The directors present the strategic report together with the audited financial statements for the year ended 31 December 2023.
In 2023 the Butterfly Group saw strong revenue growth through continued vertical, geographic and product expansion alongside building out the Meptik LLC and Polygon Labs LLC revenue streams. The Group also underwent an extensive cost rationalisation exercise across our staff and administrative expenses, and finalised the project to onshore the supply chain which will deliver future gross margin improvements.
The above cost saving measures were taken to ensure the business is rightsized and in a good position to maximise profit and cash generation in future periods and already the Company has seen a strong improvement year-on year in profitability.
The Group recorded statutory revenue of £67.2m (2022 - £59.5m). The directors also measure the Group on a Proforma basis and as agreed with its primary banking partner under the terms of the Facilities Agreement, any acquisitions acquired part way through the year have their full fiscal year included, to cover the period outside of statutory reporting. As such on a like for like basis, revenue rose to £67.2m (2022 - £61.0m) an increase of 12% driven by growth in Meptik LLC closing a large project in the final quarter of the year in our House of Worship vertical.
Geographically the largest market remained the North American market, which totals £38.4m (2022 - £26.5m) of revenue and 57% (2022: 23%) of the overall mix, up on prior year with large wins in the existing business and Meptik LLC driving the upside.
The Asia region faced macro-economic challenges delivering £10.4m (2022 - £13.9m) of revenue accounting for 14% of the mix. The year on year reduction of £3.5m was down to macro challenges and a large one-off install in Hong Kong and South Korea in prior year.
The UK market achieved revenues of £3.3m (2022 - £6.4m). This was a reduction of 48%, again due to fewer large one-off projects verus prior year. This was offset by strong performance in the Rest of Europe £8.4m (2022 - £6.2m) of revenue and Rest of World £6.7m (2022 - £6.5m) revenue growing 36% and 4% respectively year on year with Middle East growth driving a good portion of growth.
The Group finished the financial year with a statutory loss after tax of £35.5m (2022 – loss after tax £34.6m). The loss is primarily driven by depreciation and amortisation charges through the Group at £26.2m (2022 - £24.0m) and interest charges of £16.2m (2022 - £13.0m) all relating to the capital structure and ownership from the original Butterfly transaction in March 2021.
Cash EBITDA (earnings before interest, tax, depreciation and amortisation) is calculated as the operating profit of the Company with depreciation, amortisation, share-based payments, and unrealised foreign exchange/translation impact all added back, resulted in £7.5m of Cash EBITDA (2022 – £0.9m).
The principal risks and uncertainties of the Group relate to its ongoing activities as a leading global provider of hardware, software, and services that facilitates live event visualisations, allowing creative production teams to previsualise, simulate and deliver their 3D shows in real-time both on premises and remotely.
The Group undertakes regular risk reviews to identify the significant risks across the Group and ensure that they are visible to senior management, as well as to the Board. Key risks that the Group has identified, monitors and has mitigating action plans include the following:
Servicing debt and meeting banking covenants
On 31 December 2023 the Group had shareholder loan notes to the value of £146.6m (2022 - £132.9m) and banking facilities of £20m of which £12.8m (2022 - £12.6m) was drawn (excluding arrangement fee amortisation) and £3m RCF undrawn.
Failure to meet interest payments on the banking facility as they fall due or breach of covenants with the failure to generate 1.5x interest costs in Operating Cashflow would result in additional costs on the Group if facilities are renegotiated or could result in the removal of the facilities. Additionally, any significant interest rate increases may impact on group cashflow generation and covenant compliance.
The shareholder loan notes are rolled up until the earlier of a future transaction or until March 2031.
The Group monitors and reviews its cashflow position, budgets and forecast on a regular basis adjusting and refining as necessary to ensure that the business allocated its resources effectively to meet its debt commitments. The Directors have assessed the impact of interest rate increases and at this time have decided not to hedge interest rate increases, but will revisit in line with wider geo-political impact reviews.
Currency Risk
The Group's exposure to the US dollar movements as its primary trading currency for sales. A significant weakening of the US dollar could adversely impact profit, with less profit to cover GBP administrative expenses.
The Group's policies are to match where possible receipts and purchases in foreign currency to limit any residual exposure and, as the hedging policy tracked over a number of years has not proved effective and the company will rely on natural hedges only.
Liquidity Risk
Liquidity risk arises from timing differences between cash inflows and outflows, which may result in the inability of the Group to meet its short term funding requirements.
The Directors of the Group regularly review and monitor the trading performance covering the future periods, ensuring the short-term liquidity needs can be fulfilled with appropriate stress testing and scenario analysis.
The banking facilities in the Group are deemed adequate, and contingency plans are in place to ensure that if a significant geo-political event were to occur the Group can adjust accordingly.
Butterfly Group manages its KPIs at a segment level and geographic level. The primary key performance indicators used by the Group to assess performance are turnover growth, EBITDA and adjusted EBITDA. Turnover growth is calculated as the percentage increase on turnover year-on-year.
The measures below are reportable to the key stakeholders in the Group both its main investor, bank/senior debt provider. The definitions below are in line with the relevant facility agreements in place.
The Group uses EBITDA, Cash EBITDA, and Adjusted EBITDA as key performance indicators, as these approximate to the cash generation of the Group as determined for different management purposes. These are highlighted in note 4. The definitions of these are provided on the next page, which reconciles between the different types of EBITDA.
During the period the Group recorded revenues of £67.2m (2022: £59.5m), which was 26% higher than 2022 on a like for like basis.
The operating loss is predominantly due to the amortisation charge, which is mainly related to goodwill. The cost base reflects continued efforts by the Group’s management to ensure the business is rightsized to take advantage of its market position and maximise sustainable returns for all shareholders.
Adjusted EBITDA of £11.1m after adjusting for capitalised development costs, unrealised foreign exchange and costs deemed to be one-off by nature resulted in an increase of 73% on 2022 Adjusted EBITDA from strong trading upside coupled with £0.6m of cost saving initiatives.
In the year the company also incurred £1.6m (2022 - £2m) of one-off fees for management reporting purposes relating to £0.4m restructuring costs, £0.2m of costs related to board monitoring and chairman costs, £0.4m of website development costs, M&A contingent payments of £0.3m and £0.3m of professional fees that have been added back when calculating the Adjusted EBITDA.
The business generated £7.6m in EBITDA which dropped through to exceptionally strong cash generation of £10.1m from operating activities (2022 - £1.3m).
The main changes within the working capital were driven by release of inventory tie up of £2.7m year on year as the onshoring of supply chain project was completed.
The Group also reviews a number of other non-financial KPIs:
Annual employee engagement reviews and net promoter scores with all global employees. The Group uses electronic systems and perform regular employee surveys, focussing on happiness, personal motivation, company motivation, and relationships. The average at December 2023 was 4 (December 2022 - 4) (from a maximum score of 5), which the Directors are pleased with.
Collection and review of customer satisfaction surveys. Based on several metrics, the average score in 2023 was 4.53 (December 2022 - 4.51) (from a maximum score of 5). The Directors are pleased with this outcome and demonstrates a key driver behind the Group's growth.
Manufacturing quality and survey reviews including return to manufacturer authorisations ("RMA") within the first 90 days of production. Such data is tracked electronically but the Group only commenced this data collection during 2023, and as such no comparatives are presented. The average returns during 2023 were 1.1%, which demonstrates a high level of reliability of the Group's products (both hardware and software).
The Directors of the Group acknowledge that they must act in a way which is considered in good faith and would be most likely to promote the success of the company and its wider Group for the benefit of all interested parties as defined in Section 172(1) of the Companies Act 2006. In doing so, the Directors of the Group have considered the following aspects and how they have regarded each of the matters set out below.
Have regard to the likely consequence of any decision in the long-term
Our mission is to build leading edge technology solutions for creatives around the world to deliver unparalleled performances for audiences in person and in the cloud. We recognise that our decisions must take into account the long-term consequences for our company and its stakeholders. For example, when considering investment in new products or services, we take into account the potential impact on our financial position, our ability to compete in the market, and the interests of our shareholders.
The interests of the Group’s employees
We monitor the development, performance and impacts of our activity on social and employee matters. We are committed to providing a positive working environment that is free from all forms of illegal and improper discrimination and harassment. Our employees are key to the success of our company, and we are committed to promoting their interests. We provide a wider range of benefits, as well as opportunities for training and development and remote working. We also have policies in place to promote diversity and inclusion, and we seek to foster a positive working environment that promotes innovation and collaboration.
The need to foster the Group’s business relationships with suppliers, customers and others
We recognise that our success is closely tied to our relationships with our customers and suppliers. We aim to provide high-quality products and services that meet the needs of our customers, and we work closely with our suppliers to ensure that we have reliable and cost-effective supply chains.
In 2023 several new products were in Development providing new advances in power and output to match our customers creative needs. We continue to work with all our supply chain to ensure compliance with all relevant legislation and minimising impact on our business operations.
The impact of the Group’s operations on the community and environment
We understand that our operations have an impact on the wider community and the environment. We are committed to minimising our environmental footprint through the use of renewable energy sources and the reduction of waste and emissions. We also support industry initiatives and charities through donations and volunteer work within the Group.
The desirability of the Group maintaining a reputation for high standards of business conduct
Respecting human rights is a core value and one that we expect our business partners to share. We have documented policies and procedures internally as well as robust supplier T&C's which reference what we expect from our Suppliers and ensure we limit the risk to the business and uphold our core values. Employees have access to all Group policies and procedures, with training provided as part of the employee onboarding process with regards to the Corporate Criminal Offences Act, Modem Slavery Act, Anti- Bribery and Corruption.
We have a zero-tolerance stance for all human rights abuse. We are committed to ensuring we maintain robust programs and procedures to protect our people and prevent such abuse through our supply chain. Our Supplier Code of Conduct expressly prohibit the use of forced, imprisoned, bonded, indentured or involuntary labour including child labour. Other requirements include safe and clean working conditions, fair wages and no discrimination.
The need to act fairly between all interested parties within the group
The Board considers all interested parties when making business decisions to ensure fair representation irrespective of their interest holding within the Group. The Group has place to ensure that fair representation is maintained robust policies in both at board level and within the wider business through, management meetings and Non-executive representation at the Board.
On behalf of the board
The directors present their annual report and financial statements for the year ended 31 December 2023.
The result for the year is a loss after taxation of £35,494,000 (2022: loss of £34,617,000).
No ordinary dividends were paid. The directors do not recommend payment of a further dividend.
The directors who held office during the year and up to the date of signature of the financial statements were as follows:
The group's policy is to consult and discuss with employees, through unions, staff councils and at meetings, matters likely to affect employees' interests.
Information about matters of concern to employees is given through information bulletins and reports which seek to achieve a common awareness on the part of all employees of the financial and economic factors affecting the group's performance.
There is no employee share scheme at present, but the directors are considering the introduction of such a scheme as a means of further encouraging the involvement of employees in the company's performance.
This report outlines the Company's Greenhouse Gas (GHG) emissions and energy usage for the year ended 31 December 2023. The scope of the Company's reporting encompasses electricity, heating and gas associated with office properties from which it operates in the UK, as well as transport usage.
The following methodology has been applied to calculate the required energy and carbon data for this report.
Electricity and heating energy data has been gathered in the form of supplier invoices, meter readings and usage provided by the landlord at office locations.
For certain months where meter reading data was unavailable, energy usage was calculated using a pro rata approach.
Electricity and heating have been converted to GHG emissions by applying the appropriate 2023 UK Government GHG Conversion Factors for Company Reporting, in line with the GHG Protocol Corporate Standard methodology.
The selected metric for the emissions intensity ratio is total floor area of our office spaces.
The Company's total emissions for the reporting period were 78.7 tCO2, with an intensity ratio of 0.01 tCO2e/sq ft. The total proportion of the Company's GHG emissions is accounted for by office electricity usage which represents all of the emissions.
During 2023 we continue to monitor, improve energy efficiency and reduce our carbon footprint initiatives. These include:
The Group has implemented remote/hybrid working where possible and emissions associated with employees travelling to work have reduced significantly when compared to pre-pandemic levels.
Updated company policies to incorporate our Environmental Social Governance (ESG) goals.
Engaged with third party services to reuse old laptops and recycle waste from electronic equipment.
Ran awareness campaigns which suggest actions employees can implement to reduce their carbon footprint.
As at 31 December 2023, the Group had net liabilities of £86.3m (2022 - £52.0m) and net current assets of £14.7m (2022 - £10.5m).
As at the year-end date the Group had generated EBITDA of £7.6m (2022 - £0.8m) and generated cash flows from operating activities of £9.8m (2022 - £1.3m). Closing cash balances were £10.7m (2022 - £2.5m), taking into account the injection from its shareholders of £4.0m by way of convertible shareholder loan notes issued on 10 July 2023 after discussion with its Senior Lender.
The Group had £12.8m of term loans drawn from its facilities agreement with its Senior Lender to finance the acquisitions of Polygon Labs LLC and Meptik LLC both acquired in 2022. £10m is drawn from one term loan and £2.8m from an additional term loan facility of £7.0m, both of which are not due for repayment until December 2027. At the year-end date the net debt position of the Group excluding shareholder loans was £2.1m (2022 - £9.3m). The Group has access to additional facilities via a £3.0m revolving credit facility which is undrawn and £4.2m of the additional term loan facility which is undrawn to finance further commitments under the acquisitions.
The Group’s term loan arrangements with its Senior Lender are based on two covenants. The first is Adjusted Leverage (the ratio of an Adjusted EBITDA-based metric to Total Net Debt) measured on a quarterly basis on a rolling 12-month period with the target ratio reducing over time. The second covenant is an Interest Cover (the ratio of Cashflow to Net Finance Charges) again measured on a quarterly basis on a rolling 12-month period. The Senior Facilities are provided by Santander UK PLC and details can be found in Note 20 to the financial statements.
The Group has net current assets of £14.7m (2022 - £10.5m) at 31 December 2023 and has remained stable through 2024 to the date of signing of the financial statements. The directors are satisfied with the cash, additional facilities line and current balance of term loans within the business such that it can meet any future ongoing obligations.
The long term debt of the Group is made up of shareholder loan notes of £151.2m (2022 – £132.9m) which mature on the earlier of the Group entering into an agreement with a new acquirer or the maturity of those loan notes in March 2031. The shareholders have not requested any interest repayments until that point.
The directors monitor cashflow through short and long term forecasting and its going concern assessment is on a future looking period of a minimum of twelve months from the date of signing the audited financial statements. These forecasts are stress tested on revenue following a deep review of pipeline known projects and historical seasonality, alongside modelling of debtor days lengthening.
Our margin forecasts are based on our new supply chain product pricing and working capital is driven predominantly by our sales demand and appropriately run through our financial model taken into account any historical trends. The forecasts have also been heavily sensitised in producing a financing case to ensure that with minimal revenue growth and cost efficiencies actioned we are still able to maintain cash liquidity and meet our covenant requirements.
The directors have considered the financial forecasts of the overall Group inclusive of this entity, taking into consideration the current macroeconomic climate, the projections are for the Group to remain profitable and generate positive cashflows in both a short term and long term assessment giving the Group the ability to continue to operate into the future and meet the respective financial covenants.
The directors conclude that there are no material uncertainties that may cast significant doubt on the Group's ability to continue as a going concern and have therefore adopted the going concern basis in preparing the financial statements.
Disclosures required under s416(4) of the Companies Act 2006 are commented upon in the strategic report as the directors consider them to be of strategic importance to the group,
In our opinion:
the financial statements give a true and fair view of the state of the Group’s and of the Parent Company’s affairs as at 31 December 2023 and of the Group’s loss for the year then ended;
the financial statements have been properly prepared in accordance with United Kingdom Generally Accepted Accounting Practice; and
the financial statements have been prepared in accordance with the requirements of the Companies Act 2006.
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 believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion.
Independence
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, and we have fulfilled our other ethical responsibilities in accordance with these requirements.
Conclusions relating to going concern
In auditing the financial statements, we have concluded that the directors' use of the going concern basis of accounting in the preparation of the financial statements is appropriate.
Based on the work we have performed, we have not identified any material uncertainties relating to events or conditions that, individually or collectively, may cast significant doubt on the group or parent company’s ability to continue as a going concern for a period of at least twelve months from when the financial statements are authorised for issue.
Our responsibilities and the responsibilities of the directors with respect to going concern are described in the relevant sections of this report.
Other information
The Directors are responsible for the other information. The other information comprises the information included in the Annual Report, 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.
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 course of 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 this gives rise to a material misstatement in the financial statements themselves. 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.
Other Companies Act 2006 reporting
In our opinion, based on the work undertaken in the course of the audit:
the information given in the strategic report and the directors' report for the financial year for which the financial statements are prepared is consistent with the financial statements; and
the strategic report and the directors' report have been prepared in accordance with applicable legal requirements.
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.
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.
As explained more fully in the directors' responsibilities statement, 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.
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.
Extent to which the audit was capable of detecting irregularities, including fraud
Irregularities, including fraud, are instances of non-compliance with laws and regulations. We design procedures in line with our responsibilities, outlined above, to detect material misstatements in respect of irregularities, including fraud. The extent to which our procedures are capable of detecting irregularities, including fraud is detailed below:
Non-compliance with laws and regulations
Based on:
Our understanding of the Group and the industry in which it operates;
Discussion with management, legal counsel and those charged with governance; and
Obtaining and understanding of the Group’s policies and procedures regarding compliance with laws and regulations;
We considered the significant laws and regulations to be the applicable accounting framework, the Companies Act 2006, UK Corporation tax legislation and UK VAT registration.
The Group is also subject to laws and regulations where the consequence of non-compliance could have a material effect on the amount or disclosures in the financial statements, for example through the imposition of fines or litigations. We identified such laws and regulations to be the health and safety legislation, UK employment law and the Data Protection Act.
Our procedures in respect of the above included:
Review of minutes of meeting of those charged with governance for any instances of non-compliance with laws and regulations;
Discussions with legal counsel to identify any instances of non-compliance with laws and regulations;
Review of financial statement disclosures and agreeing to supporting documentation; and
Review of legal expenditure accounts to understand the nature of expenditure incurred.
Fraud
We assessed the susceptibility of the financial statements to material misstatement, including fraud. Our risk assessment procedures included:
Enquiry with management and those charged with governance regarding any known or suspected instances of fraud;
Obtaining an understanding of the Group’s policies and procedures relating to:
Detecting and responding to the risks of fraud; and
Internal controls established to mitigate risks related to fraud.
Review of minutes of meeting of those charged with governance for any known or suspected instances of fraud;
Discussion amongst the engagement team as to how and where fraud might occur in the financial statements;
Performing analytical procedures to identify any unusual or unexpected relationships that may indicate risks of material misstatement due to fraud; and
Considering remuneration incentive schemes and performance targets and the related financial statement areas impacted by these.
Based on our risk assessment, we considered the areas most susceptible to fraud to be:
Management override of controls, predominantly through the posting of inappropriate journals or manipulation of key accounting estimates;
Capitalistion of payroll and other costs as development expenditure;
Inappropriate recording of revenue in the year when performance obligations have not yet been met; and
Revenue recognition through the recording of inappropriate sales journals.
Our procedures in respect of the above included:
Testing a sample of journal entries throughout the year, which met a defined risk criteria, by agreeing to supporting documentation;
Testing of journal entries posted to revenue throughout the year which are outside of expectations to supporting documentation;
Testing of significant estimates and evaluating whether there was evidence of bias in the financial statements by management that represented a risk of material misstatement due to fraud. In particular, we identified the valuation of convertible loan notes and equity-settled and cash-settled share-based payment charges, the revenue recognition for multi-stage contracts and the impairment of stock, goodwill, intangibles and investment balances as being the principal estimates and judgements;
Testing a sample of capitalised development costs in the year to supporting documentation, confirming that those development costs meet the recognition criteria for development intangibles under FRS 102;
Performing data analytics to match sales orders, sales despatches and sales invoices by quantity and value, investigating unmatched items; and
Testing a sample of sales invoices around the year end to assess whether it was appropriate to record revenue in the year.
We also communicated relevant identified laws and regulations and potential fraud risks to all engagement team members who were all deemed to have appropriate competence and capabilities and remained alert to any indications of fraud or non-compliance with laws and regulations throughout the audit.
Our audit procedures were designed to respond to risks of material misstatement in the financial statements, recognising that the risk of not detecting a material misstatement due to fraud is higher than the risk of not detecting one resulting from error, as fraud may involve deliberate concealment by, for example, forgery, misrepresentations or through collusion. There are inherent limitations in the audit procedures performed and the further removed non-compliance with laws and regulations is from the events and transactions reflected in the financial statements, the less likely we are to become aware of it.
A further description of our responsibilities is available on the Financial Reporting Council’s website at: https://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.
The notes on pages 24 to 56 form part of these financial statements.
The notes on pages 24 to 56 form part of these financial statements.
The notes on pages 24 to 56 form part of these financial statements.
As permitted by s408 Companies Act 2006, the company has not presented its own profit and loss account and related notes. The company’s loss for the year was £1,636k (2022 - £216k loss).
The notes on pages 24 to 56 form part of these financial statements.
The notes on pages 24 to 56 form part of these financial statements.
The notes on pages 24 to 56 form part of these financial statements.
Butterfly Topco Limited (“the company”) is a private limited company domiciled and incorporated in England and Wales. The registered office is Hermes House, 88-89 Blackfriars Road, South Bank, London, SE1 8HA
The group consists of Butterfly Topco Limited and all of its subsidiaries.
These financial statements have been prepared in accordance with FRS 102 “The Financial Reporting Standard applicable in the UK and Republic of Ireland” (“FRS 102”) and the requirements of the Companies Act 2006.
The financial statements are prepared in sterling, which is the functional currency of the company. Monetary amounts in these financial statements are rounded to the nearest £'000.
The financial statements have been prepared under the historical cost convention, modified to include certain financial instruments at fair value. The principal accounting policies adopted are set out below.
The company is a qualifying entity for the purposes of FRS 102, being a member of a group where the parent of that group prepares publicly available consolidated financial statements, including this company, which are intended to give a true and fair view of the assets, liabilities, financial position and profit or loss of the group. The company has therefore taken advantage of exemptions from the following disclosure requirements for parent company information presented within the consolidated financial statements:
Section 7 ‘Statement of Cash Flows’: Presentation of a statement of cash flow and related notes and disclosures;
Section 11 ‘Basic Financial Instruments’ and Section 12 ‘Other Financial Instrument Issues: Interest income/expense and net gains/losses for financial instruments not measured at fair value; basis of determining fair values; details of collateral, loan defaults or breaches, details of hedges, hedging fair value changes recognised in profit or loss and in other comprehensive income;
Section 26 ‘Share based Payment’: Share-based payment expense charged to profit or loss, reconciliation of opening and closing number and weighted average exercise price of share options, how the fair value of options granted was measured, measurement and carrying amount of liabilities for cash-settled share-based payments, explanation of modifications to arrangements;
Section 33 ‘Related Party Disclosures’: Compensation for key management personnel.
The consolidated group financial statements consist of the financial statements of the parent company Butterfly Topco Limited together with all entities controlled by the parent company (its subsidiaries).
All financial statements are made up to 31 December 2023. Where necessary, adjustments are made to the financial statements of subsidiaries to bring the accounting policies used into line with those used by other members of the group.
All intra-group transactions, balances and unrealised gains on transactions between group companies are eliminated on consolidation. Unrealised losses are also eliminated unless the transaction provides evidence of an impairment of the asset transferred.
Subsidiaries are consolidated in the group’s financial statements from the date that control commences until the date that control ceases.
As at 31 December 2023, the Group had net liabilities of £86.3m (2022 - £52.0m) and net current assets of £14.7m (2022 - £10.5m).
As at the year-end date the Group had generated EBITDA of £7.6m (2022 - £0.8m) and generated cash flows from operating activities of £9.8m (2022 - £1.3m). Closing cash balances were £10.7m (2022 - £2.5m), taking into account the injection from its shareholders of £4.0m by way of convertible shareholder loan notes issued on 10 July 2023 after discussion with its Senior Lender.
The Group had £12.8m of term loans drawn from its facilities agreement with its Senior Lender to finance the acquisitions of Polygon Labs LLC and Meptik LLC both acquired in 2022. £10m is drawn from one term loan and £2.8m from an additional term loan facility of £7.0m, both of which are not due for repayment until December 2027. At the year-end date the net debt position of the Group excluding shareholder loans was £2.1m (2022 - £9.3m). The Group has access to additional facilities via a £3.0m revolving credit facility which is undrawn and £4.2m of the additional term loan facility which is undrawn to finance further commitments under the acquisitions.
The Group’s term loan arrangements with its Senior Lender are based on two covenants. The first is Adjusted Leverage (the ratio of an Adjusted EBITDA-based metric to Total Net Debt) measured on a quarterly basis on a rolling 12-month period with the target ratio reducing over time. The second covenant is an Interest Cover (the ratio of Cashflow to Net Finance Charges) again measured on a quarterly basis on a rolling 12-month period. The Senior Facilities are provided by Santander UK PLC and details can be found in Note 20 to the financial statements.
The Group has net current assets of £14.7m (2022 - £10.5m) at 31 December 2023 and has remained stable through 2024 to the date of signing of the financial statements. The directors are satisfied with the cash, additional facilities line and current balance of term loans within the business such that it can meet any future ongoing obligations.
The long term debt of the Group is made up of shareholder loan notes of £151.2m (2022 – £132.9m) which mature on the earlier of the Group entering into an agreement with a new acquirer or the maturity of those loan notes in March 2031. The shareholders have not requested any interest repayments until that point.
The directors monitor cashflow through short and long term forecasting and its going concern assessment is on a future looking period of a minimum of twelve months from the date of signing the audited financial statements. These forecasts are stress tested on revenue following a deep review of pipeline known projects and historical seasonality, alongside modelling of debtor days lengthening.
Our margin forecasts are based on our new supply chain product pricing and working capital is driven predominantly by our sales demand and appropriately run through our financial model taken into account any historical trends. The forecasts have also been heavily sensitised in producing a financing case to ensure that with minimal revenue growth and cost efficiencies actioned we are still able to maintain cash liquidity and meet our covenant requirements.
The directors have considered the financial forecasts of the overall Group inclusive of this entity, taking into consideration the current macroeconomic climate, the projections are for the Group to remain profitable and generate positive cashflows in both a short term and long term assessment giving the Group the ability to continue to operate into the future and meet the respective financial covenants.
The directors conclude that there are no material uncertainties that may cast significant doubt on the Group's ability to continue as a going concern and have therefore adopted the going concern basis in preparing the financial statements.
Revenue relates to the sale of hardware and associated software and/or licence keys embedded into the tangible products sold, as well as other services which cover training, support, extended warranties, and creative production within the software.
Revenue for each income stream is recognised based on when the primary risks and rewards transfer to the customer.
Hardware
Revenue for hardware and (where applicable) embedded software is recognised at the point of dispatch as it is considered to be the point at which the risk and rewards of ownership transfer, based on the contractual terms to which the customers agree. For such sales, the transaction price is analysed and separated to set aside an amount for the provision of after-sales support in relation to use of the software, which is accounted for separately based on the Group's prior experience of fulfilling such levels of support. The point of dispatch is usually when products leave the Group's premises (be it third party logistics or own offices), being the point at which carrier liability is taken on by the customer.
Software licence keys
These annual unlock keys are recognised on the same basis as Hardware at the point of dispatch of the hardware. Such unlock keys represent a right to use the Group's intellectual property and has the functionality for the software unlock. The Group is not required nor expected to provide any updates during the unlock period, and is not required to provide maintenance or support over and above that which would already be separated as part of the hardware sale. As such, the risks and rewards transfer at the point at which the customer is provided with the unlock key.
Software as a Service
Software sales typically relate to a licence to use for a period of time, be that a monthly or annual subscription. This includes ongoing access and/or after-sales support period for the software. As the customer benefits from this support for the entirety of that period, the associated revenues are recognised on a straight-line basis for the support and/or ongoing access period.
Multi-stage contracts
Where a contract with a customer represents a construction contract as defined in FRS 102, typically as a result of significant integration services being performed on a number of own and third party hardware products, the Group accounts for the revenues as a long-term contract. This means a value is assigned to each key component or project deliverable, and revenue is recognised based on either a cost plus margin basis, or (if more appropriate) based on the value transferred to the customer. A debtor is recognised for amounts recoverable on long-term contracts for the revenue recognised to date less instalment payments. Multi-stage contracts are disclosed within relevant subcategories in note 3, where underlying hardware is included within Hardware and the remainder typically relates to integration services.
Services
Revenue related to other services are recognised once the performance obligation has been completed, which is typically on delivery of the training or support. Such delivery is often at a point in time, however where such projects span an extended period revenue is recognised proportionally on a basis of completion.
Warranty income
Revenue relating to extended warranty contract sales, taken out at the time of purchase of the hardware but commence after the initial manufacturer warranty has expired, is accounted for on a deferred basis with revenue being recognised on a straight line basis over the cover period of the warranty contract once the initial standard warranty period has expired. Warranty income is disclosed within Services in note 3.
Other key revenue terms
Revenue is recognised to the extent that it is probable that economic benefits will flow to the Group and revenue can be measured reliably.
Revenue is measured at the fair value of consideration receivable, after discounts and excluding VAT.
Key revenue judgements applicable to the current and prior year are detailed in note 2.
In the research phase of an internal project it is not possible to demonstrate that the project will generate future economic benefits and hence all expenditure on research is written off against profits in the year in which it is incurred. Identifiable development expenditure is capitalised as an intangible asset if and only if certain specific criteria are met in order to demonstrate the asset will generate probable future economic benefits and that its cost can be reliably measured. The capitalised development costs are subsequently amortised on a straight line basis over their useful economic lives of 3 years.
If it is not possible to distinguish between the research phase and the development phase of an internal project, the expenditure is treated as if it were all incurred in the research phase only.
The gain or loss arising on the disposal of an asset is determined as the difference between the sale proceeds and the carrying value of the asset, and is recognised in the profit and loss account.
In the parent company financial statements, investments in subsidiaries are initially measured at cost and subsequently measured at cost less any accumulated impairment losses.
A subsidiary is an entity controlled by the group. Control is the power to govern the financial and operating policies of the entity so as to obtain benefits from its activities.
At each reporting period end date, the group reviews the carrying amounts of its tangible and intangible assets to determine whether there is any indication that those assets have suffered an impairment loss. If any such indication exists, the recoverable amount of the asset is estimated in order to determine the extent of the impairment loss (if any). Where it is not possible to estimate the recoverable amount of an individual asset, the company estimates the recoverable amount of the cash-generating unit to which the asset belongs.
The carrying amount of the investments accounted for using the equity method is tested for impairment as a single asset.
Recoverable amount is the higher of fair value less costs to sell and value in use. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset for which the estimates of future cash flows have not been adjusted.
If the recoverable amount of an asset (or cash-generating unit) is estimated to be less than its carrying amount, the carrying amount of the asset (or cash-generating unit) is reduced to its recoverable amount. An impairment loss is recognised immediately in profit or loss, unless the relevant asset is carried at a revalued amount, in which case the impairment loss is treated as a revaluation decrease.
Recognised impairment losses are reversed if, and only if, the reasons for the impairment loss have ceased to apply. Where an impairment loss subsequently reverses, the carrying amount of the asset (or cash-generating unit) is increased to the revised estimate of its recoverable amount, but so that the increased carrying amount does not exceed the carrying amount that would have been determined had no impairment loss been recognised for the asset (or cash-generating unit) in prior years. A reversal of an impairment loss is recognised immediately in profit or loss, unless the relevant asset is carried at a revalued amount, in which case the reversal of the impairment loss is treated as a revaluation increase.
At each reporting date, an assessment is made for impairment. Any excess of the carrying amount of stocks over its estimated selling price less costs to complete and sell is recognised as an impairment loss in profit or loss. Reversals of impairment losses are also recognised in profit or loss.
The group has elected to apply the provisions of Section 11 ‘Basic Financial Instruments’ and Section 12 ‘Other Financial Instruments Issues’ of FRS 102 to all of its financial instruments.
Financial instruments are recognised in the group's balance sheet when the group becomes party to the contractual provisions of the instrument.
Financial assets and liabilities are offset and the net amounts presented in the financial statements when there is a legally enforceable right to set off the recognised amounts and there is an intention to settle on a net basis or to realise the asset and settle the liability simultaneously.
Basic financial assets, which include debtors and cash and bank balances, are initially measured at transaction price including transaction costs and are subsequently carried at amortised cost using the effective interest method unless the arrangement constitutes a financing transaction, where the transaction is measured at the present value of the future receipts discounted at a market rate of interest. Financial assets classified as receivable within one year are not amortised.
Other financial assets, including investments in equity instruments which are not subsidiaries, associates or joint ventures, are initially measured at fair value, which is normally the transaction price. Such assets are subsequently carried at fair value and the changes in fair value are recognised in profit or loss, except that investments in equity instruments that are not publicly traded and whose fair values cannot be measured reliably are measured at cost less impairment.
Financial assets, other than those held at fair value through profit and loss, are assessed for indicators of impairment at each reporting end date.
Financial assets are impaired where there is objective evidence that, as a result of one or more events that occurred after the initial recognition of the financial asset, the estimated future cash flows have been affected. If an asset is impaired, the impairment loss is the difference between the carrying amount and the present value of the estimated cash flows discounted at the asset’s original effective interest rate. The impairment loss is recognised in profit or loss.
If there is a decrease in the impairment loss arising from an event occurring after the impairment was recognised, the impairment is reversed. The reversal is such that the current carrying amount does not exceed what the carrying amount would have been, had the impairment not previously been recognised. The impairment reversal is recognised in profit or loss.
Financial assets are derecognised only when the contractual rights to the cash flows from the asset expire or are settled, or when the group transfers the financial asset and substantially all the risks and rewards of ownership to another entity, or if some significant risks and rewards of ownership are retained but control of the asset has transferred to another party that is able to sell the asset in its entirety to an unrelated third party.
Financial liabilities and equity instruments are classified according to the substance of the contractual arrangements entered into. An equity instrument is any contract that evidences a residual interest in the assets of the group after deducting all of its liabilities.
Basic financial liabilities, including creditors, bank loans, and loans from fellow group companies, are initially recognised at transaction price unless the arrangement constitutes a financing transaction, where the debt instrument is measured at the present value of the future payments discounted at a market rate of interest. Financial liabilities classified as payable within one year are not amortised.
Debt instruments are subsequently carried at amortised cost, using the effective interest rate method.
Trade creditors are obligations to pay for goods or services that have been acquired in the ordinary course of business from suppliers. Amounts payable are classified as current liabilities if payment is due within one year or less. If not, they are presented as non-current liabilities. Trade creditors are recognised initially at transaction price and subsequently measured at amortised cost using the effective interest method.
Derivatives are not basic financial instruments and are initially recognised at fair value on the date a derivative contract is entered into and are subsequently re-measured at their fair value. Changes in the fair value of derivatives are recognised in profit or loss in finance costs or finance income as appropriate, unless hedge accounting is applied and the hedge is a cash flow hedge.
Debt instruments that do not meet the conditions in FRS 102 paragraph 11.9, which includes the convertible loan notes described in note , are subsequently measured at fair value through profit or loss. Debt instruments may be designated as being measured at fair value through profit or loss to eliminate or reduce an accounting mismatch or if the instruments are measured and their performance evaluated on a fair value basis in accordance with a documented risk management or investment strategy.
Financial liabilities are derecognised when the group's contractual obligations expire or are discharged or cancelled.
Equity instruments issued by the group are recorded at the proceeds received, net of transaction costs. Dividends payable on equity instruments are recognised as liabilities once they are no longer at the discretion of the group.
The tax expense represents the sum of the tax currently payable and deferred tax.
The tax currently payable is based on taxable profit for the year. Taxable profit differs from net profit as reported in the profit and loss account because it excludes items of income or expense that are taxable or deductible in other years and it further excludes items that are never taxable or deductible. The group’s liability for current tax is calculated using tax rates that have been enacted or substantively enacted by the reporting end date.
Deferred tax liabilities are generally recognised for all timing differences and deferred tax assets are recognised to the extent that it is probable that they will be recovered against the reversal of deferred tax liabilities or other future taxable profits. Such assets and liabilities are not recognised if the timing difference arises from goodwill or from the initial recognition of other assets and liabilities in a transaction that affects neither the tax profit nor the accounting profit.
The carrying amount of deferred tax assets is reviewed at each reporting end date and reduced to the extent that it is no longer probable that sufficient taxable profits will be available to allow all or part of the asset to be recovered. Deferred tax is calculated at the tax rates that are expected to apply in the period when the liability is settled or the asset is realised. Deferred tax is charged or credited in the profit and loss account, except when it relates to items charged or credited directly to equity, in which case the deferred tax is also dealt with in equity. Deferred tax assets and liabilities are offset if, and only if, there is a legally enforceable right to offset current tax assets and liabilities and the deferred tax assets and liabilities relate to taxes levied by the same tax authority.
The costs of short-term employee benefits are recognised as a liability and an expense, unless those costs are required to be recognised as part of the cost of stock or fixed assets.
The cost of any unused holiday entitlement is recognised in the period in which the employee’s services are received.
Termination benefits are recognised immediately as an expense when the company is demonstrably committed to terminate the employment of an employee or to provide termination benefits.
Payments to defined contribution retirement benefit schemes are charged as an expense as they fall due.
For cash-settled share-based payments, a liability is recognised for the goods and services acquired, measured initially at the fair value of the liability. At the balance sheet date the fair value of the liability is remeasured, with any changes in fair value recognised in profit or loss for the year.
Equity-settled share-based payments are measured at fair value at the date of grant by reference to the fair value of the equity instruments granted using the most relevant model. The fair value determined at the grant date is expensed on a straight-line basis over the vesting period, based on the estimate of shares that will eventually vest. A corresponding adjustment is made to equity.
The expense in relation to the fair value given via the parent company’s shares granted to employees of a subsidiary is recognised by the company as a capital contribution, and presented as an increase in the company’s investment in that subsidiary.
When the terms and conditions of equity-settled share-based payments at the time they were granted are subsequently modified, the fair value of the share-based payment under the original terms and conditions and under the modified terms and conditions are both determined at the date of the modification. Any excess of the modified fair value over the original fair value is recognised over the remaining vesting period in addition to the grant date fair value of the original share-based payment. The share-based payment expense is not adjusted if the modified fair value is less than the original fair value.
Cancellations or settlements (including those resulting from employee redundancies) are treated as an acceleration of vesting and the amount that would have been recognised over the remaining vesting period is recognised immediately.
Leases are classified as finance leases whenever the terms of the lease transfer substantially all the risks and rewards of ownership to the lessees. All other leases are classified as operating leases.
Assets held under finance leases are recognised as assets at the lower of the assets fair value at the date of inception and the present value of the minimum lease payments. The related liability is included in the balance sheet as a finance lease obligation. Lease payments are treated as consisting of capital and interest elements. The interest is charged to profit or loss so as to produce a constant periodic rate of interest on the remaining balance of the liability.
Rentals payable under operating leases, including any lease incentives received, are charged to profit or loss on a straight line basis over the term of the relevant lease except where another more systematic basis is more representative of the time pattern in which economic benefits from the leased asset are consumed.
Amounts due from lessees under finance leases are recognised as receivables at the amount of the group's net investment in the leases. Finance lease income is allocated to accounting periods so as to reflect a constant periodic rate of return on the group’s net investment outstanding in respect of leases.
Government grants are recognised at the fair value of the asset received or receivable when there is reasonable assurance that the grant conditions will be met and the grants will be received.
A grant that specifies performance conditions is recognised in income when the performance conditions are met. Where a grant does not specify performance conditions it is recognised in income when the proceeds are received or receivable. A grant received before the recognition criteria are satisfied is recognised as a liability.
Research and development expenditure credits
Where the Group receives research and development expenditure credits ("RDEC") it accounts for these as government grant income within other operating income, as the nature of the income more closely aligns with grant income as opposed to a taxation credit. The income is recognised on the performance model in the P&L as the Group establishes its right to receive the credit as a deduction from its tax liability (or cash refund).
In the application of the group’s accounting policies, the directors are required to make judgements, estimates and assumptions about the carrying amount of assets and liabilities that are not readily apparent from other sources. The estimates and associated assumptions are based on historical experience and other factors that are considered to be relevant. Actual results may differ from these estimates.
The estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the period in which the estimate is revised where the revision affects only that period, or in the period of the revision and future periods where the revision affects both current and future periods.
The following judgements (apart from those involving estimates) have had the most significant effect on amounts recognised in the financial statements.
An assessment is made of the recoverable value of investments in subsidiaries (company), and of the non-monetary assets, inclusive of goodwill, of cash-generating units (group and company) (together termed "assets" below).
The directors have considered whether there are any indicators of impairment of the company's assets. Factors taken into consideration include the past and expected future financial performance of subsidiaries/CGU's, development costs and customer relationships. The directors are satisfied that there are no such indicators of impairment at the reporting date as development costs remain current as well as the underlying customer base.
Revenue is generated through the sale of products, which includes preinstalled software and the provision of after sales support on an adhoc basis.
A key judgement is the point at which revenue is recognised in relation to the preinstalled software included within the hardware. The directors are satisfied that it is appropriate to recognise revenue in relation to the preinstalled software in full once control of the goods transfers to the customer. This is on the basis that the customer has the right to use the software immediately, there are no restrictions on the use of the software and no further obligations such as the requirement for customers to upgrade the software.
During the current year the Group has entered into multi-stage contracts which include complex deliverable and payment arrangements. This has required an assessment of the Group's obligations under the contract and an analysis of the fair value of each component of the project.
As part of this the Group has recognised amounts at the year end in respect of design consultancy on the contract, the Group's own products delivered to the customer where the risks and rewards have substantially been transferred to the end customer, plus a proportion of products manufactured by a third party and available for delivery at the year end. Following subsequent delivery, the Group will perform significant integration services on all of these products to the design specifications already completed. This treatment, and the proportion of completion, is a key judgement and reflects that the Group has fulfilled some of the obligations associated with the contract.
The Directors have applied a percentage of completion basis to the revenue recognition, taking into consideration the fair value of each performance obligation and the proportion of completion of the manufacturing/consultancy at each stage. The fair value was determined by reference to the stage of manufacturing completion from the underlying manufacturer, and certain other inspections of completion status of the various deliverables in the contract. Had alternative methods to determine percentage of completion been utilised, either in by FRS 102.23.22 or IFRS 15, this would have resulted in either no or additional revenue being recognised in the current year, which the Directors do not believe gives a true and fair view of the work put into the contract.
A further key judgement is to use the guidance from IFRS 15 that all items in a construction contract, where significant integration services are performed, should be recognised on a principal basis as opposed to as an agent. FRS 102 offers no such guidance in this respect. The existence of the significant integration of products from third parties post-delivery implies that such integration services are being performed.
Determine the point from which it is appropriate to recognise an intangible asset for development costs incurred in respect of new products. In doing so the directors have considered whether the various recognition criteria required by FRS102 have been met, in particular the reliable measurement of costs directly attributable to the development, the technical feasibility of the project, the availability of the necessary resources to complete the product development, and the existence of a suitable market to buy the finished project.
The directors have considered the relevant factors and requirements in determining the amount of deferred purchase consideration due to sellers of Polygon LLC.
The directors have concluded in line with the relevant standards that these payments are linked to continued employment and as such have been treated as post-combination remuneration expense.
Factors taken into account were the linkage between continued employment of the vendors and future consideration, the duration of continued employment and the level of remuneration paid to vendors post-acquisition.
The estimates and assumptions which have a significant risk of causing a material adjustment to the carrying amount of assets and liabilities are as follows.
Intangible assets are amortised over their useful economic lives. Useful lives are based on the management's estimates of the period that the assets will generate revenue. These estimates are reviewed at least annually and changes to these estimates can result in significant variations in the carrying value and amounts charges to profit or loss. The carrying amount of intangible assets by class is shown in the intangible asset note and the useful lives are stated in the accounting policy.
At each reporting date, stock is assessed for impairment. This includes an assessment of slow moving stock by comparison to expected utilisation throughout the product's lifecycle. If stock is impaired, the carrying amount is reduced to its selling price less costs to complete and sell. The impairment loss is recognised immediately in the statement of comprehensive income.
The Group has issued shares and share-matching arrangements as part of its long-term incentive plan for employees. For shares, these are classified as equity-settled share-based payments and are therefore fair valued at the grant date, and the resultant share-based payment charge spread over the expected vesting period of the instruments.
There are a number of existing schemes from prior years. For the shares issued in May 2023, these were valued using a Monte-Carlo simulation option pricing model based on the Black-Scholes model. This requires a number of assumptions to be made including the share price at the grant date, the volatility of the share price, expected dividend yield and expected period to exercise.
The shares were issued with an average exercise price of £1 per share for E shares and £0.50 per share for F shares. The weighted average fair value net of exercise price is £33.08 for E shares and £0.62 for F shares, which was determined with input from an expert.
The directors are satisfied that the share price is reasonable taking into consideration the EBITDA performance and the resultant expected enterprise value of the company, based on benchmarking of the earnings ratio to comparable companies in the sector.
The total anticipated share-based payment charge is spread over the vesting period of the instruments. For those instruments that do not vest before the year-end, management make an assessment of the the expected timing of the vesting date.
Cash-settled share-based payments
The Group has granted cash-settled share-based payments in the year. These are fair-valued at each period end, and the resultant expected share based payment charge spread over the expected vesting period of the instruments. The expected remaining life is 1.5 years, which aligns with inputs used to value both the equity-settled share-based payments (at grant date) and the convertible loan notes.
In the prior year the Company acquired investments which included an element of contingent consideration. The Directors have made their best estimate of amounts expected to be payable as at the year end and adjusted the carrying value; such estimates are based on the anticipated performance of the investments in accordance with the terms of the purchase contracts. Details of the key inputs and accounting are provided in note 20.
Recoverability of intercompany loans (Company only)
Management judgement is required in determining the recoverability of intercompany loans in order to appropriately recognise the recoverability across the group. This includes an estimate of cashflows resulting from trading in various group companies, which may differ to actual outcomes.
During the year the Group and Company issued a convertible loan note which does not qualify as a compound financial instrument as it converts for a variable number of shares. This means that the loan is carried at fair value. Details of the loan are given in note 21.
The loan is valued using an option pricing model, where the whole value of the loan is compared dependent on the outcome of the conversion rights on an exit or, if no exit is made, in redemption of the principal value. The key inputs to the model are the starting value of the company (which is not disclosed for commercial purposes), expected volatility of 42.07%, and a credit risk adjustment of 8.50%. These inputs determine the fair value of the conversion option, which in turn drives the carrying value of the convertible loan note.
The Directors have used an Alternative Performance Measures ("APM") in the preparation of these financial statements. These are as follows:
EBITDA, which is Earnings before Interest, Tax, Depreciation and Amortisation, which is calculated as the operating profit of the Group with depreciation, amortisation,
Cash EBITDA, which is EBITDA adjusted for capitalised research and development costs deducted, share-based payments, and unrealised foreign exchange/translation impact, with other exceptional items which are non-recurring in nature or relate to pure accounting adjustments. Details of these are provided in the Strategic Report.
Adjusted EBITDA, which is Cash EBITDA with one-off expenses, investor costs, and capitalised R&D expenditure added back.
The Directors have presented these APM's because they feel it most suitably represents and explains the underlying performance of the business, and allows comparability between the current and comparative period in light of the rapid changes in the business. The Directors also believe that this will allow an ongoing trend analysis of this performance based on current plans for the business.
An analysis of this performance and a reconciliation of statutory metrics to EBITDA and Adjusted EBITDA is provided in the Strategic Report.
The average monthly number of persons (including directors) employed by the group and company during the year was:
Their aggregate remuneration comprised:
Included within employment costs is an expense of £1,176,750 (2022 - £1,133,000) related to deferred consideration in respect of acquisitions completed in 2022, where entitlement relies on ongoing employment. As a result of the requirements of FRS 102 these costs are expensed as employment costs, as opposed to being included within goodwill.
Details of the calculation of the deferred consideration is provided in note 20 which explains the likelihood and potential value of future remuneration charges.
The above costs exclude £1,777,150 (2022 - £2,680,202) which has been capitalised as development costs in the year, as shown in note 12.
The number of directors for whom retirement benefits are accruing under defined contribution schemes amounted to 1 (2022 - 1).
Details of the finance costs on financial instruments measured at fair value through profit or loss are provided in note 21, and relate to convertible loan notes.
The actual charge/(credit) for the year can be reconciled to the expected credit for the year based on the profit or loss and the standard rate of tax as follows:
Factors that may affect future tax charges
The main corporation tax rate increased from 19% to 25% on 1 April 2023. The deferred tax balances at 31 December 2023 have been measured using the rates expected to apply in the reporting periods when the timing differences reverse, being 25% (2022 - 25%).
More information on impairment movements in the year is given in note .
Other changes within goodwill relates to the reassessment of contingent consideration associated with the two acquisitions made in 2022. Details of the contingent consideration is provided in note 20.
Impairment testing
The Group considers annually whether there are any indicators of impairment of its intangible assets and other non-monetary assets in the cash-generating unit ("CGU"). Consideration is made by reference to a value-in-use calculation, which covers a 5 year detailed cashflow followed by terminal values. The present value of the expected cash flows is determined by applying a suitable discount rate reflecting the current market assessments of the time value of money and risks specific to the CGU. The pre-tax discount rate applied to the group's cashflows is 20.00%, except for Broadcast (24.10%) and Meptik (28.19%).
Details of the company's subsidiaries at 31 December 2023 are as follows:
Derivatives in the prior year only are forward currency contracts. All outstanding instruments have been settled as at the year end. In the current year these represent the convertible loan note detailed in note .
Non-derivatives are contingent consideration arrangements, which are explained further in note 20.
An impairment loss of £559,064 (2022 - £239,000) was recognised in cost of sales in the year in relation to slow moving stock and stock write offs anticipated.
There is no material difference between the replacement cost of stocks and the amounts stated above.
Amounts owed by group undertakings represent intercompany loan notes which are repayable in March 2031. Interest is charged at 10% per annum. The loan is repayable on the earlier of a sale of the majority of the share capital in Butterfly Topco Limited or on maturity of the term loan.
Amounts owed by group undertakings are interest free and repayable on demand.
Other creditors includes £nil (2022 - £1.1m) of deferred bonus payments due to the sellers of Polygon Labs LLC that is being treated as a post-acquisition remuneration rather than as a cost of the acquisition included within the business combination.
The carrying value of the loan notes are reduced by loan arrangement fees. The amount expensed in respect of this in the year is shown in note 10.
Contingent consideration resulted from the acquisition of Polygon Labs LLC and Meptik LLC, which is due for repayment over several years and will ultimately be settled in July 2025.
Included within accruals and deferred income is £7,502,000 (2022 - £nil) representing interest on the loan notes which is carried separately from the loan notes.
The discount rate applied to future payments for Polygon Labs LLC is 12.5%, and for Meptik LLC is 16.5%. The amount due within one year is £nil (2022 - £912,176) and due after more than one year is £1,194,042 (2022 - £2,196,945). Both contingent considerations are liabilities at fair value through profit and loss, and represent the company's weighted average expectations for final outcomes on these liabilities, discounted to present value. The Directors view the probability of payment targets being met has materially reduced in the year. The maximum amount which could be ultimately payable under both agreements is £4,314,750. The reduction in carrying value arising from the change in estimate in the year is removed from the cost of goodwill, as shown in note 12.
Loan notes are repayable in March 2031. Interest is charged at 10% per annum. The interest is payable on the earlier of a sale of the majority of the share capital in Butterfly Topco Limited or on maturity of the term loan. Included within the loan notes carrying value at 31 December 2023 are £1.0m of issue costs.
The bank loans consist of a £10m term loan that is fully drawn and £2.8m of an additional term loan with a total of £7m funding available. The bank loans are offset with an amortised arrangement fee of £0.3m.
It is secured by a fixed and floating charge over the assets of the group and bears interest at 4.25% on top of the prevailing SONIA rate. The facility matures in December 2027.
Other loans are related to the Meptik LLC promissory notes. Interest is payable on these loan notes at 2.37% per annum, with the full value being repayable in July 2024.
The convertible loan note is carried at fair value through profit and loss. Interest is charged at a fixed 10%, payable at a date decided by the company. The lead investor can require conversion at any time, with any accrued but unpaid interest also being subject to the conversion terms which are to exchange the entire convertible loan note for a number of shares at a fixed price per share. Conversion also occurs on an exit. The loan matures on 31 March 2031.
Dilapidation provisions are expected to be utilised on expiry of operating leases in June 2030. The discount is being unwound at the estimated rate of 3.4%.
The following are the major deferred tax liabilities and assets recognised by the group and company, and movements thereon:
The Group has estimated tax losses of £22,860,000 available for use in the UK subsidiaries, of which £6,155,000 has not been recognised as a deferred tax asset on the basis that the timing and extent of use of these losses is uncertain. Had a deferred tax asset been recognised, it would increase the Group's net assets by £1,539,000.
The Group has a number of tax losses in overseas jurisdictions which are of low value to the Group.
A defined contribution pension scheme is operated for all qualifying employees. The assets of the scheme are held separately from those of the group in an independently administered fund. Contributions of £122,085 (2022: £107,000) were due to the fund and are included in other creditors.
All equity-settled share-based payment expenses relate to growth shares (for E and F shares) which have been issued as at the year end date. The only condition required to maintain ownership of these shares is ongoing employment by the Group.
A further tranche of 24,080 E and 7,551 F shares were issued to employees during the year ended 31 December 2023. The fair value of these shares for financial reporting purposes was determined using a Monte-Carlo simulation using the Black-Scholes model, with inputs based on conditions precedent at the grant date of 25 May 2023. These key inputs are (with comparatives for similar E and F shares issued in 2022):
Expected volatility - 44.5% (2022: 45.0%)
Risk-free rate - 4.5% (2022: 3.7%)
Expected life - 2.1 years (2022: 3.2 years)
The weighted average share price for cash-settled liabilities is £30.84 (2022 - £24.76) for E shares and £0.31 (2022 - £1.20) for F shares; after deduction for exercise price this falls to £30.46 and £0.31 respectively. The expected volatility is 42.1% (2022 - 43%), risk free rate 4.4% (2022 - 3.7%) and time to vesting 1.5 years (2022 - 2.5 years), based on year end market conditions.
During the year the Company issued 16,421 E and 6,532 F shares for a price per share of £1.00 and £0.50 respectively. These issues were as part of the share-based payments detailed in note 25.
All A, B, C and D shares confer voting rights and enable the holder to participate pari-passu in any distribution and dividend payments. E and F shares do not carry voting rights; E shares carry preferential rights at certain value thresholds whilst F shares are ratchet shares where distribution is on an achieved enterprise value. All shares are non-redeemable.
The profit and loss account represents retained profits or losses after dividends paid and other adjustments.
Share capital
Called up share capital represents the nominal value of the shares issued.
Share premium
The share premium represents the excess of share issue proceeds over the nominal value less any issue costs.
At the reporting end date the group had outstanding commitments for future minimum lease payments under non-cancellable operating leases, which fall due as follows:
The key management personnel of the group are considered to be the same as the directors, for whom details of remuneration are provided in note 8.
The company has taken advantage of the exemption available in section 33.1A of FRS 102 whereby it has not disclosed transactions with its wholly-owned subsidiaries. Details of amounts outstanding at the year end are provided in notes 18 and 19.
The Group made purchases on an arm's length basis from Dept Design & Technology, a sister portfolio company within the Carlyle fund of £nil (2022: £131,763). At the year-end there was no balance owed.
The Group received funding from certain shareholders of the Group via the convertible loan note during the year, details of which are provided in note 21.