DELIVERING INNOVATIVE MOBILE REAL MONEY GAMING PRODUCTS AND SERVICES ON A PROPRIETARY PLATFORM WITHIN REGULATED MARKETS. CONTENTS

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2 DELIVERING INNOVATIVE MOBILE REAL MONEY GAMING PRODUCTS AND SERVICES ON A PROPRIETARY PLATFORM WITHIN REGULATED MARKETS. CONTENTS Page 3. Highlights Page 4. Chief Executive s Review Page 8. Principal Risks Page 10. Board of Directors Page 11. Corporate Governance Statement Page 12. Directors Remuneration Report Page 14. Statement of Directors Responsibilities Page 15. Independent Auditor s Report Page 21. Consolidated Statement of Comprehensive Income Page 22. Consolidated Statement of Financial Position Page 23. Consolidated Statement of Changes in Equity Page 24. Consolidated Statement of Cash Flows Page 25. Notes to the Consolidated Financial Statements Page 49. Parent Company Balance Sheet Page 50. Parent Company Statement of Changes in Equity Page 51. Notes to the Parent Company Financial Statements Page 56. Directors, Offices and Advisors

3 Strategic Report Governance Financial Statements DIRECTORS REPORT HIGHLIGHTS FINANCIAL HIGHLIGHTS: 30 June June 2016 Total revenue ( 000) 13,250 5,893 Adjusted EBITDA loss* ( 000) (3,419) (5,744) Operating loss ( 000) (4,624) (8,349) Loss before taxation ( 000) (6,219) (10,514) Basic and diluted loss per share (pence) (21.8) (44.8) Operational and strategic highlights Revenue growth of 124% to 13.3m (2016: 5.9m) All KPIs showed a marked improvement during the year: Net Gaming Revenue up by 130% to 13.1m (2016: 5.7m) Recruited 130,105 new First Time Depositing Players (FTDs) (2016: 49,176) Total cash wagering up by 157% to 390.3m (2016: 151.9m) Processed 423.5m transactions (bets or spins) (2016: 176.9m) Adjusted EBITDA loss of 3.4m (2016: 5.7m) and an operating loss for the year of 4.6m (2016: 8.3m) In December 2016, the Company announced the placing of new shares and an offer for subscription which raised 2.275m at a price of 27.5p per share Significant product improvements, including multi-language and currency functionality, helping to increase the number of current and new casino partners, and in new geographies Enhanced games portfolio from key global studios taking the total number of games to 400+, helping to strengthen Nektan s attractions to customer partners Launched 19 new casinos on its network taking the total at year end to 75 casinos from 51 partners Signed first B2B contract leveraging the Group s multigeographic assets, expertise and reach, by delivering a set of services and solutions, from games licensing to software, across European and North American markets Bought out the remaining 50% of Respin LLC, its US joint venture now rebranded as Rapid Games Entered into an asset disposal and simultaneous separate five year licensing agreement with Buckingham HMB Ltd for three of the Company s wholly-owned gaming brands for 1.95m in cash Reached agreement to buy out its joint venture partner in Nektan Marketing Services Limited ( NMS ) for 500,000 payable in cash over 12 months to terminate the put and call option between Nektan and its joint venture partner POST YEAR END HIGHLIGHTS: Opened a further 19 casinos taking the total to 94 from 52 partners Evolve Lite, Nektan s B2B platform, went live in November 2017, opening up new revenue streams In July 2017, the Company secured commitments to raise 2,500,000 through an unsecured loan facility, with two of its Directors, Gary Shaw and Sandeep Reddy of which 1,985,000 has currently been drawn down Signed first global platform deal for Evolve Lite with Malta based gaming company, Tyche Digital Malta Limited ( Tyche ) On 18 December 2017, the Company announced that it had raised 1,759,535 through a placing of 5,095,243 new ordinary shares and subscriptions for 3,283,495 new ordinary shares both at a price of 21p per share. *The Group defines adjusted EBITDA as the operating result before depreciation, amortisation, income or expenditure relating to exceptional items and non-cash charges relating to share based payments and impairments. Exceptional items are considered to be one-off non trading items. 3

4 DIRECTORS REPORT CHIEF EXECUTIVE S REVIEW Nektan continued to make significant operational and strategic progress in its current key markets of Europe and North America, which has continued following year end. Overview During the year, Nektan continued to make significant operational and strategic progress in its current key markets of Europe and North America, which has continued following year end. This delivered significant growth from our existing casino partner base and from several new partners who launched casinos with us during the year who now have a large base of registered and active players. We are focusing on partners using our latest player acquisition strategies to continue to deliver more sustainable long term revenue helping to ensure that we continue with our current growth. The Managed Solutions business has been Nektan s core focus in Europe, leveraging our Gibraltar gaming licence, proprietary back office platform (Evolve) and operational expertise across a network of 75 managed solutions casinos. Our casino offering to partners includes 400+ casino games titles from leading gaming suppliers such as NetEnt, IGT, NYX, Realistic, Evolution, Blueprint and Scientific Gaming, as well as Nektan s proprietary games. We have a number of top tier suppliers in the pipeline for early 2018 to help to add to our already excellent casino games portfolio, which makes our offer more attractive to current and new partners to support their growth and ours. One of the biggest strengths of the platform is the ability to integrate new partners quickly, which is one of our key competitive advantages. During the year, the casino network registered 130,105 new players (2016: 49,176 players), demonstrating the importance and flexibility of the Evolve platform to support and deliver continued growth. We remain focused on strengthening our operating discipline and have made good progress across casino management, maximising player entertainment and retention opportunities, with the constant enhancements to our back office, and strong focus on utilisation and its associated services supported through customer service and relationship management, payments and more refined player marketing. Evolve Lite, Nektan s proprietary gaming platform, is now live. This gives games studios access to the Nektan casino network as well as other Tier 1 operators. We are also exploring further platform deals, allowing third-parties to access content from a wide range of games providers, including for the first time vendors from outside Europe. During the last year, considerable work was undertaken on the overall Evolve system in order to address differentiated market opportunities across a broader range of geographies. In the European and US market, a far greater emphasis is placed on our involvement in the process whereas in Asia the emphasis sits with the local operators. In order to be a product relevant to each market, Nektan is localising the entire product set from back office to frontend gaming on top of regulatory approvals in each market. As we completed this work, our first commercial discussions have led to a number of material opportunities for the Company in the last quarter of this calendar year as it became clear that the product had sufficient differentiation in its agility, speed, language and functionality. Extending into new markets and offering further product extension are important as, due to our relatively fixed cost structure as well as our historic investment in Evolve, this should improve margins significantly going forward. We expect to go live with our first B2B partner before the end of the calendar year and expect this to be transformative in terms of scalable growth, comparable to that achieved in Europe. In the US, Nektan s operating expertise, combined with the Evolve back office platform, are two critical components to the future success of Respin, now branded as Rapid Games and a full operating subsidiary, having acquired our joint venture partner Spin s 50% share during the year. Our knowledge of operations and expertise in scaling a platform to large volumes of players will be vital to our success in this market as it emerges over the next two years. Our relationships with multiple games vendors will allow us to help expand their footprint as we strengthen our position in North America with a number of partners looking at co-operation in this market by placing the games on the Evolve platform. 4

5 Strategic Report Governance Financial Statements DIRECTORS REPORT CHIEF EXECUTIVE S REVIEW Performance During the year, the Group s European Managed Solutions business has seen significant growth in all KPIs - Net Gaming Revenue (NGR) in the year ended 30 June 2017 was 13.1 million (2016: 5.7m), First Time Depositors (FTDs) were 130,105 (2016: 49,176), cash wagering was 390.3m (2016: 151.9m) and transactions were 423.5m (2016: 176.9m). the year end, the casino network included 75 white label casinos. The operating loss was 4,624k (2016: 8,349k) and adjusted EBITDA loss was 3,419k (2016: 5,744k). The adjusted EBITDA loss included 752k loss from Respin for the six months since acquisition (2016: nil). Operations FY17 FY16 Change Net Gaming Revenue 13.1m 5.7m 130% First Time Depositors 130,105 49, % Cash wagering 390.3m 151.9m 157% Transactions (bets or spins) 423.5m 176.9m 139% Europe We have made significant improvements across all aspects of casino management, including maximising player entertainment and engagement, through the use of our Evolve platform and associated services across CRM, payments, customer service and player marketing. We also continue to scale the business and are now operating in Germany, Sweden and Finland, as well as in the UK and Ireland. During the last year, we have made a number of key improvements to the front-end of our Evolve system, including localisation and multi-currency support, customisation by site, account validation by SMS, new full native ios app, wagering requirement progression bar, last played and favourite games category, bonus spins display and direct access to games. We have also made key upgrades to the back-end of the system, including tiered deposit bonus, duplicate check system improvement, bonus by game provider, further games integrations, bonus on login and by VIP level, as well as a specific emphasis on modules which focus on multi-language capability so that partners can see games which are localised for the market in which they operate. The upgrade and migration of our Evolve back office during the year positions the casino network well for further growth and geographic expansion. Controlling our product roadmap offers flexibility and the opportunity to differentiate our casino offering from other casinos in a competitive market, which benefits our white label partners. We continue to add high quality partners and, at the year-end, had 75 live casinos. We expect to continue to see strong growth in our Managed Solutions business as we improve further our CRM and operational capabilities as well as place more emphasis on overseas markets. In addition, during the last year we have been developing our B2B capability where we have established the infrastructure to manage the entry of global gaming companies into the European market. This manifests in a combination of technology, compliance/licensing and management operations. As we develop our B2B business in newer markets, this capability will allow us to expand during the coming year at a rapid pace. Our centrally managed technology centre is developing this functionality within the current fixed cost base so as we grow we will see improved margins. Recently, the Company announced the signing of its first global platform deal for its Evolve Lite gaming system with Malta based gaming company Tyche Digital Malta Limited ( Tyche ). Under the terms of the agreement, Tyche will integrate Nektan s games aggregation platform into the multiple global markets in which it operates and will be responsible for localised licensing. In addition, the Company has gone live with its first B2B integration being Videoslots which has become the first operator in Europe to go live with Konami Gaming. Both these areas of B2B will generate revenue for the Company during the year ending 30 June North America Respin LLC, our US operating subsidiary, now rebranded as Rapid Games is focused on mobile on-premise digital gaming, primarily for the Class II tribal gaming market, offering players and casinos the opportunity to play bingo games and slots on mobile devices when in the casino. In the year, the Rapid Games team has developed and released several software updates to their on-premise platform. These include enhancements that have secured independent test lab certifications for several strategic standards including GLI 11 Standards for gaming devices in casinos, GLI 16 cashless systems in casinos and GLI 21 client-server systems. The additional certifications leave Rapid Games as the only current interactive platform in the US with both Class II and III onpremise certifications. The team has maintained its live deployment in northern California and is going through internal review and approval processes in several tier 1 tribal casinos in southern California. We are in the process of renewing our Oregon State gaming license and have entered into a contract to supply our platform and content on a trial basis to a casino in that state. 5

6 DIRECTORS REPORT CHIEF EXECUTIVE S REVIEW Revenue Net gaming revenue in the year ended 30 June 2017 was 13,092k (2016: 5,746k). This is due to the increase in new partners signed up during the year, an increase in the number of casinos offered by those partners and also improved operational efficiencies across the network. Total revenue for the year was 13,250k (2016: 5,893k). Expenses The marketing, partner and affiliate costs were 7,203k for the year (2016: 4,872k), demonstrating efficiencies in spend as the revenue increases. Administrative expenses, excluding exceptional items, depreciation, amortisation and share based payment charges decreased to 4,703k (2016: 5,060k) reflecting the impact of the cost review that was carried out in 2016, despite having 6 months administrative expenses from Respin of 765k (2016: nil). As previously announced, this led to a saving of approximately 150k to the monthly run rate. Exceptional costs moved from a charge of 1,309k to a gain of 1,463k due to the profit on the disposal of brands after legal costs of 1,897k. Excluding this, the charge was 434k (2016: 1,309k) which related to fund raising costs and net settlement of the put option arrangement with the joint venture partner of Nektan Marketing Services Limited. Adjusted EBITDA The operating loss for the year was 4,624k (2016 8,349k). Adjusted EBITDA loss was 3,419k (2016: 5,744k). This figure includes 6 months of Respin, Nektan s US subsidiary, being fully consolidated, the impact being a loss of 752k (2016: nil). Cash flow The Group s cash balance at 30 June 2017 was 638k (2016: 99k). Net proceeds of 2,191k (2016: 1,800k) were raised in the year from issuing new shares and convertible loan notes of nil (2016: 4,644k) (net of transaction costs). During the year 813k (2016: 1,350k) was spent on capitalised development costs. In addition, the Group raised 1,950k (2016: nil) from the sale of 3 casino brands to Buckingham HMB LLP. Convertible Loan Note (CLN) During the year, the Company received conversion notices from Series A CLN holders to the value of 1,094,500. These were converted at the prevailing conversion price of p resulting in the issue of 3,184,000 new shares. The CLN Series A currently has 8.9m outstanding and the Series B has 1.1m outstanding. Nektan Marketing Services During the year, the Group reached agreement to buy out its joint venture partners in Nektan Marketing Services Limited ( NMS ) and terminate the put option held by it for consideration of 500,000 payable in cash. An initial payment of 250,000 was made in August 2017 with a further 150,000 payable in February 2018 and 100,000 payable in August This liability was reduced by certain credit notes received from NMS prior to acquisition resulting in a net settlement of 105k with the remaining investment of 97k being impaired. Post balance sheet events On 5 July 2017, the Directors announced that the Company had secured commitments to raise 2,500,000 through an unsecured loan facility. In order to draw upon the loan, the Company has entered into separate facility agreements with two of its Directors, Gary Shaw for 1,300,000 and Sandeep Reddy for 1,200,000. The loans carry interest of 10% per annum and the Company will grant to each lender, 5.36 debt warrants and 137 anti-dilution warrants for each 1 drawn down under the facility agreements which have a 2 year term. The Company has currently drawn down 1.985m of the 2.5m facility. MANAGED SOLUTIONS JOURNEY DEVELOP DRIVE GENERATE MANAGE COLLECT Nektan develops and operates Partner Casino Partner drives traffic to their casino Players generate revenues from the real money games Nektan manages all aspects of the end-to-end player lifecycle Nektan collects and shares revenues with partners 6

7 Strategic Report Governance Financial Statements DIRECTORS REPORT CHIEF EXECUTIVE S REVIEW Additionally, the Group announced separately on 18 December 2017 that it had raised 1,759,535 through a placing of 5,095,243 new ordinary shares and subscriptions for 3,283,495 new ordinary shares both at a price of 21p per share. As a result of this fund raise, the conversion price of the CLN moves to 26.25p being a 25% premium to the issue price of 21p. In addition, the Company reached agreement on the same date with CLN holders to remove the warrants attached for the future deferral of interest on the Series A loan notes. Outlook In Europe, Nektan will continue to focus on its core Managed Solutions business offering, whilst leveraging the infrastructure and capability to roll out its B2B business. In the US, we continue to see a number of opportunities to use Evolve with the mobile in venue casino system. It is important that our platform would allow a customer to launch on a state wide basis if the state decides to regulate internet gaming, which is key for a number of the major operators as they evolve their strategies to ensure they can take a position in what is likely to be one of the largest global mobile gaming markets. We have just signed our first platform deal and are focusing on leveraging our language capability, which we have built within the software, so that we would expect to be live in the US, Europe and Asia in our current financial year. As we have only one business line covering our central technology cost for Managed Solutions Europe, we expect to see significant margin uplift as we turn on and develop these new revenue lines. We also would expect a similar growth trajectory to our European Managed Solutions business giving the business material scalability as we utilise the same software platform across additional continents, whilst at the same time being highly relevant for the localised marketplaces. The Company is well placed to maximise revenue and margin growth across both North American, Europe and additional geographies. We are pleased to have raised 1,759,535 by way of a placing of new shares and subscriptions from a combination of existing and new shareholders as well as certain members of senior management and the Board in order to continue to invest in the platform and exploit further growth opportunities. On behalf of the Board, I would like to thank all of Nektan s employees for their efforts in the last year and our business partners for their continued commitment, all helping to support the continued growth of our business. Gary Shaw Interim Chief Executive Officer PLAYER JOURNEY REGISTER DEPOSIT PLAY CONTROL COLLECT Player registers with Partner Casino Player funds their account by card or e-wallet and chooses games from the casino lobby Player places their stakes on the game and plays Player can set play and deposit limits and review games played Player requests winnings or balance to be paid back to them 7

8 STRATEGIC REPORT principal risks There are a number of potential risks and uncertainties that could have a material impact on the Group s long-term performance and could cause results to differ materially from expected and historical results. The principal risks to which the business is exposed are set out below: Risk Legal and regulatory risks Loss of gambling licences Brexit Background Failure to comply with the terms of the Group s existing or future gambling licences may lead to penalties, sanctions or ultimately the revocation of relevant operating licences. In the June 2016 referendum, the UK voted to leave the EU. This may increase the volatility of global currency and financial markets and may reduce the Group s ability to operate in certain EU markets without a change in domiciliation, which could carry a higher tax burden. In particular the impact on Gibraltar due to the proximity and reliance on Spain is a risk. Mitigating controls The Group overall has a focused compliance approach with a dedicated in house compliance resource to develop relationships with regulators, keep up to date with legal and regulatory developments, ensure necessary staff training and enable continuation of all necessary licences to allow the Group to continue its business. In addition the Group has a Compliance Committee consisting of key personnel which meets on a fortnightly basis and reports into the holding board. The Group will continue to monitor the situation and respond as the timing and terms of the UK s exit from the EU become clearer. Change in regulations, taxation and restrictions on expansion into target markets The laws, regulations and taxation governing remote gambling are highly complex, vary greatly from jurisdiction to jurisdiction and are constantly evolving. Further, there are often differences between the activities and types of games that are permitted to be offered, the technical requirements and restrictions which apply to those games, the manner and extent to which they can be marketed and other conditions of operation imposed in different jurisdictions. As an established regulated supplier, the Group monitors legal and regulatory developments in all of its material markets closely and generally seeks to keep up to date on legal and regulatory developments affecting the remote gambling industry as a whole. The marketplace Dependency on success of partner marketing The success of the Group s services is dependent on the strength of its white label partners brands and the effectiveness of their marketing. If its partners do not invest in the marketing of the Group s services or do not market effectively, the amount of revenue generated by customers of those products is likely to be impacted. The Group works closely, through its account management team, with its broad base of partners to ensure best marketing practice is implemented and that partners fulfil their obligations. 8

9 Strategic Report Governance Financial Statements Risk Background Mitigating controls Financing The Group remains loss-making and requires further funding. The Group regularly monitors its cash requirements and has announced further equity funding. However should trading or other timings of cashflows fall short of forecasts the Group may require further funding. The Directors would if required seek additional capital through further fundraising and/or asset sales or part sales. Competition The online gambling and social gaming markets are becoming increasingly competitive as the popularity and sophistication of mobile technology rises. Failure to compete effectively may result in losing customers and market share to existing and/or new competitors. The Group continues to invest significant resources to improve its technology and content portfolio whilst also diversifying its partner and geographical base. Fraud Technology Dependence on technology Employees Reliance on key personnel Online transactions, and in particular online gambling transactions, may be subject to sophisticated schemes or collusion to defraud, launder money or other illegal activities. There is a risk that the Group s products or systems may be used for those purposes by its customers. As a provider of online gambling services, the Group s business is reliant on technology and advanced information systems. If the Group does not invest in the maintenance and further development of its technology systems, there is a risk that these systems may not cope with the needs of the business and may fail. The Group is reliant on the Internet and is vulnerable to activities such as distributed denial of service attacks, other forms of cyber-crime and a wide range of malicious viruses. The Group s future success depends on the continued service of senior and key management, the retention of which cannot be guaranteed. The Group has implemented policies and procedures designed to minimise the risk of fraud and money laundering, including conducting anti-money laundering checks on its customers. The Group continues to invest in its proprietary platform to ensure the necessary features and functionality meet their partner needs. In addition it has adopted industry standard protections to detect intrusions or other security breaches and implements preventative measures to protect against sabotage, hackers, viruses and other cyber-crime. The Group ensures that key personnel are appropriately rewarded and incentivised. This is through a mixture of short-term and long-term incentives. 9

10 GOVERNANCE BOARD of DIRECTORS Nektan s Board and management team is a key strength of the business, with extensive experience of operating both B2B and B2C gaming businesses. Jim Wilkinson Non-executive Chairman Jim is Chief Financial Officer of Oxford Sciences Innovation plc, a company recently established to invest in companies transferring technology created from Oxford University s research into commercial enterprises. Prior to this role he held the position of Chief Financial Officer of Lonrho Limited, an African facing conglomerate, from August 2013 until June He held the same position at Sportingbet Plc between 2008 and 2013, Johnson Service Group PLC between 2004 and 2007, and Informa Group PLC between 1997 and Apart from Lonrho all the companies were quoted on the London Stock Exchange. Jim is a qualified chartered accountant, having trained with Touche Ross where he worked for eight years. Gary Shaw Interim Chief Executive Officer Gary founded the business as a spin out from a joint venture with GTECH in He is an entrepreneur with a consistent track record of creating significant shareholder value. In 1994 he left Johnson Press PLC to start and selffund Hughes Rae. Hughes Rae became one of the pioneers of internet application development across Europe working in the retail bank and pharmaceutical sectors, which he sold in 1999 to Morse PLC (at that point a FTSE 250 company). In 2000, Gary left Morse to join Victor Chandler establishing the casino and poker products. He contributed to setting up the world s first poker network which launched in conjunction with Tribeca Tables, and also worked to establish the first European white label gaming business, launching white label deals with the Racing Post and Virgin Media. Gary left Victor Chandler in 2002 to establish his own gaming company, St Enodoc, which acquired the Gibraltar-based underperforming assets of Gala Interactive. He led the recovery of the business, launching a series of gaming business ventures, including both the IPN Poker network with Boss Media, and in 2004 the IBN Bingo Network. St Enodoc became Europe s largest end-to-end white label operator with 84 partners in 24 countries including Virgin Games, Yahoo, The Daily Mail and Sportingbet. Gary was the Executive Chairman when St Enodoc was acquired by GTECH-Lottomatica for $55 million in He remained with GTECH-Lottomatica working in the US, until forming Nektan. Sandeep Reddy Non-executive Director Sandeep is the co-founder of Peepul Capital, an Indian private equity firm with approximately $700 million of investments. Prior to the launch of Peepul Capital in 2000, he had 10 years of experience in strategy consulting with PricewaterhouseCoopers LLP in San Francisco and with Andersen Consulting in London. He has been one of the early participants in the rapidly evolving Indian private equity industry having been active for over ten years. Sandeep takes overall responsibility in defining and executing Peepul Capital s strategy. He is a Director of Venture Tech Assets, a substantial shareholder in the Company. He received a BSc in Computer Science and Finance from Utah State University and an MBA from IMD, Switzerland. 10

11 Strategic Report Governance Financial Statements GOVERNANCE CORPORATE GOVERNANCE STATEMENT As an AIM listed group, Nektan plc is not required to follow the provisions of the UK Corporate Governance Code (the Code). The Board however recognises the importance and value of good corporate governance procedures. Accordingly, it has selected and put in place those elements of the code considered to be relevant and appropriate to the Group, given its size and structure and have provided information which would be expected for companies listed on the AIM market. This report does not describe compliance with or departures from the Code. Role of the Board the start of the year, the Board comprised five Directors namely the Non-Executive Chairman and two further non- Executive Directors, the CEO and Gary Shaw as Strategy Director. On 15 February 2017, Alan Turner resigned as a non- Executive Director and on 7 June 2017 Leigh Nissim resigned as CEO with Gary Shaw moving from Strategy Director to Interim Chief Executive, pending appointment of a new Chief Executive. The Board meets regularly to consider strategy, performance and the framework of internal controls. Outside of the Board, Patrick Sinclair was appointed Chief Financial Officer on 16 January 2017 and Sagi Lahav was appointed interim Chief Operating Officer on 3 July The Board has been formed so that it has effective composition, size and commitment to adequately discharge its responsibilities and duties given the size and scale of operations of the Company. The Director appointments are based on the specific skills required by the Company and the Board combines a group of directors with diverse backgrounds that combine to provide the resources and expertise to drive the continuing development of the Group and advance its commercial objectives. Board committees The Directors have established an Audit committee, a Remuneration committee and a Nominations committee with formally delegated rules and responsibilities. Each of the committees currently comprises the Non-executive Directors and meets at least twice a year. Audit committee The Audit Committee meets at least twice a year and is responsible for ensuring that the Group s financial performance is properly monitored, controlled and reported. The Audit Committee is responsible for the scope and effectiveness of the external audit and compliance by the Group with statutory and other regulatory requirements. It meets at least once per year without the Executive Directors being present. The Audit committee is comprised of Jim Wilkinson (Chairman) and Sandeep Reddy. Jim Wilkinson is deemed to have recent and relevant financial experience and is the Audit Committee financial expert. Remuneration committee The Remuneration Committee determines and agrees with the Board the framework or broad policy for the remuneration of the Directors and determines the total individual remuneration package of each Executive Director, including bonuses, incentive payments and share options, with due regard to the interests of shareholders. The Remuneration Committee ensures that contractual terms are fair to the individual and the Company and determines the structure and targets for any performance-related pay schemes operated by the Company. The Remuneration Committee is comprised of Sandeep Reddy (Chairman) and Jim Wilkinson. Nominations committee The Nominations Committee is responsible for reviewing the size, structure and composition of the Board and for identifying and nominating for the approval of the Board, candidates to fill Board vacancies as and when they arise. The Nominations Committee gives full consideration to succession planning in the course of its work, taking into account the challenges and opportunities facing the Group, and the skills and expertise needed on the Board. The Nominations Committee is comprised of Jim Wilkinson (Chairman) and Sandeep Reddy. Risk management and internal controls The Board has ensured there has been an ongoing process for identifying, evaluating and managing the significant risks faced by the Group. The Board considers the principal risk factors likely to impact the financial position and prospects of the Group, including any changes thereto. The identified risks are monitored through the day to day operations with the involvement of the relevant parties. This monitoring process is guided by a risk template set out in the Group s separate Overview of Strategic Risk Management. The Group s internal control procedures continue to be reviewed, progressively developed and formalised to ensure that the sufficiently meet the requirements of the Group. Executive members of the Board are involved daily in all aspects of the business and attend regular management meetings at which performance against plan and business prospects are reviewed. The Bribery Act 2010 (Bribery Act) which came into force in the UK on 1 July 2011 prescribes criminal offences for individuals and businesses relating to the payment of bribes and, in certain cases, a failure to prevent the payment of bribes. The Group therefore has established procedures designed to ensure that no member of the Group engages in conduct for which a prosecution under the Bribery Act may result. External Auditors The Audit Committee meets periodically to review the adequacy of the Group s internal control systems, accounting policies and compliance with applicable accounting standards and to consider the appointment of external auditors and audit fees. As a matter of best practice, the auditors have held discussions with the Audit Committee on the subject of auditor independence and have confirmed their independence. 11

12 GOVERNANCE Directors remuneration report Nektan has elected voluntarily to prepare the unaudited Directors remuneration report set out below. Remuneration policy overview The aim of the remuneration policy is to encourage and reward superior performance by the Executive Directors and senior management, with performance being measured by reference to the achievement of corporate goals, strong financial performance and the delivery of value to shareholders. The policy is designed to offer awards that enable the Group to attract and retain the management talent it needs to ensure its success and to incentivise the achievement of the Group s strategy and the delivery of sustainable long term performance of the Group. The remuneration policy is reviewed by the Remuneration Committee on an annual basis to ensure it is in line with the Group s objectives and shareholders interests. The Remuneration Committee determines and agrees with the Board the framework or broad policy for the remuneration of the Directors and determines the total individual remuneration package of each Executive Director, including bonuses, incentive payments and share options. Directors emoluments This section is audited. The Directors received the following remuneration during the year to 30 June 2017: Basic salary/ Fees Executive Directors Leigh Nissim (Appointed 25 July 2016, resigned 7 June 2017) Gary Shaw Non-executive Directors Sandeep Reddy Alan Turner (resigned 15 February 2017) Jim Wilkinson Bonus Benefits Pension Share options Loss of office Total and the following remuneration during the year to 30 June 2016: Basic salary/ Fees Executive Directors Gary Shaw David Gosen (resigned 12 January 2016) David Sparks (resigned 7 December 2015) Non-executive Directors Sandeep Reddy Alan Turner Jim Wilkinson Bonus Benefits Pension Share options Loss of office Total The Executive Directors base salaries are reviewed annually. The Remuneration Committee seeks to assess the market competitiveness of pay primarily in terms of total remuneration, with less emphasis on base salary. The timing and amount of bonuses are decided by the Remuneration Committee with reference to the individual s performance and contribution to the Group. 12

13 Strategic Report Governance Financial Statements GOVERNANCE Directors remuneration report Directors interest in shares The details of the Director s interest as at 30 June 2017 were as follows: Directors interest in the Convertible Loan Note (CLN) Number of ordinary shares Percentage of issued share capital Gary Shaw 5,330, % Jim Wilkinson 301, % Sandeep Reddy* 6,431, % Gary Shaw 300, % Jim Wilkinson 250, % Sandeep Reddy* 1,000, % *The shares and CLNs relating to Sandeep Reddy are held by Venture Tech Assets a company controlled by Sandeep Reddy. Share options The company has adopted the Nektan plc 2014 share plan to provide share incentives to employees and Directors within the Group on a discretionary basis. The share plan provides for the grant of rights to acquire ordinary shares (awards) and with be administered by either the Board or the Remuneration Committee, depending on the type of participant. During the period options over 1,060,045 shares were granted or contractually promised to employees with none of these going to directors. Service contracts Gary Shaw has a service agreement with the Company dated 28 October 2014 setting out the terms of his appointment as a Director. Either party may terminate the agreement on 6 months notice. Patrick Sinclair has a service contract dated 29 December 2016 setting out the terms of his appointment. Either party may terminate the agreement on 3 months notice until 16 January 2018 at which point this changes to 6 months notice. Sagi Lahav has a fixed-term service contract expiring on 3 April Nominal value held Percentage of CLN The Non-executive Directors have entered into letters of appointment with the Company are entitled to an annual fee and reimbursement of reasonable expenses, but no other remuneration. The appointments may be terminated by either party giving 90 days written notice. 13

14 GOVERNANCE Statement of Directors responsibilities Statement of Directors responsibilities The directors are responsible for preparing financial statements for each financial year which give a true and fair view of the state of affairs of the Group and Company and of the profit or loss for the year and which comply with the Gibraltar Companies Act Under that law, the directors have elected to prepare the Group financial statements in accordance with International Financial Reporting Standards as adopted by the European Union and the Company financial statements in accordance with GFRS 102: The Gibraltar Financial Reporting Standard. In preparing the financial statements, the directors are required to: select suitable accounting policies and then apply them consistently; make judgements and estimates that are reasonable and prudent; state whether applicable accounting standards have been followed, subject to any material departures and explained in the financial statements; and prepare the financial statements on the going concern basis unless it is inappropriate to presume that the company will continue in business The directors are responsible for keeping proper accounting records which disclose with reasonable accuracy at any time the financial position of the company and to enable them to ensure that the accounts comply with applicable law. They are also responsible for safeguarding the assets of the company and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities. Auditors All of the current directors have taken all the steps that they ought to have taken to make themselves aware of any information needed by the Group s auditors for the purposes of their audit and to establish that the auditors are aware of that information. The directors are not aware of any relevant audit information of which the auditors are unaware. Approved on behalf of the board on 18 December 2017 Gary Shaw Director 14

15 Strategic Report Governance Financial Statements Independent Auditor s Report Opinion on financial statements We have audited the financial statements of Nektan plc (the Company ) and its subsidiaries (the Group ) for the year ended 30 June 2017 which comprise the Consolidated Statement of Comprehensive Income, the Consolidated Statement of Financial Position, the Consolidated Statement of Changes in Equity, the Consolidated Statement of Cash Flows, the Company Balance Sheet, the Company Statement of Changes in Equity and the related notes. The financial reporting framework that has been applied in their preparation is applicable law in Gibraltar and International Financial Reporting Standards ( IFRSs ) as adopted for use in the European Union. The financial reporting framework that has been applied in the preparation of the Company financial statements is applicable law in Gibraltar and GFRS 102: The Gibraltar Financial Reporting Standard 102. In our opinion: The financial statements give a true and fair view of the state of the Group s and the Company s affairs as at 30 June 2017 and of the Group s loss and cash flows for the year then ended; The Group financial statements have been properly prepared in accordance with IFRSs as adopted by the European Union; The Company financial statements have been properly prepared in accordance with GFRS 102: The Gibraltar Financial Reporting Standard 102; and The financial statements have been properly prepared in accordance with the Gibraltar Companies Act Basis for opinion We conducted our audit in accordance with International Standards on Auditing (ISAs). Our responsibilities under those standards are further described in the Auditor s Responsibilities for the Audit of the Financial Statements section of our report. We are independent of the Company in accordance with the International Ethics Standards Board for Accountants Code of Ethics for Professional Accountants (IESBA Code), and we have fulfilled our other ethical responsibilities in accordance with these requirements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion. Material uncertainty in relation to going concern We draw attention to note 1 in the financial statements which states the business is dependent on receipt of funds from the most recent equity fundraising as well the ability to realise additional funds if the performance of the business is not in line with forecasts. This indicates that a material uncertainty exists that may cast significant doubt on the Group and Company s ability to continue as a going concern. Our opinion is not modified in respect of this matter and the financial statements do not include the adjustments that would result if the Company or Group were unable to continue as a going concern. Going concern was therefore considered a key audit matter and our response to this was as follows: Reviewed and performed sensitivity analysis in respect of cashflows for the 12 month period from the date of approval of the financial statements; Challenged management as to the ability to mitigate any cash shortfalls or delays prior to ReSpin reaching a cash break-even position; Obtained support from management as to the ongoing plans to realise value from equity investments; and Reviewed irrecoverable letters of intent for equity subscriptions which the Company has received. Key audit matters Key audit matters are those matters that, in our professional judgment, were of most significance in our audit of the financial statements of the current period and include the most significant assessed risks of material misstatement (whether or not due to fraud) we identified, including those which had the greatest effect on: the overall audit strategy; the allocation of resources in the audit; and directing the efforts of the engagement team. These matters were addressed in the context of our audit of the financial statements as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters. 15

16 Independent Auditor s Report Revenue recognition Key audit matter Revenue recognition gives rise to a risk over completeness, existence, accuracy and presentation in the statement of comprehensive income of net gaming revenue. This is considered to be a key audit matter due to the complexity of the IT system supporting the recognition of revenue and the fact that certain judgements are made with regards to customer bonuses, progressive jackpots and treatment of contractual arrangement with white label partners. Our response We evaluated relevant IT general controls over the key revenue and financial information systems. We involved IT specialists for this purpose. The key automated and manual general application controls over the completeness and accuracy of the Group s main gaming systems have been documented and tested, including conducting test bets. We assessed whether the revenue recognition policies adopted by the Group comply with IFRS as adopted by the European Union and Industry standards. We tested revenue through substantive procedures. Our work included the use of IT audit data analytic techniques supported by our IT specialists to underpin our testing of the revenue recognised. We reviewed a sample of key contracts entered into during the year to assess whether the revenue had been recognised in accordance with the Group s accounting policy, was appropriate from a timing perspective and whether any other terms within the contract had any material accounting or disclosure implications. We noted no deficiencies in the operating effectiveness of the controls and no material errors in the substantive procedures performed in our audit of revenue. Impairment of goodwill and other intangibles Key audit matter In accordance with IAS 36, the Group monitors the carrying value of goodwill and other intangibles for indications of impairment. The Group performs annual impairment reviews for goodwill based on the cash generating unit ( CGU ), for other intangibles where there are indicators of impairment and for capitalised development costs relating to projects not launched as at the year end. Impairment reviews require significant judgement from management and are inherently based on assumptions in respect of future profitability. If the carrying value of these assets exceeds their recoverable amount there is a risk of material misstatement. The Group has two CGUs; the European business and Respin. The impairment review of both CGUs gave rise to a key audit matter due to the potential for impairment. Our response With the assistance of our valuation specialists the audit team challenged the appropriateness of the key assumptions used in the discounted cash flow models prepared by management and applied sensitivities to assess potential impairment of goodwill and other assets where indications of impairment were present. Our work was based on our assessment of the historical accuracy of the Group s estimates in previous periods, our understanding of the commercial prospects of the assets, identification and analysis of changes in assumptions from prior periods and an assessment of consistency of assumptions across the impairment reviews. We considered the appropriateness of the related disclosure provided in the Group financial statements. Based on the substantive procedures performed the impairment assessment and related disclosures are considered to be reasonable. Our assessment of impairment was linked with our overall consideration as to whether the business was capable of continuing as a going concern as this may give rise to impairments if the Group concluded it was no longer a going concern. 16

17 Strategic Report Governance Financial Statements Independent Auditor s Report Capitalisation of software development costs Key audit matter The Group capitalises external and internal software development costs. There is a risk that the costs capitalised may not meet the criteria of IAS 38 Intangible Assets and the carrying value of the intangible assets is materially misstated. Our response We have reviewed the controls and processes in respect of the Group s review of costs capitalised. We have reviewed the amounts that have been capitalised as development expenditure by reference to internal payroll costs allocated to projects. We have reviewed the Group s analysis of how these costs meet the criteria of IAS 38 Intangible Assets and also reviewed the reasonableness of the amortisation period used by the Group for each project where costs have been capitalised. We have reviewed the status of projects started and completed to consider appropriateness of capitalisation. We consider that the amounts capitalised as development expenditure are in accordance with the requirements of IAS 38. Acquisition step-up accounting Key audit matter During the year, the Group increased its 50% joint venture interest in ReSpin initially to 85% with no consideration passing following the failure by the joint venture partner to match an equity investment made by the Group. Subsequently this was increased to 100%. As the asset ceased to be a joint venture, it is necessary to apply step-up accounting at the point that control was obtained. The Group was required to fair value the original equity interest and complete a purchase price allocation exercise to determine the fair value of assets and liabilities acquired at the date control was obtained including identifiable intangibles and resulting goodwill. There is a risk that the fair value calculations in respect of the consideration and also identified assets are materially misstated. Our response With the assistance of our valuations specialists we have challenged management s assessment of the fair value of consideration and the subsequent assumptions in identifying the fair value of identifiable intangibles. We consider that the fair value of consideration on step-up to 85% and also the fair value of identified intangibles is reasonable. 17

18 Independent Auditor s Report Our application of materiality We apply the concept of materiality both in planning and performing our audit, and in evaluating the effect of misstatements. For planning, we consider materiality to be the magnitude by which misstatements, including omissions, could influence the economic decisions of reasonable users that are taken on the basis of the financial statements. In order to reduce to an appropriately low level the probability that any misstatements exceed materiality, we use a lower materiality level, performance materiality, to determine the extent of testing needed. Importantly, misstatements below these levels will not necessarily be evaluated as immaterial as we also take account of the nature of identified misstatements, and the particular circumstances of their occurrence, when evaluating their effect on the financial statements as a whole. Level of materiality applied and rationale In the current year, we consider revenue to be the critical performance measure for the Group. Using this benchmark we set materiality at 200,000 (2016: 180,000), being 1.5% of revenue (2016: 2% of total assets). In setting this level of materiality we considered the quantum of materiality was appropriate in comparison to other benchmarks including 2% of total assets ( 220,000), as the Group made an adjusted loss for the year it was not possible to use this as a measure to benchmark against. Our materiality level is higher than in previous years reflecting the maturity of the Group resulting in the key performance measure and materiality driver changing from total assets to revenue. Agreement with the Audit Committee We agreed with the Audit Committee that we would report to the Committee all audit differences individually in excess of 4,000. We also agreed to report differences below this threshold that, in our view, warranted reporting on qualitative grounds. Overview of the scope of our audit Our Group audit was scoped by obtaining an understanding of the Group and its environment, including the Group s system of internal control, and assessing the risks of material misstatement in the financial statements at the Group level. In determining the scope of our audit we considered the level of work to be performed at each component in order to ensure sufficient assurance was gained to allow us to express an opinion on the financial statements of the Group as a whole. We tailored the extent of the work to be performed at each component based on our assessment of the risk of material misstatement at each component. There were three significant components audited by BDO LLP and BDO Limited which were subject to a full scope audit based on 75% of group materiality at 150,000. In addition there were 4 non-significant components where desktop procedures and certain audit procedures were performed by BDO LLP. This work was also completed based on materiality of 150,000. Other information The directors are responsible for the other information. The other information comprises the information included in the annual report, but does not include the financial statements and our auditor s report thereon. Our opinion on the financial statements does not cover the other information and except to the extent otherwise explicitly stated in our report, we do not express any form of assurance conclusion thereon. In connection with our audit of the financial statements, our responsibility is to read the other information and, in doing so, consider whether the other information is materially inconsistent with the financial statements or our knowledge obtained in the audit, or otherwise appears to be materially misstated. If, based on the work we have performed, we conclude that there is a material misstatement. Opinions on other matters prescribed by the Gibraltar Companies Act 2014 In our opinion, based on the work undertaken in the course of the audit: the information given in the Directors Report for the financial year for which the financial statements are prepared is consistent with the financial statements; and the Directors Report has been prepared in accordance with the requirements of the Companies Act In the light of the knowledge and understanding of the company and its environment obtained in the course of the audit, we have not identified any material misstatements in the Directors Report. Responsibilities of directors The directors are responsible for the preparation of financial statements that give a true and fair view in accordance with applicable law in Gibraltar and IFRSs as adopted for use in the European Union in respect of the Group and GFRS 102: The Gibraltar Financial Reporting Standard 102 in respect of the Company, and for such internal control as the directors determine is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error. In preparing the financial statements, the directors are responsible for assessing the Group and the Company s ability to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless the directors either intend to liquidate the Group or the Company or to cease operations, or have no realistic alternative but to do so. The directors are also responsible for overseeing the Group s financial reporting process. The Audit Committee assists the directors in discharging their responsibility in this regard. 18

19 Strategic Report Governance Financial Statements Independent Auditor s Report Auditor s responsibilities for the audit of the financial statements Our objectives are to obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditor s report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with ISAs will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these financial statements. As part of an audit in accordance with ISAs, we exercise professional judgment and maintain professional scepticism throughout the audit. We also: Identify and assess the risks of material misstatement of the financial statements, whether due to fraud or error, design and perform audit procedures responsive to those risks, and obtain audit evidence that is sufficient and appropriate to provide a basis for our opinion. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control. Obtain an understanding of internal control relevant to the audit in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Group s internal control. Evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related disclosures made by the directors. Conclude on the appropriateness of the directors use of the going concern basis of accounting and, based on the audit evidence obtained, whether a material uncertain exists related to events or conditions that may cast significant doubt on the Group s and the Company s ability to continue as a going concern. If we conclude that a material uncertainty exists, we are required to draw attention in our auditor s report to the related disclosures in the financial statements or, if such disclosures are inadequate, to modify our opinion. Our conclusions are based on the audit evidence obtained up to the date of our auditor s report. However, future events or conditions may cause the Group or the Company to cease to continue as a going concern. Evaluate the overall presentation, structure and content of the financial statements, including the disclosures, and whether the financial statements represent the underlying transactions and events in a manner that achieves fair presentation. Obtain sufficient appropriate audit evidence regarding the financial information of the entities or business activities within the Group to express an opinion on the financial statements. We are responsible for the direction, supervision and performance of the group audit. We remain solely responsible for our audit opinion. We communicate with the directors regarding, among other matters, the planned scope and timing of the audit and significant audit findings, including any significant deficiencies in internal control that we identify during our audit. We also provide the directors with a statement that we have complied with relevant ethical requirements regarding independence, and to communicate with them all relationships and other matters that may reasonably be thought to bear on our independence, and where applicable, related safeguards. From the matters communicated with the directors, we determine those matters that were of most significance in the audit of the financial statements of the current period and are therefore the key audit matters. We describe these matters in our auditor s report unless law or regulation precludes public disclosure about the matter or when, in extremely rare circumstances, we determine that a matter should not be communicated in our report because the adverse consequences of doing so would reasonably be expected to outweigh the public interest benefits of such communication. Matters on which we are required to report by exception We have nothing to report in respect of the matter where the Companies Act 2014 requires us to report to you if, in our opinion, we have not received all the information and explanations we require for our audit. This report, including the opinion, has been prepared for and only for the company s members as a body in accordance with Section 257 of the Companies Act 2014 and for no other purpose. We do not, in giving these opinions, accept or assume responsibility for any other purpose or to any other person to whom this report is shown or into whose hands it may come save where expressly agreed by our prior consent in writing. The partners in charge of the audit resulting in this independent auditor s report are Kieran Storan and Christian Summerfield. 19

20 Independent Auditor s Report BDO LLP Chartered Accountants 55 Baker Street London W1U 7EU United Kingdom 18 December 2017 Christian Summerfield (Statutory Auditor) For and on behalf of BDO Limited Registered Auditors 5.20 World Trade Center 6 Bayside Road Gibraltar 18 December 2017 BDO LLP is a limited liability partnership registered in England and Wales (with registered number OC305127). BDO Limited, a Gibraltar limited company, is registered in Gibraltar with company number

21 Strategic Report Governance Financial Statements consolidated statement of comprehensive income Revenue 2 13,250 5,893 Cost of sales (4,763) (1,859) Gross profit 8,487 4,034 Marketing, partner and affiliate costs (7,203) (4,872) Administrative expenses (5,908) (7,665) Other income Adjusted EBITDA (3,419) (5,744) Exceptional items 3 1,463 (1,309) Depreciation 10 (126) (105) Amortisation 9 (1,976) (1,191) Share based payment charges 27 (566) - Operating loss 3 (4,624) (8,349) Finance income Finance expense 7 (1,357) (1,078) Share of loss of joint ventures 11 (495) (1,395) Loss before taxation (6,219) (10,514) Tax credit Loss for the year (6,121) (10,486) Other comprehensive income for the year Exchange differences arising on translation of foreign operations (227) (127) which may be reclassified to profit or loss Total comprehensive loss for the year (6,348) (10,613) Notes 30 June June 2016 Loss per share attributable to the Ordinary equity holders of the parent Basic (pence) 6 (21.8) (44.8) Diluted (pence) 6 (21.8) (44.8) 21

22 consolidated statement of FINANCIAL POSITION Non-current assets Intangible assets 9 6,900 3,200 Property, plant and equipment Investments in joint ventures 11-2,256 7,332 5,604 Current assets Trade and other receivables 12 1,805 1,816 Cash and cash equivalents ,443 1,915 Total assets 9,775 7,519 Notes 30 June June 2016 Current liabilities Trade and other payables 14 7,362 4,448 7,362 4,448 Non-current liabilities Convertible loan notes 16 9,094 9,199 Trade and other payables Deferred tax 19 1, ,600 9,246 Total liabilities 17,962 13,694 Net liabilities (8,187) (6,175) Equity attributable to equity holder: Share capital Share premium 27,331 24,115 Merger reserve (2) (2) Capital contribution reserve 3,306 3,306 Share option reserve Foreign exchange reserve (410) (183) Retained earnings (39,600) (33,914) Total deficit (8,187) (6,175) The financial statements on pages 21 to 48 were approved and authorised for issue by the Board on 18 December 2017 and were signed on its behalf by: Gary Shaw Interim Chief Executive Officer Jim Wilkinson Chairman 22

23 Strategic Report Governance Financial Statements consolidated statement of changes IN EQUITY Share capital Share premium Share option reserve Minority interest reserve Capital contribution reserve Merger reserve Foreign exchange reserve Retained earnings Total equity 30 June , ,306 (2) (56) (23,428) 2,638 Loss for the year (10,486) (10,486) Other comprehensive income (127) - (127) Issue of shares (net of costs) 15 1, , June , ,306 (2) (183) (33,914) (6,175) Loss for the year (6,121) (6,121) Other comprehensive income (227) - (227) Increased ownership of joint venture Acquisition of minority interest (496) (61) Issue of shares (net of costs) 119 3, ,335 Share based payments June , ,306 (2) (410) (39,600) (8,187) The following describes the nature and purpose of each reserve within equity: Share capital Represents the nominal value of shares allotted, called up and fully paid. Share premium Represents the amount of subscribed for share capital in excess of nominal value net of share issue costs. Share option reserve Represents the cumulative value of share option charges recorded in the consolidated statement of comprehensive income. Minority interest reserve Represents the minority share of the assets and liabilities of Respin following the move from 50% to 85% ownership and subsequent transfer to retained earnings when the remaining 15% was acquired. The loss during the period prior to the ownership increasing from 85% to 100% was immaterial and hence has not been shown on the income statement. Capital contribution reserve Represents: (a) (a) Nominal value of shares held by a shareholder in a subsidiary Company and contributed to Nektan plc. (b) (b) The release of the Group s obligation to repay borrowings of 3,304,000 by a shareholder. Merger reserve The difference between the nominal value of the Nektan (Gibraltar) Limited shares acquired in May 2011 and the nominal value of shares in Nektan plc issued to acquire these shares as part of a Group restructuring. Foreign exchange reserve Represents the gains/losses arising on retranslating the net assets of overseas operations into UK Pound Sterling. Retained earnings Represents the cumulative net gains and losses recognised in the consolidated statement of comprehensive income. 23

24 consolidated statement of CASH FLOWS Cash flow from operating activities Loss for the year (6,121) (10,486) Adjustments for: Amortisation of intangible assets 9 1,976 1,191 Profit on brand disposal (1,950) - Depreciation of property, plant and equipment Share based payment expense Loss on disposal of property plant and equipment Finance expense 7 1,357 1,078 Finance income 7 (257) (308) Impairment of intangible assets Joint venture loan impairment Impairment of trade receivables Share of loss of joint ventures ,395 Income tax credit 8 (98) (28) Operating cash flow before movement in working capital (3,809) (6,184) Increase / (decrease) in trade and other receivables 116 (935) Increase in trade and other payables 2,442 2,375 Cash used in operations (1,251) (4,744) Cash flow from investing activities Purchase of intangible fixed assets 9 (813) (1,350) Purchase of property, plant and equipment 10 (67) (96) Proceeds on brand disposals 1,950 - Investments in joint ventures 11 (1,014) (2,587) Cash acquired on acquisition Loans to joint ventures 12 - (152) Net cash generated from/(used in) investing activities 91 (4,185) Cash flow from financing activities Interest paid (406) (812) Capital payments on finance lease (25) - Purchase of non-controlling interest in Respin (61) - Issue of convertible debt (net of costs) 16-4,644 Proceeds on subscription for shares (net of costs) 2,191 1,800 Net cash generated from financing activities 1,699 5,632 Net increase/(decrease) in cash and cash equivalents 539 (3,297) Cash and cash equivalents at beginning of period ,396 Cash and cash equivalents at end of period Notes 30 June June

25 Strategic Report Governance Financial Statements NOTES TO THE CONSOLIDATED 1. Accounting policies Basis of preparation The consolidated financial statements have been prepared in accordance with International Financial Reporting Standards including International Accounting Standards ( IASs ) and interpretations (collectively IFRS ) as published by the International Accounting Standards Board ( IASB ) which have been adopted by the European Commission and endorsed for use in the EU for the purposes of the Group s full year financial statements. The company financial statements have been prepared under FRS 102 The financial statements are presented in UK Pounds Sterling ( Sterling ) and rounded to the nearest. Statutory accounts for the year ended 30 June 2017 will be filed with Companies House Gibraltar following the Company s Annual General Meeting. The audit report for the year ended 30 June 2017 includes a material uncertainty in respect of going concern. The auditors draw attention to the fact that in forming their opinion on the financial statements, which is not modified, that they have considered the adequacy of the disclosures made in note 1 to the financial statements concerning the Group and the Company s ability to continue as a going concern. The report states that this is dependent on the ability of the directors to successfully secure sufficient funding for the foreseeable future including further funds should Board approved forecasts not be met. Going concern The financial statements have been prepared on a going concern basis. The Group continues to be loss making and in addition funds its capital expenditure and the development of its US business, ReSpin LLC, which is also loss making. On 18 December 2017, the Directors announced an equity fundraising of 1,759,535 with irrecoverable undertakings having been received. The Directors have reviewed forecast cash flows for the forthcoming 12 months from the date of approval of the financial statements and consider that the Group will have sufficient cash resources available for that period to meet its liabilities as they fall due. However, this is dependent on meeting the performance and timings in the forecasts which has required significant judgement and estimation and, as such, the Group may require further funding should trading or other timings of cashflows fall short of forecasts. The Directors would, if required, seek additional capital through further fundraising and/or asset sales or part sales. Having reviewed the forecasts of the business, the irrecoverable undertakings received and based on the ability to raise further funds should this be required, the Directors have a reasonable expectation to believe that it is appropriate to continue to prepare the financial statements on a going concern basis. There are therefore material uncertainties related to events or conditions that may cast significant doubt on the Group and Company s ability to continue as a going concern. If the business is unable to raise additional finance it may be unable to realise its assets and discharge its liabilities in the normal course of business. 25

26 NOTES TO THE CONSOLIDATED 1. Accounting policies continued Adoption of new and revised Standards and Interpretations There were no new Standards and Interpretations issued by the International Accounting Standards Board ( IASB ) that were effective for the first time in the current financial year and had an impact on the Group. The following relevant standards and interpretations were issued by the IASB or the IFRIC before the year-end but are as yet not effective for the 2017 year-end: IFRS 9 Financial Instruments (effective date 1 January 2018) IFRS 15 Revenue Recognition (effective date 1 January 2018) IFRS 16 Leases (effective date 1 January 2019) The above standards have not been early adopted and the Directors, based on the review and assessment completed to date, do not expect that the adoption of these standards will have a material impact on the financial statements of the Group in future periods with the exception of IFRS 16 Leases which will bring onto balance sheet operating leases as a right of use asset with a corresponding liability. The directors intend to conclude their review in the coming months. Critical accounting policies, estimates and judgements The preparation of consolidated financial statements under IFRS requires the Group to make estimates and judgments that affect the application of policies and reported amounts. Estimates and judgments are continually evaluated and are based on historical experience and other factors including expectations of future events that are believed to be reasonable under the circumstances. Actual results may differ from these estimates. Reference is made in this note to accounting policies which cover areas that the Directors consider require estimates and assumptions which have a significant risk of causing a material adjustment to the carrying amount of assets and liabilities within the next financial year. These policies, together with references to the related notes which include the judgements made, can be found below: Revenue recognition (note 1) Going concern (note 1) Capitalisation of Intangible assets (note 9) Impairment of goodwill (note 9) Acquisition accounting and fair value of consideration (note 21) Basis of consolidation The consolidated financial statements incorporate the financial information of the Company and entities controlled by the Company made up to 30 June Control is achieved where the Company has the power to govern the financial and operating policies of an entity so as to obtain benefits from its activities. Entities included within the consolidation that have been acquired by the Company are accounted for using acquisition or merger accounting as appropriate. The consolidated financial statements include the combination of businesses achieved through a Group restructuring that falls outside the scope of IFRS 3 Business Combinations. Accordingly, following the guidance regarding the selection of an appropriate accounting policy provided by IAS 8 Accounting policies: Changes in accounting estimates and errors, these financial statements have been prepared using the principles of merger accounting set out in FRS 6 Acquisitions and Mergers and UK Generally Accepted Accounting Practice ( UK GAAP ). When merger accounting is applied, the investment is recorded in the Company s balance sheet at the nominal value of shares issued together with the fair value of any consideration paid. In the consolidated financial statements, merged subsidiary undertakings are treated as if they had always been a member of the Group. Any differences between the nominal value of the shares acquired by the Company and those issued by the Company to acquire them are taken to a separate merger reserve. Where acquisition accounting is applied, the results of subsidiaries acquired or disposed of during the year are included in the consolidated statement of comprehensive income from the effective date of acquisition and up to the effective date of disposal, as appropriate. Where the Group enters into a step-acquisition and moves from being a joint-venture investment to a controlled subsidiary, this is accounted for as a business combination. On acquisition, the joint venture investment is fair valued with the difference being recorded in the income statement. Where a non-controlling interest is held, the fair value of assets and liabilities acquired is recorded in the minority interest reserve. 26

27 Strategic Report Governance Financial Statements NOTES TO THE CONSOLIDATED 1. Accounting policies continued Where the companies acquire a non-controlling interest, the amount payable is recorded directly in retained earnings and the necessary minority interest reserve transferred to retained earnings. Uniform accounting policies have been adopted across the Group. All intra-group transactions, balances, income and expenses are eliminated on consolidation. Foreign currencies The consolidated financial statements of the Group are prepared in Sterling, this is in line with the functional and presentational currency of the Parent company and main operating subsidiaries. Transactions and balances in foreign currencies are converted into Sterling as follows; Transactions entered into by the Group in a currency other than the functional currency are recorded at the rates ruling when the transactions occur. Foreign currency monetary assets and liabilities are translated at the rates ruling at the reporting date. Exchange differences arising on retranslation of unsettled monetary assets and liabilities are recognised immediately in the profit and loss. On consolidation, the results of overseas operations are translated into Sterling at rates ruling when the transaction took place. All assets and liabilities of overseas operations, including goodwill arising on the acquisition of those operations, are translated at the rate ruling at the reporting date. Exchange differences arising on translating the opening net assets at the opening rate and the results of overseas operations at the actual rate are recognised in other comprehensive income and accumulated in the foreign exchange reserve. On disposal of a foreign operation, the cumulative exchange differences recognised in the foreign exchange reserve relating to that operation up to the date of disposal are transferred to the consolidated statement of comprehensive income as part of the profit or loss on disposal. Revenue recognition Revenue in the current year arises solely on real money gaming and account set up fees for partners. Net gaming revenue derives from online gambling operations and is defined as the difference between the amounts of bets placed by players less amounts won by players. It is stated after deduction of promotional bonuses. Net gaming revenue is recognised to the extent that it is probable that economic benefits will flow to the Group and the revenue can be reliably measured. Revenue is recognised in the accounting periods in which the transactions occur. Cost of sales Cost of sales consists primarily of licensing fees, gaming taxes, regulatory and compliance expenses, merchant fees, chargebacks and platform licensing expenses. All expenses are recognised on an accruals basis and in line with the underlying revenue. Marketing, partner and affiliate costs Marketing, partner and affiliate costs consists primarily of revenue share, commission, affiliate expenses and online and offline advertising. Other income Other income consists of research and development taxation credits. The income is recognised when receipt is virtually certain. Goodwill Goodwill represents the excess of the cost of a business combination over the total acquisition date fair value of the identifiable assets, liabilities and contingent liabilities acquired. Cost comprises the fair value of assets given, liabilities assumed and equity instruments issued, plus the amount of any non-controlling interests in the acquiree. 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 capitalised as an intangible asset with any impairment in carrying value being charged to the consolidated statement of comprehensive income. 27

28 NOTES TO THE CONSOLIDATED 1. Accounting policies continued Externally acquired intangible assets Externally acquired intangible assets are initially recognised at cost and subsequently amortised on a straight-line basis over their useful economic lives which is typically over a period of three years. Intangible assets are recognised on business combinations if they are separable from the acquired entity or give rise to other contractual or legal rights. The amounts ascribed to such intangibles are arrived at using appropriate valuation techniques. In process research and development programmes acquired in such combinations are recognised as an asset even if subsequent expenditure is written off because the criteria specified in the policy for development costs below are not met. The significant intangibles recognised by the Group, their useful economic lives and methods used to determine the cost of intangibles acquired in a business combination are as follows: Intangible asset Useful economic life Valuation method Developed software Three years Replacement cost Contractual relationships Term of contract Discounted cash flows Licenses Five years Residual value Internally generated intangible assets (development costs) Expenditure incurred on development activities including the Group s software development is capitalised only where the expenditure will lead to new or substantially improved products, the products are technically and commercially feasible and the Group has sufficient resources to complete development. Capitalised development costs are amortised over three years. The amortisation expenses are included within administrative expenses in the consolidated statement of comprehensive income. Development expenditure not satisfying the above criteria and expenditure on the research phase of internal projects are recognised in the consolidated statement of comprehensive income as incurred. Subsequent expenditure on capitalised intangible assets is capitalised only where it clearly increases the economic benefits to be derived from the asset to which it relates. All other expenditure, including that incurred in order to maintain the level of performance of an intangible asset, is expensed as incurred. Property, plant and equipment Depreciation is calculated to write off the cost of fixed assets on a straight-line basis over the expected useful lives of the assets concerned. The principal annual rates used for this purpose are: Fixtures, fittings and equipment percent straight-line Office equipment percent straight-line Computer equipment - 33 percent straight-line Subsequent expenditures are included in the carrying amount of an asset or recognised as a separate asset, as appropriate, only when it is probable that future economic benefits will flow to the Group and the cost of the item can be measured reliably. All repairs and maintenance are charged to the consolidated statement of comprehensive income during the financial period in which they are incurred. Gains and losses on disposals are determined by comparing proceeds with the carrying amount and are included in the consolidated statement of comprehensive income. Impairment of property, plant and equipment and internally generated assets Impairment tests on goodwill and other intangible assets with indefinite useful economic lives are undertaken annually at the financial year end. Other non-financial assets are subject to impairment tests whenever events or changes in circumstances indicate that their carrying amount may not be recoverable. Where the carrying value of an asset exceeds its recoverable amount (i.e. the higher of value in use and fair value less costs to sell), the asset is written down accordingly. Where it is not possible to estimate the recoverable amount of an individual asset, the impairment test is carried out on the smallest group of assets to which it belongs for which there are separately identifiable cash flows; its cash generating units ( CGUs ). Goodwill is allocated on initial recognition to each of the Group s CGUs that are expected to benefit from the synergies of the combination giving rise to goodwill. 28

29 Strategic Report Governance Financial Statements NOTES TO THE CONSOLIDATED 1. Accounting policies continued Impairment of property, plant and equipment and internally generated assets (continued) Impairment charges are included in profit or loss, except to the extent they reverse gains previously recognised in other comprehensive income. An impairment loss recognised for goodwill is not reversed. Financial assets The Group classifies its financial assets as loans and receivables. The classification depends on the purpose for which the financial assets were acquired. Management determines the classification of its financial assets at initial recognition. Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. They are included in current assets, except for those with maturities greater than 12 months after the balance sheet date. These are classified as non-current assets. The Group s loans and receivables comprise trade and other receivables, cash equivalents and loans to joint ventures. Derivative financial assets, including call options, are recognised initially at their fair value, and subsequently re-measured at each balance sheet date, with the fair value gain or loss taken to the income statement. Financial assets are derecognised when the rights to receive cash flows from the investments have expired or have been transferred and the Group has transferred substantially all risks and rewards of ownership. Loans and receivables are carried at amortised cost using the effective interest method. Trade receivables Trade receivables are recognised initially at fair value and subsequently measured at amortised cost using the effective interest method less provision for impairment. Appropriate provisions for estimated irrecoverable amounts are recognised in the statement of comprehensive income when there is objective evidence that the assets are impaired. Interest income is recognised by applying the effective interest rate, except for short-term receivables when the recognition of interest would be immaterial. Impairment provisions are recognised when there is objective evidence (such as significant financial difficulties on the part of the counterparty or default or significant delay in payment) that the Group will be unable to collect all of the amounts due under the net carrying amount and the present value of the future expected cash flows associated with the impaired receivable. For trade receivables, which are reported net; such provisions are recorded in a separate allowance account with the loss being recognised within administrative expenses in the statement of 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. Cash and cash equivalents Cash and cash equivalents comprise cash on hand, demand deposits, and other short-term highly liquid investments that have maturities of three months or less from inception, are readily convertible to a known amount of cash and are subject to an insignificant risk of changes in value. Financial liabilities Financial liabilities are classified as financial liabilities at fair value through profit or loss or as financial liabilities measured at amortised cost, as appropriate. The Group determines the classification of its financial liabilities at initial recognition. The measurement of financial liabilities depends on their classification: (i) financial liabilities at fair value through profit or loss, including put options, are carried on the balance sheet at fair value with gains or losses recognised in the income statement; and (ii) financial liabilities measured at amortised cost are initially recognised at fair value and subsequently measured at amortised cost using the effective interest method. Amortised cost is calculated by taking into account any issue costs, and any discount or premium on settlement. Gains and losses arising on the repurchase, settlement or cancellation of liabilities are recognised respectively in interest and other revenues and finance costs. The Group derecognises a financial liability from its balance sheet when the obligation specified in the contract or arrangement is discharged, cancelled or expires. Trade and other payables Trade payables are initially measured at their fair value and are subsequently measured at their amortised cost using the effective interest rate method; this method allocates interest expense over the relevant period by applying the effective interest rate to the carrying amount of the liability. 29

30 NOTES TO THE CONSOLIDATED 1. Accounting policies continued Convertible debt Where the convertible debt issued converts into a variable number of shares the proceeds received on issue are allocated between the derivative financial liability and the host debt based upon their fair values. Subsequently the conversion option is measured at fair value through profit and loss and the debt component and as a financial liability measured at amortised cost until extinguished on conversion or maturity of the debt. Transaction costs directly attributable to the raising of convertible debt are allocated across the derivative financial liability component and the debt liability component. Transaction costs allocated to the derivative financial liability component are expensed to the income statement as they are incurred. Transaction costs allocated to the debt liability component are deducted from the residual value recognised as the debt liability on recognition. On receipt of a conversion request, the appropriate number of shares are issued to the loan note holder and the debt is cancelled. The difference between the nominal value of debt and the nominal share value is allocated to the share premium account. Share capital Financial instruments issued by the Group are classified as equity only to the extent that they do not meet the definition of a financial liability or financial asset. Current and deferred tax Taxation represents the sum of the tax currently payable and deferred tax. Current tax The tax currently payable is based on taxable profit for the year. Taxable profit differs from net profit reported in the statement of comprehensive income because it excludes items of income or expense that are taxable or deductible in other years and it further excludes items that are never taxable or deductible. The Group s liability for current tax is calculated using tax rates that have been enacted or substantively enacted by the statement of financial position date. Tax losses arising as a result of research and development expenditure and subsequently surrendered for tax credit are recognised within other income and as an other debtor. Deferred tax Deferred tax is calculated at the tax rates that are expected to apply to the period when the asset is realised or the liability is settled based upon tax rates that have been enacted or substantively enacted by the balance sheet date. Deferred tax is charged or credited in the statement of comprehensive income, except when it relates to items credited or charged directly to equity, in which case the deferred tax is also dealt with in equity. Deferred tax is the tax expected to be payable or recoverable on differences between the carrying amounts of assets and liabilities in the financial statements and the corresponding tax bases used in the computation of taxable profit, and is accounted for using the balance sheet liability method. Deferred tax assets are recognised to the extent that it is probable that taxable profits will be available against which deductible temporary differences can be utilised. The carrying amount of deferred tax assets is reviewed at each statement of financial position date and reduced to the extent that it is no longer probable that sufficient taxable profits will be available to allow all or part of the asset to be recovered. Deferred tax is not discounted. Leased assets Where substantially all of the risks and rewards incidental to ownership of a leased asset have been transferred to the Group (a finance lease ), the asset is treated as if it had been purchased outright. The amount initially recognised as an asset is the lower of the fair value of the leased property and the present value of the minimum lease payments payable over the term of the lease. The corresponding lease commitment is shown as a liability. Lease payments are analysed between capital and interest. The interest element is charged to the consolidated statement of comprehensive income over the period of the lease and is calculated so that it represents a constant proportion of the lease liability. The capital element reduces the balance owed to the lessor. Where substantially all of the risks and rewards incidental to ownership are not transferred to the Group (an operating lease ), the total rentals payable under the lease are charged to the consolidated statement of comprehensive income on a straight-line basis over the lease term. The aggregate benefit of lease incentives is recognised as a reduction of the rental expense over the lease term on a straight-line basis. 30

31 Strategic Report Governance Financial Statements NOTES TO THE CONSOLIDATED 1. Accounting policies continued Share based payments Where equity-settled share options are awarded to employees or service providers, the fair value of the options at the date of grant is charged to the consolidated statement of comprehensive income over the vesting period. Non-market vesting conditions are taken into account by adjusting the number of equity instruments expected to vest at each reporting date so that, ultimately, the cumulative amount recognised over the vesting period is based on the number of options that eventually vest. Non-vesting conditions and market vesting conditions are factored into the fair value of the options granted. As long as all other vesting conditions are satisfied, a charge is made irrespective of whether the market vesting conditions are satisfied. The cumulative expense is not adjusted for failure to achieve a market vesting condition or where a non-vesting condition is not satisfied. Where the terms and conditions of options are modified before they vest, the increase in the fair value of the options, measured immediately before and after the modification, is also charged to the consolidated statement of comprehensive income over the remaining vesting period. Where equity instruments are granted to persons other than employees, the consolidated statement of comprehensive income is charged with the fair value of goods and services received. Adjusted EBITDA The Group defines adjusted EBITDA as the operating result before depreciation, amortisation, income or expenditure relating to exceptional items and non-cash charges relating to share based payments and impairments. Exceptional items are considered to be one-off non trading items. Adjusted EBITDA is considered to be the most appropriate measure as it reflects the underlying trading performance of the Group and allows ease of comparison with the prior year. Joint ventures A joint venture is a contractual arrangement whereby the Group and other parties undertake an economic activity that is subject to joint control; that is, when the strategic, financial and operating policy decisions relating to the activities require the unanimous consent of the parties sharing control. The Group reports its interests in jointly controlled entities using the equity method of accounting. Under the equity method, investments in joint ventures are carried in the consolidated statement of financial position at cost as adjusted for post-acquisition changes in the Group s share of the net assets of the joint venture, less any impairment in the value of the investment. Losses of a joint venture in excess of the Group s interest in that investment are not recognised. Additional losses are provided for, and a liability is recognised, only to the extent that the Group has incurred legal or constructive obligations or made payments on behalf of the joint venture. 2. Segmental information The accounting policies of the reportable segments follow the same policies as described in note 1. Segment result represents the gross profit earned by each segment without allocation of the share of administrative costs including Directors salaries, finance costs and income tax expense. This is the measure reported to the Group s Chief Executive for the purpose of resource allocation and assessment of segment performance. Administrative expenses comprise principally the employment and office costs incurred by the Group. Following the acquisition of the remaining 50% of Respin, the Board now reviews the results of the on premise gaming separately and the results for the year ended 30 June 2017 have been split out as such below. For the year ended 30 June 2016 the results derive from one segment, that of Managed Gaming Solutions. 31

32 NOTES TO THE CONSOLIDATED 2. Segmental information continued Managed Gaming Solutions On Premise Gaming Revenue 13, ,250 Cost of sales (4,763) - (4,763) Gross profit 8, ,487 Marketing, partner, affiliate costs and administrative expenses (11,141) (765) (11,906) Adjusted EBITDA (2,667) (752) (3,419) Depreciation, amortisation, exceptional items and share based payment charges (1,205) Net finance expense (1,100) Share of loss of joint ventures (495) Taxation 98 Loss for the year (6,121) Group Segment assets and liabilities Assets and liabilities are not separately analysed or reported to the Group s Chief Executive and are not used to assist in decisions surrounding resource allocation and assessment of segment performance. As such, an analysis of segment assets and liabilities has not been included in this financial information. Geographical analysis of non-current assets The following table provides an analysis of the Group s non-current assets, excluding goodwill and investments in equity accounted joint ventures, by geographical segment: 30 June June 2016 Gibraltar 5,993 2,383 UK 6 12 India US 377-6,413 2,429 Geographical analysis of revenues The following table provides an analysis of the Group s revenue by geographical segment: 30 June June 2016 UK 12,593 5,640 Rest of the World ,250 5,893 32

33 Strategic Report Governance Financial Statements NOTES TO THE CONSOLIDATED 3 Operating Loss Operating loss has been arrived at after charging/(crediting): Staff costs (note 5) 2,645 2,917 Auditor s remuneration: Audit of the Company s annual accounts Audit of the subsidiaries annual accounts Other assurance services 6 4 Tax compliance services 6 5 Other non-audit services - 10 Rent payable under operating leases Amortisation 1,976 1,191 Depreciation Loss on disposal - 20 Loss/(gain) on foreign exchange 47 (160) Exceptional (gain)/charge (1,463) 1,309 During the year, the Group has incurred certain costs of a significant and one off nature that warrant separate disclosure. Included within exceptional items are: Write off of loan from joint venture (note 11) Write off of trade receivable (note 12) Fundraising and listing costs Provision for onerous contracts Impairment of intangible assets (note 9) Termination payments Net settlement of Nektan Marketing Services put option (note 11) Impairment of joint venture (note 11) 97 - Profit on brand disposals (net of legal costs) (1,897) - Other 41 - Total 30 June June June June 2016 (1,463) 1,309 Fundraising and listing costs incurred in the year ended 30 June 2017 relate to professional costs incurred in the equity funding in the year, and those incurred in the year ended 30 June 2016 relate primarily to professional costs incurred in relation to the issue of convertible loan notes and equity fundraising in the year. Where the unavoidable costs under a contract exceed the economic benefit expected to be received from that contract, the Group recognises a provision for the present value of the obligations under the contract. A provision has been recognised in the year ended 30 June 2016 for onerous contracts with a payment processor and a professional services provider. Termination payments made to former Directors of the Group were recognised as an exceptional expense in the year ended 30 June The net settlement relates to the termination of the put option previously held by the joint venture partner of Nektan Marketing Services Limited. This was achieved through the acquisition of the business which is to be wound up post-acquisition and therefore has been fully impaired at the year-end. 33

34 NOTES TO THE CONSOLIDATED 4. Other income R&D tax credit 30 June June The prior year other income previously included 110,000 of customer set-up fees which has been reclassified to revenue. 5. Staff costs 30 June June 2016 The average number of employees (including Directors) employed was: Management 3 5 Administration and technical staff The aggregate remuneration of the above employees comprised (including Directors): Wages and salaries 3,039 3,238 Social security costs Pension costs Benefits in kind In the statement of comprehensive income, total staff costs are included within administrative expenses. 6. Loss per share 30 June June ,444 3,764 Staff costs capitalised in respect of internally generated intangible assets (799) (847) 2,645 2,917 Basic loss per share is calculated by dividing the loss attributable to Ordinary shareholders by the weighted average number of Ordinary shares outstanding during the year. 30 June June 2016 Basic and diluted Loss after tax () (6,121) (10,486) Weighted average number of shares 28,111,340 23,356,131 Weighted average loss per share (pence) (21.8) (44.8) The result for the year ended 30 June 2016 and 2017 was a loss and therefore there was no difference between the basic and diluted loss per share. The Group has convertible loan notes, share options and warrants which are all potentially dilutive. 34

35 Strategic Report Governance Financial Statements NOTES TO THE CONSOLIDATED 7. Finance income and costs Finance income Gain on movement in fair value of derivative financial instruments Total finance income Finance expense Interest payable Total finance costs 30 June June 2016 (1,357) (1,078) (1,357) (1,108) 8. Taxation Current tax charge/(credit) 79 (21) Deferred tax credit (177) (7) Tax credit on loss on ordinary activities (98) (28) The total tax credit can be reconciled to the overall tax charge as follows: Factors affecting tax charge for year: The tax assessed for the relevant period is higher than the average standard rate of corporation tax in Gibraltar of 10 percent (2016: 10 percent). The differences are explained below: Loss before taxation (6,219) (10,514) Loss before taxation multiplied by the average standard rate of tax in the year of 10 per cent. (2016: 10 per cent.) (622) (1,051) Effects of: Expenses not deductible for tax purposes Other tax differences (67) 20 Current year tax losses not recognised Income not taxable (195) - Tax credit The Group has maximum corporation tax losses carried forward at each period end as set out below: (98) (28) Corporation tax losses carried forward 33,514 28,651 In addition, the Group has an unrecognised deferred tax asset in respect of losses which do not expire as follows: 30 June June June June June June June June 2016 Tax losses carried forward 3,351 2,865 3,351 2,865 35

36 NOTES TO THE CONSOLIDATED 9. Intangible assets Development software Acquired licences Computer Patents & software Trademarks Cost 1 July , ,960 Additions 1, , June , ,310 Externally aquired additions Internally capitalised additions Acquisition of subsidiary* - 4, , June ,866 4, ,986 Accumulated amortisation 1 July Impairment charge (note 3) Charge for the year 1, , June , ,110 Charge for the year 1, , June , ,086 Net book value 1 July , , June , , June ,600 4, ,900 Goodwill Total * During the year the Group acquired an additional 35% share of its 50% joint venture in ReSpin LLC resulting in the Group controlling the entity. This has been accounted for as a step-up acquisition (see note 21 for more details). Developed software primarily relates to expenditure on software and applications that have been developed and generated internally. Management judgement is required in determining the useful economic life of development software and computer software intangible assets. Impairment In accordance with IAS 36 Impairment of Assets, the Group regularly monitors the carrying value of its intangible assets. A detailed review was undertaken at 30 June 2017 to assess whether the carrying value of assets was supported by the net present value of future cashflows derived from those assets. The Goodwill is wholly in the managed gaming solutions CGU in the current and prior years. Managed Gaming Solutions CGU The recoverable amount of the European cash generating unit of 6,233,000 (2016: 3,961,000) is in excess of the CGU net liabilities by 6,646,000 and has been determined using a value in use calculation. The calculation of the value in use is based on a 3 year forecast model containing assumptions including the following key items: Discount rate of 20 per cent. Cashflows in FY18, FY19 and FY 20 based on the Board approved budgets including revenue growth in 2018 of 52%, 2019 of 38% and 2020 of 15% Terminal Growth rate of 2 per cent. These assumptions were based upon management s estimates based on their experience. The key assumptions that would need to change in order for an impairment to arise is the application of a discount rate of 54% and average reduction in expected cashflows over the period of 67%. On-Premise Gaming CGU The recoverable amount of the US cash generating unit of 6,393,000 is in excess of the CGU net asset by 657,000 and has been determined using a value in use calculation. The calculation of the value in use is based on a 6 year forecast model containing assumptions including the following key items: 36

37 Strategic Report Governance Financial Statements NOTES TO THE CONSOLIDATED 9. Intangible assets continued Discount rate of 27 per cent. Cashflows in FY18, FY19 and FY 20 based on the Board approved budgets including revenue growth in 2019 of 1,102%, 2020 of 125%, 10% in FY21 & FY22 and 5% in FY23 The use of a 6 year model beyond is based on the overall expectations of this being a growth market Terminal Growth rate of 2 per cent. These assumptions were based upon management s estimates based on their experience. The key assumptions that would need to change in order for an impairment to arise is the application of a discount rate of 29% and average reduction in expected cashflows over the period of 10%. 10. Plant, property and equipment Computer equipment Office equipment Fixtures, fittings & equipment Cost 1 July Additions Disposals (16) (16) (4) (36) 30 June Additions Acquisition of subsidiaries FX movement (12) - - (12) Disposals (1) - - (1) 30 June , ,214 Accumulated depreciation 1 July Charge for the year Eliminated on disposal (12) - (4) (16) 30 June Charge for the year Eliminated on disposal (1) - - (1) 30 June Net book value 1 July June June Total 11. Joint ventures 1 July 2,256 1,064 Additions 1,014 2,587 Share of losses (495) (1,395) Eliminated on Respin acquisition (2,678) - Impairment of Nektan Marketing Services (97) 30 June - 2,

38 NOTES TO THE CONSOLIDATED 11. Joint ventures continued During the year, the Group increased its shareholding in Respin LLC, incorporated in the US, from 50% to 85% in December 2016 following the failure of the joint venture partner to meet certain equity funding requirements. This was subsequently increased to 100% through the buy-out of the remaining 15% non-controlling interest in January The investment was equity accounted prior to the increase in shareholding to 85%, at which point it became a subsidiary and therefore met the definition of a business combination (see note 21 for more details). The acquisition of the 15% non-controlling interest for 61,000 (US$75,000) has been recorded directly into retained earnings. During the year, the Group reached agreement to buy out its joint venture partners in Nektan Marketing Services Limited ( NMS ) and terminate the put option held by them for consideration of 500,000 payable in cash. An initial payment of 250,000 was made in August 2017 with a further 150,000 payable in February 2018 and 100,000 payable in August This was offset by certain credit notes received by the Group to arrive at net settlement cost of 105,000. As the Group intends to wind-down the NMS business, the remaining investment of 97k was impaired in full. 12. Trade and other receivables 30 June 2017 Loan to joint ventures Trade Receivables 958 1,078 Prepayments and other debtors In the year, an impairment charge of nil (FY16: 263,000) was recognised in the income statement relating to trade receivables that are not recoverable and of nil (FY16: 481,000) relating to joint venture loans not recoverable. The ageing of receivables that are past due but not impaired is shown below, these relate to customers with no default history: 1,805 1, June 2017 Between one and two months - 10 Between two and three months 7 6 More than three months In determining the recoverability of receivables the Group considers any change in the credit quality of the receivable from the date credit was granted up to the reporting date. The Group utilises one principal payment service provider that processes approximately 87% (2016: 50%) of the Group s payment receipts. The amount outstanding from this payment service provider at 30 June 2017 was 390k (30 June 2016: 487k). The Directors consider that the carrying amount of the trade receivables, other receivables and the loan to the joint ventures approximate to their fair value due to their short term maturity. The maximum exposure to credit risk at the reporting date is the carrying value of each class of receivable shown above. The Group does not hold any collateral as security. 30 June June

39 Strategic Report Governance Financial Statements NOTES TO THE CONSOLIDATED 13. Cash and cash equivalents Interest is earned at floating rates on cash held on short-term deposit. All of the Group s cash and cash equivalents are held with major UK, Gibraltar or US banks. The following cash and cash equivalent amounts were held in foreign currencies. The remaining balance was denominated in UK Pound Sterling ( ). The Directors consider that the carrying value of cash and cash equivalents is approximate to their fair value. 14. Trade and other payables 30 June 2017 Cash in bank accounts June 2017 United States Dollars Euros 7 5 Indian Rupees June 2017 Trade payables 1,481 1,416 Other payables 2, Corporation tax liability 79 - Accruals 2,655 1,309 Finance lease obligations 8 27 Derivative financial liability 800 1, June June June ,362 4,448 Player balances which form part of other payables represents amount due to customers including net deposits received, undrawn winnings, progressive jackpots and certain promotional bonuses. Player balances for the year ended 30 June 2017 are 384,000 (2016: 186,000) and jackpot liabilities are 378,000 (2016: nil). The Group s policy is to ensure that these balances are fully covered by either cash or by funds held with payment processors. The derivative financial liability relates to the fair value derivative component of the convertible loan notes issued in the current and prior year. Details of the convertible loan notes previously issued by the Group can be found in note 16. The Directors consider that the carrying value of trade and other payables is approximate to their fair value. 39

40 NOTES TO THE CONSOLIDATED 15. Finance lease creditor During the prior year the Group entered into finance leases for computer equipment with a net book value of 62,000. Future lease payments are as follows: 16. Convertible Loan Notes The Company raised 5,829k in the year to 30 June 2015 ( Tranche 1 and 2 ) and a further 5,271k in the year to 30 June 2016 ( Tranche 3 and 4 ). The conversion price is at a 25% premium to the price at the most recent equity issue price prior to the conversion of the loan notes, subject to a maximum conversion price. The maximum conversion price is subject to rebasing in the event of a share issue. the balance sheet date, the conversion price was p and the maximum conversion price was p. Interest of 10 per cent. per annum is payable quarterly in arrears, however during the year the Company reached agreement with the loan note holders to defer the interest on the Series A CLNs until April 2020 with the Company having the option quarterly to restart interest payments. If the Company exercises its right to defer interest, the Series A CLN holders will be granted a warrant to buy Ordinary Shares, exercisable immediately at the lowest prevailing equity issue price per share up to the value of the interest so deferred. The issue of the warrants gives rise to a share based payment charge (see note 27 for more details). As at 30 June 2017, three quarters of interest payments had been deferred leading to an interest accrual of 750k (2016: nil). Any notes that have not been converted will be redeemed in full on 28 April Minimum lease payments Not later than one year 8-8 Between one year and five years Interest June 2017 Convertible loan notes 8,344 9,199 Accrued interest Non-current liabilities 9,094 9,199 Present value 30 June 2016 The number of shares that will be issued upon conversion of the notes is variable and, therefore on recognition the proceeds received from the issue of the notes, net of directly attributable transaction costs, have been allocated between the derivative financial liability based upon the fair values on inception of the conversion option and the host debt. During the year, 1,094,500 of the Series A CLN were converted at a price of p leading to 3,184,000 ordinary shares being issued. The debt component has subsequently been measured at amortised cost based on an effective interest rate of 11.12% for Tranche 1 (2016: 13.56%), 11.12% for Tranche 2 (2016: 13.61%), 16.20% for Tranche 3 (2016: 19.11%) and 16.20% for Tranche 4 (2016: 19.98%). The difference between the carrying amount of the liability component at the date of issue and the amount reported at 30 June 2017 represents the effective interest rate less the interest paid to that date. The derivative financial liability has been revalued at the balance sheet date (note 14), which has resulted in a fair value gain to the income statement of 257,000 (2016: 308,000). Due to the equity raise during the year, the conversion price of the CLN rebased to p. The Convertible Loan Notes are secured by a first ranking fixed and floating charge on the assets of the Company and each of the Company s subsidiaries, with all other loans to the Company ranking behind the Convertible Loan Notes security. 40

41 Strategic Report Governance Financial Statements NOTES TO THE CONSOLIDATED 17. Subsidiaries Details of the Group s subsidiaries as at 30 June 2017 are set out below: Name 18. Share capital The issued and fully paid share capital of the Company amounts to 360,353 and is split into 36,035,292 1p ordinary shares. On 1 February 2017, 8,748,704 new ordinary shares were admitted to AIM following an offer for subscription. The issue price was 27.5p raising gross proceeds of 2,406k of which 50k was a loan converted into equity giving proceeds after costs of 2,191k. 87k was recorded in share capital and 2,154k in share premium having deducted 164k of costs. These ordinary shares had anti-dilution warrants attached which would have been exercisable in the event of a further equity raise at a lower price than 27.5p in the 6 months following the raise. the date of issue of the anti-dilution warrants, the directors, based on their best estimates, did not believe that the warrants would be exercised and therefore no option charge has been recorded. These anti-dilution warrants subsequently expired post year-end in July 2017 and were not capable of exercise. In April and May 2017, a total of 3,184,000 shares were issued following notices of conversion from various Convertible Loan Note holders. The conversion price was p being a 25% premium to the latest equity raise price at the time of 27.5p. The total value of loan notes converted was 1,094,500, leading to 3,184,000 ordinary shares being issued of which 32k was recorded in share capital and the balance of 1,063k in share premium. Authorised share capital The authorised share capital of the Company is 1,000,000 divided into 100,000,000 Ordinary Shares (2016: 100,000,000) of which 36,035,292 Ordinary shares have been issued, credited as fully paid (2016: 24,102,588). 19. Deferred tax liability Country of incorporation Nektan UK Limited United Kingdom 100% Mobile software development Nektan Gibraltar Limited Gibraltar 100% Internet gaming services Nektan America Limited USA 100% Commercial development Nektan USA Inc USA 100% Internet gaming services Nektan Gaming Technologies Private Limited India 100% Mobile software development Broadcast Gaming Limited Gibraltar 100% Dormant Respin Games LLC USA 100% Gaming software development Nektan Marketing Services Limited UK 100% Marketing There is no deferred tax arising in respect of other comprehensive income. Proportion of voting rights and Ordinary share capital held Nature of business Allotted, issued and fully paid 1 July ,574, ,744 Issued during the year 1,528,211 15, June ,102, ,026 Issued during the year 11,932, , June ,035, , June Credited to the income statement on amortisation of acquired intangibles (7) Charged to the income statement in respect of accelerated capital allowances - 30 June Deferred tax arising on business combination 1,642 Credited to the income statement on acquired intangibles (164) Credited to the income statement (13) 30 June ,482 Ordinary shares number Ordinary shares Total 41

42 NOTES TO THE CONSOLIDATED 20. Financial instruments and risk management The Group is exposed to the risks that arise from its use of financial instruments. This note describes the objectives, policies and processes of the Group for managing those risks and the methods used to measure them. Further quantitative information in respect of these risks is presented throughout this financial information. The Group s overall risk management programme focuses on the unpredictability of financial markets and seeks to minimise potential adverse effects on the Group s financial performance. Risk management is carried out by management under policies approved by the Board of Directors. Management identifies and evaluates financial risks in close co-operation with the management of the Group s operating segments. The Board provides principles for overall risk management, as well as policies covering specific areas, such as interest rate risk and currency risk. Principal financial instruments The principal financial instruments used by the Group, from which financial instrument risk arises are as follows: Trade and other receivables Trade and other payables Convertible loan notes and derivatives Cash and cash equivalents Finance leases Financial assets The Group held the following financial assets: Loans and receivables: Cash and cash equivalents Trade and other receivables 1,805 1,309 Loans to joint venture partners Financial liabilities The Group held the following financial liabilities: Amortised cost: 30 June ,443 1, June 2017 Trade payables 1,481 1,416 Other payables 2, Corporation tax liability 79 - Accruals 2,655 1,309 Finance lease obligations Convertible loan notes 9,094 9, June June ,680 12, June 2017 Fair value through profit and loss: Derivative financial liability 800 1, June ,057 42

43 Strategic Report Governance Financial Statements NOTES TO THE CONSOLIDATED 20. Financial instruments and risk management continued Financial instruments not measured at fair value within the financial statements Financial instruments not measured at fair value include cash and cash equivalents, trade and other receivables, trade and other payables and the non-derivative element of the convertible loan notes. The carrying values of cash and cash equivalents, trade and other receivables, trade and other payables and the non-derivative element of the convertible loan notes approximate their fair value. Financial Instruments Measured at Fair Value Included in level 3 of the fair value hierarchy is derivative financial liabilities, which is carried at fair value through profit and loss and therefore movements in fair value are recognised in the income statement through finance expenses. No other financial instruments are measured at fair value through profit and loss. There have been no transfers between levels in any of the above periods. The valuation technique used in determining the fair value measurement of derivative financial liabilities was the Black Scholes model. The significant unobservable input in this valuation model is the expected date of conversion, volatility and dividend yield. year-end, these inputs were as follows: Expected date of conversion years ( years) from year-end Volatility - 50% (2016: 50%) Dividend Yield - 0% (2016: 0%) Financial instruments not measured at fair value within the financial statements The reconciliation of the opening and closing fair value balance of level 3 financial liabilities is as follows: Management controls and procedures The Group s Directors monitor and manage the financial risks relating to the operation of the Group. These risks include market risk (including foreign currency risk and interest rate risk), credit risk and liquidity risk. Market risk The Group s activities expose it primarily to the financial risks of changes in foreign currency exchange rates and interest rates. Market risk is the risk of loss that may arise from changes in market factors such as interest rates and foreign exchange rates. Foreign currency risk management The Group has minimal exposure to foreign currency risk, and consequently no sensitivity analysis has been prepared. The Board carefully monitors exchange rate fluctuations and reviews their impact on the net assets and position of the Group and seeks to economically hedge the impact of foreign exchange by holding sufficient cash in the relevant currencies. The Group does not enter into any derivative financial instruments to manage its exposure to foreign currency risk. All trade and other receivable are denominated in Sterling. Interest rate risk management The Group has minimal exposure to interest rate risk. During the year to 30 June 2017 the Group was exposed to interest rate risk on some of its financial assets, being cash held on bank deposit. The interest rate receivable on these balances was at a rate less than 0.1 percent (2016: less than 0.1 percent). The Directors currently believe that interest rate risk is at an acceptable level. Due to its minimal exposure to interest rate risk, the Group has not prepared any sensitivity analysis. Derivative Financial Liability As at 1 July Issues 930 Total gains in profit or loss (308) As at 30 June ,057 Issues - Total gains in profit or loss (257) As at 30 June

44 NOTES TO THE CONSOLIDATED 20. Financial instruments and risk management continued Credit risk Credit risk refers to the risk that a counterparty will default on its contractual obligations resulting in financial loss to the Group. Credit risk arises principally from the Group s cash balances and trade and other receivables. The concentration of the Group s credit risk is considered by counterparty, geography and currency. See note 12 for further details on credit risk. In the year impairment charges of nil (2016: 263k) relating to trade receivables (see note 12) and nil (2016: 481k) relating to loans from joint ventures (see note 11), have been recognised in the income statement. The Group gives careful consideration to which organisations it uses for its banking services in order to minimise credit risk. An allowance for impairment is made where there is an identified loss event which, based on previous experience, is evidence of a reduction in the recoverability of the cash flows, although there have been no such impairments over the review period. Management considers the above measures to be sufficient to control the credit risk exposure. Liquidity risk management Liquidity risk is the risk that the Group will encounter difficulty in meeting its financial obligations as they fall due. This risk relates to the Group s prudent liquidity risk management and implies maintaining sufficient cash. Ultimate responsibility for liquidity risk management rests with the Board of Directors. The Board manages liquidity risk by regularly reviewing the Group s cash requirements by reference to short-term cash flow forecasts and medium term working capital projections prepared by management. Maturity of financial liabilities The following table sets out the non-discounted contractual maturities of financial liabilities: 30 June 2017 One year or less Two to five years Five years and over Trade payables 1, ,481 Other payables 2, ,339 Accruals 2, ,655 Finance lease obligations Derivative financial liability Convertible loan notes ,452-13,562 Total 7,393 13,476-20, June 2016 One year or less Two to five years Five years and over Trade payables 1, ,416 Other payables Accruals 1, ,309 Finance lease obligations Derivative financial liability 1, ,057 Convertible loan notes 1,110 12,926-14,036 5,560 12,958-18,464 Capital management The Group is currently funded principally through shareholders funds and convertible loan notes. During the year ended 30 June 2017, 2,191k (net of costs) was raised through an equity issue and 1,897k (net of costs) was raised through the sale of three casino brands to Buckingham HMB LLP. Going forward the Board will consider whether debt or equity financing is more appropriate and proceed accordingly. The Group is not subject to any externally imposed capital requirements. Fair value estimation The carrying value less impairment provision of trade receivables and payables are assumed to approximate their fair values because of the short-term nature of such assets and the effect of discounting liabilities is negligible. The risk in respect of fair value estimation is in respect of acquisition accounting. Total 44

45 Strategic Report Governance Financial Statements NOTES TO THE CONSOLIDATED 21. Acquisitions On 29 December 2016, the Company increased its ownership of Respin from a 50% joint venture to a 85% subsidiary as additional funding of US$1.7m was not matched by the joint venture partner. The Directors determined that control passed to Nektan at this time and therefore the investment was consolidated as a subsidiary from that time. On 25 January 2017, following the then 15% minority interest holder failing to invest the required equity amount, the remaining 15% was acquired for US$75k. As the Group already had control of the entity, the additional payment was recognised directly in equity. Owning 100% of Respin outright will facilitate the Company s continuing realignment as an international gaming solutions provider, offering products and services across both markets through its proprietary platform, Evolve. Full ownership also brings an increased focus on regulated digital casino gaming in North America through the deployment of Respin s Rapid Bingo on-property mobile solution, which is the first bring-your-own-device approved mobile gaming platform with a GLI 547, Class II gaming certification. Details of the fair value of identifiable assets and liabilities acquired, purchase consideration and goodwill are as follows: Fair value Property, plant and equipment 355 Patents 35 Cash 35 Trade and other receivables 7 Trade and other payables (310) Fair value of licenses 4,828 Deferred tax liability (1,642) Minority interest (496) Total net assets 2,812 Fair value of consideration paid: Release of receivable due from joint venture 134 Fair value of 50% shareholding 2,678 Total consideration 2,812 Goodwill - The revenue and costs associated with Respin since acquisition are included in Note 2 and during the period from 1 July 2016 to 31 December 2016, the entity recorded a total loss of 1,014k, with Nektan s share being 507k. The loss in the 6 month period postacquisition is 752k with revenue of 13k. The total loss for the year for the Group would have increased by a further 507k if the acquisition had occurred at the start of the year with no impact on revenue. As no consideration was payable by the Group to obtain control, the Directors were required to fair value the 50% shareholding at acquisition date. The fair value was in line with the carrying value of the investment and, therefore no fair value adjustment was required through the income statement. The key assumptions in arriving at the fair value of 2,678,000 were: Discount rate of 27 per cent. Cashflows in FY18, FY19 and FY 20 based on the Board approved budgets including revenue growth in 2019 of 1,102%, 2020 of 125%, 10% in FY21 & FY22 and 5% in FY23 The use of a 6 year model beyond is based on the overall expectations of this being a growth market Terminal Growth rate of 2 per cent. The Directors based on their best estimates and knowledge of the business determined that the goodwill arising on the transaction was negligible due to the business having a small workforce and no significant contracts in place and therefore no goodwill has been recorded. 45

46 NOTES TO THE CONSOLIDATED 22. Related party transactions Balances and transactions between the Company and its subsidiaries, which are related parties, have been eliminated on consolidation and are not disclosed in this note. The remuneration of the Directors and other executive management, who are the key management personnel of the Group, is set out below: 30 June June 2016 The aggregate remuneration comprised: Salaries/fees Bonus Loss of office - 90 Benefits in kind 28 9 Share options The following related party transactions took place during the period: During the year, the following directors had transactions or interests in the Company s Convertible Loan Notes: Gary Shaw CLN Balance 300, ,000 Interest received 7,500 10,000 Deferred interest 22,500 - Deferred interest warrants 81,596 - Jim Wilkinson CLN Balance 250, ,000 Interest received 6,250 8,333 Deferred interest 18,750 - Deferred interest warrants 67,997 - Venture Tech Assets* CLN Balance 1,000,000 1,000,000 Interest received 25,000 33,333 Deferred interest 75,000 - Deferred interest warrants 271,982 - * A company controlled by Sandeep Reddy 30 June 2017 As part of the equity raise in January 2017, Gary Shaw subscribed for 636,363 ordinary shares, Jim Wilkinson subscribed for 181,818 ordinary shares, Leigh Nissim subscribed for 90,909 ordinary shares and Sandeep Reddy subscribed for 3,181,818 ordinary shares, either directly or through their associated companies. During the year the Group sold three casino brands for total proceeds of 1.95m in cash to Buckingham HMB LLP. A Director s wife has a 8.45% interest in Buckingham HMB LLP and is also a designated member of the LLP. The assets had nil cost and this resulted in a profit net of legal costs of 1,897,000. During the year, the Group contributed a further 1,014,000 to its joint venture partner, Respin Games LLC. On 21 December 2016, the Company increased its ownership of Respin to 85% as additional funding was converted to an increased membership interest, transitioning the business to an operating subsidiary from a joint venture. In January 2017, the outstanding 15% was acquired for US$75, June

47 Strategic Report Governance Financial Statements NOTES TO THE CONSOLIDATED 23. Post-balance sheet events In July 2017, the Company announced that it had secured commitments to raise 2,500,000 through an unsecured loan facility, providing financing to facilitate the Company s continued growth and associated product development. In order to draw upon the loan, the Company has entered into separate Facility Agreements with two of its Directors, Gary Shaw for 1,300,000 and Sandeep Reddy for 1,200,000 (the Debt Fundraise ). The loans will carry interest of 10% per annum and the Company will grant to each lender, 5.36 debt warrants and 137 anti-dilution warrants for each 1 drawn down under the facility agreements. The shareholder resolutions required for this were passed at an Extraordinary General Meeting of the Company held on 28 July the date of signing, of the 2,500,000 facility, 1,985,000 had been drawn down split between Gary Shaw 1,185,000 and Sandeep Reddy 800,000. On 18 December 2017, the Company announced that it had raised 1,759,535 through a placing of 5,095,243 new ordinary shares and subscriptions for 3,283,495 new ordinary shares both at a price of 21p per share. 24. Ultimate parent undertaking The Directors consider that there is no ultimate controlling party. 25. Operating leases The total future value of minimum lease payments due is as follows: 30 June 2017 Operating leases Expiring less than one year Expiring between one and two years Expiring between two and five years June Contingent liabilities As part of the Board s ongoing regulatory compliance process, the Board continues to monitor legal and regulatory developments and their potential impact on the Group. Management is not aware of any contingencies that may have a significant impact on the financial position of the Group. 47

48 NOTES TO THE CONSOLIDATED 27. Share based payments and warrants During the year ended 30 June 2017 and prior years, 1,222,233 options and warrants were granted or contracted to service providers and members of staff and a further 2,657,415 interest deferral warrants to CLN noteholders. Current and former employees Suppliers Interest deferral warrants Total Number Average price Average Average Number price Number price Number Average price As at 1 July , p , p Granted during the year , p , p As at 30 June , p , p Granted during the year 1,113, p 109, p 2,657, p 3,879, p As at 30 June ,113, p 912, p 2,657, p 4,682, p The exercise price of options/warrants outstanding at 30 June 2017 ranged between 0.01 and 2.36 (2016: ranged between 0.01 and 2.36) and their weighted average contractual life was three years 3months (2016: three years seven months). The weighted average fair value of each option/warrant granted during the period was 28.4p. The following information is relevant in the determination of the fair value of options/warrants granted during the period: 30 June June 2016 Option pricing model used Black-Scholes Black-Scholes Share price at date of grant 27.5p to 56.5p 1.90 Exercise price 27.5p to 56.5p 2.36 Option life 3 years to 5 years 0.6 years Risk free rate 0.4% 0.89% Expected volatility 50% 23.4% Expected dividend yield Nil Nil The volatility assumption, measured at the standard deviation of expected share price returns, is based on a statistical analysis of monthly share prices. The total share based payment charge for the year was 566,000 (2016: nil). 48

49 Strategic Report Governance Financial Statements Parent company balance sheet FOR THE YEAR ENDED 30 JUNE 2017 Fixed assets Intangible assets ii 1,600 2,211 Investments iii 9,262 8,036 10,862 10,247 Current assets Debtors iv 3,959 7,104 Cash at bank and in hand ,965 7,134 Creditors: amounts falling due within one year v (4,380) (4,911) Net current assets Notes (415) 2,223 Total assets less current liabilities 10,447 12,470 Creditors: amounts falling due after more than one year vi (9,094) (9,199) Net assets 1,353 3,271 Called up share capital vii Share premium viii 27,331 24,115 Share option reserve viii Profit and loss account viii (27,166) (21,347) Shareholders funds 1,353 3,271 The financial statements on pages 49 to 55 were approved and authorised for issue by the Board on 18 December 2017 and were signed on its behalf by: Jim Wilkinson Chairman 49

50 Parent company statement of changes in equity FOR THE YEAR ENDED 30 JUNE June , (7,505) 15,313 Loss for the year (13,841) (13,841) Issue of shares 15 1, , June , (21,347) 3,271 Loss for the year (5,819) (5,819) Issue of shares 119 3, ,335 Share based payments June , (27,166) 1,353 Share capital Share Premium Share option reserve Retained earnings Total equity The following describes the nature and purpose of each reserve within equity: Share capital Represents the nominal value of shares allotted, called up and fully paid Share premium Represents the amount subscribed for share capital in excess of nominal value Share option reserve Represents the cumulative value of share option charges recorded in the condensed consolidated statement of comprehensive income Retained earnings Represents the cumulative net gains and losses recognised in the consolidated statement of comprehensive income 50

51 Strategic Report Governance Financial Statements NOTES TO THE PARENT COMPANY FINANCIAL Statements i. Basis of preparation The financial statements have been prepared in accordance with FRS 102 The Financial Reporting Standard applicable in Gibraltar. The following exemptions have been taken in applying FRS 102: No cash flow statement has been presented for the parent company. The financial statements comply with the Gibraltar Companies Act 2014 The financial statements are presented in UK Pound Sterling ( Sterling ) and rounded to the nearest. Accounting policies The financial statements have been prepared on a historical cost basis, other than for the valuation of certain financial instruments which are held at their fair value. Under section 288(2) of the Gibraltar Companies Act 2014, the Company is exempt from the requirement to present its own statement of comprehensive income. The loss for the year ended 30 June 2017 is 5,819,000 (2016: loss 13,841,000). These financial statements present the results of Nektan plc for the year ended 30 June Foreign currencies Transactions denominated in foreign currencies are recorded at exchange rates as of the date of the transaction. Monetary assets and liabilities denominated in foreign currencies at the balance sheet date are reported at the rates of exchange prevailing at that date. Any gain or loss arising from a change in exchange rates subsequent to the date of the initial transaction is included as an exchange gain or loss in the profit and loss account, except where financing of a foreign subsidiary through long-term loans is intended to be as permanent as equity. Such balances are treated as part of the net investment and any exchange differences are recorded in reserves. Externally acquired intangible assets Externally acquired intangible assets are initially recognised at cost and subsequently amortised on a straight-line basis over their useful economic lives which is typically over a period of three years. Internally generated intangible assets (development costs) Expenditure incurred on development activities including the Company s software development is capitalised only where the expenditure will lead to new or substantially improved products, the products are technically and commercially feasible and the Company has sufficient resources to complete development. Capitalised development costs are amortised over three years. The amortisation expenses are included within administrative expenses in the consolidated statement of comprehensive income. Development expenditure not satisfying the above criteria and expenditure on the research phase of internal projects are recognised in the consolidated statement of comprehensive income as incurred. Subsequent expenditure on capitalised intangible assets is capitalised only where it clearly increases the economic benefits to be derived from the asset to which it relates. All other expenditure, including that incurred in order to maintain the level of performance of an intangible asset, is expensed as incurred. Investments Investments held as fixed assets are stated at cost, less any provision for impairment in value. 51

52 NOTES TO THE PARENT COMPANY FINANCIAL Statements i. Basis of preparation continued Trade debtors Trade debtors are recognised initially at fair value and subsequently measured at amortised cost using the effective interest method less provision for impairment. Appropriate provisions for estimated irrecoverable amounts are recognised in the statement of comprehensive income when there is objective evidence that the assets are impaired. Interest income is recognised by applying the effective interest rate, except for short-term receivables when the recognition of interest would be immaterial. Impairment provisions are recognised when there is objective evidence (such as significant financial difficulties on the part of the counterparty or default or significant delay in payment) that the Group will be unable to collect all of the amounts due under the net carrying amount and the present value of the future expected cash flows associated with the impaired debtor. For trade debtors, which are reported net; such provisions are recorded in a separate allowance account with the loss being recognised within administrative expenses in the statement of comprehensive income. On confirmation that the trade debtor will not be collectable, the gross carrying value of the asset is written off against the associated provision. Cash and cash equivalents Cash and cash equivalents comprise cash on hand, demand deposits, and other short-term highly liquid investments that have maturities of three months or less from inception, are readily convertible to a known amount of cash and are subject to an insignificant risk of changes in value. Trade and other creditors Trade creditors are initially measured at their fair value and are subsequently measured at their amortised cost using the effective interest rate method; this method allocates interest expense over the relevant period by applying the effective interest rate to the carrying amount of the creditor. Convertible debt In accordance with FRS 102 the company has the opted to follow IFRS for the presentation, recognition and measurement of financial instruments. Where the convertible debt issued coverts into a variable number of shares the proceeds received on issue are allocated between the derivative financial liability and the host debt based upon their fair values. Subsequently the conversion option is measured at fair value through profit and loss and the debt component and as a financial liability measured at amortised cost until extinguished on conversion or maturity of the debt. Transaction costs directly attributable to the raising of convertible debt are allocated across the derivative financial liability component and the debt liability component. Transaction costs allocated to the derivative financial liability component are expensed to the income statement as they are incurred. Transaction costs allocated to the debt liability component are deducted from the residual value recognised as the debt liability on recognition. Taxation Current tax is provided at amounts expected to be paid (or recovered) using the tax rates and laws that have been enacted or substantively enacted by the balance sheet. Deferred tax is recognised in respect of all timing differences that have originated but not reversed at the balance sheet date, where transactions or events that result in an obligation to pay more tax in the future or a right to pay less tax in the future have occurred at the balance sheet date. A net deferred tax asset is recognised as recoverable and therefore recognised only when, on the basis of all available evidence, it can be regarded as more likely than not that there will be suitable taxable profits against which to recover carried forward tax losses and from which the future reversal of underlying timing differences can be deducted. Deferred tax is measured at the average tax rates that are expected to apply in the period in which the timing differences are expected to reverse, based on tax rates and laws that have been enacted or substantively enacted by the balance sheet date. 52

53 Strategic Report Governance Financial Statements NOTES TO THE PARENT COMPANY FINANCIAL Statements i. Basis of preparation continued Share based payments Where equity-settled share options are awarded to employees or service providers, the fair value of the options at the date of grant is charged to the consolidated statement of comprehensive income over the vesting period. Non-market vesting conditions are taken into account by adjusting the number of equity instruments expected to vest at each reporting date so that, ultimately, the cumulative amount recognised over the vesting period is based on the number of options that eventually vest. Non-vesting conditions and market vesting conditions are factored into the fair value of the options granted. As long as all other vesting conditions are satisfied, a charge is made irrespective of whether the market vesting conditions are satisfied. The cumulative expense is not adjusted for failure to achieve a market vesting condition or where a non-vesting condition is not satisfied. Where the terms and conditions of options are modified before they vest, the increase in the fair value of the options, measured immediately before and after the modification, is also charged to the consolidated statement of comprehensive income over the remaining vesting period. Where equity instruments are granted to persons other than employees, the consolidated statement of comprehensive income is charged with the fair value of goods and services received. Where share options are issued to employees of subsidiary companies, the amounts are recorded as a capital contribution and included in investments with a corresponding increase in equity. ii. Intangible assets iii. Investments The additions relate to a loan waiver converted to equity of 134,000, an additional investment in Respin LLC of 61,000 and share option charges relating to employees of a subsidiary of 17,000. IT development Cost 1 July ,689 Additions 1, June ,038 Additions June ,837 Accumulated amortisation 1 July Charge for the year 1, June ,827 Charge for the year 1, June ,237 Net book value 1 July , June , June ,600 Investments in subsidiaries Investments in joint ventures Total investments As at 1 July 3,700 11,078 4,336 1,749 8,036 12,827 Additions 212-1,014 2,587 1,226 2,587 Acquisition of subsidiaries 5,350 - (5,350) Impairments - (7,378) (7,378) As at 30 June 9,262 3,700-4,336 9,262 8,

54 NOTES TO THE PARENT COMPANY FINANCIAL Statements iii. Investments continued The Company s investments represents interest in: Name Nature of investment Country of incorporation Proportion of voting rights and Ordinary share capital held Nature of business Nektan UK Limited Subsidiary England and Wales 100% Mobile software development Nektan Gibraltar Limited Subsidiary Gibraltar 100% Internet gaming services Nektan America Limited Subsidiary USA 100% Commercial development Nektan USA Inc Subsidiary USA 100% Dormant Nektan Gaming Technologies Private Limited Subsidiary India 100% Mobile Software Development Broadcast Gaming Limited Subsidiary Gibraltar 100% Dormant ReSpin Games LLC Subsidiary USA 100% Gaming software development Nektan Marketing Services Subsidiary England and Wales 100% Online marketing iv. Debtors Amounts due from Group companies 3,807 6,829 Other debtors and prepayments Loans to joint ventures v. Creditors The derivative financial liability relates to the issue of convertible loan notes. 30 June ,959 7, June June June 2016 Trade creditors Other creditors - 48 Amounts due to Group companies 2,563 3,034 Accruals and deferred income Derivative financial liability 800 1,057 4,380 4,911 54

55 Strategic Report Governance Financial Statements NOTES TO THE PARENT COMPANY FINANCIAL Statements vi. Creditors falling due after 12 months Creditors falling due after 12 months relates solely to the convertible loan notes. Details of the convertible loan notes of the Group and company can be found in note 16 of the consolidated financial statements. vii. Called up share capital Details of the share capital of the Group and Company can be found in note 18 of the consolidated financial statements. Authorised share capital The authorised share capital of the Company is 1,000,000 divided into 100,000,000 Ordinary shares of which 36,035,292 Ordinary shares have been issued, credited as fully paid (2016: 24,102,588). viii. Parent Company result for the year Under section 288(2) of the Gibraltar Companies Act 2014, the Company is exempt from the requirement to present its own statement of comprehensive income The Company s loss for the financial year was 5,819,000 (2016: loss 13,841,000). ix. Share based payments Details of the share based payments of the Group can be found in note 27 of the consolidated financial statements. x. Related party transactions Details of the related party transactions of the Group can be found in note 22 of the consolidated financial statements. xi. Events after the reporting date Details of post balance sheet events of the Group can be found in note 23 of the consolidated financial statements. 55

56 directors, offices and advisors Directors Gary Shaw (Interim Chief Executive Officer) appointed 10 May 2011 Leigh Nissim (Chief Executive Officer) appointed July 2016 resigned 7 June 2017 Alan Turner (Non-executive Director) appointed 1 April 2014 resigned 15 February 2017 James (Jim) Henry Wilkinson (Non-executive Chairman) appointed 1 April 2014 Nadigadda Sandeep Reddy (Non-executive Director) appointed 1 April 2014 Nektan plc Gibraltar 2.1 Waterport Place 2 Europort Avenue, Gibraltar London Portland House, Bressenden Place London SW1E 5BH, United Kingdom Las Vegas Tivoli Village, Suite 390 Office South Rampart Las Vegas, Nevada, Company Secretary Trilex Secretaries Limited Suite 1, Burn s House 19 Town Range Gibraltar Registered Office Suite 1, Burn s House 19 Town Range Gibraltar Website Principal Place of Business 2/1 Waterport Place 2 Europort Avenue Gibraltar Nominated Advisor and Broker Stockdale Securities Limited Beaufort House 15 St Botolph Street London EC3A 7BB United Kingdom Auditors BDO LLP 55 Baker Street London W1U 7EU United Kingdom Auditors continued BDO Limited 5.20 World Trade Center PO Box 1200 Gibraltar Lawyers to the Company K&L Gates LLP One New Change London EC4M 9AF United Kingdom Lawyers to the Company as to Gibraltar Law ISOLAS Gibraltar Portland House Glacis Road PO Box 204 Gibraltar Financial PR Newgate Communications Sky Light City Tower 50 Basinghall Street London EC2V 5DE United Kingdom Registrars Capita Registrars (Guernsey) Limited Mont Crevelt House Bulver Avenue St Sampson GY2 4LH Guernsey Depository Capita IRG Trustees Limited The Registry 34 Beckenham Road Beckenham Kent BR3 4TU United Kingdom 56

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