Final Results

RNS Number : 4133D

Zoo Digital Group PLC

26 June 2019

 

26 June 2019

ZOO DIGITAL GROUP PLC

("ZOO" the "Group" or the "Company")

 FINAL RESULTS FOR THE YEAR ENDED 31 MARCH 2019 

ZOO Digital Group plc, the provider of cloud-based localisation and digital distribution services for the global entertainment industry, today announces its audited financial results for the year ended 31 March 2019.

HIGHLIGHTS

Key Financials

·      Revenue edged up to $28.8 million (2018: $28.5 million)

·      Adjusted EBITDA* of $0.4 million (2018: $2.4 million) - EBITDA* margin of 1.4% (2018: 8.4%)

·      Operating loss of $1.3 million  (2018: profit $0.6 million)

·      Reported Profit Before Tax of $1.3 million (2018: loss $5.0 million)

·      Cash at year end $1.8 million with no debt other than convertible loan notes (2018: $2.4 million, H1: $0.9 million)

Operational Highlights

·      Localisation revenues grew by 4% despite disruption in the market due to changes in the supply chain of a major client

·      Continued adoption of cloud-based dubbing service, with number of major studio customers doubling in year

·      Confirmed as a Netflix Preferred Fulfilment Partner

·      Continued investment in R&D including launch of ZOOstudio localisation ecosystem - an advanced project and capacity management platform that has been well received by clients and the industry

·      Continued expansion of capacity including launch of the ZOO-Enabled Dubbing Studio programme with 70 facilities enrolled across 22 key countries together with significant increase in the freelancer network

Outlook

·     Ongoing supportive market dynamics, with the increase in digital entertainment content and expansion of distribution channels driving a growing demand for high quality and scalable content localisation and digital packaging services

·      Gillian Wilmot appointed to the Board as Chairman with effect from 1 July 2019, replacing Roger Jeynes who will step down after serving a nine-year tenure

* adjusted for share-based payments

Copies of the Report and Accounts for the year ended 31 March 2019 are available to view on the Group's website www.zoodigital.com.

Stuart Green, CEO of ZOO Digital, commented,

"We have worked hard over the course of the year to enhance our offering, build up our network and differentiate ourselves further from the competition. ZOO now has the technology, the people and the local expertise to enable our clients to deliver content across multiple territories and in multiple languages simultaneously and efficiently. To be chosen as a primary vendor of localisation services for large media companies requires us to demonstrate significant global capacity, and in this regard, we have made excellent progress that puts us in good stead as we continue to grow. 

Trading in the new year has begun well. Whilst the significant decline in legacy DVD and Blu-ray formats in our digital packaging segment has continued, now leading us to not forecast any significant income from this business line in the future, this has been offset by strong growth related to Over-the-Top (OTT) delivery. We expect ZOO to be confirmed as a preferred vendor to a greater number of clients and lines of business during the course of the year ahead. Our caution around timing is reflective of the dynamic nature of the OTT marketplace and recent experience.

The end market into which we are selling our cloud-powered services continues growing and the traction that we are gaining with each of our services gives us great confidence that the business is well placed to meet opportunities and growth in the years to come."

For further enquiries please contact:

ZOO Digital Group plc	0114 241 3700
Stuart Green - Chief Executive Officer
Phillip Blundell - Chief Finance Officer
finnCap Ltd Henrik Persson / Kate Bannatyne (corporate finance) Camille Gochez / Andrew Burdis (corporate broking)	020 7220 0500
Alma PR Josh Royston / Hilary Buchanan / Helena Bogle	020 3405 0205

The Company further wishes to draw attention to the posting on its website (www.zoodigital.com) of a presentation to shareholders regarding its final results.

 

CHAIRMAN'S STATEMENT

The Group has continued its programme of planned investment to develop a full suite of services which are needed by the entertainment industry for the global delivery of localised content. These investments are helping our clients - some of the largest creators and distributors of entertainment content - launch and operate their own direct-to-consumer streaming platforms and manage their supply chains across multiple localisation vendors.

During the financial year the Group encountered two challenges: one of our largest clients changed the way in which it engages with its supply chain, and our non-core declining legacy DVD and Blu-ray business shrank at a faster rate than had been anticipated. Despite these adverse factors, the Board is pleased that ZOO's transition to become one of the most innovative providers of localisation services to the TV and film industry continues to make excellent progress. 

Total revenues for the Group edged up to $28.8 million, driven by a 4% increase in our localisation segment as our nascent dubbing service attracted new customers. As highlighted in the previous year's statement, investments in software innovation, a larger international presence and increased capacity to service our expected growth in demand from the world's largest entertainment companies resulted in adjusted EBITDA* reducing to $0.4 million compared to $2.4 million in 2017-18. Given the Group's investment in R&D, the movement in share based payments and depreciation of equipment used in the business an operating loss of $1.3 million was recorded in 2019 (2018: profit $0.6 million). As a consequence of the revalution of the embedded derivative the reported profit for the year before tax, was $1.3 million compared to a loss last year of $5.0 million.The Group was cash positive in the second half of 2018-19, closing with $1.8 million cash in the bank and debt of $3.3 million**. ZOO also has access to more than $2 million in short-term debt financing which was not used at the period end. As such, the Board is confident that the Group is able to exploit the large and expanding market opportunity for its software and services.

The disruptions during the year have been frustrating for ZOO and for shareholders, but our staff's hard work, adaptability, commitment and undiminished enthusiasm have enabled us to continue to make significant progress with our four strategic priorities:

Innovate - Our software platforms, from which we deliver cloud-based subtitling and dubbing services, have been extended with significant new functionality in the year. ZOOstudio, an advanced project and capacity management platform, was developed specifically to address our clients' needs to manage the localisation process from end to end and to embrace multiple vendors. The excellent market reaction to ZOOstudio has included being awarded Product of the Year at the recent National Association of Broadcasters (NAB) show in Las Vegas after the period end.

Scale - Our freelance network of translators, voice actors, dubbing directors and audio engineers grew by almost 50% to over 6,500. In addition, we have extended the software to allow studios to use our systems for their own projects, which again extends our reach and capacity.

Collaborate - We have continued to add global partners who work in our systems and help us deliver client projects. We launched a partnership and accreditation programme (ZOO-Enabled Dubbing Studios) and have recruited world-leading dubbing partners in Europe, Asia, South America and the Middle East. We have partnered with specialist educational organisations to enlarge the localisation talent pool and with universities to continue ground-breaking research in machine learning to enhance our services.

Build Long-term Client Partnerships - During the year we were confirmed as a preferred fulfilment partner (NPFP) for Netflix, allowing us to secure contracts for subtitling and media processing. ZOO is currently in the advanced stages of formal tenders at several major companies for the long-term supply of localisation and digital packaging services. Although these have not yet concluded, we remain optimistic of positive outcomes from these for ZOO.

The Board is committed to complying with the QCA corporate governance code and, as I have now been a non-executive director of ZOO for 9 years, I have announced that I will not seek re-election at the next AGM. Following a formal selection process, I am pleased that the Board has appointed Gillian Wilmot who will take up the role from 1 July 2019. Gillian is an experienced chairman and NED with expertise in digital, brand and value creation and in delivering growth strategies. I extend to her my very best wishes as she takes up leadership of the Board in what I expect to be an exciting period of growth for ZOO.

As announced in last year's report, Phillip Blundell joined in July 2018 as the replacement for our long-serving CFO Helen Gilder. Phillip has settled in well and is now a key member of both the Board and the senior management team. I would like to thank Helen for her commitment, integrity and significant contribution to the current success of the business.  We believe the Board is appropriate for the business in its current stage of evolution and, following the new chair appointment, we will again have two independent non-executive directors to ensure the effective representation of all stakeholders' interests.

The Board and all our staff are determined to grow ZOO into a leading next-generation media localisation business by offering a unique combination of software and customer service to the film and TV industry's leading players. Our innovative software, established client relationships, extensive partner networks and highly skilled staff give the Board confidence that we can deliver an exciting and rewarding future for our stakeholders from this rapidly evolving $4 billion market.

*     Adjusted for share-based payments

**   Represented by the £2.6m sterling-denominated convertible loan notes at an exchange rate of 1.3

Roger D Jeynes

Chairman

STRATEGIC REPORT

Introduction

Throughout the course of the year the Company has invested in people, in technology and in infrastructure so that it is ideally placed to take advantage of the continuing changes in the TV and filmed entertainment industries that our services support.

As highlighted in the Chairman's Statement, we experienced some challenges during the year due to external factors, which is unsurprising given the rapid rate of change and the relatively nascent nature of Over-the-Top (OTT) video delivery. Early in the year subtitling revenue was impacted by disruption, which was experienced by us and other market participants in the subtitling supply chain during the transition of a major OTT operator's partner programmes, and in the second half we were affected by the delay of a single, material localisation project that was scheduled to begin and be completed during the year. Furthermore, the work that we carried out processing legacy DVD and Blu-ray titles showed greater than expected decline in the second half following a poor performance of retail sales of these products over the holiday season. This deterioration confirms our view of the market trends and although these services are not core to the Group on an ongoing basis, representing only 8% of revenues in the year, they did impact on our full year profitability in the period under review. Furthermore, we now forecast this decline will accelerate in the period ahead and have significantly reduced our expectations of on-going revenue from this legacy business line in the new year and beyond.

As a result of the external factors described above, total revenue for the year was $28.8 million (2018: $28.5 million). Within this figure, total localisation revenues grew 4% to $22.3 million against a strong comparative prior year figure that included a one-off project with a value of $2.5 million for a major studio. The impact of this one-off project was to reduce the key metric relating to retained sales from 97% to 88% in the fiscal period. As a consequence of the investment in people, technology and capacity, EBITDA was $0.4 million compared to $2.4 million last year.  It also adversely affected our other operational KPI, operating expenses as a percentage of revenues, which increased to 37% compared to 33% in 2018. Despite this investment we ended the year with cash of $1.8 million (2018: $2.4 million).

Strategy and market opportunity

Digital consumption of entertainment continues to gather pace, and with the launch of new direct-to-consumer OTT platforms from some of the world's biggest media, technology and communications companies planned to take place in the coming year, this is set to accelerate even further.

Consequently, content with appeal to a broader consumer audience will continue to become commercially available in more and more geographies, and as the territorial reach increases so too does the need for subtitling and dubbing into additional languages. We envisage that services aimed at family audiences will become more prominent on a wider territorial basis, which will have an impact on demand for professional localisation services since content aimed at young viewers is always dubbed rather than subtitled. The growth in the number of languages into which entertainment is being localised increases the scope of work for ZOO.

Combined with this, companies are committing greater levels of investment to original content creation to act as a differentiator for their platforms. A number of major media companies are currently engaged in a rigorous and usually lengthy process of selecting their preferred partners for localisation services and it is pleasing to note that ZOO is being considered by each one of them, which is evidence of the quality of the work that we have undertaken to date and of our growing reputation as a partner of choice in the industry.

The growth in demand for premium media localisation services that we observe is supported by recent research findings from MESA Europe, an independent industry body, which reported that total spend on media localisation in EMEA alone exceeded $2.3 billion in 2018 (2017: $2.0 billion) and is anticipated to grow at between 5-8% a year from 2019 to 2021. Within that, dubbing represents 70% of the total spend and 69% of it is related to the localisation of episodic TV titles, with feature films accounting for 18%. MESA Europe reports that the top four vendors in subtitling in EMEA represent 62% of the market, whilst in dubbing the figure drops to 20%, a consequence of the fact that the traditional dubbing industry is highly fragmented across a large number of small operators in many countries. This helps to underline why gaining preferred vendor status is such an important step for ZOO, giving the potential for our multi-lingual dubbing proposition to grow a strong market position.

We remain confident that ZOO is well positioned to capture a significant share of this growing number of localisation projects due to the following factors:

Innovation - ZOO's innovative use of technology enables content owners to distribute their products to additional territories at a faster speed-to-market and to a consistently high quality compared with what has previously been possible, with greater security and at a competitive price. The clear benefits delivered by the Company's differentiated proposition have driven significant organic growth in sales.

Scale - ZOO's software enables the Company to collaborate with a worldwide network of thousands of freelance workers, such as translators, voice actors and dubbing directors, and to significantly reduce the human capital requirements of service fulfilment, enabling the Company to scale its capacity efficiently as demand increases and to capitalise on the on-going trend for global distribution of international content originating in a growing number of languages.

Quality - Over the eight years since we launched our subtitling proposition, we have demonstrated our ability to deliver a service across all global languages, at scale, at the highest levels of quality achieved within the industry. We have become recognised as a leading player and partner of choice for subtitling by some of the largest media organisations. Although our dubbing proposition, launched only two years ago, is at a much earlier stage in its development, we have already been engaged by major studios on initial projects, and the feedback we have received on our performance has been very favourable. This gives us confidence to believe that, given time, we will build a similar reputation for quality in our dubbing service from which we can reasonably expect accelerated adoption will follow.

Partnership - ZOO's long history of service and software provision in the entertainment industry means it has an unrivalled depth of both industry know-how and customer relationships. Recent hires to the Company include senior directors from Walt Disney and traditional industry vendors.

Review of Operations

We have continued to make considerable progress in our localisation services delivered through our proprietary cloud-based platforms, ZOOsubs and ZOOdubs, for the provision of subtitling and dubbing services respectively.

ZOOsubs: Subtitling

The performance of subtitling was affected by the disruption in the supply chain of a major OTT partner during the first half. This normalised after three months and volumes then continued to increase through the second half, resulting in continued strong growth year-on-year. However, our recent experience is that orders placed by this client are at greater likelihood of change than previously, having encountered situations where certain orders have been delayed or cancelled. For example, a large order was cancelled in our final quarter due to a content licensing deal being aborted, and our completion of a second large order was delayed by two months following late receipt of assets from the licensor, pushing some FY19 expected sales into FY20. This combination of factors leads us to be more cautious in our forecasting of sales from this major client.

It has been particularly rewarding to witness the progress of subtitling from its launch and recognition in the form of a number of industry accolades, through to its current status. It now has an excellent reputation within the industry where it continues to be adopted by an increasing number of clients as well as processing increasing volumes within existing clients. As well as the financial confidence this affords, it also affirms our belief that ZOOdubs is on a similar trajectory, being the more recently launched service and which is following a similar path.

ZOOdubs: Dubbing

The supply chain disruption previously mentioned also had an effect on the year's overall performance within dubbing, which nonetheless grew revenues by 17% in the year. ZOOdubs is still a very recent addition to our services and meaningful adoption of any offering inevitably takes time. This is particularly so of one that is so disruptive due to being in some respects at odds with conventional wisdom within the industry. This is entirely consistent with our experience following the launch of ZOOsubs, where the initial reservations articulated by our clients concerning quality, scalability and security have since been proven to have been unfounded.

We have seen an increase in major studios trialling our solution throughout the year and feel confident that this will result in increased workflow in coming periods, as well as increased volumes from existing dubbing clients. Our innovation has continued, resulting in us delivering further significant developments in ZOOdubs and we were delighted that it received its third major industry award during the year, being the International Association for Broadcast and Media Technology Suppliers (IABM) award at the NAB show in 2018.

Investing for future growth

As previously mentioned there has been exceptional growth in the volume of content consumed across different geographies and in different languages, and this is set to accelerate. With the launch of new OTT market entrants and the continued growth of our existing clients, ZOO has been investing to ensure that it has the appropriate technology, capacity and geographical expertise to partner with content owners and distributors as they bring growing volumes of entertainment titles to greater audiences.

Our freelance network, which gives us scalability at variable cost, grew by 50% during the period and at the year-end stood at just over 6,500 individuals, giving us access to 75 different languages. Included within this are over 800 voice actors who cover 34 languages between them. This readily available access to in-territory talent is a key differentiator for ZOO when clients are looking to release content in multiple countries and in multiple languages concurrently. The growth in the freelancer network again reflects ZOO's growing reputation globally.

Through our discussions with clients around our dubbing proposition, in addition to the many attractive benefits we can offer, it has become evident that certain clients require some or all of the voice recordings for some languages to take place in traditional dubbing studios. To address this, shortly prior to the end of the period under review we launched our ZOO-Enabled Dubbing Studio (ZEDS) programme, where we provide access to and training on how to use our solutions so that traditional dubbing studios are able to perform voice recording directly into our system. In this way, we are able to preserve many of the advantages of our disruptive approach while still accommodating particular requirements stipulated by our clients. To date, over 70 traditional and reputable dubbing studios across 22 languages have signed up to the ZEDS programme with more expected to follow in the current financial year. In addition to meeting the clients' criteria this also provides ZOO with much greater capacity to meet future demand.

There has been considerable investment in our technology during the year, resulting in enhanced features in both our dubbing and subtitling offerings as well as the launch of new platforms, with some of the more significant being the following:

·       Launch of lip sync dubbing - Our technology now supports the preparation and delivery of lip syncing, the more demanding, complex and therefore higher value form of dubbing, with initial projects receiving positive feedback from clients, voice actors and dubbing directors. This opens a wider pool of dubbing projects to ZOO.

·       Launch of a scripting service powered by a new cloud-based platform, ZOOscripts, a cornerstone capability that enables us to process combined subtitling and dubbing assignments consistently, providing our clients with further efficiency and greater control. This is particularly valuable when working on pre-release content, where the work on localisation begins prior to finalising the video edit. In this case localisation operates as an iterative process, necessitating robust version control. ZOOscripts is an important component of our ecosystem that ensures that any changes made to the original language dialogue are automatically propagated to all localised subtitles and dubbed soundtracks.

·       Launch of Delta - software to identify automatically the dialogue changes in different versions and iterations of TV and movie content. This removes the need for manual tracking, visual/audio inspection and duplicated work, which cause unnecessary delays and errors in traditional workflows.

·       Launch of ZOOstudio - Given the size of the localisation market, the sheer volume of content and the level of spend incurred by major producers, it has long been the case that many large companies are unwilling to source their localisation needs from a single vendor and this is unlikely to change in the future. This creates its own unique difficulties for clients in being able to manage global distribution materials delivered by multiple vendors.

To this end, the Company recently launched ZOOstudio, a localisation ecosystem management platform that provides transparency, tracks key metrics and enables scenario planning. This is therefore a strategically important tool and we are delighted that we are already in dialogue with a number of large studios regarding its adoption and that post the period end, ZOOstudio achieved critical industry acclaim at the NAB 2019 show, where it won a prestigious 'Product of the Year' award.

Outlook

ZOO has the technology, the people and the local expertise to enable our clients to deliver content across multiple territories and in multiple languages simultaneously and efficiently. We have worked hard over the course of the year to enhance our offering, build up our network and differentiate ourselves further from the competition. To be chosen as a primary vendor of localisation services for large media companies requires us to demonstrate significant global capacity, and in this regard, we have made excellent progress that puts us in good stead as we continue to grow.

Trading in the new year has begun well. Whilst the significant decline in legacy DVD and Blu-ray formats in our digital packaging segment has continued, now leading us to not forecast any significant income from this business line in the future, this has been offset by strong growth related to Over-the-Top (OTT) delivery. We expect ZOO to be confirmed as a preferred vendor to a greater number of clients and lines of business during the course of the year ahead. Our expectations of timing are reflective of the dynamic nature and disruption experienced in the OTT marketplace recently.

The end market into which we are selling our cloud-powered services continues growing and the traction that we are gaining with each of our services gives us great confidence that the business is well placed to meet opportunities and growth in the years to come.

Stuart Green

Chief Executive Officer

FINANCIAL REVIEW

Revenue

2018-19 was a challenging year as our largest client changed the way it engages with its supply chain and our legacy DVD and Blu-ray digital packaging business declined faster than we had anticipated. Despite these 2 factors revenues edged up to $28.8 million compared to $28.5 million in 2018. The movement in revenues is explained by a 4% increase in localisation offset by a 12% decline in digital packaging and a 4% decline in software solution revenues.

The majority of the Group's customers are in the USA, where revenues decreased by 3% to $25.4 million. The balance of revenues were in Europe and Asia which showed an increase of 144% to $2.7 million. The shift in geographical revenues is due to our customers seeking content from new regions and the decline in our legacy DVD and Blu-ray business.

We have experienced during the year under review a slight increase in customer concentration, as the revenue contribution from our largest client increased to 36% of sales in 2019 (2018: 34%), with the second largest accounting for 22%, down from 24% last year.

Localisation is the segment of Company revenues that will be the future engine for growth. It comprises subtitling, captioning and dubbing services. Subtitling and captioning revenues were flat year on year due to the temporary slowdown in orders from our biggest customer. Dubbing revenues grew by approximately 17% as eight major content creators, up from four the previous year, awarded us projects.

Digital packaging, our other main revenue category, saw revenues drop by 12% as our legacy DVD and Blu-ray service line reflected the global decline in demand for such products.

Software licensing, our third segment which has been a reducing proportion of our business, continued to decline, this year by 4% to $1.9 million.

Segment contribution

The Company reports gross profit after deducting both external and internal variable costs to reflect that an increasing proportion of our revenues are derived from the provision of services to our customers. To add clarity to our financial statements we include details of performance by our three key business segments: localisation, digital packaging and software solutions.

Localisation segment contribution fell in the year from $6.7 million to $6.2 million due to a significant increase in direct staff costs as the business geared up for higher revenues. The contribution percentage as a consequence reduced from 31% to 28%. This additional capacity means that in the coming year, as predicted revenues increase, the localisation contribution margin will improve.

Digital packaging segment contribution fell to 54% in the year from 60% in 2018. This is to be expected by our changing sales mix: the high margin DVD and Blu-ray revenues fell in the year whilst we invested in staff anticipating higher digital packaging revenues.

Software solutions segment contribution held steady at 95% in the year.

Overall gross profit, which is calculated after also deducting unallocated variable costs, fell 9% to $9.2 million compared to $10.1 million in 2018. This represents a gross profit margin of 32%, down 3% points from 35% last year. The majority of the reduction in gross profit margin is due to the investment in direct staff in anticipation of increased revenues from our main customers. This cost is approximately $0.7 million.

Other operating expenses

Other operating expenses, have continued to increase as we internationalise our business and gear up to support our future growth plans. Overall, they increased by 13% to $10.7 million as we have invested in expanding the sales team and broadening out our dubbing capacity. This has involved expanding the R&D department, building a team of dedicated dubbing experts and growing the freelancer network. We have expanded our US office to accommodate the increase in staff and voice capture facilities and opened a larger London office with the space for a dedicated mixing studio. To promote our new dubbing service, we have increased our marketing budget significantly, spending $0.4 million compared to $0.2 million in the prior year. This rate of increase is not expected to continue into future years as the business can now leverage the investment through higher sales without a corresponding increase in operating expenses.

Finance costs

The main component of the Group's finance costs relate to the 7.5% convertible loan note stock with a maturity date in October 2020. Interest on the principal in the year was $0.4 million, approximately the same as 2018. The other two components of finance costs are non-cash items. The first is the exchange gain on the conversion of the outstanding sterling-denominated debt at the year-end due to the weakening of sterling to the US Dollar in the year, which has given rise to an exchange gain of $0.3 million. The second is the reduction in the fair value of the embedded derivative at year-end calculated with reference to the share price movement in the past 12 months and the expected value to loan note holders at the point of conversion. This has given rise to a non-cash $2.7 million gain.

These non-cash accounting entries have had a material impact on the profit/loss before tax for the year ended March 2019, which was a profit of $1.3 million (2018: $5.0 million loss).

As a result of the expansion of costs to provide capacity for future revenue growth the business made an operating loss of $1.3 million (2018: profit $0.6million). On the Group's preferred measure of profitability, being EBITDA before share-based payments, the profit was $0.4 million, down from $2.4 million in 2018, reflecting the investment in the localisation business and the runoff of the high margin legacy DVD business.

Statement of financial position

The statement of financial position shows that trade and other receivables have increased 9% compared to last year to $8.1 million reflecting the strong sales performance in the last 2 months of the financial year compared to last year as clients prepared for new platform launches. This increase was mirrored in trade and other payables as work performed by suppliers and freelancers peaked to support our customer deliveries. Cash and cash equivalents of $1.8 million at year end, (2018: $2.4 million) was down 25%, however, in the second half of the year we generated net cash of $0.9 million through strong cash receipts from customers.

At the time of reporting, the majority of year end debtors had been collected.

Non-current liabilities fell significantly in the year due to the revaluation of the embedded derivative reducing its value by $2.7 million. This is a non-cash adjustment and does not represent a future cash liability to the business.  The value of the 7.5% convertible loan notes fell in the year by $0.3 million to $3.3 million due to the weakness of sterling against the dollar and a small redemption of $12,000 by a bond holder.

By order of the board

Phillip Blundell

Chief Financial Officer and Secretary

FINANCIAL INFORMATION

The financial information set out here for the year ended 31 March 2019 does not constitute full statutory financial statements as defined in section 434 of the Companies Act 2006 but has been extracted from the Group's financial statements for that period. Statutory financial statements for the year ended 31 March 2019 were approved by the directors on 25 June 2019, but have not yet been delivered to the Registrar of Companies. Those financial statements were reported upon without qualification by the independent auditor and did not contain a statement under section 498 (2) or (3) of the Companies Act 2006.

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME

for the year ended 31 March 2019

		2019	2018
	Note	$000	$000
Revenue		28,818	28,551
Cost of sales		(19,624)	(18,486)
Gross Profit		9,194	10,065
Other operating income		157	-
Other operating expenses		(10,671)	(9,426)
Operating (loss)/profit		(1,320)	639
Analysed as:
EBITDA before share based payments		409	2,396
Share based payments		(286)	(276)
Depreciation		(539)	(450)
Amortisation		(904)	(1,031)
		(1,320)	639
Exchange gain/(loss) on borrowings		275	(456)
Conversion of loan into equity		-	(115)
Fair value movement on embedded derivative		2,701	(4,666)
Finance cost		(392)	(411)
Total finance cost		2,584	(5,648)
Profit/(Loss) before taxation		1,264	(5,009)
Tax credit		368	253
Profit/(Loss) and total comprehensive income for the year attributable to equity holders of the parent		1,632	(4,756)

Profit/(loss) per share	3
basic		2.19 cents	(6.81) cents
diluted		2.02 cents	(6.81) cents

 

CONSOLIDATED STATEMENT OF FINANCIAL POSITION

as at 31 March 2019

		2019		2018
	Note	$000		$000
ASSETS
Non-current assets
Property, plant and equipment		944		889
Intangible assets		6,624		6,541
Deferred income tax assets		486		486
		8,054		7,916
Current assets
Trade and other receivables		8,103		7,412
Cash and cash equivalents		1,828		2,409
		9,931		9,821
Total assets		17,985		17,737
LIABILITIES
Current liabilities
Trade and other payables		(7,189)		(6,106)
Borrowings	6	(248)		(226)
		(7,437)		(6,332)
Non-current liabilities
Borrowings	6	(3,899)		(4,084)
Separable embedded derivative	6	(1,965)		(4,666)
		(5,864)		(8,750)
Total liabilities		(13,301)		(15,082)
Net assets		4,684		2,655
EQUITY
Equity attributable to equity holders of the parent
Called up share capital	5	1,010		1,010
Share premium reserve		41,003		41,003
Foreign exchange translation reserve		(992)		(992)
Convertible loan note reserve		42		42
Share option reserve		1,085		688
Capital redemption reserve		6,753		6,753
Interest in own shares		(53)		(53)
Other reserves		12,320		12,320
Accumulated losses		(56,484)		(58,116)
Attributable to equity holders		4,684		2,655

CONSOLIDATED STATEMENT OF CHANGES IN EQUITY

for the year ended 31 March 2019

	Ordinary shares	Share premium reserve	Foreign exchange translation reserve	Convertible loan note reserve	Share option reserve	Capital redemption reserve	Other reserves	Accumulated losses	Interest in own shares	Total
	$000	$000	$000	$000	$000	$000	$000	$000	$000	$000
Balance at 1 April 2017	7,236	37,007	(992)	42	328	-	12,320	(53,360)	(20)	2,561
Deferred shares	(6,753)	3,881	-	-	-	6,753	-	-	-	3,881
Loan note conversion	-	115	-	-	-	-	-	-	-	115
Share based payments	-	-	-	-	360	-	-	-	-	360
Purchase of own shares	-	-	-	-	-	-	-	-	(33)	(33)
Issue of ordinary shares	527	-	-	-	-	-	-	-	-	527
Loss for the year	-	-	-	-	-	-	-	(4,756)	-	(4,756)
Total comprehensive income for the year	-	-	-	-	-	-	-	(4,756)	-	(4,756)
Balance at 31 March 2018	1,010	41,003	(992)	42	688	6,753	12,320	(58,116)	(53)	2,655
Share based payments	-	-	-	-	397	-	-	-	-	397
Profit for the year	-	-	-	-	-	-	-	1,632	-	1,632
Total comprehensive income for the year	-	-	-	-	-	-	-	1,632	-	1,632
Balance at 31 March 2019	1,010	41,003	(992)	42	1,085	6,753	12,320	(56,484)	(53)	4,684

CONSOLIDATED STATEMENT OF CASH FLOWS

for the year ended 31 March 2019

		2019	2018
	Note	$000	$000
Cash flows from operating activities
Operating (loss)/profit for the year		(1,320)	639
Depreciation		553	450
Amortisation and impairment		904	1,031
Share based payments		397	360
Purchase of own shares		-	(33)
Changes in working capital:
Increases in trade and other receivables		(691)	(3,659)
Increases in trade and other payables		1,082	2,061
Cash flow from operations		925	849
Tax received		368	253
Net cash inflow from operating activities		1,293	1,102
Investing activities
Purchase of intangible assets		(29)	(71)
Capitalised development costs		(958)	(586)
Purchase of property, plant and equipment		(310)	(266)
Net cash outflow from investing activities		(1,297)	(923)
Cash flows from financing activities
Repayment of borrowings		(228)	(927)
Finance cost		(349)	(437)
Issue of share capital		-	2,987
Net cash (outflow)/inflow from financing		(577)	1,623
Net (decrease)/increase in cash and cash equivalents		(581)	1,802
Cash and cash equivalents at the beginning of the year		2,409	607
Cash and cash equivalents at the end of the year	4	1,828	2,409

NOTES TO THE FINANCIAL STATEMENTS

for the year ended 31 March 2019

1.    General information

ZOO Digital Group plc ('the company') and its subsidiaries (together 'the group') provide productivity tools and services for digital content authoring, video post-production and localisation for entertainment, publishing and packaging markets and continue with on-going research and development in those areas. The group has operations in both the UK and US.

The company is a public limited company which is listed on the AIM Market of the London Stock Exchange and is incorporated and domiciled in the UK. The address of the registered office is 7^th Floor, City Gate, 8 St Mary's Gate, Sheffield.

The registered number of the company is 03858881.

The consolidated financial statements are presented in US dollars, the currency of the primary economic environment in which the company operates.

2.    Basis of preparation

These financial statements have been prepared in accordance with IFRS as adopted by the European Union, and with those parts of the Companies Act 2006 applicable to companies reporting under IFRS.

The preparation of financial statements in conformity with IFRS requires management to make judgements, estimates and assumptions that effect the application of policies and reported amounts in the financial statements.

A separate Statement of Comprehensive Income for the parent company has not been presented as permitted by section 408 (2) of the Companies Act 2006.

The directors have prepared trading and cash flow forecasts for the group for the period to 31 March 2021 which show a continuation of the growth in profitability and cash generation.  In line with industry practice in this sector the directors have had informal indications from major and smaller clients to substantiate a significant proportion of the forecast sales.  The directors have considered the consequences if the sales volume is less than the level forecast and they are confident that, in this eventuality, alternative steps could be taken to ensure that the group has access to sufficient funding to continue to operate. The group has a facility with Crestmark Bank which provides invoice financing of up to $2.5m against US clients invoices raised by ZOO Digital Production LLC. This facility is in place until 7 July 2020. In the UK there is an overdraft facility with a limit of £250,000 in place with HSBC.

The convertible unsecured loan notes totalling £2.6 million are in place until 31 October 2020. 

The directors believe the assumptions used in preparing the trading and cash flow forecasts to be realistic, and consequently that the group will continue in operational existence for the foreseeable future. The financial statements have therefore been prepared on a going concern basis.

New and revised standards that are effective for annual periods beginning on or after 1 April 2018

A number of new and revised standards are effective for annual periods beginning on or after 1 April 2018. Information on these new standards is presented below.

IFRS 15 "Revenue from Contracts with Customers"

IFRS 15 "Revenue from Contracts with Customers" and the related "Clarifications to IFRS 15 Revenue from Contracts with Customers" (hereinafter referred to as "IFRS 15") replaced IAS 18 "Revenue", IAS 11 "Construction Contracts", and several revenue-related Interpretations. The new Standard has been applied retrospectively without restatement, with the cumulative effect of initial application recognised as an adjustment to the opening balance of retained earnings at 1 April 2018. In accordance with the transition guidance, IFRS 15 has only been applied to contracts that are incomplete as at 1 April 2018.

The adoption of IFRS 15 has not resulted in any adjustment to previously reported results or retained earnings.

IFRS 9 "Financial Instruments"

IFRS 9 replaces IAS 39 "Financial Instruments: Recognition and Measurement". It makes major changes to the previous guidance on the classification and measurement of financial assets and introduces an "expected credit loss" model for the impairment of financial assets.

The Group's finance team performs valuations of financial items for financial reporting purposes, in consultation with third party valuation specialists for complex valuations. Valuation techniques are selected based on the characteristics of each instrument, with the overall objective of maximising the use of market-based information. The finance team reports directly to the chief financial officer (CFO) and to the audit committee. Valuation processes and fair value changes are discussed among the audit committee and the valuation team at least every year, in line with the Group's reporting dates.

The following valuation technique was used for the embedded derivative (level 2) in relation to the outstanding convertible loan notes.

A third party specialist was used to ascertain the fair value for the convertible instruments as at 31 March 2019. This can be described as  "The price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date."

When adopting IFRS 9, the group has applied transitional relief and opted not to restate prior periods. Differences arising from the adoption of IFRS 9 in relation to classification, measurement, and impairment are recognised in retained earnings.

The adoption of IFRS 9 has impacted the following areas:

·      The impairment of financial assets applying the expected credit loss model. This affects the group's trade receivables and investments in debt type assets measured at amortised cost. For contract assets arising from IFRS 15 and trade receivables, the group applies a simplified model of recognising lifetime expected credit losses on these items do not have a significant financing component.

·      The reclassification of financial instruments, financial assets previously classified as loans and receivables are now classified as financial assets subsequently measured at amortised cost. There has been no reclassification of financial liabilities, and the reclassification of financial assets has not resulted in any adjustment to the values previously reported.

No change is required on transition to IFRS 9.

Standards and interpretations in issue at 31 March 2019 but not yet effective

IFRS 16 "Leases"

IFRS 16 will replace IAS 17 "Leases" and three related interpretations. It completes the IASB's long-running project to overhaul lease accounting. Leases will be recorded in the statement of financial position in the form of a right-of-use asset and a lease liability. There are two important reliefs provided by IFRS 16 for assets of low value and short-term leases of less than 12 months.

IFRS 16 is effective from periods beginning on or after 1 January 2019. Early adoption is permitted; however, the group has decided not to early adopt.

Management is in the process of assessing the full impact of the Standard. So far, the group:

·      has decided to make use of the practical expedient not to perform a full review of existing leases and apply IFRS 16 only to new or modified contracts. As some leases will be modified or renewed in 2019, the group has reassessed these leases and concluded they will be recognised on the statement of financial position as a right-of-use asset

·      believes that the most significant impact will be that the group will need to recognise a right of use asset and a lease liability for the office and production buildings currently treated as operating leases. At 31 March 2019 the future minimum lease payments amounted to $4,629,000. This will mean that the nature of the expense of the above cost will change from being an operating lease expense to depreciation and interest expense.

·      concludes that there will not be a significant impact to the finance leases currently held on the statement of financial position

·      is implementing a new IT system that will facilitate to record lease contracts.

The group is planning to adopt IFRS 16 on 1 April 2019 using the Standard's modified retrospective approach. Under this approach the cumulative effect of initially applying IFRS 16 is recognised as an adjustment to equity at the date of initial application. Comparative information is not restated.

Choosing this transition approach results in further policy decisions the group need to make as there are several other transitional reliefs that can be applied. These relate to those leases previously held as operating leases and can be applied on a lease-by-lease basis. The group is currently assessing the impact of applying these other transitional reliefs.

IFRS 16 has not made any significant changes to the accounting for lessors, and therefore the group does not expect any changes for leases where they are acting as lessor.

Consolidation

Subsidiaries are all entities (including structured entities) over which the group has control. The group controls an entity when the group is exposed to, or has rights to, variable returns from its involvement with the entity and has the ability to affect those returns through its power over the entity. Subsidiaries are fully consolidated from the date on which control is obtained until the date that control ceases.

The consolidated financial statements of ZOO Digital Group plc include the results of the company and its subsidiaries.  Subsidiary accounting policies are amended where necessary to ensure consistency within the group and intra group transactions are eliminated on consolidation.

Segment reporting

Operating segments are reported in a manner consistent with the internal reporting regularly reviewed by the group's chief executive officer to make decisions about resource allocation to the segments and to assess their performance.

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 US dollars which is the company's functional and presentation currency. The functional currency of the company's subsidiaries is US dollars, therefore the majority of transactions between the company and its subsidiaries and the company's revenue and receivables are denominated in US dollars.

The US dollar/pound sterling exchange rate at 31 March 2019 was 0.763 (2018: 0.710).

Transactions and balances

Transactions in foreign currencies are recorded at the prevailing rate of exchange in the month of the transaction. Foreign exchange gains or losses resulting from the settlement of such transactions and from the translation of monetary assets and liabilities denominated in foreign currencies at the year end exchange rates are recognised in the profit/(loss) for the year in the Consolidated Statement of Comprehensive Income.

Group companies

The results and financial position of all group entities that have a functional currency different from the presentation currency are translated into the presentation currency as follows:

-     assets and liabilities for each entity are translated at the closing rate at the year end date;

-      income and expenses for each Statement of Comprehensive Income are translated at the prevailing monthly exchange rate for the month in which the income or expense arose and all resulting exchange rate differences are recognised in other comprehensive income with the foreign exchange translation reserve.

Government grants relating to property, plant and equipment are credited to the cost of the asset and released to the Consolidated Statement of Comprehensive Income on a straight line basis over the expected lives of the related assets.

3.      Profit/(loss) per share

Profit/(loss) per share is calculated by dividing the profit/(loss) attributable to equity holders of the company by the weighted average number of ordinary shares in issue during the year.

		Basic and Diluted
		2019				2018
			$000		$000
Profit/(loss) for the financial year				1,632		(4,756)

					2019			2018
					Number of shares			Number of shares
Weighted average number of shares for basic & diluted profit/(loss) per share
Basic					74,356,016			69,841,166
Effect of dilutive potential ordinary shares:
Convertible loan note					-			5,452,241
Share options					6,369,815			5,711,639
Diluted					80,725,841			81,005,046
						2019			2018
						Cents			Cents
Basic						2.19			(6.81)
Diluted						2.02			(6.81)

The convertible debt has not been included in the 2019 diluted earnings per share calculations due to being anti-dilutive. 2018 diluted earnings per share were equal to basic earnings per share due to the loss for the year.
 

4.      Notes to the cash flow statement

a.     Significant non-cash transactions

During the year the group acquired property, plant and equipment and computer software with a cost of $608,000 (2018: $266,000) of which $298,000 (2018: $nil) was acquired by the means of finance leases.

b.     Cash and cash equivalents

Cash and cash equivalents consist of cash on hand and balances with banks. Cash and cash equivalents included in the cash flow statement comprise the following consolidated and parent company statement of financial position amounts.

	Group		Company
	2019	2018	2019	2018
	$000	$000	$000	$000
Cash on hand and balances with banks	1,828	2,409	113	201

The fair values of the cash and cash equivalents are considered to be their book value.

5.    Share capital and reserves

Called up share capital

	2019	2018
	$000	$000
Allotted, called-up and fully paid
74,424,771 (2018: 73,773,655) ordinary shares of 1p each	1,010	1,010

Reconciliation of the number of ordinary shares outstanding:
Opening balance	73,773,655	32,660,660
Shares issued	-	28,611,111
Conversion of unsecured convertible loan note into equity	-	5,555,556
Conversion of director's loan into equity	-	6,666,667
Share options exercised	651,116	279,661
Closing balance	74,424,771	73,773,655

On 4 May 2017 a reorganisation of the share capital took place in which the existing ordinary shares were subdivided to create two classes of shares: ordinary shares with a nominal value of 1p and deferred shares with a nominal value of 14p.  The proportion of the issued ordinary share capital held by each shareholder was unchanged by this subdivision, and other than the changed nominal value, the ordinary shares carry equivalent rights to those they replaced.  The deferred shares carry no right to vote, attend or speak at any general meeting or any right to a dividend.

On 4 May 2017 the company raised gross funds of approximately $3.33m (£2.58m) through a placing and subscription comprising the issue of 28,611,111 new ordinary shares of $0.01 (1p) each in the company at a subscription price of $0.11 (9p).  On the same day a further 12,222,223 ordinary shares were issued in return for the conversion of the £600,000 outstanding loan from Sara Green, the wife of Dr Stuart A Green, and the conversion of £500,000 of the convertible loan note.

During the year the group purchased nil (2018: 42,576) of its own shares through ZOO Employee Share Trust Limited. The total cost of the purchase was nil (2018: $20,000). 

Reserves

The following describes the nature and purpose of each reserve within owner's equity:

Reserve	Description and purpose
Share premium reserve	Represents the amount subscribed for share capital in excess of the nominal value.
Foreign exchange translation reserve	Cumulative exchange differences resulting from translation of foreign operations into the reporting currency.
Convertible loan note reserve	Represents the equity element of the convertible loan note.
Share option reserve	Cumulative cost of share options issued to employees.
Capital redemption reserve	Represents 32,660,660 deferred shares of 14p each created during the share reorganisation on 4 May 2017
Other reserves	Created as part of the reverse takeover between Kazoo3D plc and ZOO Media Corporation Ltd in 2001.
Accumulated losses	Cumulative net losses recognised in profit or loss.

6.      Borrowings

	Group		Company
	2019	2018	2019	2018
	$000	$000	$000	$000
Non-current
7.5% Unsecured convertible loan note stock	3,349	3,581	3,349	3,581
Connected person loan	-	-	-	-
Other bank borrowings	-	1	-	-
Finance lease liabilities	550	502	108	165
	3,899	4,084	3,457	3,746
Separable embedded derivative	1,965	4,666	1,965	4,666

Current
7.5% Unsecured convertible loan note stock	-	-	-	-
Amounts owed to subsidiary undertakings	-	-	9,701	9,701
Finance lease liabilities	248	226	56	54
	248	226	9,757	9,755
Total borrowings	6,112	8,976	15,179	18,167

On 1 April 2017 the group had a total of £3,070,500 in unsecured convertible loan notes in place which were due to mature on 31 October 2017.  During the year ended 31 March 2018 £500,000 of the convertible loan stock was converted into equity and the remaining £2,570,500 had its maturity extended to 31 October 2020. The loan notes pay a coupon of 7.5% and the loan stock holder is entitled, before the redemption date, to convert all or part of the loan stock into fully paid ordinary shares on the basis of one ordinary share for every £0.48 of principal amount of loan stock.  The US dollar value of the loan notes at 31 March 2019 was $3,349,000 (2018: $3,581,000).

The restructured convertible loan stock has two separate economic components within it; the holder is entitled to convert the loan note into equity at any point and the company is entitled to convert the loan note into equity if the 30 business day trailing average share price is above the level of £2.50 per share. In both instances the conversion is on the basis of one ordinary share for every £0.48 of principal amount of loan stock.  In years prior to the year ended 31 March 2018 it has been assessed that there is no material value to the resulting embedded derivative but in the year ended 31 March 2018 there has been significant increase in the company's share price leading to the appointment of an independent valuation firm to measure the fair value the two separate economic components as at the balance sheet date.  For the year ended 31 March 2019 the valuation of the embedded derivatives resulted in a non-cash charge totalling ($2,701,000) (2018: $4,666,000) which has an underlying value of $3,349,000.

The group has an arrangement with Crestmark Bank to provide an invoice financing facility of up to $2.5m against US client invoices raised by ZOO Digital Production LLC. This facility will be in place until 7 July 2020. The structure of this loan arrangement has been renegotiated since the year end to terms which are more favourable with the expectation of a reduced need for lending in the future. The principal outstanding at 31 March 2019 was nil (2018: nil). This funding is secured against the US trade receivables of ZOO Digital Production LLC.

During the year ended 31 March 2018 the group changed its UK banking partner to HSBC which provides an overdraft facility of £250,000.  The principal outstanding at 31 March 2019 was nil (2018: nil).  This line of funding has been secured as a floating charge over the assets of the UK companies.

Annual report and Accounts

Copies of the Report & Accounts for the year ended 31 March 2019 are available to view on the Group's website www.zoodigital.com

The Report & Accounts for the year ended 31 March 2019, together with the notice of annual general meeting, are expected to be posted to shareholders during August 2019; an announcement to notify shareholders of this will be made in due course. Further copies will be available from the Company's Registered Office: Floor 7, City Gate, 8 St Mary's Gate, Sheffield S1 4LW.

Annual General Meeting

The Annual General Meeting of the Group will be held at ZOO's Sheffield offices on 18 September 2019 at 4pm.

 

END

 

 

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