Press Release                                                                        14 July 2021

 

System1 Group PLC (AIM: SYS1)

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

 

Financial results to 31 March 2021

 

System1, today, announces its results for the year ended 31 March 2021.

 

Highlights

 

	2020/21	2019/20	Change**
Management Basis*	£m	£m	%
Adjusted revenue	22.8	25.3	-10
Adjusted gross profit	19.2	21.4	-10
Adjusted operating costs	(16.2)	(19.4)	-16
Adjusted profit before taxation	3.0	2.0	46
	2020/21	2019/20	Change**
Statutory Basis	£m	£m	%
Revenue	22.8	25.5	-11
Gross profit	19.2	21.6	-11
Operating costs	(17.7)	(21.3)	-17
Other operating income	0.6	-	n.m.
Profit before taxation	2.1	0.3	601
Tax charge	(0.4)	(0.5)	-27
Profit/(loss) for the financial year	1.7	(0.2)	n.m.
Diluted earnings per share	13.1p	(1.8)p	n.m.

 

* Management Basis figures for Adjusted Revenue, Adjusted Gross Profit and Adjusted Profit before Taxation exclude discontinued Agency business from 2019/20. Adjusted Operating Costs exclude impairment, interest, share based payments, bonuses, severance costs and government support related to the Covid pandemic. Adjusted figures exclude items, positive and negative, that impede easy understanding of underlying performance. See note 15 to the consolidated financial statements for further information.

** Year-on-year percentage change figures are based on unrounded numbers.

 

·      Adjusted Profit before Taxation rose 46% to £3.0m (Statutory Profit before Taxation up 601% to £2.1m) ·      Revenue declined 11% to £22.8m. H1 down 26%, H2 up 8% ·      Operating cost reductions more than offset the Revenue decline. Adjusted Operating Costs fell 16% year on year (Statutory Operating Costs: 17% down). No bonuses were awarded in 2020/21 ·      Impairment charge related to property lease assets £1.0m, taken in H1 (2019/20 Impairment: £0.9m, related to intangible assets) ·      Profit for the financial year up £1.9m to £1.7m, helped by £0.6m R&D tax credits ·      Diluted earnings per share 13.1p (2019/20: Loss per Share 1.8p) ·      Cash net of borrowings (excluding lease liabilities) increased by £2.3m in the period to £6.5m, reflecting strong underlying cash flows, a tax credit receipt, and US Paycheck Protection Program loan forgiveness ·      As previously announced, we will look to reinstate the share buyback programme which was suspended in 2020 due to uncertainty over the potential impact of the Covid pandemic on our business. More information will be provided on the proposed buyback later in the year. No final dividend will be declared ·      Transition to scalable automated data products is underway. Data products represented 15% of Revenue in the final quarter helped by the success of Test Your Ad which also led to an 18% year-on-year increase in Comms Revenue ·      We continued to invest in our growth strategy, spending over £2m on product development and restoring headcount to pre-pandemic levels to service demand in H2

Commenting on the Company's results, John Kearon, Founder and Executive President, said:

"Over the last year System1 has taken its leading research intellectual property and created automated prediction products, with assets to complement our historic consultancy services. We have been recognised by marketing industry thought leaders and are firmly becoming the research industry's champion for creativity, backed by data. As System1 returns to its pre-pandemic level of revenue, we do so in a position of relative strength. Cash balances and cash flow are healthy, and we will continue to invest in our products, data assets and talent. We plan to remain profitable and to continue to generate cash in the 2021/22 financial year, as we prioritise scaling our automated prediction products. Notwithstanding that, we are targeting revenue growth to be at least matched by the rate of cost growth, due to the pandemic-related cost reductions in the year just ended."

The Company can be found at 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:

 

System1 Group PLC	+44 (0)20 7043 1000
John Kearon	Founder & Executive President
Chris Willford	Chief Financial Officer
investorrelations@system1group.com
Canaccord Genuity Limited	+44 (0)20 7523 8000
Simon Bridges
Andrew Potts

 

 

 

Group Overview

 

Who We Are

System1 Group has undergone much change over the past three years. We would like to take this opportunity on behalf of Management to reaffirm who we are and what we do.

 

System1 Group PLC was born from the world-leading intellectual property (IP) created over many years as BrainJuicer PLC. System1 owes a great debt to BrainJuicer for its prediction methodologies, as well as a strong cash flow which we can invest into turning this IP into market leading, repeatable, scalable products.

 

Such is the extent of change in the business that System1 feels in some respects like a three-year-old start-up. We are now a product-focussed seller of marketing predictions and improvements - we believe the best in the world. We leverage data and production economics, rather than service economics.  Data and production economics point to industry value accruing disproportionately to a small number of scalable players. We are laser focussed on becoming one of them.

 

What We Do

System1 predicts and improves marketing effectiveness. We 'predict' (provide research results) and 'improve' (provide insight and consultancy on those results) where required on arguably three of the most critical marketing questions for our customers:

·      Advertising effectiveness

·      Brand effectiveness

·      Innovation effectiveness

 

We aspire to do these three things better than anyone else.

 

Our Products

 

	Comms	Brand	Innovation
Automated Predictions	Test Your Ad (TYA) ESSENTIAL or PRO	Test Your Brand (TYB) ESSENTIAL or PRO	Test Your Idea (TYI) ESSENTIAL or PRO
Expert Guidance	TYA Creative Guidance EXPRESS or FULL	TYB Creative Guidance EXPRESS or FULL	TYI Creative Guidance EXPRESS or FULL
	TYA Effectiveness Audit	TYB Effectiveness Audit
Additional Products	TYA dB Free Access	TYB Distinctive Assets Test	Concept Test
	TYA dB Premium	TYB Key Drivers Analysis	Pack Test

 

The table above shows System1's standard product set. The products shown in grey boxes for Comms, Brand, and Innovation (Idea) are Automated Data products which 'Predict'. The 'Improve Your' guidance products immediately beneath them are data-enabled, rapid-turnaround consultancy assignments that utilise the same data to 'Improve'.

 

The products shown in the third layer are higher value-add consultancy 'Improve' products, which are more standardised than our previous consultancy services. We continue to undertake large, bespoke consulting assignments for a small number of major customers but anticipate that this type of offering will decline in significance for System1 as customers convert to the faster, cheaper standard products.

 

We have already created what we believe to be the largest dataset of advertising predictions in the US and UK, where we test overnight every advert that breaks in the categories we cover. This data asset has value in its own right and supports our consultancy business, helping us build unique relationships with key global customers. Direct customer access to the database also helpfully provides some subscription revenues.

 

So, if that is "who we are" and "what we do", what might we become?

 

The Size of the Prize

'Predictions' currently represent less than 20% of the global research market. We estimate that our target markets of predicting advert, brand and innovation effectiveness represent about £6bn of the £42bn (traditional) research market.^[1] Currently at less than 1% share, we believe that System1 can gain 10% global market share in the next decade-a lower share than the current market leaders. Whether we can achieve that scale is the management challenge. But a necessary, if not sufficient, pre-condition to success is having the vision and a plan.

 

Reasons to Believe

We believe System1 can credibly become a global winner in marketing predictions, if we achieve the following:

 

1.   World beating prediction and improvement methodologies

We maintain that our predictions are the most accurate, cheapest and quickest (24-hour turnaround), and that our guidance to improve our customers' marketing is the best in the industry. This is the heart of our sales pitch. Our predictive and improvement methodologies are the foundation of the success of the company and were developed by John Kearon (Founder and Executive President) and Orlando Wood (Chief Innovation Officer) and supported by other key team members. Every day we demonstrate to customers the enhanced efficacy of our results over alternative, often well-established approaches; indeed, customers would not go through the disruptive change in research partner to us if we could not convince them of this superiority. We also believe that we have published more research proving the superior predictability of our methodologies in this space than any competitor.

 

2.   Unique and step-change improvement in product value for customers

Today many of our Advertising predictions are automated, and we have challenged ourselves to deliver them at 1/100^th the cost and 100 x faster than traditional methods. We believe we are far ahead of traditional competitors in automated predictions and indeed that some of our competitors' legacy economics will make it difficult for them to catch up with us. In addition, our pioneering framework for how advertising works at its best also enables our experts to provide the very best improvement advice for increasing our customers' return on their annual advertising investment.

 

3.   Continuous improvement to maintain this product lead

As BrainJuicer we pioneered these research techniques. As System1 we are commercialising them. However, we do continue to invest in improving our products every day to maintain and enhance our lead. We are, for example, working with Warwick University on UK government grant-funded research looking to harness artificial intelligence (AI) and our proprietary databases to further improve our understanding of predictions.

 

4.   Prediction and Improvement market dynamics are favourable

We believe that predictions and improvements are the most value-enhancing segment of the market research industry, and together with our improvement advice, we are intent on increasing the value and size of the segment still further. Some £1.9 trillion is spent on marketing worldwide each year, of which £900bn is on advertising. But only £0.9bn is spent on predicting and improving their advertising investment. (one one-thousandth of total spend).  By encouraging customers to test earlier and more often we can help them achieve a greater return from their annual advertising investment; from improving their adverts, to helping identify which adverts in which countries to put most media money behind.

 

5.   Our business is protected through IP, Branding, Customer and Supplier relationships

Our products are difficult to copy, and the economics of our business protect us to some extent. This is why we launched automated Test Your Ad prediction products at low prices last year, to drive customer penetration and increase volume per customer. We are building our Brand, first mover advantage in this space, and our associated Fame. We are also forging valuable industry partnerships including ITV (the UK's leading commercial broadcaster[2]) and LinkedIn (the world's largest B2B marketing solutions company[3]). Both of these advertising platforms are working with System1 to help their advertisers achieve a greater return on their ad investment. We are also building strong partnerships with some of the world's top creative agencies.

 

6.   There are some early signs that our plan is working

It is very early days, but we are comfortable with progress. We believe that we have proved the model and are now redoubling efforts to scale, which will be key to our future. We are aware that changing a research provider is not always a burning priority for CMOs or Insight Directors, and so we sometimes need to wait for a customer's priorities or personnel to change for them to be receptive. Many forward-thinking marketeers are engaging strongly with System1 and converting, and these relationships are important to us.

 

7.   A challenge for the near term is to grow

We believe that System1 could be worth £1 billion eventually.  Management owns 30% of the business, excluding shares under option. We take every decision with our medium term £100m+ Revenue milestone in mind. Aside from the automated product strategy, our choices on the calibre of our talent, the workflows in the company, our supply chain, the IT systems, and much more support achieving this goal.

 

In summary, we have a vision, a plan, a leadership team that is motivated via share ownership, and reasons to believe we can succeed. The last year demonstrated that life could take many twists and turns and so nothing is guaranteed other than our determination to win where we compete and to create value for all shareholders.

 

 

John Kearon	Stefan Barden	Chris Willford
Founder and Executive President	Chief Executive Officer	Chief Financial Officer

 

Strategic Report

 

Chairman's Statement

 

This year for System1, as for the rest of society, has been a dramatic one dominated by the Covid pandemic and the governmental, corporate, and personal responses to the unfolding situation. Whilst a small number of System1 employees across the world contracted a Covid infection, I am pleased to report that none was seriously ill, and all have made a full and complete recovery.

 

Our financial year commenced on 1 April 2020, just four days after the introduction of the first UK lockdown. The immediate reaction from companies and our customers in the UK and worldwide was to find ways to adapt to the new conditions, initially to conserve funds by cutting expenditure deemed to be discretionary, and postponing future plans. This inevitably had a significant impact on System1 Revenue in Q1 as customers' research and marketing expenditures were cut back.

 

From Q2 onwards we saw a steady recovery in our order book, but Revenue was still lower by 26% at the half-year. By contrast the second half of the year saw a strong sales upturn as our new products gained support, with H2 Revenue some 8% higher than the equivalent period in the previous year. This trend gives us confidence as we face the future. Our full year Revenue declined by 11% overall, however our Adjusted Operating Costs were 16% lower, leading to an Adjusted Profit before Taxation of £3.0m, (2019/20: £2.0m). Statutory Profit before Taxation increased by £1.8m to £2.1m, reflecting the growth in the adjusted measure and the impact of paying no bonuses. The business continues to generate cash and our financial position remains strong, ending the year with £6.5m cash net of debt, compared with £4.2m at last year end. Consequently, we will look to reinstate the share buyback, which was suspended in 2020, with details to be announced later.

 

System1 had previously operated with some limited use of employees working from home, and already had effective systems and technology to facilitate this, which enabled the company to move rapidly and effectively to 100% home working. This method of operating was substantially maintained throughout the year, and great credit must go to all our staff for their flexibility in adapting to the new circumstances.

 

We utilised some £0.6m of support from the US and UK government employment subsidy schemes, and senior staff took a 20% salary deferral, which we were able to pay back in full and re-instate normal salaries by October 2020. We also used the opportunity to reduce our office footprint, by closing seven locations,  and economising on rental costs.

 

Throughout the period we have maintained a high level of contact with all our customers, not only though video conferencing but with a variety of very well attended webinars, sometimes with senior industry figures joining the System1 team, where our products and ratings tools were showcased.

 

During the year and despite the new working arrangements, System1 has maintained its investment in updating and automating its suite of "Test Your" research products. Led by Test Your Ad, an automated advertising prediction tool, it has led to increased take-up by major advertisers and agencies and contributed significantly to the improved performance in H2. Work continues to enhance our Test Your Brand and Test Your Idea products which will give customers a more rapid and less expensive way of testing, and a stimulus to purchase our added-value guidance on how to improve the effectiveness of their brands and innovations.

 

In addition to customer commissioned research, we have leveraged our thought leadership by entering into partnerships with leading broadcasters, advertising agencies, and others where they recommend and integrate the use of our products into their own sales and business development processes. Our partnership with ITV, which encourages and incentivises advertisers to create more effective TV commercials, uses the System1 Test Your Ad measurement. The LinkedIn platform is another partner offering the System1 research tool to potential advertisers to refine and improve the effectiveness of their messages prior to transmission.

 

In the year ahead, we plan selectively to increase investment in future product development and IT, with priority given to scaling our automated prediction products. We also plan for an enhanced sales and marketing capability to expand our reach and generate new business.

 

In June 2020, Stefan Barden and Chris Willford were appointed to the Board as executive directors. Stefan Barden was subsequently appointed CEO in March 2021, with John Kearon, our Founder, becoming Executive President. These changes of title largely reflected their existing operational responsibilities and facilitated the recruitment and promotion of several key senior managers which will significantly strengthen the business.

 

The new financial year will see some further changes to our Board composition. Robert Brand, our Senior Independent Director, will not seek re-election at the Annual General Meeting having served on the Board since 2012. We have benefited greatly from his wise counsel, and he leaves with our heartfelt thanks and our best wishes for the future. He will be succeeded as Senior Independent Director by Sophie Tomkins, currently Audit Committee Chair. I am also delighted to welcome Rupert Howell to the Board as an Independent Director. Rupert joined in February following a long and illustrious career in advertising, public relations, television, and publishing, and is proving to be a strong addition to the team.

 

None of our business results this year and our future ambitions could be achieved without the unswerving support of all our people across the globe. This year, more than ever, their resilience and dedication has been outstanding, and on behalf of the Board and our shareholders, I thank them all for their outstanding efforts.

 

 

Graham Blashill

Chairman

 

Founder and Executive President's Statement

 

What A Year!

We have already set out System1's market positioning, potential, and headline financial performance, so I am going to focus on how we survived the impact of the pandemic and exited the year with real progress towards our goal of becoming the world leader in predicting advertising effectiveness.

 

Shaping Up

As the pandemic hit, many customers understandably pressed the 'pause-button' on their marketing, and our first quarter Revenue dropped 32%. From a practical point of view, the digitisation of the business meant we were able to move immediately to remote working with no loss of productivity and quickly acclimatise to remote working as the norm.

 

The drop in sales galvanised our remarkable staff to simplify everything we were doing and accelerate our plans to reshape the business, from tailor-made consultancy to automated prediction products and enhanced creative guidance. In the second half of the year, the top line revenue exceeded last year's level thanks to quarter-on-quarter growth from a significantly reshaped business:

 

·      Our automated prediction products represented 1% of Revenue at the half-year, 7% in the December quarter and 15% in the final quarter (34% for Test Your Ad) and are on track to continue growing in the coming months.

·      Our Comms Revenue, including Test Your Ad, grew 18% in the year to become the largest part of the business, with significant new Test Your Ad customers like adidas, Danone, Sky, Boston Beer, Carlsberg, Kellogg's, and Globo.

·      Our Partnerships Team won two major advertising platform customers: ITV and LinkedIn, who are promoting and recommending our Test Your Ad services to help enhance their advertisers' returns.

·      Our US business grew quarter on quarter, almost back to early 2019 revenue levels by the end of the period.

·      Our productivity improved, delivering higher Revenue in the second half with less cost in the business.

 

 

By the end of the year, we had shaped our automated prediction products into the following simple but compelling offerings of what we believe to be the most predictive methods, at the lowest cost, fastest turnaround and with the best value-enhancing, creative guidance:

 

	Test Your Ad	Test Your Brand	Test Your Idea
Essential	Predict Your Ad…	Predict Your Brand…	Predict Your Idea…
	Star - long-term profit potential   Spike - short-term sales potential   Fluency - strength of branding	Fame -reflects current brand share   Feeling - predicts future brand share   Fluency - creates brand premium Star Rating - brand performance	Predicted Acceptance   Speed of Choice   Emotional Pull   Star Rating - predicted success
Pro	Predict Your Ad and…	Predict Your Brand and…	Predict Your Idea and…
	Custom sample as well as nat-rep Pro diagnostics to explain & improve	Custom sample as well as nat-rep Pro diagnostics to explain & improve	Custom sample as well as nat-rep Pro diagnostics to explain & improve
Guidance	Improve Your Ad…	Improve Your Brand…	Improve Your Idea…
	Expert creative guidance to enhance the effectiveness of your advertising	Expert creative guidance to enhance the effectiveness of your brand	Expert creative guidance to enhance the effectiveness of your innovation
Subscription	Benchmark Your…
	Own advertising effectiveness   Competitor advertising effectiveness   Against every US/UK TV ad in all major categories (over 50,000 ads)

 

 

Progress Towards Global Leadership

To improve the utility of and access to System1 predictions, we continue to standardise, digitise, and automate our approaches, and the year saw significant progress in the four progressive goals we set out three years ago:

 

1.   Build defensible assets

We have now tested over 50,000 ads and have the largest database, that we are aware of, of validated ad effectiveness data and spend in the world. We use this asset to continuously enhance our understanding of ad effectiveness and help prove the value of creativity to advertisers. The database continues to prove an invaluable asset in demonstrating and validating the essential qualities of the most effective advertising. Orlando Wood is currently using the database in his work with The Institute of Practitioners in Advertising (IPA) on Lemon II, the working title of a follow-up publication to the critically acclaimed Lemon (the IPA's biggest ever selling book), showing how the principles of the most effective advertising apply as much, if not more, to online video, as they do in TV advertising. Our approaches have been critically acclaimed by such industry luminaries as Peter Field, co-author, The Long and the Short of It, who said,

"The marketing world desperately needs better metrics to benchmark the long-term growth driving potential of their advertising; to offset the tsunami of short-term metrics washing around. So, I welcome System1's new Ad Ratings service, which has to be an important step in the right direction."

 

2.   Generate fame

Testing every new ad in the categories we cover the day after it first airs has given us the ability to provide predictive data to industry publications on ads generating interest or controversy. As a result, we have been able to generate significantly more System1 coverage than in any previous year.

 

Our Ad of the Week feature, celebrating the best, most effective creative from any category in the US or UK, generated significant industry attention, as well as helping to win a number of significant new customers. In recent months we have initiated Ad of the Month, celebrating the best, most effective creative in each of our international markets: France, Germany, Brazil, Singapore, and Australia.

 

Orlando Wood's 2019 Lemon publication continued to generate significant customer interest and presentations to many thousands of client marketers and agency influencers alike. As mentioned, Orlando is working on a new book to provide the industry with a blueprint for dramatically increasing the effectiveness of the customer shift in spend towards digital channels.

 

We have managed to generate industry accolades from leading industry figures like Mark Ritson, Virtual Marketing Professor, who said,

"System1 is special because you've looked at creativity in a far more detailed way. You've balanced the creativity/media thing, you've done it on an effectiveness basis."

 

3.   Win new customers

Our increased industry effectiveness profile, the automation of our superior products, together with our enhanced Sales and Partnership teams, has led to several significant wins, including: adidas, Expedia, Danone, Sky, Boston Beer, Carlsberg, Kellogg's, Globo and perhaps most significantly, ITV and LinkedIn, who are promoting and recommending our Test Your Ad services to help enhance their advertisers' returns.

 

4.   Generate new revenues

Test Your Ad revenues increased 18% to make ad testing our most popular product, and accounting for almost half of total revenues. Part of this growth was a significant increase in customers using our Test Your Ad platform, to test a total of 2,471 advertising ideas, at varying stages of development. These tests were using our basic 'Essential' product, and the recent launch of our enhanced 'Pro' product will offer customers additional diagnostics to improve their advertising performance. Thirty companies also added an annual subscription for the competitive data on all ads in their category, with 1,086 users now accessing the platform for competitive monitoring and ad performance evaluation. In the case of adidas, we set up a new Sports Apparel category, in their 4 major markets, including backtesting the last 12 months of ads in each market. This is something we hope to do for other multinational customers in the current year, extending their competitive and performance monitoring outside of the US and UK, to include additional markets they request.

 

Over the last three years, we have reshaped the business, begun to automate our products, generated increasing industry profile and put together a management team capable of achieving our goal to become the world leader in predicting advertising effectiveness. There remains much to do, but we believe that our product set is further ahead than our competitors. There will be many more innovations in the coming year, as we continue to automate our predictions, increase System1's Fame, attract new customers and drive revenues.

 

In summary, over the last year System1 has taken its leading research intellectual property and created automated prediction products, with assets to complement our historic consultancy services. We have been recognised by marketing industry thought leaders and are firmly becoming the research industry's champion for creativity, backed by data. In the UK, our pilot market, we have developed partnerships with ITV, the largest retailer of advertising space, and in the US with LinkedIn, who are on a mission to do for online B2B advertising what Facebook and Google have done for online consumer advertising. It bodes well for the future, but we know there is much still to do.

 

Finally, a heartfelt thank you to our patient and incredibly supportive shareholders. And a huge thank you to our wonderfully creative, hardworking staff.

 

 

John Kearon

Founder & Executive President

Financial Review

 

Overview

	2021	2020	Change	Change**
	£m	£m	£m	%
Adjusted revenue*	22.8	25.3	(2.5)	-10
Adjusted gross profit*	19.2	21.4	(2.2)	-10
Adjusted operating costs*	(16.2)	(19.4)	3.2	-16
Adjusted profit before taxation*	3.0	2.0	1.0	46
Statutory profit before taxation	2.1	0.3	1.8	601
Taxation	(0.4)	(0.5)	0.1	-27
Statutory profit/(loss) for the financial year	1.7	(0.2)	1.9	n.m.

 

*All figures in the Financial Review are presented in millions rounded to one decimal place unless specified otherwise. Percentage movements are calculated based on the numbers reported in the financial statements and accompanying notes. Adjusted Revenue, Cost and Profit figures are as defined in the Highlights section.

** Year-on-year percentage change figures are based on unrounded numbers.

 

Adjusted profit before tax rose 46% to £3.0m in the year despite a 10% decline in adjusted revenue. After a disappointing first quarter there were three consecutive quarters of top-line growth, and sales ended the year at a run-rate close to what was achieved in the first half of FY 2019/20. Adjusted Revenue and Gross Profit both increased by 8% in the second half-year (first half 26% lower). Statutory Profit before Taxation increased by £1.8m to £2.1m.

 

	Q1 FY20	Q2 FY20	Q3 FY20	Q4 FY20	Q1 FY21	Q2 FY21	Q3 FY21	Q4 FY21
	£m	£m	£m	£m	£m	£m	£m	£m
Adjusted gross profit	5.7	5.7	5.6	4.4	3.9	4.6	5.2	5.5
Adjusted operating costs	4.8	4.8	4.8	4.9	4.2	4.0	3.8	4.2

 

Adjusted Operating Costs fell in each of the first three quarters of the financial year, due mainly to the Company's precautionary decision to reduce expenditure at the beginning of the Covid pandemic. To the extent that these reductions were due to decreased working hours, they had already been reversed by the end of the third quarter. The Company began recruiting for growth in the second half-year, ending the financial year with a similar level of manpower to the previous year.

 

Profit for the financial year increased by £1.9m to £1.7m on the back of improved operating profitability and lower tax payable, assisted by a £0.6m R&D tax credit received in the period. Diluted Earnings Per Share of 13.1p compared favourably to the previous year's Loss Per Share of 1.8p.

 

Product Performance

		2021		2020
		Revenue	Gross profit	Revenue	Gross profit
		£'000	£'000	£'000	£'000
By product variant
Data		1,480	1,270	-	-
Consultancy		20,561	17,467	23,468	19,976
Other services		797	415	2,008	1,625
		22,838	19,152	25,475	21,601
By product group
Communications (Ad Testing)		10,603	9,177	9,002	7,992
Brand (Brand Tracking)		3,796	2,878	4,637	3,428
Innovation		7,642	6,682	9,829	8,555
Other services		797	415	2,008	1,625
		22,838	19,152	25,475	21,601

 

The last year saw the launch of System1's automated "Test Your…" data products, starting with Test Your Ad, complemented by the "Improve Your…" standard data-enabled consultancy range of creative guidance products. For this reason, we now segment our revenue primarily by product variant rather than product area (Comms, Brand, Innovation). For continuity, we show both product variant and product area in this report. The uptake of automated data products (principally Test Your Ad) accelerated in the second half and Data represented 15% of Revenue in the final quarter compared with 6% for the year as a whole. Consultancy declined in line with the overall Revenue. Within the total, new creative guidance that provides further insight on the automated data reports and recommends improvements performed well. Bespoke consultancy assignments decreased in absolute and relative terms, in line with our plan to concentrate on standard consultancy products.

 

The success of Test Your Ad led to Communications growing in all geographic regions, representing nearly half the Group's Revenue for the year. This was offset by declines in our customers' Innovation spend, particularly in the Americas. The Brand product area fell back year on year, due mainly to two large brand tracking customers in Continental Europe scaling back their marketing operations in the region.

 

Regional Performance

		2021		2020
		Revenue	Gross profit	Revenue	Gross profit
		£'000	£'000	£'000	£'000
By location of customer
Americas		8,822	7,571	12,790	10,951
United Kingdom		6,780	5,668	5,515	4,688
Rest of Europe		5,233	4,231	5,628	4,630
APAC		2,003	1,682	1,542	1,332
		22,838	19,152	25,475	21,601

 

Revenue in the Americas fell by £4m versus a strong prior year, with all the reduction coming in the first half, partly as a result of the region's three biggest customers reducing their spend. Second half revenue in The Americas recovered and was just above H2 2019/20. The UK was the first to benefit from the Test Your Ad launch, consistently achieving high revenue growth, particularly in Comms. Continental Europe revenue fell slightly year on year, despite achieving double-digit growth in the second half-year. APAC revenue grew consistently throughout the year on the back of strong Innovation sales, ending the period a third up on FY 2019/20.

 

Operating Expenditure

At the interims we changed the way we report our expenditure in order to provide clearer information on System1's recurring operational cost base whilst disclosing separately the sometimes-significant non-recurring costs and credits. Adjusted Operating Costs therefore exclude severance, subsidies received, and bonuses.  Adjusted Operating Costs fell by £3.2m (16%) in the year to £16.2m due mainly to average headcount that was some 9% lower.  Office rents declined as we continued to vacate offices; travel and related expenditure also fell sharply as a result of pandemic travel restrictions. Statutory-basis operating costs fell by £3.6m (17%), due partly to the lack of bonus awards in FY2020/21. A reconciliation of adjusted operating costs to statutory operating costs is shown in Note 15 to the Consolidated Financial Statements. The benefit of the Paycheck Protection Program in the USA and small pandemic-related subsidies in other countries is reported as Other Income in the statutory numbers.

 

In the first half of the year, the Group reviewed its office estate for lease impairment under IFRS 16 in view of the pandemic and System1's widespread adoption of new ways of working and decided to close our offices in Rio, Sydney, Los Angeles, Rotterdam, Hamburg and Chicago as those leases expired. The review concluded that a significant reduction in the utilisation of the New York office required an impairment of the lease asset alongside much smaller impairments on leases in Chicago, Hamburg, and Rotterdam. The resulting £1.0m non-cash Impairment Charge (£0.9m relating to the New York office) affects the Group's statutory operating costs and profit before taxation, but is excluded from the Adjusted figures. As a result of these changes, annual rental costs are falling by some £0.4m. Since the end of the financial year, we have signed an agreement to sublet the New York office from July 2021 until the lease expires in 2024, on terms slightly better than the early termination alternative that informed the mid-year impairment calculation.

 

Tax

The Group's effective tax rate fell from 178% to 19% due mainly to a £0.6m research and development tax credit for 2018/19 associated with the development of the AdRatings database and System1's automated prediction products. We subsequently made a successful claim for 2019/20 which is being recognised on receipt in H1 2021/22. We anticipate a claim for FY 2020/21 which is yet to be quantified or submitted. Excluding the tax credits, the effective tax rate fell from 178% to 45%.

 

Funding and Liquidity

The Group began the year with £6.7m Cash on the balance sheet and ended it with £9.0m: funding from the £2.5m revolving credit facility is included in both years' balances . The £2.3m cash inflow is attributable to £1.9m cash generated from operations after property lease costs, £0.6m subsidies received, and £0.3m net cash tax refund. These inflows were partially offset by £0.2m capital expenditure, loan interest £0.1m and a £0.3m adverse translation effect of non-sterling bank balances of reflecting primarily the strengthening of the pound against the dollar in the period.

Some £2.5m cash was spent on research and development in the year, related primarily to the development of new IP, automated prediction products and the AdRatings database.

 

No dividends were declared or paid in the year. 

 

Outlook

As System1 returns to its pre-pandemic level of revenue we do so in a position of relative strength. Cash balances and cash flow are healthy, and we will continue to invest in our products, data assets and talent. We will look to reinstate the share buyback programme which was suspended in 2020 due to uncertainty over the potential impact of the Covid pandemic on our business. More information will be provided on the proposed buyback later in the year. We plan to remain profitable and to continue to generate cash in the 2021/22 financial year, as we prioritise scaling our automated prediction products. Notwithstanding that, we are targeting revenue growth to be at least matched by the rate of cost growth, due to the pandemic-related cost reductions in the year just ended.

Section 172 Report

 

Section 172 of the Companies Act requires the Board to take into consideration the interests of stakeholders in its decision making. This section provides information about the Board's approach to engagement with stakeholders, namely:

·      Customers

·      Talent

·      Investors

·      Suppliers

·      Community

 

Customers

The success of our customers is at the centre of our purpose as a company. Our mission is to help every brand owner make effective advertising, improve their brand equity, and launch successful new products. Our pursuit of the mission is guided by our core beliefs and values: Customer Commitment, Creativity, Collaboration and Conviction. We are single-mindedly focussed on improving the effectiveness of our customers' marketing budgets by providing better, faster, and cheaper predictions on the following:

·      Whether their advert will change people's behaviours in the way they intend

·      Whether their brand will grow stronger in the mind of their target customers; and

·      Whether their new product/ service ideas are more or less likely to be successful

·      How we engage with our customers

 

We invest significant resource in developing and growing deep customer relationships including highly rated training and professional development sessions that draw on our behavioural science expertise. We seek structured feedback from customers on all our research projects so we can improve and develop our products and services.

 

Customer Success Stories

LinkedIn

LinkedIn has been a major success story with their advertising working with us through every stage of their creative to not only optimise it but ultimately test it across countries and air it globally. LinkedIn Plant was tested from script to storyboard to animatics to finished film with System1. Every stage included System1 recommended optimisations and System1 will be creating a case study from this ad which will now be aired globally with a series of promotions and perfect timing to coincide with the current job market. Leaning into how taking small steps with the LinkedIn community can help members to grow and find opportunity. Following System1's recommendations to lead with emotion; to have a story with a beginning, middle and end; to testing different soundtracks to ensuring the highest star score; and finally testing different endings to ensure as System1 recommends the ad ends with happiness. Looking forward to many more opportunities with this partnership account!

 

adidas

System1 is proudly partnering with adidas in creating effective advertising. Since early 2021, adidas bought into System1's thinking, tech-enabled ad products and its consultancy, leveraging System1's Test Your Ad solution suite at a global scale. adidas' exciting brand campaigns, such as the Impossible Is Nothing campaign, and product campaigns are tested throughout the creative development process in a coherent way with System1's proven metrics for business effects.

 

Talent

Our primary focus is on attracting, growing, and retaining world class talent with a culture of performance. To achieve this, we embed structures that promote equal opportunity and guard against discrimination. We are proud of being an inclusive organisation - our culture is founded on principles of inclusion such as feedback, honesty, and creativity.

 

How we engage with our talent

Alongside our corporate values (Customer Commitment, Creativity, Collaboration and Determination), System1 promotes a set of team behaviours known as TIDE.

 

Truth - always tell the truth… and tell it early

Intent - always assume good intent…yet resolve issues

Dissent - Be obliged to dissent...yet adhere to 'Cabinet Responsibility'

Elephant - Don't allow 'elephants' in the room...yet be empathetic in dealing with them

 

This helps to ensure that employees understand the behaviours expected of them and allow us to operate a high trust environment, which is linked to business success.

 

We conduct quarterly employee input surveys which are reviewed by the Board. These use our FaceTrace methodology to capture how employees feel about working at System1, along with reasons. We also ask them what is working well, what could be improved and add a topical question. We hold follow up discussions with each team across the business, chaired by the departmental head and the Chief People Officer to agree improvements, actions and owners.

 

There is a comprehensive programme of employee communication and engagement sessions, ranging from the monthly Town Hall meetings with all staff, to fortnightly senior management forums, through to drop in "coffee meetings". During the past year virtually all of these have been held online. They give us the opportunity to connect across the business at different levels, share updates and celebrate success - including System1 Value Awards, where employees are nominated by colleagues and are recognised for working according to our values.

 

We pay fairly-there is no discrimination across any factor-we ensure this by using benchmarking data and conducting annual salary reviews by individual and across roles, and there is a structured approach to career and professional development across the business. We have a strong learning and development culture. We encourage employees to plan their development using the support and resources we provide (including access to LinkedIn Learning, internal training programs and professional certifications). We advertise roles internally and promote inter departmental opportunities.

 

Talent engagement outcome

In the depth of the Covid pandemic when our people were forced to work at home, we surveyed their attitudes towards home-based versus office-based working, which is informing our plans on introducing hybrid virtual working. The feedback prompted the Company to improve and clarify its policy on providing equipment for home working. The survey feedback is also helping us to formulate plans to increase employee satisfaction via continued flexible working whilst reducing our worldwide office footprint and associated costs.

 

Investors

The most visible way that the Company takes the interests of equity investors into consideration is through the high level of share ownership on the Board. In addition, the Group Executive Team members' interests are aligned through their participation in a valuable LTIP scheme. They have no cash bonus scheme.

 

The Company encourages two-way communications with all its shareholders and responds quickly to requests or queries received. Larger investors and potential investors are invited to meet management after the full-year and interim results. In addition, the Company maintains regular contact with its lender in the revolving credit facility to ensure that it is kept informed of the Company's performance and prospects.

 

Communication is primarily through the Company's website and the Annual General Meeting which shareholders are encouraged to attend and where participation is encouraged so that the Board may answer questions. All shareholders have at least twenty-one clear days' notice of the Annual General Meeting.

 

All shareholders will receive a copy of the Annual Report. We encourage the use of electronic copy but still produce a small quantity of hard copies for investors who request them. The interim report is available online via the Company's website.

 

The Group seeks advice from its Nominated Advisor, Canaccord on all formal shareholder communications and relies on their services to arrange the twice-yearly investor "roadshows".

As we have no foreseeable requirement for additional equity capital, System1 does not currently hold capital markets days, but would consider doing so if requested by a sufficient number of investors.

 

Suppliers

We work with a small number of trusted suppliers and operate on a strong partnership basis. Our approach is centred on lean principles and continuous quality improvement, with weekly and monthly meetings to review service levels, KPIs and resolve issues. We share data between teams to ensure that there is one view of our partnership metrics.

 

Our key delivery suppliers include:

·      MAP Marketing Research - provides us with survey programming and project management services

·      Toluna, Prodege and NetQuest - provide us with market research panel respondents to complete our surveys

·      Datawise - provides us with bespoke data processing and charting services on our non-standard deliverables

·      Intonation - provides us with translation services (forward translation of questionnaires and back translation of respondent verbatim)

 

During the year we ran our first virtual Supplier Conference, to share System1's latest strategy update with current and potential suppliers. We invited them to help us disrupt the industry by offering solutions to support us in new ways. It received excellent feedback and has resulted in deeper partnerships with a better understanding of our strategy, as well as discussions about alternative ways of partnering as we scale our digital solutions.

 

Community

The ESOMAR Foundation (esomarfoundation.org) is the charity arm of the Market Research industry. John Kearon has been President of the Foundation for the last four years. Its purpose is, 'using Market Research to build a better world' and it is run on a purely voluntary basis. With a team of six System1 volunteers, together with five volunteer research industry Board members, the Foundation provides research training, inspirational case studies, and support, to help charities anywhere in the world in making a difference to the communities they serve. The Foundation raises over £100,000 a year, through annual donations from the research community, to fund these activities.

 

Principal Risks and Uncertainties

 

The Board is responsible for reviewing risk and regularly reviews the risks facing the Group, as well as the controls in place to mitigate potential adverse impacts. The risk register is assessed at least twice a year, but the Board's consideration of risk matters is not limited to those formal reviews. The Audit Committee reviews the effectiveness of financial controls. The Board endeavours 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:

 

Risk Area		Potential Impact		Mitigation
Loss of a significant customer	Revenues and profits fall due to the loss of a large customer		We work with more than 250 customers and work hard to earn their loyalty. The percentage of business from our largest customer in the 12 months to 31 March 2021 stood at 8% of revenue
Loss of key personnel	Key personnel leave the business, taking knowledge and external relationships with them		We have a relatively senior team with broad experience and seek to ensure that System1 is as attractive to existing employees as it is to talented external recruits. Reward is competitive and regular performance evaluation identifies individuals who may be "at risk". For the most senior executives, the LTIP provides a strong motivation to stay with System1
Loss of a critical supplier	The bankruptcy, change of control or resignation of a strategic supplier leaves the Company unable to meet customer demand		We have several mission-critical functions carried out by third-party suppliers (such as panel suppliers). For these functions, we seek to ensure we are not too reliant on any one organisation and typically have three qualified providers. We work in close co-operation with our strategic suppliers, ensuring that any issues and concerns are surfaced rapidly and resolved in partnership
Loss of assets, data, intellectual property	Theft of intellectual property via unauthorised or illegal access to or copying of the Company's databases, proprietary methods, and algorithms		We endeavour to protect the business from significant risks, through a combination of trademark protection; insurance; information security, and our employee, customer and supplier terms and conditions
Litigation risk	Legal action is taken against the Company by customers, employees, suppliers, or other stakeholders		We endeavour to protect the business from significant risks, through our terms and conditions, trademark protection and comprehensive professional indemnity insurance

 

Risk Area	Potential Impact	Mitigation
Operational risk	An outage or other technical issues on our survey platform results in delays in delivering customer projects	All our services are hosted on a secure external cloud infrastructure with multiple failover options. We continuously monitor system availability and endeavour to alert the customer to any delays on the rare occasions where there is disruption
	A cyber-attack causes a material breach to our infrastructure	Our business does not ordinarily hold non-employee personal data. We have invested in our controls (including penetration tests), processes and IT infrastructure and hold ISO 27001 accreditation covering information security
	§    The volume of change initiatives in Sytem1's transition to a data predictions business could lead to a loss of operational control	§    All change initiatives are subject to project governance, and development is run on an "agile" methodology. The Executive Team reviews operational performance every week providing early warning of potential deviations from plan. The Board reviews operational performance monthly and strategic direction annually §
Financial risk	Failure to manage credit, currency, market, interest rate or liquidity risk expose the Group to losses	Due to the straightforward nature of the business, its international cost base, the Company's strong balance sheet, and the fact that most of the Company's customers are large, credit-worthy organisations, foreign exchange and credit risks have historically proved to be modest. Since February 2020, the Group has been exposed to interest rate risk through its £2.5m floating rate revolving credit facility which always has been more than matched by unencumbered cash
Environmental and political risks	Pandemics - the company's revenue streams could be affected by customers' decisions to reduce marketing budgets	The Company trades principally in Europe the USA and is exposed to the social and economic impacts in those regions. The recent Covid-19 pandemic demonstrated the Group's ability to operate normally without access to its offices. The main exposure is to our customers' decisions on the size of market research budgets in response to an economic downturn
	Political risk through adverse regime or regulatory change	The territories representing the vast majority of the Group's revenue are socially, politically, and economically stable. The impact of Brexit has been negligible to date. We have a regional operations centre in Brazil where just under 10 percent of our employees are based and are comfortable that the benefits of the operation outweigh the slightly elevated risks

 

 

 

Group Directors' Report

 

Review of the Business and Future Development

The Group Overview, Chairman's Statement, Founder and Executive President's Statement, the Financial Review, the Section 172 Report, Principal Risks and Uncertainties, and the Corporate Governance Report set out:

·      the issues, factors and stakeholders considered in determining that the Directors have complied with their responsibilities under section 172 of the Companies Act 2006 (Corporate Governance Review);

·      the methods used to engage with stakeholders and understand the issues to which the Directors must have regard under section 172 of the Companies Act 2006 and the effect on the Company's decisions and strategies during the year (Corporate Governance Review);

·      the way that management view the business (Group Overview, Chairman and Founder & Executive President's statements, Financial Review);

·      its strategy, positioning, and objectives (Group Overview, Chairman's, and Founder & Executive President's Statements).

·      its historic financial performance (Chairman's and Founder & Executive President's statements, Financial Review);

·      an assessment of its future potential (Group Overview, Chairman's and Founder & Executive President's Statements, Financial Review);

·      its key performance indicators (Financial Review); and

·      its key business risks (Principal Risks and Uncertainties).

 

Dividends

The Company has paid the following dividends:

		2021	2020
		£'000	£'000
2020 interim dividend paid, 1.1p per share		-	138
2019 final dividend paid, 6.4p per share		-	805
		-	943

 

The Company did not pay an interim dividend in the year ended 31 March 2021 and does not propose the payment of a final dividend.

 

Directors

The following individuals served as directors of the Company, System1 Group PLC, during the year:

 

Stefan Barden            (Executive)                 appointed 26 June 2020

John Kearon              (Executive)

Chris Willford             (Executive)                 appointed 26 June 2020

Graham Blashill          (Non-Executive)

Robert Brand             (Non-Executive)

Rupert Howell             (Non-Executive)          appointed 15 February 2021

Sophie Tomkins         (Non-Executive)

Jane Wakely              (Non-Executive)

James Geddes           (Executive)                 resigned 20 April 2020

 

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

 

Share capital

At 31 March 2021, the Company had 13,226,773 Shares in issue (2020: 13,226,773) of which 510,421 were held in treasury (2020: 626,989). The treasury shares will be used to help satisfy the requirements of the Group's share incentive schemes.

 

During the year, the Company transferred 116,568 Ordinary Shares, representing 0.9% of the called-up share capital of the Company, out of treasury to satisfy the exercise of zero-priced employee share options of 116,568 shares.

 

Changes in the share capital of the Company during the year are given in Note 10 to the financial statement.

 

Substantial shareholders

As at 1 June 2021, the Company was aware of the following significant interests in the ordinary issued share capital of the Company.

	No.	% Voting shares
John Kearon	2,918,235	22.62
University of Notre Dame Du Lac (USA)	1,200,000	9.30
Invest. fur Langfristige Investoren (Bonn)	1,020,000	7.91
Ruffer (London)	800,000	6.20
Stefan Barden	791,645	6.14
Lazard Freres Gestion (Paris)	685,000	5.31
Motley Fool Asset Mgt (Alexandria)	645,000	5.00
Ennismore Fund Mgt (London)	579,099	4.49
Heritage Capital Mgt UK	424,260	3.29

 

Financial risk management

The Group's activities expose it to the following financial risks to a small degree. Further assessment of financial risks is outlined in Note 8 to the Consolidated Financial Statements.

 

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 customers 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, Rest of 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 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 a revolving credit facility with HSBC.

 

Other risks

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

 

Capital risk management

The Group manages its capital to ensure that it can continue as a going concern while maximising its return to shareholders. The Group's capital structure consists of cash and cash equivalents, bank borrowings and share capital. Towards the end of the year ended 31 March 2020, the Company arranged and drew down a £2.5m revolving credit facility to provide greater financial flexibility in a period of uncertainty due to the global pandemic. The Group has not entered any derivative contracts.

 

Going concern

As noted in Principal Risks and Uncertainties, and in note 3 to the consolidated financial statements, the Covid outbreak has affected economies across the globe and continues to cause disruption to markets and businesses. The Company acknowledges that this presents financial and operational risks in the short term, and the Directors have considered this in their going concern assessment. In addition to the mitigating actions taken by the Company to address these risks, the Directors have closely monitored the performance of the Group throughout the pandemic, noting the strong net cash balance at year-end compared to last year due to stronger performance in the second half of the year.

 

The Group has reviewed its financial forecasts for the 12 months from the approval of these financial statements, flexing sensitivity analysis scenarios with external and internal inputs that would represent the Group's central forecast and various downturn scenarios.

 

Accordingly, after making appropriate 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 and IT Development teams are involved in the development and validation of new market research methods and products.

 

Employees

The Group maintains fair employment practices, attempts to eliminate all forms of discrimination and to give equal access, and to promote diversity. 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 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. All relevant information known to the Directors has been relayed to the appointed auditor.

 

On behalf of the Board

 

Chris Willford

Chief Financial Officer and Company Secretary

14 July 2021

 

Statement of Directors' Responsibilities

 

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

 

Company law requires the directors to prepare group and company financial statements for each financial year. The directors have elected under company law and required by the AIM Rules of the London Stock Exchange to prepare the group financial statements in accordance with international accounting standards in conformity with the requirements of the Companies Act 2006 and to prepare the company financial statements in accordance with international accounting standards in conformity with the requirements of the Companies Act 2006 and applicable law.

 

The Group and Company financial statements are required by law and international accounting standards in conformity with the requirements of the Companies Act 2006 to present fairly the financial position of the group and the company and the financial performance of the group. The Companies Act 2006 provides in relation to such financial statements that references in the relevant part of that Act to financial statements giving a true and fair view are references to their achieving a fair presentation.

 

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 of the group and the company and of the profit or loss of the group for that period.

 

In preparing each of the group and company financial statements, the directors are required to:

a.   select suitable accounting policies and then apply them consistently;

b.   make judgements and accounting estimates that are reasonable and prudent;

c.   state whether they have been prepared in accordance with international accounting standards in conformity with the requirements of the Companies Act 2006;

d.   prepare the financial statements on the going concern basis unless it is inappropriate to presume that the group and the company will continue in business.

 

The directors are responsible for keeping adequate accounting records that are sufficient to show and explain the Group and the Company's transactions and disclose with reasonable accuracy at any time the financial position of the group and the company and enable them to ensure that the financial statements comply with the requirements of the Companies Act 2006. They are also responsible for safeguarding the assets of the group and the company and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities.

 

The directors are responsible for the maintenance and integrity of the corporate and financial information included on the System1 Group PLC website.

 

Legislation in the United Kingdom governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions.

 

 

Chris Willford

Chief Financial Officer and Company Secretary

14 July 2021

 

Corporate Governance

 

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 Strategic Report section 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 Strategic Report.

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 commit the company to legal agreements or make payments;

·      regular reviews of customer 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 continuous improvement programme.

 

Corporate Culture

The Company endeavours to maintain a culture built on integrity. To surface unethical or deceitful behaviours, it promotes openness amongst its employees, provides channels for employees to feedback concerns to the Executive Directors and the Board (such as anonymous employee feedback surveys, and confidential whistle-blowing channels), and conducts exit interviews. Further information on System1's culture and values can be found in the Section 172 Report.

 

The Board of Directors

The Board comprised three Executive Directors and four independent Non-Executive Directors, including the Non-Executive Chairman for most of the year ended 31 March 2021. 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 above.

 

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.

 

During the year, the Remuneration Committee sought advice from PWC 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, RSM Audit LLP. The Board liaises regularly with the Company's Nominated Advisor, Canaccord Genuity to ensure compliance with AIM Rules.

 

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 ten 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 any of the Executive Directors; and

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

 

For financial year ended 31 March 2021, the Company Secretary was also the Chief Financial Officer, as is the case with other companies of a similar size and complexity. The Group plans to continue with this combined role and will split the roles when it reaches a size which warrants it.

 

The Board schedules regular monthly meetings during the year, except for July or August, and additional ad hoc meetings as required. All Directors can allocate sufficient time to the Company to discharge their responsibilities fully. As a result of the global pandemic, all board and board committee meetings during the year were held virtually over Microsoft Teams. The number of regular meetings that each director attended during the financial year is set out below:

 

	Board	Audit Committee	Remuneration Committee
	(11 meetings)	(2 meetings)	(2 meetings)
Graham Blashill	11	2	2
Robert Brand	11	2	2
Rupert Howell (appointed 15 February 2021)	2	n/a	1
Sophie Tomkins	11	2	2
Jane Wakely	11	n/a	2
Stefan Barden	11^	n/a	1*
John Kearon	11	n/a	1*
Chris Willford	11^	2*	2*
	^ of which 2 by invitation		*by invitation

 

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 share buybacks, 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.

 

The provisions on engagement with stakeholders including shareholders, employees and customers are dealt within the Section 172 Report on page 16.

 

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

Rupert Howell

Sophie Tomkins

Jane Wakely

 

The Remuneration Committee's role and responsibilities are to:

·      review and approve the remuneration and incentive schemes of Executive Directors, 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 any of the executive directors to attend meetings of the Remuneration Committee. 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.

 

Rupert Howell will succeed Graham Blashill as Chairman of the Remuneration Committee following the 2021 AGM.

 

The Annual Statement from the Remuneration Committee Chair is set out in the Remuneration Committee Report.

 

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

Rupert Howell

 

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 in the Audit Committee Report.

 

Board evaluation

The Board undertook an annual review of its effectiveness, in January 2021. The Board will carry out further reviews of its effectiveness on an annual basis and may use an external advisor. 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, and nearly all the categories saw improved scores year on year. The main areas identified for improvement in this second evaluation were minor administrative matters, which will be monitored between now and the next review.

 

In January 2021, a review was carried out by the Senior Independent Director with respect to evaluating the performance of the Chairman. All other Directors participated in the review, which produced both a positive overall outcome and some constructive suggestions regarding improvements which could be achieved. These suggestions have already been acted upon. A further review will be undertaken when appropriate.

 

Succession planning

The Board, led by the Chairman, carries out ongoing assessments as to the succession needs and planning of the Board. 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.