Unaudited 2016 Full Year Preliminary Results

11 April 2017

Defenx PLC("Defenx" or the "Company")

Unaudited 2016 Full Year Preliminary Results

Defenx PLC (AIM: DFX), the mobile security software solutions company, is pleased to announce its unaudited preliminary results for the year ended 31 December 2016.

Financial Highlights

· Fifth year of profitable growth - 58% year-on-year growth in revenue to €7.09 million (2015: €4.49 million) with a 10% increase in average revenue per user (ARPU)

· 88% growth in operating profits (before transaction costs) to €1.84 million (2015: €0.98 million)

· Strong cash generation (before development costs) of €2.32 million in operating cash inflow (2015: €1.02 million outflow)

· Shareholder approved placing and subscription raised €1.53 million net of expenses

Operational Highlights

· Acquisition of Memopal, a cloud backup and synchronisation business, was successfully completed and brings new IP, customers and significantly increased internal development and customer support capacity

· Enhanced product portfolio with the launch of Defenx Mobile Security Suite for Windows 10 Mobile, Defenx Privacy Advisor, Defenx Parental Control and the acquisition of Memopal Cloud Backup + Sync

· Eight new channel partners added in the year bringing many potential new end-users and driving our geographical expansion into key markets

Post year end

· Long-term strategic partnership with BV-Tech, a leading independent corporate IT and cyber security solutions provider in Italy, which the directors believe will significantly enhance Defenx's product portfolio and enable the Company to penetrate the corporate market to generate high quality, recurring revenues in the medium term.

Andrea Stecconi, Chief Executive Officer of Defenx PLC, commented: 

"2016 has been a year of significant progress for Defenx, our first full year as a public company following our IPO in December 2015. I believe that Defenx is in a strong position to continue its strategy to launch new products, enter new markets and broaden its management team in 2017; continuing to grow revenues and profits over the coming year in the ever-exciting mobile security software market. I would like to take this opportunity to thank our people and shareholders whose hard work and support have facilitated the growth achieved in 2016."

Enquiries:

About Defenx

Founded in 2009, Defenx is a fast-growing and profitable security software company that offers a range of products for the mobile, PC and network security markets. Defenx software is priced competitively, fully featured and efficient (reduced use of memory, processing capacity and therefore power).

A flexible marketing strategy, focused on white-label and profit-share arrangements with distributors, telecoms companies and hardware manufacturers, enables Defenx to compete with established industry incumbents. Since inception, Defenx has sold over 5.7 million security software licences, primarily in Europe, the Middle East and Africa.

Defenx's global distribution partners currently include 3Italia, Seagate Technology, Türk Telecom and Western Digital, amongst others including telecoms operators, systems integrators and original equipment manufacturers. Defenx was admitted to trading on AIM on 3 December 2015 and acquired Memopal SRL in August 2016, which has allowed the Group to diversify its product portfolio and grow its customer base by adding proprietary cloud backup and synchronisation technology as well as new channel partners.

www.defenx.com/company/investors

The information contained within this announcement is deemed by the Company to constitute inside information as stipulated under the Market Abuse Regulations (EU) No. 596/2014 ("MAR").

CHAIRMAN'S STATEMENT

I am pleased that, in our first full year on AIM, we have delivered significant revenue and profit growth, exceeding the Board's expectations set at the start of the year. The year was marked by new challenges, new products, new channel partners and new people with our first acquisition in August 2016 of Memopal. Our first year on AIM has been transformational.

A year of product delivery

Much of 2016 was focused on strengthening Defenx's endpoint security products, which have long been our core offering. As part of our strategy to offer '360-degree' solutions that protect the everyday digital life of our individual, family and SME end-users, Defenx also launched during 2016 products for personal privacy, safety and parental control.

We have also added products to address progressively larger customers - from our existing, largely, consumer base to SMEs and corporates in the near future. We expect that our end-point network security, mobile device management and corporate cloud storage solutions will support and de-risk our continued revenue growth.

The long-term strategic partnership announced today with BV-Tech SpA ("BV-Tech"), a leading independent corporate IT and cyber security solutions provider in Italy, is entirely consistent with this strategy. The Board firmly believes this will strengthen both our product portfolio and reach into the corporate market. We look forward to working together with the wider BV-Tech team.

Board and management

Since our AIM admission, we have doubled our headcount to add further quality and bandwidth at all levels. Our development team has been strongly reinforced with the acquisition of Memopal SRL ("Memopal"). We now maintain and support all our products exclusively with internal resources, outsourcing key aspects of new product development to trusted external partners.

The Board was sad to say goodbye to Guido Branca, Chief Operating Officer, during the summer. We remain grateful for his significant contribution since joining Defenx in 2014, most notably establishing the parent company in the UK, the subsequent private placing and the successful IPO in 2015.

The appointment of Gianluca Granero as Group Development Director follows the integration of Memopal into the Group. Gianluca's broad-ranging technical and commercial experience has provided much need management bandwidth and helped to accelerate business development.

Early in 2017, Paolo Cellini was appointed as a strategic adviser to the Board. Paolo brings extensive experience and a track record of supporting growing companies within and beyond Italy and is already helping Defenx in its product portfolio and marketing strategy.

BV-Tech have the right to nominate two directors, which will require a review of the Board's composition to ensure we have the right skills and fit to drive Defenx forward. I will be leading this review and will keep shareholders updated in this regard.

The Board continues the search for the right senior sales executive to help drive the Group's expansion.

Robust prospects

Following the €1.53 million placing and subscription last October, in which the Board was pleased to see participation by the executive directors, and today's subscription by BV-Tech, Defenx is well positioned to deliver continued profitable growth in 2017.

As a high growth and profitable security solutions company, I am confident that Defenx will have another exciting year and deliver positive returns for shareholders.

The Board looks forward to meeting shareholders at the AGM in June 2017, details of which will be posted to shareholders when the full audited financial statements are published in early May.

Anthony ReevesChairman

CHIEF EXECUTIVE'S STATEMENT

Defenx has successfully navigated its first full year on AIM. Our B2B2C strategy has again delivered significant revenue and profit growth. This growth comes through growing the team, growing our product portfolio and growing the number and quality of channel partners we now support. Year-on-year growth in revenue was 58% to €7.09 million. Operating profits (before transaction costs) increased 88% to €1.84 million with strong cash generation. Earnings per share increased four-fold to €0.185.

Growing with the market

Defenx has focused on the mobile security market since its outset. Today, Google's Android has almost overtaken Microsoft's Windows as the World's most popular operating system. The number of mobile devices continues to grow towards an estimate 5.7 billion by 2020. Internet activity increasingly revolves around mobile devices - email, messaging, web browsing, sharing photos and videos, streaming - particularly so in the secondary and emerging markets that we target. We therefore remain convinced that developing our product portfolio to securing mobile devices and protect the data they contain is the right strategy.

The rapid growth of ransomware, including more sophisticated attacks on businesses, is a key driver for the adoption of improved cyber protection. With the acquisition of Memopal, Defenx now offers Mobile Security and Cloud Backup both reducing the risk of infection and, in the event of a successful attack, ensuring data is never lost, even on the move.

New channel partners

Our focus on mobile and a channel-friendly business model enabled us to add eight new channel partners in 2016, expanding our reach into retail, mobile operators and device manufacturers. Distribution continues to grow in 2017 with the launch of Defenx Mobile Security Suite on the Café Bazaar Playstore, an Iranian Android App marketplace, through one of our channel partners.

Our channel partners have not just been increased in number, but also in the size of the target markets they address, driving our geographical expansion into key markets. The acquisition of Memopal brought Türk Telekom as a new channel partner. Their contract has been renewed and we are already working together to expand into their customer base and the wider regional market.

Memopal acquisition completed

As announced on 2 August, we successfully completed the acquisition of 95.2% of Memopal, a cloud backup and synchronisation business based in Rome, Italy. Memopal's team of seven staff and three consultants have significantly increased the Group's internal development and customer support capacity that we would otherwise have needed to recruit during the year. The acquisition diversified and enhanced the Group's product portfolio and added new channel partners, development and support staff.

Expanding the product portfolio

As we entered 2017, our product portfolio was much expanded since the IPO. In addition to Security (anti-malware end-point protection), we have added Protection (a suite of solutions to monitor and manage the online activity of family members and corporate staff) and Backup (cloud storage and sync to protect data and securely share it). With these three product segments we now address the varied needs of consumer and business end-users.

Development work is now well advanced on our in-house PC and Network Security Suite, part of our strategy to comprehensively address the needs of corporate end-users. Together with the Defenx Mobile Device Management (MDM) portal and Defenx Encrypted Call & Messaging Apps, we will soon have a compelling product portfolio with which to attack the corporate market.

We continue to explore profitable opportunities in the Internet of Things (IoT) domain. Our existing Security solution for Network Attached Storage (NAS) drives and the expertise from Memopal is being used to develop Security and Backup solutions for Smart TVs and set-top boxes.

Solid financial performance

Our B2B2C strategy again delivered significant revenue growth with full year revenues including the contribution from Memopal of €7.09 million, a year-on-year increase of 58%. Thanks to strong cost control, we have also delivered a significant increase in operating profitability and earnings per share. Our financial performance is discussed in detail below in the Financial Review.

In October, primarily to accelerate software development, we successfully sought shareholders' approval for an equity placing and subscription raising €1.53 million net of fees. Together with strong operating cash flows of €2.32 million and the debt facilities secured following the acquisition of Memopal, we now have the funding to continue our mobile-led growth and expand into the lucrative corporate market.

Corporate and social responsibility

Much of our software is optimised for mobile devices running on battery power. We seek to maximise its efficiency by reducing the impact on processing capacity and memory. These products therefore have lower power consumption reducing the frequency of battery recharging: a small, but scalable contribution to the environment. In common with many businesses, our greatest impact on the environment comes from travel, notably air travel. We seek to use modern communications to limit air travel as far as possible.

Current trading and outlook

Defenx is on track to launch new products, enter new markets and broaden its management team in 2017. The board of Defenx is confident that the Group will show continued growth in revenue and profit over the coming year in the ever-exciting security software market. I firmly believe that our long-term partnership with BV-Tech, announced today, will generate high quality, recurring revenues in the medium term.

I would like to personally thank our people and investors for their continued support and look forward to reporting further progress in 2017.

Andrea StecconiChief Executive Officer

FINANCIAL REVIEW

Key performance indicators

Revenues

Group revenues grew 58% to €7.09 million (2015: €4.49 million) driven primarily by increased demand from new and existing channel partners following the launch of new products and upgrades. On an organic basis, excluding the acquisition of Memopal, revenue growth was 53%. The market sales seasonality continues to result in the majority of Group revenues, 67% (2015: 70%), falling into the second half of the financial year.

Mobile security revenues accounted for around 65% (2015: 70%) of our business with the balance from PC and Network security and our new Backup segment. Network security revenues increased substantially with the sale of our Network Attached Storage (NAS) security products to new channel partners.

Average revenue per user (ARPU) was 10% higher than the prior year. As highlighted last year, the sale of security bundles - providing protection for multiple platforms - is increasingly important. With the addition of Backup and Protection segment products to our portfolio, we expect this trend to continue with a resultant increase in the Group's ARPU.

The deferred revenue provision increased to €590,000 (2015: €315,000) representing the proportion of sales attributable to the provision of updates and support over the licence period outstanding at the year end. As our revenue model shifts towards 'Protection as a Service' subscriptions, we expect deferred revenue to grow as a proportion of revenue. The Board continues to monitor the likely impact of IFRS 15, due for first time adoption from January 2018, and emerging market practice. We currently expect a modest increase in the proportion of revenue deferred following the adoption of this new standard.

Gross margin

In line with guidance last year, gross profit margins fell to 82.5% (2015: 88.6%) with the launch of new products that increased amortisation charges to €1.01 million (2015: €477,000). Cost of sales also includes sales commissions, expensed customer integration and software maintenance costs.

The introduction of Defenx Cloud Backup in March 2016, for which there are additional storage, connectivity and labour costs of sales, also had a modest downward impact on margins. We expect this to continue in 2017 as Cloud backup sales grow.

Expenses

The Group now reports operating expenses by department, being sales & marketing; research, development & operations; and administration with transaction costs separately itemised. Analysed by their nature, marketing, staff and AIM related expenses account for the majority of the Group's ongoing operating expenses (see note 3).

Marketing expenses, primarily contributions towards developing the Defenx brand that are generally paid to channel partners only upon the achievement of pre-agreed sales targets, increased to €2.22 million (2015: €1.45 million), a modest fall to 31.4% (2015: 32.3%) of sales against our target of 30%.

Overall staff costs increased to €1.02 million (2015: €691,000) with the addition of 11 sales, support and development staff, largely following the acquisition of Memopal, and the full year effect of the board additions and alignment of remuneration to market rates for the IPO. Performance related bonuses of €191,000 (2015: €203,000) are included in these costs. We continue to engage sales and development resources as contractors at an additional cost during the year of €88,000 (2015: €114,000) excluding software development costs that have been capitalised.

The costs of maintaining our AIM listing were €168,000 (2015: €6,000 from 3 December 2015). In addition, the share based payment charge in respect of the 204,750 warrants granted to our joint-brokers at the time of the placing in October 2016 was €59,000. Excluding these AIM expenses, administrative expenses fell during the year.

On an annualised basis, Memopal adds around €300,000 to the Group's operating expenses.

Operating profitability

Operating profits before transaction costs increased 88% to €1.84 million (2015: €979,000) resulting in an operating margin before transaction costs of 26.0% (2015: 21.8%). This increase reflects the tight control of overheads following the step change in the Group's cost base prior to our IPO. Being largely fixed costs, we anticipate operating margins to continue to improve during 2017 towards our target of 30%.

Transaction costs of €189,000 relating to the acquisition of Memopal and net interest expenses of €62,000 (2015: €3,000) resulted in profit before tax of €1.60 million (2015: €362,000). Transaction costs of €169,000 relating to the placing and subscription were charged to the share premium account.

Taxation

The Group's effective tax rate for the year of 21.2% (2015: 64.6%) is in line with the 20% main rate in the UK. The loss incurred by Defenx PLC itself, for which we do not yet obtain tax relief, was offset by the release of excess provisions for Swiss tax from 2014. With the acquisition of Memopal, we expect our effective rate of tax to increase above 20% during 2017. We keep the Group's operations under review to ensure taxes are paid that fairly reflect activities in the UK, Italy and Switzerland.

Net profit and EPS

Profit after tax attributable to ordinary shareholders of Defenx was €1.23 million (2015: €192,000). This equates to earnings per share (EPS) of €0.185 (2015: €0.042) undiluted and €0.169 (2015: €0.039) diluted.

The Board has reviewed the dividend policy in light of the Group's strategy, available opportunities and anticipated funding requirements and has concluded that it is in the interests of shareholders to continue to reinvest profits in future growth. The medium-term intention remains to become a dividend paying business.

Cash flow

The net cash inflow from operating activities was €2.32 million (2015: €1.02 million outflow) after an increase in receivables of €1.44 million (2015: €2.27 million) offset by an increase in payables and provisions of €1.04 million (2015: €347,000). We continue to work with our channel partners to accelerate the receipt of debtors, although extended terms are common in Southern Europe, the Middle East and Africa.

The cash outflow from investing activities reflects continued investment in our software assets, which accelerated following the placing and subscription in October 2016. During the year, capitalised software development costs were €4.89 million (2015: €1.35 million) including €900,000 for the Cloud Backup + Sync IP acquired with Memopal. Cash acquired upon the acquisition of Memopal was €354,000.

The net cash inflow from financing activities reflects the placing and subscription in October 2016 that raised €1.53 million net of expenses, the drawdown of new debt facilities and the partial repayment of the vendor loans in respect of the acquisition of Memopal.

The free cash outflow, defined as net cash flow from operating activities less internally capitalised development costs, was €1.67 million (2015: €2.37 million). As revenues continue to grow, it is the Board's expectation that free cash flow will turn positive.

Together with the net proceeds of €2.78 million from the IPO, Defenx has raised a total of €4.31 million since admission to AIM.

Intangible assets

The net book value of capitalised development costs increased to €6.54 million (2015: €2.61 million) reflecting the completion of work on Defenx Mobile Security for Windows 10 Mobile, Defenx Privacy Advisor and Defenx Parental Control; the start of work on Defenx Security Suite for Windows PCs and networks; integration with channel partners' systems; and the acquisition of Memopal.

The acquisition of Memopal resulted in goodwill of €1.14 million and an intangible customer relationship asset relating to certain B2B customer contracts, which is being amortised over three years, of €305,000.

Having assessed the sales prospects for our software products, the Board is satisfied that carrying value of these intangible assets is appropriate.

Current assets and liabilities

Current assets increased to €6.68 million (2015: €4.64 million) including year end trade receivables of €5.33 million (2015: €2.83 million), of which 16% was overdue, and cash balances of €1.18 million (2015: €1.33 million).

Credit risk is managed by regular review of outstanding and overdue balances and dialogue with customers. Standard payment terms are typically between 90 and 120 days in our markets. The average age of outstanding invoices at the year end was 58 days, somewhat below the average during the year due to our sales seasonality. Based on the strong relationships with our customers and their past collections experience, we are confident that trade debtors are fairly stated in the balance sheet.

Cash deposits are held in Euro, Sterling, Swiss Francs and US Dollars and placed on deposit in the UK and Switzerland. Minimal balances are held in Italy. Cash forecasts are updated monthly to ensure that sufficient cash is available for foreseeable requirements.

Current liabilities increased to €4.07 million (2015: €1.35 million) including trade creditors and accruals of €1.39 million (2015: €656,000), the current proportions of deferred revenue, loans and borrowings, and taxation of €773,000 (2015: €443,000).

Financing

The Group entered into new debt facilities of, in aggregate, €1.32 million during the year. A €400,000 term loan, €150,000 invoice discounting facility and overdraft of €150,000 are available in Italy. A supply chain finance facility of £450,000 is available in the UK. The invoice discounting and supply chain finance facilities have allowed the Group to narrow the working capital gap between the extended debtor terms customary in its overseas markets and shorter supplier credit terms in the UK. In addition, €742,000 of the €1 million vendor loans in respect of the acquisition of Memopal were outstanding at the year end.

Gross year end debt, including vendor loans, was €1.95 million (2015: €nil). Net debt was €0.78 million (2015: €nil), equivalent to a debt-equity ratio of 8.0% compared to the Board limit of 25%. The weighted average interest rate payable for the year was 9.8%.

Defenx is in a strong financial position to continue to grow and exploit many exciting opportunities ahead. The Group ended the year with a significantly stronger balance sheet. Total equity attributable to ordinary shareholders of Defenx increased to €9.63 million (2015: €5.81 million) representing a net asset value per share of €1.44 (2015: €1.28).

Philipp PrinceChief Financial Officer

CONSOLIDATED STATEMENT OF INCOME

The profit for the year arises from the Group's continuing operations.

There were no other items of comprehensive income. Accordingly, no consolidated statement of comprehensive income has been prepared.

CONSOLIDATED STATEMENT OF FINANCIAL POSITION

CONSOLIDATED STATEMENT OF CHANGES IN EQUITY

CONSOLIDATED STATEMENT OF CASH FLOWS

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

Defenx PLC is a public limited company incorporated in the UK on 11 April 2014. The Company's ordinary shares are traded on AIM. The consolidated financial statements comprise Defenx PLC and its subsidiaries, Defenx SA, a company incorporated in Switzerland, and Memopal SRL, a company incorporated in Italy (together referred to as the "Group"), for the year ended 31 December 2016.

1. Basis of preparation

Statement of compliance

The financial information contained in this announcement has been prepared on the basis of the accounting policies to be set out in the statutory accounts for the year ended 31 December 2016. While the financial information has been prepared in accordance with the recognition and measurement criteria of IFRS, this announcement does not itself contain sufficient information to comply with IFRS.

The unaudited financial information set out in this announcement does not constitute the statutory financial statements for the year ended 31 December 2016 and the year ended 31 December 2015 in accordance with section 434 of the Companies Act 2006 but is derived from those accounts.

The financial statements for the year ended 31 December 2015 were prepared in accordance with EU-Adopted IFRS and have been delivered to the Registrar of Companies. The financial statements for the year ended 31 December 2016 will be delivered to the Registrar of Companies following the Company's Annual General Meeting.

Following Board approval, the full audited financial statements of Defenx PLC for the year ended 31 December 2016 are expected to be published in early May 2017. They will be available to the public at the Company's registered office, 42-50 Hersham Road, Walton-on-Thames, Surrey KT12 1RZ and to view on the Company's website at www.defenx.com from the date of publication.

Going concern

The Chief Executive Officer's Review above outlines the activities of the Group along with factors which may affect its future development and performance. The Group's financial position is discussed in the Financial Review above along with details of its cash flow and liquidity.

As at 31 December 2016 the Group had net assets of €9,650,940 (31 December 2015: €5,812,442) as set out in the consolidated statement of financial position. The directors have prepared detailed forecasts of the Group's performance for the next two years. The forecasts contain certain assumptions about the level of future sales, margins and the level of cash recovery from trading.

After considering the forecasts and the risks, the Directors are satisfied that the Group has adequate resources to continue in operational existence for the foreseeable future and, accordingly, continue to adopt the going concern basis in preparing the Group and Company financial statements.

Accounting policies

The principal accounting policies applied in the preparation of these financial statements are consistent with those applied in the prior financial year and are applied by all Group entities unless otherwise stated.

2. Segmental analysis

The Group operates as a single division selling three main categories of product:

· Security - anti-malware software protection for mobile, PC and network devices

· Protection - client, server and web based applications to monitor, manage and secure the online activities of individuals, families and corporate employees

· Backup - Cloud based backup and synchronisation solutions to protect data and securely share it

Accordingly, the Group has a single reportable segment. This is consistent with the internal reporting provided to the chief operating decision-maker, identified as the management team including the Chief Executive Officer and the Chief Financial Officer.

The Group no longer considers its product hardware platforms (Mobile, PC and Network) as relevant to understanding performance since end-users increasingly purchase solutions for multiple platforms. The following disclosure is provided for comparison with prior period reporting. Revenue by product platform for the Group is as follows:

Non-current assets (capitalised development costs) by product segment for the Group are as follows:

The Group does not analyse costs or assets other than intangible assets by product platform.

Geographical segments

The Group is managed centrally and accordingly the Group does not analyse costs or assets by geographical region. Revenue by customer location is as follows:

3. Operating profit

In 2016, share issuance costs of €169,489 in respect of the placing and subscription were charged to the share premium account. In 2015, AIM admission costs of €366,817, including auditors' remuneration of €26,579, were charged to the share premium account.

4. Staff Costs

Staff costs (including directors' emoluments) incurred in the year were as follows:

The average monthly number of permanent employees during the period was as follows:

5. Taxation

No liability to UK or Italian income tax arose on ordinary activities for the year ended 31 December 2016. The tax charge for both 2016 and 2015 arose in respect of operations in Switzerland as follows:

The reasons for the difference between the actual income tax charge for the year and the standard rate of corporation tax in the UK applied to the profit for the year are as follows:

The aggregate tax rate in Switzerland was 20.4% during the year (2015: 20.4%). The corporation tax rate in the UK was reduced from 21% to 20% effective 1 April 2015 and will reduce to 19% effective 1 April 2017 and 18% effective 1 April 2020.

Deferred tax is calculated in full on temporary differences under the liability method using tax rates of 27.5% and 20.4% (2015: 20.4%) being the respective effective rates of tax applicable in Italy and Switzerland where the deferred tax arises.

The accumulated tax losses available to the Group at 31 December 2016 were €720,389 (2015: €553,284). These losses relate to activities, and are available indefinitely for offsetting against future taxable profits, of Defenx PLC in the UK and Memopal SRL in Italy. No deferred tax asset is recognised in respect of these losses as it is not sufficiently certain that the Group will be able to utilise them in the near future. If the Group were able to recognise all unrecognised deferred tax assets, the retained profit would increase by €153,070 (2015: €110,657).

6. Earnings per share (EPS)

Basic EPS amounts are calculated by dividing the profit for the year attributable to ordinary equity holders of Defenx PLC by the weighted average number of ordinary shares outstanding during the year.

Diluted EPS amounts are calculated by dividing the profit attributable to ordinary equity holders by the weighted average number of ordinary shares outstanding during the year plus the weighted average number of ordinary shares that would be issued on conversion of all the dilutive deferred shares (note 13), the exercise of options and crystallisation of the contingent share consideration (notes 13 and 14).

The following reflects the income and share data used in the basic and diluted EPS computations:

The weighted average numbers of shares above reflect the 8 for 1 ordinary share consolidation implemented on 16 November 2015 as further disclosed in note 13. Relevant transactions involving ordinary shares or potential ordinary shares since 31 December 2016 are set out in note 15: Events after the reporting date.

7. Intangible assets

Development costs represent qualifying expenditure on the development of software products for resale less accumulated amortisation and impairment costs.

During the year and before its acquisition, Memopal SRL sold a perpetual licence allowing Defenx SA to use, modify and sell its Cloud backup and synchronisation software for a consideration of €900,000. Goodwill relates to the acquisition of Memopal SRL and the customer relationships intangible asset relates to certain B2B customer contracts in Memopal SRL. The recognition and treatment of these asset in the financial statements is further described in note 14.

Development costs of €1.13 million (2015: €140,000) for products under development at the year end have not yet been launched or amortised. The Group has no contractual commitments for development costs (2015: nil).

There were no intangible assets in the statement of financial position of the Company.

Impairment

The Group is required to test, on an annual basis, whether goodwill and intangibles have suffered any impairment or when there are indications that the value of the assets might be impaired. The recoverable amount is determined based on value in use calculations. The use of this method requires the estimation of future cash flows and the determination of a discount rate in order to calculate the present value of the cash flows.

If the recoverable amount is estimated to be less than its carrying amount, the carrying amount of the asset is reduced to its recoverable amount. An impairment loss is recognised as an expense immediately in the statement of income. Goodwill is considered impaired if the carrying value of the cash-generating unit to which it relates is greater than the higher of fair value less costs of disposal and the value in use. Goodwill is allocated to the Group's Backup segment cash generating unit.

The Group has assessed the net present value of individual products held as development costs against forecasts of future sales of the related products, unit sales prices and costs over a five-year period. No sales beyond five years have been included in the calculations. The impairment tests are sensitive to changes in these forecasts and changes could result in impairment; however, the varying bases indicate a net present value in excess of the carrying value of the intangible assets at the balance sheet date.

The key assumptions in the value in use calculations are:

Gross margins have been based on past experience and future expectations in the light of anticipated economic and market conditions. Discount rates are based on the Group's WACC adjusted to reflect management's assessment of specific risks related to the cash generating unit. Growth rates beyond the first two years are based on economic data pertaining to the region concerned.

Future events may cause these assumptions to change, which could have an adverse effect on the future results of the Group. The discount rate would need to increase to around 30% (2015: 60%) or the gross margin and marketing contribution assumptions would need to fall by over 15% (2015: 50%) before affecting the carrying value of intangible assets.

8. Investment in subsidiaries

The following subsidiary undertakings have been included in the financial statements:

Both subsidiaries' principal activity is that of the parent, namely the development, provision and distribution of software solutions.

9. Trade and other receivables

All amounts shown under receivables are due within one year. The payments on account represent advances to an established software developer with whom the Group had agreed detailed specifications for work that had been started, but not invoiced prior the year end.

The movement in the impairment provision for trade receivables has been included in administrative expenses in the statement of income. Other classes of financial assets included within trade and other receivables do not contain impaired assets.

At 31 December 2016, €149,000 (2015: €nil) of trade receivables had been sold to providers of invoice discounting services. The Group is committed to underwrite any of the debts transferred and therefore continues to recognise the debts sold within trade receivables until the debtors repay or default. The proceeds from transferring the debts are included in loans and borrowing until the debts are collected or the Group makes good any losses incurred by the lender.

10. Cash and cash equivalents

Cash and cash equivalents comprise balances on bank accounts, cash in transit and cash floats held in the business. Finance charges are accounted for on an accruals basis and charged to the statement of income when payable.

Cash and cash equivalents are held in Euro, Sterling, Swiss Francs and US Dollars and placed on deposit in the UK, Italy and Switzerland.

For the purpose of the statement of cash flows, cash and cash equivalents comprise the following at 31 December:

11. Trade and other payables

Trade and other payables shown above are payable within one year. The carrying value of trade and other payables classified as financial liabilities measured at amortised cost approximates to fair value.

12. Loans and borrowing

The book and fair value of interest bearing loans and borrowings was:

Overdrafts and other short term facilities, excluding the supply chain facility, attract variable interest at between 3% and 6% per annum. The short-term supply chain facility, denominated in Sterling, attracts a fixed rate of interest of 1.65% per month. The bank and vendor loans, both denominated in Euros, attract interest at 3% over 3-month EURIBOR and at 8% fixed per annum respectively.

The average effective interest rate for the year ended 31 December 2016 was 9.8% (2015: nil).

The currency profile of the Group's loans and borrowings was:

At 31 December 2016, the Group had available €111,000 (2015: nil) of undrawn committed borrowing facilities.

13. Share capital

Ordinary share capital

The ordinary shares of £0.018 carry the right to one vote per share at general meetings of the Company and the rights to share in any distribution of profits or returns of capital and to share in any residual assets available for distribution in the event of a winding up. The shares are denominated in Sterling.

On 1 August 2016, 621,394 new ordinary shares were allotted at £1.2968 per share as part the consideration for the acquisition of Memopal SRL. No share premium has been recognised in the parent company's financial statements since more than 90% of Memopal SRL's shares were acquired thereby attracting merger relief under the Companies Act 2006. A total of €946,410 was credited to the merger reserve in the statement of financial position.

Contingent equity consideration, comprising up to 238,035 new ordinary shares, will be allotted on 30 June 2018, subject to Group performance in the year ending 31 December 2017 as further disclosed in note 14: Business combinations. The fair value of this contingent obligation is shown under non-current liabilities.

On 26 October 2016, 1,897,500 new ordinary shares at £0.80 per share, raising gross proceeds of £1.52 million (€1.53 million net of expenses), were allotted pursuant to a placing of 1,647,500 ordinary shares and subscription of 250,000 ordinary shares approved at an EGM held that day. The subscription was taken up by the Executive Directors of the Company.

Also on 26 October 2016, a total of 164,750 warrants over ordinary shares were issued to the Company's brokers, WH Ireland Limited and Beaufort Securities Limited, as part consideration for their broking services. These five-year warrants have an exercise price of £0.80. Separately, as part of Beaufort Securities Limited appointment to act as joint-broker to the Company, a further 40,000 five-year warrants with exercise prices of between £1.25 and £2, were issued.

Share issue costs of €169,489 (2015: €366,817) have been charged against the share premium account.

Deferred share capital

The deferred shares of £0.0001 carry no right to vote, no right to share in any distribution of profits or returns of capital and to share in any residual assets available for distribution in the event of a winding up. The shares are denominated in Pounds Sterling. Deferred shareholders have the right for five years from issue to convert their shares into ordinary shares for a consideration of £0.10 per share less the amount paid for each deferred share on an eight for one basis. The Company must give prior notice to deferred shareholders in the event of a sale.

The Company has not issued any partly paid shares nor any convertible securities or exchangeable securities. The Company does not hold any treasury shares.

14. Business combinations

Acquisition of Memopal SRL

On 1 August 2016, the Group acquired 95.2% of the voting equity of Memopal SRL ("Memopal"), an unlisted company whose principal activity is the development and sale of cloud backup and synchronisation software. The principal reason for this acquisition was to diversify the group's product portfolio with proprietary technology and grow the group's customer base with the addition of Memopal's channel partners. In addition, Memopal's team of 7 staff and 3 consultants significantly increased the group's internal development and customer support capacity that the group would otherwise have needed to recruit. Memopal is based in Rome, Italy.

Since the acquisition date, Memopal has contributed €198,394 to group revenues and a net loss of €238,830 to group profits. If the acquisition had occurred on 1 January 2016, group revenue would have been €611,240 higher and group net profit would have been €293,230 higher.

Net assets acquired

Details of the fair value of identifiable assets and liabilities acquired, purchase consideration and goodwill are as follows:

The Group has elected to measure the non-controlling interests in Memopal at the proportionate share of net assets of the acquiree.

Fair value adjustments

As at the acquisition date, the fair value of certain B2B customer contracts in Memopal was estimated to be €353,933 with a related deferred tax liability of €97,331. The fair value is determined using the DCF method. Significant unobservable valuation inputs were:

· Contracted contribution to profit per annum of €264,000

· Contract renewal probabilities of 75%, 50% and 25% in years 1, 2 and 3 respectively

· Discount rate of 10.3% being the estimated WACC of the Group

Upon consolidation, the Group held two assets representing essentially the same underlying source code: a perpetual licence in Defenx SA and the net book value of €639,212 capitalised development costs in Memopal. On the basis that the €900,000 consideration, shown within current assets above, was negotiated prior to the acquisition of Memopal on an arms-length basis, the Directors have chosen to eliminate the net book value in Memopal, which resulted in deferred tax asset of €175,783, both at the date of acquisition. In addition, post-acquisition amortisation of €136,878 relating to the acquired development costs has also been reversed leaving the licence amortisation of €75,000 in Defenx SA and post-acquisition capitalised development costs in Memopal.

As at the acquisition date, Memopal held trade receivables with a book value of €270,357. Whilst the group will make every effort to collect all contractual receivables, it considers it unlikely that the €70,190 will ultimately be received.

Consideration and goodwill

Acquisition costs of €188,590 were expensed as administrative expenses.

Contingent equity consideration

Contingent equity consideration of up to €380,856 is payable on 30 June 2018 in up to 238,035 ordinary shares based on the average mid-market closing share price and the average GBP:EUR spot rate for each of the previous five business days (note 13) or, at the Company's option, in cash.

The contingent equity consideration is payable if group EBITDA for the year ending 31 December 2017 exceeds €3.4 million and is calculated as 50% of the excess group EBITDA up to the maximum consideration of €380,856.

Based on current market expectations for the Group's 2017 results, the Directors believe that the full contingent equity consideration will be payable. The fair value of this contingent obligation is shown under non-current liabilities.

The main factors leading to the recognition of goodwill are:

· The presence of certain intangible assets, such as the Memopal brand, a portfolio of B2C web customers and the development team within Memopal, that do not qualify for separate recognition;

· Overhead cost savings that result in the Group being prepared to pay a premium, and

· The fact that a lower cost of capital is ascribed to the expected future cash flows of Memopal's entire operations than might be to individual assets.

The goodwill arising on the acquisition of Memopal will not deductible for tax purposes. 

15. Events after the reporting date

On 3 January 2017, MBooster Srl ("MBooster") was appointed as strategic adviser to the Company. MBooster will receive a semi-annual fee of €37,500 to be settled by the issue of new ordinary shares at the average mid-market price for the last five business days of each half year. The engagement commenced on 1 January 2017 and may be cancelled with three months' notice by either party.

On 11 April 2017, the Company announced a long-term strategic partnership with BV-Tech SpA ("BV-Tech"), a leading independent Italian corporate IT and cyber security solutions provider, initially comprising a conditional software acquisition for €2.65 million (£2.26 million) to be settled through the issue of 1,982,222 new ordinary shares and an equity subscription for 861,666 new ordinary shares to raise €1.15 million (£0.98 million) before expenses.