NEKTAN PLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the year ended 30 June 2019

 

1.    Accounting policies

 

Basis of preparation

 

The consolidated financial information has been prepared in accordance with International Financial Reporting Standards including International Accounting Standards ('IASs') and interpretations (collectively 'IFRS') as published by the International Accounting Standards Board ("IASB") which have been adopted by the European Commission and endorsed for use in the EU for the purposes of the Group's full year financial statements. Nektan Plc (the Group) is incorporated in Gibraltar and registered in Gibraltar with the address Fiduciary Management Limited, 23 Portland House, Glacis Road, Gibraltar.

The financial information is presented in UK Pounds Sterling ('Sterling') and rounded to the nearest £'000.  

The financial information does not constitute the Group's statutory accounts for the year ended 30 June 2019 or the year ended 30 June 2018.  Statutory accounts will be filed with Companies House Gibraltar following the Company's Annual General Meeting.

In forming their opinion on the financial statements, which is not modified, the auditors have included a material uncertainty paragraph which relates to the Group and the Company's ability to continue as a going concern. The basis for the material uncertainty is described in note 1 below.

Going concern

 

The financial statements have been prepared on a going concern basis. The Group continues to be loss making however, due to the disposal of a majority stake in the US business, Respin LLC, the group no longer funds the capital expenditure and development costs of Respin LLC which had previously consumed large parts of the Group's cash reserves. 

In November 2019, the Directors announced the successful completion of an equity fundraising of £2.7m, alongside a series of inter-conditional transactions that resulted in:

·      the full conversion of the Series A convertible loan notes of £3.9m, including accumulated interest of £0.5m;

·      an amendment to the terms of the Series B convertible loan notes totalling £0.7m to extend the repayment date to 31 March 2023, whilst at the same time reducing their coupon rate from 10% to 0% until 1 January 2021, after which date interest will be payable at 5%; and

·      an amendment to the terms to the shareholder loans to extend the repayment terms to 29 April 2021.

 

Following the above fundraise in December 2019 the Group announced that the Directors of the principal trading subsidiary; Nektan (Gibraltar) Limited had placed that Company into administration.  As previously disclosed that Company had a legacy balance debt in respect of point of consumption tax due to HMRC which at the balance sheet date was £4.6m and at the date of approval of the financial statements is £5.9m. 

The Directors also announced the conditional sale of the UK facing B2C business to a 3rd party for a purchase price of £50k upfront, contingent consideration of £150k with an ongoing platform fee for the provision of B2B services to the acquirer.  The completion of the transaction is subject to the acquirer's obtaining the necessary licenses from the UK Gambling commission. 

Following an independent valuation, Nektan (Gibraltar) Limited has also disposed of its B2B business to Nektan Technology Limited, a fellow group company for £0.2m.  Nektan Technology Limited has received from the Gibraltar Licensing Authority ("GLA") a provisional B2B license which is subject to the GLA completing certain administrative procedures, however if this is not formally issued then this may impact the Group's ability to continue as a going concern.

The administrators will also commence discussions with HMRC in order to agree a payment schedule for amounts owed by Nektan (Gibraltar) Limited for point of consumption tax.  In discussions with the Gibraltar Licensing Authority as part of obtaining the necessary licenses for the Group Company acquiring the B2B business, the Directors have confirmed that it is their intention to see settlement of the full amount of the liability.  However, whilst the Group will make their best endeavours to repay the amount due, it is dependent on successful trading, potentially further fund raising and additional B2B contract wins such that there is sufficient free cash to make the payments, whilst at the same time ensuring that the ongoing business is able to continue as a going concern.  The Group has not entered into an agreement that would give rise to a commitment to repay the amounts due to HMRC.

The Directors have reviewed forecast cash flows for the forthcoming 12 months from the date of approval of the financial statements and consider that the Group will have sufficient cash resources available for that period to meet its liabilities as they fall due (for the avoidance of doubt this does not include the HMRC liability). However, this is dependent on meeting the performance and timings in the forecasts which has required significant judgement and estimation and as such the Group may require further funding should trading or other timings of cashflows fall short of forecasts. The Directors would if required seek additional capital through further fundraising and/or further asset sales or part sales.

Having reviewed the forecasts of the business, and, based on the ability to raise further funds should this be required and B2B license being formally issued to Nektan Technology Limited, the Directors have a reasonable expectation to believe that it is appropriate to continue to prepare the financial statements on a going concern basis.  There are therefore material uncertainties related to events or conditions that may cast significant doubt on the Group and Company's ability to continue as a going concern. If the business is unable to raise additional finance, it may be unable to realise its assets and discharge its liabilities in the normal course of business. The financial statements do not include the adjustments that would result if the Company of the Group were unable to continue as a going concern.

 

Adoption of new and revised Standards and Interpretations

 

The following new Standards and Interpretations issued by the International Accounting Standards Board ('IASB') were effective for the first time in the current financial year and had an impact on the Group. The adoption of these revisions to the requirements of IFRS as adopted by the EU did not result in substantial changes to the Company's accounting policies.

IFRS 9 Financial Instruments

IFRS 9, 'Financial instruments' addresses the classification, measurement and recognition of financial assets and financial liabilities. The complete version of IFRS 9 was issued in July 2015. Amongst others, it replaces the guidance in IAS 39 that relates to the classification and measurement of financial instruments. IFRS 9 retains but simplifies the mixed measurement model and establishes three primary measurement categories for financial assets: amortised cost, fair value through OCI and fair value through profit or loss. The basis of classification depends on the entity's business model and the contractual cash flow characteristics of the financial asset. Investments in equity instruments are required to be measured at fair value through profit or loss or through OCI, the irrevocable option is at inception. There is now a new expected credit losses model that replaces the incurred loss impairment model used in IAS 39. The standard is effective for accounting periods beginning on or after 1 January 2018. The adoption of IFRS 9, on financial assets is disclosed in note 21.

The adoption of IFRS 9 has not impacted the reporting and presentation of the Group's financial assets and liabilities, which continue to be measured under IFRS 9 consistently with IAS 39.

IFRS 15 Revenue from Contracts with Customers

IFRS 15 deals with revenue recognition and establishes principles for reporting on the nature, amount, timing and uncertainty of revenues arising from contracts with customers. The core principle of IFRS 15 is that a vendor should recognise revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the vendor expects to be entitled in exchange for those goods or services.

The application of IFRS 15 is carried out in 5 steps: (1) identification of the contract, (2) identification of performance obligations, (3) determining the transaction price, (4) allocation of the transaction price to performance obligations, and (5) recognition of revenue as or when each performance obligation is satisfied.

The 5-step model is applied to individual contracts, however IFRS 15 permits an entity to apply the model to a portfolio of contracts (or performance obligations) with similar characteristics, if the entity reasonably expects that the effects would not differ materially from applying it to individual contract

IFRS 15 applies to annual reporting periods beginning on or after 1 January 2018, therefore the year ended 30 June 2019 is the first year of application of IFRS 15.

IFRS 15 is either applied retrospectively to each prior period presented in the financial statement or in the current period with a cumulative effect adjustment on the date of application. In order to ensure prior period comparatives are prepared and presented on the same basis, Directors have chosen to retrospectively apply IFRS 15.

Revenue for the Group comprises RMG revenue, website set up and management fees for partners and certain B2B activities including sheltering and platform revenue. Further detail on the application of the principles of IFRS 15 are discussed under revenue recognition.

The impact of introducing IFRS 15 for the Group was immaterial and as such there are no changes to current or prior year results.

The following relevant standard and interpretation was issued by the IASB or the IFRIC before the year-end but is as yet not effective for the 2019 year-end:

IFRS 16 Leases (effective for reporting periods beginning on or after 1 January 2019)

Under IFRS 16, "Leases", a contract is, or contains, a lease if the contract conveys the right to control the use of an identified asset for a period of time in exchange for a consideration. IFRS 16 removes the distinction between operating and finance leases for lessees, and requires them to recognise a lease liability reflecting future lease payments and a "right-of-use asset" for virtually all lease contracts; the only exceptions are short-term and low-value leases.

The standard is effective for annual periods beginning on or after 1 January 2019. The Group will apply the standard from its mandatory adoption date of 1 July 2019 and will apply the simplified transition approach. Under this approach, the Group will not restate comparative amounts for the year prior to first adoption, the lease liability is measured at the present value of the remaining lease payments as at 1 July 2019, and the right-of-use assets at that date will be measured at an amount equivalent to this lease liability plus prepaid lease expenses.

The Group has entered into lease arrangements for the use of land and buildings; these arrangements were classified as operating leases under IAS 17. As at the reporting date, the Group has non-cancellable operating lease commitments in respect of the lease of these land and buildings which amounted to £696k.

The adoption of IFRS 16 will also result in the replacement of operating lease rental expenditure on this arrangement by amortisation of the right-of-use asset, and by an interest cost on the lease liability. Management estimates that rental costs on this arrangement, amounting to £123k for the year ending 30 June 2020, will be replaced by an annual amortisation charge on the right-of-use asset and a notional interest expense of totalling £144k.

The adoption of IFRS 16 will therefore result in an increase in cost for the year ending 30 June 2020 of approximately £21k.

The above standard has not been early adopted and the Directors, based on the review and assessment completed to date, do not expect that the adoption of this standard to have a material impact on the financial statements of the Group in future periods.

Critical accounting policies, estimates and judgements

 

The preparation of consolidated financial statements under IFRS requires the Group to make estimates and judgements that affect the application of policies and reported amounts. Estimates and judgements are continually evaluated and are based on historical experience and other factors including expectations of future events that are believed to be reasonable under the circumstances. Actual results may differ from these estimates.

 

Reference is made in this note to accounting policies which cover areas that the Directors consider require estimates and assumptions which have a significant risk of causing a material adjustment to the carrying amount of assets and liabilities within the next financial year. These policies, together with references to the related notes which include the judgements made, can be found below:

 

-       Revenue recognition (note 1)

-       Going concern (note 1)

-       Capitalisation of intangible assets (note 8)

-       Impairment of goodwill (note 8)

-       Impairment of investment in associate (note 10)

-       Impairment of trade and other receivables (note 11)

-       Convertible loan notes (note 16)

 

Basis of consolidation

The consolidated financial statements incorporate the financial information of the Company and entities controlled by the Company made up to 30 June 2019. Control is achieved where the Company has the power to govern the financial and operating policies of an entity so as to obtain benefits from its activities. Entities included within the consolidation that have been acquired by the Company are accounted for using acquisition or merger accounting as appropriate.

The consolidated financial statements include the combination of businesses achieved through a Group restructuring that falls outside the scope of IFRS 3 Business Combinations. Accordingly, following the guidance regarding the selection of an appropriate accounting policy provided by IAS 8 Accounting policies: Changes in accounting estimates and errors, these financial statements have been prepared using the principles of merger accounting set out in FRS 6 Acquisitions and Mergers and UK Generally Accepted Accounting Practice ('UK GAAP').

When merger accounting is applied, the investment is recorded in the Company's balance sheet at the nominal value of shares issued together with the fair value of any consideration paid.

In the consolidated financial statements, merged subsidiary undertakings are treated as if they had always been a member of the Group. Any differences between the nominal value of the shares acquired by the Company and those issued by the Company to acquire them are taken to a separate merger reserve.

Where acquisition accounting is applied, the results of subsidiaries acquired or disposed of during the year are included in the consolidated statement of comprehensive income from the effective date of acquisition and up to the effective date of disposal, as appropriate.

Where the Group enters into a step-acquisition and moves from being a joint-venture investment to a controlled subsidiary, this is accounted for as a business combination. On acquisition, the joint venture investment is fair valued with the difference being recorded in the income statement. Where a non-controlling interest is held, the fair value of assets and liabilities acquired is recorded in the minority interest reserve.

Where the companies acquire a non-controlling interest, the amount payable is recorded directly in retained earnings and the necessary non-controlling interest reserve transferred to retained earnings.

Uniform accounting policies have been adopted across the Group. All intra-Group transactions, balances, income and expenses are eliminated on consolidation.

Foreign currencies

The consolidated financial statements of the Group are prepared in Sterling, this is in line with the functional and presentational currency of the Parent company and main operating subsidiaries. Transactions and balances in foreign currencies are converted into Sterling as follows:

·      Transactions entered into by the Group in a currency other than the functional currency are recorded at the rates ruling when the transactions occur. Foreign currency monetary assets and liabilities are translated at the rates ruling at the reporting date. Exchange differences arising on retranslation of unsettled monetary assets and liabilities are recognised immediately in the profit and loss.

On consolidation, the results of overseas operations are translated into Sterling at rates ruling when the transaction took place. All assets and liabilities of overseas operations, including goodwill arising on the acquisition of those operations, are translated at the rate ruling at the reporting date. Exchange differences arising on translating the opening net assets at the opening rate and the results of overseas operations at the actual rate are recognised in other comprehensive income and accumulated in the foreign exchange reserve.

On disposal of a foreign operation, the cumulative exchange differences recognised in the foreign exchange reserve relating to that operation up to the date of disposal are transferred to the consolidated statement of comprehensive income as part of the profit or loss on disposal.

Revenue recognition (in accordance with IFRS 15)

Revenue comprises the fair value of the consideration received or receivable for the support of services in the Company's activities. Revenue in the current year and prior year arises on real money gaming, website set up and management fees for partners and certain B2B activities including sheltering and platform revenue. In the US, revenue is from in-venue gaming set-up fees and porting 3^rd party content onto our platform.

The Company recognises revenue when the amount of revenue can be reliably measured, it is probable that future economic benefits will flow to the Company and when specific criteria have been met as described below.

Net gaming revenue derives from online gambling operations and is defined as the difference between the amounts of bets placed by players less amounts won by players. It is stated after deduction of promotional bonuses and jackpot contributions. Net gaming revenue is recognised in the accounting system at the point in time the transactions occur.

Other revenue comprises website set up and management fees for partners and B2B activities including sheltering and platform revenues and is recognised in the period that the services are rendered.

In respect of IFRS 15, the Group has individual contracts for its real money gaming business which represents 95% of the revenue for the year ended 30 June 2019. Each contract follows a consistent approach but may contain variations based on partner specific terms, for example, eligible deductions and revenue share model. Each contract contains the criteria set out in IFRS 15 to recognise the revenue:

1.     Contracts are approved in writing and the parties are committed to performing their obligations in the contract.

2.     Each party's rights regarding the goods or services to be transferred can be identified.

3.     The payment terms of the goods or services can be identified.

4.     The contract has commercial substance.

5.     It is probable that the consideration for the exchange of goods or services will be collected.

Performance obligations are defined within the contract, which in all contracts is the provision of mobile gaming and services to the partners using their brands under licence. The Group is required to develop and host gaming sites for the partners' respective brands.

Contracts include a setup fee and monthly management fee in some cases, which can be waived in certain contracted circumstances. The associated fees and costs are identified as a distinct performance obligation and depict a transfer of services to the customer and are recognised when the service and costs occur. Revenue commences in all contracts in the first month that the gaming site is operational. Once a site is live and operational, revenue is recognised in the month that the gaming activity through the site is generated by active players.

Cost of sales

Cost of sales consists primarily of licensing fees, gaming taxes, regulatory and compliance expenses, merchant fees, chargebacks and platform licensing expenses. All expenses are recognised on an accruals basis and in line with the underlying revenue.

Marketing, partner and affiliate costs

Marketing, partner and affiliate costs consists primarily of revenue share, commission, affiliate expenses and online advertising.

Goodwill

Goodwill represents the excess of the cost of a business combination over the total acquisition date fair value of the identifiable assets, liabilities and contingent liabilities acquired.

Cost comprises the fair value of assets given, liabilities assumed, and equity instruments issued, plus the amount of any non-controlling interests acquired. Contingent consideration is included in cost at its acquisition date fair value and, in the case of contingent consideration classified as a financial liability, remeasured subsequently through profit or loss.

Goodwill is capitalised as an intangible asset with any impairment in carrying value being charged to the consolidated statement of comprehensive income.

Externally acquired 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 other contractual or legal rights. The amounts ascribed to such intangibles are arrived at using appropriate valuation techniques.

In-process research and development programmes acquired in such combinations are recognised as an asset even if subsequent expenditure is written off because the criteria specified in the policy for development costs below are not met.

The significant intangibles recognised by the Group, their useful economic lives and methods used to determine the cost of intangibles acquired in a business combination are as follows:

 

Intangible asset	Useful economic life	Valuation method
Developed software	Three years	Replacement cost
Contractual relationships	Term of contract	Discounted cash flows
Licenses	Five years	Residual value

 

Internally generated intangible assets (development costs)

Expenditure incurred on development activities including the Group's software development is capitalised only where the expenditure will lead to new or substantially improved products, the products are technically and commercially feasible and the Group has sufficient resources to complete development.

Capitalised development costs are amortised over three years on a straight line basis. The amortisation expenses are included within administrative expenses in the consolidated statement of comprehensive income.

Development expenditure not satisfying the above criteria and expenditure on the research phase of internal projects are recognised in the consolidated statement of comprehensive income as incurred.

Subsequent expenditure on capitalised intangible assets is capitalised only where it clearly increases the economic benefits to be derived from the asset to which it relates.  All other expenditure, including that incurred in order to maintain the level of performance of an intangible asset, is expensed as incurred.

Property, plant and equipment

Depreciation is calculated on a straight-line basis over the expected useful lives of the assets concerned. The principal annual rates used for this purpose are:

Fixtures, fittings and equipment      -               20 - 33 % straight-line

Office equipment                                 -               20 - 33 % straight-line

Computer equipment                          -               33 % straight-line

Subsequent expenditures are included in the carrying amount of an asset or recognised as a separate asset, as appropriate, only when it is probable that future economic benefits will flow to the Group and the cost of the item can be measured reliably. All repairs and maintenance are charged to the consolidated statement of comprehensive income during the financial period in which they are incurred.

Gains and losses on disposals are determined by comparing proceeds with the carrying amount and are included in the consolidated statement of comprehensive income.

Impairment of property, plant and equipment and internally generated 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 the synergies of the combination giving rise to 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.

Financial assets (in accordance with IFRS 9)

The Group classifies its financial assets in the following measurement categories:

·      those to be measured subsequently at fair value (either through other comprehensive income (OCI) or through profit or loss), and

·      those to be measured at amortised cost.

The classification depends on the purpose for which the financial assets were acquired. For assets measured at fair value, gains and losses will either be recorded in profit or loss or other changes in OCI.

For investments in equity instruments that are not held for trading, this will depend on whether the Company has made an irrevocable election at the time of initial recognition to account for the equity investment at fair value through other comprehensive income (FVOCI).

For debt instruments subsequent measurement depends on the Company's business model for managing the asset and the cash flow characteristics of the asset. There are three measurement categories into which the Company classifies its debt instruments:

·      Amortised cost: Assets that are held for collection of contractual cash flows where those cash flows represent solely payments of principal and interest are measured at amortised cost. Interest income from these financial assets is included in finance income using the effective interest rate method. Any gain or loss arising on de-recognition is recognised directly in profit or loss and presented in other gains/(losses) together with foreign exchange gains and losses. Impairment losses are presented as separate line item in the statement of profit or loss.

 

·      FVOCI: Assets that are held for collection of contractual cash flows and for selling the financial assets, where the assets' cash flows represent solely payments of principal and interest, are measured at FVOCI. Movements in the carrying amount are taken through OCI, except for the recognition of impairment gains or losses, interest income and foreign exchange gains and losses which are recognised in profit or loss. When the financial asset is derecognised, the cumulative gain or loss previously recognised in OCI is reclassified from equity to profit or loss and recognised in other gains/(losses). Interest income from these financial assets is included in finance income using the effective interest rate method. Foreign exchange gains and losses are presented in other gains/(losses) and impairment expenses are presented as separate line item in the statement of profit or loss.

 

·      FVPL: Assets that do not meet the criteria for amortised cost or FVOCI are measured at FVPL. A gain or loss on a debt investment that is subsequently measured at FVPL is recognised in profit or loss and presented net within other gains/(losses) in the period in which it arises.

From 1 July 2018, the group assesses on a forward-looking basis the expected credit losses associated with its debt instruments carried at amortised cost and FVOCI. The impairment methodology applied depends on whether there has been a significant increase in credit risk. For trade receivables, the group applies the simplified approach permitted by IFRS 9, which requires expected lifetime losses to be recognised from initial recognition of the receivables.

Derivative financial assets, including call options, are recognised initially at fair value, and subsequently re-measured at each balance sheet date, with the fair value gain or loss taken to the income statement.

Financial assets are derecognised when the rights to receive cash flows from the investments have expired or have been transferred and the Group has transferred substantially all risks and rewards of ownership.

At initial recognition, the Company measures a financial asset at its fair value plus, in the case of a financial asset not at fair value through profit or loss (FVPL), transaction costs that are directly attributable to the acquisition of the financial asset. Transaction costs of financial assets carried at FVPL are expensed in profit or loss.

Financial assets with embedded derivatives are considered in their entirety when determining whether their cash flows are solely payment of principal and interest.

Trade and other receivables

Trade receivables are amounts due from customers for services performed in the ordinary course of business. If collection is expected in one year or less (or in the normal operating cycle of the business if longer), they are classified as current assets. If not, they are presented as non-current assets. Trade and other receivables are recognised initially at fair value and subsequently measured at amortised cost using the effective interest method, less provision for impairment. The carrying amount of the asset is reduced through the use of an allowance account, and the amount of the loss is recognised in profit or loss. When a receivable is uncollectible, it is written off against the allowance account for trade and other receivables. Subsequent recoveries of amounts previously written off are credited against profit or loss.

Cash and cash equivalents

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

Financial liabilities (in accordance with IFRS 9)

Financial liabilities are classified as financial liabilities at fair value through profit or loss or as financial liabilities measured at amortised cost, as appropriate. The Group determines the classification of its financial liabilities at initial recognition.

The measurement of financial liabilities depends on their classification: (i) financial liabilities at fair value through profit or loss are carried on the balance sheet at fair value with gains or losses recognised in the income statement; and (ii) financial liabilities measured at amortised cost are initially recognised at fair value and subsequently measured at amortised cost using the effective interest method. Amortised cost is calculated by taking into account any issue costs, and any discount or premium on settlement. Gains and losses arising on the repurchase, settlement or cancellation of liabilities are recognised respectively in interest and other revenues and finance costs. For substantial and non-substantial modifications the Group derecognises a financial liability from its balance sheet when the obligation specified in the contract or arrangement is discharged, cancelled or expires.

Trade and other payables

Trade payables are initially measured at their fair value and are subsequently measured at their amortised cost using the effective interest rate method; this method allocates interest expense over the relevant period by applying the 'effective interest rate' to the carrying amount of the liability.

Convertible debt

Where the convertible debt issued converts into a variable number of shares the proceeds received on issue are allocated between the derivative financial liability and the host debt based upon their fair values. Subsequently the conversion option is measured at fair value through profit and loss and the debt component as a financial liability measured at amortised cost until extinguished on conversion or maturity of the debt.

Debt restructuring

In accordance with IFRS 9 'Financial instruments' when modifying debt and keeping the original lender the de-recognition treatment is based on whether the modification is deemed "substantial" or whether the original debt has been replaced by another debt with "substantially" different terms.

A "substantial" debt modification is accounted for as an extinguishment of the original financial liability and the recognition of a new financial liability at fair value. The difference between carrying amount of the original financial liability and fair value of new financial liability is recorded in the profit and loss.  

Transaction costs directly attributable to the raising of convertible debt are allocated across the derivative financial liability component and the debt liability component. Transaction costs allocated to the derivative financial liability component are expensed to the income statement as they are incurred. Transaction costs allocated to the debt liability component are deducted from the residual value recognised as the debt liability on recognition.

On receipt of a conversion request, the appropriate number of shares are issued to the loan note holder and the debt is cancelled. The difference between the nominal value of debt and the nominal share value is allocated to the share premium account.

Share capital

Financial instruments issued by the Group are classified as equity only to the extent that they do not meet the definition of a financial liability or financial asset.

Current and deferred tax

Taxation represents the sum of the tax currently payable and deferred tax.

Current tax

The tax currently payable is based on taxable profit for the year. Taxable profit differs from net profit reported in the statement of comprehensive income because it excludes items of income or expense that are taxable or deductible in other years and it further excludes items that are never taxable or deductible.  The Group's liability for current tax is calculated using tax rates that have been enacted or substantively enacted by the statement of financial position date.

Tax losses arising as a result of research and development expenditure and subsequently surrendered for tax credit are recognised within other income and as an other debtor.

Deferred tax

Deferred tax is calculated at the tax rates that are expected to apply to the period when the asset is realised, or the liability is settled based upon tax rates that have been enacted or substantively enacted by the balance sheet date. Deferred tax is charged or credited in the statement of comprehensive income, except when it relates to items credited or charged directly to equity, in which case the deferred tax is also dealt with in equity.

Deferred tax is the tax expected to be payable or recoverable on differences between the carrying amounts of assets and liabilities in the financial statements and the corresponding tax bases used in the computation of taxable profit and is accounted for using the balance sheet liability method. Deferred tax assets are recognised to the extent that it is probable that taxable profits will be available against which deductible temporary differences can be utilised.

The carrying amount of deferred tax assets is reviewed at each statement of financial position date and reduced to the extent that it is no longer probable that sufficient taxable profits will be available to allow all or part of the asset to be recovered. Deferred tax is not discounted.

                Leased assets

Where substantially all of the risks and rewards incidental to ownership of a leased asset have been transferred to the Group (a 'finance lease'), the asset is treated as if it had been purchased outright. The amount initially recognised as an asset is the lower of the fair value of the leased property and the present value of the minimum lease payments payable over the term of the lease. The corresponding lease commitment is shown as a liability. Lease payments are analysed between capital and interest. The interest element is charged to the consolidated statement of comprehensive income over the period of the lease and is calculated so that it represents a constant proportion of the lease liability. The capital element reduces the balance owed to the lessor.

Where substantially all of the risks and rewards incidental to ownership are not transferred to the Group (an 'operating lease'), the total rentals payable under the lease are charged to the consolidated statement of comprehensive income on a straight-line basis over the lease term.  The aggregate benefit of lease incentives is recognised as a reduction of the rental expense over the lease term on a straight-line basis.

Share based payments

Where equity-settled share options are awarded to employees or service providers, the fair value of the options at the date of grant is charged to the consolidated statement of comprehensive income over the vesting period. Non-market vesting conditions are taken into account by adjusting the number of equity instruments expected to vest at each reporting date so that, ultimately, the cumulative amount recognised over the vesting period is based on the number of options that eventually vest. Non-vesting conditions and market vesting conditions are factored into the fair value of the options granted. As long as all other vesting conditions are satisfied, a charge is made irrespective of whether the market vesting conditions are satisfied. The cumulative expense is not adjusted for failure to achieve a market vesting condition or where a non-vesting condition is not satisfied.

Where the terms and conditions of options are modified before they vest, the increase in the fair value of the options, measured immediately before and after the modification, is also charged to the consolidated statement of comprehensive income over the remaining vesting period.

Where equity instruments are granted to persons other than employees, the consolidated statement of comprehensive income is charged with the fair value of goods and services received.

Adjusted EBITDA

The Group defines adjusted EBITDA as the operating result before depreciation, amortisation, income or expenditure relating to exceptional items and non-cash charges relating to share based payments and impairments. Exceptional items are considered income and expenditure that are separately identified to assist in understanding the underlying performance of the Group. Adjusted EBITDA is considered to be the most appropriate measure as it reflects the underlying trading performance of the Group and allows ease of comparison with the prior year.

Joint ventures and associates

A joint venture is a contractual arrangement whereby the Group and other parties undertake an economic activity that is subject to joint control; that is, when the strategic, financial and operating policy decisions relating to the activities require the unanimous consent of the parties sharing control.

Associates are all entities over which the Company has significant influence but not control or joint control. This is generally the case where the Company holds between 20% and 50% of the voting rights. Investments in associates are accounted for using the equity method of accounting, after initially being recognised at cost. Under the equity method of accounting, the investments are initially recognised at cost and adjusted thereafter to recognise the Company's share of the post-acquisition profits or losses

of the investee in profit or loss, and the Company's share of movements in other comprehensive income of the investee in other comprehensive income. Dividends received or receivable from associates are recognised as a reduction in the carrying amount of the investment. When the Company's share of losses in an equity-accounted investment equals or exceeds its interest in the entity, including any other unsecured long-term receivables, the Company does not recognise further losses, unless it has incurred obligations or made payments on behalf of the other entity. Unrealised gains on transactions between the Company and its associates and joint ventures are eliminated to the extent of the Company's interest in these entities. Unrealised losses are also eliminated unless the transaction provides evidence of an impairment of the asset transferred. Accounting policies of equity accounted investees have been changed where necessary to ensure consistency with the policies adopted by the Company. The carrying amount of equity-accounted investments is tested for impairment in accordance with the policy described in note 10.

The Group reports its interests in jointly controlled entities and associates using the equity method of accounting. Under the equity method, investments in joint ventures and associates are carried in the consolidated statement of financial position at cost as adjusted for post-acquisition changes in the Group's share of the net assets of the joint venture and associates, less any impairment in the value of the investment. Losses of a joint venture and/or associates in excess of the Group's interest in that investment are not recognised. Additional losses are provided for, and a liability is recognised, only to the extent that the Group has incurred legal or constructive obligations or made payments on behalf of the joint venture and/or associate.

2.     Segmental information

 

The accounting policies of the reportable segments follow the same policies as described in note 1. Segment result represents the gross profit earned by each segment without allocation of the share of administrative costs including Directors' salaries, finance costs and income tax expense. This is the measure reported to the Group's Chief Executive for the purpose of resource allocation and assessment of segment performance. Administrative expenses comprise principally the employment and office costs incurred by the Group.

 

Due to the sale during the year of the on-premise gaming segment, there is only one segment for the year ended 30 June 2019 (2018: 1). The prior year comparatives have been presented excluding revenues and costs from the on-premise gaming segment that was disposed of during the year ended 30 June 2019.  The results of this segment are disclosed as discontinued and also form part of the disclosure in note 21.

 

                Segment assets and liabilities

Assets and liabilities are not separately analysed or reported to the Group's Chief Executive and are not used to assist in decisions surrounding resource allocation and assessment of segment performance. As such, an analysis of segment assets and liabilities has not been included in this financial information.

Geographical analysis of non-current assets

The following table provides an analysis of the Group's non-current assets, excluding goodwill, by geographical segment:
 

	2019	2018
	£'000	£'000
Gibraltar	1,553	5,100
UK	5	5
India	20	32
US	-	172
	1,578	5,309

 

 

Geographical analysis of revenues

The following table provides an analysis of the Group's revenue by geographical segment:
 

	2019	2018
	£'000	£'000
UK	20,347	18,003
Rest of the World	2,230	1,891
	22,577	19,894

 

3.    Operating Loss

Operating loss has been arrived at after charging:

	2019	2018
	£'000	£'000
Staff costs (note 4)	3,042	3,100
Auditor's remuneration:
Audit of the Company's annual accounts	83	66
Audit of the subsidiaries' annual accounts	25	32
Other assurance services	11	6
Tax compliance services	14	3
Other non-audit services	12	6
Rent payable under operating leases	197	278
Amortisation	1,458	2,184
Depreciation	71	170
Impairment of tangible assets	-	152
Loss on foreign exchange	240	134
Exceptional charge	1,510	404

 

 

During the year, the Group has incurred certain costs that warrant separate disclosure to understand the underlying performance of the Group. Included within exceptional items are:

	2019	2018
	£'000	£'000
Fundraising costs	-	65
Write-off of onerous contracts	43	134
Restructuring costs	9	119
Expected credit loss	332	-
Impairment of goodwill	919	-
Impairment of investment	147	-
Other	60	86
	1,510	404

There were no fundraising costs incurred in the year ended 30 June 2019 charged to exceptional costs, however, £104,310 was charged against the share premium reserve in relation to the April 2019 raise.

Those fundraising costs incurred in the year ended 30 June 2018 relate primarily to professional costs incurred in relation to the issue of loans and equity fundraising in the year.

Where the unavoidable costs under a contract exceed the economic benefit expected to be received from that contract, the Group recognises a write-off for the present value of the obligations under the contract. A write-off has been recognised in the year ended 30 June 2019 for onerous contracts relating to previous premises occupied by the Group to a value of £43,000. The charge in the year ended 30 June 2018 for onerous contracts relates to a professional services provider following the group making the decision to move some services to Gibraltar which resulted in a charge of £134,000.

Other costs totalling £60,000 are principally small legal costs for one off events or business changes.

A detailed review was undertaken at 30 June 2019 to assess whether the carrying value of assets was supported by the net present value of future cash flows derived from those assets, this resulted in a full impairment of £919,000 in respect of goodwill.

During the year the Company reduced its ownership of Respin LLC from a 100% subsidiary to a 42.5% held associate. As part of the ongoing review for impairment it was determined to impair in full the investment held as an associate of £147,000 to zero after recording the associate share of losses for the period of £70,000.

During the year ended 30 June 2019, the Group incurred a further restructuring cost of £9,000 in relation to the closure of the London office. The restructuring costs incurred in the year ended 30 June 2018, relate to the decision made by the Group to close the London office and relocate some of the key roles to Gibraltar, which led to a restructuring cost of £119,000 in the period.

During the year ended 30 June 2019, amounts due from certain partners in respect of their share of  net house loss was impaired in full totalling £332,000 (2018: nil)

 

4.      Staff costs

 

	2019	2018
The average number of employees (including Directors) employed was:
Management	5	3
Administration and technical staff	86	95
	91	98

 

	2019	2018
	£'000	£'000
The aggregate remuneration of the above employees comprised (including Directors):
Wages and salaries	3,531	3,503
Social security costs	157	240
Pension costs	114	103
Benefits in kind	189	148
	3,991	3,994
Staff costs capitalised in respect of internally generated intangible assets	(949)	(894)
	3,042	3,100

 

In the statement of comprehensive income, total staff costs are included within administrative expenses.

5.      Loss per share

 

Basic loss per share is calculated by dividing the loss attributable to Ordinary shareholders by the weighted average number of ordinary shares outstanding during the year.

 

 

Loss per share for continuing operations

	2019	2018
Basic and diluted from continuing operations
Loss after tax from continuing operations (£'000)	(6,452)	(5,102)
Weighted average number of shares	57,999,367	41,918,199
Weighted average loss per share (pence)	(11.1)	(12.2)
Basic and diluted for discontinuing operations Loss after tax from discontinuing operations (£'000)	(2,763)	(1,850)
Weighted average number of shares	57,999,367	41,918,199
Weighted average loss per share (pence)	(4.8)	(4.4)
Basic and diluted for the year
Loss after tax from continuing and discontinuing operations (£'000)	(9,215)	(6,952)
Weighted average number of shares	57,999,367	41,918,199
Weighted average loss per share (pence)	(15.9)	(16.6)

The result for the year ended 30 June 2019 and 2018 was a loss and therefore there was no difference between the basic and diluted loss per share. The Group has convertible loan notes, share options and warrants which are all potentially dilutive. At 30 June 2019, the number of fully diluted shares was 146,940,835 (2018: 105,665,685).

In November 2019, the Company completed a series of inter-conditional transactions that resulted in the issuance of new ordinary shares and the amendment of certain terms of the Series B convertible loan notes. Refer to note 16 for further information.

 

6.    Finance income and costs

		2019	2018
		£'000	£'000
Finance income: Financial instruments measured at fair value through profit and loss
Gain on fair value of derivative financial liabilities		2,336		92
		2,336		92
There has been a fair value gain on the convertible loan and shareholders loan which has been recorded through the profit and loss (note 14).
Finance expense: Financial instruments measured at fair value through profit and loss
Loss on fair value of derivative financial liabilities		-		(38)
Financial instruments measured at amortised cost Loss on modification of shareholder loans		(723)		-
Loss on convertible loan note conversion		(317)		-
Interest payable		(2,545)		(1,761)
Total finance costs		(3,585)		(1,799)

 

 

7.    Taxation

	2019	2018
	£'000	£'000
Current tax charge	47	98
Deferred tax credit	(168)	(328)
Tax credit on loss on ordinary activities	(121)	(230)

 

The total tax credit can be reconciled to the overall tax charge as follows:

 

	£'000	£'000
Factors affecting tax charge for year:   The tax assessed for the relevant period is higher than the average standard rate of corporation tax in Gibraltar of 10 %. (2018: 10 %.). The differences are explained below:
Loss before taxation	(9,336)	(7,182)
Loss before taxation multiplied by the average standard rate of tax in the year of 10 %. (2018: 10 %.)	(934)	(718)
Effects of:
Expenses not deductible for tax purposes	200	222
Other tax differences	(83)	(181)
Current year tax losses not recognised	696	447
Income not taxable	-	-
Tax credit for year	(121)	(230)

 

Reconciliation of continuing tax charge/ (credit) for the year:

	2019	2018
	£'000	£000
Tax charge for the year from continuing operations	47	98
Deferred tax credit from acquired intangibles in discontinued operation	(168)	(328)
	(121)	230

 

The Group has maximum corporation tax losses carried forward at each period end as set out below:

 

	2019	2018
	£'000	£'000
Corporation tax losses carried forward	45,003	38,049

 

In addition, the Group has an unrecognised deferred tax asset in respect of losses which do not expire as follows:

 

	2019	2018
	£'000	£'000
Tax losses carried forward	5,010	4,076

 

 

8.    Intangible assets

 

	Developed software	Acquired Licences	Computer software	Patents and Trademarks	Goodwill	Total
	£'000	£'000	£'000	£'000	£'000	£'000
Cost
At 1 July 2017	4,866	4,916	250	35	919	10,986
Externally acquired additions	-	-	-	17	-	17
Internally capitalised additions	1,341	-	-	-	-	1,341
Acquisition of subsidiary*	(2,688)	-	(42)	-	-	(2,730)
At 30 June 2018	3,519	4,916	208	52	919	9,614
Externally acquired additions	-	-	-	-	-	-
Internally capitalised additions	1,829	-	-	-	-	1,829
Disposals	(509)	(88)	(208)			(805)
Respin Disposal*	(915)	(4,828)		-	-	(5,743)
Impairment **					(919)	(919)
At 30 June 2019	3,924	-	-	52	-	3,976
Accumulated amortisation
At 1 July 2017	3,266	570	250	-	-	4,086
Charge for the year	1,163	966	9	46	-	2,184
Disposals	(2,688)	-	(51)	-	-	(2,739)
At 30 June 2018	1,741	1,536	208	46	-	3,531
Charge for the year	958	494	-	6	-	1,458
Disposals		(88)	(208)	-	-	(296)
Respin Disposal	(216)	(1,942)				(2,158)
At 30 June 2019	2,483	-	-	52	-	2,535
Net book value
At 1 July 2017	1,600	4,346	-	35	919	6,900
At 30 June 2018	1,778	3,380	-	6	919	6,083
At 30 June 2019	1,441	-	-	-	-	1,441

 

* During the year, the Group disposed of 57.5% shares in Respin LLC, resulting in loss of control and the investment being classified as investment in associate post-disposal. In the prior year, this entity was recognised in the Group accounts as fully owned subsidiary after the Group purchased the remaining shares from its joint venture partner during the year ended 30 June 2017.

** During the year ended 30 June 2019, the Group realised a full impairment against the goodwill arising on the prior acquisition of Mfuse (now Nektan UK Limited).

Impairment

In accordance with IAS 36 Impairment of Assets, the Group regularly monitors the carrying value of its intangible assets. A detailed review was undertaken at 30 June 2019 to assess whether the carrying value of assets was supported by the net present value of future cash flows derived from those assets. With the challenges faced by the B2C business including the imposition of additional taxes, and review of future budgeted cash flows the directors have fully impaired the goodwill balance of £919,000.

 

9.    Plant, property and equipment

 

	Computer equipment	Office equipment	Fixtures, fittings and equipment	Total
	£'000	£'000	£'000	£'000
Cost
At 1 July 2017	1,090	58	66	1,214
Additions	65	15	3	83
FX movement	-	-	-	-
Disposals	(973)	(55)	(25)	(1,053)
At 30 June 2018	182	18	44	244
Additions	51	-	80	131
Disposals	(87)	(15)	(39)	(141)
At 30 June 2019	146	3	85	234
Accumulated depreciation
At 1 July 2017	710	43	29	782
Charge for the year	123	12	35	170
Impairment	152	-	-	152
Disposals	(925)	(55)	(25)	(1,005)
At 30 June 2018	60	-	39	99
Charge for the year	57	-	14	71
Disposals	(36)	-	(37)	(73)
At 30 June 2019	81	-	16	97
Net book value
At 1 July 2017	380	15	37	432
At 30 June 2018	122	18	5	145
At 30 June 2019	65	3	69	137

 

 

10.  Investment in associate

 

	2019	2018
	£'000	£'000
At 1 July
Additions	217	-
Share of losses	(70)	-
Impairment of Respin investment	(147)	-
At 30 June	-	-

 

During the year ended 30 June 2019, the Group reduced its shareholding in Respin LLC, incorporated in the US, from 100% to 42.5%, and accordingly recognised an investment in associate of £217,000. The investment was consolidated prior to the reduction in the shareholding, at which point it became an associate and is now treated under equity accounting method. The Group's share of losses from the date on which the entity became an associate until year end have been recognised, and at year end the remaining investment has been fully impaired recognising that the Respin LLC continues to be loss making.

 

11. Trade and other receivables

 

	2019	2018
	£'000	£'000
Trade Receivables and client segregated funds	416	726
Prepayments and other debtors	577	675
Payment provider receivables	949	1,201
	1,942	2,602

 

During the year ended 30 June 2019, amounts due from certain partners in respect of net house loss was impaired in full totalling £332,000 (2018: nil). The impairment was recorded as an exceptional item (note 3).

In determining the recoverability of receivables, the Group considers any change in the credit quality of the receivable from the date credit was granted up to the reporting date. These debts relate to customers with no default history:

 

	2019	2018
	£'000	£'000
Between one and two months	22	-
Between two and three months	31	5
More than three months	126	7
	179	12

 

The Group utilises one principal payment service provider that processes approximately 80% (2018: 80%) of the Group's payment receipts. The amount outstanding from this payment service provider at 30 June 2019 was £397k (30 June 2018: £765k).

Provision for bad debt:

	£'000	£'000
Prepayments and other debtors	909	675
Provision for impairment of other debtors	(332)	-
	577	675

 

The Directors consider that the carrying amount of the trade receivables and other approximate to their fair value due to their short-term maturity. The maximum exposure to credit risk at the reporting date is the carrying value of each class of receivable shown above. The Group does not hold any collateral as security.

12.  Cash and cash equivalents

	2019	2018
	£'000	£'000
Cash in bank accounts	857	1,402

 

Interest is earned at floating rates on cash held on short-term deposit. All of the Group's cash and cash equivalents are held with major UK, Gibraltar or US banks.

 

The following cash and cash equivalent amounts were held in foreign currencies. The remaining balance was denominated in UK Pound Sterling (£).

 

 

	2019	2018
	£'000	£'000
Euros	7	2
Indian Rupees	58	58
	65	60

 

The Directors consider that the carrying value of cash and cash equivalents is approximate to their fair value.

 

13.  Trade and other payables

 

	2019	2018
	£'000	£'000
Trade payables	847	613
Player balances	860	647
Other payables	551	703
Amounts payable to related parties	90	-
Owed to former NMS joint venture partner	-	100
Corporation tax liability	-	92
Partner revenue shares	463	1,265
Gaming duty	4,649	2,872
Jackpot contribution accruals	1,030	872
Other accruals	1,318	1,614
Finance lease obligations	-	1
	9,808	8,779

 

Player balances represent amounts due to customers including net deposits received, undrawn winnings, progressive jackpots and certain promotional bonuses. The Group's policy is to ensure that these balances are fully covered by either cash or by funds held with payment processors (note 11).

 

The Directors consider that the carrying value of trade and other payables is approximate to their fair value.

 

14.  Derivative financial liabilities

 

The derivative financial liabilities arise on two separate elements. Firstly, the fair value derivative component of the convertible loan notes issued in previous periods and, secondly, the derivative element of the warrants issued in conjunction with the loans from Sandeep Reddy and Gary Shaw during the year.

 

	2019	2018
	£'000	£'000
Fair value derivative component of convertible loan notes (note 15)	12	931
Fair value derivative component of shareholder loans (note 16)	-	1,417
	12	2,348

 

The derivative financial liability has been fair valued using the Black-Scholes model at the balance sheet date assuming an expected life of 0.8 years and a volatility of 47.5%, which has resulted in a fair value gain to the income statement of £2,336,000 (2018: gain of £92,000). Due to the equity issue during the year, the conversion price of the CLN at year end was 18.75p.

 

15.  Convertible Loan Notes

 

The Company raised £5,829k, Series A loan notes of  £5,329k and Series B loan notes of £500k, in the year to 30 June 2015 ("Tranche 1 and 2") and a further £5,272k, Series A loan notes £4,672k  and £600k Series B loan notes, in the year 30 June 2016 ("Tranche 3 and 4"). The conversion price was set at a 25% premium to the price at the most recent equity issue price prior to the conversion of the loan notes, subject to a maximum conversion price. The maximum conversion price is subject to rebasing in the event of a share issue. At the balance sheet date, the conversion price was 18.75p (2018: 26.25p) and the maximum conversion price was 30p (2018: 101.25p). Due to the variation in the conversion price, the conversion feature is valued and accounted for as a separate financial instrument is revalued to fair value each report date (Note 14). On initial recognition, the fair value of the conversion feature was determined to be £389k, with the residual value of £4,973k and £467k allocated to the Series A and Series B loan notes, respectively. 

Interest of 10 % per annum was payable quarterly in arrears, until April 2019, where during the equity raise the Company reached agreement with the Series A CLN holders to reduce the interest rate to 2.5%. and to amend the future conversion price to 200 %. - being 30p following the April 2019 raise. However, consistent with the agreement reached by the Company in previous years, interest continues to be deferred on the Series A CLNs until April 2020 with the Company having the option quarterly to restart interest payments.

At the same time as the agreement to defer interest was agreed, it was agreed that if the Company exercised its right to defer interest, the Series A CLN holders would be granted a warrant to buy Ordinary Shares, exercisable immediately at the lowest prevailing equity issue price per share up to the value of the interest so deferred. This agreement did not apply to the VCT portion, Series B CLN holders, of principal totalling £1.1m.  The issue of the warrants gave rise to a share-based payment charge (see note 27 for more details).

In December 2018, it was agreed with the loan note holders that the warrants for any future interest deferral would be removed. As at 30 June 2019, eleven quarters of interest payments (2018: 7) had been deferred, however, following the Series A CLN conversion in April 2019, the interest accrual at year end is £497k (2018: £854k).

On 30 April 2019, the holders of series A loan notes converted £4,678K of principal loan notes that had a carrying value of £4,379K and accrued interest of £1,847k, at a conversion price of 15p, to 43,529,640 common shares (Note 18). Series B loan notes were not converted and £1.1m principal remains as at 30 June 2019.  The total loss from conversion of debt to shares in the year was £317,000 (2018: £nil).

During the year ended 30 June 2018, £780,000 of the Series A CLN were converted at a price of 26.25p leading to 2,971,428 ordinary shares being issued.

The number of shares that will be issued upon conversion of the notes is variable and therefore, on recognition the proceeds received from the issue of the notes, net of directly attributable transaction costs, have been allocated between the derivative financial liability based upon the fair values on inception of the conversion option and the host debt.

                                                                               

	2019	2018
	£000's	£000's
Balance at 1 July 2018	9,411	9,094
Principal amount and accrued interest converted	(6,226)	(780)
Loss on conversion	(317)	-
Effective interest	1,287	243
Accrued interest in the period	497	854
Balance at 30 June 2019	4,652	9,411

 

The debt component has subsequently been measured at amortised cost based on an effective interest rate of 10.8% for Tranches 1 & 2 (2018: 13.6%) and 15.1% for Tranches 3 & 4 (2018: 19.1%). The difference between the carrying amount of the liability component at the date of issue and the amount reported at 30 June 2019 represents the effective interest rate less the interest paid to that date.

The Convertible Loan Notes are secured by a first ranking fixed and floating charge on the assets of the Company and each of the Company's subsidiaries, with all other loans to the Company ranking behind the Convertible Loan Notes' security.

As part of the equity raise completed in November 2019, the Directors reached agreement with the holders of the Series A CLN's to fully convert their remaining outstanding principal and accrued interest, totalling £3.9m. At the same time, the Directors reached agreement with the holder of the Series B CLN to amend the terms of the instrument. Series B VCT portion of the loan notes (principal £1.1m) remains outstanding and was not converted.

 

16.  Shareholder loan

In July 2017, the Company announced that it had secured commitments to raise £2,500,000 through two separate facility agreements with two of its Directors, Gary Shaw for £1,300,000 and Sandeep Reddy for £1,200,000, with a redemption date of two years following draw down and a coupon of 10%.

As part of the commitment secured, the Company agreed to issue 5.36 warrants at a price of 27.5p per warrant for each £1 drawn down. As at 30 June 2018, £1,985,000 had been drawn down from this facility resulting in 10,639,600 27.5p warrants being issued at the time of this drawdown. The drawdown period per the agreement expired in July 2019 without further utilisation during the year.

In addition, anti-dilution warrants were agreed to be issued in the event of any equity issue at a price of lower than 27.5p in the 12 months from the date the facility was agreed to 28 July 2018. Due to the variation of the exercise price, the warrants are treated as a derivative financial instrument and revalued to fair value each reporting date. On initial recognition, the fair value of the derivative warrants was determined to be £1,508,904 with the residual value of £476,096 allocated to the carrying value of the shareholder loan notes, accounted for using the effective interest rate method.

During the year ended 30 June 2019, as part of the equity raise completed in April 2019, Gary Shaw agreed to convert £0.65m of his principal facility along with accrued interest calculated to 30 June 2019 of £0.2m. On the date of conversion the loan and interest had a carrying value of £0.60m and a loss of £0.2m was recognized in the statement of profit and loss.  As part of the equity raise completed in April 2019, the Directors agreed to amend the terms of the facility agreements, reducing the interest rate from 10% to 2.5%. This resulted in a substantial modification of the shareholder loans leading to de-recognition of the existing loans and recognition of the modified loans at fair value along with modification losses in the profit and loss account (see note 6). The carrying value of the loan under the old terms was £0.82m and the fair value under the new loan terms was £1.3m, resulting in a loss on modification of £0.36m recognized in the statement of profit and loss.

The movement in shareholder loans during the year was as below:                                                               

	£ Gary Shaw	£	£
		Sandeep Reddy	Total
Balance, 1 July 2018	458,471	439,649	898,120
Interest Expense	382,789	299,415	682,204
Principal and Interest converted in the period	(606,653)	-	(606,653)
Extinguishment of old shareholder loans	(232,348)	(596,319)	(828,667)
Principal of new shareholder loans at date of issue	535,000	800,000	1,335,000
Balance at 30 June 2019	537,259	942,745	1,480,004

As part of the equity raise completed in November 2019, the Directors agreed to amend the terms of the facility agreements such that the redemption date was extended by one year to 29 April 2021 (previously 29 April 2020), with the Directors' receiving 830,000 in warrants in lieu of the extension.

17.  Subsidiaries

 

Details of the Group's subsidiaries as at 30 June 2019 are set out below:

 

Name	Country of incorporation	Proportion of voting rights and Ordinary share capital held	Nature of business
Nektan UK Limited	UK	100%	Mobile software development
Nektan (Gibraltar) Limited	Gibraltar	100%	Internet gaming services
Nektan Gaming Technologies Private Limited	India	100%	Mobile software development

 

18.  Share capital

 

	Ordinary shares number	Ordinary shares £
Allotted, issued and fully paid
At 1 July 2017	36,035,292	360,353
Issued during the year	11,377,310	113,773
At 30 June 2018	47,412,602	474,126
Issued during the year	64,439,000	644,390
At 30 June 2019	111,851,602	1,118,516

The issued and fully paid share capital of the Company amounts to £1,118,516 and is split into 111,851,602 1p ordinary shares.

During the year a total of 64,439,000 shares we issued through a number of transactions:

•      In January 2019, a total of 153,270 shares were issued for consideration of £0.1m as a result of warrants exercised by a noteholder.

•      In February 2019, the Company issued 3,078,020 new ordinary shares at a subscription price of 15 pence per share, for consideration of £0.5m.

•      In April 2019, the Company restructured its balance sheet through a series of inter-conditional transactions:

§ The issue of 11,566,668 new ordinary shares at a price of 15 pence per share, for consideration of £1.7m.

§ The issue of 43,529,640 new ordinary shares at a price of 15p per share, as a result of the conversion of £4.7m of the outstanding on the Series A Convertible Loan Note (CLN'). This also included £1.9m of outstanding interest due on the CLNs at the conversion date.

§ The issue of 5,583,290 new ordinary shares at a price of 15p per share, as a result of the part-conversion of the Directors' loans of £0.65m in principal, representing 32.7% of the £1.985m outstanding at the time, and £0.2m in accrued interest.

§ The issue of 528,112 new ordinary shares at a subscription price of 15p per share, in lieu of fees and expenses to two Directors. 

Total cash consideration for the issued shares was £2.2m.

Authorised share capital

The authorised share capital of the Company is £1,978,880 divided into 197,880,022 Ordinary shares of 1p each (2018: 100,000,000 Ordinary shares of 1p each) of which 111,851,602 Ordinary shares have been issued, credited as fully paid (2018: 47,412,602).

19.  Deferred tax liability

 

Note	£'000
At 1 July 2017	1,482
Credited to the income statement on acquired intangibles	(328)
Charged to the income statement in respect of accelerated capital allowances	3
At 30 June 2018	1,157
Credit to the income statement on amortization of acquired intangibles          7	(168)
Credited to the income statement in respect of disposal of investment.	(964)
At 30 June 2019	25

 

 

There is no deferred tax arising in respect of other comprehensive income.

 

20.  Financial instruments and risk management

 

The Group is exposed to the risks that arise from its use of financial instruments. This note describes the objectives, policies and processes of the Group for managing those risks and the methods used to measure them. Further quantitative information in respect of these risks is presented throughout this financial information.

 

The Group's overall risk management programme focuses on the unpredictability of financial markets and seeks to minimise potential adverse effects on the Group's financial performance.

 

Risk management is carried out by management under policies approved by the Board of Directors. Management identifies and evaluates financial risks in close co-operation with the management of the Group's operating segments. The Board provides principles for overall risk management, as well as policies covering specific areas, such as interest rate risk and currency risk.

 

Principal financial instruments

 

The principal financial instruments used by the Group, from which financial instrument risk arises are as follows:

·      Trade and other receivables

·      Trade and other payables

·      Convertible loan notes and derivatives

·      Cash and cash equivalents

·      Shareholder loans

 

Financial assets

The Group held the following financial assets:

 

	2019	2018
Amortised cost:	£'000	£'000
Cash and cash equivalents	857	1,402
Trade and other receivables	1,942	2,602
	2,799	4,004

 

 

Financial liabilities

The Group held the following financial liabilities:

 

	2019	2018
	£'000	£'000
Amortised cost:
Trade payables	847	613
Other payables	1,501	1,450
Total accruals	7,460	6,623
Finance lease obligations	-	1
Shareholder loans	1,480	898
Convertible loan notes	4,652	9,411
	15,940	18,996

 

 

	2019	2018
	£'000	£'000
Fair value through profit and loss:
Derivative financial liability	12	2,348
	12	2,348

 

Financial instruments not measured at fair value within the financial statements

Financial instruments not measured at fair value include cash and cash equivalents, trade and other receivables, trade and other payables and the non-derivative element of the convertible loan notes.

Due to their short-term nature, the carrying value of cash and cash equivalents, trade and other receivables, trade and other payables and the non-derivative element of the convertible loan notes approximated fair value.

Financial instruments measured at fair value

Included in level 3 of the fair value hierarchy is derivative financial liabilities, which is carried at fair value through profit and loss and therefore movements in fair value are recognised in the income statement through finance expenses. No other financial instruments are measured at fair value through profit and loss. There have been no transfers between levels in any of the above periods.

The valuation technique used in determining the fair value measurement of derivative financial liabilities was the Black Scholes model. The significant unobservable input in this valuation model is the expected date of conversion, volatility and dividend yield. At year-end, these inputs were as follows:

·      Expected date of conversion - 0.8 years (2018: 1.5 years) from year-end for convertible loan notes and 0.8 years (2018: 3 years) for the shareholder loans

·      Volatility - 47.5% (2018: 50%)

·      Dividend Yield - 0% (2018: 0%)

 

The reconciliation of the opening and closing fair value balance of level 3 financial liabilities is as follows:

 

	Derivative financial liability
	£'000
As at 1 July 2017	800
Issues	1,419
Fair value loss in profit or loss	129
As at 30 June 2018	2,348
Fair value gain in profit or loss	(2,336)
As at 30 June 2019	12

 

 

Management controls and procedures

The Group's Directors monitor and manage the financial risks relating to the operation of the Group. These risks include market risk (including foreign currency risk and interest rate risk), credit risk and liquidity risk.

 

Market risk

Market risk is the risk that fair value cash flows of a financial instrument will fluctuate due to changes in market prices. Market risk reflects interest rate risk, currency risk and other price risks.

The Group's activities expose it primarily to the financial risks of changes in foreign currency exchange rates and interest rates.

Foreign currency risk management

The Group has minimal exposure to foreign currency risk, and consequently no sensitivity analysis has been prepared.

The Board carefully monitors exchange rate fluctuations and reviews their impact on the net assets and position of the Group and seeks to economically hedge the impact of foreign exchange by holding sufficient cash in the relevant currencies. The Group does not enter into any derivative financial instruments to manage its exposure to foreign currency risk.

All trade and other receivable are denominated in Sterling.

Interest rate risk management

The Group has minimal exposure to interest rate risk. The Group does not have external debt or financial liabilities materially impacted by interest rate risk. All current financial liabilities have a fixed interest element if applicable.

During the year to 30 June 2019 the Group was exposed to interest rate risk on some of its financial assets, being cash held on bank deposit. The interest rate receivable on these balances was at a rate less than 0.1% (2018: less than 0.1%). The Directors currently believe that interest rate risk is at an acceptable level and continue to monitor interest rate policy and changes.

Due to its minimal exposure to interest rate risk, the Group has not prepared any sensitivity analysis.

 

Credit risk

Credit risk refers to the risk that a counterparty will default on its contractual obligations resulting in financial loss to the Group. Credit risk arises principally from the Group's cash balances and trade and other receivables. The concentration of the Group's credit risk is considered by counterparty, geography and currency.

The Group gives careful consideration to which organisations it uses for its banking services in order to minimise credit risk.

 

Impairment of financial assets

The Group has two types of financial assets that are subject to the expected credit loss model:

·      Trade and other receivables, and

·      Other financial assets carried at amortised cost

While cash and cash equivalents are also subject to impairment requirements of IFRS9, there was no identified impairment loss.

The Group applied the IFRS9 simplified approach to measuring expected credit losses which uses a lifetime expected loss allowance for all trade receivables.

To measure the expected credit losses, trade receivables have grouped based on shared credit risk characteristics and the days past due.

The Group concluded that the required additional provision calculated using IFRS 9 principles was not materially different than that would have been accounted for under IAS 39.

Receivables for which an impairment provision is recognised are written off against the provision when there is no expectation of recovering additional cash.

Impairment losses are recognised in profit and loss within administrative expenses. Subsequent recoveries of amounts previously written off are credited against administrative expenses.

During the year, impairment charges of £332,000 (2018: £nil) relating to trade and other receivables (see note 11) was recognised and a full impairment provision was recognised in relation to the related party loan with Respin LLC for £3,443,111 (2018: £nil).

Liquidity risk management

Liquidity risk is the risk that the Group will encounter difficulty in meeting its financial obligations as they fall due. This risk relates to the Group's prudent liquidity risk management and implies maintaining sufficient cash. Ultimate responsibility for liquidity risk management rests with the Board of Directors. The Board manages liquidity risk by regularly reviewing the Group's cash requirements by reference to short-term cash flow forecasts and medium-term working capital projections prepared by management.

 

Maturity of financial liabilities

The following table sets out the non-discounted contractual maturities of financial liabilities:

Year ended 30 June 2019	One year or less	One to five years	Five years and over	Total
	£'000	£'000	£'000	£'000
Trade payables	847	-	-	847
Other payables	1,501	-	-	1,501
Total accruals	7,460	-	-	7,460
Derivative financial liability	12	-	-	12
Shareholder loans	1,480	-	-	1,480
Convertible loan notes	4,652	-	-	4,652
	15,952	-	-	15,952

 

 

Year ended 30 June 2018	One year or less	One to five years	Five years and over	Total
	£'000	£'000	£'000	£'000
Trade payables	613	-	-	613
Other payables	1,450	-	-	1,450
Total accruals	6,623	-	-	6,623
Finance lease obligations	1	-	-	1
Derivative financial liability	2,348	-	-	2,348
Shareholder loans	-	898		898
Convertible loan notes	110	9,301	-	9,411
	11,145	10,199	-	21,344

 

 

Capital management

The Group is currently funded principally through shareholders' funds and convertible loan notes. During the year ended 30 June 2019, £2,197k (net of costs) was raised through equity issues arising from new equity issued (2018: £1,692k).

 

Going forward the Board will consider whether debt or equity financing is more appropriate and proceed accordingly. The Group is not subject to any externally imposed capital requirements.

 

Fair value estimation

The carrying value less impairment provision of trade receivables and payables are assumed to approximate their fair values because of the short-term nature of such assets and the effect of discounting liabilities is negligible. The risk in respect of fair value estimation is in respect of acquisition accounting.

 

21.  Disposal of interest in subsidiary

 On 9 April 2019, the Company reduced its ownership of Respin LLC from a 100% subsidiary to a 42.5% associate. The Directors determined that control passed to the acquirer at this time and therefore the investment at this date has been treated as an investment in associate and accounted for using the equity method of accounting.

Consideration for the disposal was £0.3m and a commitment by the acquirer to provide a working capital facility to Respin of $0.8m. At this time the fair value of investment in the Group was £0.2m. As part of a review of carrying values at year end, and given the ongoing loss performance of Respin, the Company has determined that this investment should be fully impaired and the carrying value has been accordingly reduced to zero (note 10). The Company's share of loss from associate share of loss from operations of Respin LLC since the disposal date of £70,000 (see note 10) has been recorded in the income statement.

Details of the calculation of the loss on disposal of the investment held in the Company are as follows:

		2019
		£'000
Investment in Respin LLC
Cash proceeds received		300
Residual investment		217
Total proceeds		517
Net liabilities		810
Impairment of intercompany loan		(3,443)
Recycle of foreign exchange from OCI on disposal		129
Total loss on disposal		(1,987)
Respin loss for the period		(776)
Total loss for the year from discontinuing operations		(2,763)

 

The results for the period/ year of Respin LLC disposed are as follows:

 

	2019	2018
	£000's	£000's
Revenue Administrative expenses Tax credit	21 (965) 168	175 (2,353) 328
Loss after tax for the period	(776)	(1,850)

 

The major classes of assets and liabilities disposed of were as follows 

 

	2019	2018
	£000s	£000s
Fixed assets	37	58
Intangible assets	3,585	4,096
Cash	29	32
Debtors	21	30
Creditors	(4,482)	(3,177)
Net (liabilities) / assets	(810)	1,039

 

                The statement of cash flow includes the following amounts relating to discontinued operations:

 

	2019	2018
	£'000	£'000
Net cash generated by operating activities	912	14
Net cash generated by investing activities	(914)	-
Net cash generated by financing activities	-	-
Net cash (outflow)/inflow	(2)	14

 

22.  Related party transactions

 

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

The remuneration of the Directors and other executive management, who are the key management personnel of the Group, is set out below:

	2019	2018
	£'000	£'000
The aggregate remuneration comprised:
Salaries/fees	411	317
Bonus	28	56
Payable to related party	90	-
Benefits in kind	36	21
	565	394

 

Payable to related party is for reimbursement of operational costs incurred.

 

The following related party transactions took place during the period:

During the year, the following directors had transactions or interests in the Company's Convertible Loan Notes:

		2019	2018
Gary Shaw	CLN Balance	-	£300,000
	Deferred interest	£24,986	£30,000
	Deferred interest warrants	-	58,417
Jim Wilkinson	CLN Balance	-	£250,000
	Deferred interest	£20,822	£25,000
	Deferred interest warrants	-	48,682
Venture Tech Assets*	CLN Balance	£1,000,000	£1,000,000
	Deferred interest	£87,466	£100,000
	Deferred interest warrants	-	194,723

* A company associated with Sandeep Reddy

 

In July 2017, the Company announced that it had secured commitments to raise £2,500,000 through two separate facility agreements with two its Directors, Gary Shaw for £1,300,000 and Sandeep Reddy for £1,200,000. The draw down facility is now closed. In April 2019, Gary Shaw converted £650,000 of principal and £187,493 of accrued interest calculated to 30 June 2019.

Jim Wilkinson received 180,000 shares in lieu of his management service charge with respect to his role as Non-Executive Chairman of the Group.

Sandeep Reddy received 348,112 shares in lieu of his management service charge with respect to his role as Non-Executive Director of the Group.

During the year, the Group contributed a further £888,355 (2018: £1,491,185) to its previous joint venture partner, Respin LLC. On 9 April 2019, the Group disposed of a majority stake in Respin LLC and is now accounted for as an associated company.

23.  Post-balance sheet events

On 13 August 2019, Lucy Buckley resigned as Chief Executive Officer with Gary Shaw, Founder and Executive Director, assuming the role of Interim CEO, to stabilise the business and drive the focus on the international expansion.

In November 2019, the Company completed a series of inter-conditional transactions that resulted in:

§ The Company issued 49.8m new ordinary shares at a subscription price of 5 pence per share, for consideration of £2.5m.

§ A further 4.7m new ordinary shares at a subscription price of 5 pence per share, for consideration of £0.2m, were also raised as part of the November 2019 raise, however these have been deferred for issue and listing on AIM in January 2020.

§ The Company issue 78.4m new ordinary shares at a subscription price of 5 pence per share, as a result of the full conversion of the remaining £3.9m of the Series A convertible loan notes (CLNs), including £0.5m of the outstanding interest also converted at this date.

§ The Company amended the terms of the £1.1m Series B convertible loan notes (CLNs), extending the maturity until March 2023, reducing the coupon to zero (previously 10%) until 1 January 2021, when it will be reintroduced at 5%.

§ The Company amended the term of the Directors' loans to expire on 29 April 2021 (previously 29 April 2020), with the Directors' receiving 830,000 in warrants in lieu of the extension - the coupon of 2.5% remains unchanged.

§ The issue of 1.8m new ordinary shares at a price of 5 pence per share, in lieu of fees and expenses to Sandeep Reddy, a Non-Executive Director of the Company.

On 19 December 2019, the Company announced the appointment of Paul Hughes as a Non-Executive Director. Paul has extensive corporate banking and commercial experience, with a focus on fundraising, the turnaround of loss-making businesses, risk management and fast-growing private and public companies. He also has extensive experience as a non-executive director and chairman of a variety of private and public companies.

During December 2019, and as part of the Group's restructuring programme to ensure the protection of the intellectual property within the Group, and the ongoing B2B and international business, for the benefit of all creditors and shareholders, the Group transferred certain assets and all Gibraltar based staff, to two recently incorporated new legal entities in Gibraltar.

In completing the restructuring programme, the Directors made the decision to seek the protection of administration for the Group's subsidiary company Nektan (Gibraltar) Limited ("NGL"). Administrators were appointed to NGL on 7 January 2020, and in one of the first acts following their appointment, the administrators completed the conditional sale of the UK B2C business. The Group secured an ongoing platform deal for a minimum 3-year period as part of this transaction.

 

24.  Ultimate parent undertaking

 

The Directors consider that there is no ultimate controlling party.

 

25.  Operating leases

 

The total future value of minimum lease payments due is as follows:

 

Land and buildings	2019	2018
	£'000	£'000
Operating leases
Expiring less than one year	123	118
Expiring between one and five years	573	103
	696	221

 

26.  Contingent liabilities

 

As part of the Board's ongoing regulatory compliance process, the Board continues to monitor legal and regulatory developments and their potential impact on the Group.

Management is not aware of any contingencies that may have a significant impact on the financial position of the Group.

 

27.  Share based payments and warrants

 

During the year ended 30 June 2019 no options and warrants were granted (year ended 30 June 2018: 983,855), no interest deferral warrants were granted to CLN noteholders (year ended 30 June 2018: 1,734,073), and no further 2018 loan warrants were issued (year ended 30 June 2018: 14,097,470).

 

During the year ended 30 June 2019, 538,844 options and warrants previously issued to service provided and members of staff lapsed (year ended 30 June 2018: 60,000), 3,457,870 of 2018 loan warrants lapsed during the year (year ended 30 June 2018: nil), and 153,272 of interest deferral warrants were exercised (year ended 30 June 2018: nil).

	Current and former employees		Suppliers		Interest deferral warrants		2018 loan warrants		Total
	Number	Average price	Number	Average price	Number	Average price	Number	Average price	Number	Average price
As at 1 July 2017	1,113,142	30.6p	912,401	105.3p	5,300,722	27.5p	-	-	7,326,265	43.4p
Granted during the year	983,855	27.5p	-	-	1,734,073	24.1p	14,097,470	21.0p	16,815,398	26.3p
Lapsed during the year	(60,000)	(27.5p)	-	-	-	-	-	-	(60,000)	(27.5p)
As at 30 June 2018	2,036,997	28.9p	912,401	105.3p	7,034,795	26.1p	14,097,470	21.0p	24,081,663	26.4p
Lapsed during the year	(155,136)	(39.8p)	(383,708)	(123.2p)	(153,272)	(64.0p)	(3,457,870)	(1.0p)	(4,149,986)	(14.2p)
As at 30 June 2019	1,881,861	28.1p	528,693	92.3p	6,881,523	46.7p	10,639,600	27.5p	19,931,677	35.9p

 

The exercise price of options/warrants outstanding at 30 June 2019 ranged between £0.01 and £2.36 (year ended 30 June 2018: ranged between £0.01 and £2.36) and their weighted average contractual life was 2 years (2018: 4 years three months).

The breakdown of options and warrants is as follows:

Expiry Date	Number	Price
December 2019	58,617	236.0p
May 2020	109,851	167.5p
October 2020	24,749	155.0p
December 2020	37,517	145.0p
March 2021	51,358	81.0p
April 2021*	3,435,622	27.5p
April 2021*	907,092	21.0p
February 2022	109,091	27.5p
April 2022	2,591,906	81.0p
July 2022**	2,010,000	27.5p
August 2022**	4,556,000	27.5p
December 2022**	4,073,600	27.5p
November 2024	137,510	1.0p
April 2027	250,000	27.5p
June 2027	594,909	27.5p
December 2027	927,219	27.5p
June 2028	56,636	19.0p
	19,931,677	35.9p

 

* The interest deferral warrants are capable of being exercised up to 12 months following the CLN final redemption date per the instrument which is April 2020.

** Warrants issued on each drawdown made from shareholder loan facility per the facility agreement dated July 2017.

The weighted average fair value of each option/warrant granted during the period was nil as no options or warrants were granted during the period (2018: 22.4p).

The following information is relevant in the determination of the fair value of options/warrants granted during the period:

		2018
Option pricing model used		Black-Scholes
Share price at date of grant		19p to 26.5p
Exercise price		1.0p to 27.5p
Option life		3 years to 10 years
Risk free rate		0.4%
Expected volatility		50%
Expected dividend yield		Nil

 

The volatility assumption, measured at the standard deviation of expected share price returns, is based on a statistical analysis of monthly share prices.

 

The total share-based payment charge for the year was £17,000 (2018: £210,000). These were in relation to options issued to an employee in prior years which vest over 3 years.