Final Results

RNS Number : 7463Y

CentralNic Group PLC

13 May 2019

 

13 May 2019 CentralNic Group plc ("CentralNic" or "the Company" or "the Group") Final results for the year ended 31 December 2018 CentralNic (AIM: CNIC), the internet platform that derives revenue from the worldwide sales of internet domain names, today announces audited results ahead of consensus forecasts for the year ended 31 December 2018. Financial Summary •      Revenue up 100% to £42.7m (2017 £21.4m*) •      Gross Profit up 69% to £19.7m (2017: £11.6m*) •      Adjusted EBITDA** up 66% to £7.0m (2017: £4.2m) •      Cash balance up 66% to £18.0m (2017: £10.9m) •      Net interest bearing debt reduced by 66% to £2.5m (2017: £7.2m) *Excluding premium domain sales - no longer a core activity of the Group **Excludes impact of share based payments expense for options, premium domain sales, foreign exchange, and non core operating costs Operational Highlights •      Transformational acquisition of KeyDrive, which is integrating to plan: o  Doubled size of Group with additional staff in Germany, USA, and Luxembourg o  Augments CentralNic's market strength, doubling customer numbers o  Diversifies business providing cross-selling opportunities o  Provides market leading technology which facilitates future acquisitions o  Cost synergies being realised •      Acquisition of GlobeHosting increased presence in Romania and Brazil •      SK-NIC integration successfully completed with pleasing contribution to the Group •      Global customer footprint expanded •      Recurring revenues stable at 90% (2017: 91%) Post year end events •      Michael Riedl (former CFO of KeyDrive) appointed CFO of CentralNic •      Don Baladasan appointed MD of CentralNic to focus on integrations •      CentralNic awarded management of c. 680,000 domain names by ICANN Commenting on the results, Mike Turner, Chairman of CentralNic, said: "Results to date in the new financial year, together with the Group's high percentage of recurring revenues, provide the Board with every confidence of meeting market expectations for 2019. Furthermore, the continued availability of attractive acquisition targets, coupled with the Group's proven ability to source, complete, and integrate complex acquisitions around the world, provides an excellent opportunity to build a sizeable global business to rival the largest industry players. Given its equity position has substantially improved and its current trading is favorable to market expectations, the Company is currently reviewing its capital structure for efficiency in view of its continued acquisition strategy.'' For further information:   CentralNic Group Plc Ben Crawford, Chief Executive Officer Don Baladasan, Group Managing Director Michael Riedl, Chief Financial Officer  [phone] Zeus Capital Limited (Nomad and Joint Broker) Nick Cowles / Jamie Peel (Corporate Finance) John Goold / Rupert Woolfenden  (Institutional Sales) [phone] [phone] Stifel (Joint Broker) Fred Walsh / Neil Shah / Alex Price / Rajpal Padam [phone] Newgate Communications (for Media) Bob Huxford Robin Tozer Tom Carnegie [phone] [e-mail] About CentralNic Group plc  CentralNic (AIM: CNIC) is a London-based AIM-listed company which drives the growth of the global digital economy by developing and managing software platforms allowing businesses globally to buy subscriptions to domain names, used for their own websites and email, as well as for protecting their brands online.  Its core growth strategy is identifying and acquiring cash-generative businesses in its industry with annuity revenue streams and exposure to growth markets and migrating them onto the CentralNic software and operating platforms.  CentralNic operates globally with customers in almost every country in the world.  It earns recurring revenues from the worldwide sales of internet domain names and other services on an annual subscription basis.  For more information please visit: www.centralnicgroup.com  Strategic Report Chairman's statement I am pleased to report on a year of outstanding growth for CentralNic, following the KeyDrive acquisition. The Group made its most significant step forward to date in its strategy to build a global domain name and web services provider, which effectively doubled the Group's size and completed its transition to a virtually pure play recurring revenue business. Both CentralNic's traditional business and the newly acquired KeyDrive continued to grow organic revenues with healthy profit margins, generating high levels of operating cash flow. This transformational evolution of the Group is the result of enormous hard work from our executives and staff, and I thank them on behalf of the Board and the shareholders for their efforts. I also welcome the new staff and senior executives who joined the enlarged Group through the KeyDrive acquisition, as well as the new shareholders who joined the register as part of that transaction. Notably Alex Siffrin, the founder of KeyDrive, has joined CentralNic as Chief Operating Officer, as well as taking most of his consideration for the sale of KeyDrive in CentralNic shares, making his family office one of our largest shareholders. Coinciding with the transaction, we extended our borrowing facility with Silicon Valley Bank, whose continued support of the Group is also worthy of recognition. The new financial year has started with continuing progress on integration, including the appointment of the former KeyDrive CFO, Michael Riedl, to the Board in the position of Group Chief Financial Officer. In addition, CentralNic's former CFO, Don Baladasan, was appointed to the new position of Managing Director, with special responsibility for the integration of new acquisitions. Results to date in the new financial year, together with the Group's high percentage of recurring revenues, provide the Board with every confidence of meeting market expectations for 2019. Furthermore, the continued availability of attractive acquisition targets, coupled with the Group's proven ability to source, complete and integrate complex acquisitions around the world, provides an excellent opportunity to build a sizeable global business to rival the largest industry players. Given its equity position has substantially improved and its current trading is favorable to market expectations, the Company is currently reviewing its capital structure for efficiency in view of its continued acquisition strategy. Mike Turner Chairman Chief Executive Officer's report Overview CentralNic enjoyed a successful year in 2018, with its organic growth supplemented by the transformative acquisition of KeyDrive, which contributed to the results for the last five months of the year. Revenues for the year were £42.7m, a 100% increase over 2017, and EBITDA was £7.0 m in 2018, a 66% improvement on 2017 - excluding the £3.0m revenue and EBITDA contribution made in 2017 by premium domain name trading, which is no longer a core activity of the Group. Market and Strategy CentralNic's reported revenues are now fourteen times higher than they were on listing on AIM five years ago. Facing an addressable market estimated at over $30 billion, we are committed to continuing the strategy proven to deliver this excellent growth, combined with strong margins and cash generation. As a foundation technology of the internet, domain names are governed by global standards, meaning that in every region of the world, the domain industry uses similar technologies and exhibits the same fundamental business dynamics of recurring revenues with highly predictable renewal rates and high cash conversion. CentralNic was formed by combining a number of the most advanced technical platforms - developed over the past 20 years as the internet in the US and Western Europe became a ubiquitous tool for business. Our core strategy is globalising these platforms, focusing on growth markets - both through winning new customers and making earnings acquisitions - and upselling additional technical services to our domain name customers. CentralNic is the only Company among its peers to offer comprehensive and quality services to all its defined customer groups - Resellers, Small Businesses, and Corporates. For each of those customer types, CentralNic has developed and operates a highly automated software platform. Our organic growth strategy includes continuing to win and retain new clients, but it also extends to introducing additional subscription services to those customers. CentralNic has sales and operations teams dedicated to achieving organic growth. In addition, distinct corporate development and integration teams focus on sourcing and completing acquisitions and integrating them into our operations. This achieves savings while obtaining additional customers and services. CentralNic has executed five acquisitions in the past five years. Similarly, KeyDrive, which CentralNic acquired in 2018, acquired the same number of businesses over the same time period. There remain dozens of attractive acquisition opportunities around the world, and CentralNic's proven team maintains a healthy deal pipeline. The economic drivers of the business remain strong. The internet now has four billion active users, meaning at least two billion adults are yet to start using it. Whilst micro-businesses are catered to, in some countries by platforms like Facebook, Amazon, WhatsApp and WeChat, small businesses and corporations continue to rely on domain names as the foundations for their websites, emails and online brand protection strategies. Further to this, the five-year period of disruption from 2013 to 2018, when the market was flooded with low-cost domain names, is now behind us, with adoption of these domain names only accounting for less than 10% of the market. CentralNic's most popular domains such as .com, .net and .uk continue to show robust growth both in volumes and pricing. Acquisitions Three successful acquisitions contributed to CentralNic's extraordinary growth in 2018. On 2 August 2018, CentralNic acquired KeyDrive, a company with complementary technology platforms and customer bases. This has created an enlarged Group that now owns and operates proprietary software platforms for each major customer type for domains and web presence services. Additionally, there was direct duplication of activities within CentralNic and KeyDrive in some areas, creating opportunities for cost synergies, which we are well advanced in realising. Due to the rapid integration of the acquired KeyDrive businesses, which has included merging businesses and migrating customers between businesses, the separate contributions of what were formerly independent business cannot be reliably reported post-acquisition. The combined entities have the number and breadth of senior managers to continue organic growth from a much higher base than the Company had previously, as well as to accelerate the roll-up strategy designed to make us a global player at scale. CentralNic previously acquired SK-NIC, the manager of the exclusive country code top-level domain for Slovakia, .SK, on 12 December 2017. SK-NIC supplies more than 390,000 domain names via 2,300 retailers, 99% of which are domiciled in Slovakia, a country with one of the strongest growth rates in the European Union. .SK is among the 50 most popular ccTLDs in the world, with an 84% renewal rate. Like most European ccTLD operators, SK-NIC is privately held, yet it is virtually unique in that it has a perpetual contract with the national Government. CentralNic retained the staff and management in Slovakia, upgraded the software to its own proprietary platform, and made strategic hires to better position .SK as a foundation of the Slovak digital economy. Finally, CentralNic acquired the business assets of GlobeHosting on 6 of September 2018, increasing its market share in the growing Romanian and Brazilian markets, and adding the proprietary SSL certificate product GlobeSSL to CentralNiclN assets. Through these acquisitions, CentralNic doubled its headcount, with additional staff in Germany (housed in a purpose-built engineering headquarters near Saarbrh the), the USA, Luxembourg, Slovakia and Romania. In addition to the contribution these acquisitions have made to the continued growth of CentralNic, they also represent a practical demonstration of our team's ability to source and complete deals around the world and successfully integrate them. We continue to build a pipeline of acquisition targets that fit our criteria with a view to making further acquisitions in the coming years. Operational Review Due to the rapid integration of the acquired KeyDrive businesses, which has included merging businesses and migrating customers between businesses, the separate contributions of what were formerly independent business cannot be reliably reported post-acquisition. CentralNic experienced both acquisition-driven and organic growth across its three segments, which reflect its main customer types of resellers, small businesses and corporates. All three segments share the same virtuous characteristics of selling subscription-based products and services with highly predictable renewal rates and cash generation. All three benefited both operationally and financially from integration activity. Supplying domains to resellers became CentralNic's largest business in 2018, growing by more than 260%, principally as a result of the KeyDrive and SK-NIC acquisitions. It provides the long tail of country code and new TLD domain inventory to 5,000 resellers including virtually all the world's leading domain name retailers, which in turn resell the domains to their customers. Therefore, the growth from those retailers drives our reseller business forwards. CentralNic has retained its leading position for the past five years, as a distributor of new TLDs. Additional growth in 2018 was provided by new reseller wins and exclusive registry backend contracts, notably with .icu and .ooo, which both ranked in the top 20 new TLDs by volume. Cost savings were achieved by the closure of KeyDrive's Open Registry operation, with the clients migrated onto the CentralNic Registry platform. Revenue from the small business customer group grew by 24% in 2018 largely through the KeyDrive acquisition. At year-end, c. 250,000 small business customers use CentralNic retailers to purchase domain names for their websites and email services. CentralNic acquires customers using search engine marketing and upselling them via email marketing and telesales. Integration savings were achieved in 2018 by consolidating the supplier accounts and connections between legacy CentralNic and KeyDrive businesses, combining purchasing power and reducing duplication to improve margins. CentralNic's corporate customer segment services large corporations that view domain names as a form of intellectual property similar to trademarks, which must be secured and protected by brand owners. The over 300 corporate clients who have entrusted their domain portfolio management to CentralNic include many S&P 500 companies and household brand names. In the years to 2017, CentralNic operated a business within the corporate segment trading in high priced premium domain names. In 2018, the strategic focus shifted from premium domain sales, and via the KeyDrive acquisition it was replaced by BrandShelter - a company which manages large domain portfolios for corporate customers. In so doing, CentralNic replaced a business based on one-off transactions with a recurring revenue business with comparable revenues, while providing the highest renewal rates, margins and growth rates in the Group. The objective for us now is to maintain our revenue growth and healthy margins across all three segments, while we rapidly scale the business up via continued acquisitions. Post Year-end and Outlook Trading in Q1 2019 was in line with management expectations. This included revenue growth across all segments and hitting milestones in the integration of the new acquisitions. For example, to eliminate duplication, KeyDrive's KS Registry clients were migrated to the CentralNic Registry platform, while CentralNic's EPP Gateway clients were migrated to the KeyDrive reseller platform. Additionally, we won new customers across the three segments, including being selected by the internet regulator, ICANN (Internet Corporation for Assigned Names and Numbers) for the bulk transfer of c. 680,000 domain names from a former registrar that was no longer accredited. We also upgraded our United Kingdom corporate headquarters and New Zealand office in the beginning of 2019. In the five years since it first listed, CentralNic's revenues increased fourteen-fold from £3.1m to close to £42.7m. The expectations for the business are to continue on its aggressive growth trajectory, supported by continued demand, the planned introduction of new products and services such as cloud hosting, managed DNS and online brand protection, plus a healthy pipeline of earnings enhancing acquisition prospects. Ben Crawford Chief Executive Officer Chief Financial Officer's report 2018 was a year of transformational events, most importantly, the acquisition of KeyDrive SA in August 2018. Through this acquisition, CentralNic augmented its market share across all its key business areas and now has access to a technology platform that will facilitate the integration of future acquisitions. This was then complemented with the acquisition of GlobeHosting, a Romanian/Brazilian hosting business. Management expects that the earnout conditions will be met in full, testimony to the great performance of these assets. The transaction was financed by an oversubscribed cash offering, raising £24.0m and an expansion of CentralNic's facility with Silicon Valley Bank to £24.0m from £18.0m. The founder and largest shareholder of KeyDrive took most of their consideration in CentralNic shares. This demonstrates the continued support of management, and both the equity and debt capital markets, in the ongoing prospects of the Company. In consequence, equity at year-end was £61.0m, up 131% from the prior year's £26.5m balance. Further, the Group enjoyed the full year effect of the 2017 acquisition of SK-NIC, the operator of the Slovakian top-level domain .SK, augmenting revenue by £3.1m and EBITDA by £1.7m. At the same time, the volatile and unpredictable one-off income from premium domain name sales faded from £3.0m to below £0.1m, in line with the Group strategy. In total, this led to overall year-on-year growth in revenue of 100% from £21.4m, excluding premium domain sales, to £42.7m. The growth in the revenue line largely flowed down to Adjusted EBITDA*, which increased by 66% to £7.0m (2017: £4.2m, excluding premium domain sales). The overall Adjusted EBITDA Margin was diluted slightly to 16.3%, reflecting the integration of the lower margin KeyDrive business (2017: 19.7% excluding premium domain sales). Foreign exchange movements were £0.6m favorable, compared to £0.6m adverse in 2017. The attractive cash generative profile of the Group continued in 2018 with the net operating cash flow, before tax and one-off deal costs and replenishment of the premium domain inventory, being £16.1m (2017: £6.8m). Cash at the end of 2018 was £18.0m (2017: £10.9m), an increase of 66% with Net Debt (including prepaid costs) of £1.7m (2017: net debt £6.5m). Key Performance Indicators 2018: ·      Revenue: £42.7m (2017: £21.4m excluding premium domain sales) ·      Adjusted EBITDA*: £7.0m (2017: £4.2m excluding premium domain sales) ·      Loss after taxation: £4.9m (2017: profit after taxation of £1.0m) ·      Cash Balance 31 Dec 2018: £18.0m (2017: £10.9m) ·      Net interest bearing debt excluding prepaid costs as at 31 Dec 2018: £2.5m (2017: £7.2m) * Earnings before interest, tax, depreciation and amortisation, foreign exchange, and non-core operating costs and revenues (acquisition costs, integration costs, share option expense, settlement items, and premium domain sales) Due to the rapid integration of the acquired KeyDrive businesses, which has included merging businesses and migrating customers between businesses, the segment reporting has been amended to absorb the businesses of the KeyDrive group.  The new segments are constructed around customer types, namely Resellers, Small Businesses and Corporates, with each having distinct needs that are served by CentralNic's proprietary SaaS platform. For each segment, revenue and gross profit contributions to the total operating expenditure platform are determined. The reseller segment includes the former Wholesale division, Small Business segment comprises the former Retail division and Corporate segment absorbs the former Enterprise division. Reseller segment Three Reseller portals, namely RRP proxy, PartnerGate and Toweb, have been added through the acquisitions in the year. This has contributed to revenue in the Reseller segment increasing by 264% from £5.7m to £20.9m. Gross profit for the segment doubled from £4.9m to £9.7m. Small Business segment The portfolio of Small Business portals was extended by domaindiscount24, Moniker.com, and GlobeHosting. In total, the Small Business segment yielded revenue of £18.3m, an increase of 24% over the £14.7m recorded in 2017. Gross profit in 2018 was £7.5m, an increase of 25% over the 2017 figure of £6.0m. Corporate segment Revenue in the Corporate segment was £3.4m, a decrease of 11% from the £3.9m reported in 2017, and Gross Profit declined by 35% to £2.5m from £3.8m. Adjusting for the significantly reduced premium domain sales, however, resulted in revenues for the segment increasing by 290% from £0.9m to £3.4m and gross profit increasing by 207% from £0.8m to £2.5m. Overhead expenses Group overhead expenses excluding foreign exchange, depreciation, amortisation, impairment and non core operating expenses increased 71% from £7.4m to £12.7m, of which £4.1m is attributable to KeyDrive for the five months post-acquisition and £1.1m to the full year effect of the SK-NIC acquisition. Earnings Profile The quality of the Group's earnings remains an important strategic priority for the Group and its investors, as we increase the proportion of revenues derived from predictable sources. This was one important factor in assessing the SK-NIC acquisition, with all of SK-NIC's revenues, earnings and cash flow derived from new registrations and renewals of domain names. Recurring revenues is stable at 90% (2017: 91% on a pro-forma basis). Adjusted EBITDA of £7.0m (2017: £4.2m) has been derived from the operating profit of (£2.7m) (2017: £1.9m) after adjusting for the following items: a) depreciation of £0.3m (2017: £0.1m), b)  amortisation of intangible assets of £4.2m (2017: £2.2m), c) fair value movement of investment of £1m (2017: nil), d) non core operating expenses of £4.5m (2017: £2.0m), e) foreign exchange gain of £0.6m (2017: loss of £0.6m), f) immaterial non core premium domain name sales in 2018 (2017: £3.0m), g) immaterial amounts of share of associate income in 2018 (2017: nil), and h) share based payment expense of £0.3m (2017: £0.4m). Non core costs (including acquisition and other costs) totaled £4.5m (2017: £2.0m). The acquisition-related costs, supporting the Group's acquisition programme, included a variety of deal costs for SK-NIC, KeyDrive Group, GlobeHosting and the accompanying equity and debt capital market transactions. Other non-cash expenses included the acquired amortisation of intangible assets, totaling £4.2m (2017: £2.2m). This reflected the scheduled amortisation for identified intangible assets of KeyDrive and SK-NIC. Further, in evaluating the fair value of the investment in Accent Media, the Group recorded a reduction of £1.0m. The value may be recovered, should the company's financial prospects significantly improve. The Jabella loan of £0.8m has been repaid to the Group in full. Basic earnings per share of (3.82) pence (2017: 1.07 pence) has been impacted by non-recurring acquisition costs, amortisation charges, and other significant non core operating costs. Diluted earnings per share, at (3.82) pence (2017: 1.04 pence) reflected the dilutive effect of the share options "in the money" at the average share price for the year. Further details of the earnings per share calculations are provided in note 12 to the financial statements. Pensions The Group created a defined contribution pension scheme in June 2016 in line with the new auto-enrolment provisions in the UK. In Australia, the Group operates a superannuation scheme in line with statutory requirements, and the KiwiSaver scheme in New Zealand, which is in line with the KiwiSaver Act 2006. In Germany and Luxembourg, all staff are subject to the federal pension schemes and the Group contributes to voluntary complementary pension schemes. The Group does not operate and has never operated any defined benefit schemes requiring actuarial valuations. Dividends It remains the intention of the Group to generate income returns for investors in the future as part of a progressive and commercially prudent dividend policy. However, due to the continued expansion opportunities presented by the sector, the Directors do not propose a final dividend in 2018. Group statement of financial position The Group had net assets of £61.0m at 31 December 2018 (2017: £26.5m). This increase was driven by share issues for cash and for contribution in kind in the context of the KeyDrive acquisition. This was offset by the net loss for year, partially mitigated by favourable movements of the foreign exchange reserve. Capital expenditure and investing activities The most significant investment made during the year was the acquisition of KeyDrive SA, with further details on the fair value provided in note 25 to the financial statements. In total, £46.2m of non-current assets have been added. £31.6m of this was attributable to Goodwill, of which £29.0m was attributable to the KeyDrive acquisition. Software, net of amortisation, increased by £6.4m and other intangible assets by £8.2m, both largely attributable to the KeyDrive acquisition. In line with the appropriate treatment for translation of a foreign operation into the Group's presentational currency, both the tangible and intangible assets are translated at the closing rate, generating foreign exchange differences as presented in notes 13 and 14 to the financial statements. With the exception of goodwill, intangible assets are amortised in line with the Group's accounting policy. The carrying value of goodwill is tested annually for impairment, while the Directors also consider other intangible assets and investments for indications of impairment. Further details are provided in notes 13, 14 and 16 to the financial statements. Cash flow and net cash The cash flow statement for the Group includes two major themes: the entries related to the financing and completion of the KeyDrive acquisition and the results of the ongoing operations of the business, taking into account fluctuations in working capital. Net cash flow from operating activities after tax was higher than the previous year at £6.7m (2017: £3.8m). In both years, the net cash flow from operating activities was in line with expectations relative to Adjusted EBITDA. Investing activities were mainly related to the KeyDrive acquisition, which was completed in August 2018. The net cash outflow related to the KeyDrive acquisition totalled £9.0m (net of cash acquired) in 2018 with a further £4.9m of earnout consideration due up to 2020, whereas up to 85% of the earnout consideration may be settled in shares. Banking facilities On 16 July 2018, the Company and Silicon Valley Bank entered into an amendment agreement to amend the terms of the Silicon Valley Bank Facilities. The amount available under the revolving credit facility was increased by £6.0m to £12.0m and the maximum amount of the uncommitted 'accordion' facility was reduced by £6.0m to £9.0m. The term of the loans remains as stated above. The debt facility is secured over the material companies within the Group. Further detail is provided in note 24 to the financial statements. The Group is in compliance with the maintenance covenant ratios and its payment obligations under the facilities agreement. Significant accounting policies and critical accounting judgements The Summary of the Group's significant accounting policies is set out in note 3 and the Group's critical accounting judgements is set out in note 4 to the financial statements. Group financial risk management The Directors reviews the financial risk management policy, noting that the Group is exposed to deposit risk, credit risk, market risk, IT security, impact on society, foreign currency risk and other risks arising from financial instruments. Further details of the Financial Risk Management Framework are provided in note 29 to the financial statements. The Group's finance function is responsible for managing investment and funding requirements including cashflow monitoring and projections. The cashflow projections are reviewed regularly by the Directors to ensure the Group has sufficient liquidity at all times to meet its cash requirements and execute its business strategy. The Group's strategy is to finance its operations through the cash generated from operations and where necessary, equity and debt finance, notably to support investing activities. The Group's financial instruments comprise cash and various items such as trade and deferred receivables. The Group had £18.0m of cash at the year-end, with interest bearing financial assets bearing interest at fixed interest rates. Deposit risk Deposit risk is mitigated by the Directors setting policy that the Group only places deposits with banks and financial institutions with high credit ratings. Credit risk The Group's exposure to credit risk from trade receivables is relatively low, due to the fact that the business has traditionally dealt with customers who often pay at the point or sale or in advance. Where there are credit accounts, which is an increasing trend in the industry particularly for the larger domain name registrars, receivables are controlled through credit limits and regular monitoring. Market risk There is a risk that the market for domains for which the Group provides registry and registrar services may not increase as quickly as expected or that the new TLDs may not generate the revenue levels anticipated by the Directors. In either case, the Group's revenues could reduce below expectations with an impact on profitability. The risk is mitigated to a degree by operating multiple lines of business themselves exposed to many vertical markets and segments, the majority of which have very little reliance on new TLDs. IT security If the Group does not prevent security breaches or becomes susceptible to cyber-attacks, it may be exposed to lawsuits, lose customers, suffer harm to its reputation, and incur additional costs. Unauthorised access, computer viruses, accidents, employee error or malfeasance, intentional misconduct by computer "hackers" and other disruptions can occur that could compromise the security of the Group's infrastructure or confidential information. The Group has created a resilient network infrastructure and Domain Name System server constellation, with failover secondary systems to ensure critical registry functions are maintained. The Reseller segment has been certified under ISO 27001/2013 for data security, thereby mitigating risk by adherence to international best practice. Impact on society The Group has a positive impact on society by offering internet services in developing countries, contributing to the United Nations Broadband Commission's objective of connecting the 50% of the world that is still offline with affordable internet. The Company can see little negative impact on society from its activities. Whilst the internet itself adds a potential avenue through which fraudsters and other undesirables can operate, the Company has stringent policies relating to its position as an enabler of such traffic and at all times adheres to laws and regulations in each and every jurisdiction, including working with regulatory authorities at all times. Foreign currency risk The Directors notes that the Group has predominantly traded in US Dollars, Euros, GB Pounds Sterling and Australian Dollars, and considers the exposure to foreign currency risk to be acceptable. The Group has held reserves in each of these currencies to meet trading obligations as required. The currency risk is actively monitored through a periodic review of inflows and outflows by currency, including an assessment of the extent to which currencies are naturally hedged across the Group's business lines. Where this is not the case, consideration is given to the use of hedging instruments. Given the Group does more than half its trade in US Dollars and the industry in which it operates is predominantly trading in US Dollars, the Directors are considering to amend its presentational currency in compliance with IAS 21 to US Dollars for all financial years commencing after 31 December 2018. Aligning the reporting currency to the dominant trading currency will reduce the exposure to foreign currency risk and facilitate benchmarking to listed peers. Other risk The Directors give due consideration to other risk factors as they arise. Particular attention is attributed to the United Kingdom invocation of Article 50 of the Treaty on European Union, commonly referred to as "Brexit", as well as additional regulatory requirements being attributed to business in the domain industry, by national or supranational lawmakers, or regulatory bodies such as ICANN or the London Stock Exchange. In the opinion of the Directors, Brexit carries limited risk for the day-to-day operations of the Group, as only a small fraction of the Group's trade is to UK customers or from UK subsidiaries to EU customers. Only 4% of global sales are with UK customers. Yet, the Directors are cognisant of more general risk such as market turmoil or increased volatility of the Pound Sterling to other currencies. Pertaining to regulatory requirements, the Group has assured that its subsidiaries are compliant with the EU General Data Protection Regulation (GDPR) respectively in their implementations to each pertinent jurisdiction law. The Group is monitoring developments in relation to EU State Aid investigations following the EU Commission opening a State Aid investigation into the Group Financing Exemption in the UK's Controlled Foreign Company regime in October 2017. In line with current UK tax law, the Group applies this regime. Based on its current assessment, the Group does not consider any provision is required in relation to this issue. Michael Riedl, Chief Financial Officer

CENTRALNIC GROUP PLC CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME For year ended 31 December 2018	Note				2018     £'000			2017**     £'000
Revenue	5,6				42,672			24,348
Cost of sales					(22,999)			(9,720)
Gross profit					19,673			14,628
Administrative expenses					(22,058)			(12,287)
Share based payments expense					(360)			(453)
Operating (loss)/ profit					(2,745)			1,888
Adjusted EBITDA*					6,957			4,203
Depreciation	13				(250)			(100)
Amortisation of intangible assets	14				(4,230)			(2,184)
Fair value movement of investment	16				(997)			-
Non core operating expenses	9				(4,485)			(1,982)
Foreign exchange					631			(588)
Premium domain sales					23			2,992
Share of associate income					(34)			-
Share based payments expense	28				(360)			(453)
Operating (loss)/ profit					(2,745)			1,888
Finance income	10				2			19
Finance costs	10				(1,094)			(536)
Net finance costs	10				(1,092)			(517)
Share of associate income					34			-
(Loss)/profit before taxation	7				(3,803)			1,371
Income tax expense	11				(1,064)			(349)
(Loss)/profit after taxation					(4,867)			1,022
Items that may be reclassified subsequently to profit and loss
Exchange difference on translation of foreign operation					1,377			(302)
Total comprehensive (loss)/ income for the period					(3,490)			720
(Loss)/ profit is attributable to:
Owners of CentralNic Plc					(4,867)			1,022
Non-controlling interest					-			-
					(4,867)			1,022
Total comprehensive (loss)/ income is attributable to:
Owners of CentralNic Plc					(3,486)			720
Non-controlling interest					(4)			-
					(3,490)			720
	Note				2018    pence			2017    pence
Earnings per share
Basic (pence)	12				(3.82)			1.07
Diluted (pence)	12				(3.82)			1.04

*Earnings before interest, tax, depreciation and amortisation, foreign exchange, and non-core operating costs and revenues (acquisition costs, integration costs, settlement items, and premium domain sales)

All amounts relate to continuing activities.

** 2017 numbers have been restated to reclassify payroll and consultancy costs of £4.8m from cost of sales into administrative expenses, in line with the 2018 presentational change.

CENTRALNIC GROUP PLC CONSOLIDATED STATEMENT OF FINANCIAL POSITION As at 31 December 2018					2018		2017
	Note				£'000		£'000
ASSETS
Non-current assets
Property, plant and equipment	13				728		208
Intangible assets	14				99,428		53,460
Deferred receivables	15				865		1,050
Investments fair value through other comprehensive income	16a				-		997
Investments	16b				1,086		-
Deferred tax assets	22				1,270		1,502
					103,377		57,217
Current assets
Trade and other receivables	17				19,047		14,054
Inventory					3,052		327
Cash and bank balances	18				18,039		10,862
					40,138		25,243
Total assets					143,515		82,460
EQUITY AND LIABILITIES
Equity
Share capital	19				171		96
Share premium	19				54,173		16,545
Merger relief reserve	19				1,879		1,879
Share based payments reserve					2,660		2,507
Foreign exchange translation reserve					2,985		1,608
(Accumulated losses)/ retained earnings					(890)		3,817
Capital and reserves attributable to owners of the Group					60,978		26,452
Non-controlling interests					4		-
Total equity					60,982		26,452
Non-current liabilities
Other payables	20				5,994		5,634
Deferred tax liabilities	22				9,839		5,519
Borrowings	24				17,917		15,541
					33,750		26,694
Current liabilities
Trade and other payables and accruals	23				46,655		27,047
Taxation payable					353		413
Borrowings	24				1,775		1,854
					48,783		29,314
Total liabilities					82,533		56,008
Total equity and liabilities					143,515		82,460

 

CENTRALNIC GROUP PLC

CONSOLIDATED STATEMENT OF CHANGES IN EQUITY

The notes form an integral part of these financial statements.

	Share capital	Share premium	Merger relief reserve	Share- based payments reserve	Foreign exchange translation reserve	Accumulated (losses)/ Retained earnings	Equity attributable to owners of the parent company	Non-Controlling interests	Total equity
	£'000	£'000	£'000	£'000	£'000	£'000	£'000	£'000	£'000
Balance as at 31 December 2016	96	16,545	1,879	2,004	1,910	2,785	25,219	-	25,219
Profit for the year	-	-	-	-	-	1,022	1,022	-	1,022
Other comprehensive income
Translation of foreign operation	-	-	-	-	(302)	-	(302)	-	(302)
Total comprehensive income for the year	-	-	-	-	(302)	1,022	720	-	720
Transactions with owners
Issue of new shares
Share based payments	-	-	-	453	-	-	453	-	453
Share based payments - reclassify lapsed options	-	-	-	(10)	-	10	-	-	-
Share based payments - deferred tax asset	-	-	-	60	-	-	60	-	60
Balance as at 31 December 2017	96	16,545	1,879	2,507	1,608	3,817	26,452	-	26,452
(Loss)/profit for the year	-	-	-	-	-	(4,867)	(4,867)	4	(4,863)
Other comprehensive income
Translation of foreign operation	-	-	-	-	1,377	-	1,377	-	1,377
Total comprehensive income for the year	-	-	-	-	1,377	(4,867)	(3,490)	4	(3,486)
Transactions with owners
Share issued	75	38,673	-	-	-	-	38,748	-	38,748
Share issue costs	-	(1,045)	-	-	-	-	(1,045)		(1,045)
Share based payments	-	-	-	360	-	-	360	-	360
Share based payments - reclassify lapsed options	-	-	-	(160)	-	160	-	-	-
Share based payments - deferred tax asset	-	-	-	(47)	-	-	(47)	-	(47)
Balance as at 31 December 2018	171	54,173	1,879	2,660	2,985	(890)	60,978	4	60,982

·      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.

·      The non-controlling interests comprise the portion of equity of subsidiaries that are not owned, directly or indirectly, by the Group. These non-controlling interests are individually not material for the Group.

 

CENTRALNIC GROUP PLC CONSOLIDATED STATEMENT OF CASH FLOWS for the year ended 31 December 2018					2018		2017
			Note		£'000		£'000
Cash flow from operating activities
(Loss)/profit before taxation					(3,803)		1,371
Adjustments for:
Depreciation of property, plant and equipment					250		100
Amortisation of intangible assets					4,230		2,184
Fair value movement of investment					997		-
Profit on investment in associate					(34)		-
Finance cost - net					1,092		517
Share based payments					360		453
Decrease in trade and other receivables					1,892		1,196
Increase/(decrease) in trade and other payables and accruals					6,667		(1,011)
(Increase)/decrease in inventories					(2,725)		77
Cash flow from operations					8,926		4,887
Income tax paid					(2,260)		(1,098)
Net cash flow generated from operating activities					6,666		3,789
Cash flow used in investing activities
Purchase of property, plant and equipment					(299)		(104)
Purchase of intangible assets					(3,389)		(415)
Payment of deferred consideration					(510)		-
Acquisition of a subsidiary, net of cash acquired			25		(8,969)		(17,368)
Net cash flow used in investing activities					(13,167)		(17,887)
Cash flow used in financing activities
Proceeds from borrowings (net of repayments)					2,342		15,298
Proceeds from issuance of ordinary shares					24,185		-
Costs from share issue					(1,045)		-
Payment of debt like items					(11,187)		-
Interest paid					(511)		(89)
Net cash flow generated from financing activities					13,784		15,209
Net increase/(decrease) in cash and cash equivalents					7,283		1,111
Cash and cash equivalents at beginning of the year					10,862		9,902
Exchange (losses)/gains on cash and cash equivalents					(106)		(151)
Cash and cash equivalents at end of the year					18,039		10,862
Bank borrowings (excluding prepaid costs)					(20,517)		(18,078)
Net (debt)/cash excluding issue costs of debt					(2,478)		(7,216)

CENTRALNIC GROUP PLC

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

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 reseller, small business, and corporate 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 of these financial statements.

2.     Application of IFRS

(a)     Basis of preparation

The financial statements are measured and presented in sterling (£) rounded to the nearest thousand, 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 adopted in the year

During the year, the Group adopted IFRS 9 - Financial Instruments and IFRS 15 - Revenue from contracts with customers which were effective for accounting periods commencing on 1 January 2018.

As described in the last annual report, the Directors completed their detailed review of IFRS 9 and IFRS 15 at the time of reporting of the year ended 31 December 2017 results and concluded that the adoption of these standards would have no material impact on the financial statements.

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 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 Reseller business 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. Small business and Corporate revenues take a similar approach, however revenues here are either recognised when control is passed on to the customer either on a percentage completion basis inline with contractual milestones or immediately recognised on delivery of the contracted work. Overall, the business 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 its financial assets and liabilities and accounts for any expected credit losses on the basis of the simplified approach within IFRS 9 using a provision matrix in the determination of the lifetime expected credit losses. Therefore, the adoption of IFRS 9 causes no material impact on the financial statements.

There have been no other standards adopted that have had a material impact on the financial statements and no standards adopted in advance of their implementation date.

(c)     Standards, amendments and interpretations to published standards not yet effective under IFRS 16 Lease

IFRS 16 supersedes IAS 17 Leases and introduces a new single lessee accounting model which eliminates the
current distinction between operating and finance leases for lessees. IFRS 16 will primarily affect the accounting for the group's operating leases and is effective for the next accounting period. As at the reporting date, the Group has non-cancellable operating lease commitments of £1,032,000, see note 27. Under IFRS 16, the obligations to pay the future leases rentals over the expected lease term (as outlined in note 27) will be recognised as a lease liability (current and non-current) discounted at the incremental borrowing rate with a  corresponding right of use asset also being recognised in the statement of financial position. Whilst there will be a material change in gross assets and liabilities, as a result of recognising the leases as right-of-use assets and liabilities, for the change in accounting policy, it is not anticipated that there will be a material impact on net assets. Additionally, whilst the depreciation on the right of use asset and the interest on the finance liability would be different to the present operating lease charge, it is not expected to have a material impact on the reported result in the statement.

There are no other standards issued not yet effective that will have a material effect 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.

Where not all of the equity of a subsidiary is acquired, the non-controlling interests are recognised at the non-controlling interest's share of the acquiree's net identifiable assets. Upon obtaining control in a business combination achieved in stages, the Group remeasures its previously held equity interest at fair value and recognises a gain or a loss to the income statement

Contingent consideration is included in cost at its acquisition date fair value and, in the case of contingent consideration classified as a financial liability, remeasured subsequently through profit or loss.

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 re-assessment 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.

The Group classifies its financial assets into one of the categories discussed below.  The Group's accounting policy for each category is as follows:

(i)   Amortised cost

These assets arise principally from the provision of goods and services to customers (eg trade receivables), but also incorporate other types of financial assets where the objective is to hold these assets in order to collect contractual cash flows and the contractual cash flows are solely payments of principal and interest.  They are initially recognised at fair value plus transaction costs that are directly attributable to their acquisition or issue and are subsequently carried at amortised cost using the effective interest rate method, less provision for impairment. 

Impairment provisions for current and non-current trade receivables are recognised based on the simplified approach within IFRS 9 using a provision matrix in the determination of the lifetime expected credit losses.  During this process the probability of the non-payment of the trade receivables is assessed.  This probability is then multiplied by the amount of the expected loss arising from default to determine the lifetime expected credit loss for the trade receivables. For trade receivables, which are reported net, such provisions are recorded in a separate provision account with the loss being shown as impairment charge in the consolidated Statement of profit or loss and other comprehensive income.  On confirmation that the trade receivable will not be collectable, the gross carrying value of the asset is written off against the associated provision.

Impairment provisions for receivables from related parties and loans to related parties are recognised based on a forward-looking expected credit loss model.  The methodology used to determine the amount of the provision is based on whether there has been a significant increase in credit risk since initial recognition of the financial asset.  For those where the credit risk has not increased significantly since initial recognition of the financial asset, 12 months expected credit losses along with gross interest income are recognised.  For those for which credit risk has increased significantly, lifetime expected credit losses along with the gross interest income are recognised. For those that are determined to be credit impaired, lifetime expected credit losses along with interest income on a net basis are recognised.

From time to time, the Group elects to renegotiate the terms of trade receivables due from customers with which it has previously had a good trading history.  Such renegotiations will lead to changes in the timing of payments rather than changes to the amounts owed and, in consequence, the new expected cash flows are discounted at the original effective interest rate and any resulting difference to the carrying value is recognised in the consolidated statement of profit or loss and other comprehensive income (operating profit).

The Group's financial assets measured at amortised cost comprise trade and other receivables and cash and cash equivalents in the consolidated statement of financial position. 

Cash and cash equivalents includes cash in hand, deposits held at call with banks, other short term highly liquid investments with original maturities of three months or less, and - for the purpose of the statement of cash flows - bank overdrafts. Bank overdrafts are shown within loans and borrowings in current liabilities on the consolidated statement of financial position.

(ii)  Fair value through other comprehensive income 

The Group has an equity interest in a number of investments in unlisted entities which are not accounted for as subsidiaries, associates or jointly controlled entities. For those investments, the Group has made an irrevocable election to classify the investments at fair value through other comprehensive income rather than through profit or loss as the Group considers this measurement to be the most representative of the business model for these assets.  They are carried at fair value with changes in fair value recognised in other comprehensive income and accumulated in the fair value through other comprehensive income reserve.  Upon disposal any balance within fair value through other comprehensive income reserve is reclassified directly to retained earnings and is not reclassified to profit or loss. 

Dividends are recognised in profit or loss, unless the dividend clearly represents a recovery of part of the cost of the investment, in which case the full or partial amount of the dividend is recorded against the associated investments carrying amount.

Purchases and sales of financial assets measured at fair value through other comprehensive income are recognised on settlement date with any change in fair value between trade date and settlement date being recognised in the fair value through other comprehensive income reserve.  

(iii)  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	Slovakia	Germany	Luxembourg
Depreciation method	Reducing Balance	Reducing Balance	Reducing Balance	Straight Line	Straight Line	Straight Line
Computer equipment	60-65%	25%	25%	20%	33%	20-25%
Furniture and fittings	15-20%	5-10%	5-20%	20%	9-10%	-
Motor Vehicles	-	-	-	-	16.7%	-

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 is five years with the customer list acquired being amortised over ten years. The useful economic life for the software acquired as part of the KeyDrive acquisition is three to nine years with the customer list acquired being amortised over seven to 10 years.

Patent and Trademarks acquired as part of the acquisition of KeyDrive and GlobeHosting are amortised over the shorter of their useful life and/or contractual life or legal rights. If the contractual or legal right are renewed, the useful life will include the renewal period. Patent and trademarks are amortised over 5 to 15 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; 

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

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 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.

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 performance obligations are met under the customer contract. 

In particular:

(i)  Sale of Reseller services for domain names to registrars

Reseller revenues are derived from their customer base, registrars, via the following three channels:

a)   Registry channel - These revenues are being generated from the provision of services through the registry service provider mechanism. CentralNic operates as a back end service provider for third party Top Level Domains on an exclusive basis, enabling the registrars to sell domain names to registrants.

b)   Reseller channel - Revenues are derived by facilitating the sale of domain names to registrars by acting as a reseller platform provider.

c)   Registry Operator channel - CentralNic is an asset holder for Country Code TLD .SK, and therefore generates revenues through sale of domain names of .SK extension to registrars.

In accordance with IFRS 15, each segment evaluates the representation of the underlying customer contracts with the registrars, and identifies the performance obligations that are required to be met under the customer contract.  Determining the transaction price and allocating the transaction price to the performance obligation is also considered, followed by the fulfilment of the performance obligation, therefore leading to the revenue recognition of the sale.

For the Registry revenues and Registry operator channels, upon evaluation of the customer contract, the registry channel has several performance obligations that need to be met over the term of the domain name sale. An invoice under these divisions could cover the sale of a domain name for a fixed term period which could vary between one and ten years, and the performance obligations are expected to be fulfilled over the course of this term on a straight-line basis. 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'.

For the Reseller channel, upon evaluation of the customer contract, the registry channel has performance obligations that are met at point of sale of the domain name. An invoice under this division could cover the licence to utilise the domain name for a fixed term period which could vary between one and ten years, however, all performance obligations are met at the point of sale, and therefore no revenue is deferred.

(ii)          Sale of Small business services for domain names to domain registrants

Small business revenues are generated from the provision of retail and similar services to domain registrants. 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.

For the small business division, upon evaluation of the customer contract, the registry channel has performance obligations that are met at point of sale of the domain name. An invoice under this division could cover the licence to utilise the domain name for a fixed term period which could vary between one and ten years, however, all performance obligations are met at the point of sale, and therefore no revenue is deferred.

(iii)         Sale of Corporate services

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. The revenue is recognised at the point of fulfilment of the performance obligation, in line with the customer contract.

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

(iv)                 Changes during the year

By exception, due to the refund policy which has been amended on 1 November 2018 as part of the integration, revenues of Instra (small business and reseller segments) and UK (small business segments) billed before the 1 November 2018 have been recognised over the course fixed term period of domain name sale, with the amounts relating to future periods being deferred into 'Deferred revenues' which are effectively customer payments on account in advance of satisfaction of the performance obligations.

 (o) Inventories

Inventories consists of Domain Names which are initially recognised at cost, and subsequently at the lower of cost and net realisable value.  Cost comprises all costs of purchase, costs of conversion and other costs incurred in bringing the inventories to their present location and condition.

Weighted average cost is used to determine the cost of ordinarily interchangeable items.

(p)            Associates

Where the Group has the power to participate in (but not control) the financial and operating policy decisions of another entity, it is classified as an associate.  Associates are initially recognised in the consolidated statement of financial position at cost. Subsequently associates are accounted for using the equity method, where the Group's share of post-acquisition profits and losses and other comprehensive income is recognised in the consolidated statement of profit and loss and other comprehensive income (except for losses in excess of the Group's investment in the associate unless there is an obligation to make good those losses).

 Profits and losses arising on transactions between the Group and its associates are recognised only to the extent of unrelated investors' interests in the associate.  The investor's share in the associate's profits and losses resulting from these transactions is eliminated against the carrying value of the associate.

Any premium paid for an associate above the fair value of the Group's share of the identifiable assets, liabilities and contingent liabilities acquired is capitalised and included in the carrying amount of the associate. Where there is objective evidence that the investment in an associate has been impaired, the carrying amount of the investment is tested for impairment in the same way as other non-financial assets.

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 and 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 fair value through other comprehensive income financial assets, 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 tangible, intangible and investment 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. 

In addition, the fair value of the deferred consideration arising on the business combination/acquisition is a key area of accounting estimate.

Judgement was exercised in determining the fair value of the assets and liabilities and the deferred consideration in the KeyDrive acquisition. Further details are set out in note 25.

5.     Segment analysis

CentralNic is an independent global domain name service provider. It provides Reseller, Small business and Corporate 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 directors do not rely on segmental cash flows arising from the operating, investing and financing activities for each reportable segment for their decision making and have therefore not included them. There was a change in the composition in the segmental analysis and the comparatives have been updated. The segmental analysis is organised around the products and services of the business.

The Reseller division is a global distributor of domain names and provides consultancy services to retailers. The Small Business division provides domain names and ancillary services to end users, also on a global basis. The Corporate division represents revenue generated by providing technical and consultancy services to corporate 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:

		2018
		Reseller	Small business	Corporate	Total
		£000	£000	£000	£000
Revenue		20,881	18,344	3,447	42,672
Gross profit		9,730	7,461	2,482	19,673
Total administrative expenses					(22,058)
Share based payments expense					(360)
Operating loss					(2,745)
Adjusted EBITDA					6,957
Depreciation					(250)
Amortisation of intangibles assets					(4,230)
Fair value movement of investment					(997)
Non core operating expenses					(4,485)
Foreign exchange					631
Premium domain sales					23
Share of associate income					(34)
Share based payment expense					(360)
Operating Loss					(2,745)
Finance cost (net)			(1,092)
Share of associate income					34
Loss before taxation					(3,803)
Income tax expense					(1,064)
Loss after taxation					(4,867)

		2017
		Reseller	Small business	Corporate		Total
		£000	£000	£000		£000
Revenue		5,743	14,736	3,869		24,348
Gross profit		4,856	5,978	3,794		14,628
Total administrative expenses						(12,287)
Share based payments expense						(453)
Operating profit						1,888
Adjusted EBITDA						4,203
Depreciation						(100)
Amortisation of intangibles assets						(2,184)
Non core operating expenses						(1,982)
Foreign exchange						(588)
Premium domain sales						2,992
Share based payment expense						(453)
Operating profit						1,888
Finance cost (net)			(517)
Profit before taxation						1,371
Income tax expense						(349)
Profit after taxation						1,022

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

	2018
	Non-current assets	Current assets	Non-current liabilities	Current liabilities
	£'000	£'000	£'000	£'000
UK	4,996	12,626	28,532	19,907
North America	862	3,367	-	1,226
Europe	73,725	13,882	5,218	19,135
Australasia	21,013	7,121	-	6,020
ROW	2,781	3,142	-	2,495
	103,377	40,138	33,750	48,783

	2017
	Non-current assets	Current assets	Non-current liabilities	Current liabilities
	£'000	£'000	£'000	£'000
UK	3,826	14,817	16,346	18,257
North America	-	117	-	(12)
Europe	25,970	689	5,857	2,623
Australasia	24,385	5,824	4,491	5,766
ROW	3,036	3,796	-	2,680
	57,217	25,243	26,694	29,314

6. Revenue

The Reseller division generated its revenue from reselling domain names totaling £19,325,000 (2017: £4,946,000), £1,386,000 (2017: £601,000) from consultancy and £170,000 (2017: £196,000) from DotBrand revenues. The Small Business division wholly represents revenue from provision of domain names sales totaling £18,344,000 (2017: 14,736,000). The Corporate division generated its revenue from premium domain sales of £23,000 (2017: 2,992,000), corporate revenues of £3,096,000 (2017: £590,000), and software licensing revenues of £328,000 (2017: £287,000). As part of the streamlining of the segmental analysis in 2018, DotBrand revenues are now included in the Reseller segment from the Corporate segment in 2017.

For revenues recognised in accordance with note 3 (n) (iv) there was a net increase in deferred revenue during 2018 of £447,000.

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

						2018		2017
						£'000		£'000
Reseller Domain Sales
UK						505		527
North America						4,053		1,317
Europe						13,536		1,491
ROW						2,787		2,408
						20,881		5,743
Small Business Domain Sales
UK						1,453		1,326
North America						4,578		3,036
Europe						4,396		4,054
ROW						7,917		6,320
						18,344		14,736
Corporate Sales
UK						523		-
North America						1,101		2,645
Europe						1,743		811
ROW						80		413
						3,447		3,869

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

The Reseller division had no one customer that representing more than 10% of the division's revenue (2017: £613,000). No single customer contributes greater than 10% or more of the Small Business sales.

The Corporate division has one customer that represented more than 10% of the division's revenue in the year of £466,000 (2017: £2,992,000 which principally represented one premium domain customer).

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

						2018		2017
						£'000		£'000
Revenue by Customer Location
United States of America						9,085		6,054
Germany						7,259		866
United Kingdom						1,875		1,603
Switzerland						1,771		232
Australia						1,610		1,434
China						1,065		1,369
United Arab Emirates						758		687
France						963		562
Singapore						656		523
Italy						801		508
Hong Kong						476		452
New Zealand						408		404
Canada						561		402
Russian Federation						563		341
Chile						90		268
India						291		226
Other						14,440		8,417
						42,672		24,348

7.          Profit before taxation

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

		2018		2017
		£'000		£'000
Employee benefit expense - wages and salaries		6,518		3,788
Employee benefit expense - social security		947		354
Employee benefit expense - pension		177		178
Employee benefit expense - share based payments		112		136
Staff consultancy fees		723		468
Directors' remuneration - fees and salaries		1,140		843
Directors' remuneration - share based payments		232		317
Operating Leases - land & buildings		315		162
Operating Leases - equipment		493		451
Fees payable to the company's auditor for the audit of parent
company and consolidated financial statements - UK auditor office		63		55
Fees payable to the company's auditor for the audit of subsidiary
Companies - Overseas auditor associates		50		50
Fees payable to company's auditors for due diligence and other acquisition costs		506		102
Net loss / (gain) on foreign currency translation		(631)		588
Depreciation and amortisation expense		4,480		2,284

8.          Employee Information

The average number of persons employed by the group (excluding directors) during the year were 217 (2017: 92), analysed by category, as follows;

		2018		2017
		£'000		£'000
Management and finance		31		10
Technical		67		28
Sales and Marketing		42		23
Administrative		30		5
Operations		47		26

Key management personnel

Total remuneration of key management personnel being the directors and key senior personnel is £2,546,000 (2017: £2,360,000) and is set out below in aggregate for each of the categories specified in IAS 24, related party disclosures.

Key management are considered to be the directors and key management personnel.  Compensation has been disclosed in this note, while further information can be found in the Remuneration report.

		2018				2017
		Directors	Senior key personnel	Total		Directors	Senior key personnel	Total
		£'000	£'000	£'000		£'000	£'000	£'000
Wages and Salaries		755	996	1,751		621	743	1,364
Social security		67	118	185		68	70	138
Pension		13	26	39		21	37	58
Share based payments		232	34	266		317	35	352
Directors consultancy fees		305	-	305		133	-	133
Settlements		-	-	-		315	-	315
		1,372	1,174	2,546		1,475	885	2,360

The Group made contributions to defined contribution personal pension schemes for 3 directors in the period (2017: 6). The number of individuals included within the senior key personnel was 10 (2017: 8). Included in the above tables, the highest paid director had wages and salaries including pensions of £241,000 (2017: £90,000), a special bonus of £297,000 (2017: nil), no settlement payments (2017: £234,000), no amounts attributable to share based payment (2017: £29,000) totaling to £538,000 (2017: £353,000).

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 fulfil their duties.

9.             Non core operating expenses

			2018		2017
			£'000		£'000
Acquisition related costs			3,675		1,554
Costs in relation to Director and employee settlements			-		428
Integration and streamlining			810		-
			4,485		1,982

10.       Finance income and costs

			2018		2017
			£'000		£'000
Interest income on loans to shareholders			-		17
Interest income on loans to Accent Media Ltd (related party)			2		2
Finance income			2		19
Unwinding of deferred consideration			(117)		-
Interest expense on loans to shareholders			(4)		-
Interest expense on short term borrowings			(62)		(7)
Interest expense on long-term bank borrowings			(911)		(529)
Finance costs			(1,094)		(536)
Net finance costs			(1,092)		(517)

                11.          Income tax expense

				2018		2017
				£'000		£'000
UK corporation tax
Current tax on profits for the year				1,074		887
Adjustments in respect of prior years				242		(45)
Current Income Tax				1,316		842
Foreign tax
Current tax on profits for the year				149		-
Adjustments in respect of prior years				130		-
				279		-
Total current tax				1,595		842
Deferred Income Tax (note 22)				(531)		(493)
Income tax expense				1,064		349
Current tax on profits for the year				730		887

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:

				2018		2017
				£'000		£'000
(Loss)/Profit before taxation				(3,803)		1,371
Tax calculated at domestic tax rates applicable to profits in the respective countries				(632)		204
Tax effects of;
- Expenses not deductible for tax purposes				1,283		199
- Tax losses movement				386		484
- Share based payment				70		-
- Deferred tax				(531)		(493)
- Withholding tax				279		-
- Other adjustments				(4)		-
- Adjustment in respect of prior years				242		(45)
- Irrecoverable foreign tax				(29)		-
Current income tax				1,064		349

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 27.9% (2017: 25.4%).

In the UK, the applicable statutory tax rate for 2018 is 19% (2017: 19%).  

In the USA, federal taxes are due at 21% 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. Further, a community business tax of c.14%-17% is also levied with rates determined by the municipality. An additional 5.5% solidarity surcharge is due on the federal and municipal tax, taking the total effective tax charge to c.30%-34%.

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. Due to the loss made in the year ended 31 December 2018, the impact of the potential shares to be issued on exercise of share options and warrants would be anti-dilutive and therefore diluted earnings per share is reported on the same basis on earnings per share.

	2018	2017
Profit after tax attributable to owners (£'000)	(4,867)	1,022
Weighted average number of shares:
Basic	127,515,308	95,894,348
Effect of dilutive potential ordinary shares	-	2,922,785
Diluted	127,515,308	98,817,133
Earnings per share:
Basic (pence)	(3.82)	1.07
Diluted (pence)	(3.82)	1.04

               

13.    Property, plant and equipment

	Motor vehicles	Computer equipment	Furniture and fittings	Total
	£'000	£'000	£'000	£'000
Cost
At 1 January 2017	-	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
Additions	-	293	6	299
Acquisition of Subsidiary	23	366	109	498
Exchange differences	1	(21)	(10)	(30)
At 31 December 2018	24	1,345	201	1,570
Accumulated depreciation
At 1 January 2017	-	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
Charge for the year	8	221	21	250
Exchange differences	1	(3)	(1)	(3)
At 31 December 2018	9	748	85	842
Property, plant and equipment, net
At 31 December 2018	15	597	116	728
At 31 December 2017	-	177	31	208

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		Patents & Trademarks		Goodwill				Total
	£'000		£'000		£'000		£'000		£'000				£'000
Cost or deemed cost
At 1 January 2017	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
Additions			377		1,150		249		1,613				3,389
Acquisition of Subsidiary	9		7,017		7,014		2,183		29,056				45,279
Exchange Differences	-		238		268		76		948				1,530
At 31 December 2018	1,150		11,437		32,770		2,508		60,625				108,490
Amortisation
At 1 January 2017	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
Charge for the year	92		1,224		2,845		69		-			4,230
At 31 December 2018	312		2,905		5,776		69		-			9,062
Intangible assets, net
At 31 December 2018	838		8,532		26,994		2,439		60,625			99,428
At 31 December 2017	921		2,124		21,407		-		29,008			53,460

For the purposes of the impairment evaluation, the intangible assets are evaluated according to their cash generating units (CGUs) which are the separate identifiable entities acquired in each of the Instra, SK Nic, Internet.bs, and KeyDrive acquisitions.  

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 2017.

The purchase of GlobeHosting, an asset acquisition is included in the additions line of the note above. The acquisition was completed on 6 September 2018. The total consideration of €2,558,000 comprises an initial consideration of €1,500,000, coupled with a deferred payment of €608,000 due on the first anniversary of completion and €450,000 due on the second anniversary of completion. The total consideration of €2,558,000 represents 3.0x of GlobeHosting's revenues of €849,000 for the 12 months to 31 July 2018 and 6.1x of its EBITDA of €419,000. The total consideration was reflected after price adjustments on the initial consideration and discounting factors on the deferred consideration. The list of Globehosting asset acquisition is as follows: a) customer list of €1,308,000, b) Goodwill of €735,000, c) Patents and trademark of €283,000, d) domain names of €93,000, and tangible fixed assets of €28,000. For future impairment evaluation of intangibles acquired in respect of the GlobeHosting acquisition, these will be considered within the KeyDrive cash generating unit in which the acquisition has been made.

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 within the CGUs as follows:

	Customer List			Goodwill
	2018	2017		2018	2017
	£,000	£,000		£'000	£'000
Reseller division	16,458	12,335		36,288	14,985
Small Business division	9,412	9,072		19,800	13,905
Enterprise division	1,124	-		4,537	118
Total carrying value	26,994	21,407		60,625	29,008

The recoverable amount of goodwill of £60,625,000 (2017: £29,008,000) at 31 December 2018 is determined based on a value in use using cash flow projections from financial budgets approved by senior management covering a one to three years period. Cash flow projections beyond the one to three year time frame 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 8.5%-10.3% depending on the segment within each CGU. 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
Reseller division			1-5%
Small Business division			1%
Corporate 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 considers 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

				2018		2017
				£'000		£'000
Deferred costs				787		976
Amounts due from related parties				78		74
				865		1,050

In June 2017 the company loaned Accent Media Ltd $100,000 (2018: £78,000, 2017: £74,000). The loan is due for repayment in two years and accruals 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

a) Fair value through other comprehensive income	£'000
At 31 December 2016 and 31 December 2017	997
Fair value movement	(997)
At 31 December 2018	-
.0

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 2018 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. Whilst the directors accept that Accent Media continues to be at an early stage, and envisage its profitability to improve, due to the business's current profitability, a prudent approach of applying a full impairment in 2018 has been adopted of £997,000.

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.

b) Investments in associates

At 31 December 2017	-
Additions	1,016
Share on profit on associate	34
Foreign exchange movement	36
At 31 December 2018	1,086

The Company owns the following investment in associates:

Name	Place of incorporation/ establishment	Principal activities	Issued and paid-up/ registered capital	Effective interests
Thomsen Trampedach GmbH	Germany	Domain registry operator	Ordinary shares	26.5%

% of ownership interests/voting rights held by the Group	2018 £'000
At 31 December:
Non-current assets	221
Current assets	1,150
Current liabilities	(735)
Net assets	636
Group's share of net assets	168
Others	468
Year ended 31 December 2018:
Revenue	2,558
Profit from continuing operations	309
Post-tax profit or loss from continuing operations	270
Total comprehensive income	270

17.       Trade and other receivables

				2018		2017
				£'000		£'000
Trade receivables				9,682		3,826
Accrued revenue				4,016		3,056
Deferred costs				2,778		3,435
Supplier payments on account				1,212		563
Amounts due from shareholders				-		764
Prepayments and other receivables				1,359		2,410
				19,047		14,054

As of 31 December 2018, trade receivables of £502,000 (2017: £294,000) were past due but not impaired.  These primarily relate to several customers for whom there is considered a low risk of default. 

The ageing of the trade receivables past due but not impaired is as follows; 0-30 days £124,000 (2017: £3,000), 30-60 days £91,000 (2017: £46,000), 60-90 days £68,000 (2017: £20,000), and over 90 days £267,000 (2017: £225,000).

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 KeyDrive and UK businesses.

Amounts due from shareholders for 2017 represented amounts due from Jabella Group Limited, a shareholder during the period. Amounts due from Jabella Group Limited bore interest at 2% above LIBOR. Interest receivable is disclosed in note 26. The loan was repaid in the year (2017: £764,000).

These are no contract assets within trade and other receivables.

 

18.  Cash and cash equivalents

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

				2018		2017
Amounts held on deposit				£'000		£'000
GBP				986		1,530
USD				9,679		7,202
EUR				6,705		1,884
AUD				153		157
NZD				187		32
CAD				42		54
Other				287		3
				18,039		10,862
				1118

 

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 2017	95,894,348			96	16,545	1,879
Issued in the year	74,758,454			75	37,628	-
	170,652,802			171	54,173	1,879

On 9 February 2018 598,000 options were exercised for £184,800 and on 1 August 2018 the group issued 74,160,454 Ordinary shares of 0.1 pence for £37,518,582, net of share issue cost.

The company has no authorised share capital.

20.          Non-current other payables

						2018		2017
						£'000		£'000
Deferred revenue						2,460		2,282
Deferred consideration						3,534		3,352
						5,994		5,634

 

                Deferred revenue represents amounts billed on account of revenues where performance obligations have not been met for recognition of revenue.

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.

22.          Deferred tax

	Share Based Payments	Losses	Other temporary differences	Total
Deferred tax assets	£'000	£'000	£'000	£'000
At 1 January 2017	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
(Charge)/credit to income	78	(6)	(241)	(169)
(Charge)/credit to equity	(47)	-	-	(47)
Exchange differences	(4)	(14)	2	(16)
At 31 December 2018	565	201	504	1,270

		KeyDrive Intangible assets		SK-NIC intangible assets		Instra intangible assets		Other temporary differences		Total
Deferred tax liabilities		£'000		£'000		£'000		£'000		£'000
At 1 January 2017		-		-		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
Acquisition of subsidiary		4,291		-		-		1,156		5,447
(Credit)/Charge to income		(206)		(166)		(385)		(1)		(758)
(Credit)/Charge to other comprehensive income		-		-		-		-		-
Exchange differences		153		(133)		(410)		21		(369)
At 31 December 2018		4,238		2,170		2,214		1,217		9,839

23.       Trade and other payables and accruals

		2018		2017
		£'000		£'000
Trade payables		7,225		3,091
Accrued expenses		9,487		7,024
Other taxes and social security		255		208
Deferred consideration		5,923		523
Deferred revenue (note 20)		7,806		9,218
Customer payments on account		15,385		6,877
Accrued interest		179		70
Other liabilities		395		36
		46,655		27,047

24.       Borrowings

								2018				2017
								£'000				£'000
Non-current
Bank borrowings								18,517				16,078
Prepaid finance costs								(600)				(537)
								17,917				15,541
Current
Bank borrowings								2,000				2,000
Prepaid finance costs								(225)				(146)
								1,775				1,854
Total Borrowings								19,692				17,395
			Bank borrowings							Prepaid finance Costs			Total
			£'000							£'000			£'000
Bank borrowings 1 January 2017			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
New financing drawdown			4,342							(310)			4,032
Repayment of new financing			(2,000)							168			(1,832)
Exchange differences			97							-			97
Total borrowing as at 31 December 2018			20,517							(825)			19,692

Bank borrowings relate to the £20.5m secured debt facility entered into with Silicon Valley Bank (SVB) on 29 August 2017 as amended and restated on 30 November 2017 and August 2018.   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. In August 2018, £3m was drawn down and in September an additional €1.5m was drawn down from the SVB facility.

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

25.     Business combinations

KeyDrive Acquisition

On 2 August 2018 CentralNic Group completed the acquisition of the entire share capital of KeyDrive S.A. for an initial consideration of $35.8m plus a performance based deferred consideration of $10.5m (discounted at $6.5m). The enterprise value of $44.5m was adjusted for settlement of debt like items of $16.0.0m, offset by the impact of cash and working capital adjustments for $7.3m, and after taking the discounted deferred consideration into account of $6.5m, this resulted in the total consideration of $42.3m.

The primary reason for the business combination is to substantially increase CentralNic's scale and product range, adding KeyDrive's strength in the domain reseller and corporate services market to CentralNic's existing expertise in the domain registry and retail registrar segments.

The enlarged Group will rank as the 11th largest domain name registrar globally by gTLD volume and be among the top five registry service providers by number of registry clients.

The following table summarises the consideration to acquire the share capital of KeyDrive S.A. 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		16,477			12,426
Deferred Consideration		6,513			4,912
Total Cash Consideration		22,990			17,338
Initial Share consideration		19,311			14,563
Total consideration		42,301			31,901
Fair value recognised on acquisition		$'000s			£'000s
Assets
Intangible assets - customer list		9,300			7,014
Software platform technology		9,305			7,017
Other intangible assets Property, plant and equipment		2,907 661			2,192 498
Investment in associate		1,347			1,016
Deferred tax on acquisition related intangibles		(5,690)			(4,291)
Other long term assets		4			3
Other receivables		8,921			6,728
Cash		4,583			3,457
		31,338			23,634
Liabilities
Trade payables		795			599
Other payables and accruals		18,780			14,164
Debt like liability		5,767			4,349
Other deferred tax liability		1,533			1,156
Other income tax liabilities		691			521
		27,566			20,789
Total identifiable net liabilities at fair value		3,772			2,845
Goodwill arising on acquisition		38,529			29,056
Purchase consideration		42,301			31,901

The initial cash consideration and associated expenses were funded through the Placing, raising gross proceeds of £24 m, its own cash resources and debt. SVB will be providing debt of c.£6 m, which is an extension of the current facilities entered in to for the SK.NIC acquisition.

In addition to the cash and Consideration Shares, if certain financial performance tests are met, CentralNic will pay Inter.Services a performance-based earn-out of up to $10.5 m, a minimum of 15 % of which shall be settled in cash and up to 85 % of which may be settled by the issue of additional consideration shares, taking the total maximum enterprise value to $55.0 m. If the performance-based earn-out pays out less than $10.5 m in total, CentralNic will pay for certain tax losses within the KeyDrive Group on the same basis as the payment of the performance-based earn-out but only to the extent that such tax losses are used by the enlarged Group and provided that the aggregate consideration for the earn-out and the tax losses does not exceed $10.5 m. As at 31 December 2018, the deferred consideration of $10.5 m was discounted to $6.5m using the discount rate outlined in note 14.

Management has 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 cash flow 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 KeyDrive gTLD and goodwill in relation to employees.

Acquisition related costs of £2,443,000 (2017: £883,000) have been recognised in the income statement, which are included in note 9.

For the post-completion period to 31st December 2018 revenues of $26.2m and Adjusted EBITDA of $3,868,000 have been generated by KeyDrive. KeyDrive's revenue for the year ended 31 December 2018 was $62,547,000 and Adjusted EBITDA was $6,724,000, with profit before tax of $2,148,000. $14,081,000 of debt like items have also been settled in cash and $750,000 of debt like item have been settled in shares.

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 directors expectations.

GlobeHosting Acquisition

The GlobeHosting acquisition which completed on 6 September 2019 is summarised in note 14.

SK NIC Acquisition in 2017

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 €5.8m5 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 cash flow 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.

 

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.

(i)            Shareholders

Balances outstanding with shareholders:

				2018		2017
				£'000		£'000
Jabella Group Limited				-		764

Amounts due from Jabella Group Limited were interest free until 31 August 2013, from which time the balance accrued interest at 2% above LIBOR. Following the loan repayment, there was no interest received in the year. An amount of £4,000 interest income over accrued in the previous year was released in the year (2017: £17,000).

During the year Inter.Services GmbH, a company of which A Siffrin is a shareholder provided services totaling £170,000 (2017: nil) to the group. £12,000 (2017: nil) was outstanding at the year-end.

During the year the group incurred rental costs of £2,000 (2017: nil) from H Siffrin, a close relative of A Siffrin is a director. There were no balances outstanding for the year ended 2018 and 2017.

The group provided services amounting to £11,000 (2017: nil) to Shortdot S.A., a company of which M Riedl is a director and shareholder. The amount outstanding at the year-end amounted to £5,000 (2017: nil).

Operating lease payable to Erin Investments & Finance Limited of which S Dayani is a member, amounted to £64,000 (2017: £64,000) for the year. The company was recharged £27,000 for the service charges. £26,000 (2017: nil) was payable at the year-end.

(ii)          Non-Executive Directors

During the year, CentralNic engaged with Rickert Rechtsanwaltsgesellschaft GmbH, 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 and other legal works.  The fees were £5,000 (2017: £9,000) and no amounts were outstanding as at 2018 and 2017 year-ends.

 (iii)        Other Related Parties

Balances outstanding with other related parties:

						2018		2017
						£'000		£'000
Accent Media Ltd						78		74

In June 2017 the Company loaned Accent Media Ltd $100,000 (2018: £78,000 and 2017: £74,000). The loan is due for repayment in three years from the date of advance and accrues interest at 5% which is payable quarterly in arrears. Interest receivable in the year amounted to £2,000 (2017: £2,000).

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:
 

				2018		2017
Land and Buildings				£'000		£'000
Less than one year				410		88
Between one and five years				567		11
				977		99

				2018		2017
Motor Vehicles				£'000		£'000
Less than one year				39		-
Between one and five years				16		-
				55		-

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

Moorgate London, UK. The lease agreement was entered into on 1 January 2010 for an initial term of six years, extended to 1 April 2018, and subsequently extended on a month by month basis. The property was vacated on 30 April 2019.

Bank London, UK. The lease agreement was entered into on 7 March 2019 with a break clause on 6 March 2024 and an expiry date of 6 March 2029. The post balance sheet lease commitment to the break clause date is £1,210,000.

Melbourne, Australia. The original lease agreement expired on 30 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 1 August 2012 for an initial term of three years, with the right to renew every 3 years. The property was vacated on 15 April 2019.

Marine Parade, Napier, New Zealand. The lease agreement was entered into on 16 April 2019 for an initial term of three years with the right to renew every three years. The final expiry date is 31 July 2027.

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

Munich Germany. The group also acquired several leases on its acquisition of KeyDrive Group for a period of 36 months from August 2012. The leases are renewed automatically and cancellation is subject to a month's notice by either party.

Köln Germany, The lease agreement was entered into on 1 July 2018 for an initial term of five years. The lease will then be renewed for two years after the lease date unless a year's notice is provided.

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.

Luxembourg. The lease agreement was acquired on acquisition of the KeyDrive Group. The contracts are renewed by tacit agreement for a period of 12 months subject to a notice period either side of three months.

Leesburg, Virginia, USA. The lease agreement was entered into on 1 October 2013 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.

Motor Vehicles

The group also acquired several motor vehicle leases on its acquisition of the KeyDrive group. These leases run for a period of 36 months.

The Group leases equipment under various operating leases, the majority of which 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 2018 (2017: 0,00).  Out of the 6,287,166 outstanding options (2017: 6,929,166),        3,607,166 options (2017: 3,730,166) were exercisable. 

598,000 share options were exercised in 2018 (2017: nil), with 44,000 options lapsing during the year (2017: 115,000).

A charge of £359,537 (2017: £452,989) 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 2018	WAEP* 31 Dec 2018	Number 31 Dec 2017	WAEP* 31 Dec 2017
Outstanding at 1 January	6,929,166	32p	7,044,166	32p
Granted during year	-	-	-	-
Exercised during year	(598,000)	31p	-	-
Lapsed during year	(44,000)	40p	(115,000)	40p
Outstanding at 31 December	6,287,166	32p	6,929,166	32p
Exercisable at 31 December	3,607,166	27p	3,730,166	26p

* weighted average exercise price.

The weighted average remaining contractual life of the options outstanding at the statement of financial position date is 5.8 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:

		2018		2017
		£'000		£'000
Financial assets measured at amortised cost
Trade and other receivables		14,808		9,835
Cash and cash equivalents		18,039		10,862
		32,847		20,697
Financial liabilities measured at amortised costs
Trade and other payables and accruals		17,483		10.432
Loan and borrowing		1,775		1,854
		19,258		12,286

Current and non-current loans and borrowings are included within section (ii), credit risk below.

(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 2018:

	GBP	US$	Euro	AUS$	other currencies	Total
	£'000s	£'000s	£'000s	£'000s	£'000s	£'000s
Current Financial assets
Loan and receivables
Trade and other receivables	8,567	3,062	2,835	62	282	14,808
Cash and cash equivalents	986	9,679	6,706	153	515	18,039
	9,553	12,741	9,541	215	797	32,847
Current Financial liabilities measured at amortised costs
Trade and other payables	12,648	3,408	952	458	17	17,483
Loan and borrowing	(225)	-	2,000	-	-	1,775
	12,423	3,408	2,952	458	17	19,258

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 2018.

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 2018		Strengthen/Weaken 2017
				£'000		£'000
USD				+/-943		+/- 378
EUR				+/-665		+ /- 225
AUD				+/-25		+/-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 2017 and 2018, CentralNic Group's long-term debt facility entered into with SVB bearing interest at a margin plus LIBOR.

2018

2017

£'000

£'000

Cash and bank balances

18,039

10,862

Effect of interest rate change of 100 basis points on cash and bank balances

+/- 180

+/- 109

SVB Bank Facilities

19,692

17,395

Effect of interest rate change of 100 basis points on cash and bank balance

+/- 197

+/- 174

(iii)   Equity price risk

The CentralNic Group does not have any quoted investments as at each of 31 December 2017 and 2018 and as such does not have significant exposure to equity price risk. At 31 December 2017 CentralNic Group held an unquoted investment in Accent Media of £1.0m which represents a shareholding of 10.4% of the share capital. The investment has been fully written off as at 31 December 2018.

(ii)     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 and analysis of trade and other receivables by foreign currency exposure is noted above. There have been no material changes in the credit risk profile of the Group during the year.

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.

			2018			2017
			£'000			£'000
Deferred receivables			78			74
Trade and other receivables			14,808			9,835
Investments			-			997
Cash and bank balances			18,039			10,862
			32,925			21,768

(iii)         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 2018
Trade and other payables and accruals		17,483	17,483	17,483	-
Borrowings		19,692	19,692	1,775	17,917
		37,175	37,175	19,258	17,917

£'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 Directors' 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:

		2018		2017
		£'000		£'000
Total liabilities		37,175		27,827
Less: cash and bank balances		(18,039)		(10,862)
Financial Instruments - net debt/(cash)		19,136		16,965
Total equity		60,982		26,452
Debt-to-equity ratio		0.31		0.64

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

			2018				2017
			£'000				£'000
Cash and bank balances			18,039				10,862
Less:  Borrowings (excluding prepaid finance costs)			(20,517)				(18,078)
Net (debt) / cash			(2,478)				(7,216)

 (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:

		2018			2017
£'000		Carrying amount	Fair value		Carrying amount	Fair value
Trade and other receivables		14,808	14,808		9,835	9,835
Deferred receivables		78	78		74	74
Investments		-	-		997	997
Cash and bank balances		18,039	18,039		10,862	10,862
		32,925	32,925		21,768	21,768
Trade and other payables and accruals		17,483	17,483		10,432	10,432
		15,442	15,442		11,336	11,336

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 from 2018 to 2020. At 2018 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 €918,000. 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 three years (post completion) with the payment profile being spread over eight 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.

In addition, the KeyDrive group acquisition on 2 August 2018 included earn-out commitments, if certain financial performance tests are met, CentralNic will pay Inter.Services a performance-based earn-out of up to $6.5m, a minimum of 15 per cent of which shall be settled in cash and up to 85% of which may be settled by the issue of additional consideration shares. If the performance-based earn-out pays out less than $6.5m in total, CentralNic will pay for certain tax losses within the KeyDrive Group on the same basis as the payment of the performance-based earn-out but only to the extent that such tax losses are used by the enlarged Group and provided that the aggregate consideration for the earn-out and the tax losses does not exceed $6.5m. At 2018 year-end, the earn-out element has been accounted for in the consolidated statement of financial position at fair value, using a discount factor of 1-10%, which has amounted to £4,912,000.

(d)           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).

30.           Post balance sheet events

The Group also upgraded our United Kingdom corporate headquarters and New Zealand office in the beginning of 2019.

The UK lease agreement was entered into on 7 March 2019 with a break clause on 6 March 2024 and an expiry date of 6 March 2029. The post balance sheet lease commitment to the break clause date is £1,210,000. The New Zealand lease agreement was entered into on 16 April 2019 for an initial term of 3 years with the right to renew every three years. The final expiry date is 31 July 2027.

 

END

 

 

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