NOTES TO THE FINANCIAL STATEMENTS

Year ended 31 December 2020

 

1.             Accounting policies

 

General information

7digital Group plc is a public company, limited by shares and incorporated in the United Kingdom (England and Wales) under the Companies Act 2006. The address of the registered office is given in the 2020 Annual Report.

 

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 2020 have been delivered to the Registrar of Companies. The financial information for the year ended 31 December 2020 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 2020, have been listed below.

 

New standards and interpretations

New standards

New standards that have been adopted in the annual financial statements for the year ended 31 December 2020, but have not had a significant effect on the Group are:

 

·      IAS 1 Presentation of Financial Statements and IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors (Amendment - Disclosure Initiative - Definition of Material); and

·      Revisions to the Conceptual Framework for Financial Reporting.

 

a)     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 following amendments are effective for the period beginning 1 January 2022:

 

·      Onerous Contracts - Cost of Fulfilling a Contract (Amendments to IAS 37);

·      Property, Plant and Equipment: Proceeds before Intended Use (Amendments to IAS 16);

·      Annual Improvements to IFRS Standards 2018-2020 (Amendments to IFRS 1, IFRS 9, IFRS 16 and IAS 41); and

·      References to Conceptual Framework (Amendments to IFRS 3).

 

In January 2020, the IASB issued amendments to IAS 1, which clarify the criteria used to determine whether liabilities are classified as current or non-current. These amendments clarify that current or non-current classification is based on whether an entity has a right at the end of the reporting period to defer settlement of the liability for at least twelve months after the reporting period. The amendments also clarify that 'settlement' includes the transfer of cash, goods, services, or equity instruments unless the obligation to transfer equity instruments arises from a conversion feature classified as an equity instrument separately from the liability component of a compound financial instrument. The amendments were originally effective for annual reporting periods beginning on or after 1 January 2022. However, in May 2020, the effective date was deferred to annual reporting periods beginning on or after 1 January 2023.

 

The Group does not expect any of the standards issued by the IASB, but not yet effective, to have a material impact on the Group.

               

Going concern

The Group made a loss after tax of £1,287k in the year (2019: £5,777K) and at year end had a net current liability position of £3,245k. This net current liability position is significantly improved on the 2019 position of £6,575k. The pressure on short-term working capital combined with a reliance on anticipated revenue growth, which is sensitive to factors outside the Group's control and with a risk that the Group's sales targets are not met, indicate that a material uncertainty exists that may cast significant doubt on the Group's ability to continue as a going concern. The Group's two major shareholders have confirmed their financial support for 12 months from the date of signing these financial statements to allow the Group to manage its working capital and to support growth needs as and when they fall due. On the basis the Group achieves the sales in the 2021 and 2022 forecast, the Directors are optimistic that the Group will have sufficient financing available until at least 31 June 2022. The Directors are also confident that the Group will achieve its forecast revenue for 2021 and 2022, and that it will generate a positive EBITDA in the next 12 months from the date of signing the accounts. If the forecast revenue is not achieved, the Group is confident that further cost savings can be implemented or additional financing sought, although nothing has been secured at the current date.

 

The stress test performed on the Group's forecast EBITDA, representing a plausible worst-case scenario, noted that there is a short-term liquidity issue over the coming three months that will be mitigated by third party financing or via the committed support from its shareholders. Beyond this period, should revenues be in line with the plausible worst-case sensitised forecast, continued support from the shareholders will be required to ensure the Group has sufficient liquidity to meet its liabilities as and when they fall due.

 

The Group's two major shareholders have confirmed their financial support for 12 months from the date of signing these financial statements to allow the Group to manage its working capital, taking into account the plausible worst-case scenario, and to support growth needs as and when they fall due. The Directors are satisfied that the shareholders have demonstrated their intention and means to provide this funding as and when this is required. This has been represented to the Directors in a letter of support from the two major shareholders in the Group.

 

COVID-19

In March 2020, the World Health Organisation declared a global pandemic due to the COVID-19 virus that has, and continues to, spread across the globe, causing different governments and countries to enforce restrictions on movement of people and international travel, and implement other precautionary measures. This has had a widespread impact economically and a number of industries have been heavily affected. Our financial results show that the Group has been resilient to the effects of COVID-19 and is now well positioned to take advantage of the improving economic conditions, driven predominantly by the successful roll out of vaccination programmes.

 

Conclusion

On the basis of the above assessment, the Directors consider the Group to be a going concern whilst highlighting there to be the existence of a material uncertainty that may cast significant doubt on the Group's ability to continue as a going concern for the following reasons:

 

-       The Group requires sufficient revenue growth as included within forecasts to ensure that it is able to meet liabilities as and when they fall due without further support from the shareholders. Should this not occur, and additional funding not be available, this would cast significant doubt as to the entity's ability to continue as a going concern.

-       The Group is likely to be reliant on shareholder support in the short and medium term to ensure that there is sufficient liquidity to meet its liabilities as and when they fall due, should third party financing options not materialise. Should this funding not be received, significant doubt would be cast as to the Group's ability to continue as a going concern.

 

The Directors are, however, confident that the shareholders will provide the required support to the Group to enable it to pay its liabilities as and when they fall due. The Directors are also confident that the Group will generate the revenue growth required to ensure no further funding is necessary to meet its liabilities as and when they fall due for a period of at least 12 months. On this basis, the Directors have prepared the financial statements on a going concern basis, whilst disclosing a material uncertainty relating to going concern in relation to shareholder funding and revenue growth being required, and these being uncertain events. As such, the financial statements do not include any adjustments should the going concern basis be inappropriate.

 

 

 

Basis of consolidation

The consolidated financial statements comprise the financial statements of the Company and its subsidiaries as at 31 December 2020.

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-existing 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.

 

Loss of control

When the Group loses control over a subsidiary, it de-recognises the assets and liabilities of the subsidiary, and any non-controling 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 Group'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. Recognition of set-up fees is detailed below.

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. Recognition of these fees is detailed below.

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 several 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 recognised when the programme is delivered and accepted by the client. These mainly include the production of weekly radio programmes, as well as the one-off production of episodes.

 

In case of one-off productions which required the Group to provide progress reports to its customers and where the Group 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 Group 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 these 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 recognise.

 

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 Group 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 are 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

-       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 and CJRS income and Furlough 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 Group 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 Group 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 Group neither transfers nor retains substantially all the risks and rewards of ownership and continues to control the transferred asset, the Group recognises its retained interest in the asset and an associated liability for amounts it may have to pay. If the Group retains substantially all the risks and rewards of ownership of a transferred financial asset, the Group continues to 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 Group de-recognises financial liabilities when and only when, the Group'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 Group 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 Group are recognised at the proceeds received.

 

Derivative financial instruments:

The Group enters into derivative financial instruments viz. a residual of the convertible loan instrument. The Group 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.

 

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.

 

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.

 

Critical accounting judgements and key areas of estimation uncertainty

In the application of the Group 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

Previously, the content cost of sales had been estimated with reference to the average cost per contract being applied to sales. This was considered to be the most effective method by which to make the estimate as the Group operated across a number of platforms. Whilst the accounting policy is unchanged and management continue to estimate content accruals at each period end, the method of estimating the content accrual was updated from March 2019. Since March 2019, the Group operate only on one platform which has the ability to analyse the usage reports derived from download sales and which are distributed to the labels on a monthly basis and publishers on a quarterly basis. These usage reports assist management in calculating content cost of sales and content accruals. Management considers the usage reports to be the most effective method of determining the true cost of content. As at 31 December 2020, the content accrual includes £114K based on the old method for accruals relating to pre-March 2019, whilst the majority of the accrual (£818K) is estimated using the new method. Historic invoicing data was used to calculate the release of accruals relating to pre-March 2019. Using data usage reports, historical invoicing patterns and supplier confirmations, management have taken the decision to release £500k of historic accruals as at 31 December 2020.

 

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).

 

Capitalisation of internally developed software

Distinguishing the research and development phases of a new customised software project and determining whether the recognition requirements for the capitalisation of development costs are met, requires judgement. After capitalisation, management monitors whether the recognition requirements continue to be met and whether there are any indicators that capitalised costs may be impaired.

 

Correction of prior period errors

The directors have determined that there was an over accrual of payroll taxes in the Company of £35k at 31 December 2019. The directors also identified the mis-analysis of £61k that was included in equity as shares to be issued but, given the non fixed element, should have been disclosed as derivative liabilty. A summary of the prior period adjustments is set out in the table below:

 

	2019 as previously reported		Increase/    (decrease)		2019
Non-current assets	1,372				1,372
Current assets	2,035				2,035
Trade and other payables	(7,009)		35		(6,974)
Derivative liability	-		(61)		(61)
Contract liabilities	(335)				(335)
Lease liability	(472)				(472)
Provisions for liabilities and charges	(768)				(768)
Non-current liabilities	(1,869)				(1,869)
	(7,046)		(26)		(7,072)
Retained profit	(31,061)		35		(31,026)
Other equity	24,015		(61)		23,954
	(7,046)		(26)		(7,072)

 

In addition, the Directors determined that the research & development tax credits of £103k, previously included in 2019 other income in error, should be reanalysed to taxation on continuing operations.

 

 

 

 

 

 

 

 

 

 

 

 

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
	2020	2019		2020	2019		2020	2019		2020	2019
	£'000	£'000		£'000	£'000		£'000	£'000		£'000	£'000
Primary Geographical Markets
UK	671	807		382	621		917	1,549		1,970	2,977
USA	1,513	2,198		683	592		-	-		2,196	2,790
Germany	216	1,397		103	117		-	-		319	1,514
Other	955	939		917	1,060		156	23		2,028	2,022
	3,355	5,341		2,085	2,390		1,073	1,572		6,513	9,303
Product Type
Set-up fees	306	528		-	-		-	-		306	528
Monthly service fees and usage fee	3,049	4,813		-	-		-	-		3,049	4,813
Production	-	-		-	-		1,073	1,572		1,073	1,572
Download/streaming	-	-		2,085	2,390		-	-		2,085	2,390
	3,355	5,341		2,085	2,390		1,073	1,572		6,513	9,303
Contract Counterparties
Direct to consumer (online)	-	-		2,085	2,390		-	-		2,085	2,390
B2B	3,355	5,341		-	-		1,073	1,572		4,428	6,913
	3,355	5,341		2,085	2,390		1,073	1,572		6,513	9,303
Timing of transfer of goods and services
Over time	3,355	5,341		-	-		127	-		3,482	5,341
Point in Time (on delivery)	-	-		2,085	2,390		946	1,572		3,031	3,962
	3,355	5,341		2,085	2,390		1,073	1,572		6,513	9,303

 

 

	Contract Assets	Contract Assets		Contract Liabilities	Contract Liabilities
	2020	2019		2020	2019
	£'000	£'000		£'000	£'000
Contract balances
At 1 January	255	458		(342)	(1,289)
Transfers in the period from the contract assets to trade receivables	(255)	(441)		-	-
Amounts included in contract liabilities that were recognised as revenue during the period	-	-		335	1,174
Excess of revenue recognised over cash (or rights to cash) being recognised during the period	86	238		-	-
Cash received in advance of performance and not recognised as revenue during the period	-	-		(165)	(227)
At 31 December	86	255		(172)	(342)

  

 

The aggregate amount of the transaction price of the remaining performance obligations amounting to £164k (2019: £335k) are all expected to be released within the next 12 months; £8k (2019: £7k) 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
	2020	2019		2020	2019		2020	2019		2020	As restated 2019
	£'000	£'000		£'000	£'000		£'000	£'000		£'000	£'000
Revenue from external customers	3,355	5,341		2,085	2,390		1,073	1,572		6,513	9,303
Segment's result (gross profit)	3,151	4,993		828	469		653	835		4,632	6,297
Depreciation	(28)	(50)		(16)	(22)		(8)	(5)		(52)	(77)
Amortisation	(30)	(228)		-	-		-	-		(30)	(228)
Other adjusted cost (see note 3)	-	(162)		-	-		-	-		-	(162)
Settlement income included in Other Income	135	1,000		-	-		-	-		135	1,000
Segment profit/(loss)	3,228	5,553		812	447		645	830		4,685	6,830
Remainder of other income										509	-
Amortisation of right to use asset										(291)	(415)
Corporate expenses										(7,042)	(12,120)
Financing costs										(136)	(172)
Tax charge										1	100
Discontinued operations										987	-
Loss for the year										(1,287)	(5,777)
Other segment items:										£'000	£'000
Capital additions										415	-

 

 

Revenue from the Group's largest customer in the year was just over £0.4m (2019: £1.0m) and revenue from the second largest customer in the year was just under £0.4m (2019: £0.5m). There were 3 (2019: zero) other customers that formed greater than 10% of external revenues within the year.

 

 

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
	2020	2019		2020	2019
Continuing Operations	£'000	£'000		£'000	£'000
United Kingdom	1,970	2,977		1,568	1,372
United States of America	2,196	2,790		-	-
Germany	318	1,514		-	-
Rest of Europe	1,329	1,401		-	-
Rest of World	700	621		-	-
	6,513	9,303		1,568	1,372

 

All revenues are derived from the provision of services.

 

3.          Other adjusting items

 

	2020		2019
	£'000		£'000
Exceptional legal fees (i)	(297)		(464)
Corporate restructuring releases/(provision) (ii)	(145)		(694)
Provisions relating to closure of Denmark business (iii)	262		(254)
Legal provision (iv)	(285)		(228)
Licensing development costs expensed on legacy Denmark platform (v)	-		(162)
	(465)		(1,802)

 

(i)            In 2020 the Group incurred legal fees in relation to funding of £104k (2019: £264k), unsuccessful M&A activity £120k (2019: £nil) and litigation fees £73k (2019: £nil). 2019 also included legal fees relating to planning for supposed insolvency £120k and finalisation of the settlement agreement with Media-Saturn-Holding £80k.

 

(ii)           During 2020, the Group incurred costs of £145k for employee redundancies; during 2019 the Group incurred costs of £649k to former directors on garden leave and for employee redundancies, all these cost related to organisational restructuring.

 

(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. In 2019, a provision of £254k had been made for the closing down of the Danish operations. At the end of 2020  the directors no longer considered an outflow or resources to be probable and the provision was released. Post year end, on 14 April 2021, the Danish entity, 24 -7 Entertainment ApS, was dissolved.

 

(iv)           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. 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. At 31 December 2020, the provision made in 2019 of £228k was increased by a further £285k. In May 2021, the parties reached a settlement agreement in principle upon confidential terms which is in the process of being executed.

 

(v)            During the normal course of business the Group would have capitalised £162k in 2019 in respect of development costs associated with the Denmark platform, which was sold in 2019.

 

£503k (2019: £1,582k) of the other adjusting items for the year ended 31 December 2020 are deductible for corporation tax purposes.

 

4.          Operating loss for the year

 

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

 

	2020		2019
	£'000		£'000
Net foreign exchange loss	179		238
Amortisation of intangible assets	30		228
Amortisation of right to use asset (see note 14)	291		415
Depreciation of property, plant & equipment	52		77
Profit on sale of right-of-use asset (see note 14)	(378)		(125)
Share-based payment expense (see note 27)	99		239

 

5.          Other operating income

 

	2020		As restated 2019
	£'000		£'000
Settlement income relating to customers contracts	135		1,000
Profit on sale of right-of-use asset (see note 14)	378		-
Furlough monies received from HMRC	131		-
	644		1,000

 

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:
	2020		As restated 2019
	£'000		£'000
Statutory operating loss	(2,139)		(5,705)
Other adjusting items (see note 3)	465		1,802
Foreign exchange	179		238
Share-based payment expense (see note 27)	99		239
Adjusted operating loss - per statutory	(1,396)		(3,426)
Profit on sale of right-of-use asset (see note 14)	(378)		(125)
Depreciation and amortisation	373		720
Adjusted EBITDA loss	(1,401)		(2,831)

7.             Auditor's remuneration

 

	2020		2019
	£'000		£'000
Fees payable to the Company's auditor for the audit of the Company's annual accounts	105		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	105		120
Non-audit fees:
Other services	-		-
Total non-audit fees	-		-
Total fees payable to Company's auditor	105		120

 

A description of the work of the Audit Committee is set out in the Corporate Governance Statement of the 2020 Annual Report 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 58 (2019: 81). Staff costs in the Group are presented in administrative expenses.

 

	2020		2019
	No.		No.
Number of production, R&D, and sales staff	48		65
Number of management and administrative staff	10		16
	58		81
	2020		2019
	£'000		£'000
Wages and salaries	3,673		4,659
Redundancy payments	132		259
Social security costs	417		573
Other pension costs	119		159
Share-based payments (note 27)	99		239
	4,440		5,889

 

Details of the directors' remuneration are provided in the Directors' Remuneration Report in the 2020 Annual Report.

 

9.          Finance cost

 

	2020		2019
	£'000		£'000
Shareholders' interest payable	-		(7)
Other charges similar to interest	(91)		(17)
Interest expenses on leased liability (see note 14)	(45)		(148)
	(136)		(172)

 

10.           Tax

 

Corporation tax is calculated at 19% (2019: 19%) of the estimated assessable profit for the year. 

 

	2020		As restated 2019
	£'000		£'000
Current tax
UK corporation tax on the results for the year	-		-
Foreign taxation	(1)		3
Research & development tax credits	-		(103)
Total current tax credit	(1)		(100)
Deferred tax
Origination and reversal of timing differences	-		-
Adjustments in respect of prior periods	-		-
Total deferred tax charge/(credit)	-		-
Tax on loss on ordinary activities	(1)		(100)
The charge for the year can be reconciled to the profit per statement of comprehensive income as follows:
Loss before tax	(2,275)		(5,777)
Tax at UK corporation tax rate of 19% (2019: 19%)	(432)		(1,098)
Fixed asset differences	-		-
Expenses not deductible for tax purposes	32		136
Income not taxable for tax purposes	(281)		(30)
Additional deduction for R&D expenditure	-		(137)
Adjustments to R&D in respect of previous periods	-		22
Adjustments to tax charge in respect of previous periods	12		-
Adjustments to tax charge in respect of previous periods - deferred tax	36		(40)
Remeasurement of deferred tax charged in tax rates	(678)		-
Deferred tax not recognised	1,304		979
Foreign taxation	(1)		3
Difference in tax rates	-		(8)
Tax credit receivable	-		79
Other	7		(6)
Tax credit	(1)		(100)

 

At the balance sheet date, the Group has unrecognised deferred tax assets of £7,101,109 (2019: £5,880,728) which has been calculated at a rate of 19% (2019: 17%) of unused trading tax losses; this has not been recognised on the grounds that there is insufficient evidence that these assets 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 2020 are 12,134,155 (2019: 19,059,858) 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 the Directors' Report and Directors' Remuneration Report in the 2020 Annual Report and note 27).

 

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

 

			31-Dec-20
	Loss/(profit)		Weighted average number of shares		Per share amount
Basic and Diluted EPS	£'000		Thousand		Pence
Loss attributable to shareholders - continuing operations:	(2,274)		2,542,122		(0.09)
Profit attributable to shareholders - discontinued operations:	987		2,542,122		0.04
Loss attributable to shareholders:	(1,287)		2,542,122		(0.05)
			31-Dec-19
	Loss - restated		Weighted average number of shares		Per share amount - restated
Basic and Diluted EPS	£'000		Thousand		Pence
Loss attributable to shareholders:	(5,777)		1,244,214		(0.46)

 

12.        Intangibles

 

			Bespoke applications
			£'000
Cost
At 1 January 2019			9,018
Disposals			(5,813)
At 31 December 2019			3,205
Additions			317
At 31 December 2020			3,522
Amortisation
At 1 January 2019			7,843
Charge for the year			228
Disposals			(4,866)
At 31 December 2019			3,205
Charge for year			30
At 31 December 2020			3,235
Net book value
At 31 December 2020			287
At 31 December 2019			-
At 31 December 2018			1,175
Useful lives			3-5 years

 

Additions relate to internally developed software relating to the 7digital platform. Amortisation charges are included within the administrative expenses within the Income Statement. The useful life of each group of intangible assets varies according to the underlying length of benefit expected to be received.

 

Impairment testing of bespoke applications

The Group tests intangibles annually for impairment, or more frequently if there are indications that the assets might be impaired. During 2020, the equity fundraising has enabled the Group to enhance and develop the platform; management are of the opinion that the internal costs associated with certain identifiable development projects of £317k can be capitalised and amortised from the time that the project is deemed "live".  As at December 2019, the bespoke applications of 7digital Limited had been fully impaired. 

Management considered the carrying value of the platform at 31 December 2020 in 7digital Limited based on value in use calculations. The key assumptions for the value in use calculations are those regarding the discount rates, future cash flows and growth rates during the period. Future cash flows of the Group were based on forecasts determined at year end, extrapolated over five years and based on existing contracts at that time, along with the expectation of new opportunities. Costs were significantly reduced reflecting the shrinking cost base and continuing restructuring to align costs and revenue. A pre-tax discount rate was applied of 6.1%, reflecting current market assessment of the time value of money and the risks specific to the CGU was applied. The review indicated no impairment was required.

 

13.           Property, plant and equipment

 

			Computer equipment & capitalised software
			£'000
Cost
At 1 January 2019			1,977
Disposals			(443)
At 31 December 2019			1,534
Additions			98
Disposals			(1,396)
At 31 December 2020			1,632
Amortisation
At 1 January 2019			1,849
Charge for the year			77
Disposals			(443)
At 31 December 2019			1,483
Charge for year			52
Disposals			(1,396)
At 31 December 2020			1,535
Net book value
At 31 December 2020			97
At 31 December 2019			51
At 31 December 2018			128

 

 

2020 disposals relate to obsolete assets that were identified prior to exiting the old premises (see note 14) and disposed of in Q1 2020 for zero cash.

 

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. At 29 February 2020, a profit on sale of £378k was recorded in relation to this lease, being the difference between the net book value and lease liability on that date.

 

On 1 July 2020, the Group entered into a new lease that would run until August 2023. After the year end this lease has subsequently been renegotiated to end in November 2023 with an agreed rent reduction (see note 28).

 

Right-of-use assets			Land and buildings
			£'000
At 1 January 2020			1,321
Disposal			(1,252)
Addition			824
Amortisation			291
At 31 December 2020			1,184
Lease liability			Land and buildings
			£'000
At 1 January 2020			1,658
Disposal			(1,630)
Addition			1,406
Interest expense			45
Lease payments			(149)
At 31 December 2020			1,330
Analysed:
Current			670
Non-current			660
Total			1,330

 

15.        Discontinued operations

 

On 16 September 2020, 7digital France SAS, a subsidiary was placed into liquidation.

 

Financial performance and cash flow information

The income statement is restated to present the discontinued operations.

 

	2020		2019
Revenue	-		-
Expenses	-		-
Profit before income tax	-		-
Gain on sale of subsidiary after income tax	987		-
Profit from discontinued operations	987		0

 

On 16 September 2020, the 7digital France SAS had €1,274k/£987k of liabilities no longer payable of which €1,147k related to the liabilities acquired when 7digital France SAS was bought by the Group in 2016 (see note 17). Subsequently, £987k has been transferred to profit and loss as profit and loss on disposal of subsidiary. There was no effect on Group cash or consideration received relating to liquidation of this subsidiary. There were no other material balances included in the Group's Consolidated Income Statement for the year ended 31 December 2020 (2019: £nil) relating to the discontinued operations.

 

A merger reserve of £959k, which was created on acquisition of the French entity in 2016, was reanalysed to retained earnings. 

 

16.        Trade and other receivables

 

	2020		2019
	£'000		£'000
Trade receivable for the sale of goods	1,890		1,851
Less: Provision for impairment of trade receivables	(897)		(1,014)
Net trade receivables	993		837
Other debtors	163		382
R&D credits receivable	79		412
Total financial assets at amortised cost (excluding cash & cash equivalents)	1,235		1,631
Prepayments	112		-
Total trade and other receivables	1,347		1,631
Less: non-current portion - other debtors	(80)		-
Current portion	1,267		1,631

 

The average credit period taken on sales of goods and services is 55 days (2019: 33 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 a 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 (2019: £0.3m), 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, however the £0.3m (2019: £0.2m) of the balance is with eMusic (a subsidiary of TriPlay Inc.), a related party (see note 26) and for which the Group has negotiated a payment plan post year-end. The average age of these receivables is 117 days (2019: 97 days). During the year, the Group provided for certain accounts receivable balances relating to revenue recognised during 2020, where the collection of the outstanding amounts is uncertain.

 

 

 

 

 

 

As at 31 December 2020 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	1%		5%		29%		67%
Gross carrying amount	379		103		155		1,253		1,890
Loss provision	5		5		45		842		897

 

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

 

	2020		2019
	£'000		£'000
Customer A	331		350
Customer B	320		209
Customer C	227		162
Customer D	209		136
Customer E	121		117
Customer F	102		101
Customer G	83		-

 

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. 

 

Movement in the allowance for doubtful debts:
	2020		2019
	£'000		£'000
Balance at the beginning of the period	1,014		408
Impairment losses recognised	28		717
Written off as bad debt	(145)		(111)
Balance at the end of the period	897		1,014

 

17.        Trade and other payables

 

	2020		As restated 2019
	£'000		£'000
Current Liabilities
Trade payables	2,499		3,101
Other taxes and social security	1,369		565
Other payables	45		674
Accrued costs	1,841		2,634
	5,754		6,974
Non-Current Liabilities
Other payables	-		676
	-		676

 

Trade payables and accruals principally comprise amounts outstanding for trade purchases and ongoing costs. The average credit period taken for trade purchases is 286 (2019: 241 days). The Group has financial risk management policies in place to ensure that all payables are paid within the credit time frame.

 

On 16 September 2020, 7digital France SAS, a subsidiary was placed into liquidation. On this date there was a €1,147k outstanding balance relating to liabilities that were acquired when 7digital France SAS was bought by the Group in 2016. On 16 September 2020, $227k/£207k of the €1,147k was guaranteed and payable by the Parent Company and has been included in provisions (note 19); the remaining amount €1,190k/£987k has been written off as gain on liquidation as discontinued operations as seen in note 15. At 31 December 2019, £325k of current payables and £676k of non-current payables related to these aforementioned 7digital France SAS liabilities.

 

At 31 December 2020, £76k accrual for certain technology fees accrued for at 31 December 2019, has been transferred to provisions (note 20).

 

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

 

18.           Derivative liability

 

	2020		As restated 2019
	£'000		£'000
Remuneration to be paid in the form of shares	71		61
	71		61

 

Certain Non-Executive directors and employees of the Group have been award remuneration in the form of shares. The number of shares will be determined at market value on the date the shares are awarded.

 

Since the year end £35k of the 31 December 2020 liability has been satisfied by options issued on 27 May 2021 (see note 27).  

 

19.           Loans and borrowings

 

On 28 September 2020, the Group secured a £1m revolving loan facility with Investec for a period of 36 months guaranteed by two of the Directors. The arrangement allows a maximum of 4 draw downs in any 12 month period of no less than £250k per draw down. An arrangement fee of £30k was agreed, of which £4k was payable at the time of the first draw down and £26k payable in 1,382,488 warrants. Interest, payable quarterly, is calculated at 6% above Investec bank rate on the drawn portion of the facilty and 2% on the undrawn portion. 

 

On 9 October 2020, £250k of the £1m facilty was drawn down. At 31 December 2020, £257k was due to Investec which includes accrued interest of £7k relating to the period 28 September 2020 to 31 December 2020.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

20.           Provisions

 

	Dilapidation		Provision for closure of business		Legal provision		Other provisions		Total
	£'000		£'000		£'000		£'000		£'000
At 1 January 2020	125		309		228		106		768
Transfer from other payables (see note 17)	-		239		-		76		315
Utilisation	(87)		(51)		-		(58)		(196)
Increase in provision	-		64		285		13		362
Release of provision	(38)		(316)		-		72		(282)
At 31 December 2020	-		245		513		209		967
Of which is: current	-		136		513		209		858
Of which is: non-current	0		109		0		0		109

A dilapidations provision was held in relation to the lease that was terminated in February 2020 (see note 14). £87k of the dilapidation provision, being the value of the initial rental deposit, was agreed with the landlord as cost of restoring the premises to its pre-lease state. The unused amount of £38k was released to the profit and loss in 2020.

 

On 16 September 2020, £239k was transferred from current liabilities to provision for closure of business (see note 17) and an extra provision of £64k was made relating to bank guarantees provided by ex-directors of the French entity, 7digital SAS (previously known as Snowite SAS). During the year £51k of the French & Demark closure provisions were utilised.  £316k of the provisions were released, primarily consisting of £262k (see note 3) in relation to the closure of the Danish entity, 24-7 Entertainment ApS (see note 28). At 31 December 2020, the provision for closure of business of £245k relates to the French entity, which is being paid off in 18 instalments of £11.2k to September 2022 and 3 instalments thereafter of £2.7k to December 2022.

 

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. 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. At 31 December 2020, the provision made in 2019 of £228k was increased by a further £285k. In May 2021, the parties reached a settlement agreement in principle upon confidential terms which is in the process of being executed.

 

At 31 December 2020, other provisions consist of £149k provision for technology costs that may become due, of which £76k has been reanalysed from 2019 trade payable (see note 17), and £60k payroll taxes on share options.

 

21.           Deferred tax

 

There is no deferred taxation provision included in the Statement of Financial Position (2019: £nil)

 

 

 

 

 

 

 

 

22.        Share capital

 

	2020		2019
	No. of shares		No. of shares
Allotted, called up and fully paid:
Ordinary shares of 0.01p each	2,722,085,961		2,455,419,294
Deferred shares of 0.99p each	419,622,489		419,622,489
Deferred shares of £0.09 each	115,751,517		115,751,517
	2020		2019
Allotted, called up and fully paid	£'000		£'000
At 1 January	14,817		14,420
Shares issued in the period
Capital fundraising	27		397
At 31 December	14,844		14,817

 

On 3 September 2020, 266,666,667 ordinary shares of 0.01p each were issued to the market to raise £6.0m (before expenses); share premium was increased by £5,662k after deducting £313k of expenses.

 

23.           Other reserves

 

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

 

The Foreign exchange translation reserve of £149k loss (2019: £184k profit) relates to cumulative foreign exchange differences on translation of foreign operations.

 

             The Merger reserve related to the difference between the nominal value of shares issued as part of an acquistion and the fair value of the assets transferred in relation to the 2016 acquisition of the French entity, 7digital France SAS. On 16 September 2020, the French entity was liquidated and the merger reserve has subsequently been transferred to retained earnings (see note 15).

 

             The Shares to be issued includes £89k (2019 restated: £178k) relating to the fair value at grant date of the share options that can be exercised in future years and £26k (2019: £nil) for share warrants (see note 19).

 

24.           Operating lease arrangements

 

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

 

25.        Defined contribution pension schemes

 

The Group operates defined contribution retirement benefit schemes for qualifying employees. The total cost charged to income of £119k (2019: £159k) represents contributions payable to these schemes by the Group at rates specified in the rules of the plans. As at 31 December 2020, contributions due in respect of the current reporting period of £25k had not been paid over to the schemes (2019: £41k).

 

26.        Related party transactions       

 

During the year, the Group paid £8.2k (2019: £6.4k) to MIDiA Research for music market research services, a company of which Mark Foster was a director during 2020. At  31 December 2020, the Group owed £nil (2019: £nil). 

 

During the year,  the Group invoiced and recognised $183k (2019: $228k) of revenue to eMusic (a subsidiary of TriPlay Inc.), a group which Tamir Koch was a director of during 2020. At 31 December 2020, the Group was owed £327k (2019: £209k); no provision was made relating to this balance at the year end (2019: provision made £164k).

 

During the year, the Group paid fees of £189k (2019: £54k) to MJ Advisory, which is Michael Juskiewicz's personal service company based in the US.

 

Transactions between the Parent 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 in the 2020 Annual Report.

 

	2020		2019
	£'000		£'000
Wages and salaries	574		999
Social security costs	34		113
Pension costs to defined contribution scheme	10		32
Share-based payments	59		283
	677		1,427

 

27.        Share-based payments

 

26 members of staff hold options to subscribe for shares in the Parent 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.

 

	2020 Options		Weighted average exercise price (pence)		2019 Options		Weighted average exercise price (pence)
Outstanding at 1 January	8,896,168		-		13,912,308		-
Granted during the period	-		-		-		-
Forfeited during the period	(852,834)		-		(5,016,140)		-
Exercised during the period	-		-		-		-
Outstanding at the end of the period	8,043,334		-		8,896,168		-
Exercisable at 31 December	5,413,334		-		-		-

 

During the period, nil shares were exercised (2019: nil). There are 8,043,334 options outstanding at 31 December 2020 (2019: 8,896,168) of which 5,413,334 (2019: nil) are exercisable.  Their remaining weighted average contractual life is 268 days (2019: 604 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%

 

The total expense recognised for the year ending 31 December 2020 arising from equity-settled share-based payment transactions amounted to £99k (2019: £239k) and the share-based payment reserve as at 31 December 2020 amounted to £461k (2019 restated: £346k).

 

28.           Post balance sheet events

 

In early 2021, the right-to-use property lease contract was renegogiated; the Directors agreed to a reduction of rental payments in Q1 2021 with a 3 month extension of the contract to November 2023.

 

On 14 April 2021, the Danish entity, 24 -7 Entertainment ApS, was dissolved.

 

On 27 May 2021, the Group issued shares options to non-executive directors and other employees to satisfy remuneration payable in shares (see note 18).

 

29.        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 22 and 23. The Group has external liabilities by way of the debts owed on the purchase of Snowite SAS in March 2016 and as disclosed in note 17. During the year the Group secured a £1m revolving loan facilty with Investec for a period of 36 months guaranteed by two of the Directors as disclosed in note 19.

 

Categories of financial instruments
	2020		As restated 2019
Financial assets at amortised cost	£'000		£'000
Cash and cash equivalents	2,839		149
Trade and other receivables	2,132		2,646
Financial liabilities at amortised cost
Trade and other payables	(4,385)		(6,934)
Loans and borrowings	(250)		-
Put options	-		(123)
Financial liabilities at fair value through the profit and loss
Derivative liability (see note 18)	(71)		(61)

 

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. By March 2020 the options had lapsed as the three institutional shareholders still retained all their shares in 7digital Group plc at that date. The value of the options at 31 December 2020 is £nil (2019: £123k). Adjustments to this provision are taken directly to the Consolidated Income Statement within Administrative expenses. In 2020 this credit was £123k (2019: £73k). The financial liability for 2019 was included within trade and other payables.

 

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

 

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 had minimised exposure to foreign currency risk due to subsidiaries in France (liquidated 16 September 2020) and United States (dissolved 22 May 2020). 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
	2020		2019		2018
Assets/(Liabilities)	£k		£k		£k
USD	878		619		163
EUR	(57)		(512)		1,548
Other	108		(440)		(130)
Totals	929		(333)		1,581

 

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 +/- £6k (2019: £47k) in relation to the Euro and +/- £89k (2019: £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 bank loan (see note 19) is repayable in full by 28 September 2023. Interest, payable per calendar quarters, is calculated at 6% above Investec bank rate on the drawn portion of the facilty and 2% on the undrawn portion. 

 

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

 

	2020		2019
Within 12 months	£'000		£'000
Trade payables	2,499		3,101
Other payables	45		325
Lease liability	670		472
	3,214		3,898
	2020		2019
More than 12 months	£'000		£'000
Other payables	-		676
Lease liability	660		1,186
	660		1,862

 

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:

 

	2020		2019		2018
	£'000		£'000		£'000
Barclays Bank	2,839		132		324
HSBC Bank	-		4		36
Bank of West	-		2		7
CIC Bank	-		11		23
Others	-		-		71
	2,839		149		461

 

   30.     Contingent liabiities

 

The Group does not have any contingent liabilities.