System1 Group PLC Annual Report and Accounts for the 12 month period ended 31 March 2020 Registered Number 05940040 INDEX GROUP STRATEGIC REPORT Highlights Chairman’s Statement Chief Executive Officer’s Statement Business and Finance Review Business Risk Review 5 Year Summary Group Strategic Report GOVERNANCE Group Directors’ Report Corporate Governance Report Board of Directors Audit Committee Report Remuneration Report Directors’ Responsibility Statement Independent Auditor’s Report FINANCIAL REPORT Consolidated Income Statement Consolidated Statement of Comprehensive Income Consolidated Balance Sheet Consolidated Cash Flow Statement Consolidated Statement of Changes in Equity Notes to the Consolidated Financial Statements Company Balance Sheet Company Statement of Changes in Equity Notes to the Company Financial Statements Company Information 1 2 3 6 10 12 13 14 17 18 24 26 31 34 36 37 38 39 40 41 68 69 70 81 Highlights £m REVENUE Gross Profit Underlying Overheads* UNDERLYING OPERATING PROFIT* Share Based Payments Finance Charges PROFIT (LOSS) BEFORE TAX Consulting AdRatings 25.4 21.5 (18.5) 3.1 0.1 (0.1) 3.0 0.1 0.1 (2.8) (2.7) - - (2.7) Total 25.5 21.6 (21.3) 0.3 0.1 (0.1) 0.3 * Underlying Overheads and Underlying Profit Before Tax are defined in the Business and Finance Review. Revenue declined 5% to £25.5m (2018/19: Revenue flat at £26.9m) 2% decline in Gross Profit to £21.6m (2018/19: £22.1m) Comms Gross Profit up 8% helped by Test Your Ad Innovation and Brand Gross Profit down 11% and 7% respectively 20% decline in Underlying Profit Before Tax (excluding AdRatings) to £3.1m (2018/19: 80% growth to £3.8m) Profit Before Tax (including AdRatings) declined to £0.3m (2018/19: £1.9m), after recognising an impairment charge of £0.9m for capitalised development costs Decline in diluted Earnings Per Share to a loss per share of 1.8p (2018/19: diluted EPS of 9.8p) £2.0m cash investment in AdRatings, with a post impairment profit and loss expense of £2.8m £6.7m cash at 31 March 2020 and debt of £2.5m (2018/19: £4.3m cash and no debt) No final dividend proposed (2018/19: 6.4p per share); proposed share buy-back suspended The Company has been making a significant investment in new AdRatings technology and has for the last two years split its results into the existing business (Consulting) and AdRatings. For consistency, these results maintain the split. For financial reporting in 2020/21 and beyond the figures will be combined, reflecting the important contribution of AdRatings IP to developing the Consulting business TRADING UPDATE AND OUTLOOK In the Trading Update issued on 27th April we said that given the impact of the Covid-19 pandemic it was difficult to provide financial guidance for the 2020/21 year, and this remains the case. In the two months to end May, Revenue and Gross Profit were 36% and 38% respectively below the same period of last year. Over these months the business as a whole incurred a Pre-Tax loss of some £0.7m as we pursued our short-term objectives of continuing to develop our new automated product set, while conserving cash by shrinking the cost base to offset lower sales. Cash net of debt facilities ended May at £3.9m compared with £4.1m at 31 March. In June, the sales pipeline has shown early signs of recovering towards pre-pandemic levels, and our cost base was in line with our targets. Commenting on the Company’s performance, John Kearon, Chief Executive Officer of System1, said: ‘‘ Over the last two years we have reshaped much of the business, automated many of our products, raised our industry profile and created a management team capable of achieving our goal of becoming the world leader in predicting advertising effectiveness. Despite Covid-19, the coming year will see more innovation and more investment as we continue to automate, attract new clients and drive revenues.’’ JOHN KEARON Chief Executive Officer System1 Group PLC Annual Report and Accounts 2020 1 Chairman’s Statement T his has been another eventful year for System1, with continued investment to transform the Company into a more automated digital business, and mixed fortunes for Sales and Profits. The year began well, build- ing on the strength of the strong profits recovery in 2018/19 with an encouraging H1 out-turn. Progress was not maintained however, with a weaker H2 and in particular a marked slowdown in our Q4 from January 2020 onwards. The full year saw Sales Revenue and Gross Profit down by a modest 5% and 2% respectively, and Underlying Profit Before Tax by a more substantial 20% as investment to drive future growth continued. As in 2018/19, these results exclude our investment in AdRatings, as we focused on developing and refining the product offering. During the year our Chief Innovation Officer, Orlando Wood, authored a seminal work on the nature of advertising, “Lemon”, which was published by The Institute of Practitioners in Advertising, (IPA), and System1 to widespread critical acclaim. This has led to an increased level of interest in our advertising testing, Test Your Ad, utilising the Star and Spike scores of our AdRatings methodology. We were encouraged by a partnership with ITV, Britain’s largest commercial broadcaster, promoting System1’s measurement of advertising effectiveness which was planned to be used in conjunction with the UEFA Euro 2020 football competition, although this has unfortu- nately been postponed until 2021 due to the Covid-19 pandemic. Whilst interest in the potential benefits of AdRatings continued to increase, short term subscription revenue to the AdRatings database remains modest, and we have decided to take an impairment charge against some of the development cost. From the current 2020/21 financial year we will consolidate AdRatings results into those of the core business. Our business benefits from a broad geographical spread and a range of testing services. Around half of our revenues come from the Americas, and the other half from the UK, continental Europe, and Asia. We saw growth in both North and South America this year, offset by some softness in the European and Asian regions. Within testing services, our communications testing, mainly of advertising, grew during the year, again offset by modest declines in innovation testing and brand tracking. System1 ended the financial year in a healthy financial position. In March 2020 the company arranged and drew down a £2.5m revolving credit facility, and the year ended with a gross cash balance of £6.7m and debt of £2.5m. The new financial year commencing 1st April 2020 has seen some changes to the composition of Executive Directors. James Geddes, our Chief Financial Officer for the past 17 years left the Company to be succeeded by Chris Willford, who we welcome to the Board. We send our heartfelt thanks to James for all he did during his time with System1, in assisting its international growth and development, and wish him every success in the future. Stefan Barden, who has worked with us for over two years in a senior consultancy capacity has also joined the Board as Chief Operating Officer, to complete many of the significant systems and process improvements that the business is engaged with as it transforms its product offering. The beginning of the current financial year has coincided with the impact of the Covid-19 pandemic, affecting our major markets and our clients’ forward planning. Whilst there was no material impact on our 2019/20 results, our current trading and profits outlook has inevitably been impacted. Given the importance of retaining cash in the business, the Board has decided to suspend the proposed share buy-back as well as payment of the final dividend for 2019/20. Future returns of capital to shareholders will be kept under review. Management priorities have been to counter the effect of the pandemic on short-term financial results, whilst positioning the business to take future advantage as situations begin to normalise. Cost saving measures have been implemented, and government employment schemes utilised where appropriate, including in the UK and the USA. The business and our staff have adapted and responded extremely well to an environment in which both we and our clients’ teams are largely working from home. Weekly client webinars, which have been widely attended, have been just one example of maintaining regular contact and stimulating sales. At this stage it is not possible to provide future guidance, but our short-term business objectives are being met, and my thanks are due to all the System1 staff worldwide for their efforts during 2019/20 but especially at the current time, in rising to the extraordinary challenges the Covid-19 pandemic is presenting. GRAHAM BLASHILL Chairman System1 Group PLC Annual Report and Accounts 2020 2 Chief Executive Officer’s Statement SIGNIFICANCE PRECEDES MOMENTUM Graham has done a great job summarising our 2019/20 financial performance, so I’ll focus on the year’s significant changes, investments and progress towards our goal of becoming the world leader in predicting advertising effectiveness. THE EFFECTIVENESS AGENCY Every year, over $900bn is spent on Advertising across the globe, by far the biggest annual investment most Companies make in future growth. However, only 0.1% of that is spent testing whether it’s going to work, despite the fact that we know from our own validated testing that over half of all advertising makes no contribution to profitable growth. Over 20 years, we pioneered the application of Behavioural Science to predicting consumer behaviour and have dramatically improved the predictive accuracy of ad testing – as validated by the IPA, the leading author- ity on ad effectiveness. Having perfected our approach through tens of thousands of ad tests, our goal is to help Companies significantly improve their return on advertising investment. To improve the utility and access to System1 predictions, we standardised, digitised and automated our approach and created AdRatings. This provides online, annual subscription access to ad effectiveness data for every US and UK ad, brand and company, in all major advertised categories. Subscribers can see their perfor- mance at a Company, Brand and individual ad level, compare themselves with competitors and learn how to improve their future ad effectiveness. The year saw significant progress in the four progressive goals I set out for AdRatings last year: FAME ASSET 1) BUILD AN ASSET. We have now tested 41,085 ads and have the larg- est database of validated ad effectiveness data and spend in the world, that we are aware of. We use this asset to continuously enhance our understanding of ad effectiveness and help prove the value of creativity to advertisers. Last year, the database proved invaluable to an effective- ness evaluation project with the IPA, which culminated in the publica- tion of Lemon – authored by our Chief Innovation Officer, Orlando Wood. The publication has been critically acclaimed by such industry luminaries as Rory Sutherland, Vice Chairman of Ogilvy and Peter Field, co-author of the seminal Long and The Short of It, who said of Lemon, “Just when you are starting to think that books on advertising effective- ness are all rather similar, along comes Orlando’s book. The book itself is itself a perfect illustration of the virtues it extols: entertaining, unpredictable, deep, broad-ranging and beautifully crafted. A book you will want to read.” NEW REVENUE NEW CLIENTS 2) GENERATE FAME FOR SYSTEM1. Testing every new ad the day after it first airs has given us the ability to provide predictive data to industry publications on ads generating interest or controversy. As a result, we’ve been able to generate significantly more System1 coverage than in any previous year. In the weeks since the Covid-19 crisis began, we have tested almost 550 Covid related ads worldwide and shared our learnings in a widely-attended weekly webinar. Our research has shown how consumers have been feeling during the crisis and the need for brands to empathise with their audience and make creative choices that strike the right emotional notes. The evidence from the IPA’s long-term studies and our own research has shown that emotionally appealing advertising is far more effective than advertising based on rational brand claims – and even more so in challenging times. System1 Group PLC Annual Report and Accounts 2020 3 Chief Executive Officer’s Statement continued But it’s Orlando’s Lemon publication that has created the greatest client interest and critical industry acclaim. The project started from the IPA’s previous publication, The Crisis In Creative Effectiveness which showed how ad effectiveness had dropped dramatically since 2008 and asked what’s responsible. Was it shifts in spend towards digital channels, greater emphasis on the short-term or structural changes in the ad industry? Based on System1’s knowledge of advertising, we thought the answer might lie in the psychology of how we perceive and relate to the world. We combined the data from our AdRatings database with the seminal brain lateralisation work of Iain McGilchrist, author of The Master And His Emissary, to uncover the roots of the decline in Advertising effectiveness. The resulting publication, Lemon, shows the single biggest determinant of adver- tising effectiveness is Creativity. Ads that use humour, generosity, humanity, story-telling, metaphor, recurring characters, a sense of between-ness generate the emotions that enable a brand to successfully and memorably connect with consumers. Lemon. This advertising brain has stopped working properly.It has lost its power to persuade, its ability to make people feel, and its talent to entertain.How has this happened? And is there anything we can do about it? In this challenging book, Orlando Wood argues that a golden age for adver- tising technology has been far from a golden age for advertising creativity.He shows how today’s analytical culture has sent the industry’s admired reputation for creativity into reverse.In place of a creative Renaissance, he maintains, we are now witnessing nothing less than a creative Reformation, a ‘stripping of the altars’. Reducing what was once dazzling artform to dreary science. So how should agencies and clients correct the wrong turn we have taken? Orlando offers some surprisingly counter-intuitive solutions of his own. If the advertising brain has stopped working properly, maybe this is the repair manual. Lemon is now the IPA’s fastest and biggest selling publication and Orlando has been invited to present the findings by the leading advertising bodies (WFA, ISBA, ARF, IPA), ad agencies,clients and companies such as: Microsoft, LinkedIn, ITV, Sky, Vodafone and Aldi. 3) WIN NEW CLIENTS. Our increased industry advertising effectiveness profile has led to the majority of new ad testing clients coming from industries beyond our historic CPG core, like Tech, Media and Online Retail. The AdRatings daily testing has also enabled us to create Ad of The Week, to honour brands making the most creative ads, with a number of the winners becoming clients. A significant new partnership has been ITV, Britain’s largest commercial broadcaster. ITV want to help adver- tisers improve the creativity, entertainment and profitability of their ads and are promoting System1’s approach to help achieve it. As a recent Covid-19 lock-down challenge, ITV challenged viewers to create their versions of 5 famous adverts and then aired the best of them during peak Saturday viewing, in the break of Britain’s Got Talent. The best of the ads recreated the famous ‘Honda Cog’ and delightfully managed to out-perform the original. Our 30 days free access to the Global Covid-19 category ads has already generated over 100 new company trialists. System1 Group PLC Annual Report and Accounts 2020 4 4) GENERATE NEW REVENUES. Although the number of annual subscribers to AdRatings is still low, it’s proving a very effective way to sell System1’s ad testing consultancy and a high proportion of our new ad testing clients are also choosing to subscribe. In the last quarter of the year we launched Test Your Ad, to increase access to our testing and generate addi- tional revenues from AdRatings. Users can upload and pre-test any ad and get next-day or even same-day predic- tions for a fraction of current costs. They see the likely performance of their ad and can compare it with all other ads in their category. It’s early days, but the initial reaction has been extremely positive and ITV are promoting the service to all their advertisers. Test Your Ad is our online offering and AdRatings remains the name for our advert database. The combination of the year’s initiatives meant we grew ad testing Gross Profit by 8%, in a year in which System1’s overall Gross Profit declined 2%. Over the last two years, ad testing has grown to the same size as innovation testing, which for many years has been the largest part of the business. Growth in ad testing has significant commercial advantage in being generally a sole-supplier, long-term partnership with clients, whereas innovation testing tends to be bought project by project from a roster of suppliers. To create a far bigger business we have made a number of important senior appointments; Orlando Wood as Chief Innovation Officer, Mark Beard as Chief Technology Officer, Karen Wolfe as Chief Commercial Officer, Jon Evans as Chief Marketing Officer, Emma Cooper as Chief People Officer and Robyn Di Cesare as Global Director of Research & Guidance. There are two recent appointments to complete our Management Team for the future. Chris Willford joins as CFO and Stefan Barden currently an Advisor, is temporarily taking the vacant COO posi- tion. Chris brings huge commercial and financial experience having been UK Finance Director at Barclays PLC and Group Finance Director at Bradford & Bingley PLC, (FTSE 100 businesses), as well as working as a consultant with scale up media and tech business similar to System1. Stefan brings Tech, Data and Online experience, having been a FTSE 250 CEO and the CEO who, in three years grew Wiggle from £140m turnover to £360m, to become Europe’s #1 online sports retailer. Over the last two years, we have reshaped much of the business, automated many of our products, generated increasing industry profile and created a management team capable of achieving our goal to become the world leader in predicting advertising effectiveness. There remains much to do, but we believe that we are further ahead than our competitors. There will be many more innovations in the coming year, as we continue to auto- mate our predictions, increase System1’s fame, attract new customers and drive revenues. In summary, over the last year System1 has taken its leading research IP and created data products and assets to complement our historic consultancy services. We have been recognised by industry leaders in what we do and are firmly becoming the research industry’s champion for creativity, backed by data. In the UK, our pilot market, we have developed partnerships with ITV, the largest retailer of advertising space and globally with LinkedIn, the B-2-B platform. It bodes well for the future, but we know there is much still to do. Finally a heartfelt thank you to our patient and incredibly supportive sharehold- ers. And a huge thank you to our wonderfully creative, hardworking staff (past and present, with a special thanks to James Geddes, our outgoing CFO for 17 years of remarkable, dedicated service to the business). I’ll give the final words to the IPA’s recent Financial Times ad, based on System1’s joint work with them. ‘‘ Emotion. The Most Rational Thing a Brand Can Use.’’ JOHN KEARON Chief Executive Officer System1 Group PLC Annual Report and Accounts 2020 5 Business and Finance Review OVERVIEW £m Consulting Ad Ratings Total Consulting Ad Ratings 2019/20 % Change YoY Revenue Gross Profit Gross Profit % Underlying Overheads Underlying Profit before Tax / (Loss) Statutory Overheads Statutory Profit Before Tax / (Loss) 25.4 21.5 85% 18.5 3.1 0.1 0.1 100% 2.8 -2.7 -5% -2% 3% 1% -20% 25% 25.5 21.6 85% 21.3 0.3 21.2 0.3 Total -5% -2% 3% 4% -86% 6% -85% * All figures in the business and finance review are presented in millions rounded to one decimal place unless specified otherwise. Percentage movements are calculated based on the numbers reported in the financial statements and accompanying notes. This turned out to be a year of mixed fortunes. At the interim results we reported 7% growth in Gross Profit on the back of growing momentum in Comms and a 33% increase in Profit Before Tax. In the final quarter sales declined due to deteroriating trading conditions and some early teething issues with our new organisational model, now resolved. As a consequence, 2019/20 Gross Profit was 2% lower than last year and underlying Profit Before Tax in Consulting fell 20% from £3.8m to £3.1m. The final quarter was minimally impacted by the Covid-19 economic slowdown, primarily Innovation, although the pandemic has of course affected the first quarter of our new fiscal year. Our AdRatings database has spawned Test Your Ad, an online product. AdRatings generates significant inter- est and enquiries from clients but it has proved difficult to attribute subsequent consulting revenue streams from those clients to the database.The Board has decided that capitalising the database is no longer appropriate and will expense future costs as they are incurred. We have therefore impaired the carrying value of the remaining asset (£0.9m) in full, which contributes to a 25% increase in the reported costs for AdRatings in the year. Including Ad Ratings, Profit Before Tax fell from £1.9m in 2018/19 to £0.3m. The Group defines Underlying Profit and Underlying Overheads as Profit Before Tax and Administrative Expenses excluding AdRatings and share-based payments, including associated social security costs. Share-based payments are a non-cash expense that varies with the Company’s share price, and so are disclosed separately. PRODUCT AREAS The Research business has three main product lines, Comms (testing adverts prior to broadcast), Brand (tracking brand health), and Innovation (testing new product and packaging concepts and ideas). We offer them from our offices in the UK, US, and seven other offices across Continental Europe and the rest of the world. Gross Profit by Product £m Innovation Comms Brand Other (includes Agency) TOTAL 2019/20 2018/19 FY 8.6 8.0 3.4 1.6 FY 9.6 7.4 3.7 1.4 21.6 22.1 Change % -11% 8% -7% 19% -2% Comms comprised 37% of the Company’s Gross Profit in the year (2018/19: 33%), growing 8% year on year and improving in all regions. System1 Group PLC Annual Report and Accounts 2020 6 Our Brand product area is closely related to Comms and it comprised 16% of 2019/20 Gross Profit (2018/19: 17%). Our brand tracking monitors the health of a brand over time, using a model which measures the “Fame”, “Feeling” and “Fluency” of the brand. It provides a leading indicator of the direction of future sales (all other fac- tors unrelated to the brand being equal). Gross Profit from Brand declined by 7%, as a result of reduced spending by two large clients in Europe. Growth in other regions was satisfactory. Our Innovation business is more ad hoc in nature than Comms and Brand. It comprised most of Company’s business in its early years and is still the largest product area, representing 40% of 2019/20 Gross Profit (2018-19: 44%). Gross Profit declined by 11% in the year despite strong growth in the Americas and fell away in the final quarter as larger clients began to defer new launches. Other business comprised mainly bespoke projects for large clients in the UK and USA that did not fall neatly into the main product categories, together with the legacy Agency business. REGIONAL PERFORMANCE Gross Profit by Region £m Americas UK (includes Agency) Europe APAC TOTAL 2019/20 2018/19 FY 10.9 4.7 4.6 1.4 21.6 FY 9.5 5.5 5.5 1.6 22.1 Change % 15% -14% -15% -17% -2% We have only a small market share in each of our regions and the addressable market in each one allows room for significant growth. Americas (Gross Profit +15% (2018/19: -6%)) enjoyed strong growth in all product areas after a disappointing prior year. Conversely Europe was down 15% (2018/19: +19%) due to lower client spend on Brand and Innovation. In the UK, despite growth in Brand and Comms, the decline in Innovation and the Agency led to a reduction of 15% in Gross Profit. In APAC Gross Profit fell for the second successive year due mainly to reduced Innovation sales. ADRATINGS AdRatings is a large database showing ‘ratings’ or ‘scores’, of adverts in the market as a whole. It allows clients to assess the effectiveness of their historical advertising and benchmark it against peer companies, competitor categories and the industry as a whole. AdRatings Expenditure £m Investment Spend Capitalisation Amortisation Impairment Reported Expenditure Net Book Value at 31 March 2019/20 2018/19 FY 2.0 (0.4) 0.3 0.9 2.8 0.0 FY 3.0 (0.9) 0.1 0.0 2.2 0.8 Change % -34% -52% 200% NM 25% -100% AdRatings has also been a catalyst for upgrading our technology across the business, as we endeavour to digitise the Company. Client interest in our automated data products has risen markedly since year-end on the back of a series of “Coronavirus Webinars” and we have offered a trial-usage promotion to stimulate demand for paid-for packages of data. System1 Group PLC Annual Report and Accounts 2020 7 Business and Finance Review continued PRODUCTIVITY £m (unless otherwise specified) Average headcount Gross profit per head Direct costs Overhead costs TOTAL COSTS 2019/20 2018/19 Growth 146 148 3.9 21.3 25.2 145 152 4.9 20.1 25.0 1% -3% -20% 6% 1% During the year we continued to focus on productivity by redesigning our business from first principles. Our Product Portfolio was simplified to comprise only products where we have real distinctive competitive advantage. We implemented a ‘Continuous Improvement Performance Culture’, accessing data and making it widely avail- able in the business for local decision making in a series of weekly reviews which present improvement from the bottom up. New specific roles were defined, as opposed to the historic generalist roles. Sales, now 25 specialists rather than 100 part-time generalists, continue to be managed at a client/office level, but now all other parts of the business are global and, for example projects can now be managed anywhere within the global network. We continue to challenge overhead costs creatively - for example hiring on lower basic salaries and having more variable performance-related upside. We invested heavily in professionalising the personal productivity of our teams through the Microsoft suite and were already working remotely as a test when the Covid-19 lockdown hit us around the world. Average headcount in 2019/20 was 1% above last year, and Underlying Overheads in Consulting rose in line with headcount. Gross Profit per head declined by 3% due to the fall in revenues in the final quarter but was 10% higher than in 2017/18. Overhead spend in AdRatings, including the £0.9m impairment charge, contributed to the 6% overall increase at Company level. Excluding the impairment of the AdRatings asset, overheads rose by 1% and total costs fell by 3%. TAX The Company’s effective tax rate (excluding AdRatings) increased to 35% from 26% due in part to the derecogni- tion of certain carried-forward tax losses as well as profits that were generated in relatively higher tax jurisdic- tions. We intend to submit a R&D tax credit claim worth approximately £0.5m in respect of the 2018/19 financial year. The potential beneficial impact of this claim is not included in the reported figures, and will be recognised upon receipt. DIVIDENDS, FUNDING AND LIQUIDITY Historically, the Company’s policy has been to maintain a level of ordinary dividends which over the long-term grow broadly in line with earnings, and to return surplus cash (after payment of ordinary dividends) by way of special dividends or share buy-backs, dependent on the price of the Company’s shares at the time. Given the emphasis on retaining cash during the global Covid-19 pandemic, the Board decided to suspend both the proposed buy-back of up to £1.5m of System1 shares announced in February this year, as well as the payment of a final dividend for the 2019/20 financial year. Future returns of capital will be kept under review as the economic situation develops. In order to provide greater financial flexibility in the current environment, the Company arranged and drew down a £2.5m revolving credit facility in March 2020. The business generated operational cash flow of £0.8m in the period (2018/19: -£0.4m) after investing £2.0m in AdRatings. Dividend payments of £0.9m and loan funding of £2.5m resulted in year-end cash of £6.7m (2018/19: £4.3m). System1 Group PLC Annual Report and Accounts 2020 8 OUTLOOK Since the end of the 2019/20 financial year, System1’s trading has inevitably been adversely affected by the global economic downturn caused by the Covid-19 pandemic. Although weekly sales bookings have improved since the 27 April Trading Statement, the Board has concluded that it is difficult at this stage to provide guidance on the financial performance for the current year until a clearer outlook emerges. The Board will keep investors updated as the impact on the Group’s performance becomes clearer. System1’s priority, as we deal with the impact of the economic downturn, is to maintain a strong financial position while safeguarding the human and intellectual capital needed to take advantage of the what the Board believes will be substantial growth opportunities when the global economy recovers. In accordance with this priority, we have taken mitigating actions including deferring employment costs, reducing the number of hours paid for where the volume of work has fallen, reducing discretionary expenditure, laying off a small number of colleagues, and taking advantage of government-backed business support and furloughing schemes. As part of this initiative, the Board and other senior executives in System1 agreed in April 2020 to defer 20% of their salaries until further notice. Important strategic investments in people, products and systems have been pro- tected throughout – a policy that we believe positions System1 well to implement our growth plans when global economic conditions improve. CHRIS WILLFORD Chief Financial Officer System1 Group PLC Annual Report and Accounts 2020 9 Business Risk Review The Board endeavours to identify and protect the business from the big, remote, risks – those that do not occur very often, but which, when they do, have major ramifications. The types of such event that we are concerned about and seek to manage are: loss of a significant client; loss of key personnel; loss of a critical supplier; material adverse event leading to significant loss of property, software, or data, or an adverse legal claim; systemic tax or legal compliance error; major outage in our survey platform; cyber-attack causing a material breach in our IT infrastructure. LOSS OF A SIGNIFICANT CLIENT This is a significant risk, with the percentage of business from our largest client in the 12 months to 31 March 2020 at 10% of revenue (2018/19: 6%). We therefore go to considerable lengths to monitor service quality and seek client feedback. LOSS OF KEY PERSONNEL The loss of a senior member of the team would have a negative impact on the business. However, we have a rela- tively large senior team and do not view the business as being overly dependent on any one individual. LOSS OF A CRITICAL SUPPLIER We have several mission-critical functions carried out by third-party suppliers (such as panel suppliers). For these functions, we seek to ensure we are not too reliant on any one organisation. MATERIAL ADVERSE EVENT LEADING TO A SIGNIFICANT LOSS OF PROPERTY, SOFTWARE, OR DATA, OR AN ADVERSE LEGAL CLAIM We endeavour to protect the business from significant risks, through a combination of: comprehensive profes- sional indemnity insurance; information security, particularly with regard to client confidentiality and personal data (see below); and sufficient focus on legal protections, for example through our terms and conditions. SYSTEMIC TAX OR LEGAL COMPLIANCE ERROR We are a small business with small finance and legal teams based in the UK and Brazil. We operate in a number of different jurisdictions and in some cases, have to deal in relatively complex tax and regulatory environments. Were we to make a small systemic error which did not surface for a number of years, the cumulative impact to correct the error could be significant. However, we endeavour to keep our tax and legal affairs simple and straightforward, and within our budgetary constraints, carefully select the best professional advisors that we can find. MAJOR OUTAGE IN OUR SURVEY PLATFORM Were there to be a major outage in our survey platform due, for example, to capacity constraints or a security breach, we could be prevented from building surveys, collecting data and downloading results. This might result in significant delay in delivering client projects with a consequential loss of revenue, reputational damage, and System1 Group PLC Annual Report and Accounts 2020 10 the costs of remedying the situation. We have suffered relatively minor outages from time to time, but none has led to significant financial loss. CYBER-ATTACK CAUSING A MATERIAL BREACH IN OUR IT INFRASTRUCTURE Were a cyber-attack to succeed in infiltrating our IT infrastructure, unauthorised persons could access confiden- tial information (particularly personal data) held within our systems, putting us in breach of our confidentiality obligations, and potentially losing access to key information or files. This is a critical risk, particularly in the cur- rent environment. Nevertheless, there are a number of mitigating factors. Our business does not ordinarily hold a great deal of personal data. For example, we do not have a panel of respondents (but instead use third party sup- pliers to reach consumers). Due to the nature of a marketing services business, the confidential information we hold is not as commercially sensitive as that for businesses in other industries (financial services or healthcare, for example). We invested in our controls, processes and IT infrastructure and hold ISO 27001 accreditation covering our information security. BREXIT The Group believes that any impact is likely to be small due to relatively minor trading between the Group’s UK companies and overseas clients and suppliers. The Group has well established operations in France, Germany, The Netherlands and Switzerland, which serve its Continental European clients. FINANCIAL RISK The Company is also exposed to the usual financial risks (such as credit, foreign exchange and liquidity risks), as set out in the Director’s Report. However, due to the straightforward nature of the business, its international cost base, the Company’s strong balance sheet, and the fact that most of the Company’s clients are large, credit-wor- thy organisations, these risks have historically proved to be modest. COVID-19 The coronavirus outbreak has affected economies across the globe and continues to cause disruption to busi- nesses. As noted in the Business and Finance review, there was minimal impact on FY2019/20 as a result of Covid-19, however the first few months of FY2020/21 have been affected by the reduction in economic activity across multiple geographies and industries. At present, the medium to long term impact of the pandemic are relatively unknown, however the Group acknowledges that it presents financial and operational risks in the short term. The Group has taken the following mitigating actions to manage this risk: reviewing discretionary spend and utilising our credit facility to ensure that the Group has sufficient cash facilitating home working and eliminating non-essential travel; reserves to withstand a potential drop in revenues in the short to medium term; controlling salary costs through a combination of reduced working hours and pay deferrals. System1 Group PLC Annual Report and Accounts 2020 11 5 Year Summary (£000s unless specified otherwise) FINANCIAL KPIs Revenue growth Gross profit growth Administrative costs growth Profit Before Tax growth (Loss)/Profit after tax growth EPS – diluted growth Operating Cash Flow** Cash balance Dividend (interim & final) growth Special dividend Share buy-backs NON-FINANCIAL KPIs Number of clients growth Gross profit per project growth Average headcount growth Gross profit per head growth 12 months to 31 Mar 12 months to 31 Dec 2019/20 2018/19 ***Restated for IFRS 16 2017/18 2016 2015 Ex AR* Inc AR* Ex AR* Inc AR* Audited Audited Audited Audited Audited Unaudited Audited 25,422 -5% 21,548 -2% 18,412 4% 3,014 -27% 26,896 -% 22,047 -1% 17,777 -12% 4,135 108% 25,475 -5% 21,601 -2% 21,183 6% 296 -85% (231) -118% (1.84)p NM 787 6,650 1.1p -85% - (30) 232 -8% 16.2 -2% 146 1% 148 -3% 26,899 -% 22,050 -1% 19,994 1% 1,921 -6% 1,267 -% 9.8p -1% 26,939 -18% 22,231 -18% 20,246 -2% 1,992 -68% 1,213 -70% 9.5p -69% 31,236 24% 25,643 27% 19,414 24% 6,200 38% 3,968 31% 30.3p 33% (421) 1,838 6,337 4,315 5,784 7,754 7.5p -% - (3) 7.5p -% 7.5p 67% 26.1 p 12.0p 1 3,195 251 23% 16.5 -18% 145 -12% 152 13% 204 -9% 20.0 -13% 165 2% 135 -20% 223 -8% 22.6 15% 157 -1% 163 27% 25,184 2% 20,250 4% 15,704 4% 4,501 5% 3,032 5% 22.7p 7% 2,696 6,365 4.5p 5% - 948 243 3% 19.6 -2% 158 4% 128 -% * Ex AR means: excluding AdRatings. Inc AR means: including AdRatings. ** Operating Cash Flow means: before dividends and share buy-backs but inclusive of property lease payments *** Years prior to 2018/19 have not been restated for the transition to IFRS 16 System1 Group PLC Annual Report and Accounts 2020 12 Group Strategic Report The Chairman and CEO statements, the Business and Finance Review, the Business Risk Review, the Corporate Governance Report and the 5 year summary (which include the Company’s key performance indicators) set out: the issues, factors and stakeholders considered in determining that the Directors have complied with their responsibilities under section 172 of the Companies Act 2006 (Corporate Governance Review); the methods used to engage with stakeholders and understand the issues to which the Directors must have regard under section 172 of the Companies Act 2006 and the effect on the Company’s decisions and strategies during the year (Corporate Governance Review); the way that management view the business (Chairman and CEO statements, Business and Finance Review); its strategy, positioning, and objectives (Chairman and CEO statements, Business and Finance Review); its historic financial performance (Chairman and CEO statements, Business and Finance Review); an assessment of its future potential (Chairman and CEO statements, Business and Finance Review); its key performance indicators (5 year summary and Business and Finance Review); and its key business risks (Business Risk Review). These form part of this Strategic Report. ON BEHALF OF THE BOARD CHRIS WILLFORD Chief Financial Officer 30 June 2020 System1 Group PLC Annual Report and Accounts 2020 13 Group Directors’ Report REVIEW OF THE BUSINESS AND FUTURE DEVELOPMENT The Chairman’s and CEO statements, the Business and Financial Review, and the Business Risk Review set out a review of the business’s performance and an assessment of its future development. DIVIDENDS The Company has paid the following dividends: Ordinary Shares 2019 interim dividend paid, 1.1p per share 2020 interim dividend paid, 1.1p per share 2018 final dividend paid, 6.4p per share 2019 final dividend paid, 6.4p per share TOTAL DIVIDENDS ON ORDINARY SHARES 31 Mar 2020 31 Mar 2019 £’000 £’000 138 805 943 138 805 943 On 13 December 2019, the Company paid an interim dividend of 1.1 pence per share, amounting to £138,000, in respect of the year ended 31 March 2020. The Company does not propose the payment of a final dividend. DIRECTORS The following individuals served as directors of the parent Company, System1 Group PLC, during the period: John Kearon (Executive) James Geddes (Executive) – resigned 20 April 2020 Robert Brand (Non-Executive) Graham Blashill (Non-Executive) Sophie Tomkins (Non-Executive) Jane Wakely (Non-Executive) Subsequent to the year-end on 26 June 2020, the following individuals were appointed to the Board of directors: Chris Willford (Executive) Stefan Barden (Executive) The Remuneration Report sets out directors’ interests in the shares of the Company. SHARE CAPITAL Changes in the share capital of the Company during the year are given in Note 10 to the financial statements. As at 29 May 2020, the Company was aware of the following significant interests in the ordinary issued share capital of the Company. At 29 May 2020 John Kearon University of Notre Dame Lazard Frères Gestion Stefan Barden Ruffer Investment Management Inv. AG f. langfr. Invest. TGV Motley Fool Funds Trust Ennismore Fund Management Heritage Capital Management Number 2,961,235 1,200,000 847,578 716,062 720,792 670,000 645,000 606,140 377,774 % of voting shares 23.6% 9.5% 6.7% 5.7% 5.7% 5.3% 5.1% 4.8% 3.0% System1 Group PLC Annual Report and Accounts 2020 14 FINANCIAL RISK MANAGEMENT The Group’s activities expose it to the following financial risks to a small degree. CREDIT RISK We manage credit risk on a Group basis, arising from credit exposures to outstanding receivables and cash and cash equivalents. Since the majority of the Group’s clients are large blue-chip organisations, the Group rarely suf- fers a bad debt. The Group’s cash balances are held, in the main, at HSBC Bank. MARKET RISK – FOREIGN EXCHANGE RISK In addition to the United Kingdom, the Group operated in the United States, Continental Europe, Brazil, Singapore and Australia during the period and was exposed to currency movements impacting commercial transactions and net investments in those countries. Management endeavours to match the currencies in which revenues are earned with the currencies in which costs are incurred. So for example, its US operation generates most of its revenue in US dollars and incurs most of its costs in US dollars also. Management does not believe that there would be any long-term benefit in endeavouring to manage currency risk further, and in order to avoid the cost and complexity does not deal in hedging instruments. LIQUIDITY RISK The Company monitors its cash balances regularly and holds its cash in immediately available current accounts to minimise liquidity risk. The Company has a revolving credit facility with HSBC. OTHER RISKS Management do not consider price risk or interest rate risk to be material to the Group. CAPITAL RISK MANAGEMENT The Company manages its capital to ensure that it is able to continue as a going concern while maximising its return to shareholders. The Company’s capital structure consists of cash and cash equivalents, bank borrowings and share capital. Towards the end of the financial year, the Company arranged and drew down a £2.5m revolv- ing credit facility to provide greater financial flexibility in a period of uncertainty due to the global pandemic. The Group has not entered into any derivative contracts. GOING CONCERN As noted in the Business Risk Review, and in note 3 of the financial statements, the coronavirus outbreak has affected economies across the globe and continues to cause disruption to markets and businesses. The Com- pany acknowledges that this presents financial and operational risks in the short term, and the Directors have considered this in their going concern assessment. In addition to the mitigating actions taken by the Company to address these risks, as set in the Business Risk Review, the Directors have closely monitored the post year-end performance of the Group, noting that net cash has been maintained at a comparable level to that as at 31 March 2020 and trading continues to be above the levels anticipated in the Group’s Covid-19 scenario planning. Accordingly, after making appropriate enquiries, at the time of approving the financial statements the Directors have a reasonable expectation that the Company and the Group have adequate resources to continue in operational existence for at least 12 months from the approval of these financial statements. For this reason the Directors continue to adopt the going concern basis in preparing the financial statements. System1 Group PLC Annual Report and Accounts 2020 15 Group Directors’ Report continued RESEARCH AND DEVELOPMENT The Company’s Labs team is involved in the development and validation of new market research methods and products. PURCHASE OF OWN SHARES During the year the Company transferred 23,167 Ordinary Shares (“Shares”) (with an aggregate nominal value of £232, representing 0.2% of the called-up share capital of the Company) out of treasury to satisfy the exercise of employee share options over 23,167 shares, for cash consideration of £30,000. At 31 March 2020, the Company had 13,226,773 Shares in issue (31 March 2019: 13,226,773) of which 626,989 were held in treasury (31 March 2019: 650,156). The treasury shares will be used to help satisfy the requirements of the Group’s share incentive schemes. EMPLOYEES The Group maintains fair employment practices, attempts to eliminate all forms of discrimination and to give equal access, and to promote diversity. Wherever possible we provide the same opportunities for disabled people as for others. If an employee were to become disabled we would make every effort to keep him or her in our employment, with appropriate training where necessary. HEALTH AND SAFETY POLICIES The Group does not have significant health and safety risks and is committed to maintaining high standards of health and safety for its employees, visitors and the general public. DIRECTORS’ INDEMNITIES Directors’ and officers’ insurance cover has been established for each of the Directors to provide cover against their reasonable actions on behalf of the Company. The indemnities, which constitute a qualifying third party indemnity provision as defined by Section 234 of the Companies Act 2006, remain in force for all current Directors. AUDITOR The Company will be seeking shareholder approval to appoint RSM UK Audit LLP as its auditor, at its Annual General Meeting. ON BEHALF OF THE BOARD CHRIS WILLFORD Chief Financial Officer 30 June 2020 System1 Group PLC Annual Report and Accounts 2020 16 Corporate Governance Report CHAIRMAN’S INTRODUCTION I am pleased to present the System1 Group PLC Corporate Governance Report for the financial year ended 31st March 2020. As Chairman of the System1 Group PLC Board, it is my responsibility to ensure that the Board is per- forming its role effectively and has the capacity, ability, structure and support to enable it to continue to do so. Your Board remains committed to delivering and maintaining high standards of Corporate Governance throughout the Group and applies the Corporate Governance Code of the QCA, which is appropriate for small and medium sized companies. This report, along with those of the Audit and Remuneration Committees, describes how the Company has applied the main principles and complied with the relevant provisions of the Code. At System1 we remain committed to complying with both the letter and spirit of the QCA Code. We believe that good governance is an essential basis on which to build our business and sustain us over the long term. The scope of the Company’s governance covers the interests of all its stakeholders, including shareholders, lenders, employees, clients and suppliers, and to the extent possible given our size, to the communities in which we oper- ate. We endeavour to be fair and transparent in all our dealings and communications with our stakeholders. Board composition has remained stable throughout 2019/20 with a good balance of skills and experience following the appointments made previously. As mentioned in my Chairman’s Report, there have been changes to the Executive Directors after the year end, with James Geddes, our former Chief Financial Officer being suc- ceeded by Chris Willford and Stefan Barden formally joining the Board as Chief Operating Officer after a period of senior consultancy with the business. The Board is also mindful that Robert Brand, our Senior Independent Director, was first appointed to the Board as a Non-Executive Director in January 2012, and I was appointed as a Non-Executive Director in July 2012, becoming Chairman in July 2018. Whilst the QCA Governance Code does not require independent Directors to limit their term of office, we are conscious that we should strike a balance between both continuity and refresh- ment. We plan to consider the future needs of the Board and make a further announcement in due course. GRAHAM BLASHILL Chairman 30 June 2020 System1 Group PLC Annual Report and Accounts 2020 17 Corporate Governance Report continued BOARD OF DIRECTORS JANE WAKELY GRAHAM BLASHILL INDEPENDENT NON-EXECUTIVE CHAIRMAN, APPOINTED ON 18 JULY 2012 (BECAME CHAIRMAN ON 25 JULY 2018); Graham Blashill joined System1 Group in 2012 as a Non- Executive Director. He was previously a main board director of Imperial Tobacco Group plc (a FTSE 100 company) where he spent the majority of his career. He joined W.D. & H.O. Wills (a division of Imperial Tobacco) in 1968, and became Managing Director of Imperial Tobacco UK in 1995. In 2003, he became Regional Director for Western Europe, and in 2005 was appointed Group Sales and Marketing Director responsible for Imperial Tobacco’s global trading operations. ROBERT BRAND INDEPENDENT NON-EXECUTIVE DIRECTOR, APPOINTED ON 5 JANUARY 2012 (BECAME SENIOR INDEPENDENT DIRECTOR ON 25 JULY 2018); Robert Brand joined System1 Group in 2012 as a Non- Executive Director. He began his career in 1977, initially as a research analyst and subsequently as Managing Director of UK Equity research at BZW, then the investment banking di- vision of Barclays Bank. In 1990 he joined Makinson Cowell, a capital markets advisory firm, as a director and partner. Over a period of 18 years he advised a range of FTSE 100 and FTSE 250 companies, focusing on their link with institu- tional investors. He retired in 2008. SOPHIE TOMKINS INDEPENDENT NON-EXECUTIVE DIRECTOR, APPOINTED ON 11 JUNE 2018 Sophie joined the Board as Non-Executive Director in June 2018. Her career has included nearly two decades as a London-based stockbroker, focusing mainly on high growth small to mid-cap companies. She started at established firm Cazenove & Co, and became more entrepreneurial, at both Collins Stewart, and then Fairfax. As City Analyst, and lat- terly Head of Equities, she has analysed and advised numer- ous companies and Boards, and been involved with a huge range of transactions, notably several high profile IPOs and M&A deals. She became a portfolio Non-Executive Director in 2012, and is currently Non-Executive Director and Audit Committee Chair of both Hotel Chocolat Group PLC (retail and manufacturing) and Cloudcall Group PLC (software), and Senior Independent Director and Remuneration Committee Chair at Proactis Holdings PLC (software). She is also a quali- fied Chartered Accountant and a fellow of the Chartered Institute for Securities and Investment. INDEPENDENT NON-EXECUTIVE DIRECTOR, APPOINTED ON 23 JULY 2018 Jane joined System1 Group in July 2018 as a Non-Executive Director. Passionate about creativity, innovation and driving profitable growth that transforms categories and brands, she has had the privilege of working for world leading CPG companies such as Mars Incorporated, Procter & Gamble and Unilever in her career, across categories as diverse as cosmetics, beauty care, healthcare, food, confectionery and pet care. She is currently Global Chief Marketing Officer for the Pet Nutrition business at Mars Incorporated and Lead Chief Marketing Officer for Mars Inc. Previously, Jane was the Global Chief Marketing Officer of the Chocolate business at Mars and has been part of the Mars drive to innovate digitally and creatively, leading to Mars being recognised creatively as one of the most awarded companies in the world. She is also a Chartered Management Accountant and holds a BSc (Hons) in Business Administration from Bath Spa University. JOHN KEARON CHIEF EXECUTIVE OFFICER John founded the Company in 1999 and remains its largest shareholder. Previously he founded innovation agency Brand Genetics, which invented new products and services for large consumer companies. Before this, he was a plan- ning director at Publicis (the leading advertising agency), having started his career at Unilever where he rose to be- come a senior marketer at Elida Gibbs. His role in establish- ing and developing the Company made him Ernst & Young’s “Emerging Entrepreneur of the Year” in 2006. CHRIS WILLFORD CHIEF FINANCIAL OFFICER AND COMPANY SECRETARY, APPOINTED 26 JUNE 2020 Chris, a Chartered Management Accountant, built his career with blue chip consumer businesses including Unilever, British Airways (Group Treasurer), Barclays (Finance direc- tor of Corporate Bank and UK Retail Bank) and Bradford & Bingley (Group Finance Director). In the past decade, Chris has worked as a consultant with a portfolio of scale up me- dia and tech businesses similar to System1. STEFAN BARDEN CHIEF OPERATING OFFICER, APPOINTED 26 JUNE 2020 Stefan has over 20 years of General Manager, Managing Director and CEO experience after graduating from McKinsey Management Consultancy and Unilever’s fast track management development programme. His previous positions include CEO of Northern Foods, CEO of Heinz UK and Ireland, as well as more latterly CEO of the internet business Wiggle which he took from £140m to £360m in sales in 3 years. Now semi-retired, he also supports several CEOs, often founders, in developing high growth businesses. System1 Group PLC Annual Report and Accounts 2020 18 STRATEGY All directors are familiar with the market in which the Company is operating, the Company’s value proposition, and its strategic intent. The Board actively participates in setting, and regularly reviewing, the strategy of the business, and is respon- sible for ensuring that the Company’s business model is, and remains, aligned to the achievement of its strategic objectives. The Company sets out its strategy within the Chairman’s Statement, the Chief Executive’s Statement, and the Business and Finance Review of its Annual Report and Accounts. RISK MANAGEMENT The Board reviews the risks facing the business on a regular basis. The identified principal risks and uncertainties are those outlined in the Business Risk Review on pages 10 and 11. The Board is responsible for the Group’s system of internal controls and risk management, and for review- ing the effectiveness of these systems. These systems are designed to manage, rather than eliminate, the risk of failure to achieve business objectives, and to provide reasonable, but not absolute assurance against material misstatement or loss. The key features of the Group’s internal controls are described below: clearly defined organisational structure with appropriate delegation of authority; comprehensive budgeting programme with an annual budget approved by the Board; regular review by the Board of actual results compared with budget and forecasts; regular reviews by the Board of full year expectations; detailed budgeting and monitoring of costs incurred on the development of new products; a limited number of Directors and Executives authorised to make payments and commit the company to legal agreements; regular reviews of client and employee feedback; information security controls (for which the Company has obtained ISO 27001 accreditation). The Board take measures to review internal controls and embed risk management procedures on an ongoing basis and implement metrics and objectives to monitor the business as part of a continual improvement pro- gramme. CORPORATE CULTURE The Company endeavours to maintain a culture built on integrity. In order to surface unethical or deceitful behav- iours, it promotes openness amongst its employees, provides channels for employees to feed back concerns to the Executive Directors and the Board (such as anonymous employee feedback surveys, and confidential whistle- blowing channels), and conducts exit interviews. THE BOARD OF DIRECTORS The Board comprised two Executive Directors and four independent Non-Executive Directors, including the Non-Executive Chairman during the year ended 31 March 2020. The membership of the Board is set out in the Directors’ Report. We believe that the directors have the mix of leadership, marketing and financial skills and experience necessary to oversee the Company and deliver its strategy for the benefit of the shareholders over the medium to long-term. The composition of the Board is intended to achieve a balanced range of personal qualities and capabilities, and to support the Company’s commitment to promoting gender equality and diversity. The biographical details of the directors are presented on page 18. System1 Group PLC Annual Report and Accounts 2020 19 Corporate Governance Report continued The Board operates an induction programme for new Non-Executive Directors. The Board reviews its AIM obligations with its Nominated Advisor annually, and endeavours to keep up with best practice governance via QCA seminars and training material. All directors can access the Company’s advisors and obtain independent professional advice at the Company’s expense in performance of their duties as directors. During the year, the Board has utilised the services of a Board Advisor, Stefan Barden, on strategy and technol- ogy, and sought advice from LGF Partners Ltd when sourcing new debt facilities. The Remuneration Committee has sought advice from PriceWaterhouseCoopers on the Company’s LTIP, advice which concluded early in the financial year. Neither the Board nor the respective committees have sought other external advice on any signifi- cant matter during the year. The Audit Committee works with the Company’s auditor, who were RSM Audit LLP for the year ended 31 March 2020. The Board liaises regularly with the Company’s Nominated Advisor, Canaccord Genuity to ensure compliance with AIM Rules. The Board considers each of the Non-Executive Directors to be independent, for the following principal reasons: they all have served on the Board for less than nine years; their remuneration is not material in the context of their financial circumstances; they have no executive role; they each own an immaterial number of shares in the Company in the context of their financial circumstances (or in some cases, no shares); they are not related to either of the Executive Directors; and they have no conflict of interest given their other roles and business activities. For financial year ended 31 March 2020, the Company Secretary was also the Chief Financial Officer, as is the case with other companies of a similar size and complexity. The Group plans to continue with this combined role, has made interim arrangements during the recent Board transition, and will split the roles when it reaches a size which warrants it. The Board schedules regular monthly meetings during the year, with the exception of July or August, and addi- tional ad hoc meetings as required. All Directors are able to allocate sufficient time to the Company to discharge their responsibilities fully. The number of regular meetings that each director attended during the financial year is set out below: Graham Blashill Robert Brand Sophie Tomkins Jane Wakely John Kearon James Geddes * Attendance by invitation. Board Audit Remuneration Committee Committee (11 meetings) (2 meetings) (2 meetings) 11 11 11 11 11 11 2 2 2 n/a n/a 2* 2 2 2 2 1* 2* On rare occasions a board member may attend by phone to accommodate overseas travel arrangements. Management provides the Board with information on the Company’s performance and appropriate information relating to the agenda prior to Board and Committee meetings. 20 System1 Group PLC Annual Report and Accounts 2020 MATTERS RESERVED FOR THE BOARD The Board discusses and reviews all matters and issues which are important to the business. Certain decisions are reserved for the Board; which include: approval of the Group’s long-term objectives and strategy; approval of the annual operating and capital budget, and any material changes thereto; extension of the Group’s activities into new business or geographic areas; changes to the Group’s capital structure and/or major changes to corporate structure, including acquisitions, disposals and investments; approval of interim and annual reports, and regulatory or non-routine shareholder communications; approval of significant changes in accounting policies or practices; approval of dividends and dividend policy; assessment of the effectiveness of risk and control processes. Matters referred to the Board are considered by the Board as a whole and no one individual has unrestricted powers of decision. Where directors have concerns which cannot be resolved in connection with the running of the Group or a proposed action, their concerns would be recorded in the Board Minutes. This course of action has not been required to date. APPOINTMENT OF DIRECTORS The Board formally approves the appointment of all new Directors. Each year at the Annual General Meeting, all Directors retire by rotation and are subject to re-election. REMUNERATION COMMITTEE The Remuneration Committee is responsible for determining the specific remuneration and incentive packages for each of the Company’s Executive Directors and keeping under review the remuneration and benefits of all senior executives and managers and overall pay levels of all employees. Its members are: Graham Blashill – Chairman of the Remuneration Committee Robert Brand Sophie Tomkins Jane Wakely The Remuneration Committee’s role and responsibilities are to: review and approve the remuneration and incentive schemes of Executive Directors, including pension rights, other benefits and any compensation payments, ensuring that no Director is involved in any decisions as to their own remuneration; review and approve the level and structure of remuneration and incentive schemes for senior management; select, appoint and set the terms of reference for any remuneration consultants who advise the Committee; approve the payments to Directors under any performance-related pay or share schemes operated by the Company; ensure that contractual terms on termination of any Director are fair to the individual and the Company, that failure is not rewarded and that the duty to mitigate loss is fully recognised; approve any major changes in employee benefits structures throughout the Group; approve the policy for authorising claims for expenses from the Directors. The Remuneration Committee schedules two formal meetings per year and meets at other times as necessary. The Remuneration Committee may invite the Chief Executive Officer or Chief Financial Officer to attend meetings of the Remuneration Committee. The Chief Executive Officer is consulted on proposals relating to the remuneration of the Chief Financial Officer and of other senior executives. The Chief Executive Officer is not involved in setting his own remuneration. The Remuneration Committee may use consultants to advise it in set- ting remuneration structures and policies. It is exclusively responsible for appointing such consultants and setting their terms of reference. The Annual Statement from the Remuneration Committee Chair is set out on pages 26 to 30. System1 Group PLC Annual Report and Accounts 2020 21 Corporate Governance Report continued AUDIT COMMITTEE The Audit Committee is responsible for ensuring the financial performance of the Company is properly monitored and reported on to shareholders, reviewing the Company’s financial systems and controls, and overseeing the Company’s risk management. Its members are: Sophie Tomkins – Chair of the Audit Committee Graham Blashill Robert Brand The Audit Committee’s role and responsibilities are to: monitor the integrity of the financial statements of the Group; review the Group’s internal financial controls and risk management systems; make recommendations to the Board, for it to put to the shareholders for their approval in relation to the appointment of the external auditor and to approve appropriate remuneration and terms of reference for the external auditor; discuss the nature, extent and timing of the external auditor’s procedures and discussion of external auditor’s findings; monitor and ensure the external auditor’s independence and objectivity and the effectiveness of the audit process; develop and implement policy on the engagement of the external auditor to supply non-audit services; report to the Board, identifying any matters in respect of which it considers that action or improvement is required; and ensure a formal channel is available for employees and other stakeholders to express any complaints in respect of financial accounting and reporting. The Annual Report from the Audit Committee Chair is set out on pages 24 to 25. BOARD EVALUATION The Board undertook a second annual review of its effectiveness, in the Company’s 2019/20 financial year. The Board will carry out further reviews of its effectiveness on an annual basis and may use an external adviser. The objective of this evaluation process is to bring to light possible changes which could make the Board’s activities and administration more effective and efficient. The Board Evaluation covered the following areas: the manner in which the Board is run, and operates as a team; the skills, experience and independence of the Board; the strategy of the business; the strategy of the business; the risks of the business; the Company’s ethical values and behaviours; and engagement with shareholders and other stakeholders. The exercise identified a number of positive areas particularly relating to the manner in which the Board is run, and the skills and experience and independence of the Board, and nearly all of the categories saw improved scores year on year. The main area for improvement identified in the previous evaluation was formal succession planning, and a process to address this in more detail started during the 2019/20 financial year. The main areas identified for improvement in this second evaluation were minor administrative matters, which will be monitored and improved, particularly in the light of changes to Board composition after the period end. 22 System1 Group PLC Annual Report and Accounts 2020 SUCCESSION PLANNING The Board, led by the Chairman, carries out ongoing assessments as to the succession needs and planning of the Board. Senior management appointments are made by the Executive Directors, who carry out ongoing assess- ments of succession needs and skills gaps across the business. Key appointments are overseen by the Remunera- tion Committee. SHAREHOLDER COMMUNICATIONS The Board endeavours to keep all interested shareholders informed by regular announcements and update statements. The Executive Directors meet regularly with institutional shareholders to understand their needs and expectations. They invite, and regularly receive, shareholder feedback and report it back to the Board. Other methods of communication are: Annual General Meetings; Broker briefings; Corporate website; and Letters to shareholders when appropriate. The Chairman and Senior Independent Director are available to meet with institutional shareholders on any concerns or issues in relation to governance, board composition, or Executive Director remuneration. OTHER STAKEHOLDERS The prime stakeholders of the business, in addition to shareholders, are clients, employees, and suppliers. The Company undertakes regular client feedback surveys (conducted by a third party) and employee feed- back surveys (conducted anonymously). The results of both are shared with the Board, and actions are taken to address the issues raised. Employee feedback survey results are shared transparently with all employees. Actions taken following client and employment feedback have included: tailoring product development; adjusting the Company’s articulation of its value proposition to clients and employees; and changing the way the Company communicates with its employees. In addition, the Company maintains a senior level dialogue with its key strategic suppliers. S.172 COMPANIES ACT 2006 STATEMENT Throughout this annual report and on our website, we provide examples of how the Company: takes into account the likely consequences of decisions in the long term; have regard to the interests of the Company’s shareholders, employees and other stakeholders; promotes openness amongst employees and endeavours to maintain a culture built on integrity; take into account the desirability of the Company maintaining a reputation for high standards of business conduct, and; have regard to the need to act fairly. The Directors assess and take into account what is most likely to promote the success of the Company for its members in the long term as part of their decision-making process, and make this assessment in good faith and fairly. The Directors continue to promote the success of the Company in accordance with section 172 of the Companies Act 2006. System1 Group PLC Annual Report and Accounts 2020 23 Audit Committee Report The Audit Committee is responsible for ensuring that the financial performance of the Group is properly reported and reviewed. Its role includes monitoring the integrity of the financial statements (including annual and interim accounts and results announcements), reviewing internal control and risk management systems, reviewing any changes to accounting policies, reviewing and monitoring the extent of the non-audit services undertaken by external auditors and advising on the appointment of external auditors. MEMBERS OF THE AUDIT COMMITTEE The membership of the Committee is set out on page 22 of the Corporate Governance Report. Sophie Tomkins took over from Robert Brand as Chair in January 2019. All members of the Committee are independent Non- Executive Directors. The Chief Financial Officer routinely attends the Audit Committee meetings by invitation, but other Executive Directors or members of the management team may also be invited to attend meetings as required. The Non-Executive Directors are provided an opportunity at the Audit Committee meetings to discuss matters with the Auditors without the presence of the Executive Directors. The Board is satisfied that the Chair of the Committee has recent and relevant financial experience. Sophie is a Chartered Accountant and is also Chair of the Audit Committee at both Hotel Chocolat plc and Cloudcall Group plc. The Committee meets at least twice a year and more frequently if required, and has unrestricted access to the Group’s auditor. Attendance at Board and Committee meetings is set out in the Corporate Governance Report on page 20. During FY20 there was additional Audit Committee contact with the Auditor due to the change of Auditor, described below. DUTIES The main duties of the Audit Committee are set out in its terms of reference, which are summarised on page 22 and available on the Group’s website (https://system1group.com/investors). The work carried out by the Audit Committee during FY20 comprised the following: ensuring the financial performance of the Company is being properly measured and reported on; review of the FY20 audit plan; consideration of key audit matters and how they are addressed; review of suitability of the external auditor; review of the financial statements and Annual Report; review of the appropriateness of the Group’s accounting policies and judgements made in the preparation of the financial statements, and adequacy of the disclosures made therein; consideration of the external audit report and management representation letter; review of the risk management and internal control systems; meeting with the external auditor without management present; review of anti-bribery policy and whistleblowing arrangements. ROLE OF THE EXTERNAL AUDITOR The Audit Committee monitors the relationship with the external auditor to ensure that auditor independence and objectivity are maintained. As part of this role, the Committee reviews the non-audit fees of the auditor. RSM’s fees for the financial year to 31st March 2020 relate solely to the Audit and Interim review. The Audit Committee also assesses the auditor’s performance. 24 System1 Group PLC Annual Report and Accounts 2020 AUDIT PROCESS The auditor prepared an audit plan for the review of the full period financial statements. The audit plan set out the scope of the audit, areas to be targeted and audit timetable. This plan was reviewed and agreed in advance by the Audit Committee. Following the audit, the auditor presented its findings to the Audit Committee for dis- cussion. No major areas of concern were highlighted by the auditor during the period, however areas of signifi- cant risk (such as Covid-19) and other matters of audit relevance are regularly communicated. TENDER AND CHANGE OF AUDITOR Having engaged Grant Thornton UK LLP as the Company’s auditor since 2003, the Board, on the recommendation of the Audit Committee, decided that it was appropriate to put the group statutory audit out to competitive ten- der, a process completed in March 2019. Longevity of tenure and consideration of the balance between audit and non-audit fees were key drivers for this tender process. The Board appointed RSM UK Audit LLP as the Company’s auditor for the financial year ending 31 March 2020 and the Audit Committee has overseen the transition with nothing to report. INTERNAL AUDIT At present the Group does not have an internal audit function and the Committee believes that management is able to derive assurance as to the adequacy and effectiveness of internal controls and risk management proce- dures without one. RISK MANAGEMENT AND INTERNAL CONTROLS As described throughout the Annual Report and the Corporate Governance section of the Group’s website (https://system1group.com/investors), the Group has established a framework of risk management and internal control systems, policies and procedures. The Audit Committee is responsible for reviewing the risk management and internal control framework and ensuring that it operates effectively. During the period, the Committee has reviewed the framework and the Committee is satisfied that the internal control systems in place are currently operating effectively. WHISTLEBLOWING The Group has in place a process whereby employees can discuss concerns confidentially. The Committee is com- fortable that the current policy is operating effectively. ANTI-BRIBERY The Group has in place an anti-bribery and anti-corruption policy which sets out its zero-tolerance position and provides information and guidance to those working for the Group on how to recognise and deal with bribery and corruption issues. The Committee is comfortable that the current policy is operating effectively. SOPHIE TOMKINS Chair, Audit Committee 25 System1 Group PLC Annual Report and Accounts 2020 Remuneration Report ANNUAL STATEMENT FROM THE REMUNERATION COMMITTEE CHAIR, GRAHAM BLASHILL Dear shareholder, The Remuneration Committee sets the strategy, structure and levels of remuneration for the Executive Directors and reviews the remuneration of senior management, to ensure alignment of objectives and incentives through- out the business in pursuit of the Group’s stated objectives. The membership and terms of reference of the Remuneration Committee are set out in the Corporate Governance Report. This Remuneration Report is split into two parts: The directors’ remuneration policy sets out the Company’s policy on directors’ remuneration, in particular the four-year long-term incentive plan (“LTIP”), and the key factors that were taken into account in setting the pol- icy. The directors’ remuneration policy is not subject to a shareholder vote at the 2020 AGM, since the main variable element (the LTIP) was approved by shareholders at the Annual General Meeting on 31 July 2019. The annual report on remuneration sets out payments and awards made to the directors for the year to 31 March 2020. There are three elements in director remuneration: Base salary LTIP Benefits Historically, the Company’s LTIPs have been established in three to four year cycles. The current LTIP was established in September 2019 and will vest on 12 August 2024 (the “2019 LTIP”). Of the total 1,058,135 options granted under the 2019 LTIP, 462,934 of these were granted as replacements to equity awards made under the 2017 LTIP scheme, which was established in February 2017. The primary performance targets of the 2019 LTIP are based on gross profit, with profit after tax and share price underpins. We endeavour to keep our director remuneration arrangements simple and correlated to increases in long term business growth. As a small Company we are also acutely aware of the dilutive impacts of equity awards, and when designing our LTIPs, we ensure that vesting only occurs when there is a substantial increase in share- holder value (after accounting for the dilution). The Company consulted with shareholders in designing the 2019 LTIP, and prior to implementing it, obtained shareholder approval at the Annual General Meeting on 31 July 2019. For levels below the participants in the 2019 LTIP, the remuneration ordinarily comprises: Base salary Bonus and profit share Benefits The Executive Directors and other senior executives who participate in an LTIP forego annual bonus and profit share. The committee regularly reviews the appropriateness of remuneration across the Group and is satisfied that an appropriate reward structure exists below Board level to recognise and retain our top talent. There were no changes to the board of directors during 2019/20. Subsequent to the year end, on 20 April 2020, James Geddes resigned from the board. On 26 June 2020, Chris Willford and Stefan Barden were appointed to the board of directors. GRAHAM BLASHILL Chair, Remuneration Committee System1 Group PLC Annual Report and Accounts 2020 26 DIRECTORS’ REMUNERATION POLICY INTRODUCTION The policy described in this part of the Remuneration Report is intended to apply for four years beginning in the 2019/20 financial year to 31st March 2024, and covers Executive Directors and a small number of other senior managers (“Executives”). The Committee considers the remuneration policy annually to ensure that it remains aligned with business needs and is appropriately positioned relative to the market. However, there is no intention to revise the policy more frequently than every four years. The Committee has based the Executive reward structure on the long term organic growth strategy of the business. If successful, this will deliver significant shareholder value, and Executive rewards are designed to cor- relate with the key driver of that value (top line growth). Fixed annual elements – including salary, pension and benefits – are to recognise the responsibilities and lead- ership roles of our Executives and to ensure current and future market competitiveness. Long-term incentives are to motivate and reward them for making the Company successful on a sustainable basis. BASE SALARY AND BENEFITS Base salary is paid in 12 equal monthly instalments during the year. Salaries are reviewed annually and any changes are effective from the beginning of the Company’s financial year (which is 1st April). Benefits comprise money purchase pension contributions of up to 6% of salary, private medical and dental insurance, life insurance and long term disability insurance. LONG TERM INCENTIVE PLAN The Company introduced the current LTIP in September 2019 (the “2019 LTIP”). It was approved by shareholders at the Annual General Meeting on 31 July 2019 and covers the period ending 31 March 2024. The 2019 LTIP was implemented as a replacement for the 2017 LTIP. The company introduced the 2017 LTIP in March 2017 and this scheme covered the four-year period ending 31 March 2021. Of the total 1,058,135 options granted under the 2019 LTIP, 462,934 of these were granted as replacements for awards made under the 2017 scheme. Of the additional 595,201 options, 198,400 were granted to John Kearon, in lieu of his previous bonus arrangement. The remainder were granted to members of senior management who have joined the company subsequent to the 2017 LTIP grant. The Company has underperformed since the introduction of the 2017 LTIP and identified during 2018/19 that even the minimum targets were unlikely to be achieved. The Committee does not wish to reward underperfor- mance and so has not reset the performance targets when designing the replacement 2019 LTIP. However, to continue to provide appropriate incentives, the 2019 LTIP extends the date by when those targets can be met by 3 years. The final performance period of the 2019 LTIP is therefore the Company’s 2023/24 financial year, and the lapse date is 12 August 2024. Under the 2017 LTIP, the final performance period was the Company’s 2020/21 financial year, and the lapse date 12 August 2021. The 2019 LTIP also allows that vesting may occur as and when the performance targets are met. Therefore, from 12 August 2020 onwards, some partial vesting may occur earlier than the lapse date, and then further vesting later (provided that no vesting could occur in relation to financial periods after the Company’s 2023/24 financial year). The awards have taken the form of zero-cost stock options. The performance targets are unchanged from the 2017 LTIP and are based on gross profit growth (the Company’s main top line performance indicator), with profit after tax and share price underpins. System1 Group PLC Annual Report and Accounts 2020 27 Remuneration Report continued The performance targets and vesting levels for the 2017 LTIP were set with growth levels of between 10% and 30% pa in mind. At the 10% pa growth level, the gross profit would be £39.5m, and at the 30% pa growth level, £77.1m. The specific vesting levels are set out in the following table. Equity level Gross profit target Executive Directors Total awards Senior Managers 138,880 shares (1.05% of issued shares) 138,880 shares (1.05% of issued shares) 119,040 shares (0.90% of issued shares) 396,800 shares (3.00% of issued shares) 231,467 shares (1.75% of issued shares) 231,467 shares (1.75% of issued shares) 198,401 shares (1.50% of issued shares) £39.5m £56.0m £77.1m £39.5m £56.0m £77.1m Total awards 661,335 shares (5.00% of issued shares) The vesting levels allow that at the lower gross profit target, 35% of awards vest. At the central gross profit target, a further 35% of awards vest, to a cumulative vesting total of 70%, and at £77.1m; the awards vest in full. There will be proportionate vesting if gross profit is between £39.5m and £56.0m pa or between £56.0m and £77.1m pa. No awards will vest unless profit after tax (“PAT”) is at least £7.0m and the average share price of the Company during the month of July in the year in which the awards vest is at least £9.945 (30% higher than the share price on 22 March 2017, the date of the 2017 LTIP grant). For the higher levels of vesting triggered by gross profit above £56.0m, the PAT underpin increases to £9.9m. For the purpose of these performance targets PAT is calculated before deducting share-based payments (to avoid any circular argument problem when performing the calculations). The gross profit and PAT targets are designed to relate to organic growth, and the Committee has the right to adjust the targets if a material acquisition or other corporate event occurs (and will ordinarily exercise such right). During the year, there were two Executive Director participants in the 2019 LTIP (James Geddes and John Kearon) and five senior manager participants. John Kearon did not participate in the 2017 LTIP, but instead, had an annual bonus potential for each of the 4 years to 31 March 2021 of between 25-75% of annual salary based on the growth targets and underpins above. John Kearon’s award under the 2019 LTIP replaces his previous bonus scheme. Participants in the 2019 LTIP do not participate in the Company’s annual bonus or profit share scheme, and have no other short-term incentive plan. This is to ensure decision-making focus is primarily on achieving long- term growth. Therefore, over the period to March 2021, the only remuneration that they will receive will be base salary and benefits, unless the Remuneration Committee determine awards in exceptional circumstances (at their sole discretion). The Committee have granted an advisor to the Board Stefan Barden, a separate equity award, comprising 300,000 zero cost stock options. The options were granted on 17 April 2019 and were approved by shareholders at the Company’s AGM. They comprise three tranches of 100,000 options each, with the following performance conditions: 100,000 zero-priced stock options Vest: when audited Gross Profit in any financial year exceeds £45m, subject to the Company’s share price exceeding £5.00 per share for a 30 day consecutive period prior to the lapse date; Lapse: on 30 July 2024. 100,000 zero-priced stock options Vest: when audited Gross Profit in any financial year exceeds £68m, subject to the Company’s share price exceeding £7.50 per share for a 30 day consecutive period prior to the lapse date; Lapse: on 30 July 2029. 100,000 zero-priced stock options Vest: when audited Gross Profit in any financial year exceeds £90m subject to share price exceeding £10.00 per share for a 30 day consecutive period prior to the lapse date; Lapses: on 30 July 2032. System1 Group PLC Annual Report and Accounts 2020 28 Subsequent to the year-end, Stefan Barden has joined the Board of Directors as Chief Operating Officer. The Committee have taken advice from PriceWaterhouseCoopers in relation to these equity incentives and consulted with major shareholders. DILUTION Vested stock options are set out below. Voting shares as at 31 March 2020 2006 employee share option scheme (now closed) 2010-2014 LTIP – vested on 28 May 2014 2014-2016 LTIP – vested on 30 April 2017 (previous LTIP) Number % 12,599,784 7,000 75,520 233,136 315,656 100% 0.1% 0.6% 1.9% 2.5% Unvested options comprise options granted under the 2019 LTIP and the equity awards to Stefan Barden, described above. The maximum aggregate dilution under both of these schemes is 10.9% of the Company’s vot- ing shares. NON-EXECUTIVE DIRECTORS Non-Executive Directors do not participate in any of the Company’s incentive arrangements nor do they receive any benefits. Their fees are reviewed periodically and set by the Board as a whole. REMUNERATION OF ALL EMPLOYEES All employees, excepting those participating in the 2019 LTIP, are entitled to base salary, benefits, and a discre- tionary annual bonus. Since January 2012 equity awards have not been granted to employees who are not also members of executive management. DIRECTOR SERVICE CONTRACTS AND POLICY ON PAYMENT FOR LOSS OF OFFICE Each of the Executive Directors have service contracts. The agreements include restrictive covenants which apply during employment and for a period of 12 months after termination. John Kearon’s agreement can be terminated on six months’ notice in writing by either the Company or by John. James Geddes’ agreement could be termi- nated on 12 months’ notice in writing by the Company and six months’ notice by James. Following an agreement reached in the year-ended 31 March 2020, James Geddes subsequently left the company and ceased to be a Director. ANNUAL REPORT ON REMUNERATION REMUNERATION FOR EXECUTIVE DIRECTORS Year ended 31 March 2020 (audited) John Kearon James Geddes Total Salary £ Benefits Pension £ £ 200,000 190,000 20,051 6,187 - 11,400 390,000 26,238 11,400 Options Exercised £ - - - Compensation for loss of office £ Total £ - 220,000 220,051 427,587 220,000 647,638 Compensation for loss of office for James Geddes was paid in April 2020. Year ended 31 March 2019 (audited) John Kearon James Geddes Alex Hunt Total System1 Group PLC Annual Report and Accounts 2020 Salary £ Benefits Pension £ £ 200,000 190,000 99,615 14,781 6,338 13,050 6,000 11,400 2,517 Options Exercised £ - 169,704 - 489,615 34,169 19,917 169,704 Compensation for loss of office £ - - - - Total £ 220,781 377,442 115,182 713,405 29 Remuneration Report continued The Executive Directors received no bonus for the year ended 31 March 2020 or for the year ended 31 March 2019. The Executive Directors have not received any stock options or other equity awards other than under the Company’s LTIP arrangements as set out in the directors’ remuneration policy. DIRECTORS’ INTERESTS IN SHARES AND OPTIONS Directors’ interests in the shares of the Company are shown below. John Kearon James Geddes Robert Brand Graham Blashill Total 31 Mar 2020 31 Mar 2019 Number Number 2,961,235 263,178 30,000 10,000 2,961,235 263,178 30,000 10,000 3,264,413 3,264,413 Directors’ interests in options over shares and conditional shares of the Company are shown below. JOHN KEARON JAMES GEDDES Date Earliest of grant exercise date Exercise price Number at 1 Apr 2019 Granted in year Replaced Number at in year 31 Mar 2020 16/01/2015 01/05/2018 22/07/2015 01/05/2018 04/09/2019 12/08/2020 22/07/2015 01/05/2018 22/03/2017 12/08/2021 04/09/2019 12/08/2020 0.0p 0.0p 0.0p 0.0p 0.0p 0.0p 56,568 *60,000 - - - **198,400 116,568 198,400 - - - - *60,000 198,400 - - - **198,400 - (198,400) - 56,568 *60,000 198,400 314,968 *60,000 - 198,400 258,400 198,400 (198,400) 258,400 * The options denoted by a single asterisk were granted under the previous LTIP. They were granted in two tranches of 137,040 and 60,000 option shares (totalling 197,040) to each director. They were subject to performance conditions, under which 116,568 of each director’s options vested on 30 April 2017. The remaining 80,472 of each director’s options lapsed. ** The options and conditional shares denoted by a double asterisk were granted under the current LTIP, as described in the directors’ remuneration policy. These options can vest at any time between 12 August 2020 and 12 August 2024, provided performance and market targets are met. Of these 198,400 options, 118,011 were cancelled in April 2020 upon James Geddes’ resignation from the Board. There were no equity awards or vesting of options other than under the LTIP as set out in the directors’ remu- neration policy. FEES FOR NON-EXECUTIVE DIRECTORS (AUDITED) The Non-Executive Directors received fees, but no other benefits, as follows. Graham Blashill Ken Ford (resigned 24 July 2018) Robert Brand Sophie Tomkins Jane Wakely Total Year to 31 Mar Year to 31 Mar 2020 £ 40,000 - 38,000 36,000 36,000 2019 £ 38,217 12,950 36,883 30,000 27,000 150,000 145,050 System1 Group PLC Annual Report and Accounts 2020 30 Directors’ Responsibility Statement The directors are responsible for preparing the Group Strategic Report, Group Directors’ Report, the Annual Report and the financial statements in accordance with applicable law and regulations. Company law requires the directors to prepare financial statements for each financial year. The directors are required by the AIM Rules of the London Stock Exchange to prepare Group financial statements in in accordance with International Financial Reporting Standards (“IFRS”) as adopted by the European Union (“EU”) and have elected under company law to prepare the parent company financial statements in accordance with FRS 101 Reduced Disclosure Framework. Under company law the directors must not approve the financial statements unless they are satisfied that they give a true and fair view of the state of affairs and profit or loss of the Company and Group for that period. In preparing these financial statements, the directors are required to: select suitable accounting policies and then apply them consistently; make judgements and accounting estimates that are reasonable and prudent; for the group financial statements, state whether they have been prepared in accordance with IFRS adopted by the EU and for the company financial statements state whether applicable UK accounting standards have been followed, subject to any material departures disclosed and explained in the company financial statements; prepare the financial statements on the going concern basis unless it is inappropriate to presume that the Group and Company will continue in business. The directors are responsible for keeping adequate accounting records that are sufficient to show and explain the Group’s and the Company’s transactions and disclose with reasonable accuracy at any time the financial position of the Group and 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 Group and the Company and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities. The directors confirm that: so far as each director is aware, there is no relevant audit information of which the Company’s auditor is unaware; and • the directors have taken all steps that they ought to have taken to make themselves aware of any relevant audit information and to establish that the auditor is aware of that information. 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 dissemina- tion of financial statements may differ from legislation in other jurisdictions. CHRIS WILLFORD Company Secretary and Chief Financial Officer 30 June 2020 31 System1 Group PLC Annual Report and Accounts 2020 Independent Auditor’s Report to the members of System1 Group PLC OPINION We have audited the financial statements of System1 Group Plc (the ‘parent company’) and its subsidiaries (the ‘group) for the year ended 31 March 2020 which comprise of the Consolidated Income Statement, Consolidated Statement of Comprehensive Income, Consolidated and Company Balance Sheets, Consolidated and Company Statement of Changes in Equity, Consolidated Cash Flow Statement, and notes to the financial statements, includ- ing 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 and, as regards the parent company financial statements, as applied in accordance with the provisions of the Companies Act 2006. In our opinion: the financial statements give a true and fair view of the state of the group’s and of the parent company’s affairs as at 31 March 2020 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 IFRSs as adopted by the European Union and as applied in accordance with the Companies Act 2006; and the financial statements have been prepared in accordance with the requirements of the Companies Act 2006. BASIS FOR OPINION We conducted our audit in accordance with International Standards on Auditing (UK) (ISAs (UK)) and applicable law. Our responsibilities 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 responsi- bilities in accordance with these requirements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion. CONCLUSIONS RELATING TO GOING CONCERN We have nothing to report in respect of the following matters in relation to which the ISAs (UK) require us to report to you where: the directors’ use of the going concern basis of accounting in the preparation of the financial statements is not appropriate; or the directors have not disclosed in the financial statements any identified material uncertainties that may cast significant doubt about the group’s or the parent company’s ability to continue to adopt the going concern basis of accounting for a period of at least twelve months from the date when the financial statements are authorised for issue. KEY AUDIT MATTERS Key audit matters are those matters that, in our professional judgment, were of most significance in our audit of the group and parent company 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 group and parent company financial statements as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters. System1 Group PLC Annual Report and Accounts 2020 32 GROUP KEY AUDIT MATTERS GOING CONCERN RISK The Group has set out its analysis of the potential impact on its operations and financial position of the COVID-19 pandemic in business risk review on pages 10 to 11 and the going concern statement on page 41. The potential risks to the Group include loss of a significant client, a decline in the advertising market resulting in a reduced demand, and market conditions resulting in a reduced ability to borrow and comply with bank covenants. In the event of a material loss of, or delay to, incoming cash resources, the Group could suffer cash pressure or default against borrowing covenants. The assessment of these risks in an uncertain economic environment requires judgement, and a risk of material misstatement arises in respect of an incorrect application of the going con- cern basis of preparation or the failure to disclose a material uncertainty. As a result, the potential impact of the COVID-19 outbreak on going concern was considered to be one of most significance in the audit and was there- fore determined to be a key audit matter. RESPONSE We audited the Group’s assessment of the application of the going concern basis of preparation. Our work included: Checking the integrity and accuracy of the cash flow forecasts and covenant calculation’s provided by manage- ment; Corroborating the reasonableness of assumptions and explanations provided by management to supporting information where available; Stress-testing the cash flow forecasts to assess the impact of assumptions worse than those provided by man- agement; Reviewed the Group’s expected future win rate on contracts; Reviewed the Group’s actual results subsequent to the period end and compared this to managements fore- casts; Considering mitigating actions available to the Group and the level of headroom in the forecasts under various scenarios; Discussing our findings with the Audit Committee; Auditing the accuracy and completeness of disclosures made in the finance statements in respect of risks, going concern and post balance sheet events. IMPACT OF COVID-19, SABBATICAL LEAVE SCHEME, INTANGIBLE ASSETS AND DEFERRED TAX RISK The impact of Covid-19 (Coronavirus) is having an adverse effect on the trading performance and profitability of companies as well as the wider economy. This is expected to impact accounting estimates and judgements in the financial statements. It is also expected to affect the associated disclosures in the financial statements and accompanying documents, in particular, principal risks and uncertainties in the strategic report, liquidity and credit risk disclosures in the directors’ report, critical accounting estimates and judgements in the notes to the accounts and the subsequent event disclosures. RESPONSE The group has a sabbatical leave scheme, open to all employees, which provides 20 days paid leave for every six years of service. The carrying amount of the provision at 31 March 2020 was £724,000. The provision for liabili- ties under the scheme is measured using the projected unit credit method. This model requires several estimates and assumptions of which the most significant inputs are the rate of salary growth and average staff turnover. We have challenged managements best estimate for average staff turnover given the sensitivity surrounding it. We have noted that further disclosure was required to better document the sensitivity of the average staff turnover (Note 11) and its impact upon the value of the provision. We have reviewed the schedule of capitalised costs and have noted that, in line with previous years, a portion of AdRatings costs were eligible to be capitalised. This remains the case in the current year. A sample of additions were tested against the IAS38 criteria. It was noted that these additions were correctly capitalised. From our System1 Group PLC Annual Report and Accounts 2020 33 Independent Auditor’s Report to the members of System1 Group PLC continued review of costs in the income statement, no additional costs were identified which should have been capitalised as development costs, under the group’s accounting policy. Capitalisation is in line with IAS 38. The AdRatings product subscriptions or other sales (as part of revenue earned on the group’s other services) in the year have not been sufficient to support the carrying value. Management therefore provided us with an impairment paper reflecting the current subscription income from the AdRatings software, including their assessment that the future income streams do not support the carrying value of the asset. We have concluded that management’s decision to include an impairment of £921,000 (Note 7) on the AdRatings intangible at the year-end to be materi- ally correct. Management have recognised a deferred tax asset of £377,000 on carry forward trading losses (Note 20). We challenged and critiqued managements assumptions on forecasts based on historical results, expected future growth and uncertainty in the economy moving forward. We have concluded that management’s decision to recognise a deferred tax asset on carry forward losses to be materially correct. The above were considered to be key audit matters due to the level of judgement and estimation involved alongside the material nature of the balances financially. OUR APPLICATION OF MATERIALITY When establishing our overall audit strategy, we set certain thresholds which help us to determine the nature, timing and extent of our audit procedures. When evaluating whether the effects of misstatements, both individu- ally and on the financial statements as a whole, could reasonably influence the economic decisions of the users we take into account the qualitative nature and the size of the misstatements. During planning overall material- ity for the group financial statements as a whole was calculated as £149,000, which subsequently decreased to £145,000 during the course of our audit. Overall materiality for the parent company financial statements as a whole was calculated as £72,500, which was not significantly changed during the course of our audit. We agreed with the Audit Committee that we would report to them all unadjusted differences in excess of £7,280 as well as differences below that threshold that, in our view, warranted reporting on qualitative grounds. AN OVERVIEW OF THE SCOPE OF OUR AUDIT Our audit was scoped by obtaining an understanding of the group and its control environment, including group- wide controls, and assessing the risks of material misstatement. The group financial statements were audited on a consolidated basis using group materiality. The parent entity and subsidiary financial statements were audited to component materiality. The scope of our audit covered 100% of both consolidated loss before tax and consoli- dated net assets. 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. 34 System1 Group PLC Annual Report and Accounts 2020 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 their 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 set out on page 31, the directors are respon- sible 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: http://www.frc.org.uk/auditorsresponsibilities. This description forms part of our auditor’s report. USE OF OUR REPORT This report is made solely to the company’s members, as a body, in accordance with Chapter 3 of Part 16 of the Companies Act 2006. Our audit work has been undertaken so that we might state to the company’s members those matters we are required to state to them in an auditor’s report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the company and the company’s members as a body, for our audit work, for this report, or for the opinions we have formed. RICHARD BARTLETT-RAWLINGS (Senior Statutory Auditor) For and on behalf of RSM UK Audit LLP, Statutory Auditor Chartered Accountants The Pinnacle, 170 Midsummer Boulevard, Milton Keynes, Buckinghamshire, MK9 1BP 30 June 2020 35 System1 Group PLC Annual Report and Accounts 2020 Consolidated Income Statement for the year ended 31 March 2020 31 Mar 2020 31 Mar 2019 Restated* Consultancy £’000 Note AdRatings £’000 Total Consultancy £’000 £’000 AdRatings £’000 Total £’000 5 15 5 25,422 (3,874) 21,548 53 - 53 25,475 (3,874) 26,896 (4,849) 21,601 22,047 3 - 3 26,899 (4,849) 22,050 REVENUE Cost of sales GROSS PROFIT Administrative expenses 15 (18,412) (2,771) (21,183) (17,777) (2,217) (19,994) OPERATING PROFIT/(LOSS) 5 3,136 (2,718) 418 4,270 (2,214) 2,056 Finance expense PROFIT/(LOSS) BEFORE TAXATION Income tax (expense)/credit PROFIT/(LOSS) FOR THE FINANCIAL PERIOD 18 16 19 ATTRIBUTABLE TO THE EQUITY HOLDERS OF THE COMPANY (122) - (122) (135) - (135) 3,014 (2,718) 296 4,135 (2,214) 1,921 (1,043) 516 (527) (1,075) 421 (654) 1,971 (2,202) (231) 3,060 (1,793) 1,267 1,971 (2,202) (231) 3,060 (1,793) 1,267 * Restatement on change of accounting policy upon the adoption of IFRS16 (Refer to Note 26). EARNINGS PER SHARE ATTRIBUTABLE TO EQUITY HOLDERS OF THE COMPANY Basic (losses)/earnings per share Diluted (losses)/earnings per share 21 21 (1.8)p (1.8)p 10.1p* 9.8p* The notes on page 41 to 67 are an integral part of these consolidated financial statements. All of the activities of the Group are classed as continuing. System1 Group PLC Annual Report and Accounts 2020 36 Consolidated Statement of Comprehensive Income for the year ended 31 March 2020 (LOSS)/PROFIT FOR THE FINANCIAL PERIOD OTHER COMPREHENSIVE INCOME: ITEMS THAT MAY BE SUBSEQUENTLY RECLASSIFIED TO PROFIT OR LOSS Currency translation differences on translating foreign operations Other comprehensive (loss)/income for the period, net of tax TOTAL COMPREHENSIVE (LOSS)/INCOME FOR THE PERIOD ATTRIBUTABLE TO EQUITY HOLDERS OF THE COMPANY * Restatement on change of accounting policy upon the adoption of IFRS16 (Refer to Note 26). The notes on pages 41 to 67 are an integral part of these consolidated financial statements. 31 Mar 2020 £’000 31 Mar 2019 Restated* £’000 (231) 1,267 (91) (91) 2 2 (322) 1,269 System1 Group PLC Annual Report and Accounts 2020 37 Consolidated Balance Sheet as at 31 March 2020 REGISTERED COMPANY NO. 05940040 ASSETS NON-CURRENT ASSETS Property, plant and equipment Intangible assets Deferred tax asset CURRENT ASSETS Contract costs Trade and other receivables Current income tax Cash and cash equivalents TOTAL ASSETS EQUITY ATTRIBUTABLE TO EQUITY HOLDERS OF THE COMPANY Share capital Share premium account Merger reserve Foreign currency translation reserve Retained earnings TOTAL EQUITY LIABILITIES NON-CURRENT LIABILITIES Provisions Lease liabilities Borrowings CURRENT LIABILITIES Provisions Lease liabilities Trade and other payables Contract liabilities TOTAL LIABILITIES 31 Mar 2020 Note £’000 31 Mar 2019 Restated* £’000 1 Apr 2018 Restated* £’000 6 7 20 9 8 10 11 8 8 11 8 12 13 3,971 368 627 4,966 217 5,423 21 6,650 2,847 814 299 3,960 208 6,907 431 4,315 3,423 26 372 3,821 131 5,704 423 5,784 12,311 11,861 12,042 17,277 15,821 15,863 132 1,601 477 132 3,416 5,758 565 3,273 2,500 6,338 300 1,001 3,209 671 5,181 11,519 132 1,601 477 223 4,635 7,068 610 1,977 - 2,587 225 899 4,508 534 6,166 8,753 132 1,601 477 221 4,482 6,913 420 2,559 - 2,979 368 877 4,146 580 5,971 8,950 TOTAL EQUITY AND LIABILITIES 17,277 15,821 15,863 * Restatement on change of accounting policy upon the adoption of IFRS16 (Refer to Note 26). The notes on pages 41 to 67 are an integral part of these consolidated financial statements. These financial statements were approved by the directors on 30 June 2020 and are signed on their behalf by: JOHN KEARON Director CHRIS WILLFORD Director System1 Group PLC Annual Report and Accounts 2020 38 Consolidated Cash Flow Statement for the year ended 31 March 2020 NET CASH GENERATED FROM OPERATIONS Tax paid NET CASH GENERATED FROM OPERATING ACTIVITIES CASH FLOWS FROM INVESTING ACTIVITIES Purchases of property, plant and equipment Purchase of intangible assets NET CASH USED BY INVESTING ACTIVITIES Note 23 6 7 31 Mar 2020 £’000 3,180 (463) 2,717 (102) (814) (916) 31 Mar 2019 Restated* £’000 2,220 (642) 1,578 (107)) (923) (1,030) NET CASH FLOW BEFORE FINANCING ACTIVITIES 1,801 548 CASH FLOWS FROM FINANCING ACTIVITIES Interest received Lease liability payments Property lease liability payments Interest paid on property leases Proceeds from borrowings Proceeds from sale of treasury shares Dividends paid to owners NET CASH FROM/(USED BY) FINANCING ACTIVITIES NET INCREASE/(DECREASE) IN CASH AND CASH EQUIVALENTS CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD Exchange gains on cash and equivalents CASH AND CASH EQUIVALENTS AT END OF PERIOD 10 22 - (47) (892) (122) 2,500 30 (943) 526 2,327 4,315 8 6,650 2 (45) (835) (136) - 3 (940) (1,951) (1,403) 5,784 (66) 4,315 * Prior period comparatives have been restated for the transition to IFRS 16. Under IFRS 16 office lease costs are now treated as a “financing activity” (rather than as an operating activity, as was the case previously). Office lease costs are therefore not now included within “Net cash flow before financing activities” (the Company’s key cash flow performance indicator). “Net cash flow before financing activities”, adjusted for office leases, known by the Company as “Operating Cash Flow” is shown below: Net cash flow before financing activities Net cash outflow for property leases OPERATING CASH FLOW 31 Mar 2020 £’000 1,801 (1,014) 787 31 Mar 2019 Restated* £’000 548 (969) (421) A summary of cash flow before financing activities, separating out Ad Ratings is presented below. Net cash generated from operating activities Net cash used by investing activities Net cash flow before financing activities (before AdRatings) Net cash outflow for property and finance leases OPERATING CASH FLOW (BEFORE ADRATINGS) Net cash flow used by AdRatings OPERATING CASH FLOW (AFTER ADRATINGS) The notes on page 41 to 67 are an integral part of these consolidated financial statements. System1 Group PLC Annual Report and Accounts 2020 31 Mar 2020 £’000 4,229 (470) 3,759 (1,014) 2,745 (1,958) 787 31 Mar 2019 Restated* £’000 3,608 (107) 3,501 (969) 2,532 (2,953) (421) 39 Consolidated Statement of Changes in Equity for the year ended ended 31 March 2020 At 1 April 2018 as originally stated Transition to IFRS 16 At 1 April 2018 restated PROFIT FOR THE FINANCIAL PERIOD Other comprehensive income: - currency translation differences TOTAL COMPREHENSIVE INCOME Transactions with owners: Employee share options: - value of employee services - current tax credited to equity - deferred tax debited to equity Dividends paid to owners Sale of treasury shares Note 10 20 22 Share capital £’000 132 - 132 Share premium account £’000 1,601 - 1,601 Foreign currency translation reserve £’000 221 - 221 Merger reserve £’000 477 - 477 - - - - - - - - - - - - - - - - - - - - - - - - - - - - 2 2 - - - - - - Retained earnings £’000 4,578 (96) Total £’000 7,009 (96) 4,482 6,913 1,267 1,267 - 2 1,267 1,269 (132) 34 (79) (940) 3 (132) 34 (79) (940) 3 (1,114) (1,114) AT 31 MARCH 2019 RESTATED 132 1,601 477 223 4,635 7,068 LOSS FOR THE FINANCIAL YEAR Other comprehensive income: - currency translation differences TOTAL COMPREHENSIVE LOSS Transactions with owners: Employee share options: - value of employee services - deferred tax debited to equity - current tax credited to equity Dividends paid to owners Sale of treasury shares 10 20 20 22 10 - - - - - - - - - - - - - - - - - - - - - - - - - - - - (231) (231) (91) (91) - (91) (231) (322) - - - - - - (60) (31) 16 (943) 30 (988) (60) (31) 16 (943) 30 (988) AT 31 MARCH 2020 132 1,601 477 132 3,416 5,758 The notes on pages 41 to 67 are an integral part of these consolidated financial statements. System1 Group PLC Annual Report and Accounts 2020 40 Notes to the Consolidated Financial Statements for the year ended 31 March 2020 1 GENERAL INFORMATION System1 Group PLC (“the Company”) was incorporated on 19 September 2006 in the United Kingdom. The Com- pany’s principal operating subsidiary, System1 Research Limited (formerly BrainJuicer Limited), was at that time already established, having been incorporated on 29 December 1999. The address of the Company’s registered office is 52 Bedford Row, Holborn, London, England, WC1R 4LR. The Company’s shares are listed on the Alterna- tive Investment Market of the London Stock Exchange (“AIM”). The Company and its subsidiaries (together “the Group”) provide marketing and market research consultancy services. The Chairman’s Statement, the Chief Executive’s Statement and the Business and Finance Review pro- vide further detail of the Group’s operations and principal activities. The Board of Directors approved these financial statements for the year ended 31 March 2020 (including the comparatives for the year ended 31 March 2019) on 30 June 2020. 2 BASIS OF PREPARATION The Group has prepared its consolidated financial statements in accordance with International Financial Report- ing Standards and IFRIC Interpretations as adopted in the European Union (“IFRSs”), and the Companies Act 2006 applicable to companies reporting under IFRS. The consolidated financial statements have been prepared under the historical cost convention. The preparation of financial statements in accordance with IFRS requires the use of certain critical accounting estimates. It also requires management to exercise its judgement in the process of applying the Group’s account- ing policies. The areas involving a high degree of judgement or complexity, or areas where estimates and judge- ments are significant to the consolidated financial statements are disclosed in Note 4. Items included in the financial statements of each of the Group’s entities are measured using the currency of the primary economic environment in which the entity operates (‘the Functional Currency’). The consolidated financial statements are presented in Pounds Sterling (GBP), which is the Company’s functional and presentation currency. The financial statements are presented in round thousands unless otherwise stated. 3 GOING CONCERN The Group has prepared its financial statements on a going concern basis. As noted in the Business and Finance Review, the global Covid-19 pandemic had minimal impact on the reported results for FY 2019/20, however, inevitably, the effects of lockdowns around the world and the corre- sponding economic slowdown have been felt in the first months of the current financial year. Whilst the longer term impact of Covid-19 of the Group cannot be assessed with certainty, Management have prepared detailed forecasts and undertaken scenario planning for FY2020/21 and have already taken mitigat- ing actions including deferring employment costs, reducing the number of hours paid for where the volume of work has fallen, reducing discretionary expenditure, exiting a small number of colleagues, and taking advantage of government-backed business support and furloughing schemes. As part of this initiative, the Board and other senior executives in System1 agreed in April 2020 to defer 20% of their salaries until further notice. Management continue to monitor sales closely and adjust costs accordingly, whilst ensuring that the Company maintains an appropriate level of investment in future sales growth. At 31 March 2020, the Company had cash of £6,650,000 and borrowings of £2,500,000. In the two months to end May, Revenue and Gross Profit were 36% and 38% respectively below the same period of last year. Over these months the business as a whole incurred a Pre-Tax loss of some £0.7m as we pur- sued our short-term objectives of continuing to develop our new automated product set, while conserving cash by shrinking the cost base to offset lower sales. Cash net of debt facilities ended May at £3.9m compared with £4.1m at 31 March. In June, the sales pipeline has shown early signs of recovering towards pre-pandemic levels, and our cost base was in line with our targets Having considered all information available, the Directors remain confident that the Company will be able to settle liabilities as they fall due for a period of at least 12 months from the date of the approval of these financial statements, and for this reason consider that it is appropriate to prepare these financial statements on a going concern basis. System1 Group PLC Annual Report and Accounts 2020 41 Notes to the Consolidated Financial Statements continued for the year ended 31 March 2020 4 PRINCIPAL ACCOUNTING POLICIES The principal accounting policies adopted are consistent with those of the financial statements for the 12-month period ended 31 March 2019, except for the first-time adoption of IFRS 16, ‘Leases’ which was adopted on 1 April 2019. IFRS 16 replaced the existing guidance in IAS 17. Under IAS 17, lessees were required to make a distinction between a finance lease (on balance sheet) and an operating lease (off balance sheet). IFRS 16 now requires les- sees to recognise a lease liability reflecting future lease payments and a ‘right-of-use asset’ for virtually all lease contracts. Under IFRS 16, a contract is, or contains, a lease if the contract conveys the right to control the use of an identified asset for a period of time in exchange for consideration. The lease liability is initially measured at the present value of the lease payments that are not paid at the commencement date, discounted by using the rate implicit in the lease. If this rate cannot be readily determined, the Group uses its incremental borrowing rate. The weighted average incremental borrowing rate applied to lease liabilities is 4.30%. A reconciliation of operating lease commitments as at 31 March 2019 to the lease liability is as follows: Operating lease commitments disclosed at 31 March 2019 Adjustment for forecast exercise of break clause Effect of discounting LEASE LIABILITY RECOGNISED AT 1 APRIL 2019 Existing finance lease payables at 1 April 2019 TOTAL LEASE LIABILITIES AT 1 APRIL 2019 £000 5,505 (2,211) (489) 2,805 71 2,876 The Group has elected to apply the full retrospective approach to the transition to IFRS 16. The full retrospec- tive approach requires the transition to be implemented with restatement of the prior year results as if IFRS 16 had always been applied. Adoption of the IFRS 16 has resulted in the recognition of Right of use assets and lease liabilities with a corresponding increase in depreciation charges and finance costs offset by a reduction in operat- ing lease costs in the income statement. Operating lease costs were previously recognised on a straight-line basis in the income statement. In the earlier periods of a lease, the expenses associated with the lease under IFRS 16 will be higher when compared to lease expenses under IAS 17. For classification within the statement of cash flows, the interest and repayment of principal elements of the lease payments are separately disclosed in financ- ing activities. The implementation of IFRS 16 has made an insignificant impact on the net assets and profit before tax of the Group, as set out in note 26. STANDARDS, AMENDMENTS AND INTERPRETATIONS IN ISSUE BUT NOT YET EFFECTIVE Certain new accounting standards and interpretations have been published that are not mandatory for 31 March 2020 reporting periods and have not been early adopted by the Group. The only amendment identified as applicable to the Group is as follows: AMENDMENTS TO IAS 1 AND IAS 8 – DEFINITION OF MATERIAL The IASB has made amendments to ‘IAS 1 Presentation of Financial Statements’ and ‘IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors which use a consistent definition of materiality’ throughout International Financial Reporting Standards and the Conceptual Framework for Financial Reporting, clarify when information is material and incorporate some of the guidance in IAS 1 about immaterial information. These amendments clarify the guidance on the application of materiality and the definition of ‘primary users of general purpose financial statements’. This amendment is not expected to have a material impact on the entity in the current or future reporting periods or on foreseeable future transactions. System1 Group PLC Annual Report and Accounts 2020 42 4 PRINCIPAL ACCOUNTING POLICIES continued BASIS OF CONSOLIDATION The Group financial statements consolidate those of the Company and all of its subsidiary undertakings drawn up to 31 March 2020. Subsidiaries are all entities over which the Group has power over the subsidiary, i.e. the Group has existing rights that give it the ability to direct the relevant activities (the activities that significantly affect the subsidiary’s returns), exposure or rights, to variable returns from its involvement with the subsidiary and the ability to use its power over the subsidiary to affect the amount of the subsidiary’s returns. The Group obtains and exercises control through voting rights. The existence and effect of potential voting rights that are currently exercisable or convertible are considered when assessing whether the Group controls another entity. Subsidiaries are fully consolidated from the date on which control is transferred to the Group. They are de-consolidated from the date that control ceases. The Group uses the acquisition method of accounting to account for business combinations. The consideration transferred for the acquisition of a subsidiary is the fair values of the assets transferred, the liabilities incurred and the equity interests issued by the Group. The consideration transferred includes the fair value of any asset or liability resulting from a contingent consideration arrangement. Acquisition related costs are expensed as incurred. Identifiable assets acquired, liabilities and contingent liabilities assumed in a business combination are measured initially at their fair values at the acquisition date. On an acquisition-by-acquisition basis, the Group recognises any non-controlling interest in the acquiree either at fair value or at the non-controlling interest’s proportionate share of the acquiree’s net assets. The excess of the consideration transferred, the amount of any non-controlling interest in the acquiree and the acquisition-date fair value of any previous equity interest in the acquiree over the fair value of the Group’s share of the identifiable net assets acquired is recorded as goodwill. All intra-group transactions and balances are eliminated on consolidation. Unrealised gains on transactions between the Group and its subsidiaries are eliminated. Unrealised losses are also eliminated unless the transac- tion provides evidence of an impairment of the asset transferred. Amounts reported in the financial statements of subsidiaries have been adjusted where necessary to ensure consistency with the accounting policies adopted by the Group. PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment are stated at historical cost less accumulated depreciation and accumulated impairment losses. Depreciation is provided to write off the cost of all property, plant and equipment to its residual value on a straight-line basis over its expected useful economic lives, which are as follows: Furniture, fittings and equipment Computer hardware 5 years 2 to 3 years The residual value and useful life of each asset is reviewed and adjusted, if appropriate, at each balance sheet date. Depreciation on all property, plant and equipment is charged to administrative expenses. RIGHT-OF-USE ASSETS A right-of-use asset is recognised at the commencement date of a lease. The right-of-use asset is measured at cost, which comprises the initial amount of the lease liability, adjusted for, as applicable, any lease payments made at or before the commencement date net of any lease incentives received, any initial direct costs incurred, and, except where included in the cost of inventories, an estimate of costs expected to be incurred for disman- tling and removing the underlying asset, and restoring the site or asset. Right-of-use assets are depreciated on a straight-line basis over the unexpired period of the lease or the estimated useful life of the asset, whichever is the shorter. Where the Group expects to obtain ownership of the leased asset at the end of the lease term, the depreciation is over its estimated useful life. The Group had no such lease arrangements for the years ended 31 March 2020 or 2019. Right-of use assets are subject to impairment or adjusted for any remeasurement of lease liabilities. Depreciation on all Right-of-use assets is charged to administrative expenses. System1 Group PLC Annual Report and Accounts 2020 43 Notes to the Consolidated Financial Statements continued for the year ended 31 March 2020 4 PRINCIPAL ACCOUNTING POLICIES continued INTANGIBLE ASSETS SOFTWARE Acquired computer software licenses are capitalised at the cost of acquisition. Costs incurred in the development of identifiable and unique software products controlled by the Group, and that will probably generate economic benefits exceeding costs beyond one year, are recognised as intangible assets. Costs include professional fees and directly-attributable employee costs required to bring the software into working condition. Non-attributable costs are expensed under the relevant income statement heading. RESEARCH AND DEVELOPMENT – INTERNALLY GENERATED INTANGIBLE ASSETS All on-going research expenditure is expensed in the year in which it is incurred. Development costs incurred in the development of the Company’s new AdRatings product are capitalised as an internally generated asset when all criteria for capitalisation are met. The AdRatings product comprises the product platform and the data avail- able to product subscribers. Costs relating to the research phase of AdRatings, amounting to £2.11m were expensed in the year to 31 March 2019. Development costs include professional fees and directly-attributable employee costs required to bring the software into working condition. Where no internally-generated intangible asset can be recognised, development expenditure is charged to administrative expenses in the period in which it is incurred. Furthermore, internally-generated software and product development costs are recognised as an intangible asset only if the Group can demonstrate all of the following conditions: (a) the technical feasibility of completing the intangible asset so that it will be available for use or sale; (b) its intention to complete the intangible asset and use or sell it; (c) its ability to use or sell the intangible asset; (d) how the intangible asset will generate probable future economic benefits; (e) among other things, the Group can demonstrate the existence of a market for the output of the intangible asset or the intangible asset itself or, if it is to be used internally, the usefulness of the intangible asset; (f) the availability of adequate technical, financial and other resources to complete the development and to use or sell the intangible asset; (g) its ability to measure reliably the expenditure attributable to the intangible asset during its development. AMORTISATION Acquired computer software licences are amortised on a straight-line basis over their estimated useful economic life of two years. Internally-generated intangible assets are amortised on a straight-line basis over their useful economic lives. The AdRatings platform and the cost of data being made available to subscribers were being amortised over a period of 3 years on a straight line basis, prior to impairment in full in the year ended 31 March 2020. Amortisation on all intangible assets is charged to administrative expenses. IMPAIRMENT OF PROPERTY, PLANT AND EQUIPMENT, RIGHT-OF-USE ASSETS AND INTANGIBLE ASSETS At each balance sheet date the Group reviews the carrying amount of its property, plant and equipment and intangible assets for any indication that those assets have suffered an impairment loss. If any such indication exists, the recoverable amount of the asset is estimated in order to determine the extent of the impairment loss, if any. Intangible assets not available for use are tested for impairment on at least an annual basis. The recover- able amount is the higher of the fair value less costs to sell and value in use. CASH AND CASH EQUIVALENTS Cash and cash equivalents comprise cash in hand and bank deposits available on demand. System1 Group PLC Annual Report and Accounts 2020 44 4 PRINCIPAL ACCOUNTING POLICIES continued CONTRACT COSTS Contract costs comprise directly-attributable external costs incurred in fulfilling customer contracts that relate to incomplete market research projects. The Group assesses at each balance sheet date whether there is objective evidence that contract cost assets are impaired and provision is made when there is evidence that the Group will not be able to recover all costs incurred under the terms of the customer contract. INCOME TAXES Current income tax liabilities comprise those obligations to fiscal authorities relating to the current or prior reporting period, that are unpaid at the balance sheet date. They are calculated according to the tax rates and tax laws that have been enacted or substantively enacted at the reporting date applicable to the fiscal periods to which they relate, based on the taxable profit for the year. All changes to current tax assets or liabilities are recognised as a component of tax expense in the income statement, except where they relate to items charged or credited to other comprehensive income or directly to equity. Deferred income taxes are calculated using the liability method on temporary differences. This involves the comparison of the carrying amounts of assets and liabilities in the consolidated financial statements with their respective tax bases. In addition, tax losses available to be carried forward as well as other income tax credits to the Group are assessed for recognition as deferred tax assets. Deferred tax liabilities are always provided for in full. Deferred tax assets are recognised to the extent that it is probable that the underlying deductible temporary differences will be able to be offset against future taxable income. Deferred tax assets and liabilities are calculated, without discounting, at tax rates that are expected to apply to their respective period of realisation, provided they are enacted or substantively enacted at the balance sheet date. Deferred tax is recognised as a component of tax expense in the income statement, except where it relates to items charged or credited to other comprehensive income or directly to equity. REVENUE RECOGNITION The Group’s revenues are primarily from the delivery of research services. Revenue from all of the Group’s Research product lines (Communications, Brand, Innovation, and other research products) and its advertising agency services arise from contracts with customers within the scope of IFRS 15 ‘Revenue from Contracts with Customers’ and are recognised on the same basis, as set out below. Revenue is recognised at a point in time (rather than over time) as the key performance obligation is the deliv- ery of the final written debrief to the client. Revenue is recognised only after the final written debrief or creative content (in respect of our Agency busi- ness) has been delivered to the client, except on the rare occasion that a large project straddles a financial period end, and that project can be sub- divided into separate discrete deliverables; in such circumstances revenue is recognised on delivery of each separate deliverable. There are no elements of variable consideration in the con- tracts entered into by the Group. Revenue is measured by reference to the fair value of consideration receivable, excluding sales taxes. COST OF SALES Cost of sales includes external costs attributable to client projects. For the research business, these include respondent sample, data processing, language translation and similar costs. EMPLOYEE BENEFITS All accumulating employee-compensated absences that are unused at the balance sheet date are recognised as a liability. The Group operates several defined contribution pension plans. The Group pays contributions to these plans based upon the contractual terms agreed with each employee. The Group has no further payment obligations once the contributions have been paid. The contributions are recognised as employee benefit expense when they are due. System1 Group PLC Annual Report and Accounts 2020 45 Notes to the Consolidated Financial Statements continued for the year ended 31 March 2020 4 PRINCIPAL ACCOUNTING POLICIES continued SHARE-BASED PAYMENT TRANSACTIONS The Group issues equity-settled share-based compensation to certain employees (including directors). Equity- settled share-based payments are measured at fair value at the date of grant. The fair value determined at the grant date of the equity-settled share-based payment is expensed on a straight-line basis over the vesting period, together with a corresponding increase in equity, based upon the Group’s estimate of the shares that will eventu- ally vest. With the exception of market-based elements of awards, these estimates are subsequently revised if there is any indication that the number of options expected to vest differs from previous estimates. Any cumulative adjustment prior to vesting is recognised in the current period. No adjustment is made to any expense recognised in prior periods. The fair value of option awards with time vesting performance conditions are measured at the date of grant using a Black-Scholes based Option Valuation model. The expected life used in the model has been adjusted, based on management’s best estimate, for the effects of non-transferability, exercise restrictions and behavioural considerations. The fair value of awards made with market-based performance conditions (for example, the entity’s share price) are measured at the grant date using a Monte Carlo simulation method incorporating the market condi- tions in the calculations. The awards made in respect of the Group’s long-term incentive scheme have been measured using such a method. Social security contributions payable in connection with the grant of share options are considered integral to the grant itself, and the charge is treated as a cash-settled transaction. PROVISIONS Provisions for sabbatical leave and dilapidations are recognised when: (i) the Group has a legal or construc- tive obligation as a result of past events; (ii) it is probable that an outflow of resources will be required to settle the obligation; and (iii) the amount has been reliably estimated. Where material, the increase in provisions due to passage of time is recognised as interest expense. The provision for sabbatical leave is measured using the projected unit credit method. The provision for dilapidations is measured at the present value of expenditures expected to be required to settle those obligations. FOREIGN CURRENCIES Items included in the individual financial statements of each of the Group’s subsidiaries are measured using the currency of the primary economic environment in which the subsidiary operates (“the Functional Currency”). The consolidated financial statements are presented in Sterling (‘GBP’), which is the Company’s functional and the Group’s presentation currency. Transactions in foreign currencies are translated into the Functional Currency at the exchange rates prevailing at the dates of the transactions. Foreign exchange gains and losses arising from the settlement of such transactions and from the translation at year-end exchange rates of monetary assets and liabilities denominated in foreign currencies are recognised in the Income Statement. The results and financial position of all Group companies that have a Functional Currency different from the presentation currency are translated into the presentation currency as follows: (a) assets and liabilities for each balance sheet presented are translated at the closing rate at the balance sheet date; (b) income and expenses for each income statement are translated at average exchange rates; and (c) all resulting exchange differences are recognised as a separate component of equity. On consolidation, exchange differences arising from the translation of the net investment in foreign opera- tions are recognised in other comprehensive income. When a foreign operation is partially disposed of or sold, exchange differences that were recorded in equity are recognised in the income statement as part of the gain or loss on sale. System1 Group PLC Annual Report and Accounts 2020 46 4 PRINCIPAL ACCOUNTING POLICIES continued SEGMENT REPORTING Operating segments are reported in a manner consistent with the internal reporting provided to the main deci- sion-making body of the Company, which collectively comprises the Executive Directors. The Executive Directors are responsible for allocating resources and assessing performance of the operating segments. FINANCIAL INSTRUMENTS FINANCIAL ASSETS The Group’s financial assets comprise trade and other receivables held at amortised cost. The Group does not possess assets held at fair value through profit or loss. The classification is determined by management at initial recognition, being dependent upon the business model and the contractual cash flows of the assets. Financial assets are derecognised when the rights to receive cash flows from the investments have expired or have been transferred and the Group has transferred substantially all risks and rewards of ownership. Financial assets aris- ing from contracts with customers are separately presented in accordance with IFRS 15 in the Balance Sheet. TRADE AND OTHER RECEIVABLES Trade and other receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. The Group’s amortised cost financial assets comprise trade and other receivables and cash and cash equivalents in the balance sheet. Trade receivables are initially recorded at fair value, but subsequently at amortised cost using the effective interest rate method. In accordance with IFRS 9, the Group assesses on a forward-looking basis the expected credit losses associated with its financial assets at amortised cost. The Group assesses expected credit losses based on the ageing of the receivable, the Group’s historical experience and informed credit assessment. The amount of the write-down is determined as the difference between the asset’s carrying amount and the present value of estimated future cash flows. FINANCIAL LIABILITIES Financial liabilities are initially recognised at fair value, net of transaction costs, and subsequently carried at amortised cost using the effective interest rate method. Financial liabilities arising from contracts with custom- ers are separately presented in accordance with IFRS 15 in the Statement of Financial Position. Financial liabilities and equity instruments are classified according to the substance of the contractual arrangements entered into. An equity instrument is any contract that evidences a residual interest in the assets of the entity after deducting all of its financial liabilities. Where the contractual obligations of financial instruments (including share capital) are equivalent to a similar debt instrument, those financial instruments are classed as financial liabilities. Financial liabilities are presented as such in the balance sheet. Finance costs and gains or losses relating to financial liabilities are included in the income statement. Finance costs are calculated so as to produce a constant rate of return on the outstanding liability. Where the contractual terms of share capital do not have any terms meeting the definition of a financial liability then this is classed as an equity instrument. Dividends and distributions relating to equity instruments are debited directly to equity. ACCRUED AND DEFERRED INCOME Accrued income is recognised when a performance obligation has been satisfied but has not yet been billed. Accrued income is transferred to receivables when the right to consideration is unconditional and billed per the terms of the contractual agreement. The Group is generally paid in arrears for its services and invoices are typically payable within 60 days. In certain cases, payments are received from customers prior to satisfaction of performance obligations and recognised as deferred income. These balances are considered contract liabilities. There is no significant passage of time between the receipt of funds from a customer and the delivery of services, or between the delivery of services to a customer and the receipt of funds when payment is in arrears. The Group does not enter into contractual arrangements with significant financing components. System1 Group PLC Annual Report and Accounts 2020 47 Notes to the Consolidated Financial Statements continued for the year ended 31 March 2020 4 PRINCIPAL ACCOUNTING POLICIES continued LEASE LIABILITIES A lease liability is recognised at the commencement date of a lease. The lease liability is initially recognised at the present value of the lease payments to be made over the term of the lease, discounted using the interest rate implicit in the lease or, if that rate cannot be readily determined, the consolidated entity’s incremental borrowing rate. Lease payments comprise of fixed payments less any lease incentives receivable, variable lease payments that depend on an index or a rate, amounts expected to be paid under residual value guarantees, exercise price of a purchase option when the exercise of the option is reasonably certain to occur, and any anticipated termina- tion penalties. The variable lease payments that do not depend on an index or a rate are expensed in the period in which they are incurred. Lease liabilities are measured at amortised cost using the effective interest method. The carrying amounts are remeasured if there is a change in the following: future lease payments arising from a change in an index or a rate used; residual guarantee; lease term; certainty of a purchase option and termination penalties. When a lease liability is remeasured, an adjustment is made to the corresponding right-of use asset, or to profit or loss if the carrying amount of the right-of-use asset is fully written down. SHARE CAPITAL Ordinary shares are classified as equity. Equity instruments issued by the Company are recorded at the proceeds received, net of direct issue costs. SHARE PREMIUM Share premium represents the excess over nominal value of the fair value of consideration received for equity shares, net of direct expenses of the share issue. MERGER RESERVE The merger reserve represents the difference between the parent company’s cost of investment and a subsidiary’s share capital and share premium. The merger reserve in these accounts has arisen from a group reconstruction upon the incorporation and listing of the parent company that was accounted for as a common control transaction. Common control transactions are accounted for using merger accounting rather than the acquisition method, where this reflects the substance of the transaction. FOREIGN CURRENCY TRANSLATION RESERVE The foreign currency translation reserve represents the differences arising from translation of investments in overseas subsidiaries. TREASURY SHARES Where the Company purchases the Company’s equity share capital, the consideration paid is deducted from the total shareholders’ equity and classified as treasury shares until they are cancelled. Where such shares are sub- sequently sold or re-issued, any consideration received is included in total shareholders’ equity. No gain or loss is recognised on the purchase, sale, issue or cancellation of the Company’s own equity instruments. SIGNIFICANT ACCOUNTING ESTIMATES AND JUDGEMENTS SHARE BASED PAYMENTS – JUDGEMENT The fair value of options granted is determined using a Black Scholes based Employee Stock Option Valuation model (for the employee share option scheme) and a Monte Carlo simulation model (for the long-term incentive scheme). These models require a number of estimates and assumptions. The significant inputs into the models are share price at grant date, exercise price, historic exercise multiples, expected volatility and the risk-free rate. Volatility is measured at the standard deviation of expected share price returns based on statistical analysis of historical share prices. These inputs are provided in Note 10. In previous years the Company has often purchased shares to satisfy the exercise of share options in order to minimise shareholder dilution and create shareholder value. IFRS 2 does not provide guidance on the application of ‘substance over form’ when evaluating whether a share based payment should be accounted for as equity or cash settled. In order to determine whether the Company’s share options are equity or cash-settled, consideration needs to be given as to whether the settlement of the share options through the issue and subsequent repurchase of treasury shares should be treated as one transaction or as two distinct transactions, and whether the Company has an obligation to settle in cash. System1 Group PLC Annual Report and Accounts 2020 48 4 PRINCIPAL ACCOUNTING POLICIES continued The Company does not publicise to option holders that option shares may be repurchased, the decision to repurchase option shares is only made at the point of option exercise, and there is no contractual or other obliga- tion to settle in cash. Therefore, it is appropriate to treat the exercise of options and repurchase of option shares as two separate transactions and account for the option exercise as equity-settled rather than cash-settled. In the past the Company has on occasion cash-settled part of long-term incentive plan equity awards. Despite the repurchase of these equity interests the Company did not have an obligation to do so and does not have an obligation, constructive or otherwise to do so in the future. As a result, the Company continues to account for share-based payments related to its long-term incentive plans as equity rather than cash-settled. EMPLOYEE BENEFITS – ESTIMATE The Group has a sabbatical leave scheme, open to all employees, which provides 20 days paid leave for each six years’ of service. The carrying amount of the provision at the balance sheet date amounted to £724,000 (31 March 2019: £753,000). The provision for liabilities under the scheme is measured using the projected unit credit method. This model requires a number of estimates and assumptions. The significant inputs into the model are rate of salary growth and average staff turnover as explained in Note 11. CAPITALISATION OF ADRATINGS PLATFORM – ESTIMATE The Group tests capitalised development costs for impairment on an annual basis by reference to expected future cash generation from the AdRatings product. In estimating future cash generation, management make judgements by reference to budgets and forecasts about the amount and timing of future profits. As a result of the impairment testing performed for the year ended 31 March 2020, management have determined that future attributable revenues are not forecast to be sufficient to supporting the carrying value of the capitalised develop- ment costs and a charge of £921,000 has been recognised to impair the asset in full. Details are contained in Note 7. LEASES – ESTIMATE AND JUDGEMENT Management exercises judgement in determining the likelihood of exercising break or extension options in deter- mining the lease term, and reviews this on a lease by lease basis. The discount rate used to calculate the lease liability is the rate implicit in the lease, if it can be readily deter- mined, or the lessee’s incremental borrowing rate if not. Incremental borrowing rates are determined based on the term, country, currency and start date of the lease, to derive the rate of interest that the lessee would have to pay to borrow over a similar term, and with a similar security, the funds necessary to obtain an asset of a simi- lar value to the right-of-use asset in a similar economic environment. 5 SEGMENT INFORMATION The financial performance of the Group’s geographic operating units (“Reportable Segments”) is set out below. The Group defines its Consultancy business as Research and Advertising Agency. CONSULTANCY Americas United Kingdom Continental Europe APAC ADRATINGS United Kingdom Americas 31 Mar 2020 31 Mar 2019* Revenue £’000 12,772 5,480 5,628 1,542 Gross profit £’000 Revenue £’000 10,933 4,653 4,630 1,332 11,657 6,596 6,770 1,873 Gross profit £’000 9,538 5,457 5,447 1,605 25,422 21,548 26,896 22,047 35 18 53 35 18 53 - 3 3 - 3 3 25,475 21,601 26,899 22,050 * Comparative information for 2019 has been restated to disclose revenues and gross profits attributable to AdRatings. The Advertising Agency business has been aggregated with the United Kingdom Research business. System1 Group PLC Annual Report and Accounts 2020 49 Notes to the Consolidated Financial Statements continued for the year ended 31 March 2020 5 SEGMENT INFORMATION continued Segmental revenue is revenue generated from external customers and so excludes intercompany revenue and is attributable to geographical areas based upon the location in which the service is delivered. Operating expenses are not reported to the Executive Directors by segment, but is provided at a consolidated level. All revenues are recognised when the research results are delivered to the client. Consolidated balance sheet information is regularly provided to the executive directors, but segment balance sheet information is not, and accordingly the Company does not disclose segment balance sheet information here. System1 Group PLC (the ultimate parent company) is domiciled in the UK. As at 31 March 2020, consolidated non-current assets, other than financial instruments and deferred tax assets, located in the UK is £2,462,000 and located in other countries is £1,877,000. As at 31 March 2019 the respective amounts were £1,543,000 and £2,118,000 (restated for IFRS 16). The split of business by research solution is set out below. CONSULTANCY Communications (Ad Testing) Brand (Brand Tracking) Innovation* Other services ADRATINGS 31 Mar 2020 31 Mar 2019 Revenue Gross Profit Revenue Gross Profit £’000 £’000 £’000 £’000 9,002 4,637 9,829 1,954 7,992 3,423 8,555 1,578 8,473 4,985 11,195 2,243 7,372 3,699 9,608 1,368 25,422 21,548 26,896 22,047 53 53 3 3 25,475 21,601 26,899 22,050 * The Group has reclassified certain product offerings from ‘Other services’ to Innovation in the current period, and the comparative period analysis has been restated accordingly. Advertising Agency revenues and gross profit have been included in ‘Other services’. A reconciliation of total operating profit for Reportable Segments to total profit before income tax is set out below. Gross profit for Consultancy (Research and Agency) Gross profit for AdRatings GROSS PROFIT FOR REPORTABLE SEGMENTS Operating expenses for reportable segments Central overheads* Exceptional credit (see Note 25) Share based payment credit** OPERATING PROFIT Finance expense PROFIT BEFORE INCOME TAX 31 Mar 2020 31 Mar 2019 £’000 £’000 21,548 53 22,047 3 21,601 22,050 (13,235) (8,031) - 83 418 (122) 296 (14,329) (6,047) 250 132 2,056 (135) 1,921 * In the Annual Report for the year ended 31 March 2019, central delivery costs of £892k were allocated to central overheads in the segmental reporting. The comparable central delivery costs are included within the operating expenses for reportable segments above for both periods presented. ** Inclusive of associated social security Segmental operating profit excludes allocation of central overheads relating to the Group’s Operations, IT, Marketing, HR, Legal and Finance teams and Board of Directors. Operating expenses are not reported to the Executive Directors by segment, but is provided at a consolidated level. System1 Group PLC Annual Report and Accounts 2020 50 5 SEGMENT INFORMATION continued Over the year to 31 March 2020, the Group earned revenue of £2,596,000 from its largest customer, rep- resenting 10% of consolidated revenue (31 March 2019: 6%). Consolidated revenue from the Group’s largest customer in each year is split by geographic segment as set out below. Continental Europe Americas APAC 6 PROPERTY, PLANT AND EQUIPMENT For the year ended 31 March 2020 AT 1 APRIL 2019 Cost Accumulated depreciation NET BOOK AMOUNT YEAR ENDED 31 MARCH 2020 OPENING NET BOOK AMOUNT Additions Disposals Foreign exchange Depreciation charge for the year CLOSING NET BOOK AMOUNT AT 31 MARCH 2020 Cost Accumulated depreciation NET BOOK AMOUNT For the year ended 31 March 2019 AT 1 APRIL 2018 Cost Accumulated depreciation NET BOOK AMOUNT YEAR ENDED 31 MARCH 2019 OPENING NET BOOK AMOUNT Adjustment on transition to IFRS 16 Additions Disposals Foreign exchange Depreciation charge for the year CLOSING NET BOOK AMOUNT AT 31 MARCH 2019 Cost Accumulated depreciation NET BOOK AMOUNT System1 Group PLC Annual Report and Accounts 2020 31 Mar 2020 31 Mar 2019 £’000 £’000 - 2,596 - 2,596 775 632 92 1,499 Right-of-use assets *Restated £’000 Furniture, fittings and equipment £’000 Computer hardware £’000 Total *Restated £’000 5,286 (2,666) 2,620 2,620 2,336 (54) 88 (1,183) 3,807 5,532 (1,725) 3,807 553 (422) 131 131 - (13) 3 (74) 47 452 (405) 47 1,285 (1,189) 7,124 (4,277) 96 2,847 96 102 - - (81) 117 2,847 2,438 (67) 91 (1,338) 3,971 1,398 (1,281) 7,382 (3,411) 117 3,971 Right of use assets *Restated £’000 Furniture, fittings and equipment £’000 Computer hardware £’000 Total *Restated £’000 5,018 (1,864) 3,154 - 3,154 320 - 121 (975) 2,620 5,286 (2,666) 2,620 562 (359) 203 203 - 1 (2) 3 (74) 131 553 (422) 131 1,160 (1,094) 6,740 (3,317) 66 3,423 66 - 106 - 1 (77) 96 269 3,154 427 (2) 125 (1,126) 2,847 1,285 (1,189) 7,124 (4,277) 96 2,847 51 Notes to the Consolidated Financial Statements continued for the year ended 31 March 2020 7 INTANGIBLE ASSETS For the year ended 31 March 2020 AT 1 APRIL 2019 Cost Accumulated amortisation NET BOOK AMOUNT YEAR ENDED 31 MARCH 2020 OPENING NET BOOK AMOUNT Additions Amortisation charge Impairment charge CLOSING NET BOOK AMOUNT AT 31 MARCH 2020 Cost Accumulated amortisation NET BOOK AMOUNT For the year ended 31 March 2019 AT 1 APRIL 2018 Cost Accumulated amortisation NET BOOK AMOUNT YEAR ENDED 31 MARCH 2019 OPENING NET BOOK AMOUNT Additions Amortisation charge CLOSING NET BOOK AMOUNT AT 31 MARCH 2019 Cost Accumulated amortisation NET BOOK AMOUNT Development costs (AdRatings) £’000 Software licenses £’000 Software Total £’000 £’000 923 (110) 813 813 446 (338) (921) - 697 (696) 1,672 (1,672) 3,292 (2,478) 1 1 - (1) - - - 814 - 368 - - 368 814 814 (339) (921) 368 1,369 (1,369) 697 (697) 2,040 (1,672) 4,106 (3,738) - - 368 368 Development costs (AdRatings) £’000 Software licenses £’000 Software Total £’000 £’000 - - - - 923 (110) 813 923 (110) 813 697 (671) 26 26 - (25) 1 697 (696) 1 1,672 (1,672) - - - - - 2,369 (2,343) 26 26 923 (135) 814 1,672 (1,672) 3,292 (2,478) - 814 Software comprises the Group’s main research software platform, at a cost of £1,604,000, other software licences of £68,000, and additions of £368,000 relating to the Group’s new finance system. The carrying amount of the Group’s main research software platform at the balance sheet date was £Nil (31 Mar 2019: £Nil). The Group’s finance system was still in development at the year end and therefore has not been amortised. Development costs comprise amounts capitalised for the Group’s AdRatings product. This comprises the plat- form and the data available to subscribers, which are both amortised over three years. The carrying value of the AdRatings product has been tested for impairment at as 31 March 2020. The car- rying value of the asset has been allocated to the AdRatings cash generating unit (‘CGU’) for the purposes of assessing future cashflows. The principal assumptions used in the forecast are the timing and amount of future revenues and profit margins, which are derived from the latest forecasts approved by the Board. As a result of this review, and in light of the continuing modest AdRatings revenues of £0.05m in the year, the carrying value of the asset has been impaired in full, and accordingly the amortisation charge above includes impairment charges of £921,000. System1 Group PLC Annual Report and Accounts 2020 52 8 FINANCIAL RISK MANAGEMENT The Group’s financial risk management policies and objectives are explained in the Group Directors’ report. CREDIT RISK The Group reviews and manages credit risk, arising from trade receivables and cash and cash equivalents, on a consolidated basis. The vast majority of the Group’s clients are large blue-chip organisations, and the Group has only ever suffered minimal bad debts. The Group has concentrations of credit risk as follows. CASH AND CASH EQUIVALENTS HSBC Bank PLC (AA credit rating) Santander Deutsche Bank UBS Other banks TRADE RECEIVABLES Largest customer by revenue FINANCIAL INSTRUMENTS BY CATEGORY At the balance sheet date the Group held the following financial instruments by category. ASSETS AND LIABILITIES AS PER BALANCE SHEET FINANCIAL ASSETS CARRIED AT AMORTISED COST Trade and other receivables (excluding prepayments and accrued income) Cash and cash equivalents OTHER FINANCIAL LIABILITIES CARRIED AT AMORTISED COST CURRENT LIABILITIES Trade payables Accruals Lease liabilities NON-CURRENT LIABILITIES Borrowings Lease liabilities 31 Mar 2020 31 Mar 2019 £’000 £’000 6,135 360 84 64 7 6,650 3,849 231 154 79 2 4,315 390 161 31 Mar 2020 31 Mar 2019 £’000 5,072 6,650 *Restated £’0000 6,102 4,315 11,722 10,417 1,005 2,086 1,001 4,092 2,500 3,273 5,773 1,990 2,226 899 5,115 - 1,977 1,977 The application of IFRS 16 has resulted in the recognition of lease liabilities in respect of property leases previ- ously treated as operating leases and expensed in the income statement on a straight line basis. The payment of the Group’s financial liabilities will be financed from existing cash to their fair value. On 10 February 2020, the Company entered into a revolving credit facility with HSBC. The agreement allows the Company to draw down up to £2,500,000 for the purposes of funding general corporate and working capital requirements. The facility is available for three years and is secured over the assets of those Group companies domiciled in the the United Kingdom and the United States. The loan accrues interest at a rate of 2.5% above LIBOR and is subject to leverage and interest covenants. System1 Group PLC Annual Report and Accounts 2020 53 Notes to the Consolidated Financial Statements continued for the year ended 31 March 2020 9 TRADE AND OTHER RECEIVABLES Trade receivables Other receivables Prepayments and accrued income 31 Mar 2020 31 Mar 2019 £’000 4,678 394 351 5,423 *Restated £’000 5,794 308 805 6,907 Trade and other receivables are due within one year and are not interest bearing. The maximum exposure to credit risk at the balance sheet date is the carrying amount of receivables (detailed above). The Group does not hold any collateral as security against trade receivables. The Directors do not believe that there is a significant concentration of credit risk within the trade receivables balance. IMPAIRMENT OF FINANCIAL ASSETS Opening balance Charged to the income statement Utilisations and other movements PROVIDED AT YEAR-END 31 Mar 2020 31 Mar 2019 £’000 £’000 64 99 (52) 111 - 64 - 64 The Group has financial assets, primarily trade receivables, that are subject to the IFRS 9 expected credit loss model and the Group is required to assess these assets for expected credit losses. The Group has applied the simplified approach to measuring expected credit losses as permitted by IFRS 9 and recognises a loss allowance based on the financial assets’ lifetime expected loss. The Group assesses on a forward-looking basis, the expected credit losses associated with its debt instru- ments carried at amortised cost. The Group assesses expected credit losses based on the ageing of the receiv- able, the Group’s historical experience and informed credit assessment. Further credit losses are recognised where the Group has information that indicates it is unlikely to recover balances in full. The Group has no financial assets designated as measured at fair value. As of 31 March 2020, trade receivables of £1,352,000 were past due but not impaired (31 March 2019: £2,070,000). The ageing of trade receivables, and the associated loss allowance, is as follows. 31 March 2020 Gross trade receivables Loss allowance Expected loss rate 31 March 2019 Gross trade receivables Loss allowance Expected loss rate Not past due Up to 3 months 3 to 6 months Over 6 months £’000 £’000 £’000 £’000 3,326 - 0% 1,274 - 0% 117 39 33% 72 72 100% Not past due Up to 3 months 3 to 6 months Over 6 months £’000 £’000 £’000 £’000 3,724 - 0% 1,757 - 0% 269 64 24% 108 - 0% As of 31 March 2020, no other receivables or contract costs were impaired (31 March 2019: £Nil). System1 Group PLC Annual Report and Accounts 2020 54 9 TRADE AND OTHER RECEIVABLES continued The carrying amount of the Group’s trade and other receivables are denominated in the following currencies. US Dollar Sterling Euro Brazilian Real Swiss Franc Chinese Yuan Canadian Dollar Australian Dollar Singapore Dollar 31 Mar 2020 31 Mar 2019 £’000 £’000 2,350 1,397 893 257 281 35 16 144 50 5,423 2,727 2,507 885 353 209 24 - 107 95 6,907 10 SHARE CAPITAL The share capital of System1 Group PLC consists only of fully paid Ordinary Shares (“Shares”) with a par value of one pence each. All Shares are equally eligible to receive dividends and the repayment of capital, and represent one vote at the Annual General Meeting. ALLOTTED, CALLED UP AND FULLY PAID ORDINARY SHARES At 1 April 2019 and at 31 March 2020 Number 13,226,773 £’000 132 During the year ended 31 March 2020 the Company transferred 23,167 Shares out of treasury to satisfy the exercise of employee share options at a weighted average exercise price of 132 pence per share for total consid- eration of £30,000. The weighted average share price at exercise date was 204 pence per share. At 31 March 2020, the Company had 13,226,773 Shares in issue (31 March 2019: 13,226,773) of which 626,989 were held in treasury (31 March 2019: 650,156). The treasury Shares will be used to help satisfy the requirements of the Group’s share incentive schemes. SHARE OPTIONS EMPLOYEE SHARE OPTION SCHEME The Group issues share options to directors and to employees under an HM Revenue and Customs approved Enterprise Management Incentive (EMI) scheme and also under an unapproved scheme. The exercise price for share options granted historically is equal to the mid-market opening quoted market price of the Company’s Shares on the date of grant, and in general, they vested evenly over a period of one to three years following grant date. Options granted in more recent years have been awarded in accordance with management long-term incentive plans and such options have a zero exercise price and are subject to per- formance criteria. If share options remain unexercised after a period of ten years from the date of grant, the options expire. Share options are forfeited in some circumstances if the employee leaves the Group before the options vest, unless otherwise agreed by the Group. System1 Group PLC Annual Report and Accounts 2020 55 Notes to the Consolidated Financial Statements continued for the year ended 31 March 2020 10 SHARE CAPITAL continued Movements in the number of share options outstanding and their related weighted average exercise prices are as follows. Opening balance Granted Lapsed Replaced Cancelled Exercised CLOSING BALANCE 31 Mar 2020 31 Mar 2019 Average exercise price per share Pence 6.4 - 131.5 - - 131.5 Options No 962,470 1,358,135 (17,000) (462,934) (132,267) (23,167) 0.5 1,685,237 Average exercise price per share Pence 4.7 - - - - - 6.4 Options No 1,393,329 - (198,400) - (132,267) (100,192) 962,470 EXERCISABLE AT END OF PERIOD 0.5 315,656 17.4 355,823 The weighted average share price at date of exercise of options exercised during the year ended 31 March 2020 was 204 (year ended 31 March 2019: 270) pence. At 31 March 2020 and 31 March 2019, the Group had the following outstanding options and exercise prices. 31 Mar 2020 31 Mar 2019 Expiry date 2020 2024 2025 2027 2029 2032 Average exercise price per share Pence Weighted average remaining Options contractual life No Months - 5.3 - - - - 10,144 172,376 233,136 1,069,581 100,000 100,000 0.5 1,685,237 1.9 50.9 60.8 83.7 112.0 148.1 82.2 Average exercise price per share Pence 50.6 - - - - - 122,687 - 233,136 606,647 - - 6.4 962,470 Weighted average remaining Options contractual life No Months 12.1 - 72.8 95.8 - - 79.5 LONG TERM INCENTIVE SCHEME On 4 September 2019 the Company granted 1,058,135 zero cost options to certain members of the senior man- agement team at a weighted average fair value of 17 pence per share. Of these, 462,934 options were granted as replacements to equity awards made under the 2017 LTIP scheme. The options vest between 12 August 2020 and 12 August 2024, subject to Gross Profit, Profit After Tax and the Company’s share price exceeding certain targets. These targets are the same as those set under the 2017 LTIP scheme, full details of which are given in the Com- pany’s Remuneration Report. The options lapse on 21 March 2027. 132,267 options were cancelled. Options outstanding under the scheme number 1,058,135 (31 March 2019: 606,647). System1 Group PLC Annual Report and Accounts 2020 56 10 SHARE CAPITAL continued NON-EMPLOYEE OPTION PLAN On 17 April 2019 the Company granted an advisor to the Board, Stefan Barden, an equity award comprising of 300,000 zero cost options at a weighted average fair value at date of grant of 37 pence per share. These options vest in three tranches of 100,000 each subject to Gross Profit and the Company’s share price exceeding certain targets. The three tranches lapse on 30 July 2024, 30 July 2029 and 30 July 2032 respectively. Full details of the grant can be found in the Company’s Remuneration Report. SHARE-BASED PAYMENT CHARGE The total credit relating to equity-settled share-based payment plans was £60,000 for the year ended 31 March 2020 (31 March 2019: credit of £132,000). The associated credit for social security was £23,000 for the year ended 31 March 2020 (31 March 2019: £64,000 credit). 11 PROVISIONS AT 1 APRIL 2018 Provided in the year Utilised in the year AT 31 MARCH 2019 Provided in the year Utilised in the year AT 31 MARCH 2020 Of which: Current Non-current Sabbatical Dilapidation provision provisions £’000 £’000 706 158 (111) 753 12 (41) 724 237 487 724 82 - - 82 59 - 141 63 78 141 Total £’000 788 158 (111) 835 71 (41) 865 300 565 865 The Group has a sabbatical leave scheme, open to all employees. The scheme provides 20 days paid leave for each successive period of six years’ service. There is no proportional entitlement for shorter periods of service. The provision for the liabilities under the scheme is measured using the projected unit credit method. The calcu- lation of the provision for the year ended 31 March 2020 assumes an annual rate of growth in salaries of 7% (year ended 31 March 2019: 7%), a discount rate of 2.1% (year ended 31 March 2019: 1.6%), based upon good quality 6-year corporate bond yields, and an average staff turnover rate of 19% (year ended 31 March 2019: 19%). The key assumptions are considered to be the estimation of future salary increases and staff turnover. An adjustment of 10% to the assumptions for salary increases and staff turnover rates would result in a change in the valuation of the provision as at 31 March 2020 of £55,000 and £150,000 respectively. Dilapidation provisions represent £63,000 in relation to agreed settlements and the remainder represents the Group’s best estimate of costs required to meet its obligations under property lease agreements. System1 Group PLC Annual Report and Accounts 2020 57 Notes to the Consolidated Financial Statements continued for the year ended 31 March 2020 12 TRADE AND OTHER PAYABLES Trade payables Social security and other taxes Accruals 31 Mar 2020 31 Mar 2019 £’000 1,005 118 2,086 3,209 *Restated £’000 1,990 292 2,226 4,508 Trade and other payables are due within one year and are not interest bearing. The contractual terms for the payment of trade payables are generally 45 days from receipt of invoice. The contractual maturity of all trade and other payables is within one year of the balance sheet date. 13 CONTRACT LIABILITIES CONTRACT LIABILITIES 31 Mar 2020 31 Mar 2019 £’000 671 £’000 534 From time to time, payments are received from customers prior to work being completed. Such payments are recorded in the balance sheet as contract liabilities. Included within Revenue is £358,000 relating to contract liabilities recognised at 1 April 2019 (2019: £355,000). No revenue has been recognised in the year from performance conditions satisfied, or partially satisfied in previ- ous periods. 14 BORROWINGS The analysis of the maturity of lease liabilities is as follows: Within one year Later than 1 but no later than 5 years More than 5 years Minimum lease payments Future finance charges Recognised as a liability The present value of finance lease liabilities is as follows: Within one year Later than 1 but no later than 5 years More than 5 years 31 Mar 2020 31 Mar 2019 £’000 1,208 3,405 - 4,613 *Restated £’000 1,002 1,972 201 3,175 (339) (299) 4,274 2,876 31 Mar 2020 31 Mar 2019 £’000 1,001 3,273 - 4,274 *Restated £’000 899 1,786 191 2,876 There are no contingent payments, purchase options or restrictive covenants in respect of property leases. Details of loan facilities and balances are given in note 8. System1 Group PLC Annual Report and Accounts 2020 58 15 EXPENSES BY NATURE Employee benefit expense Depreciation, amortisation and impairment Net foreign exchange (gains)/losses Other expenses Analysed as: Cost of sales Administrative expenses 16 PROFIT BEFORE TAXATION Profit before taxation is stated after charging: DEPRECIATION AND AMORTISATION SHARE-BASED PAYMENTS LOSS ON DISPOSAL IMPAIRMENT OF DEVELOPMENT COSTS NET (GAIN)/LOSS ON FOREIGN CURRENCY TRANSLATION AUDIT AND AUDIT RELATED FEES Audit of parent company and consolidated accounts Audit related assurance services NON-AUDIT FEES Tax compliance Tax advisory Other services 31 Mar 2020 31 Mar 2019 £’000 12,551 2,598 (21) 9,929 *Restated £’000 11,882 1,261 (3) 11,703 25,057 24,843 3,874 21,183 4,849 19,994 25,057 24,843 31 Mar 2020 31 Mar 2019 £’000 *Restated £’000 1,677 1,261 (60) (132) 66 921 (21) 2 - (3) 31 Mar 2020 31 Mar 2019 £’000 £’000 58 10 68 - - - - 68 57 7 64 58 38 25 121 185 System1 Group PLC Annual Report and Accounts 2020 59 Notes to the Consolidated Financial Statements continued for the year ended 31 March 2020 17 EMPLOYEE BENEFIT EXPENSE The average number of staff employed by the Group during the financial year was as follows: NUMBER OF ADMINISTRATIVE STAFF The aggregate employment costs of the above were: Wages and salaries Social security costs Pension costs – defined contribution plans Long service leave cost – sabbatical provision Share based remuneration Compensation for loss of office Medical benefits 31 Mar 2020 31 Mar 2019 No 146 No 145 31 Mar 2020 31 Mar 2019 £’000 £’000 10,134 1,131 361 (29) (60) 521 493 9,775 1,176 339 47 (132) 101 576 12,551 11,882 The Company had 7 key management personnel as at 31 March 2020 (31 March 2019: 6), including the two Executive Directors. Compensation to key management is set out below. Short-term employee benefits – salaries, bonuses and benefits in kind Short-term employee benefits – employer social security, including £15,000 credit (year ended 31 March 2019: £89,000 credit) in respect of share incentive plans Compensation for loss of office Post-employment benefits (pension costs – defined contribution plans) Long term bonus plan Share-based payment Details of directors’ emoluments are given in the Remuneration Report. 18 FINANCE EXPENSES Other interest payable / (receivable) Finance charges on property leases 31 Mar 2020 31 Mar 2019 £’000 949 78 220 11 (7) (24) 1,227 £’000 662 32 - 19 (48) (62) 603 31 Mar 2020 31 Mar 2019 £’000 £’000 4 118 122 (2) 137 135 System1 Group PLC Annual Report and Accounts 2020 60 19 INCOME TAX EXPENSE Current tax Deferred tax Income tax expense for the year differs from the standard rate of taxation as follows: PROFIT ON ORDINARY ACTIVITIES BEFORE TAXATION Profit on ordinary activities multiplied by standard UK tax rate Difference between tax rates applied to Group’s subsidiaries Expenses not deductible for tax purposes Tax on intra-group management charges (Brazil and China) Adjustment to current tax in respect of prior years Withholding tax Derecognition of trading losses Credit on exercise of share options taken to income statement 31 Mar 2020 31 Mar 2019 £’000 886 (359) 527 *Restated £’000 660 (6) 654 31 Mar 2020 31 Mar 2019 £’000 296 56 265 7 113 (41) 45 84 (2) 527 *Restated £’000 1,921 365 237 4 97 (27) - - (22) 654 The standard tax rate for the year ended 31 March 2020 and 2019 was 19%. The Company is working with its advisors to submit claims for a Research & Development Tax Credit (“R&D Tax Credit”) in respect of the two years ended 31 March 2020. The R&D Tax Credit in respect of the year to 31 March 2019 is anticipated to provide a benefit of approximately £0.5m, which will be recognised on approval by HMRC. No amounts have been recognised in these financial statements in relation to these claims. 20 DEFERRED TAX Deferred tax assets and liabilities are as follows. Deferred tax assets: - Deferred tax assets to be recovered after more than 12 months - Deferred tax assets to be recovered within 12 months Deferred tax liabilities: - Deferred tax liability to be recovered within 12 months DEFERRED TAX ASSET (NET): The gross movement in deferred tax is as follows. OPENING BALANCE Income statement credit Tax debited directly to equity CLOSING BALANCE 31 Mar 2020 31 Mar 2019 £’000 £’000 570 79 649 (22) 627 145 175 320 (21) 299 31 Mar 2020 31 Mar 2019 £’000 £’000 299 359 (31) 627 372 6 (79) 299 61 System1 Group PLC Annual Report and Accounts 2020 Notes to the Consolidated Financial Statements continued for the year ended 31 March 2020 20 DEFERRED TAX continued The movement in deferred income tax assets and liabilities during the year, without taking into consideration the offsetting of balances within the same tax jurisdiction, is as follows: DEFERRED TAX ASSETS AT 1 APRIL 2019 Credited/(charged) to income statement Debited directly to equity AT 31 MARCH 2020 DEFERRED TAX LIABILITIES AT 1 APRIL 2019 Charged to income statement AT 31 MARCH 2020 Trading losses £’000 Other provisions £’000 Share Dilapidation options £’000 provisions £’000 Sabbatical provision £’000 - 377 - 377 38 (10) - 28 129 (11) (31) 87 10 17 - 27 143 (13) - 130 Total £’000 320 360 (31) 649 Accelerated capital allowances £’000 (21) (1) (22) Deferred tax assets are recognised only to the extent that their recoverability is considered probable. All deferred tax assets have been recognised with the exception of those relating to our Singaporean business (£83,000 of tax benefit that would have been recognised in respect of trading losses). The deferred tax asset in respect of the Company’s share option plans relates to corporate tax deductions available on exercise of employee share options. 21 (LOSSES)/EARNINGS PER SHARE (A) BASIC (LOSSES)/EARNINGS PER SHARE Basic (losses)/earnings per share is calculated by dividing the profit or loss attributable to equity holders of the Company by the weighted average number of Ordinary Shares in issue during the year. (LOSS)/PROFIT ATTRIBUTABLE TO EQUITY HOLDERS OF THE COMPANY (£’000) Weighted average number of Ordinary Shares in issue BASIC (LOSSES)/EARNINGS PER SHARE 31 Mar 2020 31 Mar 2019 *Restated (231) 1,267 12,582,934 12,547,658 (1.8)p 10.1p (B) DILUTED (LOSSES)/EARNINGS PER SHARE Diluted (losses)/earnings per share is calculated by adjusting the weighted average number of shares outstanding assuming conversion of all dilutive share options to Ordinary Shares. Options are included in the determination of diluted earnings per share if the required performance thresholds would have been met based on the Group’s performance up to the reporting date, and to the extent that they are dilutive. (LOSS)/PROFIT ATTRIBUTABLE TO EQUITY HOLDERS OF THE COMPANY (£’000) Weighted average number of Ordinary Shares in issue Share options Weighted average number of Ordinary Shares for diluted earnings per share DILUTED (LOSSES)/EARNINGS PER SHARE 31 Mar 2020 31 Mar 2019 *Restated (231) 1,267 12,582,934 NA 12,547,658 330,378 12,582,934 12,878,036 (1.8)p 9.8p 62 System1 Group PLC Annual Report and Accounts 2020 22 DIVIDENDS On 13 December 2019, the Company paid an interim dividend of 1.1 pence per share, amounting to £138,000, in respect of the year ended 31 March 2020. Final dividend for 2018/19: 6.4p per share (prior period: 6.4p per share) Interim dividend for 2019/20: 1.1p per share (prior period: 1.1p per share) TOTAL ORDINARY DIVIDENDS PAID IN THE PERIOD 31 Mar 2020 31 Mar 2019 £’000 £’000 805 138 138 943 802 138 138 940 The directors do not propose a final dividend in respect of the year ended 31 March 2020. 23 NET CASH GENERATED FROM OPERATIONS PROFIT BEFORE TAXATION Depreciation Amortisation and impairment Interest paid Loss on disposal of property, plant and equipment Share-based payment credit Increase in contract costs Decrease/(increase) in receivables (Decrease)/increase in payables Increase/(decrease) in contract liabilities Exchange differences on operating items NET CASH GENERATED FROM OPERATIONS 24 RELATED PARTY TRANSACTIONS Dividends paid to directors were as follows. John Kearon James Geddes (resigned 20 April 2020) Ken Ford* (resigned 24 July 2018) Robert Brand Graham Blashill 31 Mar 2020 31 Mar 2019 £’000 296 1,338 1,260 122 66 (60) (8) 1,484 (1,265) 137 (190) *Restated £’000 1,921 1,126 135 135 2 (132) (77) (1,204) 417 (46) (57) 3,180 2,220 31 Mar 2020 31 Mar 2019 £ £ 222,093 19,738 NA 2,250 750 245,067 18,824 1,280 2,250 750 244,831 268,171 * Includes those dividends with an ex-dividend date prior to resignation as director on 24 July 2018. A family member of James Geddes is due to receive commission from WeWork during the year to 31 March 2021 equal to 10% of the first year of rental pay- ments to be made by the Company on its new WeWork office space in London. This commission will amount to £40,000, and the proposed transaction was reviewed by, and received the prior approval of, the Company’s Audit Committee. No such transactions arose in the year ended 31 March 2019. 63 System1 Group PLC Annual Report and Accounts 2020 Notes to the Consolidated Financial Statements continued for the year ended 31 March 2020 24 RELATED PARTY TRANSACTIONS continued The following transactions took place between entities within the Group, all of which are consolidated in these financial statements, and are related parties by virtue of the common control of the Company. For the year ended 31 March 2020 £’000 £’000 £’000 £’000 Revenues/ (direct costs) Overhead charges Royalties Amounts due from/(to) related parties System1 Group PLC System1 Research Limited System1 Research B.V. System1 Research, Inc. System1 Research Sarl System1 Research GmbH System1 Marketing Consulting (Shanghai) Co. Limited System1 Research Do Brazil Servicos de Marketing Ltda. System1 Research France Sarl System1 Market Research Pte Ltd System1 Research Pty Ltd. System1 Agency Limited 2 (190) (88) (169) 219 - - - 88 45 11 84 6,090 (1,371) 271 (2,858) (489) (410) - - (291) (116) (284) - 2,403 (557) (113) (1,120) (188) (158) - - (112) (45) (109) - 351 (78) (51) (416) 465 (211) 254 (6) 223 (52) 182 (661) Revenues/ (direct costs) Overhead charges Royalties Amounts due from/(to) related parties For the year ended 31 March 2019 £’000 £’000 £’000 £’000 System1 Group PLC System1 Research Limited System1 Research B.V. System1 Research, Inc. System1 Research Sarl System1 Research GmbH System1 Marketing Consulting (Shanghai) Co. Limited System1 Research Do Brazil Servicos de Marketing Ltda. System1 Research France Sarl System1 Market Research Pte Ltd System1 Research Pty Ltd. System1 Agency Limited - 154 - (236) 120 - 94 - 150 (201) (29) (52) 4,953 (1,210) (124) (2,008) (495) (505) - - (239) (176) (197) - 2,462 (601) (62) (997) (246) (251) (2) - (119) (87) (98) - 3,327 (1,050) (22) (339) 243 (752) 30 (108) (22) (469) 76 (915) 25 EXCEPTIONAL CREDIT – RATES REBATE IN PRIOR YEAR During the year ended 31 March 2019, the Company recognised an exceptional credit of £251,000 in administra- tive expenses in respect of a Business Rates refund that was made as a result of an error by Camden Council and the Valuation Office. There were no exceptional credits in the year to 31 March 2020. System1 Group PLC Annual Report and Accounts 2020 64 26 CHANGE IN ACCOUNTING POLICIES The adoption of IFRS 16, ‘Leases’ has resulted in the following changes to the previously reported figures: Balance sheet ASSETS NON-CURRENT ASSETS Property, plant and equipment Intangible assets Deferred tax asset CURRENT ASSETS Contract costs Trade and other receivables Current income tax asset Cash and cash equivalents 31 Mar 2019 Impact of 31 Mar 2019 £’000 IFRS 16 £’000 Restated £’000 227 814 275 1,316 208 6,915 431 4,315 11,869 2,620 - 24 2,644 - (8) - - (8) 2,847 814 299 3,960 208 6,907 431 4,315 11,861 TOTAL ASSETS 13,185 2,636 15,821 EQUITY ATTRIBUTABLE TO EQUITY HOLDERS OF THE COMPANY Share capital Share premium account Merger reserve Foreign currency translation reserve Retained earnings TOTAL EQUITY LIABILITIES NON-CURRENT LIABILITIES Provisions Lease liabilities CURRENT LIABILITIES Provisions Lease liabilities Trade and other payables Contract liabilities TOTAL LIABILITIES TOTAL EQUITY AND LIABILITIES 132 1,601 477 223 4,721 7,154 610 23 633 225 48 4,591 534 5,398 6,031 - - - - (86) (86) - 1,954 1,954 - 851 (83) - 768 2,722 132 1,601 477 233 4,635 7,068 610 1,977 2,587 225 899 4,508 534 6,166 8,753 13,185 2,636 15,821 65 System1 Group PLC Annual Report and Accounts 2020 Notes to the Consolidated Financial Statements continued for the year ended 31 March 2020 26 CHANGE IN ACCOUNTING POLICIES continued Income statement (extract) Operating profit Finance income/(expense) Income tax expense PROFIT AFTER TAXATION Cash flow statement (extract) Net cash generated from operating activities Net cash used by investing activities Net cash used by financing activities Net decrease in cash and cash equivalents CASH AND CASH EQUIVALENTS AT 31 MARCH 31 Mar 2019 Impact of 31 Mar 2019 £’000 1,932 2 (677) 1,257 IFRS 16 £’000 Restated £’000 124 (137) 23 10 2,056 (135) (654) 1,267 31 Mar 2019 Impact of 31 Mar 2019 £’000 609 (1,030) (982) (1,403) 4,315 IFRS 16 £’000 969 - (969) - Restated £’000 1,578 (1,030) (1,951) (1,403) - 4,315 The Group has elected to apply the full retrospective approach to the transition to IFRS 16. The full retrospec- tive approach requires the transition to be implemented with restatement of the prior year results as if IFRS 16 had always been applied. On adoption of IFRS 16, the Group has recognised lease liabilities reflecting future lease payments, and ‘Right- of-use assets’ in respect of property leases which meet the definition of a contract that conveys the right to con- trol the use of an identified asset for a period of time in exchange for consideration. The lease liability is initially measured at the present value of the lease payments that are not paid at the commencement date, discounted by using the rate implicit in the lease. Further details are given in note 3 of the financial statements. As a result of the implementation of IFRS 16, the following restatements have been made: 1. The increase in property, plant and equipment from the recognition of Right-of-use assets 2. The increase in lease liabilities from the recognition of liabilities for future lease payments, discounted to present value 3. The elimination of prepayments and accruals in respect of operating lease rentals, including those amounts recognised in respect of lease incentives 4. The recognition of depreciation and finance expenses in place of operating lease charges, with a corre- sponding increase in finance charges and a decrease in operating expenses for the periods presented. System1 Group PLC Annual Report and Accounts 2020 66 26 CHANGE IN ACCOUNTING POLICIES continued Balance sheet ASSETS NON-CURRENT ASSETS Property, plant and equipment Intangible assets Deferred tax asset CURRENT ASSETS Contract costs Trade and other receivables Current income tax asset Cash and cash equivalents 31 Mar 2018 Impact of 31 Mar 2018 £’000 IFRS 16 £’000 Restated £’000 269 26 372 667 131 5,711 423 5,784 12,049 3,154 - - 3,154 - (7) - - (7) 3,423 26 372 3,821 131 5,704 423 5,784 12,042 TOTAL ASSETS 12,716 3,147 15,863 EQUITY ATTRIBUTABLE TO EQUITY HOLDERS OF THE COMPANY Share capital Share premium account Merger reserve Foreign currency translation reserve Retained earnings TOTAL EQUITY LIABILITIES NON-CURRENT LIABILITIES Provisions Lease liabilities CURRENT LIABILITIES Provisions Lease liabilities Trade and other payables Contract liabilities TOTAL LIABILITIES TOTAL EQUITY AND LIABILITIES 132 1,601 477 221 4,578 7,009 420 70 490 368 46 4,223 580 5,217 5,707 - - - - (96) (96) - 2,489 2,489 - 831 (77) - 754 3,243 132 1,601 477 221 4,482 6,913 420 2,559 2,979 368 877 4,146 580 5,971 8,950 12,716 3,147 15,863 27 AUDIT EXEMPTION System1 Research Limited (company number 03900547), System1 Agency Limited (company number 09829202) and System1 Ad Ratings Limited (company number 11313402) are exempt from the requirements of the Com- panies Act 2006 relating to the audit of accounts under section 479A. System1 Group Plc has given a parental guarantee for all entities above under section 479C of the Companies Act 2006. 67 System1 Group PLC Annual Report and Accounts 2020 Company Balance Sheet as at 31 March 2020 REGISTERED COMPANY NO. 05940040 FIXED ASSETS Intangible assets Tangible assets Investments CURRENT ASSETS Debtors due within one year Debtors due after one year Cash at bank CREDITORS: AMOUNTS DUE WITHIN ONE YEAR NET CURRENT ASSETS TOTAL ASSETS LESS CURRENT LIABILITIES CREDITORS: AMOUNTS DUE AFTER ONE YEAR PROVISIONS FOR LIABILITIES NET ASSETS CAPITAL AND RESERVES Share capital Share premium account Retained earnings SHAREHOLDERS’ FUNDS 31 Mar 2020 31 Mar 2019 *Restated for IFRS 16 £’000 1 Apr 2018 *Restated for IFRS 16 £’000 Note 2 3 4 5 5 6 7 8 10 368 2,076 581 3,025 2,075 385 3,966 6,426 814 591 581 1,986 5,292 100 152 5,544 26 1,014 581 1,621 3,900 122 1,330 5,352 (2,678) (3,106) (2,117) 3,748 6,773 (4,101) (270) 2,402 132 1,601 669 2,402 2,438 4,424 (66) (287) 4,071 132 1,601 2,338 4,071 3,235 4,856 (494) (307) 4,055 132 1,601 2,322 4,055 As permitted by Section 408 of the Companies Act 2006, the Parent Company’s profit and loss account has not been included in these financial statements. The Parent Company’s loss after tax was £663,000 (2019: restated profit of £1,137,000). These financial statements were approved by the directors on 30 June 2020 and are signed on their behalf by: JOHN KEARON Director CHRIS WILLFORD Director System1 Group PLC Annual Report and Accounts 2020 68 Company Statement of Changes in Equity for the year ended 31 March 2020 At 1 April 2018 as originally stated Transition to IFRS 16 AT 1 APRIL 2018 RESTATED Share capital £’000 132 - 132 Share premium account £’000 1,601 - 1,601 Retained earnings £’000 2,373 (51) 2,322 Total £’000 4,106 (51) 4,055 PROFIT FOR THE FINANCIAL PERIOD AND TOTAL COMPREHENSIVE INCOME ATTRIBUTABLE TO THE EQUITY HOLDERS Transactions with owners: Employee share options scheme: - Value of employee services - Current tax credited to equity - Deferred tax debited to equity Dividends paid to owners Sale of treasury shares - - - - - - - - - - - - - - 1,137 1,137 (132) 18 (70) (940) 3 (132) 18 (70) (940) 3 (4,287) (4,287) AT 31 MARCH 2019 RESTATED 132 1,601 2,338 4,071 LOSS FOR THE FINANCIAL YEAR AND TOTAL COMPREHENSIVE LOSS ATTRIBUTABLE TO THE EQUITY HOLDERS Transactions with owners: Employee share scheme: - Value of employee services - Deferred tax debited to equity Dividends paid to owners Sale of treasury shares - - - - - - - - - - - - (663) (663) (60) (33) (943) 30 (60) (33) (943) 30 (1,006) (1,006) AT 31 MARCH 2020 132 1,601 669 2,402 System1 Group PLC Annual Report and Accounts 2020 69 Notes to the Company Financial Statements for the year ended 31 March 2020 1 ACCOUNTING POLICIES STATEMENT OF COMPLIANCE The separate financial statements of the Company are presented in accordance with Financial Reporting Standard 101 – ‘The Reduced Disclosure Framework’. They have been prepared under the historical cost convention. The principal accounting policies adopted in the preparation of these financial statements are set out below. These policies have been applied consistently throughout the year except for the first-time adoption of IFRS 16, ‘Leases’ which was adopted on 1 April 2019. IFRS 16 replaced the existing guidance in IAS 17. Under IAS 17, lessees were required to make a distinction between a finance lease (on balance sheet) and an operating lease (off balance sheet). IFRS 16 now requires les- sees to recognise a lease liability reflecting future lease payments and a ‘right-of-use asset’ for virtually all lease contracts. Under IFRS 16, a contract is, or contains, a lease if the contract conveys the right to control the use of an identified asset for a period of time in exchange for consideration. The lease liability is initially measured at the present value of the lease payments that are not paid at the commencement date, discounted by using the rate implicit in the lease. If this rate cannot be readily determined, the Company uses its incremental borrowing rate. The weighted average incremental borrowing rate applied to lease liabilities is 3.5%. The Company has elected to apply the full retrospective approach to the transition to IFRS 16. The full retro- spective approach requires the transition to be implemented with restatement of the prior year results as if IFRS 16 had always been applied. Adoption of the IFRS 16 has resulted in the recognition of right-of-use assets and lease liabilities with a corresponding increase in depreciation charges and finance costs offset by a reduction in operating lease costs in the income statement. The implementation of IFRS 16 has made an insignificant impact on the net assets of the Company, as set out in note 12. This Company is included in the consolidated financial statements of System1 Group PLC for the 12 months ended 31 March 2020. These accounts are available from the registered office address of the Company, and at www.system1group.com (investor section). DISCLOSURE EXEMPTIONS ADOPTED In preparing these financial statements the Company has taken advantage of all disclosure exemptions available under FRS 101. Therefore, these financial statements do not include: (a) a statement of cash flows and related notes; (b) the requirement to produce a balance sheet at the beginning of the earliest comparative period; (c) the requirements of IAS 24 Related Party Disclosures to disclose related party transactions entered into between two or more wholly owned members of the group; (d) disclosure of key management personnel compensation; (e) capital management disclosures; (f) presentation of a comparative reconciliation of the number of shares outstanding at the beginning and at the end of the period; (g) the effect of future accounting standards not adopted; (h) disclosures in respect of financial instruments and fair value measurement. RESEARCH AND DEVELOPMENT – INTERNALLY GENERATED INTANGIBLE ASSETS All on-going research expenditure is expensed in the year in which it is incurred. Development costs incurred in the development of the Company’s new AdRatings product are capitalised as an internally generated asset when all criteria for capitalisation are met. The AdRatings product comprises the product platform and the data avail- able to product subscribers. Costs relating to the research phase of the product, amounting to £2.11m were expensed in the year to 31 March 2019. Development costs include professional fees and directly-attributable employee costs required to bring the software into working condition. Where no internally-generated intangible asset can be recognised, development expenditure is charged to administrative expenses in the period in which it is incurred. Furthermore, internally-generated software and product development costs are recognised as an intangible asset only if the Company can demonstrate all of the following conditions: (a) the technical feasibility of completing the intangible asset so that it will be available for use or sale; (b) its intention to complete the intangible asset and use or sell it; (c) its ability to use or sell the intangible asset; (d) how the intangible asset will generate probable future economic benefits; System1 Group PLC Annual Report and Accounts 2020 70 1 ACCOUNTING POLICIES continued (e) among other things, the Company can demonstrate the existence of a market for the output of the intan- gible asset or the intangible asset itself or, if it is to be used internally, the usefulness of the intangible asset; (f) the availability of adequate technical, financial and other resources to complete the development and to use or sell the intangible asset; (g) its ability to measure reliably the expenditure attributable to the intangible asset during its development. AMORTISATION Acquired computer software licences are amortised on a straight-line basis over their estimated useful economic life of two years. Internally-generated intangible assets are amortised on a straight-line basis over their useful economic lives. The AdRatings platform and the cost of data being made available to subscribers were being amortised over a period of 3 years on a straight line basis, prior to impairment in full in the year ended 31 March 2020. Amortisation and impairment on all intangible assets is charged to administrative expenses. TANGIBLE ASSETS Property, plant and equipment are stated at historical cost less accumulated depreciation and accumulated impairment losses. Depreciation is provided to write off the cost of all property, plant and equipment to its residual value on a straight-line basis over its expected useful economic lives, which are as follows: Furniture, fittings and equipment Computer hardware 5 years 2 to 3 years The residual value and useful life of each asset is reviewed and adjusted, if appropriate, at each balance sheet date. Depreciation is charged to administrative expenses in the income statement. Right-of-use assets are measured at cost to include the lease liability, direct and restoration cost and are gen- erally depreciated over the shorter of the asset’s useful life and the lease term on a straight-line basis. Payments associated with short term leases of equipment and vehicles and all leases of low value assets are recognised on a straight-line basis as an expense in the profit and loss. IMPAIRMENT OF PROPERTY, PLANT AND EQUIPMENT AND INTANGIBLE ASSETS At each balance sheet date the Company reviews the carrying amount of its property, plant and equipment and intangible assets for any indication that those assets have suffered an impairment loss. If any such indication exists, the recoverable amount of the asset is estimated in order to determine the extent of the impairment loss, if any. Intangible assets not available for use are tested for impairment on at least an annual basis. The recover- able amount is the higher of the fair value less costs to sell and value in use. CASH AT BANK Cash at bank comprises cash in hand and bank deposits available on demand. INCOME TAXES Current income tax liabilities comprise those obligations to fiscal authorities relating to the current or prior reporting period, that are unpaid at the balance sheet date. They are calculated according to the tax rates and tax laws that have been enacted or substantively enacted at the reporting date applicable to the fiscal periods to which they relate, based on the taxable profit for the year. All changes to current tax assets or liabilities are recognised as a component of tax expense in the income statement, except where it relates to items charged or credited to other comprehensive income or directly to equity. Deferred income taxes are calculated using the liability method on temporary differences. This involves the comparison of the carrying amounts of assets and liabilities in the consolidated financial statements with their respective tax bases. In addition, tax losses available to be carried forward as well as other income tax credits to the Company are assessed for recognition as deferred tax assets. Deferred tax liabilities are always provided for in full. Deferred tax assets are recognised to the extent that it is probable that the underlying deductible temporary differences will be able to be offset against future taxable income. Deferred tax assets and liabilities are calculated, without discounting, at tax rates that are expected to apply to their respective period of realisation, provided they are enacted or substantively enacted at the balance sheet date. Deferred tax is recognised as a component of tax expense in the income statement, except where it relates to items charged or credited to other comprehensive income or directly to equity. System1 Group PLC Annual Report and Accounts 2020 71 Notes to the Company Financial Statements continued for the year ended 31 March 2020 1 ACCOUNTING POLICIES continued EMPLOYEE BENEFITS All accumulating employee-compensated absences that are unused at the balance sheet date are recognised as a liability. The Company operates a defined contribution pension plan. The Company pays contributions to the plan based upon the contractual terms agreed with each employee. The Company has no further payment obligations once the contributions have been paid. The contributions are recognised as employee benefit expense when they are due. SHARE-BASED PAYMENTS Equity-settled, share-based payments are measured at fair value at the date of grant. Equity-settled, share-based payments that are made available to employees of the Company’s subsidiaries are treated as increases in equity over the vesting period of the award, with a corresponding increase in the Company’s investments in subsidiaries, based on an estimate of the number of shares that will eventually vest. PROVISIONS Provisions for sabbatical leave are recognised when: the Company has a legal or constructive obligation as a result of past events; it is probable that an outflow of resources will be required to settle the obligation; and the amount has been reliably estimated. Where material, the increase in provisions due to passage of time is recog- nised as interest expense. The provision for sabbatical leave is measured using the projected unit credit method. The provision for dilapidations is measured at the present value of expenditures expected to be required to settle those obligations. FINANCIAL INSTRUMENTS The Company’s financial assets comprise trade and other receivables held at amortised cost. The Group does not possess assets held at fair value through profit or loss. The classification is determined by management at initial recognition, being dependent upon the business model and the contractual cash flows of the assets. Financial assets are derecognised when the rights to receive cash flows from the investments have expired or have been transferred and the Company has transferred substantially all risks and rewards of ownership. Financial assets arising from contracts with customers are separately presented in accordance with IFRS 15 ‘Revenue from Con- tracts with Customers’ in the Balance Sheet. TRADE AND OTHER RECEIVABLES Trade and other receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. The Company’s amortised cost financial assets comprise trade and other receivables and cash and cash equivalents in the balance sheet. Trade receivables are initially recorded at fair value, but subsequently at amortised cost using the effective interest rate method. In accordance with IFRS 9, the Company assesses on a forward-looking basis, the expected credit losses associated with its financial assets carried at amortised cost. This assessment takes into account the age of the debt, as well as historical experience. The amount of the write-down is determined as the difference between the asset’s carrying amount and the present value of estimated future cash flows. FINANCIAL LIABILITIES Financial liabilities are initially recognised at fair value, net of transaction costs, and subsequently carried at amortised cost using the effective interest rate method. Financial liabilities and equity instruments are classified according to the substance of the contractual arrangements entered into. An equity instrument is any contract that evidences a residual interest in the assets of the entity after deducting all of its financial liabilities. Where the contractual obligations of financial instruments (including share capital) are equivalent to a similar debt instrument, those financial instruments are classed as financial liabilities. Financial liabilities are presented as such in the balance sheet. Finance costs and gains or losses relating to financial liabilities are included in the income statement. Finance costs are calculated so as to produce a constant rate of return on the outstanding liability. Where the contractual terms of share capital do not have any terms meeting the definition of a financial liability then this is classed as an equity instrument. Dividends and distributions relating to equity instruments are debited directly to equity. SHARE CAPITAL Ordinary shares are classified as equity. Equity instruments issued by the Company are recorded at the proceeds received, net of direct issue costs. System1 Group PLC Annual Report and Accounts 2020 72 1 ACCOUNTING POLICIES continued SHARE PREMIUM Share premium represents the excess over nominal value of the fair value of consideration received for equity shares, net of expenses of the share issue. TREASURY SHARES Where the Company purchases the Company’s equity share capital, the consideration paid is deducted from the total shareholders’ equity and classified as treasury shares until they are cancelled. Where such shares are sub- sequently sold or re-issued, any consideration received is included in total shareholders’ equity. No gain or loss is recognised on the purchase, sale, issue or cancellation of the Company’s own equity instruments. SIGNIFICANT ACCOUNTING ESTIMATES AND JUDGEMENTS SHARE-BASED PAYMENTS – JUDGEMENT The fair value of options granted is determined using a Black Scholes based Employee Stock Option Valuation model (for the employee share option scheme) and a Monte Carlo simulation model (for the long-term incentive scheme). These models require a number of estimates and assumptions. The significant inputs into the models are share price at grant date, exercise price, historic exercise multiples, expected volatility and the risk-free rate. Volatility is measured at the standard deviation of expected share price returns based on statistical analysis of historical share prices. In previous years the Company has often purchased shares arising from the exercise of share options in order to minimise shareholder dilution and create shareholder value. IFRS 2 does not provide guidance on the applica- tion of ‘substance over form’ when evaluating whether a share based payment should be accounted for as equity or cash-settled. In order to determine whether the Company’s share options are equity or cash-settled, con- sideration needs to be given to whether the settlement of the share options through the issue and subsequent repurchase of treasury shares should be treated as one transaction or as two distinct transactions, and whether the Company has a present obligation to settle in cash. The Company does not publicise to option holders that treasury shares may be repurchased and the decision to do so is only made at the point of option exercise. Consequently, for subsequent settlements treasury shares issued may not be purchased. For this reason, treating the transaction as a whole would not reflect the transaction’s substance. There is no present obligation to settle in cash given that the Company does not have a policy of repurchasing treasury shares and has not advertised to employees that this option will be open to them until the point of exercise. As a result, the Company’s share options continue to be accounted for as equity rather than cash-settled. In prior periods the Company has on occasion cash-settled part of long-term incentive plan equity awards. Despite the repurchase of these equity interests the Company did not have an obligation to do so and does not have an obligation, constructive or otherwise to do so in the future. As a result, the Company continues to account for share-based payments related to its long-term incentive plans as equity rather than cash-settled. EMPLOYEE BENEFITS – ESTIMATE The Company has a sabbatical leave scheme, open to all employees, which provides 20 days paid leave for each six years’ of service. The carrying amount of the provision at the balance sheet date amounted to £257,000 (31 March 2019: £280,000). The provision for liabilities under the scheme is measured using the projected unit credit method. This model requires a number of estimates and assumptions. The significant inputs into the model are rate of salary growth and average staff turnover as explained in Note 8. The average number of staff employed by the Company during the year ended 31 March 2020 was 49 (2019: 44) and total employment costs were £5,343,000 (2019: £3,533,000). LEASES – ESTIMATE AND JUDGEMENT Management exercises judgement in determining the likelihood of exercising break or extension options in deter- mining the lease term, and reviews this on a lease by lease basis. The discount rate used to calculate the lease liability is the rate implicit in the lease, if it can be readily deter- mined, or the lessee’s incremental borrowing rate if not. Incremental borrowing rates are determined based on the term, country, currency and start date of the lease, to derive the rate of interest that the lessee would have to pay to borrow over a similar term, and with a similar security, the funds necessary to obtain an asset of a simi- lar value to the right-of-use asset in a similar economic environment. System1 Group PLC Annual Report and Accounts 2020 73 Notes to the Company Financial Statements continued for the year ended 31 March 2020 1 ACCOUNTING POLICIES continued CAPITALISATION OF ADRATINGS PLATFORM The Group tests capitalised development costs for impairment on an annual basis by reference to expected future cash generation. In estimating future cash generation, management make judgements by reference to budgets and forecasts about the amount and timing of future profits. The carrying value of the AdRatings product was tested for impairment as at 31 March 2020. The carrying value of the asset has been allocated to the AdRatings cash generating unit (‘CGU’) for the purposes of assessing future cashflows. The principal assumptions used in the forecast are the timing and amount of future revenues and profit margins, which are derived from the latest forecasts approved by the Board. As a result of this review, and in light of the continuing modest AdRatings revenues of £0.05m in the year, the carrying value of the asset has been impaired in full, and accordingly the amortisation charge for the year ended 31 March 2020 includes impairment charges of £921,000. 2 INTANGIBLE ASSETS For the year ended 31 March 2020 AT 1 APRIL 2019 Cost Accumulated amortisation NET BOOK AMOUNT 12 MONTHS ENDED 31 MARCH 2020 OPENING NET BOOK AMOUNT Additions Amortisation charge Impairment charge CLOSING NET BOOK AMOUNT AT 31 MARCH 2020 Cost Accumulated amortisation NET BOOK AMOUNT For the year ended 31 March 2019 AT 1 APRIL 2018 Cost Accumulated amortisation NET BOOK AMOUNT 12 MONTHS ENDED 31 MARCH 2019 OPENING NET BOOK AMOUNT Additions Amortisation charge CLOSING NET BOOK AMOUNT AT 31 MARCH 2019 Cost Accumulated amortisation NET BOOK AMOUNT Development costs (AdRatings) £’000 Software licenses £’000 Software Total £’000 £’000 923 (110) 813 813 446 (338) (921) - 499 (498) 1,672 (1,672) 3,094 (2,280) 1 1 - (1) - - - 814 - 368 - - 368 814 814 (339) (921) 368 1,369 (1,369) 499 (499) 2,040 (1,672) 3,908 (3,540) - - 368 368 Development costs (AdRatings) £’000 Software licenses £’000 Software Total £’000 £’000 - - - - 923 (110) 813 923 (110) 813 488 (462) 26 26 - (25) 1 499 (498) 1 1,672 (1,672) - - - - - 2,160 (2,134) 26 26 923 (135) 814 1,672 (1,672) 3,094 (2,280) - 814 Software comprises the Company’s main research software platform, at a cost of £1,604,000, other software licences of £68,000, and additions of £368,000 relating to the Company’s new finance system. The Company’s main research software platform was developed over a number of years and introduced in 2011. It was amortised System1 Group PLC Annual Report and Accounts 2020 74 2 INTANGIBLE ASSETS continued over 7 years and is now fully amortised. The carrying amount of this asset at the balance sheet date was £Nil (31 Mar 2019: £Nil). The Company’s finance system was still in development at the year end and therefore has not been amortised. Development costs comprise amounts capitalised for the Company’s AdRatings product. This comprises the platform and the data available to subscribers, which were being amortised over three years prior to impairment. The carrying value of the AdRatings product has been tested for impairment at as 31 March 2020. The car- rying value of the asset has been allocated to the AdRatings cash generating unit (‘CGU’) for the purposes of assessing future cashflows. The principal assumptions used in the forecast are the timing and amount of future revenues and profit margins, which are derived from the latest forecasts approved by the Board. As a result of this review, and in light of the continuing modest AdRatings revenues of £0.05m in the year, the carrying value of the asset has been impaired in full, and accordingly the amortisation charge above includes impairment charges of £921,000. 3 TANGIBLE ASSETS For the year ended 31 March 2020 AT 1 APRIL 2019 Cost Accumulated depreciation NET BOOK AMOUNT 12 MONTHS ENDED 31 MARCH 2020 OPENING NET BOOK AMOUNT Additions Disposals Depreciation charge for the year CLOSING NET BOOK AMOUNT AT 31 MARCH 2020 Cost Accumulated depreciation NET BOOK AMOUNT For the year ended 31 March 2019 AT 1 APRIL 2018 Cost Accumulated depreciation NET BOOK AMOUNT 12 MONTHS ENDED 31 MARCH 2019 OPENING NET BOOK AMOUNT Adjustment on transition to IFRS 16 Additions Depreciation charge for the year CLOSING NET BOOK AMOUNT AT 31 MARCH 2019 Cost Accumulated depreciation NET BOOK AMOUNT System1 Group PLC Annual Report and Accounts 2020 Right-of-use assets *Restated £’000 Furniture, fittings and equipment £’000 Computer hardware £’000 Total *Restated £’000 2,163 (1,698) 465 465 1,997 - (483) 1,979 2,139 (160) 1,979 165 (110) 55 55 - (13) (32) 10 56 (46) 10 580 (509) 71 71 73 - (57) 87 2,908 (2,317) 591 591 2,070 (13) (572) 2,076 653 (566) 2,848 (772) 87 2,076 Right-of-use assets *Restated £’000 Furniture, fittings and equipment £’000 Computer hardware £’000 Total *Restated £’000 2,163 (1,270) 893 - 893 - (428) 465 2,163 (1,698) 465 164 (79) 85 85 - 1 (31) 55 165 (110) 55 500 (464) 2,827 (1,813) 36 1,014 36 - 80 (45) 71 580 (509) 71 121 893 81 (504) 591 2,908 (2,317) 591 75 Notes to the Company Financial Statements continued for the year ended 31 March 2020 4 INVESTMENTS GROUP COMPANIES Cost and net book amount at 1 April 2019 and 31 March 2020 Group companies £’000 581 SUBSIDIARY UNDERTAKINGS Details of subsidiary undertakings, registered office and country of incorporation of each, at 31 March 2020 are as follows: Subsidiary undertaking Registered office Country of incorporation System1 Research Limited System1 Research B.V. System1 Research, Inc. System1 Research Sarl System1 Research GmbH System1 Marketing Consulting (Shanghai) Co. Limited System1 Research Do Brazil Servicos de Marketing Ltda. System1 Research France Sarl System1 Market Research Pte Ltd System1 Research Pty Ltd. System1 Agency Limited System1 AdRatings Limited 52 Bedford Row, Holborn, London, WC1R 4LR Conradstraat 38 D2. 138, 3013AP Rotterdam 251 Little Falls Drive, Wilmington, DE 19808, New Castle County, Delaware Avenue Gratta Paille 2, 1018 Lausanne, Switzerland Kleine Seilerstrasse 1 D-20359 Hamburg 58 Fumin Zhi Road, Chongming County, Shanghai 201914 Avenida das Nacoes Unidas 14261 – Conj. 25-126B – Cond. WT Morumbi, CEP 04794-000, Vila Gertrudes, São Paulo 17 Rue de Turbigo, 75002 Paris 30 Cecil Street, #19-08 Prudential Tower, 049712 Suite 1, Level 11, 60 Castlereagh Street, Sydney, NSW 2000 52 Bedford Row, Holborn, London, WC1R 4LR 52 Bedford Row, Holborn, London, WC1R 4LR UK Netherlands USA Switzerland Germany China Brazil France Singapore Australia UK UK System1 Research Limited, System1 Agency Limited and System1 AdRatings Limited are wholly owned direct subsidiaries of System1 Group PLC. The remaining subsidiaries are each wholly owned direct subsidiaries of System1 Research Limited. The activities of all companies are the provision of online market research services, apart from System1 Agency Limited which provided advertising agency services and System1 AdRatings Limited, which provides subscription access to marketing effectiveness data. Brainjuicer India Private Limited, previously a dormant wholly owned subsidiary of System1 Research Limited, was dissolved during the year. 5 DEBTORS DUE WITHIN ONE YEAR Trade debtors (intra-group) Amounts due from group companies Other debtors VAT recoverable Corporation tax recoverable Deferred tax (Note 9) Prepayments DUE AFTER ONE YEAR Deferred tax (Note 9) 31 Mar 2020 31 Mar 2019 £’000 £’000 312 918 135 227 126 56 301 2,075 696 3,452 10 190 189 79 676 5,292 385 100 System1 Group PLC Annual Report and Accounts 2020 76 6 CREDITORS: AMOUNTS DUE WITHIN ONE YEAR Trade creditors Social security and other taxes Amounts due to group undertakings Lease liabilities Accruals 7 CREDITORS: AMOUNTS AFTER ONE YEAR Lease liabilities Bank loan 8 PROVISIONS FOR LIABILITIES AT 1 APRIL 2018 Provided in the year Utilised in the year AT 31 MARCH 2019 Provided in the year Utilised in the year AT 31 MARCH 2020 31 Mar 2020 31 Mar 2019 £’000 451 128 848 460 791 2,678 *Restated £’000 1,192 133 822 428 531 3,106 31 Mar 2020 31 Mar 2019 £’000 1,601 2,500 4,101 *Restated £’000 66 - 66 Deferred tax (Note 9) £’000 Sabbatical provision £’000 19 - (12) 7 6 - 13 288 64 (72) 280 17 (40) 257 Total £’000 307 64 (84) 287 23 (40) 270 The Company has a sabbatical leave scheme, open to all employees. The scheme provides 20 days paid leave for each successive period of six years’ service. There is no proportional entitlement for shorter periods of service. The provision for the liabilities under the scheme is measured using the projected unit credit method. The calculation of the provision for the year ended 31 March 2020 assumes an annual rate of growth in salaries of 7% (year ended 31 March 2019: 7%), a discount rate of 2.1% (year ended 31 March 2019: 1.6%), based upon good quality 6-year corporate bond yields, and an average staff turnover rate of 19% (year ended 31 March 2019: 19%). The key assumptions are considered to be the estimation of future salary increases and staff turnover. An adjustment of 10% to the assumptions for salary increases and staff turnover rates would result in a change in the valuation of the provision as at 31 March 2020 of £20,000 and £55,000 respectively. System1 Group PLC Annual Report and Accounts 2020 77 Notes to the Company Financial Statements continued for the year ended 31 March 2020 9 DEFERRED TAX Deferred tax assets and liabilities are as follows. Deferred tax assets: - Deferred tax assets to be recovered after more than 12 months - Deferred tax assets to be recovered within 12 months Deferred tax liabilities: - Deferred tax liability to be recovered within 12 months DEFERRED TAX ASSET (NET): The gross movement in deferred tax is as follows. OPENING BALANCE Income statement credit/(charge) Tax debited directly to equity CLOSING BALANCE 31 Mar 2020 31 Mar 2019 £’000 £’000 385 56 441 (13) 428 100 79 179 (7) 172 Year to 31 Mar Year to 31 Mar 2020 £’000 172 289 (33) 428 2019 £’000 273 (31) (70) 172 The movement in deferred income tax assets and liabilities during the year, without taking into consideration the offsetting of balances within the same tax jurisdiction, is as follows: DEFERRED TAX ASSETS AT 1 APRIL 2019 Credited to income statement Debited directly to equity AT 31 MARCH 2020 DEFERRED TAX LIABILITIES AT 1 APRIL 2019 Charged to income statement AT 31 MARCH 2020 Trading losses £’000 Other provisions £’000 Share options £’000 Sabbatical provision £’000 - 304 - 304 2 - - 2 124 (5) (33) 86 53 (4) - 49 Total £’000 179 295 (33) 441 Accelerated capital allowances £’000 (7) (6) (13) System1 Group PLC Annual Report and Accounts 2020 78 10 SHARE CAPITAL ALLOTTED, CALLED UP AND FULLY PAID ORDINARY SHARES AT 1 APRIL 2019 AND AT 31 MARCH 2020 Number 13,226,773 £’000 132 11 (LOSS)/PROFIT FOR THE YEAR The Company has made use of the exemptions as permitted by Section 408 of the Companies Act 2006 and accordingly the income statement of the Company is not presented as part of the accounts. The parent company loss for the year to 31 March 2020 of £663,000 (31 March 2019: profit of £1,137,000) is included in the Group loss for the financial year. Details of Executive and Non-Executive Directors’ emoluments and their interest in shares and options of the company are shown within the Directors’ Remuneration Report. 12 CHANGE IN ACCOUNTING POLICIES The adoption of IFRS 16, ‘Leases’ has resulted in the following changes to the previously reported figures: Balance sheet FIXED ASSETS Other intangible assets Tangible assets Investments CURRENT ASSETS Debtors due within one year Debtors due after one year Cash at bank 31 Mar 2019 Impact of 31 Mar 2019 IFRS 16 £’000 Restated £’000 814 126 581 1,521 5,292 100 152 5,544 - 465 - 465 - - - - 814 591 581 1,986 5,292 100 152 5,544 CREDITORS: AMOUNTS DUE WITHIN ONE YEAR (2,660) (446) (3,106) NET CURRENT ASSETS TOTAL ASSETS LESS CURRENT LIABILITIES CREDITORS: AMOUNTS DUE AFTER ONE YEAR PROVISIONS FOR LIABILITIES NET ASSETS CAPITAL AND RESERVES Share capital Share premium account Retained earnings SHAREHOLDERS’ FUNDS 2,884 4,405 (23) (287) 4,095 132 1,601 2,362 4,095 19 19 (43) - (24) - - (24) (24) 2,438 4,424 (66) (287) 4,071 132 1,601 2,338 4,071 79 System1 Group PLC Annual Report and Accounts 2020 Notes to the Company Financial Statements continued for the year ended 31 March 2020 12 CHANGE IN ACCOUNTING POLICIES continued Balance sheet FIXED ASSETS Other intangible assets Tangible assets Investments CURRENT ASSETS Debtors due within one year Debtors due after one year Cash at bank CREDITORS: AMOUNTS DUE WITHIN ONE YEAR NET CURRENT ASSETS TOTAL ASSETS LESS CURRENT LIABILITIES CREDITORS: AMOUNTS DUE AFTER ONE YEAR PROVISIONS FOR LIABILITIES NET ASSETS CAPITAL AND RESERVES Share capital Share premium account Retained earnings SHAREHOLDERS’ FUNDS 31 Mar 2018 Impact of 31 Mar 2018 IFRS 16 £’000 Restated £’000 26 121 581 728 3,900 122 1,330 5,352 (1,597) 3,755 4,483 (70) (307) 4,106 132 1,601 2,373 4,106 - 893 - 893 - - - - (520) (520) 373 (424) - 26 1,014 581 1,621 3,900 122 1,330 5,352 (2,117) 3,235 4,856 (494) (307) (51) 4,055 - - (51) (51) 132 1,601 2,322 4,055 The Company has elected to apply the full retrospective approach to the transition to IFRS 16. The full retro- spective approach requires the transition to be implemented with restatement of the prior year results as if IFRS 16 had always been applied. On adoption of IFRS 16, the Company has recognised lease liabilities reflecting future lease payments, and ‘Right-of-use assets’ in respect of property leases which meet the definition of a contract that conveys the right to control the use of an identified asset for a period of time in exchange for consideration. The lease liability is initially measured at the present value of the lease payments that are not paid at the commencement date, discounted by using the rate implicit in the lease. As a result of the implementation of IFRS 16, the following restatements have been made: 1. The increase in property, plant and equipment from the recognition of Right-of-use assets 2. The increase in lease liabilities from the recognition of liabilities for future lease payments, discounted to present value 3. The elimination of prepayments and accruals in respect of operating lease rentals, including those amounts recognised in respect of lease incentives 4. The recognition of depreciation and finance expenses in place of operating lease charges, with a corre- sponding increase in finance charges and a decrease in operating expenses for the periods presented. 80 System1 Group PLC Annual Report and Accounts 2020 Company Information COMPANY SECRETARY INDEPENDENT AUDITOR CHRIS WILLFORD REGISTERED OFFICE 52 Bedford Row Holborn London WC1R 4LR REGISTERED NUMBER 05940040 RSM UK AUDIT LLP Statutory Auditor Chartered Accountants The Pinnacle 170 Midsummer Boulevard Milton Keynes Buckinghamshire MK9 1BP REGISTRARS LINK ASSET SERVICES 34 Beckenham Road Beckenham Kent BR3 4TU STOCKBROKERS CANACCORD GENUITY LIMITED 88 Wood Street London EC2V 7QR System1 Group PLC 52 Bedford Row Holborn London WC1R 4LR info@system1group.com www.system1group.com