System1 Group PLC (AIM: SYS1)

 ("System1" or "the Group" or "the Company")

Financial results to 31 March 2019

System1, the international marketing and market research agency, today announces its results for the 12 month period ended 31 March 2019.

As previously announced, the Company is making a significant investment in a new business line "AdRatings" and, for ease of prior year comparisons, is splitting its results into the existing business ("Consulting") and AdRatings.

* See notes 10 and 25

Highlights

Commenting on the Company's results, John Kearon, Chief Executive Officer of System1, said:

'The previous year, our first as System1, was a painful one, but with the support of our future-focussed investors and dedicated staff, we held our nerve and pushed on with the work needed to turn our intellectual leadership into a scalable business, capable of becoming the industry leader over time.

This year's results may not be spectacular, but they were significant. Flat revenues, 7% growth in Ad Testing, a 23% increase in the number of clients and 5% growth in H2 revenues against H2 2018, leave us cautiously optimistic the changes are working. Increased productivity and efficiency from our product, process and technology enhancements, saw Underlying Profit Before Tax grow by 80%. We're looking forward to what we can achieve in the years ahead, both from established products and new offerings such as AdRatings.'

The Company can be found at www.system1group.com.

The information contained within this announcement is deemed to constitute inside information as stipulated under the Market Abuse Regulations (EU) No. 596/2014.  Upon the publication of this announcement, this inside information is now considered to be in the public domain.

For further information, please contact:

CHAIRMAN'S STATEMENT

The 2018/19 financial year was my first as Chairman of System1 Group PLC - I succeeded Ken Ford, who retired from the Board at our Annual General Meeting in July 2018.  2018/19 was characterised by a number of significant developments at System1 which I highlight in my comments below, following a brief summary of our results for the year.

Despite continued industry-wide pricing pressure our core Consultancy business largely stemmed the decline in performance seen during 2017/18, with Gross Profit, the Company's main top line performance measure, 1% lower than the prior year.  Encouragingly, a drive to increase productivity delivered a significant improvement in profitability, and Underlying Profit Before Tax* increased by 80% to £3.70m.

These numbers exclude our substantial investment in AdRatings, and also share based payments and a one-off business rates rebate.  Including all of these items, our reported Profit Before Tax for the year was £1.93m, equivalent to 15.4p per share.  The Board proposes to pay a maintained final dividend of 6.4p per share.  This would make for a full year dividend of 7.5p, the same as in 2017/18.  System1's financial position remains strong.  At the year-end we had a cash balance of £4.32m (31 March 2018: £5.78m), equivalent to 34.3p per share, and no debt.

While our core business stabilised last year, and indeed showed signs of returning to growth, there remains much to be done.  System1's reputation as a leading innovator in the world of market research remains intact, but we need to turn this into greater commercial success in order to drive sustained growth.  We need to work hard to ensure that more of the Company's large multi-national clients commit to purchasing System1's products and services at scale.

Recognising the substantial and ongoing changes in demand for market research products and services over the last couple of years, System1 has re-engineered a number of its processes, enhanced its product portfolio to meet customer requirements, and begun to improve the ways in which research findings are delivered to clients.

There has been a step change in the level of investment in new product development and IT systems during 2018/19 - an increase which the Board considers vital to the delivery of future growth.  A new Chief Information Officer has recently been recruited to drive this process, and we are confident of delivering significant improvements over the coming years.

Our new AdRatings subscription service has been at the heart of the increased new product development programme.  During the year System1 invested a total of £3.03m in AdRatings, a service which enables subscribers to compare the effectiveness of their advertisements with that of competitors, and to correlate advertising effectiveness with media spend.  The product is being trialled by a number of clients as we refine and enhance its features.  Investment in AdRatings will continue in 2019/20, and we plan to roll it out further during this financial year.

During 2018/19 the System1 Board was significantly strengthened by the appointment of two additional Non-Executive Directors - Jane Wakely and Sophie Tomkins.  Jane, who is Lead Chief Marketing Officer of Mars Inc., brings to our discussions a wealth of highly relevant, top level, consumer goods marketing experience.

*Underlying Profit Before Tax is defined in the Business Review on page 11.

Sophie, a Chartered Accountant and former City financial analyst who is a Non-Executive Director of other AIM listed businesses, brings complementary and equally valuable insights to our Board discussions.  I would personally like to welcome Jane and Sophie to the Board.  Following these appointments, Robert Brand, who joined the Board as a Non-Executive Director in 2012, was appointed our Senior Independent Director.  Alex Hunt, formerly an Executive Director of System1, left the business with our best wishes in September 2018.

In June 2018 System1 formally adopted the updated Quoted Companies Alliance Corporate Governance Code, and we have taken measures to ensure full compliance.  Our corporate website has been revised to provide easy access to all appropriate governance information.  An external consultant was engaged to conduct a Board Performance Review, and we are already taking steps to implement some recommendations.  Similarly, our Senior Independent Director conducted a Performance Evaluation of the Chair exercise among the other members of the Board.  Full details of our approach can be found in the Corporate Governance section of this Annual Report.

System1 employees have once again shown impressive commitment over the past year, understanding the need to alter their approach in response to evolving market requirements.  I would like to place on record how much I appreciate the hard work and application of System1 employees everywhere.  More of the same will be required over the coming year as we seek to build on our improved performance in 2018/19.

Graham Blashill

Chairman

CHIEF EXECUTIVE OFFICER'S STATEMENT

We are on a journey to take our business from being 'Intellectual #1' in our space, to 'Commercial #1'.

The journey started two years ago, changing our name to System1, Daniel Kahneman's term for instinctive 'Fast Thinking' that we use to make most decisions. As Kahneman says, ideas are more compelling in verse, so here's our summary of his work and its application to market research:

Two systems say Amos & Dan
Explain the decisions of man
The fast system drives
While the slow system skives
So we don't act according to plan

Behavioural science reveals
What standard research conceals
So, what must be done?
Embrace System1
And measure how people feel J

The System1 name change was accompanied by a book, summarising our pioneering application of Behavioural Science to predicting which ads will create the greatest long-term growth and profitability.

The book has achieved a 5-Star Amazon rating and distribution of over 10,000 copies. Here's a taster of how to create 5-Star returns on advertising investment:

To grow a brand, you need to get, those who do not buy you yet.

Speak to the heart, don't tax the brain, emotional ads give 11x the gain.

Test, learn & push to perfect it, small changes can be highly effective.

Aim for 5-Stars, don't stop at 3, to build your Fame, Feeling & Fluency*. 

Spend on winners, avoid any waste, to put a smile on your CFO's face.

*        Fame, Feeling & Fluency are the best predictors of profitable long-term brand growth

During 2017/18, our first year as System1, we re-engineered our IP into a highly automated, value-enhancing 'Ad System', providing next day predictions, at a fraction of the previous cost, creating more consultancy time for profit-enhancing improvements of good ideas. Clients get a faster-cheaper-better 'System' to predict and maximise their advertising investment and we're better placed to win larger-scale, longer-term contracts and drive the business towards our long-term commercial leadership goal. 

During 2018/19, our second year as System1, we restructured our sales teams into 'New Client Acquisition' and 'Existing Client Growth', hired a CIO, invested in digitising our product offerings and re-organised our back-office to improve productivity.

We also continued our long track record of innovation in our sector, by published ground-breaking, industry-lauded evidence for the enhanced profitability of ads that have a successful 'Fluent Device', like Compare-the-Market's Meerkats, Felix's cat and Evian's babies. 

So how has it gone in our first two years as System1?

As shareholders and staff know only too well, year one was a painful one. Coinciding with a year of multinational budget cuts, our revenues fell by 18%, Profit Before Tax fell by 68% and staff morale took a tumble.

But with the support of our future-focussed investors and dedicated and talented staff, we held our nerve and pushed on with the work needed to turn our intellectual leadership into a compelling and scalable business, capable of becoming the industry leader over time.

Our second year's results were far from spectacular, but they were significant. Flat revenues is hardly impressive, but 7% growth in Ad Testing revenue, a 23% increase in the number of clients and 5% growth in 2019 H2 revenues against H2 2018, leave us cautiously optimistic the changes are working. In addition, increased productivity and efficiency from our product, process and technology enhancements, saw Underlying Profit Before Tax grow by 80%.

Today we sell our IP through consultancy products which help our clients make better marketing decisions. We aim to accelerate our business growth by leveraging this with judicious use of data, AI and the Internet. By doing this, we aspire to become a Global leader in long term advertising effectiveness.

An example of our new thinking is AdRatings. This is a digital product which takes our innovative IP and allows clients to benchmark their advertising against both competitors and the whole category and gain insights into how to improve their advertising effectiveness and profitability.

By leveraging these latest technologies, AdRatings evaluates adverts much more cheaply and quickly than in the past.  We have built (to our knowledge) the world's biggest database of adverts rated on long-term effectiveness.  The methodologies involved are familiar to our own Ad Testing clients, but the database can be used by any client, regardless of the technique they use to test their own ads.  Currently the database covers some two thirds of all TV advertising in the UK and USA from the beginning of 2017.  The "library" of adverts is updated daily, and we aim to evaluate every new advert within our covered categories within 24 hours of airing.

The goals for AdRatings are fourfold, sequential and progressive in their potential contribution to future Company growth:

1) BUILD the largest database of adverts evaluated on long term effectiveness.  We use this asset to enhance our understanding of effective advertising which feeds into our consultancy business.

2) BRAND this database and provide topical, predictive data to industry publications, to raise System1's presence in ad industry conversations and increase our Fame, Feeling and Fluency.  AdRatings is our first ownable asset.  It is (we believe) world leading and gets better, larger and more compelling every day - a key benefit of having an asset versus a methodology.

3)  WIN new clients in new industries (beyond the current Consumer Packaged Goods core) off the back of AdRatings' ability to increase our Fame, Feeling and Fluency.  AdRatings is a low-cost way for clients to access System1 and does not require clients to decide to change how they evaluate their own adverts (though of course, if they do change to our methodology, this will be a bonus).  Clients can use the database as a decision-making resource to augment their existing methodologies and insights.  As clients don't have to change their advert testing methodologies, we are ambitious about achieving high penetration among advertisers spending over £1m annually, which is our key target market.

4)  SELL access to the AdRatings' database via a subscription and/or other services and so create a new, scalable revenue stream.  We are refining our product offerings to commercialise this database to greatest advantage.  As with other new digital services, we expect that sales will accelerate once it begins to catch on, but cannot be certain when that will be.

The downside risks in AdRatings are relatively limited and the level of investment is closely monitored, while the long term advantages are potentially very significant.  We will continue to innovate, invest in IT, improve productivity and build System1's Fame, Feeling and Fluency, as we attempt to fulfil our ambition of turning System 1's Intellectual Leadership', into 'Commercial Leadership'.

"A huge thank you to investors, staff and clients alike, for joining us on the journey."

John Kearon

Chief Executive Officer

BUSINESS AND FINANCE REVIEW

Introduction

Our 2018/19 financial year can best be described as a return to stability after poor results in 2017/18.  Gross Profit (our main top line measure) declined slightly (1%), our cost base declined 12% (excluding AdRatings - see below), and Underlying Profit Before Tax increased 80% to £3.70m (again, see below for the definition).  The resulting profit margin was 14%, which while behind our previous long-term average (19% on average over the 4 years from 2013-2016), was ahead of 2017/18's 8%.

To put our results into context, we need to look back to the decline in 2017/18.  This stemmed primarily from external market pressures due predominantly to reductions in market research budgets within some of our largest FMCG clients.  There was also pricing pressure across the market as a whole.  This had been building over a few years but became more pronounced in 2017/18 with clients moving towards more automated, and lower cost, market research solutions.

The Company responded by reconfiguring its product offerings.  A key initiative involved separating out the provision of research data which can be delivered at scale, at speed and at low cost, from the higher cost consultancy services provided by our account management teams.  The aim was two-fold: (i) to deal with the pricing pressure and ensure our low cost (but high margin) data provision could compete with automated offerings from competitors and; (ii) to position the Company better to win large-scale work programmes.  We have achieved the first: pricing competitiveness has been restored.  The second is a work-in-progress.  Hence sales have stabilised but are not yet growing.

More strategically, we made the decision to focus our resources on our core strength - predicting the long-term effectiveness of advertising - and to use digital technology to create new products from our existing intellectual property.  AdRatings is the first example of this.

AdRatings is a large database showing 'ratings' or 'scores', of adverts in the market as a whole.  It allows clients to assess the effectiveness of their historical advertising and benchmark it against peer companies, competitor categories and the industry as a whole.  John Kearon sets out in his CEO Statement the strategic context for AdRatings and our four goals for it (a new scalable revenue stream being but one).

AdRatings has also been a catalyst for upgrading our technology across the business, as we endeavour to digitise the Company.

Product areas

Our business comprises, in the main, market research (Research), together with a small advertising agency (Agency).  The Research business has three main product lines, Communications (testing adverts prior to broadcast), Brand (tracking brand health), and Innovation (testing new product and packaging concepts and ideas).  We offer them from our offices in the UK, US, and seven other offices across Continental Europe and the rest of the world.  In time we are hoping that the AdRatings subscription service will become an important adjunct to our Communications business.

Our main competitive strength is in Communications.  We have developed market research techniques which we believe are better able to predict the long-term effectiveness of advertising than anyone else's.  In addition, our Ad Testing research tool has, we believe, more external validation than any other.  Communications is not our largest product area (33% of 2018/19 Gross Profit), but has the most potential, and is what we are increasingly best known for.  Gross Profit from Communications grew 5%, not through any significant new client wins, but as a result of steady progress across a number of clients.

Our Brand product area is closely related to Communications and it comprised 17% of 2018/19 Gross Profit.  Our brand tracking tracks the health of a brand over time, using a model which measures the "Fame", "Feeling" and "Fluency" of a brand.  It provides a leading indicator of the direction of future sales (all other factors unrelated to the brand being equal).  Gross Profit from Brand declined by 18%, as a result of some isolated client churn and slower than anticipated new wins.  However, our Brand business tends to come from ongoing, and relatively stable, brand tracking projects, and we anticipate it returning to growth.

Our Innovation business is more ad hoc in nature than Communications and Brand, and is easier to win, and also easier to lose.  It comprised most of Company's business in its early years and is still the largest product area (41% of 2018/19 Gross Profit).  It declined significantly in 2017/18 following cuts in marketing spend by some of our largest clients and returned to growth in 2018/19 (7% Gross Profit growth).

Our Agency business generated £0.43m of Gross Profit in 2019/20 (£0.37m in 2017/18) and so is a small Gross Profit contributor to the business.  However, it covers most of its costs and supports the Company's core Communications product area, showcasing what we call 5 Star (i.e. highly effective brand-building) advertising.

Regional performance

The sales pattern across our main geographic regions has varied.  Gross Profit grew in Continental Europe (up 19%, vs 2017/18), declined in our Americas region (down 6%), and was stable in the UK.  APAC, our smallest region, was also down (by 21%) due to the loss of a large client.  We have only a small market share in each of our regions and the addressable market in each one allows room for significant growth.

Over the last few years we have pared back our geographic spread in order to focus resources on those regions which are most relevant to our clients and where we have highest potential.

AdRatings

We invested £3.03m in our AdRatings asset during the year, of which £0.81m has been capitalised and £2.22m has been expensed as an operating cost.  This investment comprised £1.08m of data collection costs, £1.55m on technology, and £0.40m of running costs.  The data collection costs are those incurred in undertaking the market research on the adverts and are mainly payments to the consumers who complete the research surveys.  The technical costs are those to build, maintain and upgrade the database and client interface.  The running costs relate to sales staff and other ad hoc costs.

We are piloting ways both to enhance and commercialise this database with a small number of clients, prior to an expected further roll out later in the current financial year.  Notwithstanding the lack of visibility, we view the risk/reward profile of AdRatings as attractive.  The investment has limited downside risk and high upside potential, both in terms of helping propel our existing Communications business and in creating a new scalable revenue stream.

The Company monitors its capital allocation with regard to investment in AdRatings closely and on an on-going basis, and as learnings develop it adjusts in the light of experience.  Currently we are anticipating investing around £2.5m in AdRatings in 2019/20.

Productivity

We are focussing on improving productivity by eliminating low value work, streamlining processes, and providing enhanced role clarity across the business, particularly in account management.  This is enabling the Company to redeploy resources to higher value areas (such as product development and technology) and reduce costs.  Average headcount in 2018/19 was 12% lower than in 2017/18, and Underlying Overheads were down 9%.

Underlying Overheads excludes AdRatings (see below), share based payments, and an unusual one-off business rates rebate (discussed in our Interims Statement).  Share based payments are a non-cash expense that varies with the Company's share price, and so we disclose them separately.  Employee bonuses can be material and vary widely.  However, they were immaterial in both 2018/19 and the prior year.

Total Overheads (excluding AdRatings) declined by 12% and including AdRatings by 1%.  Costs excluding AdRatings are set out below.

Underlying Profit Before Tax (i.e. excluding AdRatings, share based payments and the rates rebate) grew by 80% to £3.70m, rebounding from the sharp decline last year and Underlying Profit Before Tax margin was 14%.  Profit Before Tax (i.e. including AdRatings, share based payments and the rates rebate) was down 3% (at £1.93m.)

Tax

The Company's effective tax rate (excluding AdRatings) has reduced to 26% from 39% in 2017/18 as a result of the reduction in the US Federal corporation tax rate.  Including AdRatings, it has decreased to 35% from 39% in 2017/18.  This smaller decrease is because the investment in AdRatings, and the associated tax credits, have all occurred in the UK where our tax rates are lowest.

Cash

We generated operational cash flow pre-financing (and pre AdRatings) of £2.53m.  This represented 61% of Profit Before Tax (pre AdRatings), which is in line with our normal high cash conversion percentage.  After the investment of £3.03m in AdRatings, and payment of £0.94m in dividends, our cash balance reduced from £5.78m on 31 March 2018 to £4.32m on 31 March 2019.  The Company has no indebtedness.

Dividends

The Board proposes to pay a final dividend of 6.4 pence per share, which, together with the interim dividend of 1.1 pence per share, would give a total of 7.5 pence per share (the same as the prior year).

At our current level of earnings this represents a low dividend cover compared to historic levels (diluted EPS is only 1.3 times dividend per share).  Given the investment opportunities with AdRatings, and a share price which some consider depressed, the decision to maintain the dividend was considered carefully.

This level of dividend will not impair the Company's plans for AdRatings, as we have sufficient liquidity to cover planned investment including that relating to AdRatings.

The Company's policy is to maintain a relatively low level of ordinary dividends which over the long-term grow broadly in line with earnings, and to return surplus cash (after payment of ordinary dividends) by way of special dividends or share buy-backs, dependent on the price of the Company's shares at the time.  The Board views the current high dividend-to-earnings ratio (i.e. low dividend cover) as temporary and expects this to revert to our normal levels as earnings grow.  Whilst the Board is prepared to consider reducing the dividend (as flagged in our Interim Statement), it views maintenance of the dividend as a useful discipline which it seeks to adhere to unless there is sufficiently clear-cut reason otherwise (which, in the Board's view, is not the case at this time).

Outlook

After poor results in the prior year, 2018/19 saw the business stabilise, upgrade its technology, invest in AdRatings, and improve productivity.  We are planning to continue to digitise our product offerings, so that we can further leverage our core intellectual property through the judicious use of data.  Gross Profit has grown 5.2% pa (compound) since 2012, and other than the double-digit growth in 2015/16 and equally steep decline the following year, has been reasonably steady year-on-year.  Although we have limited short-term revenue visibility, we believe that the core business can return to steady long-term growth, and that in addition the Company has upside potential with AdRatings.

We believe that the downside risks are modest.  Our core business is relatively stable, with a spread of large, diverse blue-chip clients and a competitive product portfolio, and our principal value proposition - prediction of the long-term effectiveness of advertising - is difficult to replicate.  Investment in AdRatings, while significant, will not strain the balance sheet, is discretionary, and is being managed dynamically as we learn from initial client feedback.

James Geddes

Chief Financial Officer

BUSINESS RISK REVIEW

The key risks to long-term value creation are competitive pressure leading to lack of take-up of our services by large clients in favour of alternative providers, and cuts to marketing budgets by clients.  Our competitors are very much larger than us with access to significantly greater resources.  Furthermore, we do not have overt technological barriers preventing competitors from encroaching into our space.  Our clients tend to be larger still, and small changes in behaviour by them can lead to significant impacts on our business.

Nevertheless, we believe that the predictive power of our services would be difficult for competitors to replicate and provide the opportunity to create significant value for our clients.  Our ongoing challenge is to adapt our products and services offerings, our pricing, and our means of delivery to ensure our value proposition remains competitive.

Over the shorter-term, the key risk issue is lack of revenue visibility, and the fairly high peaks and troughs of business with clients which are very much larger than ourselves.  The growth of our Brand Tracking and our focus on winning larger ongoing programmes of work will help here, as these services tend to give us more revenue visibility and stability.  Nevertheless, we will likely have to accept continued volatility in underlying business for some time.

In other respects, we have relatively little exposure to significant short-term shocks.  We do not attempt to manage all risk out of the organisation, but instead provide our teams with a high degree of autonomy and actively encourage our people to be entrepreneurial.

Having said that, we take risk seriously.  We endeavour to identify and protect the business from the big, remote, risks - those that do not occur very often, but which, when they do, have major ramifications.  The types of such event that we are concerned about and seek to manage are:

·      loss of a significant client;

·      loss of key personnel;

·      loss of a critical supplier;

·      material adverse event leading to significant loss of property, software, or data, or an adverse legal claim;

·      systemic tax or legal compliance error;

·      major outage in our survey platform;

·      cyber-attack causing a material breach in our IT infrastructure.

Loss of a significant client.  This is a significant risk, and we do not take it lightly, with the percentage of business from our largest client in the 12 months to 31 March 2019 at 6% of revenue (2017/18: 5% for the same client).  Revenue from our 10 largest clients accounted for 35% of revenue (2017/18: 36%). We therefore go to considerable lengths to monitor service quality and seek client feedback.

Loss of key personnel.  The loss of a senior member of the team would have a negative impact on the business.  However, we have a relatively large senior team and do not view the business as being overly dependent on any one individual.

Loss of a critical supplier.  We have several mission-critical functions carried out by third party suppliers (such as panel suppliers).  For these functions, we have endeavoured to ensure we are not overly-reliant on any one organisation.

Material adverse event leading to a significant loss of property, software, or data, or an adverse legal claim.  We cannot guarantee that all eventualities are covered, but nevertheless have continued to endeavour to protect the business from significant risks, through a combination of: comprehensive professional indemnity insurance; information security, particularly with regard to client confidentiality and personal data (see below); and sufficient focus on legal protections, for example through our terms and conditions.

Systemic tax or legal compliance error.  We are a small business with a small finance and legal team based in the UK.  Yet we operate in a number of different jurisdictions and in some cases, have to deal in relatively complex tax and regulatory environments.  Were we to make a small systemic error which did not surface for a number of years, the cumulative impact to correct the error could be significant.  However, we endeavour to keep our tax and legal affairs simple and straightforward, and within our budgetary constraints, carefully select the best professional advisors that we can find.

Major outage in our survey platform.  Were there to be a major outage in our survey platform due, for example, to capacity constraints or a security breach, we could be prevented from building surveys, collecting data and downloading results.  This may result in significant delay in delivering client projects with a consequential loss of revenue, reputational damage, and the costs of remedying the situation.  We have suffered relatively minor outages from time to time, but none has led to significant financial loss.

Cyber-attack causing a material breach in our IT infrastructure.  Were a cyber-attack to succeed in infiltrating our IT infrastructure, unauthorised persons could access confidential information (particularly personal data) held within our systems, putting us in breach of our confidentiality obligations, and potentially losing access to key information or files.  This is a critical risk, particularly in the current environment.  Nevertheless, there are a number of mitigating factors.  Our business does not ordinarily hold a great deal of personal data.  For example, we do not have a panel of respondents (but instead use third party suppliers to reach consumers).  Due to the nature of a marketing services business, the confidential information we hold is not as commercially sensitive as that for businesses in other industries (financial services or healthcare, for example).  We invested in tightening our controls, processes and IT infrastructure and hold ISO 27001 accreditation covering our information security.

Brexit

The Group believes that any impact is likely to be small due to relatively minor trading between the Group's UK companies and overseas clients and suppliers.  The Group has well established operations in France, Germany, Holland and Switzerland, which serve its Continental European clients.

The Company is also exposed to the usual financial risks (such as credit, foreign exchange and liquidity risks), as set out in the Director's Report.  However, due to the straightforward nature of the business, the Company's strong balance sheet, and the fact that most of the Company's clients are large, well-known organisations, these risks are relatively less important.

5 YEAR SUMMARY
£000 unless specified otherwise

* "Ex AR" means: excluding AdRatings.  "Inc AR" means: including AdRatings.

STRATEGIC REPORT

The Chairman and CEO statements, the Business and Financial Review, the Business Risk Review, and the 5 year summary (which include the Company's key performance indicators) set out:

·      the way that management view the business;

·      its strategy, positioning, and objectives;

·      its historic financial performance;

·      an assessment of its future potential;

·      its key performance indicators; and

·      its key business risks.

These form part of this Strategic Report.

ON BEHALF OF THE BOARD

James Geddes

Chief Financial Officer

5 June 2019

DIRECTORS' REPORT

Review of the business and future development

The Chairman's and CEO statements, the Business and Financial Review, and the Business Risk Review set out a review of the business's performance and an assessment of its future development.

Dividends

The Company has paid and proposes to pay the following dividends:

The Company paid the 2019 interim dividend on 20 December 2018 to shareholders on the register as at 16 November 2018.  The Company proposes to pay a 2018/2019 final dividend of 6.4p in July 2019.

Directors

The following are the current directors of the parent company, System1 Group PLC, and each served during the period.  In addition, Ken Ford and Alex Hunt served as directors during the year but resigned from the Board on 24 July 2018 and 30 September 2018 respectively.

John Kearon (executive)

James Geddes (executive)

Robert Brand (non-executive)

Graham Blashill (non-executive)

Sophie Tomkins (non-executive) - appointed 11 June 2018

Jane Wakely (non-executive) - appointed 24 July 2018

The Remuneration Report sets out directors' interests in the shares of the Company.

Share capital

Changes in the share capital of the Company during the year are given in Note 10 to the financial statements.  As at 15 January 2019, the Company was aware of the following significant interests in the ordinary issued share capital of the Company.

Financial risk management

The Group's activities expose it to the following financial risks to a small degree.

Credit risk

We manage credit risk on a Group basis, arising from credit exposures to outstanding receivables and cash and cash equivalents.  Since the majority of the Group's clients are large blue-chip organisations, the Group rarely suffers a bad debt.  The Group's cash balances are held, in the main, at HSBC Bank.

Market risk - Foreign exchange risk

In addition to the United Kingdom, the Group operated in the United States, Continental Europe, Brazil, Singapore and Australia during the period and was exposed to currency movements impacting commercial transactions and net investments in those countries.  Management endeavours to match the currencies in which revenues are earned with the currencies in which costs are incurred.  So for example, its US operation generates most of its revenue in US dollars and incurs most of its costs in US dollars also.  Management does not believe that there would be any long-term benefit in endeavouring to manage currency risk further, and in order to avoid the cost and complexity does not deal in hedging instruments.

Liquidity risk

The Company monitors its cash balances regularly and holds its cash in immediately available current accounts to minimise liquidity risk.  The Company has no overdraft facilities.

Other risks

Management do not consider price risk or interest rate risk to be material to the Group.

Capital risk management

The Company manages its capital to ensure that it is able to continue as a going concern while maximising its return to shareholders.  The Company's capital structure consists of cash and cash equivalents and share capital.  The Group has no borrowings, other than a small finance lease arrangement, and is not subject to any externally imposed capital requirements.  The Group has not entered into any derivative contracts.

Going concern

After making enquiries, at the time of approving the financial statements the Directors have a reasonable expectation that the Company and the Group have adequate resources to continue in operational existence for at least 12 months from the approval of these financial statements.  For this reason the Directors continue to adopt the going concern basis in preparing the financial statements.

Research and development

The Company's Labs team is involved in the development and validation of new market research methods and products.

Purchase of own shares

During the year the Company transferred 100,192 Ordinary Shares ("Shares") (with an aggregate nominal value of £1,002, representing 0.8% of the called-up share capital of the Company) out of treasury to satisfy the exercise of employee share options over 100,192 shares, for cash consideration of £3,000.

At 31 March 2019, the Company had 13,226,773 Shares in issue (31 March 2018: 13,226,773) of which 650,156 were held in treasury (31 March 2018: 750,348).  The treasury shares will be used to help satisfy the requirements of the Group's share incentive schemes.

Employees

The Group maintains fair employment practices, attempts to eliminate all forms of discrimination and to give equal access, and to promote gender equality.  Wherever possible we provide the same opportunities for disabled people as for others. If an employee were to become disabled we would make every effort to keep him or her in our employment, with appropriate training where necessary.

Health and safety policies

The Group does not have significant health and safety risks and is committed to maintaining high standards of health and safety for its employees, visitors and the general public.

Directors' indemnities

Directors' and officers' insurance cover has been established for each of the Directors to provide cover against their reasonable actions on behalf of the Company.  The indemnities, which constitute a qualifying third party indemnity provision as defined by Section 234 of the Companies Act 2006, remain in force for all current Directors.

Auditor

The Company will be seeking shareholder approval to appoint RSM UK Audit LLP as its auditor, at its Annual General Meeting.

ON BEHALF OF THE BOARD

James Geddes

Chief Financial Officer
5 June 2019

CORPORATE GOVERNANCE REPORT

Chairman's Introduction

I am pleased to present the System1 Group PLC Corporate Governance Report for the financial year ended 31st March 2019.

Your Board is committed to delivering and maintaining high standards of Corporate Governance throughout the Group and formally adopted the QCA Corporate Governance Code in 2018. This report, together with the reports from the Audit and Remuneration Committees, provides a description of how the Company has applied the main principles and complied with the relevant provisions of the Code.

The Quoted Companies Alliance Governance Code applies the principles of the UK Corporate Governance Code to small and medium-sized quoted companies and is a comprehensive yet practical code for the Company to follow.

At System1 we are committed to complying with both the letter and the spirit of the QCA Code. We believe that good governance is an essential basis on which to build our business and sustain us over the long-term. The scope of the Company's governance covers the interests of all its stakeholders, including shareholders, lenders, employees, clients, suppliers, and to the extent possible given our size, the communities in which we operate. We endeavour to be fair and transparent in all our dealings and communications with our stakeholders.

As I mentioned in my Chairman's Report on page 4, this year has seen some changes to the Board of Directors, with two new non-executive members and the appointment of a Senior Independent Director. I am confident that this new composition strengthens the Board and provides us with the right balance of experience and new perspectives for achieving our ambitions for the future of the business.

Graham Blashill

Chairman

5 June 2019

Board of Directors

Graham Blashill - Non-Executive Chairman, appointed on 18 July 2012

(became Chairman on 25 July 2018);

Graham Blashill joined System1 Group in 2012 as a Non-Executive Director.  He was previously a main board director of Imperial Tobacco Group plc (a FTSE 100 company) where he spent the majority of his career.  He joined W.D. & H.O. Wills (a division of Imperial Tobacco) in 1968, and became Managing Director of Imperial Tobacco UK in 1995.  In 2003, he became Regional Director for Western Europe, and in 2005 was appointed Group Sales and Marketing Director responsible for Imperial Tobacco's global trading operations.

Robert Brand - Non-Executive Director, appointed on 5 January 2012

(became Senior Independent Director on 25 July 2018);

Robert Brand joined System1 Group in 2012 as a Non-Executive Director.  He began his career in 1977, initially as a research analyst and subsequently as Managing Director of UK Equity research at BZW, then the investment banking division of Barclays Bank.  In 1990 he joined Makinson Cowell, a capital markets advisory firm, as a director and partner.  Over a period of 18 years he advised a range of FTSE 100 and FTSE 250 companies, focusing on their link with institutional investors.  He retired in 2008.

Sophie Tomkins - Non-Executive Director, appointed on 11 June 2018

Sophie joined the Board as Non-Executive Director in June 2018.  Her career has included nearly two decades as a London-based stockbroker, focusing mainly on high growth small to mid-cap companies. She started at established firm Cazenove & Co, and became more entrepreneurial, at both Collins Stewart, and then Fairfax. As City Analyst, and latterly Head of Equities, she has analysed and advised numerous companies and Boards, and been involved with a huge range of transactions, notably several high profile IPOs and M&A deals. She became a portfolio Non-Executive Director in 2012, and is currently Non-Executive Director and Audit Committee Chair of both Hotel Chocolat Group PLC (retail and manufacturing) and Cloudcall Group PLC (software), and Senior Independent Director and Remuneration Committee Chair at Proactis Holdings PLC (software). She is also a qualified Chartered Accountant and a fellow of the Chartered Institute for Securities and Investment.

Jane Wakely - Non-Executive Director, appointed on 23 July 2018

Jane joined System1 Group in July 2018 as a Non-Executive Director. Passionate about creativity, innovation and driving profitable growth that transforms categories and brands, she has had the privilege of working for world leading CPG companies such as Mars Incorporated, Procter & Gamble and Unilever in her career, across categories as diverse as cosmetics, beauty care, healthcare, food, confectionery and pet care. She is currently Global Chief Marketing Officer for the Pet Nutrition business at Mars Incorporated and Lead Chief Marketing Officer for Mars Inc.  Previously, Jane was the Global Chief Marketing Officer of the Chocolate business at Mars and has been part of the Mars drive to innovate digitally and creatively, leading to Mars being recognised creatively as one of the most awarded companies in the world. She is also a Chartered Management Accountant and holds a BSc (Hons) in Business Administration from Bath Spa University.

John Kearon - Chief Executive Officer

John founded the Company in 1999 and remains its largest shareholder.  Previously he founded innovation agency Brand Genetics, which invented new products and services for large consumer companies.  Before this, he was a planning director at Publicis (the leading advertising agency), having started his career at Unilever where he rose to become a senior marketer at Elida Gibbs.  His role in establishing and developing the Company made him Ernst & Young's "Emerging Entrepreneur of the Year" in 2006.

James Geddes - Chief Financial Officer and Company Secretary

James Geddes joined System1 Group in 2003 as CFO.  He is a Chartered Accountant, has a diploma in Corporate Treasury Management, and is a graduate of Harvard's executive programme.  He was previously Executive Director of Corporate Finance at MediaOne (a US telecoms company), and CFO of Iobox (an early stage technology company backed by Morgan Stanley Capita, and sold to Telefonica), having started his career at Deloitte.

Strategy

All directors are familiar with the market in which the Company is operating, the Company's value proposition, and its strategic intent.

The Board actively participates in setting, and regularly reviewing, the strategy of the business, and is responsible for ensuring that the Company's business model is, and remains, aligned to the achievement of its strategic objectives.  The Company sets out its strategy within the Chairman's Statement, the Chief Executive's Statement, and the Business and Financial Review of its Annual Report and Accounts. 

Risk Management

The Board reviews the risks facing the business on a regular basis. The identified principal risks and uncertainties are those outlined in the Business Risk Review on pages 13 and 14.

The Board is responsible for the Group's system of internal controls and risk management, and for reviewing the effectiveness of these systems.  These systems are designed to manage, rather than eliminate, the risk of failure to achieve business objectives, and to provide reasonable, but not absolute assurance against material misstatement or loss.

The key features of the Group's internal controls are described below:

·      clearly defined organisational structure with appropriate delegation of authority;

·      comprehensive budgeting programme with an annual budget approved by the Board;

·      regular review by the Board of actual results compared with budget and forecasts;

·      regular reviews by the Board of full year expectations;

·      detailed budgeting and monitoring of costs incurred on the development of new products;

·      a limited number of directors and executives authorised to make payments and commit the company to legal agreements;

·      regular reviews of client and employee feedback;

·      information security controls (for which the Company has obtained ISO 27001 accreditation).

The Board take measures to review internal controls and embed risk management procedures on an ongoing basis and implement metrics and objectives to monitor the business as part of a continual improvement programme.

Corporate Culture

The Company endeavours to maintain a culture built on integrity.  In order to surface unethical or deceitful behaviours, it promotes openness amongst its employees, provides channels for employees to feed back concerns to the Executive Directors and the Board (such as anonymous employee feedback surveys), and conducts exit interviews.

The Board of Directors

The Board comprised two executive Directors and four independent non-executive Directors, including the non-executive Chairman during the year ended 31 March 2019.  The membership of the Board is set out in the Directors' Report.  We believe that the directors have the mix of leadership, marketing and financial skills and experience necessary to oversee the Company and deliver its strategy for the benefit of the shareholders over the medium to long-term.  The composition of the Board is intended to achieve a balanced range of personal qualities and capabilities, and to support the Company's commitment to promoting gender equality and diversity.  The biographical details of the directors are presented on pages 21 and 22.

The Board operates an induction programme for new Non-Executive Directors.  The Board reviews its AIM obligations with its Nominated Advisor annually, and endeavours to keep up with best practice governance via QCA seminars and training material.

All directors can access the Company's advisors and obtain independent professional advice at the Company's expense in performance of their duties as directors.  The Board has utilised the services of a Board Advisor, Stefan Barden, on strategy and technology, and the Remuneration Committee has sought advice from PriceWaterhouseCoopers on the Company's LTIP.  Neither the Board nor the respective committees have sought other external advice on any significant matter during the year.  The Audit Committee works with the Company's auditor, who were Grant Thornton UK LLP for the year ended 31 March 2019.  The Board liaises regularly with the Company's Nominated Advisor, Canaccord Genuity to ensure compliance with AIM Rules.

The Chairman is responsible for leading the Board, setting its agenda and monitoring its effectiveness.  There is a clear division of responsibilities between the Chairman and the Chief Executive Officer, and their respective roles are well defined and documented. The role of the Executive Directors is to manage the day-to-day business activities and implement the strategy.  The role of the Non-Executive Directors as a whole is to supportively challenge and help to develop the direction of the business, and also to assess the performance of management.

The Board considers each of the Non-Executive Directors to be independent, for the following principal reasons:

·      they all have served on the Board for less than nine years;

·      their remuneration is not material in the context of their financial circumstances;

·      they have no executive role;

·      they each own an immaterial number of shares in the Company in the context of their financial circumstances (or in some cases, no shares);

·      they are not related to either of the Executive Directors; and

·      they have no conflict of interest given their other roles and business activities.

The Company Secretary is also the Chief Financial Officer, as is the case with other companies of a similar size and complexity.  The Board plans to split the roles when it reaches a size which warrants it.

The Board schedules regular monthly meetings during the year, with the exception of July or August, and additional ad hoc meetings as required. All Directors are able to allocate sufficient time to the Company to discharge their responsibilities fully.

The number of regular meetings that each director attended during the financial year is set out below:

*  Attendance by invitation.

On rare occasions a board member may attend by phone to accommodate overseas travel arrangements.

Management provides the Board with information on the Company's performance and appropriate information relating to the agenda prior to Board and Committee meetings.

Matters Reserved for the Board

The Board discusses and reviews all matters and issues which are important to the business.  Certain decisions are reserved for the Board; which include:

·      approval of the Group's long-term objectives and strategy;

·      approval of the annual operating and capital budget, and any material changes thereto;

·      extension of the Group's activities into new business or geographic areas;

·      changes to the Group's capital structure and/or major changes to corporate structure, including acquisitions, disposals and investments;

·      approval of interim and annual reports, and regulatory or non-routine shareholder communications;

·      approval of significant changes in accounting policies or practices;

·      approval of dividends and dividend policy;

·      assessment of the effectiveness of risk and control processes.

Matters referred to the Board are considered by the Board as a whole and no one individual has unrestricted powers of decision.  Where directors have concerns which cannot be resolved in connection with the running of the Group or a proposed action, their concerns would be recorded in the Board Minutes.  This course of action has not been required to date.

Appointment of Directors

The Board formally approves the appointment of all new Directors.  Each year at the Annual General Meeting, all Directors retire by rotation and are subject to re-election.

Remuneration Committee

The Remuneration Committee is responsible for determining the specific remuneration and incentive packages for each of the Company's Executive Directors and keeping under review the remuneration and benefits of all senior executives and managers and overall pay levels of all employees.  Its members are:

·      Graham Blashill - Chairman of the Remuneration Committee

·      Robert Brand

·      Sophie Tomkins

·      Jane Wakely

The Remuneration Committee's role and responsibilities are to:

·      set the remuneration and incentive schemes of Executive Directors (in the case of the Chief Financial Officer, in conjunction with the Chief Executive Officer), including pension rights, other benefits and any compensation payments, ensuring that no Director is involved in any decisions as to their own remuneration;

·      review and approve the level and structure of remuneration and incentive schemes for senior management;

·      select, appoint and set the terms of reference for any remuneration consultants who advise the Committee;

·      approve the payments to Directors under any performance-related pay or share schemes operated by the Company;

·      ensure that contractual terms on termination of any Director are fair to the individual and the Company, that failure is not rewarded and that the duty to mitigate loss is fully recognised;

·      approve any major changes in employee benefits structures throughout the Group;

·      approve the policy for authorising claims for expenses from the Directors.

The Remuneration Committee schedules two formal meetings per year and meets at other times as necessary.

The Remuneration Committee may invite the Chief Executive Officer or Chief Financial Officer to attend meetings of the Remuneration Committee. The Chief Executive Officer is consulted on proposals relating to the remuneration of the Chief Financial Officer and of other senior executives. The Chief Executive Officer is not involved in setting his own remuneration.

The Remuneration Committee may use consultants to advise it in setting remuneration structures and policies.  It is exclusively responsible for appointing such consultants and setting their terms of reference.

The Annual Statement from the Remuneration Committee Chair is set out on pages 32 to 39. 

Audit Committee

The Audit Committee is responsible for ensuring the financial performance of the Company is properly monitored and reported on to shareholders, reviewing the Company's financial systems and controls, and overseeing the Company's risk management.  Its members are:

·      Sophie Tomkins - Chair of the Audit Committee

·      Graham Blashill

·      Robert Brand

The Audit Committee's role and responsibilities are to:

·      monitor the integrity of the financial statements of the Group;

·      review the Group's internal financial controls and risk management systems;

·      make recommendations to the Board, for it to put to the shareholders for their approval in relation to the appointment of the external auditor and to approve appropriate remuneration and terms of reference for the external auditor;

·      discuss the nature, extent and timing of the external auditor's procedures and discussion of external auditor's findings;

·      monitor and ensure the external auditor's independence and objectivity and the effectiveness of the audit process;

·      develop and implement policy on the engagement of the external auditor to supply non-audit services;

·      report to the Board, identifying any matters in respect of which it considers that action or improvement is required; and

·      ensure a formal channel is available for employees and other stakeholders to express any complaints in respect of financial accounting and reporting.

The Annual Report from the Audit Committee Chair is set out on pages 29 to 31. 

Board Evaluation

The Board undertook a review of its effectiveness for the first time, in the Company's 2018/19 financial year.  The Board will carry out further reviews of its effectiveness on an annual basis and may use an external adviser.  The objective of this evaluation process is to bring to light possible changes which could make the Board's activities and administration more effective and efficient. The Board Evaluation covered the following areas:

·      the manner in which the Board is run, and operates as a team;

·      the skills, experience and independence of the Board;

·      the strategy of the business;

·      the risks of the business;

·      the Company's ethical values and behaviours; and

·      engagement with shareholders and other stakeholders.

The exercise identified a number of positive areas particularly relating to the manner in which the Board is run, and the skills and experience and independence of the Board.  The main area for improvement is the lack of a formal succession planning process (although succession is reviewed on an ongoing basis - see below), which will be addressed during the 2019/20 financial year.

Succession Planning

Succession planning for appointments to the Board and to senior management is carried out in the following way.

The Board, led by the Chairman, carries out ongoing assessments as to the succession needs and planning of the Board.  Such assessments include reviewing the structure, size and composition (including the skills, knowledge and experience) required of the Board compared to its current position.  Such succession planning involves identification and nomination of candidates to fill Board vacancies as and when they arise, using external recruitment consultants.

Senior management appointments are made by the Executive Directors, who carry out ongoing assessments of succession needs and skills gaps across the business.  Key appointments are overseen by the Remuneration Committee.

Shareholder Communications 

The Board endeavours to keep all interested shareholders informed by regular announcements and update statements.  The Executive Directors meet regularly with institutional shareholders to understand their needs and expectations.  They invite, and regularly receive, shareholder feedback and report it back to the Board.  Other methods of communication are:

·      Annual General Meetings;

·      Broker briefings;

·      Corporate website; and

·      Letters to shareholders when appropriate.

The Chairman and Senior Independent Director are available to meet with institutional shareholders on any concerns or issues in relation to governance, board composition, or executive director remuneration.

Other Stakeholders

The prime stakeholders of the business, in addition to shareholders, are clients, employees, and suppliers.

The Company undertakes regular client feedback surveys (conducted by a third party) and employee feedback surveys (conducted anonymously). The results of both are shared with the Board, and actions are taken to address the issues raised. Employee feedback survey results are shared transparently with all employees.

Actions taken following client and employment feedback have included:

·      tailoring product development;

·      adjusting the Company's articulation of its value proposition to clients and employees; and

·      changing the way the Company communicates with its employees.

In addition, the Company maintains a senior level dialogue with its key strategic suppliers.

AUDIT COMMITTEE REPORT

The Audit Committee is responsible for ensuring that the financial performance of the Group is properly reported and reviewed. Its role includes monitoring the integrity of the financial statements (including annual and interim accounts and results announcements), reviewing internal control and risk management systems, reviewing any changes to accounting policies, reviewing and monitoring the extent of the non-audit services undertaken by external auditors and advising on the appointment of external auditors.

Members of the Audit Committee

The membership of the Committee is set out on page 26 of the Corporate Governance Report. Sophie Tomkins took over from Robert Brand as Chair in January 2019. All members of the Committee are independent Non-Executive Directors. James Geddes, Chief Financial Officer, routinely attends the Audit Committee meetings by invitation, but other Executive Directors or members of the management team may also be invited to attend meetings as required. The Non-Executive Directors are provided an opportunity at the Audit Committee meetings to discuss matters with the Auditors without the presence of the Executive Directors.

The Board is satisfied that the Chair of the Committee has recent and relevant financial experience. Sophie is a Chartered Accountant and is also Chair of the Audit Committee at both Hotel Chocolat plc and Cloudcall Group plc. The Committee meets at least twice a year and more frequently if required, and has unrestricted access to the Group's auditor. Attendance at Board and Committee meetings is set out in the Corporate Governance Report on page 20. During FY19 there were extra meetings of the Audit Committee as part of the audit tender process described below.

Duties

The main duties of the Audit Committee are set out in its terms of reference, which are summarised on page 26 and available on the Group's website (https://system1group.com/investors).

The work carried out by the Audit Committee during FY19 comprised the following:

·      ensuring the financial performance of the Company is being properly measured and reported on;

·      review of the FY19 audit plan;

·      consideration of key audit matters and how they are addressed;

·      review of suitability of the external auditor;

·      review of the financial statements and Annual Report;

·      review of the appropriateness of the Group's accounting policies and judgements made in the preparation of the financial statements, and adequacy of the disclosures made therein

·      consideration of the external audit report and management representation letter;

·      review of the risk management and internal control systems;

·      meeting with the external auditor without management present;

·      review of anti-bribery policy and arrangements.

Role of the External Auditor

The Audit Committee monitors the relationship with the external auditor to ensure that auditor independence and objectivity are maintained. As part of this role, the Committee reviews the non-audit fees of the auditor, and notes that significant tax and accounting work is undertaken by the auditors' US and Chinese affiliate firms.

However, these overseas firms are independent of Grant Thornton UK LLP in terms of management and ownership.  The Company has closed its small Chinese operation and so in future the work of the Chinese affiliate will cease.  The non-audit fees of Grant Thornton and their global affiliates are 189% of their audit fees, but the non-audit fees of Grant Thornton UK LLP (i.e. excluding overseas affiliate firms) are less than 50% of their audit fees, per the table below:

The Audit Committee also assesses the auditor's performance.

Audit Process

The auditor prepared an audit plan for the review of the full period financial statements. The audit plan set out the scope of the audit, areas to be targeted and audit timetable. This plan was reviewed and agreed in advance by the Audit Committee. Following the audit, the auditor presented its findings to the Audit Committee for discussion. No major areas of concern were highlighted by the auditor during the period, however areas of significant risk and other matters of audit relevance are regularly communicated.

Tender and proposed change of auditor

Having engaged Grant Thornton UK LLP as the Company's auditor since 2003, the Board, on the recommendation of the Audit Committee, decided that it was appropriate to put the group statutory audit out to competitive tender. Longevity of tenure and consideration of the balance between audit and non-audit fees were key drivers for this tender process, which included formal proposals and presentations from three audit firms, including Grant Thornton.

Following the conclusion of this formal tender process led by the Company's Audit Committee, the Board has approved the proposed appointment of RSM UK Audit LLP as the Company's auditor for the financial year ending 31 March 2020. This will be subject to approval by the Company's shareholders at the next Annual General Meeting to be held on 31st July 2019. The Board would like to thank Grant Thornton and the audit team for their efficient work over the years.

Internal Audit

At present the Group does not have an internal audit function and the Committee believes that management is able to derive assurance as to the adequacy and effectiveness of internal controls and risk management procedures without one.

Risk Management and Internal Controls

As described throughout the Annual Report and the Corporate Governance section of the Group's website (https://system1group.com/investors), the Group has established a framework of risk management and internal control systems, policies and procedures. The Audit Committee is responsible for reviewing the risk management and internal control framework and ensuring that it operates effectively. During the period, the Committee has reviewed the framework and the Committee is satisfied that the internal control systems in place are currently operating effectively.

Anti-bribery

The Group has in place an anti-bribery and anti-corruption policy which sets out its zero-tolerance position and provides information and guidance to those working for the Group on how to recognise and deal with bribery and corruption issues. The Committee is comfortable that the current policy is operating effectively.

Sophie Tomkins

Chair, Audit Committee

REMUNERATION REPORT

Annual statement from the Remuneration Committee chair, Graham Blashill

Dear shareholder,

The Remuneration Committee sets the strategy, structure and levels of remuneration for the executive directors and reviews the remuneration of senior management, to ensure alignment of objectives and incentives throughout the business in pursuit of the Group's stated objectives. The membership and terms of reference of the Remuneration Committee are set out in the Corporate Governance Report.

This Remuneration Report is split into two parts:

·      The directors' remuneration policy sets out the Company's policy on directors' remuneration, in particular the four-year long-term incentive plan ("LTIP"), and the key factors that were taken into account in setting the policy. The directors' remuneration policy is not subject to a shareholder vote at the 2019 AGM, since the main variable element (the LTIP) was approved by shareholders at a General Meeting on 22 March 2017.

·      The annual report on remuneration sets out payments and awards made to the directors for the year to 31 March 2019.

There are three elements in director remuneration:

·      Base salary

·      LTIP

·      Benefits

Historically, the Company's LTIPs have been established in three to four year cycles.  The current LTIP was established in February 2017 and will vest on 12 August 2021 (the "2017 LTIP").  Its primary performance targets are based on gross profit, with profit after tax and share price underpins.

We endeavour to keep our director remuneration arrangements simple and correlated to increases in long term business growth.  As a small Company we are also acutely aware of the dilutive impacts of equity awards, and when designing our LTIPs, we ensure that vesting only occurs when there is a substantial increase in shareholder value (after accounting for the dilution).

The Company consulted with shareholders in designing the 2017 LTIP, and prior to implementing it, obtained shareholder approval at a General Meeting on 22 March 2017.

For levels below the participants in the 2017 LTIP, the remuneration ordinarily comprises:

·      Base salary

·      Bonus and profit share

·      Benefits

The executive directors and other senior executives who participate in an LTIP forego annual bonus and profit share.

The committee regularly reviews the appropriateness of remuneration across the Group and is satisfied that an appropriate reward structure exists below Board level to recognise and retain our top talent.

During 2018/19, Alex Hunt, former Executive Director, resigned from the Board (on 30 September 2018) with Sophie Tomkins and Jane Wakely joining the Board as Non-Executive Directors on 11 June 2018 and 24 July 2018 respectively.  Ken Ford retired as Non-Executive Chair on 24 July 2018.

Graham Blashill

Chair, Remuneration Committee

Directors' remuneration policy

Introduction

The policy described in this part of the Remuneration Report is intended to apply for four years beginning in the 2017/18 financial year, and covers executive directors and a small number of other senior managers ("Executives").

The Committee considers the remuneration policy annually to ensure that it remains aligned with business needs and is appropriately positioned relative to the market.  However, there is no intention to revise the policy more frequently than every four years.

The Committee has based the Executive reward structure on the long term organic growth strategy of the business.  If successful, this will deliver significant shareholder value, and Executive rewards are designed to correlate with the key driver of that value (top line growth).

Fixed annual elements - including salary, pension and benefits - are to recognise the responsibilities and leadership roles of our Executives and to ensure current and future market competitiveness.  Long-term incentives are to motivate and reward them for making the Company successful on a sustainable basis.

Base salary and benefits

Base salary is paid in 12 equal monthly instalments during the year.  Salaries are reviewed annually and any changes are effective from the beginning of the Company's financial year (which is 1^st April).  Benefits comprise money purchase pension contributions of up to 6% of salary, private medical and dental insurance, life insurance and long term disability insurance.

Long term incentive plan

The company introduced the current LTIP in March 2017 (the 2017 LTIP).  It was approved by shareholders at a General Meeting in March 2017 and covers the four-year period ending 31 March 2021.

The awards have taken the form of zero-cost stock options.  They were granted to Executives on 22 March 2017 and will vest on 12 August 2021 provided the Company achieves performance targets in the Company's 2020/2021 financial year.  The performance targets are based on gross profit growth (the Company's main top line performance indicator), with profit after tax and share price underpins.  Given changes to the leadership team (for example as a result of a participant in the 2017 LTIP leaving the business), further awards may be granted to new members of the leadership team, at the discretion of the Remuneration Committee, but only within the maximum dilution limit approved by shareholders.

The performance targets and vesting levels have been set with growth levels of between 10% and 30% pa in mind.  At the 10% pa growth level, the gross profit would be £39.5m, and at the 30% pa growth level, £77.1m.  The specific vesting levels are set out in the following table.

There will be proportionate vesting if gross profit is between £39.5m and £56.0m pa or between £56.0m and £77.1m pa.

No awards will vest unless profit after tax ("PAT") in 2020/21 is at least £7.0m and the average share price of the Company during July 2021 is at least £9.945 (30% higher than the share price on the award date).  For the higher levels of vesting triggered by gross profit above £56.0m, the PAT underpin increases to £9.9m.

For the purpose of these performance targets PAT is calculated before deducting share-based payments (to avoid any circular argument problem when performing the calculations).

The gross profit and PAT targets are designed to relate to organic growth, and the Committee has the right to adjust the targets if a material acquisition or other corporate event occurs (and will ordinarily exercise such right).

There is currently one executive director participant (James Geddes) and two senior manager participants.  John Kearon does not currently participate in the 2017 LTIP, but instead, has an annual bonus for each of the 4 years to 31 March 2021 of between 25-75% of annual salary based on the growth targets and underpins above.

Participants in the 2017 LTIP do not participate in the Company's annual bonus or profit share scheme, and have no other short-term incentive plan.  This is to ensure decision-making focus is primarily on achieving long-term growth.  Therefore, over the period to March 2021, the only remuneration that they will receive will be base salary and benefits (with the exception of the CEO bonus), unless the Remuneration Committee determine awards in exceptional circumstances (at their sole discretion).

The Company has underperformed since the introduction of the 2017 LTIP and even the minimum targets are unlikely to be achieved.  The Committee does not wish to reward underperformance and so will not be resetting the targets.  However it does wish to continue to provide appropriate incentives, and so proposes (subject to shareholder approval at the Company's AGM) extending the date by when the targets can be met, by 3 years.  The final performance period would be therefore be Company's 2023/24 financial year, and the lapse date 12 August 2024.

The Committee further proposes that Vesting would occur as and when the performance targets are met, so partial vesting may occur earlier than the lapse date, and then further vesting later (provided that no vesting could occur in relation to financial periods after the Company's 2023/24 financial year).

Several of the original participants are no longer in the 2017 LTIP, and the Board plan to add additional participants, provided that the maximum level of dilution from the scheme (assuming full vesting) does not exceed the current maximum (8.5% of the Company's issued Share Capital - 13,226,775 shares).  The Board are planning to add John Kearon to the LTIP at the higher of the two levels, instead of his bonus arrangement.

The Committee have granted an advisor to the Board, Stefan Barden, a separate equity award, comprising 300,000 zero cost stock options, subject to approval at the Company's AGM.  They comprise three tranches of 100,000 options each, with the following performance conditions:

·      100,000 zero-priced stock options

·      Vest: when audited Gross Profit in any financial year exceeds £45m, subject to the Company's share price exceeding £5.00 per share for a 30 day consecutive period prior to the lapse date;

·      Lapse: on 30 July 2024.

·      100,000 zero-priced stock options

·      Vest: when audited Gross Profit in any financial year exceeds £68m, subject to the Company's share price exceeding £7.50 per share for a 30 day consecutive period prior to the lapse date;

·      Lapse: on 30 July 2029.

·      100,000 zero-priced stock options

·      Vest: when audited Gross Profit in any financial year exceeds £90m subject to share price exceeding £10.00 per share for a 30 day consecutive period prior to the lapse date;

·      Lapses: on 30 July 2032.

The Committee have taken advice from PriceWaterhouseCoopers in relation to these equity incentives and consulted with major shareholders.

Dilution

Vested stock options are set out below.

Unvested options comprise options granted under the 2017 LTIP and the equity awards to Stefan Barden, described above.  The maximum aggregate dilution under both of these schemes is 11.3% of the Company's voting shares.

Non-executive directors

Non-executive directors do not participate in any of the Company's incentive arrangements nor do they receive any benefits.  Their fees are reviewed periodically and set by the Board as a whole.

Remuneration of all employees

All employees are entitled to base salary, benefits, and (providing not also an Executive) a discretionary annual bonus.  Since January 2012 equity awards have not been granted to employees who are not also Executives.  The annual discretionary bonus was negligible in both 2018/19 and 2017/18 due to the poor performance of the Company.

Director service contracts and policy on payment for loss of office

Each of the executive directors have service contracts.  The agreements include restrictive covenants which apply during employment and for a period of 12 months after termination.  John Kearon's agreement can be terminated on six months' notice in writing by either the Company or by John.  James Geddes' agreement can be terminated on 12 months' notice in writing by the Company and six months' notice by James.

Annual report on remuneration

Remuneration for executive directors

Year ended 31 March 2019 (audited)

Year ended 31 March 2018 (audited)

The executive directors received no bonus for the year ended 31 March 2019 or for the year ended 31 March 2018.  The executive directors have not received any stock options or other equity awards other than under the Company's LTIP arrangements as set out in the directors' remuneration policy.

Directors' interests in shares and options

Directors' interests in the shares of the Company are shown below.

Directors' interests in options over shares and conditional shares of the Company are shown below.

*  The options denoted by a single asterisk were granted under the previous LTIP.  They were granted in two tranches of 137,040 and 60,000 option shares (totalling 197,040) to each director.  They were subject to performance conditions, under which 116,568 of each director's options vested on 30 April 2017. The remaining 80,472 of each director's options lapsed.

** The options and conditional shares denoted by a double asterisk were granted under the current LTIP, as described in the directors' remuneration policy.  None of these vest until 12 August 2021.

There were no equity awards or vesting of options other than under the LTIP as set out in the directors' remuneration policy.

Fees for non-executive directors (audited)

The non-executive directors received fees, but no other benefits, as follows.

DIRECTORS' RESPONSIBILITY STATEMENT

The directors are responsible for preparing the Strategic Report, Directors' Report, the Annual Report and the financial statements in accordance with applicable law and regulations.

Company law requires the directors to prepare financial statements for each financial year. 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 (IFRSs) and the parent company financial statements in accordance with FRS 101 Reduced Disclosure Framework. Under company law the directors must not approve the financial statements unless they are satisfied that they give a true and fair view of the state of affairs and profit or loss of the Company and Group for that period. In preparing these financial statements, the directors are required to:

·      select suitable accounting policies and then apply them consistently;

·      make judgements and accounting estimates that are reasonable and prudent;

·      state whether applicable IFRSs and United Kingdom Accounting Standards in respect of the group and parent company financial statements respectively, have been followed, subject to any material departures disclosed and explained in the financial statements;

·      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 adequate accounting records that are sufficient to show and explain the Company's transactions and disclose with reasonable accuracy at any time the financial position of the Company and enable them to ensure that the financial statements comply with the Companies Act 2006. They are also responsible for safeguarding the assets of the Company and hence for taking reasonable steps for the preven-tion and detection of fraud and other irregularities.

The directors confirm that:

·      so far as each director is aware, there is no relevant audit information of which the Company's auditor is unaware; and

·      the directors have taken all steps that they ought to have taken to make themselves aware of any relevant audit information and to establish that the auditor is aware of that information.

The directors are responsible for the maintenance and integrity of the corporate and financial information included on the Company's website. Legislation in the United Kingdom governing the preparation and dissemina-tion of financial statements may differ from legislation in other jurisdictions.

James Geddes

Company Secretary and Chief Financial Officer

5 June 2019
 

Independent auditor's report to the members of System1 Group PLC

Opinion

Basis for opinion

We conducted our audit in accordance with International Standards on Auditing (UK) (ISAs (UK)) and applicable law. 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 group and the parent company in accordance with the ethical requirements that are relevant to our audit of the financial statements in the UK, including the FRC's Ethical Standard as applied to listed entities, 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.

Conclusions relating to going concern

We have nothing to report in respect of the following matters in relation to which the ISAs (UK) require us to report to you where:

·      the directors' use of the going concern basis of accounting in the preparation of the financial statements is not appropriate; or

·      the directors have not disclosed in the financial statements any identified material uncertainties that may cast significant doubt about the group's or the parent company's ability to continue to adopt the going concern basis of accounting for a period of at least twelve months from the date when the financial statements are authorised for issue.

Key audit matters

Key audit matters are those matters that, in our professional judgement, 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) that we identified. These matters included those that 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.

There were no key audit matters in respect of the parent company.

Our application of materiality

We define materiality as the magnitude of misstatement in the financial statements that makes it probable that the economic decisions of a reasonably knowledgeable person would be changed or influenced. We use materiality in determining the nature, timing and extent of our audit work and in evaluating the results of that work.

Materiality was determined as follows:

The graph below illustrates how performance materiality interacts with our overall materiality and the tolerance for potential uncorrected misstatements.

An overview of the scope of our audit

Our audit approach was a risk-based approach founded on a thorough understanding of the group's business, its environment and risk profile and in particular included:

·      evaluation of the group entities' internal controls environment through understanding the design of controls and testing the implementation of controls during the year;

·      evaluation by the group audit team of identified components to assess the significance of that component and to determine the planned audit response based on a measure of materiality. Significance was determined as a percentage of the group's total assets, revenues and profit before taxation, with revenue being the key factor for trading entities;

·      full scope audit procedures were performed at parent company financial statements. Targeted audit procedures were performed for the audit of the subsidiaries;

·      Our audit testing covered 100% of the group's revenue and expenditure and of its total assets and liabilities.

Other information

The directors are responsible for the other information. The other information comprises the information included in the annual report and accounts, other than 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 we identify such material inconsistencies or apparent material misstatements, we are required to determine whether there is a material misstatement in the financial statements or a material misstatement of the other information. If, based on the work we have performed, we conclude that there is a material misstatement of this other information, we are required to report that fact.

We have nothing to report in this regard.

Matters on which we are required to report under the Companies Act 2006

In the light of the knowledge and understanding of the group and the parent company and its environment obtained in the course of the audit, we have not identified material misstatements in the strategic report or the directors' report.

Matters on which we are required to report by exception

We have nothing to report in respect of the following matters in relation to which the Companies Act 2006 requires us to report to you if, in our opinion:

·      adequate accounting records have not been kept by the parent company, or returns adequate for our audit have not been received from branches not visited by us; or

·      the parent company financial statements are not in agreement with the accounting records and returns; or

·      certain disclosures of directors' remuneration specified by law are not made; or

·      we have not received all the information and explanations we require for our audit.

Responsibilities of directors for the financial statements

As explained more fully in the directors' responsibilities statement set out on page 40, the directors are responsible for the preparation of the financial statements and for being satisfied that they give a true and fair view, 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's and the parent 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 parent company or to cease operations, or have no realistic alternative but to do so.

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 (UK) 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.

A further description of our responsibilities for the audit of the financial statements is located on the Financial Reporting Council's website at: www.frc.org.uk/auditorsresponsibilities. This description forms part of our auditor's report.

Use of our report

This report is made solely to the company's members, as a body, in accordance with Chapter 3 of Part 16 of the Companies Act 2006. Our audit work has been undertaken so that we might state to the company's members those matters we are required to state to them in an auditor's report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the company and the company's members as a body, for our audit work, for this report, or for the opinions we have formed.

Jeremy Read

Senior Statutory Auditor

for and on behalf of Grant Thornton UK LLP

Statutory Auditor, Chartered Accountants

Milton Keynes

5 June 2019

CONSOLIDATED INCOME STATEMENT

for the year ended 31 March 2019

Earnings per share attributable to equity

holders of the Company

The notes on pages 51 to 81 are an integral part of these consolidated financial statements.

All of the activities of the Group are classed as continuing.