TIDMDGS
RNS Number : 6214R
Digital Globe Services Limited
10 March 2016
10 March 2016
Digital Globe Services, Ltd.
(the "Company" and together with its subsidiaries "DGS")
Interim Results
Digital Globe Services, Ltd. (AIM: DGS), a leading provider of
digital marketing solutions for large, consumer-facing
organisations, is pleased to announce interim results for the six
months ended 31 December 2015. Except where specifically stated,
all comparative figures are stated for the six months ended 31
December 2014.
Financial highlights:
-- Strongest H1 revenue and EBITDA performance in the Company's history
o Revenue increased 29% to $23.7 million (2014: $18.4
million)
o Gross profit increased by 38% to $7.7 million (2014: $5.6
million)
o Adjusted EBITDA* increased by 467% to $2.5 million (2014: $0.5
million), with adjusted EBITDA* margin of 11% (2014: 3%)
o Basic earnings per share of $0.04 (2014 loss of $0.03)
-- Cash on hand at 31 December 2015 of $0.6 million with $0.07
million drawn down under $3 million credit facility
-- Board recommendation to declare an interim dividend of $0.026 per share (2014: nil)
*EBITDA is earnings before interest, taxes, depreciation and
amortisation. "Adjusted EBITDA" excludes foreign exchange gains or
losses, extraordinary items, non-cash Employee Stock Option Plan
charges, warrants and non-recurring severance costs.
Operational highlights:
-- Record revenue and significantly improved margin from our
core US client base through the use of the Company's proprietary ad
management platform, dgSmart
-- Continued diversification of revenue, driven by expansion
into new verticals and revenue streams
-- Launch of 7degrees, our new offering in social media
advertising for middle-market and large consumer advertisers to
address this rapidly growing channel
-- Ongoing investment in the technology platform, new verticals and enhanced capabilities
Jeff Cox, CEO of Digital Globe Services, commented:
"We are pleased to confirm that the strong trading momentum from
the second half of fiscal 2015 accelerated into the first half of
the current financial year, with this period marking our strongest
first half performance to date. The Company has experienced record
growth over the twelve-month period, driven by expansion within our
existing core customers, the launch of new business offerings and
growth into new industry verticals. With our strong balance sheet
and healthy profit generation, the Board is confident in continued
profitable revenue growth."
For further information please contact:
Digital Globe Services, Ltd. www.dgsworld.com
Jeff Cox, CEO +1 303 736 2105
Panmure Gordon (UK) Limited
Fred Walsh / Karri Vuori / James Greenwood +44 207 886 2500
Alma PR +44 7515 805218
Hilary Buchanan / Josh Royston +44 7780 901979
Overview of DGS
Founded in 2008 with offices in London, Bermuda, Netherlands,
USA and Ireland, DGS is a specialist provider of outsourced online
customer, lead, and inquiry acquisition and digital media solutions
for large, consumer-facing corporations. DGS delivers customers to
its clients through optimised paid search, search engine
optimization, mobile, integrated websites, e-mail, social media and
contact centre support.
DGS is seeking to establish itself as the leading international
provider of outsourced online customer, lead and inquiry
acquisition, services, through its focus on having the premier
technology platform in the industry. By using its optimising
technology platform, dgSMART, and its experience of website
management and digital media customer acquisition, efficient
contact centre operations and other process expertise, DGS is able
to acquire customers and achieve conversion rates that deliver
profitable, high quality customers and valuable leads and inquiries
to its clients.
DGS employs over 700 staff in Europe, North America and Asia.
The Company currently has over 100 direct and indirect client
relationships globally, many of which are with companies in the US
Fortune 500.
Chairman and CEO Review
The Board is pleased to again report a record six month period
for DGS. The results clearly demonstrate the success of the
Company's strategic early move into mobile advertising and serve as
an indicator of the exciting future potential of the expanded
Group.
DGS's core operations continue to be in the provision of
technology and associated services to efficiently acquire and
deliver high quality customers for our customers through online
sales channels to large consumer facing clients, particularly
within the US cable industry and increasingly across other
verticals such as education. The Company's key areas of expertise
are in optimizing cross-device digital media spend through the use
of technology supported by our fulfilment capability through state
of the art contact centres.
Growth in the core digital advertising markets, particularly in
mobile, remains robust. Furthermore, the Company believes that its
early mover advantage and investment in the high growth social
media marketplace, with a focus on mobile, has positioned the
Company well for further success, both in the US and
internationally.
Financial Review
In the six months ended 31 December 2015, the Group produced
revenue of $23.7 million, an increase of 29% on the comparable
period ended December 2014. This growth was driven primarily by a
10% increase in prospects delivered by the Company's dgSmart
platform and a 12% increase in converting these prospects into
customers.
While DGS has continued to see strong performance in the core
business, the Group continues to diversify its revenue streams,
having grown revenues outside of its core cable business by $1.6
million over the same period ended December of '14, driven
primarily by new verticals. The education business improved
efficiency on delivering leads, with lower support costs improving
gross margin contribution in EDU by $2.4 million (a nearly twofold
improvement over 1H '14).
Gross profit for the first half increased by 38% to $7.7 million
(2014: $5.6 million), largely due to higher gross margin on higher
revenues from the Company's core client base and attainment of
volume based bonuses. Adjusted EBITDA* increased by 467% to $2.5
million (2014: $0.5 million), with an adjusted EBITDA* margin of
11% (2014: 3%).
*A reconciliation of "Adjusted EBITDA" is shown below:
Six months Six months Year ended
ended ended
31 December 31 December 30 June
2015 2014 2015
$ $ $
--------------------------- -------------- -------------- -----------
EBITDA 2,106,051 (138,026) 2,292,979
--------------------------- -------------- -------------- -----------
Foreign exchange
gains or losses 19,460 17,157 9,123
--------------------------- -------------- -------------- -----------
Write-back of
contingent consideration - - -
--------------------------- -------------- -------------- -----------
Non-cash Employee
Stock Option
Plan charges 273,438 420,089 756,092
--------------------------- -------------- -------------- -----------
Warrant - (301,555)
--------------------------- -------------- -------------- -----------
Legal costs associated
with acquisition - - -
--------------------------- -------------- -------------- -----------
One-time training
and relocation
expense - - -
--------------------------- -------------- -------------- -----------
Severance costs 107,875 237,948 194,117
--------------------------- -------------- -------------- -----------
Adjusted EBITDA 2,506,824 537,168 2,950,756
--------------------------- -------------- -------------- -----------
SG&A held relatively constant over the same period ($5.3
million) compared to 1H '14 ($5.1 million). With the increase in
revenue, SG&A dropped to 22% from 28% the 1H year before.
Increased efficiency through automation, reporting, sales expense
and infrastructure in the overall company has resulted in this
efficiency which we expect to continue throughout the rest of the
fiscal year and beyond.
Net operating cashflow improved by over $1 million that came as
a result of higher gross margins in the core and EDU business and
more efficient return on SG&A. Cash was utilized to pay a $1
million dividend, as well as fund continued execution on the
three-pillared growth strategy noted below.
Dividend
In line with the Company's dividend policy, DGS endeavours to
pay dividends twice annually, subject to the Company's by-laws,
business requirements and appropriate reserves accounting for
investment in the Company's growth. With respect to this interim
results period, the Company has determined that it will declare an
interim dividend in the amount of $0.026 per share (2014: nil). The
final dividend will be reviewed at fiscal year-end.
Operational Review
Strategy
The Company's success is underpinned by the continued execution
of its three-pillared growth strategy, namely, growing within the
existing US cable and telecoms business, expanding into new
geographies and adding contiguous industry verticals.
Expansion within core US clients:
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During the period, the Company continued to expand its business
opportunities with its core US cable client base generating record
revenues with the Company's largest customer. We grew our US
Telecom consumer businesses by expanding our partnership with the
now-largest telco-satellite video provider. The Company delivered
core customer revenue at a level that is $4.1 million greater over
the similar period last fiscal year which is a record year over
year increase. This record growth is expected to continue through
the fiscal year. The Company also expects to launch with two major
new customers in the US telco and satellite space within the fiscal
year. Additionally, the Company expects to significantly expand
with one of its key clients having proven its ability to
consistently produce superior results amongst its competitors.
New geographies:
We continue our efforts to seek anchor customers in new
geographies outside of North America. We are confident in our
ability to invest and be successful in Western Europe which will
remain our focus for geographical expansion. The Group expects to
launch a trial with a major brand in the quad play industry in
Western Europe within the fiscal year.
Enter new relevant verticals and adjacent industries:
The Company successfully entered into the US Energy sector, with
new clients in the gas, electricity and alternative energy
business. Revenues from these areas are expected to increase as the
US Utility market continues to further deregulate and where
consumers and businesses are given a choice of providers. The
Company continues to win new business in the home security and home
automation markets.
In addition, the Company launched a new social media focused
service offering targeted at the middle market and large consumer
brands. 7degrees designs and manages marketing campaigns on social
media sites such as Facebook, Twitter, Pinterest, Instagram and
Linked-In. This business unit is principally run from our offices
in San Francisco where the team regularly works with the leading
social media sites.
Product and Service Development
We continue to invest in our internal financial systems,
proprietary technology platforms and technology development teams
to capitalise on growing momentum and favourable market trends.
Strong IP is a key differentiator for us, as it enables us to more
effectively acquire and deliver high quality customers to our
clients. Our Bid Optimizer feature within the dgSmart platform uses
sophisticated algorithms to ensure that the optimal yield per
dollar invested in digital campaigns is achieved. The results of
this is that we continue to significantly grow revenue while
lowering costs.
Market
In 2013 the Group began to rapidly switch its focus from fixed
desktop advertising to advertising on mobile devices. In excess of
90% of the Group's paid search advertising revenues are now derived
from advertising on mobile devices. As an early mover to the mobile
advertising space, the Company has developed a high level of
expertise that will continue to help the Group grow with the
market. In launching its 7degrees social media marketing business
the Company is again taking a mobile-first approach, targeting the
platforms where the majority of social advertising dollars are
directed.
The Company believes that its experience and focus on mobile
advertising in the US over the past three years positions it as an
experienced market leader ready to apply itself to the Western
European market. The Company's launch into the social media
marketplace with a focus on mobile will enable successful
marketplace penetration.
Board Enhancements
Within the period we significantly enhanced our Board with the
addition of David Flowers and Simon Lee as Non-executive Directors.
Dave brings over 35 years of international finance, banking and
technology investment experience to the Board following a career in
executive roles with Liberty Media Corporation and Toronto Dominion
Bank. Simon Lee joined the Board in December and brings a wealth of
experience in international finance and operations, having spent 17
years with the National Westminster Bank Group including as its
Chief Executive of NatWest Offshore, as well as serving as Group
Chief Executive of RSA Insurance Group plc, a FTSE 100 company.
Acquisition Strategy
We continue to remain opportunistic in our approach to
acquisition targets and merger opportunities, both in the US and
European markets. We maintain a disciplined focus on our investment
and acquisition criteria and will only pursue transactions where
our shareholders will receive incremental value.
Summary and Outlook
Having completed the strongest twelve month period in the
Company's history, we are confident in meeting market expectations.
The investments we made in technologies, new verticals and enhanced
capabilities in calendar 2014 continue to reap benefits into 2016.
Our balance sheet and cash positions are strong and we are
confident the markets we serve will continue to grow at tremendous
rates. We will endeavour to remain a thought leader in our
industries.
We acknowledge the tremendous efforts of our employees,
executives and directors, without whom success is not possible. As
we enter another phase of growth in our Company we thank our
shareholders who continue to support us in our shared
successes.
Unaudited Condensed Consolidated Interim Statements of
Income
For the six months ended 31 December 2015
6 months 6 months
ended ended Year ended
31 December 31 December 30 June
2015 2014 2015
US$ US$ US$
---------------------------------- --------------------------- --------------------------- ------------------------
Revenue 23,733,075 18,408,667 40,271,031
Cost of Revenue
Search engine expenses 5,936,917 4,437,132 10,928,835
Lead generation 6,421,164 5,114,416 10,008,728
Call centre costs 2,531,046 2,500,801 4,564,860
Communication 365,054 335,077 678,374
Other cost of revenue 751,297 407,447 904,385
Total cost of revenue 16,005,478 12,794,873 27,085,182
---------------------------------- --------------------------- --------------------------- ------------------------
Gross Profit 7,727,597 5,613,794 13,185,849
---------------------------------- --------------------------- --------------------------- ------------------------
Selling, General and
Administrative
Expenses
General and administrative
costs 321,872 305,568 591,318
Salaries and other employee
costs 3,322,685 3,324,669 6,720,538
Employee Stock Options
Plan 273,438 420,089 756,092
Third-party consultants 136,788 276,496 460,851
Rent and utilities 323,998 338,725 629,675
Traveling and entertainment 277,747 218,169 379,753
Insurance 265,980 263,550 497,961
Office supplies, printing,
postage 44,227 39,285 75,972
Communication 183,164 131,604 292,709
Legal and professional
expenses 348,479 245,911 573,647
Depreciation and amortisation 861,622 628,862 1,463,013
Foreign currency exchange
loss 19,460 17,157 9,123
Other expenses 103,708 149,566 206,786
Total selling, general
and administrative expenses 6,483,168 6,359,651 12,657,438
---------------------------------- --------------------------- --------------------------- ------------------------
Operating Profit/(Loss) 1,244,429 (745,857) 528,411
---------------------------------- --------------------------- --------------------------- ------------------------
Other Expenses/(Income)
Interest expense - net 91,706 44,182 70,862
Bank charges 13,576 35,336 96,534
Warrant - - (301,555)
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Total other expenses/(income) 105,282 79,518 (134,159)
--------------------------- --------------------------- ------------------------
Profit/(Loss) before income
taxes 1,139,147 (825,375) 662,570
Income Tax Expense 23,561 33,469 405,077
---------------------------------- --------------------------- --------------------------- ------------------------
Net Profit/(Loss) 1,115,586 (858,844) 257,493
---------------------------------- --------------------------- --------------------------- ------------------------
Profit/(Loss) per share
- basic 0.041 (0.031) 0.009
Profit/(Loss) per share
- diluted 0.040 (0.031) 0.009
Shares used to compute
basic earnings per share 27,314,393 27,281,992 27,326,448
The accompanying notes are an integral part of these condensed
consolidated financial statements
Unaudited Condensed Consolidated Interim Balance Sheets
As at 31 December 2015
As at As at As at
31 December 31 December 30 June
2015 2014 2015
US$ US$ US$
----------------- ------------ -------------
Assets
Current Assets
Cash and cash equivalents 591,703 385,567 2,150,480
Trade accounts receivable 10,213,539 8,390,856 10,200,707
Related party receivables 516,628 1,859,382 270,384
Prepayments and other assets 1,240,639 1,470,087 1,214,166
Deferred tax asset 128,026 293,447 78,136
12,690,535 12,399,339 13,913,873
----------------- ------------ -------------
Non-Current Assets
Goodwill 1,686,219 1,631,969 1,631,969
Intangible Assets 3,190,137 2,031,688 3,320,594
Property and equipment, net
of accumulated depreciation
of $1,177,224 at 31 December
2015 (31 December 2014: $629,036)
(30 June 2015: $903,577) 1,143,494 1,417,314 1,116,433
6,019,850 5,080,971 6,068,996
----------------- ------------ -------------
Total Assets 18,710,385 17,480,310 19,982,869
------------------------------------- ----------------- ------------ -------------
Liabilities and Stockholders'
Equity
Current Liabilities
Revolving line of credit 70,476 583,856 1,792,301
Accounts payable 4,394,060 3,030,387 4,793,939
Related party payables 427,938 634,301 250,200
Other liabilities 1,794,014 2,758,340 1,392,770
Income tax payable 164,184 100,853 140,623
6,850,672 7,107,737 8,369,833
----------------- ------------ -------------
Non-Current Liabilities
Deferred tax liabilities 162,957 23,429 113,067
Total Liabilities 7,013,629 7,131,166 8,482,900
------------------------------------- ----------------- ------------ -------------
Stockholders' Equity
Common stock 29,926 29,926 29,926
Additional paid-in capital 6,864,448 7,997,338 7,997,378
Treasury stock (59,307.00) - -
Warrant 43,335 344,890 43,335
Accumulated and other comprehensive
loss (252) (252) (252)
Share based payment reserve 2,281,565 1,672,124 2,008,127
Retained earnings 2,537,041 305,118 1,421,455
------------------------------------- ----------------- ------------ -------------
Total Stockholders' Equity 11,696,756 10,349,144 11,499,969
------------------------------------- ----------------- ------------ -------------
Total Liabilities and Stockholders'
Equity 18,710,385 17,480,310 19,982,869
------------------------------------- ----------------- ------------ -------------
The accompanying notes are an integral part of these condensed
consolidated financial statements.
Unaudited Condensed Consolidated Statements of Stockholders'
Equity
For the six months ended 31 December 2015
Number Common Additional Treasury Accumulated Warrant Share Accumulated Total
of stock paid-in Stock Surplus Based other
Shares capital Payment comprehensive
in Reserve loss
Issue
------------ -------------- ---------------- ------------------- ------------ ------------ ------------ -------------- ----------------
No $ $ $ $ $ $ $ $
Balance,
30 June
2014 29,926,472 29,926 8,943,142 - 1,163,962 344,890 1,252,035 (252) 11,733,703
Employee
Share
Options
Plan
(SOP)
charge - - - - - - 420,089 - 420,089
Gain on
exercise
of share
options - - 46,800 - - - - - 46,800
Net loss
for the
six
months
ended
31
December
2014 - - - - (858,844) - - - (858,844)
Dividend
paid - - (992,604) - - - - - (992,604)
Balance,
31
December
2014 29,926,472 29,926 7,997,338 - 305,118 344,890 1,672,124 (252) 10,349,144
------------ -------------- ---------------- ------------------- ------------ ------------ ------------ -------------- ----------------
Employee
Share
Options
Plan
(SOP)
charge - - - - - - 336,003 - 336,003
Gain on
exercise
of share
options - - 40 - - - - - 40
Fair
value
movement
in
Warrant - - - - - (301,555) - - (301,555)
Net
profit
for the
six
months
ended
30 June
2015 - - - - 1,116,337 - - - 1,116,337
Dividend - - - - - - - - -
paid
Balance,
30 June
2015 29,926,472 29,926 7,997,378 - 1,421,455 43,335 2,008,127 (252) 11,499,969
------------ -------------- ---------------- ------------------- ------------ ------------ ------------ -------------- ----------------
Employee
Share
Options
Plan
(SOP)
charge - - - - - 273,438 - 273,438
Treasury
stock
buy back - - (59,307) - - - - (59,307)
Net
profit
for the
six
months
ended
31
December
2015 - - - 1,115,586 - - - 1,115,586
Dividend
paid - - (1,132,930) - - - - - (1,132,930)
Balance,
31
December
2015 29,926,472 29,926 6,864,448 (59,307) 2,537,041 43,335 2,281,565 (252) 11,696,756
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------------ -------------- ---------------- ------------------- ------------ ------------ ------------ -------------- ----------------
The accompanying notes are an integral part of these condensed
consolidated financial statements.
Unaudited Condensed Consolidated Interim Statements of Cash
Flow
For the six months ended 31 December 2015
6 months 6 months
ended ended Year ended
31 December 31 December 30 June
2015 2014 2015
US$ US$ US$
Cash flows from operating
activities
Net Income/(Loss) 1,115,586 (858,844) 257,493
Depreciation and amortisation 861,622 628,862 1,463,013
Income tax expense 23,561 33,469 73,239
Stock Options Plan charge 273,438 420,089 756,092
Fair value difference on
warrant - - (301,555)
Adjustment to reconcile net income to net
cash provided by operating activities:
Changes in assets and
liabilities:
Accounts receivable (12,832) 1,893,303 83,452
Related party receivables (246,244) (1,716,166) (127,168)
Prepayments and other assets (26,473) (192,085) 63,836
Accounts payable (399,879) (667,272) 1,096,280
Related party payables 177,738 - 250,200
Other liabilities 206,151 1,397,225 31,655
Deferred tax - net - - 304,949
------------------------------- --------------------------- --------------------------- ---------------------------
Net cash generated from
operating
activities 1,972,668 938,581 3,951,486
------------------------------- --------------------------- --------------------------- ---------------------------
Cash flows from investing
activities
Acquisition of DSC business (440,000) - -
Purchases of intangible assets (54,031) (381,156) (2,229,337)
Purchases of computer and
office equipment (123,352) (337,108) (311,103)
------------------------------- --------------------------- --------------------------- ---------------------------
Net cash used in investing
activities (617,383) (718,264) (2,540,440)
------------------------------- --------------------------- --------------------------- ---------------------------
Cash flows from financing
activities
Revolving line of credit (1,721,825) (432,828) 775,617
Proceeds from exercise of
share options - 46,800 46,840
Buy back of treasury shares (59,307) - -
Dividend paid (1,132,930) (358,303) (992,604)
------------------------------- --------------------------- --------------------------- ---------------------------
Net cash used in financing
activities (2,914,062) (744,331) (170,147)
------------------------------- --------------------------- --------------------------- ---------------------------
Net (decrease)/increase in
cash (1,558,777) (524,014) 1,240,899
Cash at the beginning of
the period 2,150,480 909,581 909,581
------------------------------- --------------------------- --------------------------- ---------------------------
Cash at the end of the period 591,703 385,567 2,150,480
------------------------------- --------------------------- --------------------------- ---------------------------
Supplementary disclosures
of Cash Flow Information
Cash paid during the period
for interest 88,591 41,387 64,524
Cash paid during the period - - -
for income tax
The accompanying notes are an integral part of these condensed
consolidated financial statements.
Notes to unaudited condensed consolidated interim financial
statements
31 December 2015
(1) Nature of business - Group and its operations
Digital Globe Services, Ltd. (DGSL or the "Company") was
incorporated in Bermuda on 9 November 2012 and admitted to the
Alternative Investment Market (AIM) of the London Stock Exchange on
14 February 2013. The registered office of DGSL is located at
27(th) floor, 21-24 Millbank Tower, Millbank London SWIP 4QP. DGSL
serves as a holding company for a global portfolio of companies in
the internet based advertising and related technology business.
DGSL has subsidiaries in the United States, Cyprus, Netherlands,
Ireland and Pakistan. DGSL also owns and maintains the intellectual
property (technology, brand name) associated with the business.
"The Group" refers to DGSL and its subsidiaries.
The Group is comprised of the Company and following
subsidiaries:
Ownership
at
31 December
Subsidiary Location Nature of business 2015
Internet marketing
Digital Globe for residential cable
Services, Inc. USA services 100%
Internet marketing
Telsat Online, for non-cable telco
Inc. USA services 100%
Holding company and
DGS Worldwide global marketing
Marketing Limited Cyprus (inactive) 100%
Call centre and support
DGS (Pvt.) Limited Pakistan services 100%
DGS Worldwide
BV Netherlands Global marketing 100%
DGS Tech, Limited Ireland Tech support services 100%
Lead generation in
DGS EDU LLC USA the Education industry *
DGS Auto LLC USA Motor vehicle licensing 100%
Internet marketing
DGS Lakeball for commercial cable
LLC USA services 100%
Digital marketing
7 Degrees LLC USA agency 100%
* owned indirectly through Digital Globe Services, Inc.
Digital Globe Services, Inc. (DGS, Inc.) - US
Digital Globe Services, LLC was formed on 23 May 2008 as a
Delaware (US) entity and subsequently converted to a corporation
(DGS, Inc.) in February 2011. The company provides a flexible and
robust technology platform that enables digital directed marketing
support to a variety of clients in the US. The company's major
focus has been in the cable industry. The company manages web sales
portals for clients in the US and drives consumer visits to these
channels through internet based advertising as well as mobile click
to call advertising. DGS, Inc. was previously owned by TRG
Holdings, LLC (a US based subsidiary of The Resource Group
International Limited (TRGIL)). As part of a group reorganisation,
TRG Holdings, LLC sold its ownership in DGS, Inc. to TRGIL on 1
December 2012 for a consideration of $127,400. TRGIL transferred
the shares in DGS, Inc. to DGSL in exchange for shares of the same
value in DGSL. DGSL further transferred those shares to DGS
Worldwide Marketing Limited (DGSML) in exchange for shares in
DGSML. Assets and liabilities of DGS, Inc. were recognised in the
consolidated financial statements at their carrying values (at the
date of transfer) as the exchange took place between entities under
common control.
Telsat Online, Inc. (Telsat) - US
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Telsat Online, LLC was formed by DGS, Inc. in October 2010 as a
Delaware (US) entity. Effective February 2011, Telsat Online, LLC
was converted into a corporation (Telsat Online, Inc.). Telsat
provides the same services as DGS, Inc. to non-cable customers. As
part of the Group reorganisation, DGS, Inc. sold its ownership in
Telsat to TRGIL on 30 November 2012 for a consideration of $2,600.
TRGIL transferred the shares in Telsat to DGSL in exchange for
shares of the same value in DGSL. DGSL further transferred those
shares to DGSML in exchange for shares in DGSML. Assets and
liabilities of Telsat were recognised in the consolidated financial
statements at their carrying values (at the date of transfer) as
the exchange took place between entities under common control.
On November 16, 2015 Telsat acquired call center assets and
affiliate relationships from DSI Distributing, Inc. an Indiana
corporation, for a purchase consideration of $440,000, specifically
to further develop the client relationship with DirecTV. Refer to
note 7 for details.
DGS Worldwide Marketing Limited (DGSML) - Cyprus
DGSML was incorporated by DGSL in November 2012. DGSML is
engaged in global marketing of DGS, Inc. DGSML also procures back
office services for DGS, Inc. under a global services agreement.
The operations of DGSML were closed on 26 June 2013 and transferred
to DGS BV. Furthermore, the shares in DGS Inc. and Telsat were sold
to DGS Worldwide BV (DGSBV) on 1 July 2013 at a value of $1.
(Entity is currently inactive)
DGS (Pvt.) Limited (DGSPL) - Pakistan
DGSPL was incorporated by DGSL in October 2012. DGSPL provides
call centre and other back office services to DGSBV under a global
services agreement. After the incorporation of DGSPL, all the
employees who were in service agreement with TRG (Private) Limited
(an associated company at that time) and working on DGS, Inc.
business were employed by DGSPL on 1 December 2012.
DGS Worldwide BV (DGSBV) - Netherlands
DGSBV was incorporated by DGSL in June 2013. DGSBV is engaged in
global marketing of DGS, Inc. DGSBV also procures call centre and
other back office services for DGS, Inc. under a global services
agreement.
DGS Tech, Limited (DGSTL) - Ireland
DGSTL was incorporated by DGSL in June 2013. DGSTL is engaged in
tech services of DGS, Inc. DGSTL also procures other back offices
services for DGS, Inc. under a global services agreement.
DGS EDU LLC (DGS, EDU) - US
The Education business of Ampush Media was acquired by the Group
on 31 October 2013. A separate entity was formed (DGS EDU LLC) to
acquire the assets and trading business.
DGS Auto LLC (DGS, Auto) - US
DGS Auto was incorporated on 11 March 2015. DGS Auto provides
motor vehicle registration for residents in partnership with the
State of California Department of Licensing.
DGS Lakeball LLC (DGS, Lakeball) - US
DGS Lakeball LLC was incorporated on 12 May 2015 in Delaware.
DGS Lakeball, also known as ClearConnect, purpose is to procure and
sell commercial leads for DGS Inc. core cable customers.
DGS 7 Degrees LLC (DGS, 7 Degrees)
DGS 7 Degrees LLC was incorporated on 13 September 2015 in
Delaware to serve as a mobile first digital marketing agency
specializing in the delivery of outsourced online customer, lead,
app install and engagement acquisition across social and search
platforms primarily to small and medium sized businesses.
(2) Summary of significant accounting policies
(a) Statement of compliance and basis of presentation
The accompanying condensed unaudited consolidated half year
financial statements consolidate the results of the Company and its
subsidiaries (together referred to as the Group). They have been
prepared in conformity with accounting principles generally
accepted in the United States of America (US GAAP). The accounting
policies have been applied consistently to all periods presented in
the unaudited consolidated financial statements. The amounts
presented are in United States Dollars ($).
(b) Going Concern
The Group is continuing to establish itself as the leading
international provider of outsourced online customer acquisition
services, through its focus on having the premier technology
platform for pricing and procuring digital advertising on a cost
effective basis. The Group's global profile, together with its
ability to innovate and diversify, provides it with a firm
foundation for ongoing success. This was demonstrated in the first
half of the 2016 fiscal year where, through operational discipline,
cost control and execution, we were able to have the best six month
revenue performance in the history of the company, as well as the
best EBITDA performance.
The Group's net profit for the period was $1.1 million (2014:
loss of $0.9 million). As at 31 December 2015 the Group had net
assets of $11.7 million (2014: $10.3 million) and net current
assets of $5.8 million (2014: $5.3 million).
The Group net cash position has strengthened considerably since
the beginning of the year. DGS finished the six months with $0.521
million in cash, vs cash of $0.358 million and an additional $2.93
million of available capacity on the line of credit. The Board has
reviewed cash flow forecasts up to and including the period to 31
December 2017. These forecasts take into account revenue, which has
already been contracted, and revenue which is expected to occur as
a result of ongoing negotiations and business development/marketing
initiatives. Additionally, the forecasts were stress-tested under
various scenarios should any losses in clients or revenue occur,
and confirmed that the company is viable and will continue under a
variety of circumstances.
The Directors believe there is sufficient cash to pay all of our
liabilities as they fall due. All financial covenants are forecast
to be satisfied over the period and have been certified by our
existing financial partner. The Group is well placed to manage
business risk effectively and the Board reviews the Group's
performance against budgets and forecasts on a regular basis, to
ensure action is taken where needed.
Our current banking facility is set to renew on April 1, 2016
and anticipate increasing the total capacity of the line to $4
million for more flexibility should acquisition opportunities arise
and to cover increases in working capital as revenues continue to
expand. The directors fully expect to continue the relationship
into 2017 at existing or more favorable terms. The bank has
expressed interest to keep the line in place and would like to
continue to expand our relationship. In the process of moving to
our existing lender, DGS had engaged multiple financial
institutions, all of whom showed strong interest in working with
DGS. The DGS Group has multiple options in ensuring there is
sufficient financial backing to support the ongoing concern.
The Directors therefore are confident that the Group has
adequate resources to continue in operational existence for the
foreseeable future. Thus they continue to adopt the going concern
basis of accounting in the preparation of accounts.
(c) Principles of consolidation
The unaudited consolidated financial statements include the
financials of DGSL and its subsidiaries. All significant
intercompany balances and transactions have been eliminated on
consolidation.
(d) Revolving line of credit
On 31 March 2015, DGS, Inc. entered into an agreement with
Heritage Bank whereby DGS, Inc. and DGS EDU were granted a
revolving line of credit loan facility to be used for working
capital and general business purposes. The maximum balance
outstanding cannot exceed $3 million. The Facility is a receivables
finance facility secured by a charge over the assets of DGS Inc.
and DGS EDU LLC. The Facility is a senior, secured working capital,
demand note with an interest rate of the greater of The Wall Street
Journal (WSJ) Prime Rate or 5.75%, for a period of one year ending
31 March 2016. The Facility may be renewed by mutual agreement of
the parties. The Company is not guaranteeing any payments under the
Facility.
As with any facility, there are a number of standard covenants
which must be adhered to, including "reporting" and
"financial".
The reporting covenants relate to the submission of signed
annual financial statements and submission of quarterly financial
statements (management accounts) within 60 days of the close of the
fiscal quarter. The Company must also submit a borrowing base
certificate, accounts receivable and accounts payable every 15 days
and a compliance certificate, along with quarterly financial
statements, stating whether any event of default has occurred.
The financial covenants relate to a minimum asset coverage ratio
of 1.5:1, measured quarterly and a six months rolling adjusted
EBITDA within 75% of the projections in the Borrower Financial Plan
and Parent Guarantee by the Company. During the last six months
company was fully compliant with all covenants.
(e) Trade accounts receivable
Trade accounts receivable are carried at original invoice amount
based upon the installation reports issued by the Group's clients
as part of the revenue recognition process. Credit is extended to
customers based on an evaluation of a customer's financial
condition; collateral has not been required to date. Trade accounts
receivable are generally payable within one month of installment by
the customer. Trade accounts receivable outstanding longer than the
contractual payment terms are considered past due. Management
estimates, where applicable, an allowance for doubtful accounts,
which adjusts gross trade accounts receivable to its net realisable
value. Judgments are made by the Group based on historical trends
and future expectations.
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The Group writes off trade accounts receivable when they become
uncollectible, and payments subsequently received on such
receivables are credited to the allowance for doubtful accounts.
The Group does not generally charge interest on past due
receivables. Management has determined that no allowance for
doubtful accounts is necessary at 31 December 2015.
(f) Property and equipment
Property and equipment are recorded at cost less accumulated
depreciation and impairment, if any. Depreciation is computed using
the straight--line method based on the estimated useful lives of
the assets. The estimated useful lives are as follows:
Estimated useful
life
Computer and Office Equipment 3 years
Electrical Equipment 3 years
Furniture and Fixtures 5 years
Lease Hold Improvements 10 years
Expenditure for maintenance, repairs and improvements that do
not prolong the useful life of an asset are charged to the
statement of income as incurred.
Additions and improvements that substantially extend the useful
life of the asset are capitalised. Upon sale or other disposition
of assets, the cost and related accumulated depreciation and
amortisation are removed from the respective accounts, and the
resulting gain or loss, if any, is included in the consolidated
statement of income.
The Group evaluates the impairment of property and equipment in
accordance with ASC 360, "Property, Plant and Equipment". ASC 360
states that an impairment of long-lived assets has occurred
whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. Recoverability
is measured based on net, undiscounted expected cash flows. Assets
are considered to be impaired if the net, undiscounted expected
cash flows are less than the carrying amount of the assets.
Impairment charges are recorded based upon the difference between
the carrying value and the fair value of the asset. Based on the
assessment of impairment indicators for long-lived assets, the
Group did not record any impairment on long-lived assets during the
six months ended 31 December 2015.
(g) Intangible assets
Intangible assets are stated at cost less accumulated
amortisation and impairment in value, if any, and amortised on a
straight-line basis over their useful lives. Intangible assets
relate to the purchase of a BPO Suite Enterprise Call Centre
Management System and the licenses and services associated
therewith and are being amortised over a period of 3 to 5
years.
As part of the acquisition of the Education business of Ampush
Media, customer based intangibles, customer lists, software and
intellectual property were acquired and are amortised over their
useful economic lives of 6 years (for customer based intangibles)
and 4-5 years (for software), respectively. There is also a
non-compete covenant, which is being amortised over the period of
the non-compete term (i.e. 2 years).
As part of DSC Distribution Inc. acquisition, customer based
intangibles, customer lists and software and intellectual property
were acquired and are being amortised over their remaining useful
life of 13 years (for customer based intangibles) and between 2-5
years (for property and equipment). There is a non-compete
agreement for a term of 2 years meeting the recognition criteria of
ASC 805, but does not have a material value.
(h) Goodwill
Goodwill is an asset representing the future economic benefits
arising from other assets acquired in a business combination that
are not individually identified and separately recognised. Goodwill
is reviewed for impairment at least annually. In September 2011,
the FASB issued ASU 2011-08, Testing Goodwill for Impairment, which
provides an entity the option to perform a qualitative assessment
to determine whether it is more-likely-than-not that the fair value
of a reporting unit is less than its carrying amount prior to
performing the two-step goodwill impairment test. If this is the
case, the two-step goodwill impairment test is required. If it is
more-likely-than-not that the fair value of a reporting is greater
than its carrying amount, the two-step goodwill impairment test is
not required. The company adopted this guidance in 2012.
If the two-step goodwill impairment test is required, first, the
fair value of the reporting unit is compared with its carrying
amount (including goodwill). If the fair value of the reporting
unit is less than its carrying amount, an indication of goodwill
impairment exists for the reporting unit and the entity must
perform step two of the impairment test (measurement). Under step
two, an impairment loss is recognised for any excess of the
carrying amount of the reporting unit's goodwill over the implied
fair value of that goodwill. The implied fair value of goodwill is
determined by allocating the fair value of the reporting unit in a
manner similar to a purchase price allocation and the residual fair
value after this allocation is the implied fair value of the
reporting unit goodwill. Fair value of the reporting unit is
determined using a discounted cash flow analysis. If the fair value
of the reporting unit exceeds its carrying amount, step two does
not need to be performed.
Digital Globe Services, Inc.'s goodwill was recorded as a result
of a business combination that occurred in prior years. The Group
reviews its recorded goodwill for impairment on an annual basis, or
more often if indicators of potential impairment exist, by
determining if the carrying value of each reporting unit exceeds
its estimated fair value.
The Group performs impairment analysis annually in accordance
with ASC 350 'Intangibles -Goodwill and Other'. Goodwill is
considered to be impaired if it is determined that the carrying
amount of the net assets of the reporting unit exceeds its fair
value.
(i) Long-lived assets
Long-lived assets, other than goodwill, are evaluated for
impairment when events or changes in the business circumstances
indicate that the carrying amount of the assets may not be fully
recoverable through projected undiscounted future operating cash
flows or appraised values. The Group concluded that there was no
evidence of impairment of long-lived assets for the six months
ended 31 December 2015.
(j) Use of estimates and judgments
The preparation of consolidated financial statements in
conformity with US GAAP requires management to make estimates and
assumptions that affect the reported amounts of assets and
liabilities, revenues and expenses and related disclosures of
contingent assets and liabilities in the consolidated financial
statements and accompanying notes. Although management believes its
estimates, assumptions and judgments are reasonable, they are based
upon information presently available. Due to the inherent
uncertainty involved in making those estimates, actual results
reported in future periods could differ from those estimates.
Significant estimates include the chargebacks and cancellation
rates used in recording receivables and recognising revenue.
(k) Stock options
The Company accounts for stock based compensation under ASC 718,
"Compensation - Stock Compensation" ("ASC 718"). ASC 718 requires
the measurement and recognition of compensation expense based on
estimated fair values for all share-based awards made to employees
and directors, including stock options. The Company uses the
Black-Scholes Option Pricing Model to determine the fair value of
the stock options. The expense for the options is recognised on a
straight line basis over the requisite service period.
(l) Income Taxes
The Group recognises deferred tax assets on deductible temporary
differences and deferred tax liabilities on taxable temporary
differences. Temporary differences are the differences between the
reported amount of assets and liabilities and their tax bases. As
those differences reverse, they enter into the determination of
future taxable income included on the tax return. Deferred tax
assets are reduced by a valuation allowance when, in the opinion of
management, it is more likely than not that some portion or all of
the deferred tax asset will not be realised. Deferred tax assets
and liabilities are measured using the enacted tax rates that will
apply to taxable income in the periods the deferred tax item is
expected to be settled or realised.
Taxable temporary difference relates primarily to amortisation
of intangibles and depreciation, whereas deductible temporary
difference relates to net operating losses.
The Group recognises the financial statement benefit of a tax
position only after determining that the relevant tax authority
would more likely than not sustain the position following an audit.
For tax positions meeting the more-likely-than-not threshold, the
amount recognised in the financial statements is the largest
benefit that has a greater than 50 per cent likelihood of being
realised upon ultimate settlement with the relevant tax authority.
Increases or decreases to the unrecognised tax benefits could
result from management's belief that a position can or cannot be
sustained upon examination based on subsequent information or
potential lapse of the applicable statute of limitation for certain
tax positions.
The Group may, from time to time, be assessed for interest or
penalties by major tax jurisdictions. In the event the Group
receives an assessment of interest and/or penalties, the interest
would be classified as interest expense while the penalties would
be classified as operating expense.
Management evaluated the Group's tax positions and concluded
that the Group had taken no uncertain tax positions that require
adjustment to the consolidated financial statements. The Group is
no longer subject to income tax examination by the US federal,
state of Colorado or local tax authorities for years before
2008.
(m) Earnings per share
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Basic earnings per share is computed using the weighted average
number of common shares outstanding during the period. Diluted
earnings per share is computed using the weighted average number of
common and potentially dilutive shares outstanding during the
period. Potentially dilutive shares consist of the incremental
common shares issuable upon the exercise of common stock options
and warrants. Potentially dilutive shares are excluded from the
computation if their effect is antidilutive.
(n) Foreign currency transactions and translation
The functional currency of the Group is the United States (US)
dollar. Assets and liabilities denominated in foreign currencies
are translated at the rate of exchange prevailing at the balance
sheet date. Transactions in foreign currencies are recorded at the
rate ruling at the date of transaction. Net gains and losses
resulting from foreign exchange transactions are included in the
Statement of Income. The effects of exchange rate fluctuations on
translating foreign currency assets and liabilities into US dollars
are included as part of the accumulated other comprehensive loss
component of Stockholders' Equity.
(o) Fair value measurements
The carrying value of cash, accounts receivable, accounts
payable and accrued expenses approximates their fair value due to
the relatively short-term nature of these financial
instruments.
The Company utilises valuation techniques that maximise the use
of observable inputs and minimise the use of unobservable inputs to
the extent possible. The Company determines fair value based on
assumptions that market participants would use in pricing an asset
or liability in the principal or most advantageous market. When
considering market participant assumptions in fair value
measurements, the following fair value hierarchy distinguishes
between observable and unobservable inputs, which are categorised
in one of the following levels:
-- Level 1 Inputs: Unadjusted quoted prices in active markets
for identical assets or liabilities accessible to the reporting
entity at the measurement date.
-- Level 2 Inputs: Other than quoted prices included in Level 1
inputs that are observable for the asset or liability, either
directly or indirectly, for substantially the full term of the
asset or liability.
-- Level 3 Inputs: Unobservable inputs for the asset or
liability used to measure fair value to the extent that observable
inputs are not available, thereby allowing for situations in which
there is little, if any, market activity for the asset or liability
at measurement date.
The following table presents the placement in the fair value
hierarchy of assets and liabilities that are measured at fair value
on a recurring basis at 31 December 2015 and 2014 as well as 30
June 2015:
Fair value measurements at reporting
date using
-------------------------------------------------------------------------------------------------
Quoted
prices
in active Significant
markets other Significant
for
identical observable Unobservable
31 December assets inputs Inputs
2015 (Level (Level (Level
1) 2) 3)
------------------- ------------------------ ------------------------ ------------------------
$ $ $ $
Assets:
Trade
accounts
receivable 10,213,539 - - 10,213,539
Related
party
receivables 516,628 - - 516,628
Other assets 334,974 - - 334,974
Total 11,065,141 - - 11,065,141
=================== ======================== ======================== ========================
Liabilities:
Accounts
payable 4,394,060 - - 4,394,060
Revolving
line of
credit 70,476 - - 70,476
Warrant 43,335 - 43,335 -
Related
party
payables 427,938 - - 427,938
Other
liabilities 1,725,655 - - 1,725,655
Total 6,661,464 - 43,335 6,618,129
=================== ======================== ======================== ========================
Fair value measurements at reporting
date using
------------------------------------------------------------------------------------------
Quoted
prices
in active Significant
markets other Significant
for
identical observable Unobservable
31 December assets inputs Inputs
2014 (Level (Level (Level
1) 2) 3)
------------------ ------------------------ ------------------------ ------------------
$ $ $ $
Assets:
Trade accounts
receivable 8,390,856 - - 8,390,856
Related party
receivables 1,859,382 - - 1,859,382
Other assets 611,274 - - 611,274
Total 10,861,512 - - 10,861,512
================== ======================== ======================== ==================
Liabilities:
Accounts payable 3,030,387 - - 3,030,387
Related party
payables 634,301 - - 634,301
Revolving line of
credit 583,856 - - 583,856
Other liabilities 2,682,760 - - 2,682,760
Total 6,931,304 - - 6,931,304
================== ======================== ======================== ==================
Fair value measurements at reporting
date using
-------------------------------------------------------------------------------------------------
Quoted
prices
in active Significant
markets other Significant
for
identical observable Unobservable
30 June assets inputs Inputs
2015 (Level (Level (Level
1) 2) 3)
------------------- ------------------------ ------------------------ ------------------------
$ $ $ $
Assets:
Trade
accounts
receivable 10,200,707 - - 10,200,707
Related
party
receivables 270,384 - - 270,384
Other assets 318,227 - - 318,227
Total 10,789,318 - - 10,789,318
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=================== ======================== ======================== ========================
Liabilities:
Accounts
payable 4,793,939 - - 4,793,939
Revolving
line of
credit 1,792,301 - - 1,792,301
Warrant 43,335 - 43,335 -
Related
party
payables 250,200 - - 250,200
Other
liabilities 1,315,013 - - 1,315,013
Total 8,194,788 - 43,335 8,151,453
=================== ======================== ======================== ========================
The Company's accounting policy is to recognise transfers
between levels of the fair value hierarchy on the date of the event
or change in circumstances that caused the transfer. There were no
transfers into or out of level 1 for the six months ended 31
December 2015.
(p) Recent accounting pronouncement
In May 2015, the FASB published ASU 2015-07, Fair Value
Measurement (Topic 820), Disclosures for Investments in Certain
Entities That Calculate Net Asset Value per Share (or Its
Equivalent) (a consensus of the FASB Emerging Issues Task Force).
The amendments in this Update remove the requirement to categorize
within the fair value hierarchy all investments for which fair
value is measured using the net asset value per share practical
expedient. The amendments also remove the requirement to make
certain disclosures for all investments that are eligible to be
measured at fair value using the net asset value per share
practical expedient. Rather, those disclosures are limited to
investments for which the entity has elected to measure the fair
value using that practical expedient. The amendments in this Update
are effective for public business entities for fiscal years
beginning after December 15, 2015, and interim periods within those
fiscal years.
In May 2015, the FASB published ASU 2015-08, Business
Combinations (Topic 805), Pushdown Accounting (Amendments to SEC
Paragraphs Pursuant to Accounting Bulletin No. 115). This
Accounting Standards Update amends various SEC paragraphs pursuant
to the issuance of Staff Accounting Bulletin No. 115.
In June 2015, the FASB published ASU 2015-10, Technical
Corrections and Improvements. The amendments in this Update cover a
wide range of Topics in the Codification. The amendments generally
fall into one of the types of amendments listed below.
1. Amendments Related to Differences between Original Guidance and the Codification.
2. Guidance Clarification and Reference Corrections.
3. Simplification.
4. Minor Improvements.
The amendments in this Update that require transition guidance
are effective for all entities for fiscal years, and interim
periods within those fiscal years, beginning after December 15,
2015. Early adoption is permitted, including adoption in an interim
period. All other amendments will be effective upon the issuance of
this Update.
In July 2015, the FASB published ASU 2015-12, Plan Accounting:
(Topics 962), Plan Accounting-Defined Contribution Pension Plans,
and (Topic 965), Plan Accounting-Health and Welfare Benefit Plans,
require fully benefit-responsive investment contracts to be
measured at contract value. Those Topics also require an adjustment
to reconcile contract value to fair value, when these measures
differ, on the face of the plan financial statements. Fair value is
measured using the requirements in Topic 820, Fair Value
Measurement. Under the amendments, fully benefit-responsive
investment contracts are measured, presented, and disclosed only at
contract value. A plan will continue to provide disclosures that
help users understand the nature and risks of full
benefit-responsive investment contracts. The amendments in this
update are effective for fiscal years beginning after December 15,
2015. Earlier Application is permitted.
In August 2015, the FASB published ASU 2015-16, Business
Combinations (Topic 805), Simplifying the Accounting for
Measurement. The amendments in this Update require that an acquirer
recognise adjustments to provisional amounts that are identified
during the measurement period in the reporting period in which the
adjustment amounts are determined. The amendments in this Update
require that the acquirer record, in the same period's financial
statements, the effect on earnings of changes in depreciation,
amortisation, or other income effects, if any, as a result of the
change to the provisional amounts, calculated as if the accounting
had been completed at the acquisition date. The amendments in this
Update require an entity to present separately on the face of the
income statement or disclose in the notes the portion of the amount
recorded in current-period earnings by line item that would have
been recorded in previous reporting periods if the adjustment to
the provisional amounts had been recognised as of the acquisition
date.
The amendments in this Update are effective for public business
entities for fiscal years beginning after December 15, 2015, and
interim periods within those fiscal years. The amendments should be
applied prospectively to adjustments to provisional amounts that
occur after the effective date of this Update with earlier
application permitted for financial statements have not been
issued.
In November 2015, the FASB published ASU 2015-17, Income Taxes
(Topic 740), Balance Sheet Classification of Deferred Taxes. The
amendments in this Update will align the presentation of deferred
income tax assets and liabilities with International Financial
Reporting Standards (IFRS). IAS 1, Presentation of Financial
Statements, requires deferred tax assets and liabilities to be
classified as noncurrent in a classified statement of financial
position. The amendments in this Update are effective for public
business entities for fiscal years beginning after December 15,
2016, and interim periods within those fiscal years.
In January 2016, the FASB published ASU 2016-01, Recognition and
Measurement of Financial Assets and Financial Liabilities, intended
to improve the recognition and measurement of financial
instruments. The amendments address certain aspects of recognition,
measurement, presentation and disclosure of financial instruments.
The ASU on recognition and measurement will take effect for public
companies for fiscal years beginning after December 15, 2017,
including interim periods within those fiscal years.
The adoption of these standards does not have a material effect
on the Group's unaudited consolidated interim financial
statements.
(q) Revenue recognition
In regards to Digital Globe Services, Inc. and Telsat Online,
Inc., revenue is recognised based on actual monthly installations
and activation of cable services ordered through Digital Globe
Services, Inc. at the end-customers' home or business address. Once
an order is placed through Digital Globe Services, Inc., the order
is transferred to the client for activation and installation. The
client then schedules the service to be activated at the
end-customers' address, and once successfully activated, the data
is entered into the client database, which results in the payable
to Digital Globe Services, Inc. On a monthly basis, each client
reconciles their internal database for all ordered services and
determines which activations are deemed payable for that month and
sent to Digital Globe Services, Inc. via a monthly payment file.
This may include activations from prior months, but are deemed
payable after reconciliation. Revenue is then recorded based on the
total number of installations recognised in a given month,
multiplied by the commission rate as stated in the agreement with
the client.
Total installations are reported to Digital Globe Services, Inc.
via monthly payment files detailing total installations and total
commission value based on final product mix within the month. The
payment files provide detailed payment information on total
commissions earned by Digital Globe Services, Inc. net of
chargebacks and cancellations. The revenue of Digital Globe
Services, Inc. recorded in the financial year ended 30 June 2014
and through the interim period ending 31 December 2014 includes a
portion of revenue for the period from 1 Jan 2014 through 30 June
2014. This includes but is not limited to submitted orders which
were deemed to have installed after a given period and hence we
were not given credit for, in accordance with the terms of the
contract with our largest customer. DGS has engaged an independent
audit firm to review the data as part of an audit, as allowed under
the terms of the same contract which is anticipated to be conducted
before the end of the current fiscal year. Utilizing data provided
by our largest customer, the expected revenue from underpayment has
been determined to be $1.3M. The revenue was recorded in the
financial statements in the financial year ended 30 June 2014.
In regards to DGS EDU LLC, revenue is accrued for and recognised
on a monthly basis based on the leads, clicks and data delivered
during the month, net of the historical return/disqualification
rate, with any adjustments to confirmed invoicing occurring during
the preceding month. Net adjustments are generally less than 1%.
The policy is different from that of the core business, since the
revenue is both earned and can be reliably estimable. Revenue from
core business is not deemed to be earned until the service has been
installed, due to certain factors existing in those contracts.
In regards to DGS Auto LLC, revenue is recognised as soon as the
service is rendered based exclusively on merchant activity at the
time of sale.
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In regards to the DGS Inc. subsidiary, 7 Degrees LLC, revenue is
recognised as commission earned as a percentage of total marketing
dollar spent on behalf of the client, when the related
advertisement appears before the public and intimated to the
agency.
The only other revenue is in relation to IP royalty income and
back office services provided, which is eliminated on
consolidation.
(r) Search engine and lead generation expenses
The Group's most significant operating costs are the click
through fees associated with bidding on key words or phrases with
various internet search engines. The most significant vendor used
is Google Inc. These expenses are recognised on an accrual basis
based on the number of click-throughs for the period. The fees
charged by the Search Engines vary depending on day and time but
typically range from $1.00 to $3.00 per click. Although the Group
has entered into service agreements with various Internet search
engines, these agreements do not require either party to make a
long--term commitment and can be terminated at any time.
The Group utilises sub-affiliates to generate additional volume
in conjunction with the Group's main clients. These third party
affiliates run their own marketing campaigns and send their leads
to the Group's call centres whereby the Group closes the sale and
sends the lead on to its clients. Compensation for sub-affiliate
leads varies by partner, but they are typically paid a bounty per
lead, which, when converted, generates a bounty by the company's
clients.
(s) Warrant
Warrants are initially measured at fair value at the measurement
date which is the date on which the warrant instruments are made.
Subsequently these warrants are re-measured at their fair value at
the reporting date with any change being recognised in the
consolidated statement of income.
(t) Segment reporting
The information being presented to and reviewed by the chief
operating decision maker (i.e. the Group's Chief Executive Officer)
is divided into two segments: the Education business (EDU) and the
company's usual business (INC). These are hence being identified as
reportable segments - EDU being the customer acquisition business
for the educational institutions (universities); and INC being the
customer acquisition business for other customers. The 'DGS INC'
segment comprises of communications industry customers as well as
the Group's Telsat business which caters for customers outside the
cable industry, specifically for satellite and telecommunications
service providers.
The accounting policies of the segments are the same as those
described in the summary of significant accounting policies. The
segment performance is evaluated based upon Net Income as well as
EBITDA (Earnings Before Interest, Taxes, Depreciation and
Amortisation).
The following table presents information of our various
segments.
DGS DGS
EDU INC TOTAL
31 December 2015 $ $ $
-------------------------------
Revenues from external
customers 3,062,346 20,670,729 23,733,075
Revenues from major customers
- Comcast Corporation - 6,723,184 6,723,184
- Charter Communications - 3,192,765 3,192,765
- Time Warner Cable - 2,925,832 2,925,832
Depreciation and amortisation 184,976 676,646 861,622
Interest expense - 91,706 91,706
Segment (Loss)/Profit (154,353) 1,269,939 1,115,586
EBITDA 110,855 1,995,196 2,106,051
Income tax expense - 23,561 23,561
Segment assets 4,944,948 13,765,437 18,710,385
Expenditures for segment
assets - 123,352 123,352
DGS DGS
EDU INC TOTAL
31 December 2014 $ $ $
-------------------------------
Revenues from external
customers 3,505,894 14,902,773 18,408,667
Revenues from major customers
- Comcast Corporation - 4,702,109 4,702,109
- Time Warner Cable - 2,490,338 2,490,338
- Charter Communications - 3,221,070 3,221,070
Depreciation and amortisation 197,245 431,617 628,862
Interest expense - 44,182 44,182
Segment loss (116,606) (742,238) (858,844)
EBITDA 160,858 (298,885) (138,027)
Income tax expense - 33,469 33,469
Segment assets 5,034,263 12,446,047 17,480,310
Expenditures for segment
assets - 337,108 337,108
DGS DGS
EDU INC TOTAL
30 June 2015 $ $ $
-------------------------------
Revenues from external
customers 6,802,927 33,468,104 40,271,031
Revenues from major customers
- Comcast Corporation - 10,630,775 10,630,775
- Time Warner Cable - 5,257,587 5,257,587
- Charter Communications - 5,736,587 5,736,587
Depreciation and amortisation 394,721 1,068,292 1,463,013
Interest expense - 70,862 70,862
Segment (loss)/profit (183,394) 440,887 257,493
EBITDA 371,755 1,824,690 2,196,445
Income tax expense 428 404,649 405,077
Other significant non-cash
items - stock options
plan charge - 756,092 756,092
Segment assets 5,079,740 15,201,978 20,281,718
Expenditures for segment
assets 1,385 309,718 311,103
Disclosed in the following table is the company's geographical
information:
Geographic 31 December 31 December
Information 2015 2014 30 June 2015
-------------------------------- -------------------------------- ---------------------------------
Long-Lived Long-Lived Long-Lived
Revenues Assets Revenues Assets Revenues Assets
$ $ $ $ $ $
United
States
and Canada 23,733,075 245,053 18,408,667 117,914 40,271,031 81,235
Pakistan - 898,441 - 1,299,400 - 1,035,198
23,733,075 1,143,494 18,408,667 1,417,314 40,271,031 1,116,433
================== ============ ================== ============ ================== =============
(3) Dividends
During the six months ended 31 December 2015, the Group paid
dividends of $1,132,930 (2014: $358,303) from a declared dividend
of $1,132,930.
(4) Income taxes
The tax provision consists of the following:
6 months 6 months
ended ended Year ended
31 December 31 December 30 June
2015 2014 2015
$ $ $
Current tax expense 23,561 33,469 100,128
Deferred tax expense - - 304,949
Total Income tax expense 23,561 33,469 405,077
========================= ========================= =====================
The U.S. tax provision calculations include DGS, Inc, DGS Edu,
LLC, Telsat Online, Inc, DGS Auto, LLC, DGS Lake Ball LLC and 7
Degrees LLC. Additionally, included in the provision are DGS Cyprus
Limited, DGS Tech (Ireland) and DGS BV (Netherland). DGS Private
Limited (Pakistan) is exempt from corporate income tax under
Pakistan's tax laws, being an exporter of IT enabled services. DGSL
(Bermuda based holding company) became a UK tax resident on 26 June
2013 and files its tax return in the UK.
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The Group recognizes deferred tax assets on deductible temporary
differences and deferred tax liabilities on taxable temporary
differences. Temporary differences are the differences between the
reported amount of assets and liabilities and their tax bases. As
those differences reverse, they enter into the determination of
future taxable income included on the tax return. Management has
evaluated the Group's tax positions and concluded that the Group
had taken no uncertain tax positions that require adjustment to the
consolidated financial statements. The Group recognizes interest
and penalties related to uncertain tax positions in income tax
expense. As of 31 December 2015, the Group had no provision for
interest or penalties related to uncertain tax positions. The years
2011-2015 are open to examination by the tax authorities.
The following shows the nature and components of Group's
deferred tax asset and liabilities:
As at As at As at
31 December 31 December 30 June
2015 2014 2015
$ $ $
Deferred tax asset
Net Operating Losses 2,537,833 842,515 1,856,716
Valuation Allowance (2,628,256) (612,752) (1,922,640)
Amortization of intangibles 218,449 63,684 144,060
---------------
128,026 293,447 78,136
=============== ================== ===============
Deferred tax liabilities
Depreciation (86,210) 23,429 (50,616)
Amortization of intangibles (76,747) - (62,451)
--------------- ------------------ ---------------
(162,957) # 23,429 (113,067)
=============== ================== ===============
The valuation allowance at December 31, 2015 was primarily
related to net operating losses, in the judgment of management, are
not more-likely-than-not to be realized. In assessing the
realisability of deferred tax assets, management considers whether
it is more-likely-than-not that some portion or all of the deferred
tax assets will not be realized. The ultimate realization of
deferred tax assets is dependent upon the generation of future
taxable income during the periods in which those temporary
differences become deductible. Management considers the scheduled
reversal of deferred tax liabilities (including the impact of
available carryback and carryforward periods), projected future
taxable income, and tax-planning strategies in making this
assessment. Based upon the level of historical taxable income and
projections for future taxable income over the periods in which the
deferred tax assets are deductible, management believes it is
more-likely-than-not that the Group will realize the benefits of
these deductible differences, net of the existing valuation
allowances at December 31, 2015. The amount of the deferred tax
asset considered realizable, however, could be reduced in the near
term if estimates of future taxable income during the carryforward
period are reduced.
At 31 December, 2015, group's U.S. federal and state net
operating loss carry forward for income tax purposes is $5.50
million (30 June 2015: $4.23 million) which will begin to expire in
2035. Group's UK net operating loss carry forward for income tax
purposes is $0.93 million (30 June 2015: $0.81 million). Group's
Ireland and Cyprus net operating losses carry forward for income
tax purpose are $1.13 million (30 June 2015: $0.66 million) and
$0.06 million (30 June 2015: $0.06 million), respectively. These
amounts are based on estimated amounts for the half year ended 31
December 2015.
The income tax provision differs from the amount of income tax
determined by applying the statutory tax rate to pretax income, due
to the following:
6 months 6 months Year ended
ended ended
31 December 31 December 30 June
2015 2014 2015
-------------------------- ------------------------- -----------------------
% $ % $ % $
Net Income / (loss)
for the period 1,115,586 (858,844) 257,493
Total income tax expense 23,561 33,469 405,077
Net Income excluding
income tax 1,139,147 (825,375) 662,570
================ =============== ============
Expected income tax
expense using applicable
tax rate 0.00 - 34.00 (280,628) 34.00 225,275
State taxes, net of
federal effect 0.00 - 2.50 (20,625) 2.27 15,031
Foreign subsidiaries
taxed at lower rate
or tax exempt 20.00 227,829 (97.37) 803,707 179.62 1,190,146
Non-deductible expenses
/ exempt income (17.93) (204,268) 56.82 (468,985) (154.76) (1,025,375)
Income tax expense/(credit) 2.07 23,561 (4.05) 33,469 61.13 405,077
======== ================ ======== =============== ========= ============
(5) Related party transactions
The Group has service agreements for call centre and
administrative services with subsidiaries of TRG. These agreements
are in effect until terminated by either party and specify payments
based on services performed. Expenses incurred for the six months
ended 31 December 2015, under these service agreements totaled
$319,699 (2014: $360,694) which is included in call centre costs,
communication expense and selling, general and administrative costs
in the accompanying consolidated statements of income. The net
amounts due from these subsidiaries totaled $88,690 at 31 December
2015 (2014: $1,225,081).
(6) Commitments and contingencies
The Company and its subsidiaries are subject to lawsuits and
claims filed in the normal course of business. Management does not
believe that the outcome of any of the proceedings will have a
material adverse effect on the Group's business results of
operations, liquidity or financial condition.
On 14 December 2015, DGS Edu, LLC, a member of the Group, was
served with a complaint. DGS Edu has filed a motion to dismiss the
complaint and as of the date hereof the Court has yet to decide the
motion to dismiss. Management strongly believes that there are no
cogent grounds for the complaint and therefore, intends to defend
the action vigorously. The management is of the opinion that the
complaint will be successfully settled in the favor of the company
without any costs to the company. On the basis of the objective
evidence available when the financial statements were approved, the
management is confident that there is no need to recognise any
provision since there is no obligation and the probability of
outflow of resources is also considered to be remote.
(7) Acquisitions
On November 16, 2015, Telsatonline Inc., acquired select call
center assets and affiliate relationships focused on servicing
DirecTV from DSC Distributing Inc. The assets and trading business
acquired were as follows:
Provisional
fair value
of assets acquired
Office furniture & Equipment 213,543
Customer based intangibles 367,300
Goodwill 54,250
635,093
--------------------
The consideration paid was satisfied through a Closing Cash
Consideration of USD 440,000 plus an Earn-Out Payment of up to USD
110,000 per each subsequent six month period contingent on certain
Revenue targets being met, capped at a maximum total Earn-Out
Payment no larger than USD 440,000. In the event that the 6 months
Revenue earned by Telsatonline from or in connection with the
Business between Closing and the subsequent four periods,
comprising 24 months from the date of Closing, an additional amount
will be paid. The maximum payout for each 6 month period is capped
at USD 110,000.
The Earn-Out shall be equal to 4% of Revenue as calculated on 6
month basis beginning from the first day of the month following the
date of Closing ("Additional Consideration"). However, no
Additional Consideration shall be due and owing for any of the 6
month periods in the event that Revenue is not equal to or greater
than USD 2 million during such 6 month period. The fair value or
Earn-Out was estimated at the valuation date to be $195,093.
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