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| Share Name | Share Symbol | Market | Type | Share ISIN | Share Description |
|---|---|---|---|---|---|
| Duke Capital Limited | LSE:DUKE | London | Ordinary Share | GG00BYZSSY63 | ORDS NPV |
| Price Change | % Change | Share Price | Bid Price | Offer Price | High Price | Low Price | Open Price | Shares Traded | Last Trade | |
|---|---|---|---|---|---|---|---|---|---|---|
| 0.00 | 0.00% | 31.75 | 31.50 | 32.00 | 31.75 | 31.75 | 31.75 | 361,058 | 08:00:00 |
| Industry Sector | Turnover | Profit | EPS - Basic | PE Ratio | Market Cap |
|---|---|---|---|---|---|
| Unit Inv Tr, Closed-end Mgmt | 31.06M | 19.59M | 0.0472 | 6.73 | 131.9M |
From Apr 2019 to Apr 2024
TIDMDUKE
RNS Number : 2317Z
Duke Royalty Limited
17 September 2020
17 September 2020
Duke Royalty Limited
("Duke Royalty", "Duke" or the "Company")
Final Results for the financial year ended 31 March 2020
Duke Royalty Limited (AIM: DUKE), a provider of alternative capital solutions to a diversified range of profitable and long-established businesses in Europe and abroad, is pleased to announce its final results for the 12 months ended 31 March 2020 ("FY20").
Highlights
-- Cash distributions from royalty partners of GBP10.2m (2019: GBP5.4m), an increase of 91%
-- Net cash inflow from operating activities of GBP6.8m (2019: GBP4.1m), an increase of 65%
-- Dividend per share of 2.95p (2019: 2.80p), a 5% increase -- Raised GBP17.5m of additional equity in October 2019 -- Increased revolving credit facility to GBP30m on improved terms
-- Deployed GBP20.4m of further capital into existing royalty partners resulting in a more balanced portfolio
Neil Johnson, CEO of Duke Royalty, said:
"This set of results demonstrates the significant progress made during the 12 months under review as we strengthened and scaled our business. We entered the full year to 31 March 2021 in a robust position, with operating cash flow enhanced by 65%, improved terms on our revolving credit facility and a more diverse and balanced portfolio of royalties.
"This has enabled us to tackle the challenges presented by Covid-19 post-period end from a position of relative strength. We have been well placed to support our royalty partners during a very difficult and uncertain trading environment. Importantly, the forbearance we have demonstrated to our partners in recent months has solidified our reputation as providers of supportive, flexible and long-term capital to SMEs. In the meantime, the short-term revenue reduction has been manageable and, notably, the forgone cash distributions have been accrued, capitalised or equitised.
"As the world adjusts to life with Covid-19 and our portfolio companies return to normalised trading levels from October, we look forward to strengthening our portfolio through follow-on investments to existing partners who are seeing opportunity in the current environment and new royalty partnerships.
"Our experienced and dynamic team is looking ahead with a sense of cautious optimism. Royalty finance businesses in North America have a proven track record of weathering economic cycles. We therefore look forward to emerging from the pandemic with an enhanced reputation in the UK market."
For further information, please contact www.dukeroyalty.com, or contact:
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Neil Johnson / Charlie
Cannon Brookes / Hugo +44 (0) 1481 741
Duke Royalty Limited Evans 240
Cenkos Securities
plc Stephen Keys / Callum
(Nominated Adviser Davidson / Julian Morse +44 (0) 207 397
and Broker) / Michael Johnson 8900
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(PR) Silvera/ Megan Kovach 6880 dukeroyalty@newgatecomms.com
CHAIRMAN'S STATEMENT
Dear Shareholder,
FY20 represented a period of considerable progress for Duke Royalty, with cash flow from operations increasing materially year on year on the back of further deployments of capital into the Company's diverse royalty portfolio. The operational team was also strengthened with the appointment of a full time Finance Director. The Company now has a team of professionals in place that can manage its growth for the foreseeable future.
The health and wellbeing of our employees and stakeholders is the priority for the Company at this time. In response to the initial outbreak of Covid-19, Duke implemented its business continuity plan prior to the UK government's official request for employees to work from home where possible. From an operational standpoint, the continuity plan is proving effective and the Company is well placed to continue to undertake its activities while its employees work remotely. I will come back to our Covid-19 response later in my statement and Neil Johnson provides more detail in his CEO Statement.
As a reminder to shareholders of the material events that occurred during the year under review, in May 2019 Duke Royalty reached agreement with Royalty Partners Welltel (Ireland) Limited ("Welltel"), Step Investments ("Step"), and Xtremepush Limited ("XP"), to modify the terms of existing agreements by extending out the maturity dates of the loans that were acquired as part of the February 2019 acquisition of Capital Step. Several additional follow-on investments were also made into the Company's existing 12 Royalty Partners over the course of FY20, the most material of which were the investments made into Welltel, Lynx Equity UK Ltd ("Lynx UK") and Bakhchysarai (Ireland) Limited ("BIL"). It should be noted that all three of these companies are conducting buy and build strategies in their respective sectors and it is pleasing that each has now conducted several follow-on transactions with Duke's capital. Importantly, they have publicly commented that Duke's long dated and aligned capital is the perfect fit for their business models.
To focus on these specific follow-on deals, in May 2019 Duke invested GBP1.4 million into Welltel to settle all outstanding deferred consideration payments in relation to Welltel's two previous acquisitions of ATS and Eyrco. Then, in January 2020 a further GBP2.0 million was invested into Welltel to provide it with the funds to acquire Invistech Limited, a long established and profitable IT managed service and telecommunications business. I am pleased to report that subsequent to FY20, Duke has made two additional investments into Welltel, the first in June 2020 for GBP2.3 million to acquire Globalnet Solutions Limited, trading as Novi ("Novi") and the second in August 2020 to acquire Intellicom Ireland Limited ("Intellicom"). This Intellicom follow-on financing represented the fifth tranche of capital invested by Duke in Welltel since 2017. Based on the increased total investment of GBP13.5 million, Welltel now represents the largest investment in the Duke portfolio. As a result of taking Duke's capital, Welltel has grown to be one of the largest technology service providers in Ireland, with over 3,500 enterprise clients and in 2019 was named in the Deloitte "Fast 50" (Ireland) for the sixth consecutive year, as well as the "Fast 500" (EMEA) for the first time.
In November 2019, Duke invested GBP2.0 million to fund Lynx UK's acquisition of Danish manufacturer, Sundby Trapper ("Sundby."). Sundby is a manufacturer of specialised steel staircases and related products in Denmark and throughout the Nordic region and was founded in 1964. In March 2020, Duke invested a further GBP1.0 million into Lynx UK to fund the acquisition of Danish manufacturer, Arkas A/S ("Arkas."). Arkas is a manufacturer of bespoke garage doors and single doors for commercial and residential applications that was founded in 1986. The Arkas acquisition represented Lynx UK's sixth acquisition within the UK and Europe and takes Duke's exposure into Lynx to GBP13.0 million, thereby making Lynx the second largest investment in the Duke portfolio.
In January 2020, Duke invested GBP7.7 million as a follow-on contribution into BIL. BIL is the investment holding company created to execute a buy and build strategy of synergistic companies within the Irish/UK recruitment sector, which commenced with the management buyout of Brightwater Selection (Ireland) Limited ("Brightwater"). Duke's new capital supported BIL's second acquisition, PharmEng Limited ("PE Global"), which is one of the leading Healthcare and Life Sciences Recruiters in Ireland with a growing presence in the UK. The deal took Duke's exposure in BIL to GBP9.4 million.
On the financing side, in October 2019 Duke successfully completed an equity fundraising of approximately GBP17.5 million via the issue and allotment of 39,667,899 new ordinary shares at 44 pence per share. Subsequent to this equity raise, in November 2019 the Company paid down the outstanding balance of its legacy revolving credit facility ("New Credit Facility") with Honeycomb Investment Trust from GBP11.65 million to zero. This allowed Duke to take advantage of enhanced terms which it had negotiated with Honeycomb under a new facility which involved a reduction in the interest rate from one-month UK LIBOR + 9.5% to one-month UK LIBOR + 7.25%.
Regarding the dividend, the aggregate FY20 cash dividend pay-out was 2.95p per share, which represented an increase of 5% from the previous year's cash dividend of 2.80p per share. As at the end of FY20, Duke had paid out over GBP12.7 million in dividends to shareholders and intends to continue to pay out a share of its operating cash flow to shareholders in future periods. However, post year end and in light of the exceptional stresses and challenges presented by the Covid-19 pandemic, the Company felt it would be prudent to retain cash as much as possible to support its portfolio in the short term. Management thereby elected to pay shareholders a scrip dividend instead of its normal cash dividend. In line with previous public announcements, Duke announced the payment of a scrip dividend of 0.5p per share for Q1 FY21 and has confirmed the same 0.5p scrip pay-out will be made for Q2 FY21.
As regards the financial performance in FY20, the Group saw cash flows from its operating activities increase significantly. I am pleased to report that cash received from the Company's royalty and loan investments in FY20 totalled GBP10.2 million, which represented an increase of 91% from FY19's GBP5.4 million. This year on year increase reflected additional capital deployment into the Company's royalty portfolio, positive adjustment factors achieved on existing investments as well as the positive financial effects of the acquisition of Capital Step. Net cash inflow from operating activities, which takes Duke's operating costs and tax paid into account, also rose significantly to GBP6.8 million in FY20, an increase of 65% versus the GBP4.1 million generated in FY19.
Due to the nature of IFRS 9 reporting, the Group's royalty investments are classified at fair value through profit or loss which leads to non-cash movements in the fair values of every investment at each reporting date. As a direct result of the Covid-19 pandemic and the likely negative impact on short term operating performance and revenue generation of the Company's Royalty Partners, the Company made total non-cash write-downs of GBP15.6m against its investment portfolio. These write-downs were the main factor in the Company reporting a total comprehensive loss for the period of GBP8.9 million in FY20 versus a profit of GBP1.8 million for FY19. To assist shareholders in accurately analysing the Company's true operating performance, Duke publishes a non-IFRS measure of 'Adjusted Earnings,' which represents the Group's underlying operating performance from core activities. Adjusted Earnings for the year FY20 totalled GBP5.2 million, a 74% increase over FY19. A detailed breakdown and reconciliation of the calculation of Adjusted Earnings can be found in note 7 to the Consolidated Financial Statements.
As I am sure all shareholders are aware, the Covid-19 pandemic emerged very near the end of the FY20 period and has since had a dramatic global effect on many businesses and sectors. Duke has been working closely with its Royalty Partners over the past six months, post FY20, to fully understand the impact of Covid-19 on their businesses and to ensure that they are provided with the necessary support to trade through this challenging period. By design, Duke's long-term capital is structured to be aligned with its Royalty Partners, their owners and managers through the ups and downs of economic cycles. And whilst short term impacts to Duke's portfolio are inevitable during the pandemic, I am pleased with the ongoing resilience demonstrated by the Group's portfolio as a whole.
We have seen a range of effects of the pandemic on the financial results of our Royalty Partners. Since April 2020, the Company has focused its efforts on ensuring that those Royalty Partners most impacted by the Covid-19 pandemic have been given the financial flexibility to manage their cash flow challenges, while also backing those Royalty Partners who are benefitting in the current climate. In certain circumstances, forbearance agreements were structured to cover the six-month period ending September 2020. Rather than surrendering this revenue, these agreements mean Duke's forgone cash distributions for the first six months of the pandemic have been either accrued, capitalised or equitised.
Despite the expected reduction in cash revenue generated from the Company's royalty partners as a result of entering into these forbearance agreements, it was pleasing to note that Q1 FY21 cash revenue, being cash distributions from its Royalty Partners and cash gains from sales of equity assets, still totalled over GBP2.0 million. In addition, Duke recently reported that that the cash revenue that it expects to receive from its Royalty Partners in Q2 FY21 to be GBP2.4 million and that it expects to see a continuing positive trend of increasing quarterly cash revenues for the period Q3 FY21.
Although it is clear that the macroeconomic environment is still volatile and uncertain, and that this is expected to continue for the foreseeable future, I would like to re-emphasise to investors that Duke continues to be a high margin and profitable business with a low fixed cost base and is therefore well-placed to trade through this challenging period. The Company's liquidity position remains strong and I look forward to being able to report on a more normalised trading environment shortly at which time we can reinstate official Company forecasts. Moreover, I firmly believe that the recent challenging operating environment has strengthened the relationship that Duke has with its current Royalty Partners and has provided confirmation that Duke is a long term and supportive capital provider the benefits of which should be felt in future periods.
As always, I am appreciative of the ongoing support of our shareholders and am pleased to report the Chairman's statement for FY20. I look forward to being able to report on the Group's ongoing progress and development in future periods.
Nigel Birrell - Chairman
16 September 2020
CEO STATEMENT
Dear Shareholders,
I hope that you and your family are keeping safe as the world continues to adjust to the 'new normal' in our personal and business lives. This year, I wanted to address the COVID-19 pandemic, our company's response, and how we believe the post-pandemic environment will accelerate the company's leading position in the UK alternative financing marketplace.
Before this however, it would be remiss of me not to mention the position of increased strength and robustness that the Company entered this extraordinary situation in, having made significant progress during FY20 in scaling our business. I would like to congratulate the team for working hard to achieve every objective that we set out to deliver on during the period under review. With operating cash flow enhanced by 65%, improved terms delivered on our revolving credit facility and a more diverse and balanced portfolio of royalties, we have been able to tackle the challenges facing nearly every business on the back of the pandemic in a flexible and supportive way, ultimately building trust with all our key stakeholder groups. We believe that this will hold us in very good stead for the medium to long term.
Our response to the Covid-19 pandemic, due to the Company's high profitability and small staff headcount, was prudent but not panicked. Once we had ensured the safety of our staff, our focus was to ensure we had the information we needed to assess the short-term impact of the pandemic. Our leadership experience through previous crises gave us confidence to not to make rash decisions. In fact, our view was picked up and published in a City newspaper, where we outlined our strategy of enacting a three-month battle plan for the business community at-large, arguing that they should weather the storm by focusing on cash preservation in the short term, without making large-scale, irreversible strategic decisions.
We are pleased to report that the Company, whilst implementing a cost-down plan reducing all non-essential expenditures, did not furlough or lay off any of our eight staff. Rather, we redeployed our efforts to supporting our Royalty Partners though this extraordinary period by helping them in their own three-month battle plans. The Company's commitment both to the internal employees and our wider portfolio companies has proven to bring many benefits to the human wellbeing and financial stability of our business. We feel that our strategy will benefit all the Company's stakeholders, and the results will be seen in the fullness of time.
The pandemic has required business owners of all sizes to access more capital and/or ask for forbearance from their lenders. While governments around the world took drastic steps to support small and medium sized businesses from the effects of the pandemic, the traditional banking system is simply not flexible enough to react swiftly, leaving many businesses having to look for alternative sources of capital. Duke Royalty's perspective is what is in the best interest of the company in the long-term, not the short-term. Because our capital is not repayable within five years, like almost any other form of debt in the marketplace, our response to crises can be flexible to ensure long-term preservation of value for both Duke Royalty's position and the business owner.
Looking forward, we believe that the pandemic will reinforce to business owners that the benefits to long-term capital partners can mean keeping control of their company. In times of short-term uncertainty, which we are undoubtedly in now, business owners look for long-term stability in their businesses. In a stressed business climate, traditional debt channels tighten and equity terms become unpalatable for many owner-operators, which is why we believe Duke Royalty's long-term capital will appeal to a wider and wider spectrum of owners as it becomes better known in the UK and Europe.
In the North American market, royalty financing has been proven in a number of previous periods of short-term economic uncertainty. And time and time again the resilience of the financing solution proves to be a benefit to both the royalty provider and business owner. Royalty company shareholders, while by no means escaping from the downturn of capital markets, have traditionally fared well over time because of the down-side protection the royalty form of financing affords them by being above equity in the capital table.
No one has been unaffected by the global pandemic and Duke Royalty and its portfolio is no exception. We took proactive steps to insulate the effects of the pandemic early in the outbreak and have been working to preserve value for our shareholders throughout. We firmly believe the steps we took and continue to make have given the best result possible, and as the world adjusts to the new normal, the results of our efforts will be clear. We also firmly believe the opportunity for our long-term form of financing is growing and Duke Royalty will be able to capitalise on its leadership position in providing corporate royalty finance to UK and European companies.
Neil Johnson - CEO
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE YEARED 31 MARCH 2020
Year to Year to
31-Mar-20 31-Mar-19
(audited) (audited)
Note GBP000 GBP000
Cash flows from operating activities
Receipts from royalty investments 8,977 5,097
Receipts of interest from loan investments 1,268 257
Receipts from transaction costs reimbursed 90 308
Other interest income received - 1
Payments for royalty participation fees (168) (161)
Operating expenses paid (2,811) (1,392)
Tax paid (573) -
----------- -----------
Net cash inflow from operating activities 6,783 4,110
Cash flows from investing activities
Royalty investments advanced (17,751) (25,033)
Loan investments advanced (2,661) (3,057)
Payment for acquisition of subsidiaries,
net of cash acquired 24 (321) (4,274)
Investments costs paid (548) (624)
Business combinations costs - (268)
Proceeds from disposal of equity instruments - 89
Net cash outflow from investing activities (21,281) (33,167)
Cash flows from financing activities
Proceeds from share issue 17,454 44,010
Share issue costs (1,048) (2,398)
Dividends paid (6,013) (4,023)
Proceeds from loans 16,250 3,500
Loan repaid (11,650) (9,109)
Interest paid (1,425) (172)
Other finance costs paid (534) -
----------- -----------
Net cash inflow from financing activities 13,304 31,808
Net change in cash and cash equivalents (1,464) 2,751
Cash and cash equivalents at beginning
of year 5,894 3,165
Effect of foreign exchange on cash 51 (22)
Cash and cash equivalents at the end
of year 4,481 5,894
=========== ===========
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
FOR THE YEARED 31 MARCH 2020
Year to Year to
31-Mar-20 31-Mar-19
Note (audited) (audited)
GBP000 GBP000
Income
Royalty investment net income 8 (2,994) 5,611
Loan investment net income 9 1,235 256
Impairment loss on loan investments 9 (2,947) -
Equity investment net income 10 (670) 65
Other operating income 90 209
Net foreign currency gains / (losses) 246 (42)
Total income (5,040) 6,099
Investment Expenses
Transaction costs (448) (983)
Due diligence costs (95) (526)
Royalty participation fees - (432)
-----------
(543) (1,941)
Operating Expenses
Administration and personnel (1,725) (651)
Legal and professional (584) (509)
Other operating expenses (471) (203)
Share-based payments 17 (409) (483)
----------- -----------
Total operating costs (3,189) (1,846)
Operating (loss) / profit (8,772) 2,312
----------- -----------
Finance costs (1,607) (396)
(Loss) / Profit for the period before
tax (10,379) 1,916
Taxation credit / (expense) 6 1,481 (119)
Total comprehensive (loss) / income for
the period (8,898) 1,797
=========== ===========
Basic (loss) / earnings per share (pence) 7 (4.16) 1.10
=========== ===========
Diluted (loss) / earnings per share (pence) 7 (4.16) 1.10
=========== ===========
CONSOLIDATED STATEMENT OF FINANCIAL POSITION
FOR THE YEARED 31 MARCH 2020
Note 31-Mar-20 31-Mar-19
GBP000 GBP000
Non-current assets
Goodwill 15 203 203
Royalty finance investments 8 59,435 61,989
Loan investments 9 4,418 8,993
Equity investments 10 507 1,178
Deferred tax asset 20 675 -
----------- -----------
65,238 72,363
Current assets
Royalty finance investments 8 16,124 8,065
Loan investments 9 5,099 632
Trade and other receivables 12 142 178
Cash and cash equivalents 4,481 5,894
Current tax asset 567 -
----------- -----------
26,413 14,769
Total Assets 91,651 87,132
----------- -----------
Current liabilities
Royalty debt liabilities 11 133 173
Trade and other payables 13 318 714
Borrowings 14 172 326
Current tax liability - 248
623 1,461
Non-current liabilities
Royalty debt liabilities 11 1,040 1,193
Trade and other payables 13 431 440
Borrowings 14 15,517 11,365
Deferred tax liability 20 - 565
----------- -----------
16,988 13,563
Net Assets 74,040 72,108
=========== ===========
Equity
Shares issued 16 118,479 102,044
Share based payment reserve 17 742 333
Warrant reserve 17 265 265
Retained losses 18 (45,446) (30,534)
----------- -----------
Total Equity 74,040 72,108
=========== ===========
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
FOR THE YEARED 31 MARCH 2020
Share-based
Shares payment Warrant Retained Total
Note issued reserve reserve losses equity
GBP000 GBP000 GBP000 GBP000 GBP000
At 1 April 2018 60,303 130 125 (28,314) 32,244
Total comprehensive
income for the
year - - - 1,797 1,797
Transactions
with owners
Shares issued
for cash 16 44,000 - - - 44,000
Share issuance
costs 16 (2,398) - - - (2,398)
Share based
payments 16,17 139 203 - - 342
Warrants issued 17 - - 140 - 140
Dividends 19 - - - (4,017) (4,017)
--------- ------------- --------- ---------- ---------
Total transactions
with owners 41,741 203 140 (4,017) 38,067
At 31 March
2019 102,044 333 265 (30,534) 72,108
--------- ------------- --------- ---------- ---------
Total comprehensive
loss for the
year - - - (8,898) (8,898)
Transactions
with owners
Shares issued
for cash 16 17,454 - - - 17,454
Share issuance
costs 16 (1,059) - - - (1,059)
Share based
payments 16,17 40 409 - - 449
Dividends 19 - - - (6,014) (6,014)
--------- ------------- --------- ---------- ---------
Total transactions
with owners 16,345 409 - (6,014) 10,830
At 31 March
2020 118,479 742 265 (45,446) 74,040
========= ============= ========= ========== =========
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARED 31 MARCH 2020
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. The Company is domiciled in Guernsey. Its shares are traded on the AIM market of the London Stock Exchange. The Company's registered office is shown on page 69.
Throughout the year, the "Group" comprised Duke Royalty Limited and its wholly owned subsidiaries; Duke Royalty UK Limited, Capital Step Holdings Limited, Capital Step Investments Limited, Capital Step Funding Limited, Capital Step Funding 2 Limited and Duke Royalty Employee Benefit Trust.
The Group's investing policy is to invest in a diversified portfolio of royalty finance and related opportunities
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 Consolidated Financial Statements have been prepared on a going concern basis and under the 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
The Directors consider that the Group has adequate financial resources to enable it to continue operations for a period of no less than 12 months from the reporting date. Accordingly, the Directors believe that it is appropriate to continue to adopt the going concern basis in preparing the financial statements.
Presentation of statement of cash flows
The Board considers operating cash flow to be the most important measure of the Group's performance and subsequently has presented its Statement of Cash Flows before the Statement of Comprehensive Income and Statement of Financial Position.
Presentation of statement of comprehensive income
In order to better reflect the activities of a royalty financing company, the statement of comprehensive income has been amended to include additional analysis, splitting the Group's income by investment type.
2.2 New and amended standards adopted by the Group
The following accounting standards and their amendments were effective from 1 January 2019:
-- IFRS 16 Leases
-- IAS 28 Investments in associates and Joint Ventures (long term interests in associates or joint ventures)
-- IFRIC Uncertainty over Income Tax Treatments -- Annual Improvements to IFRS 2015-2017 Cycle
The directors view none of the new and amended standards as having material effect.
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 Consolidated Financial Statements of the Group in future periods.
2.4 Going concern
In assessing the going concern basis of accounting the Directors have had regard to the guidance issued by the Financial Reporting Council. After making enquiries and bearing in mind the nature of the Company's business and assets, the Directors consider that the Company has adequate resources to continue in operational existence for the foreseeable future.
The Covid-19 pandemic has caused extensive disruptions to businesses and economic activities globally including impacting the royalty partners. The deal team are in constant contact with the royalty partners and in certain circumstances, forbearance agreements have been structured to cover the six-month period ending September 2020. Rather than surrendering this revenue, these agreements mean Duke's forgone cash distributions for the first six months of the pandemic have been either accrued, capitalised or equitised.
The cash flow needs of the Group has been assessed taking account of the reduced cash flows from royalty payments, the need for further funding for any of the existing royalty partners and the ongoing working capital needs of the business against the current cash and liquidity of the group. Despite the forebearance agreements previously discussed, the Group was able to report cash distributions from royalties and loans in Q1 FY21 which should surpass the annual operating budget.
Furthermore, there is adequate headroom in terms of the uncalled loan facility in place should it be required.
2.5 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, its subsidiaries Duke Royalty UK Limited, Capital Step Holdings Limited, Capital Step Investments Limited, Capital Step Funding Limited and Capital Step Funding 2 Limited and The Duke Royalty Employee Benefit Trust
2.6 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 operating cash flow, as calculated under IFRS, and therefore no reconciliation is required between the measure of performance used by the Board and that contained in these Consolidated Financial Statements.
For management purposes, the Group's 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 12 investments into this segment and has derived income from them. Due to the Group's nature it has no customers
2.7 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 subsidiaries
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 reporting 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 / (losses)'.
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 'royalty investment net income', 'loan investment net income' and 'equity investment net income'.
2.8 Transaction costs
Transaction costs are costs incurred to acquire financial assets at fair value through profit or loss. They include finders' fees, legal and due diligence fees and other fees paid to agents and advisers. Transaction costs, when incurred, are recognised immediately in profit or loss as an expense. Where transaction costs are in respect of loans, these are offset using the effective interest method.
2.9 Transaction costs reimbursed
Income relating to transaction costs reimbursed comprises one off fees charged to investee companies as a reimbursement of certain costs incurred by the Group in connection with the related investments (see note 2.9). Where transaction costs are received in respect of loans, the costs are offset using the effective interest rate method. The Group recognises transaction costs reimbursed when the costs have been incurred by the Group and the transaction to which they relate has completed
2.10 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
2.11 Business combinations
The acquisition method of accounting is used to account for all business combinations, regardless of whether equity instruments or other assets are acquired. The consideration transferred for the acquisition of a subsidiary comprises the:
-- fair values of the assets transferred -- liabilities incurred to the former owners of the acquired business -- equity interests issued by the Group
-- fair value of any asset or liability resulting from a contingent consideration arrangement, and
-- fair value of any pre-existing equity interest in the subsidiary
Identifiable assets acquired and liabilities and contingent liabilities assumed in a business combination are, with limited exceptions, measured initially at their fair values at the acquisition date. The Group recognises any non-controlling interest in the acquired entity on an acquisition-by-acquisition basis either at fair value or at the non-controlling interest's proportionate share of the acquired entity's net identifiable assets. Acquisition-related costs are expensed as incurred.
The excess of the:
-- consideration transferred -- amount of any non-controlling interest in the acquired entity, and -- acquisition-date fair value of any previous equity interest in the acquired entity
over the fair value of the net identifiable assets acquired is recorded as goodwill. If those amounts are less than the fair value of the net identifiable assets of the business acquired, the difference is recognised directly in profit or loss as a bargain purchase.
Where settlement of any part of cash consideration is deferred, the amounts payable in the future are discounted to their present value as at the date of exchange. The discount rate used is the acquirer's incremental borrowing rate, being the rate at which a similar borrowing could be obtained from an independent financier under comparable terms and conditions.
Contingent consideration is classified either as equity or a financial liability. Amounts classified as financial liability are subsequently remeasured to fair value, with changes in fair value recognised in profit or loss.
If the business combination is achieved in stages, the acquisition date carrying value of the acquirer's previously held equity interest in the acquiree is remeasured to fair value at the acquisition date. Any gains or losses arising from such remeasurement are recognised in profit or loss.
2.12 Goodwill
Goodwill is measured as described in note 2.11. Goodwill on acquisition of subsidiaries is included in intangible assets. Goodwill is not amortised, but it is tested for impairment annually, or more frequently if events or changes in circumstances indicate that it might be impaired and is carried at cost less accumulated impairment losses. Gains and losses on the disposal of the entity include the carrying amount of goodwill relating to the entity sold.
Goodwill is allocated to cash-generating units for the purpose of impairment testing. The allocation is made to those cash-generating units that are expected to benefit from the business combination in which the goodwill arose. The units or groups of units are identified at the lowest level at which goodwill is monitored for internal management purposes.
2.13 Dividends
Dividends are recognised as a liability in the Group's financial statements in the period in which they become obligations of the Group.
2.14 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.
a. Financial assets
The Group's financial assets are classified in the following measurement categories:
-- those to be measured subsequently at fair value through profit or loss ("FVTPL"); 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 FVTPL, transaction costs that are directly attributable to the acquisition of the financial asset. Transaction costs of financial assets carried at FVTPL 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's financial assets held at amortised cost include loans receivable, trade and other receivables and cash and cash equivalents.
Expected Credit Loss ("ECL") allowance for financial assets measured at amortised cost
Impairment of financial assets is calculated using a forward looking expected credit loss (ECL) model. ECLs are an unbiased probability weighted estimate of credit losses determined by evaluating a range of possible outcomes. They are measured in a manner that reflects the time value of money and uses reasonable and supportable information that is available without undue cost or effort at the reporting date about past events, current conditions and forecasts of future economic conditions.
The Group recognises an allowance for ECLs for all debt instruments not held at fair value through profit or loss. Assets held at fair value through profit and loss are not subject to impairment.
IFRS 9 establishes a three-stage approach for impairment of financial assets:
-- Stage 1 - when a financial asset is first recognised, it is assigned to Stage 1. If there is no significant increase in credit risk from initial recognition, the financial asset remains in Stage 1. Stage 1 also includes financial assets where the credit risk improved and the financial asset has been reclassified back from Stage 2. For financial assets in Stage 1, a 12-month ECL is recognised;
-- Stage 2 - when a financial asset has experienced a significant increase in credit risk since initial recognition, the asset is classified as Stage 2. Stage 2 also includes financial assets where the credit risk improved and the financial asset has been reclassified back from Stage 3. For financial assets in Stage 2, a lifetime ECL is recognised;
-- Stage 3 - that where there is objective evidence of impairment and the financial asset is considered to be in default, or otherwise credit-impaired, it is moved to Stage 3. For financial assets in Stage 3, a lifetime ECL is recognised and interest income is recognised on a net basis.
In relation to the above
-- Lifetime ECL is defined as ECLs that result from all possible default events over the expected behavioural life of a financial instrument
-- 12-month ECL is defined as the portion of lifetime credit loss that will result if a default occurs in the 12 months after the reporting, weighted by the probability of that default occurring
The measurement of ECLs is primarily based on the product of the instrument's probability of default ("PD"), loss given default ("LGD"), and exposure at default ("EAD"), taking into account the value of any collateral held or other mitigants of loss and including the impact of discounting using the effective interest rate.
-- The PD represents the likelihood of a borrower defaulting on its financial obligation, either over the next 12 months ("12-month PD"), or over the remaining lifetime ("Lifetime PD") of the obligation
-- EAD is based on the amounts the Group expects to be owed at the time of default, over the next 12 months ("12-month EAD") or over the remaining lifetime ("Lifetime EAD")
-- LGD represents the Group's expectation of the extent of loss on a defaulted exposure
The ECL is determined by estimating the PD, LGD, and EAD for each individual exposure. These three components are multiplied together and adjusted for the likelihood of survival. This effectively calculates an ECL.
The measurement ECLs for each stage and the assessment of significant increases in credit risk considers economic information about past events and current conditions as well as reasonable and supportable forward-looking information. When determining whether the credit risk profile has materially increased, the Group specifically reviews the debt covenant positions of each company. If the debt service coverage ratio falls below 0 and the Group does not have sufficient liquidity to cover 12 months of debt obligations, the investment will be deemed to be in default and a lifetime ECL allowance will be provided for.
As with any forecasts and economic assumptions, the projections and likelihoods of occurrence are subject to a high degree of inherent uncertainty and therefore the actual outcomes may be significantly different to those projected. Other forward-looking considerations, such as the impact of any regulatory, legislative or political changes, have also been considered, but no adjustment has been made to the ECL for such factors. This is reviewed and monitored for appropriateness on an annual basis.
Cash and cash equivalents
Cash and cash equivalents comprise current accounts 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 FVTPL
Royalty investments are debt instruments classified at FVTPL 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 'royalty investment income' 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 22.
Investments in equity instruments are classified at FVTPL. The Group subsequently measures all equity investments at fair value and the change in fair value is recognised in profit or loss and is presented within the 'equity investment income' in the Consolidated Statement of Comprehensive Income. Dividends from such investments are recognised in profit or loss when the Group's right to receive payments is established.
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.
b. 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 borrowings and trade and other payables. These liabilities are initially recognised at fair value, net of transaction costs incurred, and subsequently carried at amortised cost using the effective interest rate method.
Financial liabilities at FVTPL
Financial liabilities at FVTPL 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 FVTPL 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 'royalty investment 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 22.
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.
c. 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, warrant reserve and retained losses.
Incremental costs directly attributable to the issue of new shares are shown in equity as a deduction from proceeds.
2.15 Share-based payments
The Group operates an equity settled Share Option Plan and a Long Term Incentive Plan for its Directors and key advisers.
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 (e.g. the entity's share price)
-- excluding the impact of any service and non-market performance vesting conditions (e.g. 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. All expenses recognised in the year in relation to the Group's share option and long term incentive plan schemes are recognised through the share-based payment reserve.
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. All expenses recognised in the year in relation warrants issued are recognised through the warrant reserve.
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 semi-annually. The Directors believe that the applied valuation techniques and assumptions used are appropriate in determining the fair value of the royalty investments and have made adjustments to the discount rates and estimated revenue growth where necessary. Further details of the carrying values, methods, assumptions and sensitivities used in determining the fair value can be found in note 22.
The COVID-19 pandemic has and will continue to have a significant effect on the global economy, such that many leading economic organisations, including the international Monetary Fund, have withdrawn economic forecasts beyond 2021. Duke's royalty investments are long-dated financial instruments, often with a life span of between 25 and 30 years. As such, the main input factors that affect the fair value are currently subject to a significant level of judgement and estimation, especially with uncertainty around the impact of second waves, social Distancing requirements and Government stimulus. Therefore the actual outcomes may be significantly different to those projected.
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. Further details of the methods, assumptions and sensitivities used in determining the fair value can be found in note 22.
Fair value of equity investments
The Group's equity investments are not traded in an active market and thus the fair value of the instruments is determined using valuation techniques. The Group uses its judgement to select methods and make assumptions based on market conditions at the end of each reporting period. The key judgements that the Directors have made in arriving at the fair values are the price/earnings multiples to be applied to the investee entities' profits. These multiples have been estimated based on market information for similar types of companies. The carrying value of equity investments are disclosed in Note 10. No sensitivity has been performed given the immaterial nature of the investments.
Loan impairment provisions
The calculation and measurement of ECLs requires significant judgement and represents a key source of estimation uncertainty. The Group reviews and updates the key judgements semi-annually. These include but are not limited to:
-- liquidity and cash flows of the underlying businesses -- security strength -- covenant cover -- balance sheet strength
The carrying value of loan investments is disclosed in Note 9.
4. Auditor's remuneration
2020 2019
GBP000 GBP000
Audit of the Consolidated Financial
Statements 108 64
======== ========
The charge to 31 March 2020 includes underaccrued fees in relation to the prior year audit of GBP33,000.
5. Finance costs
2020 2019
GBP000 GBP000
Interest payable on borrowings (1,062) (291)
Non-utilisation fees (209) -
Deferred finance costs released to P&L (336) (105)
---------
(1,607) (396)
========= ========
6. 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.
2020 2019
GBP000 GBP000
Current tax
Income tax (credit) / expense (241) 243
--------- --------
Deferred tax
Increase in deferred tax assets (430) (103)
Decrease in deferred tax liabilities (876) (21)
Change in rate of deferred tax from 66 -
17% to 19%
--------- --------
Total deferred tax benefit (1,240) (124)
Income tax (credit) / expense (1,481) 119
========= ========
Factors affecting income tax expense for the year
(Loss) / profit on ordinary activities
before tax (10,550) 1,916
---------- -------
Tax using the Group effective tax rate
of 14.67% (2019 - 10.53%) (1,547) 202
Utilisation of tax losses not previously
recognised - (97)
Differential in tax rate 66 14
---------- -------
Income tax (credit) / expense (1,481) 119
========== =======
7. (Deficit) / earnings per share
2020 2019
Total comprehensive (loss) / income
(GBP000) (8,898) 1,797
Weighted average number of Ordinary
Shares in issue, excluding treasury
shares (000s) 213,792 163,129
Basic (deficit) / earnings per share
(pence) (4.16) 1.10
========= =========
2020 2019
Total comprehensive (loss) / income
(GBP000) (8,898) 1,797
Weighted average number of Ordinary
Shares in issue, diluted for warrants
in issue (000s) 213,792 163,244
Diluted (deficit) / earnings per share
(pence) (4.16) 1.10
========= =========
Basic earnings per share is calculated by dividing total comprehensive (loss) / income for the period by the weighted average number of shares in issue throughout the period, excluding treasury shares (see Note 16).
Diluted earnings per share represents the basic earnings per share adjusted for the effect of dilutive potential shares issuable on exercise of share options under the Company's share-based payment schemes, weighted for the relevant period.
While 2,000,000 warrants issued in the year ended 31 March 2018 remain 'in the money', thy are not considered dilutive given the Group made a loss during the year (refer to Note 17). All other 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.
Adjusted earnings per share
Adjusted earnings represent the Group's underlying performance from core activities. Adjusted earnings is the total comprehensive income adjusted for unrealised and non-core fair value movements, non-cash items and transaction-related costs, including royalty participation fees, together with the tax effects thereon. Given the sensitivity of the inputs used to determine the fair value of its investments, the Group believes that adjusted earnings is a better reflection of its ongoing financial performance,
Valuation and other non-cash movements such as those outlined are not considered by management in assessing the level of profit and cash generation of the Group. Additionally, IFRS 9 requires transaction-related costs to be expensed immediately whilst the income benefit is over the life of the asset. As such, an adjusted earnings measure is used which reflects the underlying contribution from the Group's core activities during the year.
2020 2019
GBP000 GBP000
Total comprehensive (loss) / income
for the period (8,898) 1,797
Unrealised fair value movements 12,641 (652)
Impairment loss on loan investments 2,947 -
Gain on warrants - (88)
Share-based payments 409 483
Transactions costs net of costs reimbursed 543 1,161
Royalty participation fees - 432
Tax effect of the adjustments above
at Group effective rate (2,426) (141)
---------
Adjusted earnings 5,216 2,992
========= ========
2020 2019
Adjusted earnings for the year (GBPm) 5,216 2,992
Weighted average number of Ordinary
Shares in issue, excluding treasury
shares (000s) 213,792 163,129
Adjusted earnings per share (pence) 2.44 1.83
========= =========
2020 2019
Diluted adjusted earnings for the year
(GBPm) 5,216 2,992
Weighted average number of Ordinary
Shares in issue, diluted for warrants
in issue 213,792 163,244
Diluted earnings per share (pence) 2.44 1.83
========= =========
8. Royalty investments
Royalty investments are financial assets held at fair value through profit and loss that relate to the provision of royalty capital to a diversified portfolio of companies.
31-Mar-20 31-Mar-19
GBP000 GBP000
At 1 April 70,054 23,569
Additions 20,983 45,793
Refinanced assets (3,233) -
Loss on financial assets at fair value
through profit and loss (12,245) 692
As at 31 March 75,559 70,054
=========== ===========
Royalty investments are comprised of:
31-Mar-20 31-Mar-19
GBP000 GBP000
Non-Current 59,435 61,989
Current 16,124 8,065
75,559 70,054
=========== ===========
Royalty investment net income on the face of the consolidated statement of comprehensive income comprises:
2020 2019
GBP000 GBP000
Royalty interest 8,976 5,097
(Loss) / gain on royalty assets at fair
value through profit and loss (12,245) 692
Gain / (loss) on royalty liabilities
at fair value through profit and loss 275 (178)
Royalty investment net income (2,994) 5,611
========== ========
All financial assets held at fair value through profit and loss are mandatorily measured as such.
The Group's royalty investment assets comprise royalty financing agreements with 12 (2019: 12) investees. Under the terms of these agreements the Group advances funds in exchange for annualised royalty distributions. The distributions are adjusted based on the change in the investees' revenues, subject to a floor and a cap. The financing is secured by way of fixed and floating charges over certain of the investees' assets. The investees are provided with buyback options, exercisable at certain stages of the agreements.
9. Loan investments
Loan investments are financial assets held at amortised cost.
31-Mar-20 31-Mar-19
GBP000 GBP000
1 April 9,626 -
Additions 7,203 9,655
Refinanced loans (4,542) -
ECL allowance (2,947) -
Net foreign currency movement 177 (29)
As at 31 March 9,517 9,626
=========== ===========
The Group's loan investments comprise secured loans advanced to six entities (2019 - five) in connection with the Group's royalty investments.
The loans comprise fixed rate loans of GBP7,160,000 which bear interest at rates of between 5% and 16% and one variable rate loan of GBP2,357,000 which bears interest at 14.5% over LIBOR. The total interest receivable during the period was GBP1,235,000 (2019 - GBP256,000).
The loan investments mature as follows:
31-Mar-20 31-Mar-19
GBP000 GBP000
In less than one year 4,418 632
In one to two years - 4,242
In two to five years 5,099 4,752
9,517 9,626
=========== ===========
Loan investment net income on the face of the consolidated statement of comprehensive income comprises:
2020 2019
GBP000 GBP000
Loan Interest charged 1,235 256
======== ========
ECL Analysis
The measurement of ECLs is primarily based on the product of the instrument's probability of default ("PD"), loss given default ("LGD"), and exposure at default ("EAD"). The Group analyses a range of factors to determine the credit risk of each investment. These include, but are not limited to:
-- liquidity and cash flows of the underlying businesses -- security strength -- covenant cover -- balance sheet strength
If there is a material change in these factors, the weighting of either the PD, LGD or EAD increases, thereby increasing the ECL impairment.
The disclosure below presents the gross and net carrying value of the Group' loan investments by stage:
Net
Gross carrying Allowance Carrying
amount for ECLs amount
As at 31 March 2020 GBP000 GBP000 GBP000
Stage 1 6,369 - 6,369
Stage 2 - - -
Stage 3 6,095 (2,947) 3,148
---------------- ----------- -----------
12,464 (2,947) 9,517
================ =========== ===========
Net
Gross carrying Allowance Carrying
amount for ECLs amount
As at 31 March 2019 GBP000 GBP000 GBP000
Stage 1 9,626 - 9,626
Stage 2 - - -
Stage 3 - - -
---------------- ----------- -----------
9,626 - 9,626
================ =========== ===========
Under the ECL model introduced by IFRS 9, impairment provisions are driven by changes in credit risk of instruments, with a provision for lifetime expected credit losses recognised where the risk of default of an instrument has increased significantly since initial recognition.
The Group has determined the risk profile of one loan investment has materially increased. Temarca is a European river cruising business that has been severely affected by the lockdown restrictions that were imposed by a number of European Governments during the peak of the pandemic. At year end, the Company was in breach of its debt covenants and did not have spare liquidity to cover its debt obligations. As such, there is objective evidence of impairment and the investment has been moved to Stage 3 and a lifetime ECL of GBP2,947,000 has been recognised.
The net carrying value of the investment was based on the estimated recoverability of the Company's assets, supported by an independent professional valuation. As the ECL has been assessed on the underlying fair valuation of the assets, no sensitivity has been performed.
The credit risk profile of the remaining investments has not increased materially and they remain Stage 1 assets. No ECLs have been charged on these assets as they are not deemed material.
The following table analyses Group's provision for ECL's by stage for the year ended 31 March 2020:
Stage Stage Stage 3 Total
1 2
GBP000 GBP000 GBP000 GBP000
At 1 April 2018 and - - - -
1 April 2019
Impairment charged
in year - - 2,947 2,947
Carrying value at 31
March 2020 - - 2,947 2,947
========== ========== ========= ========
10. Equity investments
Equity investments are financial assets held at fair value through profit and loss.
31-Mar-20 31-Mar-19
GBP000 GBP000
At 1 April 1,177 -
Additions - 1,201
Loss on equity assets at fair value
through profit and loss (670) (23)
As at 31 March 507 1,178
=========== ===========
The Group's equity investments comprise unlisted shares and warrants in six of its royalty investment companies (31 March 2019: six)
The Group also still holds two (2019: two) unlisted investments in mining entities from its previous investment objectives. The Board does not consider there to be any future cash flows from the remaining investments and they are fully written down to nil value.
Equity investment net income on the face of the consolidated statement of comprehensive income comprises:
2020 2019
GBP000 GBP000
(Loss) on equity assets at fair value
through profit and loss (670) (23)
Realised gain on exercise of warrants - 88
-------- --------
Equity investment net income (670) 65
======== ========
11. Royalty debt liabilities
Royalty debt liabilities are financial liabilities held at fair value through profit and loss.
31-Mar-20 31-Mar-19
GBP000 GBP000
At 1 April 1,366 917
Additions 250 432
Payments made (168) (161)
(Gain) / loss on royalty liabilities
at fair value through profit and loss (275) 178
As at 31 March 1,173 1,366
=========== ===========
Royalty investment liabilities are comprised of:
31-Mar-20 31-Mar-19
GBP000 GBP000
Non-Current 1,040 1,193
Current 133 173
1,173 1,366
=========== ===========
12. Trade and other receivables
31-Mar-20 31-Mar-19
GBP000 GBP000
Prepayments and accrued income 140 178
Other debtors 2 -
142 178
=========== ===========
13. Trade and other payables
31-Mar-20 31-Mar-19
GBP000 GBP000
Current
Trade payables - 159
Consideration on business acquisition - 321
Transaction costs 191 99
Accruals and deferred income 127 135
318 714
Non-current
Transaction costs 431 440
749 1,154
=========== ===========
14. Borrowings
31-Mar-20 31-Mar-19
GBP000 GBP000
Current - accrued interest 172 326
Non-current 15,517 11,365
15,689 11,691
=========== ===========
The secured loan had an interest rate of 9.5% over one-month UK LIBOR per annum. This rate was lowered to 7.25% over one-month UK LIBOR per annum following the extinguishment of the previous facility inherited from the Capital Step acquisition and the completion of the new credit facility on 8 October 2019. The principal amount is repayable on 7 October 2024. The loan is secured by means of a fixed and floating charge over the assets of the Group.
At the date of extinguishment of the previous facility, capitalised loan issue fees of GBP264,000 were outstanding. These fees were immediately charged to the income statement. Further fees of GBP534,000 were capitalised against the new credit facility. At 31 March 2020, GBP483,000 (31 March 2019: GBP284,000) of unamortised fees remained outstanding.
The table below set out an analysis of net debt and the movements in net debt for the year ended 31 March 2020 and prior year.
Interest
Payable Borrowings
GBP000 GBP000
At 1 April 2019 326 11,365
Cash movements
Loan advanced - 16,250
Loan repaid - (11,650)
Deferred finance costs paid - (534)
Interest paid (1,425) -
Non-cash movements
Deferred finance costs released to P&L
- old credit facility - 284
Deferred finance costs released to P&L
- new credit facility - 52
Transfer to royalty debt liability - (250)
Interest charged 1,271 -
At 31 March 2020 172 15,517
========== ============
Interest
Payable Borrowings
GBP000 GBP000
At 1 April 2018 - -
Cash movements
Loan advanced - 3,500
Loan repaid - (9,109)
Interest paid (172) -
Non-cash movements
Loan acquired as part of business combination 207 16,964
Deferred finance costs released to P&L
- old credit facility - 10
Interest charged 291 -
At 31 March 2019 326 11,365
========== ============
15. Goodwill
Goodwill
GBP000
Net book value at 1 April 2018 -
Arising on business combination 203
----------
Closing net book value at 31 March 2019 and 31
March 2020 203
==========
The goodwill has not been assessed for impairment on the basis of materiality.
16. Share capital
External Treasury Total
Shares Shares shares
No. No. No. GBP000
Allotted, called up
and fully paid
At 1 April 2018 96,877 - 96,877 60,303
Shares issued for cash
during the year 100,000 - 100,000 44,000
Share issuance costs - - - (2,398)
Shares issued to Employee
Benefit Trust during
the year - 2,690 2,690 -
Shares issued to directors
and key advisers as
remuneration 305 - 305 139
---------- ---------- ---------- ----------
At 31 March 2019 197,182 2,690 199,872 102,044
---------- ---------- ---------- ----------
Shares issued for cash
during the year 39,668 - 39,668 17,454
Share issuance costs - - - (1,059)
Shares issued to key
advisers as remuneration 87 - 87 40
---------- ---------- ---------- ----------
At 31 March 2020 236,937 2,690 239,627 118,479
========== ========== ========== ==========
There is a single class of shares. There are no restrictions on the distribution of dividends and the repayment of capital with respect to externally held shares. The shares held by The Duke Royalty Employee Benefit Trust are treated as treasury shares. The rights to dividends and voting rights have been waived in respect of these shares.
17. Equity-settled share-based payments
Warrant reserve
The following table shows the movements in the warrant reserve during the year:
Warrants
No. (000) GBP000
At 1 April 2018 2,000 125
Issued during the period 2,375 140
At 31 March 2019 and 31 March 2020 4,375 265
=========== ========
In September 2018 the Company issued a further 2,375,000 warrants to Partners Value Investments LP to subscribe for shares at 50 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 GBP140,000, being the value of services provided. This was recognised within 'Transaction costs' in the Consolidated Statement of Comprehensive Income.
At 31 March 2020, 4,375,000 (31 March 2019: 2,375,000) warrants were outstanding and exercisable at a weighted average exercise price of 46 pence (2019 - 42 pence). The weighted average remaining contractual life of the warrants outstanding was 3.00 years (31 March 2019: 4.08 years).
Share-based payment reserve
The following table shows the movements in the share-based payment reserve during the period:
Share options LTIP Total
GBP000 GBP000 GBP000
At 1 April 2018 124 6 130
LTIP awards 12 191 203
--------------- -------- --------
At 31 March 2019 136 197 333
LTIP awards - 409 409
--------------- -------- --------
At 31 March 2020 136 606 742
=============== ======== ========
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 four per cent of the Company's Ordinary Shares in issue from time to time. Options vest immediately and lapse five years from the date of grant.
In October 2018 the Company issued 200,000 options at an exercise price of 50 pence under the terms of the Scheme. The Black-Scholes value of the options was assessed as GBP12,000. Since the options vested immediately, the full expense was recognised in profit or loss during the year.
At 31 March 2020, 960,000 options (31 March 2019: 960,000) were outstanding and exercisable at a weighted average exercise price of 70 pence (31 March 2019: 70 pence). The weighted average remaining contractual life of the options outstanding at the year end was 1.00 year (31 March 2019: 2.09 years).
Long Term Incentive Plan
Under the rules of the Long Term Incentive Plan ("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.
The fair value of the LTIP awards consists of (a) the fair value of the TSR portion; and (b) the fair value of the TCAD per share portion. Since no consideration is paid for the awards, the fair value of the awards is based on the share price at the date of grant, as adjusted for the probability of the likely vesting of the performance conditions. Since the performance condition in respect of the TSR portion is a market condition, the probability of vesting is not revisited following the date of grant. The probability of vesting of the TCAD per share portion, containing a non-market condition, is reassessed at each reporting date. The resulting fair values are recorded on a straight-line basis over the vesting period of the awards.
On 31 October 2019, 2,525,000 PSAs were granted to Directors and key personnel with a fair value of GBP871,000. An expense of GBP94,000 was recognised in Administration and Personnel costs in the Consolidated Statement of Comprehensive Income.
At 31 March 2020, 5,215,000 (2019 - 2,690,000,000) PSAs were outstanding. The weighted average remaining vesting period of these awards outstanding was 1.99 years (2019 - 2.33 years).
Other share-based payments
During the year ended 31 March 2020. the Company issued 87,000 shares to certain members of the Investment Committee in recognition of the significant contribution made during the previous financial year and for voluntarily forgoing service fees. The fair value of the shares was determined to be GBP40,000 being the share price at the date of the awards. The expense was recognised in full in the Consolidated Statement of Comprehensive Income during that year.
During the year ended 31 March 2019. the Company issued 305,000 shares to certain Non-Executive Directors, members of the Investment Committee and to new members ("New Joiners") of the Duke team. The shares issued to the Non-Executive Directors and Investment Committee members were in recognition of the significant contribution made during the previous financial year and for voluntarily forgoing service fees. The shares issued to New Joiners were as signing bonuses. The fair value of the shares was determined to be GBP139,395, being the share price at the date of the awards. The expense was recognised in full in the Consolidated Statement of Comprehensive Income during that year.
18. 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.
19. Dividends
The following interim dividends have been recorded in the periods to 31 March 2019 and 31 March 2020:
Dividend Dividends
per
share payable
pence/share GBP000
Record date Payment date
3 April 2018 12 April 2018 0.60 581
29 June 2018 12 July 2018 0.70 678
12 October
28 September 2018 2018 0.70 1,378
11 January
28 December 2018 2019 0.70 1,380
-----------
Dividends paid for the period ended
31 March 2019 4,017
-----------
Record date Payment date
5 April 2019 17 April 2019 0.70 1,380
28 June 2019 12 July 2019 0.70 1,381
18 October
27 September 2019 2019 0.75 1,476
14 January
27 December 2019 2020 0.75 1,777
Dividends paid for the period ended
31 March 2020 6,014
===========
Further quarterly dividends were paid post year end, refer to Note 25 for details.
Rights to dividends have been waived in respect of shares held by the Group's Employee Benefit Trust (see note 16).
20. Deferred tax
The temporary differences for deferred tax are attributable to:
Royalty Equity
investments investments Tax losses Total
GBP000s GBP000s GBP000s GBP000s
1 April 2018 - - - -
Arising on business
combination (742) (204) 258 (688)
(Charged) / credited
to profit & loss 151 4 (31) 124
-------------- -------------- ------------ ---------
At 31 March 2019 (591) (200) 227 (564)
Credited to profit
& loss 579 200 460 1,239
-------------- --------------
At 31 March 2020 (12) - 687 675
============== ============== ============ =========
A deferred tax asset has been recognised as it is expected that, even in the wake of COVID-19, future available taxable profit will be available against which the Group can use against the current year tax losses.
21. Related parties
Directors fees
The following fees were payable to the Directors during the period:
Share Share
Basic based Annual Basic based
fees payments bonus Total fees payments Total
2020 2020 2020 2020 2019 2019 2019
GBP000 GBP000 GBP000 GBP000 GBP000 GBP000 GBP000
Non-Executive
N Birrell 26 - - 26 24 20 44
J Cochrane* 35 17 - 52 35 17 52
M Wrigley 24 - - 24 24 12 36
M LeTissier - - - - - - -
Executive
N Johnson 200 190 200 590 150 95 245
C Cannon Brookes 160 134 140 434 105 67 172
-------- ----------- -------- -------- -------- ----------- --------
445 341 340 1,126 338 211 549
======== =========== ======== ======== ======== =========== ========
* Resigned 11 March 2020
Fees relating to Charles Cannon Brookes are paid to Arlington Group Asset Management Limited.
Directors' fees include the following expenses relating to shares issued as remuneration in 2019 (see note 17):
2020 2019
GBP000 GBP000
N Birrell - 20
M Wrigley - 13
- 33
========== ========
Directors' fees include the following expenses relating to awards granted under the Group's Long Term Incentive Plan (see note 17):
2020 2019
GBP000 GBP000
N Johnson 190 95
C Cannon Brookes 134 68
J Cochrane 17 17
341 180
======== ========
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.
At the year end a total of GBP13,000 of fees remained outstanding (2019 - GBP33,000), of which GBP7,000 was due to Nigel Birrell (2019 - GBP6,000), GBP6,000 was due to Matthew Wrigley (2019 - GBP6,000), GBPnil was due to Neil Johnson (2019: GBP13,000) and GBPnil was due to Charles Cannon Brookes (2019 - GBP9,000). These fees have been settled subsequent to the year end.
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 payable to the members of the Investment Committee during the year:
2020 2019
GBP000 GBP000
A Carragher 20 20
J Romeo 20 20
J Webster 117 87
157 127
======== ========
Investment Committee fees include the following expenses relating to shares issued as remuneration (see note 17):
2020 2019
GBP000 GBP000
A Carragher 20 20
J Romeo 20 20
40 40
======== ========
Investment Committee fees include the following expenses relating to awards granted under the Group's Long Term Incentive Plan (see note 17):
2020 2019
GBP000 GBP000
J Webster 36 11
======== ========
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.
At the year end a total of GBP16,000 remained outstanding (2019 - GBP13,000) to Jim Webster. These fees have been settled subsequent to the year end.
Support services administration fees
The following amounts were payable to related parties during the year in respect of support services fees:
2020 2019
GBP000 GBP000
Abingdon Capital Corporation 325 248
Arlington Group Asset Management Limited 72 62
397 310
======== ========
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 assisting the Board with the selection, execution and monitoring of royalty partners and royalty performance. Abingdon fees also includes fees relating to remuneration of staff residing in North America.
Share options and LTIP awards
The Group's related parties, either directly or beneficially, were awarded share options issued under the Group's share option scheme and Long Term Incentive Plan as follows:
Share options LTIP awards
2020 2019 2020 2019
No. No. No. No.
Neil Johnson 85 85 2,200 1,350
Charles Cannon
Brookes(1) 85 85 1,550 950
Nigel Birrell 85 85 - -
Justin Cochrane 70 70 175 175
Jim Webster - - 430 215
======== ======= ======= =======
(1) Includes share options issued to Arlington Group Asset Management
Dividends
The following dividends were paid to related parties
2020 2019
GBP000 GBP000
N Johnson(1) 103 103
C Cannon Brookes(2) 158 158
N Birrell 24 24
J Cochrane 22 22
M Wrigley 1 1
A Carragher 10 10
J Romeo 2 2
======== ========
(1) Includes dividends paid to Abinvest Corporation, a wholly owned subsidiary of Abingdon
(2) Includes dividends paid to Arlington Group Asset Management
22. 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:
31-Mar-20 31-Mar-19
Level 3 Level 3
GBP000 GBP000
Financial assets
Financial assets at fair value through
profit or loss
- Royalty investments 75,559 70,054
- Equity investments 507 1,177
----------- -----------
76,066 71,231
=========== ===========
Financial liabilities
Financial liabilities at fair value
through profit or loss
- Royalty participation instruments 1,173 1,367
----------- -----------
1,173 1,367
=========== ===========
The following table presents the changes in level 3 items for the years ended 31 March 2020 and 31 March 2019:
Financial Financial
assets liabilities Total
GBP000 GBP000 GBP000
At 1 April 2018 23,569 (917) 22,652
Additions 31,500 (432) 31,068
Business combination 15,493 - 15,493
Royalty income received (5,097) - (5,097)
Royalty participation liabilities
paid - 161 161
Proceeds from exercise of
warrants (88) - (88)
Net change in fair value 5,854 (178) 5,676
----------- ------------- ---------
At 31 March 2019 71,231 (1,366) 69,865
Additions 17,751 (250) 17,501
Royalty income received (8,977) - (8,977)
Royalty participation liabilities
paid - 168 168
Net change in fair value (3,939) 275 (3,664)
----------- ------------- ---------
At 31 March 2020 76,066 (1,173) 74,893
=========== ============= =========
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 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 -6.0% to 6.0% (2019: 0.0% to 6.0%) and the range of risk-adjusted discount rates is 13.9% to 23.6% (2019: 12.4% to 18.8%).
An increase in the annual revenue growth rates (subject to the collars set under the terms of the royalty financing agreements) of 5% would increase the fair value by GBP371,000 (2019: GBP497,000).
A reduction in the discount rate of 25 basis points would increase the fair value by GBP818,000 (2019: GBP910,000).
A decrease in the annual revenue growth rates (subject to the collars set under the terms of the royalty financing agreements) of 5% would decrease the fair value by GBP393,000 (2019: GBP489,000).
An increase in the discount rate of 25 basis points would decrease the fair value by GBP821,000 (2019: GBP923,000).
Equity investments
Sensitivity analysis has not been performed on the Group's equity investments on the basis that they are not material to the Condensed 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 -6.0% to 6.0% (2019: 0.0% to 6.0%) and the range of risk-adjusted discount rates is 13.9% to 23.6% (2019: 12.4% to 18.8%).
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 GBP6,000.
A reduction in the discount rate of 25 basis points would increase the fair value of the liability by GBP12,000.
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 GBP6,000.
An increase in the discount rate of 25 basis points would decrease the fair value of the liability by GBP13,000
23. 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 Board monitors foreign exchange risk on a regular basis. The Group's exposure to this risk is outlined below
The Group's exposure to foreign currency risk at the end of the reporting period was as follows:
31-Mar-20 31-Mar-20 31-Mar-19 31-Mar-19
Euro US Dollar Euro US Dollar
GBP000 GBP000 GBP000 GBP000
Royalty investment 7,081 - 7,095 -
Equity investments 507 - 1,177 -
Loans receivable 3,148 642 2,413 614
Cash and cash
equivalents 33 - 373 -
Royalty participation
liability (2) - (275) -
Transaction costs
payable - (533) - (538)
----------- ----------- ----------- -----------
10,767 109 10,783 76
=========== =========== =========== ===========
If Sterling strengthens by 5% against the Euro, the net
Euro-denominated assets would reduce by GBP506,000 (2019:
GBP513,000). Conversely, if it weakens by 5% the assets
would increase by GBP555,000 (2019: GBP568,000).
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 risks arise in relation to its royalty investments, which are carried at fair value through profit or loss, and its borrowings, which are subject to an interest charge of one-month UK LIBOR + 7.25%. The Group's royalty investments have a fair value at the reporting date of GBP76,527,000 (2019: GBP70,054,000). A sensitivity analysis in respect of these assets is presented in note 22.
The Group's borrowings at the reporting date are GBP15,517,000 (2019: GBP11,365,000). A movement in the rate of LIBOR of 100bps impacts loan interest payable by GBP79,000.
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 factors applied to the royalties payable by each of the investee companies, which 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 22.
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 maximum exposure to credit risk is as follows:
31-Mar-20 31-Mar-19
GBP000 GBP000
Royalty investments 75,559 70,054
Loan investments 9,517 9,626
Cash and cash equivalents 4,481 5,894
89,557 85,574
=========== ===========
Royalty investments
The royalty investments relate to the Group's 12 royalty financing agreements. At the reporting date there are no royalty receipts that are past due.
The outbreak of COVID-19 has seen the Group speak to its royalty partners daily and actively reviewing the impact on the portfolio to ensure the correct actions are being taken to mitigate the impact where possible.
The Investment team is working with its royalty partners to help them navigate the difficult environment. This has been achieved in certain circumstances by agreeing to either accrue, capitalise or equitise Duke's monthly cash payments with the intention of alleviating some of their negative cash flow impacts in the short term. These forbearance agreements have been structured to cover the six-month period ending 30 September 2020 whereupon the Group expects its partners to revert to full cash payment.
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 credit risk relating to these investments is taken into account in calculating the fair value of the instruments.
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.
Loan investments
The Group's loan investments are held at amortised cost. Included within 'loan investments' asset of GBP9,517,000 (2019: GBP9,626,000) is GBP3,457,000 (2019: GBP6,599,000) relating to assets acquired as part of the business combination (see note 24). Any expected credit losses at the time of the business combination were taken into account in arriving at the acquisition date fair values.
All loans have been reviewed by the Directors. The Board considered the credit risk, both at issue and at the year end, and have determined that there has been no significant movement for all but one loan investment. Consequently, any loss allowance is limited to 12 months' expected losses and such allowances are considered to be immaterial.
The Board have deemed the credit risk profile for one loan investment to have changed materially, hence a lifetime ECL has been calculated (see note 9).
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:
31-Mar-20 31-Mar-19
GBP000 GBP000
Moody's credit rating:
Aa2 3,533 2
Baa2 442 5,194
BB- 506 -
Unrated - 698
4,481 5,894
=========== ===========
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.
At the year end the Group had access to an undrawn borrowing facility of GBP14,000,000 (2019 - GBP4,550,000) (see note 14).
The table below analyses the Group's royalty investments and financial liabilities into relevant maturity groupings based on their undiscounted contractual maturities.
Less than Over five
one year 1 - 5 years years Total
As at 31 March 2020 GBP000 GBP000 GBP000 GBP000
Royalty finance investments 15,973 49,750 221,729 287,452
Royalty finance liabilities (163) (1,136) (3,075) (4,374)
Trade and other payables (438) (452) (401) (1,291)
Borrowings (1,677) (19,108) - (20,785)
----------- ------------- ----------- ----------
13,695 29,054 218,253 261,002
=========== ============= =========== ==========
Less than Over five
one year 1 - 5 years years Total
As at 31 March 2019 GBP000 GBP000 GBP000 GBP000
Royalty finance investments 8,737 48,983 200,393 258,113
Royalty finance liabilities (185) (948) (4,206) (5,339)
Trade and other payables (1,286) (384) (480) (2,150)
Borrowings (1,304) (14,583) - (15,887)
----------- ------------- ----------- ----------
5,962 33,068 195,707 234,737
=========== ============= =========== ==========
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
24. Business combinations
There were no acquisitions in the year ending 31 March 2020
Summary of prior year acquisition
On 1 February 2019, Duke Royalty Limited acquired the entire issued share capital of both the Capital Step Holdings and Capital Step Investments groups. Capital Step Holdings Group comprises Capital Step Holdings Limited and its wholly owned subsidiary Capital Step Funding Limited. Capital Step Investments Group comprises Capital Step Investments Limited and its wholly owned subsidiary Capital Step Funding 2 Limited.
The Capital Step group was a UK-based diversified provider of royalty and uni-tranche financing.
Details of the purchase consideration, the net assets acquired and goodwill were as follows:
GBP000
Cash paid 4,592
Cash payable 321
Contingent consideration -
Total purchase consideration 4,913
========
The contingent consideration was estimated at GBPnil as at 31 March 2019 as it was subject to the achievement of certain performance related milestones in the period to 31 March 2020. These milestones were not met, hence there has been no change to the acquisition accounting and the obligation has been extinguished.
The Group designated 31 January 2019 as the acquisition date for the purposes of determining the fair value of assets acquired and liabilities assumed. The assets and liabilities recognised as a result of the acquisition were as follows:
Fair value
GBP000
Royalty investments 14,293
Equity investments 1,200
Loan investments 6,599
Cash 318
Other current assets 104
Corporation tax payable (5)
Other current liabilities (146)
Loans payable (16,965)
Deferred tax liability (688)
------------
4,710
Add goodwill 203
Total purchase consideration 4,913
============
The goodwill was attributable to the workforce of the acquired business. It was not deductible for tax purposes.
Revenue and profit contribution
The acquired business contributed income of GBP394,000 and profit before tax of GBP66,000 to the Group for the period from 1 February to 31 March 2019.
The Group did not present the information required by paragraph B64(q)(ii) of IFRS 3 'Business Combinations', being the revenue and profit or loss of the combined entity for the current reporting period as though the acquisition date for the business combination had been as of the beginning of the annual reporting period. The acquired entities were in a transition phase during the period, with their total number of investments increasing from two to six between 1 April 2018 and 31 March 2019. Consequently, such information would not be representative of the financial effect of the acquisition and would have given rise to misleading results.
Purchase consideration - cash outflow
GBP000
Cash paid 4,592
Less: Cash balance acquired (318)
Total purchase consideration 4,274
========
Acquisition-related costs
Acquisition-related costs of GBP701,000 was included in 'Transaction costs' in the Consolidated Statement of Comprehensive Income. Of this, GBP268,000 was paid during 2019.
25. Events after the financial reporting date
Dividends
On 12 April 2020 the Company paid a quarterly dividend of 0.75 pence per share and on 10 July 2020 the Company paid a further quarterly scrip dividend of 0.50 pence per share.
Follow-on royalty investments
On 18 June 2020, the Group announced a follow-on investment of GBP2.3 million into its royalty partner Welltel (Ireland) Limited. On 6 August 2020, the Group announced a further follow-on investment of GBP2.9 million into Welltel (Ireland) Limited.
Exit of royalty and loan investment
On 2 September, XtremePush repaid in full both its royalty and loan facility, inclusive of all exit premiums. Total repayment was in line with the fair value of the investment at the balance sheet date.
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END
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