Source - LSE Regulatory
RNS Number : 6231B
Duke Royalty Limited
24 September 2018
 

Duke Royalty Limited

("Duke Royalty", "Duke" or the "Company")

Final results for the full year ended 31 March 2018,

Posting of Annual Report and Notice of AGM

 

Full year highlights:

·   First three royalty partners secured, delivering total income for the year of £1.80 million and generating £0.25 million net cash inflow from operating activities

·    Successfully raised a total of £20 million of equity to fund investments, bringing a suite of new institutional investors onto the share register

·     Dividend yield of 2.1 pence per share, above Duke's stated target of 2 pence per share

·    Strong pipeline of potential new royalty partners developed, testament to the demand for Duke Royalty's alternative finance solution

 

Post period highlights

·     Two more royalty transactions completed, taking the total number of royalty partners to five

·     Raised an additional £44 million of equity to fund current pipeline of royalty investments

·     Currently in the top 5% highest AIM dividend paying stocks - dividend paid quarterly

 

Neil Johnson, CEO of Duke Royalty, said:

 

 

Notice of AGM

 

The Company announces that its Annual General Meeting ("AGM") will be held at Trafalgar Court, 4th Floor, West Wing, Admiral Park, St Peter Port, Guernsey GY1 2JA on 1 November 2018 at 11:00 BST.

 

The full annual report and accounts, including the audit report and the notice of the Company's AGM will be posted to applicable shareholders by 28 September 2018 and will be available on the Company's website at that time.

 

 

 

 

 

For further information, please visit www.dukeroyalty.com, or contact:

 

Duke Royalty Limited

Neil Johnson /

Charlie Cannon-Brookes

 

+44 (0) 148 1741 240

Grant Thornton UK LLP 

(Nominated Adviser)

Colin Aaronson /

Samantha Harrison

 

+44 (0) 207 383 5100

 

Cenkos Securities plc 

(Joint Broker)

 

Julian Morse / Michael Johnson

+44 (0) 207 397 8900

Mirabaud Securities Limited

(Joint Broker)

 

Peter Krens /

Edward Haig-Thomas

 

+44 (0) 203 167 7222

Redleaf Communications

(PR)

 

 

Elisabeth Cowell/

Robin Tozer/ Ian Silvera

+44 (0) 203 757 6880

About Duke Royalty

Duke Royalty Limited provides alternative capital solutions to a diversified range of profitable and long-established businesses in Europe and abroad. Duke Royalty's experienced team provide financing solutions to private companies that are in need of capital but whose owners wish to maintain equity control of their business. Duke Royalty's royalty investments are intended to provide robust, stable, long term returns to its shareholders. Duke Royalty is listed on the AIM market under the ticker DUKE and is headquartered in Guernsey.

 

CHAIRMAN'S REPORT

FOR THE YEAR ENDED 31 MARCH 2018

 

 

Dear Shareholder,

 

 

I am pleased to report the results for the financial year ending 31 March 2018 ("Fiscal 2018") which has been a period of significant progress and development for the Company.

Following the Company's re-admission to AIM in March 2017 and concurrent raising of its first institutional equity capital of £15 million to finance a pipeline of near term royalty financing transactions, we were delighted therefore that the Company was able to quickly announce that, during April 2017, it had closed its inaugural royalty investment of €8 million (£6.9 million) into Temarca, an established European river cruise operator. 

The Temarca investment was followed by two further royalty transactions during Fiscal 2018.  The first of these transactions was a £7 million investment (split into two tranches) into Lynx UK, the European subsidiary of Lynx Equity which is a Toronto-based private firm that seeks to acquire, own and operate mature, old-economy businesses in a diverse range of industries.  The second was a £9 million investment into Trimite, a 70-year-old UK private company that formulates and manufactures high performance and technologically superior coatings and paints for speciality industrial markets.

To be able to fund the third transaction and subsequent investments, Duke closed a successful second equity fundraising of £20 million which was completed in December 2017.  Both of our fundraisings in Fiscal 2018 were well supported by institutional investors, which underpins our confidence in the ability for us to execute our business plan of diversifying the royalty partners at a measured but focused pace. 

I am also pleased to report that during Fiscal 2018, the Company has grown the quality and quantity of the pipeline of transactions the team are evaluating.  Duke Royalty is the first UK quoted non-resource royalty investment company, which means the Company needs to do some education in Europe of the advantages of this alternative finance solution which is well established in North America.  However, one of the most pleasing aspects of Fiscal 2018 has been that we have seen a strong demand for the Duke financing solution in our key target markets.

As referenced in the Company's IPO document, the Company announced that it would target a minimum dividend yield of five percent (or 2 pence per share) for Fiscal 2018.  The actual Fiscal 2018 pay-out was above target at 2.1 pence per share with the initial quarterly dividend of 0.5p per share being increased to 0.6p per share in respect of the final quarter of Fiscal 2018.  A stable and increasing dividend yield is a fundamental principle that Duke will continue to focus on in future years and I am happy to be able to report that post the financial year end the quarterly dividend was increased again to 0.7p per share in respect of the first quarter of Fiscal 2019.

Fiscal 2018 also saw the inaugural income generated from our royalty investment strategy, which is a significant step in the Company's development and we are therefore pleased to report a total income for the year of £1.80 million. Our total comprehensive loss for the year was £0.86 million, however, to understand the overall trading of the Company, we need to point out that our inaugural income coincides with the early adoption of the new IFRS 9 accounting standard for financial instruments.  Due to the nature of the royalty investments, under IFRS 9 they are classified at fair value through profit or loss which requires transaction and similar costs to be expensed immediately.  Accordingly, the Company has had several material items expensed in the financial statements that need to be highlighted. 

Firstly, there were transactional related deal costs of £0.49 million that were expensed.  These related to the execution of the three royalty transactions referred to above. On top of this, there is also a liability associated with the net present value of the long-term Oliver Wyman collaboration fee. This fee was expensed in full during Fiscal 2018 and was valued at £0.85 million, however the payments are directly tied to Duke's actual cash received over the life of its royalty investments.  Finally, there was also a one-off expense associated with the 1.5 million share payment to the Support Service providers which was valued at of £0.59 million.  This payment arose in recognition of the execution of the royalty strategy, principally the completion of royalty investments by the Group, and is now fully satisfied.  If these three items were to be stripped out, then the total operating expenses of the Company would have fallen from £2.65 million to £0.72 million which is line with previous market guidance given by the Company.

As a result of the above impacts on the income statement, I would urge investors to focus their attention on the Consolidated Statement of Cash Flows to obtain a clearer picture of the Company's operating performance.  In Fiscal 2018, this showed a net cash inflow from operating activities of £0.25 million.  Because of the IFRS guidelines in valuing financial instruments as highlighted above, in the more mature Canadian royalty market, many of the independent research analysts focus much more heavily on operating cashflow per share rather than on earnings per share.

Finally, I am glad to be able to inform shareholders that post the financial year end the Company has continued its progress and growth.  The Company has now successfully closed its fourth and fifth royalty investments further diversifying the existing portfolio and also has a strong pipeline of new royalty transactions that are currently under review.  In order to fund this continued growth and portfolio diversification, the Company was able to successfully close a £44 million equity financing in August 2018 which has brought in a number of new institutional shareholders that has further strengthened the Company's share register and has provided the Company with an excellent platform for the future. 

I am grateful for the support of our shareholders and am pleased to report the Chairman's statement for Fiscal 2018.  I look forward to being able to report on the Company's ongoing progress and development in future periods.

 

Nigel Birrell

Chairman

21 September 2018

 

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME

FOR THE YEAR ENDED 31 MARCH 2017

 

 

Note

2018

 

2017

 

 

 

£

 

£

 

 

 

 

 

Income

 

 

 

 

Net change in fair value on financial assets and financial liabilities

 

 

 

 

  at fair value through profit or loss

8,14,16

1,554,518

 

-

Transaction costs reimbursed

2.7

145,000

 

-

Net foreign currency gains

 

97,238

 

-

Bank interest receivable

 

-

 

44

 

 

 

 

 

 

 

 

 

 

Total income

 

1,796,756

 

44

 

 

 

 

 

 

 

 

 

 

Expenses

 

 

 

 

Support services administration fees

15

(806,537)

 

(375,000)

Directors' fees

15

(132,065)

 

(218,000)

Investment Committee fees

15

(37,500)

 

(60,000)

Legal and professional fees

 

(229,723)

 

(334,195)

Transaction costs

2.8

(488,308)

 

(95,025)

Royalty participation fees

2.10,16

(848,534)

 

-

Other operating costs

 

(112,289)

 

(320,450)

Bank interest payable

 

(2)

 

(1,956)

 

 

 

 

 

 

 

 

 

 

Total operating expenses

 

(2,654,958)

 

(1,404,626)

 

 

 

 

 

 

 

 

 

 

Loss for the financial year

 

(858,202)

 

(1,404,582)

 

 

 

 

 

Taxation expense

5

-

 

-

 

 

 

 

 

 

 

 

 

 

Total comprehensive loss for the year

 

(858,202)

 

(1,404,582)

 

 

 

 

 

 

Basic and diluted deficit per share (pence)

6

(1.38)

 

(15.83)

 

 

 

 

 

 

 

 

 

 

 

All income is attributable to the holders of the Ordinary Shares of the Company.

 

The notes on pages 25 to 48 form an integral part of these Consolidated Financial Statements.

 

 

CONSOLIDATED STATEMENT OF FINANCIAL POSITION

AS AT 31 MARCH 2018

 

 

Note

2018

 

2017

 

 

 

£

 

£

 

 

 

 

 

Non-current assets

 

 

 

 

 

 

 

 

 

Financial assets at fair value through profit or loss

8

20,782,297

 

-

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Current assets

 

 

 

 

 

 

 

 

 

Financial assets at fair value through profit or loss

8

2,786,501

 

-

Trade and other receivables

9

6,687,020

 

381,467

Cash and cash equivalents

 

3,165,221

 

14,350,154

 

 

 

 

 

 

 

 

 

 

 

 

12,638,742

 

14,731,621

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total assets

 

33,421,039

 

14,731,621

 

 

 

 

 

 

 

 

 

 

Equity

 

 

 

 

 

 

 

 

 

Shares issued

10

60,303,293

 

40,905,094

Share based payment reserve

11

129,977

 

124,412

Warrant reserve

10

125,000

 

-

Retained losses

12

(28,314,324)

 

(26,523,494)

 

 

 

 

 

 

 

 

 

 

 

 

 

32,243,946

 

14,506,012

 

 

 

 

 

 

 

 

 

 

Current liabilities

 

 

 

 

 

 

 

 

 

Trade and other payables

13

259,693

 

225,609

Financial liabilities at fair value through profit or loss

14

140,886

 

-

 

 

 

 

 

 

 

 

 

 

 

 

 

400,579

 

225,609

 

 

 

 

 

Non-current liabilities

 

 

 

 

 

 

 

 

 

Financial liabilities at fair value through profit or loss

14

776,514

 

-

 

 

 

 

 

 

 

 

 

 

Total liabilities

 

 

1,177,093

 

225,609

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total equity and liabilities

 

33,421,039

 

14,731,621

 

 

 

 

 

 

 

 

 

 

 

 

 

CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED 31 MARCH 2018

 

 

 

2018

 

2017

 

 

 

£

 

£

Cash flows from operating activities

 

 

 

 

 

 

 

 

 

Receipts from royalty investments

 

987,192

 

-

Receipts from transaction costs reimbursed

 

45,000

 

-

Proceeds from sale of investments

 

-

 

516,535

Interest income received

 

-

 

44

Operating expenses paid

 

(785,714)

 

(1,255,997)

 

 

 

 

 

 

 

 

 

 

Net cash inflow/(outflow) from operating activities

 

246,478

 

(739,418)

 

 

 

 

 

 

 

 

 

 

Cash flows from investing activities

 

 

 

 

 

 

 

 

 

Royalty investments advanced

 

(22,932,356)

 

-

Transaction costs paid

 

(277,737)

 

(31,500)

Amounts advanced to agents pending royalty investment

 

 

 

 

  completion

 

(6,467,500)

 

-

Payment to acquire equity investment

 

(250)

 

-

 

 

 

 

 

 

 

 

 

 

Net cash outflow from investing activities

 

(29,677,843)

 

(31,500)

 

 

 

 

 

 

 

 

 

 

Cash flows from financing activities

 

 

 

 

 

 

 

 

 

Proceeds from share issue

 

19,840,275

 

14,209,425

Share issue costs

 

(765,613)

 

(712,148)

Dividends paid

 

(925,468)

 

-

Finance costs paid

 

-

 

(1,956)

 

 

 

 

 

 

 

 

 

 

Net cash inflow from financing activities

 

18,149,194

 

13,495,321

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net change in cash and cash equivalents

 

(11,282,171)

 

12,724,405

 

 

 

 

 

Cash and cash equivalents at beginning of year

 

14,350,154

 

1,625,749

Effect of foreign exchange on cash

 

97,238

 

-

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents at the end of year

 

3,165,221

 

14,350,154

 

 

 

 

 

 

 

 

 

 

 

CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
FOR THE YEAR ENDED 31 MARCH 2018

 

 

 

 

 

Share-based

 

 

 

 

 

 

 

 

Shares

 

payment

 

Warrant

 

Retained

 

Total

 

Note

issued

 

reserve

 

reserve

 

losses

 

equity

 

 

£

 

£

 

£

 

£

 

£

At 1 April 2016

 

27,064,815

 

124,412

 

72,454

 

(25,191,366)

 

2,070,315

 

 

 

 

 

 

 

 

 

 

 

Total comprehensive loss for the year

 

-

 

-

 

-

 

(1,404,582)

 

(1,404,582)

 

 

 

 

 

 

 

 

 

 

 

Transactions with owners

 

 

 

 

 

 

 

 

 

 

Shares issued for cash

10

14,552,425

 

-

 

-

 

-

 

14,552,425

Share issuance costs

-    

10

(1,159,721)

 

-

 

-

 

-

 

(1,159,721)

Share based payments

11

447,575

 

-

 

-

 

-

 

447,575

Warrants lapsed

10

-

 

-

 

(72,454)

 

72,454

 

-

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total transactions with owners

 

13,840,279

 

-

 

(72,454)

 

(1,332,128)

 

12,435,697

 

 

 

 

 

 

 

 

 

 

 

At 1 April 2017

 

40,905,094

 

124,412

 

-

 

(26,523,494)

 

14,506,012

 

 

 

 

 

 

 

 

 

 

 

Total comprehensive loss for the year

 

-

 

-

 

-

 

(858,202)

 

(858,202)

 

 

 

 

 

 

 

 

 

 

 

Transactions with owners

 

 

 

 

 

 

 

 

 

 

Shares issued for cash

10

19,507,275

 

-

 

-

 

-

 

19,507,275

Share issuance costs

-    

10

(1,188,338)

 

-

 

-

 

-

 

(1,188,338)

Share based payments

10,11

1,079,262

 

5,565

 

-

 

-

 

1,084,827

Warrants issued

10

-

 

-

 

125,000

 

-

 

125,000

Dividends

7

-

 

-

 

-

 

(932,628)

 

(932,628)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total transactions with owners

 

19,398,199

 

5,565

 

125,000

 

(932,628)

 

18,603,296

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

At 31 March 2018

 

60,303,293

 

129,977

 

125,000

 

(28,314,324)

 

32,243,946

 

 

 

 

 

 

 

 

 

 

 

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEAR ENDED 31 MARCH 2018

 

1.

General Information

 

 

Duke Royalty Limited ("Duke Royalty" or the "Company") is a closed-ended investment company with limited liability formed under the Companies (Guernsey) Law, 2008. Its shares are traded on the AIM market of the London Stock Exchange. The Company's registered office is shown on page 49.

 

The Group comprised Duke Royalty Limited and its wholly owned subsidiary Duke Royalty UK Limited, a company registered in England and Wales.

 

The Group's investing policy is to invest in a diversified portfolio of royalty finance and related opportunities.

 

The Company's shares are traded on AIM, a market operated by the London Stock Exchange.

 

2.

Significant accounting policies

 

 

2.1

Basis of preparation

 

 

 

The Consolidated Financial Statements of the Group have been prepared in accordance with International Financial Reporting Standards ("IFRS"), to the extent that they have been adopted by the European Union, and applicable Guernsey law, and reflect the following policies, which have been adopted and applied consistently.

 

The Financial Statements have been prepared on a historical cost basis, except for the following:

 

§ Royalty investments - measured at fair value through profit or loss

§ Equity investments - measured at fair value through profit or loss

§ Royalty participation liabilities - measured at fair value through profit or loss

 

 

2.2

New and amended standards adopted by the Group

 

 

 

The Group has elected to apply IFRS 9 'Financial instruments' early.

 

IFRS 9 sets out requirements for recognising and measuring financial assets, financial liabilities and some contracts to buy or sell non-financial items.  This standard replaces IAS 39 'Financial instruments: recognition and measurement'.

 

The application of IFRS 9 has resulted in the following changes to the classification of the Group's financial instruments:

 

§ Trade and other receivables were classified as 'loans and receivables' under IAS 39 and are now classified as 'financial assets held at amortised cost'

§ Cash and cash equivalents were classified as 'loans and receivables' under IAS 39 and are now classified as 'financial assets held at amortised cost'

 

The adoption of IFRS 9 has not materially impacted the measurement basis of the opening balance sheet.

 

Further information can be found in note 2.10.

 

 

 

 

2.3

New standards and interpretations not yet adopted

 

 

 

At the date of authorisation of these Consolidated Financial Statements, certain standards and interpretations were in issue but not yet effective and have not been applied in these Consolidated Financial Statements.  The Directors do not expect that the adoption of these standards and interpretations will have a material impact on the Financial Statements of the Group in future periods.

 

 

2.4

Basis of consolidation

 

 

 

Where the Company has control over an investee, it is classified as a subsidiary. The Company controls an investee if all three of the following elements are present: power over the investee, exposure to variable returns from the investee, and the ability of the investor to use its power to affect those variable returns. Control is reassessed whenever facts and circumstances indicate that there may be a change in any of these elements of control.

 

All intra-group transactions, balances, income and expenses are eliminated on consolidation.  Accounting policies of subsidiaries have been changed where necessary to ensure consistency with the policies adopted across the Group.

 

The "Group" is defined as the Company and its subsidiary Duke Royalty UK Limited.

 

 

2.5

Segmental reporting

 

 

 

Operating segments are reported in a manner consistent with the internal reporting provided to the chief operating decision-maker. The chief operating decision-maker, who is responsible for allocating resources and assessing performance of the operating segments, has been identified as the Board of Directors, as a whole. The key measure of performance used by the Board to assess the Group's performance and to allocate resources is the total return on the Group's net asset value, as calculated under IFRS, and therefore no reconciliation is required between the measure of profit or loss used by the Board and that contained in these Consolidated Financial Statements.

 

For management purposes, the Group's new investment objective is to focus on one main operating segment, which is to invest in a diversified portfolio of royalty finance and related opportunities. At the end of the period the Group has three investments into this segment and has derived income from them. Due to the Group's nature it has no customers.

 

 

 

2.6

Foreign currency

 

 

 

Functional and presentation currency

 

Items included in the Financial Statements of each of the Group's entities are measured using the currency of the primary economic environment in which the entity operates (the "functional currency").  The Consolidated Financial Statements are presented in pounds sterling, which is also the functional currency of the Company and its subsidiary.

 

Transactions and balances

 

Foreign currency transactions are translated into the functional currency using the exchange rates prevailing at the dates of the transactions.  Foreign currency assets and liabilities are translated into the functional currency using the exchange rate prevailing at the balance sheet date.

 

Foreign exchange gains and losses relating to cash and cash equivalents are presented in the Consolidated Statement of Comprehensive Income within 'net foreign currency gains'.

 

Foreign exchange gains and losses relating to the financial assets and liabilities carried at fair value through profit or loss are presented in the Consolidated Statement of Comprehensive Income within 'net change in fair value on financial assets and financial liabilities at fair value through profit or loss'.

 

 

 

2.7

Transaction costs reimbursed

 

 

 

Income relating to transaction costs reimbursed comprises one off fees charged to investee companies as a reimbursement of certain costs incurred on their behalf. The Group recognises transaction costs reimbursed when the costs have been incurred and right to reimbursement has been established.

 

 

2.8

Transaction costs

 

 

 

Transaction costs are costs incurred to acquire financial assets at fair value through profit or loss.  They include fees and commissions paid to agents and advisers.  Transaction costs, when incurred, are recognised immediately in profit or loss as an expense.

 

           

 

2.9

Income tax

 

 

 

The income tax expense or credit for the period is the tax payable on the current period's taxable income based on the applicable income tax rate for each jurisdiction adjusted by changes in deferred tax assets and liabilities attributable to temporary differences and to unused tax losses.

 

The current income tax charge is calculated on the basis of the tax laws enacted or substantively enacted at the end of the reporting period in the countries where the Company's subsidiaries operate and generate taxable income.  Management periodically evaluates positions taken in tax returns with respect to situations in which applicable tax regulation is subject to interpretation.  It establishes provisions where appropriate on the basis of amounts expected to be paid to the tax authorities.

 

Deferred income tax is provided in full, using the liability method, on temporary differences arising between the tax bases of assets and liabilities and their carrying amounts in the Consolidated Financial Statements.  Deferred income tax is determined using tax rates (and laws) that have been enacted or substantively enacted by the end of the reporting period and are expected to apply when the related deferred income tax asset is realised or the deferred income tax liability is settled.

 

Deferred tax assets are recognised only if it is probable that future taxable amounts will be available to utilise those temporary differences and losses.

 

Deferred tax assets and liabilities are offset when there is a legally enforceable right to offset current tax assets and liabilities and when the deferred tax balances relate to the same taxation authority.  Current tax assets and tax liabilities are offset where the entity has a legally enforceable right to offset and intends either to settle on a net basis, or to realise the asset and settle the liability simultaneously.

 

Current and deferred tax is recognised in profit or loss, except to the extent that it relates to items recognised in other comprehensive income or directly in equity.  In this case, the tax is also recognised in other comprehensive income or directly in equity, respectively.

 

 

 

2.10

Financial instruments

 

 

 

Financial assets and financial liabilities are recognised in the Consolidated Statement of Financial Position when the Group becomes a party to the contractual provisions of the instrument. Financial assets and financial liabilities are only offset and the net amount reported in the Consolidated Statement of Financial Position and Consolidated Statement of Comprehensive Income when there is a currently enforceable legal right to offset the recognised amounts and the Group intends to settle on a net basis or realise the asset and liability simultaneously.

 

Financial assets

 

The Group financial assets are classified in the following measurement categories:

 

§ those to be measured subsequently at fair value or through profit or loss; and

§ those to be measured at amortised cost.

 

The classification depends on the entity's business model for managing the financial assets and the contractual terms of the cash flows.

 

 

 

At initial recognition, the Group measures a financial asset at its fair value, plus, in the case of a financial asset not at fair value through profit or loss, transaction costs that are directly attributable to the acquisition of the financial asset.  Transaction costs of financial assets carried at fair value through profit or loss are expensed in profit or loss.

 

Financial assets held at amortised cost

 

Assets that are held for collection of contractual cash flows where those cash flows represent solely payments of principal and interest are measured at amortised cost.  These assets are subsequently measured at amortised cost using the effective interest method.

 

The Group assesses on a forward looking basis the expected credit losses associated with its financial assets held at amortised cost.  The Group has elected to apply the simplified approach permitted by IFRS 9 in respect of trade receivables.  This approach requires expected lifetime losses to be recognised from initial recognition of the receivables.

 

The Group's financial assets held at amortised cost include trade and other receivables and cash and cash equivalents.

 

Cash and cash equivalents

 

Cash and cash equivalents comprise cash on hand and demand deposits and other short-term highly liquid investments with an original maturity of three months or less that are readily convertible to a known amount of cash and are subject to an insignificant risk of changes in value.

 

Financial assets at fair value through profit or loss

 

Royalty investments are debt instruments classified at fair value through profit or loss under IFRS 9.   The return on these investments is linked to a fluctuating revenue stream and thus, whilst the business model is to collect contractual cash flows, such cash flows are not solely payments of principal and interest.  Such assets are recognised initially at fair value and remeasured at each reporting date.  The change in fair value is recognised in profit or loss and is presented within the 'net change in fair value on financial assets and financial liabilities' in the Consolidated Statement of Comprehensive Income.  The fair value of these financial instruments is determined using discounted cash flow analysis.  Further details of the methods and assumptions used in determining the fair value can be found in note 16. 

 

Derecognition of financial assets

 

A financial asset (in whole or in part) is derecognised either (i) when the Group has transferred substantially all the risks and rewards of ownership; or (ii) when it has neither transferred nor retained substantially all the risks and rewards and when it no longer has control over the assets or a portion of the asset; or (iii) when the contractual right to receive cash flow has expired. Any gain or loss on derecognition is taken to other income/expenses in the Consolidated Statement of Comprehensive Income as appropriate.

 

 

 

 

Financial liabilities

 

The classification of financial liabilities at initial recognition depends on the purpose for which the financial liability was issued and its characteristics.

 

All financial liabilities are initially recognised at fair value. Unless otherwise indicated the carrying amounts of the Group's financial liabilities are approximate to their fair values.

 

Financial liabilities measured at amortised cost

 

These consist of trade and other payables.  These liabilities are initially recognised at fair value and subsequently carried at amortised cost using the effective interest rate method.

 

Financial liabilities at fair value through profit or loss

 

Financial liabilities at fair value through profit or loss comprise royalty participation liabilities.  These liabilities arise under a contractual agreement between the Group and a strategic partner for the provision of services in connection with the Group's royalty financing arrangements.  Under this agreement services are provided in exchange for a percentage of gross royalties receivable.  These instruments are classified at fair value through profit or loss on the basis that the liability is linked to the Group's royalty investments. Such liabilities are recognised initially at fair value with the costs being recorded immediately in profit or loss as 'royalty participation fees' and remeasured at each reporting date in order to avoid an accounting mismatch.  The change in fair value is recognised in profit or loss and presented within 'net change in fair value on financial assets and financial liabilities'.  The fair value of these financial instruments is determined using discounted cash flow analysis.  Further details of the methods and assumptions used in determining the fair value can be found in note 16.

 

Derecognition of financial liabilities

 

A financial liability (in whole or in part) is derecognised when the Group has extinguished its contractual obligations, it expires or is cancelled. Any gain or loss on derecognition is taken to other income/expenses in the Consolidated Statement of Comprehensive Income.

 

Capital

 

Financial instruments issued by the Group are treated as equity if the holder has only a residual interest in the assets of the Group after the deduction of all liabilities. The Company's Ordinary Shares are classified as equity instruments.

 

The Group considers its capital to comprise its Ordinary Share Capital, share based payment reserve, warrants and retained losses.

 

Equity instruments

 

Incremental costs directly attributable to the issue of new shares are shown in equity as a deduction from proceeds.

 

 

2.11

Share-based payment

 

 

 

The Group operates an equity settled Share Option Plan for its Directors and key advisers and a Long Term Incentive Plan for its Directors.

 

The fair value of awards granted under the above plans are recognised in profit or loss with a corresponding increase in equity.  The total amount to be expensed is determined by reference to the fair value of the awards granted:

 

§ including any market performance conditions (eg. the entity's share price);

§ excluding the impact of any service and non-market performance vesting conditions (eg. increase in cash available for distribution, remaining a Director for a specified time period); and

§ including the impact of any non-vesting conditions.

 

The total expense is recognised over the vesting period, which is the period over which all of the specified vesting conditions are to be satisfied.  At the end of each reporting period, the Group revises its estimates of the number of options that are expected to vest based on the non-market vesting and service conditions.  It recognises the impact of the revision to original estimates, if any, in profit or loss, with a corresponding adjustment to equity.

 

The Group also settles a portion of expenses by way of share-based payments. These expenses are settled based on the fair value of the service received as an expense with the corresponding amount increasing equity.

 

The Group issues warrants in return for services.  These are measured based on the value of the service provided and are recognised as the service is delivered.

 

3.

Critical accounting judgements and estimates

 

 

 

The preparation of the Consolidated Financial Statements in conformity with IFRS requires management to make judgements, estimates and assumptions that affect the application of policies and the reported amounts of assets and liabilities, income and expenses. The estimates and associated assumptions are based on historical experience and various other factors that are believed to be reasonable under the circumstances, the results of which form the basis of making the judgements about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates.

The estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the period in which the estimate is revised, if the revision affects only that period, or in the period of revision and future periods, if the revision affects both current and future periods.  The following judgements, estimates and assumptions that may cause a material adjustment to the carrying amount of assets and liabilities are:

Fair value of royalty investments

Royalty investments are valued using a discounted cash flow analysis.  The discount rate used in these valuations has been estimated to take account of market interest rates and the credit worthiness of the investee.  Revenue growth has been estimated by the Directors and is based on unobservable market inputs.

 

Where the royalty investment contains a buy-back clause, the Directors have assessed the likelihood of this occurring.  Where occurrence of the buy-back is deemed likely, this is built into the discounted cash flow at the appropriate point.

These assumptions are reviewed annually.  The Directors believe that the applied valuation techniques and assumptions used are appropriate in determining the fair value of the royalty investments.  Due to the relatively short time between entering into the investments and the year end, and having considered all relevant factors, the Directors have used the initial implied yield in the instruments as the year end discount rate. At the year end the Directors did not consider that there had been any changes to the assumptions applied at inception of the investments.  Further details of the methods and assumptions used in determining the fair value can be found in note 16.

Fair value of royalty participation liabilities

The payments falling due under the Group's contract for royalty participation fees are directly linked to the Group's royalty investments and thus the same assumptions have been applied in arriving at the fair value of these liabilities.  The Directors have considered whether any increase in discount rate is required to represent the Group's credit risk as the payments are made by the Group rather than the investee and have concluded that none is required since payment under the contract is only due once the Group has received the gross amounts from the investee.

 

4.

Auditor's remuneration

 

 

 

2018

 

2017

 

 

£

 

£

 

Audit of the Consolidated Financial Statements

28,500

 

28,000

 

 

 

 

 

 

5.

Income tax

 

 

The Company has been granted exemption from Guernsey taxation.  The Company's subsidiary in the UK is subject to taxation in accordance with relevant tax legislation.

 

 

Factors affecting income tax expense for the year

 

 

 

2018

 

2017

 

 

£

 

£

 

Loss on ordinary activities before tax

(858,202)

 

(1,404,582)

 

Corporation tax at country rates

(122,458)

 

-

 

Tax losses not recognised

122,458

 

-

 

 

 

 

 

 

 

 

 

 

 

 

-

 

(1,404,582)

 

 

 

 

 

 

 

Tax losses

 

 

 

2018

 

2017

 

 

£

 

£

 

Unused tax losses for which no deferred tax asset has been recognised

644,517

 

-

 

 

 

 

 

 

 

 

 

 

 

Potential tax benefit at 17%

109,568

 

-

 

 

 

 

 

 

 

The unused tax losses were incurred by the Company's subsidiary, Duke Royalty UK Limited.

 

6.

Deficit per share

 

 

 

2018

 

2017

 

Basic and diluted deficit per Ordinary Share

£

 

£

 

 

 

 

 

 

Loss for the year

(858,202)

 

(1,404,582)

 

Weighted average number of Ordinary Shares in issue

62,234,062

 

8,874,766

 

 

 

 

 

 

Deficit per share (pence)

(1.38)

 

(15.83)

 

 

 

 

 

 

 

The deficit per share is based on the Group loss for the year and on the weighted average number of Ordinary Shares in issue for the year. The share options, warrants and Long Term Incentive Plan awards in issue are not dilutive at the year end but could become dilutive in future periods. For more details on the share options see note 11.

 

Subsequent to the year end, 100 million new Ordinary Shares were placed (see note 18).

 

7.

Dividends

 

 

The Company implemented a quarterly dividend policy during the year and paid three quarterly dividends of 0.5 pence per share, totalling £932,628 (2017: £nil).

 

On 28 March 2018 a fourth interim dividend of 0.6 pence per share, totalling £1,117,415, was declared and this was paid on 12 April 2018. On 12 July 2018 the Company paid a further quarterly dividend of 0.7 pence per share, totalling £1,385,317. On 20 September 2018 the Company approved a further quarterly dividend of 0.7 pence per share, to be paid on 12 October 2018.

 

8.

Financial assets at fair value through profit or loss

 

 

 

2018

 

2017

 

 

£

 

£

 

Non-current

 

 

 

 

Royalty investments

20,782,047

 

-

 

Equity investments

250

 

-

 

 

 

 

 

 

 

 

 

 

 

 

20,782,297

 

-

 

 

 

 

 

 

Current

 

 

 

 

Royalty investments

2,786,501

 

-

 

 

 

 

 

 

 

 

 

 

 

 

23,568,798

 

-

 

 

 

 

 

 

 

 

 

 

 

 

Net changes in fair value on financial assets at fair value through profit or loss:

 

 

 

2018

 

2017

 

 

£

 

£

 

On royalty investments

1,623,384

 

-

 

On equity investments

-

 

-

 

 

 

 

 

 

 

 

 

 

 

Total net gains

1,623,384

 

-

 

 

 

 

 

 

 

 

 

 

 

 

Net changes in fair value on financial assets at fair value through profit or loss:

 

 

 

2018

 

2017

 

 

£

 

£

 

Realised

987,192

 

-

 

Change in unrealised

636,192

 

-

 

 

 

 

 

 

 

 

 

 

 

Total net gains

1,623,384

 

-

 

 

 

 

 

 

 

 

 

 

 

 

Realised changes in fair value relate to cash amounts received under the Group's royalty financing agreements.

 

 

Royalty investments

Temarca B.V.

In April 2017 the Group completed its first royalty financing agreement with Temarca B.V. ("Temarca").  Under the terms of the agreement the Group advanced €8 million (£6.9 million) to Temarca for a term of 25 years in exchange for annualised royalty distributions of approximately €1 million (£0.9 million).  The distributions are adjusted annually based on the percentage change in Temarca's gross revenues compared to the prior year, subject to a floor and cap.  The financing is secured by way of fixed and floating charges over certain assets and the Group has provided Temarca with a buyback option.  This buyback option can be exercised at Temarca's discretion at any time during the term of the agreement.

 

Lynx Equity (U.K.) Limited

In October 2017 the Group entered into a royalty financing agreement with Lynx Equity (U.K.) Limited ("Lynx").  Under the terms of the agreement the Group advanced £7 million to Lynx in perpetuity in exchange for annualised royalty distributions of approximately £0.8 million.  The distributions are adjusted annually based on the percentage change in the aggregated gross revenues of Lynx's investee companies compared to the prior year, subject to a floor and cap.  The financing is secured over all present and after-acquired property and assets of Lynx and shares of the subsidiaries of Lynx.  The Group has provided Lynx with a buyback option after the expiry of a period of five years from the date of the original investment.  This buyback option is exercisable at Lynx's discretion.

Trimite Global Coatings Limited

In March 2018 the Group entered into a royalty financing agreement with Trimite Global Coatings Limited ("Trimite").  Under the terms of the agreement the Group advanced £9 million to Trimite for a term of 30 years in exchange for annualised distributions of approximately £1.1 million.  The distributions are adjusted annually based on the percentage change in Trimite's gross revenues compared to the prior year, subject to a floor and cap.  The financing is secured by way of fixed and floating charges over certain assets and the Group has provided Trimite with a buyback option. This buyback option can be exercised at Trimite's discretion at any time during the term of the agreement.

 

 

Equity investments

At completion of the Group's royalty financing agreement with Trimite (see above) the Group acquired a 2.5% interest in the Trimite group for £250.

The Group still holds three unlisted investments in mining entities from its previous investment objectives. The Board do not consider there to be any future cash flows from these investments and were fully written down to nil value.

9.

Trade and other receivables

 

 

 

2018

 

2017

 

 

£

 

£

 

Transaction costs reimbursed receivable

100,000

 

-

 

Prepayments and accrued income

109,520

 

38,467

 

Unpaid share capital

10,000

 

343,000

 

Amounts advanced to agents pending royalty investment

 

 

 

 

  completion (see note 18)

6,467,500

 

-

 

 

 

 

 

 

 

 

 

 

 

 

6,687,020

 

381,467

 

 

 

 

 

 

10.

Share capital

 

 

 

No. shares

 

£

 

 

 

 

 

 

Authorised

 

 

 

 

Unlimited number of shares of no par value

-

 

-

 

 

 

 

 

 

 

 

 

 

 

Allotted, called up and fully paid

 

 

 

 

A 1 April 2016

7,877,459

 

27,137,269

 

Shares issued for cash during the year

36,381,062

 

14,552,425

 

Shares issued in settlement of share issuance costs

1,118,938

 

447,575

 

Share issuance costs

-

 

(1,159,721)

 

Warrants lapsed

-

 

(72,454)

 

 

 

 

 

 

 

 

 

 

 

At 31 March 2017

45,377,459

 

40,905,094

 

Shares issued for cash during the year

48,768,187

 

19,507,275

 

Shares issued in settlement of share issuance costs

1,231,813

 

492,725

 

Share issuance costs

-

 

(1,188,339)

 

Shares issued in connection with support services agreement

1,500,000

 

586,537

 

 

 

 

 

 

 

 

 

 

 

At 31 March 2018

96,877,459

 

60,303,292

 

 

 

 

 

 

 

        On 22 December 2017 the Company issued 50,000,000 new Ordinary Shares at 40p per share, comprising 48,768,187 issued for cash and 1,231,813 issued in settlement of broker and other commission arising on the fundraising of £492,725. A total of £18,811,661 was raised, net of issuance costs.  At the year end £10,000 of the shares issued remained outstanding.  This was settled subsequent to the year end.

 

      On 22 December 2017 the Company also issued 1,500,000 shares with a fair value of £586,537 in respect of its support services agreement (see note 15).

 

       On 23 March 2017 the Company issued 37,500,000 new Ordinary Shares at 40p per share, of which 1,118,938 were issued in settlement of broker and other commission arising on the fundraising.  At 31 March 2017 £343,000 of the shares issued remained outstanding.

 

 

 

11.

Share-based payments

 

 

Warrants

 

 

On 8 November 2017 the Company issued 2,000,000 warrants to Partners Value Investments LP to subscribe for shares at 42 pence per share.  The warrants are exercisable immediately and can be exercised within a period of five years from the date of the agreement.  The fair value of the warrants was determined to be £125,000, being the value of services provided.  This was recognised in profit or loss with £70,000 attributed to 'Transaction costs' and £55,000 to 'Legal and professional fees'.

 

On 29 October 2016, 363,196 warrants with an exercise price of £4.13 lapsed.  The fair value of the warrants of £72,454 was reclassified to reserves during the year ended 31 March 2017.

 

 

The following table shows the movements in the share-based payment reserve during the year:

 

 

 

Share

 

LTIP

 

 

 

 

options

 

awards

 

Total

 

 

£

 

£

 

£

 

At 1 April 2016 and 1 April 2017

124,412

 

-

 

124,412

 

LTIP awards granted in the year

-

 

5,565

 

5,565

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

At 31 March 2018

124,412

 

5,565

 

129,977

 

 

 

 

 

 

 

 

 

Share option scheme

 

 

The Group operates a share option scheme ("the Scheme").

The Scheme was established to incentivise Directors, staff and certain key advisers and consultants to deliver long-term value creation for shareholders.

Under the Scheme, the Board of the Company will award, at its sole discretion, options to subscribe for Ordinary Shares of the Company on terms and at exercise prices and with vesting and exercise periods to be determined at the time. However, the Board of the Company has agreed not to grant options such that the total number of unexercised options represents more than 4 per cent of the Company's Ordinary Shares in issue from time to time. Options vest immediately and lapse 5 years from the date of grant.

At the year end 760,000 (2017 - 760,000) options were outstanding and exercisable at a weighted average exercise price of 75 pence (2017 - 75 pence).  The weighted average remaining contractual life of the options outstanding at the year end was 2.43 years (2017 - 3.43 years).

 

 

Long Term Incentive Plan

 

 

On 7 November 2017 the Remuneration Committee adopted the Duke Royalty Limited Long Term Incentive Plan ("LTIP") which the Board approved the framework of and described in the Admission Document of the Company dated 20 March 2017.

Under the rules of the LTIP the Remuneration Committee may grant Performance Share Awards ("PSAs") which vest after a period of three years and are subject to various performance conditions.  The LTIP awards will be subject to a performance condition based 50 per cent on total shareholder return ("TSR") and 50 per cent on total cash available for distribution ("TCAD per share").  TSR can be defined as the returns generated by shareholders based on the combined value of the dividends paid out by the Company and the share price performance over the period in question. Upon vesting the awards are issued fully paid.

 

On 6 March 2018 1,025,000 PSAs were issued to Directors with a fair value of £234,390.  An expense of £5,565 was recognised in these Consolidated Financial Statements in 'Directors' fees'.  Disclosure of the valuation assumptions used to value the PSAs has not been made on the basis that the related IFRS 2 charge in the year under review is immaterial.

At the year end 1,025,000 (2017 - nil) LTIP awards were outstanding.  The weighted average remaining vesting period of the LTIP awards outstanding at the year end was 2.93 years (2017 - nil).

 

Support services agreement

During the year the Company issued 1,500,000 shares with a fair value of £586,537 in respect of its support services agreement (see note 15).

 

Other share-based payments

The Company also issues shares periodically in settlement of certain share issuance costs (see note 10).

 

12.

Distributable reserves

 

 

         Pursuant to the Companies (Guernsey) Law, 2008 (as amended), all reserves (including share capital) can be designated as distributable. However, in accordance with the Admission Document, the Company shall not make any distribution of capital profits or capital reserves except by means of capitalisation issues in the form of fully paid Ordinary Shares or issue securities by way of capitalisation of profits or reserves except fully paid Ordinary Shares issued to the holders of its Ordinary Shares.

 

 

13.

Trade and other payables

 

 

 

2018

 

2017

 

 

£

 

£

 

 

 

 

 

 

Trade payables

178,761

 

-

 

Accruals and deferred income

80,932

 

225,609

 

 

 

 

 

 

 

 

 

 

 

 

259,693

 

225,609

 

 

 

 

 

 

14.

Financial liabilities at fair value through profit or loss

 

 

 

2018

 

2017

 

 

£

 

£

 

Royalty participation liability

 

 

 

 

Current

140,886

 

-

 

Non-current

776,514

 

-

 

 

 

 

 

 

 

 

 

 

 

 

917,400

 

-

 

 

 

 

 

 

 

Net changes in fair value on financial liabilities at fair value through profit or loss:

 

 

 

2018

 

2017

 

 

£

 

£

 

Realised

-

 

-

 

Change in unrealised

68,866

 

-

 

 

 

 

 

 

 

 

 

 

 

Total net losses

68,866

 

-

 

 

 

 

 

 

15.

Related parties

 

 

Directors' fees

 

 

The following fees were paid to the Directors during the year:

 

 

 

2018

 

2017

 

 

£

 

£

 

Neil Johnson

52,715

 

100,000

 

Charles Cannon Brookes

36,900

 

70,000

 

Nigel Birrell

12,000

 

24,000

 

James Ryan

6,000

 

24,000

 

Justin Cochrane

18,450

 

-

 

Matthew Wrigley

6,000

 

-

 

Mark Le Tissier

-

 

-

 

 

 

 

 

 

 

 

 

 

 

 

132,065

 

218,000

 

 

 

 

 

 

 

 

 

 

 

 

During the year, the Directors voluntarily reduced their fees in order for the Company to implement and sustain its quarterly dividend policy.  Subsequent to the year end this reduction has ceased.

The above noted fees include the following expenses relating to awards granted under the Group's Long Term Incentive Plan (see note 11):

 

 

 

2018

 

2017

 

 

£

 

£

 

Neil Johnson

2,715

 

-

 

Charles Cannon Brookes

1,900

 

-

 

Justin Cochrane

950

 

-

 

 

 

 

 

 

 

 

 

 

 

 

5,565

 

-

 

 

 

 

 

 

 

 

 

 

 

 

Mark Le Tissier, a Director of Trident Trust Company (Guernsey) Limited has waived his entitlement to a fee in relation to being Director of the Company.

Fees relating to Matthew Wrigley are paid to MJ Hudson, a law firm in which he is a partner.

At the year end no fees remained outstanding.  At 31 March 2017 £6,000 remained outstanding to James Ryan.

 

 

Investment Committee fees

 

 

The Group's Investment Committee assist in analysing and recommending potential royalty transactions and its members are considered to be key management along with the Directors.  The following fees were paid to the members of the Investment Committee during the year:

 

 

 

2018

 

2017

 

 

£

 

£

 

Andrew Carragher

-

 

20,000

 

Jim Webster

37,500

 

40,000

 

 

 

 

 

 

 

 

 

 

 

 

37,500

 

60,000

 

 

 

 

 

 

 

 

 

 

 

 

Jim Webster is also the Group's Chief Investment Officer and has an operational role in the Group beyond the Investment Committee, which is reflected in the level of his fee.

Andrew Carragher has waived his entitlement to a fee during the year in relation to being a member of the Group's Investment Committee, and Jim Webster agreed to voluntarily reduce his fee, in conjunction with the voluntary reductions of the Directors, in order for the Company to implement and sustain its quarterly dividend policy.  Subsequent to the year end this reduction has ceased.

During the fiscal year, the representatives of Oliver Wyman were not paid by the Group for their service as per the terms of the collaboration agreement.

No amounts remained outstanding at the year end (2017 - £nil).

 

 

Other related party transactions

 

 

The following amounts were paid to related parties during the year in respect of support services fees:

 

 

 

2018

 

2017

 

 

£

 

£

 

 

 

 

 

 

Payable to Abingdon Capital Corporation

 

 

 

 

Annual service fee

196,000

 

280,000

 

Share award

415,818

 

-

 

 

 

 

 

 

 

 

 

 

 

 

611,818

 

280,000

 

 

 

 

 

 

Payable to Arlington Group Asset Management Limited

 

 

 

 

Annual service fee

24,000

 

95,000

 

Share award

170,719

 

-

 

 

 

 

 

 

 

 

 

 

 

 

194,719

 

95,000

 

 

 

 

 

 

 

 

 

 

 

 

806,537

 

375,000

 

 

 

 

 

 

 

 

 

 

 

 

Support Service Agreements with Abingdon Capital Corporation ("Abingdon"), a company of which Neil Johnson is a Director, and Arlington Group Asset Management Limited ("Arlington"), a company of which Charles Cannon Brookes is a Director, were signed on 16 June 2015. The services to be provided by both Abingdon and Arlington include global deal origination, vertical partner relationships and on-going investment management, including preparation of investment reports, performance data and compliance with the Company's investing policy.

 

 

The Support Services Agreements also entitled Abingdon and Arlington to be allotted up to 1,500,000 Ordinary shares in the Company, in recognition of the execution of the royalty strategy, principally the completion of royalty investments by the Group.  These conditions were met during the year and the shares were issued on 22 December 2017. This entitlement has now been satisfied in full and no further shares will be issued pursuant to the Support Services Agreements. The shares were valued at £586,537 based on the 20-day volume weighted average share prices preceding the dates on which Abingdon and Arlington became entitled to them in accordance with the terms of the agreement.

During the year, both Abingdon and Arlington agreed to voluntary reductions in their annual service fees in order for the Company to implement and sustain its quarterly dividend policy.  Currently these reductions are still in place.

 

 

Share options and LTIP awards

 

 

The Group's related parties have the following interests, either directly or beneficially, in share options issued under the Group's share option scheme and Long Term Incentive Plan:

 

 

 

Share options

 

LTIP awards

 

 

2018

 

2017

 

2018

 

2017

 

 

No.

 

No.

 

No.

 

No.

 

Neil Johnson

85,000

 

85,000

 

500,000

 

-

 

Charles Cannon Brookes1

85,000

 

85,000

 

350,000

 

-

 

Nigel Birrell

85,000

 

85,000

 

-

 

-

 

James Ryan

85,000

 

85,000

 

-

 

-

 

Justin Cochrane

70,000

 

70,000

 

175,000

 

-

 

 

 

 

 

 

 

 

 

 

 

1 Includes share options issued to Arlington

 

 

The following dividends were paid to related parties:

 

 

 

 

 

 

 

 

 

 

 

 

2018

 

2017

 

 

 

 

 

 

£

 

£

 

Neil Johnson1

 

 

 

 

33,636

 

-

 

Charles Cannon Brookes2

 

 

 

 

58,000

 

-

 

Nigel Birrell

 

 

 

 

8,500

 

-

 

Justin Cochrane

 

 

 

 

10,600

 

-

 

 

 

 

 

 

 

 

 

 

 

1 Includes dividends paid to Abinvest Corporation, a wholly owned subsidiary of Abingdon

2 Includes dividends paid to Arlington

 

16.

Fair value measurements

 

 

Fair value hierarchy

 

IFRS 13 requires disclosure of fair value measurements by level of the following fair value hierarchy:

 

Level 1: Inputs are quoted prices (unadjusted) in active markets for identical assets and liabilities that the entity can readily observe.

 

Level 2: Inputs are inputs other than quoted prices included within Level 1 that are observable for the asset, either directly or indirectly.

 

Level 3: Inputs that are not based on observable market date (unobservable inputs).

 

The Group has classified its financial instruments into the three levels prescribed as follows:

 

 

 

2018

 

2017

 

 

Level 3

 

Level 3

 

 

£

 

£

 

 

 

 

 

 

Financial assets

 

 

 

 

Financial assets at fair value through profit or loss

 

 

 

 

- Royalty investments

23,568,548

 

-

 

- Equity investments

250

 

-

 

 

 

 

 

 

 

 

 

 

 

Total financial assets

23,568,798

 

-

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Financial liabilities

 

 

 

 

Financial liabilities at fair value through profit or loss

 

 

 

 

- Royalty participation instruments

917,400

 

-

 

 

 

 

 

 

 

 

 

 

 

Total financial liabilities

917,400

 

-

 

 

 

 

 

 

 

The following table presents the changes in level 3 items for the years ended 31 March 2018 and 31 March 2017:

 

 

 

Financial

 

Financial

 

 

 

 

assets

 

liabilities

 

Total

 

 

£

 

£

 

£

 

At 1 April 2016 and 1 April 2017

-

 

-

 

-

 

Additions

22,932,606

 

(848,534)

 

22,084,072

 

Royalty income received

(987,192)

 

-

 

(987,192)

 

Net change in fair value

1,623,384

 

(68,866)

 

1,554,518

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

At 31 March 2018

23,568,798

 

(917,400)

 

22,651,398

 

 

 

 

 

 

 

 

 

Valuation techniques used to determine fair values

 

The fair value of the Group's financial instruments is determined using discounted cash flow analysis and all of the resulting fair value estimates are included in level 3.

 

Valuation processes

 

The main level 3 inputs used by the Group are derived and evaluated as follows:

 

Annual adjustment factors for royalty investments and royalty participation liabilities

 

These factors are estimated based upon the underlying past and projected performance of the royalty investee companies together with general market conditions.

 

Discount rates for financial assets and liabilities

 

These are initially estimated based upon the projected internal rate of return of the royalty investment and subsequently adjusted to reflect changes in credit risk determined by the Group's Investment Committee.

 

 

Changes in level 3 fair values are analysed at the end of each reporting period and reasons for the fair value movements are documented.

 

Valuation inputs and relationships to fair value

 

The following summary outlines the quantitative information about the significant unobservable inputs used in level 3 fair value measurements:

 

Royalty investments

 

The unobservable inputs are the annual adjustment factor and the discount rate.  The range of annual adjustment factors used is 0.0% to 6.0% and the range of risk-adjusted discount rates is 15.4% to 17.3%.

 

An increase in the annual adjustment factor (subject to the collars set under the terms of the royalty financing agreements) of 5% would increase the fair value by £160,969.

 

A reduction in the discount rate of 25 basis points would increase the fair value by £366,748.

 

A decrease in the annual adjustment factor (subject to the collars set under the terms of the royalty financing agreements) of 5% would decrease the fair value by £243,127.

 

An increase in the discount rate of 25 basis points would decrease the fair value by £364,692.

 

Equity investments

 

Sensitivity analysis has not been performed on the Group's equity investments on the basis that they are not material to the Consolidated Financial Statements.

 

 

 

 

Royalty participation instruments

 

The unobservable inputs are the annual adjustment factor and the discount rate used in the fair value calculation of the royalty investments.  The range of annual adjustment factors used is 0.0% to 6.0% and the range of risk-adjusted discount rates is 15.4% to 17.3%.

 

An increase in the annual adjustment factor (subject to the collars set under the terms of the royalty financing agreements) of 5% would increase the fair value of the liability by £6,026.

A reduction in the discount rate of 25 basis points would increase the fair value of the liability by £13,755.

A decrease in the annual adjustment factor (subject to the collars set under the terms of the royalty financing agreements) of 5% would decrease the fair value of the liability by £9,092.

 

An increase in the discount rate of 25 basis points would decrease the fair value of the liability by £13,679.

 

17.

Financial risk management

 

 

The Group's royalty financing activities expose it to various types of risk that are associated with the investee companies to which it provides royalty finance. The most important types of financial risk to which the Group is exposed are market risk, liquidity risk and credit risk. Market risk includes price risk, foreign currency risk and interest rate risk. The Board of Directors has overall responsibility for risk management and the policies adopted to minimise potential adverse effects on the Group's financial performance.

The policies and processes for measuring and mitigating each of the main risks are described below.

Market Risk

Market risk comprises foreign exchange risk, interest rate risk and other price risk.

Foreign exchange risk

Currency risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in foreign currency exchange rates. The functional and presentation currency of the Group is Sterling.

The Group is exposed to foreign exchange risk arising from foreign currency transactions, primarily with respect to the Euro.  Foreign exchange risk arises from future commercial transactions in recognised assets and liabilities denominated in a currency that is not the functional currency of the Company and its subsidiary.

The Group does not consider the foreign exchange risk to be significant and therefore no steps have been taken to mitigate this risk.

 

 

The Group's exposure to foreign currency risk at the end of the reporting period was as follows:

 

 

 

2018

 

2017

 

 

Euro

 

Euro

 

 

£

 

£

 

 

 

 

 

 

Royalty investments

7,216,755

 

-

 

Cash and cash equivalents

75,663

 

-

 

Royalty participation liability

(293,002)

 

-

 

 

 

 

 

 

 

 

 

 

 

 

6,999,416

 

-

 

 

 

 

 

                         

 

If Sterling strengthens by 5% against the Euro the net Euro-denominated assets would reduce by £361,720.  Conversely, if it weakens by 5% the assets would increase by £398,634.

 

 

During the year the following foreign exchange related amounts were recognised in profit or loss:

 

 

 

2018

 

2017

 

 

£

 

£

 

 

 

 

 

 

Exchange gain on royalty investment included in net change in fair value

 

 

-

 

  on financial assets and liabilities at fair value through profit or loss

77,837

 

 

 

Exchange loss on royalty participation liability included in net change in

 

 

 

 

  fair value on financial assets and liabilities at fair value through profit

 

 

 

 

  or loss

(8,493)

 

 

 

Other exchange gains included in other income/expenses

97,238

 

-

 

 

 

 

 

 

 

 

 

 

 

 

166,582

 

-

 

 

 

 

 

 

 

Interest rate risk

Interest rate risk is the risk that the fair value of future cash flows of a financial asset will fluctuate because of changes in market interest rates.

The Group's main interest rate risk arises in relation to its royalty investments, which are carried at fair value through profit or loss.  The Group's royalty investments have a fair value at the balance sheet date of £23,568,548 (2017: £nil).  A sensitivity analysis in respect of these assets is presented in note 16.

Other price risk

Other price risk is the risk that the fair value of future cash flows of a financial asset will fluctuate because of changes in market prices (other than those arising from interest rate risk or foreign exchange risk).

The fair value of the Group's royalty investments fluctuates due to changes in the expected annual adjustment factor applied to the royalties payable by each of the investee companies, which factors are based upon the revenue growth of the investee company.

A sensitivity analysis in respect of the annual adjustment factors applied to the royalty investments is presented in note 16.

 

 

Credit risk

Credit risk is the risk that one party to a financial instrument will cause a financial loss for the other party by failing to discharge an obligation.

The Group's assets subject to credit risk are as follows:

 

 

 

2018

 

2017

 

 

£

 

£

 

Royalty investments

23,568,548

 

-

 

Deal fees reimbursed receivable

100,000

 

-

 

Funds held in escrow

6,467,500

 

-

 

Cash and cash equivalents

3,165,221

 

14,350,154

 

 

 

 

 

 

 

 

 

 

 

 

33,301,269

 

14,350,154

 

 

 

 

 

 

 

Royalty investments

The royalty investments relate to the Group's three royalty financing agreements.  At the reporting date there are no royalty receipts that are past due.

The Group monitors the credit worthiness of the investee companies on an ongoing basis and receives regular financial reports from each investee company.  These reports are reviewed by the Investment Committee.

The Group also has security in respect of the royalty investments which can be called upon if the counterparty is in default under the terms of the agreement (see note 8). 

 

 

Funds held in escrow

The Group's funds held in escrow at the reporting date were held in a solicitor's client account pending completion of the Group's investment in Brownhills Investment Limited (see note 18).  This royalty financing agreement was completed in April 2018 and the funds transferred to the investee.

Cash and cash equivalents

The credit quality of the Group's cash and cash equivalents can be assessed by reference to external credit ratings as follows:

 

 

 

2018

 

2017

 

Moody's credit rating:

£

 

£

 

Aa3

294,136

 

-

 

Baa2

-

 

14,350,154

 

Baa3

2,871,085

 

-

 

 

 

 

 

 

 

 

 

 

 

 

3,165,221

 

14,350,154

 

 

 

 

 

 

 

The Group considers that the credit risk relating to cash and cash equivalents is acceptable.

 

 

Liquidity risk

Liquidity risk is the risk that the Group will encounter in realising assets or otherwise raising funds to meet financial commitments.

The Group maintains sufficient cash to pay accounts payable and accrued expenses as they fall due.  The Group's overall liquidity risks are monitored on a quarterly basis by the Board.

The table below analyses the Group's royalty investments and financial liabilities into relevant maturity groupings based on their contractual maturities:

 

 

 

 

 

 

 

 

Total

 

 

 

 

 

 

 

contrac-

 

 

Less than

6 - 12

Between

 

Between

Over

tual cash

 

 

6 months

months

1 - 2 years

2 - 5 years

5 years

flows

 

 

£'000

£'000

£'000

£'000

£'000

£'000

 

As at 31 March 2018

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Royalty investments

1,473

1,515

3,132

10,044

88,712

104,876

 

Royalty participation

(92)

(57)

(117)

(377)

(3,327)

(3,970)

 

Trade and other payables

(260)

-

-

-

-

(260)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

1,121

1,458

3,015

9,667

85,385

100,646

 

 

 

 

 

 

 

 

 

 

As at 31 March 2017

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Trade and other payables

(226)

-

-

-

-

(226)

 

 

 

 

 

 

 

 

 

         

Capital management

The Board manages the Company's capital with the objective of being able to continue as a going concern while maximising the return to Shareholders through the capital appreciation of its investments. The capital structure of the Company consists of equity as disclosed in the Consolidated Statement of Financial Position.

 

18.

Events after the financial reporting date

 

         

Brownhills Investments Limited

In April 2018 the Group entered into a royalty financing agreement with Brownhills Investments Limited ("Brownhills").  Under the terms of the agreement the Group advanced £6.5 million to Brownhills for a term of 30 years in exchange for annualised distributions of approximately £0.9 million.  The distributions are adjusted annually based on the percentage change in Brownhill's gross revenues compared to the prior year, subject to a floor and cap.  The investment is secured via fixed and floating charges. The Group has provided Brownhills with a buyback option.

 

Lynx Equity (U.K.) Limited

In April 2018 the Group contributed a further £2 million of royalty financing to Lynx Equity (U.K.) Limited ("Lynx").  This entitled the Group to higher distributions from Lynx from June 2018, of £1.08 million per annual.  The terms of the agreement are outlined in note 8 to the Consolidated Financial Statements.

InterHealth Canada Holding Corp

In August 2018 the Group entered into a royalty financing agreement with InterHealth Canada Holding Corp ("ICHC").  Under the terms of the agreement the Group advanced £10 million to ICHC for a term of 30 years in exchange for annualised distributions of approximately £1.35 million.  The distributions are adjusted annually based on the percentage change in ICHC's gross revenues compared to the prior year, subject to a floor and cap.  The investment is secured via fixed and floating charges.  The Group has provided ICHC with a buyback option.

Secured loan

In June 2018 the Group was granted a secured loan of £3.5 million by a non-related third party.  This loan has an expiry date of 30 June 2019 and bears interest at 9% per annum until 31 December 2018, rising to 12% per annum for the final six-month period ending 30 June 2019.  The loan required automatic repayment in the event of the closure of an equity issue of more than £3.5 million and accordingly was repaid following the fundraising noted below.

Fundraising

On 13 July 2018 the Company announced that 100 million new Ordinary Shares had been successfully placed or subscribed for at a price of 44 pence per share.  The net proceeds from this fundraising were approximately £42 million.

 

Dividends

 

On 12 April 2018 the Company paid a quarterly dividend of 0.6 pence per share and on 12 July 2018 the Company paid a further quarterly dividend of 0.7 pence per share. On 20 September 2018 the Company approved a further quarterly dividend of 0.7 pence per share, to be paid on 12 October 2018.

 

Exclusive healthcare collaboration

On 14 June 2018 the Company announced that it has mutually agreed with Oliver Wyman to end the exclusive healthcare collaboration.  The work that the two firms have undertaken together while developing the Group's existing royalty portfolio has adhered to the economic framework of the original agreement however, the sector focus has been broader than originally envisaged by either party.  As such, the necessity of the exclusive relationship in potential healthcare investments was deemed to be no longer relevant by either party, given that the Group's future pipeline transactions are mostly outside of this sector.

 

Going forward, the Group intends to continue working with Oliver Wyman on a non-exclusive basis.  It also plans to supplement Oliver Wyman's due diligence efforts with relationships with additional global consulting firms which demonstrate expertise and local knowledge for each investment opportunity.

 

 

 

 


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