CONSOLIDATED STATEMENTS OF CASH FLOWS

The audited, Consolidated Statements of Cash Flows of the Group for each of the years ended 31 December 2022 and 2023 are set out below:

Notes to the financial statements

1.      ORGANISATION AND NATURE OF BUSINESS

The Financial Information consolidates the financial information of the Company and:

·      its wholly-owned subsidiaries:

o  Fadel Partners UK Limited ("Fadel UK"), and its wholly-owned subsidiary;

§ Image Data Systems (UK) Limited ("IDS");

o  Fadel Partners France SAS ("Fadel France"); and

o  Fadel Partners Canada Inc. ("Fadel Canada") disolved November 2023.

·      its 99.99%-owned subsidiary, Fadel Partners SAL Lebanon ("Fadel Lebanon").

The Company is a New York Corporation formed in July 2003 and reincorporated in Delaware in January 2014. Fadel Lebanon was incorporated in Lebanon in August 2014. Fadel UK was formed in the United Kingdom ("UK") in January 2015, while Fadel Canada was formed in Canada in June 2021 and subsequently dissolved in November 2023. The primary reason for this dissolution was to initiate investment in the UK and expand our workforce there, following our decision to go public in that market. Consequently, it was more logical to close the entity in Canada and concentrate on strengthening our operations in the UK. Fadel France was formed in France in February 2020. IDS was formed in April 1992 in the UK by an unrelated party and acquired by the company on 1 October 2021. Together the entities are collectively referred to herein as the "Group". The Group is headquartered in New York, with a presence in Los Angeles, London, Paris and Beirut (Lebanon) and is engaged in providing and servicing its Intellectual Property Rights and Royalty Management suite of software.

On 6 April 2023, the Company was listed and started trading on AIM, a market operated by the London Stock Exchange plc ("AIM").

2.      LIQUIDITY AND FINANCIAL CONDITION

Under Accounting Standards Update, or ASU, Presentation of Financial Statements-Going Concern (Accounting Standard Codification ("ASC") Subtopic 205-40) ("ASC 205-40"), the Company has the responsibility to evaluate whether conditions and/or events raise substantial doubt about the Group's ability to meet its future financial obligations as they become due within one year after the date that the Consolidated Financial Information is issued. As required by ASC 205-40, this evaluation shall initially not take into consideration the potential mitigating effects of plans that have not been fully implemented as at the date the Consolidated Financial Information is issued. The Company has assessed the Group's ability to continue as a going concern in accordance with the requirement of ASC 205-40.

As reflected in the consolidated financial information, the Group had approximately $3.2 million in cash on the Statement of Financial Position as at 31 December 2023. As at 31 December 2023, the Group had positive working capital of approximately $3.7 million and an accumulated deficit approximating $16.7 million. Additionally, the Group had a net loss of approximately $1.5 million and cash used by operating activities of approximately $5.5 million during the year ended 31 December 2023.

The Company has historically funded its operations through the sale of convertible preferred stock, common stock, and lines of credit from shareholders and banks. During the year ended 31 December 2023, the Company raised gross proceeds of $8,635,053 from its successful initial public offering to AIM, including $564,009 by way of a loan from Tarek Fadel (the "Fadel Loan"). Also, during the year ended 31 December 2023, the Company issued 223,289 common shares at a price of £1.44 per share to employees and friends, resulting in a cash receipt of $401,245. This cash was used to part repay the Fadel Loan.

Based on the results above, the Group believes there are sufficient funds to provide the Group with sufficient liquidity for at least twelve months from the date of this Document.

3.      SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of consolidation

The consolidated financial Information has been prepared in accordance with accounting principles generally accepted in the United States of America ("US GAAP"). They include the accounts of the Company, and interest owned in subsidiaries as follows: 99.99% of Fadel Lebanon and 100% of Fadel UK, Fadel France, Fadel Canada (dissolved November 2023) and IDS. All significant intercompany balances and transactions are eliminated on consolidation. The non-controlling interest represents the 0.00011% share of Fadel Lebanon owned by outside parties.

Use of estimates

The preparation of the consolidated financial information in conformity with US GAAP requires the Group to make estimates and assumptions that affect the reported amounts of the Group's assets and liabilities and disclosure of contingent assets and liabilities, at the date of the consolidated financial information, as well as the reported amounts of revenue and expenses during the reporting period. Actual results could differ from these estimates.

Fair value measurements

Generally accepted accounting principles require the disclosure of the fair value of certain financial instruments, whether or not recognised on the Consolidated Statement of Financial Position, for which it is practicable to estimate fair value. The Group estimated fair values using appropriate valuation methodologies and market information available as at year-end. Considerable judgment is required to develop estimates of fair value, and the estimates presented are not necessarily indicative of the amounts that the Group could realise in a current market exchange. The use of different market assumptions or estimated methodologies could have a material effect on the estimated fair values. Additionally, the fair values were estimated at year end, and current estimates of fair value may differ significantly from the amounts presented.

Fair value is estimated by applying the following hierarchy, which prioritises inputs used to measure fair value into three levels and bases categorisation within the hierarchy upon the lowest level of input that is available and significant to the fair value measurement:

Level 1:        Quoted prices in active markets for identical assets or liabilities;

Level 2:        Observable inputs other than quoted prices in active markets for identical assets and liabilities, quoted prices for identical or similar assets or liabilities in inactive markets, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities; and

Level 3:        Inputs that are generally unobservable and typically management's estimate of assumptions that market participants would use in pricing the asset or liability.

Cash and cash equivalents

All highly liquid investments with maturities of three months or less at the date of purchase are classified as cash equivalents.

Concentrations of credit risk

Financial instruments that potentially subject the Group to concentrations of credit risk consist primarily of cash, accounts receivable and unbilled work-in-progress. The Company performs on-going evaluations of the Group's customers' financial condition and, generally, requires no collateral from customers.

The Group maintains its bank accounts with major financial institutions in the United States, Lebanon, the UK, and France.  At 31 December 2023, the Group had cash balances in excess of the Federal or National insured limits at financial institutions in the United States, France and the UK totalling some US$2.37 million out of a total of US$3.2 million cash deposits. The Company believes the risk is limited as the institutions are large national institutions with strong financial positions. Cash amounts held in Lebanon are not insured and as such minimal deposits are held in Lebanese accounts, with payments transferred in country only on an as needed basis.

Accounts receivable, unbilled work-in-progress and credit losses

Accounts receivable is recorded at the invoiced amount and do not bear interest. Credit is extended based on the evaluation of a customer's financial condition and collateral is not required. Unbilled work-in-progress is revenue which has been earned but not invoiced. An allowance is placed against accounts receivable or unbilled work-in-progress for management's best estimate of the amount of probable credit losses. The Company determines the allowance based on historical write-off experience and information received during collection efforts.

Credit losses to date have been insignificant and within management's expectations. The company provides an allowance for credit losses that is based upon a review of outstanding receivables, historical collection information, expected future losses, and existing economic conditions. Account balances are charged against the allowance after all means of collection have been exhausted and the potential for recovery is considered remote. See Note 8 for more details.

Revenue recognition

Since 1 January 2019, the Group has accounted for revenue recognition in line with ASC 606 "Revenue from Contracts with Customers" and ASC 340 "Other Assets and Deferred Cost."

The Group's revenue is derived from three primary sources:

·      license / subscription fees;

·      customer support; and

·      services.

Revenue is recognised upon transfer of control of promised products and services to customers in an amount that reflects the consideration the Group expects to receive in exchange for those products or services. If the consideration promised in a contract includes a variable amount, for example, overage fees, contingent fees or service level penalties, the Group includes an estimate of the amount it expects to receive for the total transaction price if it is probable that a significant reversal of cumulative revenue recognised will not occur.

The Group determines the amount of revenue to be recognised through the application of the following steps:

·      identification of the contract, or contracts, with a customer;

·      identification of the performance obligations in the contract;

·      determination of the transaction price;

·      allocation of the transaction price to the performance obligations in the contract; and

·      recognition of revenue when or as the Group satisfies its performance obligations.

We typically have multiple contracts with each customer with each contract varying in nature depending on the type of license or services being contract.

·      Term licenses: a majority of our contracts (in revenue terms) are term licenses. Some of these, based on specific terms within the contracts, are recognised rateably, but some which are single tenant, cloud hosted in a private environment and non-cancellable in nature, are recognised in full upon the signing of the annual contract under the requirements of Accounting Standards Codification (ASC) 606. Most of these term contracts are for the provision of our IPM Suite family of products. These contracts typically range from between 1-3 years in duration.

·      Software as a service ("SaaS") contracts: Increasingly, our contracts are SaaS in nature and are recognised rateably on a monthly basis. These SaaS type contracts are a majority in number, however many of these are not particularly high value contracts on either an individual or collective basis relative to our overall revenue levels today. However, they are expected to scale significantly over the next few years as existing clients expand their usage and we win new clients.

·      Perpetual licenses: There are a small number of perpetual licenses, accompanied by annual support contracts that were sold to customers more than a decade ago, and in line with our efforts, some of these customers, moved to subscription contracts during 2023.

·      Professional services: The Group's professional services contracts are either on a time and materials, fixed fee or subscription basis. These revenues are recognized as the services are rendered for time and materials contracts, on a proportional performance basis for fixed price contracts or rateably over the contract term for subscription professional services contracts. Other revenues consist primarily of training revenues recognized as such services are performed.

Significant judgements - contracts with multiple performance obligations

The Group enters into contracts with its customers that may include promises to transfer multiple performance obligations such as cloud services, software licenses, support, updates, and professional services. Multiple performance obligations are a promise in a contract with a customer to transfer products or services that are concluded to be distinct. Determining whether products and services are distinct performance obligations that should be accounted for separately or combined as one unit of accounting may require significant judgment. The Group accounts for these performance obligations under individual contracts on an 'as combined' basis because the supplementary product or services that accompany cloud services and or software licenses are tailored and do not have a distinct fair market value.

As the Group's go-to-market strategies evolve, the Group may modify its pricing practices in the future, which could result in distinct products or services that require a standalone selling price.

The Group records amounts billed in advance of services being performed as deferred revenue. Unbilled work-in-progress represents revenue earned but not yet billable under the terms of the fixed-price contracts. Most of these amounts are expected to be billed and collected within 12 months.

Costs of obtaining a revenue contract

The Group capitalises costs of obtaining a revenue contract. These costs consist of sales commissions related to the acquisition of such contracts that would not have been incurred if these contracts were not won.

For licenses, the Group estimated the amortisation period based on the remaining expected life of the customer/the term for which it anticipates the Group's contract will remain effective. It anticipates the term due to the project size, terms, complexity and cost of implementation and transition, making it less likely that a client will change vendors for this service.

During the implementation, the Group applied the guidance as at 1 January 2019 only to contracts that were either not completed as at that date, or that had a life of customer that ended after 1 January 2019.

For service and support contracts, the amortisation period is based on the duration of the contract in consideration that it would be less difficult and costly for clients to transition to another vendor for continued service.

Amortisation periods for customer lives typically vary between 5 and 10 years. The Group elected not to apply the practical expedient for contracts that have a duration of less than one year. The Group has also elected to not include amortisation of the costs of obtaining a revenue contract within gross profit in order to help the reader see the business through the eyes of management.

Depreciation

Furniture and equipment are stated at cost. Depreciation is computed using the straight-line method over the estimated useful lives of the assets, generally three to seven years. When assets are retired or otherwise disposed of, the cost and related accumulated depreciation are removed from the accounts and any resulting gain or loss is reflected in operations for the period. The cost of maintenance and repairs is charged to operations as incurred. Significant renewals and betterments are capitalised.

Intangible assets - goodwill

Goodwill arises on the acquisition of a business. Goodwill is not amortized. Instead, goodwill is tested annually for impairment, or more frequently if events or changes in circumstances indicate that it might be impaired and is carried at cost less accumulated impairment losses. Impairment losses on goodwill are taken to profit or loss and are not subsequently reversed.

Intangible assets other than goodwill

The Group has three categories of intangible assets other than goodwill:

Brand assets

The Group purchased IDS in October 2021 and with it acquired a long-established and respected brand. At the time of purchase, the Group estimated the useful life of the brand assets acquired for financial reporting purposes and recognises amortisation on a straight-line basis over the useful life of the asset, typically 10 years. Purchased brand assets are reviewed for impairment at each reporting date or when events and circumstances indicate an impairment. The Group determined that an impairment charge was not necessary during the years ended 31 December 2022 and 2023.

Customer relationships

The Group purchased IDS in October 2021 and with it acquired a number of customer relationships. At the time of purchase, the Group estimated the useful life of the customer relationships acquired for financial reporting purposes and recognises amortisation on a straight-line basis over the useful life of the asset, typically 10 years. Purchased customer relationships are reviewed for impairment at each reporting date or when events and circumstances indicate an impairment. The Group determined that an impairment charge was not necessary during the years ended 31 December 2022 and 2023.

Software and technology assets

The Group purchased IDS in October 2021 and with it acquired a number of software and technology assets.  At the time of purchase, the Group estimates the useful life of the software and technology assets acquired for financial reporting purposes and recognised amortisation on a straight-line basis over the useful life of the asset, typically 10 years. Purchased software and technology assets are reviewed for impairment at each reporting date or when events and circumstances indicate an impairment. The Group determined that an impairment charge was not necessary during the years ended 31 December 2022 and2023.

Billed accounts receivable and concentrations of credit risk

As at 31 December 2023, there were two significant customers (defined as contributing at least 10%) that accounted for 72% of accounts receivable.

As at 31 December 2022, there were three significant customers that accounted for 68% of accounts receivable.

Accounts payable and concentrations of credit risk

As at 31 December 2023, there were three significant vendors (defined as contributing at least 10%) that accounted for 58% of accounts payable.

As at 31 December 2022, there were three significant vendor that accounted for 62% of accounts payable.

Unbilled work-in-progress and concentrations of credit risk

As at 31 December 2023, there were three significant customers that accounted for 76% (39%, 19% and 18%) of unbilled work-in-progress.

As at 31 December 2022, there were three significant customers that accounted for 88% (44%, 27% and 17%) of unbilled work-in-progress.

Segmental reporting

The Group reports its business activities in two areas:

·      License/subscription and support revenue (recurring); and

·      Professional services (non-recurring),

which are reported in a manner consistent with the internal reporting to the CEO, who has been identified as the chief operating decision maker.

Revenue concentrations

During 2023, the five largest customers accounted for an aggregate of $8,769,838 of revenue, some 61% of revenue from continuing operations

During 2022, the five largest customers accounted for an aggregate of $8,411,729 of revenue, some 64% of revenue from continuing operations.

Advertising and promotion costs

Advertising and promotion costs are expensed as incurred. These costs totalled $536,552 for the year ended 31 December 2022 and $781,410 for the year ended 31 December 2023.

Income taxes

The Group records deferred tax assets and liabilities for the estimated future tax effects of temporary differences between the tax bases of assets and liabilities and amounts reported in the Group's Consolidated Statements of Financial Position, as well as operating loss and tax-credit carry-forwards. The Group also measures deferred tax assets and liabilities using enacted tax rates expected to be applied to taxable income in the years in which those temporary differences are expected to be recovered or settled. Deferred tax assets are reduced by a valuation allowance if, based on available evidence, it is more likely than not that these benefits will not be realised.

Stock-based compensation

The Group records stock-based compensation in accordance with FASB ASC Topic 718 "Compensation-Stock Compensation". The fair value of awards granted is recognised as an expense over the requisite service period.

Leases

In February 2016, Financial Accounting Standards Board ("FASB") issued guidance Accounting Standards Codification ("ASC") 842, "Leases", to increase transparency and comparability among organizations by requiring the recognition of right-of-use ("ROU") assets and lease liabilities on the Consolidated Statements of Financial Position. Most prominent among the changes in the standard is the recognition of ROU assets and lease liabilities by lessees for those leases classified as operating leases. Under the standard, disclosures are required to meet the objective of enabling users of financial statements to assess the amount, timing, and uncertainty of cash flows arising from leases. The Company adopted FASB ASC 842 effective 1 January 2022.

The Company determines if an arrangement is a lease at inception. If applicable, operating leases are included in operating lease ROU assets, other current liabilities, and operating lease liabilities on the accompanying Consolidated Statements of Financial Position. If applicable, finance leases are included in property and equipment, other current liabilities, and other long-term liabilities on the accompanying Consolidated Statements of Financial Position.

ROU assets represent the right to use an underlying asset for the lease term and lease liabilities represent our obligation to make lease payments arising from the lease. Operating lease ROU assets and liabilities are recognized at commencement date based on the present value of lease payments over the lease term.

Foreign currency

The Group's reporting currency is the US Dollar. The functional currency of foreign operations, excluding the Lebanon entity, is the local currency for the foreign subsidiaries. Assets and liabilities of those foreign operations denominated in local currencies are translated at the spot (historical) rate in effect at the applicable reporting date. The Group's Consolidated Statements of Comprehensive Income are translated at the weighted average rate of exchange during the applicable period. Realised and unrealised transaction gains and losses generated by transactions denominated in a currency different from the functional currency of the applicable entity are recorded in other income (expense) in the Consolidated Statements of Comprehensive Income in the period in which they occur.

The exchange rate used to translate the sterling pound ("£"), ("EURO") and (CAD) into $ for the purpose of preparing the consolidated financial information uses the average rate for the Consolidated Statements of Comprehensive Income and Consolidated Statements of Cash Flows and the rate at the end of the reporting period for the Consolidated Statements of Financial Position.

In accordance with applicable US GAAP, as at January 1, 2023, our company transitioned Fadel to a USD functional currency entity due to the hyperinflationary conditions prevalent in the Lebanese currency. Prior to this date, the Lebanon subsidiary was accounted for using its local currency as a functional currency. This change was applied prospectively and is consistent with US GAAP principles. As a result, all financial statements for periods after January 1, 2023, reflect the Lebanon subsidiary's operations and financial position in USD, while comparative financial information remains reported in its previous local currency.

Comprehensive income/(loss)

Comprehensive income/(loss) consists of two components:

•      net income/(loss); and

•      other comprehensive income/(loss).

Other comprehensive income/(loss) refers to revenue, expenses, gains and losses that are recorded as an element of Shareholder's equity but are excluded from net income/(loss). Other comprehensive income/(loss) consists of foreign currency translation adjustments from those subsidiaries not using the $ as their functional currency.

Statement of cash flows

Cash flows from the Group's operations are calculated based upon the functional currencies. As a result, amounts related to assets and liabilities reported on the Consolidated Statements of Cash Flows will not necessarily agree with changes in the corresponding balances on the Consolidated Statements of Financial Position.

New Accounting Pronouncements:

From time to time, new accounting pronouncements are issued by the FASB or other standard setting bodies and adopted by the Company as at the specified date. Unless otherwise discussed, the Company believes that the impact of recently issued standards that are not yet effective will not have a material impact on the Group's Consolidated Statements of Financial Position, Consolidated Statements of Comprehensive Income or Consolidated Statements of Cash Flows.

Recently Adopted Accounting Pronouncements

In June 2016, the FASB issued ASU No. 2016-13, "Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (ASU 2016-13)". ASU 2016-13 requires that credit losses be reported as an allowance using an expected losses model, representing the entity's current estimate of credit losses expected to be incurred. The accounting guidance currently in effect is based on an incurred loss model. For available-for-sale debt securities with unrealised losses, this standard now requires allowances to be recorded instead of reducing the amortized cost of the investment. The amendments under ASU 2016-13 are effective for interim and annual fiscal periods beginning after 15 December 2022. The Company adopted this standard as at 1 January 2023, with no material impact on its consolidated financial statements.

Recently Issued Accounting Pronouncements

In November 2023, the FASB issued ASU No. 2023-07, "Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosure". This standard requires disclosure of significant segment expenses that are regularly provided to the chief operating decision maker ("CODM") and included within each reported measure of segment profit or loss, an amount and description of its composition for other segment items to reconcile to segment profit or loss and the title and position of the entity's CODM. The amendments in this update also expand the interim segment disclosure requirements. This standard is effective for fiscal years beginning after 15 December 2023, and interim periods within fiscal years beginning after 15 December 2024 and early adoption is permitted. The Company is currently evaluating the potential impact that this new standard will have on our consolidated financial statement disclosures.

In December 2023, the FASB issued ASU 2023-09, "Income Taxes (Topic 740): Improvements to Income Tax Disclosures", which is intended to provide enhancements to annual income tax disclosures. In particular, the standard will require more detailed information in the income tax rate reconciliation, as well as the disclosure of income taxes paid disaggregated by jurisdiction, among other enhancements. The standard is effective for years beginning after 15 December 2024 and early adoption is permitted. The Company is currently evaluating the impact of the standard on the presentation of its consolidated financial statements and footnotes.

4.      SEGMENTAL REPORTING

The Group reports its business activities in two areas:

·      License/subscription and support revenue; and

·      professional services,

which are reported in a manner consistent with the internal reporting to the Chief Executive Officer, which has been identified as the chief operating decision maker.

While the chief operating decision maker considers there to be only two segments, the Group's revenue is further split between "license subscriptions and support" (recurring in nature) and "professional services" (non-recurring) and by key product families (IPM Suite and Brand Vision) and hence to aid the readers understanding of our results, the split of revenue from these categories is shown below:

5.      INCOME TAXES

The components of income/(loss) before income taxes are as follows:

Provision for income taxes consisted of the following:

The differences between income taxes expected at the U.S federal statutory income tax rate and income taxes reported were as follows:

The Company is subject to taxation in the United States and certain foreign jurisdictions. Earnings from non-U.S. activities are subject to local country income tax.

The material jurisdictions where the Company is subject to potential examination by tax authorities include the United States, Lebanon, France and the UK.

U.S Companies are eligible for a deduction that lowers the effective tax rate on certain foreign income.  This treatment is referred to as the Foreign-Derived Intangible Income deduction.

The Group records deferred tax assets and liabilities for the estimated future tax effects of temporary differences between the tax bases of assets and liabilities and amounts reported in the Group's Consolidated Statements of Financial Position, as well as operating loss and tax-credit carry-forwards. The Group also measures the Group's deferred tax assets and liabilities using enacted tax rates expected to be applied to taxable income in the years in which those temporary differences are expected to be recovered or settled. Deferred tax assets are reduced by a valuation allowance if, based on available evidence, it is more likely than not that these benefits will not be realised.

As at 31 December 2022, the Company had a US federal and state NOL carry forward of approximately $612 thousand and $5.5 million respectively. The state NOL will expire beginning in 2037. As at 31 December 2022, the Company had NOLs in California, Florida, New Jersey and Pennsylvania

As at 31 December 2023, the Company had a federal, state, and foreign NOL carry forwards of approximately $135 thousand, $1.5 million, and $40 thousand, respectively.  The state NOL will begin to expire in 2037. As at 31 December 2023, the Company had foreign NOLs in the UK and state NOLs in California, Connecticut, Florida, Massachusetts, New York, and Pennsylvania.

Due to its current year earnings, the Company believes that it is more-likely-than-not that substantially all the deferred tax assets, except the foreign NOL, will be realized.  The foreign NOL is comprised of two types of UK losses; losses which occurred in periods prior to 2018 ("pool 1") and losses which occurred after 31 December 2017 ("pool 2").  Neither type of NOL is eligible for use in the U.S. due to the dual consolidated loss rules.  "Pool 1" losses are available to offset taxable income in the UK, only, without restriction; "pool 2" losses are restrictive based on the type of income recognized in the future.  Management assesses the need to establish a valuation allowance using all available evidence to estimate whether sufficient future taxable income will be generated to permit the use of the existing deferred tax asset related to the "pool 2" foreign NOL.  For the period ended 31 December 2023, the Company has determined that a valuation allowance is needed for the deferred tax asset balance related to the "pool 2" foreign NOL as management believes it is more likely than not that the specific deferred tax asset will be not realized in the future. 

On 27 March 2020, the CARES Act was signed into law. The Act contains several new or changed income tax provisions, including but not limited to the following: increased limitation threshold for determining deductible interest expense, class life changes to qualified improvements (in general, from 39 years to 15 years), and the ability to carry back net operating losses incurred from tax years 2018 through 2020 up to the five preceding tax years. Most of these provisions are either not applicable or have no material effect on the Company.  

The Tax Cuts and Jobs Act of 2017 (the "Tax Act") contains a provision which subjects a U.S parent of a foreign subsidiary to current U.S. tax on its global intangible low-taxed income ("GILTI"). The Company will report the tax impact of GILTI as a period cost when incurred. In 2023, the company has a net GILTI inclusion of approximately $2.9 million primarily due to Section 174 capitalisation. Accordingly, the Company is not providing deferred taxes for basis differences expected to reverse as GILTI.

In 2023, as a part of the 2022 tax return, the Company  finalized an R&D study and method change related to deferred revenue in order to defer revenue expected to be received within one year.

Significant components of the Company's deferred tax assets and deferred tax liabilities are as follows:

Due to its current year earnings, the Company believes that it is more-likely-than-not that substantially all of the deferred tax assets will be realised. Therefore, the Company has not recorded a valuation allowance on the deferred tax assets. The change in the valuation allowance is as follows:

At 31 December 2023, the Company did not have any unrecognized tax benefits and did not anticipate any significant changes to the unrecognized tax benefits within twelve months of this reporting date. In the year ended 31 December 2023, the Company recorded no interest and penalties on income taxes. At 31 December 2023, there was no accrued interest included in income taxes payable.

6.      EARNINGS PER SHARE

The Company computes earnings (loss) per share in accordance with ASC 260, Earnings per Share, which requires presentation of both basic and diluted earnings per share on the face of the Consolidated Statements of Comprehensive Income. Basic earnings (loss) per share is computed by dividing net income (loss) available to common shareholders by the weighted average number of outstanding shares during the period.

Diluted earnings (loss) per share gives effect to all dilutive potential common shares outstanding during the period. Due to their anti-dilutive effect, the calculation of diluted net loss per share for the years ended 31 December 2022 and 31 December 2023 does not include stock options and warrants. The number of dilutive shares would have been 1,689,826 and 8,290,788 as at 31 December 2023 and 31 December 2022, respectively.

.

7.      BUSINESS COMBINATION

On 1 October 2021, Fadel UK Limited signed a Share Purchase Agreement to acquire 100% of the ordinary shares of Image Data Systems (IDS), a UK based business with over 30 years' experience in image and video management providing production agencies and media publishers with a fast and scalable cloud-based content services platform. The complementary nature of the IDS content services platform, when combined with the digital rights management system of FADEL will make an even more compelling offering for brand managers.

Fair Value of Purchase Consideration

The fair value of the purchase consideration on the acquisition date was $7.4 million (5.5 million)

Fair Value of Assets Acquired and Liabilities Assumed

The Group accounted for the acquisition using the purchase method of accounting for business combinations under ASC 805, Business Combinations. The total purchase price was allocated to the tangible and identifiable intangible assets acquired and liabilities based on their estimated fair values as at the acquisition date.

Fair value estimates are based on a complex series of judgments about future events and uncertainties and rely heavily on estimates and assumptions. The Company's judgments used to determine the estimated fair value assigned to each class of assets acquired and liabilities assumed, as well as asset lives and the expected future cash flows and related discount rates, can materially impact the Consolidated Financial Information. Significant inputs used for the calculations included the amount of cash flows, the expected period of the cash flows and the discount rates.

The allocation of the purchase price was based on the Company's estimate of the fair values of the assets acquired and liabilities assumed on the acquisition date, as follows:

·      brand assets ($0.4 million (£0.30 million));

·      customer relationships $0.4 million (£0.29 million)); and

·      software / technology assets ($2.07 million (£1.53 million)).

The following table shows the current carrying value of the intangible assets.  The information is presented in US Dollar given the assets acquired were paid for in £ and the resulting values arise on consolidation of our UK entities.

The approximate estimated future amortisation expense is $261,000 (£212,537) each year, for the next five years (2024-2027).                          

Goodwill represented the excess of the purchase price over the fair value of the net assets acquired. The fair value of IDS net assets on the date of acquisition was $2.28 million (£1.69 million) of which $1.96 million (£1.45 million) was cash and $0.34 million (£0.25 million) was net working capital). Goodwill was therefore determined to be $2.34 million (£1.74 million), which reflects the perceived value of the employees and expected synergies the combination of the two businesses will bring to the Group.

The consideration's fair value was estimated on the date of acquisition and was to be paid out in a series of stage payments. As at 1 October 2021, the total consideration paid to the sellers or transferred into escrow for future payment was $6.7 million (£5 million). A final payment of $0.58 million (£428,874) , as assessed at 31 December 2021. A revised final payment of $0.63 million (£470,032) was agreed subsequently on 10 July 2022 and is recognised as a liability within accounts payable and accrued expenses as at 31 December 2021. The final payment of $568,867 (£470,032) was paid on 30 December 2022.

Goodwill Impairment

The Company assesses its investment in IDS for impairment on at least an annual basis. Based on projections of income, cash flows and the conditions of current operations, it believes the fair value of the reporting unit is greater than it carrying amount and no impairment is needed.

8.      ACCOUNTS RECEIVABLE, Net

Accounts receivable consist of the following:

9.      FURNITURE AND EQUIPMENT

Furniture and equipment consist of the following:

The depreciation expense was $16,286 and $14,760 for the years ended 31 December 2023 and 2022, respectively.

10.   CONTRACT COSTS

The Group applied ASC-606 with effect from 1 January 2019 to contracts that were either not completed as at that date, or that had an expected customer lifetime value that ended after 1 January 2019. This resulted in the capitalisation of $283,106 in commission costs incurred prior to and during 2019. Accumulated amortisation was $1,461,203 and $1,093,968 for the year's ended 31 December 2023 and 2022, respectively. Amortisation periods for customer lives typically vary between 5 and 10 years. The Group elected not to apply the practical expedient for contracts that have a duration of less than one year.

Contract costs consist of the following:

11.   RELATED PARTIES

Notes Payable:

In each of January 2022 and January 2023, the Group entered into demand note agreements totalling up to $75,000 and up to $50,000, respectively, with a Director in Fadel Lebanon for facilitating banking transactions and working capital purposes in Lebanon. The notes call for payment of interest at 0% per annum compounded annually. The outstanding balance of $75,000 as at 31 December 2022, was paid in full in year 2023.

On 2 April 2023, Tarek Fadel and the Company entered into a loan agreement whereby Mr. Fadel agreed to advance a loan (the "Fadel Loan") of £451,346 to the Company equivalent to $564,009. The Fadel Loan is unsecured and bears no interest or fees. The Company made a loan repayment of $401,613 on 28 April 2023 after the issuance of 223,289 new depositary interests ("New Shares") over common shares at a price of £1.44 per share (the "Placing"). As of 31 December 2023, the remaining balance on the Fadel Loan is $162,396 and is repayable only as and when, following Admission (and excluding the issue of the New Shares in the Placing), the Company issues new shares at or above the placing price.

12.   LINE OF CREDIT: Bank of America

On 29 June 2022, the Company entered into a new $1 million note agreement for a line of credit between the Company and Bank of America, N.A.. Advances under the note bear interest at the bank's Prime Rate plus 0.7%. On 11 May 2023, the line of credit between the Company and Bank of America, N.A. was extended until 31 May 2024. The balance owed to Bank of America, N.A under the terms of the line of credit was zero and $1,000,000 as at 31 December 2023 and 2022, respectively.

13.   COMMON AND PREFERRED STOCK

The Company has authority to issue 150,000,000 shares at $0.001 par value per Share. As at 31 December 2023, there were no preferred shares outstanding, compared to 7,552,309 as at 31 December 2022, which were converted to common shares at IPO.

On 2 April 2023 the outstanding preferred shares of MEVP, BBEF, iSME and B&Y were converted into common shares in accordance with the terms of their agreements pursuant to the IPO. Impact Fund by MEVP Holding SAL converted their Series A-2, B and B-1 preferred shares into 5,496,821 common shares, BBEF (Holding) SAL converted their Series A-1 preferred shares into 1,068,837 common shares, iSME SAL Holding converted their Series A-1 preferred shares into 580,383 common shares and B&Y Division One Holding SAL converted their Series B-2 preferred shares into 406,268 common shares.

On 6 April 2023 the Company announced the admission of its entire issued share capital to trading on AIM, a market operated by the London Stock Exchange. In connection with its initial public offering the Company raised gross proceeds of £8.0 million. On 2 May 2023, the Company announced the issuance of 223,289 new depositary interests over common shares at a price of £1.44 per share, raising $401,245.

On 4 August 2023 the company announced that following receipt of two notices to exercise warrants over a total of 121,925 common shares of $0.001 in the Company (the "Common Shares") on a net exercise basis, the Company has concluded the exercise resulting in the issuance of 39,958 Common Shares. These warrants were issued in July 2016 as part of a previous capital raising process. As the warrants were exercised on a net exercise basis there are no proceeds due to the company and following the exercise, no warrants remain outstanding in the Company.

As at 31 December 2023, the Company had 20,231,250 common shares of $0.001 each in issue. Shareholders may use this figure as the denominator by which they are required to notify their interest in, or change their interest in, the Company under the Disclosure Guidance and Transparency Rules.

14.  Stock option plans

In 2014, the Directors approved the "2014 Equity Incentive Plan" with a maximum of 1,620,366 shares reserved for issuance. As applicable, the exercise price is as established between the Company and recipient. These options vest over three or four years from date of grant. Options to acquire 961,267 shares were granted and remain outstanding as at 31 December 2022 and 2023, respectively. Following Admission to AIM on 6 April 2023, the Company does not intend to operate the 2014 Equity Incentive Plan to grant further options, as it was superseded by the 2023 Equity Incentive Plan.

Outside of the above 2014 Equity Incentive Plan, are 576,924 non-plan options with an exercise price of $1.03. These non-plan options were fully vested at 31 December 2021 and expired in February 2023. On 2 April 2023, the Board approved the reissuance of these non-plan options in the same amount (with a ten-year term and an exercise price of £1.44 per share. As at 31 December 2023, the 576,924 non-plan options remained outstanding.

On 2 April 2023, the Directors approved the "2023 Equity Incentive Plan" which supersedes the 2014 Plan. Options may be granted at an exercise price determined by the Remuneration Committee which will be not less than the fair market value of a share on the date of grant (i.e. the current market price). Options may not be exercised later than the tenth anniversary of the date of the grant (or such earlier date specified when granted). These options vest over four years from date of grant. As at 31 December 2023, 1,186,032 options under the 2023 Equity Incentive Plan were granted and remain outstanding.

Determining the appropriate fair value model and the related assumptions requires judgment. The fair value of each option granted is estimated using a Black-Scholes option-pricing model on the date of grant as follows:

Due to limited historical data, the expected volatility rates are estimated based on the actual volatility of comparable public companies over the expected term. The expected term represents the average time that options that vest are expected to be outstanding. Due to limited historical data, the Company calculates the expected life based on the midpoint between the vesting date and the contractual term, which is in accordance with the simplified method. The risk-free rate is based on the United States Treasury yield curve during the expected life of the option.

A summary of the status of the Group's option plans for the year ended 31 December 2023 is as follows:

Stock option expense for the year ended 31 December 2023 was $542,409 and ($20,051) for the year ended 31 December 2022. Unrecognized compensation expense related to share options which will be recognized through 2024 was $229,224 and $7,588 as at 31 December 2023 and 2022, respectively.

Warrants

On 4 October 2022, all warrants held by MEVP, ISME and B&Y were exercised and retired in exchange for the issuance of shares of the Company's preferred and/or common shares, as follows:

·      Impact Fund by MEVP Holding SAL

·      300,000 common shares;

·      1,436,260 preferred shares "Series A-2";     

·      2,943,243 preferred shares "Series B"; and

·      1,117,318 preferred shares "Series B-1".

·      iSME SAL Holding

·      580,383 preferred shares "Series A-1"

·      B&Y Division One Holding SAL

·      406,268 preferred shares "Series B21"

On 4 August 2023, all warrants held by Hamed Moghaddam and Arcadia were exercised and retired in exchange for the issuance of common shares, as follows:

·      Hamed Moghaddam

·      35,962 common shares;

·      46,804 preferred shares "Series A-1"; and

·      62,929 Preferred shares "Series A-2".

·      Arcadia:

·      3,996 common shares;

·      5,200 preferred shares "Series A-1"; and

·      6,992 Preferred shares "Series A-2".

As at 31 December 2023, the Company had no outstanding warrants.

15.   RETIREMENT PLAN

The Company has a 401(k) safe harbor plan that covers all employees at least 21 years of age who have worked for the Company for at least three months. Employees vest immediately for all employer matching contributions. The retirement plan expense was $87,251 for the year ended 31 December 2022 and $90,299.45 for the year ended 31 December 2023.          

The provision for end-of-service indemnity in Lebanese companies is established to account for the financial obligation to employees who are entitled to end-of-service benefits upon leaving the company. This provision is particularly crucial when an employee opts to withdraw their pension immediately after leaving and has not yet commenced employment elsewhere.

To calculate this provision for inclusion in the Consolidated Statements of Financial Position at the end of each year, the company typically estimates the total liability it will incur for all eligible employees who may potentially claim end-of-service benefits in the future. This estimation involves considering factors such as the length of service of each employee, their salary level, and any applicable legal requirements or company policies regarding end-of-service benefits.

The calculation is performed based on factors such as the length of service of each employee, their salary level, and any applicable legal requirements or company policies regarding end-of-service benefits. This process ensures that the provision accurately reflects the company's financial obligation towards employees' end-of-service benefits, providing transparency and accountability in financial reporting. As at 31 December 2023 and 2022, the end of services liability amounted to $467,225 and $274,045 respectively.

16.   LEASES

On 1 May 2021, the Group entered into a 2-month lease for an apartment in France, with monthly lease payments of €1,600 per month, and extended it to a 12-month lease from 1 July 2021 at a monthly lease payment of €1,700 per month. This lease was extended for one additional month at the same rate and then to a 10-month lease, starting 1 August 2022, at a monthly lease payment of €1,800 per month and was terminated in March 2023. The total lease payments during 2023 was $5,813 (€5,400).

On January 2023, the Group entered into a 12-month lease for a work space office in France.  The total annual lease payment was $995 (€920) for a pack of 200 hours valid for one year. It was not renewed for 2024 as at the date of this document.

On 1 March 2022, the Group entered into a 12-month lease for a work space office in New York. This lease does not need to be renewed as it is payable month-to-month and is cancellable with 30 days' notice. The average monthly lease payment during the year ended 31 December 2023 was $2,069.

In February 2023, the Group entered into a lease for another work space office in New York. This lease was payable month-to-month and was terminated in October 2023. The average monthly lease payment during the year ended 31 December 2023 was $760. The total lease payments during 2023 was $6,080.

On October 2022, the Group entered into a 12-month lease for a work space office in the UK. This lease does not need to be renewed as it is payable month-to-month and is cancellable with 30 days' notice. The average monthly lease payment during the year ended 31 December 2023 was $1,360 (£1,090).

On October 30, 2023, the Group entered into a 12-month lease for a work space office in Jordan. The monthly lease payment was $900.

On October 26, 2023, the Group entered into a 12-month lease for an apartment in Jordan payable every three months in advance. The quarterly lease payment was $3,420.

On October 26, 2023, the Group entered into a 12-month lease for another apartment in Jordan payable every three months in advance. The quarterly lease payment was $3,240.

On 1 October 2023, the Group entered into a 36-month lease for the 2^nd, 6^th and 7^th Floor offices in Beirut, Lebanon. The monthly lease payment is $6,938.

As at 31 December 2023, the Company rents office space in Beirut across three separate floors under non-cancellable operating lease agreements with monthly payments ranging from approximately $1,803 to $2,590. These leases end on 30 September 2026.

During the year ended 31 December 2023, the leases signed during 2022 were ended early by the lessor. Subsequently, the leases were renewed and the end dates were all brought in-line with each other, 30 September 2026. The previous end dates were as follows:

·      2nd floor - 28 February 2024;

·      6th floor - 28 February 2024; and

·      7th floor - 30 June 2024.

The following summarizes the cash flow information related to operating leases for the year ended 31 December 2023:

Cash paid for amounts included in the measurement of lease liabilities:               2022                              2023

Operating cash flows from operating leases (fixed payments)                               $ 91,038                        $94,544

The following table presents lease costs, future minimum lease payments and other lease information as at 31 December 2023 of the remaining years under lease:

The following summarizes the line items in the Consolidated Statements of Financial Position which include amounts for operating and financing leases at 31 December 2023:

   Total Operating Lease Liabilities                                                                  $85,187                                                                         $202,228

The discount rate for operating leases was based on market rates from a bank for obligations with comparable terms effective at the lease inception date. The weighted average lease term and discount rate are as follows as at 31 December 2023:

17.  Income Tax Receivable

On 30 September 2022 a withholding tax of 32.5% became payable within the UK in respect of an intercompany loan between IDS and Fadel UK of $2,032,690, associated with the acquisition of IDS. This withholding tax amount of $660,624 will be reclaimable, conditional upon the loan between IDS and Fadel UK being repaid or cancelled before 31 December 2023. On 21 June 2023, the withholding tax of $660,624 due in the UK was paid by Image Data Systems (UK) Limited ("IDS") to HMRC. We are expecting the tax to be repaid in Q4 2024.

18.  SUBSEQUENT EVENTS

In April 2024, the Company extended the line of credit with Bank of America, N.A for one more year until May 2025.