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| Share Name | Share Symbol | Market | Type | Share ISIN | Share Description |
|---|---|---|---|---|---|
| Juridica | LSE:JIL | London | Ordinary Share | GG00B29LSW52 | ORD NPV |
| Price Change | % Change | Share Price | Bid Price | Offer Price | High Price | Low Price | Open Price | Shares Traded | Last Trade | |
|---|---|---|---|---|---|---|---|---|---|---|
| 0.00 | 0.00% | 1.475 | 0.00 | 01:00:00 |
| Industry Sector | Turnover | Profit | EPS - Basic | PE Ratio | Market Cap |
|---|---|---|---|---|---|
| 0 | 0 | N/A | 0 |
From Apr 2019 to Apr 2024
TIDMJIL
RNS Number : 2770B
Juridica Investments Limited
03 April 2017
Juridica Investments Limited
("Juridica," "JIL" or the "Company")
Results for the year ended 31 December 2016
Juridica, a provider of strategic capital for corporate legal claims, announces its results for the year ended 31 December 2016.
Summary of results
Hot Features
Premium
-- Dividends paid to investors during 2016 totalling 40 pence
per share (bringing total life-to-date dividends to GBP1.036
per share).
-- 31 December 2016 net asset value ("NAV") per ordinary share
is US$0.2541, a reduction of US$0.8891 from 31 December 2015
NAV per ordinary share due to:
-- payment of dividends during 2016 (US$0.5461 per share); and
-- total comprehensive loss for 2016 (US$0.3430 per share).
-- 2016 total comprehensive loss of US$37.8 million, primarily
attributable to realised and unrealised loss totalling US$30.7
million, a significant proportion of which (US$24.5 million)
was reported in our 30 June 2016 interim accounts.
Investment results
During the year ended 31 December 2016:
-- Final settlements occurred in the last two cases in the Company's
large antitrust and competition investment. Net proceeds remitted
to the Company totalled US$46.5 million which funded part
of the dividends paid in 2016.
-- A net reduction in the valuation of the Company's investments
of US$20.3 million.
-- Three investments, representing a total of US$1.1 million
of 2015 year end NAV were written off due to (i) adverse judicial
decisions with limited opportunity for appeal; or (ii) adverse
market conditions.
A total of 11 investments remain active (after considering the post 2016 settlement occurring in one of our litigation investments) with four being litigation related, four relating to special purpose vehicles ("SPV"), and three being non-litigation and non-SPV.
Corporate update
The Board of Directors announced on 18 November 2015 that it would not make any new investments (other than further funding of existing investments where such funding was reasonably required in the interests of shareholders) and that it would seek to make distributions to shareholders in the most appropriate manner, following the completion of investments.
The Board of Directors and the Company's Manager continue to work to monetise all of the Company's remaining investments by 31 December 2017 and investors should be assured that the Board of Directors will continue to operate the Company efficiently and manage the Company's remaining investments beyond that date, if so required.
- Ends -
This report contains forward looking statements, which are based on the current expectations and assumptions of the Manager and involve known and unknown risks and uncertainties that could cause actual results or performance to differ materially from those expressed or implied in such statements. It is believed that the expectations reflected in these statements are reasonable but they may be affected by a number of variables that could cause actual results or trends to differ materially. Each forward looking statement speaks only as of the date of this report. Except as required by the AIM Rules or otherwise by law, the Company and the Manager expressly disclaims any obligation or undertaking to release publicly any updates or revisions to any forward looking statements contained herein to reflect any change in the Company's or Manager's expectations with regard thereto or any change in events, conditions or circumstances on which any such statement is based.
For further information contact:
Brickell Key Asset Management Limited +1 (866) 443 William Yuen 1080 Cenkos Securities PLC - Nominated Adviser and Joint Broker Nicholas Wells +44 (0) 20 7397 Camilla Hume 8900 Investec Bank PLC - Joint Broker Darren Vickers +44 (0) 20 7597 Jeremy Ellis 4000 Bell Pottinger +44 (0) 20 3772 Dan de Belder 2500
CHAIRMAN'S STATEMENT
FOR THE YEARED 31 DECEMBER 2016
On behalf of the Board, I present the results of Juridica Investments Limited ("JIL" or the "Company") for the year ended 31 December 2016.
Financial Results
During 2016, the net asset value ("NAV") per share has fallen by US$0.8891 per share from US$1.1432 per share at 31 December 2015 to US$0.2541 per share at 31 December 2016. The change in NAV was due to the following:
-- payment of dividends during 2016 amounting to US$60.3 million
(US$0.5461 per share); and
-- total comprehensive loss of US$37.8 million (US$0.3430 per
share).
The total comprehensive loss of US$37.8 million was primarily attributable to net realised loss on resolved investments and net unrealised loss on revaluation of case investments totalling US$30.7 million (US$0.2780 per share), most of which (US$24.5 million) was previously reported in our 30 June 2016 interim accounts.
Corporate Run-off Strategy
The Board announced on 18 November 2015 that the Company would not make any new investments (other than further funding of existing investments where such funding was reasonably required in the interests of shareholders) and it would seek to make distributions to shareholders in the most appropriate manner, following the completion of investments. In early 2016, the Board made a new agreement with the Company's investment manager, Brickell Key Asset Management Limited ("BKAML" or "Manager"), formerly named Juridica Asset Management Limited, for continued services for a further two years until 31 December 2017. On that date, the Company is entitled to terminate these arrangements. This timing reflected our view of the circumstances of the remaining portfolio. Nevertheless, we reiterate the approach set out in my statement in the 2015 Annual Report that should circumstances involve the continuation of any significant investments into 2018 then the Company will make appropriate arrangements as required.
In accordance with the Company's run-off strategy, the Board instructed BKAML, to look into the resolution and monetisation of the remaining litigation assets as their circumstances reasonably permit, and for non-litigation assets where reasonable, by on or about 31 December 2017.
For those investments that are likely to extend beyond 31 December 2017 before reaching their natural completion, the Board, with input from the Manager, has reviewed the values of certain remaining assets to reflect the potential likelihood of monetising them where reasonably possible by the end of 2017.
As part of the Company's run-off strategy, and as previously announced in my 2015 year-end statement, the Board and the Manager agreed to a programme of cost reductions over and above the cuts to investment management fees with target savings of US$900,000 for 2016 compared with 2015. We were successful in meeting this objective as the Company's reported results reflect 2016 operating expenses lower by US$1.0 million as compared to 2015 results (excluding the non-cash impact of foreign exchange loss).
Assessment of Going Concern
In a year of run-off, the Board has made their regular assessment that the Company is a going concern in respect of a period of at least one year from the date of approval of these accounts.
The Board concluded that there are no material uncertainties related to events or conditions that might cast doubt on the ability of the Company to continue as a going concern. The Board is of the opinion that the Company will have sufficient resources to meet its liabilities as they fall due and is positioned to continue into 2018 if necessary.
Investment Results
During the year ended 31 December 2016 there were settlements in the final two cases in the Company's large antitrust and competition investment. Gross proceeds totalling US$71.3 million were generated from these combined settlements. Net proceeds remitted to the Company (after reserves for taxes and contingencies were held by the law firm that is the counterparty to the Company's investment) totalled US$46.5 million. We believe additional proceeds from these reserves may be released to the Company once actual tax returns are filed (expected no later than third quarter 2017) and again once all contingencies are cleared.
-- Case 5308-U: Settlement was reached during trial that generated
US$69.1 million in gross proceeds and cost reimbursement.
After reserving for taxes and other contingencies, net proceeds
of US$46.0 million were received in July 2016. Additional
proceeds from this settlement may be remitted to the Company
after filing of tax returns, which is expected no later than
third quarter 2017.
-- Case 1008-A: A partial settlement was reached generating
approximately US$2.2 million, in gross proceeds. After reserving
for taxes and other contingencies, net proceeds of US$500,000
were received by the Company in July 2016. Although the case
continues, the Board determined that the quantum of potential
additional returns was not worth the additional investment
required to continue to retain an interest in the case.
Further details of the closing of the structures supporting the antitrust and competition portfolio are set out in the footnotes (Notes 5 and 14) to these Financial Statements.
Investment Portfolio
The valuation of the portfolio has been carefully reviewed and several investments were written off during 2016.
Number of Active
Portfolio category Investments Fair value $US % of Total NAV
Million
-------------------------- --------------------- ------------------- -------------------
2016 2015 2016 2015 2016 2015
Litigation investments 5 7 15.8 71.0 56.5% 56.3%
SPV investments 4 4 2.9 15.1 10.3% 11.9%
Other investments 3 4 0.3 6.7 1.0% 5.4%
---------- --------- --------- -------- --------- --------
Total investments 12 15 19.0 92.8 67.8% 73.6%
========== ========= ========= ======== ========= ========
There were 15 investments active as of 1 January 2016, of which seven involved litigation. During 2016, two of these litigation investments had significant adverse judicial decisions that prompted us to write off the Company's remaining interest. Specifically, these investments were Case 12013 and Case 1608-T.
Of the remaining five litigation investments:
-- Investment 3608-A has come to completion relative to the
underlying cases but remains active until residual reserves
are transferred to the Company.
-- Case 2709-E and Case 5009-S are both being appealed for decisions
adverse to our position.
-- Case 1410 won its initial appeal to increase damages, however
both parties have now filed further legal appeals.
-- Case 114107, an investment we made in early 2015, had several
partial settlements in 2015 and 2016 providing for US$1.7
million in total proceeds. In March 2017, the Company received
additional proceeds of US$890,000 which completed the Company's
interest in this case. Total proceeds received by the Company
for this case was $US2.6 million on an investment of US$1.3
million.
Four investments are in special purpose vehicles ("SPV"). These investments began in 2014.
As to ACK / Smooth3D, after extensive investigation it was determined that the inventions had no commercial value and during 2016, approximately US$330,000 of excess investment was returned to the Company. The remaining investment is a negotiable note.
As to Rich Media, 25 patent filings occurred in 2016 and, as of 31 December 2016, none have been issued and all remain under review by the United States Patent and Trademark Office ("USPTO"). Monetisation of this vehicle continues.
As to GrandiOS, 37 US domestic patents have been filed, and as of 31 December 2016, 23 patents have either been granted or allowed by the USPTO. Monetisation efforts continue.
As to ProSports, 55 domestic patent filings have been made and, as of 31 December 2016, 14 patents have been granted or allowed by the USPTO. A shareholder partner is the National Football League Players Association ("NFLPA"). Marketing is underway.
These SPVs are commercial ventures and their fair value considers circumstances and conditions relevant to each SPV market.
For the remainder of the Company's investments, those that are not litigation or SPV, the Company began 2016 with four. During 2016, one investment, specifically Investment 1610 is facing potential bankruptcy and has been written off. Of the three remaining investments, two of them (investments 7313 and 6609-S) are facing enhanced risk and their respective fair value has been reduced accordingly. The final investment is the Company's interest in our former investment manager, JCML 2007 Limited ("JCML 2007") and retains value equal to the Company's share of JIL stock held by JCML 2007.
Further details on the status of each investment can be found in the Investment Manager's Report that follows.
Dividend
For 2016, the Company paid dividends totalling 40 pence per share (US$60.3 million). The Board will continue to evaluate the appropriate timing of future dividends.
Exchange rate movements
Since the vote by the UK on 23 June 2016 to leave the EU and concerns about the future economic effect on the UK there has been a fall in the value of the Sterling against the US Dollar. This has been beneficial to the Company as its assets are almost entirely denominated in US Dollars.
Conclusion
The Board appreciates that investors wish run-off to be effective and efficient and we will seek to achieve this. The Board and the Company's Manager continue to work to monetise all of the Company's investments by 31 December 2017 and investors should be assured that we will continue to efficiently operate the Company and manage our remaining investments beyond this date, if so required.
Lord Daniel Brennan QC
Chairman
31 March 2017
INVESTMENT MANAGER'S REPORT
FOR THE YEARED 31 DECEMBER 2016
The Company began operations in December 2007 and has, since inception, made 30 investments (some of which have multiple underlying cases or other assets and some which have had supplemental investments). A total of 19 of these investments have come to full conclusion, including one investment which came to full conclusion in March 2017. Of the remaining 11 investments, five have had some return on the Company's investment, including the Company's investment in JCML 2007, either from settlements or other distributions, and still remain active.
During the year ended 31 December 2016, the Company continued to move forward in its strategy to monetise its remaining investments by 31 December 2017. This strategy, which was announced on 18 November 2015, directs us to manage the Company's existing investments by balancing the desired conclusion date with what we believe is each investment's optimal conclusion and to make distributions to shareholders in the most appropriate manner. For the year ended 31 December 2016, and since the adoption of the run-off strategy, the Company has achieved the following:
-- settlement in two cases within our antitrust and competition
portfolio generating approximately US$71.3 million in gross
proceeds (US$46.5 million in net proceeds after reserving
for taxes and contingencies);
-- additional settlements and return of excess invested cash
totalling US$750,000; and
-- dividends totalling 40 pence per share paid to shareholders
on the Register at 27 May 2016 (8 pence per share) and 16
September 2016 (32 pence per share).
We continue to seek resolution and monetisation of all the remainder of the Company's assets, if possible by the end of 2017.
Financial Performance During 2016
The NAV per ordinary share decreased from US$1.1432 (77 pence per share as at 31 December 2015 to US$0.2541 (21 pence per share) as at 31 December 2016. This decrease of 88.91 cents in NAV per ordinary share was attributable to the declaration and payment of dividends totalling US$60.3 million or 54.61 cents per ordinary share and a total comprehensive loss of US$37.8 million or 34.30 cents per ordinary share.
The Company's US$37.8 million total comprehensive loss for the year ended 31 December 2016 was due to the net unrealised loss of US$20.3 million generated from the change in valuation of the Company's investments, net realised loss of US$10.4 million associated with the write-off of three investments partially offset by a realised gain associated with one investment, intangible impairment and amortisation expenses of intangible of US$2.1 million, impairment of settlement proceeds of US$500,000 and net operating expenses of US$4.5 million.
The Company's net unrealised loss from net reduction in the valuation of the Company's investments of US$20.3 million was attributable to the following:
-- US$15.1 million reduction in value associated with the Company's
contractual interests. This was due to changes in our expectations
on probability of a successful resolution, changes in projected
quantum and timing of a successful resolution and application
of additional risk factors on certain investments (principally
the patent special purpose vehicles ("SPV") accounted for
as contractual interests to incorporate the potential of
monetising those investments within a shortened development
period following the Board's instructions in accordance with
the Company's run-off strategy. The risk factors associated
with monetising the investment within a shorter development
period were increased from the Company's 30 June 2016 interim
accounts and may be adjusted in future reporting periods
based on our ongoing monetisation efforts.
-- US$3.4 million reduction in value associated with the Company's
debt securities consisting exclusively of our antitrust and
competition portfolio.
-- US$1.8 million reduction in value associated with the Company's
equity investments. This change was partially due to changes
in our expectations on the quantum and timing and application
of additional risk factors on one equity investment to incorporate
the potential of monetising this investment within a shortened
growth period following the Board's instructions in accordance
with the Company's run-off strategy. The risk factors associated
with monetising the investment within a shorter growth period
were increased from the Company's 30 June 2016 accounts and
may be adjusted in future reporting periods based on our
ongoing monetisation efforts.
Investment Results During 2016
Proceeds Received:
Investment 3608-A: During the year ended 31 December 2016, the two remaining cases in our large antitrust and competition investment, Case 5308-U and Case 1008-A, reached their conclusion.
-- Case 5308-U reached a final settlement during 2016 generating
gross proceeds of approximately US$69.1 million. As per the
terms of the Company's investment arrangement, Fields Law
Firm PLLC ("Fields Law"), which is the law firm that is counterparty
to this investment, is permitted to set aside reserves for
taxes and contingencies resulting from the settlement or
other matters related to the investment. After netting out
these reserves, a total of US$46.0 million was paid to the
Company.
-- Case 1008-A reached partial settlement during 2016 which
generated total gross proceeds of US$2.2 million that was
paid in several tranches. After providing for the appropriate
reserves (similar to those described above for Case 5308-U),
US$500,000 in net proceeds was paid to the Company. Although
the case continues, the Company determined that the quantum
of potential additional returns was not worth the additional
investment required to continue to retain an interest in
the case.
As noted above, the Company's interest in the underlying cases in Investment 3608-A reached their conclusion during 2016 and on 25 August 2016, the loan and swap arrangements that served as the Company's facility agreement with Fields Law were terminated through a series of agreements and cash arrangements that resulted in no additional net cash gain or loss to the Company. The loan and swap arrangements were replaced with termination agreements that provide for additional proceeds to ultimately be remitted to the Company, if additional proceeds become available. Specifically, additional proceeds may become available once Fields Law's 2016 tax returns are filed (which is expected no later than third quarter 2017) and again once Fields Law's contingencies are cleared (which is expected no later than end of year 2020). The expected release of US$10.5 million in excess reserves is reflected as the remaining valuation of this investment. The final amount of excess reserves that may be released could vary significantly from the estimate we have developed due to actual taxes and expected contingency payments being different from our estimates. (See notes 5 and 14 for further details).
Investment 114107: During the year ended 31 December 2016, Investment 114107 generated gross proceeds of US$400,000 from two partial settlements. This investment became finalised in March 2017 with receipt of US$890,000 additional proceeds. The Company received a total of US$2.6 million on an investment of US$1.3 million.
Other proceeds received: In addition to the above activity, US$40,000 in residual proceeds related to Case 8008-L and Case 5208-E were received by the Company during the year ended 31 December 2016 and approximately US$330,000 in residual cash from one of the Company's SPVs was returned to JIL.
Investments Written Off:
Investment 12013: The Company invested US$250,000 in a case involving a legal claim of misappropriation of trade-secrets. The Company's investment was used for funding an appeal which, during the fourth quarter of 2015, was lost. All subsequent legal actions, including the Plaintiff's petition for Writ of Certiorari in February 2016, have failed. As a result, during 2016, the investment was written off. Approximately US$95,000 of the Company's 2015 year-end NAV was applicable to this investment.
Case 1608-T: In 2008, the Company invested US$500,000 in a case involving a judgement on behalf of insurance companies against a foreign government. This investment was structured whereby the Company would receive US$2.0 million once collection was made. In 2014, we identified potential problems with the investment and wrote down our valuation to reflect this increased risk. At year-end 2015, this investment carried a valuation of US$446,000. During 2016, the United States Court of Federal Claims granted the Defendant's motion for summary judgment denying the Plaintiff's claims. As such, during 2016, this investment was written off.
Investment 1610: This investment began as an investment in litigation which resulted in a favourable arbitration award obtained in 2013 in the amount of US$4.0 million. While this settlement enabled the Company to recoup its entire investment, the Company intended to recover further proceeds from its security interest in a revenue stream to be generated from a US based coal mine. Due to unfavourable market conditions for the coal industry, at year-end of 2015, we retained an industry expert to provide input into valuation and likelihood to monetise the Company's interest. At year-end 2015, this investment carried a valuation of US$600,000. Shortly before 31 December 2016, we learned that the parent company of the mine was facing potential bankruptcy which will eliminate the Company's interest. As such, at 31 December 2016, this investment has been written off.
In addition to the above investments written off, the Company wrote off a portion of the ACK / Smooth3D investment (formerly Investment 0808-C) which was deemed to no longer hold value and returned US$300,000 of unspent investment to the Company. At year-end 2015, the now written off portion of this investment carried a valuation of US$600,000.
Fair Value of Investments
The fair value of the Company's investments at 31 December 2016 was US$18.9 million. From an accounting standpoint, these investments are categorised as contractual interests, debt securities, or equity investments. These categories reflect the following changes from the carrying value as at 31 December 2015:
31 December Additions Net Realised Fair Value 31 December
2015 Fair During the Proceeds Loss Attributable Change During 2016 Fair
Value Year Ended Attributable to the Year the Year Value
$USM 31 December to the Year Ended 31 Ended 31 $USM
2016 Ended 31 December December
$USM December 2016 2016
2016 $USM $USM
$USM
--------------------- ------------ ------------- -------------- ------------------- --------------- ------------
Contractual
Interests:
includes
assets from
the Company's
patent and
commercial
claims portfolios
(1) 29.4 1.0 (0.8) (6.7) (15.1) 7.8
--------------------- ------------ ------------- -------------- ------------------- --------------- ------------
Debt Securities:
includes
assets from
our antitrust
and competition
portfolio
(2, 3, 4) 55.4 30.4 (71.9) - (3.4) 10.5
--------------------- ------------ ------------- -------------- ------------------- --------------- ------------
Equity Investments:
includes
assets from
our patent
and commercial
claims portfolios
as well as
other investments
(5, 6) 6.0 0.1 - (3.7) (1.8) 0.6
--------------------- ------------ ------------- -------------- ------------------- --------------- ------------
Total 90.8 31.5 (72.7) (10.4) (20.3) 18.9
--------------------- ------------ ------------- -------------- ------------------- --------------- ------------
-- (1) Realised loss within the Company's contractual interests
resulted from the write off of Case 12013 (US$250,000)
and the write off of a portion of the ACK / Smooth3D SPV
investment (US$6.4 million) that was treated as contractual
interest. The write off amount reflects the remaining
basis in each of these investments and does not reflect
the fair value of each investment prior to write off.
The remaining value associated with the Company's ACK
/ Smooth3D SPV is treated as an equity investment.
-- (2) Additions within the Company's investments accounted
for as debt securities were provided from: i) US$5 million
clawback of prior year swap payments to Fields Law for
purposes of making required contributions into the underlying
cases; ii) US$11.1 million clawback of prior year swap
payments made to Riverbend Investments Limited ("Riverbend")
enabling Fields Law to prepay a portion of accrued interest
and principal on the facility between the Company and
Fields Law; and iii) US$14.3 million enabling Riverbend
to fulfil its obligation under the swap agreement and
allowing for Fields Law to pay all remaining accrued interest
and principal on the facility once the Company's interest
in the underlying cases was deemed complete.
-- (3) Net proceeds within the Company's investments accounted
for as debt securities include: i) US$46.5 million of
net proceeds provided by settlements in the Company's
antitrust and competition portfolio; and ii) a total of
US$25.4 million paid by Fields Law from the US$11.1 million
clawback of prior year swap payments made to Riverbend
and the US$14.3 million provided by Riverbend fulfilling
its obligation under the swap agreement and allowing for
Fields Law to pay all remaining accrued interest and principal
on the facility once the Company's interest in the underlying
cases was deemed complete.
-- (4) Current valuation of the Company's investments accounted
for as debt securities reflects expected release of excess
reserves currently being held by Fields Law. The reserves
held relate to taxes resulting from the two settlements
in this portfolio that occurred during 2016 and contingencies
related to the investment. The final amount of excess
reserves that may be released could vary significantly
from this estimate.
-- (5) Realised loss for the Company's equity investments
reflects US$3.7 million of remaining basis in Investment
1610 which was written off at 31 December 2016. This investment
generated US$4.0 million of proceeds in 2013 of which
approximately US$300,000 was allocated to the recovery
of our investment. At year-end 2015, this investment carried
a valuation of US$600,000.
-- (6) Equity investments exclude an intangible, with amortised
value of approximately US$111,000.
As discussed in previous reports, we value JIL's investments using valuation and accounting methods that are applied in a manner that follows International Financial Reporting Standards' ("IFRS") accounting principles. In particular, we follow guidance provided by IFRS 13 in establishing the method of applying fair value accounting. Under this guidance, we develop a fair value of a case or investment by discounting its expected terminal value from its expected completion date.
We determine our initial expectations on quantum and timing of case results by assigning a probability of various scenarios coming to fruition and applying risk factors that: i) are intrinsic to the specific case; and ii) reflect general risks within and outside of the legal process. Our assumptions behind an investment's fair value are revisited on a semi-annual basis (to coincide with the Statement of Financial Position date). If needed, we will re-run the investment's valuation model and revise its expected future cash flow which we then discount to the reporting date. The discount rate used for valuation purposes is the Company's cost of equity. All due diligence and transaction costs related to an investment are expensed.
Unlike an investment that is backed by a physical asset, litigation assets are subject to certain legal hurdles each of which has the potential to cause the litigation portion of any investment to be worthless. A key element in selecting investment worthy cases is the likelihood of a particular case overcoming any remaining hurdles and generate either a settlement or trial victory.
For the Company's litigation investments, we consider the current legal merits of each underlying case, the legal history of the case, the current legal environment, and any other factors we feel are relevant as of the date of our valuation. Working with the lawyers assigned to each case, we develop scenarios of potential outcomes, including the various situations that can generate outsized returns, moderate returns, or a complete loss, and assign each scenario a probability. The Monte Carlo simulation runs the statistically relevant number of iterations to provide us with an expected value and timing. These results are then discounted to the reporting date at the Company's cost of equity. For certain of the Company's investments, we found it more appropriate to value them by using discounted cash flow models incorporating the various risks associated with the investment.
Of significance is the risk of loss that is assigned to each case. This must be considered given the typical binary characteristics of a legal case (i.e. win or lose).
Beginning in 2016 and in response to the Company's run-off strategy, as part of us reaching a fair value assessment of the Company's investments, we have considered the potential likelihood of monetising certain investments within a shortened development period.
Our accounting fair value on the Company's investments is not intended to express our prediction about the ultimate outcome of any investment, but rather our fair value estimate based on the best information available to us at the Statement of Financial Position date using a range of possible outcomes.
Portfolio Update
As the Company's portfolio has progressed, it has evolved into three types of investments: litigation related investments; SPV related investments; and other investments. As such, our investment update will be grouped in the same manner.
The summary of our investment holdings at 31 December 2016 for each of these groups is as noted on the following table, together with the current concentration risk:
Number of Active
Portfolio category Investments Fair value $US % of Total NAV
Million
-------------------------- --------------------- ------------------- -------------------
2016 2015 2016 2015 2016 2015
Litigation investments
(1) 5 7 15.8 71.0 56.5% 56.3%
SPV investments 4 4 2.9 15.1 10.3% 11.9%
Other investments
(2) 3 4 0.3 6.7 1.0% 5.4%
---------- --------- --------- -------- --------- --------
Total investments 12 15 19.0 92.8 67.8% 73.6%
========== ========= ========= ======== ========= ========
(1) Includes Investment 114107 which became finalised in March 2017.
(2) Includes the Company's investment in JCML 2007. Also includes an investment in which US$111,000 of its fair value at 31 December 2016 is categorised as an intangible.
Litigation investments
The Company began 2016 with seven investments in litigation. During 2016, two of these investments, Investment 12013 and Case 1608-T, were written off (as detailed above) leaving five investments in litigation remaining active as of 31 December 2016.
Case summaries:
-- Investment 3608-A: This investment originally included six
cases of which five were related to antitrust and competition
and one was related to statutory claims against an international
bank. The investment was initiated in 2008 with terms that
required funding obligations by the Company through 2016
with an annual option providing for the Company to extend
the funding obligation beyond 2016. During 2016, the Company
declined to exercise its option to continue funding the investment.
Under the terms of the facility agreement (consisting of a consolidated loan agreement and a swap agreement), gross proceeds generated from the investment are received and held by Fields Law, which is the law firm that is the counterparty to the Company's investment. Deducted from the gross proceeds are taxes and reserves required for certain contingencies. Per the terms of the facility agreement, the Company received net proceeds at the end of each calendar year, or earlier if approved by JIL and Fields Law.
As of 31 December 2016 all of the Company's interest in the underlying cases have come to conclusion either through final settlement or, for Case 1008-A, partial settlement and the Company's determination to no longer fund an ongoing interest in the case.
Although the Company's interest in the underlying cases in Investment 3608-A has ended, additional proceeds may be delivered once Fields Law's 2016 tax returns are filed (which is expected to occur in the third quarter 2017) and again once all contingencies are cleared (which is expected by the end of 2020). The expected release of US$10.5 million in excess reserves is reflected as the remaining valuation of this investment. The final amount of excess reserves released could vary significantly from this estimate.
On 25 August 2016, the loan and swap arrangements that served as the Company's investment agreement were terminated and replaced with termination agreements that provide for arrangements described above.
-- Case 2709-E: This case originally consisted of three patents
against three defendants. After a protracted patent re-examination,
one patent was abandoned. During 2016, an unexpected event
occurred which severely impacted one of the remaining patents
and resulted in partial settlements relating to this patent.
Proceeds generated were far below our expectations and were
reinvested into the case to further the legal proceedings
on the remaining patent. A Markman hearing on the remaining
patent completed during 2016 with the plaintiff prevailing
on validity. The issue of infringement remains in question
and both parties are seeking to get appellate review of the
ruling by the Court of Appeals for the Federal Circuit. We
will continue to closely monitor this investment as the case
progresses.
-- Case 5009-S: This case completed its trial by jury during
2015. Although the plaintiff fully won on liability, the
jury only awarded an amount of damages which will result
in proceeds to the Company of approximately US$2.0 million
as compared to an investment of approximately US$3.5 million.
Both sides filed post-trial motions for a new trial with
the plaintiff requesting a new trial on damages and the defendant
requesting a new trial on all issues. These motions were
decided in favour of the defendant; however, the plaintiff
has appealed this adverse decision of the trial court. We
believe there remains a low possibility that a new trial
on damages will occur.
-- Case 1410: This case completed its trial during 2014 with
a positive ruling on liability but damages awarded were far
less than expected. Cross-appeals on liability and plaintiff's
appeal on damages were filed after the ruling. In early 2016,
the plaintiff's appeal received a favourable appeals court
ruling overturning the trial court's damages award and subsequent
to 31 December 2016, the trial court judge added punitive
damages to the award. Although the total award has increased,
the plaintiff and their counsel still believe damages should
be higher. Both parties have now filed further legal appeals.
Although risk remains, we believe there is the possibility
of a new award on damages without a further trial.
-- Case 114107: This investment was made in early 2015. The
underlying case consists of five separate patent portfolios
comprising several hundred patents related to information
technology. As of 31 December 2016, the Company had received
proceeds totalling US$1.7 million on an investment of US$1.3
million. In March 2017, additional proceeds of US$890,000
were received bringing total proceeds received on this investment
to US$2.6 million and finalising the Company's interest in
the case.
SPV investments
In early 2014, we identified a changing patent market whereby value was maximised by developing operating entities around a portfolio of patents. We identified several existing patent investments in which the underlying patents were at risk of not realising their full potential. Working with subject matter experts, new inventions were developed with the intention of obtaining patents, developing commercial applications, and monetising each SPV through litigation or other commercial strategies. These investments were funded through SPVs in order to facilitate monetisation of each developed entity.
A total of four SPVs were created. Three of these SPVs were developed around existing core patents. The fourth SPV was developed in partnership with the National Football League's Players Association ("NFLPA").
SPV summaries:
-- Rich Media: This investment originated with litigation involving
an underlying patent for which the Company previously has
received proceeds. In 2014, we began to develop a portfolio
of related patents in the areas of rich media and multimedia.
The inventor of the patent that was the subject of the original
litigation, along with other subject matter experts, developed
25 additional inventions all of which were filed as patent
applications in early 2016. At 31 December 2016, no patents
had yet completed their review by the United States Patent
and Trademark Office ("USPTO"). We are working with the original
inventor to monetise the SPV.
-- ACK / Smooth3D: This investment consisted of three components:
o The investment originated with litigation that resulted
in a judgment of liability but low damages and which
provided no proceeds to the Company. During 2015, the
case had progressed to the point where we determined
that there was no prospect of generating any proceeds
from the original litigation and no value has been assigned
to the litigation component.
o During 2014, we worked with the inventor of the patents
that were the subject of the original litigation and
other subject matter experts to develop a portfolio of
related inventions with the intention of procuring patents.
In early 2016, it was determined that the underlying
inventions had no commercial value and all work on these
inventions has ceased. The remaining cash in the SPV
(approximately US$330,000) was transferred back to the
Company.
o As collateral for the Company's original investment in
the litigation, JIL received an equity interest in a
company that has developed energy-saving software for
electrical motors. The energy-saving software continues
to be tested by a major industrial conglomerate. During
the year ended 31 December 2016, JIL exchanged its equity
interest in the company for a note subject to agreed
discounts if redeemed early. The redemption discounts,
along with other risk factors, have been factored into
the Company's reported fair value for this investment
at 31 December 2016.
-- GrandiOS: This investment consists of two components:
o The investment originated with litigation surrounding
core computer technology. Although prior settlements
have provided the Company with some small return, during
the year ended 31 December 2016 we learned of new hurdles
related to the original litigation which we believe put
severe doubt on the ability of the Company to generate
any further proceeds. As such, the Company has no longer
assigned any value to the litigation component.
o The original investment included an interest in certain
mobile phone related patents. In 2014, we worked with
subject matter experts to develop a portfolio of patents
related to mobile phone technology and a total of 37
patent applications have been filed with the USPTO. At
31 December 2016, a total of 23 patents have either been
granted or been allowed by the USPTO. We continue to
market this developing portfolio of patents and inventions
to prospective buyers.
-- ProSports: This SPV was established to develop and monetise
a large portfolio of patents in the technology and sports
market. The Company has partnered with the NFLPA in this
endeavour. As of 31 December 2016, a total of 55 patent applications
have been filed with the USPTO. At 31 December 2016, a total
of 14 patents have either been granted or been allowed by
the USPTO. We continue to market this developing portfolio
of patents and inventions to prospective buyers.
Other investments:
The Company began 2016 with four investment that are not directly related to litigation and are not specific to a particular SPV. During 2016, one of these investments, Investment 1610, was written off (as detailed above) leaving three active investments as of 31 December 2016, that are not directly related to litigation and are not specific to a particular SPV. These are detailed below:
-- Investment 7313: As part of the Company's 2014 revised patent
strategy, the Company acquired a 7.8% preferred ownership
in ipCreate, Inc. ("ipCreate") with an expectation to monetise
this investment as part of future capital raising by ipCreate.
In the second half of 2016, ipCreate underwent a restructuring
that severely diluted the Company's interest. The valuation
of this investment at 31 December 2016 reflects this dilution.
-- Investment in JCML 2007: At admission of the Company's shares
to AIM on 21 December 2007, the Company acquired 15 per cent
(subsequently diluted to 13.6 per cent) of JCML 2007 for
US$2.9 million. In 2012, the Company acquired a further holding
in JCML 2007, its then investment manager, for US$4.3 million,
bringing its overall holding in JCML 2007 to 36.17%. As a
result of its interest in JCML 2007, the Company is entitled
to its percentage share of any performance fees paid to JCML
2007 as well as its percentage share of any assets distributed.
In 2015, the Company received dividend income of approximately
US$5.4 million from a combination of performance fees and
a distribution of the Company's shares held by JCML 2007.
No further performance fees are expected to be earned by
JCML and at 31 December 2016, the value attributable to JIL's
investment in JCML 2007 is based on the Company's share of
JIL stock still held by JCML 2007.
-- Investment 6609-S: Beginning in 2010, the Company made a
series of investments in a large, multi-party pre-litigation
settlement opportunity that we believed had the potential
to generate significant proceeds for the Company. This highly
complex investment had significant activity in 2016 with
increased prospect for a partial settlement to occur. However,
just prior to the end of 2016, these prospects had a significant
setback which has greatly increased the risk associated with
monetisation of the investment. At 31 December 2016, this
investment represented approximately US$250,000 of the Company's
NAV.
Outlook
We will continue to work with the Company's Board of Directors to maximise shareholder value and to make distributions to shareholders in the most appropriate manner, following the completion of investments.
Disclaimer on Forward Looking Statements
This report contains forward looking statements, which are based on the current expectations and assumptions of the Investment Manager and involve known and unknown risks and uncertainties that could cause actual results or performance to differ materially from those expressed or implied in such statements. It is believed that the expectations reflected in these statements are reasonable but they may be affected by a number of variables that could cause actual results or trends to differ materially. Each forward looking statement speaks only as of the date of this report. Except as required by the AIM Rules or otherwise by law, the Company and the Manager expressly disclaims any obligation or undertaking to release publicly any updates or revisions to any forward looking statements contained herein to reflect any change in the Company's or Manager's expectations with regard thereto or any change in events, conditions or circumstances on which any such statement is based.
Brickell Key Asset Management Limited
31 March 2017
DIRECTORS' REPORT
FOR THE YEARED 31 DECEMBER 2016
The Directors present their report together with the audited financial statements of Juridica Investments Limited (the "Company") for the year ended 31 December 2016, with comparative information for the year ended 31 December 2015.
Principal activities
The Company is an authorised closed-ended investment company incorporated under The Companies (Guernsey) Law, 2008 (the "Law"). The Law does not make a distinction between private and public companies. Shares in the Company were admitted to trading on AIM, a market operated by the London Stock Exchange, on 21 December 2007. The address of the Company's registered office is 11 New Street, St Peter Port, Guernsey, GY1 2PF.
Corporate update
The investment objective of the Company had been to build a diversified portfolio of investments in claims and to provide shareholders with an attractive level of dividends and capital growth through investing directly and indirectly in litigation and arbitration cases, claims and disputes. These investments have been made predominantly in the United States. On 18 November 2015, the Company announced that it would not make new investments (other than for funding existing investments in the Company's portfolio where such funding is reasonably required to realise maximum shareholder value) but, instead, would make distributions to shareholders in the most appropriate manner following the completion of investments.
Results and dividend
The results for the year are shown in the Statement of Comprehensive Income on page 24. The Company declared a dividend of 8 pence per share on 19 May 2016 which was paid on 24 June 2016 to shareholders on the register at 27 May 2016 and a dividend of 32 pence per share on 6 September 2016 which was paid on 30 September 2016 to shareholders on the register at 16 September 2016. These dividends were funded by the cash proceeds of US$47.0 million from settlements that were transferred to the Company during the year.
Audit Committee
The Audit Committee consists of Richard Battey, Lord Daniel Brennan and Kermit Birchfield. The Audit Committee is chaired by Mr Battey, and meets to review the financial statements, audit timetable, and other risk management and governance matters.
Statement of Directors' responsibilities in respect of financial statements
The Directors are responsible for preparing financial statements for each financial year which give a true and fair view, in accordance with applicable Guernsey law and International Financial Reporting Standards, of the state of affairs of the Company and of the profit or loss of the Company for that period. In preparing those financial statements, the Directors are required to:
-- select suitable accounting policies and then apply them consistently;
-- make judgements and estimates that are reasonable and prudent;
-- state whether applicable accounting standards have been followed,
subject to any material departures disclosed and explained
in the financial statements; and
-- prepare the financial statements on the going concern basis
unless it is inappropriate to presume that the Company will
continue in business.
The Directors confirm that they have complied with the above requirements in preparing the financial statements.
The Directors are responsible for keeping proper accounting records that disclose with reasonable accuracy at any time the financial position of the Company and enable them to ensure that the financial statements comply with The Companies (Guernsey) Law, 2008. They are also responsible for safeguarding the assets of the Company and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities.
The maintenance and integrity of the Company's website is the responsibility of the Directors. The work carried out by the Auditor does not involve consideration of these matters and, accordingly, the Auditor accepts no responsibility for any changes that may have occurred to the financial statements since they were initially presented on the website. Legislation in the United Kingdom and Guernsey governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions.
To the best of our knowledge, and in accordance with the applicable reporting principles, the financial statements give a true and fair view of the assets, liabilities, financial position, comprehensive income and cash flows of the Company, although there is uncertainty around valuation of the Company's investments in the absence of an established market. The Investment Manager's report includes a fair review of the development and performance of the business and the position of the Company, together with a description of the principal opportunities and risks associated with the expected development of the Company.
Furthermore, to the best of our knowledge and belief, this annual report includes a fair review of the development and performance of the business and the position of the Company as at 31 December 2016 together with a description of the principal risks and uncertainties that the Company faces.
Auditor confirmation
Each of the Directors, at the date of approval of the financial statements, confirms that:
1. So far as the Director is aware, there is no relevant audit information of which the Group's auditor is unaware; and
2. Each Director has taken all steps he ought to have taken to make himself aware of any relevant audit information and to establish that the Company's auditor is aware of that information.
This confirmation is given and should be interpreted in accordance with the provisions of Section 249 of The Companies (Guernsey) Law, 2008.
Independent Auditor
The Auditor, PricewaterhouseCoopers CI LLP, have expressed their willingness to continue in office and a resolution for their re-appointment will be proposed at the forthcoming Annual General Meeting.
Continuation and going concern
In accordance with the Company's Admission Document of 17 December 2007, the Directors convened an extraordinary general meeting of the Company, on 14 November 2013, at which a resolution was proposed (as required) that the Company be wound up voluntarily. The resolution was not passed by the Company's members.
The Company's members resolved to remove the requirement to convene an extraordinary general meeting for the voluntary wind-up of the Company every three years from the date of the original meeting, at the Annual General Meeting held on 10 May 2016.
Although the Company is in a run-off strategy, the Directors have given consideration to the maturity of the Company's existing portfolio, the performance of the portfolio to date, the prospects of expected future cash flows, and existing cash reserves. In addition, the Directors have reviewed the Company's budgets and cash flows for the year ahead and, accordingly, are satisfied on reasonable grounds that it is appropriate to prepare these financial statements on a going concern basis.
Approved by the Board of Directors on 31 March 2017 and signed on their behalf:
RJ Battey
Director
INDEPENT AUDITOR'S REPORT TO THE MEMBERS OF
JURIDICA INVESTMENTS LIMITED
FOR THE YEARED 31 DECEMBER 2016
Report on the audit of the financial statements
Our opinion
In our opinion, the financial statements give a true and fair view of the financial position of Juridica Investments Limited (the "Company") as at 31 December 2016, and of its financial performance and its cash flows for the year then ended in accordance with International Financial Reporting Standards and have been properly prepared in accordance with the requirements of The Companies (Guernsey) Law, 2008.
What we have audited
The Company's financial statements comprise:
-- the statement of financial position as at 31 December 2016; -- the statement of comprehensive income for the year then ended; -- the statement of changes in equity for the year then ended; -- the statement of cash flows for the year then ended; and
-- the notes to the financial statements, which include a summary of significant accounting policies.
Basis for opinion
We conducted our audit in accordance with International Standards on Auditing ("ISAs"). Our responsibilities under those standards are further described in the Auditor's responsibilities for the audit of the financial statements section of our report.
We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion.
Independence
We are independent of the Company in accordance with the International Ethics Standards Board for Accountants' Code of Ethics for Professional Accountants ("IESBA Code"). We have fulfilled our other ethical responsibilities in accordance with the IESBA Code.
Our audit approach
Overview
Materiality -- Overall materiality for the Company was $0.7 million which
represents 2.5% of net assets
Audit scope -- The Company is based in Guernsey with the Investment Manager
located in the United States of America. The financial statements
consist of the parent company and a number of subsidiary
investments held at fair value and not consolidated.
-- We conducted the majority of our audit work in Guernsey,
with a visit to the Investment Manager to discuss the portfolio,
obtain supporting documentation and also to hold discussions
with the underlying lawyers for each of the investments.
Key audit matters -- Valuation of investments
-- Realisation of investments
Audit scope
As part of designing our audit, we determined materiality and assessed the risks of material misstatement in the financial statements. In particular, we considered where the directors made subjective judgements; for example, in respect of significant accounting estimates that involved making assumptions and considering future events that are inherently uncertain. As in all of our audits, we also addressed the risk of management override of internal controls, including among other matters, consideration of whether there was evidence of bias that represented a risk of material misstatement due to fraud.
Our understanding of the controls environment was informed by our review of the controls report available on Vistra Fund Services (Guernsey) Limited ("the Administrator") as well as our visit to the Investment Manager in The United States of America, however our approach remained predominantly substantive in nature.
We tailored the scope of our audit in order to perform sufficient work to enable us to provide an opinion on the financial statements as a whole, taking into account the structure of the Company, the accounting processes and controls, and the industry in which the Company operates.
Materiality
The scope of our audit was influenced by our application of materiality. An audit is designed to obtain reasonable assurance whether the financial statements are free from material misstatement. Misstatements may arise due to fraud or error. They are considered material if individually or in aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of the financial statements.
Based on our professional judgement, we determined certain quantitative thresholds for materiality, including the overall Company materiality for the financial statements as a whole as set out in the table below. These, together with qualitative considerations, helped us to determine the scope of our audit and the nature, timing and extent of our audit procedures and to evaluate the effect of misstatements, both individually and in aggregate on the financial statements as a whole.
Overall Company materiality $0.7 million
------------------------------- --------------------------------------
How we determined it 2.5% of Net Assets
------------------------------- --------------------------------------
Rationale for the materiality We believe that net assets is
benchmark the most appropriate benchmark
because, being an investment
fund, we believe this to be the
key metric of interest to investors.
It is also a generally accepted
measure used for companies of
a similar structure within the
same industry.
------------------------------- --------------------------------------
We agreed with the Audit Committee that we would report to them misstatements identified during our audit above $35,000 as well as misstatements below that amount that, in our view, warranted reporting for qualitative reasons.
Key audit matters
Key audit matters are those matters that, in our professional judgment, were of most significance in our audit of the financial statements of the current period. These matters were addressed in the context of our audit of the financial statements as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters.
Key audit matter How our audit addressed the Key audit
matter
Valuation of Investments Our audit of the investment valuation
We draw your attention was fully substantive in nature and
to Notes 2(d), 3 and 15(a) focused on understanding the portfolio
to the financial statements movements during the year and validating
surrounding the fair value the significant assumptions driving
of non-current assets. the fair value model for each investment.
The financial statements
include non-current assets We selected a sample of investments
stated at their fair value from across the portfolio based on
of US$19,024,625. our materiality level. For each investment
selected, we agreed the valuation model
The Company's investment for mathematical accuracy, considered
portfolio is split between the appropriateness of the methodology
contractual interests, used and the consistency of the model
equity investments and with prior years.
debt securities and constitutes
a significant element of Contractual interests
the financial statements. For contractual interests, we met with
the lawyers involved in the underlying
The investments are highly litigation to ascertain key developments
complex and include but and the expected future outcome of
are not limited to interests each case. We compared these findings
in intellectual property, to our previous knowledge, our conversations
patents and active litigation. with management, the fair value models
Investments are either prepared by management and supporting
held directly or through documentation, where available.
a Special Purpose Vehicle
("SPV"), and are measured We also considered the professional
at fair value. competency and objectivity of the lawyers
involved in each case.
Fair value is determined
through using models which Equity investments
take into account various For patent investments held by the
inputs. SPVs, we corroborated the assumptions
in the valuation of the patent portfolios
The level of subjectivity through discussion with the patent
involved, and the significance development manager. The assumptions
of the investments balance included the status of each underlying
in the statement of financial patent application, the probability
position, meant that this of successfully filing and monetising
was a key audit matter the patent and the associated impact
for us. on the estimated net future cash flows.
We also agreed a sample of successful
The key assumptions used patent applications to the US patent
in the fair value model register to confirm their ownership
include but are not limited by the Company.
to:
Due to the published realisation policy,
* Forecasting future expected developments in management revised some of the assumptions
litigation cases; and expectations applied to the valuation
of the SPVs carrying these investments
from the prior year. This resulted
* Forecasting timings, amounts and probability of in a significant net decrease in the
future cash flows; fair value of these investments. We
understood and validated the current
year assumptions and expectations with
* Considering amounts that may be paid by market reference to the directors' stated
participants to purchase the investment; and realisation strategy as documented
in the statutory minutes of the Company
and through discussion with management.
* Estimating future tax liabilities that may be
incurred at the investment level. We compared the assumed aggregated
price per patent applied by management
at a portfolio level to available market
Valuing these investments information within similar industries
therefore requires significant for reasonableness.
judgement by management.
Debt securities
The significant unobservable input
in the calculation of debt securities
was the estimated tax liability to
be incurred on gross settlement proceeds
receivable. We obtained the model prepared
by management estimating future settlement
proceeds to be received net of expected
tax liabilities deducted at the investment
level. Our testing involved agreeing
tax rates used within the model to
statutory rates applicable in the United
States and considering the reasonableness
of prior year estimates made by management
in light of proceeds received during
the year.
Conclusion
During the performance of our procedures,
we noted some observations on the fair
valuations derived by management which
have subsequently been rectified. In
our view, those observations were not
indicative of a wider issue. We continue
to emphasise however that due to the
inherent uncertainty associated with
the valuation of the investments and
the absence of a liquid market, the
fair values may differ from their realisable
values, and the differences could be
material.
Realisation of Investments Our audit testing focussed on the criteria
Realised gains and losses required to recognise a realisation.
and disposal proceeds from We challenged management to ensure
investments are disclosed that any realisations are appropriately
in Note 5 to the financial related to 'disposals' and also whether
statements. any other investments should be realised
where a decision has been made to no
The realisation of investments longer invest / pursue. Our work in
is also determined to be this area consisted of corroborating
a key audit matter as legal board minutes, discussions with the
agreements exist that contain board of directors and the Investment
complex distribution hierarchies Manager and considering the results
governing the payment of of our interviews with the case lawyers.
proceeds to the Company.
Where the de-recognition criteria was
In addition, the esoteric met, we understood and recalculated
nature of the legal agreements the associated distribution hierarchy
creates uncertainty over governing payments in line with the
the de-recognition of investments, relevant agreements up from the underlying
the rights to any future gross proceeds through to the Company.
proceeds that may be generated This included assessing any amounts
and whether the Company held back for future tax liabilities
is entitled to those proceeds (see Valuation of Investments above).
following a decision to
no longer invest in that We tested the mathematical accuracy
investment. of the realised gains and losses in
the year by tracing the historic cost
Proceeds received from of the investments to the original
the realisation of investments investment amount. Where proceeds were
for the year ended 31 December received we agreed the amounts to cash
2016 is material, with receipts to verify the net loss of
a significant realised $10,417,718 in the statement of comprehensive
loss recognised only on income.
the contractual interests
asset class. Where significant judgment was used,
we have reviewed the disclosures of
Recognising a realisation the financial statements to ensure
is not always a straightforward these judgements are sufficiently disclosed.
process, as there is no
physical asset or note/shares Conclusion
that are being disposed Judgements made by management over
of. In many cases, there the de-recognition of investments and
are cash receipts received the calculation of realised gains and
yet an interest in the losses are deemed to be reasonable.
investment remains but
the extent of that interest
continues to be uncertain.
Other information
The directors are responsible for the other information. The other information comprises the Corporate Information, the Chairman's Statement, the Investment Manager's Report, and the Directors' Report (but does not include the financial statements and our auditor's report thereon).
Our opinion on the financial statements does not cover the other information and we do not express any form of assurance conclusion thereon.
In connection with our audit of the financial statements, our responsibility is to read the other information identified above and, in doing so, consider whether the other information is materially inconsistent with the financial statements or our knowledge obtained in the audit, or otherwise appears to be materially misstated. If, based on the work we have performed, we conclude that there is a material misstatement of this other information, we are required to report that fact. We have nothing to report in this regard.
Responsibilities of the directors for the financial statements
The directors are responsible for the preparation of financial statements that give a true and fair view in accordance with International Financial Reporting Standards, the requirements of Guernsey law and for such internal control as the directors determine is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error.
In preparing the financial statements, the directors are responsible for assessing the Company's ability to continue as a going concern, disclosing, as applicable, matters relating to going concern and using the going concern basis of accounting unless the directors either intend to liquidate the Company or to cease operations, or have no realistic alternative but to do so.
Auditor's responsibilities for the audit of the financial statements
Our objectives are to obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditor's report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with ISAs will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these financial statements.
As part of an audit in accordance with ISAs, we exercise professional judgment and maintain professional scepticism throughout the audit. We also:
-- Identify and assess the risks of material misstatement of the
financial statements, whether due to fraud or error, design
and perform audit procedures responsive to those risks, and
obtain audit evidence that is sufficient and appropriate to
provide a basis for our opinion. The risk of not detecting
a material misstatement resulting from fraud is higher than
for one resulting from error, as fraud may involve collusion,
forgery, intentional omissions, misrepresentations, or the
override of internal control.
-- Obtain an understanding of internal control relevant to the
audit in order to design audit procedures that are appropriate
in the circumstances, but not for the purpose of expressing
an opinion on the effectiveness of the Company's internal control.
-- Evaluate the appropriateness of accounting policies used and
the reasonableness of accounting estimates and related disclosures
made by the directors.
-- Conclude on the appropriateness of the director's use of the
going concern basis of accounting and, based on the audit evidence
obtained, whether a material uncertainty exists related to
events or conditions that may cast significant doubt on the
Company's ability to continue as a going concern. If we conclude
that a material uncertainty exists, we are required to draw
attention in our auditor's report to the related disclosures
in the financial statements or, if such disclosures are inadequate,
to modify our opinion. Our conclusions are based on the audit
evidence obtained up to the date of our auditor's report. However,
future events or conditions may cause the Company to cease
to continue as a going concern.
-- Evaluate the overall presentation, structure and content of
the financial statements, including the disclosures, and whether
the financial statements represent the underlying transactions
and events in a manner that achieves fair presentation.
We communicate with those charged with governance regarding, among other matters, the planned scope and timing of the audit and significant audit findings, including any significant deficiencies in internal control that we identify during our audit.
We also provide those charged with governance with a statement that we have complied with relevant ethical requirements regarding independence, and to communicate with them all relationships and other matters that may reasonably be thought to bear on our independence, and where applicable, related safeguards.
From the matters communicated with those charged with governance, we determine those matters that were of most significance in the audit of the financial statements of the current period and are therefore the key audit matters. We describe these matters in our auditor's report unless law or regulation precludes public disclosure about the matter or when, in extremely rare circumstances, we determine that a matter should not be communicated in our report because the adverse consequences of doing so would reasonably be expected to outweigh the public interest benefits of such communication.
Report on other legal and regulatory requirements
Under The Companies (Guernsey) Law, 2008 we are required to report to you if, in our opinion:
-- we have not received all the information and explanations
we require for our audit;
-- proper accounting records have not been kept; or
-- the financial statements are not in agreement with the accounting
records.
We have no exceptions to report arising from this responsibility.
This report, including the opinion, has been prepared for and only for the members as a body in accordance with Section 262 of The Companies (Guernsey) Law, 2008 and for no other purpose. We do not, in giving this opinion, accept or assume responsibility for any other purpose or to any other person to whom this report is shown or into whose hands it may come save where expressly agreed by our prior consent in writing.
Joanne Peacegood
For and on behalf of PricewaterhouseCoopers CI LLP
Chartered Accountants and Recognised Auditor
Guernsey, Channel Islands
31 March 2017
STATEMENT OF COMPREHENSIVE INCOME
FOR THE YEARED 31 DECEMBER 2016
2016 2015
--------------------- ---------------------
Notes US$ US$
INCOME
Finance income 1,029 -
Dividend income 14(b) - 5,369,711
Foreign exchange gain - 805,211
1,029 6,174,922
--------------------- ---------------------
EXPENSES
Management fees 14(a) 3,000,000 4,795,036
Due diligence and transaction costs 2(e) 65,723 477,111
Directors' fees and expenses 14(f) 345,953 599,549
Audit fees 156,569 233,383
Legal and professional expenses 199,639 212,109
Administration fees 14(e) 151,593 242,209
Foreign exchange loss 233,179 -
Other expenses 339,015 498,813
4,491,671 7,058,210
--------------------- ---------------------
INVESTMENT MOVEMENTS
Amortisation of intangible asset 4 (1,069,398) (829,070)
Impairment of intangible asset 4 (1,078,011) -
Realised (losses)/gains on financial
assets and financial liabilities
at fair value through profit or
loss 5 (10,417,718) (369,946)
Movement in unrealised loss on
financial assets and financial
liabilities at fair value through
profit or loss 5 (20,257,942) (47,073,882)
Impairment of settlement proceeds 8 (533,171) -
(33,356,240) (48,272,898)
--------------------- ---------------------
Total comprehensive loss for the
year (37,846,882) (49,156,186)
===================== =====================
Deficit per Ordinary Share 17
Basic Cents (34.30) (44.49)
Diluted Cents (34.16) (44.31)
The notes on pages 28 to 49 form an integral part of these financial statements.
STATEMENT OF FINANCIAL POSITION
AS AT 31 DECEMBER 2016
2016 2015
--------------------- ------------------
Notes US$ US$
ASSETS
Non-current assets
Intangible assets 4 111,387 2,058,796
Financial assets at fair value
through profit or loss 5 18,913,238 90,777,677
19,024,625 92,836,473
--------------------- ------------------
Current assets
Other receivables and prepayments 8 4,167,210 6,207,781
Cash and cash equivalents 5,017,077 27,384,242
9,184,287 33,592,023
--------------------- ------------------
TOTAL ASSETS 28,208,912 126,428,496
===================== ==================
EQUITY AND LIABILITIES
Equity
Treasury shares 13 - (645,459)
Reserves 13 28,036,878 126,783,917
Total assets attributable to ordinary
shareholders 28,036,878 126,138,458
--------------------- ------------------
Current liabilities
Other payables 10 172,034 290,038
Total liabilities 172,034 290,038
--------------------- ------------------
TOTAL EQUITY AND LIABILITIES 28,208,912 126,428,496
===================== ==================
Number of ordinary shares (excludes treasury
shares) 110,340,019 110,340,019
Net asset value per ordinary share 16 $0.2541 $1.1432
These financial statements were approved and authorised for issue by the Board of Directors on 31 March 2017 and signed on its behalf by:
RJ Battey
Director
The notes on pages 28 to 49 form an integral part of these financial statements.
STATEMENT OF CHANGES IN EQUITY
FOR THE YEARED 31 DECEMBER 2016
Reserves Treasury Shares Total
--------------------- --------------------- ---------------
Notes US$ US$ US$
Balance at 1 January 2015 184,158,780 - 184,158,780
Changes in equity for
2015
Loss for the year (49,156,186) - (49,156,186)
Total comprehensive loss (49,156,186) - (49,156,186)
Treasury shares acquired - (645,459) (645,459)
Dividends declared (8,218,677) - (8,218,677)
Balance at 31 December
2015 126,783,917 (645,459) 126,138,458
===================== ===================== ===============
Changes in equity for
2016
Loss for the year (37,846,882) - (37,846,882)
Total comprehensive loss (37,846,882) - (37,846,882)
Dividends declared 9 (60,254,698) - (60,254,698)
Treasury shares cancelled (645,459) 645,459 -
Balance at 31 December
2016 28,036,878 - 28,036,878
===================== ===================== ===============
The notes on pages 28 to 49 form an integral part of these financial statements.
STATEMENT OF CASH FLOWS
FOR THE YEARED 31 DECEMBER 2016
2016 2015
-------------------- ---------------------
US$ US$
Cash flows from operating activities
Loss for the year (37,846,882) (49,156,186)
Adjusted for:
Realised losses on financial assets and
financial liabilities at fair value through
profit or loss 10,417,718 369,946
Movement in unrealised losses on financial
assets and financial liabilities at fair
value through profit or loss 20,257,942 47,073,882
Impairment of intangible asset 1,078,011 -
Amortisation of intangible assets 1,069,398 829,070
Finance income (1,029) -
Impairment of settlement proceeds 533,171 -
Foreign exchange losses / (gains) 233,179 (805,211)
Changes in working capital
Purchases of non-current assets at fair
value through profit or loss (30,574,299) (38,417,376)
Settlement of non-current assets and financial
liabilities at fair value through profit
or loss 72,301,200 98,570,910
Decrease / (increase) in other receivables
and prepayments 769,278 (697,681)
(Decrease) in other payables and performance
fee (118,004) (15,555,250)
Net cash flow from operating activities 38,119,683 42,212,104
Cash flows from investing activities
Interest received 1,029 -
Net cash flow from investing activities 1,029 -
-------------------- ---------------------
Cash flows from financing activities
Dividends paid (59,017,109) (42,710,577)
Net cash flow from financing activities (59,017,109) (42,710,577)
Net decrease in cash and cash equivalents (20,896,397) (498,473)
-------------------- ---------------------
Cash and cash equivalents at the beginning
of the period 27,384,242 27,962,963
Effect of foreign exchange rate changes (1,470,768) (80,248)
Cash and cash equivalents at the end of
the period 5,017,077 27,384,242
==================== =====================
The notes on pages 28 to 49 form an integral part of these financial statements.
NOTES TO THE FINANCIAL STATEMENTS
FOR THE YEARED 31 DECEMBER 2016
1. LEGAL FORM AND PRINCIPAL ACTIVITY
The Company is an authorised closed-ended investment company incorporated under The Companies (Guernsey) Law, 2008 (the "Law"). The Law does not make a distinction between private and public companies. Shares in the Company were admitted to trading on AIM, a market operated by the London Stock Exchange, on 21 December 2007. The address of the Company's registered office is 11 New Street, St Peter Port, Guernsey, Channel Islands, GY1 2PF.
The investment objective of the Company had been to build a diversified portfolio of investments in claims and to provide Shareholders with an attractive level of dividends and capital growth through investing directly and indirectly in litigation and arbitration cases, claims and disputes. These investments have been made predominantly in the United States. On 18 November 2015 the Company announced that it would not make new investments (other than for funding existing investments in the Company's portfolio where such funding is reasonably required to realise maximum shareholder value) but, instead, would seek to return capital to shareholders in the most appropriate manner following the completion of investments.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The principal accounting policies applied in the preparation of these financial statements are set out below. These policies have been consistently applied to all the years presented, unless otherwise stated.
(a) Basis of preparation
The financial statements of the Company have been prepared in accordance with International Financial Reporting Standards ("IFRS") and all applicable requirements of The Companies (Guernsey) Law, 2008. They have been prepared on a going concern basis, under the historical cost convention as modified by the revaluation of financial assets and financial liabilities at fair value through profit or loss.
The preparation of financial statements in conformity with IFRS requires the use of certain critical accounting estimates. It also requires the Board of Directors to exercise its judgement in the process of applying the Company's accounting policies. The areas involving a degree of judgement or complexity, or areas where assumptions and estimates are significant to the financial statements are disclosed in Note 3.
There have been no new IFRS or IFRIC interpretations that are effective for the first time for the financial year beginning 1 January 2016, which have had a significant effect on the Company.
For the financial year beginning 1 January 2013, the Company early adopted IFRS 9 'Financial instruments', effective for periods beginning on or after 1 January 2018.
The following IFRS standards or interpretations have been issued but are not yet effective, and have not been adopted by the Company:
-- Amendments to IFRS 9 'Financial Instruments' effective for
periods commencing on or after 1 January 2018. This IFRS
introduces a new approach to the classification of financial
assets, which is driven by the business model in which the
asset is held and their cash flow characteristics.
-- Amendment to IAS 7 'Statement of Cash Flows', effective for
periods commencing on or after 1 January 2017. Amendments
requiring entities to disclose information about changes
in their financing liabilities ; and
-- Annual Improvements 2014 -2016 Cycle, effective for periods
commencing on or after 1 January 2017.
The adoption of the above standards is not anticipated to have any significant bearing on the Company's financial statements.
In accordance with the Company's Admission Document of 17 December 2007, the Directors convened an extraordinary general meeting of the Company, on 14 November 2013, at which a resolution was proposed that the Company be wound up voluntarily. The resolution was not passed by the Company's members.
Although the Company is under a run-off strategy, the Directors have given consideration to the maturity of the Company's existing portfolio, the performance of the portfolio to date, the prospects of expected future cash flows, and existing cash reserves. In addition, the Directors have reviewed the Company's budgets and cash flows for the year ahead and, accordingly, are satisfied on reasonable grounds that it is appropriate to prepare these financial statements on a going concern basis.
(b) Investment entity
The Company has multiple unrelated investors and indirectly holds multiple investments through the subsidiary companies. Ownership interests in the Company are in the form of redeemable shares which are classified as equity in accordance with IAS 32 and which are exposed to variable returns from changes in the fair value of the Company's net assets. The Company has been deemed to meet the definition of an investment entity per IFRS 10, and therefore does not prepare consolidated financial statements, as the following conditions exist:
(a) The Company has obtained funds for the purpose of providing investors with investment management services.
(b) The Company's business purpose, which was communicated directly to investors, is investing solely for returns from capital appreciation and investment income.
(c) The performance of investments made through the Company are measured and evaluated on a fair value basis.
(c) Geographical and segmental reporting
Since the Company is engaged in the provision of similar products and services within a particular economic environment, being subject to similar risks and returns, management considers that the Company has only one business segment and geographical focus, being investments in legal claims primarily in the United States ("US"), and accordingly does not present additional business and geographical segment information. The Investment Manager is responsible for the investment decisions for the Company's entire portfolio and considers the business to have a single operating segment. The Investment Manager's asset allocation decisions are based on a single, integrated investment strategy, and the Company's performance is evaluated on an overall basis.
(d) Financial assets at fair value through profit or loss (i) Contractual interests
Classification
Unless otherwise determined by the Company, investments in claims will be categorised as contractual interests held at fair value through profit or loss. These financial assets will initially be measured as the cash sum provided to acquire an interest in a plaintiff's claim or as the cash advanced to law firms under loan agreements. Attributable due diligence costs are expensed when they occur.
Recognition, derecognition and measurement
Subsequent measurement of contractual interests will be at fair value utilising a fair value model developed by the Investment Manager. The principal assumptions to be used in the fair value model are as follows:
-- Estimated duration of each contractual interest; and
-- Best estimate of anticipated outcome.
Movements in fair value arising on all performing contractual interests is recognised in the Statement of Comprehensive Income, as determined by utilising the fair valuation model.
The fair value model is a way of calculating the fair value of a financial asset or liability and of recognising the fair value gains and losses in that period.
Fair value estimation
Fair value will be reviewed semi-annually on an individual case basis. Events that will trigger changes to the fair value of each contractual interest include the following:
-- Changes in general US dollar interest rate assumptions (market
assumption) and the time value of money;
-- Changes in any variable relating to a claim including: assessment
of probability of successful judgement; range of settlement
or award; expected timing until claim resolution; and extrinsic
risks related to a claim;
-- Successful judgement of a claim in which the Company has
a contractual interest;
-- Unsuccessful judgement of a claim in which the Company has
a contractual interest;
-- Outstanding appeals against both successful and unsuccessful
judgements;
-- A contractual interest to be sold at a discount or to be
settled out of Court by a binding agreement;
-- Legal impediments to collectability of claims (in the US
Chapter 7 Bankruptcy or Chapter 11 Court Protection from
Creditors); and
-- A case is dismissed with prejudice (meaning, it can never
be re-filed anywhere).
Partial settlement
Partial settlement of contractual interests occurs when one or more parties, but not all parties, involved in the matter agree to terms on a settlement amount. Proceeds received by the Company are allocated between return of original principal and any gain based on the following process:
-- Proceeds are discounted at a rate equal to the Company's
cost of equity;
-- This discounted value represents the portion of proceeds
attributable to a return of investment with the remainder
representing a gain associated with the partial settlement;
and
-- The amount representing the gain is then compared against
any prior gain recognised on the portion of the proceeds
attributed to a return of investment (calculated by using
the fair valuation model) with the difference reflected as
current year realised gain or loss.
Full settlement
Full settlement of contractual interests occurs when all parties involved in the matter agree to terms on a settlement amount or the full legal process has concluded with either proceeds being awarded or dismissal (no proceeds awarded). Proceeds received by the Company are first allocated to the return of any remaining principal with the remainder allocated to gain. The amount representing the gain is then compared against any prior gain recognised on the portion of the proceeds attributed to a return of investment (calculated by using the fair valuation model) with the difference reflected as current year realised gain or loss.
(ii) Equity investments
Classification
The Company classifies its equity investments at fair value through profit or loss at inception. These financial assets will initially be measured as the cash sum provided to acquire the investment. Attributable due diligence costs are expensed when they occur.
Equity investments are intended to be held for an indefinite period of time, and that may be sold in response to needs for liquidity or changes in interest rates, exchange rates or equity prices. The Company could be seen to have significant influence over certain of its equity investments as a result of its stake in each of those assets. If significant influence exists, that investment, under IFRS, should be accounted for as an 'Associate' and hence the equity accounting method should be applied. However, the Board has taken the view that (a) there is no material difference in accounting for these investments as associates and accounting for them as financial assets at fair value; (b) there is no material difference in the disclosure; and (c) the strategy of the Company is to hold investments as part of an investment portfolio with a view to the ultimate realisation of capital gains rather than as a medium to carry out its own business, hence accounting for these investments as non-current assets is the most appropriate method.
Recognition, derecognition and measurement
Equity investments will initially be measured at cost and are subsequently carried at fair value. Gains and losses arising from changes in the fair value are recognised in the Statement of Comprehensive Income.
Fair value estimation
The assessment of fair value is determined by the level of assets of the investments (including intellectual property), the quality of income and earnings and the present value of future cash flows of the equity investments, discounted at the cost of equity. The estimates and assumptions made by the Investment Manager in determining this fair value have been outlined in Note 3.
Settlement
When equity investments are sold or impaired, the movement in fair value will be recognised in the Statement of Comprehensive Income.
(iii) Debt securities
Classification
Debt security investments are classified at fair value through profit or loss at inception. These financial assets will initially be measured as the cash sum advanced to the law firm.
Recognition, derecognition and measurement
The debt security investments will initially be measured at cost and are subsequently carried at fair value. Gains and losses arising from changes in the fair value are recognised in the Statement of Comprehensive Income.
Fair value estimation
Fair value is determined by the present value of future cash flows, at the discount rate of the Company. The estimates and assumptions made by the investment manager in determining this fair value have been outlined in Note 3.
Settlement
When debt security investments are sold, the movement in fair value will be recognised in the Statement of Comprehensive Income.
(iv) Forward foreign currency contracts
Classification, recognition, derecognition and measurement
Forward foreign currency contracts are classified as financial instruments at fair value through profit or loss at inception. They will initially be measured at the contractual amount at the date the contract is entered into. Accordingly, only gains and losses arising from changes in the fair value are recognised in the Statement of Comprehensive Income.
Fair value estimation
Fair value is determined by the foreign currency exchange rate prevailing at that date.
Settlement
Settlement will occur at the date the contract is due to expire. Gains and losses on the settlement of the contracts will be recognised as realised gains or losses at this time in the Statement of Comprehensive Income.
(e) Due diligence and transaction costs
The due diligence and transaction costs attributable to investments in contractual interests, equity investments and debt securities, and any other due diligence and transaction costs not directly relating to an investment, have been expensed immediately in the Statement of Comprehensive Income.
Due diligence and transaction costs associated with investments characterised as intangible assets are expensed until such time as the following has been affirmed: i) the technical feasibility of completing the intangible so that it will be available for use or sale; ii) the intention to complete the intangible asset and use or sell it; iii) the ability to use or sell the intangible asset; iv) how the intangible asset will generate probable future economic benefits; v) the availability of adequate technical, financial and other resources to complete the development and to use or sell the asset; and vi) the ability to measure reliably the expenditure attributable to the intangible asset during its development, at which time they are capitalised as an intangible asset and held at cost less accumulated amortisation and any impairment loss.
(f) Foreign currency
Functional and presentation currency
Items included in the financial statements are measured using the currency of the primary economic environment in which the entity operates (the "functional currency"). The functional currency of the Company as determined in accordance with IFRS is the United States Dollar ("US Dollar") because this is the currency that best reflects the economic substance of the underlying events and circumstances of the Company. The financial statements are presented in US Dollars, the presentation currency.
Transactions and balances
Foreign currency transactions are translated into the functional currency using the exchange rate prevailing at the date of the transaction. Foreign exchange gains and losses resulting from the settlement of such transactions and from the translation at year-end exchange rates of monetary assets and liabilities denominated in foreign currencies are recognised in the Statement of Comprehensive Income.
(g) Finance income
Finance income arising on cash and cash equivalents is recognised in the Statement of Comprehensive Income on the effective interest basis.
(h) Cash and cash equivalents
Cash and cash equivalents comprised of cash balances and deposits held at banks with a maturity profile of 3 months or less.
(i) Taxation
The Company has obtained exempt company status in Guernsey. The Company is, therefore, only liable to an annual exemption fee of GBP1,200 (2015: GBP1,200). The Company's subsidiaries are subject to income tax in their respective jurisdictions.
To the extent that any foreign withholding taxes or any form of profits taxes become payable, these will be accrued on the basis of the event that created the liability to taxation.
(j) Expenses
Expenses are accounted for on an accruals basis. Expenses for monitoring claims will generally be paid by the Investment Manager except in extraordinary circumstances approved by the Board of Directors of the Company.
(k) Dividends
Dividends declared during the period will be disclosed directly in equity via the Statement of Changes in Equity. A final dividend proposed by the Board and approved by the shareholders prior to the year-end will be disclosed as a liability. Dividends proposed and not approved will be disclosed in the Notes.
(l) Other receivables and prepayments
Other receivables and prepayments are recognised initially at fair value and subsequently measured at cost less provision for impairment.
(m) Other payables
Other payables are recognised initially at fair value and subsequently measured at amortised cost using the effective interest rate method.
(n) Capital and reserves
Ordinary shares are classified as equity. Incremental costs directly attributable to the issue of new shares are shown in equity via the reserves as a deduction from the issue proceeds.
Where the Company purchases the Company's own equity share capital (treasury shares), the consideration paid, including any directly attributable incremental costs (net of income taxes) is deducted from equity attributable to the Company's equity holders until the shares are cancelled or reissued. Where such ordinary shares are subsequently reissued, any consideration received, net of any directly attributable incremental transaction costs and the related income tax effects, is included in equity attributable to the Company's equity holders. Where such ordinary shares are cancelled their value is transferred to reserves.
(o) Intangible asset
Where the Company has entered into an agency agreement involving licensing of intellectual property, the resulting transaction will be categorised as an intangible asset (see Note 4). The cost of the intangible asset will be capitalised once it is possible to demonstrate that the intangible asset will generate probable future economic benefit. Intangible assets will be held at cost less any accumulated amortisation and any accumulated impairment losses. Amortisation will be on a systematic basis over the asset's useful life.
(p) Impairment of intangible assets
The carrying amounts of intangible assets are assessed on a semi-annual basis to determine whether there is any indication of impairment. If such indication exists, the Company estimates the recoverable amount of the asset, being the higher of the asset's net selling price and its value in use. Any impairment loss is recognised for the amount which the asset's recoverable amount is lower than its carrying value and the difference being taken to the Statement of Comprehensive Income.
The Company first assesses whether objective evidence of impairment exists. In assessing value in use, the estimated future cash flows are discounted to their present value using the discount rate that reflects current assessment of the time value of money and the risks specific to the asset for which the estimates of future cash flows have not been adjusted.
The amount of the loss is measured as the difference between the asset's carrying amount and the present value of estimated future cash flows. The carrying amount of the asset is reduced and the amount of the loss is recognised in the Statement of Comprehensive Income.
If, in a subsequent period, the amount of the impairment loss decreases and the decrease can be related objectively to an event occurring after the impairment was recognised, the reversal of the previously recognised impairment loss is recognised in the Statement of Comprehensive Income. In the year ended 31 December 2016 an impairment of US$1.1 million was determined and is reflected in the Statement of Comprehensive Income (2015: US$Nil).
(q) Share-based payments transactions
The Company engages in equity settled share-based payment transactions in respect of the services received from one of its Directors and from Cenkos Securities PLC ("Nominated Adviser and Broker") as set out in the Company's Admission Document. The fair value of the services received is measured by reference to the fair value of the shares or share options granted on the date of the grant. The fair value of the share options is recognised in the Statement of Comprehensive Income over the period that the services are received, which is the vesting period.
The fair value of the options granted is determined using the Black-Scholes option pricing model, which takes into account the exercise price of the option, the current share price, the risk free interest rate, the expected volatility of the share price over the life of the option and other relevant factors. Except for those which include terms relating to market conditions, vesting conditions included in the terms of the grant are not taken into account in estimating the fair value.
Non-market vesting conditions are taken into account by adjusting the number of shares or share options included in the measurement of the cost of the services so that, ultimately, the amount recognised in the Statement of Comprehensive Income reflects the number of vested shares or share options. Where vesting conditions are related to market conditions, the charges for the services received are recognised regardless of whether or not the market conditions-related vesting condition is met, provided that the non-market vesting conditions are met.
(r) Earnings/deficit per share
The basic earnings/deficit per share value is calculated by taking the total comprehensive income/loss for the period and dividing it by the weighted average number of ordinary shares in issue over the period. The diluted earnings per share figure is calculated by adjusting the weighted average number of ordinary shares outstanding to assume conversion of all dilutive potential ordinary shares (see Note 17).
(s) Net asset value per share
Net asset value per share is calculated by taking the net assets attributable to ordinary shareholders and dividing it by the number of shares in issue at the year-end (see Note 16).
3. CRITICAL ACCOUNTING ESTIMATES AND JUDGEMENTS
The Investment Manager makes estimates and assumptions concerning the future. The resulting accounting estimates will, by definition, seldom equal the related actual results. The estimates and assumptions that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities are outlined below.
Critical accounting judgements in applying the Company's accounting policies
The Company makes investments in claims that may involve litigation. The nature of the investments made by the Company reduces by some predetermined amount the cost of litigating a matter to a plaintiff and/or a law firm. A typical investment by the Company will include cash and may also include cash commitments subject to certain restrictions. In most arrangements, the Company is paid only from proceeds generated from the litigation and any related settlement or award. If a lawsuit fails to generate any proceeds and all legal remedies are exhausted, the Company will often not be entitled to reimbursement of the facility they advanced to the counterparty for the specific claim. In these cases the Company will write off their investment in the claim as a loss. The Company is compensated for this risk through the return structure built into the investment. The Company mitigates this risk through the use of their Investment Manager which is experienced in evaluating the investment worthiness of a particular opportunity.
In the process of applying the Company's accounting policies, which are described in Note 2, the Directors have reviewed the Investment Manager's assessment of the fair value of contractual interests including the probability of success on the merits of each claim, likelihood of settlement and claim duration. This is most evident in the assessment of the fair value applied to contracts entered into by the Company, as disclosed in Note 5.
To determine the appropriate fair value to apply to each contract, the Investment Manager follows a formal process of developing a set of scenarios for each case and assigns probabilities to each potential outcome. The probabilities are phased based on the expected progression path of each particular case. In addition, each potential successful scenario has a range of likely settlement proceeds assigned to it as well as a most likely resolution or settlement date. The scenarios not only incorporate the merits of each particular case but also consider known risks intrinsic to the particular matter, as well as general risks found in any litigation matter.
The Investment Manager then runs a Monte-Carlo method analysis which dictates that the Investment Manager runs algorithms that rely on random sampling based on the variables within each scenario and their related probabilities. The results of the analysis provide expected outcomes and other statistical data which is used to calculate the future valuation of each particular contractual interest. A discount rate is then applied to the future value to determine the current fair value.
For certain of the Company's investments, the Investment Manager determines fair value by developing a discounted cash flow model incorporating various risk factors such as: quantum risk; timing risk; execution risk; and for certain investments, consideration of monetising an investment within a shortened development period (following the Company's intention to seek resolution and monetisation of the remaining investments if possible by the end of 2017).
Determining whether intangible assets are impaired requires an estimation of the future cash flows of the intangible assets, and the use of a suitable discount rate in order to calculate present value. During the year, an impairment to the intangible asset was recognised. The carrying amount of the intangible asset is shown in Note 4.
4. INTANGIBLE ASSET
31 December 31 December
2016 2015
------------------- ---------------------
US$ US$
Balance at start of the year 2,058,796 2,647,866
Additions 200,000 240,000
Amortisation (1,069,398) (829,070)
Impairment of Intangible Asset (1,078,011) -
Balance at end of the year 111,387 2,058,796
=================== =====================
The Company's intangible asset comprises an investment structured as an agency agreement. Additions to the intangible asset during the first half of the year are deemed to have occurred at 30 June 2016 and additions during the second half of the year are deemed to have occurred at 31 December 2016. The Company amortises the intangible asset on a straight-line basis so that the balance is US$Nil by 31 December 2017. The Directors consider that the straight-line basis of amortisation most accurately reflects the pattern in which the asset's future economic benefits are expected to be consumed by JIL.
In addition, the Company purchased common and preferred stock related to the intangible asset, which has been classified as a financial asset at fair value through profit or loss (Note 5).
As at 31 December 2016 the Intangible Asset and related common and preferred stock was assessed to have a fair value of $250,000. A provision for impairment of the Company's intangible asset has been recognized accordingly.
5. FINANCIAL ASSETS AND FINANCIAL LIABILITIES AT FAIR VALUE THROUGH PROFIT AND LOSS
31 December 2016
----------------------------------------------------------------------------------------------------------
Balance Additions Disposal Movement Realised Balance
at proceeds in fair losses at
1 Jan value 31 Dec
2016 2016
------------------ ---------------- ---------------- ----------------- ------------- ----------------
Financial US$ US$ US$ US$ US$
assets
Contractual
interests 29,435,299 997,274 (748,210) (15,159,640) (6,733,161) 7,791,562
Equity
investments 5,950,296 100,000 - (1,744,063) (3,684,557) 621,676
Debt
securities 55,392,082 30,431,136 (71,968,979) (3,354,239) - 10,500,000
Total 90,777,677 31,528,410 (72,717,189) (20,257,942) (10,417,718) 18,913,238
================== ================ ================ ================= ============= ================
Financial
liabilities
Forward FX - - - - - -
Total - - - - - -
================== ================ ================ ================= ============= ================
31 December 2015
------------------------------------------------------------------------------------------
Balance Additions Disposal Movement Realised Balance
at proceeds in fair gains at
1 Jan value 31 Dec
2015 2015
------------- ---------------- ------------- ------------- -------------- -----------
Financial assets US$ US$ US$ US$ US$
Contractual
interests 54,553,859 2,866,104 (24,117,413) (5,126,834) 1,259,583 29,435,299
Equity investments 12,963,078 468,328 - (7,481,110) - 5,950,296
Debt securities 82,544,923 35,000,000 (27,000,000) (35,152,841) - 55,392,082
Total 150,061,860 38,334,432 (51,117,413) (47,760,785) 1,259,583 90,777,677
============= ================ ============= ============= ============== ===========
Financial liabilities
Forward FX (686,903) - 1,629,529 686,903 (1,629,529) -
Total (686,903) - 1,629,529 686,903 (1,629,529) -
============= ================ ============= ============= ============== ===========
(a) Contractual interests
Fair value movements of contractual interests are due to amendments in estimated cash flows arising from changes in expectations surrounding each case. The valuation of the Company's contractual interests decreased by approximately US$21.6 million reflecting the net of US$1.0 million in additional investment funding, US$0.7 million of disposal proceeds, US$6.7 million of realised losses on disposals and US$15.2 million net decrease due to each investment's individual change in fair value.
(b) Equity investments
The valuation of the Company's equity investments decreased by US$5.3 million reflecting the net of US$0.1 million in additional investment funding, US$3.7 million of realised loss due to the write-off of one investment, and US$1.7 million net decrease due to each investment's individual change in fair value.
The Company's equity investments include a holding in JCML 2007. The fair value of the Company's investment in JCML 2007 was assessed as at 31 December 2016 to be US$9,240 (2015: US$27,257). This assessment of fair value is deemed appropriate given the investment in the company, the level of assets, and the quality of income and earnings and the projection of future cash flows.
(c) Debt securities
Historically the facility agreement with Fields Law (consisting of a consolidated loan agreement and a swap agreement) have been aggregated and treated as a single claim asset. Returns on the loan and the swap are dependent on returns in claims financed by Fields Law. In accordance with provisions under the swap, proceeds previously paid by Fields Law to Riverbend can be clawed back by Fields Law if needed to meet funding obligations within the antitrust and competition portfolio or to prepay accrued interest and principal if agreed to by Fields Law and the Company.
Additions to the Company's debt securities during 2016 totalled US$30.4 million and consisted of the following: i) a clawback of US$5.0 million paid to Fields Law to fund the underlying investment; ii) a clawback of US$11.1 million paid to Fields Law enabling Fields Law to prepay a portion of accrued interest and principal owed under the loan; and iii) US$14.3 million enabling Riverbend to fulfil its obligation under the swap and allowing for Fields Law to pay all remaining accrued interest and principal on the loan coinciding with the termination of the loan and swap.
During 2016, the Company received payments under the loan totalling US$72.0 million consisting of: i) US$46.5 million from proceeds received by Fields Law from settlements in the cases financed through Fields Law; and ii) a total of US$25.4 million paid by Fields Law from the US$11.1 million clawback of prior year swap payments made to Riverbend and the US$14.3 million provided by Riverbend fulfilling its obligation under the swap agreement and allowing for Fields Law to pay all remaining accrued interest and principal owed under loan. Subsequent to the receipt of these funds, the loan and swap agreements were terminated and replaced with termination agreements (see Note 14).
Fair value movements of debt securities are due to amendments in estimated cash flows arising from changes in expectations surrounding each investment. The fair value at 31 December 2016 includes an estimate of reserves that may be released by Fields Law after filing of tax returns (expected to be no later than third quarter 2017) and again after all contingencies are cleared (expected to be no later than end of year 2020).
To the extent proceeds received by the Company in any year exceeds the excess of the total prior unrealised gain, a realised gain equal to the excess will be reflected in the financial statements. At completion of the investment, any residual unrealised gain or loss will be reclassified to a realised gain or loss.
(d) Forward foreign currency contracts
The Company held no forward foreign currency contracts at 31 December 2016 (2015: none).
6. FAIR VALUE ESTIMATION
For instruments for which there is no active market and for which reliable pricing sources cannot be obtained, the Company may use internally developed models, which are usually based on valuation methods and techniques generally recognised as standard within the industry. Valuation models are used primarily to value unlisted equity, debt securities and other debt instruments for which markets are or have been inactive during the financial year. Some of the inputs to these models may not be market observable and are therefore estimated based on assumptions.
In response to the Company's run-off strategy, as part of the fair value assessment of the Company's investments in the current year, the potential likelihood of monetising certain investments within a shortened development period has been considered.
The carrying value less impairment provision of other receivables and payables are assumed to approximate their fair values.
IFRS 13 requires the Company to classify fair value measurements using a fair value hierarchy that reflects the significance of the inputs used in making the measurements. The fair value hierarchy has the following levels:
-- Quoted prices (unadjusted) in active markets for identical
assets or liabilities (level 1).
-- Inputs other than quoted prices included within level 1 that
are observable for the asset or liability, either directly
(that is, as prices) or indirectly (that is, derived from
prices) (level 2).
-- Inputs for the asset or liability that are not based on observable
market data (that is, unobservable inputs) (level 3).
The level in the fair value hierarchy within which the fair value measurement is categorised in its entirety is determined on the basis of the lowest level input that is significant to the fair value measurement in its entirety. For this purpose, the significance of an input is assessed against the fair value measurement in its entirety. If a fair value measurement uses observable inputs that require significant adjustment based on unobservable inputs, that measurement is a level 3 measurement. Assessing the significance of a particular input to the fair value measurement in its entirety requires judgement, considering factors specific to the asset or liability.
The determination of what constitutes 'observable' requires significant judgement by the Company. The Company considers observable data to be that market data that is readily available, regularly distributed or updated, reliable and verifiable, not proprietary, and provided by independent sources that are actively involved in the relevant market.
Investments classified within level 3 have significant unobservable inputs, as they trade infrequently. Level 3 instruments include equity investments. As observable prices are not available for these investments, the Company has used valuation techniques to derive their fair value.
All of the Company's other financial assets and liabilities are classified as level 3. There were no transfers between levels for the year ended 31 December 2016 (2015: Nil).
The Company has identified three key unobservable inputs to the valuation model used in the valuation of investments held at fair value through profit or loss: expected quantum, expected duration, and cost of equity. Not all of these unobservable inputs are applicable to every investment.
Expected quantum
The greater the quantum expected at conclusion, the greater the valuation at any point in time. The reduction of the quantum expected at conclusion, will reduce the valuation at any point in time.
Expected duration
The greater the expected duration of an investment, the lower the valuation at any point in time, other than at conclusion. The reduction of the expected duration of an investment will increase the valuation at any point in time, other than at conclusion.
Cost of equity
The Company's cost of equity is 11%. As the Company's cost of equity decreases, the valuations at any point in time will increase, other than at conclusion. As the Company's cost of equity increases, the valuations at any point in time will decrease, other than at conclusion.
The following table summarises the sensitivities:
Change in valuation
Unobservable Reasonable possible (due to +/- change
input shift (+/-) in input)
--------------- -------------------- --------------------
Quantum 10% 8.89% / (9.31%)
Timing 1 year (14.02%) / 6.55%
Cost of equity 3% (2.13%) / 2.66%
7. UNCONSOLIDATED SUBSIDIARY AND ASSOCIATE INVESTMENTS
The following subsidiary and associate investments are held by the Company but have not been consolidated, following the Investment Entities exemption per IFRS 10 (see Note 2 (b)):
% Share holdings
Date Country 31 December 31 December
incorporated of incorporation 2016 2015
---------------------- ------------ ------------
JCML 2007 Limited (#) 28-Nov-07 Guernsey 36.2% 36.2%
Riverbend Investments Limited 08-Oct-08 Guernsey 100.0% 100.0%
GrandiOs Technologies,
LLC 25-Feb-09 United States 100.0% 100.0%
Juridica Ventures KFT 02-Mar-09 Hungary 100.0% 100.0%
Juridica Ventures (US)
Inc. 31-May-09 United States 100.0% 100.0%
Escon Capital, Inc. (#) 26-Apr-10 United States 38.6% 38.6%
Spinal Spot LLC 28-Feb-11 United States 65.9% 65.8%
Spinal Ventures LLC 25-Mar-11 United States 100.0% 100.0%
Juridica Sports Technology
LLC 22-Apr-14 United States 100.0% 100.0%
ProSports Technologies,
LLC 22-Apr-14 United States 81.3% 81.3%
Juridica Kinetics, LLC
* 13-May-14 United States - 100.0%
Smooth 3D IP, LLC * 13-May-14 United States - 76.2%
Juridica RMIP Holdings,
LLC 31-Jul-14 United States 100.0% 100.0%
Rich Media Ventures, LLC 31-Jul-14 United States 86.6% 89.9%
Juridica Holdings LLC () 15-Jun-16 United States 100.0% -
Turtle Bay Technologies 22-Oct-08 United Kingdom 100.0% -
Limited ^
Eleven Engineering Game 05-Aug-09 United States 100.0% -
Control LLC
There are no outstanding commitments with these unconsolidated subsidiaries and associates at the year end, other than those disclosed in Note 11.
(#) JCML 2007 Limited and Escon Capital, Inc. are not subsidiaries however, Juridica Investments Limited has a significant interest in them.
(*) Juridica Kinetics, LLC and Smooth 3D IP, LLC were dissolved during 2016.
() Juridica Holdings LLC, a Delaware limited liability company formed and registered on 15 June 2016, is 100% owned by JIL. Its only asset is a US$7.25 million note received in exchange for the shares of AC Kinetics.
(^) Turtle Bay Technologies Limited, previously owned by JCML 2007, became 100% owned by JIL during 2016. Turtle Bay Technologies Limited is the sole owner of Eleven Engineering Game Control LLC.
8. RECEIVABLES AND PREPAYMENTS
31 December 31 December
2016 2015
-------------------- ------------------
US$ US$
Settlement proceeds 4,135,159 5,430,086
Management fees 366 719,549
Prepayments and accrued bank
interest 31,685 58,146
4,167,210 6,207,781
==================== ==================
Settlement proceeds has been reduced by US$533,171 to reflect expected collectability of outstanding receivable.
9. DIVIDS
The following dividends were declared and paid during the year:
Declaration Payment Dividend Total dividends
date date per share US$
19 May 2016 24 June 2016 8 pence 12,904,817
6 September
2016 30 September 2016 32 pence 47,349,881
----------------
60,254,698
================
During the year to 31 December 2016, dividends totalling US$60,254,698 (2015: US$8,218,677) had been declared. No dividends remained payable as at 31 December 2016 (2015: US$Nil).
10. OTHER PAYABLES
31 December 31 December
2016 2015
------------------ ---------------
US$ US$
Payable on investment purchases 9,460 28,735
Audit fees 59,216 196,495
Other creditors 103,358 64,808
172,034 290,038
================== ===============
11. COMMITMENTS & GUARANTEES
Under the terms of some of its contracts, the Company provides a line of credit to counterparties. As at 31 December 2016, the maximum commitment under these lines of credit was US$7,000 (2015: US$7.3 million). A portion of commitment may be fulfilled from investment returns.
12. FUNCTIONAL AND PRESENTATION CURRENCY / EXCHANGE RATES
The financial statements are presented in United States Dollar ("US$") which is also the Company's functional currency. The following rate was applicable as at 31 December:
Closing rate
--------------------------
31 December 31 December
2016 2015
------------ ------------
US$ US$
British pounds (GBP) 1.2337 1.4734
============ ============
13. CAPITAL AND RESERVES
Authorised share capital: Unlimited number of ordinary shares of no par value ("shares").
Issued share capital: 110,340,019 shares as at 31 December 2016 (2015: 110,701,754 shares).
Issuance of shares included 80,000,000 shares issued at a premium of GBP1 per share on admission, and 30,701,754 shares issued at a premium of GBP1.14 on 6 April 2009. On 4 June 2015, the Company received 361,735 of its own shares as a result of an in-specie dividend received from JCML 2007 at GBP1.16. During 2016 these shares were cancelled.
Under a Share Buyback Programme, the Company acquired 6,000,000 shares at a price of GBP1.02 per share on 3 November 2010 and the Company also received 126,607 of its own shares subsequent to an in-specie dividend received from the previous Investment Manager, JCML 2007 on 27 November 2013. These shares were held in treasury, however were subsequently sold for a premium at GBP1.39.
The Company's capital is represented by ordinary shares of no par value and share premium. Each share carries one vote and is entitled to dividends when declared. The relevant movements in capital are shown on the statement of changes in equity through reserves.
The Company has authority to make market purchases of up to 14.99 per cent of its own issued ordinary shares. This authority was renewed at the annual general meeting of the Company held on 30 April 2014. A renewal of the authority to make purchases of ordinary shares will be sought from Shareholders at each annual general meeting of the Company. The timing of any purchases will be decided by the Board.
14. RELATED PARTY TRANSACTIONS
Richard Battey, as investor representative and non-executive director of the Company, is also a non-executive director of JCML 2007. The principal of JCML 2007 is Richard Fields, who owns 103,000 Ordinary Shares in the Company (0.09 per cent equity interest) (2015: 103,000). JCML 2007 owns 118,254 Ordinary Shares in the Company (0.107 per cent equity interest) (2015: 118,254 shares). Mr Fields was also sole beneficial owner of Juridica Asset Management Limited ("JAML") until 11 January 2017.
(a) Management fee
The Investment Manager changed its name from Juridica Asset Management Limited to Brickell Key Asset Management Limited ("BKAML") on 19 January 2017.
Previously, BKAML was entitled to a management fee of 2 per cent of the adjusted net asset value of the Company.
The adjusted net asset value is the net asset value of the Company at the relevant time and will be calculated, after accruing for the annual management fee but not taking into account any liability of the Company for accrued performance fees, and after:
(i) deducting any unrealised gains on non-current assets; and
(ii) adding the amount of any write downs with respect to contractual interests which have not been written off.
On 8 February 2016, the Company entered into an amended management agreement with BKAML. Under the terms of the amendments the existing arrangements for management fees to BKAML as stated above have been altered to state that from 1 January 2016, the Company will pay US$3,000,000 in management fees for the year ending 31 December 2016, and US$1,750,000 in management fees for the year ending 31 December 2017. In compliance with the management agreement, management fees paid during 2015 (which was based on adjusted net asset value at 31 December 2014) was trued up against actual adjusted net asset value at 31 December 2015 and resulted in a receivable from BKAML of which US$366 remains at 31 December 2016 (2015: US$719,549). This receivable is being offset against the agreed 2016 management fee of US$3,000,000. The total resulting net management fee that was paid to BKAML during 2016 was US$2,280,451.
(b) Investment in JCML 2007 Limited
The Company acquired 15 per cent of JCML 2007 on Admission, which was subsequently diluted to 13.6 per cent by the exercise of share options by certain of JCML 2007's employees. In 2012, the Company acquired a further holding in JCML 2007, taking the Company's overall holding in JCML 2007 to 36.17 per cent. An impairment review of JCML 2007 has been performed as part of the fair value assessment and continues to be carried out on a semi-annual basis. The Company received dividend income from JCML 2007 during the year of US$Nil (2015: US$5,369,711).
(c) Performance fee
Under the terms of the Management Agreement, JCML 2007, as former Investment Manager, was entitled to a performance fee based on the adjusted net asset value ("ANAV") (being the NAV of the Company before taking into account any performance fee payable less any unrealised gains on investments plus the value of any write downs in any investments that have been written down but not written off) of the Company. The performance fee payable was for an amount equal to the sum of: (i) 20 per cent of the amount by which the ANAV exceeded a 8 per cent annually compounding hurdle but was less than an amount equal to a 20 per cent annually compounding hurdle; (ii) 35 per cent of the amount by which the ANAV exceeded a 20 per cent annually compounding hurdle but was less than an amount equal to a 40 per cent annually compounding hurdle; and (iii) 50 per cent of the amount by which the ANAV exceeded a 40 per cent annually compounding hurdle.
The performance fee was subject to a high water mark such that no performance fee will be paid if the performance of the Company does not exceed the ANAV at the end of the previous year in which the performance fee was paid.
As at 31 December 2016, the ANAV was below the high water mark and no performance fee is payable for the year ended 31 December 2016. (2015: US$Nil)
BKAML replaced JCML 2007 as Investment Manager with effect from 1 January 2014. For financial periods following this date, any performance fee payable on investments will be calculated based on the date on which investments were made, and attributable to JCML 2007 for investments held at 31 December 2013, and to BKAML for all new investments. BKAML will become entitled to a performance fee of 20 per cent of the annualised increase in the adjusted net asset value over the hurdle rate. As at 31 December 2016, this hurdle rate had not been achieved on investments attributable to BKAML.
(d) Facility agreement and collateral account
The Company had entered into a facility agreement (the "Facility") with which it agreed to loan to Fields Law, a law firm in which Richard Fields is a partner, money for funding cases in which Fields Law is to act under a Co-counsel Agreement. Prior to adopting its run-off strategy, the Company expected to enter into loan arrangements with other law firms (which could have included other law firms established by the Principal of the Company) on terms and conditions similar to those contained in the Facility. The Facility available to Fields Law was to be for up to approximately 50 per cent of the net proceeds of the capital raised by the Company less any loans made to other law firms.
On 25 August 2016, the Facility (consisting of a consolidated loan agreement and a swap agreement) was terminated with the receipt by the Company of US$71.9 million in respect of the loan, which was funded by the following: (i) payment by Fields Law to JIL of US$46.5 million from proceeds received from settlements in the underlying cases; and ii) a total of US$25.4 million paid by Fields Law from the US$11.1 million clawback of prior year swap payments made to Riverbend and US$14.3 million provided by Riverbend fulfilling its obligation under the swap agreement and allowing Fields Law to pay all remaining accrued interest and principal on the facility once the Company's interest in the underlying cases was deemed complete. The series of transactions resulted in a net cash gain to JIL of US$46.5 million.
On 20 December 2016, and in conjunction with the termination of the Facility and planned wind-up of Fields Law, an additional US$3.0 million was returned by Fields Law to Riverbend. This amount is to be held in escrow for certain contingencies relating to JIL's investment in Fields Law. The escrow requirements will terminate three years after the filing of Fields Law's final tax return which is expected to occur by the end of the third quarter of 2017. Upon termination of the escrow requirements (which is expected to occur by the end of 2020), any unused funds in the escrow will be paid to JIL.
In addition to the reserves held under the escrow arrangement describe above, at 31 December 2016, Fields Law holds reserves from the settlement proceeds described above for expected tax payments. Once Fields Law determines and pays its final tax obligation (expected no later than end of third quarter 2017), all remaining funds held in reserve at Fields Law will be returned to Riverbend.
(e) Administration fees
The Company has an administration agreement with Vistra Fund Services (Guernsey) Limited (the "Administrator"). Fees payable to the Administrator for the year were US$151,593 (2015: US$242,209), of which US$50,961 remained payable as at 31 December 2016 (2015: US$36,372).
(f) Directors' fees and expenses
31 December 31 December
2016 2015
------------ ------------
Directors' remuneration US$ US$
Lord Daniel Brennan (GBP90,000 per annum 2015:
GBP187,500 per annum) 121,817 284,813
Richard Battey (GBP50,000 per annum 2015: GBP75,000
per annum) 68,825 113,925
Kermit Birchfield 110,000 125,000
------------ ------------
300,642 523,738
Director expenses 45,311 75,811
345,953 599,549
============ ============
No pension contributions were paid or were payable on behalf of the Directors.
Lord Daniel Brennan has an interest in 447,817 shares (2015: 447,817 shares) under a Share Option Agreement, details of which were disclosed in the Admission Document. Lord Brennan can exercise these share options at any time up until 17 December 2017. The other Directors have no beneficial interest in the share capital of the Company.
(g) Escon Capital Inc.
The Company has an interest of 38.6% (2015: 38.6%) in the voting common stock and 100% (2015: 100%) of the issued preference shares of Escon Capital, Inc. ("Escon"), a Delaware corporation of which Kermit Birchfield and Richard Fields are directors.
During the year ended 31 December 2016, Kermit Birchfield received a director's fee of US$50,000 (2015: US$50,000).
(h) Eleven Engineering Game Control LLC
The Company has provided a loan of US$575,000 to Eleven Engineering Game Control LLC, a company ultimately owned and controlled by JIL (31 December 2015: US$575,000). Prior to 2016, Eleven Engineering Game Control LLC was owned and controlled by JCML 2007. As of 31 December 2016, no further facility remains available to be drawn (31 December 2015: US$Nil). Interest will be accrued at a rate of 10% per annum, and the loan and interest are repayable on Eleven Engineering Game Control LLC's receipt of net recoveries.
(i) Special purpose vehicles
As compensation for providing management services, Kermit Birchfield receives a fee from each of Smooth 3D IP, LLC (until 31 December 2016), Rich Media Ventures, LLC, and GrandiOs Technologies, LLC. For the year ending 31 December 2016, Kermit Birchfield received fees totalling US$90,000 for provision of these services (2015: US$67,500).
15. FINANCIAL RISK MANAGEMENT OBJECTIVES AND POLICIES (a) Investment risk
There is no established market for the Company's assets. The Investment Manager's assessment of the quantum and timing of returns is subjective and based on the Investment Manager's experience and due diligence. The estimates of the outcome and financial effect on the Company of the assets are determined by the judgement of the Investment Manager. In coming to its best estimate of fair value, the Investment Manager has estimated the probability, timing and quantum of particular outcomes.
(b) Cash flow and fair value interest rate risk
Interest rate risk arises from the effects of fluctuations in the prevailing levels of market interest rate on the fair value of financial assets and liabilities and future cash flows. The Company holds fixed and variable rate interest securities that expose the Company to fair value interest rate risk. For 2016, debt securities were fixed at a regular interest rate of 15.0%.
The Company is exposed to interest rate risk related to its cash balances. The Company does not actively manage this risk.
2016
Fixed Variable Non-interest Total
interest interest bearing
---------------- --------------- ------------- -----------
US$ US$ US$ US$
Assets
Intangible assets - - 111,387 111,387
Contractual interests - - 7,791,562 7,791,562
Equity investments - - 621,676 621,676
Debt securities - - 10,500,000 10,500,000
Other receivables and
prepayments - - 4,167,210 4,167,210
Cash and cash equivalents - 5,017,077 - 5,017,077
Total assets - 5,017,077 23,191,835 28,208,912
--------------- --------------- ------------- -----------
Liabilities
Other payables - - (172,034) (172,034)
Total liabilities - - (172,034) (172,034)
--------------- --------------- ------------- -----------
Total exposure to interest
sensitivity - 5,017,077 23,019,801 28,036,878
================ =============== ============= ===========
2015
Fixed Variable Non-interest Total
interest interest bearing
--------------- --------------- ------------- -----------------
US$ US$ US$ US$
Assets
Intangible assets - - 2,058,796 2,058,796
Contractual interests - - 29,435,299 29,435,299
Equity investments - - 5,950,296 5,950,296
Debt securities 55,392,082 - - 55,392,082
Other receivables and
prepayments - - 6,207,781 6,207,781
Cash and cash equivalents - 27,384,242 - 27,384,242
Total assets 55,392,082 27,384,242 43,652,172 126,428,496
--------------- --------------- ------------- -----------------
Liabilities
Other payables - - (290,038) (290,038)
Total liabilities - - (290,038) (290,038)
--------------- --------------- ------------- -----------------
Total exposure to interest
sensitivity 55,392,082 27,384,242 43,362,134 126,138,458
=============== =============== ============= =================
At 31 December 2016, if variable interest rates had moved by 75 basis points with all other variables remaining constant, the change in net assets attributable to holders of ordinary shares for the year would amount to approximately +/- US$37,628 (2015: +/- US$205,382), arising substantially from the cash and cash equivalents. No interest was receivable on the collateral cash deposit.
(c) Credit risk
The Company is exposed to credit risk, which is the risk that a counterparty will be unable to pay amounts in full when they fall due.
The Company has in place various policies and procedures to guide the Investment Manager's evaluation and management of investment opportunities and, particularly, the credit risk associated with investment counterparties (law firms and claim interest holders) and investments. The policies include Investment Restrictions (which contain prohibitions on pursuing investments with certain kinds of claims and claim holders, those being prosecuted by certain law firms, and those where collection, counterparty or compliance risk is significant), Investment Policies (which contain guidelines for diversification of the Company's portfolio based on certain claimholder characteristics, jurisdiction(s) involved, prosecuting law firm, claim size and investment structure), and Investment Process Guidelines (which define the due diligence, investment and investment monitoring processes to be followed by the Investment Manager in claim evaluation, valuation and investment completion). Collectively, these Investment Parameters are designed to guide the investment opportunity analysis so to limit credit, collection and portfolio concentration risks associated with Company investments. In addition, the Investment Manager has, pursuant to its own Underwriting Guidelines, developed and implemented systems and procedures to analyse and (pursuant to investment contracts) manage credit risk associated with Company investments.
The main concentration to which the Company was exposed arises from the Company's loan to Fields Law. This loan was terminated during 2016. The Company is also exposed to counterparty credit risk on trading contractual interests, cash and cash equivalents and other receivables.
In accordance with the Company's policy, the Investment Manager monitors the Company's credit position on a daily basis, and the Board of Directors reviews it on a quarterly basis.
The Company is also exposed to material credit risk in respect of the contractual interests and cash and cash equivalents. The credit risk of the cash and cash equivalents is mitigated as all cash is placed with reputable banking institutions with a sound credit rating. The maximum credit risk exposure represented by total assets excluding intangible assets amounted to US$28,097,525 (2015: US$124,369,700).
(d) Concentration risk
The Company has sought to minimise concentration risk by investing in a diverse portfolio of contractual interests through a number of different law firms, including interests in antitrust, patent, property damage, insurance subrogation, shareholder dispute, contract claim and arbitration cases.
The Company further sought to minimise concentration risk by utilising a variety of Investment Parameters which are designed to guide the investment opportunity analysis so as to minimise, amongst other things, concentration risk. These Investment Parameters are further detailed in Note 15(c).
As the Company will no longer make new investments in line with the run-off strategy, the level of concentration of investments will increase as investments in the existing portfolio mature.
(e) Liquidity risk
The Company is exposed to liquidity risk. The contractual interests are acquisition of claims, as well as loans to lawyers to fund participation in claims on a contingency fee basis, and therefore require significant capital contribution with little or no immediate return and no guarantee of return or repayment. The market for such contractual interests is not active. In the opinion of the Directors the current liquidity risk at 31 December 2016 is low as cash and cash equivalents exceed unmatched liabilities or other contractual commitments.
Maturity analysis 2016
--------------------------------------------------------
< 3 months < 6 months < 12 months Total
----------- ----------- -------------------- --------
US$ US$ US$ US$
Investment purchases
payable 9,460 - - 9,460
Audit fees 59,216 - - 59,216
Other creditors 103,358 - - 103,358
172,034 - - 172,034
----------- ----------- -------------------- --------
Maturity analysis 2015
-------------------------------------------------------------------
< 3 months < 6 months < 12 months Total
----------- --------------- ------------------- ----------------
US$ US$ US$ US$
Investment purchases
payable 28,735 - - 28,735
Audit fees 196,495 - - 196,495
Other creditors 64,808 - - 64,808
290,038 - - 290,038
----------- --------------- ------------------- ----------------
(f) Capital risk management
The capital of the Company is represented by the net assets attributable to holders of ordinary shares. The Company's objectives when managing this risk are to safeguard the Company's ability to continue as a going concern in order to provide returns for shareholders and benefits for other stakeholders and to maintain a strong capital base to support the development of the investment activities of the Company.
The Company is closed-ended and therefore the capital risk is reduced as shareholder funds are locked in until the closure of the Company. The level of capital funding is monitored by the Board of Directors, who will ensure adequate solvency is in place prior to making distributions.
(g) Foreign currency risk
Foreign currency risk is the risk that the value of a financial instrument will fluctuate because of changes in foreign exchange rates.
The Company's policy, generally, is not to manage exposure to foreign exchange movements (both monetary and non-monetary) by entering into any foreign exchange hedging transactions. However, the Company did enter into a forward currency contract, maturing 14 January 2015, to lock in the US dollar equivalent of the dividends declared during the year, which were paid to shareholders on 14 January 2015. The Directors considered that this was a prudent step in order to mitigate the cash flow impact of adverse exchange rate fluctuations on the amount of the dividends, which were declared in GBP.
The Company holds assets denominated in currencies other than the functional currency. It is therefore exposed to currency risk, as values of the assets denominated in other currencies will fluctuate due to changes in exchange rates. The Company may hedge future investment opportunities in the functional currency.
As at 31 December 2016, a proportion of the net financial assets/(liabilities) of the Company are denominated in currencies as follows:
2016 2015
---------------- -------------
US$ US$
USD 27,485,151 126,255,337
GBP 551,727 (116,879)
28,036,878 126,138,458
================ =============
At 31 December 2016, if exchange rates had moved by 5% with all other variables remaining constant, the change in net assets attributable to holders of ordinary shares for the year would amount to approximately +/- US$30,242 (2015: +/- US$5,844). Management assesses the risk of exposure to the general banking system, and specific banks, and invests cash in US government securities when there is perceived risk to principal.
(h) Fair value estimation
The fair value of financial assets and liabilities that are not traded in an active market is determined by using valuation techniques. See Note 6 for further details.
The carrying value less impairment provision of other receivables and payables is assumed to approximate their fair value. The fair value of financial liabilities for disclosure purposes is not discounted as the Company does not expect there to be any material differences.
16. NET ASSET VALUE ATTRIBUTABLE TO EACH ORDINARY SHARE
The net asset value attributable to each ordinary share is calculated by dividing the net asset value attributable to ordinary shareholders of US$28,036,878 (2015: US$126,138,458) by the 110,340,019 ordinary shares in issue at 31 December 2016 (2015: 110,340,019), and excludes shares held in treasury. As at 31 December 2016 there were no shares held in treasury (2015: 361,735 shares).
17. DEFICIT PER SHARE
Basic and diluted deficit per share is calculated by dividing the Total Comprehensive Loss for the Year of US$37,846,882 (2015: US$49,156,186) by the weighted average number of ordinary shares during the year.
For basic deficit per share, the weighted average number of ordinary shares excludes treasury shares for the period in which they are held in treasury during the year. The basic weighted average number of ordinary shares for the year is 110,340,019 (2015: 110,493,632).
The diluted deficit per share figure is calculated by adjusting the basic weighted average number of ordinary shares outstanding to assume conversion of all dilutive potential ordinary shares under the Share Option Agreement (see Note 14(f)). The diluted number of ordinary shares for the year is 110,787,836 (2015: 110,941,449).
18. SUBSEQUENT EVENTS
Investment 114107 was finalised in March 2017 with receipt of US$890,000 additional proceeds. The Company received a total of US$2.6 million on an investment of US$1.3 million.
Effective January 2017, ownership of the Company's Investment Manager, BKAML, changed from Richard Fields to Solomon Asset Management LLC.
This information is provided by RNS
The company news service from the London Stock Exchange
END
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