MXCP.L Regulatory News (MXCP)

31 January 2014

2ergo Group plc

Full year results

2ergo Group plc (AIM: RGO, "2ergo" or "the Group") the mobile solutions company, announces its full year results for the 12 months ended 31 August 2013. It will be posting to shareholders today its Annual Report and Accounts for 2013 (the "Report & Accounts") and Notice of Annual General Meeting (the "Notice").

The resolutions detailed in the Notice will be proposed at the Annual General Meeting of the Group, to be held at 11.30 am on 25 February 2014 at the offices of the Company's advisers MXC Capital at 15 Buckingham Gate, London, SW1E 6LB.

Copies of the Report & Accounts and the Notice are available from the Group's website in accordance with the AIM rules.

Highlights

· Trials with high profile customers demonstrate strength and robustness of patented technology

· Podifi coupon and voucher redemption rates proven to be significantly ahead of traditional methods, with considerably enhanced data capture

· Comprehensive strategic review focused on larger sales opportunities and reducing costs

· Board changes announced with appointment of Ian Smith and Simon Duckworth in July 2013

· Operating loss from continuing operations £5.07 million (2012: Loss £16.40 million following non-cash impairment charge of £12.26 million)

· EBITDA loss from continuing operations(1) £3.28 million (2012: Loss £2.44 million)

· Placing and subscription raised a total of £5.7 million in the year

· Retention and development of key customers throughout period of change, together with strength of pipeline position 2ergo well for the coming months

(1) stated before IFRS 2 share based payment charge

Ian Smith, Executive Chairman commented

"During the year the Group raised £5.7 million (net of issue costs) to provide additional working capital and the capital resources necessary to develop the podifi technology and associated sales strategies. The technology is now scalable and robust, as proven in several live client installations, and the pipeline is healthy.

"2ergo's patented technology is at an early stage of commercialisation but through several client pilots the business demonstrates significant potential whilst striving for a breakthrough to profitability. It is anticipated that full commercialisation of any one of these existing pilots would achieve this."

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Strategic overview

Following the fundraise and Board changes in July 2013, 2ergo has carried out a comprehensive strategy review. This review has seen the Group continue to focus on its patented podifi and mobile marketing platforms, but with the emphasis on closing larger sales opportunities, whilst significantly reducing 2ergo's cost base.

As detailed in the circular posted to shareholders on 17 June 2013, customer uptake is taking longer than previously expected. The Board attribute this to the early stage of the market in terms of the education and adoption of contactless mobile technology. Whilst not yet leading to significant revenue generation, the Group now has a number of extremely successful case studies following trials of its technology with high profile customers. These case studies show exceptional results and are helping to shorten the time taken to close opportunities. In addition, the blue chip names within the pipeline also validate the strength of the technology and its application. The Board is encouraged by the progress made with pipeline development since the year end.

The success of the trials is testament to the stability and robustness of the podifi technology, following a period of significant investment in its development. The Group is keen to protect the uniqueness of the technology and has a number of patents granted and patents pending. The Board believes these patents hold great value for the Group. This is especially relevant in the case of the podifi patents, which cover contactless transactions between a phone and a pod-like device. In light of recent technology developments, particularly in the US, the Board are currently taking advice on how best to monetise its patents.

Following the conclusion of its planned exit from the commoditised areas of the mobile market during the year, the Group has continued to provide its core base of customers such as Orange Wednesdays, PizzaExpress, Ladbrokes, Phones4U and the NHS with an increasingly robust and reliable technology platform and extensive mobile marketing experience.

The market for 2ergo's technology is at an early stage of development and remains fragmented but as we have seen with some newly listed companies there is still investor appetite. The key to success will depend on attaining critical mass and it may well be that the market sees some form of consolidation among the smaller players before this happens. For now 2ergo remains a small business with significant potential but is still striving for the breakthrough to profitability. It is anticipated that full commercialisation of any one of the existing pilots would achieve this.

Operational review

During the period the Group has undertaken a number of high profile trials of its podifi technology, including for Telefonica Ireland and Chelsea Football Club. The podifi mobile wallet allows clients to communicate with their customers in a targeted and meaningful manner enabling them to browse, save and store coupons and loyalty rewards on their smartphones. The mobile wallet, coupled with the podifi patented contactless redemption and payment technology, which integrates into any EPoS terminal, means 2ergo have closed the loop on coupon and loyalty reward redemption at the point of purchase, whilst also allowing valuable data to be collected.

These trials have shown coupon redemption rates significantly exceeding those commonly attributed to more traditional paper coupon and voucher based methods. Typically, the traditional methods show single figure redemption rates whereas the redemption rates utilising the podifi technology consistently exceed 40%. Furthermore, downloads of the podifi digital wallets have consistently exceeded expectations, demonstrating both the ease of use and demand for the technology, in addition to validating 2ergo's mobile marketing expertise.

Since the end of the financial year, Palmer & Harvey, the UK's leading delivered wholesaler, has entered into a project to trial podifi in 20 Mace convenience stores on behalf of the Costcutter Supermarkets Group. The trial, for which podifi has received support from a number of leading household name FMCG brands, will go live during February 2014. The project serves to further affirm 2ergo's strategy, with a digital agenda seen as crucial to the convenience stores sector in response to the big supermarkets increasing their local footprint, and also enables the supporting brands to gain an insight into the spend patterns in store networks which have previously been offline and impossible to measure.

Hull University has become the latest domestic university to deliver offers and rewards to students on campus via a new relationship between 2ergo's podifi technology and University of Hull Students Union. Based on the same formula which has been successfully deployed at other campuses including Salford and Leicester de Montfort, students will receive a blend of topical information, personalised offers and rewards via a branded mobile wallet. Further engagement with other businesses in the region is also planned.

Existing podifi client Jersey Telecom have further entrenched podifi into the marketing mix for businesses in Jersey by having the podifi mobile wallet app "JT Rewards" pre-loaded onto its latest range of Android smartphones. As a result, local businesses engaged by JT will be assured of their special offers being promoted to a wide audience of consumers and subsequently redeemed and measured in store via an interaction with JT branded podifi units.

These clients have demonstrated the stability and robustness of the Group's technology. Across all areas of the business the technology is highly scalable supported by either a managed service or self-service modules, meaning implementation for customers is fast and easy.

Financial review

(1)stated before IFRS 2 share based payment charge

Continuing 2ergo's transition towards its stated commercial model of sales of its podifi technology supported by its advanced messaging and marketing platforms has seen the Group conclude its planned exit from certain of its legacy clients and areas of operation. This has resulted in a fall in revenues of over £4 million in its non-core, and now commoditised, low margin business - typically premium rate billing. This move away from its remaining premium rate clients has significantly reduced the Group's exposure to an increasingly onerous and penal regulatory landscape. Also, over £1 million of revenue generated in 2012 from one-off projects was not repeated as the Group moves away from bespoke, labour intensive contracts to the provision of highly scalable solutions. As a result, overall revenue declined from £8.4 million in 2012 to £3.5 million in 2013.

This fall in total revenue masks the increase in revenues in the Group's focus areas which, although taking longer than anticipated to come to fruition, are showing encouraging signs of a return to future revenue growth for 2ergo. Revenues from certain core retained customers have grown significantly in the year and have continued to do so post the year end. As detailed in the strategic review and reflecting the stage of evolution of the contactless market, income from podifi services during the year was low, however the Board is encouraged by progress made since the end of the year.

The gross profit margin has benefited, as expected, from the results of the above transition. Although margins for the year are constant at 34%, 2012 margins reflected the benefit of certain one-off projects, with the gross margin from recurring business from that year being 26%. As the transition happened during the course of 2013, the full effect on margins will only be seen after the year end. Gross profit margins for the four months to December 2013 average 54%, showing the improvement in the quality of the Group's earnings.

Much has been done to reduce the Group's cost base to bring it more closely into line with the operating position. The cost base needs to be such that the technical and sales development required to drive the business forward can continue, whilst ensuring only essential costs are incurred. The Board feels that the cost base is now appropriate for the current stage of the business. In the year to August 2013, costs before share option charges, amortisation and depreciation were £4.5 million, compared to £5.3 million in 2012. The majority of this fall was due to a reduction in staff costs. In July 2013 full time staff numbers were reduced from 70 to 28. The full impact of the reduction in staff numbers will be seen in 2014 as will the effects of the Group's head office relocation which took place in December 2013. Cash overheads have been more than halved and are now running at the significantly reduced rate of circa £200k per month.

The loss from continuing operations before interest, depreciation, amortisation, impairment and share option charge (EBITDA) was £3.3 million (2012: £2.4 million) and the reported loss before tax and impairment charges was £5.1 million (2012: £3.9 million). The IFRS2 share option charge primarily relates to the share options issued in the July 2013 fundraise and is a non-cash item. EBITDA is a key financial performance indicator for the Group along with revenue, gross profit and the Group's cash balance.

The Group has £12.3 million (2012: £10.5 million) of unused tax losses carried forward, in respect of which no deferred tax asset has been recognised as the timing of utilisation of these losses is uncertain.

Net assets of the Group at 31 August 2013 were £4.8 million (2012: £3.1 million) and the Group held cash of £1.5 million (2012: £0.5 million).

During the year the Group raised £5.7 million (net of issue costs) to provide additional working capital and the capital resources necessary to develop the podifi technology and associated sales strategies. The technology is now scalable and robust, as proven in several live client installations and the pipeline is healthy. However, the Board continues to closely monitor the Group's cost base and cash balances as uncertainty surrounding the timing of the uptake of the podifi technology makes the forecasting of sales performance in the short and medium term difficult.

 Consolidated income statement

for the year ended 31 August 2013

Consolidated statement of comprehensive income

for the year ended 31 August 2013

Consolidated statement of financial position

as at 31 August 2013

 Consolidated statement of changes in equity

for the year ended 31 August 2013

Consolidated statement of cash flows

for the year ended 31 August 2013

Notes to the consolidated financial statements

1 Accounting policies

Basis of preparation

While the financial information included in this preliminary announcement has been computed in accordance with International Financial Reporting Standards as adopted in the European Union ("IFRS"), this announcement does not itself contain sufficient information to comply with IFRS. The accounting policies used in preparation of this preliminary announcement are those set out in the Group's 2013 annual report, which has been published today.

The financial information set out in this preliminary announcement does not constitute the Group's financial statement for the periods ended 31 August 2013 and 2012. The financial information for the period ended 31 August 2012 is derived from the statutory accounts for that year which have been delivered to the Registrar of Companies. The statutory accounts for the year ended 31 August 2013 will be delivered to the Registrar of Companies following the Company's Annual General Meeting. The auditors have reported on those accounts; their reports were unqualified and did not contain a statement under s498(2) or s498(3) of the Companies Act 2006.

Going concern

These financial statements have been prepared on a going concern basis. The Group meets its day-to-day working capital requirements through its existing cash reserves.

The directors have prepared a business plan and cash flow forecast for the period to August 2015. The forecast contains certain assumptions about the level of future sales and the level of gross margins. These assumptions are the directors' best estimate of the future development of the business based on performance in the year to date and the current and expected future pipeline of opportunities.

The directors have taken steps to satisfy themselves about the robustness of sales forecasts, but acknowledge that uncertainty surrounding the timing of the uptake of the Group's technology makes the forecasting of sales performance in the short and medium term difficult. For this reason, the directors have also prepared a sensitised plan which shows a materially reduced level of sales together with mitigating actions in respect of cost reductions which could be taken in the event of such a sales variance. Both the business plan and the sensitised plan forecast the Group to have sufficient working capital to continue trading for the foreseeable future. On this basis, the directors feel it is appropriate to continue to prepare the financial statements on a going concern basis. The directors will continue to monitor cash flow forecasts on a regular basis and, if necessary, will explore banking facilities, further cost reductions, further equity investment or other corporate activity in good time. An overview of the Group's financial risk management policies and exposures is provided in note 13.

Adoption of new accounting standards

The Group has not adopted any new interpretations, revisions or amendments to IFRS issued by the International Accounting Standards Board during the year which have a significant effect on current, prior or future periods in respect of presentation, recognition or measurement. An overview of standards, amendments and interpretations to IFRSs issued but not yet effective is provided below under Recently issued accounting pronouncements.

Basis of consolidation

The consolidated financial statements consolidate those of 2ergo Group plc ("the Company") and its subsidiary undertakings drawn up to 31 August each year. Subsidiaries are entities over which the Company has the power to control the financial and operating policies so as to obtain benefits from their activities. The Group generally obtains and exercises control through voting rights.

The results of subsidiaries acquired are consolidated from the date on which control passed. Acquisitions of subsidiaries are accounted for under the acquisition method, other than for the original acquisition of 2ergo Limited by 2ergo Group plc which has been accounted for using the principles of merger accounting as permitted by IFRS 1. This involves the recognition at fair value of the assets, liabilities and contingent liabilities of the subsidiary at the acquisition date. These fair values are also used as the bases for subsequent measurement in accordance with the Group's accounting policies. The results of subsidiaries disposed of in the year ended 31 August 2012 were consolidated up until the date on which control passed and are included within profit or loss from discontinued operations as part of a single line item along with those major business lines discontinued in that year.

Any profit or loss arising from the sale of discontinued operations is presented as part of a single line item, "profit or loss from discontinued operations".

All intra-group transactions, balances, income and expenses are eliminated on consolidation.

Business combinations

Under the provisions of IFRS 1, the Group has elected not to apply IFRS 3 Business Combinations retrospectively to business combinations prior to the date of transition to IFRS.

Accordingly, the classification of acquisitions prior to the date of transition remain unchanged from those used under UK GAAP. Assets and liabilities are recognised at the date of transition (if they would be recognised under IFRS), and are recognised at net book value.

In accordance with IFRS 3, the fair value of assets or liabilities acquired, where cash flows arise in future periods, is obtained by discounting to present value the amounts expected to be receivable or payable in the future using a weighted average cost of capital.

Segmental reporting

Operating segments are identified based on internal management reporting information that is regularly reviewed by the chief operating decision maker and is used to make strategic decisions.

Revenue

The Group derives its revenues from contracts which include individual or varying combinations of the Group's managed services and products. The timing of revenue recognition in each case depends upon a variety of factors, including the specific terms of each contract and the nature of the Group's deliverables and obligations.

Revenue represents the fair value of consideration receivable by the Group for services provided, net of value added tax. The Group's revenue streams include monthly service fees, set up and activation fees, licence fees and transaction fees depending on the type and delivery of service.

Revenue for transaction fees is recognised at the point of service delivery and when collection of the resulting receivable is reasonably assured. Monthly service and licence fees are recognised over the period of the agreement. Set up and activation fees are generally recognised when the relevant service is available to the customer. When components of a single invoice are separately identifiable, such as set up and monthly service fees, revenue is measured separately for each component in accordance with the recognition policies above.

Intangible assets

Purchased intellectual property

Purchased intellectual property is capitalised at cost and amortised on a straight line basis based upon the directors' estimate of useful economic lives (5 years).

Research and development

Expenditure on research is written off in the period in which it is incurred, except where such expenditure is recoverable from third parties. Development costs incurred are capitalised when all the following conditions are satisfied:

· completion of the product is technically feasible so that it will be available for use or sale;

· the Group intends to complete the product and use or sell it;

· the Group has the ability to use or sell the product;

· the product is commercially viable and will generate probable future economic benefits;

· there are adequate technical, financial and other resources to complete development of the product; and

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

Development costs comprise all directly attributable costs, including employee costs incurred on software development along with an appropriate portion of relevant overheads. Development costs not meeting the criteria for capitalisation are written off as incurred. Development costs are capitalised at cost and amortised from completion and commercial sale of the product on a straight line basis based upon the directors' estimate of their useful economic lives (5 years).

Assets acquired as part of a business combination

In accordance with IFRS 3 Business combinations, an intangible asset acquired in a business combination is deemed to have a cost to the Group of its fair value at the acquisition date. The fair value of the intangible asset reflects expectations about the probability that future economic benefits from the asset will flow to the Group. These costs are amortised on a straight line basis based upon the directors' estimate of their useful economic lives as above. 

Goodwill

Goodwill arising on business combinations prior to the adoption of IFRS 3 (revised 2008) represents the difference between the cost of a business acquisition and the fair value of the net identifiable assets acquired, less any accumulated impairment losses. The cost of acquisition represents the fair value of assets given and equity instruments issued in return for the assets acquired, plus directly attributable costs. There have been no business combinations since the adoption of IFRS 3 (revised 2008).

Property, plant and equipment

Property, plant and equipment are stated at cost less depreciation and any provision for impairment. Depreciation is provided to write down the cost to the residual value over the assets' estimated useful economic lives on a straight line basis with the following lives:

The residual values and economic lives of assets are reviewed by the directors on at least an annual basis and are amended as appropriate.

Impairment testing of intangible assets and property, plant and equipment

For the purposes of assessing impairment, assets are grouped at the lowest levels for which there are separately identifiable cash flows (cash-generating units). Those intangible assets not yet available for use and goodwill are tested for impairment at least annually by reviewing management approved forecasts for those cash generating units. All other individual assets or cash-generating units are tested for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable.

An impairment loss is recognised for the amount by which the asset or cash-generating unit's carrying amount exceeds its recoverable amount. The recoverable amount is the higher of fair value less costs to sell, and value in use based on an internal discounted cash flow valuation. Any impairment loss is charged pro rata to the assets in the cash-generating unit.

Leases

Leases are classified according to the substance of the transaction. A lease that transfers substantially all the risks and rewards of ownership to the lessee is classified as a finance lease. All other leases are classified as operating leases. Rentals paid under operating leases are charged to the income statement on a straight line basis over the period of the lease.

Taxation

Current tax is the tax currently payable based upon the taxable loss for the period.

Deferred income taxes are calculated using the liability method on temporary differences. Deferred tax is generally provided on the difference between the carrying amounts of assets and liabilities and their tax bases. However, deferred tax is not provided on the initial recognition of goodwill or of any other asset or liability unless the related transaction is a business combination or affects tax or accounting profit. Deferred tax on temporary differences associated with shares in subsidiaries is not provided if reversal of these temporary differences can be controlled by the Group and it is probable that the temporary difference will not reverse in the foreseeable future. Tax losses which are available to be carried forward and other income tax credits to the Group are assessed for recognition as deferred tax assets.

Deferred tax liabilities are provided in full, with no discounting. Deferred tax assets are recognised to the extent that it is probable that the underlying temporary differences will be able to be offset against future taxable income.

Current and deferred tax assets and liabilities are measured at tax rates that are expected to apply in the period of realisation based on tax rates and laws that have been enacted or substantively enacted at the reporting date.

Changes in deferred tax assets or liabilities are recognised as a component of tax expense in the income statement except where they relate to items that are charged or credited directly to equity in which case the related deferred tax is also charged or credited directly to equity.

Financial assets

Financial assets are recognised when the Group becomes a party to the contractual provisions of the contract. They are assigned to the categories described below by management on initial recognition, depending on the purpose for which they were acquired. The designations of financial assets are re-evaluated at every reporting date at which a choice of classification or accounting treatment is available, and are as follows:

Loans and receivables

Loans and receivables are non-derivative financial assets with fixed payments that are not quoted in an active market. These are initially recognised at fair value and subsequently are measured at amortised cost using the effective interest rate method, less provision for estimated irrecoverable amounts. Receivables are assessed for impairment based on a number of factors including their credit-worthiness, previous payment history and future prospects. Any change in their value through impairment or reversal of impairment is recognised in the income statement. The carrying value less impairment provision of loans and receivables is assumed to approximate to their fair value. The Group's trade receivables and cash and cash equivalents fall into this category.

Cash and cash equivalents

Cash and cash equivalents comprise cash in hand and demand deposits, together with other short-term, highly liquid investments that are readily convertible into known amounts of cash and which are subject to an insignificant risk of changes in value.

Financial liabilities

Financial liabilities are obligations to pay cash or other financial assets and are recognised when the Group becomes a party to the contractual provisions of the contract. The Group's financial liabilities include trade payables and consideration on acquisitions which are measured initially at fair value and subsequently at amortised cost using the effective interest rate method, based on management's expectations of performance. Changes to the value of consideration result in a revision to the value of goodwill recognised on the associated acquisition.

Derecognition of financial assets and liabilities

A financial asset or liability is generally derecognised only when the contract that gives rise to it is settled, sold, cancelled or expires.

Foreign currencies

Transactions in foreign currencies are recorded at the rate of exchange at the date of the transaction. Monetary assets and liabilities denominated in foreign currencies at the reporting date are reported at the rates of exchange prevailing at that date. Exchange differences arising on the settlement and retranslation of monetary items are included in the operating result for the year.

The assets and liabilities of overseas operations are translated at the rates of exchange ruling at the reporting date. Exchange differences arising on translation of the opening net assets of overseas operations are recognised in other comprehensive income.

Employee benefits

The Group operates a defined contribution pension scheme. The assets of the scheme are held separately from those of the Group in an independently administered fund. The pension costs charged in the income statement are the contributions payable to the scheme in respect of the accounting period.

Share-based payments

The Group issues equity-settled share-based payments to certain employees. The fair value of these payments is determined at the date of grant and is expensed on a straight line basis over the vesting period based on the Group's estimate of shares or options that will eventually vest. Estimates for non-market based vesting conditions are subsequently revised if there is any indication that the number of share options expected to vest differs from previous estimates. Any cumulative adjustment prior to vesting is recognised in the current period. No adjustment is made where a change occurs to the expectation of a market based vesting condition. No adjustment is made to any expense recognised in prior periods if share options ultimately exercised are different to that estimated on vesting.

In the case of options granted without a market based vesting condition, fair value is measured by the Black-Scholes pricing method. Where options are granted with a market based vesting condition, fair value is measured by the binomial pricing method. All equity-settled share-based payments are ultimately recognised as an expense in the income statement with a corresponding credit to the share option reserve.

Upon exercise of share options the proceeds received, net of attributable transaction costs, are credited to share capital and, where appropriate, share premium. Where vested share options have lapsed, the value previously credited to the share option reserve in relation to those options is transferred to Retained Losses. Where share options are modified the fair value of those options is reassessed and the revised value is expensed over the vesting period of the modified option.

Employee benefit trust

The assets and liabilities of the Employee Benefit Trust (EBT) have been included in the consolidated financial statements. Any assets held by the EBT cease to be recognised in the consolidated statement of financial position when the assets vest unconditionally in identified beneficiaries. The costs of purchasing own shares held by the EBT are shown as a deduction against equity. The proceeds from the sale of own shares increase equity. Neither the purchase nor sale of own shares leads to a gain or loss being recognised in the consolidated income statement.

Equity

Equity comprises the following:

· Share capital, representing the nominal value of shares of the Company;

· Share premium, representing the excess over the nominal value of the fair value of consideration received for shares, net of expenses of the share issue;

· Investment in own shares, representing the cost of purchasing issued shares in the Company into treasury;

· Merger relief reserve, representing the excess of the fair value of net assets acquired and goodwill arising on acquisition over the nominal value of shares issued;

· Merger reserve, representing the excess of the Company's cost of investment over the nominal value of 2ergo Limited's shares acquired using the principles of merger accounting;

· Other reserve, representing the cost of the Company's shares held by the EBT that are shown as a deduction against equity;

· Translation reserve, representing translation differences on foreign operations; and

· Share option reserve, representing the cost of equity-settled share-based payments until such share options are exercised or lapse.

Recently issued accounting pronouncements

At the date of issue 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. The directors anticipate that the adoption of these Standards and Interpretations, which is expected to occur on their effective dates, will not have a material impact on the Group's financial statements.

· IAS 12 (Amendment)- Deferred tax- Recovery of underlying assets

· IAS 19 (Revised)- Employee benefits

· IAS 27 (Revised)- Separate financial statements

· IAS 28 (Revised)- Investments in associates and joint ventures

· IFRS 1 (Amendment)- Government loans

· IFRS 7 (Amendment)- Disclosures- Offsetting financial assets and financial liabilities

· IFRS 10- Consolidated financial statements

· IFRS 11- Joint arrangements

· IFRS 12- Disclosure of interests in other entities

· IFRS 13- Fair value measurement

· IFRIC 20- Stripping costs in the production phase of a surface mine

Critical accounting estimates and judgements

Estimates and judgements are continually evaluated and are based on historical experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances. There are no critical accounting judgements.

Critical accounting estimates and their underlying assumptions affect the reported amounts of assets and liabilities at the date of the financial statements and the reported revenue and expenses during the periods presented. Actual results may differ significantly from the estimates, the effect of which is recognised in the period in which the facts that give rise to the revision become known. The following paragraphs detail the critical accounting estimates the Group believes to have the most significant impact on the annual results under IFRS.

Intangible assets

Intangible assets include intellectual property which is capitalised at cost and amortised on a straight line basis based upon the directors' estimate of its useful economic life. In addition, the carrying value of intellectual property is assessed when indications of impairment exist. The level of success of propositions and products based on this intellectual property may be different from the directors' estimates, which could impact the useful economic life of the intellectual property and operating results positively or negatively. The Group holds intellectual property with a net book value of £3,081,000 (2012: £2,969,000).

Impairment of goodwill

The Group determines whether goodwill arising on acquisitions is impaired on at least an annual basis. This requires an estimation of the 'value in use' of the cash-generating units to which the goodwill is allocated. Estimating a value in use amount requires the directors to make an estimate of the expected future cash flows from the cash-generating unit and also to choose a suitable discount rate in order to calculate the present value of those cash flows (see note 8). The actual cash flows may be different from the directors' estimates, which could impact the carrying value of the goodwill and therefore operating results negatively. The value of goodwill at 31 August 2013 is £511,000 (2012: £915,000).

Provision for doubtful trade receivables

The Group evaluates the collectability of trade receivables and records provisions based on experience. These provisions are based on, amongst other things, comparison of the relative age of accounts and consideration of actual write-off history. The actual level of receivables collected may differ from the estimated levels of recovery, which could impact operating results positively or negatively. The value of the provision for doubtful receivables at 31 August 2013 is £46,000 (2012: £257,000).

Share-based payments

The Group calculates the share-based payment charge using the Black-Scholes option pricing model for options granted without a market based vesting condition and the Binomial option pricing model for those options granted with a market based vesting condition. Calculating the share-based payment charge requires the directors to make an estimate of the expected number of options which will vest, amongst other inputs to the relevant model (see note 16). The actual number of options which vest may be different from the directors' estimate, which could impact operating results positively or negatively. The value of the share-based payment charge in the year ended 31 August 2013 is £550,000 (2012: £37,000).

2 Segmental analysis

The Group is organised into one principal operating division for management purposes based in the UK focussed on the monetisation of the Group's technology. Therefore the Group has only one operating segment and segmental information is not required to be disclosed. Revenue is not analysed by product or service.

The Group has one customer, revenues with whom represent more than 10% of the Group's revenue. Revenues related to that customer in the year to 31 August 2013 were £0.7 million (2012: £2.2 million) and gross profit recognised was £22,000 (2012: £0.1 million).

All revenues are from external customers. Continuing revenues can be attributed to the following countries, based on the customers' location, as follows:

All non-current assets are held in the United Kingdom.

3 Operating loss

Operating loss is stated after charging to administrative costs:

(1) Total assets impaired in the year to 31 August 2012 includes intangible assets of £15,416,000, tangible assets of £26,000 and other assets of £313,000.

(2) Other non-audit services includes tax services of £17,000 (2012: £21,000).

(3) Research and development costs include elements of amortisation, impairment and employee costs also included separately above.

4 Particulars of staff

The average number of persons employed by the Group, including executive directors, during the year was:

The aggregate payroll costs of these persons were:

(1) The IFRS 2 share scheme costs primarily relate to the share options issued in the July 2013 fundraising and are a non-cash item.

Key management remuneration

Remuneration of the key management team, including executive directors, during the year was as follows:

Directors' remuneration

Remuneration of directors during the year was as follows:

The remuneration of the highest paid director during the year was:

Retirement benefits are accruing to 2 (2012: 3) directors in respect of defined contribution schemes.

5 Finance income

6 Taxation

7 Loss per share

The calculation of basic and diluted loss per share from continuing operations is based on the result attributable to ordinary shareholders divided by the weighted average number of ordinary shares in issue during the year. The weighted average number of shares for the purpose of calculating the basic and diluted measures is the same. This is because the outstanding share options would have the effect of reducing the loss per ordinary share and therefore would be anti-dilutive. Basic and diluted loss per share from continuing operations is calculated as follows:

Basic and diluted loss per share from discontinued operations is calculated as follows:

Basic and diluted loss per share from continuing and discontinued operations is calculated as follows:

8 Intangible assets

In the year ended 31 August 2012, the Group moved its focus away from providing mainstream mobile solutions, which were increasingly difficult to scale, and also disposed of its development company in India and its US and Australian businesses. Following this, together with the focus on the development and realisation of value from its podifi contactless mobile loyalty technology, the Board considered that the value of certain assets of the Group may no longer certainly be realisable through future cash flows. Accordingly intangible assets with a value of £15,416,000 were impaired in the year to 31 August 2012.

£10,295,000 of this charge was in respect of the impairment of Secure Connect, the Group's secure mobile communication protocol. Previously the Board had anticipated that the Secure Connect technology would be used as a stand-alone product and would have particularly strong potential in emerging markets such as Asia and South America. Following the decision to focus on the development of podifi, the Board now believes that this technology will form an element of the security solution for podifi's contactless mobile payment and wallet capability. However, due to the early stage of development of mobile wallets globally, it is difficult to forecast accurately the payback period for the Secure Connect technology. Therefore, in accordance with IAS 36, the Group recognised a non-cash impairment charge to goodwill of £7,403,000 and to intangible assets of £2,892,000 within continuing operations in the year to 31 August 2012 as the book value of the Secure Connect technology and associated goodwill was written down to £nil.

The remaining £1,760,000 intangible asset impairment charge recognised in the year to 31 August 2012 related to technologies for non-core business, which were written down to reflect the Group's new operating model. In addition, the total impairment charge for the year to 31 August 2012 included the impairment of assets relating to the discontinued operations with a value of £3,361,000.

The Group's goodwill relates to its previous acquisition of Ticketing and Couponing technology. An annual impairment review of goodwill arising on acquisition has been performed for the Ticketing and Couponing cash-generating unit. The Group's podifi technology is included within Intellectual Property at its carrying value of £1.8 million (2012: £1.3 million) and is being amortised over its estimated useful economic life. However, due to podifi's innovative technology, the timing and rate of growth for revenues from this cash-generating unit is uncertain. Therefore an impairment review has been performed for the podifi cash-generating unit.

The recoverable value of each unit has been based on its value in use. The cash flow projections, which were based on 12 month forecasts approved by the directors and then extended to cover up to a 6 year period, supported the carrying value of goodwill and the Group's intellectual property with no impairment required. Discount rates are determined by reference to relevant comparator companies.

The key assumption underlying the Ticketing and Couponing forecast is the continued profitability flowing from existing contracts. This assumption is based on management's experience and the historical success of loyalty campaigns operated by the Ticketing & Couponing cash-generating unit and the recent extension of contracts which have been in place for over 9 years. The forecast for the Ticketing & Couponing cash-generating unit provides sufficient headroom over the value of goodwill and intangible assets attributed to the cash-generating unit.

The key assumption underlying the podifi forecasts is the growth rate for use of podifi. The growth rate is based on numbers of clients forecast to be signed up for trials and expected conversion rates for full roll out of the podifi solution. Revenue streams from each client are derived from set-up, monthly licence and transactional fees. These assumptions are based on management's experience and industry forecasts for the growth in mobile couponing, mobile payments and mobile wallets. The forecast for podifi provides sufficient headroom over the value of the intellectual property attributed to the cash-generating unit.

The Group has no intangible assets with indefinite useful lives other than goodwill.

9 Property, plant and equipment

10 Trade and other receivables

The ageing of trade receivables that were not impaired at 31 August 2013 was:

Accrued income and other receivables are not past due (2012: not past due).

The Group trades only with recognised, credit-worthy third parties. Receivable balances are monitored on an ongoing basis with the aim of minimising the Group's exposure to bad debts and in some cases the Group holds cash as security for some customers' debts. The Group has reviewed in detail all items comprising the above not past due and overdue but not impaired trade receivables to ensure that no impairment exists. As at 31 August 2013, trade receivables of £48,000 (2012: £309,000) were impaired and provided for, all of which were more than 3 months old (2012: more than 3 months old). The amount of the provision was £46,000 as at 31 August 2013 (2012: £257,000). Movements on the provision for impairment of trade receivables are as follows:

The other classes within trade and other receivables do not contain impaired assets. The maximum exposure to credit risk at the reporting date is the carrying value of each class of receivable disclosed above.

The carrying amounts of the Group's trade and other receivables are denominated in the following currencies:

11 Trade and other payables

Deferred consideration is payable in relation to the acquisition of Activemedia Technologies Limited and can be settled in either shares or loan notes, to be determined at the Group's discretion (see note 18).

12 Deferred tax liability

The elements of deferred taxation are as follows:

Movement in deferred tax:

No deferred tax asset is recognised for unused tax losses across the Group of £12.3 million (2012: £10.5 million).

13 Financial instruments and financial risk management

The Group's activities are exposed to a variety of financial risks: market risk (including foreign exchange risk and interest rate risk), credit risk, liquidity risk and capital risk. The Group uses financial instruments, comprising cash, trade receivables and trade payables, to manage financial and commercial risk wherever it is appropriate to do so.

Market risk

Foreign exchange risk

The vast majority of the Group's revenues and costs are in Sterling (the parent Company's functional currency) and involve no currency risk. Activities in currencies other than Sterling are funded as much as possible through operating cash flows, mitigating foreign exchange risk on these investments. The Group has the following cash and cash equivalent deposits:

The Group has the following net trade receivables/(payables):

Following the disposal of non-core overseas operations in the year to 31 August 2012, foreign exchange risk is not material and therefore a sensitivity analysis has not been performed.

Interest rate risk

Sterling cash deposits are placed on deposit at the most favourable bank deposit interest rates, taking into account the Group's short and medium term cash flow expectations. The Group's income and operating cash flows are substantially independent of changes in market interest rates.

Credit risk

The Group has no significant concentrations of credit risk. The Group's standard policies require appropriate credit checks on potential customers before sales commence. Surplus funds held in the Group are invested, in line with board-approved policy, in high quality, short-term liquid investments, usually money market funds or bank deposits.

Credit risk is managed by placing cash deposits with banks which carry a minimum credit rating of BBB-, after also considering asset funding, capital and leverage ratios of the banks. The maximum exposure to credit risk is represented by the carrying amount of each financial asset in the statement of financial position.

The IFRS 7 analysis of financial assets included in the statement of financial position is as follows:

The carrying amounts for loans and receivables above reflect the Group's maximum exposure to credit risk.

Liquidity risk

Prudent liquidity risk management requires the Group to maintain sufficient cash, short-term liquid investments and available facilities to be able to settle its short-term payables as they fall due. The Group monitors rolling forecasts of its cash and cash equivalent short-term investments on the basis of expected cash flow.