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7digital Group PLC (7DIG)

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Tuesday 29 September, 2020

7digital Group PLC

Full Year Results

RNS Number : 3728A
7digital Group PLC
29 September 2020
 

29 September 2020

7digital Group plc

("7digital", "the Group" or "the Company")

 

Full Year Results

 

7digital Group plc (AIM: 7DIG), the global leader in B2B end-to-end digital music solutions, announces its audited full year results for the year ended 31 December 2019.

 

Financial Summary

 

· Revenue of £9.3m (2018: £19.9m)

· Revenue from continuing operations * : £8.2m (2018: £9.3m)

· Gross profit of £6.3m (2018: £14.7m)

· Gross margin of 67.7% (2018: 74.0%)

· Gross margin from continuing operations * : 64.0% (2018: 62.0%)

· Operating loss reduced by 54% to £5.6m (£12.1m)

· Adjusted EBITDA loss of £2.8m (2018 restated: £2.5m)

· Loss per share reduced by 84% to 0.47p (2018: 2.97p)

· Successfully delivered annualised cost savings of more than £6.0m, reducing operational cost run rate by over 50% since beginning of the year

 

*After excluding the termination of Juke contract (major customer) during the year

 

Operational Highlights

 

· Received €4m settlement from MediaMarktSaturn over Juke contract and agreed sale of select unprofitable technology and staff to TDC Group for €1.375m

· New Board in place since July 2019 led by Tamir Koch and David Lazarus, both experienced businessmen widely recognised for technology entrepreneurship and executive leadership

· £4.1 million invested in 2019, rising to £5 million in first 12 months since taking charge, to reposition the company, stabilise the business and secure future growth

· Paul Langworthy promoted to CEO and Michael Juskiewicz appointed CFO to oversee implementation of new strategy

· Repositioned 7digital as a music technology company and the global leader in B2B music solutions

· Streamlined the technology offering - supporting both established markets and new business models and verticals with greater profit margins

· New contract wins, contract expansions and renewals show growing demand for digital music services in new entertainment formats

 

Tamir Koch, Chairman of 7digital, commented: " Upon taking over the Group halfway through the year, the new Board set in motion a transformation programme to bring the business to break even as quickly as possible. Our plan was to build a business around best-in-class technology, a global music catalogue and music industry expertise. We provided the required financial support to move the business forward, reduced our cost base by moving away from the development of bespoke, customer-specific services and focused on delivering a world-leading, cloud-based, music platform-as-a-service that offers true global coverage at scale. The business is now on a much more stable financial footing, winning market share in strategic growth industries, and the Board is very excited about the future." 

 

Paul Langworthy, CEO of 7digital, commented: "Having realigned our strategy around our leading technology offering, we have been able to capitalise on the growing demand for digital music services and enjoy meaningful growth and significant revenue opportunities from the fastest-growing sectors in social media, online fitness and artist monetisation. The strength in our core business paired with financially supportive majority shareholders and an extensive pipeline of deals, gives us full confidence in our long-term growth and sustainability in 2020 and beyond."

 

 

The Company will today be publishing its 2019 Annual Report and Accounts. This will be available to download from the investor relations section of the 7digital website at  www.7digital.com/reports and will be posted to shareholders.

 

 

Enquiries

 

7digital                                                              

020 7099 7777

Paul Langworthy, CEO  

 

 

 

Arden Partners (Nominated Adviser and Broker)          

020 7614 5900

Richard Johnson, Benjamin Cryer

 

 

 

Luther Pendragon (Financial PR)   

020 7618 9100

Harry Chathli, Joe Quinlan, Elliot Fradd  

 

 

 

 

 

About 7digital ( www.7digital.com )

 

7digital is the global leader in B2B end-to-end digital music solutions. The core of its business is the provision of robust and scalable technical infrastructure, licensing expertise and extensive global music rights used to create music and music video streaming and radio services for a diverse range of customers. These include consumer and social media brands, online fitness technologies, mobile carriers, broadcasters, automotive systems, record labels and retailers.  7digital also offers radio production and music curation services, editorial strategy and content management expertise.

 

7digital fosters industry growth and innovation by simplifying access to music for clients. From years of being the largest independent producer of programming for the BBC and powering services for partners like Triller, Soundtrack Your Brand, Global Eagle, GrandPad and Fender, 7digital is perfectly positioned to lead innovation at the intersection of digital music and next-generation radio services.

 

 

 

Operational Review

 

In 2019, 7digital secured new investment and installed a new Board and management team to stabilise the business and position it for future growth. In the second half of the year, the new Board implemented a series of critical changes and refocused resources to turn around the Company and ensure it could fully support its customers and employees. By taking advantage of the core technology and industry relationships, the management team and Board successfully worked together to lay the foundation for how 7digital positions, sells, develops and delivers its technology to current and future clients. The Group won new business, streamlined operations, returned to financial stability and set on a path to financial stability.

 

By contrast, in the first half of 2019, the Group was significantly impacted by the loss of its largest contract with European retailer MediaMarktSaturn ("MMS") to provide the music streaming service for its wholly-owned subsidiary, Juke Entertainment Gmbh ("Juke"). The Group had to take immediate action and agreed the sale of select technology from the Company and the transfer of staff to TDC Group for a total consideration of €1.375m in cash. This technology, which was only used by one customer, had become unprofitable to maintain.

 

As a result of the changes and progress made in the second half, the Board is pleased to report that the Group's revenue from operations (after adjusting for the loss of the Juke contract) declined only by 12% in 2019 to £8.2m. However, gross profit on the same basis increased by 2% to £5.2m. The statutory operating loss for 2019 decreased by 54% to £5.6m (£12.1m).  

 

Investment and Refocused Strategy

 

From June 2019 onwards, the Group welcomed investment from a consortium comprising Magic Investment S.A. and Shmuel Koch Holdings Limited, led by Tamir Koch and David Lazarus who joined the Board as respectively Non-Executive Chairman and Non-Executive Director in July 2019. This group of successful entrepreneurs and business leaders has provided the required financial support to move the business forward, including a £5m cash injection in the first 12 months of taking charge of the Group. However, the new Board also recognised that a change of strategy and management team was required to suit the changing business environment. Paul Langworthy, the Group's former Chief Operating Officer, was appointed Chief Executive Officer and set about a plan to bring the business to break even as quickly as possible.

 

This new strategy recognised that 7digital is foremost a technology company rather than a media company. It has allowed the Group to considerably reduce its cost base by moving away from the development of a bespoke, customer-specific service to focus on delivering a highly productised technology offering. This contrasts with previous strategies where the Company implemented bespoke solutions for a diverse range of customers often with divergent needs, leading to unprofitable business at higher risk. From an operational standpoint, the new strategy has enabled 7digital to streamline its technology estate as well as the associated costs and staffing levels. The Group also retired a number of legacy radio technology services that were no longer strategic for 7digital and improved its technology efficiency through the use of cloud-based services. As a result, the Group was able to reduce its operational cost run rate by over 50% since the beginning of 2019 and successfully deliver annualised cost savings of over £6.0 million.

 

With a more stable financial platform in place, the Group has been able to focus on delivering a world-leading, cloud-based, music platform-as-a-service that provides true global coverage at scale. By moving from bespoke modular solutions to a highly productised technology offering, 7digital is now able to support a myriad of business use cases while operating with much greater profit margins.

 

Winning New Business and Renewing Important Contracts

 

In spite of a difficult year and poor market sentiment, the Group was able to renew existing customer contracts and sign new deals with a number of innovative companies in fast-growing sectors.

 

7digital signed an initial one-year deal with Dubset, a rights technology company that identifies and collects royalties within mix content. The Group also entered significant partnerships in fast-growing sectors.

 

The Group was also awarded an initial one year-long contract to provide its Music Platform-as-a-Service in support of an innovative new music streaming company. The full premium service was launched in a single European market and is in the process of rolling out to several additional countries.

 

This commercial momentum accelerated post-year end as the Group's Music Platform-as-a-Service was used to launch jazzed, the world's first dedicated audio-visual streaming service for jazz and jazz-influenced music. This deal epitomises the growing opportunity for premium streaming services catering to more specific tastes, genres and geographies.

 

In addition to jazzed, the Group has signed multiple new contracts and contract renewals. This includes a new contract to power Single Music, a Shopify-integrated, direct-to-fan distribution platform as well as a contract renewal with GrandPad, the first purpose-built tablet for people over the age of 75. The Group has also renewed its contract with major music label to support its streaming service through a French mobile carrier, and fan-facing music playlist service.

 

 

Financial Review

 

On 4 January 2019, the Group announced that its largest customer, MediaMarktSaturn, had indicated that it may wish to change the current arrangements and that this could involve 7digital taking more responsibility for certain aspects of the service or the service being closed with a resulting termination payment becoming due and payable to the Group. On 1 March 2019, 7digital announced that it had accepted settlement of, and release from, all outstanding contracts and commitments relating to the Juke music service for an immediate payment by Juke of €4,000,000. Further, Juke agreed to write off all interest payments and £250,000 of the principal amount of the convertible loan note issued to Juke (as announced on 26 October 2018). 7digital settled a further £500,000 balance of the convertible loan note principal amount from the proceeds of the Agreement.

 

Following the loss of the MMS contracts, the platform was used by only one customer and had become unprofitable for the Group to maintain. On 2 May 2019, the Group announced the sale of bespoke technology from the Danish business and transfer of staff to TDC Group ("TDC"), the largest telecommunications company in Denmark. The sale transferred control of bespoke technology, and the resources to maintain it, to TDC.

 

The consideration was €1.375 million, of which £1.0 million was paid to 7digital in cash during 2019 being equivalent to the net value of the assets sold.  The remainder of the cash consideration was retained by TDC to cover certain potential liabilities of which £47k was released by TDC to the Group in April 2020 to the extent that it is not required to meet such liabilities and is subject to customary post-closing adjustments. The annualised losses eliminated from the business totalled around £1.6 million. This sale meant that 7digital would focus its resources on its productised, cloud-hosted technology.

 

On 13 May 2019, Magic Investments S.A. (a technology investment holding company) ("Magic") bought the remaining loans from the existing shareholders at face value of £0.6 million.

 

On 7 June 2019, a consortium, comprising Magic and Shmuel Koch Holdings Limited ("SKH") subscribed for, an aggregate of, 634,132,641 shares at 0.01 pence per share, to raise £1.3 million (before expenses). On the same date, Magic agreed to capitalise the outstanding £585,932 principal and accrued interest of the Convertible Loan Notes at the Exchange Price of 0.02p into 332,915,704 shares with a discount of 12%. A number of changes to the Board were proposed, conditional upon the passing of the Resolutions at the General Meeting held on 25 June 2019.

 

On 18 July 2019, Paul Langworthy, the Group's current Chief Operating Officer and key contributor to the revised business strategy, succeeded John Aalbers as Chief Executive Officer and as a Director of the Group. Michael Juskiewicz, the CFO of eMusic, joined as Chief Financial Officer and was appointed to the Board on 20 September 2019.

 

On 20 September 2019, the Group announced that it had raised a further £1.88 million through a subscription of 937,900,000 new Ordinary shares of 0.01 pence to new and existing shareholders.

 

On 25 September 2019, the Group announced that it had completed an oversubscribed conditional Placing. The Placing of 130,848,460 new Ordinary Shares raised approximately £0.3 million (before expenses) at an issue price of 0.01 pence per share on 4 October 2019.

 

During the year, the Group secured a total of £4.1 million (gross) in funding.

 

Results and Financial Key Performance Indicators

 

The Group's revenue from operations (after adjusting for the loss of the Juke contract as shown on the table below) declined by 12% in 2019 to £8.2m (2018: £9.3m).

 

On-going gross profit% increased to 64.0%, a rise of 2 percentage points to £5.2m, as a result of growth in high-margin B2B licensing revenues which now represents a greater share of the total sales mix. The statutory operating loss for 2019 decreased 54% to £5.6m (2018: £12.1m). The adjusted EBITDA loss for 2019 increased 10% to £2.8m (2018: £2.5m) and this is reconciled to the operating loss in note 6.

 

The decrease in 2019 statutory operating loss is due to decrease in administration expenses by 52.1%, largely due to the significant payroll and technology cost reductions implemented by the new management under Paul Langworthy, the incoming CEO, to align the business with the new strategy going forward.

 

The loss per share decreased by 84% to 0.47 pence (2018: 2.97 pence).

 

Revenue

2019 reported

£'000

2019 ongoing* £'000

2018 reported

£'000

2018 ongoing*

£'000

Change ongoing*

Change ongoing*

%

Licensing revenue

5,341

4,227

13,410

4,046

181

4%

Content

2,390

2,390

3,933

2,704

-314

-12%

Creative

1,572

1,572

2,569

2,569

-997

-39%

Total Revenues

9,303

8,189

19,912

9,319

-1,130

-12%

Gross Margin

6,297

5,239

14,727

5,816

-577

-10%

Gross Margin%

68.0%

64.0%

74.0%

62.0%

+2.0%

 

 

 

Expenditure

 

Administrative expenses

2019

£'000

2018

£'000

 

Change

%

Underlying Administrative Expenses

11,235

19,918

 

-8,683

-43.6%

Other Adjusted Administrative Expenses

1,802

7,305

 

-5,503

 

Total Administrative expenses

13,037

27,223

 

14,186

-52.1%

 

*After excluding the termination of Juke contract (major customer) during the year

 

 

Other Adjusting Items

 

Other adjusting items for the year totaled £1.8m of which £0.7m relates to corporate restructuring, £0.5m to legal fees relating to fund raising and contingency planning, £0.4m of expenses and provisions relating to the closure of the Danish business and £0.2m as a legal provision for an ongoing litigation issue.

 

Dividend

 

During the year, 7digital did not pay an interim or final 2019 dividend (2018: no interim or final 2018 dividend). The Board of Directors is not proposing a final dividend in the current year.

 

Shareholder Loans

 

On 8 February 2019, the Group received notice of conversion from one holder in respect of £193,858 (including interest) of the Facility at a conversion price of 1p pursuant to which 19,385,843 ordinary shares were issued. Following conversion, an aggregate of £1,311,691 of the facility remained outstanding. 

 

On 1 March 2019, the Group agreed to a €4m settlement from MMS under the MMS Settlement Agreement noted above. Out of the loan payable of £0.75m plus accrued interest of £27k, £0.5m was settled against the above €4m and £0.25m, together with the accrued interest of £27k, was forgiven by MMS. Following settlement of MMS's share of the Facility, an aggregate of £561,691 of the facility remained outstanding.

 

On 11 April 2019 the Group received a notice from the holder in respect of a tranche of the Facility, due to non-payment of interest. The Notice related to outstanding Facility and interest amounting to £325,570. Following receipt of the Notice, the outstanding amount became due and payable by 3 May 2019. The remaining tranche under the Facility of £0.25m plus accrued interest remained outstanding to another loan note holder.

 

On 13 May 2019 the remaining Facility was sold to Magic. Magic entered into a standstill agreement with the Group pursuant to which it agreed not to seek early redemption or conversion of the Facility before 30 June 2019 except in certain limited circumstances (including a major equity issuance or the insolvency of the Group).

 

On 7 June 2019 Magic agreed to capitalise the outstanding £585,932 principal and accrued interest of the Facility held by it into 332,915,704 new Ordinary Shares (at a 12 per cent. discount to the Issue Price). 

 

Cash and Cash Flow

 

As of 31 December 2019, the Group had a cash balance of £0.1m (2018: £0.5m).

 

Net cash outflows in 2019 totalled £0.3m (2018: outflow £6.4m). The reduction was largely driven from a decrease in operating cash outflow of 38% as a result of the effective cost reduction efforts implemented by the new management team, issuance of share capital to the consortium and the sale of the Danish platform.

 

 

CONSOLIDATED INCOME STATEMENT AND STATEMENT OF COMPREHENSIVE INCOME

Year ended 31 December 2019

 

 

 

 

Year to 31 Dec 2019

 

 

 

Year to 31 Dec 2018

 

 

 

 

 

 

 

Notes

£'000

 

£'000

 

 

 

 

 

Revenue

2

9,303

 

19,912

Cost of sales

 

(3,006)

 

(5,185)

Gross profit

 

6,297

 

14,727

 

 

 

 

 

Other Income

5

1,103

 

371

Administrative expenses

 

(13,037)

 

(27,223)

 

 

 

 

 

Adjusted operating loss

 6

(3,358)

 

(4,599)

- Share based payments

26

(239)

 

(173)

- Foreign exchange

 

(238)

 

(48)

- Other adjusting items

3

(1,802)

 

(7,305)

 

 

 

 

 

Operating loss

 4

(5,637)

 

(12,125)

 

 

 

 

 

Finance income

9

-

 

31

Finance cost

9

(172)

 

(101)

Loss before tax

 

(5,809)

 

(12,195)

 

 

 

 

 

Taxation on continuing operations

10

(3)

 

 334

Loss for the year attributable to owners of the parent company

 

(5,812)

 

(11,861)

 

 

 

 

 

Loss per share (pence)

 

 

 

 

Basic and diluted

11

(0.47)

 

(2.97)

 

 

 

Consolidated Statement of Comprehensive Income

 

 

 

Year to 31 Dec 2019

 

Year to 31 Dec 2018

 

Notes

£'000

 

£'000

 

 

 

 

 

Loss for the year

 

(5,812)

 

(11,861)

 

 

 

 

 

Items that may be reclassified subsequently to profit or loss:

 

 

 

 

Exchange differences on translation of foreign operations

22 

184

 

(43)

Other comprehensive loss

 

(5,628)

 

(11,904)

 

 

 

 

 

 

 

 

 

 

Total comprehensive loss attributable to owners of the parent company

 

(5,628)

 

(11,904)

 

 

 

 

 

 

 

CONSOLIDATED STATEMENT OF FINANCIAL POSITION

31 December 2019

 

 

 

2019

 

 

2018

 

 

Notes

£'000

 

£'000

 

Assets

 

 

 

 

 

Non-current assets

 

 

 

 

 

Intangible assets

12

-

 

1,175

 

Property, plant and equipment

13

51

 

128

 

Right-of-use assets

14

1,321

 

-

 

 

 

1,372

 

1,303

 

Current assets

 

 

 

 

 

Trade and other receivables

16

1,631

 

5,784

 

Contract assets

2

255

 

458

 

Cash and cash equivalents

 

149

 

461

 

 

 

2,035

 

6,703

 

Total assets

 

3,407

 

8,006

 

Current liabilities

 

 

 

 

 

Trade and other payables

17

(7,009)

 

(9,739)

 

Loans and borrowings

18

-

 

(1,306)

 

Derivative liability

18

-

 

(257)

 

Contract liabilities

2

(335)

 

(1,149)

 

Lease liability

14

(472)

 

-

 

Provisions for liabilities and charges

19

(768)

 

(303)

 

 

 

(8,584)

 

(12,754)

 

Net current liabilities

 

(6,549)

 

(6,051)

 

 

 

 

 

 

 

Non-current liabilities

 

 

 

 

 

Other payables

17

(676)

 

(1,066)

 

Contract liabilities

2

(7)

 

(141)

 

Lease liability

14

(1,186)

 

-

 

Provisions for liabilities and charges

19

-

 

(125)

 

 

 

(1,869)

 

(1,332)

 

Total liabilities

 

(10,453)

 

(14,086)

 

Net liabilities

 

(7,046)

 

(6,080)

 

 

 

 

 

 

 

Equity

 

 

 

 

 

Share capital

21

14,817

 

14,420

 

Share premium account

 21 

12,043

 

8,294

 

Other reserves

22

(2,845)

 

(3,268)

 

Retained earnings

 

(31,061)

 

(25,526)

 

Total deficit

 

(7,046)

 

(6,080)

 

 

 

 

 

 

 

CONSOLIDATED CASHFLOW STATEMENT

Year ended 31 December 2019

 

 

 

 

 

 

Year to 31 Dec 2019

 

 

 

Year to 31 Dec 2018

 

 

 

 Notes

£'000

 

£'000

 

 

 

 

 

Loss for the year

 

(5,812)

 

(11,861)

Adjustments for:

 

 

 

 

Taxation

10 

3

 

(334)

Finance Cost

 9

172

 

101

Profit on sale of fixed assets

 

(125)

 

(11)

Foreign exchange

 4

238

 

48

Amortisation of intangible assets

 12

228

 

1,839

Amortisation of right-of-use asset

 14

415

 

-

Depreciation of fixed assets

 13

77

 

251

Impairment of intangible fixed assets

 12

-

 

3,946

Impairment of tangible fixed assets

 13

-

 

131

Share based payments

 26

239

 

173

Increase/(decrease) in provisions

 19

340

 

(9)

Decrease in accruals and deferred income

 

(1,190)

 

(3,639)

Decrease in trade and other receivables

 

3,793

 

778

(Decrease)/increase in trade and other payables

 

(2,658)

 

1,732

Cash flows used in operating activities

 

(4,280)

 

(6,855)

Taxation

 10

19

 

(44)

Interest income received

  9

-

 

1

Interest expense paid

  9

(31)

 

(39)

Net cash used in operating activities

 

(4,292)

 

(6,937)

 

 

 

 

 

Investing activities

 

 

 

 

Purchase of property, plant and equipment, and intangible assets

 

-

 

(1,000)

Proceeds from sale of intangible and tangible fixed assets

 

1,073

 

11

Net cash generated/(used) in investing activities

 

1,073

 

(989)

 

 

 

 

 

Financing activities

 

 

 

 

Proceeds from issuance of share capital (net)

 

3,313

 

-

Proceeds from issuance of shareholder loans

18

-

 

1,500

Principal paid on lease liabilities

14

(352)

 

-

Net cash generated from financing activities

 

2,961

 

1,500

 

 

 

 

 

Net decrease in cash and cash equivalents

 

(258)

 

(6,426)

Cash and cash equivalents at beginning period

 

461

 

6,978

Effect of foreign exchange rate changes

 

(54)

 

(91)

Cash and cash equivalents at end of year

 

149

 

461

 

 

 

 

 

 

 

 

  CONSOLIDATED STATEMENT OF CHANGES IN EQUITY

Year ended 31 December 2019  

 

Notes

Share capital

 

Share premium account

 

 

Reverse acquisition reserve (note 22)

 

Foreign exchange translation reserve

(note 22)

 

Merger reserve
(note 22)

 

Shares to be issued (note 22)

 

Retained earnings

 

Total

 

 

£'000

 

£'000

 

 

£'000

 

£'000

 

£'000

 

£'000

 

£'000

 

£'000

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

At 31 December 2018

 

 

14,420  

 

 

8,294

 

 

 

(4,430)

 

 

35

 

 

959

 

 

168

 

 

(25,526)

 

 

(6,080)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Comprehensive income/(loss) for the year

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loss for the year

 

 

 

 

 

-

 

-

 

-

 

(5,812)

 

(5,812)

Other comprehensive income

 

 

 

 

-

 

184

 

-

 

-

 

-

 

184

Total comprehensive income/(loss) for the year

 

-

 

-

 

 

-

 

184

 

-

 

-

 

(5,812)

 

(5,628)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Contributions by and distributions to owners

 

 

 

 

 

 

 

 

 

 

 

 

 

 

-

 

 

Share issued (net of costs)

21

397

 

3,749

 

 

-

 

-

 

-

 

-

 

-

 

4,146

Share based payments

26

-

 

-

 

 

-

 

-

 

-

 

239

 

-

 

239

Capital contribution

18

-

 

-

 

 

-

 

-

 

-

 

-

 

277

 

277

Total contributions by and distributions to owners

 

397

 

3,749

 

 

-

 

-

 

-

 

239

 

277

 

4,662

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

At 31 December 2019

 

14,817

 

12,043

 

 

(4,430)

 

219

 

959

 

407

 

(31,061)

 

(7,046)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

                                       

 

CONSOLIDATED STATEMENT OF CHANGES IN EQUITY

Year ended 31 December 2019

 

 

 

Notes

Share capital

 

Share premium account

 

 

Reverse acquisition reserve (note 21)

 

Foreign exchange translation reserve

(note 21)

 

Merger reserve
(note 21)

 

Shares to be issued (note 21)

 

Retained earnings

 

Total

 

 

£'000

 

£'000

 

 

£'000

 

£'000

 

£'000

 

£'000

 

£'000

 

£'000

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

At 31 December 2017 as previously stated

 

 

14,404  

 

 

8,232

 

 

 

(4,430)

 

 

78

 

 

959

 

 

26

 

 

(12,837)

 

 

6,432

Adjustment on the adoption of IFRS 15

 

 

 

 

-

 

 

-

 

 

 

-

 

 

-

 

 

-

 

 

-

 

 

(344)

 

 

(344)

Prior year adjustments

 

-

 

-

 

 

-

 

-

 

-

 

-

 

(484)

 

(484)

1 January 2018 as restated

 

14,404  

 

8,232

 

 

(4,430)

 

78

 

959

 

26

 

(13,665)

 

5,604

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Comprehensive loss for the year

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loss for the year

 

 

 

 

 

-

 

-

 

-

 

(11,861)

 

(11,861)

Other comprehensive loss

 

 

 

 

-

 

(43)

 

-

 

-

 

-

 

(43)

Total comprehensive loss for the year

 

-

 

-

 

 

-

 

(43)

 

-

 

-

 

(11,861)

 

(11,904)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Contributions by and distributions to owners

 

 

 

 

 

 

 

 

 

 

 

 

 

 

-

 

 

Share issued

21

16

 

62

 

 

-

 

-

 

-

 

-

 

-

 

78

Share based payments

26

-

 

-

 

 

-

 

-

 

-

 

142

 

-

 

142

Total contributions by and distributions to owners

 

16

 

62

 

 

-

 

-

 

-

 

142

 

-

 

220

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

At 31 December 2018

 

14,420

 

8,294

 

 

(4,430)

 

35

 

959

 

168

 

(25,526)

 

(6,080)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

NOTES TO THE FINANCIAL STATEMENTS

Year ended 31 December 2019

 

1.   Accounting policies

 

General information

7digital Group plc is a public company, limited by shares and incorporated in the United Kingdom (England and Wales) under the Companies Act 2006..

 

The Group prepares its consolidated financial statements in accordance with International Financial Reporting Standards ("IFRS") as adopted by the EU. The financial statements have been prepared on the historical cost basis, except for the revaluation of financial instruments. The principal accounting policies set out below have been consistently applied to all the periods presented in these financial statements; except as stated below.

 

Basis of Preparation

Statutory accounts for the year ended 31 December 2019 have been delivered to the Registrar of Companies. The financial information for the year ended 31 December 2019 contained in these results has been audited.

 

The financial information contained in these results has been prepared using the recognition and measurement requirements of International Financial Reporting Standards (IFRSs) as adopted by the EU. The accounting policies adopted in these results have been consistently applied to all the years presented and are consistent with the policies used in the preparation of the financial statements for the year ended 31 December 2019. New standards, amendments and interpretations to existing standards, which have been adopted by the Group for the year ended 31 December 2019, have been listed below.

 

  New standards and interpretations

 

a) New standards, interpretations and amendments effective from 1 January 2019.

 New standards impacting the Group that have been adopted in the annual financial statements for the year ended 31 December 2019, and which have given rise to changes in the Group's accounting policies are:

 

• IFRS 16 Leases (IFRS 16) refer note 14

 

The Group adopted IFRS 16 using the modified retrospective approach, with recognition of transitional adjustments on the date of initial application (1 January 2019), without restatement of comparative figures. The Group elected to apply the practical expedient to not reassess whether a contract is or contains a lease at the date of initial application. Contracts entered into before the transition date that were not identified as leases under IAS 17 and IFRIC 4 were not reassessed. The definition of a lease under IFRS 16 was applied only to contracts entered into or changed on or after 1 January 2019.

 

b) New standards, interpretations and amendments not yet effective.

There are a number of standards, amendments to standards, and interpretations which have been issued by the IASB that are effective in future accounting periods that the group has decided not to adopt early.  The most significant of these is:

 

• IAS 1 Presentation of Financial Statements and IAS 8 Accounting Policies, Changes in

Accounting Estimates and Errors (Amendment - Definition of Material)

• IFRS 3 Business Combinations (Amendment - Definition of Business)

• Revised Conceptual Framework for Financial Reporting

 

New and amended standards and Interpretations issued by the IASB that will apply for the first time in the next annual

financial statements are not expected to impact the Group as they are either not relevant to the Group's activities or require accounting which is consistent with the Group's current accounting policies.

 

Going concern

 

Summary

On 21 February 2020, a short term loan of £500k was signed with CSS Alpha (BVI) Limited. The loan is repayable over 12 months in equal parts starting from 28 March 2020 with interest based on 1.5% of the outstanding balance. The loan is guaranteed by one of the Directors.

 

On 3 September 2020, 7digital annouced the placing of 266,666,667 new Ordinary Shares of 0.01p each, which raised £6m at an issue price of 2.25 pence per share. The net proceeds of the fundraising will be used to meet the immediate working capital requirements of the Group and support immediate and medium term commercial growth opportunities, in particular within home fitness, artist monetisation, and social media.

 

Background to and reasons for the placing and subscription

The music industry is undergoing a period of change and opportunity whereby revenue sources are changing. and growing. Whereas five years ago revenues were dominated mainly by music sales and live performances, today streaming has displaced download music sales and COVID-19 has shut down live performances for much of 2020 and is likely to continue to impact live performances in the medium term. In addition, as music streaming has gained in popularity, music listening on social video platforms has begun to outpace DSP streaming services.

7digital has an advanced, scalable, cloud-based platform and the Directors believe that the Company is positioned to take advantage of new sources of growth brought on by the changing industry as well as the new opportunities and models accelerated by the COVID-19 pandemic. This is supported by a number of renewals and new contracts over the last year, including with Triller, eMusic and a global technology company in August 2020. In particular 7digital has identified potentially significant emerging opportunities within social media, home fitness and artist monetisation channels.

COVID-19

In March 2020, the World Health Organisation declared a global pandemic due to the COVID-19 virus that has spread across the globe, causing different governments and countries to enforce restrictions on people movements, a stop to international travel, and other precautionary measures. This has had a widespread impact economically and a number of industries have been heavily impacted. This has resulted in impacts on certain industries and a more general need to consider whether budgets and targets previously set are realistic in light of these events.

As described above, the COVID-19 pandemic has impacted our business but the Board believes that the business is well positioned to be able to navigate through the impact of COVID-19 due to the strength and flexibility of its service proposition.

Brexit

The United Kingdom ('UK') formally left the European Union ('EU') on 30 January 2020. The period of time from when the UK voted to exit the EU on 23 June 2016 and the formal process initiated by the UK government to withdraw from the EU, or Brexit, created volatility in the global financial markets. The UK now enters a transition period, being an intermediary arrangement covering matters like trade and border arrangements, citizens' rights and jurisdiction on matters including dispute resolution, taking account of The EU (Withdrawal Agreement) Act 2020, which ratified the Withdrawal Agreement, as agreed between the UK and the EU. The transition period is currently due to end on 31 December 2020 and ahead of this date, negotiations are ongoing to determine and conclude a formal agreement between the UK and EU on the aforementioned matters.

 

The Group operates subsidiaries in many countries. The Directors currently deem that the effects of the UK's current transitional period outside the EU and the impact of ongoing discussions with the EU will not have a significant impact on the Group's operations due to the global geographical footprint of the business and the nature of is operations.

 

Facility

On 28 September 2020, the Group secured a £1m revolving credit facility with Investec for a period of 36 months guaranteed by two of the Directors; this attracts 6% interest above Investec bank rate on the drawn portion of the facilty and 2% on the undrawn portion.

 

Conclusion

The Directors have reviewed 7digital's going concern position taking account of its current business activities, financial forecasts and factors likely to affect its future financial position, as set out in this Annual report which include 7digital's objectives, policies and processes for managing its capital and its financial risk management objectives. Considering the global coronavirus (COVID-19) pandemic, the global economic uncertainties and impact on delayed sales cycles, the Directors have undertaken an elevated scrutiny  to the cashflow forecasts covering a period of at least 12 months from the date of approval of the financial statements. Cashflow forecasts have been prepared based on a range of scenarios including, but not limited to, no further debt or equity funding, existing customer churn at different churn rates, no new contracted sales revenue, delayed sales, cost reductions, both limited and extensive, and a combination of these different outcomes.

Having assessed the sensitivity analysis on cashflows including the funding of £6m and the security of the newly agreed credit facility, together with the significant current business momentum from new customers including Triller, the launch of eMusic Live and growing demand for streaming and digital music solutions, the Directors strongly believe 7digital will continue to operate as a going concern for the foreseeable future, being 12 months from their signing of the financial statements.

 

Basis of consolidation

The consolidated financial statements comprise the financial statements of the Company and its subsidiaries as at 31 December 2019.

All subsidiaries are controlled by the Group and are included in the consolidated financial statements; the Group controls an investee if, and only if, the Group has:

Power over the investee (i.e., existing rights that give it the current ability to direct the relevant activities

of the investee)

Exposure, or rights, to variable returns from its involvement with the investee

The ability to use its power over the investee to affect its returns.

 

Generally, there is a presumption that a majority of voting rights results in control. To support this presumption and when the Group has less than a majority of the voting or similar rights of an investee, the Group considers all relevant facts and circumstances in assessing whether it has power over an investee, including:

The contractual arrangement(s) with the other vote holders of the investee

Rights arising from other contractual arrangements

The Group's voting rights and potential voting rights.

 

The Group re-assesses whether or not it controls an investee if facts and circumstances indicate that there are changes to one or more of the three elements of control. Consolidation of a subsidiary begins when the Group obtains control over the subsidiary and ceases when the Group loses control of the subsidiary. Assets, liabilities, income and expenses of a subsidiary acquired or disposed of during the year are included in the consolidated financial statements from the date the Group gains control until the date the Group ceases to control the subsidiary. 

 

Profit or loss and each component of OCI are attributed to the equity holders of the parent of the Group and to the non-controlling interests, even if this results in the non-controlling interests having a deficit balance. When necessary, adjustments are made to the financial statements of subsidiaries to bring their accounting policies in line with the Group's accounting policies. All intra-group assets and liabilities, equity, income, expenses and cash flows relating to transactions between members of the Group are eliminated in full on consolidation.

 

A change in the ownership interest of a subsidiary, without a loss of control, is accounted for as an equity transaction. 

If the Group loses control over a subsidiary, it derecognises the related assets (including goodwill), liabilities, non-controlling interest and other components of equity, while any resultant gain or loss is recognised in profit or loss. Any investment retained is recognised at fair value.

 

Business combinations

The Group accounts for business combinations using the acquisition method when control is transferred to the Group. The consideration transferred In the acquisition is generally measured at fair value, as are the identifiable net assets acquired. Any goodwill that arises is tested annually for impairment. Any gain on a bargain purchase Is recognised in profit or loss immediately. Transaction costs are expensed as incurred, except If related to the issue of debt or equity securities.

 

The consideration transferred does not include amounts related to the settlement of pre-exlstlng relationships, such amounts are generally recognised In profit or loss.

 

Any contingent consideration payable is measured at fair value at the acquisition date, if an obligation to pay contingent consideration that meets the definition of a financial instrument is classified as equity, then it is not remeasured and settlement is accounted for within equity. Otherwise, other contingent consideration is remeasured at fair value at each reporting date and subsequent changes in the fair value of the contingent consideration are recognised In profit or loss.

 

Subsidiaries

Subsidiaries are entitles controlled by the Group, the Group controls an entity when it is exposed to, or has rights to, variable returns from its Involvement with the entity and has the ablity to affect those returns through its power over the entity. The financial statements of subsidiaries are included In the consolidated financial statements from the date on which control commences until the date on which control ceases.

 

Loss of control

When the Group loses control over a subsidiary, it de-recognlses the assets and liabilities of the subsidiary, and any non-controllng interests and other components of equity. Any resulting gain or loss is recognised in the profit or loss. Any interest retained in the former subsidiary is measured at fair value when control is lost.

 

Transactions eliminated on consolidation

Intra-group balances and transactions, and any unrealised income and expenses arising from intra-group transactions, are eliminated. Unrealised gains arising from transactions with equity-accounted investees are eliminated against the investment to the extent of the Group's interest in the investee. Unrealised losses are eliminated In the same way as unrealised gains, but only to the extent that there is no evidence of impairment.

 

Revenue

 

The group comprises of mainly three types of revenues

1)  Licencing fees (also known as B2B sales)

a.  Setup Fees

b.  Monthly development and support fees

c.  Usage fees

2)  Content ("download") revenues (also know as B2C sales)

3)  Creative revenues

 

Each type of revenue is detailed below

 

Revenue comprises of:

 

I. Licensing revenues

7digital defines licensing revenues as fees earned both for access to the company's platform and for development work on that platform in order to adapt functions to customer needs. The Board considers that the provision of Technology Licensing Services comprises three separately identifiable components:

The description of the licence fees compromise three categories;

1.  Set-up fees : Set up fees which grant initial access to the platform, allow use of our catalogue and associated metadata and mark the start of work to define a client's exact requirements and create the detailed specifications of a service.

2.  Monthly development and support fees which cover the costs of developer and customer support time.  These are usually fixed and are paid monthly once a service has been specified in detail; they are calculated at commercial rates based on the number of developer or support days required.

3.  Usage fees which cover certain variable costs like bandwidth which can be re-charged to clients with an administrative margin are recognised at point in time based on usage.

II. Content ("download") revenues

Content revenues are recognised at the value of services supplied and on delivery of the content. The group manages a number of content stores and the income is recognised in the month it relates to. Majority of the revenue converts directly to cash; any accrued revenue converts to trade receivables within 30days.

III. Creative revenues

Creative revenues relate to the sale of programmes and other content. 7digital also undertakes bespoke radio programming for its customers.  As the programmes are being created the associated revenue is accrued/deferred until such time as the programme is delivered and accepted by the client. At this time the accrued revenue coverts to trade receivables. These mainly include the production of weekly radio programmes, as well as the one-off production of episodes. In case of one-off productions which required the Group to provide progress reports to its customers and where the company has no alternative use of the program produced, the group recognises revenue over the period i.e. based on percentage of completion, for

the rest of the regular programs and contents, where the company does not own the IP, the group measures the revenue based on delivery of the content i.e. at a point in time.

 

Contracts with multiple performance obligations

Many of the Group's contracts include a variety of performance obligations, including Licencing revenue (set-up fees, monthly revenue for using 7digital's API licence platform and usage fees), however may not be distinct in nature. Under IFRS 15, the Group evaluates the segregation of the agreed goods or services based on whether they are 'distinct'. If both the customer benefits from them either on its own or together with other readily available resources, and it is 'separately identifiable' within the contract.

 

To determine whether to recognise revenue, the Group follows a 5-step process:

Identifying the contract with customers

Identifying the performance obligations

Determining the transaction price

Allocating the transaction price to the performance obligations

Recognising revenue when/ as performance obligations are satisfied.

Performance Obligations and timing of revenue recognition

Revenue generated from B2B customer contracts often identify separate goods/services, with these generally being the access of the API license platform, and the associated monthly licence maintenance fees and content usage fees.

 

The list of obligations as per the contract that are deemed to be one performance obligation in case of licencing revenue are (B2B):

The licenses provide access to the 7D platform

The development and support fees which cover the costs of developer and customer support time

Usage fees which cover certain variable costs like bandwidth and content.

A key consideration is whether licencing fees give the customer the right to use the API Licence as it exists when the licence is granted, or access to API which will, amongst other considerations, be significantly updated during the API licence period.

 

The group grants the customer a limited, revocable, non-exclusive and non-transferable licence in the Territory during the Term, to use the 7digital API and the content to enable the provision of the Music Service to the End Users via Application.

 

Set-up fees represent an obligation under the contract, which is not a distinct performance obligation, as the customer is not able to access the platform without them. These are therefore spread over the period of the contract agreed initially with the customers.

 

Monthly licence maintenance fees indicate service contracts that provide ongoing support over a period of time.  Revenue is recognised over the term of the contract on a straight-line basis.

 

In the case of Creative Revenue, the sole performance obligation is to deliver the content specified as per contract, whether this be the delivery of regular content throughout the year (e.g. a radio series), or the production of a longer, one-off episode.

 

The only obligation for the group is to deliver the content production agreed in the contract. Control and risks are passed to the customer on delivery of the episode produced, news bulletins etc. The right to the IP varies from project to project. If the customer suggests a specific programme idea to tender, they will then own the underlying rights of the recordings and the IPR is exclusive to customer; 7digital's only performance obligation would be to produce the content.

 

In the case of one-off productions for an identifiable customer contract where 7digital is required to update the client on the progress of work completed, the Group applies an output method to determine the stage of completion and amount of revenue to recognize.

 

Payment terms vary depending on the specific product or service purchased. With licence fees, the set-up fees element is invoiced and paid upfront, while monthly maintenance revenues and usage fees are normally invoiced on a monthly basis. In the case of download sales, the cost is paid immediately by the customer upon download of the music/songs content from the 7digital platform. In the case of creative revenues, the payment terms are generally 50% on signing with the balance on delivery. All contracts are subject to these standard payment terms, to the extent that the parties involved expressly agree in writing that the conflicting terms of any agreement shall take precedence.

 

In the case of fixed-price contracts, the customer pays the fixed amount based on a monthly schedule. If the services rendered by the company exceed the payment, a contract asset (Accrued Income) is recognised; if the payments exceed the services rendered, a contract liability (Deferred Revenue) is recognised.

 

Determine transaction price and allocating to each performance obligation

The transaction price for licencing fees (set-up fees and monthly licence fee) is fixed as per contract and is explicitly noted in the contract. In the case of usage fees, the per gigabyte fee is determined and agreed in the contract. In the case of creative revenue, the transaction fees for radio services and one-off series is determined by taking into account the length of the production (this may vary for commercials, radio programs, tv shows, series, etc.). Any variations in transaction price are agreed and charged additionally depending on the obligations to be performed. None of the five factors (i.e. variable consideration, constraining estimates of variable consideration, the existence of a significant financing component in the contract, non-cash consideration, and consideration payable to a customer identified) are particularly relevant to 7digital's customer contracts. The transaction price included in 7digital's contracts is generally easily identifiable and is for cash consideration.

 

Other adjusting items

Other adjusting items are those items the Group considers to be non-recurring or material in nature that should be brought to the readers' attention in understanding the Group's financial statements. Other adjusting items consist of one-off acquisition costs, costs related to non-recurring legal and statutory events, restructuring costs and other items which are not expected to re-occur in future years.

 

Foreign currency

For the purpose of the consolidated financial statements, the results and financial position of each Group company are expressed in Pounds Sterling, which is the functional currency of the Company, and the presentation currency for the consolidated financial statements.

 

In preparing the financial statements of the individual companies, transactions in currencies other than the entity's functional currency (foreign currencies) are recorded at the rates of exchange prevailing on the dates of the transactions. 

At each balance sheet date, monetary assets and liabilities that are denominated in foreign currencies are retranslated at the rates prevailing on the balance sheet date.  Non-monetary items that are measured in terms of historical cost in a foreign currency are not retranslated.

 

Exchange differences arising on the settlement of monetary items and on the retranslation of monetary items, are included in profit and loss for the year. 

 

For the purpose of presenting consolidated financial statements, the assets and liabilities of the Group's foreign operations are translated at exchange rates prevailing on the balance sheet date. Income and expense items are translated at the average monthly rate of exchange ruling at the date of the transaction, unless exchange rates fluctuate significantly during that month, in which case the exchange rates at the date of transactions are used.

 

Intangible assets

Externally acquired intangible assets are initially recognised at cost and subsequently amortised on a straight-line basis over their useful economic lives.

 

Intangible assets are recognised on business combinations if they are separable from the acquired entity or give rise to contractual/legal rights. The amounts ascribed to such intangibles are arrived at by using appropriate valuation techniques.

 

Intangible assets (Bespoke Applications) arising from the internal development phase of projects is recognised if, and only if, all of the following have been demonstrated:

-  The technical feasibility of completing the intangible asset so that it will be available for use or sale

-  The intention to complete the intangible asset and use or sell it

-  The ability to use or sell the intangible asset

-  How the intangible asset will generate probable future economic benefits

-  The availability of adequate technical, financial and other resources to complete the development and to use or sell the intangible asset; and

-  The ability to measure reliably the expenditure attributable to the intangible asset during its development.

 

The amount initially recognised for internally generated intangible assets is the sum of the expenditure incurred from the date when the intangible asset first meets the recognition criteria listed above. Where no internally generated intangible asset can be recognised, development expenditure is charged to profit or loss in the period in which it is incurred.

 

Internally generated intangible assets are amortised over their useful economic lives on a straight-line basis, over 3 years.

 

Property, plant and equipment

Items of property, plant and equipment are initially recognised at cost. As well as the purchased price, cost includes directly attributable costs and the estimated present value of any future unavoidable costs of dismantling and removing items. The corresponding liability is recognised within provisions.

 

Depreciation is provision on all items of property, plant and equipment, so as to write off their carrying value over their expected useful economic lives. It is provided at the following rates:

 

Property  - 20% per annum straight line

Computer equipment  - 33.33% per annum straight line

Fixtures and fittings  - 33.33% per annum straight line

 

Impairment of tangible and other intangible assets

Impairment tests on goodwill and other intangible assets with indefinite useful economic lives are undertaken annually at the financial year end.  Other non-financial assets are subject to impairment tests whenever events or changes in circumstances indicate that their carrying amount may not be recoverable.  Where the carrying value of an asset exceeds its recoverable amount (i.e. the higher of value in use and fair value less costs to sell), the asset is written down accordingly.

 

Where it is not possible to estimate the recoverable amount of an individual asset, the impairment test is carried out on the smallest group of assets to which it belongs for which there are separately identifiable cash flows; its cash generating units ('CGUs').  Goodwill is allocated on initial recognition to each of the Group's CGUs that are expected to benefit from a business combination that gives rise to the goodwill.

 

Impairment charges are included in profit or loss, except to the extent they reverse gains previously recognised in other comprehensive income.  An impairment loss recognised for goodwill is not reversed.

 

Cash and cash equivalent

Cash and cash equivalents comprise cash on hand and demand deposits and other short-term, highly liquid investments that are readily convertible to a known amount of cash and are subject to an insignificant risk of changes in value.

 

Government grants

Government grants, including research and development credits are recognised when it is reasonable to expect that the grants will be received and that all related conditions will be met, usually on submission of a valid claim for payment. Grants of a revenue nature are credited to income so as to match them with the expenditure to which they relate.

 

Financial instruments

Financial assets and financial liabilities are recognised when a Company becomes a party to the contractual provisions of the instruments.

 

Initial Recognition:

Financial assets and financial liabilities are initially measured at fair value. Transaction costs that are directly attributable to the acquisition or issue of financial assets and financial liabilities (other than financial assets and financial liabilities at fair value through profit or loss and ancillary costs related to borrowings) are added to or deducted from the fair value of the financial assets or financial liabilities, as appropriate, on initial recognition.

 

Transaction costs directly attributable to the acquisition of financial assets or financial liabilities at fair value through profit or loss are charged to the Statement of Profit and Loss over the tenure of the financial assets or financial liabilities.

 

Classification and Subsequent Measurement: Financial Assets

The Company classifies financial assets as subsequently measured at amortised cost, Fair Value through Other Comprehensive Income ("FVOCI") or Fair Value through Profit or Loss ("FVTPL") on the basis of following:

• the entity's business model for managing the financial assets and

• the contractual cash flow characteristics of the financial asset.

 

Amortised Cost:

  A financial asset shall be classified and measured at amortised cost if both of the following conditions are met:

• the financial asset is held within a business model whose objective is to hold financial assets in order to collect contractual cash flows and

• the contractual terms of the financial asset give rise on specified dates to cash flows that are solely payments of principal and interest on the principal amount outstanding.

 

In case of financial assets classified and measured at amortised cost, any interest income, foreign exchange gains or losses and impairment are recognised in the Statement of Profit and Loss.

 

Fair Value through OCI:

A financial asset shall be classified and measured at fair value through OCI if both of the following conditions are met:

• the financial asset is held within a business model whose objective is achieved by both collecting contractual cash flows and selling financial assets and

 

• the contractual terms of the financial asset give rise on specified dates to cash flows that are solely payments of principal and interest on the principal amount outstanding.

 

Fair Value through Profit or Loss:

A financial asset shall be classified and measured at fair value through profit or loss unless it is measured at amortised cost or at fair value through OCI.

All recognised financial assets are subsequently measured in their entirety at either amortised cost or fair value, depending on the classification of the financial assets.

For financial assets at FVTPL, net gains or losses, including any interest or dividend income, are recognised in the Statement of Profit and Loss.

 

Classification and Subsequent Measurement: Financial liabilities

Financial liabilities are classified as either financial liabilities at FVTPL or 'other financial liabilities'.

 

Financial Liabilities at FVTPL:

Financial liabilities are classified as at FVTPL when the financial liability is held for trading or is a derivative (except for effective hedge) or are designated upon initial recognition as FVTPL.

 

Gains or Losses, including any interest expense on liabilities held for trading, are recognised in the Statement of Profit and Loss.

 

Other Financial Liabilities:

Other financial liabilities (including borrowings and trade and other payables) are subsequently measured at amortised cost using the effective interest method.

 

The effective interest rate is the rate that exactly discounts estimated future cash payments (including all fees and points paid or received that form an integral part of the effective interest rate, transaction costs and other premiums or discounts) through the expected life of the financial liability, or (where appropriate) a shorter period, to the amortised cost on initial recognition.

 

Interest expense (based on the effective interest method), foreign exchange gains and losses, and any gain or loss on derecognition is recognised in the Statement of Profit and Loss.

 

Impairment of financial assets:

Expected credit losses are recognized for all financial assets subsequent to initial recognition other than financial assets in FVTPL category. For financial assets other than trade receivables, as per IFRS 9, the Group recognises 12 month expected credit losses for all originated or acquired financial assets if at the reporting date the credit risk of the financial asset has not increased significantly since its initial recognition. The expected credit losses are measured as lifetime expected credit losses if the credit risk on financial asset increases significantly since its initial recognition.

 

Impairment provisions for trade receivables are recognised based on the simplified approach within IFRS 9 using the lifetime expected credit losses. During this process the probability of the non-payment of the trade receivables is assessed. Thus probability is then multiplied by the amount of the expected loss arising from default to determine the lifetime expected credit loss for the trade receivables For trade receivables, which are reported net, such provisions are recorded in a separate provision account with the loss being recognised within cost of sales in the consolidated statement of comprehensive Income. On confirmation that the trade receivable will not be collectable, the gross carrying value of the asset is written off against the associated provision.

 

The impairment losses and reversals are recognised in Statement of Profit and Loss.

 

De-recognition of financial assets and financial liabilities:

The Company de-recognises a financial asset when the contractual rights to the cash flows from the asset expire, or when it transfers the financial asset and substantially all the risks and rewards of ownership of the asset to another party. If the Company neither transfers nor retains substantially all the risks and rewards of ownership and continues to control the transferred asset, the Company recognises its retained interest in the asset and an associated liability for amounts it may have to pay. If the Company retains substantially all the risks and rewards of ownership of a transferred financial asset, the Company continues to recognise the financial asset and also recognises an associated liability for amounts it has to pay.

 

On de-recognition of a financial asset, the difference between the asset's carrying amount and the sum of the consideration received and receivable and the cumulative gain or loss that had been recognised in OCI and accumulated in equity is recognised in the Statement of Profit and Loss.

 

The Company de-recognises financial liabilities when and only when, the Company's obligations are discharged, cancelled or have expired. The difference between the carrying amount of the financial liability de-recognised and the consideration paid and payable is recognised in the Statement of Profit and Loss.

 

Financial liabilities and equity instruments:

• Classification as debt or equity

Debt and equity instruments issued by the Company are classified as either financial liabilities or as equity in accordance with the substance of the contractual arrangements and the definitions of a financial liability and an equity instrument.

• Equity instruments

An equity instrument is any contract that evidences a residual interest in the assets of an entity after deducting all of its liabilities. Equity instruments issued by a Company are recognised at the proceeds received.

 

Derivative financial instruments:

The Company enters into derivative financial instruments viz. a residual of the convertible loan instrument. The Company does not hold derivative financial instruments for speculative purposes. Derivatives are initially recognised at fair value at the date the derivative contracts are entered into and are subsequently remeasured to their fair value at the end of each reporting period. The resulting gain or loss is recognised in profit or loss immediately.

 

Fair value measurement

A number of assets and liabilities included in the Group's financial statements require measurement at, and/or disclosure of, fair value.

 

The fair value measurement of the Group's financial and non-financial assets and liabilities utilises market observable inputs and data as far as possible. Inputs used in determining fair value measurements are categorised into different levels based on how observable the inputs used in the valuation technique utilised are (the 'fair value

hierarchy'): 

 

- Level 1: Quoted prices in active markets for identical items (unadjusted)

- Level 2: Observable direct or indirect inputs other than Level 1 inputs and

- Level 3: Unobservable inputs (i.e. not derived from market data).

 

The classification of an item into the above levels is based on the lowest level of the inputs used that has a significant effect on the fair value measurement of the item. Transfers of items between levels are recognised in the period they occur.

 

Valuation techniques used to determine fair values

 

Specific valuation techniques used to value financial instruments Include

 

· current liabilities (level 3) - Monte-Carlo model

 

Share-based payments

The fair value determined at the grant date is expensed on a straight-line basis over the vesting period, based on the Group's estimate of shares that will eventually vest. Fair value is measured by use of an appropriate valuation model. The Black-Scholes option pricing model has been used to value the share options plans.

 

Taxation

The tax expense for the period comprises current and deferred tax. Tax is recognised in profit or loss, except that a charge attributable to an item of income or expense recognised as other comprehensive income is also recognised directly in other comprehensive income.

 

The deferred tax charge is calculated on the basis of tax rates and laws that have been enacted or substantively enacted by the reporting date in the countries where the company operates and generates taxable income.

 

Deferred income tax is recognised on temporary differences arising between the tax bases of assets and liabilities and their carrying amounts in the financial statements and on unused tax losses or tax credits in the company. Deferred income tax is determined using tax rates and laws that have been enacted or substantively enacted by the reporting date.

 

The carrying amount of deferred tax assets are reviewed at each reporting date. Recognition of deferred tax assets is restricted to those instances where it is probable that taxable profit will be available against which the difference can be utilised.

 

Leases

All leases are accounted for by recognising a right-of-use asset and a lease liability except for:

• Leases of low value assets; and

• Leases with a duration of 12 months or less.

 

IFRS 16 was adopted 1 January 2019 without restatement of comparative figures.

 

Lease liabilities are measured at the present value of the contractual payments due to the lessor over the lease term, with the discount rate determined by reference to the rate inherent in the lease.

 

On initial recognition, the carrying value of the lease liability also includes:

• amounts expected to be payable under any residual value guarantee;

• the exercise price of any purchase option granted in favour of the group if it is reasonably certain to assess that option; and

• any penalties payable for terminating the lease, if the term of the lease has been estimated on the basis of termination option being exercised.

 

Right-of-use assets are initially measured at the amount of the lease liability, reduced for any lease incentives received, and increased for:

• lease payments made at or before commencement of the lease;

• initial direct costs incurred; and

• the amount of any provision recognised where the group is contractually required to dismantle, remove or restore the leased asset.

 

Subsequent to initial measurement lease liabilities increase as a result of interest charged at a constant rate on the balance outstanding and are reduced for lease payments made. Right-of-use assets are amortised on a straight-line basis over the remaining term of the lease.

The effect of adoption of IFRS 16 as at 1 January 2019 :

 

 

 

 

£'000

Assets

 

 

 

Right-of-use asset

 

 

1,862

Less accruals (net)

 

 

(126)

Total assets

 

 

1,736

 

 

 

 

Liabilities

 

 

 

Lease liability

 

 

(1,862)

Total liabilities

 

 

(1,862)

 

The present value of the lease payments is based on applying a discount rate which is either the interest rate implicit in

the lease or the incremental borrowing rate. The lease liabilities as at 1 January 2019 can be reconciled to the operating lease commitments as of 31 Decemer 2018 as follows:

 

 

 

 

£'000

Operating lease commitments as at 31 December 2018

 

 

2,902

Removal of elements not relevant to IFRS16 (service charges)

 

 

(719)

 

 

 

2,183

 

 

 

 

Weighted average incremental borrowing rate as at 1 January 2019

 

 

7.0%

Discounted operating lease commitments at 1 January 2019

 

 

1,862

 

 

 

 

Lease liability recognised at 1 January 2019

 

 

1,862

 

1.1   Critical accounting judgements and key areas of estimation uncertainty

 

In the application of the Company accounting policies, which are described above, the directors are required to make judgements, estimates and assumptions about the carrying amount of assets and liabilities that are not readily apparent from other sources. The estimates and associated assumptions are based on historical experience and other factors that are considered to be relevant. Actual results may differ from these estimates.

 

The estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the period which the estimate is revised if the revisions affect only that period, or in the period of the revision and future periods if the revision affects both current and future periods.

 

  Content cost of sales

Content cost of sales is determined at an average rate of sales and is consistent with previous years. The directors believe that this calculation is deemed to be the most effective method of determining the true cost of content considering varied pricing structures agreed with all the label suppliers and publishers.

 

Creative revenue

Management considers the detailed criteria for the recognition of creative revenue as set out in the Group's accounting policy, in particular whether the Group determines the appropriate apportionment of revenue to the correct accounting period and subsequent amount accrued or deferred at the year end.

 

Impairment of accounts receivables

The management and directors have made certain estimates and judgements in the application of IFRS 9 when measuring expected credit losses and the assessment of expected credit loss provisions required for accounts receivable balances. (see note 16).

 

Other adjusting items

The management and directors considers items of income and expenses as other adjusting items where the nature of the item, or its magnitude, is material and likely to be non-recurring in nature so as to assist the user of the financial statements to better understand then results of the core operations of the group. Details of other adjusting items are shown in note 3.

 

2.  Revenue

 

2.1 Revenue from contracts with customer

 

The Group has disaggregated revenue into various categories in the following table which is intended to:

· depict how the nature, amount, timing and uncertainity of revenue and cash flows are affected by economic data; and

· enable users to understand the relationship with revenue segments information provided in 2.2 below

 

 

Licensing

 

Content

 

Creative

 

Total

 

2019

2018

 

2019

2018

 

2019

2018

 

2019

2018

 

£'000

£'000

 

£'000

£'000

 

£'000

£'000

 

£'000

£'000

 

Primary Geographical Markets

 

 

 

 

 

 

 

 

 

UK

807

773

 

621

1,278

 

1,549

2,099

 

2,977

4,150

USA

2,198

2,279

 

592

632

 

-

88

 

2,790

2,999

Germany

1,397

7,333

 

117

70

 

-

-

 

1,514

7,403

Denmark

-

1,388

 

-

1,038

 

-

-

 

-

2,426

France

35

299

 

-

-

 

-

-

 

35

299

Other

904

1,338

 

1,060

915

 

23

382

 

1,987

2,635

 

5,341

13,410

 

2,390

3,933

 

1,572

2,569

 

9,303

19,912

 

 

 

 

 

 

 

 

 

 

 

 

Product Type

 

 

 

 

 

 

 

 

 

Set-up fees

528

211

 

-

-

 

-

-

 

528

211

Monthly service fees and usage fee

 

4,813

 

13,199

 

 

-

 

-

 

 

-

 

-

 

 

4,813

 

13,199

Production

-

-

 

-

-

 

1,572

2,569

 

1,572

2,569

Download/streaming

-

-

 

2,390

3,933

 

-

-

 

2,390

3,933

 

5,341

13,410

 

2,390

3,933

 

1,572

2,569

 

9,303

19,912

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Contract Counterparties

 

 

 

 

 

 

 

 

 

Direct to consumer (online)

 

-

 

-

 

 

2,390

 

3,933

 

 

-

 

-

 

 

2,390

 

3,933

B2B

5,341

13,410

 

-

-

 

1,572

2,569

 

6,913

15,979

 

5,341

13,410

 

2,390

3,933

 

1,572

2,569

 

9,303

19,912

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Timing of transfer of goods and services

 

 

 

 

 

 

 

 

 

Over time

5,341

13,410

 

-

-

 

-

48

 

5,341

13,458

Point in Time (on delivery)

 

-

 

-

 

 

2,390

 

3,933

 

 

1,572

 

2,521

 

 

3,962

 

6,454

 

5,341

13,410

 

2,390

3,933

 

1,572

2,569

 

9,303

19,912

 

 

 

 

 

 

 

 

 

 

 

 

 

The aggregate amount of the transaction price of the remaining performance obligations amounting to £335k (2018: £1,149k) are all expected to be released within the next 12 months; £7k  (2018: £141k) released in the following year.

 

 

2.2 Business segments

 

For management purposes, the Group is organised into three continuing operating divisions - Licensing, Content and Creative. The principal activity of Licensing is the creation of software solutions for managing and delivering digital content. The principal activity of the Content division is the sales of digital music direct to consumers.  The principal activity of Creative is the production of audio and video programming for broadcasters. These divisions comprise the Group's operating segments for the purposes of reporting to the Group's chief operating decision maker, the Chief Executive Officer.

 

 

Licensing

 

Content

 

Creative

 

Total

 

2019

2018

 

2019

2018

 

2019

2018

 

2019

2018

 

£'000

£'000

 

£'000

£'000

 

£'000

£'000

 

£'000

£'000

Revenue from external customers

5,341

13,410

 

 

2,390

 

3,933

 

 

1,572

 

2,569

 

 

9,303

 

19,912

 

 

 

 

 

 

 

 

 

 

 

 

Segment's result (gross profit)

 

4,993

 

12,739

 

 

469

 

849

 

 

835

 

1,139

 

 

6,297

 

14,727

 

 

 

 

 

 

 

 

 

 

 

 

Depreciation

(50)

(218)

 

(22)

(14)

 

(5)

(19)

 

(77)

(251)

Amortisation

(228)

(1,839)

 

-

-

 

-

-

 

(228)

(1,839)

Impairment

-

(4,077)

 

-

-

 

-

-

 

-

(4,077)

Other adjusted cost- development costs expensed (see note 3)

 

(162)

 

(2,715)

 

 

-

 

-

 

 

-

 

-

 

 

(162)

 

(2,715)

Settlement income included in Other Income

1,000

 

 

 

 

 

 

 

 

1,000

-

 

 

 

 

 

 

 

 

 

 

 

 

Segment profit/(loss)

5,553

3,890

 

447

835

 

830

1,120

 

6,830

5,845

 

 

 

 

 

 

 

 

 

 

 

 

Remainder of other income

 

 

 

 

 

 

 

 

 

103

371

Amortisation of right to use asset

 

 

 

 

 

 

 

 

 

(415)

-

Corporate expenses

 

 

 

 

 

 

 

 

 

(12,155)

(18,341)

Financing income

 

 

 

 

 

 

 

 

 

-

31

Financing costs

 

 

 

 

 

 

 

 

 

(172)

(101)

Tax charge

 

 

 

 

 

 

 

 

 

(3)

334

Loss for the year

 

 

 

 

 

 

 

 

 

(5,812)

(11,861)

 

 

 

 

 

 

 

 

 

 

 

 

Other segment items:

 

 

 

 

 

 

 

 

 

£'000

£'000

Capital additions

 

 

 

 

 

 

 

 

 

-

1,000

                                 

 

Revenue from the Group's largest customer in the year was £1.0m (2018: £7.7m) and revenue from the second largest customer in the year was £0.5m (2018: £2.4m) . There were no other customers that formed greater than 10% of external revenues within the years ended 31 December 2019 and 2018.

 

2.3 Geographical information

The Group's revenue from external customers and information about its segments by geographical location is detailed below:

 

Revenue

 

Non-current assets

 

2019

 

2018

 

2019

 

2018

Continuing Operations

£'000

 

£'000

 

£'000

 

£'000

United Kingdom

2,977

 

4,150

 

1,498

 

1,304

United States of America

2,790

 

2,999

 

-

 

-

Germany

1,514

 

7,403

 

-

 

-

Denmark

-

 

2,426

 

-

 

-

France

35

 

299

 

-

 

-

Rest of Europe

1,366

 

1,553

 

-

 

-

Rest of World

621

 

1,082

 

-

 

-

 

9,303

 

19,912

 

1,498

 

1,304

 

All revenues are derived from the provision of services.

 

3.  Other adjusting items

 

 

2019

 

2018

 

£'000

 

£'000

Impairment of intangibles (i)

-

 

(2,135)

Costs/impairment relating to closure of French business (ii)

-

 

(992)

Costs/impairment relating to closure of Denmark business (iii)

(254)

 

(1,237)

Development costs expensed on legacy Denmark platform (iv)

(162)

 

(2,715)

Corporate restructuring releases/(provision) (v)

(694)

 

(226)

Exceptional legal fees (vi)

(464)

 

-

Legal provision (vii)

(228)

 

-

 

(1,802)

 

(7,305)

 

(i)  In 2018 the Group tested intangibles annually for impairment, or more frequently if there are indications that the assets might be impaired. Accordingly, certain bespoke applications have been impaired during the year resulting in a charge of £2,135k.

(ii)  In 2018, due to the cessation of the French operations in Snowite SAS, a provision of £287k has been made for closing down the operations and an impairment of £705k for the intangible assets, as the directors consider these have a zero fair value.

 

(iii)  In May 2019 the Group sold select technology from the Parent Company and its Denmark subsidiary,  24 -7 Entertainment ApS, and transferred staff to TDC Group, a large telecommunications company based in Denmark (see note 12). In 2019, a provision of £254k has been made for the closing down of the Danish operations.  In 2018, fair value adjustments relating to goodwill of £688k and to customer lists of £418k were made (see note 12) and the 24-7 Entertainment ApS tangible assets of £131k were fully impaired (see note 13).

 

(iv)  During the normal course of business the group would have capitalised £162k (2018: £2,715k) in respect of development costs associated with the Denmark platform, which was sold in 2019 as described in (iii) above. Due to the sale of this platform these costs have not been capitalised and are reflected in the profit and loss account.

 

(v)  During 2019, the Group incurred costs of £649k (2018: £226k) to former directors on garden leave and for employee redundancies all relating to organisational restructuring.

 

(vi)  In 2019 the Group incurred legal fees in relation to funding of £264k, legal costs relating to planning for supposed insolvency £120k and finalisation of the settlement agreement with Media-Saturn-Holding £80k.

 

(vii)  During 2018 a civil action was brought by a former US customer against the parent company for failure to deliver services specified in their Term Sheet. No contract was ever put in place with this customer. The breach of contract claim is for: i) consequential damages for loss of future profits in an amount to be determined at trial; ii) compensatory damages including but not limited to the contract amount of USD200k; iii) punitive damages in an amount to be determined by a jury; (iv) attorney's fees, costs, and expenses; and (v) pre-and post-judgment interest. 7digital's legal team made a motion to dismiss the claims, however in the event that the claims are upheld, the Group estimates that damages would be in the region of USD300k/£228k, with an appropriate provision being made.

£1,582k (2018: £3,228k) of the Other adjusting items for the year ended 31 December 2019 are deductible for corporation tax purposes.

 

4.  Operating loss for the year

 

Operating loss for the year has been arrived at after charging:

 

2019

 

2018

 

£'000

 

£'000

Net foreign exchange loss

238

 

48

Amortisation of intangible assets

228

 

1,839

Amortisation of right to use asset (see note 14)

415

 

-

Depreciation of property, plant & equipment

77

 

251

Profit on sale of fixed assets

(125)

 

(11)

Operating lease payments - land and buildings (see note 23)

-

 

1,290

Share-based payment expense (see note 26)

239

 

173

 

 

5.   Other operating income

 

In 2019, the Group agreed a settlement of €4m/£3.4m with Media-Saturn-Holding GmbH , of which £0.5m was used as payment for Shareholders fund (see note 18) and £1.9m cleared down outstanding trade-related balances; resulting in a net settlement income of £1,000k. As part of the settlement agreement Media-Saturn-Holding GmbH agreed to forgive £250k of outstanding loans plus associated unpaid interest of £27k. The total amount forgiven was £277k which is disclosed as a capital contribution (see note 18).

The remaining other operating income earned by the Group in the current year of £103k (2018: £371k) relates to Research & Development tax credits.

 

6.   Reconciliation of non-IFRS financial KPIs

 

This note reconciles the adjusted operating loss to the adjusted EBITDA loss. This note reconciles these key performance indicators to individual lines in the financial statements. In the Directors' view it is important to consider the underlying performance of the business during the year. Therefore, the directors have used certain alternative performance measures (AMPs) which are not IFRS compliant metrics. The main effect has been that the APMs exclude other adjusting items, amortisation, foreign exchange, depreciation and share based payments to reflect the underlying cash utilisation for the performance of the business. The APMs are consistent with those established within the prior year annual report and their derivation is set out in the table below.

 

Reconciliation of adjusted operating loss and adjusted EBITDA loss

2019

 

2018

 

£'000

 

£'000

Statutory operating loss

(5,637)

 

(12,125)

Other adjusting items (see note 3)

1,802

 

7,305

Foreign exchange

238

 

48

Share-based payment expense

239

 

173

Adjusted operating loss

(3,358)

 

(4,599)

Profit on sale of fixed assets

(125)

 

-

Depreciation and amortisation

720

 

2,090

Adjusted EBITDA loss

(2,763)

 

(2,509)

 

 

7.   Auditor's remuneration

 

 

2019

 

2018

 

£'000

 

£'000

Fees payable to the Company's auditor for the audit of the Company's annual accounts

120

 

120

Fees payable to the Company's auditor for other services to the Group

 

 

 

The audit of the Company's subsidiaries pursuant to legislation

-

 

-

Total audit fees

120

 

120

Non-audit fees:

 

 

 

Other services

-

 

-

Total non-audit fees

-

 

-

Total fees payable to Company's auditor

120

 

120

 

 

A description of the work of the Audit Committee is set out in the Corporate Governance Statement and includes an explanation of how auditor's objectivity is safeguarded when non-audit services are provided by the auditor.

 

 

8.  Staff costs

 

The average monthly number of persons employed by the Group during the year, including executive directors, was 81 ( 2018: 147). Staff costs in the Group are presented in administrative expenses.

 

2019

 

2018

 

No.

 

No.

Number of production, R&D, and sales staff

65

 

121

Number of management and administrative staff

16

 

26

 

81

 

147

 

 

2019

 

2018

 

£'000

 

£'000

Wages and salaries

4,659

 

6,294

Redundancy payments

259

 

97

Social security costs

573

 

854

Other pension costs

159

 

511

Share-based payments (note 26)

239

 

173

 

5,889

 

7,929

 

 

Details of the directors' remuneration are provided in the Directors Remuneration Report.

 

9.  Finance income and cost

 

2019

 

2018

 

£'000

 

£'000

Bank interest receivable

-

 

1

Rental deposit retained

-

 

19

Other income

-

 

11

Finance income

-

 

31

 

 

 

 

 

2019

 

2018

 

£'000

 

£'000

Shareholders interest payable

(7)

 

(64)

Other charges similar to interest

(17)

 

(37)

Interest expenses on leased liability (see note 14)

(148)

 

-

 

(172)

 

(101)

 

10.  Tax

 

Corporation tax is calculated at 19% (2018: 19.25%) of the estimated assessable profit for the year.

 

 

2019

 

2018

Current tax

£'000

 

£'000

UK corporation tax on the results for the year

 

Foreign tax suffered

3

 

35

Adjustment in respect of prior period

-

 

(61)

Total current tax charge/(credit)

3

 

(26)

 

 

2019

 

2018

Deferred tax

£'000

 

£'000

Origination and reversal of timing differences

-

 

(374) 

Adjustments in respect of prior periods

-

 

66

Total deferred tax charge/(credit)

-

 

(308)

 

 

 

 

Tax on loss on ordinary activities

3

 

(334)

 

The charge for the year can be reconciled to the profit per statement of comprehensive income as follows:

 

 

2019

 

2018

 

£'000

 

£'000

Loss before tax

(5,809)

 

(12,195)

 

 

 

 

Tax at UK corporation tax rate of 19% (2018: 19.25%)

(1,104)

 

(2,317)

Fixed asset differences

-

 

2

Expenses not deductible for tax purposes

136

 

940

Income not taxable for tax purposes

(30)

 

(208)

Additional deduction for R&D expenditure

(34)

 

(133)

Adjustments to R&D in respect of previous periods

22

 

-

Adjustments to tax charge in respect of previous periods

-

 

(61)

Adjustments to tax charge in respect of previous periods - deferred tax

-

 

66

Adjust closing deferred tax to average rate of 19% (2018: 19%)

-

 

752

Adjust opening deferred tax to average rate of 19% (2018: 19%)

(40)

 

(651)

Deferred tax not recognised

979

 

1,459

Foreign taxation

3

 

35

Difference in tax rates

(8)

 

(219)

Tax credit receivable

79

 

309

Deferred tax movement on business combinations

-

 

(308)

Tax credit / (credit)

3

 

(334)

 

At the balance sheet date, the Group has unrecognised deferred tax assets of £5,880,728 at a rate of 17% (2018: £6,393,798 (17%)) in respect of unused trading tax losses which have not been recognised on the grounds that there is insufficient evidence that these will be recoverable. These assets will be recovered when future tax charges are sufficient to absorb these tax benefits. 

 

11.  Earnings per share

 

Basic earnings per share is calculated by dividing the loss attributable to shareholders by the weighted average number of ordinary shares in issue during the year. IAS 33 requires presentation of diluted EPS when a company could be called upon to issue shares that would decrease earnings per share, or increase the loss per share. For a loss-making company with outstanding share options, net loss per share would be decreased by the exercise of options. Therefore the antidilutative potential ordinary shares are disregarded in the calculation of diluted EPS. Total potential ordinary shares which are outstanding at 31 December 2019 are 19,059,858 (2018: 13,912,308) which relate to the employee share options and shares to be issued to the non-executive directors under the terms of their service contracts (see Directors Report, Directors Remuneration Report and note 26).

 

Reconciliation of the profit and weighted average number of shares used in the calculation are set out below:

 

 

31 Dec 2019

 

Loss

 

Weighted average number of shares

 

Per share amount

Basic and Diluted EPS

£'000

 

Thousand

 

Pence

Loss attributable to shareholders:

(5,812)

 

1,244,214

 

(0.47)

 

31 Dec 2018

Basic and Diluted EPS

£'000

 

Thousand

 

Pence

Loss attributable to shareholders:

(11,861)

 

399,430

 

(2.97)

 

12.  Intangibles

 

 

Bespoke applications

 

Customer list

 

Goodwill

 


Total

 

£'000

 

£'000

 

£'000

 

£'000

Cost

 

 

 

 

 

 

 

At 1 January 2018

8,215

 

509

 

688

 

9,412

Additions

803

 

-

 

-

 

803

At 31 December 2018

9,018

 

509

 

688

 

10,215

Disposals

(5,813)

 

(509)

 

(688)

 

(7,010)

At 31 December 2019

3,205

 

-

 

-

 

3,205

 

 

 

 

 

 

 

 

Accumulated Amortisation and impairment

 

 

 

 

 

 

 

At 1 January 2018

3,167

 

88

 

-

 

3,255

Charge for the year

1,836

 

3

 

-

 

1,839

Impairment losses

2,840

 

418

 

688

 

3,946

At 31 December 2018

7,843

 

509

 

688

 

9,040

Charge for year

228

 

-

 

-

 

228

Disposals

(4,866)

 

(509)

 

(688)

 

(6,063)

At 31 December 2019

3,205

 

-

 

-

 

3,205

 

 

 

 

 

 

 

 

Net book value

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

At 31 December 2019

-

 

-

 

-

 

-

At 31 December 2018

1,175

 

-

 

-

 

1,175

At 31 December 2017

5,048

 

421

 

688

 

6,157

Useful lives

3-5 years

 

3-5 years

 

 

 

 

 

 

 

 

 

 

 

 

 

Amortisation charges are included within the administrative expenses within the Income Statement. The useful life of each group of intangible assets varies according to the underlying length of benefit expected to be received.

On 29 May 2019 the Danish Platform, with a carrying value of £948k was sold to a Danish communications company, TDC Group for £951k. The customer list and goodwill, initially originating from the acquisition of Danish Platform, were deemed disposed.

 

13.  Property, plant and equipment

 

 

Property

 

Computer equipment

 

Fixture and fittings

 

Vehicle

 

Total

 

£'000

 

£'000

 

£'000

 

£'000

 

£'000

Cost

 

 

 

 

 

 

 

 

 

At 1 January 2018

404

 

1,795

 

125

 

19

 

2,343

Additions

-

 

197

 

-

 

-

 

197

Acquisitions

-

 

-

 

-

 

-

 

-

Released on disposals

-

 

(15)

 

-

 

(19)

 

(34)

At 31 December 2018

404

 

1,977

 

125

 

-

 

2,506

Released on disposals

 

(443) 

 

(5) 

 

-

 

(448) 

At 31 December 2019

404

 

1,534

 

120

 

-

 

2,058

 

 

 

 

 

 

 

 

 

 

Accumulated depreciation and amortisation

 

 

 

 

 

 

 

 

 

At 1 January 2018

368

 

1,522

 

120

 

9

 

2,019

Charge for year

36

 

210

 

5

 

-

 

251

Impairment losses

-

 

131

 

-

 

-

 

131

Released on disposals

-

 

(14)

 

-

 

(9)

 

(23)

At 31 December 2018

404

 

1,849

 

125

 

-

 

2,378

Charge for year

-

 

77

 

-

 

-

 

77

Released on disposals

-

 

(443)

 

(5)

 

-

 

(448)

At 31 December 2019

404

 

 1,483

 

120

 

-

 

2,007

 

 

 

 

 

 

 

 

 

 

Net book value

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

At 31 December 2019

-

 

51

 

-

 

-

 

51

At 31 December 2018

-

 

128

 

-

 

-

 

128

At 31 December 2017

36

 

273

 

5

 

10

 

324

 

 

 

 

14.   Leases

 

The Group leased a property that originally ran until April 2023. In February 2020, on agreement with the landlord the lease was terminated, and the Group vacated the premises. The Group has adopted IFRS 16 on the date of application and determined the value of the lease and the right to use asset based on the rental payments from the period 1 January 2019 to April 2023.

 

Right-of-use asset

 

 

 

 

 

 

Land and buildings 

 

 

 

£'000

Right-of-use asset

 

 

1,862

Less accruals (net)

 

 

(126)

As at 1 January 2019

 

 

1,736 

Amortisation

 

 

(415)

At 31 December 2019

 

 

1,321

 

 

 

 

Lease liability

 

 

 

 

 

 

Land and buildings 

 

 

 

£'000

As at 1 January 2019

 

 

1,862

Interest expense

 

 

148

Lease payments

 

 

(352)

At 31 December 2019

 

 

1,658

 

 

 

 

Analysed:

 

 

 

Current

 

 

472

Non-current

 

 

1,186

Total

 

 

1,658

 

 

 

 

 

The group terminated the existing lease contract in February 2020 and in August 2020, it signed a new lease for 3 years (see note 27).

 

15.   Investment in subsidiary undertakings

 

A list of the significant investments in subsidiaries, including the name, country of incorporation and proportion of ownership interest is given in note E to the Parent Company financial statements. 

 

 

16.  Trade and other receivables

 

 

2019

 

2018

 

 

£'000

 

£'000

Trade receivable for the sale of goods

 

1,851

 

4,610

Less: Provision for impairment of trade receivables

 

(1,014)

 

(408)

Net trade receivables

 

837

 

4,202

Other debtors

 

382

 

667

R&D credits receivable

 

412

 

815

Prepayments

 

-

 

100

Total financial assets at amortised cost (excluding cash & cash equivalents)

 

1,631

 

5,784

 

                 

 

 

The average credit period taken on sales of goods and services is 33 days (2018: 79 days). No interest is charged on receivables. Trade receivables are provided for based on estimated irrecoverable amounts from the sale of goods and services, determined by reference to past default experience and likelihood of recovery as assessed by the directors. Before accepting any new material customer, the Group uses an external credit scoring system to assess the potential customer's credit quality and defines credit limits by customer. The directors believe that the trade receivables that are past due but not impaired are of a good credit quality. The Group adopts a policy that each new customer is analysed individually for credit worthiness before the Group's standard payment and delivery terms and conditions are offered.

 

The management assessed the requirement for general bad debt provision under IFRS 9. The expected loss rates are based on the combination of the Group's historical credit losses experienced over the three-year period prior to the period end coupled with forward looking information. Management also note that the Group generally has a consistent recovery rate on trade and other receivables, due to a significant amount of work being completed for reputable businesses. However, Management does note that dealings with smaller businesses can be difficult at times to recover funds owed and as such, provisions have been raised based on historic knowledge of each client's credit risk. On confirmation that the trade receivable will not be collectable, the gross carrying value of the asset is written off against the associated provision.

 

Included in the Group's trade receivable balance are debtors with a carrying amount of £0.3m (2018: £2.3m), which are past due at the reporting date for which the Group has not provided as there has not been a significant change in credit quality and the amounts are still considered recoverable. The Group does not hold any collateral over these balances. The average age of these receivables is 97 days (2018: 60 days). During the year the Group provided for certain accounts receivable balances relating to revenue recognised during 2019, where the collection of the outstanding amounts is uncertain.

 

As at 31 December 2019 the lifetime expected loss provision for trade receivables is:

 

 

Current

More than 30 days past due

More than 60 days past due

More than 120 days past due

Total £'000

Expected loss rate

 

2%

7%

20%

92%

 

Gross carrying amount

 

274

275

296

1,006

1,851

Loss provision

 

7

18

59

930

1,014

 

 

Customers that represent more than 5% of the total balance of trade receivables are:

 

 

2019

 

2018

 

 

£'000

 

£'000

Customer A

 

350

 

2,329

Customer B

 

209

 

381

Customer C

 

162

 

261

Customer D

 

136

 

200

Customer E

 

117

 

192

Customer F

 

101

 

-

 

 

Movement in the allowance for doubtful debts:

 

 

2019

 

2018

 

 

£'000

 

£'000

Balance at the beginning of the period

 

408

 

1,943

Impairment losses recognised

 

717

 

408

Written off as bad debt

 

(111)

 

(1,943)

Balance at the end of the period

 

1,014

 

408

 

In determining the recoverability of trade receivables the Group considers any change in the credit quality of the trade receivable from the date credit was initially granted up to the reporting date. 

 

 

17.  Trade and other payables

 

Current Liabilities

 

2019

 

2018

 

 

£'000

 

£'000

Trade payables

 

3,101

 

4,990

Other taxes and social security

 

565

 

984

Other payables

 

674

 

500

Accrued costs

 

2,669

 

3,246

Corporation tax

 

-

 

19

 

 

7,009

 

9,739

 

Non-Current Liabilities

 

 

 

 

Other payables

 

676

 

1,066

 

 

676

 

1,066

 

Trade payables and accruals principally comprise amounts outstanding for trade purchases and ongoing costs. The average credit period taken for trade purchases is 241 (2018: 171 days). The Group has financial risk management policies in place to ensure that all payables are paid within the credit time frame.

 

In March 2016 the Group acquired Snowite SAS (now 7digital France SAS).  As part of the acquisition it negotiated a reduction in the amount of some of the existing liabilities within Snowite SAS, at the time of the purchase, to €1.7m (£1.5m).  Terms of repayment were also agreed to be over 8 years starting on 7th April 2017.  For the first two years repayments were set at 8% of the debt and then at 14% for each year thereafter.  No interest is payable. The parent company has guaranteed the repayments of £245k.

 

A total amount of £1.0m (2018: £1.1m) remains repayable under this agreement at the balance sheet date.  Of this balance, £0.7m (2018: £0.9m) falls due for repayment after more than one year. On 16 September 2020 the Group received confirmation that the long term portion of £676K was forgiven by the French authorities.

 

The directors consider that the carrying amount of trade payables approximates to their fair value.

 

 

18.  Financial Liabilities

 

 

 

 

2019

 

 

2018

 

 

 

£'000

 

£'000

Current

 

 

 

 

 

Convertible debt

 

 

-

 

1,306

Embedded derivative

 

 

-

 

257

 

 

 

-

 

1,563

 

During the year the convertible loan from shareholders including the derivative instrument have been converted and forgiven, through the below series of events:

 

On 8 February 2019, £193,858 (including interest of £5,549) of the £1.5 million Shareholder loan facility was converted to 19,385,843 ordinary shares of 1p each.

 

On 4 January 2019, Juke GmbH, a wholly owned subsidiary of Media-Saturn-Holding GmbH, decided to discontinue their music services and their contract with the Group. On 1 March 2019, a settlement was agreed on the termination of all outstanding contracts and commitments relating to the Juke music service for an immediate payment by Juke of €4.0m.  Further, Juke agreed to forgive £250,000 of the principal amount of the convertible loan, the balance of the principal amount of £500,000 was paid from the proceeds of the termination settlement and all associated interest payments totalling £27,239 were forgiven. The total amount forgiven of £277k is accounted and disclosed as a capital contribution in the statement of changes in equity.

 

On 7 June 2019, the remaining £585,932 (including interest £24,241) of the £1.5 million facility was converted to 332,915,704 ordinary shares of 0.01p each.

 

 

 

 

 

19.  Provisions

 

 

 

Dilapidation

 

Provision for closure of business

 

Legal provision

 

Other provisions

 

Total

 

 

£'000

 

£'000

 

£'000

 

£'000

 

£'000

 

 

 

 

 

 

 

 

 

 

 

At 1 January 2019

 

125

 

288

 

-

 

15

 

428

Increase in provision

 

 

255

 

228

 

91

 

574

Release of provision

 

 

(234)

 

-

 

-

 

(234)

At 31 December 2019

 

125

 

309

 

228

 

106

 

768

 

 

 

 

 

 

 

 

 

 

 

Of which is: current

 

125

 

309 

 

228

 

106

 

768

Of which is: non-current

 

-

 

-

 

 

 

-

 

A dilapidations provision is held to cover the estimated costs of returning the Group's main office space to as it was at the commencement of the lease (see note 14).

 

On 4 October 2019, the Danish entity was liquidated by the local authorities; a provision has been made of £255k for possible associated outstanding liabilities.

 

In 2018 a provision of £288k relating to the closing of operations in Snowite SAS was made; during 2019 £234k of this provision has been utilised.

 

During 2018 a civil action was brought by a former US customer against the parent company for failure to deliver services specified in their Term Sheet. No contract was ever put in place with this customer. The breach of contract claim is for: i) consequential damages for loss of future profits in an amount to be determined at trial; ii) compensatory damages including but not limited to the contract amount of USD200k; iii) punitive damages in an amount to be determined by a jury; (iv) attorney's fees, costs, and expenses; and (v) pre-and post-judgment interest. 7digital's legal team made a motion to dismiss the claims, however in the event that the claims are upheld, estimate that damages would be in the region of USD300k/£228k.

 

 

 

20.  Deferred tax

 

The deferred taxation provision included in the Statement of Financial Position, together with the charge/(credits) made to the Income Statement is set out below:

 

Deferred tax liability

 

£'000

At 1 January 2019

-

Charge/(credit) to income

-

At 31 December 2019

-

 

 

At 1 January 2018

308

Credit to income

 (308)

At 31 December 2018

-

 

 

 

 

21.  Share capital

 

2019

 

2018

 

 

No. of shares

 

No. of shares

 

Allotted, called up and fully paid:

 

 

 

 

Ordinary shares of 0.01p each

2,455,419,294

 

-

 

Ordinary shares of £0.01 each

-

 

400,236,646

 

Deferred shares of 0.99p each

419,622,489

 

-

 

Deferred shares of £0.09 each

115,751,517

 

115,751,517

 

 

 

 

 

 

 

2019

 

2018

 

Allotted, called up and fully paid

£'000

 

£'000

 

At 1 January

14,420

 

14,404

 

 

 

 

 

 

Shares issued in the period

 

 

 

 

Capital fundraising

397

 

-

 

Issued to employees/directors in lieu of salary

-

 

15

 

Share options exercised

-

 

1

 

At 31 December

14,817

 

14,420

 

 

i.  On 8 February 2019, £193,858 (including interest) of the £1.5 million Shareholder loan facility was converted in to 19,385,843 ordinary shares of 1p each.

 

ii.  In order for the Company to lawfully allot the shares as described in iii and iv below, all the 419,622,489 shares of 1p each were converted into 419,622,489 deferred shares of 0.99p each and 419,622,489 ordinary shares of 0.01p each on 7 June 2019. The deferred shares of 0.99p each carry limited voting rights.

 

iii.  On 7 June 2019, £585,932 (including interest) of the £1.5 million Shareholder loan facility was converted to 332,915,704 ordinary shares of 0.01p each; share premium was increased by £552,640.

 

iv.  On 7 June 2019, a number of shareholders, including Magic Investments S.A. (a tech investment holding company) ("Magic") and Shmuel Koch Holdings Limited ("SKH") subscribed for, an aggregate of, 634,132,641 ordinary shares at 0.01p each, to raise £1.3 million (before expenses). Share premium was increased by £1,204,852.

 

v.  On 20 September 2019, 937,900,000 shares of 0.01p each were issued to the market to raise £1,875k (before expenses); share premium was increased £1,780,504.

 

vi.  On 4 October 2019, a further 130,848,460 ordinary shares of 0.01p were issued to the market to raise £261,697; share premium was increased by £210,527 net of share issue expenses.

 

 

22.  Other reserves

 

  The Reverse acqusition reserve was created upon the application of reverse acqusition accounting relating to the purchase of 7digital Group Inc, by UBC Media plc on 10 June 2014.

 

The Foreign exchange translation reserve of £184k profit (2018: £43k loss)  relates to cumulative foreign exchange differences on translation of foreign operations.

 

  The Merger reserve relates to the difference between the nominal value of shares issued as part of an acquistion and the fair value of the assets transferred.

 

  The Shares to be issued includes £231k (2018: increase £89k) relating to the fair value at grant date of the share options that can be exercised in future years and £8k (2018: £53k) for the fair value of the shares to be issued to Non-Executive directors in lieu of salary as at December 2019  (see Directors' Remuneration Report pages 23 to 24 and note 26).

 

 

23.  Operating lease arrangements

 

The only lease has been accounted for under IFRS 16 (see note 14). There are no short term operating leases.

 

 

24.  Defined contribution pension schemes

 

The Group operates defined contribution retirement benefit schemes for qualifying employees. The total cost charged to income of £159k ( 2018: £511k) represents contributions payable to these schemes by the Group at rates specified in the rules of the plans. As at 31 December 2019, contributions due in respect of the current reporting period of  41k  had not been paid over to the schemes (2018: £33k).

 

 

25.  Related party transactions 

 

During the year, the Group paid £6.4k (2018: £9.6k) to MIDiA Research for music market research services, a company of which Mark Foster was a director during 2019. At  31 December 2019, the Group owed £nil (2018: £6.4k). 

 

During the year,  the Group invoiced and recognised £175k of revenue to eMusic (a subsidiary of TriPlay Inc.), a group which Tamir Koch was a director of during 2019. At 31 December 2019, the Group was owed £209k; £164k of this amount has been provided for at the year end.

Transactions between the Company and its subsidiaries, which are related parties, have been eliminated on consolidation and are not disclosed in this note.

 

Remuneration of key management personnel

The remuneration of the directors, who are the key management personnel of the Group, is set out below in aggregate for each of the categories specified in IAS 24 Related Party Disclosures. Further information about the remuneration of individual directors is provided in the audited part of the Directors' Remuneration Report.

 

 

 

2019

 

2018

 

£'000

 

£'000

Wages and salaries

999

 

704

Social security costs

113

 

101

Pension costs to defined contribution scheme 

32

 

24

Share-based payments

283

 

-

 

1,427

 

829

 

 

26.  Share-based payments

 

30 members of staff hold options to subscribe for shares in the Company under the 7digital Group plc enterprise management incentive scheme (approved by the Board on 10 June 2014). The Performance Share Plan is a "free" share award with an effective exercise price of £nil. All awards are subject to an Earnings per Share (EPS) performance condition. The performance period is three years. Further details of these conditions are set out in the Directors' Report. Awards are normally forfeited if the employee leaves the Group before the awards vest.

 

 

2019 Options

 

Weighted average exercise price (pence)

 

2018 Options

 

Weighted average exercise price (pence)

Outstanding at the beginning of the period

13,912,308

 

  -

 

5,428,899

 

  -

Granted during the period

-

 

-

 

11,500,000

 

 -

Forfeited during the period

(5,016,140)

 

  -

 

(2,881,258)

 

  -

Exercised during the period

-

 

  -

 

(135,333)

 

  -

Outstanding at the end of the period

8,896,168

 

 -

 

13,912,308

 

 -

Exercisable at the end of the period

-

 

 -

 

-

 

 -

 

During the period, nil shares were exercised (2018: 135,333). There are 8,896,168 options outstanding at 31 December 2019 (2018: 13,912,308) of which nil (2018: nil) are exercisable.  Their remaining weighted average contractual life is 604 days (2018: 1,224 days).

 

The fair value of the share options has been calculated using the Black-Scholes model at the grant date. The key inputs into the Black-Scholes model are detailed below:

 

 

 

2018 Options

 

Share price at date of grant

 

 

5.85p

Exercise price

 

 

0.00p

Volatility

 

 

100%

Option life

 

 

3 yrs.

Risk-free interest rate

 

 

0.5%

 

 

 

 

 

At 31 December 2019 £61k (2018: £53k) was accrued for shares to be issued to non executive directors under the terms of their service contracts and as disclosed within the Directors' Report and Directors' Remuneration.

 

Also included within these charges are equity settled share based payment charges of £nil (2018: £31k) reflecting share awards to non-executive directors during the year. 

 

The total expense recognised for the year ending 31 December 2019 arising from equity-settled share-based payment transactions amounted to £239k (2018 - £173k) and the share-based payment reserve as at 31 December 2019 amounted to £407k (2018 - £168k).

 

The issuance of shares relates to the shares issued to some non-executive directors in lieu of their remuneration. Further details can be found in the Directors' Remuneration Report.

 

27.  Post balance sheet events

 

On 21 February 2020, a short term loan of £500k was signed with CSS Alpha (BVI) Limited. The loan is repayable over 12 months in equal parts starting from 28 March 2020 with interest based on 1.5% of the outstanding balance. The loan is guaranteed by one of the Directors.

 

On 12 August 2020, following the termination of the old lease (see note 14),  a new lease agreement was signed with Labs relating to a property in Camden, NW1. The initial period of the agreement is for 35 months starting from 1 July 2020, with a total cost of £1.4m.

 

On 3 September 2020, 7digital annouced the placing of 266,666,667 new Ordinary Shares of 0.01p each, which raised £6m at an issue price of 2.25 pence per share. The net proceeds of the fundraising will be used to meet the immediate working capital requirements of the Group and support immediate and medium term commercial growth opportunities, in particular within home fitness, artist monetisation, and social media.

 

On 16 September 2020 the Group received confirmation that the long term portion of £676K was forgiven by the French authorities.

 

On 28 September 2020, the Group secured a £1m revolving credit facility with Investec for a period of 36 months guaranteed by two of the Directors; this attracts 6% interest above Investec bank rate on the drawn portion of the facilty and 2% on the undrawn portion.

 

The rapid spread of the coronavirus and resulting COVID-19 global pandemic has had a small impact on the Group, primarily on cash-in; management have taken action to mitigate and minimise the effect. The Group was already fully operational from home as a result of existing infrastructure.

 

28.  Financial instruments

 

Capital risk management

The Group manages its capital to ensure that entities in the Group will be able to meet their financial obligations as they arise while maximising the return to stakeholders. The capital structure of the Group consists of cash and cash equivalents and equity attributable to equity holders of the parent, comprising issued capital, reserves and retained earnings as disclosed in notes 21 and 22. The Group has external liabilities by way of the debts owed on the purchase of Snowite SAS in March 2016 and as disclosed in note 17. It does not have access to committed borrowing facilities, and is not subject to externally imposed capital requirements.

 

 

Categories of financial instruments

 

 

 

2019

 

2018

Financial assets at amortised cost

 

 

£'000

 

£'000

Cash and cash equivalents

 

 

149

 

452

Trade and other receivables

 

 

2,646

 

6,388

 

 

 

 

 

 

Financial liabilities at amortised cost

 

 

 

 

 

Trade and other payables

 

 

(7,004)

 

(10,091)

Borrowings (Convertible Loan Note)

 

 

-

 

(1,306)

Put options

 

 

(123)

 

(196)

 

 

 

 

 

 

Financial liabilities at fair value through profit and loss

 

 

 

 

 

 

 

 

 

 

 

Embedded derivative (see note 18)

 

 

-

 

(257)

             

 

Put Options

As part of the 2016 acquisition of Snowite, the Group agreed with three of the original institutional shareholders that if they are unable to sell the 3,056,894 shares in 7digital Group they received  in the public market, 7digital Group plc would purchase 75% of their shares at a strike price of 8.75p over a 4-year period starting from March 2016, 10% in year 1 and then c.21.7% each year thereafter. As at 31 December 2019, the three institutional shareholders still retain all their shares in 7digital Groupl plc. The value of the options at 31 December 2019 is £123k (2018: £196k). Adjustments to this provision are taken directly to the Consolidated Income Statement within Administrative expenses. In 2019 this credit was £73k (2018: £47k). The financial liability is included in note 18.

 

The carrying amounts of financial assets and financial liabilities not carried at FVTPL approximate their fair values.

 

Financial instruments measured at fair value

 

 

 

2019

 

2018

 

 

 

£'000

 

£'000

Level 3

 

 

 

 

 

 

 

 

 

 

 

Embedded derivative (see note 18)

 

 

-

 

(257)

 

The embedded derivative liabilty has been converted/forgiven during the year as described in note 18.

 

  Financial and market risk management objectives

It is, and has been throughout the year under review, the Group's policy not to use or trade in derivative financial instruments. The Group's financial instruments comprise its cash and cash equivalents and various items such as trade debtors and trade creditors that arise directly from its operations. The main purpose of the financial assets and liabilities is to provide finance for the Group's operations in the year.

 

Currency risk management

The Group has exposure to foreign currency risk due to subsidiaries in France, Denmark and United States. The Group manages the risk by holding cash in numerous currencies to avoid foreign exchange charges on payments and receipts.

 

The carrying value of the Group's short-term foreign currency denominated assets and liabilities are set out below

 

 

GBP BU's

 

USD BU's

 

DKK BU's

 

 

2019

2018

2017

 

2019

2018

2017

 

2019

2017

Assets/(Liabilities)

 

 

 

 

 

 

 

 

 

 

 

GBP

-

-

-

 

-

-

-

 

-

(538,151)

(55,583)

USD

619,120

162,683

1,694,004

 

-

-

-

 

-

(41,484)

(5,686)

EUR

(511,810)

1,548,206

1,647,447

 

-

139

139

 

-

(98,672)

(6,361)

Other

(440,127)

(130,135)

59,403

 

(41,444)

(63,473)

(103,783)

 

-

-

-

Totals

(332,817)

1,580,754

3,400,854

 

(41,444)

(63,334)

(103,644)

 

-

(678,307)

(67,630)

                             

 

 

The majority of the Group's financial assets are held in Sterling but movements in the exchange rate of the Euro and US dollar against Sterling have an impact on both the result for the year and equity.  Sensitivity to reasonably possible movement in the Euro and US dollar exchange rates can be measured on the basis that all other variables remain constant. The effect on profit and equity of strengthening or weakening of the Euro or US dollar in relation to Sterling by 10% would result in a movement of +/- £47k (2018: £142k) in relation to the Euro and +/- £44k (2018: £44k) in relation to the US dollar.

  Interest rate risk management and sensitivity

The Group's policy is to ensure that it maximises the interest income on surplus cash. This involves placing cash in a mix of fixed rate and floating rate short-term deposits. There is no prescribed ratio of fixed to floating rate. Due to the current level of cash and the current rates of interest the Group is not exposed to any significant interest rate risk.

 

  Credit risk management

Credit risk refers to the risk that a counterparty will default on its contractual obligations resulting in financial loss to the Group. The Group has adopted a policy of only dealing with creditworthy counterparties, as a means of mitigating the risk of financial loss from defaults. The Group only transacts with entities after assessing credit quality using independent rating agencies and if not available, the Group uses other publicly available financial information and its own trading records to rate its major customers. The Group's exposure is continuously monitored and the aggregate value of transactions concluded is spread amongst approved counterparties. Credit exposure is controlled by counterparty limits.

 

On going credit evaluation is performed on the financial condition of accounts receivable. The credit risk on liquid funds is limited because the counterparties are banks with high credit-rating assigned by international credit-rating agencies. The carrying amount of financial assets recorded in the financial statements, which is net impairment losses, represents the Group's maximum exposure to credit risk.

 

Liquidity risk management

The Group's policy throughout the year has been to ensure continuity of funds. The Group manages liquidity risk by maintaining adequate reserves and banking facilities by continuously monitoring forecast and actual cash flows and matching the maturity profiles of financial assets and liabilities.

 

Liquidity and interest risk tables

All trade and other payables are non-interest bearing and fall due within one month. The agreed term of repayment of the loan relating to the purchase of Snowite SAS is over 8 years starting 7th April 2017, payable in equal instalments with no interest.

 

The following table sets out the contractual maturities (representing the undiscounted contractual cash-flows) of financial liabilities:

 

2019

 

2018

Within 12 months

£'000

 

£'000

Trade payables

3,101

 

4,990

Other payables

325

 

222

Lease liability

472

 

-

 

3,898

 

5,212

 

 

2019

 

2018

More than 12 months

£'000

 

£'000

Other payables

676

 

870

Lease liability

1,186

 

-

 

1,862

 

870

 

Fair value of financial instruments

The fair value of other non-derivative financial assets and financial liabilities are determined in accordance with generally accepted pricing models based on discounted cash flow analysis using prices from observable current market transactions.

 

Cash at bank and short-term bank deposits

Cash is held within the following institutions:

 

 

 

2019

 

2018

 

2017

 

 

 

£'000

 

£'000

 

£'000

Barclays Bank

 

 

132

 

324

 

6,490

HSBC Bank

 

 

4

 

36

 

26

Bank of West

 

 

2

 

7

 

59

CIC Bank

 

 

11

 

23

 

15

Others

 

 

-

 

71

 

388

 

 

 

149

 

461

 

6,978

 

  29.  Contingent liabiities

 

The group does not have any contingent liabilities.

 

 

2019

 

2018

 

Notes

£'000

 

£'000

Assets

 

 

 

 

Non-current assets

 

 

 

 

Intangibles

B

-

 

1,176

Tangibles

C

39

 

63

Right-of-use asset

D

1,321

 

-

Fixed asset investments

E

-

 

1,000

 

 

1,360

 

2,239

Current assets

 

 

 

 

Trade and other receivables

F

248

 

1,987

Contract assets

 

-

 

252

Cash at bank and in hand

 

1

 

19

 

 

249

 

2,258

Current liabilities

 

 

 

 

Trade and other payables

H

(1,308)

 

(4,344)

Loans and borrowings

I

-

 

(1,306)

Derivative liabilities

I

-

 

(257)

Contract liabilities

 

-

 

(417)

Lease liability

D

(472)

 

-

Provision for liabilities and charges

J

(829)

 

(517)

 

 

(2,609)

 

(6,841)

Net current liabilities

 

(2,360)

 

(4,583)

Total assets less current liabilities

 

(1,000)

 

(2,344)

 

Non-current liabilities

Other payables

H

-

 

(197)

Lease liability

 

(1,186)

 

-

Provision for liabilities and charges

J

-

 

(111)

 

 

(1,186)

 

(308)

Total liabilities

 

(3,795)

 

(7,149)

Net liabilities

 

(2,186)

 

(2,652)

 

 

 

 

 

Capital and reserves

 

 

 

 

Called up share capital

K

14,817

 

14,420

Share premium account

 

12,043

 

8,294

Shares to be issued

 

407

 

168

Profit and loss account

 

(29,453)

 

(25,534)

Shareholders' deficit

 

(2,186)

 

(2,652)

 

 

Result for the year

As permitted by section 408 of the Companies Act 2006 the Company has not prepared its own profit and loss account for the year. 7digital Group plc reported a loss for the financial year ended 31 December 2019 of £4,196k ( 201 8: loss £21,608k).

 

This Company Statement of Financial Position and related notes were approved by the Board of Directors on 28 September 2020 and were signed on its behalf by

 

Paul Langworthy, Director

 

 

Statement of changes in Equity for the year ended 31 December 2019

 

Share capital

 

Share premium account

 

Shares to be issued

 

 

Profit and Loss account

 

Total

 

£'000

 

£'000

 

£'000

 

 

£'000

 

£'000

 

 

 

 

 

 

 

 

 

 

 

At 1 January 2019

14,420

 

8,294

 

168

 

 

(25,534)

 

(2,652)

Comprehensive loss for the year

 

 

 

 

 

 

 

 

 

 

Loss for the year

-

 

-

 

-

 

 

(4,196)

 

(4,196)

Total comprehensive loss for the year

-

 

-

 

-

 

 

(4,196)

 

(4,196)

 

 

 

 

 

 

 

 

 

 

 

Contributions by and distributions to owners

 

 

 

 

 

 

 

 

 

 

Shares issued

397

 

3,749

 

-

 

 

-

 

4,146

Share based payments

-

 

-

 

239

 

 

-

 

239

Capital contribution

-

 

-

 

-

 

 

277

 

277

Total contributions by and distributions to owners

 

397

 

 

3,749

 

 

239

 

 

 

277

 

 

4,662

 

 

 

 

 

 

 

 

 

 

 

At 31 December 2019

14,817

 

12,043

 

407

 

 

(29,453)

 

(2,186)

 

 

Statement of changes in Equity for the year ended 31 December 2018

 

 

Share capital

 

Share premium account

 

Shares to be issued

 

 

Profit and Loss account

 

Total

 

£'000

 

£'000

 

£'000

 

 

£'000

 

£'000

 

 

 

 

 

 

 

 

 

 

 

At 1 January 2018

14,404

 

8,232

 

26

 

 

(500)

 

22,162

Comprehensive loss for the year

 

 

 

 

 

 

 

 

 

 

Prior year adjustments

 

 

 

 

 

 

 

(805)

 

(805)

Change in accounting policy - IFRS 9 Financial Instruments (see note G)

-

 

-

 

-

 

 

(2,621)

 

(2,621)

At 1 January 2018

14,404

 

8,232

 

26

 

 

(3,926)

 

18,736

Comprehensive loss for the year

 

 

 

 

 

 

 

 

 

 

Loss for the year

-

 

-

 

-

 

 

(21,608)

 

(21,608)

Total comprehensive loss for the year

-

 

-

 

-

 

 

(21,608)

 

(21,608)

 

 

 

 

 

 

 

 

 

 

 

Contributions by and distributions to owners

 

 

 

 

 

 

 

 

 

 

Shares issued

16

 

62 

 

-

 

 

 

78

Share based payments

-

 

-

 

142

 

 

-

 

142

Total contributions by and distributions to owners

 

16

 

 

62

 

 

142

 

 

 

-

 

220

 

 

 

 

 

 

 

 

 

 

 

At 31 December 2018

14,420

 

8,294

 

168

 

 

(25,534)

 

(2,652)

 

 

 

 

A.  Principal accounting policies

 

7digital Group plc is a company incorporated in the United Kingdom (England and Wales) under the Companies Act 2006.

 

The parent company financial statements are presented as required by the Companies Act 2006. They have been prepared in accordance with applicable law and accounting standards in the United Kingdom. The Company balance sheet and related notes have been prepared under the historical cost convention and in accordance with Financial Reporting Standards 100 Application of Financial Reporting Requirements (FRS100) and 101 Reduced Disclosures Framework.  The company has taken advantage of the following disclosure exemptions in preparing these financial statements, as permittd by FRS 101 Reduced disclosure framework:

 

· the requirements of paragraphs 45(b) and 46 to 52 of IFRS 2 Share-based payment;

· the requirements of IFRS 7 Financial Instruments: Disclosures;

· the requirements of paragraphs 91 to 99 of IFRS 13 Fair value measurement;

· the requirement in paragraph 38 of IAS 1 Presentation of Financial Statements to present comparative information in respect of:

paragraph 79(a)(iv) of IAS1:

paragraph 118(e) of IAS 38 Intangible Assets

· the requirements of paragraphs 10(d), 10(f), 16, 38A, 38B, 38C, 38D, 40A, 40B, 40C, 40D and 111 of IAS 1 Presentation of financial statements;

· the requirements of paragraphs 134 to 136 of IAS 1 Presenation of financial statements;

· the requirements of IAS 7 Statement of Cashflows;

· the requirements of paragraphs 30 and 31 of IAS 8 Accounting policies, changes in accounting estimates and errors:

· the requirement of paragraphs 17 and 18A of IAS24 Related party disclosures;

· the requirements in IAS 24 Related party disclosures to disclose related party transactions entered into between two or more members of a group; and

· the requirements of paragraphs 134(d) to 134(f) and 135(c) to 135(e) of IAS 36 Impairment of assets.

 

These financial statements are separate financial statements.

 

Where required, equivalent disclosures are given in the Group's consolidated financial statements in notes 1 to 29.

 

Foreign currency

Transactions in currencies other than the entity's functional currency (foreign currencies) are recorded at the rates of exchange prevailing on the dates of the transactions.  At each balance sheet date, monetary assets and liabilities that are denominated in foreign currencies are retranslated at the rates prevailing on the balance sheet date.  Non-monetary items that are measured in terms of historical cost in a foreign currency are not retranslated.

 

Exchange differences arising on the settlement of monetary items, and on the retranslation of monetary items, are included in profit and loss for the year. 

 

Intangible assets

Intangible assets acquired as part of acquisition of a business are stated at fair value less accumulated amortisation and any impairment losses are stated at cost less accumulated depreciation and impairment losses, if any.

 

Intangible assets (Bespoke applications) arising from the internal or external development phase of projects is recognised if, and only if, all of the following have been demonstrated:

 

-  The technical feasibility of completing the intangible asset so that it will be available for use or sale;

-  The intention to complete the intangible asset and use or sell it;

-  The ability to use or sell the intangible asset;

-  How the intangible asset will generate probable future economic benefits;

-  The availability of adequate technical, financial, and other resources to complete the development and to use or sell the intangible asset; and

-  The ability to measure reliably the expenditure attributable to the intangible asset during its development.

 

The amount initially recognised for internally generated intangible assets is the sum of the expenditure incurred from the date when the intangible asset first meets the recognition criteria listed above. Where no internally generated intangible asset can be recognised, development expenditure is charged to profit or loss in the period in which it is incurred.

Internally and externally generated intangible assets are amortised over their useful economic lives on a straight-line basis, typically over 3 years.

 

Research expenditure is recognised as an expense in the period in which it is incurred.

 

Impairment of tangible and other intangible assets

The Company reviews, at least annually, the carrying amounts of its tangible and intangible assets compared to the recoverable amounts to determine whether those assets have suffered an impairment loss. Where an impairment loss subsequently reverses, the carrying amount of the asset is increased to the revised estimate of its recoverable amount, but so that the increased carrying amount does not exceed the carrying amount that would have been determined had no impairment loss had been recognised for the asset in prior years.

 

Cash and cash equivalent

Cash and cash equivalents comprise cash on hand and demand deposits and other short-term, highly liquid investments that are readily convertible to a known amount of cash and are subject to an insignificant risk of changes in value.

 

Fixed asset investments

Investments in subsidiaries are accounted for at cost less impairment in the Company's financial statements.

Classification

Financial instruments are classified and accounted for according to the substance of the contractual arrangement, as financial assets, financial liabilities or equity instruments. An equity instrument is any contract that evidences a residual interest in the assets of the company after deducting all of its liabilities. Where shares are issued, any component that creates a financial liability of the company is presented as a liability on the balance sheet. The corresponding dividends relating to the liability component are charged as interest expenses in the profit and loss account.

 

Recognition and measurement

All financial assets and liabilities are initially measured at transaction price (including transaction costs), except for those financial assets classified as at fair value through profit or loss, which are initially measured at fair value (which is normally the transaction price excluding transaction costs), unless the arrangement constitutes a financing transaction.

If an arrangement constitutes a financing transaction, the financial asset or financial liability is measured at the present value of the future payments discounted at a market rate of interest for a similar debt instrument.

 

Impairment

Assets, other than those measured at fair value, are assessed for indicators of impairment at each balance sheet date. If there is objective evidence of impairment, an impairment loss is recognised in profit or loss.

 

Share-based payments

The Company issues equity settled share based payments to certain Directors and employees, which have included grants of shares and options in the current year . The fair value determined at the grant date is expensed on a straight-line basis over the vesting period, based on the Group's estimate of shares that will eventually vest. Fair value is measured by use of an appropriate valuation model. The Black-Scholes option pricing model has been used to value the share options plans.

 

Going concern

These financial statements have been prepared on the going concern basis. Please refer to the Directors Reports on pages 15 to 19 of the Annual Report for further going concern commentary.

 

IFRS 9 "Financial Instruments"

IFRS 9 Financial Instruments replaces the existing guidance in IAS 39 Financial Instruments Recognition and Measurement IFRS 9 Includes revised guidance on the classification and measurement of financial Instruments, including a new expected loss model for calculating impairment on financial assets as is set out in the Group's accounting policy.

Impairment provisions for receivables from related parties and loans to related parties are recognised based on a forward- looking expected credit loss model.  The methodology used to determine the amount of the provision is based on whether there has been a significant increase in credit risk since initial recognition of the financial asset.  For those where the credit risk has not increased significantly since initial recognition of the financial asset, twelve month expected credit losses along with gross interest income are recognised.  For those for which credit risk has increased significantly, lifetime expected credit losses along with the gross interest income are recognised.  For those that are determined to be credit impaired, lifetime expected credit losses along with interest income on a net basis are recognised.

 

Leases

All leases are accounted for by recognising a right-of-use asset and a lease liability except for:

• Leases of low value assets; and

• Leases with a duration of 12 months or less.

 

IFRS 16 was adopted 1 January 2019 without restatement of comparative figures.

 

Lease liabilities are measured at the present value of the contractual payments due to the lessor over the lease term, with the discount rate determined by reference to the rate inherent in the lease.

 

On initial recognition, the carrying value of the lease liability also includes:

• amounts expected to be payable under any residual value guarantee;

• the exercise price of any purchase option granted in favour of the group if it is reasonably certain to assess that option; and

• any penalties payable for terminating the lease, if the term of the lease has been estimated on the basis of termination option being exercised.

 

Right-of-use assets are initially measured at the amount of the lease liability, reduced for any lease incentives received, and increased for:

• lease payments made at or before commencement of the lease;

• initial direct costs incurred; and

• the amount of any provision recognised where the group is contractually required to dismantle, remove or restore the leased asset.

 

Subsequent to initial measurement lease liabilities increase as a result of interest charged at a constant rate on the balance outstanding and are reduced for lease payments made. Right-of-use assets are amortised on a straight-line basis over the remaining term of the lease. When the group revises its estimate of the term of any lease.

 

  Critical accounting judgements and key sources of estimation uncertainty

In the application of the Company accounting policies, which are described above, the directors are required to make judgements, estimates and assumptions about the carrying amount of assets and liabilities that are not readily apparent from other sources. The estimates and associated assumptions are based on historical experience and other factors that are considered to be relevant. Actual results may differ from these estimates.  

 

The estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the period which the estimate is revised if the revisions affect only that period, or in the period of the revision and future periods if the revision affects both current and future periods.

 

Investment in subsidiary is carried at cost under IAS 27 in the financials are to be tested for impairment at each reporting date as per IAS 36. The impairment standard requires the management to estimate the recoverable amount of the asset and compare it with the carrying value in the books to measure any impairment. For estimating the recoverable amount of the "Investment in subsidiary" the management relies upon; the net asset position of the subsidiary as on the balance sheet date, which brings the necessary assurance about the recoverability of the investment.

There are no critical judgements, apart form those involving estimates, that directors have made in the process of applying the Company's accounting policies and that have the most significant effect on the amounts recognised in the financial statements.

 

Employees

The average number of employees throughout 2019 was 14 ( 2018: 22). Staff costs amounted to £1.8m (2018: £1.9m). Information about the remuneration of directors is provided in the audited part of the Directors' Remuneration Report of the consolidated financial statements.

 

 

B.  Intangibles

 

 

 

 

Bespoke applications

 

 

 

 

£'000

Cost

 

 

 

 

 

At 1 January 2019

 

 

 

2,086

 

Disposals

 

 

 

(2,086)

 

At 31 December 2019

 

 

 

-

 

 

 

 

 

 

 

Amortisation

 

 

 

 

 

At 1 January 2019

 

 

 

910

 

Charge for year

 

 

 

228

 

Disposals

 

 

 

(1,138)

 

At 31 December 2019

 

 

 

-

 

 

 

 

 

 

 

Net book value

 

 

 

 

 

 

 

 

 

 

 

At 31 December 2019

 

 

 

-

 

At 31 December 2018

 

 

 

1,176

 

At 31 December 2017

 

 

 

1,833

 

                   

 

On 29 May 2019 the Danish Platform, with a carrying value of £948k was sold to a Danish communications company, TDC Group (see note 12) for £951k.

 

 

C.  Tangibles

 

 

 

 

Computer equipment

 

 

 

 

£'000

Cost

 

 

 

 

At 1 January 2019 and at 31 December 2019

 

 

 

69

 

 

 

 

 

Depreciation

 

 

 

 

At 1 January 2019

 

 

 

6

Charge for year

 

 

 

24

At 31 December 2019

 

 

 

30

 

 

 

 

 

Net book value

 

 

 

 

 

 

 

 

 

At 31 December 2019

 

 

 

39

At 31 December 2018

 

 

 

63

At 31 December 2017

 

 

 

-

 

 

D.  Leases

 

The Company leased a property that originally ran until April 2023. In February 2020, on agreement with the landlord the lease was terminated, and the Company vacated the premises. The Company has adopted IFRS 16 on the date of application and determined the value of the lease and the right to use asset based on the rental payments from the period 1 January 2019 to April 2023.

 

 Right-of-use asset

 

 

 

 

Land and buildings 

 

 

 

 

 

£'000

Right-of-use asset

 

 

 

 

1,862

Less accruals (net)

 

 

 

 

(126)

As at 1 January 2019

 

 

 

 

1,736 

Amortisation

 

 

 

 

(415)

At 31 December 2019

 

 

 

 

1,321

 

 

 

 

 

 

Lease liability

 

 

 

 

Land and buildings 

 

 

 

 

 

£'000

As at 1 January 2019

 

 

 

 

1,862

Interest expense

 

 

 

 

148

Lease payments

 

 

 

 

(352)

At 31 December 2019

 

 

 

 

1,658

 

 

 

 

 

 

Analysed:

 

 

 

 

 

Current

 

 

 

 

472

Non-current

 

 

 

 

1,186

Total

 

 

 

 

1,658

 

 

 

 

 

 

The company terminated the existing lease contract in February 2020 and in August 2020, it signed a new lease for 3 years (see note 27).

 

 

E.  Fixed asset investments

 

 

£'000

Cost

 

 

At 1 January 2019 and at 31 December 2019

 

21,769

 

 

 

Provision for impairment

 

 

At 1 January 2019

 

(20,769)

Impairment during the year

 

(1,000)

At 31 December 2019

 

(21,769)  

 

 

 

 

 

 

Net book value at 31 December 2019

 

-

Net book value at 31 December 2018

 

1,000

Net book value at 31 December 2017

 

3,665

 

 

Related subsidiaries, joint ventures and associates

 

Ordinary shares held at 31 December 2019

Principle activity

Country of incorporation

Registered office

Subsidiaries

 

 

 

 

7digital Limited

100%

Music streaming and download services

England and Wales

***

 

7digital Creative Limited

100%

Radio production

England and Wales

***

 

7digital Trading Limited

100%

HR Services2

 England and Wales

***

 

7digital Group, Inc.

100%

Holding company3

Delaware,

United States of America

369 Pine Street, Suite 103, San Francisco, CA 94104 USA

 

7digital, Inc

100%

Music streaming and download services3

Delaware,

United States of America

369 Pine Street, Suite 103, San Francisco, CA 94104 USA

 

7digital SAS

100%

Non-trading

France

21 Rue Aristade Briand Espace Aristide

92170 Vanves France

 

7digital Wing India Private Limited 

100%

Non-trading

India

D-202, Polite Hermitage, Sec 18 Shivtej Nagar, Chinchwad Pune MH 411019 India

 

 

 

 

 

 

 

Smooth Operations (Productions) Limited

100%

Dormant

England and Wales

***

 

Unique Interactive Limited

100%

Dormant

England and Wales

***

 

Oneword Radio Limited - dissolved 28 January 2020

100%1

Dormant

England and Wales

***

 

UBC Interactive Limited - dissolved 28 January 2020

100%1

Dormant

England and Wales

***

 

7digital ApS - dissolved 3 October 2019

SD Music Stores Limited -  dissolved 26 February 2019