - - - - 1,041 1,041 176 - 176 - - - (10) 26 - - (166) (150) Retained earnings £'000 (8,209) (304) (8,513) (4,826) - (4,826) 10 30 (2) - (20) 18 Total £'000 (940) (304) (1,244) (4,826) 43 (4,783) - 56 (2) (678) 12,599 11,975 - - - - - - - - - (4,430) 78 959 26 (13,321) 5,948 34 DRAFT - - - - - - - 5 5 - 7digital Group plc Notes to the financial statements Year ended 31 December 2018 1. Accounting policies General information 7digital Group plc is a public company, limited by shares and incorporated in the United Kingdom (England and Wales) under the Companies Act 2006. The address of the registered office is given on page 80. The Group prepares its consolidated financial statements in accordance with International Accounting Standards (“IAS”) and International Financial Reporting Standards (“IFRS”) as adopted by the EU. The financial statements have been prepared on the historical cost basis, except for the revaluation of financial instruments. The principal accounting policies set out below have been consistently applied to all the periods presented in these financial statements; except as stated below. Basis of Preparation Statutory accounts for the year ended 31 December 2018 have been delivered to the Registrar of Companies. The financial information for the year ended 31 December 2018 contained in these results has been audited. The financial information contained in these results has been prepared using the recognition and measurement requirements of International Financial Reporting Standards (IFRSs) as adopted by the EU. The accounting policies adopted in these results have been consistently applied to all the years presented and are consistent with the policies used in the preparation of the financial statements for the year ended 31 December 2018. New standards, amendments and interpretations to existing standards, which have been adopted by the Group for the year ended 31 December 2018, have been listed below. New standards and interpretations a) New standards, interpretations and amendments effective from 1 January 2018 New standards impacting the Group that have been adopted in the annual financial statements for the year ended 31 December 2018, and which have given rise to changes in the Group’s accounting policies are: • IFRS 9 Financial Instruments (IFRS 9) refer note 15 and note 16; and • IFRS 15 Revenue from Contracts with Customers (IFRS 15) refer note 2 DRAFT The Group adopted IFRS 15 and IFRS 9 with a transition date of 1 January 2018. The group has chosen not to restate comparatives on adoption of IFRS 15 and 9 and, therefore, are not reflected in the restated prior year financial statements. Rather, these changes have been processed at the date of initial application (i.e. 1 January 2018) and recognised in the opening equity balances. Therefore, upon the adoption of IFRS 15, the excess of the current and non- current portions of deferred revenue of £137,875 and £206,940, respectively, was transferred to Retained earnings as at 1 January 2018. In case of IFRS 9, the adjustments with regards to impairment of inter-company loan balances have been disclosed in the Company accounts as detailed in note F, having no impact on the Group, however at the Company level, inter-company balances which have been impaired amounting £2.6m are adjusted to the retained earnings as at 1 January 2018. b) New standards, interpretations and amendments not yet effective There are a number of standards, amendments to standards, and interpretations which have been issued by the IASB that are effective in future accounting periods that the group has decided not to adopt early. The most significant of these is: • IFRS 16 Leases (mandatorily effective for periods beginning on or after 1 January 2019) • IFRIC 23 Uncertainty over Income Tax Positions (effective 1 January 2019). New and amended standards and Interpretations issued by the IASB that will apply for the first time in the next annual financial statements are not expected to impact the Group as they are either not relevant to the Group’s activities or require accounting which is consistent with the Group’s current accounting policies. Adoption of IFRS 16 will result in the group recognising right-of-use assets and lease liabilities for all contracts that are, or contain, a lease. For leases currently classified as operating leases, under current accounting requirements the group does not recognise related assets or liabilities, and instead spreads the lease payments on a straight-line basis over the lease term, disclosing in its annual financial statements the total commitment. 35 7digital Group plc Notes to the financial statements Year ended 31 December 2018 1. Accounting policies (continued) The Board has decided it will apply the modified retrospective adoption method in IFRS 16, and, therefore, will only recognise leases on balance sheet as at 1 January 2019. In addition, it has decided to measure right-of-use assets by reference to the measurement of the lease liability on that date. This will ensure there is no immediate impact to net assets on that date. At 31 December 2018 operating lease commitments amounted to £2,902k (see note 22), which is not expected to be materially different to the anticipated position on 31 December 2019 or the amount which is expecte to be disclosed at 31 December 2018. Assuming the Group’s lease commitments remain at this level, the effect of discounting those commitments is anticipated to result in right-of-use assets and lease liabilities of approximately £2,828k being recognised on 1 January 2019. However, further work still needs to be carried out to determine whether and when extension and termination options are likely to be exercised, which will result in the actual liability recognised being higher than this. Going concern The Group and parent company’s business activities, together with the factors likely to affect its future development, performance and position are set out in the Strategic Report on pages 7 to 9. The financial position of the Group, its cash flows and liquidity position are described in the Chief Financial Officer Review on pages 4 to 6. In addition, note 27 to the financial statement includes the Group’s objectives, policies and processes for managing its capital, its financial risk management objectives, details of its financial instruments and its exposures to credit risk and liquidity risk. The financial statements at 31 December 2018 show that the Group generated a loss for the year of £11.9 (2017: loss restated of £4.8m), and with cash used in operating activities of £6.9m (2017: £0.2m cash used) and a net decrease in cash and cash equivalents of £6.4m in the year (2017: increase of £6.1m). The Group balance sheet also showed cash reserves at 31 December 2018 of £0.5m (2017: £7.0 million). The parent company generated a loss for the year of £21.6m (2017 restated: £4.7m) and showed cash reserves at 31 December of £nil (2017: £6.0m).On 7 June 2019, 7digital announced a number of important developments to raise additional finance to meet the immediate working capital requirements of the Group. In summary, it was announced that: a consortium, comprising Magic Investments S.A. (a tech investment holding company) (“Magic”) and Shmuel DRAFT Koch Holdings Limited (“SKH”) had conditionally agreed to subscribe for, an aggregate of, 634,132,641 Subscription Shares at 0.2 pence per share (“Issue Price”), to raise £1.3 million (before expenses); Magic had agreed to capitalise the outstanding £585,932 principal and accrued interest of the Convertible Loan Notes at the Exchange Price into 332,915,704 Exchange Shares; a number of changes to the Board were proposed, conditional upon the passing of the Resolutions at the General Meeting held on 25 June 2019 The Issue Price represents a discount of 11 per cent to the closing middle market price of an Ordinary Share on 6 June 2019 (being the last dealing date prior to the publication of the announcement). The Resolutions enabling the company to issue share capital in return for £1.3m (before expenses) and convert the Convertible Loan Notes into equity were passed at the shareholders meeting on 25 June 2019. The funds were subsequently received by the company on 26 June 2019 and the Loan Notes were converted on the same date. The proposals were necessary to finance the immediate working capital requirements of the Group as announced on 9 April 2019 and on 13 May 2019. The Board, however, remains of the view that equity investment in addition to the Subscription and Debt to Equity Swap is required to meet the working capital requirements of the Group. It was intended that, on publication of this annual report for the year ended 31 December 2018, the Company would immediately seek to raise an additional £4.5 million by way of a placing and further subscription of new Ordinary Shares with new and existing shareholders at the Issue Price. The Consortium has indicated that, acting together with its business partners and associates, it may subscribe for up to £2.5 million of this amount, subject to review of the annual report, however no assurance can be given in this respect. However, as announced in the ‘Result of General Meeting’ on 25 June 2019, Resolution 7, which was to approve the disapplication of statutory pre-emption rights in relation to the allotment of equity securities for cash up to an aggregate nominal amount of £300,000, was not passed. The failure by Shareholders to pass this Resolution has created greater execution risk for any subsequent equity raise (a "Follow-on Financing") by the Company since further shareholder approval would be required in order to implement this. The Directors therefore intend to engage with the relevant Shareholders, where possible, with a view to securing their support for a Follow-on Financing. However, Magic and SKH, our new majority shareholders, have indicated that they will support the necessary resolutions. As set out in the Circular 36 7digital Group plc Notes to the financial statements Year ended 31 December 2018 to shareholders dated 7 June 2019, the Company currently believes that it still needs to raise Additional Funds of at least £4.5 million by 31 1. Accounting policies (continued) July 2019, failing which it is highly likely that the Company would need to be placed into administration. It is further noted that should the implementation of the Company’s new strategy take longer than currently expected, growth in revenue is slower or the Company is unable to reduce certain costs as anticipated then it is highly likely that the Company will be required to raise additional finance during 2020. The directors have reviewed 7digital’s going concern position taking account of its current business activities, budgeted performance and the factors likely to affect its future development as detailed above, and which include the Group's objectives, policies and processes for managing its capital, its financial risk management objectives and its exposure to credit and liquidity risks. The directors have prepared cash flow forecasts covering a period of 3 years from the date of these results. Please refer to the Directors Reports on pages 12 to 17 for further going concern commentary. These financial statements have been prepared on the going concern basis, however the requirement for further finance of £4.5m, which at the date of this audit report had not been secured, along with the challenge of potential additional finance being required if the company is not able to implement its business plan and forecast means that a material uncertainty exists that may cast significant doubt on the group and parent’s ability to continue as a going concern. These financial statements do not include the adjustments that would result if the group and the parent company were unable to continue as a going concern. Basis of consolidation The consolidated financial statements comprise the financial statements of the Company and its subsidiaries as at 31 December 2018. All subsidiaries controlled by the Group are included in the consolidated financial statements; the Group controls an investee if, and only if, the Group has: • • • DRAFT Power over the investee (i.e., existing rights that give it the current ability to direct the relevant activities of the investee) Exposure, or rights, to variable returns from its involvement with the investee The ability to use its power over the investee to affect its returns Generally, there is a presumption that a majority of voting rights results in control. To support this presumption and when the Group has less than a majority of the voting or similar rights of an investee, the Group considers all relevant facts and circumstances in assessing whether it has power over an investee, including: • • • The contractual arrangement(s) with the other vote holders of the investee Rights arising from other contractual arrangements The Group’s voting rights and potential voting rights . The Group re-assesses 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. Consolidation of a subsidiary begins when the Group obtains control over the subsidiary and ceases when the Group loses control of the subsidiary. Assets, liabilities, income and expenses of a subsidiary acquired or disposed of during the year are included in the consolidated financial statements from the date the Group gains control until the date the Group ceases to control the subsidiary. Profit or loss and each component of OCI are attributed to the equity holders of the parent of the Group and to the non- controlling interests, even if this results in the non-controlling interests having a deficit balance. When necessary, adjustments are made to the financial statements of subsidiaries to bring their accounting policies in line with the Group’s accounting policies. All intra-group assets and liabilities, equity, income, expenses and cash flows relating to transactions between members of the Group are eliminated in full on consolidation. A change in the ownership interest of a subsidiary, without a loss of control, is accounted for as an equity transaction. If the Group loses control over a subsidiary, it derecognises the related assets (including goodwill), liabilities, non- controlling interest and other components of equity, while any resultant gain or loss is recognised in profit or loss. Any investment retained is recognised at fair value. 37 7digital Group plc Notes to the financial statements Year ended 31 December 2018 1. Accounting policies (continued) Business combinations The Group accounts for business combinations using the acquisition method when control is transferred to the Group The consideration transferred In the acquisition is generally measured at fair value, as are the identifiable net assets acquired. Any goodwill that arises is tested annually for impairment. Any gain on a bargain purchase Is recognised in profit or loss immediately. Transaction costs are expensed as incurred, except If related to the issue of debt or equity securities. The consideration transferred does not include amounts related to the settlement of pre-exlstlng relationships, such amounts are generally recognised In profit or loss. Any contingent consideration payable is measured at fair value at the acquisition date, if an obligation to pay contingent consideration that meets the definition of a financial instrument is classified as equity, then it is not remeasured and settlement is accounted for within equity. Otherwise, other contingent consideration is remeasured at fair value at each reporting date and subsequent changes in the fair value of the contingent consideration are recognised In profit or loss. Subsidiaries Subsidiaries are entitles controlled by the Group, the Group controls an entity when it is exposed to, or has rights to, variable returns from its Involvement with the entity and has the ablity to affect those returns through its power over the entity. The financial statements of subsidiaries are included In the consolidated financial statements from the date on which control commences until the date on which control ceases. Loss of control When the Group loses control over a subsidiary, it derecognlses the assets and llabllltles of the subsidiary, and any non- controllng interests and other components of equity. Any resulting gain or loss is recognised in the profit or loss. Any interest retained in the former subsidiary is measured at fair value when control is lost. DRAFT Transactions eliminated on consolidation Intra-group balances and transactions, and any unrealised income and expenses arising from intra-group transactions, are eliminated. Unrealised gains arising from transactions with equity-accounted investees are eliminated against the investment to the extent of the Group's interest in the investee. Unrealised losses are eliminated In the same way as unrealised gains, but only to the extent that there is no evidence of impairment. Revenue IFRS 15 "Revenue from Contracts with Customers" IFRS 15 establishes a five-step model to account for revenue arising from contracts with customers where revenue is recognized at the amount that reflects the consideration to which an entity expects to be entitled in exchange for transferring goods and services to a customer. The new revenue standard supersedes all current revenue recognition requirements under IAS 18 'Revenue'. The Group has applied IFRS 15 on 1 January 2018. The Group has reviewed its position on the contracts not completed at the date of initial application 1 January 2018 and the cumulative effect of initially applying this Standard as an adjustment to the opening balance of retained earnings as at 1 January 2018. The group comprises of mainly three types of revenues 1) Licencing fees (also known as B2B sales) Setup Fees a. b. Monthly development and support fees c. Usage fees 2) Content (“download”) revenues (also know as B2C sales) 3) Creative revenues Each type of revenue is detailed below 38 7digital Group plc Notes to the financial statements Year ended 31 December 2018 1. Accounting policies (continued) Changes in accounting policy due to the adoption of the new standard The adoption of the standard has mainly affected the following areas which is further explained below 1) Set up fees Set-up activities are not deemed to be separate performance obligations as it is not a distinct service provided to the customer under the contract as they are functional in nature, the performance of which gives customers the right to access 7Digital’s API platform. Consequently, these have been spread over the period of the contract agreed initially with the customers, as opposed to under IAS 18 where set-up fees were recognized on a straight- line basis over the set-up period (deemed to be the date the contract was signed to the point at which monthly recurring revenues started being invoiced). Therefore, upon the adoption of IFRS 15, the excess of the current and non-current portions of deferred revenue of £137,875 and £206,940, respectively, was transferred to Retained earnings as at 1 January 2018. 2) Creative revenues The Group analysed several contracts for one-off productions which required the Group to provide progress reports to its customers. The Group has judged that these need to be measured over a period of time according to the percentage-of-completion method. This represents a change in accounting policy from the prior year where these contracts were recognised in line with other Creative contracts using a point-in-time methodology. At the date of initial application, no contracts were outstanding and therefore the introduction of the new standard had no impact on this Revenue stream. Revenue comprises of: I. Licensing revenues 7Digital defines licensing revenues as fees earned both for access to the company’s platform and for development work on that platform in order to adapt functions to customer needs. The Board considers that the provision of Technology Licensing Services comprises three separately identifiable components: The description of the licence fees compromise three categories; DRAFT 1. Set-up fees : Set up fees which grant initial access to the platform, allow use of our catalogue and associated metadata and mark the start of work to define a client’s exact requirements and create the detailed specifications of a service. 2. Monthly development and support fees which cover the costs of developer and customer support time. These are usually fixed and are paid monthly once a service has been specified in detail; they are calculated at commercial rates based on the number of developer or support days required. 3. Usage fees which cover certain variable costs like bandwidth which can be re-charged to clients with an administrative margin are recognised at point in time based on usage. II. Content (“download”) revenues Content revenues are recognised at the value of services supplied and on delivery of the content. The group manages a number of content stores and the income is recognised in the month it relates to. its customers. As the programmes are being created the associated revenue III. Creative revenues Creative revenues relate to the sale of programmes and other content. 7digital also undertakes bespoke radio is programming for accrued/deferred until such time as the programme is delivered and accepted by the client. These mainly include the production of weekly radio programmes, as well as the one-off production of episodes. In case of one-off productions which required the Group to provide progress reports to its customers and where the company has no alternative use of the program produced, the group recognises revenue over the period ie based on percentage of completion, for the rest of the regular programs and contents, where the company doesn’t own the IP, the group measures the revenue based on delivery of the content ie point in time. Contracts with multiple performance obligations Many of the Group's contracts include a variety of performance obligations, including Licencing revenue (set-up fees, monthly revenue for using 7Digital’s API licence platform and usage fees), however may not be distinct in nature. Under IFRS 15, the Group must evaluate the segregation of the agreed goods or services based on whether they are 'distinct'. If both the customer benefits from them either on its own or together with other readily available resources, and it is 'separately identifiable' within the contract. 39 7digital Group plc Notes to the financial statements Year ended 31 December 2018 1. Accounting policies (continued) To determine whether to recognise revenue, the Group follows a 5-step process: - - - - - Identifying the contract with customers Identifying the performance obligations Determining the transaction price Allocating the transaction price to the performance obligations Recognising revenue when/ as performance obligations are satisfied Performance Obligations and timing of revenue recognition Revenue generated from B2B customer contracts often identify separate goods/services, with these generally being the access of the API license platform, and the associated monthly licence maintenance fees and content usage fees. The list of obligations as per the contract that are deemed to be one performance obligation in case of licencing revenue are (B2B): - - - The licenses provide access to the 7D platform The development and support fees which cover the costs of developer and customer support time Usage fees which cover certain variable costs like bandwidth and content A key consideration is whether licencing fees give the customer the right to use the API Licence as it exists when the licence is granted, or access to API which will, amongst other considerations, be significantly updated during the API licence period. The group grants the customer a limited, revocable, non-exclusive and non-transferable licence in the Territory during the Term, to use the 7Digital API and the content to enable the provision of the Music Service to the End Users via Application. DRAFT Set-up fees represent an obligation under the contract, which is not a distinct performance obligation, as the customer is not able to access the platform without them. These are therefore spread over the period of the contract agreed initially with the customers. Monthly licence maintenance fees indicate service contracts that provide ongoing support over a period of time. Revenue is recognised over the term of the contract on a straight-line basis. In the case of Creative Revenue, the sole performance obligation is to deliver the content specified as per contract, whether this be the delivery of regular content throughout the year (e.g. a radio series), or the production of a longer, one-off episode. The only obligation for the group is to deliver the content production agreed in the contract. Control and risks are passed to the customer on delivery of the episode produced, news bulletins etc. The right to the IP varies from project to project. If the customer suggests a specific programme idea to tender they will then own the underlying rights of the recordings and the IPR is exclusive to customer; 7Digital’s only performance obligation would be to produce the content. In the case of one-off productions for an identifiable customer contract where 7Digital is required to update the client on the progress of work completed, the Group applies an output method to determine the stage of completion and amount of revenue to recognize. Payment terms vary depending on the specific product or service purchased. With licence fees, the set-up fees element is invoiced and paid upfront, while monthly maintenance revenues and usage fees are normally invoiced on a monthly basis. In the case of download sales the cost is paid immediately by the customer upon download of the music/songs content from the 7Digital platform. In the case of creative revenues, the payment terms are generally 50% on signing with the balance on delivery. All contracts are subject to these standard payment terms, to the extent that the parties involved expressly agree in writing that the conflicting terms of any agreement shall take precedence. In the case of fixed-price contracts, the customer pays the fixed amount based on a monthly schedule. If the services rendered by the company exceed the payment, a contract asset (Accrued Income) is recognised; if the payments exceed the services rendered, a contract liability (Deferred Revenue) is recognised. 40 7digital Group plc Notes to the financial statements Year ended 31 December 2018 DRAFT 41 7digital Group plc Notes to the financial statements Year ended 31 December 2018 1. Accounting policies (continued) Determine transaction price and allocating to each performance obligation The transaction price for licencing fees (set-up fees and monthly licence fee) is fixed as per contract and is explicitly noted in the contract. In the case of usage fees, the per gigabyte fee is determined and agreed in the contract. In the case of creative revenue, the transaction fees for radio services and one-off series is determined by taking into account the length of the production (this may vary for commercials, radio programs, tv shows, series, etc.). Any variations in transaction price are agreed and charged additionally depending on the obligations to be performed. None of the five factors (i.e. variable consideration, constraining estimates of variable consideration, the existence of a significant financing component in the contract, Non-cash consideration, and consideration payable to a customer identified) are particularly relevant to 7Digital’s customer contracts. The transaction price included in 7Digital’s contracts is generally easily identifiable and is for cash consideration. Other adjusting items Other adjusting items are those items the Group considers to be non-recurirng or material in nature that should be brought to the readers’ attention in understanding the Group’s financial statements. Other adjusting items consist of one-off acquisition costs, costs related to non-recurring legal and statutory events, restructuring costs and other items which are not expected to re-occur in future years. Foreign currency For the purpose of the consolidated financial statements, the results and financial position of each Group company are expressed in Pounds Sterling, which is the functional currency of the Company, and the presentation currency for the consolidated financial statements. In preparing the financial statements of the individual companies, transactions in currencies other than the entity’s functional currency (foreign currencies) are recorded at the rates of exchange prevailing on the dates of the transactions. At each balance sheet date, monetary assets and liabilities that are denominated in foreign currencies are retranslated at the rates prevailing on the balance sheet date. Non-monetary items that are measured in terms of historical cost in a foreign currency are not retranslated. DRAFT Exchange differences arising on the settlement of monetary items and on the retranslation of monetary items, are included in profit and loss for the year. 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 monthly rate of exchange ruling at the date of the transaction, unless exchange rates fluctuate significantly during that month, in which case the exchange rates at the date of transactions are used. Intangible assets Externally acquired intangible assets are initially recognised at cost and subsequently amortised on a straight-line basis over their useful economic lives. Intangible assets are recognised on business combinations if they are separable from the acquired entity or give rise to contractual/legal rights. The amounts ascribed to such intangibles are arrived at by using appropriate valuation techniques (see section related to critical accounting judgements and key areas of estimation uncertainty below). Intangible assets (Bespoke Applications) arising from the internal development phase of projects is recognised if, and only if, all of the following 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 The ability to measure reliably the expenditure attributable to the intangible asset during its development. 42 7digital Group plc Notes to the financial statements Year ended 31 December 2018 1. Accounting policies (continued) The amount initially recognised 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 recognised, development expenditure is charged to profit or loss in the period in which it is incurred. Internally generated intangible assets are amortised over their useful economic lives on a straight-line basis, over 3 years. Property, plant and equipment Items of property, plant and equipment are initially recognised at cost. As well as the purchased price, cost includes directly attributable costs and the estimated present value of any future unavoidable costs of dismantling and removing items. The corresponding liability is recognised within provisions. Depreciation is provision on all items of property, plant and equipment, so as to write off their carrying value over their expected useful economic lives. It is provided at the following rates: Property Computer equipment Fixtures and fittings - 20% per annum straight line - 33.33% per annum straight line - 33.33% per annum straight line Impairment of tangible and other intangible assets Impairment tests on goodwill and other intangible assets with indefinite useful economic lives are undertaken annually at the financial year end. Other non-financial assets are subject to impairment tests whenever events or changes in circumstances indicate that their carrying amount may not be recoverable. Where the carrying value of an asset exceeds its recoverable amount (i.e. the higher of value in use and fair value less costs to sell), the asset is written down accordingly. Where it is not possible to estimate the recoverable amount of an individual asset, the impairment test is carried out on the smallest group of assets to which it belongs for which there are separately identifiable cash flows; its cash generating units ('CGUs'). Goodwill is allocated on initial recognition to each of the Group's CGUs that are expected to benefit from a business combination that gives rise to the goodwill. DRAFT Impairment charges are included in profit or loss, except to the extent they reverse gains previously recognised in other comprehensive income. An impairment loss recognised for goodwill is not reversed. Cash and cash equivalent Cash and cash equivalents comprise cash on hand and demand deposits and other short-term, highly liquid investments that are readily convertible to a known amount of cash and are subject to an insignificant risk of changes in value. Government grants Government grants, including research and development credits are recognised when it is reasonable to expect that the grants will be received and that all related conditions will be met, usually on submission of a valid claim for payment. Grants of a revenue nature are credited to income so as to match them with the expenditure to which they relate. Financial instruments IFRS 9 Financial Instruments replaces IAS 39 Financial Instruments: Recognition and Measurement for annual periods beginning on or after 1 January 2018, bringing together all three aspects of the accounting for financial instruments: classification and measurement; impairment; and hedge accounting. The Group applied IFRS 9 retrospectively, with an initial application date of 1 January 2018. The Group has not restated the comparative information, which continues to be reported under IAS 39. Differences arising from the adoption of IFRS 9 have been recognised directly in retained earnings and other components of equity. No impact due to this on the Group. 43 7digital Group plc Notes to the financial statements Year ended 31 December 2018 1. Accounting policies (continued) Financial assets and financial liabilities are recognised when a Company becomes a party to the contractual provisions of the instruments. Initial Recognition: 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 and ancillary costs related to borrowings) are added to or deducted from the fair value of the financial assets or financial liabilities, as appropriate, on initial recognition. Transaction costs directly attributable to the acquisition of financial assets or financial liabilities at fair value through profit or loss are charged to the Statement of Profit and Loss over the tenure of the financial assets or financial liabilities. Classification and Subsequent Measurement: Financial Assets The Company classifies financial assets as subsequently measured at amortised cost, Fair Value through Other Comprehensive Income (“FVOCI”) or Fair Value through Profit or Loss (“FVTPL”) on the basis of following: • the entity’s business model for managing the financial assets and • the contractual cash flow characteristics of the financial asset. Amortised Cost: A financial asset shall be classified and measured at amortised cost if both of the following conditions are met: • the financial asset is held within a business model whose objective is to hold financial assets in order to collect contractual cash flows and • the contractual terms of the financial asset give rise on specified dates to cash flows that are solely payments of principal and interest on the principal amount outstanding. In case of financial assets classified and measured at amortised cost, any interest income, foreign exchange gains or losses and impairment are recognised in the Statement of Profit and Loss. DRAFT Fair Value through OCI: A financial asset shall be classified and measured at fair value through OCI if both of the following conditions are met: • the financial asset is held within a business model whose objective is achieved by both collecting contractual cash flows and selling financial assets and • the contractual terms of the financial asset give rise on specified dates to cash flows that are solely payments of principal and interest on the principal amount outstanding. Fair Value through Profit or Loss: A financial asset shall be classified and measured at fair value through profit or loss unless it is measured at amortised cost or at fair value through OCI. All recognised financial assets are subsequently measured in their entirety at either amortised cost or fair value, depending on the classification of the financial assets. For financial assets at FVTPL, net gains or losses, including any interest or dividend income, are recognised in the Statement of Profit and Loss. Classification and Subsequent Measurement: Financial liabilities Financial liabilities are classified as either financial liabilities at FVTPL or ‘other financial liabilities’. Financial Liabilities at FVTPL: Financial liabilities are classified as at FVTPL when the financial liability is held for trading or is a derivative (except for effective hedge) or are designated upon initial recognition as FVTPL. Gains or Losses, including any interest expense on liabilities held for trading, are recognised in the Statement of Profit and Loss. 44 7digital Group plc Notes to the financial statements Year ended 31 December 2018 1. Accounting policies (continued) Other Financial Liabilities: Other financial liabilities (including borrowings and trade and other payables) are subsequently measured at amortised cost using the effective interest method. The effective interest rate is the rate that exactly discounts estimated future cash payments (including all fees and points paid or received that form an integral part of the effective interest rate, transaction costs and other premiums or discounts) through the expected life of the financial liability, or (where appropriate) a shorter period, to the amortised cost on initial recognition. Interest expense (based on the effective interest method), foreign exchange gains and losses, and any gain or loss on derecognition is recognised in the Statement of Profit and Loss. Impairment of financial assets: Expected credit losses are recognized for all financial assets subsequent to initial recognition other than financial assets in FVTPL category. For financial assets other than trade receivables, as per IFRS 9, the Group recognises 12 month expected credit losses for all originated or acquired financial assets if at the reporting date the credit risk of the financial asset has not increased significantly since its initial recognition. The expected credit losses are measured as lifetime expected credit losses if the credit risk on financial asset increases significantly since its initial recognition. Impairment provisions for trade receivables are recognised based on the simplified approach within IFRS 9 using the lifetime expected credit losses. During this process the probability of the non-payment of the trade receivables is assessed. Thus probability Is then multiplied by the amount of the expected loss arising from default to determine the lifetime expected credit loss for the trade receivables For trade receivables, which are reported net, such provisions are recorded in a separate provision account with the loss being recognised within cost of sales in the consolidated statement of comprehensive Income On confirmation that the trade receivable will not be collectable, the gross carrying value of the asset is written off against the associated provision. The impairment losses and reversals are recognised in Statement of Profit and Loss. DRAFT De-recognition of financial assets and financial liabilities: The Company de-recognises a financial asset 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 party. If the Company neither transfers nor retains substantially all the risks and rewards of ownership and continues to control the transferred asset, the Company recognises its retained interest in the asset and an associated liability for amounts it may have to pay. If the Company retains substantially all the risks and rewards of ownership of a transferred financial asset, the Company continues to recognise the financial asset and also recognises an associated liability for amounts it has to pay. On de-recognition of a financial asset, 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 recognised in OCI and accumulated in equity is recognised in the Statement of Profit and Loss. The Company de-recognises financial liabilities when and only when, the Company’s obligations are discharged, cancelled or have expired. The difference between the carrying amount of the financial liability de-recognised and the consideration paid and payable is recognised in the Statement of Profit and Loss. Financial liabilities and equity instruments: • Classification as debt or equity Debt and equity instruments issued by the Company are classified as either financial liabilities or as equity in accordance with the substance of the contractual arrangements and the definitions of a financial liability and an equity instrument. • 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 a Company are recognised at the proceeds received. 45 7digital Group plc Notes to the financial statements Year ended 31 December 2018 1. Accounting policies (continued) Derivative financial instruments: The Company enters into derivative financial instruments viz. a residual of the convertible loan instrument. The Company does not hold derivative financial instruments for speculative purposes. Derivatives are initially recognised at fair value at the date the derivative contracts are entered into and are subsequently remeasured to their fair value at the end of each reporting period. The resulting gain or loss is recognised in profit or loss immediately. Fair value measurement A number of assets and liabilities included in the Group’s financial statements require measurement at, and/or disclosure of, fair value. The fair value measurement of the Group’s financial and non-financial assets and liabilities utilises market observable inputs and data as far as possible. Inputs used in determining fair value measurements are categorised into different levels based on how observable the inputs used in the valuation technique utilised are (the ‘fair value hierarchy’): - Level 1: Quoted prices in active markets for identical items (unadjusted) - Level 2: Observable direct or indirect inputs other than Level 1 inputs - Level 3: Unobservable inputs (i.e. not derived from market data). The classification of an item into the above levels is based on the lowest level of the inputs used that has a significant effect on the fair value measurement of the item. Transfers of items between levels are recognised in the period they occur. Valuation techniques used to determine fair values Specific valuation techniques used to value financial instruments Include current liabilities (level 3) - discounted cash flow analysis DRAFT Operating leases Rentals payable under operating leases are charged against income on a straight-line basis over the lease term. Benefits received and receivable as an incentive to sign an operating lease are similarly spread on a straight-line basis over the lease term, except where the period to the review date on which the rent is first expected to be adjusted to the prevailing market rate is shorter than the full lease term, in which case the shorter period is used. Share-based payments The fair value determined at the grant date is expensed on a straight-line basis over the vesting period, based on the Group’s estimate of shares that will eventually vest. Fair value is measured by use of an appropriate valuation model. The Black-Scholes option pricing model has been used to value the share options plans. Taxation The tax expense for the period comprises current and deferred tax. Tax is recognised in profit or loss, except that a charge attributable to an item of income or expense recognised as other comprehensive income is also recognised directly in other comprehensive income. The deferred tax charge is calculated on the basis of tax rates and laws that have been enacted or substantively enacted by the reporting date in the countries where the company operates and generates taxable income. Deferred income tax is recognised on temporary differences arising between the tax bases of assets and liabilities and their carrying amounts in the financial statements and on unused tax losses or tax credits in the company. Deferred income tax is determined using tax rates and laws that have been enacted or substantively enacted by the reporting date. The carrying amount of deferred tax assets are reviewed at each reporting date. Recognition of deferred tax assets is restricted to those instances where it is probable that taxable profit will be available against which the difference can be utilised. 46 7digital Group plc Notes to the financial statements Year ended 31 December 2018 1. Accounting policies (continued) Critical accounting judgements and key areas of estimation uncertainty Measurement of impairment of goodwill and intangibles assets As set out on page 57 the carrying value of goodwill and intangible assets is reviewed for impairment at least annually. In determining whether goodwill or intangible assets are impaired, an estimation of the value in use of the cash generating unit (CGU) to which the goodwill and intangible assets have been allocated is required. This calculation of value in use requires estimates to be made relating to the timing and amount of future cash flows expected from the CGU, and suitable discount rates based on the Group’s weighted average cost of capital adjusted to reflect the specific economic environment of the relevant CGU. These estimates have been used to conclude that management has fully impaired Goodwill amounting to £688k, customer lists of £418k, intangibles of £2,135k in 7D Ltd and £705k in the French entity. Further disclosure of these estimates, together with the sensitivity of the underlying impairment calculations to changes in these estimates are provided in note 12 to the financial statements. Revenue recognition Management considers the detailed criteria for the recognition of revenue from the sale of goods and services as set out in the Group’s accounting policy, in particular whether the Group determines the appropriate apportionment of revenue to the correct accounting period and subsequent amount accrued or deferred at the year end. Capitalisation of internally developed software Distinguishing the research and development phases of a new customised software project and determining whether the recognition requirements for the capitalisation of development costs are met requires judgement. After capitalisation, management monitors whether the recognition requirements continue to be met and whether there are any indicators that capitalised costs may be impaired. Correction of prior period errors The directors have determined that there was an under accrual of content in three of the Group’s subsidiaries, 7digital Limited, 7digital Group, Inc & SD Music Stores Limited at the end of 2017 by £416k; £112k related to year ended 31 December 2017 and £304k related to prior years. Cost of sales and retained profit have been adjusted to reflect this error. DRAFT The directors have identified an over accrual of revenue of £68k in the Company and one of its subsidiaries, 7digital Limited at the end of 2017. A prior year adjustment has been made to reflect this revenue in 2017. A summary of this prior period adjustment is set out in the table below: Impact on equity (increase/(decrease) in equity) Balance sheet (extract) Intangibles Property, plant and equipment Trade and other receivables Cash and cash equivalents Trade and other payables Provisions for liabilities and charges - current Non-Current liabilities Net assets/(liabilities) Other equity Retained earnings Total equity 2017 As previously stated £'000 6,157 324 7,002 6,978 (11,917) (34) (2,078) 6,432 19,269 (12,837) 6,432 Increase/ (Decrease) 2017 Restated £'000 £'000 - - (68) - (416) - - (484) - (484) (484) 6,157 324 6,934 6,978 (12,333) (34) (2,078) 5,948 19,269 (13,321) 5,948 47 7digital Group plc Notes to the financial statements Year ended 31 December 2018 DRAFT 48 7digital Group plc Notes to the financial statements Year ended 31 December 2018 1. Accounting policies (continued) 1. Impact on statement of profit or loss (increase/(decrease) in profit) Statement of profit or loss (extract) Revenue Cost of sales Other income Administration expenses Operating loss 2017 Increase/ (Decrease) 2017 As previously Stated £'000 16,801 (4,766) 509 (17,515) (4,971) £'000 (68) (112) - - (180) Restated £'000 16,733 (4,878) 509 (17,515) (5,151) Basic and diluted loss per share for the prior year have also been restatred to account for the above error. The impact was to increase both basic and diluted loss per share by 0.11p per share. Impact on equity (increase/(decrease) in equity) Balance sheet (extract) Intangibles Property, plant and equipment Trade and other receivables Cash and cash equivalents Trade and other payables Provisions for liabilities and charges - current Non-Current liabilities Net (liabilities) DRAFT Other equity Retained earnings Total equity 2016 As previously Stated £'000 2,201 475 3,826 838 (6,080) (143) (2,057) (940) 7,269 (8,209) (940) Increase/ (Decrease) £'000 - - - - (304) - - (304) - (304) (304) 2016 Restated £'000 2,201 475 3,826 838 (6,384) (143) (2,057) (1,244) 7,269 (8,513) (1,244) 49 7digital Group plc Notes to the financial statements Year ended 31 December 2018 2. Revenue 2.1 Revenue from contracts with customer The Group has disaggregated revenue into various categories in the following table which is intended to: depict how the nature, amount, timing and uncertainity of revenue and cash flows are affected by economic date; and enable users to understand the relationship with revenue segments information provided in 2.2 below Licensing 2018 £'000 2017 £'000 Content 2018 £'000 2017 £'000 Creative 2018 £'000 2017 £'000 Total 2018 £'000 2017 £'000 Primary Geographical Markets Germany 7,333 UK 773 USA 2,279 Denmark 1,388 France 299 Other 1,338 13,410 5,097 872 2,879 466 1,154 1,148 11,616 70 1,278 632 1,038 - 915 3,933 55 1,007 498 818 - 721 3,099 - 2,099 88 - 382 2,569 - 1,648 69 - - 301 2,018 7,403 4,150 2,999 2,426 299 2,635 19,912 5,152 3,527 3,446 1,284 1,154 2,170 16,733 Product Type Set-up fees Monthly service fees and usage fee Production Download/streaming 211 129 - - - - 211 129 13,199 - - 13,410 11,487 - - 11,616 - - 3,933 DRAFT 3,933 - - 3,099 3,099 - 2,569 - 2,569 - 2,018 - 2,018 13,199 2,569 3,933 19,912 11,487 2,018 3,099 16,733 Contract Counterparties Direct to consumer (online) B2B - 13,410 13,410 - 11,616 11,616 3,933 - 3,933 3,099 - 3,099 - 2,569 2,569 - 2,018 2,018 3,933 15,979 19,912 3,167 13,761 16,733 Timing of transfer of goods and services Overtime Point in Time (on delivery) 13,410 - 13,410 11,616 - 11,616 - - 48 - 1,209 3,307 3,933 3,933 3,099 3,099 2,521 2,569 2,038 2,018 18,703 19,912 13,426 16,733 50 7digital Group plc Notes to the financial statements Year ended 31 December 2018 2. Revenue (continued) Contract balances At 1 January Cumulative catch-up adjustment 1 January (Restated) Transfers in the period from the contract assets to trade receivables Amounts included in contract liabilities that were recognised as revenue during the period Excess of revenue recognised over cash (or rights to cash) being recognised during the period Cash received in advance of performance and not recognised as revenue during the period Contract Assets 2018 £’000 Contract Assets 2017 £’000 Contract Liabilities 2018 £’000 Contract Liabilities 2017 £’000 100 - 100 615 - 615 (4,492) (671) (344) (4,836) - (671) (469) (749) - - - - 3,835 671 827 234 - - - - (288) (4,492) 458 100 (1,289) (4,492) Contract assets are included with “trade and other receivables” and contract liabilities are included in “trade and other payables” and “Other payables” on the face of the statement of financial position. DRAFT The aggregate amount of the transaction price of the remaining performance obligations amounting to £1,148k are all expected to be released within the next 12 months; £133k will be released in 2020 and £8k in 2021. 51 7digital Group plc Notes to the financial statements Year ended 31 December 2018 2. Revenue (continued) 2.2 Business segments For management purposes, the Group is organised into three continuing operating divisions – Licensing, Content and Creative. The principal activity of Licensing is the creation of software solutions for managing and delivering digital content. The principal activity of the Content division is the sales of digital music direct to consumers. The principal activity of Creative is the production of audio and video programming for broadcasters. These divisions comprise the Group’s operating segments for the purposes of reporting to the Group’s chief operating decision maker, the Chief Executive Officer. Licensing Content Creative Total Revenue from external customers Segment's result (gross profit) 2018 £'000 2017 £'000 2018 £'000 2017 £'000 2018 £'000 2017 £'000 2018 £'000 2017 £'000 13,410 11,616 3,933 3,099 2,569 2,018 19,912 16,733 12,739 9,324 849 1,871 1,139 660 14,727 11,855 Depreciation (218) (327) (14) (65) (19) (23) (251) (415) Amortisation (1,839) (1,758) Impairment (4,077) Other adjusted cost– development costs expensed (see note 3) (2,715) - - - - - DRAFT - - - - - - - - - (1,839) (1,758) (4,077) (2,715) - - Segment profit/(loss) 3,890 7,239 835 1,806 1,120 637 5,845 9,682 Other Income Corporate expenses Financing income Financing costs Tax charge Loss for the year Other segment items: Capital additions 371 (18,384) 509 (15,342) 31 (101) 334 1 (56) 380 (11,904) (4,826) £'000 1,000 £'000 4,575 Revenue from the Group’s largest customer in the year was £7.7m (2017: £4.9m) and revenue from the second largest customer in the year was £2.4m (2017: £1.5m) . There were no other customers that formed greater than 10% of external revenues within the years ended 31 December 2018 and 2017. 52 7digital Group plc Notes to the financial statements Year ended 31 December 2018 2. Revenue (continued) 2.3 Geographical information The Group’s revenue from external customers and information about its segments by geographical location is detailed below: Continuing Operations Germany United Kingdom United States of America Denmark France Rest of Europe Rest of World Revenue 2018 £'000 7,403 4,150 2,999 2,426 299 1,553 1,082 19,912 2017 £'000 5,152 3,527 3,446 1,284 1,154 1,499 671 16,733 Non-current assets 2018 £'000 - 1,304 - - - - - 1,304 2017 £'000 6,594 - 61 (793) 619 - - 6,481 All revenues are derived from the provision of services. 3. Other adjusting items Impairment of intangibles (i) Costs/impairment relating to closure of French business (ii) Impairment relating to closure of Denmark business (iii) DRAFT Development costs expensed on legacy Denmark platform (iv) Corporate restructuring releases/(provision) (v) Acquisition costs (vi) Exceptional legal fees (vii) 2018 £'000 (2,135) (992) (1,237) (2,715) (226) - - (7,305) 2017 £'000 - - - - (359) (268) (80) (707) (i) (ii) (iii) (iv) The Group tested intangibles annually for impairment, or more frequently if there are indications that the assets might be impaired. Accordingly, certain bespoke applications have been impaired during the year resulting in a charge of £2,135k (see note 12). Due to the cessation of the French operations in Snowite SAS, a provision of £287k (see note 18) has been made for closing down the operations and an impairment of £705k for the intangible assets (see note 12), as the directors consider these have a zero fair value. On 29 May 2019 the Group annouced the sale of select technology from the Parent Company and its Denmark subsidiary, 24 -7 Entertainment ApS, and the transfer of staff to TDC Group, a large telecommunications company based in Denmark (see note 26). Consequently, the net book value of the 2017 fair value adjustments relating to goodwill of £688k and to customer lists of £418k have been fully impaired during 2018 (see note 12). In addition the 24-7 Entertainment ApS tangible assets of £131k have been fully impaired at the year end, as the directors consider these assets to have zero fair value (see note 13). During the normal course of business the group would have capitalised £2,715k in respect of development costs associated with the Denmark platform, which during 2019 was sold, as described in (iii) above. Due to the sale of this platform these costs have not been capitalised and are reflected in the profit and loss account. 53 7digital Group plc Notes to the financial statements Year ended 31 December 2018 3. Other adjusting items (continued) (v) (vi) (vii) During 2018, the Group incurred costs of £226k largly relating to redundancy costs in the UK. During 2017, the Group incurred costs relating to restructuring the business following the acquisition of the French entity, Snowite SAS in March 2016 and aquistion of Denmark entity, 24-7 Entertainment ApS in June 2017. The main items being the removal of cost duplication in technical, management and sales areas. On 19th June 2017, 7digital Group plc announced the acquisition of 24-7 Entertainment ApS. As part of this transaction the Group incurred a variety of legal and professional fees which have been classified as Other adjusting items due to their one-off nature. During 2017, the Group incurred legal fees in relation to the settlement of patent infringement claims. The settlement and associated legal fees were classified as Other adjusting items due to the size and nature. £3,228k (2017: £439k) of the Other adjusting items for the year ended 31 December 2018 are deductible for corporation tax purposes. 4. Operating loss for the year Operating loss for the year has been arrived at after charging: Net foreign exchange loss Amortisation of intangible assets Depreciation of property, plant & equipment Operating lease payments - land and buildings (note 22) Share based payment expense (note 25) DRAFT 5. Other operating income 2018 £'000 48 1,839 251 1,290 173 2017 £'000 417 1,738 415 649 86 The other operating income earned by the Group in the current year of £371k (2017: £509k) relates to Research & Development tax credits. 6. Reconciliation of non-IFRS financial KPIs This note reconciles the adjusted operating loss to the adjusted EBITDA loss. This note reconciles these key performance indicators to individual lines in the financial statements. In the Directors’ view it is important to consider the underlying performance of the business during the year. Therefore, the directors have used certain alternative performance measures (AMPs) which are not IFRS compliant metrics. The main effect has been that the APMs exclude other adjusting items, amortisation, foreign exchange, depreciation and share based payments to reflect the underlying cash utilisation for the performance of the business. The APMs are consistent with those established within the prior year annual report and their derivation is set out in the table below. 54 7digital Group plc Notes to the financial statements Year ended 31 December 2018 6. Reconciliation of non-IFRS financial KPIs (continued) Reconciliation of adjusted operating loss and adjusted EBITDA loss Statutory operating loss Other adjusting items Foreign exchange Share based payment Adjusted operating loss Depreciation and amortisation Adjusted EBITDA loss 7. Auditor’s remuneration Fees payable to the Company's auditor for the audit of the Company's annual accounts Fees payable to the Company's auditor for other services to the Group The audit of the Company's subsidiaries pursuant to legislation Total audit fees Non-audit fees: Other services Total non-audit fees Total fees payable to Company's auditor DRAFT 2018 £'000 (12,125) 7,305 48 173 (4,599) 2,090 (2,509) 2018 £'000 120 - 120 - - 120 2017 restated £'000 (5,151) 707 417 86 (3,941) 2,153 (1,788) 2017 £'000 30 58 88 51 51 139 A description of the work of the Audit Committee is set out in the Corporate Governance Statement and includes an explanation of how auditor’s objectivity is safeguarded when non-audit services are provided by the auditor. 8. Staff costs The average monthly number of persons employed by the Group during the year, including executive directors, was 147 (2017: 140). Staff costs in the Group are presented in administrative expenses. Number of production, R&D, and sales staff Number of management and administrative staff Wages and salaries Redundancy payments Social security costs Other pension costs Share based payments (note 25) 2018 No. 121 26 147 2018 £'000 6,294 97 854 511 173 7,929 Details of the directors’ remuneration are provided in the Directors Remuneration Report on pages 20 to 22. 2017 No. 115 25 140 2017 £'000 6,574 0 1,174 326 86 8,160 55 7digital Group plc Notes to the financial statements Year ended 31 December 2018 9. Finance income and cost Shareholders interest payable Other charges similar to interest Bank interest receivable Rental deposit retained Profit on sale of fixed assets 10. Tax 2018 £'000 (64) (37) 1 19 11 (70) Corporation tax is calculated at 19.25% (2017: 19.25%) of the estimated assessable profit for the year. Current tax UK corporation tax on the results for the year Foreign tax suffered Adjustment in respect of prior period Total current tax charge Deferred tax Origination and reversal of timing differences Adjustments in respect of prior periods Total deferred tax charge/(credit) DRAFT Tax on profit on ordinary activities 2018 £'000 - 35 (61) (26) 2018 £'000 (374) 66 (308) (334) The charge for the year can be reconciled to the profit per statement of comprehensive income as follows: Profit/(loss) before tax Tax at UK corporation tax rate of 19% (2017: 19.25%) Fixed asset differences Expenses not deductible for tax purposes Income not taxable for tax purposes Adjustments to tax charge in respect of previous periods - deferred tax Additional deduction for R&D expenditure Adjustments to tax charge in respect of previous periods Adjust closing deferred tax to average rate of 19% (2017 : 19.25%) Adjust opening deferred tax to average rate of 19% (2018 : 19.25%) Deferred tax not recognised Foreign taxation Difference in tax rates Tax credit receivable Current year deferred tax movement on business combinations Tax credit and effective tax rate for the year 2018 £'000 (12,195) (2,317) 2 940 (208) 66 (133) (61) 752 (651) 1,459 35 (219) 309 (308) (334) 2017 £'000 - (56) 1 - - (55) 2017 £'000 - 39 (2) 37 2017 £'000 (335) (82) (417) (380) 2017 £'000 (5,138) (968) (19) 54 (118) (84) (384) - 642 (650) 1,132 37 (157) 477 (342) (380) 56 7digital Group plc Notes to the financial statements Year ended 31 December 2018 10. Tax (continued) At the balance sheet date, the Group has unrecognised deferred tax assets of £6,393,798 at a rate of 17% (2017: £4,842,727 (17%)) in respect of unused trading tax losses which have not been recognised on the grounds that there is insufficient evidence that these will be recoverable. These assets will be recovered when future tax charges are sufficient to absorb these tax benefits. 11. Earnings per share Basic earnings per share is calculated by dividing the loss attributable to shareholders by the weighted average number of ordinary shares in issue during the year. IAS 33 requires presentation of diluted EPS when a company could be called upon to issue shares that would decrease earnings per share, or increase the loss per share. For a loss-making company with outstanding share options, net loss per share would be decreased by the exercise of options. Therefore the antidilutative potential ordinary shares are disregarded in the calculation of diluted EPS. Total potential ordinary shares which are outstanding at 31 December 2018 are 13,912,308 (2017: 5,820,327) which relate to the employee share options and shares to be issued to the non-executive directors under the terms of their service contracts (see Directors Report, Directors Remuneration Report and note 25). Reconciliation of the profit and weighted average number of shares used in the calculation are set out below: Basic and Diluted EPS Loss attributable to shareholders: Basic and Diluted EPS Loss attributable to shareholders: 31 Dec 2018 Weighted average number of shares Thousand 399,430 31 Dec 2017 – restated Thousand 169,580 Per share amount Pence (2.97) Pence (2.85) Loss £'000 DRAFT (11,861) £'000 (4,826) 57 7digital Group plc Notes to the financial statements Year ended 31 December 2018 12. Intangibles Bespoke applications £'000 Customer list £'000 Goodwill £'000 Cost At 1 January 2017 Acquisitions Additions At 31 December 2017 Additions At 31 December 2018 and Amortisation Accumulated impairment At 1 January 2017 Charge for the year At 31 December 2017 Charge for year Impairment losses At 31 December 2018 Net book value At 31 December 2018 At 31 December 2017 At 31 December 2016 Useful lives 3,718 - 4,497 8,215 803 9,018 1,517 1,650 3,167 1,836 2,840 7,843 DRAFT 1,175 5,048 2,201 - 509 - 509 - 509 - 88 88 3 418 509 - 421 - 3-5 years 3-5 years - 688 - 688 - 688 - - - - 688 688 - 688 - Total £'000 3,718 1,197 4,497 9,412 803 10,215 1,517 1,738 3,255 1,839 3,946 9,040 1,175 6,157 2,201 Amortisation charges are included within the administrative expenses within the Income Statement. The useful life of each group of intangible assets varies according to the underlying length of benefit expected to be received. Impairment testing of bespoke applications The group tests intangibles annually for impairment, or more frequently if there are indications that the assets might be impaired. The bespoke applications of 7digital Limited have been fully impaired during the year by £2,135k. The loss- making position of the Group, together with the new strategy, which is reliant on new untested revenue streams, led to the UK platform being fully impaired. Management considered the carrying value of the platform at 31 December 2018 in 7digital Limited based on value in use calculations. The key assumptions for the value in use calculations are those regarding the discount rates, future cash flows and growth rates during the period. Future cash flows of the Group were based on forecasts determined at year end, extrapolated over five years and based on existing contracts at that time, along with the expectation of new opportunities. Costs were significantly reduced reflecting the shrinking cost base and continuing restructuring to align costs and revenue. A pre-tax discount rate was applied of 20%, reflecting current market assessment of the time value of money and the risks specific to the CGU was applied. The review indicated a full impairment was required, which has been reflected in the carrying value. Due to the cessation of the French operations in Snowite SAS (see note 26), the net book value of £705k has been impaired at the year end. The carrying value of £1.175m at 3 December 2018 was sold on 29 May 2019 to a Danish communications company, TDC Group (see note 26). The management believes that no impairment was required of this platform. 58 7digital Group plc Notes to the financial statements Year ended 31 December 2018 12. Intangibles (continued) Impairment of customer list and goodwill The group tests goodwill and customer relations annually for impairment. The goodwill and customer relations acquired from acquisition of 24/7 Entertainment APS in June 2017 have been fully impaired during the year. Due to the sale of the select technology platform to TDC in May 2019 (see note 26), the management believes the recoverable amount to which the goodwill and customer relationships relates, determined from the value-in-use, has a nil impact. This has consequently resulted in an impairment of £688k of goodwill and £418k of customer relationship. 13. Property, plant and equipment Property £'000 Computer equipment £'000 Fixture and fittings £'000 Vehicle £'000 Cost At 1 January 2017 Additions Acquisitions Disposals At 31 December 2017 Additions Disposals At 31 December 2018 Accumulated depreciation and amortisation At 1 January 2017 Charge for year Released on disposals At 31 December 2017 Charge for year Impairment losses Released on disposals At 31 December 2018 Net book value At 31 December 2018 At 31 December 2017 At 31 December 2016 443 - - (39) 404 - - 404 287 81 - 368 36 - - 404 - 36 156 1,504 139 172 (20) 1,795 197 (15) 1,977 DRAFT 1,214 316 (8) 1,522 210 131 (14) 1,849 128 273 290 121 4 - - 125 - - 120 102 18 - 120 5 - - 120 - 5 19 23 - - (4) 19 - (19) - 13 - (4) 9 - - (9) - - 10 10 Total £'000 2,091 143 172 (63) 2,343 197 (34) 2,506 1,616 415 (12) 2,019 251 131 (23) 2,378 128 324 475 Impairment of plant and equipment Due to the announcement on 29 May 2019 of the impending closure of the Danish software company, 24-7 Entertainment ApS (see note 26), the net book value of the tangible assets of £131k has been fully impaired at the year end, as these assets are deemed to have zero fair value. 59 7digital Group plc Notes to the financial statements Year ended 31 December 2018 14. Investment in subsidiary undertakings A list of the significant investments in subsidiaries, including the name, country of incorporation and proportion of ownership interest is given in note D to the Parent Company financial statements. 15. Trade and other receivables Trade receivable for the sale of goods Less: Provision for impairment of trade receivables Net trade receivables Other debtors Contract assets R&D credits receivable Prepayments Total financial assets at amortised cost (excluding cash & cash equivalents) 2018 £’000 4,610 (408) 4,202 667 458 815 100 6,242 2017 restated £’000 7,022 (1,943) 5,079 821 604 238 192 6,934 The average credit period taken on sales of goods and services is 79 days (2017: 110 days). No interest is charged on receivables. Trade receivables are provided for based on estimated irrecoverable amounts from the sale of goods and services, determined by reference to past default experience and likelihood of recovery as assessed by the directors. Before accepting any new material customer, the Group uses an external credit scoring system to assess the potential customer’s credit quality and defines credit limits by customer. The directors believe that the trade receivables that are past due but not impaired are of a good credit quality. DRAFT The Group adopts a policy that each new customer is analysed individually for credit worthiness before the Group’s standard payment and delivery terms and conditions are offered The Group's review includes external ratings, when available, and in some cases bank references Customers that fall to meet the Group's benchmark creditworthiness may transact with the Group on a prepayment basis. Under IAS 39, the group management assessed the requirement for general bad debt provision by reference to historic default patterns and management’s knowledge of the respective customer’s credit worthiness and forward-looking estimate. The approach under IFRS 9 simplified method will be fairly similar. The expected loss rates are based on the Group’s historical credit losses experienced over the three year period prior to the period end. Management also note that group generally has a consistent recovery rate on trade and other receivables. This is due to significant amount of work being completed for reputable businesses. However, Management does note that dealings with smaller businesses can be difficult at times to recover funds owed and as such, provisions have been raised based on historic knowledge of each client’s credit risk. Included in the Group’s trade receivable balance are debtors with a carrying amount of £2.3m (2017: £2.8m), which are past due at the reporting date for which the Group has not provided as there has not been a significant change in credit quality and the amounts are still considered recoverable. The Group does not hold any collateral over these balances. The average age of these receivables is 60 days (2017: 213 days). 60 7digital Group plc Notes to the financial statements Year ended 31 December 2018 15. Trade and other receivables (continued) As at 31 December 2018 the lifetime expected loss provision for trade receivables Expected loss rate Gross carrying amount Loss provision More than 30 days past due More than 60 days past due More than 120 days past due 30% 257 77 37% 161 60 11% 1,897 201 Current 3% 2,294 70 Total £'000 4,609 408 Customers that represent more than 5% of the total balance of trade receivables are: Customer A Customer B Customer C Customer D Customer E Movement in the allowance for doubtful debts Balance at the beginning of the period Impairment losses recognised Written off as bad debt Balance at the end of the period DRAFT 2018 £'000 2,329 381 261 200 192 2018 £'000 1,943 408 (1,943) 408 2017 £'000 2,324 1,357 1,254 608 - 2017 £'000 1,387 556 - 1,943 In determining the recoverability of trade receivables 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. 16. Trade and other payables Current Liabilities Trade payables Other taxes and social security Other payables Accrued costs Contract liabilities Corporation tax Non-Current Liabilities Contract liabilities Other payables 2018 £'000 4,990 984 500 3,246 1,149 19 2017 Restated £'000 3,212 614 476 3,539 4,492 - 10,888 12,333 141 1,066 1,207 - 1,367 1,367 2016 Restated £'000 1,422 1,087 347 2,857 671 - 6,384 - 1,511 1,511 61 7digital Group plc Notes to the financial statements Year ended 31 December 2018 16. Trade and other payables (continued) Trade payables and accruals principally comprise amounts outstanding for trade purchases and ongoing costs. The average credit period taken for trade purchases is 171 (2017: 127 days). The Group has financial risk management policies in place to ensure that all payables are paid within the credit time frame. On 26 October 2018 the company announced shareholder funding, it has signed agreements with 3 shareholders to provide an aggregate facility of £1.5 million. The Facility is on standard market terms and is convertible into ordinary shares at certain specified times prior to maturity in December 2019. The price at which the principal and interest under the Facility may be converted into new ordinary shares is calculated by reference to the volume weight average price of the existing ordinary shares. The maximum number of new ordinary shares which may be issued pursuant to the Facility is 58,157,529 ordinary shares. In March 2016 the Group acquired Snowite SAS (now 7digital France SAS). As part of the acquisition it negotiated a reduction in the amount of some of the existing liabilities within Snowite SAS, at the time of the purchase, to €1.7m (£1.5m). Terms of repayment were also agreed to be over 8 years starting on 7th April 2017. For the first two years repayments were set at 8% of the debt and then at 14% for each year thereafter. No interest is payable. The parent company has guaranteed the next three repayments of €125k each, payable in April 2019, October 2019 and April 2020. A total amount of £1.1m (2017: £1.4m) remains repayable under this agreement at the balance sheet date. Of this balance, £0.9m (2017: £1.2m) falls due for repayment after more than one year. The directors consider that the carrying amount of trade payables approximates to their fair value. 17. Financial Liabilities Current Convertible debt Embedded derivative DRAFT 2018 £'000 1,306 257 1,563 2017 £'000 - - - The parent company issued the following Convertible Loan Notes (CLN) in October 2018, ie 17th October – Harwood LLP - £250,000; 25th October – Amcomri Ltd - £500,000; and 25th October – Media Saturn - £750,000, totalling to £1,500,000. The CLN have a fixed coupon of 10.438% which accrues daily on the principal amount and is payable monthly. The maturity date of the CLNs is 31st December 2019. However, the Company may at any time, by giving the noteholders written notice, repay the principal amount and accrued interest. The Company’s right to repay the CLNs is limited to the right to repay in two tranches of £750,000 principal amount (and accrued but unpaid interest). The CLNs do not meet the fixed-for-fixed test since the number of shares to be issued is not fixed. The number of shares to be issued is impacted by the cap on new shares to be issued (58,157,529) as well as the volume weighted average price for the period 30 days prior to conversion notice. Consequently, the CLNs comprises a host debt liability and an embedded derivative liability (conversion option). The conversion option was valued as at the issue date (17th October 2018) using the Monte-Carlo simulation. IFRS 9 requires that an embedded derivative be separated from its host contract and accounted for as a derivative when the conditions in IFRS 9 (retained from IAS 39) are met. Accordingly, the fair value of the embedded derivate is £ 257,129 and the residual value is assigned to the debt host liability component. The fair value of the liability component, included in current borrowings, at inception was calculated using a market interest rate for an equivalent instrument without conversion option. The discount rate applied was 27.58%. 62 7digital Group plc Notes to the financial statements Year ended 31 December 2018 18. Provisions Dilapidation £'000 Group restructuring £'000 Provision for closure of business £'000 Other provisions £'000 At 1 January 2018 Increase in provision Utilisation of provision Release of provision At 31 December 2018 Of which is: current Of which is: non-current 125 - - - 125 - 125 278 - - (278) - - - - 288 - - 288 288 - 34 7 (17) (9) 15 15 - Total £'000 437 295 (17) (287) 428 303 125 A dilapidations provision is held to cover the estimated costs of returning the Group’s main office space to as it was at the commencement of the lease. The lease, which has 4 years and 3 months remaining on it at 31 December 2018 is currently being renegotiated. Due to the cessation of the French operations in Snowite SAS, a provision of £346k has been made for closure costs. 19. Deferred tax The deferred taxation provision included in the Statement of Financial Position, together with the charge/(credits) made to the Income Statement is set out below: DRAFT At 1 January 2018 Charge/(credit) to income At 31 December 2018 At 1 January 2017 Arising on acquisition Charge/(credit) to income At 31 December 2017 Deferred tax Liability £'000 308 (308) - 546 111 (349) 308 63 7digital Group plc Notes to the financial statements Year ended 31 December 2018 20. Share capital Allotted, called up and fully paid: Ordinary share of £0.10 each Ordinary share of £0.01 each Deferred share of £0.09 each Allotted, called up and fully paid At 1 January Shares issued in the period Vendor consideration shares Capital fundraising Issued to employees/directors in lieu of salary Share options exercised At 31 December 2018 No. of shares 2017 2016 No. of shares No of shares - 400,236,646 115,751,517 - 398,638,987 115,751,517 115,751,517 - - 2018 £'000 14,404 - - 15 1 14,420 2017 £'000 11,575 231 2,566 25 7 14,404 2016 £’000 10,843 732 - - - 11,575 During the year, nil (2017: 28,336) treasury shares were issued to employees to settle the exercising of share options. In 2017, the Company carried out a capital subdivision of shares. This created two classes of share; ordinary 1p shares that carry full voting rights; and 9p deferred shares that carry limited voting rights. Neither the 1p ordinary shares, nor 9p deferred shares, carry a right to fixed income. Each ordinary 1p share carries the right to one vote at general meetings of the Company. DRAFT On 19th June 2017, in connection with the acquisition of 24-7 Entertainment ApS, the Group issued 23,144,616 Ordinary shares. In 2017, the Company issued 256,615,165 Ordinary shares via two placement offers. Total funds raised before professional fees and broker costs associated with the raises, amounted to £11.3m. 21. Other reserves The Reverse acqusition reserve was created upon the application of reverse acqusition accounting relating to the purchase of 7digital Group Inc, by UBC Media plc on 10 June 2014. The Foreign exchange translation reserve of £43k loss (2017: £43k profit) relates to cumulative foreign exchange differences of translation of foreign operations. The Merger reserve relates to the difference between the nominal value of shares issued as part of an acquistion and the fair value of the assets transferred. The Shares to be issued relates to the fair value at grant date of the share options that can be exercised in future years £89k and the fair value of the shares to be issued £53k to Non-Executive directors in lieu of salary for the period between July 2018 and 31 December 2018 (see Directors’ Remuneration Report pages 20 to 22 and note 25). 64 7digital Group plc Notes to the financial statements Year ended 31 December 2018 22. Operating lease arrangements The Group as lessee Minimum lease payments under operating leases recognised as an expense in the year 2018 £'000 1,290 2017 £'000 743 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 year inclusive 2018 £'000 683 2,219 2,902 2017 £'000 710 26 736 Operating lease payments represent rentals payable by the Group for its office properties and equipment. Property leases are negotiated for an average term of ten years and equipment for an average term of five year. 23. Defined contribution schemes The Group operates defined contribution retirement benefit schemes for qualifying employees. The total cost charged to income of £511k (2017: £326k) represents contributions payable to these schemes by the Group at rates specified in the rules of the plans. As at 31 December 2018, contributions due in respect of the current reporting period of £33k had not been paid over to the schemes (2017: £25k). been paid over to the schemes (2017: £25k). 24. Related party transactions During the year, the Group recognised £nil (2017: £105k) of revenue from HMV Digital Limited, of which Paul McGowan is also a Director. The revenue relates to licensing of software. At 31 December 2018, the Group was owed £nil (2017: £13k). The Group also incurred £nil (2017: £5k) of costs relating to royalties due. DRAFT During the year, the Group paid £9.6k (2017; £9.6k) to MIDiA Research for music market research services, a company of which Mark Foster was a director during 2018. At 31 December 2018, the Group owed £6.4k (£nil). Transactions between the Company and its subsidiaries, which are related parties, have been eliminated on consolidation and are not disclosed in this note. Remuneration of key management personnel The remuneration of the directors, who are the key management personnel of the Group, is set out below in aggregate for each of the categories specified in IAS 24 Related Party Disclosures. Further information about the remuneration of individual directors is provided in the audited part of the Directors’ Remuneration Report on pages 20 to 22. Short- term employment benefits Post-employment benefits 2018 £'000 805 24 829 2017 £'000 832 10 842 65 7digital Group plc Notes to the financial statements Year ended 31 December 2018 25. Share-based payments 53 members of staff hold options to subscribe for shares in the Company under the 7digital Group plc enterprise management incentive scheme (approved by the Board on 10 June 2014). The Performance Share Plan is a “free” share award with an effective exercise price of £nil. All awards are subject to an Earnings per Share (EPS) performance condition. The performance period is three years. Further details of these conditions are set out in the Directors’ Report. Awards are normally forfeited if the employee leaves the Group before the awards vest. Outstanding at the beginning of the period Granted during the period Forfeited during the period Exercised during the period Outstanding at the end of the period Exercisable at the end of the period 2018 Options 5,428,899 11,500,000 (2,881,258) (135,333) 13,912,308 - Weighted average exercise price (pence) - - - - - - 2017 Options 3,319,291 3,360,000 (498,000) (752,392) 5,428,899 293,222 Weighted average exercise price (pence) - - - - - - During the period, 135,333 shares were exercised (2017: 752,392). There are 13,912,308 options outstanding at 31 December 2018 (2017: 5,428,899) of which nil (2017: 293,222) are exercisable. Their remaining weighted average contractual life is 1,224 days (2017: 1,005 days). The fair value of the share options has been calculated using the Black-Scholes model at the grant date. The key inputs into the Black-Scholes model are detailed below: Share price at date of grant Exercise price Volatility Option life Risk-free interest rate DRAFT 2018 Options 2017 Options 5.85p 0.00p 100% 3 yrs. 0.5% 6.12p 0.00p 100% 3 yrs. 0.5% In total a £89k (2017: £26k) has been recognised in the statement of comprehensive income related to equity settled share based payment charges in respect of share options. At 31 December 2018 £53k (2017: £30k) was accrued for shares to be issued to non executive directors under the terms of their service contracts and as disclosed within the Directors’ Report and Directors’ Remuneration. Also included within these charges are equity settled share based payment charges of £31k (2017: £30k) reflecting share awards to non-executive directors during the year. The total share based payment charge to the Consolidated Income Statement is £173k (2017: £86k). This is reflected in the Consolidated Statement of Changes in Equity as: Shares to be issued – share options Shares to be issued – in lieu of Directors Remuneration Shares issued – in lieu of Directors Remuneration 2018 £’000 89 53 31 173 2017 £’000 26 30 30 86 The issuance of shares relates to the shares issued to some non-executive directors in lieu of their remuneration. Further details can be found in the Directors’ Remuneration Report on pages 20 to 22. 66 7digital Group plc Notes to the financial statements Year ended 31 December 2018 26. Post balance sheet events Discontinuance of MMS (major customer) On 4 January 2019, Juke GmbH, a wholly owned subsidiary of Media-Saturn-Holding GmbH, decided to discontinue their music services and their contract with the Group. On 1 March 2019 a settlement was agreed on the termination of all outstanding contracts and commitments relating to the Juke music service for an immediate payment by Juke of €4.0m. Further, Juke agreed to write off all interest payments and £250,000 of the principal amount of the convertible loan note issued to Juke. The balance of the principal amount of £500,000 was paid from the proceeds of the termination settlement. Sale of platform to TDC On 2 May, the Group announced the sale of select technology from the Parent Company and its Denmark subsidiary, 24-7 Entertainment ApS, and the transfer of staff to TDC Group, a large telecommunications company based in Denmark for £0.9m. Following the loss of MMS, this technology was used by only one customer and had become unprofitable for the Company to maintain. The annualised losses eliminated from the business totalled around £1.6m and the net value of the assets sold was approximately £0.9m as at December 2018. The consideration was €1.375m in cash, of which €1.0m was paid to 7digital at completion. The remainder of the cash consideration was retained by TDC to cover certain potential liabilities and will be released by TDC to the Company by no later than 31 January 2020 to the extent that it is not required to meet such liabilities and is subject to customary post- closing adjustments. The cash was used for general working capital. The loss of MMS and TDC, being marginally in excess of 50% of the 2018 sales, is a fundamental loss to the Company. The transfer of the Danish platform and staff to TDC will eliminate around £3m of annualised costs from the Business. Settlement of Convertible Loan Notes On 8 February 2019, £193,858 (including interest) of the £1.5 million facility announced on 26 October 2018 (see note 17) DRAFT were converted to 19,385,843 ordinary shares of 1p each. On 26 June 2019, the remaining £585,932 (including interest) of the £1.5 million facility announced on 26 October 2018 (see note 17) were converted to 332,915,704 ordinary shares of 1p each. 67 7digital Group plc Notes to the financial statements Year ended 31 December 2018 26. Post balance sheet events (continued) New shareholders and new proposals On 26 June 2019, a consortium, comprising Magic Investments S.A. (a tech investment holding company) (“Magic”) and Shmuel Koch Holdings Limited (“SKH”) subscribed for, an aggregate of, 634,132,641 shares at 0.2 pence per share, to raise £1.3 million (before expenses). On the same date, Magic agreed to capitalise the outstanding £585,932 principal and accrued interest of the Convertible Loan Notes at the Exchange Price of 0.2p into 332,915,704 shares. A number of changes to the Board were proposed, conditional upon the passing of the Resolutions at the General Meeting to be held on 25 June 2019. The proposals were necessary to finance the immediate working capital requirements of the Company as announced on 9 April 2019 and on 13 May 2019. The Board, however, remains of the view that equity investment in addition to the Subscription and Debt to Equity Swap is required to meet the short-term working capital requirements of the Company. 27. Financial instruments Capital risk management The Group manages its capital to ensure that entities in the Group will be able to meet their financial obligations as they arise while maximising the return to stakeholders. The capital structure of the Group consists of cash and cash equivalents and equity attributable to equity holders of the parent, comprising issued capital, reserves and retained earnings as disclosed in notes 21 and 23. The Group has external liabilities by way of the debts owed on the purchase of Snowite SAS in March 2016 and as disclosed in note 16. It does not have access to committed borrowing facilities, and is not subject to externally imposed capital requirements. DRAFT Categories of financial instruments Financial Instruments Financial assets at amortised cost Cash and cash equivalents Trade and other receivables Financial liabilities at amortised cost Trade and other payables Borrowings (Convertible Loan Note) Put options 2018 £'000 452 6,388 (10,091) (1,306) (196) 2017 £'000 6,978 5,820 (8,180) - (149) Financial liabilities at fair value through profit and loss Embedded derivative (see note 17) (257) - Put Options As part of the 2016 acquisition of Snowite, the Group agreed with three of the original institutional shareholders that if they are unable to sell the 3,056,894 shares in 7digital Group they received in the public market, 7digital Group plc would purchase 75% of their shares at a strike price of 8.75p over a 4-year period starting from March 2016, 10% in year 1 and then c.21.7% each year thereafter. As at 31 December 2018, the three institutional shareholders still retain all their shares in 7digital Groupl plc. The value of the options at 31 December 2018 is £196k (2017: £149k). Adjustments to this provision are taken directly to the Consolidated Income Statement within Administrative expenses. In 2018 this charge was £47k (2017: £36k). The financial liability is included in note 16. The carrying amounts of financial assets and financial liabilities not carried at FVTPL approximate their fair values. 68 7digital Group plc Notes to the financial statements Year ended 31 December 2018 27. Financial instruments (continued) Financial instruments measured at fair value Level 3 Embedded derivative (see note 19) 2018 £'000 (257) 2017 Restated £'000 - There were no transfers between levels during the period. The valuation technique used to measure the fair value of the derivative financial instrument utilises the observable market price of the Company’s shares adjusted to the fixed price of the underlying host contract. The valuation techniques used in the valuation of the embedded derivative portion are summarised using the below inputs Share Price £0.0313 Expected Life 1.2 years Risk-free rate 0.75% Volatility 50% There were no changes to the valuation techniques during the year. Financial and market risk management objectives It is, and has been throughout the year under review, the Group’s policy not to use or trade in derivative financial instruments. The Group’s financial instruments comprise its cash and cash equivalents and various items such as trade debtors and trade creditors that arise directly from its operations. The main purpose of the financial assets and liabilities is to provide finance for the Group’s operations in the year. DRAFT Currency risk management The Group has exposure to foreign currency risk due to subsidiaries in France, Denmark and United States. The Group manages the risk by holding cash in numerous currencies to avoid foreign exchange charges on payments and receipts. The carrying value of the Group’s short term foreign currency denominated assets and liabilities are set out below GBP BU's USD BU's DKK BU's 2018 2017 2016 2018 2017 2016 2018 2017 2016 Assets/(Liabilities) GBP USD EUR DKK Other Totals - - - 162,683 1,694,004 1,442,604 1,548,206 1,647,447 (65,111) (34,308) (37,525) - - - 139 - - - 139 - (95,827) 96,928 19,913 (63,473) (103,783) 1,580,754 3,400,854 1,397,406 (63,334) (103,644) - - 0 - 80,813 80,813 (538,151) (55,583) (41,484) (5,686) (98,672) (6,361) - - - - (678,307) (67,630) - - - - - - 69 7digital Group plc Notes to the financial statements Year ended 31 December 2018 27. Financial instruments (continued) The majority of the Group’s financial assets are held in Sterling but movements in the exchange rate of the Euro and US dollar against Sterling have an impact on both the result for the year and equity. Sensitivity to reasonably possible movement in the Euro and US dollar exchange rates can be measured on the basis that all other variables remain constant. The effect on profit and equity of strengthening or weakening of the Euro or US dollar in relation to Sterling by 10% would result in a movement of +/- £142k (2017: £197k) in relation to the Euro, +/- £44k (2017: £271k) in relation to the US dollar and +/- £2k (2017: £nil) in relation to the Danish Kroner. Interest rate risk management and sensitivity The Group’s policy is to ensure that it maximises the interest income on surplus cash. This involves placing cash in a mix of fixed rate and floating rate short-term deposits. There is no prescribed ratio of fixed to floating rate. Due to the current level of cash and the current rates of interest the Group is not exposed to any significant interest rate risk. 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. The Group has adopted a policy of only dealing with creditworthy counterparties, as a means of mitigating the risk of financial loss from defaults. The Group only transacts with entities after assessing credit quality using independent rating agencies and if not available, the Group uses other publicly available financial information and its own trading records to rate its major customers. The Group’s exposure is continuously monitored and the aggregate value of transactions concluded is spread amongst approved counterparties. Credit exposure is controlled by counterparty limits. On going credit evaluation is performed on the financial condition of accounts receivable. The credit risk on liquid funds is limited because the counterparties are banks with high credit-rating assigned by international credit-rating agencies. The carrying amount of financial assets recorded in the financial statements, which is net impairment losses, represents the Group’s maximum exposure to credit risk. Liquidity risk management The Group’s policy throughout the year has been to ensure continuity of funds. The Group manages liquidity risk by maintaining adequate reserves and banking facilities by continuously monitoring forecast and actual cash flows and matching the maturity profiles of financial assets and liabilities. DRAFT Liquidity and interest risk tables All trade and other payables are non-interest bearing and fall due within one month. The agreed term of repayment of the loan relating to the purchase of Snowite SAS is over 8 years starting 7th April 2017, payable in equal instalments with no interest. The following table sets out the contractual maturities (representing the undiscounted contractual cash-flows) of financial liabilities: Within 12 months Trade payables Other payables More than 12 months Other payables 2018 £'000 4,990 222 5,212 2018 £’000 870 2017 £'000 3,161 302 3,463 2017 £’000 1,392 Fair value of financial instruments The fair value of other non-derivative financial assets and financial liabilities are determined in accordance with generally accepted pricing models based on discounted cash flow analysis using prices from observable current market transactions. Cash at bank and short-term bank deposits 70 7digital Group plc Notes to the financial statements Year ended 31 December 2018 Cash is held within the following institutions: Barclays Bank Danske Bank HSBC Bank PayPal Bank of West CIC Bank Others 28. Contingent liabiities 2018 £’000 324 2 36 66 7 23 3 461 2017 £’000 6,490 272 26 111 59 15 5 6,978 2016 £’000 576 - 54 71 53 44 40 838 A civil action was brought by a former US customer against 7digital Group plc (“7digital”) in July 2018 in New York State for failure to deliver services specified in their Term Sheet. No contract was ever put in place with this customer. The breach of contract claim is for: i) consequential damages for loss of future profits in an amount to be determined at trial; ii) compensatory damages including but not limited to the contract amount of USD200k; iii) punitive damages in an amount to be determined by a jury; (iv) attorney’s fees, costs, and expenses; and (v) pre-and post-judgment interest. 7digital’s legal team has made a motion to dismiss the claims, however in the event that the claims are upheld, estimate that damages would be in the region of USD200k. The Company vigorously denies that it was at fault and is intending to defend itself against any such action. It is anticipated the case will be concluded by the end of September 2019. DRAFT 71 7digital Group plc Parent Company Statement of Financial Position For the year ended 31 December 2018 Assets Non-current assets Intangibles Tangibles Fixed asset investments Current assets Debtors - due within one year Cash at bank and in hand Current liabilities Trade and other payables Loans and borrowings Derivative liabilities Provision for liabilities and charges Net current (liabilities)/assets Total assets less current liabilities Non-current liabilities Other payables Provision for liabilities and charges Total liabilities Net (liabilities)/assets Capital and reserves Called up share capital Share premium account Shares to be issued Profit and loss account Shareholders’ (deficit)/funds Notes B C D E G H H I G I J 2018 £’000 1,176 63 1,000 2,239 2,239 19 2,258 (4,761) (1,306) (257) (517) (6,841) (4,583) (2,344) (197) (111) (308) (7,149) (2,652) 14,420 8,294 168 (25,534) (2,652) 2017 Restated £’000 1,833 - 3,665 5,498 19,894 5,951 25,845 (9,873) - - - (9,873) 15,792 21,470 (113) - (113) (9,986) 21,357 14,404 8,232 26 (1,305) 21,357 Result for the year As permitted by section 408 of the Companies Act 2006 the Company has not elected to present its own profit and loss account for the year. 7digital Group plc reported a loss for the financial year ended 31 December 2018 of £21,608k (2017: restated loss £4,747k). This Company Statement of Financial Position and related notes for company registration number 03958483 were approved by the Board of Directors on 28 June 2019 and were signed on its behalf by 28 June 2019 Director 72 7digital Group plc Parent Company Statement of changes in Equity For the years ended 31 December 2018 and 2017 Statement of changes in Equity for the year ended 31 December 2018 Share capital £'000 14,404 - - 14,404 - - 16 - 16 Share premium account £'000 8,232 - - 8,232 - - 62 - 62 At 31 December 2017 as previously stated Prior year adjustments (see page 76) Change in accounting policy – IFRS 9 Financial Instruments (see note F) At 1 January 2018 Comprehensive income for the year Loss for the year Total comprehensive income for the year Contributions by and distributions to owners Shares issued Share based payments Total contributions by and distributions to owners At 31 December 2018 14,420 8,294 Statement of changes in Equity for the year ended 31 December 2017 DRAFT Shares to be issued £’000 26 - - 26 - - - 142 142 168 Profit and Loss account £'000 (500) (805) (2,621) (3,926) (21,608) (21,608) - - - Total £'000 22,162 (805) (2,621) 18,736 (21,608) (21,608) 78 142 220 (25,534) (2,652) Share premium account £'000 Shares to be issued £’000 Treasury reserves £'000 Profit and Loss account £'000 Total £'000 176 (5) 3,555 15,301 Share capital £'000 11,575 - - 2,597 232 - At 1 January 2017 Comprehensive income for the year Loss for the year (restated – see note A) Total comprehensive income for the year Contributions by and distributions to owners Issuance of shares Cost of capital raises Acquisition of subsidiary Share based payments Total contributions by and distributions to owners - - - 8,838 (678) 72 - - - (176) - 26 2,829 8,232 (150) At 31 December 2017 14,404 8,232 26 The notes from pages 72 to 79 form part of the financial statements. - - 5 - - 5 - (4,860) (4,860) (4,860) (4,860) - - - - 11,264 (678) 304 26 10,916 (1,305) 21,357 73 7digital Group plc Notes to the Parent Company financial statements Year ended 31 December 2018 A. Principal accounting policies 7digital Group plc is a company incorporated in the United Kingdom (England and Wales) under the Companies Act 2006. The parent company financial statements are presented as required by the Companies Act 2006. They have been prepared in accordance with applicable law and accounting standards in the United Kingdom. The Company balance sheet and related notes have been prepared under the historical cost convention and in accordance with Financial Reporting Standards 100 Application of Financial Reporting Requirements (FRS100) and 101 Reduced Disclosures Framework. The company has taken advantage of the following disclosure exemptions in preparing these financial statements, as permittd by FRS 101 Reduced disclosure framework: the requirements of paragraphs 45(b) and 46 to 52 of IFRS 2 Share-based payment; the requirements of IFRS 7 Financial Instruments: Disclosures; the requirements of paragraphs 91 to 99 of IFRS 13 Fair value measurement; the requirement in paragraph 38 of IAS 1 Presentation of Financial Statements to present comparative information in respect of: o o paragraph 79(a)(iv) of IAS1: paragraph 118(e) of IAS 38 Intangible Assets the requirements of paragraphs 10(d), 10(f), 16, 38A, 38B, 38C, 38D, 40A, 40B, 40C, 40D and 111 of IAS 1 Presentation of financial statements; the requirements of paragraphs 134 to 136 of IAS 1 Presenation of financial statements; the requirements of IAS 7 Statement of Cashflows; the requirements of paragraphs 30 and 31 of IAS 8 Accounting policies, changes in accounting estimates and errors: the requirement of paragraphs 17 and 18A of IAS24 Related party disclosures; the requirements in IAS 24 Related party disclosures to disclose related party transactions entered into between two or more members of a group; and the requirements of paragraphs 134(d) to 134(f) and 135(c) to 135(e) of IAS 36 Impairment of assets. These financial statements are separate financial statements. Where required, equivalent disclosures are given in the Group’s consolidated financial statements in notes 1 to 27. Foreign currency Transactions in currencies other than the entity’s functional currency (foreign currencies) are recorded at the rates of exchange prevailing on the dates of the transactions. At each balance sheet date, monetary assets and liabilities that are denominated in foreign currencies are retranslated at the rates prevailing on the balance sheet date. Non-monetary items that are measured in terms of historical cost in a foreign currency are not retranslated. Exchange differences arising on the settlement of monetary items, and on the retranslation of monetary items, are included in profit and loss for the year. Intangible assets Intangible assets acquired as part of acquisition of a business are stated at fair value less accumulated amortisation and any impairment losses are stated at cost less accumulated depreciation and impairment losses, if any. Intangible assets (Bespoke applications) arising from the internal or external development phase of projects is recognised if, and only if, all of the following 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 The ability to measure reliably the expenditure attributable to the intangible asset during its development. 74 7digital Group plc Notes to the Parent Company financial statements Year ended 31 December 2018 A. Principal accounting policies (continued) The amount initially recognised 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 recognised, development expenditure is charged to profit or loss in the period in which it is incurred. Internally and externally generated intangible assets are amortised over their useful economic lives on a straight-line basis, typically over 3 years. Research expenditure is recognised as an expense in the period in which it is incurred. Impairment of tangible and other intangible assets The Company reviews, at least annually, the carrying amounts of its tangible and intangible assets compared to the recoverable amounts to determine whether those assets have suffered an impairment loss. Where an impairment loss subsequently reverses, the carrying amount of the asset 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 had been recognised for the asset in prior years. Cash and cash equivalent Cash and cash equivalents comprise cash on hand and demand deposits and other short-term, highly liquid investments that are readily convertible to a known amount of cash and are subject to an insignificant risk of changes in value. Fixed asset investments Investments in subsidiaries are accounted for at cost less impairment in the Company’s financial statements. Classification Financial instruments are classified and accounted for according to the substance of the contractual arrangement, as financial assets, financial liabilities or equity instruments. An equity instrument is any contract that evidences a residual interest in the assets of the company after deducting all of its liabilities. Where shares are issued, any component that creates a financial liability of the company is presented as a liability on the balance sheet. The corresponding dividends relating to the liability component are charged as interest expenses in the profit and loss account. Recognition and measurement All financial assets and liabilities are initially measured at transaction price (including transaction costs), except for those financial assets classified as at fair value through profit or loss, which are initially measured at fair value (which is normally the transaction price excluding transaction costs), unless the arrangement constitutes a financing transaction. If an arrangement constitutes a financing transaction, the financial asset or financial liability is measured at the present value of the future payments discounted at a market rate of interest for a similar debt instrument. Impairment Assets, other than those measured at fair value, are assessed for indicators of impairment at each balance sheet date. If there is objective evidence of impairment, an impairment loss is recognised in profit or loss. Share-based payments The Company issues equity settled share based payments to certain Directors and employees, which have included grants of shares and options in the current year. The fair value determined at the grant date is expensed on a straight-line basis over the vesting period, based on the Group’s estimate of shares that will eventually vest. Fair value is measured by use of an appropriate valuation model. The Black-Scholes option pricing model has been used to value the share options plans. Going concern The company’s business activities, together with the factors likely to affect its future development, performance and position are set out in the Strategic Report on pages 7 to 9. The financial position of the company, its cash flows and liquidity position are described in the Chief Financial Officer Review on pages 4 to 6. In addition, note 27 to the financial statement includes the Group’s objectives, policies and processes for managing its capital, its financial risk management objectives, details of its financial instruments and its exposures to credit risk and liquidity risk. 75 7digital Group plc Notes to the Parent Company financial statements Year ended 31 December 2018 A. Principal accounting policies (continued) The financial statements at 31 December 2018 show that the company generated a loss for the year of £21.6m (2017 restated: £4.7m) and showed cash reserves at 31 December of £nil (2017: £6.0m).On 7 June 2019, 7digital announced a number of important developments to raise additional finance to meet the immediate working capital requirements of the Group. In summary, it was announced that: a consortium, comprising Magic Investments S.A. (a tech investment holding company) (“Magic”) and Shmuel Koch Holdings Limited (“SKH”) had conditionally agreed to subscribe for, an aggregate of, 634,132,641 Subscription Shares at 0.2 pence per share (“Issue Price”), to raise £1.3 million (before expenses); Magic had agreed to capitalise the outstanding £585,932 principal and accrued interest of the Convertible Loan Notes at the Exchange Price of 0.2p into 332,915,704 Exchange Shares; a number of changes to the Board were proposed, conditional upon the passing of the Resolutions at the General Meeting to be held on 25 June 2019 The Issue Price represents a discount of 11 per cent to the closing middle market price of an Ordinary Share on 6 June 2019 (being the last dealing date prior to the publication of the announcement). The Resolutions enabling the company to issue share capital in return for £1.3m (before expenses) and convert the Convertible Loan Notes into equity were passed at the shareholders meeting on 25 June 2019. The funds were subsequently received by the company on 26 June 2019 and the Loan Notes were converted on the same date. The proposals were necessary to finance the immediate working capital requirements of the Group as announced on 9 April 2019 and on 13 May 2019. The Board, however, remains of the view that equity investment in addition to the Subscription and Debt to Equity Swap is required to meet the working capital requirements of the Group. It is intended that, on signature of the Company's annual report for the year ended 31 December 2018, which is anticipated shortly after Admission, the Company would immediately seek to raise an additional £4.5 million by way of a placing and further subscription of new Ordinary Shares with new and existing shareholders at the Issue Price. The Consortium has indicated that, acting together with its business partners and associates, it may subscribe for up to £2.5 million of this amount, subject to review of the annual report, however no assurance can be given in this respect. However, as announced in the ‘Result of General Meeting’ on 25 June 2019, Resolution 7, which was voting to disapply statutory pre-emption rights in relation to the allotment of equity securities for cash up to an aggregate nominal amount of £300,000, was not passed. The failure by Shareholders not to pass this Resolution has created greater execution risk for any subsequent equity raise (a "Follow-on Financing") by the Company since further shareholder approval would be required in order to implement this. The Directors therefore intend to engage with the relevant Shareholders, where possible, with a view to securing their support for a Follow-on Financing. However, Magic and SKH, our new majority shareholders, have indicated that they will support the necessary resolutions. The Company currently believes that it still needs to raise Additional Funds of at least £4.5 million by 31 July 2019 to secure the business for the next 12 months, failing which it is highly likely that the Company would need to be placed into administration. In addition, if the implementation of the company’s new strategy takes longer than currently expected, growth in revenue is slower and the company is unable to reduce certain costs as anticipated, then it is highly likely that the company will be required to raise additional finance during 2020. The directors have reviewed 7digital’s going concern position taking account of its current business activities, budgeted performance and the factors likely to affect its future development as detailed above, and which include the Group's objectives, policies and processes for managing its capital, its financial risk management objectives and its exposure to credit and liquidity risks. The directors have prepared cash flow forecasts covering a period of 3 years from the date of these results. Please refer to the Directors Reports on pages 12 to 17 for further going concern commentary. These financial statements have been prepared on the going concern basis, however the requirement for further finance of £4.5m, which at the date of this audit report had not been secured, along with the challenge of potential additional finance being required if the company is not able to implement its business plan and forecast means that a material uncertainty exists that may cast significant doubt on the group and parent’s ability to continue as a going concern. These financial statements do not include the adjustments that would result if the group and the parent company were unable to continue as a going concern. 76 7digital Group plc Notes to the Parent Company financial statements Year ended 31 December 2018 A. Accounting policies (continued) IFRS 9 "Financial Instruments" IFRS 9 Financial Instruments replaces the existing guidance in IAS 39 Financial Instruments Recognition and Measurement IFRS 9 Includes revised guidance on the classification and measurement of financial Instruments, including a new expected loss model for calculating impairment on financial assets as is set out in the Group’s accounting policy on page number 42 to 43. Impairment provisions for receivables from related parties and loans to related parties are recognised based on a forward- looking expected credit loss model. The methodology used to determine the amount of the provision is based on whether there has been a significant increase in credit risk since initial recognition of the financial asset. For those where the credit risk has not increased significantly since initial recognition of the financial asset, twelve month expected credit losses along with gross interest income are recognised. For those for which credit risk has increased significantly, lifetime expected credit losses along with the gross interest income are recognised. For those that are determined to be credit impaired, lifetime expected credit losses along with interest income on a net basis are recognised Prior period adjustment The Company identified certain accounting errors which have been adjusted as a prior period restatement in the parent company financial statements. These adjustment errors related to intercompany loan movements and share option charges. There was no impact on the Consolidated financial statements. Critical accounting judgements and key sources of estimation uncertainity In the application of the Company accounting policies, which are described above, the directors are required to make judgements, estimates and assumptions about the carrying amount of assets and liabilities that are not readily apparent from other sources. The estimates and associated assumptions are based on historical experience and other factors that are considered to be relevant. Actual results may differ from these estimates. The estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the period which the estimate is revised if the revisions affect only that period, or in the period of the revision and future periods if the revision affects both current and future periods. There are no critical judgements, apart form those involving estimates, that directors have made in the process of applying the Company’s accounting policies and that have the most significant effect on the amounts recognised in the financial statements. Employees The average number of employees throughout 2018 was 22 (2017: 19). Staff costs amounted to £1.9m (2017: £1.9m). Information about the remuneration of directors is provided in the audited part of the Directors’ Remuneration Report on pages 20 to 22 of the consolidated financial statements. Correction of prior period errors The directors have identified certain intergroup receivables arising out of transfer pricing that were overstated in the company’s financial statements in the year ending 31 December 2017 due to an error. As a result, in the prior year the company loss was understated and amounts due from group undertakings were overstated by an amount of £633k. The directors have recognised an additional liability of £113k to reflect the shareholder put option liability, which was incorrectly excluded from the prior period financial statements. The directors have identified a 2017 consolidation journal that had incorrectly been omitted from the company’s standalone books at 31 December 2017. This has been corrected in 2018. The reversal of this journal has increased the net book value of bespoke applications by £104k and decreased the net book value of fixed assets investments by £95k with the balance going to the P/L. The directors had identified over-accrued revenue at the end of 2017 of £68k. A prior year adjustment has been made to reflect this revenue in 2017. Accordingly, the directors have restated net assets at 31 December 2017 and profit for the year ended 31 December 2017 to correct these errors. The result of this prior period adjustment was to reduce net assets and retained earnings at 1 January 2017 by £805k (see note A). 77 7digital Group plc Notes to the Parent Company financial statements Year ended 31 December 2018 A. Accounting policies (continued) Impact on equity (increase/(decrease) in equity) Balance sheet (extract) Intangibles Fixed asset investments Trade and other receivables Cash Trade and other payables Provisions for liabilities and charges Net assets/(liabilities) Other equity Retained earnings Total equity B. Intangibles Cost At 1 January 2017 Additions At 31 December 2017 (as restated see note A) Additions At 31 December 2018 Amortisation At 1 January 2017 Charge for year At 31 December 2017 (as restated see note A) Charge for year At 31 December 2018 Net book value At 31 December 2018 At 31 December 2017 (as restated see note A) At 31 December 2016 2017 As previously Stated £'000 1,729 3,760 20,595 5,951 (9,873) - 22,162 22,662 (500) 22,162 Increase/ (Decrease) £'000 104 (95) (701) - - (113) (805) - (805) (805) 2017 Restated £'000 1,833 3,665 19,894 5,951 (9,873) (113) 21,470 22,662 (1,305) 21,357 Bespoke applications £'000 - 2,054 2,054 32 2,086 - 221 221 689 910 1,176 1,833 - Total £'000 - 2,054 2,054 32 2,086 - 221 221 689 910 1,176 1,833 - 78 7digital Group plc Notes to the Parent Company financial statements Year ended 31 December 2018 C. Tangibles Computer equipment £'000 Total £'000 Cost At 1 January 2017 Additions At 31 December 2017 Additions At 31 December 2018 Depreciation At 1 January 2017 Charge for year At 31 December 2017 Charge for year At 31 December 2018 Net book value At 31 December 2018 At 31 December 2017 At 31 December 2016 D. Fixed asset investments Cost At 1 January 2018 (as restated see note A) Additions in year At 31 December 2018 Provision for impairment At 1 January 2018 (as restated see note A) Charge for the year At 31 December 2018 Net book value at 31 December 2018 Net book value at 31 December 2017 (as restated see note A) - - - 69 69 - - - 6 6 63 - - - - - 69 69 - - - 6 6 63 - - £’000 21,768 1 21,769 (18,103) (2,666) (20,769) 1,000 3,665 79 7digital Group plc Notes to the Parent Company financial statements Year ended 31 December 2018 D. Fixed asset investments Related subsidiaries, joint ventures and associates Ordinary shares held at 31 December 2018 Principle activity Country of incorporation Registered office Subsidiaries 7digital Limited 7digital Creative Limited 7digital Trading Limited 7digital Group, Inc. 7digital, Inc. SD Music Stores Limited Smooth Operations (Productions) Limited Unique Interactive Limited Music streaming and download services Radio production HR Services Holding company Music streaming and download services Music streaming and download services Dormant Dormant 100% 100% 100% 100% 100% 100% 100% 100% England and Wales England and Wales England and Wales Delaware, United States of America *** *** *** 369 Pine Street, Suite 103, San Francisco, CA 94104 USA Delaware, United States of America 369 Pine Street, Suite 103, San Francisco, CA 94104 USA England and Wales England and Wales England and Wales *** *** *** 21 Rue Aristade Briand Espace Aristide 92170 Vanves Gothersgarde 12,3 1123 København Denmark D-202, Polite Hermitage, Sec 18 Shivtej Nagar, Chinchwad Pune MH 411019 India *** *** *** 7digital SAS 7digital ApS 100% Non-trading**** France 100% Non-trading Denmark 7digital Wing India Private Limited 7digital Projects Limited Oneword Radio Limited UBC Interactive Limited 100%** 100% 100%* 100%* Non-trading Dormant Dormant Dormant India England and Wales England and Wales England and Wales * indicates indirect investment of the company ** set up during 2018 *** registered office is 69 Wilson Street London UK EC2A 2BB The directors subjected the carrying value of investments to an impairment test at the year end. The investment in all of its subsidiaries apart from 7digital Limited was written down to zero. The director’s assessment indicated that no further impairment to the carrying value of the investments in subsidiaries was required. E. Debtors Due within one year: Trade Debtors Contract assets R&D credits receivable Other debtors Prepayments Amounts owed by group undertakings 2018 £’000 163 252 281 143 65 1,335 2,239 2017 Restated £’000 569 - - 526 - 18,799 19,894 80 7digital Group plc Notes to the Parent Company financial statements Year ended 31 December 2018 F. Related Party Loans Impact of the adoption of IFRS 9 on interest free loans In accordance with IFRS 9, the management have reviewed the related parties with outstanding receivable loan balances and have determined that only 2 entities are at risk of recoverability. This risk is as a result of the closure of these entities post 31 December 2018. All other entities in which the company has a receivable balance, have long term contracts and licences with customers ensuring their ability to derive income in the future and repay the outstanding loan balances if demanded. As a result, the Company has incurred impairment losses under the general expected credit loss model of £2.62m relates to balances as at 31 December 2017 and £21k relates to balances at 31 December 2018 as these loans are considered to be in level 3 of the general approach. The Company has chosen not to restate comparatives on adoption of IFRS 9 and, therefore, are not reflected in the restated prior year financial statements. Rather, these changes have been processed at the date of initial application (i.e. 1 January 2018) and recognised in the opening equity balances of £ 2.62m. G. Trade and other payables: Current Liabilities Trade creditors Other taxes and social security Other creditors Contract liabilities Accruals Amounts owed to group undertakings Non Current Liabilities Other payables H. Loans and borrowings Current Convertible debt Embedded derivative 2018 £’000 2,273 175 14 413 1,700 186 4,761 197 197 2017 Restated £’000 828 - 205 - 3,578 5,262 9,873 113 113 2018 £'000 1,306 257 1,563 k The parent company issued the following Convertible Loan Notes (CLN) in October 2018, ie 17th October – Harwood LLP - £250,000; 25th October – Amcomri Ltd - £500,000; and 25th October – Media Saturn - £750,000, totalling to £1,500,000. The CLN have a fixed coupon of 10.438% which accrues daily on the principal amount and is payable monthly. The maturity date of the CLNs is 31st December 2019. However, the Company may at any time, by giving the noteholders written notice, repay the principal amount and accrued interest. The Company’s right to repay the CLNs is limited to the right to repay in two tranches of £750,000 principal amount (and accrued but unpaid interest). The CLNs do not meet the fixed-for-fixed test since the number of shares to be issued is not fixed. The number of shares to be issued is impacted by the cap on new shares to be issued (58,157,529) as well as the volume weighted average price for the period 30 days prior to conversion notice. Consequently, we conclude that the CLNs comprises a host debt liability and an embedded derivative liability (conversion option). The conversion option was valued as at the issue date (17th October 2018) using the Monte-Carlo simulation. IFRS 9 requires that an embedded derivative be separated from its host contract and accounted for as a derivative when the conditions in IFRS 9 (retained from IAS 39) are met. Accordingly, the fair value of the embedded derivate is £ 257,129 and the residual value is assigned to the debt host liability component. The fair value of the liability component, included in current borrowings, at inception was calculated using a market interest rate for an equivalent instrument without conversion option. The discount rate applied was 27.58%. 81 7digital Group plc Notes to the Parent Company financial statements Year ended 31 December 2018 I. Provision for liabilities and charges At 1 January 2018 Provision for closure of operations Partial guarantee of subsidiary loan Other At 31 December 2018 Of which is: current Of which is: non-current Provision for closure of business £'000 Other provisions £'000 - 288 333 - 621 510 111 - - - 7 7 7 - Total £'000 - 288 333 7 628 517 111 Due to the cessation of the French operations in Snowite SAS, a provision of £347k has been made for closing down the operations (see note 3). In addition, a provision has been made in the companys books for future payments In March 2016 the company acquired Snowite SAS (now 7digital France SAS). As part of the acquisition it negotiated a reduction in the amount of some of the existing liabilities within Snowite SAS, at the time of the purchase, to €1.7m (£1.5m). Terms of repayment were also agreed to be over 8 years starting on 7th April 2017. For the first two years repayments were set at 8% of the debt and then at 14% for each year thereafter. No interest is payable. The whole of the liability has been included in the Group’s Consolidated Statement of Financial Position (See note 16). A provision has been made of £333k (of which £111k is non current) in the standalone books of the parent company, as the parent company has guaranteed the next three repayments of €125k each, payable in April 2019, October 2019 and April 2020. J. Share capital Allotted, called up and fully paid: 400,236,646 ordinary shares of £0.01 each (2017: 398,638,987) 115,751,517 deferred shares of £0.09 each (2017: 115,751,517) 2018 £’000 4,002 10,418 2017 Restated £’000 3,986 10,418 82 7digital Group plc Notes to the Parent Company financial statements Year ended 31 December 2018 GENERAL INFORMATION AND ADVISORS Registered office 69 Wilson Street London EC2A 2BB Country of Incorporation England and Wales Registered number 03958483 Nominated adviser and broker Arden Partners plc 125 Old Broad Street London EC2N 1AR Solicitors Osborne Clarke One London Wall London EC2Y 5EB Principal bankers Barclays Bank plc United Kingdom House 180 Oxford Street London W1D 1EA Registrars Link Market Services Limited The Registry 34 Beckenham Road Beckenham Kent BR3 4TU Auditor BDO LLP 55 Baker Street London W1U 7EU 83
Continue reading text version or see original annual report in PDF format above