ZOO Digital Group plc (LON:ZOO), the provider of cloud-based localisation and digital distribution services for the global entertainment industry, today announces its audited financial results for the year ended 31 March 2018.
HIGHLIGHTS
Key Financials
· Revenue increased by 73% to $28.6 million (2017: $16.5 million)
· Adjusted EBITDA* increased by 35% to $2.4 million (2017: $1.8 million)
· Operating profit increased to $0.6m (2017: $0.5m)
· Reported Loss Before Tax of $5.0m (2017: profit $0.5m)
· Adjusted Profit Before Tax† increased to $0.5 million (2017: loss of $0.1 million)
Operational highlights
· Growing adoption and demand for subtitling services, with revenue almost doubling in the year
· Successful launch of industry’s first cloud-based dubbing service, with good uptake from existing and new customers
· Growing international network of over 4,000 international freelancers and 8 affiliates across 10 locations
· Ongoing supportive market dynamics, with the increase in digital entertainment content and expansion of distribution channels driving a growing demand for high quality and scalable content localisation and digital packaging services
* Adjusted for share-based payments
† Adjusted for share-based payments, exchange loss/gain on borrowings, conversion of loan into equity and finance cost of embedded derivative
Copies of the Report and Accounts for the year ended 31 March 2018 are available to view on the Group’s website www.zoodigital.com.
Stuart Green, CEO of ZOO Digital, commented, “This has been another extremely successful year for the Group, delivering considerable revenue growth while expanding our offering. It is clear that we are operating in a market which is right for our approach, where our technological innovation can facilitate greater scalability for all of our client groups.
“ZOO is increasingly viewed as a significant player in the media localisation market, and with the introduction of dubbing we have achieved a key milestone on our journey towards becoming a one stop shop for all media localisation and digital packaging services across all languages. Through the development of our innovative technology, we are facilitating the ongoing disruption and growth of the digital entertainment market and we will continue to invest in innovation, quality and security to ensure we remain at the forefront of our industry.
“Our sales pipeline continues to grow across our offerings, both from existing and new customers, giving us confidence in achieving on-going organic growth. With a strengthened balance sheet, enlarged commercial team and augmented offering, we look to the future with confidence.”
CHAIRMAN’S STATEMENT
The Board is very pleased with the excellent progress made by the Company in the execution of its strategy to become one of the leading providers of software-driven localisation services for movie, TV and video content around the world.
A 73% increase in revenues to $28.6 million from some of the world’s largest entertainment content creators and distributors has been accompanied by investments in innovative new service offerings, international expansion, and translation capacity, resulting in an increase of EBITDA before share based payments to $2.4 million (2017: $1.8 million).
With strong underlying market drivers in its favour, demand for ZOO’s subtitling services has constituted the largest part of its revenue growth, and the Board is confident in the long term revenue and profit opportunity from this segment. However, 2017-18 also saw the introduction of ZOO’s new dubbing service, and initial customer acceptance of this exceeded expectations. This opens up a significant new axis of growth for the company, since it finds customers valuing the ability to deliver a ‘one stop shop’ for all localisation and digital packaging services worldwide. We therefore plan to make further investments in both dubbing and subtitling offerings to capitalise on ZOO’s position as a preferred vendor to many of the leading names in an industry undergoing unprecedented growth and upheaval.
We are also delighted that ZOO was able to strengthen its balance sheet early in the financial year, thanks to the investment of £2.6 million in new equity by existing and new shareholders and the conversion of £1.1 million of existing debt into equity. Combined with the cash generation from operations, this has put the company in a very strong position to exploit the large market opportunity which is described in more detail in the CEO report.
The Board is conscious of the need to develop the Company’s governance and management structures to cope with the demands of a larger listed entity, so was pleased to welcome Mickey Kalifa as a non-executive director in October 2017. Mickey is a Chartered Accountant with nearly 30 years’ experience across the technology, media and gaming sectors. He was appointed Chief Executive Officer of the betPawa Group in May 2018. Previously he spent eight years with Sportech PLC, latterly as Chief Financial Officer, where he led a transformation in the company’s financial strength and played a prominent role in driving Sportech’s global expansion. The Board has also decided to adopt the new QCA Corporate Governance Code with immediate effect, rather than wait until the date next year when the changes to AIM rules would have required the adoption of such a formal governance code.
Our long-serving CFO Helen Gilder decided to resign for personal reasons early in 2018, and, as separately announced today, I am pleased to welcome Phill Blundell as Helen’s replacement, who starts work for us during July 2018. Phill joins ZOO with a strong pedigree in senior finance and operational roles within UK technology public companies, including DotDigital Group plc, Eagle Eye Solutions Group plc and Intelligent Environments plc. He has over 20 years’ experience building strong software businesses through product innovation and global strategic partnerships. Phillip qualified as a Chartered Accountant with Coopers & Lybrand, now part of PwC. The Board warmly thanks Helen for her many years of loyal service and wishes her every success for the future.
The progress achieved by ZOO has resulted from a lot of sustained hard work by ZOO’s staff and the patient support of our stakeholders. However, the Board believes it represents just the start of an exciting period for ZOO: it can combine the power of cloud computing with its deep understanding and experience of the industry to create a highly valuable company which provides localisation and digital packaging services to many of the world’s leading creators and distributors of film and TV entertainment. Following the fundraising at the start of the year, and with strong cash generation during it, the business enters the new year on a solid financial footing and with confidence in its future success.
Roger D Jeynes
Chairman
ZOO Digital Group plc
STRATEGIC REPORT
Introduction
I am pleased to report that the year saw the continuation of the considerable progress achieved in the prior period. Revenue for the year increased by 73% to $28.6 million (2017: $16.5 million), earnings before interest, tax, depreciation and amortisation (EBITDA) adjusted for share-based payments grew by 35% to $2.4 million (2017: $1.8 million). The successful launch of our dubbing service at the end of the first half of the year was a major milestone adding a powerful second arm to our growth strategy and provides us with the opportunity to become a ‘one-stop-shop’ for localisation services, although having a short term downward impact on profit margins.
Strategy
ZOO’s services allow TV and movie content to be subtitled and dubbed in any language and prepared for sale with all major online retailers as well as on optical disc formats. ZOO’s strategy is to develop and employ innovative, proprietary cloud-based software technology to deliver localisation services to entertainment content owners that will enable them to capitalise on the growing consumer demand for digital content. ZOO’s software enables the Company to collaborate with a worldwide network of thousands of freelance workers, such as translators, voice actors and dubbing directors, and to significantly reduce the human capital requirements of service fulfilment, enabling the Company to scale its capacity efficiently as demand increases.
ZOO’s innovative use of technology enables content owners to distribute their products to additional territories at a faster speed-to-market and lower cost than has previously been possible, and with a consistently high level of quality. The clear benefits delivered by the Company’s differentiated proposition have driven significant organic growth in sales, leading to ZOO being named in March 2018 as the organic growth leader in global localisation services by language services market research specialist Nimdzi.
Market Opportunity
The transition towards digital consumption of entertainment has been the greatest single change to the industry in modern times and, now that this form of delivery has been widely welcomed and adopted by the mass market, it is difficult to envisage such a cultural change again any time soon. It is now easier for content owners to reach a much wider audience through digital rather than physical products as the supply chain is simplified.
Consequently, content has become commercially available in more and more geographies, and as the territorial reach increases so too does the need for subtitling and dubbing into additional languages. A TV series that was previously translated into fewer than ten major European languages will now potentially be translated into 30 or more global languages, which increases the scope of work for ZOO.
The global home entertainment market reached c.$48bn in 2017, with digital distribution accounting for 66% of that spend. Since 2012 around 200 over-the-top (OTT) platforms providing streamed and downloadable content have emerged, with the number of subscribers to streaming services globally reaching 447 million in 2017. Investment by OTT operators in new original content reached $13bn in 2017, with growth expected to continue as providers commit to increased future spending.
The increase in digital entertainment content, the expansion of distribution channels and disruptive innovation in the sector by vendors such as Amazon, Hulu, Apple and Google are all combining to drive a growing demand for high quality and scalable content localisation services. ZOO’s technology is a powerful differentiator and we believe provides us with the means to capitalise on the long-term growth opportunity within the TV and film entertainment market.
Key Drivers
The bulk of the growth in the year came from localisation services, of which subtitling remains a key tenet. The volume of work on physical products, namely DVD and Blu-ray, continued its expected gradual decline in the year while the main driver of growth was undoubtedly the preparation of content for sale through digital platforms.
Operational review
The principal focus of the Group has been on the continuing progress of our localisation services delivered through our proprietary cloud-based platforms, ZOOsubs and ZOOdubs, for the provision of subtitling and dubbing services respectively.
Another year of strong subtitling revenue growth
We are delighted to report on another successful year of growth for our subtitling services, with revenues almost doubling over the period. Following ongoing investment in research and development and building a pipeline for ZOOsubs, it has been reassuring to witness its continued growing adoption and demand from customers, both existing and new. As well as helping to reduce seasonality within the business, it has enhanced ZOO’s reputation for innovation within the marketplace and driven strong revenue growth. Enhancements to the platform delivered over the period have enabled freelance translators who work on ZOO projects to operate more efficiently and productively, for example, by reducing the administrative overhead of processing purchase orders and raising invoices. Since many of our translators undertake work for other localisation service providers, these enhancements benefit ZOO by making our ecosystem attractive to this community, helping us to retain and grow our network of translators.
Successful launch of the industry’s first cloud-based dubbing service
In April 2017 we launched the industry’s first cloud-based dubbing service, powered by our new ZOOdubs platform, at the National Association of Broadcasters (NAB) show in Las Vegas, where it was awarded TV Technology’s ‘Best in Show’ accolade. Two further awards have subsequently followed: an IABM award for Design and Innovation at the International Broadcast Convention in Amsterdam and a Broadcast and Media Award at NAB 2018.
Our software provides a systematic and truly multi-lingual solution for dubbing services which significantly reduces the need for dedicated facilities, expensive, high-tech equipment and the associated technical operators. As such it has been imperative to ensure an exceptional quality of service and we were delighted that the first projects, delivered in nine different languages, received extremely positive feedback from the client who was particularly impressed with the quality and speed of completion.
Helped by our success in subtitling, our dubbing service has quickly developed strong levels of interest given that it addresses a more complex and costly requirement for content owners. Within a short space of time we have won projects from significant industry players and are now delivering hundreds of hours of dubbing on a monthly basis. Even within our first month of delivering the service we were completing more dubbing each month than most mature and established dubbing facilities, due to the scalability of our distributed cloud computing approach.
Two main approaches to dubbing are widely used in the entertainment industry. Voiceover, sometimes referred to as “UN-style”, is the simpler approach used in some countries and for certain types of content, and is a style that does not usually convey the richness of what is being said by the screen actors. With this method, dubbed voices are not synchronised with the lip movements of the screen actors. The second approach is known as “lip-sync” dubbing in which voice actors aim to recreate a similar performance to those on screen, delivering lines that match as closely as possible the lip movements. This style is popular in more countries than voiceover and is costlier to produce. While our initial projects were for voiceover, we have subsequently developed ZOOdubs to deliver both styles, meaning we are in a position to complete any dubbing project in any language, subject to having access to voice actors and directors, giving us the capability to address a significant market opportunity.
We have been cautious to build out demand for ZOOdubs at the right pace, with rigorous testing, high levels of verification and relatively high levels of human involvement during the software’s nascence. The foundations are being laid now to build a scalable technological and service capability to satisfy client demand so that the operational gearing of the business will be seen in future periods. The experience that we have gained from ZOOsubs, through early adoption to its current rate of growth in both volumes and margin contribution, gives us confidence that ZOOdubs will follow a similar path.
Strong growth in localisation services
Our localisation services, which include subtitling and dubbing, grew by 149% to $21.4 million (2017: $8.6 million). This is due to ongoing strong growth of subtitling together with the introduction of dubbing, where the contribution was mainly in the second half. In the first half an average of 28 hours of dubbing was processed through ZOOdubs per month. This increased to an average of 79 hours per month in the second half, and in the two months following the period under review has increased further to an average of 154 hours per month.
There has been additional recruitment of talent and the Group now has a network of over 5,000 freelance workers, including translators and voice actors, who are able to collaborate efficiently with us on projects to satisfy an ever-growing pipeline of demand.
Further innovation
In the traditional entertainment localisation ecosystem, subtitling and dubbing assignments have followed two detached work streams from the point of inception, and in the case of dubbing, across different in-territory studios, which tends to lead to a duplication of work and inconsistencies in translation across the two independently crafted approaches. A recent innovation of ZOO is a scripting service powered by a new cloud-based platform, ZOOscripts, which is a cornerstone capability that will enable the Company to process combined subtitling and dubbing assignments consistently, providing our customers with further efficiency and greater control.
A significant challenge when dubbing newly produced titles arises due to the need to have localised versions available across multiple languages on the day of release. This necessitates that the dubbing process begins with a preliminary edit of the content, which is subject to change before the programme is finalised. In practice, the production company may deliver a number of such preliminary versions for localisation before final release, each of which may differ from its predecessor through the addition of new dialogue. Therefore, rigorous version control is essential to ensure that the process operates efficiently, with voice actors being recalled to record new dialogue but only where necessary, and to quality assure the final delivery. We have addressed this requirement through the development of a sophisticated version control capability that is integral to our production systems, involving the analysis of video and audio to identify automatically the changes that occur between successive versions of the content. This is enabling us to turn around each iteration of such a project quickly and accurately.
The security of client content is paramount to ZOO’s operations, and we have continued to enhance our cloud software with further features to enable even greater levels of protection. This includes a new capability to prepare video content through the use of facial recognition in order to ‘spoil’ the material without detriment to the localisation process.
With the significant number of digital distribution channels now available, together with the availability of consumer services in over 200 countries, it is becoming increasingly challenging for content owners to estimate the costs of distribution and determine the return on investment of a particular strategy. ZOO has developed a scenario planner to assist clients with this dilemma, enabling language choices to be evaluated and localisation costs estimated quickly and accurately.
With all of these new innovations the Board believes that the strength of its existing relationships and its increasing reputation as a technological innovator in the industry will help it to cross sell services into its client base as well as attracting additional new clients. We also anticipate some uplift in digital packaging, as an increasing number of customers turn to us for a broadening array of services, and we expect a growing preference amongst buyers to work with partners that are able to deliver an end-to-end solution for localisation and digital packaging.
In the year ahead, we plan to continue investment in the development of our cloud-based platforms to further enhance the production services we offer, and to integrate our platforms with a number of third party technologies to streamline our end-to-end service offering. This should deliver improved operational efficiencies, with benefits that we will be able to pass on to our clients, leading to greater differentiation and competitive advantage for our services. More recently we have begun a research collaboration with the Speech and Hearing group in the Computer Science department of the University of Sheffield. This project will focus on machine learning and the application of speech technologies that we believe will lead to further disruptive innovation within the ecosystem that we are developing.
Expansion of our Freelance network
We have been pleased with progress in our programme to select, train and engage freelance translators, dubbing directors, voice actors and audio mixers in order to ensure that talent is available to scale sufficiently to meet the growing levels of demand in both of our dubbing and subtitling offerings, helping us to be more effective and efficient than our competitors. Our freelance network has now increased to over 5,000, growing from around 4,400 at the end of the year under review (2017: 2,000), including members from across multiple territories and languages, and its continued expansion will remain a focus for the year ahead.
Growth of the customer base
One of the Company’s main assets is the quality and breadth of its customer base. Following the launch of its first cloud services in 2009, the Group has expanded its customer base to include major Hollywood studios, the BBC, Apple and many more. It was granted Netflix preferred vendor status in 2016 and has recently been named a Netflix Preferred Fulfilment Partner. Historically ZOO has been reliant on revenue from one large customer, which once accounted for over 80% of revenue. Due to the expansion of our customer base and overall increased workflow, client concentration has decreased in recent years, with the top two customers representing 34% and 24% in the year under review. Importantly, both these customers have indicated their intention to increase their activities with ZOO.
The consistently high quality of services we provide is indicated by the proportion of client revenues that we retain from one year to the next: after stripping out sales to one client with which the Group discontinued services in 2016 following its acquisition by a competitor, the proportion of client business in FY2017 that continued into the period under review was 98% (2017: 97%).
Affiliate Network
Our affiliates provide us with additional capacity to meet client demand as well as access to skilled linguists, dubbing directors and voice actors in the territories in which they deliver services to their own networks of clients. During the year, the Group has been successful in adding new affiliates in emerging markets, bringing the growing network to a current total of 8 across 10 locations. The new additions are Studio Ares in Turkey, Bossdom in Taiwan, WhatSub Pro in South Korea, Dragoman in Turkey, Captivate Arabia in Jordan and Olive Digital in UAE.
More recently we have strengthened our relationship with Kantana Group in Thailand and Vietnam, one of Thailand’s oldest and largest film studios, to support our expansion of dubbing services in the region. Staff at Kantana have been trained in our cloud-powered software and will shortly be using ZOOdubs to work on in-territory dubbing projects. Meanwhile, Kantana is helping ZOO to build capacity, increase the local dubbing talent pool and identify suitable in-territory traditional and alternative recording environments in Asia.
We are seeing an increasing number of traditional dubbing studios approaching us, which bodes well for future growth. We look forward to building out this network further and working closely with our chosen partners.
Investment in people and operations
We continue to invest in the expansion of our teams to support further growth. Through the year we enlarged the R&D team to accelerate development and assist in the roll-out of our dubbing service. In March 2018 we appointed a new Creative Director and Producer to oversee dubbing projects in Latin America: Raul Aldana has joined the team to continue to grow ZOO’s in-territory localisation network and bring the very best talent to the cloud dubbing platform. Raul brings a wealth of experience to the role, having worked as Disney’s creative head for Latin American Spanish for the last 20 years.
More recently we have appointed a new Head of Operations and Business Development, Asia to lead localization and distribution services in the region. Norie Negishi has joined ZOO to help grow capacity in Asia as we expand our cloud dubbing services in the region. Norie joins ZOO with a 20-year track record with the Walt Disney Company in Asia Pacific including working as Executive Director of Operations for Disney Character Voices International.
In the year ahead, we will add select resource in our operations to ensure we have the structure to support the increase in volumes of activity.
Another important operational development in the year was that our new Sheffield facility received security accreditation from the Content Delivery and Security Association. This is in addition to our US office’s existing accreditation under the Motion Pictures Association of America Content Security Program, both of which are key endorsements required by some of our existing and target clients.
Fundraise
On 18 April 2017, a Placing was announced to raise £2.6 million of additional funds whilst at the same time converting £1.1 million of debt into equity, strengthening the Balance Sheet. The funds are being used to accelerate organic growth and the benefits are already being seen. The Placing also presented the opportunity to welcome new institutions to the register of shareholders.
Outlook
This has been another extremely successful year for the Group, delivering considerable revenue growth while expanding our offering. It is clear that we are operating in a market which is right for our approach, where our technological innovation can facilitate greater scalability for all industry players.
ZOO is increasingly viewed as a significant player in the media localisation market, and with the introduction of dubbing we have achieved a key milestone on our journey towards becoming a one-stop-shop for all media localisation services across all languages. Through the development of our innovative technology, we are facilitating the ongoing disruption and growth of the digital entertainment market and we will continue to invest in innovation, quality and security to ensure we remain at the forefront of our industry.
Our sales pipeline continues to grow across our offerings, both from existing and new customers, giving us confidence in achieving on-going organic growth. With a strengthened balance sheet, enlarged commercial team and augmented offering, we look to the future with confidence.
Stuart Green
Chief Executive Officer
FINANCIAL REVIEW
The strong growth that was reported last year continued into the period ended 31 March 2018. We are pleased to report that sales have increased 73% to $28.6 million (2017: $16.5 million) with EBITDA adjusted for share-based payments up to $2.4 million (2017: $1.8 million). The reported turnover for the second half was $15.9 million compared to $12.7 million in the first, which underlines the reduction in seasonality of the business. The reported operating profit for the year was $0.6m (2017: $0.5m) and the reported loss before tax was $5.0m (2017: profit $0.5m) following a non-cash charge for the fair value movement on an embedded derivative brought about due to the rising share price.
Due to the Group’s origins as a software company, gross profit has previously been calculated as revenue less only external costs of sale, being the cost of translators and other freelance workers who provide linguistic services to us. Some other variable costs, including those associated with internal staff employed to deliver client projects, have been previously reported as central overheads. As the proportion of our revenues from delivery of services is now growing rapidly, it is becoming increasingly difficult to infer our operational gearing from gross profit reported on that basis. For that reason we have decided to classify all variable costs as cost of sales, leading to a lower reported gross profit margin but which, we believe, is more representative of the dynamics of the business going forward. It bears clarifying that, as a result of this recategorisation of costs, we would expect that central overheads should increase at a more modest rate in line with the growth of the business and the costs of underlying infrastructure required to support it.
The prior full year period has been restated in the consolidated statement of comprehensive income and is set out below for comparison purposes. This change is presentational only and represents a change in accounting policy with no impact on current or prior year loss/profit.
We have also sought to add further clarity to the financial statements by adapting the segmental analysis of revenues. In previous reports the segmental reporting was based on the operating divisions, when UK sales were primarily related to software licensing whereas US sales were from service provision. As the company has grown over recent periods, an increasing proportion of service sales are invoiced from a UK subsidiary. Consequently, this segmental reporting has become less appropriate for providing an understanding of the constitution of sales. Going forward we will report revenue analysis using the following three segments in line with the internal reporting and management of the business:
1. Localisation – this is the fastest growing segment of Company revenues and is made up of subtitling, captioning and dubbing. Localisation grew very strongly by 149% to $21.4 million (2017: $8.6 million) due to subtitling sales almost doubling over the corresponding prior period, combined with the commencement of sales from dubbing services that were introduced at the end of the first half.
2. Digital Packaging – previously referred to as ‘Digital Distribution’, this segment consists of sales for all service lines, excluding localisation, that are required for the delivery of video-based entertainment content to distribution channels, including to OTT operators and for delivery on optical disc formats. These services include compression and encoding of video and audio materials, preparation of metadata, assembly of digital packages and authoring of DVD and Blu-ray formats. During the period under review, sales in this segment fell to $5.2 million (2017: $5.8 million), primarily due to the on-going slow global decline in demand for DVD and Blu-ray.
3. Software Licensing – this segment consists of sales generated directly from the provision of our proprietary software which, during the period under review, consisted predominantly of recurring revenue from legacy products and declined slightly to $1.9 million (2017: $2.0 million).
It has been particularly pleasing to see the commercialisation of new dubbing services, made possible by our innovative cloud software platforms, start so strongly and delivering a meaningful contribution to our localisation segment in the second half of the year.
The much higher billing amounts for dubbing projects compared to those for subtitling may lead to a significant shift in client concentration in future periods, dependent on the timing of the adoption of this new service line by existing and new clients. We have, during the year under review, continued to diversify our client base and significantly reduce revenue concentration, such that the revenue contribution from our largest client reduced to 34% of sales in 2018 (2017: 44%), with the second largest accounting for 24%.
The initial period of delivering services using the new ZOOdubs platform has followed a similar pattern to the one we observed five years ago with the deployment of ZOOsubs: our imperative to provide clients with services of the highest quality has led to higher costs from extensive verification and quality control while the software is being refined. We fully expect these margins to improve as the software is proven and new features continue to be added. In contrast, our subtitling services and the associated cloud software have, over a period of five years, been proven, enhanced and continually refined and are now delivering strong contribution margins. From the segmental analysis it can be seen that the contribution margin for localisation has increased to 31% (2017: 27%), and has the potential to improve further as our dubbing proposition matures.
The second largest segment is digital packaging where the blended contribution margin during the period has reduced to 60% (2017: 69%), primarily due to the decline in demand for DVD and Blu-ray titles.
The different gross margins achieved in the three revenue segments, combined with the changing sales mix including strong growth in localisation has led to an overall blended gross profit margin of 35% (2017: 45%).
Operational fixed costs have increased to $7.7 million (2017: $5.6 million) as we continue to build up the business. Our sales team has been expanded to provide us with the means to develop business opportunities with a greater number of clients; the total number of accounts invoiced in the period increased to 158 (2017: 145). The R&D team has been enlarged through the addition of new staff, enabling us to accelerate the development and roll-out of our cloud software platforms, ensuring that we maintain our competitive advantage in the market. Staff additions and other enhancements in our operations, including in relation to provision of high levels of security, have led to an increase in IT expenditure in the period. The improved performance of the business has led to us paying a bonus to all staff, including executive members of the Board, recognising the significant contributions on which such performance was made possible. We have also increased our expenditure on marketing, primarily through exhibiting at a greater number of international trade shows and other events that provide a cost-effective way to reach existing and prospective clients.
The post balance sheet event mentioned in the financial review for the period to March 2017, consisting of an equity fundraising, the conversion of debt into equity and extending the maturity of the conversion of remaining loan notes, has led to a significant strengthening of the balance sheet. Whilst we continue to have access to a facility of up to $2.5 million in the US and a further £250,000 overdraft in the UK, we have no borrowings outstanding with the associated providers, and the only debt on the balance sheet is the residual £2.54 million convertible loan note. This instrument pays a coupon of 7.5%, has a conversion price of 48 pence and its term now ends in October 2020. For so long as the share mid-price trades above this amount, as it has since mid-December 2017, it would be reasonable to expect that holders will choose to convert their holdings into equity prior to the end of the term rather than request repayment.
A further consequence of a convertible loan note denominated in pound sterling, whilst our financial statements are denominated in US dollars, is that the consolidated statement of comprehensive income includes an exchange adjustment on borrowings due to the conversion of the value of the debt on 31 March. In the period under review, the strengthening of pound sterling relative to US dollar led to an exchange loss of $0.5 million, while in the equivalent prior year period the statement showed a gain of $0.6 million, giving rise to a year on year variance of $1.1 million. However, since the loan note can reasonably be expected to convert into equity rather than be repaid, we do not expect an exchange profit or loss to crystalise. In addition, the conversion of £1.1 million of the loan note in May 2017 has resulted in a charge to the consolidated statement of comprehensive income of $0.1 million (2017: nil).
Due to the fact that the remaining loan note is convertible, compounded by its denomination in pound sterling while the Group’s reporting currency is US dollars, the instrument needs to be treated as an embedded derivative for accounting purposes. Movements in the share price of the Company can therefore have a considerable, non cash effect on reported profit or loss before taxation as these embedded derivatives are linked to the Company’s share price performance. ZOO’s share price at the close of business on 31 March 2017 was 10p, which contrasts sharply with its price of 97.5 at close of business on 29 March 2018 (being the last business day before the year end date). Consequently, the statement of comprehensive income includes a charge after EBITDA of $4.7 million and the long term borrowings reported on the statement of financial position are increased by $4.7 million. The long term borrowings reported on the statement of financial position show a total of $8.8 million which is made up from $3.6 million for the convertible loan note, which is expected to convert into equity, $4.7 million for the non-cash embedded derivative movement and $0.5 million for finance lease liabilities. Only the latter item is expected to have any cash impact.
These non-cash accounting entries have a material impact on profit/loss before tax where the reported figure for the year to March 2018 is a loss of $5.0 million (2017: $0.5 million profit). After adjusting for share-based payments, the exchange gain/loss on borrowings, the charge for the conversion of loan into equity and the charge for the embedded derivative, profit before tax was $0.5 million (2017: loss of $0.1 million). None of these adjustments have any cash implication.
The statement of financial position shows trade and other receivables have increased significantly over the prior year period to $7.4 million (2017: $3.8 million) and up 4% on the half year end position (September 2017: $7.1 million). This figure includes debtors together with a contribution for work in progress , sales accruals and other items. The much higher volume of projects that we are processing has led not only to a significant increase in these assets. Despite a much enlarged debtor book, this is being converted into cash in the normal course of business and, as of the date of this report, 93% of year end debtors have since been paid.
This will be my last report as CFO of the Group. In February I took the difficult decision that after 18 years with ZOO, the last 12 of which have been in the role of CFO, it is time for me to move on. Having worked as a senior member of the management team, I feel proud to have contributed significantly to the transformation of the Company from a small business providing DVD authoring tools for one large customer, to become one of the leading providers of localisation services to most of the major Hollywood studios and global digital entertainment distributors. ZOO is at a really exciting point in its development. While it will feel strange not to be involved as the business moves forward, it is the right time for me to pursue the next stage of my career. As I pass the baton to my successor I am pleased to do so for a company that has the strongest balance sheet for many years, is on an exciting growth trajectory and has a wide range of excellent opportunities for strong continued growth in a rapidly expanding market. I wish the business ongoing success and growth in the coming years and will continue to take an active interest in my capacity as a shareholder.
By order of the Board
Helen P Gilder
Director and Secretary
