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2023 Annual Report and Accounts and Investor Presentation

23 April 2024 - London, UK - Crossword Cybersecurity Plc (AIM:CCS, "Crossword", the "Company" or the "Group"), the technology commercialisation company focused on cyber security and risk, is pleased to announce its final results for the year ended 31 December 2023. The Annual Report and Accounts along with the Notice of its Annual General meeting ("AGM") and a Form of Proxy will be posted to Shareholders shortly and will be available on the Company’s website at www.crosswordcybersecurity.com.


AGM and Investor Meeting

The AGM will be held on Thursday 23rd May 2024 at 3.00pm at the offices of Shakespeare Martineau LLP, 6th Floor, 60 Gracechurch Street, London EC3V 0HR.  

The Company will be hosting an update on the Investor Meet Company platform on Tuesday 28th May at 11.00am.  The presentation is open to all existing and potential shareholders. Investors can sign up to Investor Meet Company for free and join the Company presentation via:


Financial Highlights

  • 15% revenue growth to £4.2m

  • Continued growth in ARR, year-end ARR of £2.5m

  • 65% recurring revenue in 2023

  • 9% growth in revenue per client

  • Loss before taxation of £4.1 million

  • £0.7m cash and cash equivalents at year end


Operational Highlights

  • AI Workshops in partnership with major industry partners and leading academics to investigate the application of Generative AI to cybersecurity

  • Software Engineering services revenue in 2023 helped to strengthen ties with a key partner

  • Launched Ransomware Readiness Assessment service in March 2023, helping organisations reduce their exposure to ransomware attacks

  • Awarded a threat intelligence contract with a FTSE 250 engineering company, which was already a Consulting client

  • Inclusion in the CYBERTECH100, an annual list of 100 of the world’s most innovative CyberTech companies

  • £2.62m Convertible Loans issued to support sales and marketing, product and services development and to provide general working capital


Post Period Highlights

  • Launch of Trillion Harvista, a first of its kind solution which allows enterprise security teams to search conversations on the dark web in a clean and sanitised environment

  • Partnership with TD Synnex for Trillion™ platform to become available through the distributor’s extensive community of small and medium-sized resellers across Europe

  • Launch a new CyberAI Practice. The practice, which sits within Crossword Cybersecurity’s Consulting business, consolidates Crossword’s artificial intelligence (AI) expertise into a centre of excellence that will deliver AI-focused cybersecurity consulting services and products to help clients harness the power of AI in the organisation


Outlook

  • Targeting strong revenue growth in 2024.  At this stage of the year, we expect to be within 10% of our anticipated revenue of £7m, albeit at the lower end of the range

  • Crossword is on track to deliver EBITDA and cash breakeven on a monthly basis during the second half of 2024

  • Crossword is targeting a drop by half in administrative expenses as a percentage of revenue in 2024 compared to 2022

  • Crossword has a strong sales pipeline, the continued conversion of which will drive revenue growth

  • Crossword’s diversified product and services offering will drive scale while managing risk

  • Focus on margin improvement will ensure that there is a clear, carefully managed route to achieving profitability in the short term

 

Tom Ilube, CEO of Crossword Cybersecurity plc, commented:

“In 2023, Crossword achieved a revenue growth rate of 15%.  Although the UK economy was in recession during H2 2023, Crossword continued to grow, which demonstrates the resilience of the cybersecurity sector.  With reducing inflation and interest rates having peaked, we expect growth rates to improve during 2024.  With costs continuing to be tightly controlled, Crossword is determined to achieve EBITDA and cash breakeven during the second half of 2024.

 

2024 has started well with the launch of HarVista, a first of its kind tool which allows enterprise security teams to search conversations on the dark web in a clean and sanitised environment.

HarVista is part of the Trillion Threat Intelligence suite of products and services. We have also launched a new CyberAI Practice. Our engineering team and experienced consultants position Crossword well to support our clients incorporate future technology concepts.

We are seeing international expansion into the Caribbean via a partner, primarily with our managed cyber-security monitoring service, Nightingale. Crossword has secured over $500k of new business in this region since the start of 2024 and the outlook for the rest of the year is strong.

 

Earlier in April 2024, I was pleased to welcome our new Managing Director, Consulting, Chris Dunning Walton, who will use his considerable sector and business experience to drive revenue and profitability growth in our Consulting offering. I also welcomed Stuart Jubb, Group Managing Director, to the PLC Board reflecting his wide range of responsibilities and leadership role across the Group.

In 2023, we saw the continued support of our shareholders when £2.62m Convertible Loans were issued to support sales and marketing, product and services development and to provide general working capital.  A working capital fund raise is anticipated in 2024 to further support the drive to profitability, which remains the key focus of the Company. We are grateful for the ongoing support of our shareholders.

I would like to thank the Crossword team for their hard work in delivering our mission to reduce cyber risks for our clients by providing a portfolio of innovative products and services, powered by university and other research driven insights.”

 

- Ends –

The information contained within this announcement is deemed to constitute inside information as stipulated under the retained EU law version of the Market Abuse Regulation (EU) No. 596/2014 (the "UK MAR") which is part of UK law by virtue of the European Union (Withdrawal) Act 2018. The information is disclosed in accordance with the Company's obligations under Article 17 of the UK MAR. Upon the publication of this announcement, this inside information is now considered to be in the public domain.

 

Contacts

Crossword Cybersecurity plc - Tel: +44 (0) 333 090 2587

Tom Ilube, Chief Executive Officer

Mary Dowd, Chief Financial Officer

Grant Thornton (Nominated Adviser) - Tel: +44 (0) 20 7383 5100

Colin Aaronson / Jamie Barklem / Ciara Donnelly

Hybridan LLP (Broker) - Tel: +44 (0)203 764 2341

Claire Louise Noyce

For media enquiries contact:

Duncan Gurney, GingerPR

duncan@gingerpr.co.uk - Tel: +44 (0)1932 485 300

 

About Crossword Cybersecurity plc

Crossword offers a range of cyber security solutions to help companies understand and reduce cyber security risk. We do this through a combination of people and technology, in the form of SaaS and software products, consulting, and managed services. Crossword's areas of emphasis are cyber security strategy and risk, supply chain cyber, threat detection and response, and digital identity and the aim is to build up a portfolio of cyber security products and services with recurring revenue models in these four areas. We work closely with UK universities and our products and services are often powered by academic research-driven insights. In the area of cybersecurity strategy and risk our consulting services include cyber maturity assessments, industry certifications, and virtual chief information security officer (vCISO) managed services.

Crossword's end-to-end supply chain cyber standard operating model (SCC SOM) is supported by our best-selling SaaS platform, Rizikon Assurance, along with cost-effective cyber audits, security testing services and complete managed services for supply chain cyber risk management. Threat detection and response services include our Nightingale AI-based network monitoring, our Trillion™ suite of threat intelligence products, Trillion Breach, Harvista and Arc and incident response. Crossword's work in digital identity is based on the World Wide Web Consortium W3C verifiable credentials standard and our current solution, Identiproof, enables secure digital verification of individuals to prevent fraud.

Crossword serves medium and large clients including FTSE 100, FTSE 250 and S&P listed companies in various sectors, such as defence, insurance, investment and retail banks, private equity, education, technology and manufacturing and has offices in the UK, Poland and Oman. Crossword is traded on the AIM market of the London Stock Exchange.

Chair’s Statement

Heading to profitability, with growth

2023 was a pivotal year for Crossword. Revenue growth of 15% to £4.2m was achieved while the costs of the business were managed, to improve margin and create stable overheads to support business growth. Crossword is now on track to monthly EBITDA and cash breakeven, which it aims to achieve in the second half of 2024. Crossword in its near term strategy of achieving monthly EBITDA and cash breakeven later in 2024.

Following three acquisitions in 2021 and 2022, Crossword’s strategy in 2023 was organic revenue growth. With the acquisitions successfully integrated, cross selling and key account management have been the drivers for growth. The structure of the sales and customer success team and cross departmental collaboration are integral to our growth plans.

Well documented issues within the UK equity markets have taken their toll on Crossword’s AIM market capitalisation. The Company remains hopeful that government initiatives and the hard work of The Quoted Companies Alliance will result in a truer reflection of Company value on AIM.

Board Governance

To ensure that we maintain a robust framework of controls and high standards, the Board continues to adhere to the Quoted Companies Alliance (“QCA”) Corporate Governance Code in line with the London Stock Exchange’s requirement for all AIM quoted companies to adopt a recognised corporate governance code. The Corporate Governance Statement on page 29 of this report provides further details.

In December 2023, Tara Cemlyn-Jones resigned from the Board. I would like to thank Tara for the contribution she has made to Crossword during her time on the Board and wish her the best for the future.

I am pleased to announce that Stuart Jubb joined the board of the Company as executive director in early April 2024. Stuart joined Crossword in February 2016 to head up Crossword’s newly established cybersecurity Consulting division. From 1 January 2022, Stuart has been Group Managing Director of Crossword, with responsibility for Consulting, Sales and Managed Services, and in September 2023 also became responsible for Product. Prior to joining Crossword, Stuart worked at KPMG where he was Associate Director, Defence & Security. Prior to that, he was Chief Operating Officer of a global Consulting team of over 200 in KPMG Advisory. Stuart spent nine years as an officer in HM Forces, after commissioning from the Royal Military Academy Sandhurst, serving in Afghanistan, NATO and elsewhere.

Stakeholders Support

Crossword is grateful for the ongoing support of our shareholders. £2.62m convertible loan notes were issued in 2023, including £2m to Gresham House Asset Management Limited, Crossword’s largest shareholder, and £250k to Tom Ilube CEO. This funding is for sales & marketing, product and services development and support and working capital, and will support Crossword in its near term strategy of EBITDA and cash breakeven later in 2024.

Crossword’s mission is to reduce cyber risks for our clients by providing a portfolio of innovative products and services, powered by university and other research-driven insights. We are grateful for the trust our client and partners place in us to achieve our mission. This is clearly evidenced by referrals and cross selling of our product and services portfolio.

I am very appreciative of the hard work and expertise of the Crossword team over the past year, and I would like to acknowledge them all.

Crossword’s core values are responsibility towards its customers and staff, openness, flexibility, and constant learning. This company culture underpins everything we do and will act as a catalyst in leveraging our growth into profitability.

Outlook

Since the launch of ChatGPT in November 2022, businesses across all industry sectors have awoken to the disruptive potential of AI based on Large Language Models (LLMs). LLMs have led to the emergence of many new tools, which must be assessed and assured so that adoption is controlled and does not pose legal, reputational, or commercial threats. Simultaneously, the dual-use nature of LLMs has empowered would-be attackers by lowering information and capability barriers to launching successful attacks. Cybersecurity teams are at the forefront of these changes. Crossword is well poised to support clients with frameworks that let businesses adopt new technology and

services, whilst ensuring their safety.

Crossword is looking forward to a strong performance in 2024, predicting revenue growth and breakeven on a monthly basis in the second half of 2024.

 

Sir Richard Dearlove KCMG OBE

Chair, Crossword Cybersecurity PLC

22 April 2024

 

CEO’s Statement

It is my pleasure, as Chief Executive Officer, to present the Annual Report and audited accounts for Crossword Cybersecurity PLC (‘Crossword’ or the ‘Company’ or the ‘Group’) for the financial year ended 31 December 2023.

Crossword’s revenue grew by 15% in 2023. Although the UK economy was in recession during H2 2023, Crossword continued to grow, which demonstrates the resilience of the cybersecurity sector. However, we didn’t achieve our aspirations for revenue growth during 2023, as we experienced our clients being somewhat cautious in committing to projects, particularly in the second half of the year. As we entered 2024, with inflation continuing to fall, costs of living improving and optimism in economic outlook, this caution is dissipating, and we are seeing our pipeline growing and converting into contracts at a pleasing rate.

A key priority for Crossword in 2023 was to drive to profitability. We are well on our way to achieving EBITDA profitability, with administrative expenses having stabilised in 2023. Excluding one-off professional fees in 2022 and 2023, administrative expenses have decreased by 10% in 2023 compared to 2022. This represents a reduction of 27% in administrative expenses as a percentage of revenue in 2023.

The UK Cybersecurity Market size is estimated at USD 15.72 billion in 2024, and is expected to reach USD 25.81 billion by 2029, growing at a CAGR of 10.42% during the forecast period (2024-2029) (Mordor Intelligence). As the digital economy grows, digital crime grows with it. Soaring numbers of online and mobile interactions are creating millions of attack opportunities. Many lead to data breaches that threaten both people and businesses. At the current rate of growth, damage from cyberattacks will amount to about $10.5 trillion annually by 2025, a 300 percent increase from

2015 levels (McKinsey). In France recently, half the populations’ data was stolen in a major cybersecurity breach - the largest ever in France - leaving 33 million people at risk. In this particular incident, two French service providers for medical insurance companies were targeted, with the companies admitting that millions of people’s data were potentially exposed to the hackers (Euronews).

In 2023, Crossword’s development teams worked hard to upgrade and develop our products and services. The launch of Trillion HarVista early in 2024 was one of the outputs of their work. Part of the Trillion Threat Intelligence suite of products and services, Trillion HarVista enables security teams, for the first time, to be able to identify the threats developing both from hacker discussions and shared compromised credential data all from a single interface, without the risk of searches on hostile websites being linked to your organisation.

During 2023, Crossword was awarded a contract with a FTSE 250 engineering company, to provide forward looking Dark Web Threat Intelligence services. The service will be delivered via Crossword’s Trillion platform using its market leading credential leak and discussion monitoring services. The solution will be backed up by expert human analysis to deliver the service. The FTSE 250 engineering company is already a Consulting client of Crossword’s. The close relationship between the Consulting team and the product team at Crossword helped identify the benefits the client will derive from the Dark Web Threat Intelligence services.

We were pleased to be included in the CYBERTECH100 in 2023, an annual list of 100 of the world’s most innovative CyberTech companies selected by a panel of industry experts and analysts. Companies were selected for inclusion in the fourth annual CYBERTECH100 based on their innovative use of technology to solve a significant industry problem or generate cost savings or efficiency improvements across the security value chain. CYBERTECH100 considers that these are the companies every financial institution needs to know about as they consider and develop their information security and financial crime fighting strategies.

The quality of Crossword’s engineering team, our experienced consultants, and our impressive portfolio of clients, positioned Crossword to lead a significant initiative with major industry partners and leading universities, including academics from Oxford University and MIT in the USA and AI researchers from the world famous Alan Turing Institute, to investigate the application of Generative AI to cybersecurity. This funded CyberAI Initiative was designed to bring together several world-leading universities, chosen for their expertise in GenerativeAI/Large Language Models, and a select group of industry partners in an indepth programme.

The first phase of the CyberAI Initiative commenced in October 2023 with a three-month exercise to explore the Generative AI landscape in depth, share a full understanding of how Generative AI/Large Language Model techniques are currently being applied to cybersecurity challenges, assess the landscape of current and emerging solutions appearing in the market, identify a long list of real world problems that would benefit from a Generative AI/Large Language Model techniques approach, demonstrate several of these approaches and select a target list of challenges that the CyberAI Initiative could take forward.

Following the successful first phase of our CyberAI programme, we are evaluating the suitability of AI based technologies and services to improve our current product and services and developing new services which incorporate future technology concepts early to enable us to get ahead of the competition.

Crossword is grateful for the ongoing support of our shareholders. £2.62m convertible loan notes were issued in 2023, including £2m invested by Gresham House Asset Management Limited, Crossword’s largest shareholder, and £250k invested myself. This funding is for sales & marketing, product and services development and support and working capital, and will support Crossword in its short-term strategy of EBITDA and cash breakeven later in 2024.

In December 2023, Tara Cemlyn-Jones resigned from the Board. I would like to thank Tara for the contribution she has made to Crossword during her time on the Board and wish her the best for the future.

Crossword is focused on achieving EBITDA profitability and cash breakeven on a monthly basis and delivering revenue growth in 2024. We hope that our positive performance and commitment from those in power to addressing the issues in UK equities will result in a better reflection of Crossword’s value on the AIM market.

I would like to thank the Crossword team for their hard work in delivering our mission to reduce cyber risks for our clients by providing a portfolio of innovative products and services, powered by university and other research driven insights. Crosswords strong culture and values of responsibility, openness, flexibility and learning have been in evidence in many ways throughout 2023, and hold us in good stead for 2024.

Tom Ilube, Chief Executive Officer

Crossword Cybersecurity PLC

22 April 2024


Consolidated Financial Statements

for Crossword Cybersecurity PLC company number 08927013

 

The Company has taken advantage of the exemption allowed under Section 408 of the Companies Act 2006 and has not presented its own Statement of Comprehensive Income in these financial statements.                                                   

The Company's loss for the year was £3,264,495 (2022: £3,326,925).       

The financial statements were approved by the Board and authorised for issue on xx April 2024. They were signed on its behalf by

Tom Ilube

Chief Executive Officer



Notes to the Financial Information

1               Accounting Policies

1.1                The Group and its operations

Crossword Cybersecurity plc (the “Company”) is a Company incorporated on 6 March 2014 in England and Wales under the Companies Act 2006. The Company is the parent company of the Crossword Group of Companies focusing on the cybersecurity sector. Crossword offers a range of cyber security solutions to help companies understand and reduce cyber security risk. We do this through a combination of people and technology, in the form of SaaS and software products, consulting, and managed services.

The financial information includes the results of the Company and its subsidiaries (together referred to as the “Group” and individually as “Group entities”).

The material accounting policies applied in the preparation of the financial information are set out below. These policies have been consistently applied to all the periods presented, unless otherwise stated.

 

1.2           Basis of preparation of financial information

The financial information has been prepared in accordance with the requirements of the London Stock Exchange plc AIM Rules for Companies and in accordance with International Financial Reporting Standards as adopted in the United Kingdom (“UK adopted IFRS”) and those parts of the Companies Act 2006 applicable to companies reporting in accordance with UK adopted IFRS.

The financial information has been prepared in accordance with UK adopted IFRS, which requires the use of certain critical accounting estimates. It also requires management to exercise its judgement in the process of applying the Group’s material accounting policies. Changes in assumptions may have a significant impact on the financial information in the year the assumptions changed. Management believes that the underlying assumptions are appropriate. The areas involving a higher degree of judgement or complexity, or areas where assumptions and estimates are significant to the financial information are disclosed in note1.22.

At the year end, the following standards and interpretations which have not been applied in these financial statements were in issue but not yet effective. The Group is considering their impact but do not expect a material on the future results of the Group.

 

New standards, interpretations and amendments effective in current period

 

In 2023 the Group has applied all of the new and revised standards and interpretations issued by the International Accounting Standards Board and adopted in the UK, that are relevant to its operations and effective for the accounting periods beginning on or after 1 January 2023. None of the new standards or revisions had a material effect on the financial statements of the Group.

 

New standards, interpretations and amendments not yet effective

 

The Group adopt early the following amendments to standards which are not yet mandatory.

 

Amendments to IAS 1 Presentation of Financial Statements – Classification of Liabilities as Current or Non-current and Non-current Liabilities with Covenants (effective 1 January 2024).

 

Amendments to IAS 7 and IFRS 7 Financial Instruments: Disclosures - Supplier Finance Arrangements (effective 1 January 2024).

 

Amendments to IFRS 16 Leases – Lease Liability in a Sale and Leaseback (effective 1 January 2024).

 

Amendments to IFRS 10 Consolidated Financial Statements and IAS 28 Investments in Associates and Joint Ventures – Sale or Contribution of Assets between an Investor and its Associate or Joint Venture (effective date yet to be set).

 

 

1.3           Going Concern

The financial information has been prepared on a going concern basis. The Group’s business model has been enhanced following the three acquisitions in 2021 and 2022. The Group’s operations have incurred a loss in the financial year whilst the Group’s products and services continue to be enhanced, developed and brought to market. The Directors’ forecast in 2024 shows a trading loss with net cash outflows as the business continues to develop and enhance its products and services and grows revenue. In 2023, the Group’s operations have been supported by cash inflows from customers and from the issue of £2.62m loan notes during 2023 and further £0.275m in 2024.

 

The Directors have considered the Group’s future and forecast business and cash requirements. The Directors have determined that the group wants to continue to expand, while having a clear and determined focus on a path to profitability, which is expected to require successful additional fundraise.

 

The Directors have concluded that these circumstances could give rise to a material uncertainty arising from events or conditions that may cast significant doubt on the entity’s ability to continue as a going concern if a further fund raise was unsuccessful. However, considering recent successful fund raises the Directors are confident that they can continue to adopt the going concern basis in preparing the financial statements.

 

The financial statements do not include any adjustment that may arise in the event that the Group is unable to raise finance, realise its assets and discharge its liabilities in the normal course of business.

 

 

1.4           Basis of consolidation

Subsidiaries are fully consolidated from the date on which control is transferred to the Group. Control exists when then the Group has:

- the power over 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 the amount of the investor’s returns.

The parent company reassesses 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 listed above.

When the parent company has less than a majority of the voting rights of an investee, it considers that it has power over the investee when the voting rights are sufficient to give it the practical ability to direct the relevant activities of the investee unilaterally.

All intra-Group transactions balances income and expenses are eliminated on consolidation. Uniform accounting policies are applied by the Group entities to ensure consistency.

 

1.5           Revenue

Revenue is measured at the fair value of the consideration received or receivable, net of returns, trade discounts and volume rebates.

 

The Group recognises revenue according to the principles of IFRS 15 using the five-step model:

1. Identify the contracts with customers

2. Identify the performance obligations in the contract

3. Determine the transaction price

4. Allocate the transaction to the performance obligations in the contract

5. Recognise the revenue when (or as) the entity satisfies the performance obligation


The Group recognises revenue when it transfers control over service to a customer.

The major streams of revenue for the Group are highlighted below:

 

(a)    Licence Income

Technology and product licensing revenue represents amounts earned for licenses granted under licensing agreements. Revenue is recognised over the subscription period from the start of a licencing agreement, as control is transferred to the customer, because the customer simultaneously receives and consumes the benefits provided by the Group. Revenues relating to up-front payments are recognised when the obligations related to the revenues have been completed.

(b)    Rendering of Services

Services relate to implementation and deployment fees for the technology and products licensed to customers. Revenue is recognised at a point in time when control is transferred to the customer and performance obligations satisfied.

(c)    Consulting

(d)    Consulting revenue is recognised depending on the nature of the contract with customer. For contracts stating the objectives and deliverables for each part of the project, and the revenue attributable to each deliverable, the revenue is recognised when the performance obligation is met (when confirmation has been received from the customer that the work has been satisfactorily completed), primarily at a point in time. For recurring contracts with customers, which are based on a certain number of fixed advisory hours, the revenue is recognised over time using an input method to measure progress towards complete satisfaction of the service, because the customer simultaneously receives and consumes the benefits provided by the Group.

(e)    Software Engineering Services

        Revenues for software engineering services are recognised on the basis of input method, which uses the company’s efforts or inputs to the satisfaction of a performance obligation.

 

Identifying performance obligations

At contract inception, the Group assess services promised to a customer and identifies as a performance obligation each promise to transfer to the customer either:

(a) a service (or a bundle of services) that is distinct; or

(b) a series of distinct services that are substantially the same and that have the same pattern of transfer to the customer.

In arriving at the performance obligations, the Group assessed the services as capable of being distinct and as distinct within the context of the contract after considering:

1.     If the customer can benefit from the individual service on its own

2.     If the customer can use the service with other readily available resources

3.     If multiple promised services work together to deliver a combined output(s)

4.     Whether the service is integrated with, highly interdependent on, highly interrelated with, or significantly modifying or customising, other promised services in the contract

 

Significant financing component

Generally, the Group receives short-term advances from its customers. Using the practical expedient in IFRS 15, the Group does not adjust the promised amount of consideration for the effects of a significant financing component if it expects, at contract inception, that the period between the transfer of the promised good or service to the customer and when the customer pays for that good or service will be one year or less.

 

Contract balances

A contract asset is the right to consideration in exchange for goods or services transferred to the customer. If the Group performs by transferring goods or services to a customer before the customer pays consideration or before payment is due, a contract asset is recognised for the earned consideration that is conditional.

 

A trade receivable represents the Group’s right to an amount of consideration that is unconditional (i.e., only the passage of time is required before payment of the consideration is due) – note 1.13.

 

A contract liability is the obligation to transfer goods or services to a customer for which the Group has received consideration (or an amount of consideration is due) from the customer. If a customer pays consideration before the Group transfers goods or services to the customer, a contract liability is recognised when the payment is made or the payment is due (whichever is earlier). Contract liabilities are recognised as revenue when the Group performs under the contract.

 

1.6           Functional and presentation currency

The presentation currency of the Group is pounds sterling (GBP). The functional currency of the Company is pounds sterling. The functional currency of the Company’s polish subsidiary is Polish Zloty (PLN).

 

1.7           Business combinations

The acquisition of subsidiaries is accounted for using the acquisition method. The cost of the acquisition is measured as the aggregate of the fair values, at the date of exchange, of assets given, liabilities incurred or assumed, and equity instruments issued by the Group in exchange for control of the acquiree. Acquisition related costs are recognised in the income statement as incurred.

 

Any contingent consideration to be transferred by the Group is recognised at fair value at the acquisition date. Subsequent changes to the fair value of the contingent consideration that is deemed to be an asset or liability is recognised in the consolidated income statement. Contingent consideration that is classified as equity is not remeasured, and its subsequent settlement is accounted for within equity.

 

        Goodwill arising on acquisition is recognised as an asset and initially measured at cost, being the excess of the cost of the business combination over the Group’s interest in the net fair value of the identifiable assets, liabilities and contingent liabilities recognised. For the purpose of impairment testing, goodwill acquired in a business combination is, from the acquisition date, allocated to the cash generating unit (“CGU”) that is expected to benefit from the synergies of the combination. CGU to which goodwill has been allocated is tested for impairment annually, or more frequently when there is an indication that the unit may be impaired. If the recoverable amount of the cash-generating unit is less than the carrying amount of the unit, the impairment loss is allocated first to reduce the carrying amount of any goodwill allocated to the unit and then to the other assets of the unit pro-rata on the basis of the carrying amount of each asset in the unit. Any impairment loss is recognised directly in the income statement. An impairment loss recognised for goodwill is not reversed in a subsequent period.

 

1.8           Foreign operations

In preparing the financial statements of the group entities, transactions in currencies other than Pound sterling (foreign currencies) are recognised at the rates of exchange prevailing on the dates of the transactions. At each reporting date, monetary assets and liabilities that are denominated in foreign currencies are retranslated at the rates prevailing at that date. Non-monetary items carried at fair value that are denominated in foreign currencies are translated at the rates prevailing at the date when the fair value was determined. Non-monetary items that are measured in terms of historical cost in a foreign currency are not retranslated.

 

All resulting foreign exchange differences are recognised in other comprehensive income through the foreign currency reserve in equity.

 

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.

 

1.9           Intangible assets – research and development

               Expenditure on research is written off in the period in which it is incurred.

 

Development expenditure incurred on specific projects is capitalised where the management is satisfied that the following criteria have been met:

 

•       it is technically feasible to complete the software product so that it will be available for use;

•       management intends to complete the software product and use or sell it;

•       there is an ability to use or sell the software product;

•       it can be demonstrated how the software product will generate probable future economic benefits;

•       adequate technical, financial and other resources to complete the development and to use or sell the software product are available; and

•       the expenditure attributable to the software product during its development can be reliably measured.

 

        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. Directly attributable costs that are capitalised as part of the software product include the software development employee costs and an appropriate portion of relevant overheads.

 

Other development expenditure that does not meet these criteria is recognised as an expense as incurred.

 

        An intangible asset is derecognised on disposal, or when no future economic benefits are expected from use or disposal. Gains or losses arising from derecognition of an intangible asset, measured as the difference between the net disposal proceeds and the carrying amount of the asset, are recognised in profit or loss when the asset is derecognised.

 

1.10        Property, plant and equipment

Property, plant and equipment is stated at purchase price less accumulated depreciation and impairment losses. The cost includes all expenses directly related to the purchase of a relevant asset.

All other repair and maintenance costs are charged to the income statement for the period during the reporting period in which they are incurred.

An item of property, plant and equipment is derecognised upon disposal or when no future economic benefits are expected to arise from the continued use of the asset. The gain or loss arising on the disposal or retirement of an asset is determined as the difference between the sales proceeds and the carrying amount of the asset and is recognised in profit or loss.


1.11        Depreciation and amortisation

Each item of property, plant and equipment is depreciated using the straight-line method over the estimated useful life and depreciation charge is included in the income statement for the period.

The depreciation is charged to the income statement for the period and determined using the straight-line method over the estimated useful life of the item of property, plant and equipment.

The expected useful lives of property, plant and equipment in the reporting and comparative period are as follows: Useful lives in years

Computers                                                 3.33

Furniture & fittings                                    3.33

 

Computer software development expenditure recognised as assets is amortised on a straight-line basis over their estimated useful lives, which does not exceed 5 years.

 

1.12        Impairment of property, plant and equipment and intangible assets excluding goodwill

At each reporting date, the Group reviews the carrying amounts of its property, plant and equipment and intangible assets to determine whether there is any indication that those assets have suffered an impairment loss. If any such indication exists, the recoverable amount of the asset is estimated to determine the extent of the impairment loss (if any). Where the asset does not generate cash flows that are independent from other assets, the Group estimates the recoverable amount of the cash-generating unit to which the asset belongs.

 

Recoverable amount is the higher of fair value less costs of disposal and value in use. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset for which the estimates of future cash flows have not been adjusted.

 

If the recoverable amount of an asset (or CGU) is estimated to be less than its carrying amount, the carrying amount of the asset (or CGU) is reduced to its recoverable amount. An impairment loss is recognised immediately in profit or loss.

 

Where an impairment loss subsequently reverses, the carrying amount of the asset (or CGU) is increased to the revised estimate of its recoverable amount, but so that the increased carrying amount does not exceed the carrying amount that would have been determined had no impairment loss been recognised for the asset (or CGU) in prior years. A reversal of an impairment loss is recognised immediately in profit or loss to the extent that it eliminates the impairment loss which has been recognised for the asset in prior years.

 

1.13        Financial Instruments

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

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) 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  recognised  immediately in profit or loss.

All financial instruments are classified in accordance with the principles of IFRS 9 Financial Instruments.

 

 

  1.13 a Financial assets

Classification of financial assets

Debt instruments that meet the following conditions are subsequently measured at amortised cost:

•       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.

Debt instruments that meet the following conditions are subsequently measured at FVTOCI:

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

By default, all other financial assets are subsequently measured at FVTPL.

 

Amortised cost and effective interest method

The effective interest method is a method of calculating the amortised cost of a debt instrument and of allocating interest income over the relevant period.

For financial instruments other than purchased or originated credit-impaired financial assets, the effective interest rate is the rate that exactly discounts estimated future cash receipts (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) excluding expected credit losses, through the expected life of the debt instrument, or, where appropriate, a shorter period to the gross carrying amount of the debt instrument on initial recognition. For purchased or originated credit-impaired financial assets, a credit-adjusted effective interest rate is calculated by discounting the estimated future cash flows, including expected credit losses, to the amortised cost of the debt instrument on initial recognition.

The amortised cost of a financial asset is the amount at which the financial asset is measured at initial recognition minus the principal repayments, plus the cumulative amortisation using the effective interest method of any difference between that initial amount and the maturity amount, adjusted for any loss allowance. On the other hand, the gross carrying amount of a financial asset is the amortised cost of a financial asset before adjusting for any loss allowance.

 

Impairment of financial assets

The Group recognises a loss allowance for expected credit losses on financial assets that are measured at amortised cost. The amount of expected credit losses is updated at each reporting date to reflect changes in credit risk since initial recognition of the respective financial instrument.

Expected credit loss measurement

The consolidated entity has applied the simplified approach to measuring expected credit losses, which uses a lifetime expected loss allowance. To measure the expected credit losses, trade receivables have been grouped based on days overdue.

 

  1.13 b Financial liabilities and equity

Debt and equity instruments are classified as either financial liabilities or as equity in accordance with the substance of the contractual arrangement.

 

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 the Group entity are recognised at the proceeds received, net of direct issue costs.

Compound instruments

The component parts of convertible loan notes issued by the Group are classified separately as financial liabilities and equity in accordance with the substance of the contractual arrangements and the definitions of a financial liability and an equity instrument. A conversion option that will be settled by the exchange of a fixed amount of cash or another financial asset for a fixed number of the parent company’s own equity instruments is an equity instrument.

At the date of issue, the fair value of the liability component is estimated using the prevailing market interest rate for a similar non-convertible instrument. This amount is recorded as a liability on an amortised cost basis using the effective interest method until extinguished upon conversion or at the instrument’s maturity date.

The conversion option classified as equity is determined by deducting the amount of the liability component from the fair value of the compound instrument as a whole. This is recognised and included in equity and gets released to the retained earnings over the period of the bond to offset against the amortised cost release. Where the conversion option remains unexercised at the maturity date of the convertible loan note, the balance recognised in equity will be transferred to retained earnings. No gain or loss is recognised in profit or loss upon conversion or expiration of the conversion option.

 

Financial liabilities

All financial liabilities are subsequently measured at amortised cost using the effective interest method or at “Fair Value Through Profit or Loss” (“FVTPL”).

 

Financial liabilities at FVTPL

Financial liabilities are classified as at FVTPL when the financial liability is contingent consideration of an acquirer in a business combination to which IFRS 3 applies, or it is designated as at FVTPL.

 

Financial liabilities subsequently measured at amortised cost

Financial liabilities that are not 1) contingent consideration of an acquirer in a business combination, 2) held-for-trading, or 3) designated as at FVTPL, are subsequently measured at amortised cost using the effective interest method.

The convertible loan notes issued by the Group are classified as financial liabilities when a conversion option that will be settled by the exchange of a fixed amount of cash or another financial asset for a variable number of the parent company’s own equity instruments. The notes are recorded as a liability on an amortised cost basis using the effective interest method until extinguished upon conversion or at the instrument’s maturity date. The difference between the fair value (i.e. future cash flows discounted at the effective interest rate) of the convertible loan notes and the transaction price (contractual amount) principal is recognised as a gain or loss through profit or loss on initial recognition of the financial liability.

The effective interest method is a method of calculating the amortised cost of a financial liability and of allocating interest expense over the relevant period. 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 of a financial liability.

 

Derecognition of financial liabilities

The Group derecognises financial liabilities when, and only when, the Group’s obligations are discharged, cancelled or they expire. The difference between the carrying amount of the financial liability derecognised and the consideration paid and payable, including any non-cash assets transferred or liabilities assumed, is recognised in the statement of comprehensive income.

1.14        Leases

The Group assesses whether a contract is or contains a lease, at inception of the contract. The Group recognises a right-of-use asset and a corresponding lease liability with respect to all lease arrangements in which it is the lessee, except for short-term leases (defined as leases with a lease term of 12 months or less) and leases of low value assets. For these leases, the Group recognises the lease payments as an administrative expense on a straight-line basis over the term of the lease.

The lease liability is initially measured at the present value of the lease payments that are not paid at the commencement date, discounted by using the rate implicit in the lease. If this rate cannot be readily determined, the Group uses its incremental borrowing rate. The lease liability is subsequently measured by increasing the carrying amount to reflect interest on the lease liability (using the effective interest method) and by reducing the carrying amount to reflect the lease payments made.

The right-of-use assets comprise the initial measurement of the corresponding lease liability, lease payments made at or before the commencement day, less any lease incentives received and any initial direct costs. They are subsequently measured at cost less accumulated depreciation and impairment losses. Right-of-use assets are depreciated over the shorter period of lease term and useful life of the right-of-use asset.

1.15        Taxes

Current tax is calculated using rates and laws enacted or substantively enacted at the reporting date. Current tax is recognised in profit or loss unless it relates to an item of other comprehensive income or equity whereby it is recognised in other comprehensive income or equity respectively.

Deferred income tax is calculated using rates and laws enacted or substantively enacted at the reporting date that are expected to apply on reversal of the related temporary difference, and is determined in accordance with the expected manner of recovery of the related asset.

Deferred income tax is recognised in profit or loss unless it relates to an item of other comprehensive income or equity whereby it is recognised in other comprehensive income or equity respectively.

1.16        Share Based Payments

On occasion, the Company has made share-based payments to certain Directors and employees by way of issue of share options. The fair value of these payments is calculated by the Company using the binomial option valuation model and Monte Carlo simulation model.

The expense, where material, is recognised on a straight-line basis over the period from the date of award to the date of vesting, based on the Company’s best estimate of the number of shares that will eventually vest.

 

1.17        Investments

Shares in subsidiary undertakings are stated at cost less provision for impairment. 

If there is objective evidence that the Group’s net investment in subsidiary is impaired, the requirements of IAS 36 Impairment of Assets are applied to determine whether it is necessary to recognise any impairment loss with respect to the Group’s investment. When necessary, the entire carrying amount of the investment (including goodwill) is tested for impairment in accordance with IAS 36 as a single asset by comparing its recoverable amount (higher of value in use and fair value less costs of disposal) with its carrying amount. Any impairment loss recognised is not allocated to any asset, including goodwill that forms part of the carrying amount of the investment. Any reversal of that impairment loss is recognised in accordance with IAS 36 to the extent that the recoverable amount of the investment subsequently increases.

Unlisted investments are measured at fair value through profit or loss. Fair value measurements are estimated based on the amounts for which the assets could be exchanged at the relevant transaction date or reporting period end and are therefore not necessarily reflective of the likely cash flow upon actual settlements. Where fair value measurements cannot be derived from publicly available information, they are estimated using models and other valuation methods. To the extent possible, the assumptions and inputs used take into account externally verifiable inputs. However, such information is by nature subject to uncertainty, particularly where comparable market-based transactions may not exist.

1.18        Intercompany Financing arrangements

The amortised cost methodology is applied to the financing arrangement between the Company and subsidiaries Crossword Consulting Limited and Stega UK Limited.  An assessment in undertaken to determine the market rate of interest for a similar loan given the credit rating of the subsidiaries to apply discounting with the principal conceptually including a financing element. The difference between the discounted loan balance at inception of the loan and the principal are treated as a capital contribution in the subsidiaries.

1.19        Pension Obligations

The Group operates a defined contribution pension scheme for employees in the United Kingdom. A defined contribution scheme is a pension plan under which the Group pays fixed contributions into a separate entity.

Contributions payable to the Group’s pension scheme are charged to the income statement in the year to which they relate. The Group has no further payment obligations once the contributions have been paid.

In Poland, the Group pays the statutory employer’s contribution into the public pension scheme for each employee, but does not operate any pension schemes.  The Group implemented the Employee Capital Plans (PPK) programme which involved employee consultation and selection of a financial institution.

1.20        Cash and Cash Equivalents

Cash comprises cash-in-hand and demand deposits.  Cash equivalents are short-term, highly liquid investments that are readily convertible to known amounts of cash, and which are subject to an insignificant risk of change in value. An investment normally qualifies as a cash equivalent only when it has a maturity of three months or less from the date of acquisition.

1.21        Accounting for Government Grants

Government grants are not recognised until there is reasonable assurance that the Group will comply with the conditions attached to them and that the grants will be received.

Government grants are recognised as income over the periods necessary to match them with the costs for which they are intended to compensate, on a systematic basis. Government grants that are receivable as compensation for expenses or losses already incurred or for the purpose of giving immediate financial support to the Group with no future related costs are recognised in the income statement in the period in which they become receivable.

1.22        Critical accounting estimates and judgements and key sources of estimation uncertainty

Estimates and judgements are continually evaluated and are based on experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances.

The following are the key judgements that the directors have made which involve sources of estimation uncertainty and have the significant effect on the amounts recognised in the financial information. There are no further critical accounting judgements.

 

Convertible Loans

The Group has given consideration to the measurement and presentation of the convertible loans.

In the measurement of financial liability, a reasonable estimate of the Group’s cost of debt is used.

Accounting for investment in subsidiaries

An assessment of the carrying value in the Company of the investment in subsidiaries is undertaken using an NPV model over the projected cash flows, with a discount rate based on the assessment of weighted average cost of capital. The assessment also requires an estimate of a schedule for repayment of long and short term intercompany loans.

Impairment

The Group assesses goodwill and intangible assets for possible impairment. The testing for impairment involves comparing the carrying value of the cash generating unit with its recoverable amount, that is, the higher of fair value less cost to sell and value in use.

Intercompany loans

Intergroup lending agreements are assessed by applying expected credit losses method based on the management estimates for probability of default.

        Deferred tax

Deferred tax assets are recognised for unused tax losses to the extent that it is probable that taxable profit will be available against which the losses can be utilised. Significant management judgement is required to determine the amount of deferred tax assets that can be recognised, based upon the likely timing and the level of future taxable profits, together with future tax planning strategies. The Group has taxable temporary differences that partly support the recognition of the losses as deferred tax assets based on the above. The Group has determined that it cannot recognise deferred tax assets on all of the tax losses carried forward however, based on the likely characteristics, timing and level of future taxable profits, together with future tax planning strategies. Further details on taxes are disclosed in note 11.

Other estimates

These estimates do not carry significant risk of resulting in material adjustment to the carrying amounts of assets and liabilities within the next financial year.

 

Fair value of options granted to employees

The Group uses the Binomial model and Monte Carlo simulation model in determining the fair value of options granted to employees under the Group’s various share schemes. The determination of the fair value of options requires a number of assumptions. The alteration of these assumptions may impact charges to the income statement over the vesting period of the award. Details of the assumptions used are shown in note 4.



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