The Descartes Systems Group Annual Report 2018

Plain-text annual report

3 A N N U A L R E P O R T 2 0 1 8 50 Leman St London E1 8HQ www.dillistonegroup.com STRATEGIC REPORT 4 Designed and printed by Perivan 6 D I L L I S T O N E A N N U A L R E P O R T 2 0 1 8 DILLISTONE GROUP PLC EMPOWERING RECRUITMENT GLOBALLY THROUGH TECHNOLOGY We provide software and services to recruitment firms and recruiting teams within major corporations. Across our subsidiaries, we work with over 2,000 firms in over 60 countries. Our three divisions are Dillistone Systems, Voyager Software and GatedTalent. Dillistone Systems specialises in the supply of software and services into executive level recruitment teams. Voyager Software’s clientele are primarily involved in contingent recruitment, including permanent placement, contract placement and the provision of temporary staff. GatedTalent was established in 2017 to provide a network allowing executives to share information with selected executive recruiters in a GDPR compliant manner. Contents Strategic Report Highlights Dillistone Group at a glance Chairman’s statement CEO’s review Financial review Governance Corporate governance report Report to the Shareholders on Directors’ remuneration Board of Directors Directors’ report Financial Statements Independent Auditor’s report to the members of Dillistone Group Plc Consolidated statement of comprehensive income 24 30 Consolidated statement of changes in equity 31 Company statement of changes in equity 32 Consolidated and Company statement of financial position Consolidated cash flow statement Company cash flow statement Notes to the financial statements Directors and advisers 33 34 35 36 74 1 2 4 5 10 11 17 20 22 FINANCIAL STATEMENTSDILLISTONE GROUP PLC Annual Report and Accounts 2018 HIGHLIGHTS STRATEGIC REPORT 1 0.61p Adjusted basic EPS3 (2017: 3.73p) 82% Recurring revenues1 (restated 2017: 82%) • Recurring revenues1 represent 82% (restated 2017: 82%) of Group revenue • Adjusted operating proﬁ t2 of £0.055m (restated 2017: £0.459m) before acquisition intangible writes offs, reﬂ ecting the loss of the major contract announced in 2017 which reduced revenues by £0.625m compared to 2017 in a ten-month period • Loss for the year of £0.260m (restated 2017: proﬁ t £0.057m) • Adjusted basic EPS3 of 0.61p (2017: 3.73p) • The Group continued to generate cash from operating activities resulting in cash at 31 December 2018 of £0.725m (2017: £1.390m) with borrowings of £0.404m (2017: £0.391m). [2017 numbers have been restated for the introduction of IFRS 15, the new revenue recognition standard.] Commenting on the results and prospects, Mike Love, Non-Executive Chairman, said: “2018 was clearly a challenging year for the Group. The executive team has nevertheless worked tirelessly and, despite the challenges faced during the year of GDPR, the loss of a major client, the continued investment in new products and, during 2018, the implications of re- structuring to reduce our cost base, we are now well on our way to restoring Dillistone to healthy operating proﬁ ts on a sustainable footing.” Deﬁ nitions: 1 The component elements of recurring revenues are detailed in note 3. 2 Adjusted operating proﬁ t is statutory operating proﬁ t before acquisition costs, related intangible amortisation, movements in contingent consideration and other one-off costs. See note 2. 3. Adjusted basic EPS is computed from statutory proﬁ ts after tax adjusted to exclude the post-tax effect of acquisition costs, related intangible amortisation, movements in contingent consideration and other one-off costs. See note 10. Visit our investor relations website at www.dillistonegroup.com for further information about Dillistone Group Plc. 254300 Dillistone AR Cover-pp9.indd 1 254300 Dillistone AR Cover-pp9.indd 1 22/05/2019 22:30 22/05/2019 22:30 2 DILLISTONE GROUP PLC Annual Report and Accounts 2018 DILLISTONE GROUP AT A GLANCE Dillistone Group Plc is a global leader in the supply of technology solutions and services to the recruitment industry. Operating across 60 countries, working with over 2,000 ﬁ rms, we are made up of 3 divisions. Dillistone Systems Dillistone Systems division Dillistone Systems is a leading global supplier of technology and services to executive search ﬁ rms and to in-house search teams at major corporations and not-for-proﬁ t organisations. The Division’s principal product is the FileFinder Anywhere suite, which is typically delivered from the cloud via a range of apps. The Division is headquartered in the UK, but has ofﬁ ces in the United States, Australia and Germany and serves clients in more than 60 countries, generating more revenue from outside the UK than from its home market. It employs around 50 people. Products FileFinder is designed speciﬁ cally for the executive recruiting market with FileFinder Anywhere being the latest generation of the suite. FileFinder Anywhere is available in two forms: Essentials and Premium. FileFinder is an executive search database, CRM system, research tool, report writer and project management solution all rolled into one. It is designed to support every element of the search process. It features exclusive integration with the GatedTalent platform, allowing users to search the GatedTalent database and send GDPR related privacy notices without leaving the product. GatedTalent division GatedTalent was established in 2017 with ﬁ rst revenue seen in 2018 as a network allowing executives to share information with executive recruiters in a GDPR compliant manner. GatedTalent generates revenue from both Executive Search ﬁ rms (where it has a similar client base to the Dillistone Systems division) and directly from Executives. Products GatedTalent is a private network allowing executives to share conﬁ dential data with executive recruiters. The product beneﬁ ts from exclusive integration with the FileFinder Anywhere CRM, developed by the Dillistone Systems division. 254300 Dillistone AR Cover-pp9.indd 2 254300 Dillistone AR Cover-pp9.indd 2 22/05/2019 22:30 22/05/2019 22:30 STRATEGIC REPORT 3 Voyager Software division Voyager Software became a part of the Dillistone Group in September 2011. It has always provided end-to-end recruitment solutions to the recruitment sector, typically those clients working on a contingency basis, and continues to do so to this day. In September 2012, Voyager Software launched its Inﬁ nity product which has been and continues to be designed to improve the performance and efﬁ ciency of recruitment businesses specialising in permanent, contract and temporary roles. With automation at its heart, it meets the demands of ﬂ exibility and functionality required by these recruitment ﬁ rms. Furthermore, its ongoing development continues to enhance its capabilities and widen its market appeal. Alongside Voyager Software’s VDQ product, for pure fast paced temporary agencies, and Mid-Ofﬁ ce, the pay-and-bill solution for the back ofﬁ ce, the Division covers the whole contingency recruitment space. In 2013, the Group acquired FCP Internet, suppliers of the evolve™ SaaS product, and this has subsequently been integrated into the Voyager Software Division. In October 2014, a further acquisition, ISV Software – a supplier of skills testing and training services, was also incorporated into the Division. Today, the Voyager Software Division’s products are used globally by many thousands of users in different-sized recruitment businesses. The Division has ofﬁ ces in the UK and Australia and employs around 60 people. Products Voyager front ofﬁ ce: Voyager Inﬁ nity manages the work of recruiters working to ﬁ ll permanent, contract and both short and long term temporary vacancies and delivers measurable performance efﬁ ciencies and audit trails. Voyager Inﬁ nity SaaS has all of the great features of Inﬁ nity available as a managed service on the Azure Cloud with affordable set-up and monthly cost. Voyager Inﬁ nity Connect Mobile App is the super easy-to-use mobile app for recruiters on the go. The app, available in both iOS (Apple) and Android (Google) stores, allows the user to quickly and easily look up contacts from their Voyager Inﬁ nity SaaS database and all communication is logged against the database in real time. Voyager VDQ! is designed for fast-paced blue and white collar temporary placement agencies that have to quickly assemble transient or ad hoc teams to serve highly volatile and urgent labour requirements. TempNinja is a smartphone app for temporary workers that increases their engagement with recruiters, both on and off assignment. It seamlessly integrates with Voyager’s Inﬁ nity and VDQ! front ofﬁ ce applications, as well as being available as a white label option for customers wanting to promote their own brand. Through FCP Internet, the Division also provides its evolveTM solution. evolve™ has been designed to deliver an effective workﬂ ow solution for all sizes and types of recruitment business. It is delivered only as a SaaS product. Voyager back ofﬁ ce: Voyager Mid-Ofﬁ ce is a ﬂ exible Pay & Bill solution, which automates the processing of large volumes of timesheets and payments to numerous clients and candidates. Voyager Bureau enables bureaus to subcontract back-ofﬁ ce operations for multiple client recruitment companies on a single platform. Skills testing and training: ISV delivers pre-employment skills testing and training tools to recruitment businesses and corporates. In late 2017, ISV launched ISV Online, incorporating all the best elements from its original testing platform, FastPath. 254300 Dillistone AR Cover-pp9.indd 3 254300 Dillistone AR Cover-pp9.indd 3 22/05/2019 22:30 22/05/2019 22:30 4 DILLISTONE GROUP PLC Annual Report and Accounts 2018 CHAIRMAN’S STATEMENT For the year ended 31 December 2018 2018 was a challenging year for the business. The loss of a major client, announced in Summer 2017 but materialising in February 2018, had a year on year revenue impact of around £0.625m. Meanwhile, the new General Data Protection Regulations meant that the Group, like all technology businesses, had to invest heavily in compliance. This investment covered everything from product development and infrastructure through to staff training and reviews of our various legal documents. 2018 was also the start of a period of change. In February of 2019, we announced the closure of our London ofﬁ ce as part of a broader restructuring. However, some of the groundwork for this project was undertaken in 2018, with the implementation of various company wide systems and procedures. The restructuring programme is expected to return the Group to a healthy level of operating proﬁ t on a sustainable basis. While much work was undertaken behind the scenes in 2018, we also continued to develop our products. Enhancements and new functionality were delivered for each of our leading products, while the year also saw the ﬁ rst revenue materialise for our GatedTalent platform. GatedTalent experienced various highs and lows during the year. In the early stages of the year, we signiﬁ cantly surpassed our initial expectations for recruiter take up but were disappointed by the number of executive registrations. In the second half of the year, we saw registrations begin to accelerate, and in Q4 we launched “Member Services” which is a new premium B2C revenue stream. We are pleased to report that this has proven successful and, less than 6 months since launch, we now realise more recurring revenue every month from Member Services than we do from any single executive search ﬁ rm contract. Overall, Group revenue fell 11% to £8.692m, of which recurring revenue fell 10% to £7.154m – a signiﬁ cant part of this loss was the previously referenced client departure. IFRS 15 Revenue from contracts with customers was introduced with effect from 1 January 2018 and has resulted in the restatement of the 2017 numbers. Adjusted operating proﬁ t dropped signiﬁ cantly to £0.055m (2017: £0.459m), in part due to the continued investment in GatedTalent and in part due to the loss of the major client. The operating loss generated by GatedTalent was £0.612m. The Board remains committed to investing in and supporting the Group’s core products and remains excited by the potential of GatedTalent. Dividends The Group is not recommending a ﬁ nal dividend in respect of the year to 31 December 2018 (2017: 0.5p per share). Staff Our staff are fundamental to our success. It is through their efforts, commitment and determination that we continue to be a leading technology provider in the sectors we serve. On behalf of the Board I would like to take this opportunity to thank all of our staff for their individual and collective contributions during 2018 and the support we have seen for the changes we are making to the Group. Outlook The current year has begun well in each of the three divisions. However, the Board is cognisant of the economic challenges that the year may bring. As announced in February 2019, the Directors are taking the opportunity to reduce the number of UK ofﬁ ces from three to two by exercising an option to break the lease of the London ofﬁ ce later in the year and to increase the size of our Basingstoke and Eastleigh ofﬁ ces. The majority of our London based staff have been given the opportunity to relocate to Basingstoke, Eastleigh or to work from home and we are pleased to report that the vast majority of our client facing staff are likely to accept this offer. The Board anticipates that the efﬁ ciencies gained from merging the various teams across the Group into fewer locations will allow the Group to maintain current levels of client service and product development investment while delivering a signiﬁ cant reduction in costs from 2020 onwards. This exercise will inevitably lead to the Group incurring restructuring costs this year, which are currently estimated to be in the region of £500,000 to £900,000 and which are expected to be met without recourse to shareholders. An update on the cost of the restructuring and the anticipated savings will be provided later in the year. The Board currently expects that the Group will deliver a proﬁ t before tax in 2019 which will be comparable with 2018 (£0.018m) before restructuring and acquisition related costs. Proﬁ t is expected to grow strongly in future years as the beneﬁ ts of the restructuring and the investment in GatedTalent start to materialise. Dr Mike Love Non-Executive Chairman 29 April 2019 254300 Dillistone AR Cover-pp9.indd 4 254300 Dillistone AR Cover-pp9.indd 4 22/05/2019 22:30 22/05/2019 22:30 STRATEGIC REPORT 5 CEO’S REVIEW For the year ended 31 December 2018 The Group’s objectives are principally to: • • • • ensure our products meet the needs of the recruitment sector through continual investment and development; be a leading player in all of the markets we serve; develop our staff, delivering progressive career development; and increase our proﬁ tability and deliver increased shareholder value year on year in conjunction with a progressive dividend policy. Dillistone Group Plc supplies products and services to facilitate recruitment. We do this through three divisions which, between them, cover everything from retained executive search technology through to tools to facilitate the hiring of temporary staff, from pre- employment skills testing through to a B2C platform that allows executives to share information with executive search ﬁ rms. Strategy and objectives In our time as a public company, we have made three acquisitions and each of them has made a contribution to the business. However, as our markets have become increasingly competitive, it has become apparent that it is necessary to streamline our operating structure and this is a major focus for us in 2019. In the longer term, our strategy remains to grow the business both organically and through acquisition. This requires ongoing investment in product development which ensures that the business continues to command a leading role in the markets in which it operates. Our acquisition strategy typically entails consideration of businesses offering: • • • products that would further increase market share in the Group’s core markets; legacy applications, where clients could be transferred to our modern suite of products; or complementary applications, which may be cross-sold to clients of the Group. Key Performance Indicators (KPIs) The Board and management use absolute ﬁ gures to monitor the performance of the business using the ﬁ nancial KPIs set out below. As discussed above the Board is undertaking a major restructuring exercise to address the longer term performance of the business: Total revenues Recurring revenues Non recurring revenues Adjusted proﬁ t before tax Cash FY 2017 £000 9,732 7,942 1,326 453 1,390 FY 2018 £000 8,692 7,154 1,169 18 725 Measure used by management Met /Not met year on year growth year on year growth year on year growth year on year growth not met not met not met not met sufﬁ cient cash resources maintained met Adjusted proﬁ t before tax is statutory proﬁ t before acquisition costs, related intangible amortisation, movements in contingent consideration and other one-off costs. See note 2 and note 5. 254300 Dillistone AR Cover-pp9.indd 5 254300 Dillistone AR Cover-pp9.indd 5 22/05/2019 22:30 22/05/2019 22:30 6 DILLISTONE GROUP PLC Annual Report and Accounts 2018 CEO’S REVIEW Continued Restructuring Plan Results in 2018 have clearly been disappointing and the Board has embarked on a plan which, it believes, will deliver signiﬁ cantly improved performance from 2020 onwards. We are now well progressed on our plan to streamline our operating procedures while maintaining our excellent reputation for client service. As stated previously we expect the costs of the restructuring to be in the region of £500,000 to £900,000. These costs are expected to be met without recourse to shareholders. We have: • Completed the implementation of a Group wide CRM system, allowing team members to operate more easily on Group wide projects • Begun the process of implementing a Group wide ﬁ nancial system and expect this to be complete prior to the year end. • Merged certain back ofﬁ ce teams and are in the process of merging the product development and other teams. • Terminated the lease of our London ofﬁ ce while expanding our Basingstoke ofﬁ ce. We expect to vacate London before the end of the year. • While conversations with staff are ongoing, we are pleased that the vast majority of our client facing staff have agreed to remain with the Group, ensuring that client service is not negatively impacted by these changes. • Informed clients that certain products are being withdrawn from the market, while maintaining overall product development expenditure. We will continue to invest in product development for each of our ﬂ agship products and believe that our new development structure will lead to more efﬁ cient development going forward. Our business model The business is currently split into three Divisions. Dillistone Systems and Voyager Software are our established businesses, with GatedTalent launched in the second half of 2017 with ﬁ rst revenue seen in 2018. The statutory and operational structure of the Group is being reviewed as part of the restructuring exercise with an aim to simplify this and reduce the costs of reporting. Dillistone Systems specialises in the supply of software and services into executive-level recruitment teams. Voyager Software’s clientele are primarily involved in contingent recruitment, including permanent placement, contract placement and the provision of temporary staff. GatedTalent is a private network of executives, accessed by executive recruiters. There is a close relationship between GatedTalent and Dillistone Systems. The majority of our products are commercialised through one or more of the following: 1. an upfront licence fee plus a recurring support fee; 2. Software as a Service (SaaS) subscription basis; or 3. a hybrid model incorporating an upfront payment and recurring support and cloud hosting fees. There is a continuing move away from the upfront licence model towards our cloud delivery (SaaS) services. The GatedTalent Division generates revenue from a combination of recruiter subscription fees and premium fees direct from executives. The business operates out of four countries: the UK, Germany, the US and Australia. As well as supplying and supporting our software we also host the software for a proportion of our clients. This is done through data centres in Europe, the Americas, Singapore and Australia. Group review of the business 2018 saw recurring revenues fall 10% to £7.154m (restated 2017: £7.942m) reﬂ ecting principally the loss of the major client in 2018. Non-recurring revenues decreased to £1.169m (restated 2017: £1.326m). As a result, overall revenues decreased by 11% to £8.692m (restated 2017: £9.732m) with recurring revenues representing 82% of Group revenues (restated 2017: 82%). Costs have reduced despite continuing investment in GatedTalent which made, as expected, an operating loss of £0.612m (2017: loss £0.439m). Adjusted EBITDA1 fell to £1.301m (restated 2017: £1.559m). Adjusted operating proﬁ t fell to £0.055m (restated 2017: £0.459m) and pre-tax proﬁ ts before acquisition related items and one-off adjustments reduced to £0.018m (restated 2017: £0.453m). There was an operating loss for the year of £0.414m (restated 2017: loss £0.364m) and loss for the year of £0.260m (restated 2017: proﬁ t £0.057m). Cash at the year end was £0.725m (2017: £1.390m). Divisional Reviews Dillistone Systems The Dillistone Systems division is primarily focused on providing technology solutions to the executive search market via our range of “FileFinder” applications. This client group is made up of both executive search ﬁ rms and executive search teams in major organisations. Dillistone Systems’ head ofﬁ ce is currently in London and it has ofﬁ ces in the US, Germany and Australia. The Division accounts for 48% (restated 2017: 47%) of the Group’s revenue and it saw revenue fall 7% to £4.195m (restated 2017: £4.531m). Product development focus in 2018 included GDPR and integration with GatedTalent, along with a signiﬁ cant number of user experience improvements. As part of our restructuring, we have 1 Adjusted EBITDA is adjusted operating proﬁ t with depreciation and amortisation added back. See note 3. 254300 Dillistone AR Cover-pp9.indd 6 254300 Dillistone AR Cover-pp9.indd 6 22/05/2019 22:30 22/05/2019 22:30 STRATEGIC REPORT 7 brought development resources from other parts of the Group in to support FileFinder product development, and are already seeing the beneﬁ ts of this. We continue to invest in FileFinder and expect new releases later in the year. Earnings before interest, tax, depreciation and amortisation (‘EBITDA’) fell to £0.723m (restated 2017: £0.761m) as sales fell and costs improved. The total amortisation and depreciation charge was £0.644m (2017: £0.589m). Operating proﬁ t for 2018 was £0.079m (restated 2017: £0.172m). Voyager Software Voyager Software is a provider of technology products targeted at the entire recruitment landscape, from front ofﬁ ce to back ofﬁ ce and bureaus, and includes both recruitment management systems and pre-employment skills testing technology. In 2018, the Voyager Software division accounted for 51% (2017: 53%) of Group revenues. The Division’s revenues decreased by 15% to £4.429m (restated 2017: £5.201m) mainly due to the loss of a major client in 2018. EBITDA decreased to £1.003m (restated 2017: £1.367m). Amortisation and depreciation decreased to £0.475m (2017: £0.511m). Divisional operating proﬁ t decreased to £0.528m (restated 2017: £0.856m). 2018 saw some major developments in the Division including: • The addition of global addressing and location searching in Inﬁ nity • A new fast-paced temporary recruitment Planner system in Inﬁ nity • The extension of ISV.online to include psychometric as well as skills testing • Market leading support for enabling clients to work under the GDPR We are in the process of removing certain legacy Voyager products from the market. However we continue to invest in the core products of the Division. GatedTalent Interest rate risk The Group is exposed to interest rate risk through its ﬂ oating rate overdraft, and through its management of retained cash. The Group monitors its exposure to interest rate risk when borrowing and investing its cash resources. Credit risk The Group has a large customer base in excess of 2,000 customers and is not dependent on a small number of customers. Accordingly, the Group does not believe it is exposed to signiﬁ cant credit risk. Exchange risk The Group is exposed to translation and transaction foreign exchange risk. The Group’s foreign operations primarily trade in their own currencies, reducing the transaction risk. As a result, the main foreign exchange transactional exposure arises when repatriating proﬁ ts. The Group only seeks to remit cash when required in the UK and it usually has some ﬂ exibility on timing of such appropriations to minimise any exchange losses. The Group is, however, exposed to translation risks on net assets held. Liquidity risk Although the Group has some borrowings, it maintains positive cash resources and has sufﬁ cient available funds for its operations and planned expansion of its existing activities. GatedTalent was established in 2017 to provide a network allowing executives to share information with selected executive recruiters in a GDPR compliant manner. The GatedTalent product was launched in late 2017 with ﬁ rst revenues occurring in 2018 of £0.068m. The basic platform has over 50,000 proﬁ les and is free to executives. New proﬁ les are being added at around 1,000 per week. Revenue is being generated from executive recruiters through subscriptions to the platform. In Q4 2018, we launched “Member Services” generating a new premium B2C revenue stream for the Division. This has been successful and has accelerated rapidly. We would anticipate that member revenues will be larger than recruiter revenues in 2019. After less than six months, we realise more recurring revenue every month from Member Services than we do from any single executive search contract. The Division is effectively a start-up business within the Group and made an operating loss of £0.612m (2017 loss: £0.439m) after depreciation and amortisation charges of £0.127m (2017: £nil). The business is expected to remain loss making in 2019. The total investment in GatedTalent (including capitalised development) to 31 December 2018 was over £1.700m. The Board is conﬁ dent that all three Divisions have strong futures. Financial risk management The Group’s operations expose it to a number of risks that include the effect of changes in interest rates, credit, foreign currency exchange rates and liquidity. The Group does not trade in ﬁ nancial instruments. Further details in relation to these risks are shown in note 25. 254300 Dillistone AR Cover-pp9.indd 7 254300 Dillistone AR Cover-pp9.indd 7 22/05/2019 22:30 22/05/2019 22:30 8 DILLISTONE GROUP PLC Annual Report and Accounts 2018 CEO’S REVIEW Continued Principal risks and uncertainties There are a number of risks and uncertainties which could have an impact on the Group’s long term performance and cause actual results to differ materially from expected and historical results. The Directors seek to identify material risks and put in place policies and procedures to mitigate any exposure. The table of risks that follows gives details of the principal risks and the approach being taken to manage them. Risk Economic risk Potential adverse impact Mitigation The recruitment industry has a reputation for being vulnerable to the cyclical nature of the economy. This can impact signiﬁ cantly on non-recurring revenue and to a lesser extent recurring revenue. The Company operates globally and so is not reliant on one economy. It enjoys a high percentage of recurring revenues. Acquisitions have increased the exposure to the UK economy. Future acquisitions may be overseas. New product risk All technology suppliers need to develop new products and applications and there is always a risk that new products may lead to issues. This could damage the Group’s reputation and result in loss of new orders and therefore reduce revenue growth. It could also result in claims against the Group. The cost and time frame for developing and releasing new products could be a bigger drain on resource than built into budgets and forecasts. In a downturn there may be a reduction in new permanent hires which may be replaced by temporary hires. The temporary recruitment market is potentially anti-cyclical. The Group’s products support both permanent and temporary hires. Innovation and new products help maintain opportunities for the business world-wide. Products are tested pre-launch, and launch and implementation strategies developed to minimise risks. The development plan is regularly reviewed by management and the Board. Agile project methodology so stakeholders have regular visibility and inﬂ uence on what is being developed. We strengthened the Product team in 2018 and expect to add further resource in 2019. Attrition of customer base Failure to attract new customers, or the loss of existing customers, may have a detrimental effect on the Group’s ability to generate revenues. Actively manage existing customer relationships through account management structures and promptly dealing with issues. Competitor activity The market for recruitment software is extremely fragmented with a large number of small suppliers operating in all of the Group’s geographical markets. Very few of these suppliers have the necessary ﬁ nancial, technical and marketing resources to be able to develop their competitive position. However, the competition may intensify through consolidation or new entrants to the market. Some competitors offer a broader product range enabling them to compete across the whole of the sector. The businesses can easily lose market share if its products are not well regarded either from being “out of date” or “buggy”. Some ﬁ rms may try to compete on price, particularly if the market deteriorates. The Group continues to invest in new products with new features being added. The Group has strong customer relationships and uses account management to keep in touch with clients. The Group continues to invest in its product development and 2018 saw the continued development of temp functionality to Inﬁ nity, tempNinja and the continued development of ISV Online. The Group continues to innovate and provide solutions to client needs. There is a focus on ﬁ xing bugs and issues as they arise to ensure the user experience is good. Pricing strategies are reviewed on a regular basis. If successful, GatedTalent will provide a competitive advantage to FileFinder. Close integration with FileFinder is likely to lead to a sustained competitive advantage for our executive search CRM platform. The Group continues to look into developing new products and additional features to more readily compete. 254300 Dillistone AR Cover-pp9.indd 8 254300 Dillistone AR Cover-pp9.indd 8 22/05/2019 22:30 22/05/2019 22:30 STRATEGIC REPORT 9 Risk Potential adverse impact Mitigation Business continuity risks associated with information systems, operational failure, data security and cyber security risks Employee engagement and retention A failure of systems or failure of hosting facilities leading to loss of customer conﬁ dence in the Group being able to deliver their requirements. Each division is reliant on data centres. Work ongoing to move data centres to the cloud through Amazon and Azure. Loss or corruption of data held on behalf of customers which could have a detrimental effect on their conﬁ dence in data security processes and could cause ﬁ nancial loss. External attacks on servers could result in lost or corrupted data and loss of reputation. Capability to meet the demands of the markets in which the Group operates and competes effectively with other IT suppliers is largely dependent on the skills, experience and performance of staff. Failure to attract or retain high calibre employees could seriously impede future growth and present performance. Reliability on small group of people, especially in parts of the business. Plans are regularly reviewed on how to improve data centre management as the business grows worldwide. Data backups occur at least daily and the necessary test carried out on a regular basis to ensure data can be restored. Penetration testing helps minimise the risk of attacks. Regular review of Group wide infrastructure to improve cyber defences locally and at data centres To retain staff the Group operates competitive remuneration packages. Appraisals are carried out which also consider individual’s personal development. Cross training being carried out where possible. Ability to fund the restructure Management capacity The restructuring potentially requires access to short term funding either via borrowing or through the availability of its own cash resources. Ongoing discussions with investors and potential investors to build a following in Dillistone. Strong relationship with bank. Size of business means that management tends to be stretched and under resourced. As the business grows there may be insufﬁ cient support to ensure that the growth is effectively managed and integrated. A major restructuring is planned for 2019 to add efﬁ ciencies to the Group and help ensure it has the right resources. Foreign exchange volatility The Group has substantial operations in both the UK and overseas. Proﬁ ts are exposed to variations in exchange rates thereby impacting on reported proﬁ ts. There is usually some element of natural hedge in the currencies, although if sterling strengthens against all currencies it can have a negative impact on results. Brexit Potential economic uncertainty could lead to a reduction in orders in the short to medium term, impacting adversely on the Group’s results. Clearly, any changes brought about by Brexit are likely to be implemented in the lead up to the exit date, which might introduce changes to the UK-EU trading arrangements. This may impact where recruiting individuals with European languages requirement. It may increase the time and difﬁ culty in recruiting skilled employees. Clients usually choose best in class and already buy from global ﬁ rms. The Group continues to monitor implications and is continually reviewing its products and pricing to ensure it stays competitive. We deal with visa requirements for some staff already. Data protection legislation Ensure that all Group products comply with international data protection legislation and demonstrate to clients that they do. Ability to source new talent The Group is reliant on specialist skills, especially in Development and Dev Ops and it may not be possible to recruit resources locally. Work continues to be carried out to ensure data is secure and protected at appropriate levels. Senior member of executive team has GDPR practitioner certiﬁ cate. Appropriate internal committee established. Data Protection Ofﬁ cer (‘DPO’) appointed. Look more broadly at where staff are based or use of outsourcing. Reorganisation risk The Group is planning a major restructuring exercise which could result in losing people that are key to the business or loss of focus on delivery of the business plan. Detailed project plan in place and key people appointed to roles. Frequent discussions with staff and ﬂ exibility on working arrangement being adopted. 254300 Dillistone AR Cover-pp9.indd 9 254300 Dillistone AR Cover-pp9.indd 9 22/05/2019 22:30 22/05/2019 22:30 10 DILLISTONE GROUP PLC Annual Report and Accounts 2018 FINANCIAL REVIEW For the year ended 31 December 2018 Total revenues decreased by 11% to £8.692m (restated 2017: £9.732m) with recurring revenues decreasing by 10% to £7.154m (restated 2017: £7.942m) while non-recurring revenues decreased to £1.169m (restated 2017: £1.326m). Third party resell revenue amounted to £0.369m in the period (2017: £0.464m). Contractor and internal development costs were reclassiﬁ ed as administrative expenses from costs of sales and the 2017 comparatives have also been restated on this basis (see note 27). Cost of sales decreased to £1.054m (2017: £1.247m). Administrative costs, excluding acquisition related items, depreciation and amortisation, fell 8% to £6.337m (2017: £6.926m) as measures were taken to reduce costs following the loss of the major contract in 2018. Depreciation and amortisation (excluding acquisition related amortisation) increased to £1.246m (2017: £1.100m). Acquisition related administrative costs totalled £0.469m (2017: £0.823m) and were in respect of the amortisation of intangibles arising on the Voyager, FCP and ISV acquisitions. The prior year ﬁ gure included an acceleration of the acquisition intangibles amortisation as a result of the loss of the major contract in that business. Recurring revenues covered 94% of administrative expenses before acquisition related and one-off costs (restated 2017: 99%). Excluding depreciation and amortisation of our own internal development, the administrative costs are covered 112% (restated 2017: 115%) by recurring revenues. The Group beneﬁ tted from a tax credit in 2018 of £0.191m (restated 2017: credit £0.432m). The 2018 credit reﬂ ects the signiﬁ cant R&D tax credits available to all three divisions and the assumption that any tax losses will be surrendered for the R&D tax credit payment. It also beneﬁ ts from a deduction for the IFRS 15 adjustment put through the accounts although this is largely offset by the release of the deferred tax asset created in the opening balance position at 1 January 2017. The acquisition related items tax credit reﬂ ects the reduction in deferred tax that arises as amortisation is charged in the proﬁ t and loss account. Proﬁ t for the year before acquisition related and other one-off items amounted to £0.120m (restated 2017: £0.734m). The 2018 adjusted proﬁ ts beneﬁ tted from a tax credit of £0.102m (restated 2017: tax credit of £0.281m). The loss for the year after acquisition related items and other one-off items was £0.260m (2017: proﬁ t £0.057m). Basic loss per share (EPS) fell to (1.32)p (restated 2017: EPS of 0.29p). Fully diluted EPS fell to (1.32)p (restated 2017: EPS of 0.29p). Adjusted basic EPS fell to 0.61p (restated 2017: EPS of 3.73p). Dillistone Group Plc company results show a proﬁ t of £1.338m (2017: £1.311m) after an impairment of £0.451m (2017: £nil) to its investment in Voyager/FCP due to the loss of a major contract. Capital expenditure The Group invested £1.536m in property, plant and equipment and product development during the year (2017: £1.506m). This expenditure included £1.446m (2017: £1.358m) spent on capitalised development related costs. Trade and other payables As with previous years, the trade and other payables includes deferred income of £3.575m (2017 restated: £3.811m), i.e. income which has been billed in advance but is not recognised as income at that time. This principally relates to support, SaaS and cloud hosting renewals, which are billed in 2018 but are in respect of services to be delivered in 2019. It also includes licence revenue for which a support contract is required, and which is spread over 5 years under IFRS15. Contractual income is recognised monthly over the period to which it relates. It also includes deposits taken for work which has not yet been completed; as such income is only recognised when the work is substantially complete, or the client software goes “live”. At the end of 2018, there was no contingent consideration payable (2017: £0.146m). Cash The Group ﬁ nished the year with cash funds of £0.725m (2017: £1.390m); and a convertible loan of £0.404m (2017: £0.391m after taking into account the equity adjustment). This is after capital expenditure of £1.536m, the ﬁ nal payment to the vendors of ISV of £0.146m and dividend payments of £0.098m. On behalf of the Board Julie Pomeroy Finance Director 29 April 2019 The Strategic Report is signed on behalf of the Board by Jason Starr Chief Executive 29 April 2019 254300 Dillistone AR pp10-pp23.indd 10 254300 Dillistone AR pp10-pp23.indd 10 22/05/2019 22:30 22/05/2019 22:30 CORPORATE GOVERNANCE REPORT For the year ended 31 December 2018 GOVERNANCE 11 The Board is collectively responsible for setting the tone and culture of the Group and promoting good corporate governance. Dillistone has adopted the Quoted Companies Alliance Corporate Governance Code (the “Code”). At Dillistone we believe in good corporate governance and accountability and we make robust corporate governance part of our culture and business values. Details of the Code and how Dillistone complies with it is detailed below: 1. Establish a strategy and business model which promote long-term value for shareholders Compliance The Group’s strategy is to grow the business both organically and through acquisition. This strategy is made possible through our commitment to product development, which ensures that the business continues to command a leading role in all of the markets in which it operates. Details of the Group’s strategy, objectives and business model are set out on pages 5 and 6 of this report. The key challenges and risks faced by the business are included on pages 8 and 9. The business is split into three Divisions. Dillistone Systems, Voyager Software and GatedTalent. Dillistone Systems specialises in the supply of software and services into executive-level recruitment teams. Voyager Software’s clientele are primarily involved in contingent recruitment, including permanent placement, contract placement and the provision of temporary staff. GatedTalent is a private network of executives, accessed by executive recruiters. This Division generates revenue based on a combination of recruiter subscription, member services and transaction fees for connecting with executives. There is a close relationship between GatedTalent and Dillistone Systems. There is a 3-year rolling process of business planning throughout the Group, within a framework and structure set by the Board. For new projects or products, a 5-year horizon may be used. The Group seeks to deliver long term growth and value to shareholders and other stakeholders and its strategy evolves over time as the Group grows. The Executive Directors through the Chief Executive Ofﬁ cer are responsible for executing the strategy once agreed by the Board. The Chief Executive Ofﬁ cer is also responsible for reporting on business strategy, operational performance, risks and other signiﬁ cant developments at Board meetings. 2. Seek to understand and meet shareholder needs and expectations Compliance The Board recognises its primary role of representing and promoting the interests of the Group’s shareholders. The Board is accountable to shareholders for the long-term performance and success of the Company. The Chief Executive Ofﬁ cer and Finance Director hold regular meetings with institutional shareholders and private client brokers to discuss and review the Group’s activities, strategies and performance. Investor feedback from these meetings is provided by the Group’s NOMAD. The Chief Executive Ofﬁ cer and Finance Director also present interim and annual results through webinars open to all shareholders and members of the public, which has been well received. Questions are also encouraged at these sessions. For the majority of RNS announcements the Chief Executive also records an appropriate update to explain the announcement and again this is available to shareholders. The Chief Executive Ofﬁ cer and Finance Director also make themselves available to speak to potential institutional shareholders. These meetings and discussions give the Board an opportunity to gauge shareholder feedback and expectations, much of which has been around GatedTalent in 2018. A RNS is published after the AGM to announce the resolutions passed at the AGM. To date all AGM resolutions proposed have been passed; the Group has not experienced signiﬁ cant dissenting shareholder votes for resolutions proposed at the AGM (over 20%), including proxy votes. 3. Take into account wider stakeholder and social responsibilities and their implications for long-term success Compliance The Board recognises its prime responsibility under UK corporate law is to promote the success of the Group for the beneﬁ t of its members as a whole. Our customers are essential to our business and we maintain long-term relationships with our customers. Dillistone operates a system of key account managers whose role is to communicate with them and ensure close liaison, in addition to the day-to-day communication that occurs with every customer contract. Customer feedback is considered at Divisional board meetings, and our services evolves accordingly. Senior executives have frequent discussions with key customers and regular newsletters and other mailings are used to inform customers and potential customers. Our staff are key to the business and the Directors recognise the need for engagement with employees. Each main division hold monthly staff meetings to update staff on current matters both in the division and in the wider group. With less than 150 people, it means that Directors and management staff are relatively accessible to all employees. We also encourage engagement of staff in the business through share schemes and the Group runs a Sharesave scheme for all UK employees. We develop long standing relationships with our bankers and keep them regularly updated as to how the business is performing. We also seek to maintain long term relationships with key suppliers. The Board also understands that it has a responsibility to consider, where practicable, the social, environmental and economic impact of its approach. 254300 Dillistone AR pp10-pp23.indd 11 254300 Dillistone AR pp10-pp23.indd 11 22/05/2019 22:30 22/05/2019 22:30 12 DILLISTONE GROUP PLC Annual Report and Accounts 2018 CORPORATE GOVERNANCE REPORT For the year ended 31 December 2018 Continued 4. Embed effective risk management, considering both opportunities and threats, throughout the organisation Compliance The Board undertakes a regular and robust assessment of the effectiveness of the Group’s risk management framework at least annually. Each Board meeting includes an agenda item on risk and consideration is also given to whether any new risks have been identiﬁ ed. The latest annual summary of the signiﬁ cant risks and uncertainties, is contained in pages 8 and 9. We do not have a formal risk committee. Our internal governance and reporting structure, for example through monthly Divisional board meetings and ﬁ nancial reporting, provides a key and effective risk management tool. Divergences from expected ﬁ nancial and project performances are discussed in detail and remedial action taken where possible. All divisional Board meetings are attended by the Chief Executive and Finance Director. The Group takes external advice from its advisors on signiﬁ cant matters, and also tries to ensure that it has qualiﬁ ed staff who understand key risk issues. For example, GDPR had a signiﬁ cant impact within the recruitment and software industry. A senior member of executive team qualiﬁ ed for a GDPR practitioner certiﬁ cate and also an internal committee was established to help manage risk and compliance. Legal advice was also sought. 5. Maintain the board as a well- functioning, balanced team led by the chair Compliance The Board exercises full and effective control over Dillistone Group. There is a formal schedule of matters reserved speciﬁ cally for its decisions, relating to strategy, ﬁ nance, risk, operations and governance. The Board delegates certain functions to its three principal committees, the Audit Committee, the Remuneration Committee and the Nomination Committee, as set out below. Details of the members of the Board are set out below and further biographical details are on pages 20 and 21 or on our website. Non-Executive Directors M D Love Non-executive Chairman G R Fearnley Non-executive Director Independent – although Dr Love has served on the Board for over 9 years and holds 5% of the share capital he is free from any business or other relationship which could materially interfere with the exercise of his independent judgement. Time commitment to the business is appropriately 1 day per month. Senior independent director. Mr Fearnley holds 2.3% of the share capital and this level of holding is not considered by the Board to change his independence. Commitment to the business is approximately ½ day per month. Executive Directors J S Starr R Howard A D James Chief Executive Operations Director Director Full time Part time – 3 days per week Full time J P Pomeroy Finance Director Part time – 4 days per week A Milne Managing Director – Dillistone Systems Division Full time 254300 Dillistone AR pp10-pp23.indd 12 254300 Dillistone AR pp10-pp23.indd 12 22/05/2019 22:30 22/05/2019 22:30 GOVERNANCE 13 6. Ensure that between them the directors have the necessary up-to-date experience, skills and capabilities Compliance Directors who have been appointed to the Company have been chosen because of the skills and experience they offer. Full biographical details of the Directors are included under the Management section on the website and on pages 20 and 21 of this report. The Board considers itself sufﬁ ciently diverse when considering the background, knowledge and experience that each individual member brings to the Board. Where Board appointments are made the whole Board is involved. One member of the Board is female. Board appointments are made solely on merit. Other senior management appointments, i.e. divisional and subsidiary directors, are considered by the remuneration committee and the Board. Directors are encouraged to keep their skills up to date by attending appropriate courses or by being members of other boards where new skills and ideas can be learned. The Board keeps under review the strength and depth of its senior management and encourages the divisional teams to ensure they have the skills required. Succession planning is currently not formally discussed but will be considered going forward as part of the Board appraisal process. The Chairman leads the Board, while the Chief Executive Ofﬁ cer is charged with managing the Group’s business. The roles of the Chairman and Chief Executive Ofﬁ cer are distinct. The Code expects an appropriate combination of executive and non-executive directors. Our split is between ﬁ ve Executive and two Non-Executive Directors (including the Non- Executive Chairman). The Chairman and the Board collectively believes this split between its Executive and Non-Executive Directors is appropriate. This composition continues to provide the expertise, breadth of experience and independence of thought needed, while maintaining efﬁ cient Board meetings. The Group considers that both of its Non- executive directors are independent as discussed above. The Board considers its composition appropriate for an AIM-quoted Group of its size, market cap, and individual circumstances. The Board meets at least ﬁ ve times each year and has adopted a formal schedule of matters speciﬁ cally reserved for decision by it, thus ensuring that it exercises control over appropriate strategic, ﬁ nancial, operational and compliance issues. At these meetings the Board reviews trading performance, ensures adequate ﬁ nancing, sets and monitors strategy, examines investment and acquisition opportunities and discusses reports to Shareholders. The Board meeting attendance record is set out below: Number of meetings held Number of meetings attended 7 7 7 7 7 7 7 6 5 7 7 7 7 7 Name M D Love G R Fearnley J S Starr R Howard A D James J P Pomeroy A Milne Currently one third of the Board submits itself for re-election at each AGM as part of the Group’s formal retirement by rotation policy. Under the current Articles every Director must offer himself for re-election every three years. We consider a re- election every three years appropriate for all Directors, which is not in line with the Code’s suggestion of annual re-elections. Mike Love, Jason Starr, Alex James and Rory Howard have served on the Board for more than 9 years; despite serving the Board on a long term basis, the Directors individually believe that they act objectively in their respective roles and can act with sufﬁ cient independence. All Directors are given full and timely access to all relevant management and accounting information. All Directors are able to seek independent professional advice in the course of their duties, at the Group’s expense. If any Director has concerns regarding unresolved business issues, they are entitled to require the Company Secretary to minute their concerns. Formal terms of reference have been agreed for all Board Committees. The Board has three principle committees. The audit committee which is made up of the two non executive directors, meets twice yearly and is chaired by Giles Fearnley. The remuneration committee again is made up of the two independent directors and meets on an adhoc basis and is chaired by Mike Love. The nomination committee meets as and when required and there were no such meetings in 2018. The Board reviews trading and operational performance regularly. Divergences from expected performance are followed up promptly and rigorously. Monthly management accounts are prepared and distributed members of the Board. Divisional management accounts are also produced and circulated to divisional directors. 254300 Dillistone AR pp10-pp23.indd 13 254300 Dillistone AR pp10-pp23.indd 13 22/05/2019 22:30 22/05/2019 22:30 14 DILLISTONE GROUP PLC Annual Report and Accounts 2018 CORPORATE GOVERNANCE REPORT For the year ended 31 December 2018 Continued Board member Role Mike Love Chairman Giles Fearnley Senior Independent Director Jason Starr CEO Rory Howard Operations Director Alex James Director Julie Pomeroy Finance Director and Company Secretary Alistair Milne Managing Director – Dillistone Systems Division Experience Mike brings a wealth of experience to the Dillistone Board. He was group managing director of SciSys from 1986 to 2003 during which time he led a management buy-out of the business and ﬂ oated it on AIM in 1997. He is an experienced chairman through his current role at SciSys and also as chairman of a private company Redcliffe Precision Ltd. He has a good understanding of software development projects and he brings strong independent judgement to Dillistone. Giles has a signiﬁ cant experience leading large business in the passenger transport sector. He brings real commercial judgement to Dillistone through his knowledge of working in challenging sectors. Jason has worked for the majority of his career at Dillistone and so knows the sector extremely well. He also brings further AIM experience through his role as a non-executive director of AIM listed PCIPAL PLC where he chairs the remuneration committee. Rory has a background as a technical and database analyst as well as being an experienced project manager and a PRINCE2 practitioner. Alex brought his experience of quality control and account manager as well as his background in recruitment to Dillistone when he joined in 1999. He has since worked in training and consultancy and in projects management. He is now responsible for the implementation of products and services GatedTalent and also projects director for Voyager Division. Julie is a chartered accountant (ACA) with additional qualiﬁ cations in both tax and treasury. She is also a Chartered Director. She is an experienced ﬁ nance director of quoted and private companies. Julie is also a non-executive director of Nottingham University Hospitals NHS Trust. Alistair brought with him a background in marketing and management when he joined Dillistone in 2003. He has worked principally in support and technical services within the business. 7. Evaluate board performance based on clear and relevant objectives, seeking continuous improvement Compliance The Group undertakes regular monitoring of personal and corporate performance using agreed Key Performance Indicators and detailed ﬁ nancial reports. The Board does not expect to undertake an annual independent evaluation as recommended by the Code. A two-yearly internal evaluation is considered appropriate given the smaller size of the Board and regular day-to-day contact between Board members. The Board’s ﬁ rst evaluation took place in March 2019 with the results reported to the Board in April 2019. The Chairman and Independent Non-Executive Director prepared the board evaluation questionnaire and assessment criteria drawing on their experience of running evaluation programmes at other quoted companies. The key areas addressed by the questionnaire were as follows: • • Board Role and Agenda Setting (Monitoring Performance and Strategic Planning) Size, Composition and Independence of Boa rd • Director Orientation and Development • Board Leadership, Teamwork and Management Relations • Board (and Committee) Meetings • • Director and Board Evaluation, Compensation and Ownership Management Evaluation, Compensation and Ownership • Succession Planning • Ethics 254300 Dillistone AR pp10-pp23.indd 14 254300 Dillistone AR pp10-pp23.indd 14 22/05/2019 22:30 22/05/2019 22:30 GOVERNANCE 15 The Chairman aggregated the scores and the results were discussed. For the low scoring questions plans are being drawn for the following areas: 8. Promote a corporate culture that is based on ethical values and behaviours 1. Board training Compliance 2. Board performance benchmarks 3. Board evaluation 4. Succession planning Directors’ performance has been informally reviewed by the chairman annually. A formal annual review is currently being put in place. The Board keeps under review the strength and depth of its senior management and encourages the divisional teams to ensure they have the skills required. Succession planning is currently not formally discussed but will be considered going forward as part of the Board appraisal process. Our corporate values of openness and respect, set by the Board, seek to promote good corporate behaviours. The Group operates in international markets and is mindful that respect of individual cultures is critical to corporate success. The Group has an anti-bribery policy and has implemented adequate procedures described by the Bribery Act 2010. The Group has undertaken a review of its requirements under the General Data Protection Regulation, implementing appropriate policies, procedures and training to ensure it is compliant. A senior member of executive team has a GDPR practitioner certiﬁ cate and also an internal committee has been established to help manage risk and compliance. Legal advice was also sought. 9. Maintain governance structures and processes that are ﬁ t for purpose and support good decision-making by the board Compliance The Board sets the Group’s strategic aims and ensures that necessary resources are in place in order for the Group to meet its objectives. All members of the Board take collective responsibility for the performance of the Group and all decisions are taken in the interests of the Group. The Chairman leads the Board, while the Chief Executive Ofﬁ cer is charged with managing the Group’s business. The roles of the Chairman and Chief Executive Ofﬁ cer are distinct. Board member Role Mike Love Chairman Responsibilities Leads the Board Giles Fearnley Senior Independent Director NED Jason Starr Rory Howard CEO Operations Director Alex James Director Managing the Group’s businesses Responsible for operations at Dillistone Division including commercial contracts and insurance. He is also Group DPO Responsible for the implementation of products and services for GatedTalent and also projects director for Voyager Division Julie Pomeroy Finance Director Group Finance Director and Company Secretary Alistair Milne Managing Director – Dillistone Systems Division Responsible for the performance of Dillistone Division 254300 Dillistone AR pp10-pp23.indd 15 254300 Dillistone AR pp10-pp23.indd 15 22/05/2019 22:30 22/05/2019 22:30 16 DILLISTONE GROUP PLC Annual Report and Accounts 2018 CORPORATE GOVERNANCE REPORT For the year ended 31 December 2018 Continued We have two main Board committees; an Audit Committee and a Remuneration Committee. The Board as a whole makes up the Nomination committee. Their responsibilities are summarised below: Audit Committee • • • • The Committee is made up of the 2 non executive directors and meets twice a year to consider the scope of the annual audit and the interim ﬁ nancial statements and to assess the effectiveness of the Group’s system of internal controls. It reviews the results of the external audit, its cost effectiveness and the objectives of the auditor. Given the size of the Group, the Audit Committee considers an internal audit function is not currently justiﬁ ed. The audit committee meets at least annually with the auditors without executive management. While our divisions operate as separate units with areas of autonomy set by the Board, they are supervised by the Board through structured Divisional board meetings and reporting, which is fed into the Chief Executive Ofﬁ cer, and reported back into the Board meetings. Divisional boards normally meet monthly. In 2017, a separate GDPR committee was formed and meets monthly. A Data Protection Ofﬁ cer has been appointed. Further details of the Group’s corporate governance arrangements are provided within this Corporate Governance section of the website. The appropriateness of the Company’s governance structures will be reviewed as the Company evolves. 10. Communicate how the company is governed and is performing by maintaining a dialogue with shareholders and other relevant stakeholders • The audit committee reports its discussions to the next Board Meeting. Compliance Remuneration Committee • • • It meets at least once a year to determine Group policy on senior Executive remuneration, to make detailed recommendations to the Board regarding the remuneration packages of the Executive Directors and to consider awards under the Group’s option schemes. The Chief Executive Ofﬁ cer is consulted on remuneration packages and policy but does not attend discussions regarding his own package. The remuneration and terms and conditions of the appointment of Non- executive Directors are determined by the Board. The Board recognises its primary role of representing and promoting the interests of the Group’s shareholders. The Board is accountable to shareholders for the long- term performance and success of the Group. The Chief Executive and Finance Director hold regular meetings with institutional shareholders and private client brokers to discuss and review the Group’s activities, strategies and performance. Investor feedback from these meetings is provided by WH Ireland. The Chief Executive Ofﬁ cer and Finance Director also present interim and annual results through webinars open to all shareholders and members of the public, which has been well received. Questions are also encouraged at these sessions. For the majority of RNS announcements the Chief Executive also records an appropriate update to explain the announcement and again this is available to shareholders. The Chief Executive Ofﬁ cer and Finance Director also make themselves available to speak to potential institutional shareholders. These meetings and discussions give the Board an opportunity to gauge shareholder feedback and expectations. A RNS is published after the AGM to announce the resolutions passed at the AGM. To date all AGM resolutions proposed have been passed; the Group has not experienced signiﬁ cant dissenting shareholder votes for resolutions proposed at the AGM (over 20%), including proxy votes. In conjunction with the Group’s Nomad and other ﬁ nancial advisers we distribute news in a timely fashion through appropriate channels, to ensure that shareholders are able to access material information about the Group’s progress. Details of the work of the audit and remuneration committee are dealt with above. The remuneration report is contained on pages 17 to 19. In view of the size of the organisation no formal audit committee report is produced. Regular newsletters are sent to customers and potential customers to keep them updated. Also LinkedIn groups have been formed which enable interested parties to have appropriate dialogues with the various businesses. Monthly staff meetings are held in the divisions to keep them informed about developments in the business and for issues to be raised. Details of RNS announcements and copies of annual and interim reports are contained within the accounts and RNS sections of the AIM Rule 26 area of our website. 254300 Dillistone AR pp10-pp23.indd 16 254300 Dillistone AR pp10-pp23.indd 16 22/05/2019 22:30 22/05/2019 22:30 GOVERNANCE 17 REPORT TO THE SHAREHOLDERS ON DIRECTORS’ REMUNERATION For the year ended 31 December 2018 Remuneration report Service contracts The Board’s policy is that service contracts of Executive Directors should provide for termination by the Group on one year’s notice. The service contracts of each of the current Executive Directors provide for such a period of notice. The independent Non-Executive Directors have letters of appointment providing ﬁ xed three-year service periods, which may be terminated by giving six months’ notice. Non-Executive Directors’ remuneration The fees for the Chairman and independent Non-Executive Director are determined by the Board. The Chairman and the Non-Executive Director are not involved in any discussions or decisions about their own remuneration. The Chairman and independent Non-Executive Director do not receive bonuses or pension contributions and are not entitled to participate in any of the Group’s share schemes. They are entitled to be reimbursed the reasonable expenses incurred by them in carrying out their duties as Directors of the Company. Executive Directors’ remuneration The remuneration package of the Executive Directors includes the following elements: Basic salary Salaries are normally reviewed annually taking into account inﬂ ation and salaries paid to directors of comparable companies. Pay reviews also take into account Group and personal performance. The Board as a whole decides the remuneration of the Chairman and the Non-Executive Director. Performance related pay scheme There are two performance related pay schemes for Executive Directors. The ﬁ rst is an annual bonus scheme which is based upon the achievement of certain proﬁ t and commercial targets for the Group, as appropriate. The Executive Directors’ bonus recognised in the 2018 ﬁ nancial year is £nil (2017: £17,000) including Employer’s National Insurance. The second scheme is a long-term incentive plan linked to growth in earnings per share over a three year period or other targets set by the Remuneration Committee. At the discretion of the Remuneration Committee, Executive Directors are either granted share options at the ruling mid-market price at the time of the grant or a pure cash bonus ﬁ xed as a percentage of salary. The awards are subject to meeting challenging targets. Annual awards are usually made under this scheme. Where options are awarded, the value of the award is calculated using a Black- Scholes model (see note 23 for further details). The awards made in the period are included in the LTIP tables below. Directors’ remuneration Details of the remuneration of the Directors for the ﬁ nancial year are set out below: Executive Directors J S Starr R Howard A D James J P Pomeroy A Milne Non-Executive Directors M D Love G R Fearnley Salary* and fees £’000 Annual Bonus £’000 Pension payments† £’000 Beneﬁ ts £’000 124 46 98 91 98 35 13 505 - - - - - - - - 8 33 9 12 8 - - 70 1 1 - 1 - - - 3 2018 £’000 133 80 107 104 106 35 13 578 2017 £’000 133 81 104 105 104 35 13 575 * Salary is calculated after deducting salary sacriﬁ ce payments which totalled £36,000. † Includes salary sacriﬁ ce payments which totalled £36,000. 254300 Dillistone AR pp10-pp23.indd 17 254300 Dillistone AR pp10-pp23.indd 17 22/05/2019 22:30 22/05/2019 22:30 18 DILLISTONE GROUP PLC Annual Report and Accounts 2018 REPORT TO THE SHAREHOLDERS ON DIRECTORS’ REMUNERATION For the year ended 31 December 2018 Continued Long term incentive payments made in the period are not included in the above ﬁ gures but are detailed below: LTIP award – % of salary arrangement J S Starr R Howard Maximum payout awarded in period £’000 Paid in the year including NI Employer’s £’000 Total value of salary based LTIP awards carried at 31 December 2018* £’000 Total value of all salary based LTIP awards carried at 31 December 2017* £’000 - - - - - - 1 1 2 8 4 12 * Awards accrued over the period that they relate to and the valuation takes into account the likelihood of performance conditions being met. LTIP award – share options A D James J P Pomeroy A Milne Total No options were exercised in the year. Number of options granted under LTIP scheme in year Total number of options granted under LTIP scheme at 31 December 2018 Total number of options granted under LTIP scheme at 31 December 2017 - - - - 264,471 264,063 264,471 793,005 330,830 330,134 327,659 988,623 Directors’ interests The interests of the Directors (including family interests) in the share capital of the Company at the year end are set out below: J S Starr R Howard A D James M D Love G R Fearnley A Milne J P Pomeroy Ordinary shares of 5p each At 31 December 2018 At 31 December 2017 3,577,591 3,300,000 112,744 989,754 453,435 59,109 63,733 3,577,591 3,300,000 112,744 989,754 453,435 59,109 63,733 254300 Dillistone AR pp10-pp23.indd 18 254300 Dillistone AR pp10-pp23.indd 18 22/05/2019 22:30 22/05/2019 22:30 GOVERNANCE 19 The Dillistone Group Plc also issued an 8.15% convertible loan note in which the Directors participated. Their holdings are as follows: J S Starr R Howard A D James M D Love G R Fearnley J P Pomeroy 8.15% convertible loan notes At 31 December 2018 At 31 December 2017 £24,250 £24,250 £1,000 £250,000 £75,000 £10,000 £24,250 £24,250 £1,000 £250,000 £75,000 £10,000 The Loan Notes carry an interest coupon of 8.15% pa over their maximum term of 36 months, with a conversion price of 71.6p per new Dillistone ordinary share. The interest payments are payable quarterly in arrears and will be satisﬁ ed through the issue of further new ordinary shares or in cash at the individual Director’s election. In addition, the following Directors had total share options including the options granted under the LTIP scheme above and options granted under the sharesave scheme. A D James J P Pomeroy A Milne Options over ordinary shares of 5p each At 31 December 2018 At 31 December 2017 264,471 275,586 269,098 809,155 330,830 341,657 332,286 1,004,773 254300 Dillistone AR pp10-pp23.indd 19 254300 Dillistone AR pp10-pp23.indd 19 22/05/2019 22:30 22/05/2019 22:30 20 DILLISTONE GROUP PLC Annual Report and Accounts 2018 BOARD OF DIRECTORS For the year ended 31 December 2018 MIKE LOVE 70 NON-EXECUTIVE CHAIRMAN JASON STARR 47 CHIEF EXECUTIVE Mike Love has a PhD in Theoretical Physics and over 40 years’ experience in the software industry. He is currently non- executive chairman of SciSys plc, also an AIM quoted company, and director and chairman at Redcliffe Precision Ltd. He was group managing director of SciSys from 1986 to 2003 during which time he led a management buy-out of the business and ﬂ oated it on AIM in 1997. He is a previous member of the AIM Advisory Group of the London Stock Exchange. Jason Starr joined Dillistone Systems in 1994. He became Marketing Manager in 1996 before becoming Managing Director of the UK business in 1998. Following the MBO, Jason became Managing Director of Dillistone Systems Ltd and subsequently became Group Chief Executive Ofﬁ cer. Jason is a Director of all three Divisions and has an executive role with both Dillistone Systems and GatedTalent. Jason was appointed a non-executive director of AIM listed PCIPAL PLC from 1 January 2015. RORY HOWARD 51 OPERATIONS DIRECTOR ALEX JAMES 46 PRODUCT DEVELOPMENT DIRECTOR Rory Howard has a BA (Honours) in Business Administration and is a PRINCE2 practitioner. Rory started his career with the Dixons Stores Group and from 1991 to 1994 he worked in the systems and control department as a technical support analyst working on their EPOS systems, data reporting and security. He then joined JATO Dynamics Ltd, a software company specialising in the automotive research market, as a database analyst, developing databases for pricing models for the large automotive manufacturers. In 1998 he joined Dillistone Systems Limited as a project manager, and the following year became the Global Projects Manager, tasked with restructuring all implementations and data migrations procedures and operations. In 2003 Rory became Operations Director of Dillistone Systems Limited and a member of the Board. Alex graduated from Swansea University in 1995 with a degree in Psychology. In 1995 Alex joined Mallinckrodt Veterinary, working in quality control. In 1997 he moved to Responseability, a company that manages aspects of the recruitment process for clients, starting in administration before progressing into an account management role. Alex started at Dillistone in 1999 in a training/consultancy position prior to becoming the UK and then Global Projects Manager, being ultimately responsible for the implementation of all products and services to both new and existing clients. Alex joined the Board of Dillistone Systems Limited in January 2005 and the Group Board in February 2006. Alex is a Director of both Dillistone Systems and GatedTalent and sits on the Group Board with an overall responsibility for Product Development. 254300 Dillistone AR pp10-pp23.indd 20 254300 Dillistone AR pp10-pp23.indd 20 22/05/2019 22:30 22/05/2019 22:30 GOVERNANCE 21 ALISTAIR MILNE 43 MANAGING DIRECTOR – DILLISTONE SYSTEMS DIVISION JULIE POMEROY 63 FINANCE DIRECTOR Alistair started his career at Richmond Theatre in 1994, working in both the marketing department and box ofﬁ ce. In 1997 he joined The Football Association, initially in a ticketing administration role, before progressing to a management role. Alistair then began working at the Shaw Theatre as Box Ofﬁ ce Manager. He joined Dillistone Systems in 2003. He was initially appointed to the UK and then Global Support Manager role with responsibility for all aspects of support services. He was promoted to the Dillistone Systems Limited Board in 2006 and joined the Group Board in January 2011. Alistair became Managing Director of Dillistone Systems in October 2018, previously being the Director of Support Services. Julie is an experienced ﬁ nance director of quoted and private companies. She graduated with an honours degree in Physics from Birmingham University and is a Chartered Accountant and Chartered Director. She also holds tax and treasury qualiﬁ cations. Julie was group ﬁ nance director of Carter & Carter Group plc until October 2005, having joined in 2002 to help grow and ﬂ oat the business. She had previously been chief ﬁ nancial ofﬁ cer of Weston Medical Group plc and prior to this Julie worked at East Midlands Electricity plc as director of corporate ﬁ nance. She was ﬁ nance director of AIM quoted Biofutures International plc until July 2010. Julie is also a non-executive director of Nottingham University Hospitals NHS Trust. GILES FEARNLEY 64 NON-EXECUTIVE DIRECTOR A career in the passenger transport industry saw Giles lead an MBO in 1991, forming Blazeﬁ eld Holdings Limited, a business operating bus networks principally across Yorkshire and Lancashire. This company was sold to Transdev in 2006. In 1997 he was appointed chief executive of Prism Rail PLC, having been one of that company’s founders, and held that position until its sale to National Express in 2000. Prism Rail operated four of the UK’s passenger rail franchises with a turnover of £500 million per annum. Giles is currently managing director - Bus, UK and Ireland for First Group Plc. Giles served as chairman of the Association of Train Operating Companies in 1999/2000 and as chairman of The Confederation of Passenger Transport UK. 254300 Dillistone AR pp10-pp23.indd 21 254300 Dillistone AR pp10-pp23.indd 21 22/05/2019 22:30 22/05/2019 22:30 22 DILLISTONE GROUP PLC Annual Report and Accounts 2018 DIRECTORS’ REPORT For the year ended 31 December 2018 The Directors present their report and ﬁ nancial statements for the year ended 31 December 2018. Results and dividends The consolidated statement of comprehensive income for the year is set out on page 30. No ﬁ nal dividend will be paid (2017: 0.5p) Directors The following Directors have held ofﬁ ce since 1 January 2018: M D Love – Non-Executive Chairman J S Starr R Howard A D James J P Pomeroy G R Fearnley – Non-Executive Director A Milne The interests of the Directors (including family interests) in the share capital of the Company are listed on pages 18 and 19. Giles Fearnley and Julie Pomeroy are proposed for re-election at the forthcoming AGM. Julie has a service contract with a one year notice period. Mike Love has been a Non-Executive Director for over nine years and therefore will offer himself for re-election annually. Financial risk management Details of the Group’s ﬁ nancial risk management are set out in the Strategic Report section. Directors’ and ofﬁ cers’ insurance The Group maintains insurance cover for all Directors and ofﬁ cers of Group companies against liabilities which may be incurred by them while acting as Directors and ofﬁ cers. Future developments The Directors consider that the continued investment in product and market development will allow the business to grow organically in its core markets. The combination of organic growth along with strategic acquisitions will support the expected growth as outlined in the Chairman’s Statement and the Strategic Report. Research and development activities The Group continues its development programme of software for the recruitment market including the research and development of new products and enhancement to existing products. The Directors consider the investment in research and development to be fundamental to the success of the business in the future. Post balance sheet events In February 2019 the Group announced a major restructuring and closing of its London Ofﬁ ce. Overseas branch operations The Group has a branch operating in Germany. Details of all subsidiaries and their locations are detailed in note 15. Annual General Meeting The Company’s Annual General Meeting will be held at the ofﬁ ces of Voyager Software, 12 Cedarwood, Crockford Lane, Chineham Business Park, Basingstoke, RG24 8WD on 26 June 2019 at 10:30 am. The Notice convening the Annual General Meeting and an explanation of the business to be put to the meeting is contained in the separate document to Shareholders which accompanies this report. 254300 Dillistone AR pp10-pp23.indd 22 254300 Dillistone AR pp10-pp23.indd 22 22/05/2019 22:30 22/05/2019 22:30 GOVERNANCE 23 Auditor A resolution proposing the reappointment of BDO LLP as Auditor to the Group and Company will be put to the forthcoming Annual General Meeting. Directors’ responsibilities The Directors are responsible for preparing the Directors’ Report and the ﬁ nancial statements in accordance with applicable law and regulations. Company law requires the Directors to prepare ﬁ nancial statements for each ﬁ nancial year. The Directors are also required to prepare ﬁ nancial statements in accordance with the rules of the London Stock Exchange for companies trading on the Alternative Investment Market. The Directors have elected under company law to prepare the Group and Company’s ﬁ nancial statements in accordance with International Financial Reporting Standards as adopted by the European Union (IFRSs). Under company law the Directors must not approve the ﬁ nancial statements unless they are satisﬁ ed that they give a true and fair view of the state of affairs and proﬁ t or loss of the Group and Company for that period. In preparing the Group and Company ﬁ nancial 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; • • state whether they have been prepared in accordance with IFRSs adopted by the EU; and prepare the ﬁ nancial statements on the going concern basis unless it is inappropriate to presume that the Group and the Company will continue in business. The Directors are responsible for keeping adequate accounting records that are sufﬁ cient to show and explain the Company’s transactions and disclose with reasonable accuracy at any time the ﬁ nancial position of the Company and enable them to ensure that the ﬁ nancial 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. Website publication The Directors are responsible for ensuring the Annual Report and the ﬁ nancial statements are made available on a website. Financial statements are published on the Company’s website in accordance with legislation in the United Kingdom governing the preparation and dissemination of ﬁ nancial statements, which may vary from legislation in other jurisdictions. The maintenance and integrity of the Company’s website is the responsibility of the Directors. The Directors’ responsibility also extends to the ongoing integrity of the ﬁ nancial statements contained therein. The Directors conﬁ rm 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 as Directors to make themselves aware of any relevant audit information and to establish that the Auditor is aware of that information. On behalf of the Board J P Pomeroy Company Secretary 29 April 2019 254300 Dillistone AR pp10-pp23.indd 23 254300 Dillistone AR pp10-pp23.indd 23 22/05/2019 22:30 22/05/2019 22:30 24 DILLISTONE GROUP PLC Annual Report and Accounts 2018 INDEPENDENT AUDITOR’S REPORT to the members of Dillistone Group Plc For the year ended 31 December 2018 Opinion We have audited the ﬁ nancial statements of Dillistone Group Plc (the ‘parent company’) and its subsidiaries (the ‘group’) for the year ended 31 December 2018 which comprise the consolidated statement of comprehensive income, the consolidated and company statement of changes in equity, the consolidated and company statement of ﬁ nancial position, the consolidated and company cash ﬂ ow statement; and notes to the ﬁ nancial statements, including a summary of signiﬁ cant accounting policies. The ﬁ nancial reporting framework that has been applied in the preparation of the ﬁ nancial statements is applicable law and International Financial Reporting Standards (IFRSs) as adopted by the European Union and as regards the parent company ﬁ nancial statements, as applied in accordance with the provisions of the Companies Act 2006. In our opinion: • • • the ﬁ nancial statements give a true and fair view of the state of the group’s and of the parent company’s affairs as at 31 December 2018 and of the group’s loss for the year then ended; the group ﬁ nancial statements have been properly prepared in accordance with IFRSs as adopted by the European Union; the parent company ﬁ nancial statements have been properly prepared in accordance with IFRSs as adopted by the European Union and as applied in accordance with the provisions of the Companies Act 2006; and • the ﬁ nancial 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 ﬁ nancial statements section of our report. We are independent of the group in accordance with the ethical requirements that are relevant to our audit of the ﬁ nancial statements in the UK, including the FRC’s Ethical Standard as applied to listed entities, and we have fulﬁ lled our other ethical responsibilities in accordance with these requirements. We believe that the audit evidence we have obtained is sufﬁ cient 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 ﬁ nancial statements is not appropriate; or the directors have not disclosed in the ﬁ nancial statements any identiﬁ ed material uncertainties that may cast signiﬁ cant 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 ﬁ nancial statements are authorised for issue. Overview MATERIALITY AUDIT SCOPE Group materiality was £130,000 (2017: £143,000), which represents 1.50% (2017: 1.50%) of total revenue. Component materiality and other considerations are detailed in the materiality section below. We identiﬁ ed ﬁ ve centrally controlled components (either those operations required to have individual audit opinions issued under the Companies Act 2006, or those that contributed greater than 15% of group revenue), which, in our view, required an audit of their complete ﬁ nancial information. Further review procedures were performed on both centrally and foreign controlled operations in the US by the group audit team at the group’s head ofﬁ ce. BDO network component auditors were engaged to perform speciﬁ c audit procedures on the operations located in Australia. AREAS OF FOCUS We have identiﬁ ed and reported on three key audit matters, Capitalised Development Costs, Impairment of Intangible Assets and Revenue Recognition (as detailed below). 254300 Dillistone AR pp24-pp29.indd 24 254300 Dillistone AR pp24-pp29.indd 24 22/05/2019 22:30 22/05/2019 22:30 FINANCIAL STATEMENTS 25 Key audit matters Key audit matters are those matters that, in our professional judgement, were of most signiﬁ cance in our audit of the ﬁ nancial statements of the current period and include the most signiﬁ cant assessed risks of material misstatement (whether or not due to fraud) we identiﬁ ed, 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 ﬁ nancial statements as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters. Key audit matter Description of key audit matter Our response Capitalised development costs Recognition of internally developed intangible assets was considered to be a key audit matter, given the involvement of signiﬁ cant judgement, including: • Determining the distinction between research and development costs; and • Determining the value of salary costs relating to members not in the development team to be capitalised. Management have also utilised signiﬁ cant judgement in assessing the technological and commercial feasibility of the projects. As described in note 1.12, the group capitalises costs incurred on product development relating to the design and development of new or enhanced products. Details of the products concerned are given in the “Dillistone Group at a Glance” section of the annual report on pages 2 and 3. Recognition of revenue The group’s revenue recognition policy can be found in note 1.4 to the ﬁ nancial statements. We consider a signiﬁ cant risk of material misstatement to arise from the recognition of revenue around the year end. Further, the offering of bonus schemes and incentive plans increases the risk that sales may be overstated due to fraud. Therefore the key audit matter was the existence of revenue around the year end, including the recognition of the correct apportionment of revenue in the year and the related amount deferred at the year end. Our audit procedures involved: • Making enquiries of “Heads of Development” within the group to understand procedures performed to capitalise internally generated intangible assets. • Reviewing all project summary reports for all ongoing and completed projects during the year for which costs were capitalised. • Consideration of management’s assessment of technical feasibility. • Where appropriate, conﬁ rmation of the existence of an active market through consideration of sales activity. • For a sample of capitalised payroll costs, obtained and reviewed employment contracts and timecards. We tested that consistent revenue recognition procedures have been adopted during the year by reviewing a selection of contracts, tracing the satisfaction of performance obligations, cash receipts and revenue postings into the income statement. We performed testing over all material revenue streams, including: • Applying predictive analytical testing procedures for contract revenue earned during the year and investigated all movements that were not consistent with independent expectations set. All inputs used to set those expectations were tested substantively. • Verifying a sample of bespoke and non-recurring orders received in the year, reconciling to underlying agreements, cash receipt and appropriate trigger events for revenue recognition. • Selecting a sample of entries deferred at year end, tracing these back to the cash receipt and expected delivery of performance obligations. • Reviewing a sample of revenue items posted either side of year end to conﬁ rm revenue cut-off procedures have been correctly applied. 254300 Dillistone AR pp24-pp29.indd 25 254300 Dillistone AR pp24-pp29.indd 25 22/05/2019 22:30 22/05/2019 22:30 26 DILLISTONE GROUP PLC Annual Report and Accounts 2018 INDEPENDENT AUDITOR’S REPORT to the members of Dillistone Group Plc For the year ended 31 December 2018 Continued Key audit matter Description of key audit matter Our response Impairment of Intangible Assets The group’s policy regarding impairment of intangible assets can be found in note 1.10 to the ﬁ nancial statements. In the current year, the group lost a major customer contract, signiﬁ cantly reducing the income generated by the Voyager division. In addition, the group experienced lower sales and proﬁ ts than forecast across all divisions during 2018. Given the group carries a material balance of intangible assets, we determined that these indicators of impairment presented a signiﬁ cant risk of material misstatement. Therefore, the key audit matter was the valuation of the goodwill and other intangible asset balances held on the statement of ﬁ nancial position at year-end, and speciﬁ cally, the potential for these to be impaired. Our audit procedures involved: • • • We reviewed management’s impairment assessments for each CGU, including the discounted cash ﬂ ow analysis. As part of this, we challenged the key assumptions, including the growth rate and discount rates applied. This included consultation with valuation experts on the appropriate use of these assumptions, where required. Based on external evidence, we performed sensitivity testing on certain assumptions used in the impairment assessment. Compared the discounted cash ﬂ ow analysis to the historical performance and the actual post year-end results of each CGU. Our application of materiality We apply the concept of materiality in performing our audit and evaluating the effect of misstatements. We consider materiality to be the magnitude by which misstatements, including omissions, could inﬂ uence the economic decisions of reasonable users that are taken on the basis of the ﬁ nancial statements. In order to reduce to an appropriately low level the probability that any misstatements exceed materiality, we use a lower materiality, performance materiality, to determine the extent of testing needed. Importantly, misstatements below these levels will not necessarily be evaluated as immaterial as we also take account of the nature of identiﬁ ed misstatements, and the particular circumstances of their occurrence, when evaluating their effect on the ﬁ nancial statements as a whole. We agreed with the audit committee that we would report to the committee all individual audit differences identiﬁ ed during the course of our audit in excess of £6,500 (2017: £7,150). We also agreed to report differences below these thresholds that, in our view, warranted reporting on qualitative grounds. Overall group materiality Basis for determining Rationale for benchmark applied £130,000 (2017: £143,000) 1.50% of total group revenue (2017: 1.50%) The ability of the group to generate continued and new sources of revenue is imperative for management to conclude on the market feasibility of software projects and the ability to capitalise costs in accordance with IAS 38. Furthermore, as a signiﬁ cant driver of proﬁ t, revenue growth impacts the achievement of key performance indicators resulting in bonus schemes and incentive plans offered by the group. Parent company materiality £121,000 (2017: £108,000) 254300 Dillistone AR pp24-pp29.indd 26 254300 Dillistone AR pp24-pp29.indd 26 22/05/2019 22:30 22/05/2019 22:30 FINANCIAL STATEMENTS 27 Dillistone Group Plc (Consolidated Revenue) Dillistone Group Plc (Group Materiality) Highest Component Materiality Audit Committee Reporting Threshold Component materiality Component materiality is established when performing audits on complete ﬁ nancial information of subsidiaries within the group where the subsidiary is considered signiﬁ cant to the group. We determined component materiality as follows: Range of component materiality 8% to 92% (2017: 3% to 93%) of group materiality Performance materiality was set at 75% (2017: 75%) of the above materiality ﬁ gures. An overview of the scope of our audit Our group audit was scoped by obtaining an understanding of the group and its environment, including the group’s system of internal control, and assessing the risks of material misstatement in the ﬁ nancial statements at the group level. In determining the scope of our audit we considered the level of work to be performed at each component in order to ensure sufﬁ cient assurance was gained to allow us to express an opinion on the ﬁ nancial statements of the Group as a whole. We tailored the extent of the work to be performed at each component, either by us, as the group audit team or component auditors within the BDO International network, based on our assessment of the risk of material misstatement at each component. We identiﬁ ed ﬁ ve centrally controlled components as signiﬁ cant, and have audited these for group reporting purposes. The group audit team centrally performed the audit of 83% (2017: 82%) of group revenue and 95% (2017: 95%) of total assets using the materiality levels set out above. For two of the components not considered signiﬁ cant, the component auditors performed speciﬁ c scope procedures based on their relative size, risks in the business and our knowledge of those entities appropriate to respond to the risk of material misstatement. Review and speciﬁ c scope procedures were performed by the group audit team on the remaining three reporting components not considered signiﬁ cant to the group. Total Revenue Total Assets UK, 83% US, 13% AUS, 4% UK, 95% US, 4% AUS, 1% 254300 Dillistone AR pp24-pp29.indd 27 254300 Dillistone AR pp24-pp29.indd 27 22/05/2019 22:30 22/05/2019 22:30 28 DILLISTONE GROUP PLC Annual Report and Accounts 2018 INDEPENDENT AUDITOR’S REPORT to the members of Dillistone Group Plc For the year ended 31 December 2018 Continued Other information The directors are responsible for the other information. The other information comprises the information included in the annual report, other than the ﬁ nancial statements and our auditor’s report thereon. Our opinion on the ﬁ nancial 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 ﬁ nancial statements, our responsibility is to read the other information and, in doing so, consider whether the other information is materially inconsistent with the ﬁ nancial 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 ﬁ nancial 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 ﬁ nancial year for which the ﬁ nancial statements are prepared is consistent with the ﬁ nancial statements; and • the strategic report and the directors’ report have been prepared in accordance with applicable legal requirements. Matters on which we are required to report by exception In the light of the knowledge and understanding of the group and the parent company and its environment obtained in the course of the audit, we have not identiﬁ ed 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 ﬁ nancial statements are not in agreement with the accounting records and returns; or • certain disclosures of directors’ remuneration speciﬁ ed 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 23, the directors are responsible for the preparation of the ﬁ nancial statements and for being satisﬁ ed that they give a true and fair view, and for such internal control as the directors determine is necessary to enable the preparation of ﬁ nancial statements that are free from material misstatement, whether due to fraud or error. In preparing the ﬁ nancial 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 ﬁ nancial statements Our objectives are to obtain reasonable assurance about whether the ﬁ nancial 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 inﬂ uence the economic decisions of users taken on the basis of these ﬁ nancial statements. A further description of our responsibilities for the audit of the ﬁ nancial statements is located on the Financial Reporting Council’s website at: www.frc.org.uk/auditorsresponsibilities. This description forms part of our auditor’s report. 254300 Dillistone AR pp24-pp29.indd 28 254300 Dillistone AR pp24-pp29.indd 28 22/05/2019 22:30 22/05/2019 22:30 FINANCIAL STATEMENTS 29 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. Signature David Butcher (Senior Statutory Auditor) For and on behalf of BDO LLP, Statutory Auditor London 29 April 2019 BDO LLP is a limited liability partnership registered in England and Wales (with registered number OC305127). 254300 Dillistone AR pp24-pp29.indd 29 254300 Dillistone AR pp24-pp29.indd 29 22/05/2019 22:30 22/05/2019 22:30 30 DILLISTONE GROUP PLC Annual Report and Accounts 2018 CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME For the year ended 31 December 2018 Revenue Cost of sales Gross proﬁ t Administrative expenses Operating loss Adjusted operating proﬁ t before acquisition related and one–off items Acquisition related and one-off items Operating (loss)/proﬁ t Financial income Financial cost Loss before tax Tax income (Loss)/proﬁ t for the year Other comprehensive income/(loss) Items that will be reclassiﬁ ed subsequently to proﬁ t and loss: Currency translation differences Total comprehensive (loss)/income for the year Earnings per share Basic Diluted Note 3 6 2 5 8 8 9 2018 £’000 8,692 (1,054) 7,638 (8,052) (414) 55 (469) (414) 1 (38) (451) 191 (260) (30) (290) 10 10 (1.32)p (1.32)p 2017 restated £’000 9,732 (1,247) 8,485 (8,849) (364) 459 (823) (364) 1 (12) (375) 432 57 (24) 33 0.29p 0.29p See note 26 for details of restatement of 2017 numbers as a result of a change in accounting policy. Cost of sales have been reduced by £0.289m in 2017 and administrative costs increased by the same amount due to the reclassiﬁ cation of contractors and internal development costs. The notes on pages 36 to 73 are an integral part of these consolidated and company ﬁ nancial statements. 254300 Dillistone AR pp30-pp35.indd 30 254300 Dillistone AR pp30-pp35.indd 30 22/05/2019 22:30 22/05/2019 22:30 CONSOLIDATED STATEMENT OF CHANGES IN EQUITY For the year ended 31 December 2018 Share Share capital premium £’000 £’000 Merger Retained reserve earnings £’000 £’000 Convertible loan reserve £’000 FINANCIAL STATEMENTS 31 Share Foreign option exchange £’000 £’000 Total £’000 Balance at 1 January 2017 (as previously stated) 983 1,631 365 3,725 85 117 6,906 Prior year adjustment IFRS 15 (1,190) (1,190) Balance at 1 January 2017 (restated) 983 1,631 365 2,535 - 85 117 5,716 Comprehensive income Proﬁ t for the year (as restated) Other comprehensive income Exchange differences on translation of overseas operations Total comprehensive income (as restated) Transactions with owners Share option charge Issue of convertible loan note Dividends paid Total transactions with owners - - - - - - - - - - - - - - - 57 - - - - - - - 57 4 - (551) (547) Balance at 31 December 2017 (as restated) 983 1,631 365 2,045 - - - - 14 - 14 14 Comprehensive income (Loss) for the year ended 31 December 2018 Other comprehensive income/(loss) Exchange differences on translation of overseas operations Total comprehensive income Transactions with owners Share option charges Dividends paid Total transactions with owners Balance at 31 December 2018 - - - - - - - - - - - - - (260) - - - - - - - (260) - (98) (98) - - - - - - - - 16 - - 16 101 - - - 5 - 5 - 57 (24) (24) (24) 33 - - - - 20 14 (551) (517) 93 5,232 - (260) (30) (30) (30) (290) - - - 5 (98) (93) 983 1,631 365 1,687 14 106 63 4,849 The notes on pages 36 to 73 are an integral part of these consolidated and company ﬁ nancial statements. 254300 Dillistone AR pp30-pp35.indd 31 254300 Dillistone AR pp30-pp35.indd 31 22/05/2019 22:30 22/05/2019 22:30 32 DILLISTONE GROUP PLC Annual Report and Accounts 2018 COMPANY STATEMENT OF CHANGES IN EQUITY For the year ended 31 December 2018 Balance at 1 January 2017 Comprehensive income Total comprehensive income for the year ended 31 December 2017 Transactions with owners Share option charge Issue of convertible loan Dividends paid Total transactions with owners Balance at 31 December 2017 Comprehensive income Total comprehensive income for the year ended 31 December 2018 Transactions with owners Share option charge Dividends paid Total transactions with owners Balance at 31 December 2018 Convertible Share Share capital premium £’000 £’000 Merger reserve £’000 loan Retained reserve earnings £’000 £’000 Share option £’000 Total £’000 983 1,631 365 - 1,825 85 4,889 - - - - - - - - - - - - - - - 983 1,631 365 - 1,311 - 1,311 - 14 - 14 14 4 - (551) (547) 16 - - 16 20 14 (551) (517) 2,589 101 5,683 - - - - - - - - - - - - - 1,338 - 1,338 - - - - (98) (98) 5 - 5 5 (98) (93) 983 1,631 365 14 3,829 106 6,928 The notes on pages 36 to 73 are an integral part of these consolidated and company ﬁ nancial statements. 254300 Dillistone AR pp30-pp35.indd 32 254300 Dillistone AR pp30-pp35.indd 32 22/05/2019 22:30 22/05/2019 22:30 FINANCIAL STATEMENTS 33 CONSOLIDATED AND COMPANY STATEMENTS OF FINANCIAL POSITION As at 31 December 2018 Group Company ASSETS Non-current assets Goodwill Other intangible assets Property, plant and equipment Investments Total non-current assets Current assets Inventories Trade and other receivables Cash and cash equivalents Total current assets Total assets EQUITY AND LIABILITIES Equity attributable to owners of the parent Share capital Share premium Merger reserve Convertible loan reserve Retained earnings Share option reserve Translation reserve Total equity Liabilities Non-current liabilities Trade and other payables Borrowings Deferred tax liability Current liabilities Trade and other payables Borrowings Current tax payable Total liabilities Total liabilities and equity Note 12 13 14 15 16 17 19 21 23 18 20 9 18 20 2018 £’000 3,415 4,754 113 - 8,282 3 1,522 725 2,250 2017 restated £’000 3,415 4,881 164 - 8,460 3 1,677 1,390 3,070 10,532 11,530 983 1,631 365 14 1,687 106 63 4,849 690 390 489 4,370 14 (270) 5,683 10,532 983 1,631 365 14 2,045 101 93 5,232 794 386 508 4,775 5 (170) 6,298 11,530 2018 £’000 - - - 7,151 7,151 - 1,289 - 1,289 8,440 983 1,631 365 14 3,829 106 - 6,928 2 390 - 1,091 29 - 1,512 8,440 2017 £’000 - - - 7,602 7,602 - 934 99 1,033 8,635 983 1,631 365 14 2,589 101 - 5,683 12 386 - 2,549 5 - 2,952 8,635 The proﬁ t for the ﬁ nancial year for the parent Company was £1,338,000 (2017: £1,311,000). The notes on pages 36 to 73 are an integral part of these consolidated and company ﬁ nancial statements. The ﬁ nancial statements were approved by the Board of Directors and authorised for issue on 29 April 2019. They were signed on its behalf by J P Pomeroy – Director Company Registration No. 4578125 254300 Dillistone AR pp30-pp35.indd 33 254300 Dillistone AR pp30-pp35.indd 33 22/05/2019 22:30 22/05/2019 22:30 34 DILLISTONE GROUP PLC Annual Report and Accounts 2018 CONSOLIDATED CASH FLOW STATEMENT As at 31 December 2018 Operating activities (Loss) before tax Adjustment for: Financial income Financial cost Depreciation and amortisation Share option expense Foreign exchange adjustments arising from operations Operating cash ﬂ ows before movement in working capital: (Increase) in receivables Decrease in inventories (Decrease) in payables Taxation refunded/(paid) 2018 £’000 (451) (1) 38 1,714 5 70 1,375 171 - (471) 65 2018 £’000 2017 restated £’000 2017 restated £’000 (375) (1) 12 1,938 20 (12) 1,582 573 2 (273) (12) Net cash generated from operating activities 1,140 1,872 Investing activities Interest received Purchases of property, plant and equipment Investment in development costs Contingent and deferred consideration paid Net cash used in investing activities Financing activities Financial cost Net proceeds from convertible loan note Bank loan repayments made Dividends paid Net cash used in ﬁ nancing activities Net decrease in cash and cash equivalents Cash and cash equivalents at beginning of year Effect of foreign exchange rate changes Cash and cash equivalents at end of year 1 (55) (1,481) (146) (33) - - (98) 1 (55) (1,439) (219) (1,681) (1,712) (7) 400 (158) (551) (131) (672) 1,390 7 725 (316) (156) 1,537 9 1,390 The notes on pages 36 to 73 are an integral part of these consolidated and company ﬁ nancial statements. 254300 Dillistone AR pp30-pp35.indd 34 254300 Dillistone AR pp30-pp35.indd 34 22/05/2019 22:30 22/05/2019 22:30 FINANCIAL STATEMENTS 35 COMPANY CASH FLOW STATEMENT For the year ended 31 December 2018 Operating activities Proﬁ t before tax Adjustment for: Financial cost Impairment Share option expense Operating cash ﬂ ows before movements in working capital Increase in receivables (Decrease) in payables Net cash generated from operating activities Investing activities Acquisition of subsidiaries Contingent consideration paid Net cash used in investing activities Financing activities Net proceeds from convertible loan note Financial cost Bank loan repayments made Dividends paid Net cash used in ﬁ nancing activities Net increase/(decrease) in cash and cash equivalents Cash and cash equivalents at beginning of year Cash and cash equivalents at end of year 2018 £’000 1,338 37 451 5 1,831 (355) (1,313) - (146) - (33) - (98) 2017 £’000 1,311 12 20 1,343 (583) (168) (1) (219) 400 (7) (158) (551) 2018 £’000 163 (146) (131) (114) 99 (15) 2017 £’000 592 (220) (316) 56 43 99 The notes on pages 36 to 73 are an integral part of these consolidated and company ﬁ nancial statements. 254300 Dillistone AR pp30-pp35.indd 35 254300 Dillistone AR pp30-pp35.indd 35 22/05/2019 22:30 22/05/2019 22:30 36 DILLISTONE GROUP PLC Annual Report and Accounts 2018 NOTES TO THE FINANCIAL STATEMENTS For the year ended 31 December 2018 Dillistone Group Plc (the ‘Company’) is a company incorporated in England and Wales. The ﬁ nancial statements are presented in thousand Pounds Sterling. The principal activities have been detailed in the Strategic Report and the registered ofﬁ ce is 50 Leman St, London, E1 8HQ. The Group ﬁ nancial statements consolidate those of the Company and its subsidiaries (together referred to as the ‘Group’). The parent company ﬁ nancial statements present information about the Company as a separate entity and not about its Group. Both the Group ﬁ nancial statements and the Company ﬁ nancial statements have been prepared and approved by the Directors in accordance with International Financial Reporting Standards (’IFRS’) as adopted by the European Union (’EU’), IFRIC Interpretations and the Companies Act 2006 applicable to companies reporting under IFRS. In publishing the Company ﬁ nancial statements here together with the Group ﬁ nancial statements, the Company has taken advantage of the exemption in s408 of the Companies Act 2006 not to present its individual income statement and related notes in these ﬁ nancial statements. 1. Accounting policies 1.1 Basis of accounting The consolidated and company ﬁ nancial statements have been prepared using the signiﬁ cant accounting policies and measurement bases summarised below: Signiﬁ cant estimates In the application of the Group’s accounting policies the Directors are required to make estimates and assumptions about the carrying amounts of assets and liabilities that are not readily apparent from other sources. The estimates and associated assumptions are based on historical experience and other factors that are considered to be relevant. Actual results may differ from these estimates. The estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the period in which the estimate is revised if the revision affects only that period, or in the period of the revision and future periods if the revision affects both current and future periods. The key areas are summarised below: Expected life of support contracts As detailed in note 1.4, the Group recognises revenue arising on perpetual licences with mandatory support contracts over time. The Group must determine the relevant period to be the life of the support contract, which is unknown at inception. Having reviewed support contract turnover, Management estimates the typical life of relevant contracts to be ﬁ ve years. Changes to this estimate would impact the timing of revenue recognition on such contracts. Amortisation of internal development expenditure Amortisation rates are based on estimates of the useful economic lives and residual values of the assets involved. The assessment of these useful economic lives is made by projecting the economic life cycle of the asset which is subject to alteration as a result of product development and innovation. Amortisation rates are changed where economic lives are re-assessed and technically obsolete items written off where necessary. The carrying value of capitalised development is reviewed for impairment indicators at each accounting period end. See note 13. In addition, management estimate the amount of Directors’ costs that are capitalised given the degree of the Director’s involvement in relevant projects. Impairment of goodwill, other intangible assets and investments There are a number of assumptions management has considered in performing impairment reviews of goodwill, other intangible assets and investments which include an estimate of the future cash ﬂ ows expected to arise from the cash generating unit and a suitable discount rate in order to calculate the recoverable amount. See notes 12, 13 and 15. Valuation of assets and liabilities Management has made a number of assumptions with regards to the models used to value assets and liabilities at the statement of ﬁ nancial position date. Valuation techniques commonly used by market practitioners are applied. In particular, in applying the provision matrix model to trade receivables (see note 1.14) Management has estimated the impact of forward-looking economic data on the future collectability of its trade receivables. In particular, given its geographical areas of operation include the UK and Europe, Management has considered the potential impact of the UK’s exit from the European Union. Although it is thought likely to increase default levels, the ongoing uncertainty of the outcome to this process and the uncertainty of its effect on the Group’s clients has meant that precision is very difﬁ cult to achieve. Thus the Group evaluated a range of outcomes in determining probable future loss rates and chose what it considered to be the most likely scenario. See note 17. 254300 Dillistone AR pp36-END.indd 36 254300 Dillistone AR pp36-END.indd 36 22/05/2019 22:30 22/05/2019 22:30 FINANCIAL STATEMENTS 37 Valuation of share-based payments The estimation of share-based payment costs requires the selection of an appropriate valuation model and consideration as to the inputs necessary for the valuation model chosen. The Group has made estimates as to the volatility of its own shares, the probable life of options granted and leaver of those options. The model used by the Group is a Black-Scholes valuation model. Further details are shown in note 23. Judgements in applying the Group’s accounting policies In the process of applying the Group’s accounting policies, Management makes various judgements that can signiﬁ cantly affect the amounts recognised in the ﬁ nancial statements. The critical judgements are considered to be the following: Capitalisation of internal development expenditure Management exercises judgement in establishing both the technical feasibility of completing an intangible asset which can be used internally or sold and the degree of certainty that a market exists for the asset, or its output, for the generation of future economic beneﬁ ts. Valuation of separately identiﬁ able intangible assets As detailed in note 1.8, separately identiﬁ able intangible assets are identiﬁ ed and amortised over a deﬁ ned period. The Directors use acknowledged approaches eg: relief from royalty method, capital asset pricing model, excess earnings valuation method but these are reliant upon certain judgements and assumptions which they determine are reasonable by reference to companies in similar industries. Customers’ practical acceptance of licence software As detailed in note 1.4, various elements of the Group’s revenue recognition policy require determination of point at which control of the good or service being provided passes to the customer. The Group uses the ‘live’ date as the basis of determining the timing of customer practical acceptance of the software and the passing of control. In particular for sales of perpetual licences without mandatory support, this constitutes the point in time at which performance obligations relating to the licence are fulﬁ lled and revenue can be recognised. Likewise, for SaaS contracts, this date is the commencement for the period of time over which licence revenue can be recognised. Alternative judgements of when control passes to the customer could impact the timing of revenue recognition. Capitalisation of internal development expenditure Management exercises judgement in establishing both the technical feasibility of completing an intangible asset which can be used internally or sold and the degree of certainty that a market exists for the asset, or its output, for the generation of future economic beneﬁ ts. See ‘Capitalisation and amortisation of internal development expenditure’ in Signiﬁ cant estimates above for further details. The accounting policies set out below have, unless otherwise stated, been applied consistently by the Group to all periods presented in these ﬁ nancial statements. 1.2 Going concern The Group’s business activities and ﬁ nancial position, together with the factors likely to affect its future development, performance and position, are set out in the CEO’s Review and Financial Review on pages 5 to 10. In addition, note 25 to the ﬁ nancial statements includes the Company’s objectives, policies and processes for managing its capital; its ﬁ nancial risk management objectives; details of its ﬁ nancial instruments; and its exposures to credit risk and liquidity risk. The Group prepare budgets and cashﬂ ow forecasts to ensure that the Group can meet its liabilities as they fall due. The Group has considerable ﬁ nancial resources together with well established relationships with a number of customers and suppliers across different geographic areas. In addition a substantial proportion of its revenue is recurring. As a consequence, the Directors believe that the Company is well placed to manage its business risks successfully despite the current uncertain economic outlook. The Directors have a reasonable expectation that the Company has adequate resources to continue in operational existence for at least 12 months from the date of approval of these ﬁ nancial statements. Thus they continue to adopt the going concern basis of accounting in preparing the annual ﬁ nancial statements. 254300 Dillistone AR pp36-END.indd 37 254300 Dillistone AR pp36-END.indd 37 22/05/2019 22:30 22/05/2019 22:30 38 DILLISTONE GROUP PLC Annual Report and Accounts 2018 NOTES TO THE FINANCIAL STATEMENTS For the year ended 31 December 2018 Continued 1.3 Basis of consolidation The Group ﬁ nancial statements consolidate those of the parent company and all of its subsidiaries as of 31 December 2018. The parent controls a subsidiary if it is exposed, or has rights, to variable returns from its involvement with the subsidiary and has the ability to affect those returns through its power over the subsidiary. All subsidiaries have a reporting date of 31 December. All transactions and balances between Group companies are eliminated on consolidation, including unrealised gains and losses on transactions between Group companies. Amounts reported in the ﬁ nancial statements of subsidiaries have been adjusted where necessary to ensure consistency with the accounting policies adopted by the Group. Proﬁ t or loss and other comprehensive income of subsidiaries acquired or disposed of during the year are recognised from the effective date of acquisition, or up to the effective date of disposal, as applicable. 1.4 Revenue The Group’s revenue recognition policy is based on the principle of transfer of promised goods and services (‘performance obligations’) to the customer. Revenue is recognised on the satisfaction of these contractual performance obligations using a ﬁ ve-step approach, consisting of: (cid:129) (cid:129) (cid:129) (cid:129) (cid:129) identiﬁ cation of the contract with the customer; identiﬁ cation of all performance obligations in that contract; determination of the transaction price; allocation of the transaction price to the performance obligations; and recognition of revenue as the performance obligations are fulﬁ lled. Contracts are broken down into distinct goods and services in order to identify the separate performance obligations within. Goods and services are considered distinct if they are capable of being used independently by the customer, and if they are separately identiﬁ able in the context of the contract. Depending on the work being performed, customers are typically invoiced work in two stages: a deposit invoice at contract inception before work commences, then a ﬁ nal invoice on completion. For ongoing contracts such as support and SaaS contracts, invoices are issued in advance for the relevant subscription period. All such invoices are typically due for payment within 30 days. Transaction prices are the amounts of consideration the Group expects to be entitled to in exchange for the transfer of promised goods and services to the customer, exclusive of VAT or any applicable sales taxes. If the timing of payments provides either the Group or customer with a beneﬁ t of ﬁ nancing the transfer of goods or services, a signiﬁ cant ﬁ nancing component exists. Although standard payment terms for all customers is 30 days, there is some variability in the timing of payment and delivery (for instance, some customers pay by instalments). However, timing differences between delivery and settlement are one year or less. As such, the Group applies the practical expedient in IFRS 15 not to adjust for signiﬁ cant ﬁ nancing components. Transaction prices are allocated to contractual performance obligations based on stand-alone selling prices. Where the Group occasionally offers discounts to customers, these are allocated to performance obligations within the contract on the basis of relative stand-alone selling prices. Revenue is recognised when control of the good or service has been passed to the customer by satisfying the performance obligation, either over time or at a point in time, as follows: (cid:129) (cid:129) Over time: this typically occurs when the customer simultaneously receives and consumes the beneﬁ ts of a service performed by the Group. At a point in time: The moment of transfer of control is typically indicated by: o o o o o the Group having right to payment; the customer having legal title to the asset; the Group transferring physical possession of the asset to the customer, where relevant; the customer having signiﬁ cant risks and rewards of ownership of the asset; and the customer having accepted the asset. The incremental costs incurred in obtaining contracts with customers (e.g. sales commissions) are recognised as an expense as incurred using the practical expedient under IFRS 15 since, if such costs were recorded as an asset, the amortisation period of that asset would be less than one year. The Group has considered the most signiﬁ cant ways it generates revenue from the goods and services it sells. The following sets out how the general principles above apply to each of these signiﬁ cant areas and how revenue on each is recognised. 254300 Dillistone AR pp36-END.indd 38 254300 Dillistone AR pp36-END.indd 38 22/05/2019 22:30 22/05/2019 22:30 FINANCIAL STATEMENTS 39 Sales of perpetual licences without a mandatory support contract The Group licences software under licence agreements. The customer typically pays a one-off amount to purchase a licence conferring a perpetual right to use a version of the software. Revenue is recognised at a point in time, when control of the licence passes to the customer through practical acceptance. The Group considers the ‘live’ date to indicate practical acceptance of the software (refer note 1.1) and thus the date for transfer of control. If payments have been received in advance for licences, where practical acceptance has not yet been reached, these amounts are not recognised as revenue but as deferred income in the statement of ﬁ nancial position. Sales of perpetual licences with a mandatory support contract Some of the Group’s perpetual licences are sold with mandatory support contracts. In these instances, if the customer decides to cancel their support contract their ability to use the perpetual licence ceases. In these cases, the Group considers the provision of the perpetual licence and the support contract to constitute one performance obligation. As such, the Group recognises the revenue relating to the perpetual licence over time, being the life of the support contract. As this is not known at inception, the group estimates the expected life of support contracts to be ﬁ ve years. Subscription services, such as support, hosting and SaaS (‘Software as a Service’) Each subscription service constitutes a separate contractual arrangement, and separate performance obligation. In each case the customer pays a regular ﬁ xed amount for the right to access relevant services, commencing on practical acceptance of the software (as previously deﬁ ned). As these services are consumed as they are provided revenue is recognised over time, matching the period of the contract. If subscription services are invoiced in advance, these amounts are deferred and recognised as revenue over the relevant period. Installations The customer pays a fee for the software to be installed. To the extent to which this work is not complex and could be performed by a third party, revenue is recognised at a point in time, on completion. Complex work constitutes one performance obligation with the software licence, with installation revenue recognised in accordance with how revenue is recognised on the licence. Training The customer pays a fee for training. To the extent to which training is not essential for use of the software, revenue is recognised at a point in time, on delivery. Training that is considered essential constitutes one performance obligation with the software licence, and training revenue is recognised in accordance with how revenue is recognised on the licence. Third party revenues The Group sells, predominantly as principal, software developed by other organisations together with services that are bought in from third parties. The Group applies the principles of its revenue recognition policy to sales of third-party software in the same way it does sales of its own licenced products. As such, where perpetual licences that are capable of independent use represent one performance obligation, revenue on these is recognised at a point in time on practical acceptance of the software. If use of the software relies on using other services that are consumed over time, revenue from perpetual licence sales are recognised over time in line with recognition of those other services. Services are recognised over time in the period in which they are provided. Tokens The Group sells single-use tokens to access certain services within the business. Tokens are normally bought in bundles and can be used once within a certain period of time. Tokens have a ﬁ xed expiry period after which the customer has no legally enforceable right to claim on the tokens. The performance obligation conveyed by each token is satisﬁ ed when the token is used. As such, revenue is recognised at a point in time, being on use of the token or on expiry of unused tokens. 1.5 Share based payments The Company operates a share based payment scheme. It is an equity settled share-based compensation plan (share options) for remuneration of its employees. All employee services received in exchange for the grant of any share-based compensation are measured at their fair values. These are determined by reference to the share option awarded. Their value is appraised at the grant date and excludes the impact of any non-market vesting conditions (e.g. proﬁ tability or sales growth targets). All equity-settled share-based compensation is ultimately recognised as an expense in the proﬁ t or loss with a corresponding credit to share based payment reserve, net of deferred tax where applicable. If vesting periods or other vesting conditions apply, the expense is allocated over the vesting period, based on the best available estimate of the number of share options expected to vest. Non market vesting conditions are included in assumptions about the number of options that are expected to become exercisable. Estimates are subsequently revised if there is any indication that the number of share options expected to vest differs from previous estimates. No adjustment to expenses recognised in prior periods is made if fewer share options ultimately are exercised than originally estimated. Upon exercise of share options, the proceeds received, net of any directly attributable transaction costs, up to the nominal value of the shares issued are reallocated to share capital with any excess being recorded as additional share premium. 254300 Dillistone AR pp36-END.indd 39 254300 Dillistone AR pp36-END.indd 39 22/05/2019 22:30 22/05/2019 22:30 40 DILLISTONE GROUP PLC Annual Report and Accounts 2018 NOTES TO THE FINANCIAL STATEMENTS For the year ended 31 December 2018 Continued 1.6 Long term incentive plan (“LTIP”) – capped cash bonus The LTIP awards can be share based or cash based. The cash awards are based on a capped cash bonus with performance conditions related to the growth in earnings per share of the Group or other targets set by the Remuneration Committee. These awards automatically mature following the publication of the Annual Report of the Company, three years after the period to which the grant relates. The liability is accrued and recognised in the statement of comprehensive income. 1.7 Long term incentive plan (“LTIP”) – share option based award The LTIP awards can be share based or cash based. The number of share option granted under these awards are usually based on a percentage of salary with performance conditions related to the growth in earnings per share of the Group or other targets set by the Remuneration Committee. These awards can be exercised between three and ten years after the date of the grant. This element is expensed and recognised in the statement of comprehensive income over the vesting period. 1.8 Business combinations The Group applies the acquisition method in accounting for business combinations. The consideration transferred by the Group to obtain control of a subsidiary is calculated as the sum of the acquisition-date fair values of assets transferred, liabilities incurred and the equity interests issued by the Group, which includes the fair value of any asset or liability arising from a contingent consideration arrangement. Acquisition costs are expensed as incurred. The Group recognises identiﬁ able assets acquired and liabilities assumed in a business combination regardless of whether they have been previously recognised in the acquiree’s ﬁ nancial statements prior to the acquisition. Assets acquired and liabilities assumed are generally measured at their acquisition-date fair values. Goodwill is stated after separate recognition of identiﬁ able intangible assets. It is calculated as the excess of the sum of: a) fair value of consideration transferred; b) the recognised amount of any non-controlling interest in the acquiree; and c) acquisition-date fair value of any existing equity interest in the acquiree, over the acquisition-date fair values of identiﬁ able net assets. If the fair values of identiﬁ able net assets exceed the sum calculated above, the excess amount (ie gain on a bargain purchase) is recognised in proﬁ t or loss immediately. Where contingent consideration relates to the results spread over different accounting periods, the fair value of such consideration is recalculated at each year end and any adjustment is recognised in proﬁ t or loss immediately. 1.9 Adjusted operating proﬁ t Adjusted operating proﬁ t excludes acquisition costs and related intangible asset amortisation and movements in contingent consideration and other one-off costs which can include, as an example, the additional amortisation charge required in re-estimating the useful economic life of an intangible asset. 1.10 Impairment testing of goodwill, other intangible assets and property, plant and equipment For impairment assessment purposes, assets are grouped at the lowest levels for which there are largely independent cash inﬂ ows (cash generating units). As a result, some assets are tested individually for impairment and some are tested at cash generating unit level. Goodwill is allocated to those cash generating units that are expected to beneﬁ t from synergies of the related business combination and represent the lowest level within the Group at which management monitors goodwill. Cash generating units to which goodwill has been allocated are tested for impairment at least annually. All other individual assets or cash generating units are tested for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. An impairment loss is recognised for the amount by which the asset’s or cash generating unit’s carrying amount exceeds its recoverable amount, which is the higher of fair value less costs to sell and value-in-use. To determine the value-in-use, management estimates expected future cash ﬂ ows from each cash generating unit and determines a suitable interest rate in order to calculate the present value of those cash ﬂ ows. The data used for impairment testing procedures are directly linked to the Group’s latest approved budget, adjusted as necessary to exclude the effects of future reorganisations and asset enhancements. Discount factors are determined individually for each cash generating unit and reﬂ ect management’s assessment of respective risk proﬁ les, such as market and asset-speciﬁ c risks factors. Impairment losses for cash generating units reduce ﬁ rst the carrying amount of any goodwill allocated to that cash generating unit. Any remaining impairment loss is charged pro rata to the other assets in the cash generating unit. With the exception of goodwill, all assets are subsequently reassessed for indications that an impairment loss previously recognised may no longer exist. An impairment charge is reversed if the cash generating unit’s recoverable amount exceeds its carrying amount. 254300 Dillistone AR pp36-END.indd 40 254300 Dillistone AR pp36-END.indd 40 22/05/2019 22:30 22/05/2019 22:30 FINANCIAL STATEMENTS 41 1.11 Segment reporting Operating segments are reported in a manner consistent with the internal reporting provided to the chief operating decision-maker. The chief operating decision-maker, who is responsible for allocating resources and assessing performance of the operating segments, has been identiﬁ ed as the Board of Directors. 1.12 Intangible assets Internal development costs Costs incurred on product development relating to the design and development of new or enhanced products are capitalised as intangible assets when it is reasonably certain that the development will provide economic beneﬁ ts, considering its commercial and technological feasibility and the resources available for the completion and marketing of the development, and where the costs can be measured reliably. The expenditures capitalised are the direct labour costs and subcontractor costs, which are managed and controlled centrally. Product development costs previously recognised as an expense are not recognised as an asset in a subsequent period. Capitalised product development expenditure is amortised over its useful life of ﬁ ve years. As development expenditure is incurred on multiple projects simultaneously, with roll-outs occurring on a continuous basis, amortisation commences in the month of costs being incurred. Maintenance costs are expensed. Amortisation of new products commences once a product is available for use. Capitalised product development expenditure is subject to regular impairment reviews and is stated at cost less any accumulated impairment losses. Any impairment taken during the year is shown under administrative expenses on the statement of comprehensive income. Development costs that do not meet the requirements for capitalisation are written off to proﬁ t and loss as incurred. In accordance with IAS 38, no research costs are capitalised to the balance sheet, but are expensed as incurred. Purchased Software Software acquired externally is capitalised when it is expected to have ongoing use within the business. Capitalised expenditure includes both the purchase price and any costs directly associated with bringing the software into use. Amortisation is charged over the useful economic life of the software, typically 3 to 5 years, beginning when it is capable of being used by the business. Acquired as part of a business combination In accordance with IFRS 3 Business Combinations, an intangible asset acquired in a business combination is deemed to have a cost to the Group of its fair value at the acquisition date. The fair value of the intangible asset reﬂ ects market expectations about the probability that the future economic beneﬁ ts embodied in the asset will ﬂ ow to the Group. Where an intangible asset might be separable, but only together with a related tangible or intangible asset, the Group of assets is recognised as a single asset separately from goodwill where the individual fair values of the assets in the Group are not reliably measurable. Where the individual fair values of the complementary assets are reliably measurable, the Group recognises them as a single asset provided the individual assets have similar useful lives. Subsequent to initial recognition, intangible assets are reported at cost less accumulated amortisation and accumulated impairment losses. Amortisation is provided to write off the cost of each intangible asset over its useful economic life as follows: Intangible assets: Brand and IP Acquired developed technology Contractual customer relationships Non-contractual customer relationships Estimated life 15 years 6 – 11.25 years 1.25 years 6 – 10.25 years The useful economic life of intangible assets are reviewed annually. The Group has reviewed its useful economic life in respect of non contractual relationships following the loss of a major contract in one part of the business. 1.13 Property, plant and equipment Property, plant and equipment are stated at cost less accumulated depreciation. Depreciation on these assets is provided at rates estimated to write off the cost, less estimated residual value, of each asset over its expected useful life as follows: Leasehold land and buildings Ofﬁ ce and computer equipment Fixtures, ﬁ ttings and equipment the lower of 5 years or the remaining lease period 3-5 years straight line 4-5 years straight line 254300 Dillistone AR pp36-END.indd 41 254300 Dillistone AR pp36-END.indd 41 22/05/2019 22:30 22/05/2019 22:30 42 DILLISTONE GROUP PLC Annual Report and Accounts 2018 NOTES TO THE FINANCIAL STATEMENTS For the year ended 31 December 2018 Continued 1.14 Financial assets The Group classiﬁ es its ﬁ nancial assets under the deﬁ nitions provided in International Financial Reporting Standard 9 (IFRS 9), depending on the purpose for which the ﬁ nancial assets were acquired. Management determines the classiﬁ cation of its ﬁ nancial assets at initial recognition. Management considers that the Group’s ﬁ nancial assets fall under the amortised cost category. These are non-derivative ﬁ nancial assets with ﬁ xed or determined payments that are not quoted in an active market. They are included in current assets, except for maturities greater than 12 months after the statement of ﬁ nancial position date, which are classiﬁ ed as non-current assets. The Group’s ﬁ nancial assets held at amortised cost arise principally through the provision of goods and services to customers (e.g. trade receivables), but also incorporate other types of contractual monetary asset. As such they comprise trade receivables, intercompany trading balances (in relation to Company accounts), and cash and cash equivalents. Financial assets do not comprise prepayments. The Group’s ﬁ nancial assets are initially recognised at fair value plus transaction costs that are directly attributable to their acquisition or issue. The exception are trade and receivables balances, which are recorded at their transaction price as they do not contain a signiﬁ cant ﬁ nancing component (see note 1.4). The Group’s ﬁ nancial assets are subsequently measured at amortised cost using the effective interest rate method, less provision for impairment. Impairment provisions for trade receivables, being loss allowances for ‘expected credit losses’ (ECLs) per IFRS 9, are measured on a lifetime basis using the simpliﬁ ed approach set out in that ﬁ nancial reporting standard. The Group’s method in measuring ECLs reﬂ ects: (cid:129) (cid:129) (cid:129) unbiased and probability-weighted amounts, determined using a range of possible outcomes; the time value of money; and reasonable and supportable information that is available without undue cost or effort at the reporting date about past events, current conditions and forecasts of future economic conditions. The Group has applied the practical expedient in IFRS 9 of using a provision matrix to calculate ECLs. This requires the use of historical credit loss experience, as revealed for groupings of similar trade receivable assets, to estimate the relevant ECLs. As such, the Group has employed the following process in calculating ECLs: (cid:129) (cid:129) (cid:129) (cid:129) (cid:129) Grouping – trade receivables are grouped based on the similarity of their customer risk proﬁ le, being underlying product type and geographical region; Default deﬁ nition – amounts not collected are deﬁ ned in accordance with the credit risk management of the Group and include qualitative factors, broadly encompassing scenarios where the customer is either unable or unwilling to pay; Collection proﬁ les and loss rates – the collection time periods (e.g. within 30 days, 30 – 60 days, etc.) for sales made in the preceding 12-month period are gathered, amounts not collected assessed and loss rates based on ageing inferred; Historical periods – historic losses are reviewed over a 3-year time horizon; and Forward-looking assessment – the Group considers relevant future economic factors affecting each group of trade receivables, giving an expected probability of default for the portfolio. The resultant expected loss rates are applied to the ageing proﬁ le of grouped trade receivables at the balance sheet date to give the lifetime ECLs for each. This produces the loss allowances to be booked as an impairment adjustment to the carrying value of trade receivables. For further details on the estimates applied in these calculations, see note 1.1. Trade receivables are reported net of the resultant loss allowances. The loss is recognised within administrative expenses in the consolidated statement of comprehensive income. On conﬁ rmation that the trade receivable will not be collectable, the gross carrying value of the asset is written off against the associated provision. Impairment provisions for other receivables are recognised based on the general impairment model within IFRS 9. The Parent Company’s receivables due from Group company’s are subject to the requirements of IFRS 9, with speciﬁ c considerations relating to: (cid:129) (cid:129) (cid:129) Whether the loans are within the scope of IFRS 9; Whether the loans meet the Solely Payments of Principal and Interest test; and Whether the loans are in a “hold to collect” business model. The Parent Company has followed the considerations required under IFRS 9 on the above, and determined the appropriate recognition of the balances receivable from Group companies is at ‘amortised cost’ following the General ECL model. 254300 Dillistone AR pp36-END.indd 42 254300 Dillistone AR pp36-END.indd 42 22/05/2019 22:30 22/05/2019 22:30 FINANCIAL STATEMENTS 43 This requires the Parent Company to further consider: (cid:129) (cid:129) Whether the loans are credit impaired; and Whether the loans have suffered a signiﬁ cant increase in credit risk. The Parent Company has followed the considerations required under IFRS 9 on the above, and noted that neither of the above have occurred during the year ended 31 December 2018, and as such, the appropriate model is the 12-month ECL model. The implications of this have been disclosed in note 17. 1.15 Financial liabilities The Group classiﬁ es its ﬁ nancial liabilities under the deﬁ nitions provided in IFRS 9. All ﬁ nancial liabilities are recorded initially at fair value plus or minus directly attributable transaction costs. Except where noted, such liabilities are then measured at amortised cost using the effective interest method. Financial liabilities measured at amortised cost include trade payables, intercompany trading balances (in relation to Company accounts), bank loans and accruals. All ﬁ nancial liabilities are recognised in the statement of ﬁ nancial position when the Group becomes a party to the contractual provision of the instrument. Unless otherwise indicated, the carrying values of the Group’s ﬁ nancial liabilities measured at amortised cost represents a reasonable approximation of their fair values. 1.16 Convertible loan notes The proceeds received on issue of the Group’s convertible loan note are allocated into their liability and equity components. The amount initially attributed to the debt component equals the discounted cash ﬂ ows using a market rate of interest that would be payable on a similar debt instrument that does not include an option to convert. Subsequently, the debt component is accounted for as a ﬁ nancial liability measured at amortised cost until extinguished on conversion or maturity of the loan note. The remainder of the proceeds is allocated to the conversion option and is recognised in the ‘Convertible loan note reserve’ within Shareholders’ equity, net of income tax effects. 1.17 Investments Investments in subsidiary companies are included at cost in the accounts of the Company less any amount written off in respect of any impairment in value. 1.18 Leases Leases taken by the Group are assessed individually as to whether they are ﬁ nance leases or operating leases. Leases are classiﬁ ed as ﬁ nance leases whenever the terms of the lease transfer substantially all the risks and rewards of ownership to the lessee. All other leases are classiﬁ ed as operating leases. Operating lease rental payments are recognised as an expense in the income statement on a straight-line basis over the lease term. The beneﬁ t of lease incentives is spread over the term of the lease. 1.19 Inventories Inventories are stated at the lower of cost and net realisable value. Cost includes all directly attributable expenses. Costs of ordinarily interchangeable items are assigned using the ﬁ rst in, ﬁ rst out cost formula. Net realisable value is the estimated selling price in the ordinary course of business less any applicable selling expenses. 1.20 Cash and cash equivalents Cash and cash equivalents includes cash in hand, deposits held at call with banks and other short-term highly liquid investments with original maturities of three months or less and which are subject to an insigniﬁ cant risk of changes in value. 254300 Dillistone AR pp36-END.indd 43 254300 Dillistone AR pp36-END.indd 43 22/05/2019 22:30 22/05/2019 22:30 44 DILLISTONE GROUP PLC Annual Report and Accounts 2018 NOTES TO THE FINANCIAL STATEMENTS For the year ended 31 December 2018 Continued 1.21 Equity Equity comprises the following: (cid:129) (cid:129) (cid:129) (cid:129) (cid:129) (cid:129) (cid:129) ‘Share capital’ represents the nominal value of equity shares. ‘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. ‘Merger reserve’ is used where more than 90% of the shares in a subsidiary are acquired and the consideration includes the issue of new shares by the Company, thereby attracting merger relief under the Companies Act 2006. ‘Convertible loan note reserve’ represents the equity element arising on the issue of a loan note with rights to an equity conversion. ‘Share option reserve’ represents equity-settled share-based employee and non-employee remuneration until such share options are exercised. ‘Retained earnings’ represents retained proﬁ ts and losses. ‘Translation reserve’ represents translation differences arising on the consolidation of investments in overseas subsidiaries. 1.22 Foreign currency translation The consolidated ﬁ nancial statements are presented in Sterling, which is also the functional currency of the parent Company. Monetary assets and liabilities denominated in foreign currencies are translated into functional currency at the rates of exchange ruling at the statement of ﬁ nancial position date. Transactions in foreign currencies are recorded at the rate ruling at the date of the transaction. All differences are taken to proﬁ t and loss. On consolidation, the assets and liabilities of the Group’s overseas subsidiaries are translated from their functional currency to Sterling at exchange rates prevailing on the statement of ﬁ nancial position date. Income and expenses have been translated from their functional currency into Sterling at the average rate for each month over the reporting period. Exchange differences are charged/credited to other comprehensive income and recognised in the currency translation reserve in equity. On disposal of a foreign entity, the deferred cumulative amount recognised in equity relating to that particular foreign operation is recognised in the income statement. 1.23 Income taxes Current income tax assets and liabilities comprise those obligations to ﬁ scal authorities in the countries in which the Group carries out its operations. They are calculated according to the tax rates and tax laws applicable to the ﬁ scal period and the country to which they relate. Tax expense recognised in proﬁ t or loss comprises the sum of deferred tax and current tax not recognised in other comprehensive income or directly in equity. Deferred income taxes are calculated using the liability method on temporary differences. This involves the comparison of the carrying amount of assets and liabilities in the consolidated ﬁ nancial statements with their respective tax bases. However, deferred tax is not provided on the initial recognition of goodwill, or on the initial recognition of an asset or liability unless the related transaction is a business combination or affects tax or accounting proﬁ t. Deferred tax on temporary differences associated with investments in subsidiaries is not provided if reversal of these temporary differences can be controlled by the Group and it is probable that reversal will not occur in the foreseeable future. Deferred tax liabilities are always provided for in full. Deferred tax assets are recognised to the extent that it is probable that future taxable proﬁ ts will be available against which the temporary differences can be utilised. Deferred tax assets and liabilities are calculated at tax rates that are expected to apply to their respective period of realisation, provided they are enacted or substantively enacted at the statement of ﬁ nancial position date. 1.24 Deﬁ ned contribution pension scheme The pension costs charged in proﬁ t or loss represent the contributions payable by the Group during the year. 254300 Dillistone AR pp36-END.indd 44 254300 Dillistone AR pp36-END.indd 44 22/05/2019 22:30 22/05/2019 22:30 FINANCIAL STATEMENTS 45 1.25 New accounting standards to update The following standards have been issued by the IASB and have been adopted by the EU but not adopted early by the Group: Standard IFRS 16 Key requirements Effective date as adopted by the EU Leases 01-Jan-19 IFRS 16 requires almost all leases to be recorded in the statement of ﬁ nancial position. This requires recognition of a right-of-use asset and lease liability. The lease liability is measured as the present value of the future lease payments, discounted at the interest rate implicit in the lease if determinable, or otherwise at the lessee’s incremental borrowing rate. The asset is measured as equivalent to the lease liability, adjusted for other costs including initial direct costs or obligations under the lease such as restoration costs. The asset is subsequently depreciated on a straight line basis to the expected maturity date of the lease. The liability is increased by interest and reduced by the lease payments made. The Group expects to apply the modiﬁ ed retrospective approach in adopting IFRS 16. This recognises the right-of-use asset at the date of initial application (1 January 2019). The lease liability is measured based on remaining payments. There is no effect on prior year ﬁ gures and no need to re-state comparatives. The Group has undertaken a review of its lease arrangements and concluded that the most signiﬁ cant leases the Group has are its ofﬁ ces. Following the contracted closure of the Group’s London ofﬁ ces, it is expected that the impact of this standard for the year ending 31 December 2019 will be reduced. The anticipated estimated changes to the Group’s statement of ﬁ nancial position, statement of comprehensive income and key metrics for the year ending 31 December 2019 are set out below. These calculations assume no changes to the contracted leases anticipated in the reporting period to end 31 December 2019, although it is possible additional leases will be entered into or existing lease contracts amended during the forthcoming period. Under the existing standard (IAS 17) £130,000 would be expected as an expense in 2019. The adjustment to ‘Current liabilities – Trade and other receivables’ arises on the reversal of an accrual in respect of rent-free periods and other cash timing differences that would be made under that standard. Statement of ﬁ nancial position year ending 31 December 2019 Assets Non-current assets – right-of-use asset Increase to Total assets Equity attributable to owners of the parent Retained earnings (Decrease) to Total Equity Liabilities Current liabilities – lease liability Current liabilities – Trade and other receivables Non-current liabilities – lease liability Increase to Total liabilities and equity Statement of comprehensive income 2019 Administrative Expenses Financial Cost Decrease to proﬁ t before tax Increase to depreciation in the year Increase in EBITDA in the year £’000 583 583 (14) (14) 16 (92) 673 597 583 £’000 (40) 54 14 £’000 90 130 254300 Dillistone AR pp36-END.indd 45 254300 Dillistone AR pp36-END.indd 45 22/05/2019 22:30 22/05/2019 22:30 46 DILLISTONE GROUP PLC Annual Report and Accounts 2018 NOTES TO THE FINANCIAL STATEMENTS For the year ended 31 December 2018 Continued 2. Reconciliation of adjusted operating proﬁ ts to consolidated statement of comprehensive income Note Adjusted operating proﬁ ts 2018 £’000 8,692 (1,054) 7,638 (7,583) 55 1 (38) 18 102 120 (30) Acquisition related and one-off items 2018* £’000 - - - (469) (469) - - (469) 89 (380) 2018 £’000 8,692 (1,054) 7,638 (8,052) (414) 1 (38) (451) 191 (260) - (30) 90 (380) (290) 10 10 0.61p 0.61p (1.32)p (1.32)p Adjusted operating proﬁ ts restated 2017 £’000 Acquisition related items 2017* £’000 – – – (823) (823) - (5) (828) 151 (677) - (677) 9,732 (1,247) 8,485 (8,026) 459 1 (7) 453 281 734 (24) 710 3.73p 3.73p 2017 restated £’000 9,732 (1,247) 8,485 (8,849) (364) 1 (12) (375) 432 57 (24) 33 0.29p 0.29p Revenue Cost of sales Gross proﬁ t Administrative expenses Operating proﬁ t/(loss) Financial income Financial cost Proﬁ t/(loss) before tax Tax income Proﬁ t/(loss) for the year Other comprehensive loss net of tax: Currency translation differences Total comprehensive income/(loss) for the year net of tax Earnings per share Basic Diluted * See note 5 254300 Dillistone AR pp36-END.indd 46 254300 Dillistone AR pp36-END.indd 46 22/05/2019 22:30 22/05/2019 22:30 FINANCIAL STATEMENTS 47 3. Segment reporting The Board principally monitors the Group’s operations in terms of results of the three divisions, Dillistone Systems, Voyager Software and GatedTalent. Segment results reﬂ ect management charges made or received. Divisional segments For the year ended 31 December 2018 Segment revenue Segment EBITDA Depreciation and amortisation expense Segment result Acquisition related amortisation Operating proﬁ t/(loss) Financial income Loan interest Loss before tax Income tax income Loss for the year Dillistone £’000 4,195 723 (644) 79 - 79 - - Voyager £’000 4,429 1,003 (475) 528 - 528 1 - GatedTalent £’000 Central £’000 68 (485) (127) (612) – (612) - - – 60 - 60 (469) (409) - (38) Total £’000 8,692 1,301 (1,246) 55 (469) (414) 1 (38) (451) 191 (260) Additions of non-current assets 567 536 434 - 1,537 Divisional segments For the year ended 31 December 2017 Segment revenue Segment EBITDA Depreciation and amortisation expense Segment result Acquisition related amortisation Acquisition related income Operating proﬁ t/(loss) Financial income Loan interest Acquisition related interest expenses Loss before tax Income tax income Proﬁ t for the year Dillistone £’000 4,531 761 (589) 172 - - Voyager £’000 5,201 1,367 (511) 856 - - GatedTalent £’000 – (439) – (439) - - 172 856 (439) 1 - - - - - - - - Central £’000 – (130) - (130) (838) 15 (953) - (7) (5) Total £’000 9,732 1,559 (1,100) 459 (838) 15 (364) 1 (7) (5) (375) 432 57 Additions of non-current assets 608 502 396 - 1,506 254300 Dillistone AR pp36-END.indd 47 254300 Dillistone AR pp36-END.indd 47 22/05/2019 22:30 22/05/2019 22:30 48 DILLISTONE GROUP PLC Annual Report and Accounts 2018 NOTES TO THE FINANCIAL STATEMENTS For the year ended 31 December 2018 Continued Products and services The following table provides an analysis of the Group’s revenue by products and services: Revenue Recurring income Non-recurring income Third party revenues 2018 £’000 7,154 1,169 369 8,692 2017 restated £’000 7,942 1,326 464 9,732 See note 1.4 on the revenue recognition policy under IFRS 15 and the distinction on timing of revenue recognition. In the analysis above ‘Recurring income’ represents all income recognised over time, whereas ‘Non-recurring income’ and ‘Third party revenues’ represent all income recognised at a point in time. Recurring income includes all support services, SaaS and hosting income and revenue on perpetual licenses with mandatory support contracts deferred under IFRS 15. Non-recurring income includes sales of new licenses which do not require a support contract, and income derived from installing licences including training, installation and data translation. Third party revenues arise from the sale of third party software. It is not possible to allocate assets and additions between recurring, non-recurring income and third party revenue. No customer represented more than 10% of revenue of the Group in 2018 or 2017. 4. Geographical analysis The following table provides an analysis of the Group’s revenue by geographic market. The Board does not review the business from a geographical performance viewpoint and this analysis is provided for information only. Revenue UK Europe US Australia Non-current assets by geographical location UK US Australia 2018 £’000 6,188 1,007 1,118 379 8,692 2018 £’000 8,274 4 4 2017 restated £’000 6,920 1,041 1,359 412 9,732 2017 restated £’000 8,453 5 2 8,282 8,460 254300 Dillistone AR pp36-END.indd 48 254300 Dillistone AR pp36-END.indd 48 22/05/2019 22:30 22/05/2019 22:30 FINANCIAL STATEMENTS 49 2018 £’000 - 469 - 469 - 469 2018 £’000 106 1,608 4 - 229 359 30 79 22 6 2017 £’000 (15) 379 459 823 5 828 2017 £’000 105 1,833 7 13 234 319 22 78 18 6 2018 number 108 12 120 2017 number 111 13 124 5. Acquisition related and other one-off items Included within administrative expenses: Estimated change in fair value of contingent consideration (note 24) Amortisation of acquisition intangibles Acceleration of amortisation of acquisition intangibles Included within ﬁ nancial cost: Unwinding of discount on contingent consideration (note 8) 6. Operating loss Operating loss is stated after charging: Depreciation Amortisation Realised net loss on foreign exchange transactions Research costs expensed Operating lease rentals – land and buildings Money purchase pension contributions Fees receivable by the Group auditors: Audit of ﬁ nancial statements Other services: Audit of accounts of subsidiaries of the Company Taxation compliance services Tax advisory services 7. Employees The average number of employees was: Operations Management Total Employee numbers 254300 Dillistone AR pp36-END.indd 49 254300 Dillistone AR pp36-END.indd 49 22/05/2019 22:30 22/05/2019 22:30 50 DILLISTONE GROUP PLC Annual Report and Accounts 2018 NOTES TO THE FINANCIAL STATEMENTS For the year ended 31 December 2018 Continued Their aggregate remuneration including Directors’ remuneration comprised: Wages and salaries Social security costs Pension costs Share based payments LTIP share based LTIP non share based 2018 £’000 5,139 542 359 12 (7) (10) 2017 £’000 5,255 528 319 20 1 (3) 6,035 6,120 The aggregate remuneration includes salary cost totalling £1,253,000 (2017: £1,168,000) that has been capitalised in intangible assets. Key management of the Group are the Directors and the divisional directors of Dillistone Systems and Voyager Software. Remuneration of key management was as follows: Wages and salaries Social security costs Pension costs Share based payments charged LTIP share based LTIP non share based 2018 £’000 922 115 100 2 (7) (10) 2017 £’000 936 116 107 2 1 (3) 1,122 1,159 The Company’s only employees are the Directors. Details of Directors’ emoluments, share options and pension entitlements are given in the Report to the Shareholders on Directors’ Remuneration on pages 17 to 19. 8. Financial income and cost Interest receivable Finance cost on bank overdraft Finance cost on bank loan Finance cost on convertible loan Unwinding of discount on convertible loan Unwinding of discount on contingent consideration 2018 £’000 1 (1) - (33) (4) - (37) 2017 £’000 1 - (2) (5) - (5) (11) 254300 Dillistone AR pp36-END.indd 50 254300 Dillistone AR pp36-END.indd 50 22/05/2019 22:30 22/05/2019 22:30 FINANCIAL STATEMENTS 51 2018 £’000 (165) (7) (172) 64 6 (89) (19) (191) 2017 restated £’000 (100) (238) (338) 58 (1) (151) (94) (432) (451) (375) 19.00% 19.25% (86) (72) (3) 10 (148) 14 (25) (7) 55 (1) (191) 1 18 (209) 32 (1) 38 (239) (432) 9. Tax income Current tax Prior year adjustment – current tax Total current tax Deferred tax Prior year adjustment – deferred tax Deferred tax re acquisition intangibles Total deferred tax Tax (income) for the year Factors affecting the tax credit for the year Loss before tax UK rate of taxation Loss before tax multiplied by the UK rate of taxation Effects of: Overseas tax rates Impact of deferred tax not provided Enhanced R&D relief Disallowed expenses IFRS 15 impact Rate differences re current tax and deferred tax Rate difference between CT rate and rate of R&D repayment Prior year adjustments Tax (income) 254300 Dillistone AR pp36-END.indd 51 254300 Dillistone AR pp36-END.indd 51 22/05/2019 22:30 22/05/2019 22:30 52 DILLISTONE GROUP PLC Annual Report and Accounts 2018 NOTES TO THE FINANCIAL STATEMENTS For the year ended 31 December 2018 Continued Deferred tax liability provided in the ﬁ nancial statements is as follows: Internally generated intangible and ﬁ xed assets IFRS 15 Provisions Acquisition intangibles Internally generated intangible and ﬁ xed assets IFRS 15 Provisions Acquisition intangibles Group Movement £’000 (90) 160 - (89) (19) Group Movement restated £’000 26 22 9 (151) (94) 2018 £’000 251 - - 238 489 2017 restated £’000 341 (160) - 327 508 2017 restated £’000 341 (160) - 327 508 2016 restated £’000 315 (182) (9) 478 602 Company 2018 £’000 2017 £’000 - - - – - - - - – - Company 2017 £’000 2016 £’000 - - - - - - – – – – The UK corporation tax rate for the year is 19.00%. Deferred tax is provided in relation to the UK at rates of between 17% to 19% depending on when reversals are expected to occur. The tax credit is impacted by the R&D tax credits available to Dillistone Systems division, Voyager Software division and GatedTalent division. It has also been assumed that where there are tax losses arising as a result of R&D tax credits they will be surrendered for a tax repayment at the HMRC stated rate of 14.5%. The Group has gross tax losses of £154,000 (2017: £205,000) for which no deferred tax asset has been recognised as the timing of their utilisation is uncertain. 10. Earnings per share 2018 Using adjusted operating proﬁ t 2017 Using adjusted operating proﬁ t restated 2018 2017 restated Proﬁ t/(loss) attributable to ordinary shareholders (note 2) £120,000 £(260,000) £734,000 £57,000 Weighted average number of shares Basic earnings/(loss) per share 19,668,021 19,668,021 19,668,021 19,668,021 0.61 pence (1.32) pence 3.73 pence 0.29 pence Weighted average number of shares after dilution 19,797,067 19,668,021 19,676,018 19,676,018 Fully diluted earnings/(loss) per share 0.61 pence (1.32) pence 3.73 pence 0.29 pence Reconciliation of basic to diluted average number of shares: Weighted average number of shares (basic) Effect of dilutive potential ordinary shares – employee share plans Weighted average number of shares after dilution 2018 2017 19,668,021 19,668,021 129,046 7,997 19,797,067 19,676,018 There are 919,848 (2017: 1,270,732) share options not included in the above calculations, as they are underwater or have not yet vested. The impact of the convertible loan notes in the period is not dilutive and therefore does not impact the calculation of the fully diluted earnings per share. 254300 Dillistone AR pp36-END.indd 52 254300 Dillistone AR pp36-END.indd 52 22/05/2019 22:30 22/05/2019 22:30 FINANCIAL STATEMENTS 53 11. Proﬁ t for the ﬁ nancial year As permitted by section 408 of the Companies Act 2006, the parent company’s income statement has not been included in these ﬁ nancial statements. The proﬁ t for the ﬁ nancial year for the parent Company was £1,338,000 (2017: £1,311,000) and has been approved by the Directors. 12. Goodwill Group Cost At 1 January 2017 Additions At 31 December 2017 Additions At 31 December 2018 Carrying amount At 31 December 2018 At 31 December 2017 Goodwill £’000 3,415 - 3,415 - 3,415 3,415 3,415 At the year end date, an impairment test has been undertaken by comparing the recoverable amount of the cash generating units listed below (CGU) to which the goodwill has been allocated, against the carrying value of those CGUs. The recoverable amount of the cash generating unit is based on value-in-use calculations. These calculations use cash ﬂ ow projections covering a three year period based on ﬁ nancial budgets and a calculation of the terminal value, for the period following these formal projections. The key assumptions used for value-in-use calculations are those regarding growth rates, increases in costs and discount rates. The discount rate is reviewed annually to take into account the current market assessment of the time value of money and the risks speciﬁ c to the cash generating units and rates used by comparable companies. The pre-tax discount rate used to calculate value-in-use is 15.5% (2017: 12% to 15.5%). Costs are reviewed and increased for inﬂ ation and other cost pressures. The long term growth rate used for the terminal value calculation was 2.5% (2017: 2.5%) for all CGUs. The allocation of goodwill across the CGUs is as follows: Dillistone Division Voyager and FCP consolidated ISV Opening £’000 494 2,251 670 3,415 Addition £’000 Impairment £’000 - - - - - - - - Closing £’000 494 2,251 670 3,415 Sensitivities A decrease in the forecast future cashﬂ ow by 10% would result in an impairment of £341,000 for the Voyager and FCP consolidated CGU and an increase in the discount rate to 16.25% would require an impairment of £181,000. For ISV the discount rate would need to increase to over 22% or future forecast cash ﬂ ows would need to fall by 32% to reduce the headroom to £nil. Cashﬂ ows in respect of Dillistone goodwill would need to reduce by over 65% or the discount rate to increase to over 36% to reduce the headroom to £nil. 254300 Dillistone AR pp36-END.indd 53 254300 Dillistone AR pp36-END.indd 53 22/05/2019 22:30 22/05/2019 22:30 54 DILLISTONE GROUP PLC Annual Report and Accounts 2018 NOTES TO THE FINANCIAL STATEMENTS For the year ended 31 December 2018 Continued 13. Other intangible assets Group Cost At 1 January 2017 Additions At 31 December 2017 Additions At 31 December 2018 Amortisation At 1 January 2017 Charge for the year At 31 December 2017 Charge for the year At 31 December 2018 Carrying amount At 31 December 2018 At 31 December 2017 Acquisition intangibles can be summarised as follows: NBV At 1 January 2018 Amortisation At 31 December 2018 Development costs £’000 Purchased software £’000 Acquisition intangibles £’000 6,612 1,358 7,970 1,446 9,416 4,054 991 5,045 1,128 6,173 3,243 2,925 34 93 127 35 162 1 4 5 11 16 146 122 4,172 - 4,172 - 4,172 1,500 838 2,338 469 2,807 1,365 1,834 Developed technology £’000 Brand and IP £’000 Contractual and non-contractual customer relationships £’000 176 (53) 123 481 (41) 440 1,064 (362) 702 Brand £’000 113 (13) 100 Total £’000 10,818 1,451 12,269 1,481 13,750 5,555 1,833 7,388 1,608 8,996 4,754 4,881 Total £’000 1,834 (469) 1,365 Intangible assets under development are reviewed each reporting period for impairment prior to amortisation. Forecasts of future revenue are prepared and these are discounted and compared to the carrying value. Sensitivities are carried out including applying differing growth and attrition rates as well as alternative discount rates. Purchased software is reviewed for impairment based on its continued use within the business. The Company has no intangible assets. 254300 Dillistone AR pp36-END.indd 54 254300 Dillistone AR pp36-END.indd 54 22/05/2019 22:30 22/05/2019 22:30 FINANCIAL STATEMENTS 55 Land and buildings £’000 Ofﬁ ce & computer equipment £’000 Fixtures and ﬁ ttings £’000 Total £’000 1,184 (7) 55 - (20) 1,212 5 55 168 (1) 8 (10) - 165 1 - 166 1,272 150 (1) 5 - 154 1 6 969 (7) 105 (19) 1,048 5 106 161 1,159 5 11 113 164 186 - - - – 186 - - 186 82 - 38 - 120 - 37 157 29 66 830 (6) 47 10 (20) 861 4 55 920 737 (6) 62 (19) 774 4 63 841 79 87 14. Property, plant and equipment Group Cost At 1 January 2017 Currency impact Additions Reclassiﬁ cation Disposals At 31 December 2017 Currency impact Additions At 31 December 2018 Depreciation At 1 January 2017 Currency impact Charge for the year Eliminated on disposal At 31 December 2017 Currency impact Charge for the year At 31 December 2018 Carrying amount At 31 December 2018 At 31 December 2017 The Company has no property, plant and equipment. 254300 Dillistone AR pp36-END.indd 55 254300 Dillistone AR pp36-END.indd 55 22/05/2019 22:30 22/05/2019 22:30 56 DILLISTONE GROUP PLC Annual Report and Accounts 2018 NOTES TO THE FINANCIAL STATEMENTS For the year ended 31 December 2018 Continued 15. Non-current asset investments Company Cost At 1 January 2017 Additions At 31 December 2017 Impairment At 31 December 2018 Investments in subsidiaries £’000 7,601 1 7,602 (451) 7,151 The addition in 2017 related to the formation of GatedTalent Limited. Investments are reviewed when evidence exists that there may be a loss in value or in certain circumstances where dividends are paid by the subsidiary. In 2018, following the loss of a major contract the Voyager/FCP investment has been reviewed as has the ISV investment following a dividend payment. The recoverable amount of the cash generating unit is based on value-in-use calculations. Forecasts of future cash generation are prepared and these are discounted and compared to the carrying value of the investment. These calculations use cash ﬂ ow projections covering a three year period based on ﬁ nancial budgets and a calculation of the terminal value, for the period following these formal projections. The key assumptions used in these calculations are those regarding growth rates, increases in costs and discount rates. The pre-tax discount rate used was 15.5%. Costs are reviewed and increased for inﬂ ation and other cost pressures. The long term growth rate used for the terminal value calculation was 2.5%. The calculations for Voyager/FCP showed that an impairment was required. No impairment loss was required for ISV and cashﬂ ows would need to reduce by over 28% or the discount rate to increase to more than 22% before impairment was considered necessary. No impairment loss was required for Dillistone and cashﬂ ows would need to reduce by over 70% before impairment was considered necessary The Company has the following subsidiary undertakings: Name Principal activity Holding of ordinary shares Registered Dillistone Systems Limited Sale of computer software and related support services 100% England & Wales Dillistone Systems (Australia) Pty Limited Sale of computer software and related support services Dillistone Systems (US) Inc Sale of computer software and related support services 100% (indirect) 100% Australia USA FCP Internet Limited Provision of software services and related consultancy services 100% England & Wales FCP Internet Holdings Limited Dormant holding company GatedTalent Limited Provision of software services 100% England & Wales 100% England & Wales ISV Software Limited Provision of software services and related consultancy services 100% England & Wales Woodcote Software Limited Dormant company 100% England & Wales Voyager Software Limited Sale of computer software and related support services 100% England & Wales Voyager Software (Australia) Pty Limited Sale of computer software and related support services 100% (indirect) Australia 254300 Dillistone AR pp36-END.indd 56 254300 Dillistone AR pp36-END.indd 56 22/05/2019 22:30 22/05/2019 22:30 FINANCIAL STATEMENTS 57 The registered addresses of related undertakings are as follows: Company Dillistone Group Plc Dillistone Systems Limited Registered Address 50 Leman St, London E1 8HQ 50 Leman St, London E1 8HQ Dillistone Systems (Australia) Pty Limited Suite 3, Level 3, 245 Castlereagh Street, Sydney, NSW 2000, Australia Dillistone Systems (US) Inc 50 Harrison Street, Suite 201A, Hoboken, NJ 07030, USA FCP Internet Limited 50 Leman St, London E1 8HQ FCP Internet Holdings Limited 50 Leman St, London E1 8HQ GatedTalent Limited ISV Software Limited Woodcote Software Limited Voyager Software Limited 50 Leman St, London E1 8HQ 50 Leman St, London E1 8HQ 50 Leman St, London E1 8HQ 12 Cedarwood, Crockford Lane, Chineham Business Park, Basingstoke, RG24 8WD Voyager Software (Australia) Pty Limited Suite 3, Level 3, 245 Castlereagh Street, Sydney, NSW 2000, Australia 16. Inventories Licences for resale 17. Trade and other receivables Trade receivables – net Group receivables Other current assets Prepayments and accrued income Group Group 2018 £’000 3 2017 £’000 3 Company Company 2018 £’000 - Group Group Company Company 2018 £’000 1,171 - 35 316 1,522 2017 £’000 1,377 - 37 263 1,677 2018 £’000 - 1,253 - 36 1,289 2017 £’000 - 2017 £’000 - 915 - 19 934 The carrying value of trade receivables is considered a reasonable approximation of fair value. All of the receivables have been reviewed for indicators of impairment. The movement in the provision for bad debt is shown below. Trade receivables are recorded and measured in accordance with note 1.14 above. The Group applies the IFRS 9 simpliﬁ ed approach to measuring expected credit losses (ECLs) using a lifetime expected credit loss provision for trade receivables. To measure expected credit losses on a collective basis, trade receivables are grouped based on similar credit risk and ageing. The expected loss rates are based on the Group’s historical credit losses experienced over the three-year period prior to the period end. The historical loss rates are then adjusted for current and forward-looking information on macroeconomic factors affecting the Group’s customers. The Group has identiﬁ ed gross domestic product (GDP) as the key macroeconomic factor for each geographical region where the Group operates. It has also considered the impact of the UK’s exit from the European Union on the recoverability of its trade receivables. This has resulted in a range of potential loss rates and provision levels, as set out below. See note 1.1 and 1.14 for further details on the Group’s approach to calculating ECLs and the material estimates and judgements involved. 254300 Dillistone AR pp36-END.indd 57 254300 Dillistone AR pp36-END.indd 57 22/05/2019 22:30 22/05/2019 22:30 58 DILLISTONE GROUP PLC Annual Report and Accounts 2018 NOTES TO THE FINANCIAL STATEMENTS For the year ended 31 December 2018 Continued Trade Receivables Gross Carrying Amount Loss Allowance Provision Expected Loss Rate The movement in the provision for loss allowances is as follows: Current £’000 1,064 48 4% From 1 to 30 days past due £’000 From 31 to 60 days past due £’000 Greater than 60 days past due £’000 116 10 8% 19 3 16% 43 11 25% Balance as at 1 January 2017 Increase during the year Amounts written off as uncollectible Balance as at 31 December 2017 Unused amounts reversed Amounts written off as uncollectible Balance as at 31 December 2018 The ageing proﬁ le of trade receivables as at the year end is as follows: Current Past due date: Up to 30 days overdue More than 30 days overdue Total Total £’000 1,242 71 £’000 97 125 (74) 148 (2) (75) 71 2017 £’000 1,205 54 118 2018 £’000 1,064 116 62 1,242 1,377 The Company’s group receivables, being amounts due from wholly-owned subsidiaries, are repayable on demand. Additionally, all companies are covered by a group-wide guarantee. The Parent Company has determined that Credit risk for receivables from Group Company’s has not increased signiﬁ cantly since their initial recognition. The Parent Company have considered a range of scenarios relating to amounts to be received from amounts receivable from Group Company’s, and the likelihood of those outcomes. The impact of these scenarios using the 12-month ECL model disclosed in note 1.14 was not material to the Company. 254300 Dillistone AR pp36-END.indd 58 254300 Dillistone AR pp36-END.indd 58 22/05/2019 22:30 22/05/2019 22:30 FINANCIAL STATEMENTS 59 18. Trade and other payables Current liabilities Trade payables Group payables Deferred income Accruals Contingent consideration Non-current liabilities Deferred Income Cash settled LTIP Group Group Company Company 2018 £’000 776 - 2017 £’000 664 - 2,887 3,029 707 - 936 146 2018 £’000 122 824 - 145 - 2017 £’000 73 2,135 - 195 146 4,370 4,775 1,091 2,549 £’000 £’000 £’000 £’000 688 2 690 782 12 794 - 2 2 - 12 12 Contingent consideration is valued at fair value. Further details of the contingent consideration are given in note 24. The deferred income in 2018 and 2017 represents the entire balance of contract liabilities from contracts with customers. The movement on this balance is the revenue recognised in the reporting period. 19. Cash and cash equivalents Cash balances available on demand 20. Borrowings Current bank borrowings Current loan note borrowings Non current loan note borrowings Total borrowings Group Group 2018 £’000 725 2017 £’000 1,390 Company Company 2018 £’000 - Group Group Company Company 2018 £’000 - 14 390 404 2017 £’000 - 5 386 391 2018 £’000 15 14 390 419 2017 £’000 99 2017 £’000 - 5 386 391 The Directors consider that the fair value of borrowings approximates to the carrying value except for the convertible loan note. 254300 Dillistone AR pp36-END.indd 59 254300 Dillistone AR pp36-END.indd 59 22/05/2019 22:30 22/05/2019 22:30 60 DILLISTONE GROUP PLC Annual Report and Accounts 2018 NOTES TO THE FINANCIAL STATEMENTS For the year ended 31 December 2018 Continued The Group has an overdraft facility in the UK of £200,000 which was unused at the year-end (2017: unused). Under the banking arrangements all UK accounts are netted. In 2017, the Company raised £400,000 from Directors and other PDMRs via a convertible loan note. The loan notes carry an interest coupon of 8.15% pa over their maximum term of 36 months, with a conversion price of 71.6p per new Dillistone ordinary share. The interest payments are payable quarterly in arrears and will be satisﬁ ed through the issue of further new ordinary shares or in cash at the individual loan note holder’s election. Various rights are built into the agreement for early repayment or conversion. Based on other outline loan offers around the time of the fund raising, a 10% rate has been used as the borrowing rate without conversion. This rate has been used in the calculation of the equity adjustment required in respect of this loan which totals £14,000. Reconciliation of liabilities arising from ﬁ nancing activities Long term borrowings Convertible loan note Long term borrowings Bank Loan Convertible loan note 21. Share capital Allotted, called up and fully paid Ordinary shares of 5p each No share options were exercised in the period (2017: nil). Shares issued and fully paid Beginning of the year Shares issued on exercise of options Shares issued and fully paid 2017 £’000 Cashﬂ ows £’000 Non cash changes – interest adjustment £’000 Closing 2018 £’000 386 386 - - 4 4 390 390 2016 £’000 Cashﬂ ows £’000 158 158 (158) 400 242 Non cash changes equity adjustment £’000 Closing 2017 £’000 - (14) (14) 2018 £’000 983 - 386 386 2017 £’000 983 2018 Number 2017 Number 19,668,021 19,668,021 - - 19,668,021 19,668,021 254300 Dillistone AR pp36-END.indd 60 254300 Dillistone AR pp36-END.indd 60 22/05/2019 22:30 22/05/2019 22:30 FINANCIAL STATEMENTS 61 22. Operating lease arrangements The Group leases ofﬁ ces under non-cancellable operating lease agreements. At 31 December 2018, the Group had future total commitments under non-cancellable operating leases as follows: Commitments payable: Within one year Between two and ﬁ ve years The Company has no operating leases. 23. Share options Share based payments 2018 £’000 182 172 10 2017 £’000 295 158 137 There are three share option schemes in operation: an Enterprise Management Incentive Scheme (the ‘EMI Scheme’) which complies with the requirements of HMRC; a scheme which has not been approved by HMRC (the ‘Unapproved Scheme’) and a Share Save Scheme (“SAYE Scheme”). The terms and conditions of the EMI and Unapproved schemes are the same. If the options remain unexercised after a period of 10 years from the date of grant, the options expire. Options are normally forfeited if the employee leaves the Company before the options become available to exercise, which would normally be three years after grant. Performance conditions are associated with the LTIP options granted on 29 June 2016 and 9 November 2017. The Company launched its ﬁ rst SAYE scheme in 2016 with a second issue in 2017. Under this scheme discounts of up to 20% can be offered. The scheme has a linked savings contract of 3 years. There were no grants of options in 2018. Expected volatility takes into account historic volatility of the share price and its current trend. There were three grants of options in 2017. The weighted average share price of all grants in 2017 was 57.28p. The fair values of the services received in exchange for share based payments were calculated using a Black-Scholes pricing model. The inputs into the model were as follows: Date of grant 9 November 2017 LTIP/EMI 9 November 2017 EMI 9 November 2017 Sharesave Share price on issue date 58p 58p 58p Number granted 845,000 90,000 131,713 Exercise price Expected volatility Vesting period Leaver rate over vesting period Risk-free rate Expected dividend yield 58p 58p 30% 3.3 years 0% 1.00% 30% 3.3 years 10% 1.00% 52.2p 30% 3.3 years 10% 1.00% 2.0% 2.0% 2.0% 254300 Dillistone AR pp36-END.indd 61 254300 Dillistone AR pp36-END.indd 61 22/05/2019 22:30 22/05/2019 22:30 62 DILLISTONE GROUP PLC Annual Report and Accounts 2018 NOTES TO THE FINANCIAL STATEMENTS For the year ended 31 December 2018 Continued Details of the number of share options and the weighted average exercise price (‘WAEP’) outstanding during the year are as follows: Outstanding at the beginning of year Granted during the year Exercised during the year Forfeited during the year Outstanding at the end of the year Exercisable at the year end 2018 2017 2017 No of options WAEP No of options 2,367,445 74.75 1,364,351 - (-) (391,884) 1,975,561 403,000 - - 1,066,713 (-) 101.73 (63,619) 69.40 88.15 2,367,445 384,500 WAEP 89.15 57.28 - 90.55 74.75 88.76 The Company’s mid-market share price on 31 December 2018 was 47.5p. The average mid- market share price in 2018 was 67.07p. The fair value of all options granted is shown as an employee expense with a corresponding increase in equity. The employee expense is recognised equally over the time from grant until vesting of the option. The expense charged takes into account the likelihood of performance targets being met. The employee expense for the year was £5,000 (2017: £20,000). Share options remaining in the schemes are as follows: Scheme type Unapproved EMI Unapproved EMI EMI Unapproved EMI EMI EMI Sharesave EMI (LTIP) EMI Sharesave Date of grant 14/01/2011 Exercise from 14/01/2014 Lapse date 13/01/2021 21/09/2011 21/09/2014 20/09/2021 21/09/2011 21/09/2014 20/09/2021 08/07/2013 08/07/2016 07/07/2023 25/11/2013 25/11/2016 24/11/2023 08/12/2014 08/12/2017 07/12/2024 Options remaining 30,000 79,500 16,000 17,000 10,000 10,000 08/12/2014 08/12/2017 07/12/2024 182,000 03/02/2015 03/02/2017 02/02/2025 29/06/2016 29/06/2019 28/06/2026 14/10/2016 01/11/2019 30/04/2020 09/11/2017 09/11/2020 08/11/2027 09/11/2017 09/11/2020 08/11/2027 58,500 441,500 105,348 814,000 80,000 09/11/2017 01/12/2020 31/5/2021 131,713 1,975,561 Exercise price (p) 58.33 77.00 77.00 79.50 115.00 97.00 97.00 90.50 78.50 77.80 58.00 58.00 52.20 The weighted average remaining contractual life of options at 31 December 2018 was 6.9 years (2017: 7.8 years). LTIP LTIP awards under the long term incentive plan take the form of a cash bonus of up to one-third annual salary or the grant of share options, with appropriate performance conditions in place. In 2018, the credit in respect of the LTIP schemes, which are share based and require separate disclosure under IFRS 2, was (£7,000) (2017: £1,000). 24. Contingent consideration payable in respect of acquisitions In September 2014 the Group acquired the entire share capital of ISV. As part of the acquisition, the vendors are entitled to contingent consideration based on revenue over the period to 30 September 2017. The ﬁ nal payment of £146,000 was made in 2018. 254300 Dillistone AR pp36-END.indd 62 254300 Dillistone AR pp36-END.indd 62 22/05/2019 22:30 22/05/2019 22:30 FINANCIAL STATEMENTS 63 25. Financial instruments The Group uses various ﬁ nancial instruments; these include cash, bank deposits, bank loans and various items such as trade receivables and trade payables that arise directly from its operations. The main purpose of these ﬁ nancial instruments is to provide ﬁ nance for the Group’s operations. The Group’s ﬁ nance department maintains liquidity, manages relations with the Group’s bankers, identiﬁ es and manages foreign exchange risk and controls Group treasury operations. Treasury dealings such as investments and foreign exchange are conducted only to support underlying business transactions. Consequently, the Group does not undertake speculative foreign exchange dealings for which there is no underlying exposure. The Group’s policies for management of the ﬁ nancial risks to which it is exposed are outlined below (i) Interest rate risk The Group is exposed to interest rate risk on its ﬂ oating rate borrowings and its ﬁ nancial assets. The interest rate proﬁ le of the Group’s ﬁ nancial assets at 31 December 2018 was: At 31 December 2018 Trade and other receivables (current assets) Cash and cash equivalents Total Group Company Non interest bearing ﬁ nancial assets £’000 Floating rate ﬁ nancial assets £’000 Non interest bearing ﬁ nancial assets £’000 £’000 Floating rate ﬁ nancial assets £’000 1,205 - 1,205 - 725 725 1,253 - 1,253 - - - The interest rate proﬁ le of the Group’s ﬁ nancial assets at 31 December 2017 was: At 31 December 2017 Trade and other receivables (current assets) Cash and cash equivalents Total Group Company Group Non interest bearing ﬁ nancial assets £’000 Floating rate ﬁ nancial assets £’000 Non interest bearing ﬁ nancial assets £’000 £’000 Company Floating rate ﬁ nancial assets £’000 1,414 - 1,414 - 1,390 1,390 915 - 915 - 99 99 The table below shows the Group’s ﬁ nancial liabilities split by those bearing interest at ﬂ oating rates or ﬁ xed rates and those that are non interest bearing. At 31 December 2018 Group Company Trade and other payables (current liabilities) Trade and other payables (non-current liabilities) Borrowings – convertible loan note Borrowings – bank Non interest bearing ﬁ nancial liabilities £’000 1,126 2 - - 1,128 Fixed rate ﬁ nancial liabilities £’000 - - 404 - 404 Non interest bearing ﬁ nancial liabilities £’000 £’000 1,068 2 - - 1,070 Fixed rate ﬁ nancial liabilities £’000 - - 404 15 419 254300 Dillistone AR pp36-END.indd 63 254300 Dillistone AR pp36-END.indd 63 22/05/2019 22:30 22/05/2019 22:30 64 DILLISTONE GROUP PLC Annual Report and Accounts 2018 NOTES TO THE FINANCIAL STATEMENTS For the year ended 31 December 2018 Continued At 31 December 2017 Trade and other payables (current liabilities) Trade and other payables (non-current liabilities) Borrowings – convertible loan note Contingent consideration (current liabilities) Group Company Non interest bearing ﬁ nancial liabilities £’000 1,196 12 - 146 1,354 Floating rate ﬁ nancial liabilities £’000 - - 391 - 391 Non interest bearing ﬁ nancial liabilities £’000 £’000 2,382 12 - 146 2,540 Floating rate ﬁ nancial liabilities £’000 - - 391 - 391 The benchmarks for interest rates on ﬂ oating rate ﬁ nancial assets and ﬁ nancial liabilities are bank base rates for the currencies in which the assets are held. Sensitivities of movements in interest rates have been considered by Directors and reasonably possible movements in interest rates are not considered to have a material impact on future Group proﬁ ts or equity. (ii) Credit risk The Group’s principal ﬁ nancial assets are cash and cash equivalents and trade and other receivables. Credit risk is the risk of ﬁ nancial loss to the Group if a customer or counterparty to a ﬁ nancial instrument fails to meet its contractual obligations and arises principally from the Group’s receivables from customers and monies on deposit with ﬁ nancial institutions. Trade receivables are adjusted for credit risk by applying the impairment methodology set out in IFRS 9 (see note 1.14). Provisions for loss allowances arising from expected credit losses are booked against the carrying value of trade receivables (see note 17). Once the Group has determined that there is no reasonable expectation of recovery, the relevant trade receivable balances are written off against the loss allowance provision. Indicators that recovery cannot reasonably be expected include the conclusion of legal proceedings or 3rd-party debt collection without full recovery. Historically, the cash collection proﬁ le has been very good. Debt ageing and collections are monitored on a regular basis and for new customers deposits are usually required. Some trade receivables are past due as at the reporting date. The company bases its provisions on trade receivable balances based on the expected credit loss model (‘ECL’) as required by IFRS. Information on ﬁ nancial assets past due are included in note 17. The credit risk on liquid funds is limited because the counterparties are banks with high credit ratings assigned by international credit rating agencies. The Group has no signiﬁ cant concentration of credit risk. The Group’s maximum exposure to credit risk at the reporting date is represented by the carrying value of ﬁ nancial assets, as follows: Trade and other receivables (current assets) Cash and cash equivalents Total Group Group Company Company 2018 £’000 1,205 725 1,930 2017 £’000 1,414 1,390 2,804 2018 £’000 1,253 - 1,253 2017 £’000 915 99 1,014 The Company’s other receivables are primarily intercompany loans made to wholly-owned subsidiaries and supported by a group-wide guarantee and repayable on demand. The Company has followed the considerations required under IFRS 9 on the above and as such, no provision has been raised on these balances. See note 17. 254300 Dillistone AR pp36-END.indd 64 254300 Dillistone AR pp36-END.indd 64 22/05/2019 22:30 22/05/2019 22:30 FINANCIAL STATEMENTS 65 (iii) Liquidity risk Liquidity risk is the risk that the Group will not be able to meet its ﬁ nancial obligations as they fall due. The Group’s approach to managing liquidity is to ensure it has sufﬁ cient liquidity to meet its liabilities when due. As at 31 December 2018, the Group and Company’s ﬁ nancial liabilities (excluding deferred income, payroll taxes, VAT and similar taxes) have contractual cashﬂ ows as summarised below: Group At 31 December 2018 Trade and other payables (current liabilities) Trade and other payables (non-current liabilities) Borrowings At 31 December 2017 Trade and other payables (current liabilities) Contingent consideration (current liabilities) Trade and other payables (non-current liabilities) Borrowings Carrying amount £’000 1,126 2 400 < 1 year £’000 1,126 - - 1,528 1,126 Carrying amount £’000 1,196 146 12 400 < 1 year £’000 1,196 146 - - 1,754 1,342 1-2 years £’000 2-5 years £’000 - 2 400 402 - - - - 1-2 years £’000 2-5 years £’000 - - - - - - - 12 400 412 The Group forecasts its cash requirements through its budget processes and looks to ensure that it has sufﬁ cient cash over the coming year to meet liabilities as they fall due and over each subsequent annual period covered by the 3 year forecast. As such it considers the time bands set out above the most appropriate representation of its liquidity risk proﬁ le. Company At 31 December 2018 Trade and other payables (current liabilities) Trade and other payables (non-current liabilities) Borrowings Bank overdraft At 31 December 2017 Trade and other payables (current liabilities) Contingent consideration (current liabilities) Trade and other payables (non-current liabilities) Borrowings Carrying amount £’000 1,068 2 400 15 < 1 year £’000 1,068 - - 15 1,485 1,083 Carrying amount £’000 2,382 146 12 400 < 1 year £’000 2,382 146 - - 2,940 2,528 1-2 years £’000 2-5 years £’000 - 2 400 - 402 - - - - 1-2 years £’000 2-5 years £’000 - - - - - - - 12 400 412 The Group would normally expect that sufﬁ cient cash is generated in the operating cycle to meet contractual cash ﬂ ows as disclosed above. In addition, the Group has signiﬁ cant cash balances as at the year end to minimise any liquidity risk. 254300 Dillistone AR pp36-END.indd 65 254300 Dillistone AR pp36-END.indd 65 22/05/2019 22:30 22/05/2019 22:30 66 DILLISTONE GROUP PLC Annual Report and Accounts 2018 NOTES TO THE FINANCIAL STATEMENTS For the year ended 31 December 2018 Continued (iv) Foreign currency risk The Group is exposed to foreign currency risk on sales and purchases which are denominated in a currency other than Sterling. Exposures to currency exchange rates are primarily denominated in US Dollars ($), Australian Dollars (AUD) and Euros (€). The Group does not use derivatives to hedge translation exposures arising on the consolidation of its overseas operations. The Group aims to manage foreign exchange risk at a local level by matching the currency in which revenue is generated and expenses are incurred. At the year end, the Group had assets totalling £1,105,000 and liabilities totalling £695,000 denominated in Euros (2017: assets totalling £1,837,000 and liabilities totalling £443,000), assets totalling £1,239,000 and liabilities totalling £1,187,000 denominated in US Dollars (2017: assets totalling £1,655,000 and liabilities totalling £997,000) and assets totalling £497,000 and liabilities totalling £473,000 denominated in Australian Dollars (2017: assets totalling £441,000 and liabilities totalling £447,000). If each of the exchange rates strengthened by 5%, the impact on the statement of comprehensive income would be as follows: Euros US Dollars Australian Dollars Group Group 2018 £’000 26 4 (1) 29 2017 £’000 31 6 (2) 35 At the year end, the Company had liabilities totalling £116,000 denominated in Euros (2017: liabilities totalling £115,000), assets totalling £288,000 denominated in US Dollars (2017: assets totalling £257,000) and assets totalling £42,000 denominated in Australian Dollars (2017: assets totalling £36,000). For the Company, a 5% increase in the value of each of the above currencies would have resulted in an impact on the income statement as follows: Euros US Dollars Australian Dollars Company Company 2018 £’000 (6) 15 2 11 2017 £’000 (6) 12 2 8 Capital risk management The Group’s objectives when managing capital are to safeguard the entity’s ability to continue as a going concern, so that it can continue to provide returns for Shareholders and beneﬁ ts for other stakeholders. The Group sets the amount of capital in proportion to risk. The Group manages the capital structure and makes adjustments to it in the light of changes in economic conditions and the risk characteristics of the underlying assets. In order to maintain or adjust the capital structure, the Group may adjust the amount of dividends paid to Shareholders, return capital to Shareholders, issue new shares, sell assets or take on bank debt. The decision to take on some element of debt gives the Group additional ﬂ exibility in its capital structure and enables it to lower its cost of capital. The Group considers its capital to include share capital, share premium, merger reserve, translation reserve, convertible loan note reserve, share option reserve, retained earnings and net cash. Net cash comprises borrowings less cash and cash equivalents. Total borrowings Less cash or cash equivalents Net cash Total equity Total capital gearing ratio NoteNote 20 2018 £’000 404 (725) (321) 4,849 0% 2017 restated £’000 391 (1,390) (999) 5,232 0% 254300 Dillistone AR pp36-END.indd 66 254300 Dillistone AR pp36-END.indd 66 22/05/2019 22:30 22/05/2019 22:30 FINANCIAL STATEMENTS 67 Summary of ﬁ nancial assets and liabilities by category The carrying amounts of the ﬁ nancial assets and liabilities as recognised at the statement of ﬁ nancial position date of the years under review may also be categorised as follows: Loans and receivables Cash and cash equivalents Trade and other receivables Financial liabilities held at amortised cost Trade and other payables Borrowings Bank overdraft Financial liabilities held at fair value Contingent consideration Group Group 2018 £’000 725 1,205 1,930 Group Group 2018 £’000 1,128 404 - - 1,532 2017 £’000 1,390 1,414 2,804 2017 £’000 Company Company 2018 £’000 - 1,253 1,253 Company Company 2018 £’000 2017 £’000 99 915 1,014 2017 £’000 1,208 1,070 2,394 391 - 146 1,745 404 15 - 1,489 391 - 146 2,931 Financial assets and ﬁ nancial liabilities measured at fair value in the statement of ﬁ nancial position are grouped into three Levels of a fair value hierarchy. The three Levels are deﬁ ned based on the observability of signiﬁ cant inputs to the measurement, as follows: (cid:129) Level 1: quoted prices (unadjusted) in active markets for identical assets or liabilities (cid:129) Level 2: inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly (cid:129) Level 3: unobservable inputs for the asset or liability. The following table shows the Levels within the hierarchy of ﬁ nancial assets and liabilities measured at fair value on a recurring basis at 31 December 2018 and 31 December 2017: Contingent consideration 2018 £’000 Level 2 - 2017 £’000 Level 2 146 The Group’s ﬁ nance team performs valuations of ﬁ nancial items for ﬁ nancial reporting purposes, including Level 3 fair values, in consultation with third party valuation specialists for complex valuations. Valuation techniques are selected based on the characteristics of each instrument, with the overall objective of maximising the use of market-based information. The ﬁ nance team reports directly to the Group Finance Director and to the audit committee. The valuation techniques used for instruments categorised in Level 2 and 3 are described below: Contingent consideration (2017 – Level 2) In 2017, the fair value of contingent consideration relates to the acquisition of ISV Software and is estimated using a present value technique. The contingent consideration at 31 December 2017 (level 2) of £146,000 is included at fair value which has been calculated as payable based on the revenues of ISV Software to 30 September 2017. The contingent consideration was paid in 2018. 254300 Dillistone AR pp36-END.indd 67 254300 Dillistone AR pp36-END.indd 67 22/05/2019 22:30 22/05/2019 22:30 68 DILLISTONE GROUP PLC Annual Report and Accounts 2018 NOTES TO THE FINANCIAL STATEMENTS For the year ended 31 December 2018 Continued 26. IFRS 15 impact on 2017 and 2018 results The material change to the Group’s reported revenue following adoption of IFRS 15 arose on the timing of recognising revenue on perpetual licences sold with mandatory support contracts. Previously, these licences were deemed separate from the support contract, whereas under IFRS 15 they represent one performance obligation. Revenue on such licence sales was thus recognised at a point in time, on the customer’s practical acceptance of the software. Under IFRS 15, this revenue is recognised over time. As the actual life of the support contract is unknown at inception, an estimate of 5 years has been made following analysis of the historic turnover rates of support contracts. If this period was shorter, revenue would be recognised more quickly and vice versa. See note 1.4 for further details of how revenue is recognised following the adoption of IFRS 15. Revenue from previous periods is thus deferred and recognised later. Adjustments are required to: (cid:129) (cid:129) (cid:129) (cid:129) Revenue in the period, being revenue released as deferred from prior periods and current period revenue deferred; Retained earnings, being revenue deferred from prior periods and cumulative tax effects; Trade and other liabilities both current and non-current, being deferred revenue; and Deferred and current tax, arising on revenue already subject to tax that will be recognised in future periods. The results for 2018 fully incorporate these changes. As IFRS 15 has been adopted retrospectively, the reported results for 2017 must also be adjusted as if that standard applied in full to that period. The impact of adopting IFRS 15 therefore had the following effect on the Group’s primary ﬁ nancial statements: Impact on the Consolidated Statement of Comprehensive income for the year ended 31 December 2017 Revenue Cost of sales Gross proﬁ t Administrative expenses Result from operating activities Financial income Financial cost Loss before tax Tax income (Loss)/proﬁ t for the period Earnings per share Basic Diluted As reported previously £’000 9,582 (1,536) 8,046 (8,560) (514) 1 (12) (525) 454 (71) (0.36)p (0.36)p Effect £’000 150 - 150 - 150 - - 150 (22) 128 As reported under IFRS 15 £’000 9,732 (1,536) 8,196 (8,560) (364) 1 (12) (375) 432 57 0.29p 0.29p 254300 Dillistone AR pp36-END.indd 68 254300 Dillistone AR pp36-END.indd 68 22/05/2019 22:30 22/05/2019 22:30 FINANCIAL STATEMENTS 69 As reported previously £’000 Effect £’000 As reported under IFRS 15 £’000 8,460 3,070 11,530 983 1,631 365 14 - - - - - - - 8,460 3,070 11,530 983 1,631 365 14 3,107 (1,062) 2,045 101 93 - - 101 93 6,294 (1,062) 5,232 12 386 668 4,335 5 (170) 5,236 11,530 782 - (160) 794 386 508 440 4,775 - - 1,062 - 5 (170) 6,298 11,530 Impact on Consolidated statement of ﬁ nancial position as at 31 December 2017 ASSETS Non-current assets Current assets Total assets EQUITY AND LIABILITIES Equity Share capital Share premium Merger reserve Convertible loan reserve Retained earnings Share option reserve Translation reserve Total equity Liabilities Non current liabilities Trade and other payables Borrowings Deferred tax Current liabilities Trade and other payables Borrowings Current tax (receivable)/payable Total liabilities Total liabilities and equity 254300 Dillistone AR pp36-END.indd 69 254300 Dillistone AR pp36-END.indd 69 22/05/2019 22:30 22/05/2019 22:30 70 DILLISTONE GROUP PLC Annual Report and Accounts 2018 NOTES TO THE FINANCIAL STATEMENTS For the year ended 31 December 2018 Continued Impact on Consolidated statement of cash ﬂ ows for year ended 31 December 2017 Operating activities Loss before taxation As reported previously £’000 Effect £’000 As reported under IFRS 15 £’000 (525) 150 (375) Operating cash ﬂ ows before movements in working capital 1,432 150 Decrease in receivables Decrease in inventories Decrease in payables Taxation Paid Net Cash generated by operating activities 573 2 (123) (12) 1,872 - - (150) - - 1,582 573 2 (273) (12) 1,872 Impact on Consolidated Statement of Comprehensive Income for year ended 31 December 2018 See Note 1.4 for details of how revenue income is recognised following the adoption of IFRS 15. Revenue Cost of sales Gross proﬁ t Administrative expenses Result from operating activities Financial income Financial cost Loss before tax Tax income (Loss)/proﬁ t for the period Earnings per share Basic Diluted Under previous accounting policy £’000 Effect of IFRS 15 £’000 As reported under IFRS 15 £’000 8,588 (1,054) 7,534 (8,052) (518) 1 (38) (555) 206 (349) (1.85)p (1.85)p 104 - 104 - 104 - - 104 (15) 89 8,692 (1,054) 7,638 (8,052) (414) 1 (38) (451) 191 (260) (1.32)p (1.32)p 254300 Dillistone AR pp36-END.indd 70 254300 Dillistone AR pp36-END.indd 70 22/05/2019 22:30 22/05/2019 22:30 FINANCIAL STATEMENTS 71 Impact on Consolidated Statement of Financial Position for year ended 31 December 2018 ASSETS Non-current assets Current assets Total assets EQUITY AND LIABILITIES Equity Share capital Share premium Merger reserve Convertible loan reserve Retained earnings Share option reserve Translation reserve Total equity Liabilities Non current liabilities Trade and other payables Borrowings Deferred tax Current liabilities Trade and other payables Borrowings Current tax (receivable)/payable Total liabilities Total liabilities and equity Under previous accounting policy £’000 Effect of IFRS 15 £’000 As reported under IFRS 15 £’000 8,282 2,250 10,532 983 1,631 365 14 2,659 106 73 5,831 2 390 518 3,931 14 (154) 4,701 10,532 - - - - - - - (972) - (10) (982) 688 - (29) 439 - (116) 982 - 8,282 2,250 10,532 983 1,631 365 14 1,687 106 63 4,849 690 390 489 4,370 14 (270) 5,683 10,532 254300 Dillistone AR pp36-END.indd 71 254300 Dillistone AR pp36-END.indd 71 22/05/2019 22:30 22/05/2019 22:30 72 DILLISTONE GROUP PLC Annual Report and Accounts 2018 NOTES TO THE FINANCIAL STATEMENTS For the year ended 31 December 2018 Continued Impact on Consolidated Statement of Cash ﬂ ows for year ended 31 December 2018 Operating activities Loss before taxation Operating cash ﬂ ows before movements in working capital Decrease in receivables Decrease in inventories Decrease in payables Taxation Paid Net Cash generated by operating activities Under previous accounting policy £’000 Effect of IFRS 15 £’000 As reported under IFRS 15 £’000 (555) 104 (451) 1,271 171 - (367) 65 1,140 104 1,375 - - (104) - - 171 - (471) 65 1,140 27. Prior year reclassiﬁ cation The Group reclassiﬁ ed contractor and internal development costs previously recognised as cost of sales as administrative expenses during the period. The 2017 comparatives have also been restated on this basis. The impact in 2018 was £0.216m (2017: £0.289m). 28. Post Balance Sheet events In February 2019 the Group announced a major restructuring and closing of its London Ofﬁ ce. The Board anticipates that the efﬁ ciencies gained from merging the function teams across the Group into fewer locations will allow the Group to maintain current levels of client service and product development investment while delivering a signiﬁ cant reduction in costs from 2020 onwards. This process will inevitably lead to the Group incurring restructuring costs during 2019, which are currently estimated to be in the region of £500,000 to £900,000. 29. Control No individual Shareholder, or Shareholders acting in concert, hold more than 50% of voting shares, and accordingly there is not considered to be an ‘ultimate controlling party’. 30. Related party transactions Group The Directors received dividends paid by the Company of £43,000 (2017: £240,000). Details of earnings of key management is included in note 7. Such remuneration includes a divisional director’s spouse who is employed as a software engineer. The amounts outstanding at the year end due to key management was £10,000 (2017: £30,000) (excluding Employer’s NI) and related to estimated bonus payments payable in relation to 2018. The Directors and certain key management participated in the issue of convertible loan notes in 2017 as follows: Mike Love Giles Fearnley Jason Starr Rory Howard Julie Pomeroy Alex James Simon Warburton Paul Mather £250,000 £75,000 £24,250 £24,250 £10,000 £1,000 £8,000 £7,500 254300 Dillistone AR pp36-END.indd 72 254300 Dillistone AR pp36-END.indd 72 22/05/2019 22:30 22/05/2019 22:30 FINANCIAL STATEMENTS 73 Company The Company has a related party relationship with its subsidiaries, its Directors, and other employees of the Company with management responsibility. During the year the Company received a dividend of £589,000 from its subsidiary company Dillistone Systems (US) Inc (2017: £nil). At the year end, Dillistone Systems (US) Inc owed £282,000 (2017: owed £257,000) to the Company. During the current year Dillistone Systems Limited paid a management charge of £264,000 (2017: £306,000) to Dillistone Group Plc. At the year end Dillistone Systems Limited was owed £185,000 (2017: £752,000). The Company was owed £42,000 (2017: £36,000) by Dillistone Systems (Australia) Pty Limited at the year end. Voyager Software paid a management charge of £144,000 (2017: £144,000) and a dividend of £500,000 (2017: £nil). It owed the Company £255,000 at the year end (2017: £187,000). FCP Internet Limited paid a management charge of £84,000 (2017: £84,000) and a dividend of £500,000 (2017: £1,000,000) and was owed by the Company £538,000 at the year end (2017: owed by the Company £754,000). A management charge of £60,000 (2017: £60,000) was received from ISV Software together with a dividend of £250,000 (2017: £400,000) and at the year end the Company owed ISV £100,000 (2017: £208,000). GatedTalent Limited paid a management charge of £50,000 (2017: £86,000) and owed the Company £654,000 at the year end (2017: £373,000). FCP Internet Holdings Limited was owed by the Company £2,000 at the year end (2017: owed by the Company £2,000). Woodcote Software Limited owed the Company £13,000 (2017: £13,000). Management charges payable by Group members to Dillistone Group Plc relate to management support provided directly to them. 31. Dividends The dividends paid in 2018 and 2017 were £98,000 (0.5p per share) and £551,000 (2.8p per share) respectively. No ﬁ nal dividend in respect of the year ended 31 December 2018 is proposed. 254300 Dillistone AR pp36-END.indd 73 254300 Dillistone AR pp36-END.indd 73 22/05/2019 22:30 22/05/2019 22:30 74 DILLISTONE GROUP PLC Annual Report and Accounts 2018 DIRECTORS AND ADVISERS Directors Secretary Company number Registered ofﬁ ce Independent auditor Principal bankers Solicitors Nominated adviser Broker Registrars M D Love – Non-Executive Chairman G R Fearnley – Non-Executive Director J S Starr – Chief Executive R Howard – Operations Director A D James – Product Development Director J P Pomeroy – Group Finance Director A F Milne – MD – Dillistone Systems J P Pomeroy 4578125 50 Leman St London E1 8HQ BDO LLP 55 Baker Street London W1U 7EU HSBC Bank Plc Basingstoke Commercial Centre 8 London Street Basingstoke RG21 7NU Blake Morgan LLP Apex Plaza Forbury Road Reading RG1 1AX WH Ireland Limited 24 Martin Lane London EC4R 0DR WH Ireland Limited 24 Martin Lane London EC4R 0DR Link Assets Services The Registry 34 Beckenham Road Beckenham Kent BR3 4TU 254300 Dillistone AR pp36-END.indd 74 254300 Dillistone AR pp36-END.indd 74 22/05/2019 22:30 22/05/2019 22:30 4 Designed and printed by Perivan 6 D I L L I S T O N E A N N U A L R E P O R T 2 0 1 8 DILLISTONE GROUP PLC EMPOWERING RECRUITMENT GLOBALLY THROUGH TECHNOLOGY We provide software and services to recruitment firms and recruiting teams within major corporations. Across our subsidiaries, we work with over 2,000 firms in over 60 countries. Our three divisions are Dillistone Systems, Voyager Software and GatedTalent. Dillistone Systems specialises in the supply of software and services into executive level recruitment teams. Voyager Software’s clientele are primarily involved in contingent recruitment, including permanent placement, contract placement and the provision of temporary staff. GatedTalent was established in 2017 to provide a network allowing executives to share information with selected executive recruiters in a GDPR compliant manner. Contents Strategic Report Highlights CEO’s review Financial review Governance Dillistone Group at a glance Chairman’s statement Corporate governance report Report to the Shareholders on Directors’ remuneration Board of Directors Directors’ report Financial Statements Independent Auditor’s report to the members of Dillistone Group Plc Consolidated statement of comprehensive income Consolidated statement of changes in equity 31 Company statement of changes in equity 32 Consolidated and Company statement of financial position Consolidated cash flow statement Company cash flow statement Notes to the financial statements Directors and advisers 24 30 33 34 35 36 74 1 2 4 5 10 11 17 20 22 FINANCIAL STATEMENTSDILLISTONE GROUP PLC Annual Report and Accounts 2018 3 R E P O R T A N N U A L 2 0 1 8 50 Leman St London E1 8HQ www.dillistonegroup.com STRATEGIC REPORT

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