7DIG.L Regulatory News (7DIG)

16 August 2018

7digital Group plc

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

Preliminary results for the year ended 31 December 2017

7digital Group plc (AIM: 7DIG), the global leader in B2B digital music solutions, today announces its preliminary results for the full year ended 31 December 2017.

Operational Highlights:

· Excellent progress made in building the business and solidifying the Company's leading position in the rapidly growing streamed music market

· 7digital is now the premier supplier of business-to-business music and radio streaming services to corporates in sectors including retail, telecoms and the automotive industry, who are looking to strengthen their consumer offering

· Established position within the music industry - all the major labels are now customers of 7digital

· Organic and acquisition-led growth has positively impacted the financial performance of the Company with strong contributions seen across all revenue streams

· Operational savings already realised and the process is continuing into 2018

· Transformative deal with MediaMarktSaturn ("MMS"), Europe's largest retailer of electronics and entertainment, to build their digital music services in 15 countries

· Successful acquisition and integration of 24-7 Entertainment ("24-7"), the only remaining significant business-to-business European competitor, expands client base which now includes MMS and Danish telco TDC

Financial Highlights:

· 50% increase in revenues to £16.80m (2016: £11.21m)

· Improving sales momentum with licensing revenues up 74% at £11.61m (2016: £6.67m)

· 63% reduction in adjusted EBITDA loss to £1.60m (2016: £4.31m)

· 33% reduction in adjusted operating loss to £3.76m (2016: £5.60m)

o including one-off costs of acquisitions and share-based payments, unadjusted operating loss reduced to £4.97m (2016: £5.46m)

· Gross profit margin now 72% (2016: 69%)

· The Board is confident that the Group will be able to operate within its existing financial facilities with additional support from two major shareholders

· Momentum continued into H1 2018 with H1 total sales, before full consideration of revenue recognition, up 57% to £9.33m (2017 £5.93m)

· The Directors believe that the further convergence of the acquired businesses in 2018 will lead to operating profit and positive cash flow

· New interim CFO in place and recommended improvements to financial reporting systems being implemented

Simon Cole, Chief Executive of 7digital, said: "2017 was a transformative year for 7digital where we have solidified our leading position as a business-to-business platform in the rapidly growing market for streamed music and radio services. As expanded on in the Chairman's Statement, we have put a difficult situation behind us in the publication of these results, but I believe we are in a very healthy position to continue our growth, as reflected in the figures, deliver on our strategy and reward shareholders.

"The Group continued to expand its customer base which already included nearly 50 companies across an increasing range of geographies, strengthened its relationships with the music industry, with all major labels now customers and improved the quality of its business through the visibility of its revenues. This was highlighted in particular by the acquisition of our major competitor 24-7. This not only increased our European penetration, but also led to expanding our contract to deliver new music services for MediaMarktSaturn, Europe's largest electronics retailer, who also become a key shareholder.

"7digital is one of only two companies in the world to be able to provide full white-label streaming services to businesses who want to use music as part of their offering. Our product is sought after because of our catalogue of 60m licensed tracks and our platform on which new music services can be built quickly. We have a strong pipeline of business which is enjoying increasing momentum and a Board which remains committed to growing profitability again in 2018. The enlargement of the Group has significantly strengthened our market position and will bring materially enhanced revenue against a fixed cost base and a clear path to profitability. I look forward to providing further updates on our progress as we look to fully capitalise on our leading technology."

The information communicated in this announcement contains inside information for the purposes of Article 7 of the Market Abuse Regulation (EU) No. 596/2014.

Enquiries:

Chairman's Statement

I would like to start with an apology for the late publication of our results. It is a situation we are not proud of but it is unconnected with the underlying health of our business. The process we have been through in the last few painful weeks leaves us with a more robust financial structure and a set of accounts that have now been through the most rigorous review.

As part of the audit for the year ended 31 December 2017, BDO were appointed as the company's new auditors in order to apply increased rigour as the company has gone through significant growth and change in the last 24 months, partly arising from two significant acquisitions.

In the course of the Audit, certain deficiencies in our preparation were brought to the attention of the Board. This resulted in the Group's auditor undertaking additional verification work and a detailed review of the Group's internal systems and accounting practices. During the extended Audit process, the Company's Audit Committee has met with the Auditors on a number of occasions and closely monitored the work. As a consequence, there has been a lengthy delay to the normal publication of our results. 7digital shares were suspended from trading on AIM on 2 July 2018 as a result of this delay.

The review has been both extensive and exhaustive and we are implementing BDO's recommendations on accounting records and controls. This is expected to resolve all accounting issues and the Audit Committee will continue to work with the Auditors to keep progress under review. Matt Honey, our previous CFO has resigned from the Company. We appointed an interim CFO in June; David Holmwood has previously served as FC at Universal Music in London and took charge of the audit and of implementing changes in our finance function. David has expressed an interest in taking the role on a permanent basis. The Board will conduct an appointment process and will evaluate David alongside external candidates. We expect this process to be complete by the end of September.

Notwithstanding these difficulties, I am pleased now to be able to report on another year of progress for 7digital, one in which the Group delivered against its key objectives of growing its customer base across identified target sectors, strengthened the quality and resilience of its revenue base and improved its overall financial performance. The Group delivered on the Board's commitment to achieving reduced losses in 2017. The Board and I remain confident that 2018 will see continued progress towards profitability and positive operating cash flow.

2017 has proven transformational for 7digital - most important was the Company's transaction with MediaMarktSaturn ("MMS"), Europe's biggest electronics and entertainment retailer, including the acquisition of 24-7 Entertainment ("24-7"). As part of the transaction, the Company signed contracts with MMS with a value of £18.0m over three years and MMS became 7digital's largest shareholder. Our work to create a suite of new digital services for Europe's biggest entertainment and electronics retailer began in 2017 and has gained significant momentum into 2018.

Overall, the Group continues to benefit from global acceleration of music streaming as an increasing number of clients use our platform to build new digital music services. The wirelessly connected world is rapidly bringing the capability of streamed music to a wide variety of new devices including home hi-fi, car dashboards and even aeroplanes. 7digital has customers providing services in all of these areas. Crucially, these technologies are enabling the music industry to serve the traditionally passive listener and opening up streaming services to a much larger market globally.

We believe we offer current and potential customers the leading international B2B platform and music rights capability to deliver music and radio streaming services. Our unmatched combination of market leading technology, broad music rights and deep industry relationships is creating significant barriers to entry for others in the sector. We predicted a year ago that there would be further consolidation in the digital music industry and that 7digital would be both a beneficiary and a leader of this consolidation. Our corporate transactions (two significant acquisitions, a major transaction with MMS, and two fundraise activities) have led the way in this regard. While we expect much more to come, the Company has already begun to benefit from this consolidation.

The company undertook two fundraising rounds. In March a successful Placing and Open Offer raised £2.9m Gross (£2.7m Net). In December 2017, 7digital undertook a further fundraising and experienced strong demand from both high quality institutional investors and private retail investors. A Placing by way of an accelerated bookbuild was heavily oversubscribed with 16 new institutional investors and raised £6.5 million for the Company. Taken together with a Subscription to raise £1.5 million and a significantly oversubscribed Open Offer which raised gross proceeds of £0.5 million, the Capital Raising raised approximately £8.5 million Gross (£8.1m Net) of new Capital. The proceeds of the Capital Raising are being used to position the Company to capitalise on all the growth opportunities of the PaaS (Platform as a Service) model.

Our solid progress throughout 2017 has been important for the business and reflects the valued contributions from our staff across all teams and in all locations globally. On behalf of the Board, I would once again like to thank them for their high-quality work and commitment to 7digital.

I would also like to share the recent formation of an Advisory Board to support the Group's US operations, particularly regarding strategic guidance and corporate partnership support. Industry veteran (and former CEO of Gracenote), John Batter, has joined 7digital as chair of our US Advisory Board.

Despite clear challenges, I am optimistic for the future of 7digital. We are implementing a clear strategy to pursue opportunities in a market that is developing as we anticipated and through which we are intent on delivering strong returns to shareholders.

Don Cruickshank

Chair

15 August 2018

Chief Executive Officer Review

2017 was a transformative year for 7digital. In line with our stated strategy, we benefited both from the anticipated changes in the digital music industry and our acquisition of a major competitor. Turnover is up 50%, and losses have been reduced; the second half of the financial year was profitable, setting us up well for continuing this momentum into 2018. We ended the year with a strengthened Balance Sheet, having completed a successful cash raise and added significant new institutions to our shareholder register.

Our business is in providing a platform that allows companies to create new digital music services; our revenues come from fees paid for access to that platform. The digital music industry until now has coalesced around music enthusiasts - the current streaming services do not address the majority of music consumers. There are around 160 million subscribers to the major consumer streaming services compared with the more than 3 billion people who listen to music every day.

We believe that this mass market will be addressed by a range of companies for whom music is adjunct to their main business. These companies will "bundle" music with devices, loyalty schemes and tariffs, creating customer loyalty and enabling the collection of data on user behaviour. Amazon is already providing an example of how this will work and their "Echo" voice activated loudspeaker with its bundled music and radio offering is presently the fastest growing area of streamed music. 7digital is working directly with Amazon on services for the Echo and is also developing music streaming services for other clients that will be available on the Echo.

Echo and other "smart speakers" are set to expand music listening significantly. Music Ally, an information service focused on the digital music business, reported on the burgeoning smart speaker category in March 2018 and compiled analyst predictions: "Canalys forecasts that 56.3m smart speakers will be sold globally this year, while Loup Ventures predicts around 58.3m units. Further on, Juniper Research expects smart speakers to be installed in 55% of US households by 2022 - 175m devices in 70m homes. Meanwhile, Accenture claims that these devices will be owned by one third of the online population in China, India, Brazil and Mexico as soon as the end of 2018".

As streaming continues to grow and new technology experiences on connected devices like the Echo become increasingly popular, we expect that more companies will begin to offer music services that cater to a mainstream audience more used to listening to traditional radio than the current batch of streaming experiences. We believe these companies need a supplier with access to an extensive music industry catalogue and a technology platform to deliver it anywhere in the world in licensed form to any device.

A good example of this trend is the work commenced this year with major European retailer MediaMarktSaturn ("MMS"). They are using 7digital to create a range of music services, from free, radio-like offerings linked to loyalty cards to full subscription services in 15 European territories.

The deal with MMS, and alongside it the successful acquisition in June of our only remaining significant business to business European competitor, 24-7 Entertainment ("24-7") (the "Acquisition"), was the most important event in 2017. We have now successfully taken on the former 24-7 clients, including MMS and Danish telco TDC, among others and have begun the work to integrate our technology platforms. The completion of this work will lead to significant overhead savings in the second half of 2018.

The Acquisition delivered against all of its key strategic and financial objectives, including contributing annualised monthly recurring revenues of over £5.6m and leading to the further contract to deliver new music services for MMS and migrate the existing "Juke" service in Germany onto the 7digital platform. The transaction has cemented our market leading position as a business-to-business platform in the rapidly growing market for streamed music and radio services. Most importantly, it led to a profitable H2 in 2017 and a significantly improved EBITDA loss for the year.

The Group's revenue is up 50% at £16.8m (2016: £11.2m). The Company's contracted and billed revenues for the period were in fact £18.7m, with revenues from major new client MMS at £7.0m. However, of this MMS revenue, £2m, including a proportion of setup fees, which have been paid in advance, is to be recognised in H1 2018 rather than in the 2017 financial period, leading to reported revenue of £16.8m. This accounting approach - detailed in the notes below - prepares the company for the impact of IFRS 15 in 2018.

We have continued to improve the quality and mix of our revenues, with total monthly recurring revenues ("MRR") rising by 71% against 2016. Improving sales momentum during the period saw the annualized total licensing exit MRR for the year rise by 23% and annualised streaming exit MRR rise by 31%. Licensing revenues for the year rose by 74% compared with 2016.

Gross Profit rose 55% to £12.0m (2016: £7.8m), with the margin rising again to 72% (2016: 69%), as the Company delivered good growth across all revenue streams.

The adjusted EBITDA loss has significantly reduced to £1.6m (2016: £4.3m adjusted EBITDA loss). We continue to focus on our cost base. Costs rose for a period during the second half of the year as we integrated the 24-7 business, but those are expected to fall again in 2018 as we converge our technology platforms.

The Group continues to benefit from global acceleration of music streaming as an increasing number of clients use our platform to build new digital music services. The wirelessly connected world is rapidly bringing the capability of streamed music to a wide variety of new devices including home hi-fi, car dashboards and even aeroplanes. 7digital has customers providing services in all of these areas. Streaming is powering a return to growth in the music industry. The worldwide music market is rising again after 15 years of decline and streaming is expected to drive the majority of this growth with compound annual growth rate (CAGR) of 37% (2015-2020), according to Oddo Securities. By 2020, streaming is expected to be worth $11bn globally.

We are increasingly well placed as the supplier of choice to enable a growing number of current and potential customers who are looking to strengthen their consumer offer by delivering music and radio streaming services. The music industry recognises this change and the major labels are now customers of 7digital. In 2017, we established our position with the music industry through deals with the three major labels to provide services such as developing playlist tools, creating content to market their artist releases, and supplying technology and access to a global music catalogue for proprietary platforms.

We have made significant progress in the four key verticals we targeted in our strategy: retail, connected devices, telco/mobile and broadcast radio:-

Retail:

In the retail space, MediaMarktSaturn's (MMS) transaction with 7digital and its launch of the Juke streaming service demonstrates that one of the world's leading retailers is putting music at the forefront of its customer engagement strategy. Last year, Amazon mostly drove the massive change in the music marketplace, however, we believe that other retailers will respond to this challenge and seek to retain customers rather than simply stocking Amazon devices. Our sales pipeline supports this: active discussions are ongoing with some of the world's leading retailers. MMS, Europe's biggest retailer of entertainment, is the first example; their commitment to roll out a range of music services across Europe, integrated into their retail offering, has, by itself, transformed our business.

In addition, we have signed two content deals with Amazon, illustrating that we are at the forefront of the market for smart speakers, which are an increasingly important retail category. We recently announced a deal with one of the world's largest suppliers of music to retail. The new client, who cannot be named for reasons of commercial confidentiality, is a market leader in this field, providing music in venues and commercial outlets throughout the world. This is the start of an expansive relationship with a company that is building significant value from the previously neglected background music market.

Connected devices:

7digital believes that voice and AI are set to be the catalysts for re-imagining music streaming in the home and car, where there is huge potential for growth over the next few years. In preparation for this large-scale change in the industry, 7digital announced a partnership with SoundHound, an innovative company specialising in sound recognition and voice-enabled conversational intelligence technologies. The partnership enhances 7digital's capabilities to offer customers the latest AI-powered experiences to discover and consume music, as does our continued partnership with Will.i.am's company i.am+ and its Omega voice assistant. This is one example of how 7digital is anticipating the ways in which consumption of digital music will change and is building the right network of partners to be able to deliver the listening experiences of the future.

Within the connected devices category, connected aeroplanes are set to yield further opportunities as more airlines look to offer improved and differentiated inflight entertainment services to their passengers. During 2017, 7digital signed a two-year deal with Global Eagle Entertainment Inc. ("Global Eagle") to provide technology, access to music, web development expertise and rights holder reporting. Global Eagle is a leading worldwide provider of inflight entertainment content to the airline industry and offers Wi-Fi, movies, television, music, interactive software and portable inflight entertainment services to a number of regional and flagship carriers. Customers of "Global Eagle" include Southwest Airlines, Norwegian Air, Emirates, Japan Airlines, Singapore Airlines, Qatar Airways, Air France and Flydubai.

7digital has also been working with DTS, a pioneer in audio solutions for automotive, mobile devices, home theatre systems and cinema, to develop new high-resolution audio solution prototypes for the automotive market. This is another sub-section of the connected devices vertical that will yield further opportunities as voice technologies become more fully integrated with music services, allowing the driver to control their music listening more easily while on the move. 

Telco/ mobile:

Mobile network operators and mobile-focused services continue to comprise a key client sector for 7digital. Following the Company's acquisition of 24-7 from MMS, we provide services to Danish telco TDC, whose music service YouSee reaches approximately 8% of the Danish population (as subscribers) and has been shown to successfully reduce customer churn over its past 10 years of operation.

2017 has seen further territory expansion of 7digital's relationship with popular mobile app musical.ly, one of the world's fastest growing social video networks. The new contract doubled the number of territories in which we provide access to music for the musical.ly service, extending its reach from 30 to 60 territories around the world.

We also agreed a three-year deal with French company Deedo SAS to power a new mobile-first streaming service across 27 markets. The focus of the service, which launched in 4 territories in Q4 2017, is to cater for listeners in Africa and the African expatriate community with Pan African music catalogues. 7digital provides technology, access to music and web app development for the service.

Broadcast radio:

We believe there are significant opportunities for the Company to provide services to the radio broadcasters that are coming under increasing pressure to compete with streaming services for listeners' time and engagement. While radio still has robust listening figures and curation skills to serve a loyal audience, it faces challenges from Spotify, Apple and Amazon. 7digital is already working with world-leading radio companies like Global Radio in the UK, Talpa in the Netherlands and the online aggregator of radio, TuneIn.

During the period, we strengthened our position in the merging of radio and music streaming with the acquisition of the FlowRadio® technology, platform and certain customers from Imagination Technologies Group plc ("IMG"). FlowRadio® is an internet radio aggregation service which offers instant access to over 25,000 stations worldwide. As part of the acquisition, 7digital has acquired responsibility for three staff and all current contracts from "IMG".

Our top 10 client accounts in 2017 represented 70% of the revenue and are expected to represent 60% of revenue for 2018.

Licensing division

Licensing is the core of our business, providing the platform and rights management expertise through which our B2B customers can create their own streamed music services, either standalone or bundled into their device or product offering. In line with the Company's Platform as a Service ("PaaS") model, typically, customers pay an initial set-up fee and then a fixed monthly licence fee for using our platform; in addition, we may also take a share of user related revenues generated by the service, including transaction and subscription revenues.

The Company has continued to make progress in signing new clients to its platform. Licensing revenues rose by 74% to £11.6m (2016: £6.7m). Annualised exit MRR, which includes streaming and other platform licensing revenues, for December 2017, grew to £7.7m, an increase of 23% against December 2016 (£6.2m). Licensing fees included £3.2m (2016: £1.8m) of One Off Revenues paid by new customers, who we would expect to contribute to increasing MRR in 2018. Within One Off Revenues are set up fees which are non-refundable and have previously been recognised at the time they are paid. In 2017, the total paid in setup fees was in fact £2.0m; however, we have deferred £527k of these fees into H1 2018 as we prepare to present future accounts under the new IFRS accounting standard which came into effect in January 2018 standard (see note 1: "accounting policies").

Our licensing revenues continue to see the results of the global growth in music streaming, and more particularly, the development of services in new markets and with new business models (such as inflight entertainment). 7digital's customers come from a variety of sectors, including retail, telcos, music labels, broadcasters, automotive, inflight, consumer brands, well-funded start-ups and pureplay streaming services.

7digital's strategic decision to move into higher quality streaming or "Hi-Res" has gained significant momentum. Hi-Res files outsold traditional MP3 files in the 7digital download stores in every month of this period. The MQA format and technology, adopted 2 years ago by 7digital, has gained traction and is endorsed by both major and independent labels. We are seeing the growing demand for Hi-Res audio have an increasingly positive impact on all divisions of our business.

In line with a strategic emphasis on further developing commercial relationships with rights holders, 7digital has continued to win new work with all three of the world's major music labels in 2017. In addition to licensing and providing access to their catalogues for customers, 7digital is helping to create new services for the labels across a number of geographies and earning direct revenues from the labels.

In addition to the 4 main sales verticals highlighted above (retail, connected devices, telco/ mobile and broadcast radio), we are also driving revenue growth in our other major sales verticals, including:

· Consumer brands: we announced a deal in Q3 2017 with Fender®, one of the world's leading instrument companies, to provide technology and access to our music and metadata platform. In addition, we have also been working with Onkyo, the Japanese consumer electronics manufacturer, to redesign their music stores and load MQA content

· Hardware: 7digital signed a three-year deal to power a subscription streaming service on the innovative "Prizm" smart audio player, now available in France with further territories to follow, which selects music according to the moods and tastes of the people in the room

· Pureplay music services: In September, we announced a new contract with 8tracks, a popular digital music service based in the US. 8tracks was founded in 2008 and focuses on music discovery through crowd-curated playlists. TriPlay's eMusic, a direct-to-consumer service in the US, signed on to use the 7digital platform during 2017. 7digital has been working with a number of customers to prepare to deliver studio quality music to consumers using the MQA format. 7digital also signed a deal with US-based company Fan Label, a dynamic new music fan engagement platform, to provide access to our preview clip catalogue for a new service and handle licensing and rights holder reporting.

Since the period end we have continued to make good progress in licensing, agreeing several key contracts as the digital music industry continues to expand into new areas of current music consumption.

Creative division

Our Creative division is engaged in the creation of award winning audio, video and multimedia programming. This content is produced for broadcasters (such as the BBC's national radio networks, commercial radio stations and other broadcasters such as Sky Television), commissioned to enhance the services provided by our technology licensing division, or designed to create new content streams for digital services. It is a profitable business that brings an increasing number of synergistic benefits to our licensing and operations, in particular the ability to offer clients complementary knowledge and skillsets such as playlist curation and video or audio production.

As anticipated, Creative revenues were weighted towards the second half of the year and grew 6% on 2016 to £2.0m (2016: £1.9m). The division continues to win and retain business as a result of our broad capabilities and deep industry relationships.

Examples of the work produced by 7digital's Creative division in 2017 include audio and video entertainment news bulletins for Amazon's ground breaking "Echo" wireless smart speakers, video content featuring leading artists to celebrate key catalogue anniversaries for Warner Music Group, video documentaries on gaming for BBC Radio 1's iPlayer channel, and a bestselling podcast series for Amazon's Audible service.

The Group retained BBC Radio 2 programmes Pick of the Pops, The Folk Show and The Golden Hour in the latest commissioning round and there are other opportunities for the Group to add to these with the new 'Compete or Compare' commissioning process, whereby a minimum of 60% of BBC Radio hours will be open to competition from independent content producers by 2022.

Content division

The Content division includes revenue from the lower margin legacy sales of digital music downloads by the Group direct to consumers and higher margin one off projects from record labels. In 2017 Content revenues grew by 21% to £3.2m (2016: £2.6m). As in 2016, a continued shift towards Hi-Res digital music files is allowing the group to positively manage the decrease in digital music download sales as consumers move to streaming.

As anticipated, Hi-Res continues to increase as a proportion of content sales, with year-on-year Hi-Res sales showing 100% growth and with Hi-Res audio outselling MP3 audio every month in the year.

Re-Structure

In the second half of 2017, 7digital began a re-structuring which will continue into 2018 with the aim of reducing costs and converging the platforms and operations that have been brought together by the acquisitions of Snowite Sarl in 2016 and 24-7 Entertainment ApS in 2017. This resulted in the closure of the Company's office in Paris during the period with the redundancy of 7 staff.

Outlook2017 was a year of progress for the Group overall.

The Group continued to expand its customer base across an increasing range of geographies, strengthen its relationships with the music industry and improve the quality of its business through the quality of its revenues.

7digital has a strong pipeline and is enjoying increasing momentum, and the Board remains committed to being profitable at PBT level during the second half of 2018. The Board believes that the enlargement of the Group has significantly strengthened our market position and will bring materially enhanced revenue against a fixed cost base. The acquisition of 24-7 and the deepening relationship with significant shareholder MMS provides the right foundation to see the full benefits of consolidation realised in 2018 and beyond.

Simon Cole

Chief Executive

15 August 2018

Chief Financial Officer's Review

Introduction

The Chairman has referred in his report to the appointment of BDO as the Group's new auditors in December 2017. In conjunction with the change of Auditor, we have looked at all areas of our Accounting Practices and Accounting Policies and ensured that we have embedded best practice where possible. This review has led to the correction of a number of accounting errors relating to prior periods which are shown in detail in note 1. Many of the errors relate to the accounting for acquisitions in recent years.

The overall effect of these changes to the Income Statement increases the prior loss by £142k. Most of the Balance Sheet movements are reclassifications. Nevertheless, it has been important to make these prior period changes in line with IAS8 which we also believe presents a clearer picture of the true underlying performance of the business in those periods.

Following an extensive review we have restated the accruals held for payments due to Labels for historic content sales. The accrual had built up over some years and has now been reviewed and determined that the accrual had been overstated for some time. It has been reduced by £773k back dated prior to 31 December 2015.

As a step forward in preparation for IFRS 15, we have robustly reviewed our policy regarding the timing of recognition of One-Off Revenues. In particular we often receive Set Up fees from customers prior to the delivery of a new service contract. In the past these (generally non-refundable fees) have been taken to revenue when charged. We have reviewed the timings and as a result we have not needed to restate 2016 revenue, but we have reduced 2017 Revenue by £527k and deferred this forward into 2018 Revenue instead.

Lastly, following a detailed review we have concluded that our accounting system was erroneously setup with regard to the way it made automated Foreign Exchange revaluation journals during 2016. The effects have been reversed and have caused the following restatements: Revenue in 2016 was reduced by £241k, offset by a reduction in administration expenses of the same amount, leaving no net effect on Reported Losses.

Results

The Group Revenue grew by 50% in 2017 to £16.8m (2016: £11.2m) and Gross profit increased by 55% to £12.0m. Our overall gross margin also increased to 72% from 69%.

The Operating loss for 2017 was £4,971k (2016: £5,462k) being an improvement of £491k. The EBITDA loss for 2017 was £1,608k (2016: £4,310k) being an improvement of £2,702k and is reconciled to the Operating loss in note 6.

The Loss per share was 2.74 pence (2016: 4.81 pence).

Dividend

During the year, 7digital did not pay an interim or final 2016 dividend (2016: no interim or final 2015 dividend). The Board of directors is not proposing a final dividend in the current year.

Revenue

Shown in the table below: our high-margin business-to-business ("b2b") Licensing revenues have continued to enjoy growth, rising by 74% overall, with the strategically important Monthly Recurring Revenues ("MRR") up 71% to £8.4m (2016: £4.9m). One Off Revenues increased by 82% to £3.2m (2016: £1.7m).

The Licensing Revenue Exit rate for Monthly Recurring Revenues increased by 23% year on year. The Exit MRR rate is calculated by taking the MRR revenues in the last month of the period and multiplying them by 12.

The table below breaks out the Exit MRR rates for all elements of Licensing revenue. Within this the Exit MRR rate for our targeted growth business of Streaming increased by 31%. The MRR for Downloads increased by 88% due to trade acquired within the 24-7 acquisition. Radio MRR declined by 52% due to reduced business with our one remaining client in this small sector.

Expenditure

Other administration expenses increased by 27% as we have the inclusion of 7 months of the operating costs of 24-7 Entertainment ApS (now rebranded as '7digital Denmark') which was acquired during the year.

Cash and cash flow

At 31 December 2017, the Group had a cash balance of £6,978k (2016: £838k) and saw overall cash inflows in 2017 of £6,498k (2016: £1,737k cash outflow). This included a cash inflow of £127k from operating activities (2016: £1,362k cash outflow), £4,394k cash outflow on investing activities (2016: £349k outflow), and £10,694k cash inflow on financing activities (2016: Nil).

Mark Foster

Director

15 August 2018

Consolidated Income Statement

Consolidated Statement of Comprehensive Income

The notes from pages 36 to 65 form part of the financial statements.

Consolidated Statement of Financial Position

These financial statements for company registration number 03958483, which comprise the Consolidated Statement of Comprehensive Income, the Consolidated Statement of Financial Position, the Consolidated Statement of Cash Flow, the Consolidated Statement of Changes in Equity and related Notes 1 to 29 were approved by the Board of Directors on 15 August 2018 and were signed on its behalf by:

Mark Foster

Director

The notes from pages 36 to 65 form part of the financial statements.

Consolidated Cash Flow Statement

Consolidated Statement of Changes in Equity

The notes from pages 36 to 65 form part of the financial statements.

Notes to the financial statements

1. Accounting policies

General information

7digital Group plc is a public company incorporated in the United Kingdom (England and Wales) under the Companies Act. The address of the registered office is given on page 66.

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

Basis of Preparation

Statutory accounts for the year ended 31 December 2017 have been delivered to the Registrar of Companies. The financial information for the year ended 31 December 2017 contained in these results has been audited.

The financial information contained in these results has been prepared using the recognition and measurement requirements of International Financial Reporting Standards (IFRSs) as adopted by the EU. The accounting policies adopted in these results have been consistently applied to all the years presented and are consistent with the policies used in the preparation of the financial statements for the year ended 31 December 2016. New standards, amendments and interpretations to existing standards, which have been adopted by the Group for the year ended 31 December 2017, have been listed below.

New standards and interpretations

New and amended standard issued in the year have not had a significant impact on the financial statements. At the date of authorisation of these financial statements, certain new standards, amendments and interpretations to existing standards have been published by the IASB and adopted by the EU but are not yet effective, and have not been adopted early by the Group. Management anticipates that all of the relevant pronouncements will be adopted in the Group's accounting policies for the first period beginning after the effective date of pronouncement. Information on new standards, amendments and interpretations that are expected to be relevant to the Group's financial statements is provided below.

• IFRS 9: Financial Instruments (effective 1 January 2018)

• IFRS 15: Revenue from Contracts with Customers (effective 1 January 2018)

• IFRS 16 Leases (effective 1 January 2019)

In relation to IFRS9 and the measuring of the impairment of trade receivables, the Group anticipates adopting the simplified approach available under IFRS 9 to calculate impairment provisions based on their life-time expected losses, instead of having to closely monitor changes in credit risk with the counterparty. Under this approach, the Group will measure impairment losses based upon a probability weighted approach to expected loss, even if no indicators of impairment exist at the balance sheet date. Potentially, this will result in impairment provisions being recognised at an earlier stage than currently. As a result, the Group is currently undertaking a review of its trade receivable provisioning policies, which will be complete by the issue of our interim results for the period ended 30th June 2018, in which the full impact will be disclosed and recognised. There will also be minor changes to the disclosures in the financial statements in order to comply with the new standard.

The Group's current revenue recognition policies are set out on page 38. IFRS 15 will replace IAS 18 Revenue and IAS 11 Construction Contracts. The central principles of IFRS 15 revolve around identifying "separate performance obligations" to the customer and recognising the identified consideration for those obligations as they are delivered to the customer. The Group currently recognises revenues related to the download of Content and the provision of Creative services when they are delivered to the customer and, as a result, the Group currently does not anticiapte any material change in the profile of recognistion of this revenue. In respect of the provision of our software platform, the Group currently recognises set up revenues as an initial fee at the start of the contractual agreement. Subsequent licensing of maintenance revenues are recognised on a straight-line basis over the the period of the contractual agreement. The Group is currently undertaking a review of its existing revenue recognition policies in respect of services connected to the software platform as well as its Content and Creative revenues to establish whether the profile of recognition of those revenues may change on adoption. IFRS 16 will replace IAS 17 Leases. It will require nearly all leases to be recognised on the balance sheet as liabilities,

including those currently recognised a operating leases, with corresponding assets being created. The existing opearting lease commitments of the Group are disclosed in note 23. The Group will conduct a systematic review to quantify the exact impact of adoption of the standard. A number of IFRS and IFRIC intepretations are also currently in issue which are not relevant for the Group's activities and which have not therfore been adopted in prepared these financial statements.

Going concern

The Group and parent company's business activities, together with the factors likely to affect its future development, performance and position are set out in the Strategic Report on pages 8 to 9. The financial position of the Group, its cash flows and liquidity position are described in the Finance Review on pages 6 to 7. In addition, note 28 to the financial statement includes the Group's objectives, policies and processes for managing its capital, its financial risk management objectives, details of its financial instruments and its exposures to credit risk and liquidity risk.

The financial statements at 31 December 2017 show that the Group generated an loss for the year of £4.7m (2016: loss of £5.5m), and with cash generated in operating activities of £0.2m (2016: £1.4m cash used) and a net increase in cash and cash equivalents of £6.1m in the year (2016: decrease of £0.8m). The Group balance sheet also showed cash reserves at 31 December 2017 of £7.0m (2016: £0.8 million). The parent company generated a loss for the year of £4.1m (2016: £1.4m) and showed cash reserves at 31 December of £6.0m (2016: £0.4m).

These financial statements have been prepared on the going concern basis. The directors have reviewed 7digital's going concern position taking account of its current business activities, budgeted performance and the factors likely to affect its future development, and include the Group's objectives, policies and processes for managing its capital, its financial risk management objectives and its exposure to credit and liquidity risks.

The directors have prepared cash flow forecasts covering a period of 18 months from the date of these results. The Group is confident in the budgets set and market forecasts, on this basis the Group and parent company will be able to operate within its existing cash reserves and facilities. Clearly the timeline required to close sales contracts and the order value of individual sales can vary considerably. The Group has therefore secured non-binding Letters of Intent from two major shareholders who have indicated conditional support on standard market terms should extra Working capital be required. Should these conditions not be met, the Group and parent company would need to seek alternative methods of finance. This matter indicates that a material uncertainty exists that may cast significant doubt on the group and parent's ability to continue as a going concern. These financial statements do not include the adjustments that would result if the group and the parent company were unable to continue as a going concern. The directors believe that taken as a whole - the factors described above enable the Group to continue as a going concern for the foreseeable future. These financial statements do not include the adjustments that would be required if the Group was unable to continue as going concern.

The Board has concluded that no matters have come to its attention which suggests that the Group will not be able to maintain its current terms of trade with customers and suppliers. The Group's forecasts for the combined Group, including due consideration of the continued operating losses of the Group, and projections, taking account of reasonably possible changes in trading performance and the opportunity for cost cutting, indicate that the Group has sufficient cash available to continue in operational existence throughout the forecast period and beyond. The Board has considered various alternative operating strategies should these be necessary and are satisfied that revised operating strategies could be adopted if and when necessary. As a consequence, the Board believes that the Group is well placed to manage its business risks, and longer term strategic objectives, successfully. Accordingly, they continue to adopt the going concern basis in preparing the annual report and accounts.

Basis of consolidation

The consolidated financial statements incorporate the financial statements of the Company and its subisidiairies made up to 31 December each year. The results of the subsidiairies acquired or disposed of during the year are included in the consolidated income statement using the acquisition method from the effective date of acquisition or up to the effective date of disposal, as appropriate. Where necessary, adjustments are made to the financial statements of the subisidiairies to bring the accounting policies used into line with those used by the Group. All intra-group transactions, balances, income and expenses are eliminated on consolidation.

Business combinations

On acquisition, the assets and liabilities and contingent liabilities of a subisidiary are measured at their fair values at the date of acquistion. Any excess of the cost of acquisition over their fair values of the identifiable net assets acquired is recognised as goodwill, which is allocated to Cash-Generating Units ("CGUs"). Goodwill is reviewed for impairment at least annnually. Any impairment is recognised immediately in the income statements and is not subsequently reversed.

Investment in subsidiaries

The consolidated financial statements incorporate the financial statements of the Company and investees controlled by the Group (its subsidiaries). The company controls an investee if all three of the following elements are present: power over the investee, exposure to variable returns from the investee, and the ability of the investor to use its power to affect those variable returns. Control is reassessed whenever facts and circumstances indicate that there may be a change in any of these elements of control.

The results of subsidiaries acquired or disposed of during the year are included in total comprehensive income from the effective date of acquisition and up to the effective date of disposal, as appropriate, using accounting polices with those of the parent. All intra group transactions, balances, income and expenses are eleminated in full on consolidation.

Revenue

Revenue represents amounts receivable for services provided in the normal course of business, and excludes intra-group sales, Value Added Tax and trade discounts. Revenue comprises:

Licensing revenues

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

The fees compromise three categories;

1. Set up fees which grant initial access to the platform, allow use of our catalogue and associated metadata and mark the start of work to define a client's exact requirements and create the detailed specifications of a service. These are non-refundable, paid up front and revenue is recognised over the period of the set up phase of the contract in accordance with the contractual terms, which is generally the period from commencement of the set up phase to the period that the monthly licence fees are eligible to commence. Revenue relating to the set up phase is generally taken on a straight line basis over the set up period.

2. Monthly development and support fees which cover the costs of developer and customer support time. These are usually fixed and are paid monthly once a service has been specified in detail; they are calculated at commercial rates based on the number of developer or support days required. These are generally "b2b" sales where there are service contracts in place to provide ongoing support over a period of time. Revenue is recognised over the term of the contract on a straight line basis.

3. Usage fees which cover certain variable costs like bandwidth which can be re-charged to clients with an administrative margin.

These accounts have been prepared using the Company's existing policies. From January 1 2018, IFRS 15 will demand a new approach to technology licensing revenues and the Board and its Audit Committee expect that the treatment of these fees may differ for future years.

Content ("Download") revenues

Content revenues are recognised as the value of services supplied, on delivery of the content.

Creative revenues

Creative revenues relate to sale of programmes and other content. The value of the goods and services supplied are recognised on delivery of the programme or content. Production costs are recognised on the same date as the relevant revenue.

Exceptional items

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

Foreign currency

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

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

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

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

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

Intangible assets

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

Intangible assets are recognised on business combinations if they are separable from the acquired entity or give rise to contractual/legal rights. The amounts ascribed to such intangibles are arrived at by using appropriate valuation techniques (see section related to critical accounting judgements and key areas of estimation uncertainty below).

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

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

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

- The ability to use or sell the intangible asset

- How the intangible asset will generate probable future economic benefits

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

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

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

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

Property, plant and equipment

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

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

Property - 20% per annum straight line

Computer equipment - 33.33% per annum straight line

Fixtures and fittings - 33.33% per annum straight line

Impairment of tangible and other intangible assets

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

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

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

Cash and cash equivalent

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

Government grants

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

Financial instruments

Classification

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

Recognition and measurement

All financial assets and liabilities are initially measured at transaction price (including transaction costs), except for those financial assets classified as at fair value through profit or loss, which are initially measured at fair value (which is normally the transaction price excluding transaction costs), unless the arrangement constitutes a financing transaction. If an arrangement constitutes a financing transaction, the financial asset or financial liability is measured at the present value of the future payments discounted at a market rate of interest for a similar debt instrument.

Fair value through profit or loss

Such financial instruments are carried in the consolidated statement of financial position at fair value with changes in fair value recognised in the consolidated statement of comprehensive income. The Group does not hold or issue derivative instruments for speculative purposes. Other than these derivative financial instruments, the Group does not have any liabilities held for trading nor has it designated any financial liabilities as being at fair value through profit or loss.

Impairment

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

Operating leases

Rentals payable under operating leases are charged against income on a straight-line basis over the lease term. Benefits received and receivable as an incentive to sign an operating lease are similarly spread on a straight-line basis over the lease term, except where the period to the review date on which the rent is first expected to be adjusted to the prevailing market rate is shorter than the full lease term, in which case the shorter period is used.

Share-based payments

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

Taxation

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

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

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

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

Critical accounting judgements and key areas of estimation uncertainty

Valuation of intangible assets on acquisition

On acquiring a business, the Group is required to consider the existence or otherwise of intangible assets. On identification of these assets, such as intellectual property, technical know-how, brands and customer relationships, the Group considers the cash flows expected to arise from existing relationships, which is a judgement. Separable intangibles recognised during the year was £1,197k (2016: £2,201k).

Share based compensation

The fair value of share based payments is measured using a Black-Scholes valuation model. The Directors have used judgement in the calculation of the fair values of the share based compensation which has been granted during the period, and different assumptions in the model would change the financial result of the business. The total share based payment charge recognised during the year amounted to £86k (2016: £172k).

The number of shares issued in lieu of services is based on the remuneration due at specificed dates divided by the share price on that date.

Measurement of impairment of goodwill and intangibles assets

The carrying value of goodwill and intangible assets is reviewed for impairment at least annually. In determining whether goodwill or intangible assets are impaired, an estimation of the value in use of the cash generating unit (CGU) to which the goodwill and intangible assets have been allocated is required. This calculation of value in use requires estimates to be made relating to the timing and amount of future cash flows expected from the CGU, and suitable discount rates based on the Group's weighted average cost of capital adjusted to reflect the specific economic environment of the relevant CGU. These estimates have been used to conclude that no impairment is required to either goodwill or intangible assets, but are judgemental in nature. Further disclosure of these estimates, together with the sensitivity of the underlying impairment calculations to changes in these estimates are provided in note 13 to the financial statements.

Revenue recognition

Management considers the detailed criteria for the recognition of revenue from the sale of goods and services as set out in the Group's accounting policy, in particular whether the Group had transferred to the buyer the significant risks and rewards of ownership of the goods.

Capitalisation of internally developed software

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

Correction of prior period errors

Restatement of 2015:

The directors have considered and revised the cost of sales accruals held relating to content revenues. As a result, the directors have concluded that the accruals held at 31 December 2015 were £773k too high, and have restated the accruals at 1 January 2016 and 31 December 2016 by this amount. The impact of the correction of this prior period error was to reduce brought forward loss reserves at 1 January 2016 by £773k and to reduce trade payables by the same amount. There was no effect on the 2016 Income Statement.

Restatement of 2016:

On 8 April 2016, 7digital Group plc acquired a French software company Snowite SAS out of administration (see note 12). The difference between the consideration paid and the fair value of the net assets acquired was incorrectly identified and accounted for as goodwill in the prior year, whereas the directors have subsequently concluded that the balance should have been accounted as part of the bespoke application intangible asset. As a result, the directors have restated the prior period balance sheet and amortised the resulting bespoke application intangible asset. The impact of the correction of this prior period error was to reclassify the £546k of goodwill originally recognised to bespoke application intangible assets and to recognise amortisation in the 2016 income statement of £137k, increasing the loss for the year by the same amount.

In addition, the directors have recognised an additional liability of £114k to reflect the shareholder put option liability, which was incorrectly excluded from the prior period financial statements. The impact of the correction was to increase finance costs in 2016, thereby increasing the loss for the prior period by the same amount.

The directors have found that £109k of revenue was under accrued at the end of 2016, which has now been adjusted, increasing revenue by £109k.

The directors have identified that foreign exchange gains of £551k were incorrectly recognised within revenue in the prior period, whereas they should have been correctly recognised within administrative expenses. As a result, the directors have restated both revenue and administrative expenses for the year ended 31 December 2016. The result of this prior period adjustment was to reduce revenue and administrative expenses by £551k respectively. There was no impact on the net assets of the Group at 31 December 2016. In addition, further amounts of foreign exchange misstatement have been found and corrected as follows: reducing Revenue by £241k, reducing Cost of Sales by £5k and reducing administrative expenses by £236k.

In the prior year the Group recognised work done on behalf of third parties as work in progress within inventory. The directors have subsequently concluded that as the Group did not legally own the right to the value under those contracts that these amounts should be presented as other debtors. Accordingly, the balance sheet for the year ended 31 December 2016 has been restated. The impact of this restatement was to increase trade receivables by £142k and to reduce inventories (work-in-progress) by the same amount. There was no impact on the net assets of the Group at 31 December 2016.

In the prior year the Group presented patents as current assets. The directors have subsequently concluded that that these assets meet the definition of intangible assets and should have been presented as such. Accordingly, the prior period balance sheet has been restated to reclassify those patents as intangible assets. The impact of this restatement was to increase intangible assets and reduce current assets by £35k respectively. There was no impact on the net assets of the Group at 31 December 2016.

In the prior year, liabilities assumed as part of the acquisition of Snowite SAS (see note 12) were classified as loans in the Statement of Financial Position. The directors have subsequently concluded that these liabilities represent other payables rather than loans. Accordingly, the amounts payable of £122k and £1,397k due within one year and after one year respectively have been reclassified to Trade and other Payables within the Statement of Financial Position at 31 December 2016. There was no impact on the net assets of the Group at 31 December 2016.

In the prior year 477,762 options issued to a non-executive director under a separate arrangement to the group's enterprise management scheme (set out in note 25) were excluded from the disclosure of total options. The disclosures in note 25 have been updated to include these additional options in the 2016 figures. In addition, the share based payment disclosures excluded the charges related to options provided to non-executive directors in lieu of salary. The disclosures have been updated to show the total share based payment charges exercised as well as the split between charges recognised in connection with options granted to non-executive directors. In addition, the presentation of share based payments and the issue of shares to non-executive directors in the Statement of Changes in Equity in 2016 has been simplified to aid reconciliation with other related disclosures. There has been no impact on the net assets of the group as at 31 December 2016 as a result of these adjustments.

A summary of the prior period adjustments described above is set out in the table below:

Basic and diluted loss per share for the prior year have also been restated to account for the correction of these errors. The impact was to increase both basic and diluted loss per share by 0.12p per share.

2. Business and geographical segments

Business segments

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

Revenue from the Group's largest customer in the year was £4.9m (2016: £1.4m). There were no other customers that formed greater than 10% of external revenues within the years ended 31 December 2017 and 2016.

Geographical information

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

All revenues are derived from the provision of services.

3. Exceptional items

On 19th June 2017, 7digital Group plc announced the successful acquisition of 24-7 Entertainment ApS. As part of this transaction the Group incurred a variety of legal and professional fees which have been classified as exceptional items due to their one-off nature.

On 7th July 2016, the High Court approved the cancellation of the balance standing to the credit of the Company's share premium account. As part of this capital reduction, the Group incurred a variety of legal and professional fees which have been classified as exceptional items due to their one-off nature.

During 2016 and 2017, the Group incurred legal fees in relation to the settlement of patent infringement claims. The settlement and associated legal fees were classified as exceptional items due to the size and nature.

During 2017, the Group incurred costs relating to restructuring the business following the acquisition of Snowite SAS in March 2016 and aquistion of 24-7 Entertainment ApS in June 2017. The main items being the removal of cost duplication in technical, management and sales areas.

£439k (2016: £382k) of the exceptional items for the year ended 31 December 2017 are deductible for corporation tax purposes.

4. Operating loss for the year

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

5. Other operating income

The other operating income earned by the Group in the current year of £509k (2016: £560k) relates to Research & Development tax credits.

6. Reconciliation of non-IFRS financial KPIs

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

7. Auditor's remuneration

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

8. Staff costs

The average monthly number of persons employed by the Group during the year, including executive directors, was 140 (2016: 131). Staff costs in the Group are presented in administrative expenses.