CENTRALNIC GROUP PLC CONSOLIDATED STATEMENT OF CASH FLOWS for the year ended 31 December 2017					2017		2016
			Note		£'000		£'000
Cash flow from operating activities
Profit before taxation					1,371		1,157
Adjustments for:
Depreciation of property, plant and equipment					100		124
Amortisation of intangible assets					2,184		2,066
Finance cost - net					428		130
Share based payments					453		621
Decrease / (Increase) in trade and other receivables					1,196		(4,066)
(Decrease) / Increase in trade and other payables and accruals					(1,011)		3,350
Decrease in inventories					77		474
Cash flow from operations					4,798		3,856
Income tax paid					(1,098)		(538)
Net cash flow generated from operating activities					3,700		3,318
Cash flow used in investing activities
Purchase of property, plant and equipment					(104)		(145)
Purchase of intangible assets					(415)		(350)
Acquisition of a subsidiary, net of cash acquired			25		(17,368)		(14,831)
Net cash flow used in investing activities					(17,887)		(15,326)
Cash flow used in financing activities
Proceeds from borrowings (net)					15,298		2,625
Proceeds from issuance of ordinary shares					-		23
Payment of deferred consideration					-		(36)
Net cash flow generated from financing activities
					15,298		2,612
Net increase/(decrease) in cash and cash equivalents					1,111		(9,396)
Cash and cash equivalents at beginning of the year					9,902		19,060
Exchange (losses)/gains on cash and cash equivalents					(151)		238
							9,902
Cash and cash equivalents at end of the year					10,862		9,902

 

    Bank borrowings                                                                                                                         (18,078)                      (2,625)   

 

 

    Net (debt)/cash excluding issue costs of debt                                                                               (7,216)                   7,277                                                                                                      

 

 

 

 

 

 

 

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

for the year ended 31 December 2017

 

1.     General information

(a)           Nature of operations

CentralNic Group Plc is the UK holding company of a group of companies which are engaged in the provision of global domain name services.  The company is registered in England and Wales.  Its registered office and principal place of business is 35-39 Moorgate, London, EC2R 6AR.  

The CentralNic Group provides wholesale ("registry"), retail ("registrar") and enterprise services and strategic consultancy for new Top Level Domains ("TLDs"), Country Code TLD's ("ccTLDs") and Second-Level Domains ("SLDs") and it is the owner and registrant of a portfolio of domain names, which it uses as domain extensions and for resale on the domain name aftermarket.

 (b)          Component undertakings

The principal activities of the subsidiaries and other entities included in the financial statements are presented within the Particulars of Subsidiaries and Associates on pages 78 and 79 of the Annual Report and Accounts.

2.     Application of IFRS

(a)           Basis of preparation

The financial statements are measured and presented in sterling (£), unless otherwise stated, which is the currency of the primary economic environment in which many of the entities operate. They have been prepared under the historical cost convention, except for those financial instruments which have been measured at fair value through profit and loss.

 

The financial statements have been prepared on the going concern basis, which assumes that the Group will continue to be able to meet its liabilities as they fall due for the foreseeable future. The financial statements have been prepared in accordance with International Financial Reporting Standards as adopted by the EU ("IFRS") issued by the International Accounting Standards Board ("IASB"), including related interpretations issued by the International Financial Reporting Interpretations Committee ("IFRIC").

 

The Directors have reviewed forecasts and budgets for the coming year having regard to both the macroeconomic environment in which the group operates, historic and current industry knowledge and contracted trading activities and the future strategy of the Group.  As a result of that review the Directors consider that it is appropriate to adopt the going concern basis of preparation. 

(b)           Standards, amendments and interpretations to published standards not yet effective

A number of new standards and amendments to standards and interpretations have been issued but are not yet effective and in some cases have not yet been adopted by the EU.

 

As described below, the Directors have completed their detailed review of IFRS 9 and IFRS 15 and concluded that the adoption of these standards would have no material impact on Financial Instruments and Revenue Recognition respectively from the next set of financial statements. Whilst Directors carry out their detailed review on IFRS 16, which is effective from 1 January 2019, it is currently expected that no material impact will arise from the adoption of this standard. 

 

IFRS 15 is a prescriptive standard which requires a business to identify the performance obligations which are contracted with its customer base. The transaction price of the contract is determined after which the transaction price is allocated against the identified performance obligations. Revenue is recognised against each of the performance obligations as they are satisfied and as control is transferred. The Group has evaluated the revenue recognition policy in place against the requirement of the standard. Performance obligations within customer contracts have been identified where domain names are sold for a term, where the management, customer and technical support is available to the customer over the period of that term, in both Wholesale and

 

Retail Division. The transaction price of the contract is evaluated in accordance with IFRS 15, and is attached to the performance obligations of the customer contract. Performance obligations are deemed to be satisfied by transferring control rateably over the period of contractual time, being the anniversary of the expiry date of the domain name. Enterprise and consultancy revenues take a similar approach, however revenues here are either recognised when control is passed onto the customer either on a percentage completion basis inline with contractual milestones or immediately recognised on delivery of the contracted work. Overall, the business has determined that there is no material impact on the adoption of IFRS 15.

 

IFRS 9 relates to Financial Instruments which contains the requirement for a) the classification and measurement of financial assets and financial liabilities, b) Impairment methodology, and c) general hedge accounting. As disclosed in note 29, the Group measures it's financial assets and liabilities and accounts for any expected credit losses on the basis of fair value recognition. Therefore, the adoption of the IFRS 9 causes no material impact on the financial statements.

 

3.     Summary of significant accounting policies

The financial statements have been prepared on the historical cost basis, as explained in the accounting policies set out below, which has been prepared in accordance with IFRS. The principal accounting policies are set out below.

(a)           Basis of consolidation

The consolidated financial statements include the financial statements of all subsidiaries. The financial year ends of all entities in the group are coterminous

 

The financial statements of subsidiaries are included in the consolidated financial statements from the date on which control over the operating and financial decisions is obtained and cease to be consolidated from the date on which control is transferred out of the Group. Control is achieved when the Group is exposed, or has rights, to variable returns from its involvement with the investee and has the ability to affect those returns through its power over the investee.

 

All intercompany balances and transactions, including recognised gains arising from inter-group transactions, have been eliminated in full. Unrealised losses are eliminated in the same manner as recognised gains except to the extent that they provide evidence of impairment.

(b)           Business combinations

Business combinations are accounted for using the acquisition method. The cost of an acquisition is measured as the aggregate of the consideration transferred measured at acquisition date fair value and the amount of any non-controlling interests in the acquiree. For each business combination, the Group elects whether to measure the non-controlling interests in the acquiree at fair value or at the proportionate share of the acquiree's identifiable net assets. Acquisition-related costs are expensed as incurred and included in administrative expenses.

 

When the Group acquires a business, it assesses the financial assets and liabilities assumed for appropriate classification and designation in accordance with the contractual terms, economic circumstances and pertinent conditions as at the acquisition date. This includes the separation of embedded derivatives in host contracts by the acquiree.

 

If the business combination is achieved in stages, any previously held equity interest is remeasured at its acquisition date fair value and any resulting gain or loss is recognised in profit or loss.

 

Any contingent consideration to be transferred by the acquirer will be recognised at fair value at the acquisition date. Contingent consideration classified as an asset or liability that is a financial instrument and within the scope of IAS 39 Financial Instruments: Recognition and Measurement, is measured at fair value with changes in fair value recognised in profit or loss. If the contingent consideration is not within the scope of IAS 39, it is measured in accordance with the appropriate IFRS. Contingent consideration that is classified as equity is not remeasured and subsequent settlement is accounted for within equity.

 

Goodwill is initially measured at cost, being the excess of the aggregate of the consideration transferred and the amount recognised for non-controlling interests, and any previous interest held, over the net identifiable assets acquired and liabilities assumed. If the fair value of the net assets acquired is in excess of the aggregate consideration transferred, the Group re-assesses whether it has correctly identified all of the assets acquired and all of the liabilities assumed and reviews the procedures used to measure the amounts to be recognised at the acquisition date. If the reassessment still results in an excess of the fair value of net assets acquired over the aggregate consideration transferred, then the gain is recognised in profit or loss.

 

After initial recognition, goodwill is measured at cost less any accumulated impairment losses. For the purpose of impairment testing, goodwill acquired in a business combination is, from the acquisition date, allocated to each of the Group's cash-generating units that are expected to benefit from the combination, irrespective of whether other assets or liabilities of the acquiree are assigned to those units.

 

Where goodwill has been allocated to a cash-generating unit and part of the operation within that unit is disposed of, the goodwill associated with the disposed operation is included in the carrying amount of the operation when determining the gain or loss on disposal. Goodwill disposed in these circumstances is measured based on the relative values of the disposed operation and the portion of the cash-generating unit retained.

 (c)          Functional and foreign currencies

(i)           Functional and presentation currency

Items included in the financial statements of each of the Group's entities are measured using the currency of the primary economic environment in which the entity operates (the 'functional currency'). The consolidated financial statements are presented in pounds sterling (£) the Group's and the Company's presentational currency.

(ii)          Transactions and balances

Foreign currency transactions are translated into the functional currency at the exchange rates prevailing at the dates of the transactions or valuation where items are re-measured. Foreign currency gains and losses resulting from the settlement of such transactions and from the translation at year-end exchange rates of monetary assets and liabilities denominated in foreign currencies are recognised in the income statement, except where deferred in other comprehensive income as qualifying cash flow hedges and qualifying net-investment hedges. Foreign exchange gains and losses that relate to borrowings and cash and cash equivalents are presented in the income statement within finance income or finance costs. All other foreign exchange gains and losses are recognised in profit and loss within administrative expenses.

(iii)         Group companies

The results and financial position of all of the Group entities, none of which has the currency of a hyper-inflationary economy that have a functional currency different from the presentation currency of the Group are translated as follows:

 

a)     assets and liabilities for each statement of financial position are translated at the closing rate at the date of that statement of financial position;

 

b)    income and expenses for each income statement are translated at average exchange rates (unless this average is not a reasonable approximation of the cumulative effect of the rates prevailing at the transaction dates, in which case income and expenses are translated at the rate on the dates of the transactions).

 

c)     All resulting exchange differences are recognised in other comprehensive income.

Goodwill and fair value adjustments arising on the acquisition of a foreign entity are treated as assets and liabilities of the foreign entity and translated at the closing rate. Exchange differences arising are recognised in other comprehensive income.

(d)           Financial instruments

Financial assets and liabilities are recognised in the statements of financial position when CentralNic or one of the CentralNic Group entities has become a party to the contractual provisions of the instruments.

The CentralNic Group's financial assets and liabilities are initially measured at fair value plus any directly attributable transaction costs. The carrying value of the CentralNic Group's financial assets (primarily cash and bank balances) and liabilities (primarily CentralNic's payables and other accrued expenses) approximate their fair values.

Financial instruments are offset when the CentralNic Group has a legally enforceable right to offset and intends to settle either on a net basis or to realise the asset and settle the liability simultaneously.

Financial instruments recognised in the pro forma aggregated statements of financial position are disclosed in the individual policy statement associated with each item.

(i)           Financial assets

On initial recognition, financial assets are classified as either financial assets at fair value through profit or loss, held-to-maturity investments, loans and receivables financial assets, or available-for-sale financial assets, as appropriate.

·      Trade and other receivables

Trade and other receivables (including deposits and prepayments) that have fixed or determinable payments that are not quoted in an active market are classified as other receivables, deposits and prepayments. Other receivables, deposits and prepayments are measured at amortised cost using the effective interest method, less any impairment loss. Interest income is recognised by applying the effective interest rate, except for short-term receivables when the recognition of interest would be immaterial.

·      Derivative financial instruments

o  Cash flow hedge

Derivatives are initially recognised at fair-value on the date a derivative contract is entered into and are subsequently re-measured at their fair-value. The method of recognising the resulting gain or loss depends on whether the derivative is designated a hedging instrument and if so, the nature of the item being hedged. 

The Group has only undertaken hedges of a particular risk associated with a recognised asset or liability or a highly probable forecast transaction (cash flow hedges).

The Group documents at the inception of the transaction the relationship between hedging instruments and hedged items, as well as risk management objectives and strategy for undertaking various hedging transactions. The Group also documents its assessment, both at hedge inception and on an ongoing basis, of whether the derivatives which are used in hedging transactions are highly effective in offsetting changes in fair values or cash flows of hedged items.

 

 

The effective portion of changes in the fair value of derivatives that are designated and qualify as cash flow hedges is recognised in other comprehensive income. The gain or loss relating to the ineffective portion, if any, is recognised immediately in the income statement.

Amounts accumulated in equity are reclassified to profit and loss in the period or periods that the hedged item affects profit and loss. When a hedging instrument expires or is sold, or where a hedge no longer meets the criteria for hedge accounting any cumulative gain or loss existing in equity at that time remains in equity and is recognised when the forecast transaction is ultimately recognised in the income statement. When a forecast transaction is no longer expected to occur, the cumulative gain or loss which was reported in equity is immediately transferred to the income statement.

o  Cash and bank balances

Cash and bank balances comprise cash balances that are subject to insignificant risk of changes in their fair value and are used by the CentralNic Group in the management of its short-term commitments.

(ii)          Financial liabilities and equity instruments

Financial liabilities are classified as liabilities or equity in accordance with the substance of the contractual arrangement. Interest, dividends, gains and losses relating to financial liabilities are reported in profit or loss. Distributions to holders of financial liabilities are classified as equity and charged directly to equity.

·      Financial liabilities

Financial liabilities comprise long-term borrowings, short-term borrowings, trade and other payables and accruals, measured at amortised cost using the effective interest method.

The effective interest method is a method of calculating the amortised cost of a financial liability and of allocating interest income over the relevant period. The effective interest rate is the rate that exactly discounts estimated future cash payments (including all fees on points paid or received that form an integral part of the effective interest rate, transaction costs and other premiums or discounts) through the expected life of the financial liability, or, where appropriate, a shorter period to the net carrying amount on initial recognition.

·      Equity instruments

An equity instrument is any contract that evidences a residual interest in the assets of an entity after deducting all its liabilities.  Equity instruments issued by the CentralNic Group are recognised at the proceeds received, net of direct issue costs.

Ordinary shares are classified as equity. Incremental costs directly attributable to the issue of new ordinary shares or options are shown in equity as a deduction, net of tax, from proceeds.

Dividends on ordinary shares are recognised as liabilities when approved for appropriation.

(e)           Property, plant, and equipment

Property, plant and equipment, including leasehold improvements and office furniture and equipment, are stated at cost less accumulated depreciation and impairment losses, if any.

Depreciation is calculated using the methods below to write off the depreciable amount of the assets over their estimated useful lives. Depreciation of an asset does not cease when the asset becomes idle or is retired from active use unless the asset is fully depreciated. The principal annual rates used for this purpose are:

	UK	Australia	New Zealand	Germany	Slovakia
Depreciation method	Reducing Balance	Reducing Balance	Reducing Balance	Straight Line	Straight Line
Computer equipment	60% - 65%	25%	25%	33%	20%
Furniture and fittings	15% - 20%	5-10%	5-20%	10%	20%

The depreciation method, useful lives and residual values are reviewed, and adjusted if appropriate, at the end of each reporting period to ensure that the amounts, method and periods of depreciation are consistent with previous estimates and the expected pattern of consumption of the future economic benefits embodied in the asset.

Subsequent component replacement costs are included in the asset's carrying amount or recognised as a separate asset, as appropriate, only when the cost is incurred and it is probable that the future economic benefits associated with the asset will flow to the CentralNic Group and the cost of the asset can be measured reliably. The carrying amount of parts that are replaced is derecognised. The costs of the day-to-day servicing of property, plant and equipment are recognised in profit or loss as incurred. Cost also comprises the initial estimate of dismantling and removing the asset and restoring the site on which it is located for which the CentralNic Group are obliged to incur when the asset is acquired, if applicable.

An item of property and equipment is derecognised upon disposal or when no future economic benefits are expected from its use. Any gain or loss arising from de-recognition of the asset is recognised in profit or loss.

(f)            Intangible assets

Intangible assets represent amounts paid to acquire the rights to own and act as registrant for a portfolio of domain names.

Capitalised domain names have a finite useful life and are measured at cost less accumulated amortisation and impairment losses, if any. Domain names are amortised on an annual basis at the rate of 10% reducing balance.

Domain names not held for resale are included in the balance sheet at amortised cost and classified as "Domain names" and amortised over their useful lives. Domain names held for resale are included in the balance sheet at the lower of cost and net realisable value and classified as stock held for sale, no amortisation being charged. If a decision is taken to sell a domain name previously included in intangible assets it is reclassified as stock at net book value prior to sale.

The useful economic life for the software acquired as part of the Internet.BS, Instra and SK-NIC acquisitions is five years with the customer list acquired being amortised over ten years.

Development costs that the CentralNic Group incurs for identifiable and unique software will be capitalised, where the following criteria are met;

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

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

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

o  it can be demonstrated that the asset will probably generate future economic benefits; and 

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

o  that there are adequate technical and finance resources available to complete this development.

Costs capitalised in relation to computer software development may relate to either;

o  completely separable software, or;

o  enhancements of existing software which are clearly identifiable as new modules within the system or new features which enable the asset to generate additional future economic benefit.  For the avoidance of doubt this excludes the ongoing maintenance to the existing software.

Directly attributable costs that are capitalised as part of the software product include the employee costs and an appropriate portion of the relevant overheads.  Computer software development recognised as assets are amortised over their estimated useful lives, which are determined by the Directors.

Costs for development initiatives that the CentralNic Group undertakes that are not otherwise allocable to specific domain names or projects are charged to expense through profit and loss when incurred.

Intangible assets acquired separately are measured on initial recognition at cost. The cost of intangible assets acquired in a business combination is their fair value at the date of acquisition. Following initial recognition, intangible assets are carried at cost less any accumulated amortisation and accumulated impairment losses. Internally generated intangibles, excluding capitalised development costs, are not capitalised and the related expenditure is reflected in profit or loss in the period in which the expenditure is incurred.  The useful lives of intangible assets are assessed as either finite or indefinite.

Intangible assets are tested for impairment annually if facts and circumstances indicate that impairment may exist. In the event that the expected future economic benefits of the intangible assets are no longer probable or expected to be recovered, the capitalised amounts are written down to their recoverable amount through profit and loss.

(g)           Impairment

(i)           Impairment of financial assets

Financial assets not categorised at fair value through profit or loss are assessed at the end of each reporting period to determine whether there is any objective evidence of impairment. A financial asset is impaired if there is objective evidence of impairment as a result of one or more events that occurred after the initial recognition of the asset and that loss event(s) had an impact on the estimated future cash flows of the asset. Objective evidence that financial assets are impaired includes default or delinquency by a debtor and the restructuring of an amount due to the CentralNic Group on terms that the CentralNic Group would not consider otherwise.

An impairment loss in respect of a financial asset measured at amortised cost, including other receivables and deposits, is recognised in profit or loss and is measured as the difference between the asset's carrying amount and the present value of estimated future cash flows, discounted at the financial asset's original effective interest rate. Losses are recognized in profit or loss and reflected in an allowance account against the amounts receivable.

When the amount of the impairment loss decreases and the decrease can be related objectively to an event occurring after the impairment was recognised, the previously recognised impairment loss is reversed through profit or loss to the extent that the carrying amount of the investment at the date the impairment is reversed does not exceed what the amortised cost would have been had the impairment not been recognised.  

 (ii)         Impairment of non-financial assets

The carrying values of non-financial assets, other than deferred tax assets, are reviewed at the end of each reporting period to determine whether there is any indication of impairment. If any such indication exists, then the asset's recoverable amount is estimated. The recoverable amount of the asset is the higher of the asset's fair value less cost to sell and their value-in-use, which is measured by reference to discounted future cash flows.

An impairment loss is recognised if the carrying value of the asset exceeds its recoverable amount.

  (ii)          Impairment of non-financial assets

An impairment loss is recognised in profit or loss immediately.

In respect of assets other than goodwill, a subsequent increase in the recoverable amount of an asset is treated as a reversal of the previous impairment loss and is recognised to the extent of the carrying amount of the asset that would have been determined (net of amortisation and depreciation) had no impairment loss been recognised. The reversal is recognised in profit or loss immediately.

(h)           Cash and cash equivalents

Cash and bank balances comprise of cash in hand, bank balances, deposits with financial institutions and short-term, highly liquid investments that are readily convertible to known amounts of cash and which are subject to an insignificant risk of changes in value.

(i)            Employee benefits

Short-term employee benefits, including wages, salaries, paid annual leave and sick leave, bonuses and non-monetary benefits are accrued in the period in which the associated services are rendered by employees of the CentralNic Group.

(j)            Leases

Assets held under leases are classified as operating leases and are not recognised in the CentralNic Group's statement of financial position.  Payments made under operating leases are recognised in profit or loss on a straight-line basis over the term of the lease.  Lease incentives received are recognised as part of the total lease expense, over the term of the lease.

(k)           Taxation

Taxation for the year comprises of current and deferred tax.

Current tax is the expected amount of income taxes payable in respect of the taxable profit for the year and is measured using the tax rates that have been enacted or substantively enacted at the end of the reporting period.

Deferred tax is provided in full, using the liability method, on temporary differences arising between the tax bases of assets and liabilities and their carrying amounts in the financial statements.

Deferred tax liabilities are recognised for all taxable temporary differences other than those that arise from goodwill or excess of the acquirer's interest in the net fair value of the acquiree's identifiable assets, liabilities and contingent liabilities over the business combination costs or from the initial recognition of an asset or liability in a transaction which is not a business combination and at the time of the transaction, affects neither accounting profit nor taxable profit.

Deferred tax assets are recognised for all deductible temporary differences, unused tax losses and unused tax credits to the extent that it is probable that future taxable profits will be available against which the deductible temporary differences, unused tax losses and unused tax credits can be utilised. The carrying amounts of deferred tax assets are reviewed at the end of each reporting period and reduced to the extent that it is no longer probable that sufficient future taxable profits will be available to allow all or part of the deferred tax assets to be utilised.

Deferred tax assets and liabilities are measured at the tax rates that are expected to apply in the period when the asset is realised or the liability is settled, based on the tax rates that have been enacted or substantively enacted at the end of the reporting period.

Deferred tax assets and liabilities are offset when there is a legally enforceable right to set off current tax assets against current tax liabilities and when the deferred income taxes relate to the same taxation authority.

Deferred tax relating to items recognised outside profit or loss is recognised outside profit or loss. Deferred tax items are recognised in correlation to the underlying transactions either in other comprehensive income or directly in equity and deferred tax arising from a business combination is included in the resulting goodwill or excess of the acquirer's interest in the net fair value of the acquiree's identifiable assets, liabilities and contingent liabilities over the business combination costs.

(l)            Share based payments

Employees (including Directors and Senior Executives) of the Group receive remuneration in the form of share-based payment transactions, whereby these individuals render services as consideration for equity instruments ("equity-settled transactions"). These individuals are granted share option rights approved by the Board which can only be settled in shares of the respective companies that award the equity-settled transactions. Share option rights are also granted to these individuals by majority shareholders over their shares held. No cash settled awards have been made or are planned.

 

The cost of equity-settled transactions is recognised, together with a corresponding increase in equity, over the period in which the performance and/or service conditions are fulfilled, ending on the date on which the relevant individuals become fully entitled to the award ("vesting point"). The cumulative expense recognised for equity-settled transactions at each reporting date until the vesting date reflects the extent to which the vesting period has expired and the Group's best estimate of the number of equity instruments and value that will ultimately vest. The statement of comprehensive income charge for the year represents the movement in the cumulative expense recognised as at the beginning and end of that period.

 

The fair value of share-based remuneration is determined at the date of grant and recognised as an expense in the statement of comprehensive income on a straight line basis over the vesting period, taking account of the estimated number of shares that will vest. The fair value is determined by use of Black Scholes model method.

(m)          Provisions, contingent liabilities and contingent assets

Provisions are recognised if, as a result of a past event, the CentralNic Group has a present legal or constructive obligation, when it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation, and when a reliable estimate of the amount can be made. Provisions are reviewed at the end of each financial reporting period and adjusted to reflect the current best estimate. Where effect of the time value of money is material, the provision is the present value of the estimated expenditure required to settle the obligation.

A contingent liability is a possible obligation that arises from past events and whose existence will only be confirmed by the occurrence of one or more uncertain future events not wholly within the control of the CentralNic Group. It can also be a present obligation arising from past events that is not recognised because it is not probable that outflow of economic resources will be required or the amount of obligation cannot be measured reliably.

A contingent liability is not recognised in the financial statements but is disclosed in the notes to the financial statements. When a change in the probability of a contingent outflow occurs so that the outflow is probable, a liability will be recognised as a provision.

A contingent asset is a probable asset that arises from past events and whose existence will be confirmed only by the occurrence or non-occurrence of one or more uncertain events not wholly within the control of the CentralNic Group. The CentralNic Group does not recognise contingent assets but discloses their existence where inflows of economic benefits are probable, but not virtually certain.

(n)           Revenue recognition

Revenue is measured at the fair value of the consideration received or receivable and represents amounts receivable for services provided in the course of ordinary activities, net of discounts and sales related taxes.

Revenue from the sale of services is recognised when the amounts of revenue and cost can be measured reliably.  In particular:

                                (i)           Sale of Wholesale ("registry") services for domain names ("Wholesale Domain sales")

Wholesale revenues are generated from the provision of wholesale and related services between a registrar and registry operator. The sub revenue streams would be those of new registrations and renewals. The division performs the role of both the registry operator and registry service provider for the legacy proprietary domains that the company owns and operates. For third party domain names, the division provides the registry service provision, whether this be purely technical provision, or incorporate marketing and billing and cash collection services. An invoice under the wholesale division could cover the sale of a domain name for a fixed term period which could vary between one and ten years. An invoice generated to the registrar is offset by invoice from the registry operator to derive net revenues. Revenues that relate to the period in which the services are performed are recognised in the income statement of that period, with the amounts relating to future periods being deferred into 'Deferred revenues.'

Revenue from strategic consultancy and similar services is recognised in profit and loss in proportion to the stage of completion of the assignment at the reporting date. The stage of completion is determined based on completion of work performed to date as a percentage of total services to be performed.

 

                                (ii)          Sale of Retail ("registrar") services for domain names ("Retail Domain sales")

Retail revenues are generated from the provision of retail and similar services to domain registrants and resellers. The sub revenue streams would be those of new registrations and renewals. Revenue originates when a transaction is generated on the service registry platform by the customer. The transaction constitutes a term period which may vary between one and ten years. Revenues that relate to the period in which the services are performed are recognised in the income statement of that period, with the amounts relating to future periods being deferred into 'Deferred revenues.' These revenues are matched to deferred wholesale costs which cover the same period of the underlying sale.

(iii)         Sale of Enterprise services including premium domain names ("Enterprise including Premium Domain Name Sales")

Revenue from enterprise services and premium domain name sales are recognised in profit and loss at the point of sale. Revenue from the provision of computer software to a customer is recognised when the Group has delivered the related software and completed all of the adaptions required by the customer for either the whole contract or for a specific milestone deliverable within the contract. Where no adaptions are required revenue is recognised on delivery.

Revenue from strategic consultancy and similar services is recognised in profit and loss in proportion to the stage of completion of the assignment at the reporting date. The stage of completion is determined based on completion of work performed.

4.             Critical accounting judgments and key sources of estimating uncertainty

In the application of the CentralNic Group's accounting policies, which are described in note 3, the Directors are required to make judgments, estimates and assumptions about the carrying amounts of assets and liabilities that are not apparent from other sources.  The estimates and assumptions are based on historical experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances.  Actual results may differ from these estimates.

The estimates and underlying assumptions are reviewed on an on-going basis.  Revisions to accounting estimates are recognised in the period in which the estimate is revised if the revision affects only that period or in the period of the revision and future periods if the revision affects both current and future periods.

The following are the key assumptions concerning the future and other key sources of estimation uncertainty at the statement of financial position date that have a significant risk of causing a significant adjustment to the carrying amounts of assets and liabilities in the Financial statements:

Impairment Testing and Fair Value Assessment

The recoverable amounts of individual non-financial assets are determined based on the higher of the value-in-use or the fair value less costs to sell.  These calculations will require the use of estimates and assumptions.  It is reasonably possible that assumptions may change, which may impact the Directors' estimates and may then require a material adjustment to the carrying value of investments, tangible and intangible assets. 

The Directors review and test the carrying value of investments, tangible and intangible assets when events or changes in circumstances suggest that the carrying amount may not be recoverable. For the purposes of performing impairment tests, assets are grouped at the lowest level for which identifiable cash flows are largely independent of cash flows of other assets or liabilities.  If there are indications that impairment may have occurred, estimates will be prepared of expected future cash flows for each group of assets. 

For available for sale assets held at fair value, the Directors review the appropriateness and reasonableness of (i) the valuation technique(s) followed to determine the fair value and corroborative support (ii) the assumptions used in preparing such valuations and the evaluation of the sensitivity in such assumptions (iii) the evidence of indicators of a change in fair value and (iv) the adjustments required if there are indications that a change in fair value has arisen. 

Expected future cash flows used to determine the value in use of tangible and intangible assets will be inherently uncertain and could materially change over time.  The carrying value of the Group's investments, tangible and intangible assets are disclosed in notes 13, 14 and 16 respectively.

                Acquisition accounting and goodwill

Where the Group undertakes business combinations, the cost of acquisition is allocated to identifiable net assets and contingent liabilities acquired and assumed by reference to their estimated fair values at the time of acquisition. The remaining amount is recorded as goodwill. The valuation of identifiable net assets involves an element of judgement related to projected results. Fair values that are stated as provisional are not finalised at the reporting date and final fair values may be determined that are materially different from the provisional values stated. 

 

Judgement was exercised in determining the fair value of the SK-NIC a.s. acquisition. Further details are set out in note 25.

5.     Segment analysis

CentralNic is an independent global domain name service provider. It provides Wholesale, Retail and Enterprise services and is the owner and registrant of a portfolio of domain names.  Operating segments are prepared in a manner consistent with the internal reporting provided to the management as its chief operating decision maker in order to allocate resources to segments and to assess their performance. The segmental analysis is organised around the products and services of the business.

The Wholesale Division is a global distributor of domain names and provides consultancy services to retailers. The Retail Division provides domain names and ancillary services to end users, also on a global basis. The Enterprise Division represents revenue generated by providing technical and consultancy services to corporate and DotBrand clients, licencing of the Group's in house developed registry management platform, and selling premium domain names. 

Management reviews the activities of the CentralNic Group in the segments disclosed below.

	2017
	Revenue	Adjusted EBITDA	Non-current assets	Current assets	Non-current liabilities	Current liabilities
	£'000	£'000	£'000	£'000	£'000	£'000
Wholesale Domain Sales	4,706	2,098	29,514	13,896	22,203	19,530
Retail Domain Sales	15,577	2,650	27,571	11,070	4,491	9,759
Enterprise including Premium Domain Name Sales	4,065	2,828	132	277	-	25
Group overheads including costs associated with public company status	-	(969)	-	-	-	-
	24,348	6,607	57,217	25,243	26,694	29,314

               

	2016
	Revenue	Adjusted EBITDA	Non-current assets	Current assets	Non-current liabilities	Current liabilities
	£'000	£'000	£'000	£'000	£'000	£'000
Wholesale Domain Sales	3,176	1,237	2,901	12,614	1,775	13,578
Retail Domain Sales	14,320	2,417	30,564	8,848	6,651	8,159
Enterprise including Premium Domain Name Sales	4,633	2,785	122	359	-	26
Group overheads including costs associated with public company status	-	(956)	-	-	-	-
	22,129	5,483	33,587	21,821	8,426	21,763

 

 

The geographical locations of the non-current and current assets and non-current and current liabilities are located in the following territories.

 

	2017
	Non-current assets	Current assets	Non-current liabilities	Current liabilities
	£'000	£'000	£'000	£'000
UK	3,260	14,817	16,346	18,257
North America	-	117	-	(12)
Europe	25,874	689	5,857	2,623
Australasia	23,471	5,824	4,491	5,766
ROW	3,036	3,796	-	2,680
	55,641	25,243	26,694	29,314

 

 

	2016
	Non-current assets	Current assets	Non-current liabilities	Current liabilities
	£'000	£'000	£'000	£'000
UK	2,993	13,781	5,010	13,786
North America	-	33	-	(123)
Europe	9	135	-	26
Australasia	25,817	4,804	3,023	5,803
ROW	3,647	3,068	393	2,271
	32,466	21,821	8,426	21,763

 

6.     Revenue

The Wholesale Division generated its revenue from sale of domain names totalling £4,105,000 (2016: £3,112,000) and £601,000 (2016: £64,000) from consultancy and other services. The Retail Division wholly represents revenue from provision of reselling domain names totalling £15,577,000 (2016: £14,320,000). The Enterprise Division generates its revenue from sale of premium domain names amounting to £2,992,000 (2016: £3,744,000), corporate revenues of £590,000 (2016: £574,000), software licensing revenues of £287,000 (2016: £150,000) and dotbrand revenues of £196,000 (2016: £165,000).

 

The CentralNic Group's revenue is generated from the following geographical areas:

 

						2017		2016
						£'000		£'000
Wholesale Domain Sales
UK						451		805
North America						1,092		904
Europe						1,260		451
ROW						1,903		1,016
						4,706		3,176
Retail Domain Sales
UK						1,402		1,215
North America						3,209		3,416
Europe						4,285		3,723
ROW						6,681		5,966
						15,577		14,320
Enterprise including Premium Domain Name Sales
UK						-		4
North America						2,697		3,745
Europe						811		575
ROW						557		309
						4,065		4,633

 

 

Enterprise including premium domain name sales by nature are subject to annual variation depending on customer demand.

 

The Wholesale Division had one customer that representing more than 10% of the division's revenue at £613,000 (2016: none). No single customer contributes greater than 10% or more of the retail domain sales.

 

The enterprise including premium domain name sales were principally driven by premium domain name sales of £2,992,000 (2016: £3,744,000) of which £2,638,000 was made to one customer (2016: £3,555,000 to one customer).

The CentralNic Group's revenue is generated from the following countries:

 

 

						2017	2016
						£'000	£'000
Revenue by Customer Location
United States of America						6,054	7,552
United Kingdom						1,603	1,580
Australia						1,434	1,359
China						1,369	670
Germany						866	908
United Arab Emirates						687	595
France						562	488
Singapore						523	476
Italy						508	436
Hong Kong						452	406
New Zealand						404	346
Canada						402	351
Russian Federation						341	325
Chile						268	426
Switzerland						232	225
India						226	199
Other						8,417	5,787
						24,348	22,129

 

 

7.             Profit before taxation

                The profit before taxation is stated after charging the following amounts.

		2017		2016
		£'000		£'000
Employee benefit expense - wages and salaries		3,788		3,057
Employee benefit expense - social security		354		275
Employee benefit expense - pension		178		132
Employee benefit expense - share based payments		136		123
Staff Consultancy fees		468		567
Directors' remuneration - fees and salaries		843		925
Directors' remuneration - share based payments		317		498
Operating Leases - land & buildings		162		148
Operating Leases - equipment		451		431
Fees payable to the company's auditor for the audit of parent
company and consolidated financial statements - UK auditor office		55		50
Fees payable to the company's auditor for the audit of subsidiary
Companies - Overseas auditor associates		50		45
Fees payable to company's auditors for due diligence and other acquisition costs		102		128
Net loss / (gain) on foreign currency translation		588		(567)
Depreciation and amortisation expense		2,284		2,190

8.             Employee Information

The average number of persons employed by the group (excluding directors) during the year were 92 (2016: 87), analysed by category, as follows;

		2017		2016
		Number		Number
Management and finance		10		7
Technical		28		29
Sales and Marketing		23		21
Administrative		5		6
Operations		26		24

Key management personnel

Total remuneration of key management personnel being the directors and key senior personnel is £2,360,000 (2016: £1,810,000), and is set out below in aggregate for each of the categories specified in IAS24, related party disclosures.

		2017				2016
		Directors	Senior key personnel	Total		Directors	Senior key personnel	Total
		£'000	£'000	£'000		£'000	£'000	£'000
Wages and Salaries		621	743	1,364		623	328	951
Employers NI		68	70	138		57	18	75
Pension		21	37	58		16	16	32
Share based payments		317	35	352		498	25	523
Directors consultancy fees		133	-	133		162	0	162
Settlements		315	-	315		67	-	67
		1,475	885	2,360		1,423	387	1,810

The Group made contributions to defined contribution personal pension schemes for 6 directors in the period (2016: 5). The number of individuals included within the senior key personnel increased to 8 (2016: 4). Included in the above tables, the highest paid director had wages and salaries including pensions of £90,000 (2016: £162,000), Director's consultancy fees £nil (2016: £66,000), share based expense of £29,000 (2016: £118,000), and settlement payments of £234,000 (2016: nil) totalling to £353,000 (2016: £346,000).

The Group operates payrolls in several foreign subsidiaries and fully complies with local jurisdiction obligations. Directors and key personnel are compensated through the payroll of the country in which those individuals fulfill their duties.

9.             Acquisition costs & settlement costs

			2017		2016
			£'000		£'000
Acquisition related costs			1,554		1,094
Costs in relation to Director and employee settlements			428		-
Other non trading items			-		168
			1,982		1,262

10.          Finance income and costs

			2017		2016
			£'000		£'000
Interest income on loans to shareholders			17		18
Interest income on loans to Accent Media Ltd (related party)			2		-
Finance income			19		18
Interest expense on short-term borrowings			(7)		-
Interest expense on long-term bank borrowings			(529)		(232)
Cash flow hedges			-		(38)
Finance costs			(536)		(270)
Net finance costs			(517)		(252)

 

11.          Income tax expense

				2017		2016
				£'000		£'000
Current tax on profits for the year				887		282
Adjustments in respect of prior years				(45)		(48)
Current Income Tax				842		234
Deferred Income Tax (note 22)				(493)		(32)
Income tax expense				349		202

A reconciliation of the current income tax expense applicable to the profit before taxation at the statutory tax rate to the current income tax expense at the effective tax rate of CentralNic is as follows:

				2017		2016
				£'000		£'000
Profit before taxation				1,371		1,157
Tax calculated at domestic tax rates applicable to profits in the respective countries				204		158
Tax effects of;
- Expenses not deductible for tax purposes				199		82
- Unutilised tax losses				(9)		10
Adjustment in respect of prior years				(45)		(48)
Current income tax				349		202

 

The Company provides for income taxes on the basis of its income for financial reporting purposes, adjusted for items that are not assessable or deductible for income tax purposes, in accordance with the regulations of domestic tax authorities. 

The effective rate of tax for the year is 25.4% (2016: 17.5%).

In the UK, the applicable statutory tax rate for 2017 is 19% (2016: 20%).  

In the USA, federal taxes are due at 15% on taxable income.  Under California tax legislation a statutory minimum of $800 of state tax is due.

In Germany, federal taxes are due at 15% on taxable income. With an additional 5.5% solidarity surcharge due on the income tax. A community business tax of c.17% is also levied with rates determined by the municipality.

In addition, for the current year, included within the domestic tax rates applicable to profits are Australia where income tax is due at 30% of taxable income and New Zealand, where income tax is due at 28% on taxable income.

                In Slovakia, income tax is due at 21% of taxable income

                                12.          Earnings per share

Earnings per share has been calculated by dividing the consolidated profit after taxation attributable to ordinary shareholders by the weighted average number of ordinary shares in issue during the period.

Diluted earnings per share has been calculated on the same basis as above, except that the weighted average number of ordinary shares that would be issued on the conversion of the dilutive potential ordinary shares as calculated using the treasury stock method (arising from the Group's share option scheme and warrants) into ordinary shares has been added to the denominator. There are no changes to the profit (numerator) as a result of the dilutive calculation.

	2017	2016
Profit after tax attributable to owners (£'000)	1,022	955
Weighted average number of shares:
Basic	95,894,348	95,632,390
Effect of dilutive potential ordinary shares	2,922,785	2,745,348
Diluted	98,817,133	98,377,738
Earnings per share:
Basic (pence)	1.07	1.00
Diluted (pence)	1.04	0.97

 

 

 

 

 

                               

               

 

 

 

                                13.          Property, plant and equipment

		Computer equipment	Furniture and fittings	Total
		£'000	£'000	£'000
Cost
At 1 January 2016		356	38	394
Additions		139	6	145
Acquisition of Subsidiary		31	32	63
Exchange differences		51	25	76
Disposals		(12)	-	(12)
At 31 December 2016		565	101	666
Additions		103	1	104
Acquisition of Subsidiary		47	-	47
Exchange differences		(7)	(6)	(13)
Disposals		(1)	-	(1)
At 31 December 2017		707	96	803
Accumulated depreciation
At 1 January 2016		297	32	329
Charge for the year		112	13	125
Exchange differences		45	18	63
Disposals		(12)	-	(12)
At 31 December 2016		442	63	505
Charge for the year		91	9	100
Exchange differences		(2)	(7)	(9)
Disposals		(1)	-	(1)
At 31 December 2017		530	65	595
Property, plant, and equipment, net
At 31 December 2017		177	31	208
At 31 December 2016		123	38	161

 

Depreciation of property, plant and equipment is included in administrative expenses in the consolidated statement of comprehensive income.

 

 

                14.          Intangible assets

 

	Domain names	Software	Customer List	Goodwill	Total
	£'000	£'000	£'000	£'000	£'000
Cost or deemed cost
At 1 January 2016	2,340	1,064	2,548	1,573	7,525
Additions	-	350	-	-	350
Acquisition of Subsidiary	1,121	1,615	8,738	11,774	23,248
Reclassification	(2,295)	-	-	-	(2,295)
Exchange Differences	-	265	1,430	1,956	3,651
At 31 December 2016	1,166	3,294	12,716	15,303	32,479
Additions	-	415	-	-	415
Acquisition of Subsidiary	-	132	11,709	13,839	25,680
Reclassification	(25)	-	-	-	(25)
Exchange Differences	-	(36)	(87)	(134)	(257)
At 31 December 2017	1,141	3,805	24,338	29,008	58,292
Amortisation
At 1 January 2016	1,473	280	382	-	2,135
Charge for the year	196	640	1,230	-	2,066
Reclassification	(1,544)	-	-	-	(1,544)
At 31 December 2016	125	920	1,612	-	2,657
Charge for the year	104	761	1,319	-	2,184
Reclassification	(9)	-	-	-	(9)
At 31 December 2017	220	1,681	2,931	-	4,832
Intangible assets, net
At 31 December 2017	921	2,124	21,407	29,008	53,460
At 31 December 2016	1,041	2,374	11,104	15,303	29,822

 

Amortisation of intangible assets is included in administrative expenses in the consolidated statement of comprehensive income.

Certain domain names previously held as intangible assets were reclassified to stock held for resale in the 2017 and the 2016 periods.

 

Goodwill and Customer List

 

The Group tests goodwill recognised through business combinations annually for impairment. Additions to goodwill arose through the business combinations outlined in note 25. The carrying value of goodwill and the customer list is allocated to the respective segments as follows:

 

	Customer List			Goodwill
	2017	2016		2017	2016
	£,000	£,000		£'000	£'000
Wholesale Division	11,727	-		13,957	-
Retail Division	9,680	11,104		14,933	15,189
Enterprise Division	-	-		118	114
Total carrying value	21,407	11,104		29,008	15,303

                The recoverable amount of goodwill of £29,008,000 (2016: £15,303,000) at 31 December 2017, is determined based on a value in use using cash flow projections from financial budgets approved by senior management covering a three year period. Cash flow projections beyond the three year timeframe are extrapolated by applying a flat growth rate in perpetuity per the table below which is based on management judgement, historical trends, expected return on investment, experience and discretion. The pre-tax discount rate applied to the cash flow projections is 10.0%. As a result of the analysis, management did not identify any impairment of goodwill.

The assumptions used in the cash flow projections were as follows;

 

		Growth Rates
Wholesale Division			9%
Retail Division			1%
Enterprise Division			-%

 

 

Discount rates:

Discount rates represent the current market assessment of the risks specific to the CGU, taking into consideration the time value of money and individual risks of the underlying assets that have not been incorporated in the cash flow estimates. The discount rate calculation is based on the specific circumstances of the Group and its operating segments and is derived from its WACC, with appropriate adjustments made to reflect the risks specific to the CGU and to determine the pre-tax rate. The cost of equity is derived from the expected return on investment by the Group's investors.

 

Management consider that no reasonable change in these key assumptions would cause the carrying amount of this asset to exceed its value in use. 

15.  Deferred receivables

				2017		2016
				£'000		£'000
Deferred costs				976		1,486
Amounts due from related parties				74		-
				1,050		1,486

 

In June 2017 the Company loaned Accent Media Ltd $100k (£74k).   The loan is due for repayment in three years and accrues interest at 5% which is payable quarterly in arrears. The deferred costs are prepaid invoices for a period over 12 months relating to domain name purchases from wholesalers.

16.          Investments

Available for sale investments carried at fair value	£'000
At 31 December 2016	997
Additions	-
At 31 December 2017	997

 

                The Company owns less than 20% of the following undertakings which are incorporated in the United Kingdom (UK):

 

Name	Place of incorporation/ establishment	Principal activities	Issued and paid-up/ registered capital	Effective interests
Accent Media Ltd	UK	Domain registry operator	Ordinary shares	10.4%

This investment is categorised in the fair value hierarchy under Level 3 as no observable market data was available.

The fair value of the investment at 31 December 2017 continues to be assessed using a price of recent investment valuation technique, supported by a DCF valuation technique to corroborate the measure of fair value of the investment.  The valuation method applied to this investment is considered the most appropriate with regard to the stage of the development of the business and the IPEVCV guidelines.  In applying the price of recent investment valuation methodology, the basis used is the initial cost of the investment.

In deriving the price of recent investment the Directors have given consideration to the cost of investment arising from transactions involving both the Company and (subsequently) third parties.  In determining the continued use of the price of recent investment valuation the directors have considered the continued validity of this method by reference to the timing of the most recent transactions, the existence of indicators of change in fair value and the appropriateness of alternative valuation techniques.  The Directors have considered that whilst Accent Media Limited continues to be at an early-stage, more recent developments within the business provide indicators that it is now anticipated to progress during 2018/19 in line with the expectations set when the initial investment was made by the Group.

For the corroborative valuation measures determined by use of DCF techniques, the key significant unobservable inputs include cumulative average growth rate, weighted average cost of capital and expected operating margins. A reasonable change to the input assumptions, such as 2% change in weighted average cost of capital would lead to an increase or decrease in the value of this investment of approximately £250,000.  

In the event that the performance of Accent Media Limited does not meet future expectations there is a risk that a reduction in the fair value of the investment could arise.  The net assets of Accent Media Limited (in which the Group has 10.4% shareholding) in the most recently publicly available unaudited financial statements for the year ended 31 March 2017 were £3,619,466.

17.          Trade and other receivables

				2017		2016
				£'000		£'000
Trade receivables				3,826		5,361
Accrued revenue				3,056		1,123
Deferred costs				3,435		3,315
Prepayments				222		163
Supplier payments on account				563		376
Amounts due from shareholders				764		747
Other receivables				2,188		444
				14,054		11,529

 

As of 31 December 2017, trade receivables of £294,000 (2016: £451,000) were past due but not impaired.  These primarily relate to four customers for whom there is considered a low risk of default. 

 

The aging of the trade receivables past due but not impaired is as follows; 0-30 days £3,000 (2016: £163,000), 30-60 days £46,000 (2016: £229,000), 60-90 days £20,000 (2016: £29,000), and over 90 days £225,000 (2016: £30,000).

 

The deferred costs are prepaid invoices for a period within 12 months relating to domain name purchases from wholesalers. Supplier payments on account reflect payments to domain name registries for use against future wholesale domain purchases within the Internet.BS and Instra retail businesses.  Other receivables primarily relate to rebates due from registries in the Internet.BS retail business.

 

Amounts due from shareholders represent amounts due from Jabella Group Limited, a shareholder during the period. Amounts due from Jabella Group Limited were interest free until 31 August 2013, from which time the balance accrued interest at 2% above LIBOR (2017: £17,359; 2016: £17,749). The loan was granted in August 2011 for an initial term of five years, the balance is currently £764,000.  The loan is now repayable on demand.

 

The directors are reviewing the terms of the loan and consider the loan to be fully recoverable.  The directors consider that the fair value of this receivable is not materially different from the carrying value.

18.          Cash and cash equivalents

                For the purpose of the statement of cash flows, cash and cash equivalents comprise the following:

				2017		2016
Amounts held on deposit				£'000		£'000
GBP				1,530		939
USD				7,202		7,428
EUR				1,884		1,171
AUD				157		203
NZD				32		159
CAD				54		-
Other				3		2
				10,862		9,902

19.          Share capital

                The Company's issued and fully paid share capital is as follows:

		Share Capital	Share Premium	Merger relief reserve
	Number	£'000	£'000	£'000
Ordinary shares of 0.1 pence each
At 31 December 2016 and 31 December 2017	95,894,348	96	16,545	1,879

The Company has no authorised share capital.

20.          Non-current other payables

						2017		2016
						£'000		£'000
Deferred revenue						2,282		3,820
Deferred consideration						3,352		-
						5,634		3,820

21.  Reserves

                          Share capital represents the nominal value of the company's cumulative issued share capital.

Share premium represents the cumulative excess of the fair value of consideration received for the issue of shares in excess of their nominal value less attributable share issue costs and other permitted reductions.

Merger relief reserve represents the cumulative excess of the fair value of consideration received for the issue of shares in excess of their nominal value less attributable share issue costs and other permitted reductions. Where the consideration for shares in another company includes issued shares, and 90% of the equity is held in the other company.

Retained earnings represent the cumulative value of the profits not distributed to shareholders, but retained to finance the future capital requirements of the CentralNic Group.

Share based payments reserve represents the cumulative value of share based payments recognised through equity.

Foreign exchange translation reserve represents the cumulative exchange differences arising on Group consolidation.

Foreign currency hedging reserve represents the effective portion of changes in the fair value of derivatives

22.          Deferred tax

	Share Based Payments	Losses	Other temporary differences	Total
Deferred tax assets	£'000	£'000	£'000	£'000
At 1 January 2016	168	-	-	168
Acquisition of subsidiary	-	-	835	835
(Charge)/credit to income	79	194	(357)	(84)
(Charge)/credit to equity	26	-	-	26
Exchange differences	-	-	176	176
At 31 December 2016	273	194	654	1,121
Acquisition of subsidiary	-	-	95	95
(Charge)/credit to income	205	27	17	249
(Charge)/credit to equity	60	-	-	60
Exchange differences	-	-	(23)	(23)
At 31 December 2017	538	221	743	1,502

 

	SK-NIC intangible assets	Instra intangible assets	Other temporary differences	Total
Deferred tax liabilities	£'000	£'000	£'000	£'000
At 1 January 2016	-	-	65	65
Acquisition of subsidiary	-	3,002	-	3,002
(Credit)/Charge to income	-	(399)	(18)	(417)
Exchange differences	-	632	-	632
At 31 December 2016	-	3,235	47	3,282
Acquisition of subsidiary	2,451	-	-	2,451
(Credit)/Charge to income	(5)	(286)	47	(244)
(Credit)/Charge to other comprehensive income	-	-	(53)	(53)
Exchange differences	23	60	-	83
At 31 December 2017	2,469	3,009	41	5,519

 

23.          Trade and other payables and accruals

		2017		2016
		£'000		£'000
Trade payables		3,091		3,120
Accrued expenses		7,024		4,596
Other taxes and social security		208		220
Deferred consideration		523		-
Deferred revenue		9,218		7,375
Customer payments on account		6,877		4,602
Accrued interest		70		22
Other liabilities		36		12
		27,047		19,947

 

24.  Borrowings

 

		2017		2016
		£'000		£'000
Non-current
Bank borrowings		16,078		1,458
Prepaid finance costs		(537)		(134)
		15,541		1,324
Current
Bank borrowings		2,000		1,167
Prepaid finance costs		(146)		(134)
		1,854		1,033
Total Borrowings		17,395		2,357

 

		Bank borrowings				Prepaid finance Costs	Total
		£'000				£'000	£'000
Bank borrowings 1 January 2016		-				-	-
Term Loan drawdown (January 2016)		3,500				(396)	3,104
Repayment in 2016		(875)				128	(747)
Total borrowing as at 31 December 2016		2,625				(268)	2,357
Repayment of initial loan		(2,625)				268	(2,357)
New financing drawdown (August 2017)		1,750				-	1,750
New financing drawdown (November 2017)		16,250				(732)	15,518
Repayment of new financing		-				49	49
Exchange differences		78				-	78
Total borrowing as at 31 December 2017		18,078				(683)	17,395

 

Bank borrowings relate to the £18.0m secured debt facility entered into with Silicon Valley Bank ("SVB") on 29 August 2017 as amended and restated on 30 November 2017.   The debt facility refinanced the remaining £1.75m due in relation to the original debt facility entered into with SVB on 8 December 2015, with the remaining £16.25m being drawn down on 30 November 2017 to fund the initial cash consideration of the SK-NIC acquisition.

Interest for the period has been accrued at the applicable margin plus LIBOR.  The term of the loan is 5 years with quarterly loan and interest repayments.

25.  Business combinations

On 5 December 2017 Centralnic Group completed the acquisition of the entire share capital of SK-NIC a.s. for a total consideration of €28.1m, consisting of €26.1m in cash less a cash adjustment for working capital at completion of (€0.4m), plus a fair value adjustment relating to the deferred and contingent consideration which is due for payment by 2024 (€1.1m) and an assumption of loans due from the vendor on completion of €3.4m.

The primary reason for the business combination was to acquire the manager of the exclusive country code top-level domain for Slovakia, .SK. The business exhibits a high level of recurring earnings and provides access to a new international market with sustainable growth characteristics in line with the Group strategy.

The following table summarises the consideration to acquire the share capital of the SK-NIC a.s. and the provisional fair value of the assets and liabilities at the acquisition date in line with Group accounting policies.

Consideration		€'000s		£'000s
Initial Cash Consideration		20,273		17,843
Contingent Consideration		4,850		4,269
Deferred Consideration		1,000		880
Maximum Cash Consideration		26,123		22,992
Adjustment for working capital		(421)		(371)
Total Cash Consideration		25,702		22,621
Fair value adjustment for deferred and contingent consideration		(1,064)		(937)
Assumption of loans due from the vendor DanubiaTel a.s.		3,413		3,004
Total consideration		28,051		24,688
Fair value recognised on acquisition		€'000s		£'000s
Assets
Intangible assets - customer list		13,304		11,709
Other intangible assets		150		132
Property, plant & equipment		53		47
Trade receivables		244		215
Other receivables		3,905		3,436
Deferred income tax asset		108		95
Cash		539		474
		18,303		16,108
Liabilities
Trade payables		751		661
Other payables and accruals		571		502
Deferred Revenue		2,028		1,785
Deferred income tax liability		2,785		2,451
Other income tax liabilities		(159)		(140)
		5,976		5,259
Total identifiable net liabilities at fair value		12,327		10,849
Goodwill arising on acquisition		15,724		13,839
Purchase consideration		28,051		24,688

The initial cash consideration of €20.3m was funded by an increase in the SVB term loan and RCF of €18.4m and existing cash balances held by the Group of €1.9m. 

The deferred of €1m and contingent consideration of €4.85m, totalling €5.85 has been placed in to an escrow account and subject to any claims will be released to the vendor in tranches until 2024.   Deferred contingent cash consideration of €4.85m is dependent on SK-NIC attaining defined growth targets over the next three years, with the remaining deferred cash consideration being payable in 2024. At 2017 year end, the deferred cash consideration has been accounted for in the consolidated statement of financial position at fair value, using a discount factor of 10%, which has amounted to €1.06m. This will unwind as the payment stages become due through the consolidated statement of comprehensive income.

The growth rates in relation to the contingent consideration are calculated on the number of registered domains at the end of each financial year over the next 3 years (post completion) with the payment profile being spread over 8 years. The last payment on the profile is not subject to the defined growth rates. The directors have considered the range of outcomes on the target growth rate which would trigger the unwinding of the deferred consideration and on the basis that there exists sufficient headroom against management sensitivity to attain these domain name growth rates, they have concluded that the deferred consideration will be payable in full over the agreed period, with the first payment from the profile having been settled in April 2018 of €1.02m.

Management have evaluated the value of the acquired customer list in relation to the domains under management at the time of acquisition and the expected discounted future cashflow that is expected to derive from the existing customer base, with the residual intangible classed as goodwill.  Goodwill arising on acquisition primarily relates to the inherent value of the acquired .sk ccTLD and goodwill in relation to employees.

Acquisition related costs of £883k (2016: £348k) have been recognised in the income statement, which are included in note 9.

For the post-completion period to 31^st December 2017 revenues of £291k (€330k) and Adjusted EBITDA of £230k (€260k) have been generated by SK-NIC. SK-NIC's revenue for the year ended 31 December 2017 was £3,207k (€3,664k) and Adjusted EBITDA was £2,328k (€2,659k), with profit before tax of £2,292k (€2,168k).

The trade and other receivables are stated at gross valuation which equates to the contractual amounts with no provisions being made against them in line with the director's expectations.

26.  Related party disclosures

(a)           Ultimate controlling party

The company is not controlled by any one party

(b)           Related party transactions

Key management are considered to be the directors and key management personnel.  Compensation has been disclosed in Note 8, while further information can be found in the Remuneration Report on page 29 of the Annual Report and Accounts.

(i)           Shareholders

Balances outstanding with shareholders:

				2017		2016
				£'000		£'000
Jabella Group Limited				764		747

Amounts due from Jabella Group Limited were interest free until 31 August 2013, from which time the balance accrued interest at 2% above LIBOR (2017: £17k;  2016: £18k).

Transactions with one member of Erin Investments & Finance Limited, of which no amounts were outstanding at 2017 and 2016 year ends:

						2017		2016
						£'000		£'000
Operating lease payments						64		73

 

(ii)          Non-Executive Directors

During the year CentralNic engaged with Rickert Rechtsanwaltsgesellschaft mBH, of which Thomas Rickert has a controlling interest, to provide legal services in relation to the purchase of intangible assets and advise on potential acquisitions.  The fees for 2017 were £9,000 (2016 £20,000) and no amounts were outstanding as at 2017 and 2016 year ends.   

(ii)          Other Related Parties

Balances outstanding with other related parties:

						2017		2016
						£'000		£'000
Accent Media Ltd						74		-

 

In June 2017 the Company loaned Accent Media Ltd $100k (£74k).   The loan is due for repayment in three years and accrues interest at 5% which is payable quarterly in arrears.

 

27.  Commitments

 

Operating lease commitments

At the end of each of the reporting periods, the minimum lease payments under non-cancellable leases are payable as follows:

				2017		2016
Land and Buildings				£'000		£'000
Less than one year				88		136
Between one and five years				11		28
				99		164

The Group leases office space at the following locations, all of which are operating leases;

London, UK . The lease agreement was entered into on 1st January 2010 for an initial term of 6 years, extended to 1 April 2018, and subsequently extended on a month by month basis.

Melbourne, Australia .  The original lease agreement expired on 30^th November 2016, with the lease being extended on a month by month basis with a three month notice period.

Napier, New Zealand.     The lease agreement was entered into on 1st August 2012 for an initial term of 3 years, with the right to renew every 3 years.  The final expiry date is 31^st July 2021.

Bonn, Germany .  The lease agreement was entered into on 1st January 2015 for an initial term of 3 years.  The lease will renew each year for a further year unless either party terminates with 6 months notice.

Bratislava, Slovakia . The lease agreement was acquired on acquisition and can be terminated at any point in time with immediate effect and as there exists no minimum commitment period, the above table excludes these amounts.

The Group leases equipment under various operating leases, the majority of which exist can be terminated immediately, and equate to immaterial sums.   

28.  Share Options and Warrants

                Share Options

The share option scheme, which was adopted by CentralNic during 2013, was established to reward and incentivise the executive management team and staff for delivering share price growth.  The option schemes are all equity settled. 

The share option scheme is administered by the Remuneration Committee.

No options were granted during 2017 (2016: 2,820,000).  Out of the 6,929,166 outstanding options (2016: 7,044,166),           3,730,166 options (2016: 3,230,166) were exercisable. 

No options were exercised in 2017 (2016: 230,417), with 115,000 options lapsing during the year (2016: 150,000).

A charge of £452,989 (2016: £621,204) has been recognised in the statement of comprehensive income for the year relating to these options.

These fair values were calculated using the Black Scholes option pricing model. The inputs into the model were as follows:

 

Date of Options grant	4th Feb 2016	4th Feb 2016	4th Feb 2016	4th Feb 2016	4th Feb 2016	29th August 2016	29th August 2016
Options Granted	700,000	750,000	350,000	48,000	419,000	318,000	235,000
Stock price	51p	51p	51p	51p	51p	43p	43p
Exercise price	40p	40p	40p	51p	40p	40p	40p
Interest rate	5%	5%	5%	5%	5%	4%	4%
Volatility	75%	75%	75%	75%	75%	52%	52%
Vesting period	3 years from the date of grant	15th September 2018	26th October 2018	3 years from the date of grant	14th January 2019	14th January 2019	3 years from the date of grant
Time to maturity	10 years	10 years	10 years	10 years	10 years	10 years	10 years

Options are exercisable in accordance with the contracted vesting schedules, if the employee leaves the employment of the Group prior to the options vesting then the share options previously granted will lapse. The expected volatility was determined with reference to similar entities trading on AIM.

Details of the share options outstanding at the year-end are as follows:

	Number 31 Dec 2017	WAEP* 31 Dec 2017	Number 31 Dec 2016	WAEP* 31 Dec 2016
Outstanding at 1 January	7,044,166	32p	4,604,583	26p
Granted during year	-	-	2,820,000	40p
Exercised during year	-	-	(230,417)	10p
Lapsed during year	(115,000)	40p	(150,000)	10p
Outstanding at 31 December	6,929,166	32p	7,044,166	32p
Exercisable at 31 December	3,730,166	26p	3,230,166	25p

 

* weighted average exercise price.

 

 

 

The weighted average remaining contractual life of the options outstanding at the statement of financial position date is 6.8 years.

 

Warrants

 

On 12 August 2013, CentralNic Group executed a warrant instrument to create and issue warrants to Zeus Capital to subscribe for an aggregate of 1,772,727 ordinary shares. The warrants will expire six years after admission and were exercisable after the first anniversary of admission (2 September 2014) at the placing price of 55p. The ordinary shares to be allotted and issued on the exercise of any or all of the warrants will rank for all dividends and other distributions declared after the date of the allotment of such shares but not before such date and otherwise pari passu in all respects with the ordinary shares in issue on the date of such exercise allotment.

 

29.  Financial instruments

The CentralNic Group is exposed to market risk, credit risk and liquidity risk arising from financial instruments. The CentralNic Group's overall financial risk management policy focuses on the unpredictability of financial markets and seeks to minimise potential adverse effects on the CentralNic Group's financial performance. The group does not trade in financial instruments.

The principal financial instruments used by the CentralNic Group, from which financial instrument risk arises, are as follows:

		2017		2016
		£'000		£'000
Current Financial assets
Loan and receivables
Trade and other receivables		9,835		7,673
Cash and cash equivalents		10,862		9,902
		20,697		17,575
Current Financial liabilities measured at amortised costs
Trade and other payables and accruals		10.432		7,971
Loan and borrowing		1,854		1,033
		12,286		9,004

(a)           Financial risk management framework

The Directors' risk management policies are established to identify and analyse the risks faced by the CentralNic Group, to set appropriate risk limits and controls, and to monitor risks and adherence to limits.

(i)            Market risk

                (i)           Foreign currency risk

The CentralNic Group is exposed to foreign currency risk on transactions and balances that are denominated in a currency other than its functional currency, primarily US$ and Euros. Foreign   currency risk is monitored on an on-going basis to ensure that the net exposure is at an   acceptable   level.

The CentralNic Group's exposure to foreign currency risk is minimal as it trades predominantly in US$, Euros, GB Pound Sterling and Australian Dollars. Exposure to currency risk is negated by the CentralNic

Group holding adequate reserves in these four currencies to meet trading and provisioned obligations as the need arises.

As the group evolves, foreign currency risk will be monitored more closely given exposure to additional markets and currencies.

The carrying amounts of the CentralNic Group's financial instruments are denominated in the following currencies at 31 December 2017:

	GBP	US$	Euro	AUS$	other currencies	Total
	£'000s	£'000s	£'000s	£'000s	£'000s	£'000s
Current Financial assets
Loan and receivables
Trade and other receivables	4,499	4,419	789	112	16	9,835
Cash and cash equivalents	1,530	7,202	1,884	157	88	10,862
	6,029	11,621	2,673	269	104	20,697
Current Financial liabilities measured at amortised costs
Trade and other payables	7,000	2,461	566	280	125	10,432
Loan and borrowing	(146)	-	2,000	-	-	1,854
	6,854	2,461	2,566	280	125	12,286

 

The sensitivity analyses in the table below details the impact of changes in foreign exchange rates on the CentralNic Group's post-tax profit or loss for the year ended 31 December 2017.

It is assumed that the named currency is strengthening or weakening against all other currencies, while all the other currencies remain constant.

If the GBP strengthened or weakened by 10% against the other currencies, with all other variables in each case remaining constant, then the impact on the CentralNIC Group's post-tax profit or loss would be gains or losses as follows:

				Strengthen / Weaken
				£'000
2017
USD				+ / - 378
EUR				+ / - 225
AUD				+ / - 337

 

 

 

 

 

 (ii)         Interest rate risk

Interest rate risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in market interest rates. The CentralNic Group's exposure to interest rate risk arises mainly from interest-bearing financial assets and liabilities. The Directors' policy is to obtain the most favourable interest rates available. 

 

 

As at each of 31 December 2016 and 2017, CentralNic Group's long-term debt facility entered into with SVB bearing interest at a margin plus LIBOR.

			2017	2016
			£'000	£'000
Cash and bank balances			10,862	9,902
Effect of interest rate change of 100 basis points on cash and bank balances			+/- 109	+/- 99
SVB Bank Facilities			17,395	2,357
Effect of interest rate change of 100 basis points on cash and bank balances			+/- 174	+/- 24

 

 

 

(iii)         Equity price risk

The CentralNic Group does not have any quoted investments as at each of 31 December 2016 and 2017 and as such does not have significant exposure to equity price risk.  At 31 December 2016 and 2017 the Centralnic Group held an unquoted investment in Accent Media of £1.0m which represents a shareholding of 10.4% of the share capital.

(i i )           Credit risk

The CentralNic Group's exposure to credit risk arises mainly from counterparty's failure to meet its obligation to settle a financial asset. The Directors consider the CentralNic Group's exposure to credit risk arising from trade receivables to be minimal as the CentralNic Group is often paid at the outset or in advance. Credit risk arising from other receivables is controlled through monitoring procedures, including credit approvals and credit limits, with the balance largely offset by separate liabilities held on the balance sheet relating to the same party.

The CentralNic Group uses ageing analysis to monitor the credit quality of the trade receivables. Any receivables having significant balances past due or more than 90 days, which are deemed to have higher credit risk, are monitored individually. Analysis of the trade receivables past due is disclosed in note 17.

For cash and bank balances, the Directors minimise the CentralNic Group's credit risk by dealing exclusively with banks and financial institution counterparties with high credit ratings. 

The carrying amounts of financial assets at the end of the reporting periods represent the maximum credit exposure.

 

			2017	2016
			£'000	£'000
Deferred receivables			74	-
Trade and other receivables			9,835	7,673
Investments			997	997
Cash and bank balances			10,862	9,902
			21,768	18,572

 

 

 

 

 

  (i ii )        Liquidity risk

Liquidity risk is the risk that the CentralNic Group will encounter difficulty in settling its financial obligations that are settled with cash or another financial asset. The Directors' objective is to maintain, as much as possible, a level of its cash and bank balances adequate enough to ensure that there will be sufficient liquidity to meet its liabilities when they fall due.

The following set forth the remaining contractual maturities of financial liabilities as at:

£'000		Carrying amount	Total	Within 1 year	1 - 5 years
31 December 2016
Trade and other payables and accruals		7,971	7,971	7,971	-
Borrowings		2,357	2,357	1,033	1,324
		10,328	10,328	9,004	1,324

 

£'000		Carrying amount	Total	Within 1 year	1 - 5 years
31 December 2017
Trade and other payables and accruals		10,432	10,432	10,432	-
Borrowings		17,395	17,395	1,854	15,541
		27,827	27,827	12,286	15,541

 

(b)           Capital risk management

The Directors define capital as the total equity of CentralNic. The Director s' objectives when managing capital are to safeguard the CentralNic Group 's ability to continue as a going concern in order to provide returns for shareholders and benefits for other stakeholders and to maintain an optimal capital structure to reduce the cost of capital. In order to maintain or adjust the capital structure, the Directors may adjust the amount of dividends paid to shareholders, return capital to shareholders, issue new shares or sell assets to reduce debt.

The Directors manage CentralNic's capital based on debt-to-equity ratio. The debt-to-equity ratio is calculated as net debt divided by total equity. Net debt is calculated as total liabilities less cash and cash equivalents.

The debt-to-equity ratio of the CentralNic Group as at the end of each of the reporting periods was as follows:

		2017		2016
		£'000		£'000
Total liabilities		27,827		10,328
Less: cash and bank balances		(10,862)		(9,902)
				426
Net debt/(cash)		16,965		426
Total equity		26,452		25,219
Debt-to-equity ratio		0.64		0.02

The net cash of the CentralNic Group as at the end of each of the reporting periods was as follows:

		2017		2016
		£'000		£'000
Cash and bank balances		10,862		9,902
Less:  Borrowings (excluding prepaid finance costs)		(18,078)		(2,625)
Net (debt) / cash		(7,216)		7,277

 (c)          Fair values of financial instruments

In addition to the fair value of financial instruments disclosed elsewhere in the financial statements, the following carrying amounts of the financial assets and liabilities reported in the consolidated financial statements approximate their fair values:

 

		2017			2016
£'000		Carrying amount	Fair value		Carrying amount	Fair value
Trade and other receivables		9,835	9,835		7,673	7,673
Deferred receivables		74	74		-	-
Investments		997	997		997	997
Cash and bank balances		10,862	10,862		9,902	9,902
		21,768	21,768		18,572	18,572
Trade and other payables and accruals		10,432	10,432		7,971	7,971
		11,336	11,336		10,601	10,601

The SK-NIC acquisition on 5 December 2017 had an element of deferred and contingent consideration of €5.85m that has been placed in to an escrow account and subject to any claims will be released to the vendor in tranches until 2024.   Deferred cash consideration of €5.85m is dependent on SK-NIC attaining defined growth targets over the next three years. At 2017 year end, the deferred cash consideration has been accounted for in the consolidated statement of financial position at fair value, using a discount factor of 10%, which has amounted to €1.06m. This will unwind as the payment stages become due through the consolidated statement of comprehensive income.

The growth rates in relation to the contingent consideration are calculated on the number of registered domains at the end of each financial year over the next 3 years (post completion) with the payment profile being spread over 8 years. The last payment on the profile is not subject to the defined growth rates. The directors have considered the range of outcomes on the target growth rate which would trigger the unwinding of the deferred consideration and on the basis that there exists sufficient headroom against management sensitivity to attain these domain name growth rates, they have concluded that the deferred consideration will be payable in full over the agreed period, with the first payment from the profile having been settled in April 2018 of €1.02m.

(d)           Fair value hierarchy

Financial instruments carried at fair value are analysed by the levels in the fair value hierarchy.  The different levels are defined as follows:

Level 1:                  Fair value measurements are derived from quoted prices (unadjusted) in active markets for identical assets or liabilities;

Level 2:                  Fair value measurements are derived from inputs other than quoted prices included within level 1 that are observable for the asset or liability, either directly or indirectly; and

Level 3:                  Fair value measurements derived from valuation techniques that include inputs for the asset or liability that are not based on observable market data (unobservable inputs).