REG - IP Group PLC - Final Results <Origin Href="QuoteRef">IPO.L</Origin> - Part 5
01/03/2016 07:12
- Part 5: For the preceding part double click ID:nRSA5517Qd
treatment is permitted by IAS 28
Investment in Associates and Joint Ventures, which permits investments held by entities that are akin to venture capital
organisations to be excluded from its measurement methodology requirements where those investments are designated, upon
initial recognition, as at fair value through profit or loss and accounted for in accordance with IAS 39 Financial
Instruments: Recognition and Measurement. Changes in fair value of associates are recognised in profit or loss in the
period of the change. The Group has no interests in associates through which it carries on its business.
The disclosures required by Section 409 of the Companies Act 2006 for associated undertakings are included in Note 11 of
the Company financial statements to these financial statements. Similarly, those investments which may not have qualified
as Associate but fall within the wider scope of significant holdings and so are subject to Section 409 disclosure acts are
also included in Note 11 of the Company financial statements.
(iv) Limited Partnerships and Limited Liability Partnerships ("Limited Partnerships")
Limited Partnerships
Group entities act as general partner and investment manager to the following Limited Partnerships:
Name Interest in limited partnership%
IP Venture Fund II LP ("IPVFII") 33.3
IP Venture Fund ("IPVF") 10.0
The North East Technology Fund LP ("NETF") -
The Group receives compensation for its role as investment manager to these Limited Partnerships including fixed fees and
performance fees. The directors consider that these amounts are in substance and form "normal market rate" compensation for
its role as investment manager.
In order to determine whether these Limited Partnerships were required to be consolidated, the presence of the three
elements of control noted in part (ii) was examined.
The Group's significant stake in IPVFII creates a significant exposure to the variability of returns from those interests
and the Group's ability to direct the operations of the fund would result in IP Group obtaining the benefits of its
activities. As such, IPVFII meets the criteria in IFRS 10 Consolidated Financial Statements and is consequently
consolidated.
In the case of IPVF, the directors consider that the minority Limited Partnership interest does not create an exposure of
such significance that it indicates that the Group acts as anything other than agent for the other Limited Lartners in the
arrangement. This is further supported by the presence of a strict investment policy and the inability for the general
partner to change the restrictive terms of that policy other than with agreement of 100% of IPVF's Limited Partners.
Similarly, the lack of a stake in NETF indicates the Group's role as an agent for the limited partner. As a result, the
Directors consider that the Group does not have the power to govern the operations of theses limited partnerships so as to
obtain benefits from their activities and accordingly do not meet the definition of a subsidiary under IFRS 10 Consolidated
Financial Statements. However the Group does have the power to exercise significant influence over its limited partnerships
and accordingly the Group's accounting treatment for the interest in IPVF is consistent with that of associates as
described earlier in this report, i.e. in accordance with IAS 39 Financial Instruments: Recognition and Measurement and
designated as at fair value through profit or loss on initial recognition.
Limited Liability Partnerships
The Group has a 17.8% interest in the total capital commitments of Technikos LLP ("Technikos"). The general partner and
investment manager of Technikos are parties external to the Group.
(v) Non-controlling interests
The total comprehensive income, assets and liabilities of non-wholly owned subsidiaries are attributed to owners of the
parent and to the non-controlling interests in proportion to their relative ownership interests.
Portfolio return and revenue
Change in fair value
Change in fair value of equity and debt investments represents revaluation gains and losses on the Group's portfolio of
investments. Gains on disposal of equity investments represent the difference between the fair value of consideration
received and the carrying value at the start of the accounting period on the disposal of equity investments. Change in fair
value of Limited Partnership investments represents revaluation gains and losses on the Group's investments in Limited
Partnership funds. Changes in fair values of assets do not constitute revenue.
Revenue from services and other income
All revenue from services is generated within the United Kingdom and is stated exclusive of value added tax. Revenue from
services and other income comprises:
Advisory fees: Fees earned from the provision of business support services are recognised as the related services are
provided. Corporate finance advisory fees are generally earned as a fixed percentage of total funds raised and recognised
at the time the related transaction is successfully concluded. In some instances, these fees are settled via the issue of
equity in the company receiving the corporate finance services at the same price per share as equity issued as part the
financing round to which the advisory fees apply.
Fund management services: Fiduciary fund management fees are generally earned as a fixed percentage of total funds under
management and are recognised as the related services are provided.
Licence income: Income from licensing and similar income is recognised on an accruals basis in accordance with the terms of
the relevant licensing agreements. Income from milestone income is recognised once performance obligations are satisfied,
on an accruals basis and in accordance with the terms of the relevant licensing agreements.
Dividends: Dividends receivable from equity shares are included within other portfolio income and recognised on the
ex-dividend date or, where no ex-dividend date is quoted, are recognised when the Group's right to receive payment is
established.
Property, plant and equipment
All property, plant and equipment is shown at cost less subsequent depreciation and impairment. Cost includes expenditure
that is attributable to the acquisition of the items. Depreciation on assets is calculated using the straight-line method
to allocate the cost of each asset to its residual value over its estimated useful life, as follows:
Fixtures and fittings Over 3 to 5 years
Computer equipment Over 3 to 5 years
The assets' residual values and useful lives are reviewed, and adjusted if appropriate, at each reporting date.
Intangible assets
Goodwill
Goodwill represents the excess of the cost of an acquisition over the fair value of the net identifiable assets of the
acquired subsidiary at the date of acquisition. Goodwill on acquisitions of subsidiaries is included in intangible assets
and allocated from the acquisition date to each of the Group's cash-generating units ("CGUs") that are expected to benefit
from the business combination. Goodwill may be allocated to CGUs in both the acquired business and in the existing
business.
Other intangible assets
Other intangible assets represents contractual arrangements and memorandums of understanding with four UK universities
acquired through acquisition of a subsidiary. At the date of acquisition the cost of these intangibles as a share of the
larger acquisition was calculated and subsequently the assets are held at amortised cost.
Impairment of intangible assets (including goodwill)
Goodwill is not subject to amortisation but is tested for impairment annually and whenever events or circumstances indicate
that the carrying amount may not be recoverable. Assets that are subject to amortisation are tested for impairment when
events or a change in circumstances indicate that the carrying amount may not be recoverable. An impairment loss is
recognised for the amount by which the carrying amount exceeds its recoverable amount. The recoverable amount is the higher
of the asset's fair value less costs to sell and the value in use. For the purposes of assessing impairments, assets are
grouped at the lowest levels for which there are identifiable cash flows (i.e. CGUs).
Financial assets
In respect of regular way purchases or sales, the Group uses trade date accounting to recognise or derecognise financial
assets.
Financial assets are derecognised when the rights to receive cash flows from the assets have expired or the Group has
transferred substantially all risks and rewards of ownership.
The Group classifies its financial assets into one of the categories listed below, depending on the purpose for which the
asset was acquired. None of the Group's financial assets are categorised as held to maturity or available for sale.
(i) At fair value through profit or loss
Financial assets at fair value through profit or loss are either financial assets held for trading or financial assets
which are designated at fair value through profit or loss on initial recognition.
This category includes equity investments, debt investments, equity rights, contingent value rights and investments in
limited partnerships. Investments in associated undertakings, which are held by the Group with a view to the ultimate
realisation of capital gains, are also categorised as at fair value through profit or loss. This measurement basis is
consistent with the fact that the Group's performance in respect of investments in equity investments, limited partnerships
and associated undertakings is evaluated on a fair value basis in accordance with an established investment strategy.
Financial assets at fair value through profit or loss are initially recognised at fair value and any gains or losses
arising from subsequent changes in fair value are presented in profit or loss in the statement of comprehensive income in
the period in which they arise.
Fair value hierarchy
The Group classifies financial assets using a fair value hierarchy that reflects the significance of the inputs used in
making the related fair value measurements. The level in the fair value hierarchy, within which a financial asset is
classified, is determined on the basis of the lowest level input that is significant to that asset's fair value
measurement. The fair value hierarchy has the following levels:
Level 1 - Quoted prices in active markets.
Level 2 - Inputs other than quoted prices that are observable, such as prices from market transactions. These are mainly
based on prices determined from recent investments in the last twelve months.
Level 3 - One or more inputs that are not based on observable market data.
Equity investments
The fair values of quoted investments are based on bid prices in an active market at the reporting date. The fair value of
unlisted securities is established using valuation techniques. These include the use of recent arm's length transactions,
discounted cash flow analysis and earnings multiples. Wherever possible, the Group uses valuation techniques which make
maximum use of market-based inputs. Accordingly, the valuation methodology used most commonly by the Group is the 'price of
recent investment' contained in the International Private Equity and Venture Capital Valuation Guidelines (the "IPEVCV
Guidelines") endorsed by the British & European Venture Capital Associations. The following considerations are used when
calculating the fair value of unlisted securities:
Cost
Where the investment being valued was itself made recently, its cost may provide a good indication of fair value unless
there is objective evidence that the investment has since been impaired, such as observable data suggesting a deterioration
of the financial, technical, or commercial performance of the underlying business.
Price of recent investment
The Group considers that fair value estimates, which are based entirely on observable market data, will be of greater
reliability than those based on assumptions and, accordingly, where there has been any recent investment by third parties,
the price of that investment will generally provide a basis of the valuation. The length of period for which it remains
appropriate to use the price of recent investment depends on the specific circumstances of the investment and the stability
of the external environment.
Given the nature of the Group's investments in seed, start-up and early-stage companies, where there are often no current
and no short-term future earnings or positive cash flows, it can be difficult to gauge the probability and financial impact
of the success or failure of development or research activities and to make reliable cash flow forecasts. Consequently, the
most appropriate approach to determine fair value is a methodology that is based on market data, that being the price of a
recent investment. Where the Group considers that the price of recent investment, unadjusted, is no longer relevant and
there are limited or no comparable companies or transactions from which to infer value, the Group carries out an enhanced
assessment based on milestone analysis and/or industry and sector analysis. In applying the milestone analysis approach to
investments in companies in early or development stages the Group seeks to determine whether there is an indication of
change in fair value based on a consideration of performance against any milestones that were set at the time of the
original investment decision, as well as taking into consideration the key market drivers of the investee company and the
overall economic environment.
Where the Group considers that there is an indication that the fair value has changed, an estimation is made of the
required amount of any adjustment from the last price of recent investment. Wherever possible, this adjustment is based on
objective data from the investee company and the experience and judgement of the Group. However, any adjustment is, by its
very nature, subjective. Where a deterioration in value has occurred, the Group reduces the carrying value of the
investment to reflect the estimated decrease. If there is evidence of value creation the Group may consider increasing the
carrying value of the investment; however, in the absence of additional financing rounds or profit generation it can be
difficult to determine the value that a purchaser may place on positive developments given the potential outcome and the
costs and risks to achieving that outcome and accordingly caution is applied.
Factors that the Group considers include, inter alia, technical measures such as product development phases and patent
approvals, financial measures such as cash burn rate and profitability expectations, and market and sales measures such as
testing phases, product launches and market introduction.
Other valuation techniques
If there is no readily ascertainable value from following the 'price of recent investment' methodology, or there is
objective evidence that a deterioration in fair value has occurred since a relevant transaction, the Group considers
alternative methodologies in the IPEVCV Guidelines such as discounted cash flows ("DCF") or price-earnings multiples. DCF
involves estimating the fair value of a business by calculating the present value of expected future cash flows, based on
the most recent forecasts in respect of the underlying business. Given the difficulty of producing reliable cash flow
forecasts for seed, start-up and early-stage companies as described earlier, this methodology is generally used as a
confirmatory indicator of the level of any adjustment that may need to be made to the last price of recent investment.
When using the earnings multiple methodology, earnings before interest and tax ("EBIT") are generally used, adjusted to a
maintainable level. A suitable earnings multiple is derived from an equivalent business or group of businesses, for which
the average price-earnings multiple for the relevant sector index can generally be considered a suitable proxy. This
multiple is applied to earnings to derive an enterprise value which is then discounted by up to 60% for non-marketability
and other risks inherent to businesses in early stages of operation.
No reliable estimate
Where a fair value cannot be estimated reliably, the investment is reported at the carrying value at the previous reporting
date unless there is objective evidence that the investment has since been impaired.
Debt investments
Debt investments are generally unquoted debt instruments which are convertible to equity at a future point in time. Such
instruments are considered to be hybrid instruments containing a fixed rate debt host contract with an embedded equity
derivative. The Group designates the entire hybrid contract at fair value through profit or loss on initial recognition
and, accordingly, the embedded derivative is not separated from the host contract and accounted for separately. The fair
value of debt investments is established by calculating the present value of expected future cash flows associated with the
instrument.
Equity rights
The equity rights asset represents consideration paid to the University of Oxford between December 2000 and June 2001 that
gives the Group contractual rights to the receipt of shares in unlisted spin-out companies (or cash) based on research
carried out in the university's Department of Chemistry. It is considered to be a derivative financial asset and is
designated as at fair value through profit and loss. Its value has been assessed each year with any impairments being
charged to the income statement. The contract expired in November 2015 and consequently the asset has been impaired to nil
value.
Contingent value rights
In instances where the Group receives contingent financial consideration upon the disposal of a financial asset, the
resulting asset shall be recognised and designated as at fair value through profit and loss, and treated accordingly.
(ii) Loans and receivables
These assets are non-derivative financial assets with fixed and determinable payments that are not quoted in an active
market. They arise principally through the provision of services to customers (trade receivables) and are carried at cost
less provision for impairment.
Deposits
Deposits comprise longer-term deposits held with financial institutions with an original maturity of greater than three
months.
Cash and cash equivalents
Cash and cash equivalents include cash in hand and short-term deposits held with financial institutions with an original
maturity of three months or less.
Financial liabilities
Current financial liabilities are composed of trade payables and other short-term monetary liabilities, which are
recognised at amortised cost.
Non-current liabilities are composed of loans from Limited Partners of consolidated funds, and outstanding amounts drawn
down from a debt facility provided by the European Investment Bank. The loans from Limited Partners of consolidated funds
are repayable only upon the applicable funds generating sufficient returns to repay the Limited Partners. Management
anticipates that the funds will generate the required returns and consequently recognises the full associated liabilities.
Non-current liabilities are recognised initially at fair value net of transaction costs incurred, and subsequently at
amortised cost.
Unless otherwise indicated, the carrying amounts of the Group's financial liabilities are a reasonable approximation to
their fair value.
Share capital
Financial instruments issued by the Group are treated as equity if the holders have only a residual interest in the Group's
assets after deducting all liabilities. The objective of the Group is to manage capital so as to provide shareholders with
above average returns through capital growth over the medium to long-term. The Group considers its capital to comprise its
share capital, share premium, merger reserve and retained earnings.
Top Technology Ventures Limited, a Group subsidiary, is subject to external capital requirements imposed by the Financial
Conduct Authority ("FCA") and as such must ensure that it has sufficient capital to satisfy these requirements. The Group
ensures it remains compliant with these requirements as described in the financial statements of Top Technology Ventures
Limited.
Employee benefits
(i) Pension obligations
The Group operates a company defined contribution pension scheme for which all employees are eligible. The assets of the
scheme are held separately from those of the Group in independently administered funds. The Group currently makes
contributions on behalf of staff to this scheme or to employee personal pension schemes on an individual basis. The Group
has no further payment obligations once the contributions have been paid. The contributions are recognised as employee
benefit expenses when they are due.
(ii) Share-based payments
The Group engages in equity-settled share-based payment transactions in respect of services receivable from employees, by
granting employees conditional awards of ordinary shares subject to certain vesting conditions.
Conditional awards of shares are made pursuant to the Group's Long-Term Incentive Plan ("LTIP") awards and/or the Group's
Annual Incentive Scheme ("AIS"). The fair value of the shares is estimated at the date of grant, taking into account the
terms and conditions of the award, including market-based performance conditions.
The fair value at the date of grant is recognised as an expense over the period that the employee provides services,
generally the period between the start of the performance period and the vesting date of the shares. The corresponding
credit is recognised in retained earnings within total equity. The fair value of services is calculated using the market
value on the date of award and is adjusted for expected and actual levels of vesting. Where conditional awards of shares
lapse the expense recognised to date is credited to the statement of comprehensive income in the year in which they lapse.
Where the terms for an equity-settled award are modified, and the modification increases the total fair value of the
share-based payment, or is otherwise beneficial to the employee at the date of modification, the incremental fair value is
amortised over the vesting period.
Deferred tax
Full provision is made for deferred tax on all temporary differences resulting from the carrying value of an asset or
liability and its tax base. Deferred tax is determined using tax rates (and laws) that have been enacted or substantively
enacted by the reporting date and are expected to apply when the related deferred tax asset is realised or deferred tax
liability settled. Deferred tax assets are recognised to the extent that it is probable that the deferred tax asset will be
recovered in the future.
Leases
Leases where the lessor retains substantially all of the risks and rewards of ownership are classified as operating leases.
Payments made under operating leases are charged to administrative expenses in the statement of comprehensive income on a
straight-line basis over the term of the lease.
2. Financial Risk Management
As set out in the Principal risks and uncertainties section above, the Group is exposed, through its normal operations, to
a number of financial risks, the most significant of which are market, liquidity and credit risks.
In general, risk management is carried out throughout the Group under policies approved by the Board of Directors. The
following further describes the Group's objectives, policies and processes for managing those risks and the methods used to
measure them. Further quantitative information in respect of these risks is presented throughout these financial
statements.
(a) Market risk
(i) Price risk
The Group is exposed to equity securities price risk as a result of the equity and debt investments, and investments in
Limited Partnerships held by the Group and categorised as at fair value through profit or loss.
The Group mitigates this risk by having established investment appraisal processes and asset monitoring procedures which
are subject to overall review by the Board. The Group has also established corporate finance and communications teams
dedicated to supporting portfolio companies with fundraising activities and investor relations.
The Group holds investments which are publicly traded on AIM (20 companies) and investments which are not traded on an
active market.
The net increase in fair value of the Group's equity and debt investments during 2015 of £86.4m represents a 25% change
against the opening balance (2014: net increase of £20.7m, 7%) and a similar increase or decrease in the prices of quoted
and unquoted investments is considered to be reasonably possible. The table below summarises the impact of a 1%
increase/decrease in the price of both quoted and unquoted investments on the Group's post-tax profit for the year and on
equity.
2015 2014
Quoted£m Unquoted£m Total£m Quoted£m Unquoted£m Total£m
Equity investments and investments in limited partnerships 2.0 3.6 5.6 1.4 2.1 3.5
(ii) Interest rate risk
The EIB debt facility bears interest at a fixed rate of 1.98% with an additional variable spread equal to the six month GBP
Libor rate as at the first date of each six month interest period. The first £15.0m tranche was disbursed on 17 December
2015 and the total floating interest rate (including the fixed element) for the remainder of 2015 was 2.48%.
The other primary impact of interest rate risk to the Group is the impact on the income and operating cash flows as a
result of the interest-bearing deposits and cash and cash equivalents held by the Group.
(iii) Concentrations of risk
The Group is exposed to concentration risk via the significant majority of the portfolio being UK based companies and thus
subject to the performance of the UK economy. The Group is increasing its operations in the US and the determination of the
associated concentrations is determined by the number of investment opportunities that management believe represent a good
investment.
The Group mitigates this risk, in co-ordination with liquidity risk, by managing its proportion of fixed to floating rate
financial assets. The table below summarises the interest rate profile of the Group.
2015 2014
Fixedrate £m Floating rate£m Interest free£m Total£m Fixed rate£m Floating rate£m Interest free£m Total£m
Financial assets
Equity rights - - - - - - 1.1 1.1
Equity investments - - 543.1 543.1 - - 345.9 345.9
Debt investments 0.2 - 8.9 9.1 0.2 - 3.8 4.0
Limited and limited liability partnership interests - - 4.4 4.4 - - 4.6 4.6
Contingent value rights - - 1.4 1.4 - - 1.4 1.4
Deposits 70.0 - - 70.0 30.0 - - 30.0
Cash and cash equivalents - 108.8 - 108.8 - 67.3 - 67.3
Trade receivables - - 3.0 3.0 - - 4.8 4.8
Other receivables - - 0.2 0.2 - - - -
70.2 108.8 561.0 740.0 30.2 67.3 361.6 459.1
Financial liabilities
Trade payables - - (0.7) (0.7) - - (1.5) (1.5)
Other accruals and deferred income - - (3.2) (3.2) - - (0.6) (0.6)
Loans from limited partners of consolidated funds - - (7.1) (7.1) - - (4.5) (4.5)
EIB debt facility - (14.9) - (14.9) - - - -
- (14.9) (11.0) (25.9) - - (6.6) (6.6)
At 31 December 2015, if interest rates had been 1% higher/lower, post-tax profit for the year, and other components of
equity, would have been £1.1m (2014: £0.7m) higher/lower as a result of higher interest received on floating rate cash
deposits.
(b) Liquidity risk
The Group seeks to manage liquidity risk, to ensure sufficient liquidity is available to meet foreseeable needs and to
invest cash assets safely and profitably. The Group's Treasury Management Policy asserts that at any one point in time no
more than 60% of the Group's cash and cash equivalents will be placed in fixed-term deposits with a holding period greater
than three months. Accordingly, the Group only invests working capital in short-term instruments issued by reputable
counterparties. The Group continually monitors rolling cash flow forecasts to ensure sufficient cash is available for
anticipated cash requirements.
(c) Credit risk
The Group's credit risk is primarily attributable to its deposits, cash and cash equivalents, debt investments and trade
receivables. The Group seeks to mitigate its credit risk on cash and cash equivalents by making short-term deposits with
counterparties, or by investing in treasury funds with an "AA" credit rating or above managed by institutions. Short-term
deposit counterparties are required to have most recently reported total assets in excess of £3bn and, where applicable, a
prime short-term credit rating at the time of investment (ratings are generally determined by Moody's or Standard &
Poor's). Moody's prime credit ratings of "P1", "P2" and "P3" indicate respectively that the rating agency considers the
counterparty to have a "superior", "strong" or "acceptable" ability to repay short-term debt obligations (generally defined
as having an original maturity not exceeding 13 months). An analysis of the Group's deposits and cash and cash equivalents
balance analysed by credit rating as at the reporting date is shown in the table below. All other financial assets are
unrated.
Credit rating 2015£m 2014£m
P1 126.3 68.7
P2 52.5 28.6
AA - -
Total deposits and cash and cash equivalents 178.8 97.3
The Group has no significant concentration of credit risk, with exposure spread over a large number of counterparties and
customers. The Group has detailed policies and strategies which seek to minimise these associated risks including defining
maximum counterparty exposure limits for term deposits based on their perceived financial strength at the commencement of
the deposit. The maximum single counterparty limit for deposits at 31 December 2015 was £50m (2014: £25m).
The Group's exposure to credit risk on debt investments is managed in a similar way to equity price risk, as described
earlier, through the Group's investment appraisal processes and asset monitoring procedures which are subject to overall
review by the Board.
The maximum exposure to credit risk for debt investments, receivables and other financial assets is represented by their
carrying amount.
3. Significant Accounting Estimates and Judgements
The Directors make judgements and estimates concerning the future. Estimates and judgements are continually evaluated and
are based on historical experience and other factors, such as expectations of future events, and are believed to be
reasonable under the circumstances. Actual results may differ from these estimates. The estimates and assumptions, which
have the most significant effects on the carrying amounts of the assets and liabilities in the financial statements, are
discussed below.
(i) Valuation of unquoted equity investments
The judgements required, in order to determine the appropriate valuation methodology of unquoted equity investments, have a
significant risk of causing a material adjustment to the carrying amounts of assets and liabilities. These judgements
include making assessments of the future earnings potential of portfolio companies, appropriate earnings multiples to
apply, and marketability and other risk discounts.
(ii) Impairment of goodwill
The Group is required to test, at least annually, whether goodwill has suffered any impairment. The recoverable amount is
determined using a number of value-in-use and fair-value-less-costs-to-sell calculations. The use of these methods requires
the estimation of future cash flows, and the selection of a suitable discount rate, in order to calculate the present value
of these cash flows as well as the selection of applicable and reasonable multiples.
(iii) Acquired intangible assets
At the date of its acquisition by IP Group, Fusion IP had contractual arrangements with four UK universities. The Group
separately recognised each of these contractual arrangements as an intangible asset at its fair value at acquisition date.
As the intangible assets are not quoted on an active market, the fair value at acquisition date was determined by averaging
the inflation- and venture capital industry activity-adjusted true cost of all university contracts that IP Group was aware
of and that have had costs associated with those contracts.
As the contractual agreements are for a finite term, the intangible assets are subsequently measured at amortised cost.
Amortisation will occur over the remaining term (or useful life) of each contractual arrangement with each of the four
universities.
Discussion of sensitivity analyses is included in the relevant note for each of the above estimates and judgements.
4. Revenue from Services
All revenue from services is derived from either the provision of advisory and venture capital fund management services or
the licensing of internally developed therapeutic compounds.
5. Operating Segments
For both the year ended 31 December 2015 and the year ended 31 December 2014, the Group's revenue and profit/loss before
taxation were derived almost entirely from its principal activities within the UK. Though the Group has initiated
operations in the US, the associated revenues and costs are currently immaterial and accordingly, no additional
geographical disclosures are given. For management reporting purposes, the Group is currently organised into three
operating segments: (i) the commercialisation of intellectual property via the formation of long-term partner relationships
with universities; (ii) the management of venture funds focusing on early-stage UK technology companies; and (iii) the
in-licensing of drugable intellectual property from research intensive institutions. These activities are described in
further detail in the Strategic report.
Year ended 31 December 2015 University partnership business£m Venture capital fund management£m In-licensing activity £m Consolidated£m
STATEMENT OF COMPREHENSIVE INCOME
Portfolio return and revenue
Change in fair value of equity and debt investments 86.4 - - 86.4
Gain on disposal of equity investments (0.2) - - (0.2)
Change in fair value of limited and limited liability partnership interests 0.4 - - 0.4
Other portfolio income 0.2 - - 0.2
Licensing income 0.1 - 8.0 8.1
Revenue from services and other income 0.9 1.1 - 2.0
Revenue from fund management services - 1.4 - 1.4
Change in fair value of Oxford Equity Rights asset (1.3) - - (1.3)
Amortisation of intangible assets (6.0) - - (6.0)
Administrative expenses (13.9) (0.8) (2.5) (17.2)
Operating profit 66.6 1.7 5.5 73.8
Finance income - interest receivable 1.3 - - 1.3
Profit before taxation 67.9 1.7 5.5 75.1
Taxation - - - -
Profit and total comprehensive income for the year 67.9 1.7 5.5 75.1
STATEMENT OF FINANCIAL POSITION
Assets 788.8 11.3 7.7 807.8
Liabilities (25.5) (0.1) (0.3) (25.9)
Net assets 763.3 11.2 7.4 781.9
Other segment items
Capital expenditure - - - -
Depreciation (0.1) - - (0.1)
Year ended 31 December 2014 University partnership business£m Venture capital fund management£m In-licensing activity £m Consolidated£m
STATEMENT OF COMPREHENSIVE INCOME
Portfolio return and revenue
Change in fair value of equity and debt investments 20.7 - - 20.7
Gain on disposal of equity investments 1.6 - - 1.6
Change in fair value of limited and limited liability partnership interests 0.5 - - 0.5
Other portfolio income 0.2 - - 0.2
Licensing income - - 3.0 3.0
Revenue from services and other income 0.8 0.3 - 1.1
Revenue from fund management services - 1.3 - 1.3
Change in fair value of Oxford Equity Rights asset (1.8) - - (1.8)
Amortisation of intangible assets (4.9) - - (4.9)
Administrative expenses (9.5) (1.4) (1.9) (12.8)
Operating profit 7.6 0.2 1.1 8.9
Finance income - interest receivable 0.6 - - 0.6
Profit before taxation 8.2 0.2 1.1 9.5
Taxation - - - -
Profit and total comprehensive income for the year 8.2 0.2 1.1 9.5
STATEMENT OF FINANCIAL POSITION
Assets 520.6 9.4 3.1 533.1
Liabilities (5.8) (0.1) (1.0) (6.9)
Net assets 514.8 9.3 2.1 526.2
Other segment items
Capital expenditure (0.1) - - (0.1)
Depreciation (0.1) - - (0.1)
6. Auditor's Remuneration
Details of the auditor's remuneration are set out below:
2015£'000 2014£'000
Fees payable to the Company's auditor for the audit of the Company's annual accounts 73 70
The audit of the Company's subsidiaries, pursuant to legislation 87 94
Total fees for audit services 160 164
Audit-related assurance services 20 33
Total assurance services 180 197
Tax compliance services - -
Taxation advisory services - -
All other services - -
Total non-assurance services - -
180 197
7. Profit/(Loss) From Operations
Profit/(loss) from operations has been arrived at after charging:
2015£m 2014£m
Amortisation of intangible assets (6.0) (4.9)
Depreciation of tangible assets (0.1) (0.1)
Employee costs (see note 8) (8.8) (6.1)
Operating leases - property (0.4) (0.4)
(Loss)/profit on disposal of equity investments (0.2) 1.6
8. Employee Costs
Employee costs (including directors) comprise:
2015£m 2014£m
Salaries 5.5 4.4
Defined contribution pension cost 0.3 0.3
Share-based payment charge (see note 21) 1.5 0.9
Other bonuses (released)/accrued in the year 0.7 (0.1)
Social security 0.8 0.6
8.8 6.1
The average monthly number of persons (including Executive Directors) employed by the Group during the year was 64, all of
whom were involved in management and administration activities (2014: 49). Details of the Directors' remuneration will be
set out in the Directors' Remuneration Report within the Group's 2015 Annual Report and Accounts.
9. Taxation
2015£m 2014£m
Current tax - -
Deferred tax - -
The amount for the year can be reconciled to the profit per the statement of comprehensive income as follows:
2015£m 2014£m
Profit before tax 75.1 9.5
Tax at the UK corporation tax rate of 20.3% (2014: 21.5%) 15.2 2.0
Expenses not deductible for tax purposes 1.4 1.3
Non-taxable income - -
Fair value movement on investments qualifying for SSE (18.8) (3.4)
Movement on share-based payments (0.6) (1.0)
Unrecognised other temporary differences 1.3 (2.1)
Movement in tax losses arising not recognised 1.5 3.2
Tax credit - -
At 31 December 2015, deductible temporary differences and unused tax losses, for which no deferred tax asset has been
recognised, totalled £105.5m (2014: £62.7m). An analysis is shown below:
2015 2014
Amount £m Deferred tax £m Amount £m Deferred tax £m
Share-based payment costs and other temporary differences 6.0 1.1 5.0 1.0
Unused tax losses 99.5 17.9 57.7 11.5
105.5 19.0 62.7 12.5
At 31 December 2015, deductible temporary differences and unused tax losses, for which a deferred tax asset/(liability) has
been recognised, totalled £nil (2014: £nil). An analysis is shown below:
2015 2014
Amount £m Deferred tax £m Amount £m Deferred tax £m
Temporary timing differences (4.4) (0.8) 11.3 2.3
Unused tax losses 4.4 0.8 (11.3) (2.3)
- - - -
10. Earnings per Share
Earnings 2015£m 2014£m
Earnings for the purposes of basic and dilutive earnings per share 73.9 9.1
Number of shares 2015Number of shares 2014Number of shares
Weighted average number of ordinary shares for the purposes of basic earnings per share 540,681,647 462,466,944
Effect of dilutive potential ordinary shares:
Options or contingently issuable shares 1,237,274 2,523,968
Weighted average number of ordinary shares for the purposes of diluted earnings per share 541,918,921 464,990,912
The Group has only one class of potentially dilutive ordinary share. These are contingently issuable shares or shares that
may be issued to meet the exercise of options arising from the Group's existing and former employee incentive schemes.
11. Goodwill
£m
At 1 January 2014 18.4
Recognised on acquisition of subsidiary 37.1
At 1 January 2015 57.1
At 31 December 2015 57.1
The Group conducts annual impairment tests on the carrying value of goodwill, based on the recoverable amount of the CGUs
to which the goodwill has been allocated. The goodwill allocated to each CGU is summarised in the table below. A number of
both value-in-use and fair-value-less-costs-to-sell calculations are used to assess the recoverable values of the CGUs,
details of which are specified below.
2015£m 2014£m
University partnership CGU 55.0 55.0
Fund management CGU 2.1 2.1
57.1 57.1
Impairment review of venture capital fund management CGU
The key assumptions of the DCF model used to assess the value in use, and the range of multiples applied in calculating the
fair-value-less-costs-to-sell based on a percentage of assets under management are shown below:
2015 2014
Discount rate 9%-11% 9%-11%
Number of funds under management 3 3
Management fee 2%-3.5% 2%-3.5%
Cost inflation 2% 3%
Percentage of assets under management 2%-7% 2%-7%
A number of different value-in-use models were assessed in order to evaluate the recoverable value of the CGU, none of
which resulted in an impairment being required.
Impairment review of the university partnership CGU
The key assumptions of the DCF models used to assess the value in use are shown below.
For the purposes of impairment testing, the university partnership CGU comprises those elements connected with the Group's
university partnership business other than those that specifically arose as a result of the Group's now expired contract
with the University of Oxford's Department of Chemistry which were used in the valuation of that asset prior to its expiry.
The Directors consider that for each of the key variables which would be relevant in determining a recoverable value for
the university partnership CGU, there is a range of reasonably possible alternative values. The key variable ranges are set
out below:
2015£m 2014£m
Number of spin-out companies per year 10-15 10-15
Annual investment rate £40m-£60m £40m-£60m
Rate of return achieved 18%-22% 18%-22%
Initial equity stake acquired by the Group under the university partnership 15%-35% 15%-35%
Proportion of spin-out companies failing 32%-45% 32%-45%
Weighted average holding period (years) 3-5 3-5
Dilution rates prior to exit as a result of financing for spin-out companies 40%-60% 40%-60%
Proportion of IPO exits 25%-35% 25%-35%
IPO exit valuations £30m-£40m £30m-£40m
Proportion of disposal exits 25%-32% 28%-32%
Disposal valuations £25m-£35m £25m-£35m
Discount rate 9%-11% 9%-11%
When determining the key variables, management has, where possible and appropriate, used historical performance data as a
basis. In instances where the forecasted volumes and scale of activity do not align with the Group's prior performance,
management applies its judgement in determining said variables. A number of different value-in-use models were assessed in
order to evaluate the recoverable value of the CGU, none of which resulted in an impairment being required.
12. Intangible Assets
Total£m
Cost
At 1 January 2015 21.4
At 31 December 2015 21.4
Accumulated amortisation
At 1 January 2015 4.9
Charge for the year 6.0
At 31 December 2015 10.9
Net book value
At 31 December 2015 10.5
At 31 December 2014 16.5
The intangible assets represent contractual arrangements and memorandums of understanding with four UK universities
acquired through acquisition of a subsidiary. The contractual arrangements have fixed terms and, consequently, the
intangible assets have a finite life which align with the remaining terms which, at the end of the period, range from 11
months to 32 months. The individual contractual arrangements are amortised in a straight line over the remainder of their
terms with the expense being presented directly on the primary statements.
13. Categorisation of Financial Instruments
At fair value throughprofit or loss
Financial assets Held for trading£m Designated upon initial recognition £m Loans and receivables £m Total £m
At 31 December 2015
Equity rights - - - -
Equity investments - 543.1 - 543.1
Debt investments - 9.1 - 9.1
Other financial assets - - - -
Contingent value rights - 1.4 - 1.4
Limited and limited liability partnership interests - 4.4 - 4.4
Trade and other receivables - - 3.2 3.2
Deposits - -
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