16 Jun 2015 07:02
16 June 2015
DJI Holdings plc
("DJI", or "the Group")
Audited Final Results for the 12 months ended 31 December 2014
DJI Holdings plc, (AIM: DJI), a licensed promoter and distributor of Chinese sports and welfare lottery products to third party retailers and direct to consumers, today announces its financial results for the 12 months ended 31 December 2014.
Financial Highlights
Operating and Corporate Highlights
Commenting on the results, Darren Mercer, CEO of DJI Holdings plc, said:
"This was a year of significant progress for DJI Holdings plc. The acquisitions and joint venture agreements completed prior to our IPO and listing in July have positioned our business to capitalise on the fast growing online sector of the Chinese lottery industry. The March 2015 temporary suspension of online sales continues pending regulatory changes, but when these sales resume, we expect Chinese consumers increasingly to choose web and mobile as their channel of choice for lottery ticket purchases."
For further information please contact:
DJI Holdings plc | +44 (0) 1565 872990 |
Darren Mercer, Group Chief Executive Rodney Davis, Chief Financial Officer | |
IHA Consulting | +44 (0) 20 3393 1185 |
Stephen Benzikie | |
Strand Hanson Limited (Nominated Adviser to DJI) | +44 (0) 20 7409 3494 |
Andrew Emmott / Ritchie Balmer | |
Mirabaud Securities LLP (Broker to DJI) | +44 (0) 20 7878 3362 |
Peter Krens |
Note to editors
DJI's strategy is to capitalise on the rapidly expanding Chinese lottery market and the opportunity to deliver lottery ticket fulfilment sales to its substantial client base of large Chinese corporations (B2B) and individual consumers via the Group's owned and operated websites (B2C), within the online and mobile environment.
Through the Group's long-standing relationships with the Chinese regulators, a portfolio of lottery contracts and its reliable technology platform, the Group is well positioned to capture the market opportunity.
The principal activities of the Group are the development, promotion and distribution of authorised lottery products in China. DJI's subsidiaries are licensed and/or contractually authorised to distribute and promote Sports and Welfare lottery products online, via mobile and through physical retail outlets across China.
The Group has a differentiated approach to the Chinese lottery market in that DJI operates throughout the promotion and distribution value chain. The Group offers:
CHAIRMAN'S REVIEW
In 2014 the company succeeded in converting several years of development effort in China into the establishment of a significant business in the online distribution channels of both the Sports and Welfare lotteries sections of the Chinese lottery market.
In July 2014, DJI completed a listing and an Initial Public Offering ("IPO") of the company's ordinary shares on the AIM section of the London Stock Exchange and these are DJI's first results as a listed company.
The business achievement comprises the integration of three acquisitions: two business to business (B2B) lottery ticket transaction fulfilment operations and a business to consumer (B2C) operation have been integrated into the existing infrastructure of DJI, collectively bringing about a rapid growth in sales. The client partner organisations in the B2B business include several of China's largest e-commerce companies. The number of lottery fulfilment contracts for portals of household name companies across the mobile telecoms, banking and insurance sectors continues to grow.
Separately, the Company announced a joint venture with Xinhuatong Software Development (Beijing) Co. Limited ("Xinhuatong") to develop and promote new lottery products using the Group's technologies and Xinhuatong's network through a newly formed joint venture company named Beijing Xinhuacai Technology Co. Limited, of which DJI owns 49%. The launch of the venture's B2B service was delayed as a result of the recent suspension of online sales, but once operational, we expect this joint venture to add significantly to the scale of DJI's operations. Since 1949 gambling has been outlawed in China and the State lottery represents the only legalised gambling outlet. The Welfare lottery was launched in 1987 to support the elderly, the sick and the victims of natural disasters. The Sports lottery was added in 1994 to fund the 2008 Olympic Games and has since been extended in scope to include government defined wagers on selected sports including UK Premier League and European football matches which accounts for the great majority of ticket purchases in the sports wager sector.
In both the Welfare and Sports Lotteries, the central and provincial governments retain control over the rules of all types of lotteries, scratch cards, video lottery terminal ("VLT") content, games content, and over all stages of the prize draw process and licensing for all aspects of both land based and online distribution and for the chain of related commissions.
From the government's perspective, the end of the one child policy has highlighted the demographic challenge in terms of care for very large numbers of the elderly. Development and growth of the regulated lottery market is a key policy of the State Council, China's ruling body, to meet the pensions and disability benefits challenge by growing government revenues from the lottery. In some western countries more than 50% of the adult population play the lottery markets whereas in China perhaps less than 30% have purchased a ticket.
Regular lottery players number fewer than 200m out of a total population of 916 million people (16-60) year olds.
Participants in the industry, such as DJI, are dependent on the issuance of a complex matrix of fulfilment and other distribution channel licenses from provincial and central government authorities. The licenses typically enjoy a term of 5 years and are generally renewed on a routine basis without exception unless any conditions have been unfulfilled. DJI is the holder of four key Tele-draw licenses for the Welfare Lottery which permit large-scale fulfilment activities on a wholesale B2B basis. The technology of the settlement system for the Sports lottery is under review by the Ministry of Finance.
The potential growth of the lottery industry is illustrated both by the small player numbers to date, relative to world standards, and by observing that, while statistics for the industry may be inaccurate, illegal turnover, entailing large potential government revenue shares not reaching the state, until recently may total two or three times the size of the licensed and legal market. The government has encouraged the digitisation of the industry via online and other digital channels to minimise the illegal segment and to ensure a 100% audit trail for the gathering of the government's revenue share.
The lottery market is closely regulated by various ministries who in turn are supervised by the Ministry of Finance.
The Welfare lottery is regulated and administered by provincial lottery authorities, such as the Beijing Welfare Lottery Authority ("BWLC"), one of several key provincial authorities with whom DJI has a long standing relationship and from whom other provincial lottery authorities often take a lead on innovations in lottery distribution.
Separately, the Sports lottery is administered centrally by the Ministry of Civil Affairs. The provincial welfare lottery authorities report to the Ministry of Commerce and both Ministries report to the Ministry of Finance who are in turn responsible to the State Council.
The degree of central government involvement is well illustrated by the commencement in the fourth quarter of 2014 of the State Council's audit of the online distribution channel of the lottery industry, culminating in the suspension of the majority of online lottery sales in March 2015, pending a revision by the Ministry of Finance of the rules to protect further against illegal, unlicensed operators. DJI believes that the impending revision of rules and regulations announced by the MOF on 3 April 2015 could benefit the Company because the new rules are expected to make it significantly harder for un-licensed, illegal entrants to remain in the market.
According to Ministry of Finance statistics, total sales in 2014 in the welfare lottery segment were c206bn RMB, an increase on 2013 of 16.7%. Sports lottery total sales in 2014 were 176bn RMB, a 32.8% increase on 2013.
The Board of DJI comprises a breadth of expertise and experience in the lottery and consumer facing industries, and in financial, regulatory and governance disciplines. Robert Lerwill joined the Board as a Non-Executive Director in May 2014 bringing a wealth of commercial experience from a range of former roles including Non-Executive Director and chair of the audit committee of BAT plc, Chief Executive of FTSE 250 company, Aegis plc and Finance Director at WPP plc.
In due course the Board expects to add Chinese nationals to the board to ensure appropriate representation for the Company's operations, all of which are located in China. As noted above, the development of the lottery industry is a priority of central government's consumer and welfare policies and your Board additionally has taken initiatives to build relationships with the UK's diplomatic staff in China and to maintain senior links in the UK with those interested in Anglo-Chinese trade relations.
DJI's listing on AIM in July achieved the important objective of providing existing investors with a liquidity option and attracted several new investors. The lack of London-based institutional investor familiarity with China makes it challenging for smaller companies operating in China to build a meaningful institutional following. To address this challenge the board announced in December that DJI would seek a secondary listing in either New York or Hong Kong.
The Board is encouraged with the Company's progress in 2014 and looks forward to reporting to shareholders next year.
Simon Prior-Palmer, Chairman
16 June 2015
CHIEF EXECUTIVE'S REVIEW
This past year has been one of significant progress for DJI Holdings plc. The acquisitions and joint venture agreements completed prior to our IPO and listing in July have positioned our business to capitalize on the fast growing online sector of the lottery industry as Chinese consumers increasingly choose web and mobile as their channel of choice for lottery ticket purchases.
Our commercial relationships with large websites that drive high lottery ticket sales volumes provide a steady and reliable income stream. Pure play websites and mobile applications serve high value consumers in competition with other sports themed sites and mobile apps.
During the first half of 2014, our business focused on the integration of our two lottery ticket fulfilment businesses acquired in the fourth quarter of 2013 and by year end 2014, we believe DJI has become one of the largest electronic fulfilment operators supporting digital lottery ticket sales in the Chinese market. In the second half of the year, we pursued a number of strategic alliances and also focused on the development of our direct to consumer web and mobile lottery ticket sales business.
Prior to our IPO in July, we signed a joint venture agreement with Xinhuatong Software Development (Beijing) Limited to form Beijing Xinhuacai Technology Co. Limited with objectives to expand our license portfolio and leverage our technology platform for additional high value B2B ticket fulfilment business, expand into new game development and to gain access to a large online and mobile customer base.
We are rapidly developing products and services to serve the growing demands of Chinese lottery ticket buyers by engaging them through all digital channels where they want access to lottery products.
Our performance and growth over this past year have demonstrated the merits of the Group's 2013 acquisition strategy. By the end of 2014 our large-scale technology platforms were fulfilling more than 350 million sports and welfare lottery tickets per month. In fact, in December 2014, weekly gross sales of lottery tickets almost exceeded the levels achieved for the whole of 2013.
These platforms are scalable, robust and secure and, together with our large license and contract portfolios, we are able to support the ticketing and sales requirements of the large Chinese web sites selling lottery products. As 2014 came to a close this business was set to expand significantly in 2015, through growth from contracts with new large e-commerce sites and increasing volumes from existing customers.
As part of our commitment to our joint venture partners, Xinhuacai, we invested significant resources in the development of our direct to consumer sports and welfare lottery sites and mobile apps and the related Sports Engine. The Sports Engine is DJI's unique promotional offering that will enable our business to offer differentiated combinations of sports betting games sold by the National Sports Lottery Authority. Separately, we dedicated additional resources to the development of our white-label microsite with unique and exclusive content that we hope to make available to large websites so they can enhance their lottery offering to their customers.
Significant progress was made throughout 2014, including advancement in the application process to deliver new high-frequency racing games which, following approval, we expect will be launched in the 5,000 Heilongjiang Sports Lottery stores and ultimately, as mobile and online versions for nationwide distribution. It is very much hoped that final approval will be received during the second half of 2015.
Our growing strength in Heilongjiang province is further demonstrated by the signing, in the fourth quarter of last year, of an agreement with the Heilongjiang Sports Lottery Administration Centre to use our technology platform to partner with retail outlets in the province to extend their users' online to offline (O2O) sales. This, we believe will grow revenues by providing added convenience and increased access to consumers. We are presently working on a number of similar agreements with a number of other provinces, which we hope to announce sometime later this year.
For the year ended 31 December 2014, the Company reported consolidated gross sales, revenue and loss after tax of £642m (2013: £22m), £13m (2013: £1m) and £3.6m (2013: £7.2m) respectively. This reflects a ten-fold increase in revenues and the loss before tax of £3.0m was a £4.2m improvement compared to 2013. The rapid adoption of the Company's online ticket fulfilment platform supported by multiple provincial licenses and contractual agreements in welfare and sports resulted in large increases in revenues and gross sales.
In June 2014 the Company rationalized the land business by outsourcing the majority of our retail outlets and streamlining the number of instant ticket vending machines in operation by year-end to include only machines operated jointly with commercial or independent partners. Online and mobile sales accounted for 96% (2013: 8%) of the Company's revenues in 2014. This is expected to continue.
In short, prior to the suspension we had turned the corner to cash profitability. A strong performance in the second half of the year came close to eliminating losses from the first half and have positioned the business for an even better 2015.
Administration expenses before exceptional items remained broadly flat in 2014 at £8.7 million (2013: £8.3 million) as reduced occupancy and labour costs from the outsourcing achieved in the land business were offset by new labour and occupancy costs related to the expanded digital business. In addition, in 2014 the Company incurred higher than planned marketing costs related to the development of the Company's website and new business development activity.
A further £0.6m of costs were incurred towards acquisitions and fundraising activity in 2014 (2013: £0.3 million costs offset by £0.5m exceptional gains). These have been treated as exceptional.
At the year end DJI had £10.8m in cash on hand, not including a £5m cash investment in our Xinhuacai joint venture which has been accounted for on an equity basis. Available resources should be sufficient to achieve our 2015 business plans and any additional capital market activity this year will be to take advantage of exciting new opportunities that continue to present themselves to our business because of our unique market position and strong relationships within our sector. Non-current assets increased by £13.2m, including a £8.4m increase in goodwill principally arising as a result of acquisitions and £4.9m related to the investment in our Xinhuacai joint venture.
Post Period End
Since March 2015, all provincial lottery administration centres to which we provide sports and welfare lottery sales services have temporarily suspended online sales in response to the Self-inspection Notice which was jointly promulgated by the Ministry of Finance (MoF), the Ministry of Civil Affairs and the General Administration of Sports of the People's Republic of China.
We have therefore temporarily suspended all of our online lottery sales operations, which historically represented 96% of our total sales. Since 1 March 2015 and at present we have minimal revenues from our land business and mobile services. As of the time of writing, there is no indication how long the temporary suspension will last.
The Self-Inspection Notice requires provincial and municipal government branches, including financial, civil affairs and sports bureaus, to conduct inspections and take remedial measures for unauthorized online lottery sales within their respective jurisdictions. The scope of inspection includes, among other things, commercial contract arrangements, online lottery products, lottery sales data exchange, online lottery sales channels, and sales commission fees in connection with unauthorized engagements of online sales agents by lottery administration centres. The Self-Inspection Notice further required a formal report on the result of the self-inspection and self-remedy be submitted by each provincial or municipal government to the Ministry of Finance, the Ministry of Civil Affairs and the General Administration of Sports of the People's Republic of China by 1 March 2015.
On 3 April 2015, a public announcement with regard to online lottery sales in China was jointly released by eight government authorities, namely the MoF, the Ministry of Public Security, the State Administration for Industry & Commerce, the Ministry of Industry and Information Technology, the Ministry of Civil Affairs, the People's Bank of China, the General Administration of Sports of China and the China Banking Regulatory Commission requiring among other things that:
(i) all lottery institutions, internet companies, and other institutions or individuals which provide unauthorized online lottery sales services, either directly or through agents, shall immediately cease such services. The local governmental authorities of finance, civil affairs and sports shall investigate and sanction unauthorized online lottery sales in their respective jurisdictions according to relevant laws and regulations;
(ii) the local government authorities of public security and industry & commerce shall investigate any issuance or sales of illegal lottery within their respective jurisdictions, with necessary assistance from local government authorities of finance, communication, banking regulatory commission, civil affairs, sports and local branches of the People's Bank of China, and report any criminal activities to the judicial authority for prosecution; and
(iii) the lottery issuance authorities that plan to sell lottery products online shall obtain the approval from the Ministry of Civil Affairs or the General Administration of Sports of China by submitting an application to the MoF for written approval. No entity shall provide online lottery sales services without the approval by the MoF.
It is widely believed in the industry that the government is taking significant steps to eradicate the illegal online lottery market, which is estimated to significantly outsize the legal market. Given the importance of the contribution that lottery ticket sales make to welfare causes and sporting infrastructure development, and given the explosive growth in both online and mobile lottery sales, the Chinese government is taking this opportunity to regulate and formalise the framework of operation to ensure that this source of welfare funds is not prejudiced.
We believe the close proximity of the promulgation of the Self-Inspection Notice and the Public Announcement signals a potential significant change of regulatory framework in the online lottery market in China.
We view the "investigation" positively, as a means of reshaping the industry, especially the notoriously grey area between the lottery ticket issuer and the internet distributors. Through this process, we expect that China's lottery industry is likely to introduce new laws and regulations, particularly on internet and mobile distribution as a means to further regulate and professionalise the supervision of the industry.
The Group's subsidiaries have each established strong and long-standing relationships with a significant number of Lottery Centres, ranging up to 14 years in some cases. It is widely believed that the new regulatory framework will facilitate and support the evolutionary shift from land to mobile devices and it is our intention to use those long-standing relationships to afford us the opportunity to benefit from this shift in dynamic. To that end, the Company will diversify some of its attention away from front-end fulfilment and sale of lottery tickets and to exploit some of the leading-edge capabilities we have developed at the back-end, to provide platforms that will enable Lottery Centres to support new lottery games for mobile devices.
As well as the provision of those back-end systems, we continue to explore the opportunity of working with our partners to apply for the approval of new games. The provision of those back-end systems and new game titles are not expected to be impeded by the ongoing MoF regulatory overview and whilst the approval process can take some time, the resulting contracts are typically long-term in nature and can be extremely valuable.
Outlook
Given our successes in 2014 and our considerable investment in developing our direct to consumer offerings, the Board believes DJI is well positioned to achieve an even more successful 2015. Our objective is simple: engage lottery ticket purchasers with the best range of lottery products in the channels where they prefer to play.
As a result of the ongoing investigations, the deployment of our direct to consumer web and mobile offerings were delayed into 2015 and both the Company and our partners determined it would be better to delay any new implementations until the results of the reviews were made public and the industry could proceed with greater clarity. However, because of our historical commitment to working within the regulations and focusing our business model on the areas where we see the greatest opportunities and with the best partners, we believe that following the regulatory evolution we will be well placed in the industry to achieve significant sales growth through our platform and as a result of our provincial licenses and contracts.
We will continue to work closely with our corporate and government partners to understand the opportunities available to us in the industry and, where practical, to work with the best partners and providers to maximize our speed to market and available returns for our shareholders.
As of the date of this announcement, there is no clear indication how long the suspension will last.
Darren Mercer, Chief Executive
16 June 2015
CONSOLIDATED INCOME STATEMENT
For the year ended 31 December 2014
Note | 2014 £ | 2013 £ | ||
Continuing operations | ||||
Revenue | 2 | 13,413,542 | 1,116,959 | |
Cost of sales | (6,467,371) | (131,770) | ||
|
| |||
Gross profit | 6,946,171 | 985,189 | ||
Administrative expenses before exceptional items | (8,661,074) | (8,341,191) | ||
Exceptional items | 4 | (560,737) | 195,893 | |
Administrative expenses after exceptional items | (9,221,811)
| (8,145,298) | ||
Share of results of associates | 8 | (118,581) | - | |
|
| |||
Operating loss | (2,394,221) | (7,160,109) | ||
Profit on disposal of associate | 8 | - | 5,397 | |
Investment revenues | - | 10,338 | ||
Finance costs | 5 | (567,896) | (13,965) | |
|
| |||
Loss before tax | (2,962,117) | (7,158,339) | ||
Tax | 6 | (663,532) | (44,092) | |
|
| |||
Loss for the year | (3,625,649) | (7,202,431) | ||
|
| |||
Attributable to: | ||||
Owners of the Company | (4,212,848) | (6,958,435) | ||
Non-controlling interests | 587,199 | (243,996) | ||
|
| |||
(3,625,649) | (7,202,431) | |||
|
| |||
Basic loss per share | 3 | 3.4 pence | 6.4 pence | |
|
|
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
For the year ended 31 December 2014
2014 £ | 2013 £ | |||
Loss for the year | (3,625,649) | (7,202,431) | ||
|
| |||
Items that may be reclassified subsequently to profit or loss: | ||||
Exchange differences on translation of foreign operations | (19,909) | 50,627 | ||
|
| |||
Total comprehensive income for the year | (3,645,558) | (7,151,804) | ||
|
| |||
Total comprehensive income attributable to: | ||||
Owners of the Company | (4,252,495) | (6,906,998) | ||
Non-controlling interests | 606,397 | (243,806) | ||
|
| |||
(3,645,558) | (7,151,804) | |||
|
|
CONSOLIDATED BALANCE SHEET
For the year ended 31 December 2014
Note | 2014 £ | 2013 £ | ||
Non-current assets | ||||
Goodwill | 7 | 12,192,699 | 3,752,765 | |
Other intangible assets | 320,387 | 360,954 | ||
Property, plant and equipment | 359,384 | 477,077 | ||
Investments | 8 | 4,941,260 | - | |
|
| |||
17,813,730 | 4,590,796 | |||
|
| |||
Current assets | ||||
Inventories | 151,716 | 392,723 | ||
Trade and other receivables | 9 | 4,711,639 | 2,465,671 | |
Cash and cash equivalents | 10,834,439 | 5,306,675 | ||
|
| |||
15,697,794 | 8,165,069 | |||
|
| |||
Total assets | 33,511,524 | 12,755,865 | ||
|
| |||
Current liabilities | ||||
Trade and other payables | 11 | (9,532,852) | (4,403,527) | |
Borrowings | 10 | - | (500,000) | |
|
| |||
(9,532,852) | (4,903,527) | |||
|
| |||
Non-current liabilities | ||||
Contingent liabilities | 11 | (2,891,336) | - | |
Convertible loan | 10 | (5,964,107) | - | |
|
| |||
(8,855,443) | - | |||
|
| |||
Net assets | 15,123,229 | 7,852,338 | ||
|
| |||
Equity | ||||
Share capital | 12 | 13,052,339 | 34,464 | |
Share premium account | 13 | 19,432,947 | 31,435,434 | |
EBT reserve | 13 | (574,613) | (508,200) | |
Retained earnings | 13 | (17,473,653) | (23,058,475) | |
|
| |||
Equity attributable to owners of the Company | 14,437,020 | 7,903,223 | ||
Non-controlling interests | 13 | 686,209 | (50,885) | |
|
| |||
Total equity | 15,123,229 | 7,852,338 | ||
|
|
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
For the year ended 31 December 2014
Share capital £ | Share premium account £ |
EBT reserve £ | Retained earnings £ | Total £ | Non-controlling interest £ | Total equity £ | ||
Balance at 1 January 2013 |
32,618 |
28,537,479 |
- |
(16,176,232) |
12,393,865 |
(59,133) |
12,334,732 | |
|
|
|
|
|
|
| ||
Loss for the year | - | - | - | (6,958,435) | (6,958,435) | (243,996) | (7,202,431) | |
Exchange differences | - | - | - | 51,437 | 51,437 | (810) | 50,627 | |
|
|
|
|
|
|
| ||
Total comprehensive income for the year |
- |
- |
- |
(6,906,998) |
(6,906,998) |
(244,806) |
(7,151,804) | |
|
|
|
|
|
|
| ||
Issue of share capital | 1,846 | 2,897,955 | - | - | 2,899,801 | - | 2,899,801 | |
Acquisition of own shares |
- |
- |
(508,200) |
- |
(508,200) |
- |
(508,200) | |
Equity-settled share based payments |
- |
- |
- |
24,755 |
24,755 |
- |
24,755 | |
Transactions with non-controlling interests |
- |
- |
- |
- |
- |
253,054 |
253,054 | |
|
|
|
|
|
|
| ||
Balance at 31 December 2013 | 34,464 | 31,435,434 | (508,200) | (23,058,475) | 7,903,223 | (50,885) | 7,852,338 | |
Loss for the year | - | - | - | (4,212,848) | (4,212,848) | 587,199 | (3,625,649) | |
Exchange differences | - | - | - | (39,647) | (39,647) | 19,738 | (19,909) | |
|
|
|
|
|
|
| ||
Total Comprehensive income for the year | - | - | - | (4,252,495) | (4,252,495) | 606,937 | (3,645,558) | |
|
|
|
|
|
|
| ||
Issue of share capital | 1,198,544 | 7,676,244 | (66,413) | (177,568) | 8,630,807 | - | 8,630,807 | |
| 14,885 | 14,885 | - | 14,885 | ||||
Acquisitions | 695 | 2,139,905 | - | - | 2,140,600 | 130,157 | 2,270,757 | |
Capital reduction | - | (10,000,000) | 10,000,000 | - | ||||
Bonus issue | 11,818,636 | (11,818,636) | - | - | - | - | - | |
|
|
|
|
|
|
| ||
Balance at 31 December 2014 | 13,052,339 | 19,432,947 | (574,613) | (17,473,653) | 14,437,020 | 686,209 | 15,123,229 | |
|
|
|
|
|
|
|
CONSOLIDATED CASH FLOW STATEMENT
For the year ended 31 December 2014
Note | 2014 £ | 2013 £ | ||
Net cash used in operating activities | 14 | (4,023,532) | (6,801,716) | |
|
| |||
Investing activities | ||||
Interest received | - | 10,338 | ||
Purchases of property, plant and equipment | (96,677) | (77,210) | ||
Proceeds on disposal of property, plant and equipment | 21,148 | - | ||
Disposal of associate | - | 238,224 | ||
Investment in associate | (4,130,400) | - | ||
Purchases of other intangible assets | (33,636) | (14,091) | ||
Acquisition of subsidiary net of cash acquired | (347,472) | (1,602,316) | ||
|
| |||
Net cash used in investing activities | (4,587,037) | (1,445,055) | ||
|
| |||
Financing activities | ||||
Issue of convertible loan notes | 5,958,318 | 500,000 | ||
Proceeds on issue of shares | 8,130,807 | 2,899,801 | ||
|
| |||
Net cash generated by financing activities | 14,089,125 | 3,399,801 | ||
|
| |||
Net increase / (decrease) in cash and cash equivalents | 5,478,556 | (4,846,970) | ||
Cash and cash equivalents at beginning of year | 5,306,675 | 10,107,438 | ||
Effect of foreign exchange rate changes | 49,208 | 46,207 | ||
|
| |||
Cash and cash equivalents at end of year | 10,834,439 | 5,306,675 | ||
|
|
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the year ended 31 December 2014
1. ACCOUNTING POLICIES AND BASIS OF PREPARATION
DJI Holdings PLC is a company incorporated in the United Kingdom under the Companies Act.
Directors' responsibilities
The Directors of DJI Holdings plc are responsible for preparing and issuing this preliminary announcement, which was approved on 16 June 2015.
Basis of preparation
The financial statements for the year ended 31 December 2014 do not constitute statutory accounts as defined in sections 435 (1) and (2) of the Companies Act 2006. Statutory accounts for 2013 have been delivered to the Registrar of Companies and those for 2014 will be delivered following the company's annual general meeting. The auditor has reported on those accounts and their report was unqualified, and did not contain statements under section 498(2) or (3) of the Companies Act 2006. The auditors have drawn attention to the going concern disclosure in note 3 of the 2014 financial statements by way of emphasis without qualifying the accounts. The 2013 Annual Report of DJI Holdings plc, can be found on the Group's website www.djiholdings.com and the 2014 Annual Report will be included on the website shortly.
The financial information is prepared on the basis of the accounting policies set out in the 2013 Annual Report of DJI Holdings plc, except in relation to the new standards which have been adopted in the year with no significant impact on the results for the current or prior year.
Application of significant new or amended EU endorsed accounting standards
New and revised standards and interpretations that have been endorsed for the financial year have no impact on the Group.
At the date of authorisation of these financial statements, the following Standards and Interpretations which have not been applied in these financial statements were in issue but not yet effective (and in some cases had not yet been adopted by the EU):
· | IAS 27 (amended) | Equity method in separate financial statements |
· | Annual improvements to IFRS; 2012 – 2014 cycle | |
· | Amendments to IFRS 10, IFRS 12 and IAS 28 | Investment entities: Applying the consolidation exemption and sale or contribution of assets between an investor and its associate or joint venture |
· | IFRS 9 | Financial Instruments |
· | IFRS 15 | Revenue from contracts with customers |
· | IAS 16 (amended) | Classification of acceptable methods of depreciation and amortisation |
· | IFRS 11 (amended) | Accounting for acquisitions of interests in joint operations |
· | IAS 1 (amended) | Disclosure initiative |
Going concern basis
In determining the appropriate basis of preparation of the financial statements, the directors are required to consider whether the Group can continue in operational existence for the foreseeable future; that is for at least 12 months from the date of signing of the financial statements.
The Group continues to make progress with its business plan and has been successful in expanding the number of licences held by the Company and the integration of its strategic acquisitions. This has driven a tenfold increase in the Group's revenue which has led to the reduction of operating cash outflows for the year to £4.0m (2013: £6.8m). At 31 December 2014, the Group was funded by cash balances of £10.8m and had no access to additional borrowing facilities.
Subsequent to the year end, all online lottery sales (which represented approximately 96% of the Group's revenues) were temporarily suspended across the industry following the Self-Inspection Notice jointly promulgated by the Ministry of Finance, the Ministry of Civil Affairs and the General Administration of Sports of the People's Republic of China and remain suspended at the date of this report.
However, the timing of resumption of online lottery sales and the ability of the Group to meet any new regulatory requirements imposed by the relevant Chinese Authorities and therefore deliver its business plans represents a material uncertainty which could have a significant impact on the Group's ability to continue as a going concern.
Notwithstanding the above, the directors have reviewed trading and cash flow forecasts, which take into consideration the uncertainties in the current operating environment and their expectations that online lottery sales will resume during the second half of 2015. After making the appropriate enquiries and, considering the Group's existing cash reserves and forecasts, the directors have concluded that they have a reasonable expectation that the Group will have adequate resources to continue in operational existence for the foreseeable future.
2. REVENUE AND SEGMENTAL REPORTING
IFRS 8 'Operating Segments' requires the segmental information presented in the financial statements to be that used by the chief operating decision maker to evaluate the performance of the business and decide how to allocate resources. The Group has identified the Group's Chief Executive Officer as its chief operating decision maker. The Group's Chief Executive Officer considers the results of the business as a whole when assessing the performance of the business and making decisions about the allocation of resources. Accordingly the Group has one operating segment and therefore the results of the segment are the same as the results for the Group.
The Group's revenue is analysed between the Land and Online routes to market and this information is provided to the Group's chief operating decision maker. An analysis of the Group's revenue by channel, all of which arose from the Group's operations in China, is as follows:
2014 £ | 2013 £ | ||
Land | 504,004 | 1,023,612 | |
Online | 12,909,538 | 93,347 | |
|
| ||
13,413,542 | 1,116,959 | ||
|
|
Included in gross sales arising from the Online business are revenues of approximately £6,710,000 (2013: £nil) which arose from sales to the Group's largest customer. No other single customers contributed 10% or more to the Group's gross sales in either 2014 or 2013.
Gross sales are shown below as a memorandum disclosure and represent the total transaction value of all lottery sales and services, net of VAT and other sales taxes. The Group reports the total transaction value since the directors believe that it reflects more accurately the transactional volume within the Group.
GROSS SALES | 2014 £ | 2013 £ | |
Land | 6,558,356 | 22,090,198 | |
Online | 635,854,150 | 93,347 | |
|
| ||
642,412,506 | 22,183,545 | ||
|
|
Geographical information
The Group's revenue from external customers is generated entirely in China, information about its segment assets (non-current assets excluding financial instruments, deferred tax assets and other financial assets) by geographical location are detailed below:
NON-CURRENT ASSETS | 2014 £ | 2013 £ | |
China | 17,523,437 | 4,205,154 | |
United Kingdom | 290,293 | 385,642 | |
|
| ||
17,813,730 | 4,590,796 | ||
|
|
3. LOSS PER SHARE
The calculation of basic loss per share is based on the following data:
2014 £ | 2013 £ | ||
Losses for the purposes of basic loss per share being net losses attributable to owners of the Company |
(4,212,848) |
(6,958,435) | |
|
| ||
2014 No. | 2013 No. | ||
Weighted average number of ordinary shares for the purposes of basic loss per share |
123,964,909 |
109,299,924 | |
|
| ||
2014 Pence | 2013 Pence | ||
Basic loss per share | 3.4 | 6.4 | |
|
|
The weighted average number of shares has been restated in all periods to take into account the 333 for 1 bonus issue of shares which took place on 17 April 2014. This is in line with IAS 33: Earnings per share.
No dilutive loss per share figure has been noted following an assessment by the Directors of the dilutive impact of the Company's potential ordinary shares as no dilutive impact was noted.
4. EXCEPTIONAL ITEMS
Exceptional items included within administration expenses principally relate to costs associated with the acquisitions (see note 7) and external fees related to the Group's IPO in July 2014.
2014 £ | 2013 £ | ||
Settlement agreement | - | 508,200 | |
Acquisition costs | (21,770) | (167,197) | |
IPO fees | (461,633) | (145,110) | |
Other costs | (77,334) | - | |
|
| ||
(560,737) | 195,893 | ||
|
|
5. FINANCE COSTS
2014 £ | 2013 £ | ||
Interest on other loans | 562,107 | 8,965 | |
Debt issue costs | 5,789 | 5,000 | |
|
| ||
567,896 | 13,965 | ||
|
|
6. TAX
2014 £ | 2013 £ | ||
Corporation tax: | |||
Current year | 663,532 | 44,092 | |
|
| ||
663,532 | 44,092 | ||
Deferred tax | - | - | |
|
| ||
Total tax expense | 663,532 | 44,092 | |
|
|
Corporation tax is calculated at 21.50% (2013: 23.25%) of the estimated taxable loss for the year. Taxation for other jurisdictions is calculated at the rates prevailing in the respective jurisdictions.
The charge for the year can be reconciled to the loss in the income statement as follows:
2014 £ | 2013 £ | ||
Loss before tax on continuing operations | (2,962,117) | (7,158,339) | |
|
| ||
Tax at the UK corporation tax rate of 21.50% (2013: 23.25%) |
(636,855) |
(1,664,314) | |
Effect of foreign tax rates | 81,199 | (120) | |
Tax effect of non-deductible expenses | 315,150 | 75,242 | |
Change in unrecognised deferred tax assets | 22,490 | 20,126 | |
Utilisation of tax losses not previously recognised | (767,207) | (5,733) | |
Carry-forward of unrecognised tax losses | 1,648,755 | 1,618,891 | |
|
| ||
Tax expense for the year | 663,532 | 44,092 | |
|
|
7. GOODWILL
2014 £ | 2013 £ | |||
Cost and carrying amount | ||||
At 1 January | 3,752,765 | 224,903 | ||
Additions | 7,844,454 | 3,526,290 | ||
Exchange differences | 595,480 | 1,572 | ||
|
| |||
At 31 December | 12,192,699 | 3,752,765 | ||
|
|
Allocation to CGUs
Goodwill acquired in a business combination is allocated, at acquisition, to the cash generating units (CGUs) that are expected to benefit from that business combination. Before recognition of impairment losses, the carrying amount of goodwill had been allocated as follows:
2014 £ | 2013 £ | ||
Chinese operations | 12,192,699 | 3,752,765 |
Acquisitions
On 31 March 2014, the Group acquired 80% of the issued share capital and control of I Will Win Limited ("Woying") for total consideration of RMB 84,800,000 in cash and shares (approximately £8,272,240).
£ | |||
Assets acquired: | |||
Cash | 526,193 | ||
Property, plant and equipment | 13,363 | ||
Debtors | 761,987 | ||
Creditors | (743,600) | ||
| |||
Total identifiable assets acquired | 557,943 | ||
Non-controlling interest | (130,157) | ||
Goodwill | 7,844,454 | ||
| |||
Total consideration | 8,272,240 | ||
| |||
Satisfied by: | |||
Cash consideration | 1,449,240 | ||
Equity consideration | 2,140,600 | ||
Contingent consideration - cash | 1,872,960 | ||
Contingent consideration - equity | 2,809,440 | ||
| |||
8,272,240 | |||
| |||
Net cash outflow arising on acquisition: | |||
Expenses incurred | 21,770 | ||
Less: cash and cash equivalent balances acquired | (526,193) | ||
| |||
(504,423) | |||
| |||
The acquisitions provide the group with enhanced web and mobile direct to consumer platforms as well as a base on which to roll out our proprietary microsite and sports engine applications. The goodwill arising from the transaction represents expected synergies arising from the acquisition as well as the value attributed to the new platforms. Goodwill is not expected to be deductible for tax purposes. Woying contributed £7.9m revenue and £1m profit to the Group for the period between acquisition and the balance sheet date.
The contingent consideration arrangement with Woying is dependent upon the delivery of a pre-determined level of pre-tax earnings for 2014 and 2015. The potential undiscounted amount of the future payments that the Group could be required to make is between £1.5 to £7.7m. The fair value of the contingent consideration arrangement was estimated based on future trading expectations.
At 31 December 2014 there were still some remaining post-closing conditions to be completed by the sellers and as such the closing payment has been held in an escrow account pending the completion of these items by the sellers. The purchase accounting for these acquisitions remain preliminary as the Group continues to finalise the fair values of assets and liabilities acquired and resulting consideration payable.
8. ASSOCIATES
On 7 July 2014 Beijing New Net Science and Technology Development Limited, a company within the group, entered in to an agreement with the Xinhuatong Software Development Co. (Beijing) Limited to develop and promote new lottery products. As part of the agreement a new joint venture company was formed, Beijing Xinhuacai Technology Co. Limited ("Xinhuacai"), of which the group owns 49%.
Summarised financial information in respect of each of the group's material associates is set out below:
Xinhuacai | ||||||
2014 £ | 2013 £ | |||||
Aggregated amounts relating to associates | ||||||
Non-current assets | 258,301 | - | ||||
Current assets | 4,586,049 | - | ||||
Total assets | 4,844,350 | - | ||||
Total liabilities | (26,999) | - | ||||
|
| |||||
Net assets | 4,817,351 | - | ||||
|
| |||||
Total revenue | - | - | ||||
|
| |||||
Loss and other comprehensive loss for the year | 242,416 | - | ||||
|
| |||||
Group's share of net assets of associates | 49% | - | ||||
|
| |||||
Reconciliation of the above summarised financial information to the carrying amounts in the Group financial statements is shown below:
| ||||||
Proportion of the Group's ownership interest in associate (49%) | 2,360,502 | - | ||||
Goodwill | 2,580,758 | - | ||||
Fair value adjustments | - | - | ||||
|
| |||||
4,941,260 | - | |||||
|
| |||||
Group's share of loss of associates | 118,581 | - | ||||
|
|
| ||||
In November 2013 an associate company, Beijing Beiguangshicai (BGSC) Media Technology Limited, was sold realising a profit on disposal of £5,397.
9. TRADE AND OTHER RECEIVABLES
2014 £ | 2013 £ | ||
Trade receivables | 887,620 | 387,812 | |
Unpaid share capital | 11,433 | 62,234 | |
Amounts owed by related parties | 52,348 | 35,447 | |
Other debtors | 657,179 | 952,737 | |
VAT receivable | - | 223,801 | |
Prepayments | 3,103,059 | 803,640 | |
|
| ||
4,711,639 | 2,465,671 | ||
|
|
Trade receivables
Trade receivables disclosed above are classified as loans and receivables and are therefore measured at amortised cost. The directors consider that the carrying amount of trade and other receivables is approximately equal to their fair value.
In determining the recoverability of a trade receivable the Group considers any change in the credit quality of the trade receivable to the date credit was initially granted up to the reporting date. The concentration of credit risk is limited due to the customer base being large and unrelated. There are no customers who represent more than 5%of the total balance of trade receivables.
The Group does not hold any collateral or other credit enhancements over any of its trade receivables nor does it have a legal right of offset against any amounts owed by the Group to the counterparty.
10. BORROWINGS
2014 £ | 2013 £ | ||
Unsecured borrowing at amortised cost | |||
Loans from related parties | - | 500,000 | |
Convertible loan notes | 5,964,107 | - | |
|
| ||
5,964,107 | 500,000 | ||
|
| ||
Amounts due for settlement within: | |||
1 year | - | 500,000 | |
2-5 years | 5,964,107 | - | |
|
| ||
5,964,107 | 500,000 | ||
|
|
All borrowings are in Pound Sterling.
The other principal features of the Group's borrowings are as follows:
11. TRADE AND OTHER PAYABLES
2014 £ | 2013 £ | ||
Trade creditors | 701,544 | 744,545 | |
Amounts owed to related parties | 931,529 | 2,087 | |
Accruals | 1,249,600 | 146,208 | |
Taxes and social security | - | 245,891 | |
Contingent consideration | 5,458,948 | 2,619,968 | |
Other payables | 1,191,231 | 644,828 | |
|
| ||
9,532,852 | 4,403,527 | ||
|
|
Non-current | |||
Contingent consideration | 2,891,336 | - | |
|
| ||
2,891,336 | - | ||
|
|
Trade creditors and accruals principally comprise amounts outstanding for trade purchases and ongoing costs. The average credit period taken for trade purchases is 62 days (2013: 33 days). For most suppliers, no interest is charged on the trade payables. The Group has financial risk management policies in place to ensure that all payables are paid within the pre-agreed credit terms.
The directors consider that the carrying amount of trade payables approximates to their fair value.
12. SHARE CAPITAL
2014 £ | 2013 £ | ||
Allotted, called-up and fully paid | |||
130,523,391 ordinary shares of 10p each (2013: 344,640) | 13,052,339 | 34,464 | |
|
|
In April 2014, the company completed a 333 for 1 bonus issue resulting in the issue of 118,186,362 shares. At the same time, the Company underwent a capital reduction and transferred £10,000,000 from the share premium account to retained earnings.
During the year, the Company issued 11,985,400 ordinary shares of 10p each for cash consideration of £8,630,807 giving rise to a share premium of £7,676,244. Additionally 6,950 shares were issued at a value of £2,140,600 as consideration for acquisitions (see note 7)
The Company has one class of ordinary shares which carry no right to fixed income.
13. RESERVES
Share premium £ | EBT Reserve £ | Retained earnings £ | Non-controlling interests £ | |
At 31 December 2013 | 31,435,434 | (508,200) | (23,058,475) | (50,885) |
Loss for the year | - | - | (4,212,848) | 587,199 |
Equity based share payments | - | - | 14,885 | - |
Exchange differences | - | - | (39,647) | 19,738 |
Issue of equity shares | 7,676,244 | (66,413) | (177,568) | - |
Bonus issue | (11,818,636) | - | - | - |
Acquisition | 2,139,905 | - | - | 130,157 |
Capital reduction | (10,000,000) | - | 10,000,000 | - |
|
|
|
| |
At 31 December 2014 | 19,432,947 | (574,613) | (17,473,653) | 686,209 |
|
|
|
|
Included within retained earnings is an amount of £508,200 that represents unrealised profits arising on the settlement agreement reached with a former director in 2013.
The EBT reserve represents the cost of shares in DJI Holdings PLC which are held by the Group's Employee Benefit Trust to satisfy options and other awards to the Group's employees. The number of ordinary shares held by the Employee Benefit Trust at 31 December 2014 was 1,215,234 (2013: 1,650).
14. NOTES TO THE CASH FLOW STATEMENT
2014 £ | 2013 £ | |
Loss for the year | (3,625,649) | (7,202,431) |
Adjustments for: | ||
Profit on disposal of associates | - | (5,397) |
Share of loss of associate | 118,581 | - |
Income tax expense | 663,532 | 44,092 |
Investment revenues | - | (10,338) |
Finance costs | 567,896 | 13,965 |
Exceptional items | 21,770 | (341,003) |
Loss on disposal of property, plant and equipment | - | 133 |
Depreciation of property, plant and equipment | 214,118 | 243,848 |
Amortisation of intangible assets | 88,685 | 77,686 |
Share based payment charge | 14,885 | 24,755 |
|
| |
Operating cash flows before movements in working capital | (1,936,182) | (7,154,690) |
Decrease in inventories | 241,007 | 1,014,193 |
(Increase)/decrease in receivables | (1,720,021) | 605,246 |
Increase/(Decrease) in payables | 175,440 | (1,217,373) |
|
| |
Net cash used by operations | (3,239,756) | (6,752,624) |
Income taxes paid | (663,532) | (44,092) |
Interest paid | (120,244) | (5,000) |
|
| |
Net cash used by operating activities | (4,023,532) | (6,801,716) |
|
|
2014 £ | 2013 £ | ||
Cash and bank balances | 10,834,439 | 5,306,675 | |
|
|
Cash and cash equivalents comprise cash and short-term bank deposits with an original maturity of three months or less, net of outstanding bank overdrafts. The carrying amount of these assets is approximately equal to their fair value.
Analysis of changes in net debt
1 January 2014 £ |
Cash flow £ | Non-cash movements £ | 31 December 2014 £ | |
Cash and bank balances | 5,306,675 | 5,478,556 | 49,208 | 10,834,439 |
Other loans | (500,000) | (5,958,318)
| 494,211 | (5,964,107) |
|
|
|
| |
Net debt | 4,806,675 | (479,762) | 543,419 | 4,870,332 |
|
|
|
|
Full accounts are scheduled to be posted to shareholders on 30 June 2015 and may be obtained, free of charge, at the Company's registered office, at First Floor, Mallory House, Goostrey Way, Mobberley, Knutsford, Cheshire WA16 7GY for a period of one month.
The Annual General Meeting of DJI Holdings plc will be held at the Company's registered office on Friday 24 July 2015 at 11am.