Earthport Regulatory News (EPO)

23 November 2011

Earthport plc ("Earthport" or the "Company")

Preliminary Results

Earthport plc, the global payments utility, announces its preliminary results for the year ended 30 June 2011.

Highlights

·; Revenue increased by 28% to £2,488,000 (2010: £1,947,000)

·; Gross profit increased by 32% to £1,926,000 (2010: £1,459,000)

·; Gross margin improved to 77% from 75%

·; Raised £7.5m through an equity placing to provide growth and working capital and to strengthen the balance sheet in October 2010

·; Month on month increase in transactions processed every month since March and still increasing

·; Significant new additions to Board and senior management team

·; Awarded Best Alternative Payments Programme at the Annual Cards and Payments Awards

·; Post period end, raised a further £10.6m from new and existing institutional investors

During the last 12 months, Earthport has been characterised by reorganisation and investing for growth. Much progress has been made in transforming and preparing Earthport to become a global payments infrastructure provider and there have been notable successes along the way.

Earthport ended fiscal 2010 with a record number of monthly transactions processed in June 2010. The number processed in July 2010 was also a record number for July. In August and September 2010, the "Bring Money Home" and the "Earthport Direct" services were launched, respectively. Also in August, the first corporate client went live under Earthport's previously announced IBM GERS contract. The IBM GERS solution is an expense reporting and payment system which IBM markets to its corporate clients.

In October 2010, £7.5 million of equity was raised from institutional and other investors, with confidence in the business being underlined by the fundraising being oversubscribed. These funds were for growth and working capital.

During the year several Board changes were made. In November 2010, Mike Harrison retired as Non-Executive Chairman and Lance Brown stepped down as Non-Executive Vice Chairman. Simultaneously, Phil Hickman was appointed Non-Executive Chairman and Terry Williams was appointed as Non-Executive Director. In January 2011, Paul Thomas was appointed Executive Director.

In February of this year, Earthport was awarded winner of the Best Alternative Payments Programme in the Card and Payment Awards 2011. Competitors included Barclays, HSBC and Moneybookers. These prestigious awards focus on customer service, excellence and innovation.

A very significant step for Earthport in April 2011 has been becoming authorised by the UK Financial Services Authority ("FSA") as a Payments Institution ("PI") regulated under the Payments Services Regulations ("PSRs") 2009. Obtaining this formal licence has enhanced Earthport's credibility and has been important in progressing some of the new business initiatives Earthport has been targeting.

In June, Earthport announced the "go live'' of a number of clients including Legitas, a market leading provider of outsourced payroll services, along with a top UK based foreign exchange house. Both are examples of Earthport successfully addressing new segments. Both contracts contain minimum monthly revenue commitments with both clients exceeding their monthly minimums to date.

Post the year end, in August, a holder of £500,000 (£565,000 including accrued interest) of Earthport loan notes converted the notes and accrued interest to equity. At that point the conversion extinguished all Earthport debt.

Also subsequent to the year end, Earthport announced the "go live" of additional clients and its "epXchange" point of sale solution. IBM GERS, which, as mentioned above, went live with its first client in August 2010, has now added more clients including a global consumer personal care company and a global hotel and lodging company. In October, Earthport announced that it was live processing transactions for Western Union's direct to bank solution. Also in October, Earthport announced that it will be utilising a Bank Of America Merrill service to expand further its banking network and offering additional coverage in Latin America, Asia-Pac and Europe. Through the year, the launch of various services and on-boarding of various clients has assisted in clarifying and sharpening Earthport's strategy, one area of which is becoming a white-label supplier to financial institutions, aggregators, money service businesses and foreign exchange houses. Consistent with this strategy, focus on certain products such as Earthport Direct and Bring Money Home has been de-emphasised as these services are offered by existing and potential clients of Earthport.

Finally, in November, Earthport announced that £10.6 million of funding was raised from institutional and other investors. Of the funding raised, £7.5 million was through the issuance of equity, £1.6 million was through the issuance of convertible loan notes, which automatically convert to equity on permission being obtained to issue sufficient equity, and £1.5 million is through the issuance of equity conditional on permission being obtained to issue sufficient equity. These permissions are being sought at the upcoming Annual General Meeting.

As shown by the most recent fundraise, investor confidence was again demonstrated by the significant oversubscription; the largest shareholders continuing to support Earthport; and the addition of new global institutional investors. The funds are expected to be used to grow further the sales team, expand geographically, for potential regulatory bonding requirements and for general working capital.

As mentioned at the outset, the year has been one of reorganisation and investing for growth. Much effort has been put in, much progress has been made; and strategy has been clarified enabling greater focus on segments that are demonstrating traction.

Financial Review 

Transaction volumes for the year ended 30 June 2011 were up 24% compared to the prior year. Total revenue for the year ended 30 June 2011 was up 28% to £2,488,000 (2010: £1,947,000). Transactional revenue was up 10% reflecting the increase in transaction volumes. Other revenue (including foreign exchange and integration) was up 72%. Gross profit was up 32% to £1,926,000 (2010: £1,459,000). Gross margin was slightly higher at 77% (2010: 75%).

Administrative expenses increased by 18% to £6,763,000 (2010: £5,728,000). This increase occurred in the second half of the year as Earthport started its reorganising and investment for growth. Administrative expenses for the six months to December 2010 were £2,872,000 while those for the six months to 30 June 2011 were £3,891,000. The primary reason for the rise was an increase in staff costs: staff costs (excluding non-cash share-based payments) for the year ended 30 June 2011 were up 9% to £4,218,000 (2010: £3,864,000). The main other items contributing to the increase were sales and marketing costs, recruitment costs and travel and entertainment. The increases primarily reflect activity in sales and marketing, which has already begun bearing fruit in the form of new client wins.

The share-based payment charge of £2,368,000 (2010: £426,000) is a non-cash item. This relates to options granted to employees and Directors during the year.

Operating loss before share-based payment charge increased by 13% to £4,837,000 (2010: £4,269,000). Including the share-based payment charge of £2,368,000, operating loss increased by 54% to £7,205,000 (2010: £4,670,000).

Finance costs of £314,000 related to warrants granted during the year and interest payable on debt. Overall, loss for the year before share-based payment charge increased by 11% to £5,151,000 (2010: £4,653,000). Including the share-based payment charge of £2,368,000 (2010: £426,000), loss before taxation rose 48% to £7,519,000 (2010: £5,079,000).

Debt was reduced to £500,000 from £586,000 by way of repayment of unsecured loans. Subsequent to the year end, in August, debt was further reduced to zero by way of conversion of a loan note and its accrued interest to equity. As part of the recent £10.6 million fund raise, £1.6 million of convertible loan notes were issued. These are expected to convert to equity following the upcoming annual general meeting.

Cash and cash equivalents at the year end were £3,826,000. With the recent post balance sheet warrant exercises and successful fundraising of £10.6 million (of which £1.5 million is equity conditional on permissions being sought at the upcoming Annual General Meeting to issue equity and is therefore yet to be received), the cash and equivalents position of the Company as at 21 November 2011 was £ 9.7 million (this amount does not include the £1.2 million that would result upon the exercise of 11,045,455 warrants which have an exercise price of 11 pence and expire on 31 December 2011).

Sales and Marketing

With Paul Thomas joining as Head of Sales and Marketing in January 2011, a review of the function was undertaken in January and February with the objective of creating a sales and marketing plan for the remainder of the current and the next fiscal year.

Target market analysis was undertaken by product leading to market segmentation from which sales plans were created for the European, North American and Middle Eastern sales teams. During this process a sales resourcing strategy was generated together with an integrated marketing plan. Sales managers, with leadership roles were appointed in each of the territories and recruitment commenced aligned to the sales planning and segmentation process.

By the year end new sales resources had been added in London and New York, covering the European and North American territories. Further resources have been added to all teams since the end of the fiscal year.

In parallel with the development of the sales organisation, a marketing function was established, and several key projects initiated, including the appointment of a new public relations agency and the appointment of a third party lead generation agency to help demand creation. A project was also commenced to re-position the core service proposition through a new messaging platform, forming the basis for future brand and collateral initiatives. A full time marketing executive was added. In addition, a new product development function was created.

The final quarter of the fiscal year saw the sales and marketing activities significantly increase the value of the sales pipeline, with the value doubling in the final quarter. Seven new contracts were signed from January 2011 to June 2011.

Banking Network and Payment Operations

The Banking Operations Team which covered three functions, payment operations, client support and banking network was reorganised into its constituent parts and each part was expanded. This has enabled better focus and more effective operations in each of these key areas.

In January a new Head of Professional Services was hired to lead the Payment Operations, Client Support and Professional Services team. The Professional Services team was rebuilt from the bottom up and now comprises dedicated professionals in London, New York and the Middle East. A streamlined and standardised approach to client implementations means that clients can be on-boarded more cost effectively and quickly than before.

Client Support has been significantly improved through the implementation of an automated call-tracking system and the creation of a team of qualified client support staff whose focus is to ensure that the experience of live clients is as positive as possible.

Payment Operations has been re-focused into a team whose goal is efficient processing of client transactions. Wide ranging improvements, from the tightening of settlement periods, the improvement in quality of delivery to the reduction of manual and paper-based processes, have been made. As Earthport strives to provide excellent client experience, the Payment Operations team are focusing on ensuring that the experience continues to improve while processing volumes and transaction values increase.

The important area of maintaining and growing Earthport's banking network has a team dedicated to it. The Banking Network Team focuses solely on the on-boarding and management of relationships with the many banking partnerships Earthport engages to deliver services globally.

Last year this area had three dedicated staff. During the year this increased to five with the addition of regional specialists covering the key Asia-Pac and Latin American regions. The Team is expected to grow further.

The ability to expand banking coverage into previously difficult geographies has directly benefitted from Earthport becoming an authorised PI, a development that has renewed confidence and motivation within key banking partners and also paved the way for meaningful and structured engagement with new providers in several critical territories.

Complex banking projects such as Japanese Zengin and a renewed South African ACH were delivered. Several multi-geography projects with key providers across Asia, Africa, and the Americas were initiated with significant progress made.

As a result, local delivery capability currently encompasses 49 countries and is targeted to grow further over the next year.

Compliance

Shortly after the successful fundraising in October 2010, the Compliance Team was strengthened with the hiring of a new Head of Compliance who has experience at the Dubai FSA and London Clearing House. The level of staffing in the Compliance Team was increased from two at the beginning of the period to six at the end of the period. This reflects the increased focus placed on Compliance by Earthport.

A very significant step for Earthport in April has been becoming authorised by the UK FSA as a PI regulated under the PSRs 2009. As part of this process Earthport has also been passported as a PI throughout the European Economic Area. Obtaining this formal licence, rather than relying on the transitional provisions of the PSRs, has enhanced Earthport's credibility and has been important in progressing some of the new business initiatives Earthport has been targeting, particularly as Earthport's core focus going forward is building relationships with regulated institutions.

IT Development

The year to 30 June 2011 saw further adoption of the new web services platform. Some large existing customers have successfully migrated onto this new platform. Enhancements to this system continue, with the focus being on ease of access for customers to new territories opened by the Banking Network Team.

Post the year end, Earthport saw the successful launch of "epXchange", an additional interface based point of sale product that allows easy access to the Earthport banking network with little or no integration effort.

System security and availability remain major priorities. Initiatives undertaken in these areas include significant enhancements in both infrastructure and processes, including a major investment in a second data centre. The foundations are being laid to take uptime targets beyond the current 99.9%.

Team Changes

In November 2010, the Board was significantly strengthened with the addition of Philip (Phil) Hickman as Non-Executive Chairman and Terence (Terry) Williams as a Non-Executive Director. Phil, (61), had a successful 32 year career with HSBC where he held several roles including Managing Director (Europe) for HSBC Global Payments & Cash Management and Head of Planning & Development (Commercial and Corporate) for HSBC Ltd. Phil currently sits on the Board of Alfa Bank Holdings SA in Russia, Elephant Talk Communications Inc in the USA and is Chairman of Validsoft Limited. Phil's experience and network are directly applicable to Earthport's business.

Terry, (64), is Chairman of Calastone, an independent cross-border transaction network for the mutual funds industry. From 2002 to 2008, Terry was Chairman of Coexis Ltd, where he was instrumental in helping the business become a leading provider of technology solutions for the global securities markets. Terry founded Wilco, the computer services company offering open systems technology for the back office. He was responsible for positioning Wilco as a global leader. In 1996, Wilco was acquired by ADP Ltd with Terry as Chairman and CEO of the acquired business.

At the same time as the above appointments, Mike Harrison, the previous Non-Executive Chairman, resigned his position. Mike has played an important role at Earthport during a period of significant change. We thank him for his contribution and wish him well. Lance Browne also resigned as Non-Executive Vice Chairman. We thank Lance for his contributions during his time at Earthport and wish him well.

Also in November 2010, the Compliance Team was strengthened with the hiring of a new Head of Compliance who has experience at the Dubai FSA and London Clearing House. He is also a qualified chartered accountant having started his career at PWC. The level of staffing in the Compliance Team was also increased.

In January 2011, an experienced new Head of Professional Services (client integration) was hired who has managed development, operations and client services divisions within securities processing organisations such as Broadridge, Coexis and GBST. The Professional Services team was rebuilt from the bottom up and now comprises dedicated professionals in London, New York and the Middle East.

In January 2011, Paul Thomas, (47), was appointed as an Executive Director and Head of Sales and Marketing. Paul has almost two decades of experience in the securities software arena. He joined from Fiserv, where he was head of sales, with responsibility for the post-trade securities processing and corporate actions processing software solutions of Fiserv's Investment Services business.

Since Paul's appointment, the sales team has been revamped and expanded. Marketing functions and product development functions have also been added.

The Banking Operations Team which covered three functions, banking operations, client services and support and banking network was reorganised into its constituent parts, and each part was expanded. This has enabled better focus and more effective operations in each of these key areas.

Outlook

Earthport is at an exciting point in its evolution. Significant investment into the infrastructure (both people and systems) has been made and has prepared Earthport for growth. The sales team now has 14 sales people and is expected to grow further. The pipeline of clients has grown from around 50 in January 2011 to over 250 in October 2011 covering all target industry segments. There has been a month on month increase in transactions every month from March 2011 and this is expected to continue going forward. In October 2011, 40% more transactions were processed than in June 2011.

As the Board looks forward, it is clear that the client demand for high volume cross-border payments is significant and Earthport is well positioned to address this opportunity. This is being demonstrated by the number and type of new clients being signed up and in the pipeline. Given the recurring nature of the revenues and the increasing number of clients, transaction revenues are expected to grow month on month for the foreseeable future. Most new clients are being signed up on terms that include monthly minimum revenue and multi-year contract terms.

In order to maximize the value of some of the recent client wins and to convert the large pipeline of potential clients into revenue producing clients faster, Earthport is continuing to invest in its global network and product offering. Although we do not expect Earthport to generate a profit in the financial year ending June 2012, we do expect the rate of growth of transaction revenue to accelerate further over the coming months as recent clients' increase their volumes and new clients go live.

Much progress has been made in transforming Earthport into a global white-label cross-border payment service provider. The Board looks forward to the future with confidence.

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME

for the year ended 30 June 2011

There were no items of other Comprehensive Income for the year.

CONSOLIDATED STATEMENT OF FINANCIAL POSITION

COMPANY STATEMENT OF FINANCIAL POSITION

CONSOLIDATED STATEMENT OF CASHFLOWS

COMPANY STATEMENT OF CASHFLOWS

CONSOLIDATED STATEMENT OF CHANGES IN EQUITY

for the year ended 30 June 2011

COMPANY STATEMENT OF CHANGES IN EQUITY

for the year ended 30 June 2011

NOTES TO THE FINANCIAL STATEMENTS

for the year ended 30 June 2011

1. GENERAL INFORMATION

Earthport plc is a public limited company incorporated and domiciled in England and Wales under the Companies Act 2006. The address of its principal place of business and registered office is 21 New Street, London EC2M 4TP.

2. GOING CONCERN

The Directors believe that the Group has demonstrated further progress in achieving its objective of positioning the Group as an infrastructure supplier to the global payments industry. In addition, the Group has raised £10.6 million (£1.5 million conditional on permissions being obtained at the upcoming Annual General Meeting to issue equity and disapply re-emption rights) of funding through the issue of equity and convertible loan notes. The Directors have prepared cashflow forecast covering a period extending beyond 12 months from the date of these financial statements. After taking account of anticipated overheads costs and revenue the Board are confident that sufficient funds are in place to support the going concern status of the Company. Therefore, the Directors consider that it is appropriate to prepare the Group's financial statements on a going concern basis, which assumes that the Company is to continue in operational existence for the foreseeable future. When assessing the foreseeable future the Directors have looked at a period of twelve months from the date of approval of the financial statements.

3. ACCOUNTING POLICIES

Basis of preparation

The financial statements are prepared in accordance with International Financial Reporting Standards ("IFRS'') as adopted by the European Union.

The financial statements have been prepared under the historical cost convention and the principal accounting policies are set out below.

New and amended standards adopted by the Group

The following standards have been adopted in these financial statements and the Directors do not consider that there was any material impact:

·; IFRS 2 - Group cash settled share-based payment transactions

·; IAS 36 - Impairment of Assets

·; IFRIC 17 - Distribution of non cash assets to owners

·; The amendments to IFRS 3 relating to (a) transition for contingent consideration from business acquired under IFRS 3 (2004), (b) measurement of Non-Controlling Interests, and (c) un-replaced and voluntarily replaced Share-based Payment awards.

·; IAS 27 - Describing the transition for amendments resulting from IAS 27 (2008).

·; IAS 32 - Financial Instruments: Presentation - Amendments relating to classification of rights issues.

·; IFRIC 19 - Extinguishing liabilities with equity instruments.

At the date of authorisation of these financial statements, the following Standards and Interpretations relevant to the group operations that have been applied in these financial statements were in issue but not yet effective or endorsed (unless otherwise stated). All amendments, except where otherwise stated, are applicable for periods commencing on or after 1 January 2013:

·; The amendments to IFRS 1relating to (a) accounting policy changes in year of adoption, (b) revaluation as deemed cost and of deemed cost for operations subject to rate regulation (c) additional exemptions for first time adopters, and (d) limited exemption from comparative IFRS 7 disclosure for first-time adopters.

·; IFRS 7 - Clarification of Disclosures.

·; IFRS 9 - Financial Instruments - Classification and Measurement.

·; IFRS 10 - Consolidated Financial Statements.

·; IFRS 11 - Joint Arrangements.

·; IFRS 12 - Disclosure of Interests in Other Entities.

·; IFRS 13 - Fair Value Measurement.

·; IAS 1 - Clarification of the Statement of Changes in Equity ('SOCE')

·; IAS 24 - Related Party Disclosures - Revised definition of related parties.

·; IAS 27 - Separate Financial Statements (as amended 2011).

·; IAS 28 - Investment in Associates and Joint Ventures (as amended 2011).

·; IAS 34 - Interim Financial Reporting.

The Directors anticipate that the adoption of these Standards and Interpretations as appropriate in future periods will have no material impact on the financial statements of the group.

Basis of consolidation

The Group financial statements consolidate the financial statements of Earthport plc and all of its subsidiaries for the year ended 30 June 2011. The results of subsidiaries acquired or sold are included in the Group financial statements from the date control passes, until control ceases. Profits and balances arising on trading between Group companies are excluded from the financial statements. All companies in the Group make up their financial statements to the same date.

Revenue recognition

Revenue from client transactions is recognised on completion of the transactions as they occur. Revenue from foreign exchange is recognised on completion of the associated transactions. Revenue from client implementation and consultancy is recognised as the services are performed. In the normal course of business, certain balances arise which are not allocable to any client. Efforts are made to allocate such balances. If such balances remain unallocated for a period of at least six months, then, in accordance with client contracts, they are recognised as revenue.

Foreign currency translation

The functional and presentational currency of the parent Company and its subsidiaries is the UK Pound Sterling. Transactions in foreign currencies are recorded at the rate ruling at the date of the transaction. Monetary assets and liabilities denominated in foreign currencies are retranslated at the rate of exchange ruling at the balance sheet date and exchange differences taken to the income statement.

The Group offers executive and employee share schemes. For all grants of share options and warrants, the fair value as at the date of grant is calculated using an option pricing model and the corresponding expense is recognised either in the income statement or within equity over the vesting period. The expense of options granted is recognised as a staff cost and the associated credit is made against equity and included in the share-based payment reserve. The fair value of warrants granted in respect of equity fundraising activities are offset against the share premium account.

Current tax is the expected tax payable on taxable income for the year, using tax rates enacted or substantively enacted at the balance sheet date and any adjustments to tax payable in respect of previous years.

Deferred tax expected to be payable or recoverable on differences at the balance sheet date between the tax bases and liabilities and their carrying amounts for financial reporting purposes is accounted for using the liability method. Deferred tax liabilities are generally recognised for all taxable temporary differences and deferred tax assets are recognised to the extent that it is probable that taxable profits will be available against which deductible differences can be utilised.

Deferred tax is calculated at the rates of taxation which are expected to apply when the deferred tax asset or liability is realised or settled based on the rates of taxation enacted or substantially enacted at the balance sheet date. Deferred tax is measured on an undiscounted basis.

Impairment of non-financial assets

The carrying amounts of the Group's property, plant and equipment are reviewed at each balance sheet date to determine whether there is any indication of impairment. If such an indication exists, the asset's recoverable amount is estimated and compared to its carrying value. Where the asset does not generate cashflows that are independent from other assets, the Group estimates the recoverable amount of the cash-generating unit to which the asset belongs. Where the carrying value exceeds the recoverable amount, a provision for the impairment loss is established with a charge being made to the income statement.

Property, plant and equipment and depreciation

Property, plant and equipment are stated at cost less depreciation and provision for impairment. Depreciation is provided at rates calculated to write down assets to their estimated residual values over their expected useful life as follows:

Leasehold improvements: short lease - straight line per annum over lease term

Fixture, fittings and equipment - 20% - 33% straight line per annum

Computer equipment - 33% straight line per annum

The carrying values of property, plant and equipment are reviewed for impairment annually and when events or changes in circumstances indicate that the carrying value may be impaired. Any impairment is taken direct to the income statement.

Leasing

Leases in which a significant portion of the risks and rewards of ownership are retained by the lessor are classified as operating leases. Rentals payable under operating leases are charged against income on a straight-line basis over the lease term.

Pensions

The Group offers a stakeholder pension scheme to all employees and the contributions are charged to the income statement as they are incurred.

Financial risk management and financial instruments

Financial assets and liabilities are recognised in the Group's balance sheet when the Group becomes party to the contractual provisions of the instrument.

The Group's principal financial instruments comprise secured and unsecured short-term creditors, cash, short-term deposits and loans. The main purpose of these financial instruments is to finance the Group's operations, including any acquisitions where relevant. The Group has various other financial instruments, such as trade receivables and trade payables that arise directly from its operations.

It is the Group's policy that no trading in financial instruments is undertaken. The Group borrows at both fixed and floating rates of interest. The Group's policy in relation to the finance is to ensure that sufficient liquid funds are maintained for operations.

Trade receivables are initially measured at fair value and subsequently at amortised cost using the effective interest rate method, if material. Appropriate allowances for estimated irrecoverable amounts are recognised in profit or loss when there is evidence that the asset is impaired.

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

Trade payables are initially measured at fair value and subsequently at amortised cost using the effective interest rate method, if material.

Borrowings are recognised initially at fair value, net of transaction costs incurred. Borrowings are subsequently stated at amortised cost; any difference between the proceeds (net of transaction costs) and the redemption value is recognised in the income statement over the period of the borrowings using the effective interest method.

Fees paid on the establishment of loan facilities are recognised as transaction costs of the loan to the extent that it is probable that some or all of the facility will be drawn down. In this case, the fee is deferred until the draw-down occurs. To the extent there is no evidence that it is probable that some or all of the facility will be drawn down, the fee is capitalised as pre-payment for liquidity services and amortised over the period of the facility to which it relates.

Equity instruments issued by the Company are recognised at the proceeds received net of direct issue costs.

Employee benefit trust

Shares to be awarded, and those that have been awarded, but have yet to vest unconditionally are held at cost by an employee benefit trust and shown as a deduction from equity in the Group and Company balance sheet.

Exceptional items

Exceptional items are non-recurring items which are disclosed separately because of their size or nature.

IT development costs

Development expenditure is only recognised as an intangible asset if each of the following conditions have been met:

·; It is technically feasible to complete the asset so that it will be available for use

·; It is reasonably expected that the asset is likely to generate net future economic benefits

·; Development costs in relation to the asset can be reliably measured

·; Management intends to complete the asset and use or sell it

Capitalised development expenditure is stated at cost less accumulated amortisation and impairment losses. Amortisation is charged to the income statement on a straight line basis over the estimated useful life of the asset.

Where no intangible asset can be recognised, development expenditure is treated as expenditure in the period in which it is incurred.

Significant judgements and estimates

Capitalisation of development expenses

In determining whether development expenses should be capitalised, the Company makes estimates and assumptions based on the ability to reliably measure the costs and on the expected future economic benefits generated by products that are the result of these development costs. It is the Director's judgement that currently costs and future economic benefit cannot be measured with sufficient reliability to capitalise these cost at this time.

Share-based payment

Recognition and measurement of share-based payments require estimation of the fair value of awards at the date of grant. Judgement is also exercised when estimating the number of awards that will ultimately vest. Both of these judgements have a significant impact on the amounts recognised in the profit or loss and in the balance sheet. To assist in determining each award's fair value, the Directors engage a qualified and independent valuation expert. Estimation of the number of awards that will ultimately vest is based on historic vesting trends for similar awards, taking into consideration specific features of the awards and the current intrinsic value of those awards.

Substance over form

Historically and recently the Company has funded itself primarily with the use of equity. On certain occasions the Company has not had sufficient permissions to issue the required amount of equity. In these instances the Company has issued convertible loan notes which mandatorily convert to equity upon the granting of permissions to issue sufficient equity and disapply sufficient pre-emptive rights. In the Directors' judgement the substance of the transactions in which such convertible loan notes have been issued is that the issuance was one of equity and not of debt. Consequently, such issuances have been accounted for as the issuance of equity. Reference is made to note 18.

4. REVENUE

Revenue, loss and net assets/liabilities are all attributable to one business segment operating from Groups headquarters in London, the United Kingdom. This is consistent with the information reviewed by the chief operating decision maker. The segmental analysis by location of customers is as follows:

There are two customers who individually contribute 15% and 16% respectively towards the total revenue (2010: three; 10%, 13% and 20%).

Of the staff costs shown above, £14,000 (2010: £30,000) is included in cost of sales.

* Hank Uberoi receives a fixed £5,000 per month towards his expenses, including international travel and accommodation that he incurs in relation to Earthport. He received no other emoluments or reimbursements.

As part of his retirement, 2,026,316 options held by Peter Chappell lapsed and he received the termination benefit of £30,000 included above and was granted 1,250,000 options with an exercise price of 25p.

Defined contribution pension benefits are being accrued for two (2010: three) Directors.

Social security costs in respect of the Directors were £34,000 (2010: £34,000).

The share-based payment charge in respect of the Directors was £919,000 (2010: £133,000).

The Directors are considered to be the key management of the Group.

Cost of sales includes bank transaction charges and sales commission.