TIDMPSD
RNS Number : 1319Y
PSource Structured Debt Limited
27 February 2012
PSOURCE STRUCTURED DEBT LIMITED
INTERIM REPORT AND UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS
FOR THE PERIOD FROM 1 JULY 2011 TO 31 DECEMBER 2011
PSOURCE STRUCTURED DEBT LIMITED
Contents
Company Information 1
Directors 2
Financial Calendar 3
Investment Objective and Policy 3
Summary Information 3-5
Chairman's Statement 6-7
Responsibility Statement 8
Consolidated Statement of Financial Position (unaudited)
9
Consolidated Statement of Comprehensive Income (unaudited)
10
Consolidated Statement of Changes in Equity (unaudited) 11
Consolidated Statement of Cash Flows (unaudited) 12
Notes to the Financial Statements 13-42
Analysis of Significant Investments 43-46
Portfolio Analysis 47-48
PSOURCE STRUCTURED DEBT LIMITED
Company Information
Company Number: Financial adviser and stockbroker
47075 (Registered in Guernsey) to the Company:
Numis Securities Limited
The London Stock Exchange Building
10 Paternoster Square
London, EC4M 7LT
Directors: Auditors to the Company:
William Scott, Independent Chairman KPMG Channel Islands Limited
Soondra Appavoo 20 New Street
Peter Niven, Independent Director St Peter Port
Tim Jenkinson, Independent Director Guernsey, GY1 4AN
Keith Dorrian, Independent Director
Company Secretary and Administrator: Solicitors to the Company:
Praxis Fund Services Limited Eversheds LLP
Sarnia House 1 Wood Street
Le Truchot London, EC2V 7WS
St Peter Port
Guernsey, GY1 4NA
Registered office of the Company: Guernsey lawyers to the Company:
Sarnia House Mourant Ozannes
Le Truchot PO Box 186
St Peter Port 1 Le Marchant Street
Guernsey, GY1 4NA St Peter Port
Guernsey, GY1 4HP
Manager: U.S. Counsel:
PSource Capital Guernsey Limited Alston & Bird LLP
Sarnia House 90 Park Avenue
Le Truchot New York, NY 10016-1387
St Peter Port USA
Guernsey, GY1 4NA
Investment Manager: Bankers:
Laurus Capital Management, LLC Investec Specialist Private Bank
875 Third Avenue, 3(rd) Floor Glategny Court,
New York, NY 10022 Glategny Esplanade,
USA St Peter Port,
Guernsey, GY1 3LP
Effective 21 February 2012
Investment Consultant and Promoter: Custodian:
PSource Capital Limited Wells Fargo Bank
126 Jermyn Street 45 Broadway,14th Floor
London, SW1Y 4UJ New York, NY 10006
USA
Independent Valuation Consultant: Registrar:
Clayton IPS Corporation Capita Registrars (Guernsey) Limited
1700 Lincoln Street Mont Crevelt House
Suite 1600 Bulwer Avenue
Denver, Colorado 80263 St Sampson
USA Guernsey, GY2 4JN
Clearing Broker: Executing Broker:
Albert Fried & Company, LLC GP Nurmenkari Inc.
45 Broadway, 24th Floor 6 East 39(th) Street
New York, NY 10006 New York, NY 10016
USA USA
Financial Public Relations:
Weber Shandwick Financial
Fox Court
14 Gray's Inn Road
London, WC1X 8WS
PSOURCE STRUCTURED DEBT LIMITED
Company Information, continued
Directors
The Directors are responsible for the determination of PSource
Structured Debt Limited's (the "Group" or "Company" or "PSD")
investment policy and have overall responsibility for the Group's
activities. The Directors have put in place procedures to ensure
that the Group meets current corporate governance requirements.
The Directors of the Company, all of whom are non-executive and
who, apart from Mr Appavoo, are entirely independent of the
Manager, the Investment Manager and the Investment Consultant,
are:
William Scott, Chairman
William Scott was from 2003 to 2004 Senior Vice President with
the Financial Risk Management Group, a leading specialist manager
of funds of hedge funds. From 1989 to 2002 he worked at Rea
Brothers (subsequently part of Close Brothers) as an investment
manager specialising in fixed income portfolios and latterly in
private banking where he was a director of Close Bank Guernsey
Limited. Prior to this he was an equity sector manager with a large
public sector pension fund. He holds a number of non-executive
directorships of listed companies including AcenciA Debt Strategies
Limited and a number of funds managed by the Financial Risk
Management group where he is Chairman of the Audit, Risk Management
and Control Committee. He is also a director of several other
investment management and property companies. He is a chartered
accountant with over 25 years' experience in the funds sector. He
is a resident of Guernsey.
Soondra Appavoo
Soondra Appavoo is managing director of PSource Capital Limited
and director of PSource Capital Guernsey Limited. He has 18 years
experience in the investment industry, including 4 years as
director and managing director of PSolve Alternative Investments,
the fund of hedge fund business of Punter Southall Group. He was
formerly a director at UBS Warburg investment banking and is a
chartered accountant. Mr Appavoo holds an MA in Natural Sciences
and MBA with Distinction, both from the University of Oxford. He is
the sole representative of the Manager on the Board.
Peter Niven
Peter Niven, is the part time Chief Executive of Guernsey
Finance, which is the island's promotional agency for the Guernsey
Finance industry internationally. He has over 33 years experience
in the financial services market in both the UK, offshore and
internationally having worked in a number of senior positions in
the Lloyds TSB Group until his retirement in 2004. In addition to
his work with Guernsey Finance he is also a non executive director
of several Guernsey based financial services companies listed on
the main London Stock Exchange together with a captive insurance
protected cell company. Mr Niven is a Fellow of the Chartered
Institute of Bankers and a Chartered Director.
Tim Jenkinson
Tim Jenkinson is Professor of Finance and Director of the
Private Equity Institute at the Oxford Said Business School. He is
also Chairman of the economic consulting firm Oxera. He is an
expert on corporate finance, in particular initial public
offerings, private equity and the cost of capital, and has
consulted for a wide range of companies and regulatory bodies. He
has written widely on finance and economics and his work has been
published in books and leading international journals. He initially
studied economics as an undergraduate at Cambridge University,
before going as a Thouron Fellow to the University of Pennsylvania,
where he obtained a Masters in Economics. He then returned to the
UK and obtained a DPhil in Economics from Oxford.
Keith Dorrian
Keith Dorrian has over 30 years experience in the offshore
finance industry. Joining Manufacturers Hanover in 1973 he moved to
First National Bank of Chicago in 1984. In 1989 he joined ANZ Bank
(Guernsey) where as a director of the bank and fund management
company he was closely involved in the banking and fund management
services of the group. He took up the position of Manager Corporate
Clients in Bank of Bermuda Guernsey in 1999 and was appointed Head
of Global Fund Services and Managing Director of the bank's
Guernsey fund administration company in 2001 retiring on 31
December 2003. He is currently a director of a number of funds and
fund management companies and holds the Institute of Directors
Diploma in Company Direction. He is a resident of Guernsey.
PSOURCE STRUCTURED DEBT LIMITED
Company Information, continued
Financial Calendar
Interim Report and Accounts sent to shareholders by 29 February
2012.
Annual Report and Accounts sent to shareholders by 30 September
2012.
Annual General Meeting to be held on during October 2012.
Investment Objective and Policy
The Group's original investment objective, as set our in the
prospectus, was to seek to provide a total return to shareholders
of 10-15 per cent per annum over a rolling 3-year period with
annual standard deviation of less than 5 per cent.
The Group's investment policy was to invest in a diversified
portfolio of asset backed loans and debt made predominantly to, and
equity warrants and similar instruments issued predominately by,
publicly traded small and micro-cap companies in the US. The exact
number of assets and strategies in which the Group invested may
have varied over time but the Directors expected that the Group
would have been invested at all times in a minimum of 30 underlying
companies, at time of investment.
The current balance of the Group's portfolio has resulted partly
from the requirement to monetise liquid assets to enable the Group
to repay bank debt.
Summary Information
There are 59,564,681 (30 June 2011: 59,564,681) Ordinary Shares
in issue and the NAV per Ordinary Share at 31 December 2011 was
US$1.2450 (30 June 2011: US$1.6562). The Company listed on 3 August
2007 with an initial NAV per Ordinary Share after launch costs of
97.75p. No dividends have been declared in respect of the period
ended 31 December 2011 (6 months ended 31 December 2010: zero pence
per Ordinary Share).
As at 31 December 2011, the portfolio which comprised 24
companies (30 June 2011: 30), represented 101.78% of Net Asset
Value (30 June 2011: 107.60%). The maximum position in any company
was 79.95% of the portfolio (30 June 2011: 76.47%).
PSOURCE STRUCTURED DEBT LIMITED
Company Information, continued
Summary Information, continued
Monthly total return performance, NAV and dividends declared
since inception is set out below:
5 June
2007
to
30 June Financial
2008 Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun YTD
---------- ----- ------ ------ ------- ------- ------- ------- ------- ------- ------- ------- ------- ----------
NAV (p) 97.37 98.53 100.17 102.13 103.81 103.13 105.06 107.21 107.54 109.40 110.19 -
Returns
(%) -0.38 1.19 2.49 1.95 1.64 0.55 1.87 2.05 1.49 1.73 0.72 16.37
Dividend
(p) - - 0.8 - - 1.25 - - 1.25 - - 3.30
1 July
2008
to
30 June Financial
2009 Jul Aug Sep Oct Nov Dec Jan* Feb Mar Apr May Jun YTD
---------- ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- ----------
NAV (p) 110.48 113.17 113.20 110.78 105.49 105.88 - - - - - - -
NAV (c)* - - - - - - 162.22 153.71 158.24 160.08 166.10 168.85 -
Returns
(%) 1.41 2.43 0.03 -2.14 -4.78 0.37 4.99 -5.25 2.95 1.16 3.76 1.66 6.20
Dividend
(p) 1.25 - - - - - - - - - - - 1.25
1 July
2009
to
30 June Financial
2010 Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun YTD
---------- ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- ----------
NAV (c) 171.16 170.94 170.09 172.59 179.84 188.30 199.31 199.10 202.62 198.52 193.41 189.22 -
Returns
(%) 1.37 -0.13 -0.50 1.47 4.20 4.70 5.85 -0.11 1.77 -2.02 -2.57 -2.17 12.06
Dividend
(c) - - - - - - - - - - - - -
* On 30 January 2009, a special resolution was passed to convert
the issued Sterling Shares into US Dollar Shares in accordance with
article 3.12 of the Company's articles of association at an
exchange rate of US$1.4593/GBP. With effect from this date the
performance of the Company is measured in US Dollars.
PSOURCE STRUCTURED DEBT LIMITED
Company Information, continued
Summary Information, continued
1 July
2010
to
30 June Financial
2011 Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun YTD
---------- ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- ----------
NAV (c) 187.02 179.00 180.93 182.23 181.83 179.47 177.73 176.04 174.38 171.37 170.88 165.62 -
Returns
(%) -1.16 -4.29 1.08 0.72 -0.22 -1.30 -0.97 -0.95 -0.94 -1.73 -0.29 -3.08 -12.48
Dividend
(c) - - - - - - - - - - - -
1 July 2011
to
30 June Financial
2012 Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun YTD
------------- ------- ------- ------- ------- ------- ------- ------- ---- ---- ---- ---- ---- ----------
NAV (c) 164.24 162.67 161.78 161.15 159.18 124.50 127.33 -
Returns
(%) -0.83 -0.96 -0.55 -0.39 -1.22 -21.79 2.27 -23.13
Dividend
(c) - - - - - - - -
-- Total net return since inception as at 31 December 2011 in
reporting currency -8.89%
-- Total net return since inception as at 31 December 2011 in
reporting currency (annualised) -2.09%
-- Annualised standard deviation (volatility) 13.21%
Total Expense Ratio:
Period end 31 December Period end 31 December
2011 2010
Expense Type: % of Average Net Assets % of Average Net Assets
------------------------ ------------------------
Net operating expenses* 1.97 1.96
Total expense ratio** 1.97 1.96
======================== ========================
*Net operating expenses are the costs of the Group excluding
capital gains and losses, and costs associated with investment
transactions.
**The Total Expense Ratio represents total operating expenses of
the Group, expressed as a percentage of average net assets during
the accounting period.
PSOURCE STRUCTURED DEBT LIMITED
Chairman's Statement
Period end 31 December 2011
I am pleased to present this interim report and unaudited
consolidated financial statements (the "financial statements") for
the six months to 31 December 2011.
Some important milestones have been achieved during this last
half year period. Firstly, as shareholders will be aware, our
holding in Sentinel Technologies was sold at a slight premium to
carrying value, realising US$5.6 million which allowed our bank
borrowings to be completely extinguished leaving approximately
US$1.1 million in positive cash balances which serves both to
provide for ongoing working capital and a very modest contingency
reserve should any of our current investments require additional
funding to defend our existing position. Secondly and consequently,
for the first time since December 2008, we are free of the
constraints of our bank repayment schedule. We have since moved our
banking relationship to Investec Specialist Private Bank.
Parabel Inc. (formerly PetroAlgae Inc.)
Through common and preferred stock in an intermediate holding
company, PetroTech Holdings, Inc., PSource Structured Debt Limited
("PSD" or "Company") has an indirect equity interest of
approximately 7% in Parabel Inc ("Parabel"). Some significant
progress was made here, too, in that an updated S-1 registration
statement (a necessary precursor to an IPO) was filed with the SEC
in December 2011. Goldman Sachs, UBS and Citi remain committed as
the lead underwriters.
There have been a number of positive steps forward in the
commercialisation of Parabel's technologies. Not least of these has
been research by the universities of Idaho and Minnesota into the
non-energy applications of Parabel's micro-crop biomass. As a
consequence of the increased understanding of the opportunities in
the food and animal industries and to avoid the perception that
Parabel's product applications are predominantly or solely in the
fuel sector, the company changed its name from PetroAlgae Inc to
Parabel Inc on 9 February 2012.
Further details on this and on developments in Parabel's
commercialisation programme are set out in Note 17 to these
financial statements and in the analysis of significant investments
on pages 43 to 46.
That said, our principal disappointment has been the lack of a
successful consummation yet of an IPO of Parabel and this of course
will have a material impact on the proposals which we put to
shareholders shortly.
The further delay in concluding an IPO of Parabel, general
equity market developments over the period and the change of
commercial emphasis at Parabel have led the Board to review the
valuation which we apply to Parabel in our financial statements and
net asset value announcements. Ascribing a valuation to a
materially pre-revenue company such as Parabel is not an exact
science resulting in a pin-point price but is a process that
necessarily involves judgements in respect of a range of factors
including the evolution of future events which cannot be
guaranteed. The product of such a process is therefore a range of
valuation outcomes depending on the views which may be taken of the
various input parameters and the likelihood of certain
contingencies.
The result of our review is that we have written down the value
per Parabel share from US$11.56 to US$8.70. This reflects the
uncertainty over the timing and outcome of any exit
transaction.
Further details of the process of assessment applied to Parabel
together with key sensitivities and risks are set out in Note 17 to
these financial statements. Shareholders will be able to give their
own consideration to these factors and may interpolate or
extrapolate their own assessment if they wish.
Non-Parabel Inc. elements of the PSD portfolio
Excluding Parabel, PSD's investments at 31 December 2011
consisted of holdings in 23 companies valued at US$15.1 million.
The largest 8 of these holdings represented 97% by value of this
amount. There are active sale or other realisation processes under
way on all of the material investments. In addition to the disposal
of Sentinel Technologies PSD received average cash inflows from
interest, loan repayments and equity shares of US$304,529 per month
during the 6 month period.
PSOURCE STRUCTURED DEBT LIMITED
Chairman's Statement, continued
Period end 31 December 2011
Overall NAV performance, share price developments and market
background
Given the proportion of PSD's net assets represented by Parabel,
it is unsurprising but no less disappointing that the PSD Net Asset
Value per share fell by 24.8% over the period, largely as a result
of our valuation review. The share price performance has been even
more disappointing, falling by 52% from 31.25p to 15p at the period
end and by a further 2p subsequently. While this reflects in part
the negative NAV performance, it principally reflects a lack of
buying interest in PSD shares at a time of uncertainty surrounding
the timing and pricing of an exit from Parabel.
The environment for your Company remains a difficult one in
which to exit current holdings in the portfolio. In the wider
economy, during the 6 months ended 31 December 2011, the S&P500
fell 4.8%. However, since then markets have rallied somewhat and
recovered these losses. In addition, the US recovery has picked up
to an extent, as might be expected in election year: the
unemployment rate in the United States fell to 8.3% in January of
2012, the lowest since February 2009. The US equity market may
therefore be better poised than might have been expected several
months ago. Given the importance of a possible IPO of Parabel, the
Board looks forward to judging the success of some of the currently
planned IPOs, including high profile transactions which are likely
to be an indicator of US market appetite for primary issuance.
Portfolio liquidity and the future of PSource Structured Debt
Limited
We are grateful to shareholders for the overwhelming support
they showed for our strategy at the AGM on 31 October 2011. It is
ironic to say the least that the investment opportunity which PSD
was set up to exploit - that is the lack of funding sources for
micro-cap growth companies in the US - is now even more acute (and
a richer opportunity set than before the financial crisis of 2008)
and therefore at the same time is now a frustrating factor to the
monetisation of the value within our holdings. The Sentinel
Technologies transaction was a validation of the value that over
time may be realised from these on a non-fire sale basis.
In September 2011, the Board committed to put wind-up or
reconstruction proposals to shareholders by the end of March 2012
as it did not believe that a continuation of PSD in its current
form would be in shareholders' interest. In conjunction with the
Investment Consultant, we are working on proposals to seek to
address shareholders' valid concerns, which the Board shares, and
intend to consult again with major shareholders shortly. We remain
on schedule to finalise and publish proposals to put to
shareholders on or prior to 31 March 2012.
William Scott (Chairman)
Date: 24 February 2012
PSOURCE STRUCTURED DEBT LIMITED
Responsibility Statement
We confirm that to the best of our knowledge and in accordance
with DTR 4.2.10R of the Disclosure and Transparency Rules:
a) The consolidated financial statements (the "financial
statements") have been properly prepared in accordance withthe
Disclosure and Transparency Rules of the Financial Services
Authority and with International Financial Reporting Standards
("IFRS") and give a true and fair view of the assets, liabilities,
financial position and profit or loss of the Group as at and for
the period ended 31 December 2011.
b) The interim report, which includes information detailed in
the Chairman's Statement and Notes to financial statements,
includes a fair review of the information required by DTR 4.2.7R
(indication of important events during the first six months ended
31 December 2011 and description of principal risks and
uncertainties for the remaining six months of the year); and
c) The interim report, which includes information detailed in
the Chairman's Statement and Notes to financial statements,
includes a fair review of the information required by DTR 4.2.8R
(disclosure of related party transactions and changes therein).
Director: William Scott
Director: Peter Niven
Date: 24 February 2012
On behalf of the Board of Directors
PSOURCE STRUCTURED DEBT LIMITED
Consolidated Statement of Financial Position (unaudited)
As at 31 December 2011
Notes 31 December 30 June 2011
2011
(audited)
-------------------------------- ----- ------------ ------------
US$ US$
Investments 7
Fair value through profit and
loss 62,098,629 83,809,708
Held for trading 251,485 1,210,737
Loans and receivables 13,123,167 21,126,349
------------ ------------
Total investments 75,473,281 106,146,794
------------ ------------
Current assets
Cash and cash equivalents 8 1,068,337 280,038
Unsettled investment sales - 392,930
Other receivables 9 3,414,833 2,423,435
------------ ------------
4,483,170 3,096,403
------------ ------------
Current liabilities
Bank overdraft 8&11 - 790,281
Other payables 10 5,800,015 5,935,327
Loan 11 - 3,867,480
------------ ------------
5,800,015 10,593,088
------------ ------------
Net current liabilities (1,316,845) (7,496,685)
------------ ------------
Total net assets 74,156,436 98,650,109
============
Represented by Shareholders'
equity:
Share Premium 12 47,512,742 47,512,742
Distributable reserve 12 42,793,973 42,793,973
Reserves (16,150,279) 8,343,394
Total Shareholders' equity 74,156,436 98,650,109
============ ============
Net asset value per Ordinary 13 US$1.2450 US$1.6562
Share
============ ============
The accompanying notes form an integral part of these financial
statements.
PSOURCE STRUCTURED DEBT LIMITED
Consolidated Statement of Comprehensive Income (unaudited)
For the period ended 31 December 2011
Notes 1 July 2011 1 July 2010
to to
31 December 31 December
2011 2010
------------------------------------------------ ----- ------------- ------------
US$ US$
Income
Loan interest income 1,223,005 827,536
Bank interest 89 152
Fee income 5,400 -
Other income 12,868 -
Bad debt provision (14,595) (258,449)
Movement in net unrealised (losses)/gains
on investments 7&14 (20,787,478) 1,632,003
Movement in net unrealised (losses)/gains
on restructuring of loans 7&14 (751,005) (1,549,159)
Net realised losses on disposal/restructuring
of investments 7&14 (2,238,812) (2,134,510)
Impairment charge on loans and
receivables 7&14 (126,650) (2,193,953)
Net foreign exchange gains/(losses) 4,605 (6,787)
------------- ------------
Net investment deficit (22,672,573) (3,683,167)
------------- ------------
Expenses
Management fee 4 935,738 1,093,474
Directors' fees and expenses 5 89,892 93,114
Administration fees 4 117,914 117,076
Custodian fees 4 14,000 21,790
Registrar fees 4 9,526 10,691
Auditor's remuneration 56,079 55,169
Loan arrangement fees 210,106 113,595
Legal and professional fees 153,561 357,833
Independent valuation consultancy
fee 60,493 59,861
US Taxation 22,369 (16,457)
Other expenses 27,525 38,936
------------- ------------
Operating expenses before finance
costs 1,697,203 1,945,082
------------- ------------
Net deficit from operations before
finance costs (24,369,776) (5,628,249)
------------- ------------
Finance costs
Bank interest 11 20,201 26,218
Loan interest 11 103,696 152,534
Deficit after finance costs for
the period (24,493,673) (5,807,001)
Total comprehensive deficit for
the period (24,493,673) (5,807,001)
============= ============
Basic & diluted deficit per Ordinary 6 US$(0.4112) US$(0.0975)
Share
============= ============
The results for the current and prior periods are derived from
continuing operations.
The accompanying notes form an integral part of these financial
statements.
PSOURCE STRUCTURED DEBT LIMITED
Consolidated Statement of Changes in Equity (unaudited)
For the period ended 31 December 2011
1 July 2011 to 31 December 2011
Share Distributable
Premium Reserve Reserves Total
------------------------ ---------- ------------- ------------- -------------
US$ US$ US$ US$
Balance brought forward 47,512,742 42,793,973 8,343,394 98,650,109
Total comprehensive
deficit for the period - - (24,493,673) (24,493,673)
Balance carried forward 47,512,742 42,793,973 (16,150,279) 74,156,436
========== ============= ============= =============
1 July 2010 to 31 December 2010
Share Distributable
Premium Reserve Reserves Total
------------------------ ---------- ------------- ------------- -------------
US$ US$ US$ US$
Balance brought forward 47,512,742 42,793,973 22,401,409 112,708,124
Total comprehensive
income for the period - - (5,807,001) (5,807,001)
Balance carried forward 47,512,742 42,793,973 16,594,408 106,901,123
========== ============= ============= =============
The accompanying notes form an integral part of these financial
statements.
PSOURCE STRUCTURED DEBT LIMITED
Consolidated Statement of Cash Flows (unaudited)
For the period ended 31 December 2011
Notes 1 July 2011 1 July 2010
to to
31 December 31 December
2011 2010
------------------------------------------- ----- ------------ ------------
US$ US$
Cash flows from operating activities
Loan interest received 239,744 667,478
Fee income received 5,400 -
Other income received 12,868 -
Operating expenses paid (1,832,806) (2,398,836)
Amounts paid for purchase of investments - (4,089,610)
Sale proceeds received from disposal
of investments 705,274 4,900,634
Amounts received on loan repayments 6,457,225 4,982,458
------------ ------------
Net cash from in operating activities 5,565,263 4,062,124
------------ ------------
Cash flows used in financing activities
Bank interest received 89 152
Bank interest paid (20,201) (26,218)
Loan interest paid (103,696) (144,690)
Loan repayments (3,867,480) (984,003)
Net cash used in financing activities (3,991,288) (1,154,759)
------------ ------------
Net increase in cash and cash
equivalents 1,573,975 2,907,365
Cash and cash equivalents, start
of period (510,243) (942,204)
Effect of exchange rate changes
during the period 4,605 (6,787)
------------ ------------
Cash and cash equivalents, end
of period 8 1,068,337 1,958,374
============ ============
Cash and cash equivalents comprise
the following amounts:
Bank deposits 1,068,337 1,958,375
Bank overdrafts - (1)
--------- ---------
1,068,337 1,958,374
========= =========
The accompanying notes form an integral part of these financial
statements.
PSOURCE STRUCTURED DEBT LIMITED
Notes to the Financial Statements
For the period ended 31 December 2011
1. The Company:
The Company is a closed-ended investment company, incorporated
and registered with limited liability in Guernsey on 5 June 2007 in
accordance with The Control of Borrowing (Bailiwick of Guernsey)
Ordinance, 1959 to 2003 as amended. The Company commenced business
on 3 August 2007 when the initial 30,000,000 Ordinary Shares of the
Company were admitted to the Official List of the London Stock
Exchange. The Company is a Guernsey Authorised Closed-ended
Investment Scheme and is subject to the Authorised Closed-ended
Investment Scheme Rules 2008.
PSD SPV 2, Inc ("SPV2") was incorporated in the State of
Delaware on 2 April 2009. The Subsidiary commenced trading on 1 May
2009. SPV2 was established to hold certain US assets. For reasons
of tax efficiency, newly originated direct investments and
co-investments after that time were made through this
Subsidiary.
The Group comprises PSource Structured Debt Limited and
SPV2.
2. Principal Accounting Policies:
(a) Basis of Preparation:
(i) General
The financial statements give a true and fair view, they have
been prepared in accordance with International Financial Reporting
Standards ("IFRS") and are in compliance with the Companies
(Guernsey) Law, 2008 and the Listing Rules of the UK Listing
Authority.
The financial statements of the Group have been prepared under
the historical cost convention modified by the revaluation of
investments and assets and liabilities at fair value through profit
or loss, in accordance with IFRS.
(ii) Functional and Presentation Currency
The Group's investors are mainly from the UK, however, the vast
majority of underlying investment portfolio is denominated in US
Dollars. For this reason Directors consider the presentation and
functional currency of the Group to be US Dollars. As at 31
December 2011, the performance of the Group is measured and
reported to investors in US Dollar. The financial information is
presented in US Dollars, which is the Group's functional and
presentation currency.
Foreign currency transactions are translated into the functional
currency using the exchange rates prevailing at the dates of the
transactions. Foreign exchange gains and losses resulting from the
settlement of such transactions and from the translation at
period-end exchange rates of monetary assets and liabilities
denominated in foreign currencies are recognised in the
Consolidated Statement of Comprehensive Income. Translation
differences on the revaluation of non-functional currency financial
instruments are included in net unrealised gains and losses on
investments and are recognised in the Consolidated Statement of
Comprehensive Income.
(iii) Judgements and estimates
The preparation of financial statements in conformity with IFRS
requires management to make judgements, estimates and assumptions
that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and
expenses during the reporting period. The estimates and associated
assumptions are based on historical experience and other factors
that are considered to be relevant. Actual results could differ
from such estimates.
PSOURCE STRUCTURED DEBT LIMITED
Notes to the Financial Statements, continued
For the period ended 31 December 2011
2. Principal Accounting Policies, continued:
(a) Basis of Preparation, continued:
(iii) Judgements and estimates, continued
The estimates and underlying assumptions are reviewed on an
on-going basis. Revisions to accounting estimates are recognised in
the period in which the estimate was revised if the revision
affects only that period or in the period of the revision and
future periods if the revision affects both current and future
periods.
The most critical judgements, apart from those involving
estimates, that management has made in the process of applying the
accounting policies and that have the most significant effect on
the amounts recognised in the consolidated financial statements are
the functional currency of the Group (see note 2(a)(ii)) and the
fair value of investments designated to be at fair value through
profit or loss (see note 2(d)(iii)). The valuation
methods/techniques used in valuing financial instruments involve
critical judgements to be made and therefore the actual value of
financial instruments could differ significantly from the value
disclosed in these financial statements.
(iv) Going concern
The Board believes that it is in the interests of shareholders
to begin the process of winding up the Company. As a result, the
Board intends to publish proposals to shareholders on the future of
the Company on or prior to 31 March 2012. These proposals could
affect the life span of the Company. Whilst the exact timing of a
possible orderly liquidation of the Company's outstanding
investment portfolio is uncertain, it the Boards opinion it is
unlikely to be concluded within the next 12 months and therefore
the Board has prepared these financial statements on a going
concern basis.
(v) IFRS
New standards and interpretations adopted
The Group has adopted the following new and amended standards
and interpretations, which are applicable to the Group's
operations, for the accounting period commencing 1 July 2011:
-- Improvements to IFRSs 2010 - various standards (effective 1
January 2011)
-- Amendments to IFRS 7 Financial Instruments: Disclosures -
amendments enhancing disclosures about transfer of financial assets
(effective 1 July 2011)
-- IAS 24 - Related Party Disclosures (Revised 2009) (effective
1 January 2011)
-- IFRIC 19 Extinguishing Financial Liabilities with Equity -
addresses the accounting by an entity when the terms of a financial
liability are renegotiated and result in the entity issuing equity
instruments to a creditor to extinguish all or part of the
financial liability (effective 1 July 2010)
Significant new standards and interpretations not yet
adopted
A number of new standards, amendments to standards and
interpretations are not yet effective for the current year, and
have not been applied in preparing these financial statements. None
of these will have a significant effect on the financial statements
of the Group, with the exception of the following:
-- IFRS 9 Financial Instruments, published on 12 November 2009
(effective 1 January 2015) as part of phase I of the IASB's
comprehensive project to replace IAS 39, deals with classification
and measurement of financial assets. The requirements of this
standard represent a significant change from the existing
requirements in IAS 39 in respect of financial assets. The standard
contains two primary measurement categories for financial assets:
amortised cost and fair value. A financial asset would be measured
at amortised cost if it is held within a business model whose
objective is to hold assets in order to collect contractual cash
flows, and the asset's contractual terms give rise on specified
dates to cash flows that are solely payments of principal and
interest on the principal outstanding. All other financial assets
would be measured at fair value.
PSOURCE STRUCTURED DEBT LIMITED
Notes to the Financial Statements, continued
For the period ended 31 December 2011
2. Principal Accounting Policies, continued:
(a) Basis of Preparation, continued:
(v) IFRS, continued
Significant new standards and interpretations not yet adopted,
continued
-- IFRS 9 Financial Instruments, continued, the standard
eliminates the existing IAS 39 categories of held to maturity,
available for sale and loans and receivables. For an investment in
an equity instrument which is not held for trading, the standard
permits an irrevocable election, on initial recognition, on an
individual share-by-share basis, to present all fair value changes
from the investment in other comprehensive income. No amount
recognised in other comprehensive income would ever be reclassified
to profit or loss at a later date. However, dividends on such
investments are recognised in profit or loss, rather than other
comprehensive income unless they clearly represent a partial
recovery of the cost of the investment. Investments in equity
instruments in respect of which an entity does not elect to present
fair value changes in other comprehensive income would be measured
at fair value with changes in fair value recognised in profit or
loss.
The standard requires that derivatives embedded in contracts
with a host that is a financial asset within the scope of the
standard are not separated; instead the hybrid financial instrument
is assessed in its entirety as to whether it should be measured at
amortised cost or fair value.
The Directors' are currently in the process of evaluating the
potential effect of this standard. The standard is not expected to
have a significant impact on the financial statements since the
majority of the Group's financial assets are designated at fair
value through profit or loss. The amendments will become will
become mandatory for the Group's 30 June 2016 annual consolidated
financial statements.
-- IFRS 10 Consolidated Financial Statements, IFRS 10 supersedes
IAS 27 Consolidated and Separate Financial Statements and SIC-12
Consolidation - Special Purpose Entities. It introduces a new,
principle-based definition of control which will apply to all
investees to determine the scope of consolidation.
-- IFRS 13 Fair Value Measurement, currently, guidance on
measuring fair value is distributed across many IFRS. Some
standards contain limited guidance and others quite extensive
guidance that is not always consistent. IFRS 13 has been developed
to remedy this problem, by:
1) establishing a single source of guidance for all fair value measurements;
2) clarifying the definition of fair value and related guidance; and
3) enhancing disclosures about fair value measurements
The fair value measurement framework is based on a core
principle that defines fair value as an exit price, whilst
retaining the exchange price notion contained in the existing
definition of fair value in IFRS.
The standard also clarifies that fair value is based on a
transaction taking place in the principal market for the asset or
liability or, in the absence of a principal market, the most
advantageous market. The principal market is the market with the
greatest volume and level of activity for the asset or
liability.
For liabilities, the standard provides extensive guidance to
deal with the problematic issue of measuring the fair value of a
liability in the absence of a quoted price in an active market to
transfer an identical liability.
Proposed disclosures in the new standard will increase
transparency about fair value measurements, including the valuation
techniques and inputs used to measure fair value.
The Directors believe that other pronouncements, which are in
issue but not yet operative or adopted by the Company, will not
have a material impact on the financial statements of the
Group.
PSOURCE STRUCTURED DEBT LIMITED
Notes to the Financial Statements, continued
For the period ended 31 December 2011
2. Principal Accounting Policies, continued:
(b) Basis of Consolidation:
The financial statements of the Group incorporate the financial
statements of the Company and its wholly owned subsidiary made up
to 31 December 2011. There are no minority interests in the income
or assets of the subsidiaries. Control is achieved where the
Company has the power to govern the financial and operating
policies of the subsidiaries so as to benefit the Company. The
accounting policies of the Subsidiary are consistent with those
adopted by the Group. All intra-group transactions, balances,
income and expenses are eliminated on consolidation.
(c) Income
Bank interest, loan interest income and other income are
included in these financial statements on an accruals basis, using
the effective interest method.
Where interest income falls past due it is assessed for
impairment and where impairment is identified a 0-100% provision is
made, on a case by case basis after the recoverability of each
interest receipt has been assessed.
Subordination fee income is included in these consolidated
financial statements on an accruals basis and is recognised in the
Consolidated Statement of Comprehensive Income.
(d) Investments:
The Group's investments comprise loans, fees receivables,
royalties, equities, warrants (for listed equities) and options
(for listed equities).
(i) Classification
Equity investments have been designated as fair value through
profit or loss in accordance with IAS 39 (Revised) "Financial
Instruments: Recognition and Measurement".
Warrants and penny warrants investments meet the definition of
"Derivatives" under IAS 39 and have been designated as held for
trading in accordance with IAS 39 (Revised) "Financial Instruments:
Recognition and Measurement". They are accounted for as fair value
through profit or loss.
Investments in loans, royalties and fees receivable have been
classified as loans and receivables in accordance with IAS 39
(Revised) "Financial Instruments: Recognition and Measurement".
(ii) Measurement
Equities, warrants and penny warrants are initially recognised
at fair value. Transaction costs are expensed in the Consolidated
Statement of Comprehensive Income. Subsequent to initial
recognition, equity, warrants and penny warrants are measured at
fair value. Realised gains and losses on disposal of investments,
where the disposal proceeds are higher/lower than the book cost of
the investment are presented in the Consolidated Statement of
Comprehensive Income in the period in which they arise. Unrealised
gains and losses arising on the fair value of investments are
presented in the Consolidated Statement of Comprehensive Income in
the period in which they arise. Dividend income, if any, from
equity investments is recognised in the Consolidated Statement of
Comprehensive Income within dividend income when the Group's right
to receive payments is established.
Loans and royalties are initially recognised at fair value,
which at the point of acquisition is equal to cost, less any
directly attributable transaction cost. Subsequent to initial
recognition, loans are measured at amortised cost using the
effective interest rate method. Royalties are measured at the
discounted value of future cash flows. Fee receivables are measured
at fair value.
Loans are carried at amortised cost and reviewed for impairment
in accordance with IAS 39 (see note 2(e)).
(iii) Fair Value Estimation
Quoted equity investments at fair value through profit or loss
are valued at the bid price on the relevant stock exchange.
Unquoted investments at fair value through profit and loss are
valued in accordance with the International Private Equity and
Venture Capital valuation guidelines or any other valuation model
and techniques which can provide a reasonable estimate of fair
value of the investment involved.
PSOURCE STRUCTURED DEBT LIMITED
Notes to the Financial Statements, continued
For the period ended 31 December 2011
2. Principal Accounting Policies, continued:
(d) Investments, continued:
(iv) Recognition/derecognition
All regular way purchases and sales of investments are
recognised on trade date - the date on which the Company commits to
purchase or sell the investment. Investments are derecognised when
the rights to receive cash flows from the investments have expired
or the Company has transferred substantially all risks and rewards
of ownership.
(e) Impairment of financial assets:
Financial assets are assessed at each reporting date to
determine whether there is any objective evidence that it is
impaired. A financial asset is considered to be impaired if
objective evidence indicates that one or more events have had a
negative effect on the estimated future cash flows of that
asset.
An impairment loss in respect of a financial asset measured at
amortised cost is calculated as the difference between its carrying
amount and the present value of the estimated future cash flows
discounted at the original effective interest rate.
Individually significant financial assets are tested for
impairment on an individual basis. The remaining financial assets
are assessed collectively in groups that share similar credit risk
characteristics.
All impairment losses are recognised in the Consolidated
Statement of Comprehensive Income.
An impairment loss is reversed if the reversal can be related
objectively to an event occurring after the impairment loss was
recognised. The reversal is recognised in the Consolidated
Statement of Comprehensive Income.
(f) Expenses:
Expenses are accounted for on an accruals basis.
(g) Cash and Cash Equivalents:
Cash and cash equivalents are defined as cash in hand, demand
deposits and highly liquid investments readily convertible to known
amounts of cash and subject to insignificant risk of changes in
value. For the purposes of the Consolidated Statement of Cash Flows
cash and cash equivalents consist of cash in hand, deposits in bank
and overdrafts.
(h) Other Receivables and Other Payables:
Other receivables are stated at amortised cost less any
provision for doubtful debts. Other payables are stated at
amortised cost.
(i) Segment Reporting:
The Board has considered the requirements of IFRS8. The Board,
as a whole, has been determined as constituting the chief operating
decision maker ("CODM") of the Group.
The Board is charged with setting the Group's investment
strategy in accordance with the Prospectus. They have delegated the
day to day Investment Management of the Group to the Investment
Manager, under the terms set out in the Investment Management
Agreement, but the Board retains the responsibility to ensure that
adequate resources of the Group are directed in accordance with
their decisions. All investment recommendations made by the
Investment Manager are reviewed by the Board for compliance with
the policies and legal responsibilities of the Directors and the
provisions of the Prospectus. Only after such reviews have been
satisfactorily conducted will the Board approve the investments
recommendations. The Board therefore retains full responsibility
for the allocation decisions made on an ongoing basis. Pursuant to
the terms of the Investment Management Agreement the Investment
Manager is obliged to comply with the investment strategy detailed
in the Prospectus. This strategy sets out guidelines for proposed
investments and the procedures that the Investment Manager is
required to follow in dealing with the Group's assets. These
guidelines and procedures are regularly reviewed and can be altered
by the Board if it considers it appropriate to do so.
PSOURCE STRUCTURED DEBT LIMITED
Notes to the Financial Statements, continued
For the period ended 31 December 2011
2. Principal Accounting Policies, continued:
(i) Segment Reporting, continued:
The key measure of performance used by the Board in its capacity
of CODM, is to assess the Group's performance and to allocate
resources based on the total return of each individual investment
within the Group's portfolio, as opposed to geographic regions. As
a result, the Board is of the view that the Group is engaged in a
single segment of business, being investment in a diversified
portfolio of asset backed loans and debt made predominantly to, and
equity warrants and similar instruments issued predominately by,
publicly traded small and micro-cap companies in the US and Canada.
Therefore, no reconciliation is required between the measure of
gains or losses used by the Board and that contained in these
consolidated financial statements.
Information on realised gains and losses derived from sales of
investments are disclosed in Note 7 to the financial
statements.
The Group has no assets classified as non-current assets. An
analysis of the significant investments held by the Group is given
on page 43, in addition to the industry and geographic location
analysis of the investments which are given on page 47 and 48
respectively.
The Company has a diversified shareholder population and no
individual investor is known to own more than 18.47% (per the share
register as at 31 January 2012) of the issued capital of the
Company.
3. Taxation:
The Income Tax Authority of Guernsey has granted the Company
exemption from Guernsey income tax under the Income Tax (Exempt
Bodies) (Guernsey) Ordinance, 1989 and the income of the Company
may be distributed or accumulated without deduction of Guernsey
income tax. Exemption under the above mentioned Ordinance entails
payment by the Company of an annual fee of GBP600. It should be
noted, however, that interest and dividend income accruing from the
Company's investments may be subject to withholding tax in the
country of origin. With effect from 1 January 2008 the standard
rate of income tax for most companies in Guernsey is zero per cent.
Tax Exempt status continues to exist and the Company was granted
this status for 2011. The Company has not suffered any withholding
tax in the period.
PSD SPV 2, Inc is a Delaware corporation and subject to US
taxation. As such, PSD SPV 2, Inc will suffer taxes on realised
capital gains and income generated by assets which it holds, to the
extent that pre-tax earnings are not offset by expenses and
realised losses. Moreover, as generated by a business wholly-owned
by the Company, distributions of pre-tax earnings of PSD SPV 2, Inc
to the Company (e.g. any interest payments on intercompany loans)
will likely be subject to a withholding tax.
To the extent permissible, the Company will seek to minimise the
income tax and withholding tax suffered, although for accounting
purposes, no benefits have been assumed. A 35% income tax liability
is accrued against any income and capital gains accrued by PSD SPV
2, Inc, and a 30% withholding tax liability is accrued against any
interest accruals related to intercompany loans between PSD SPV 2,
Inc and the Company. An accrued liability of US$496 (30 June 2011:
US$16,308 asset) associated with income tax and withholding tax
related to PSD SPV 2, Inc has been made as at 31 December 2011.
4. Material Agreements & Related Parties:
The Company is responsible for the continuing fees of the
Manager, the Investment Manager, the Administrator, the Registrar,
the Custodian and the Independent Valuation Consultant in
accordance with the Management, Investment Management,
Administration, Registrar, Custodian and Independent Valuation
Consultant's Agreements.
Management Agreement
Pursuant to the provisions of the Management Agreement, the
Manager is entitled to receive a management fee during the period
at 2.0% per annum of the net asset value of the Company. This fee
is paid monthly in arrears. As at 31 December 2011, the management
fee creditor was US$126,196 (30 June 2011: US$162,453).
PSOURCE STRUCTURED DEBT LIMITED
Notes to the Financial Statements, continued
For the period ended 31 December 2011
4. Material Agreements & Related Parties, continued:
Management Agreement, continued
In addition the Manager is entitled to a Performance Fee in
respect of any Performance Fee Period in which the Performance
Trigger has been achieved. If the Performance Trigger is achieved,
the Performance Fee shall equal 20 per cent of the amount by which
the Total Return NAV per Ordinary Share exceeds the NAV per
Ordinary Share at the end of the previous Performance Fee Period,
multiplied by the time-weighted average number of Ordinary Shares
in issue during the relevant Performance Fee Period. If there has
not been any previous Performance Fee Period the Performance Fee
shall equal 20 per cent of the amount if any by which the Total
Return NAV per Ordinary Share exceeds the NAV per Ordinary Share
(calculated net of all initial expenses payable by the Company) on
the Effective Date (date of Admission of the Company), multiplied
by the time-weighted average number of Ordinary Shares in issue
during the relevant Performance Fee Period. As at 31 December 2011,
the Performance Fee creditor was US$5,581,184 (30 June 2011:
US$5,581,184). In January 2010, the Manager agreed to defer payment
of the Performance Fee owed by the Group until such time as the
Group has resumed dividend payments.
Administration Agreement
Pursuant to the provisions of the Administration Agreement,
Praxis Fund Services Limited is entitled to receive an
administration fee at an annualised rate of 0.16% up to GBP150
million, 0.12% for the following GBP100 million and 0.10%
thereafter, subject to a monthly minimum of GBP4,500. With regard
to company secretarial services, the Administrator is compensated
on a time cost basis. As at 31 December 2011, the administration
fee creditor was US$13,871 (30 June 2011: US$23,421).
Registrar Agreement
Pursuant to the provisions of the Registrar Agreement, Capita
Registrars (Guernsey) Limited is entitled to a maintenance fee of
GBP2.00 per shareholder (subject to an annual minimum maintenance
fee of GBP5,000) together with various per deal fees per
shareholder transactions. As at 31 December 2011, the registrar fee
creditor was US$3,599 (30 June 2011: US$4,302).
Custodian Agreement
Pursuant to the provisions of the Custodial Agreement that was
in place during the period, Wells Fargo Bank will be entitled to
receive a custodian fee as follows:
Wells Fargo Bank
-- US$30,000 acceptance fee; plus
-- US$30,000 annual administration fee; plus
-- US$30 per asset annual custody fee; plus
-- various activity fees.
Effective from 26 November 2010, the Company migrated its
custody and clearing services for its short term trading assets
from Fidelity Prime Services to Albert Fried & Company, LLC.
Albert Fried & Company, LLC is entitled to receive various
activity based fees for its services to the Company. During the
period Albert Fried & Company, LLC were entitled to receive
US$7,991 (period ended 31 December 2010: US$500) in respect of such
services.
Effective 1 December 2010, the Company migrated its trading
services from Fidelity to GP Nurmenkari Inc.. GP Nurmenkari Inc. is
entitled to receive various activity based fees for its services to
the Company. During the period GP Nurmenkari Inc. were entitled to
receive US$5,202 (period ended 31 December 2010: US$nil) in respect
of such services.
In addition to the above agreements, during the prior period the
Group paid US$6,064 to Fidelity Prime Services for custodial
services provided in respect of the Group's short term trading
assets.
Independent Valuation Consultant
Pursuant to the provisions of the Independent Valuation
Consultant's Agreement between the Company and Clayton IPS
Corporation ("Clayton"). Clayton has agreed to provide a monthly
and quarterly valuation of the assets of the Company. For these
services Clayton is entitled to a fee of US$10,000 for each monthly
valuation. As at 31 December 2011, the independent valuation
consultancy fee creditor was US$10,000 (30 June 2011:
US$9,507).
PSOURCE STRUCTURED DEBT LIMITED
Notes to the Financial Statements, continued
For the period ended 31 December 2011
4. Material Agreements & Related Parties, continued:
Master Agreement
The Master Agreement dated 31 July 2007 (and as subsequently
amended on 1 September 2007 and 29 October 2007) between the
Company and Laurus Master Fund Ltd which governs the terms on which
Laurus Master Fund Ltd may, from time to time, offer investments
for sale to the Company and the Company may, if it wishes, accept
such offers of investments (including the Initial Portfolio). The
Company shall not be obliged to accept such an offer, but is
entitled to accept the offer in respect of one or more of the
investments offered. Investments will be offered on the basis of an
agreed valuation methodology set out in the Agreement.
The Laurus Master Fund Ltd makes a number of representations and
warranties in the Master Agreement in respect of the investments
that it offers to the Company.
Under the Master Agreement ongoing investments made by the
Company may include purchases from Laurus Master Fund Ltd and other
affiliates of the Investment Adviser, subject to approval by the
Board of Directors or a duly authorised committee of the Board.
The Company entered into a similar Master Agreement with Valens
Offshore SPV I Ltd (4 September 2007 and amended on 29 October
2007) and Valens US SPV 1, LLC (19 October 2007 and amended on 29
October 2007). Valens Offshore SPV I Ltd and Valens US SPV 1, LLC
are managed by an affiliate of the Investment Manager, Valens
Capital Management, LLC.
There were no purchase or sales transactions with related
parties for the period ended 31 December 2011 (year ended 30 June
2011: none).
Directors' and Other Related Parties' Interests
As at 31 December 2011, the interests of the Directors and their
families who held office during the period are set out below:
31 December 2011 30 June 2011
Ordinary Shares Ordinary Shares
----------------- ----------------
William Scott (Chairman) 50,000 50,000
Peter Niven 30,000 30,000
Soondra Appavoo 20,000 20,000
Tim Jenkinson 50,000 50,000
Keith Dorrian - -
There were no changes in the interests of the Directors prior to
the date of this report.
No Director, other than those listed above, and no connected
person of any Director has any interest, the existence of which is
known to, or could with reasonable diligence be ascertained by that
Director, whether or not held through another party, in the share
capital of the Company.
As at 31 December 2011, the Investment Manager held 500,000 (30
June 2011: 500,000) Ordinary Shares in the Company.
PSOURCE STRUCTURED DEBT LIMITED
Notes to the Financial Statements, continued
For the period ended 31 December 2011
5. Directors' Fees:
Each of the Directors has entered into an agreement with the
Company providing for them to act as a non-executive director of
the Company. Their annual fees, excluding all reasonable expenses
incurred in the course of their duties which were reimbursed by the
Company were as follows:
31 December 30 June 2011
2011
Annual Fee Annual Fee
------------ -------------
GBP GBP
William Scott (Chairman) 30,000 30,000
Soondra Appavoo - -
Peter Niven (Audit Committee chairman) 27,000 27,000
Tim Jenkinson 25,000 25,000
Keith Dorrian 25,000 25,000
Mr Appavoo has waived his Director's fees for the period. As at
31 December 2011, the Directors' fees creditor was US$227 (30 June
2011: US$42,139).
6. Basic & diluted deficit per Ordinary Share:
Basic deficit per Ordinary Share is based on the net deficit for
the period of US$24,493,673 (period ended 31 December 2010:
US$5,807,001) and on a weighted average of 59,564,681 (period ended
31 December 2010: 59,564,681) Ordinary Shares in issue.
Diluted deficit per Ordinary Share is the same as basic deficit
per Ordinary Share since there are no dilutive potential Ordinary
Shares arising from financial instruments.
7. Investments:
Fair Value Through Profit or 1 July 2011 1 July 2010 1 July 2010
Loss Investments: to to to
31 December 30 June 31 December
2011 2011 2010
------------- ------------ -------------
US$ US$ US$
Investments listed on recognised
investment exchanges 1,685,106 2,285,132 4,402,416
Unlisted investments 60,413,523 81,524,576 85,121,610
------------- ------------
62,098,629 83,809,708 89,524,026
============= ============ =============
Opening fair value 83,809,708 92,635,523 92,635,523
Converted from loans - 171,835 -
Converted to loans - (2,767,279)
Converted from warrants 5,443,554 - 294,427
Exercises of warrants - 488,038 -
Purchases - 530,357 294,351
Sales - proceeds (312,343) (6,555,967) (4,552,002)
Sales - realised gains on disposals 23,523 1,773,638 1,032,184
Movement in net unrealised loss (26,865,813) (2,466,437) (180,457)
Closing fair value 62,098,629 83,809,708 89,524,026
============= ============ =============
Closing book cost 22,093,822 16,939,089 20,367,427
Closing net unrealised gain 40,004,807 66,870,619 69,156,599
------------- ------------ -------------
Closing fair value 62,098,629 83,809,708 89,524,026
============= ============ =============
PSOURCE STRUCTURED DEBT LIMITED
Notes to the Financial Statements, continued
For the period ended 31 December 2011
7. Investments, continued:
Held for Trading Investments: 1 July 2011 1 July 2010 1 July 2010
to to to
31 December 30 June 31 December
2011 2011 2010
------------- ------------- -------------
US$ US$ US$
Unlisted investments 251,485 1,210,737 2,755,118
============= ============= =============
Opening fair value 1,210,737 2,834,377 2,834,377
Converted to equity (5,443,554) - (294,427)
Sales - proceeds - (351,781) (348,030)
Sales - realised losses on disposals/conversion (1,594,033) (2,775,572) (1,249,262)
Exercise of warrants - (488,038) -
Movement in net unrealised gain 6,078,335 1,991,751 1,812,460
Closing fair value 251,485 1,210,737 2,755,118
============= ============= =============
Closing book cost 20,294,468 27,332,055 29,055,727
Closing net unrealised loss (20,042,983) (26,121,318) (26,300,609)
------------- -------------
Closing fair value 251,485 1,210,737 2,755,118
============= ============= =============
Warrants and penny warrants are valued based on the listed price
of the equity for which the warrants and penny warrants relates and
then adjusted using the Black Scholes method. The Directors
consider it prudent to apply certain discounts (7% against the
value of penny warrants and 30% against the value of standard
warrants) when valuing warrants and penny warrants for the purposes
of calculating the Company's issued monthly NAV and for these
consolidated financial statements due to their illiquid nature and
the fact that there is no active market to trade these warrants and
penny warrants.
Loans and Receivables: 1 July 2011 1 July 2010 1 July 2010
to to to
31 December 30 June 31 December
2011 2011 2010
------------- ------------- -------------
US$ US$ US$
Loans 13,123,167 21,126,349 23,183,468
============= ============= =============
Opening carrying value 21,126,349 30,031,017 30,031,017
Loans converted to equity - (171,835) -
Loans converted from equity - 2,767,279 -
Purchases - 19,436 3,795,453
Repayments/restructuring of loans
-
proceeds (6,457,225) (1,390,476) (4,982,458)
Repayments/restructuring of loans/fee
receivables - realised losses
on repayments/restructuring (668,302) (1,917,592) (1,917,432)
Movement in unrealised gains
on restructuring of loans (751,005) (1,783,159) (1,549,159)
Movement in impairment charge (126,650) (6,428,322) (2,193,953)
Closing carrying value 13,123,167 21,126,349 23,183,468
============= ============= =============
Closing book cost 15,972,883 32,765,416 30,354,166
Closing unrealised gains on restructuring
of loans 967,195 1,718,200 1,952,200
Impairment charge (3,816,911) (13,357,267) (9,122,898)
Closing carrying value 13,123,167 21,126,349 23,183,468
============= ============= =============
PSOURCE STRUCTURED DEBT LIMITED
Notes to the Financial Statements, continued
For the period ended 31 December 2011
7. Investments, continued:
Total Investments: 1 July 2011 1 July 2010 1 July 2010
to to to
31 December 30 June 31 December
2011 2011 2010
------------- ------------- -------------
US$ US$ US$
Investments listed on recognised
investment exchanges 1,685,106 2,285,132 4,402,416
Unlisted investments 60,665,008 82,735,313 87,876,728
Loans 13,123,167 21,126,349 23,183,468
75,473,281 106,146,794 115,462,612
============= ============= =============
Opening fair/carrying value 106,146,794 125,500,917 125,500,917
Purchases - 549,794 4,089,804
Sales - proceeds (312,343) (6,907,748) (4,900,032)
Sales - realised losses on disposals/conversions (1,570,510) (1,001,934) (217,078)
Repayments/restructuring of loans
-
proceeds (6,457,225) (1,390,476) (4,982,458)
Repayments/restructuring of loans/fee
receivables - realised losses
on repayments/restructuring (668,302) (1,917,592) (1,917,432)
Movement in unrealised losses
on restructuring of loans (751,005) (1,783,159) (1,549,159)
Movement in impairment charge (126,650) (6,428,322) (2,193,953)
Movement in net unrealised gains (20,787,478) (474,686) 1,632,003
Closing fair/carrying value 75,473,281 106,146,794 115,462,612
============= ============= =============
Closing book cost 58,361,173 77,036,560 79,777,320
Closing unrealised gains on restructuring
of loans 967,195 1,718,200 1,952,200
Impairment charge (3,816,910) (13,357,267) (9,122,898)
Closing net unrealised gain 19,961,823 40,749,301 42,855,990
-------------
Closing fair/carrying value 75,473,281 106,146,794 115,462,612
============= ============= =============
As at 31 December 2011 the Directors identified impairment
charges on loans and receivables, in accordance with IAS 39, due to
an underlying investment filing for chapter 11 bankruptcy. This
resulted in the investments being written down by a further
US$126,650 during the period (period ended 31 December 2010:
US$2,193,953 & year ended 30 June 2010: US$6,428,322). This
impairment charge is reflected in the Consolidated Statement of
Comprehensive Income. PSOURCE STRUCTURED DEBT LIMITED
Notes to the Financial Statements, continued
For the period ended 31 December 2011
8. Cash and Cash Equivalents:
31 December 30 June 2011
2011
------------ -------------
US$ US$
Bank deposits 1,068,337 280,038
Bank overdrafts (see note 11) - (790,281)
------------ -------------
1,068,337 (510,243)
============ =============
9. Other Receivables:
31 December 30 June 2011
2011
------------ -------------
US$ US$
Loan interest & fee receivables 3,392,276 2,384,950
Prepayments 22,557 22,177
US Tax receivable - 16,308
3,414,833 2,423,435
============ =============
The Directors consider that the carrying amount of other
receivables approximates fair value.
10. Other Payables:
31 December 30 June 2011
2011
------------ -------------
US$ US$
Management fee payable 126,196 162,453
Performance fee 5,581,184 5,581,184
Administration fee 13,871 23,421
Audit fee 58,117 86,606
US Tax payable 496 -
Other payables 20,151 81,663
------------ -------------
5,800,015 5,935,327
============ =============
The Directors consider that the carrying amount of other
payables approximates fair value.
11. Loan and Overdraft:
During the period the Company had an amended US Dollar bank
facilities with Bank of Scotland plc ("Bank of Scotland"), in
accordance with the facility agreement dated 30 November 2007 and
supplemental restatement facility agreement (utilisation date 1
September 2011). The facilities comprised a US$3.7million term note
and a US$1.5million committed overdraft. The key terms of this
facility are as follows:
-- Facility available for 6 months from 1 September 2011;
-- interest is chargeable at a rate of the 1 month US LIBOR
+6.5% (increasing to +7% with effect from 1 January 2012 if the
facility has not been reduced to zero);
-- arrangement fee of US$25,000;
-- redemption fee of US$25,000 if the facility is repaid in full
on or before 31 December 2011; US$75,000 if the facility is repaid
in full after 31 December 2011. Redemption fee is payable upon
final repayment or expiration date of the facility;
-- no fixed amortisation. The term note is amortised using cash
sweep equal to 80% of monthly free cashflow;
-- no net debt/gross asset covenants; and
-- dividend payments permitted by the Company, subject to
approval by Bank of Scotland.
As at 31 December 2011, the Company had fully repaid the loan
facility with Bank of Scotland (30 June 2011: US$3,867,480). The
outstanding overdraft facility as at 31 December 2011 was US$nil
(30 June 2011: US$790,281).
On 26 September 2011, the Company migrated it's banker from Bank
to Scotland to Lloyds Banking Group plc.
The above credit facility was secured against the Company's
investment portfolio.
PSOURCE STRUCTURED DEBT LIMITED
Notes to the Financial Statements, continued
For the period ended 31 December 2011
12. Share Capital and Distributable Reserve:
31 December
2011
&
30 June 2011
-------------
Authorised Share Capital US$
Unlimited Ordinary and Qualifying C Shares of no -
par value
-
=============
31 December 30 June 2011
2011
------------ -------------
Allotted, issued and fully paid US$ US$
59,564,681 (30 June 2011: 59,564,681)
Ordinary Shares of no par value each - -
============ =============
1 July 2011 1 July 2010
to to
31 December 30 June 2011
------------ -------------
No. No.
Carried forward 59,564,681 59,564,681
============ =============
Share premium US$ US$
Brought forward & carried forward 47,512,742 47,512,742
============ =============
Distributable reserve US$ US$
Brought forward & carried forward 42,793,973 42,793,973
============ =============
The Ordinary Shareholders shall have the following rights:
(i) Dividends
During the period Shareholders (other than the Company itself
where it holds its own Shares as treasury Shares) are entitled to
receive, and participate in, any dividends or other distributions
out of the profit of the Company available for dividend and
resolved to be distributed in respect of any accounting period or
other income or right to participate therein.
(ii) Winding up
On a winding up, Shareholders (other than the Company itself
where it holds its own Shares as treasury Shares) shall be entitled
to the surplus assets remaining after payment of all the creditors
of the Company.
(iii) Voting
Shareholders (other than the Company itself where it holds its
own Shares as treasury Shares) shall have the right to receive
notice of and to attend and vote at general meetings of the Company
and each Shareholder being present in person or by proxy or by a
duly authorised representative (if a corporation) at a meeting
shall upon a show of hands have one vote and upon a poll each such
holder present in person or by proxy or by a duly authorised
representative (if a corporation) shall have one vote in respect of
every Ordinary Share held by him.
On 27 July 2007, an ordinary resolution was passed at an
extraordinary general meeting of the Shareholders approving the
cancellation of the entire amount which will stand to the credit of
the share premium account immediately after the Placing,
conditionally upon the issue of the Shares and the payment in full
thereof and with respect to any further issue of Shares. The
cancellation was confirmed by the Royal Court on 25 January 2008
that the surplus thereby created formed a distributable
reserve.
PSOURCE STRUCTURED DEBT LIMITED
Notes to the Financial Statements, continued
For the period ended 31 December 2011
12. Share Capital and Distributable Reserve, continued:
By a resolution dated 2 November 2009, the holders of the
Subscriber Shares in the Company granted the Company the authority
to make market purchases of up to 14.99% of its own issued Ordinary
Shares. A renewal of the authority to make purchases of Ordinary
Shares is sought from Shareholders at each annual general meeting
of the Company.
Following closing of an Offer for Subscription on 18 June 2008,
the Placing and the Offer raised GBP26.53 million (net of placing
costs) and on 20 June 2008, 24,154,681 additional Ordinary Shares
in the Company were admitted to the Official List of the London
Stock Exchange.
On 30 July 2008, the Company issued 5,410,000 Ordinary Shares of
no par value, representing 9.9% of the Ordinary Shares in issue.
These Ordinary Shares were issued and admitted to the Official List
on the London Stock Exchange for trading on the same day.
Re-Designation of Sterling Shares into US Dollar Shares
On 30 January 2009, a special resolution was passed by the
shareholders so that the sterling currency of all of the issued
Sterling Shares of the Sterling Class be re-designated into the
U.S. Dollar currency in accordance with article 3.12 of the
Company's Articles of Association at an exchange rate of
US$1.4593/GBP calculated as at 31 December 2008.
Capital Management
Under its Articles of Incorporation, the Company has the ability
to borrow up to 30% of net assets in order to implement any hedging
and buyback strategies and to meet ongoing expenses (please refer
to note 11).
13. Net Asset Value per Ordinary Share:
The net asset value per Ordinary Share is based on the net
assets attributable to Ordinary shareholders of US$74,156,436 (30
June 2011: US$98,650,109) and on the period end Ordinary Shares in
issue of 59,564,681 (30 June 2011: 59,564,681).
PSOURCE STRUCTURED DEBT LIMITED
Notes to the Financial Statements, continued
For the period ended 31 December 2011
14. Financial Instruments:
(a) Categories of financial instruments:
31 December 2011 30 June 2011
Percentage Percentage
of net assets of net assets
attributable attributable
to Ordinary to Ordinary
Fair Value Shareholders Fair Value Shareholders
---------------------------------------- ------------ --------------- ------------- ---------------
Assets US$ % US$ %
Financial assets at fair
value through profit or
loss:
Listed equity securities 1,685,106 2.27 2,285,132 2.32
Unlisted equity securities 60,413,523 81.47 81,524,576 82.64
Warrants 246,506 0.33 1,021,683 1.03
Penny warrants 4,979 0.01 189,054 0.19
------------ ---------------
62,350,114 84.08 85,020,445 86.18
------------ --------------- ------------- ---------------
Cash and cash equivalents 1,068,337 1.44 280,038 0.28
------------ --------------- ------------- ---------------
Loans and receivables*:
Loans 13,123,167 17.70 21,126,349 21.42
Unsettled investment sales - - 392,930 0.40
Other receivables 3,414,833 4.60 2,423,435 2.46
79,956,451 107.82 109,243,197 110.74
============ =============== ============= ===============
Liabilities
Cash and cash equivalents
(bank overdrafts) - - (790,281) (0.80)
Loan - - (3,867,480) (3.92)
Other payables (5,800,015) (7.82) (5,935,327) (6.02)
------------ --------------- ------------- ---------------
(5,800,015) (7.82) (10,593,088) (10.74)
============ =============== ============= ===============
*The Directors deem that the carrying value of loans and
receivables at amortised cost, written down where appropriate for
known impairments, is not considered to be materially different
from fair value.
(b) Net gains and losses on financial instruments:
Movement in
net unrealised Net realised Movement
(losses)/gains gains/(losses) in unrealised
and unrealised on disposals/ Movement losses on
Period ended foreign exchange conversion/loan in restructuring
31 December 2011 gains on translation repayments Impairment of loans
charge
---------------------------------------- ---------------------- ----------------- ------------ ---------------
US$ US$ US$ US$
Financial assets at
fair value through profit
or loss:
Listed equity securities (137,978) 213,016 - -
Unlisted equity securities (26,727,835) (189,493) - -
Warrants 3,123,749 (1,594,033) - -
Penny warrants 2,954,586 - - -
(20,787,478) (1,570,510 - -
---------------------- ----------------- ------------ ---------------
Loans and receivables:
Loans - (668,302) (126,650) (751,005)
(20,787,478) (2,238,812) (126,650) (751,005)
====================== ================= ============ ===============
PSOURCE STRUCTURED DEBT LIMITED
Notes to the FinancialStatements, continued
For the period ended 31 December 2011
14. Financial Instruments, continued:
(b) Net gains and losses on financial instruments, continued:
Movement in
net unrealised Net realised Movement
gains/(losses) (losses)/gains in unrealised
and unrealised on disposals/loan Movement losses on
foreign exchange repayments in restructuring
Year ended 30 June 2011 gains on translation Impairment of loans
charge
---------------------------------------- ---------------------- ------------------- ------------ ---------------
US$ US$ US$ US$
Financial assets at
fair value through profit
or loss:
Listed equity securities (1,924,825) - - -
Unlisted equity securities (541,612) 1,773,638 - -
Warrants 2,660,213 (2,654,639) - -
Penny warrants (668,462) (120,933) - -
(474,686) (1,001,934) - -
---------------------- ------------------- ------------ ---------------
Loans and receivables:
Loans - (1,917,592) (6,428,322) (1,783,159)
(474,686) (2,919,526) (6,428,322) (1,783,159)
====================== =================== ============ ===============
Movement in
net unrealised Net realised Movement
(losses)/gains gains/(losses) in unrealised
and unrealised on disposals/loan Movement loss on
Period ended foreign exchange repayments in restructuring
31 December 2010 gains on translation Impairment of loans
charge
---------------------------------------- ---------------------- ------------------- ------------ ---------------
US$ US$ US$ US$
Financial assets at
fair value through profit
or loss:
Listed equity securities (237,685) 1,032,184 - -
Unlisted equity securities 57,228 - - -
Warrants 2,220,264 (1,249,262) - -
Penny warrants (407,804) - - -
1,632,003 (217,078) - -
---------------------- ------------------- ------------ ---------------
Loans and receivables:
Loans - (1,917,432) (2,193,953) (1,549,159)
1,632,003 (2,134,510) (2,193,953) (1,549,159)
====================== =================== ============ ===============
(c) Derivatives:
The following tables detail the Group's aggregate investments in
derivative contracts, by maturity, outstanding as at 31 December
2011.
Penny Warrants
31 December 30 June 2011
2011
Maturity Fair Value Fair Value
----------------------- ------------ -------------
US$ US$
3-5 years - 7,417
5-10 years - 70,097
>20 years 4,979 111,540
------------ -------------
Total 4,979 189,054
============ =============
PSOURCE STRUCTURED DEBT LIMITED
Notes to the Financial Statements, continued
For the period ended 31 December 2011
14. Financial Instruments, continued:
(c) Derivatives, continued:
A penny warrant is a derivative financial instrument with
similar economic characteristics to the underlying equity
instrument which gives the right, but not the obligation to buy a
specific amount of a given stock, at a specified price (strike
price) during a specified period (American option) or on a specific
date (European option). The fair value of the penny warrants are
included in options classified as financial assets at fair value
through profit or loss disclosed in note (a) above. All the penny
warrants the Group owns have an exercise price of US$0.01 or less
(quasi equities) and are valued at a 7% discount to net intrinsic
value (see note 2(d) (iii)).
Warrants
31 December 30 June 2011
2011
Maturity Fair Value Fair Value
------------------------ ------------ -------------
US$ US$
< 1 year 4,676 363,540
1-3 years 143,723 514,362
3-5 years 26,071 31,590
5-10 years 9,783 20,714
10-15 years 62,253 91,477
------------ -------------
Total 246,506 1,021,683
============ =============
A warrant is a derivative financial instrument which gives the
right, but not the obligation to buy a specific amount of a given
stock, at a specified price (strike price) during a specified
period (American option) or on a specific date (European option).
The fair value of warrants are included in warrants classified as
financial assets at fair value through profit or loss disclosed in
note (a) above. The warrants are valued at a 30% discount to Black
Scholes value (see note 2(d) (iii)).
Forward foreign currency swaps
As at 31 December 2011 and 30 June 2011, the Group had no
outstanding forward foreign currency swaps.
In accordance with the Group's scheme particulars the Group may
invest in forward foreign exchange contracts for the purpose of
efficient portfolio management.
15. Financial Risk Management:
Strategy in Using Financial Instruments:
The Group's investment objective is to seek to provide a total
return of 10-15 per cent per annum over a rolling 3-year period
with annual standard deviation of less than 5 per cent, primarily
through investing in a diversified portfolio of asset backed loans
made predominantly to publicly traded small and micro-cap companies
and equity warrants issued predominantly by publicly traded small
and micro-cap companies.
The Group's activities expose it to a variety of financial
risks: market risk (including currency risk, fair value, interest
rate risk, cash flow interest rate risk and price risk), credit
risk and liquidity risk. The Group's overall risk management
program focuses on the unpredictability of financial markets and
seeks to minimise potential adverse effects on the Group's
financial performance. These policies include the use of certain
financial derivative instruments. The risk management policies
employed by the Group to manage these risks are discussed
below.
Market Price Risk:
Market price risk results mainly from the uncertainty about
future prices of financial instruments held. It represents the
potential loss the Group may suffer through holding market
positions in the face of price movements and changes in interest
rates or foreign exchange rates, with the maximum risk resulting
from financial instruments being determined by the fair value of
the financial instruments. The Group's investment portfolio is
monitored by the Investment Manager, Investment Consultant and the
Directors in pursuance of the investment objectives.
PSOURCE STRUCTURED DEBT LIMITED
Notes to the Financial Statements, continued
For the period ended 31 December 2011
15. Financial Risk Management, continued:
Market Price Risk, continued:
All investments present a risk of loss of capital. The
profitability of a significant portion of the Group's investment
program depends to a great extent upon correctly assessing the
future course of movements in interest rates, currencies and other
investments. There can be no assurance that the Investment Manager
will be able to predict accurately these price movements. The
Investment Manager moderates this risk through a careful selection
of securities and other financial instruments within specified
limits. The maximum risk resulting from financial instruments is
determined by the fair value of the financial instruments. The
Group's portfolio and investment strategy is reviewed continuously
by the Investment Manager, Investment Consultant and on a quarterly
basis by the Board and the Manager.
By their nature, the Group's equity investments at fair value
through profit and loss, and, warrants and penny warrants
investments held for trading are directly exposed to market price
risk. The Group's investments in loans and receivables are not
directly subject to market price risk in the same way as equities
and derivatives. By their nature there is no upside in the value of
loans and receivables. However market conditions may dictate that
loan investments need to be impaired. The Group's exposure to this
risk is dealt with under credit risk.
The following details the Group's sensitivity to a 5% increase
and decrease in market prices of equities, with 5% being the
sensitivity rate used when reporting price risk internally to key
management personnel and representing management's assessment of
the possible changes in market prices.
At 31 December 2011, the Group's market risk is affected by four
main components: changes in actual market prices, credit risk,
interest rate and foreign currency movements. Credit risk, interest
rate and foreign currency movements are covered below. A 5%
increase in the value of equity investments, with all other
variables held constant, would bring about 4.19% or US$3,104,931
(30 June 2011: 4.25% or US$4,190,485) increase in net assets
attributable to equity shareholders. If the value of equity
investments had been 5% lower, with all other variables held
constant, net assets attributable to equity shareholders would have
fallen by 4.19% or US$3,104,931 (30 June 2011: 4.25% or
US$4,190,485). Warrants and penny warrants by their nature may be
more sensitive to changes in the value of the underlying equity
instrument dependent upon a number of factors including time to
expire and whether or not they are in the money or not. A 5%
increase in the value of underlying equity prices for derivatives
held, with all other variables held constant, would bring about a
0.03% or US$22,605 (30 June 2011: 0.14% or US$133,712) increase in
net assets attributable to equity shareholders. A 5% decrease in
the value of underlying equity prices for derivatives held, with
all other variables held constant, would bring about a 0.03% or
US$21,857 (30 June 2011: 0.13% or US$125,154) decrease in net
assets attributable to equity shareholders.
Credit Risk:
Credit risk is the risk that an issuer or counterparty will be
unable or unwilling to meet a commitment that it has entered into
with the Group, resulting in financial loss to the Group.
To the extent the Group invests in derivative instruments,
certain types of options or other customised financial instruments
or non-UK securities, the Group takes the risk of non-performance
by the other party to the contract. This risk may include credit
risk of the counterparty and the risk of settlement default. This
risk may differ materially from those entailed in UK
exchange-traded transactions which generally are supported by
guarantees of clearing organisations, daily marking-to-market and
settlement, and segregation and minimum capital requirements
applicable to intermediaries. Transactions entered directly between
two counterparties generally do not benefit from such protections
and expose the parties to the risk of counterparty default. In
addition, there are risks involved in dealing with the custodians
or brokers who settle trades particularly with respect to non-UK
investments.
At the reporting date financial assets exposed to credit risk
include loan instruments, receivables and derivatives. It is the
opinion of the Board of Directors that the maximum exposure to
credit risk that the Group faces is equal to the carrying value of
these financial instruments held by the Group.
PSOURCE STRUCTURED DEBT LIMITED
Notes to the Financial Statements, continued
For the period ended 31 December 2011
15. Financial Risk Management, continued:
Credit Risk, continued:
The loan and receivable instruments are private loans and
receivables with the underlying counterparties and as such do not
have associated agency credit ratings. To mitigate the credit risk
on these loan and receivable instruments the Directors consider
impairment on an ongoing basis also taking into consideration the
results of any reviews performed by Clayton. Clayton is employed to
review a sample the of loan and receivable instruments on a monthly
basis and report to the Board of Directors/Investment Manager any
issues with regards to the valuation of the loan and receivable
instruments in accordance with the Independent Valuation
Consultant's Agreement. Any impairment on the loan and receivable
instruments is written off to the Consolidated Statement of
Comprehensive Income. As at 31 December 2011, impairment charges
totaling US$13,483,917 (30 June 2011: US$13,357,267) had been
written off to the Consolidated Statement of Comprehensive Income
since the Group commenced trading (see note 2(e)).
The credit risk on cash transactions and transactions involving
derivative financial instruments is mitigated by transacting with
counterparties that are regulated entities subject to prudential
supervision, or with high credit-ratings assigned by international
credit-rating agencies.
In accordance with the investment restrictions as described in
its Placing Document, the Group may not invest more than 10% of its
total assets in any one underlying company (calculated at the time
of any relevant investment being made).
As at 31 December 2011, the following amounts on debt
instruments were past due:
31 December 30 June 2011
2011
------------ -------------
US$ US$
Principal default 6,625,903 4,912,865
Interest default 171,450 61,811
The Group has entered into certain agreements with affiliates of
the Investment Manager in which the Group and the affiliates have
investments in the same loan instruments. The Group has agreed to
alter the allocation of cash principal and interest repayments in
the event of a restructuring or liquidation of the entity in which
the Group and affiliate(s) are invested. The agreements provide for
the Group to receive upfront consideration from the affiliate(s) in
exchange for reallocating the cash liquidation proceeds received by
the Investment Manager in respect of the loan securities first to
the affiliate(s) and secondly to the Group. This reallocation
applies only to regular principal and interest, and not to any
contingent amounts including default interest and fees.
The Group has mitigated the credit risk of these certain
agreements by only entering into agreements related to loan
instruments in which the collateral and/or operating strength of
the invested companies was sufficiently in excess of the loan
amounts outstanding such that doing so did not materially alter the
credit risk of the loan instruments held by the Group. This
determination of whether the loan instruments were sufficiently
collateralised was made by Clayton IPS Corporation at the time of
the agreements, and Clayton IPS Corporation continues to evaluate
the loan instruments in the context of these agreements.
As at 31 December 2011, of the total loans held by the Group of
US$13,123,167 (30 June 2011: US$21,126,349), US$3,933,538 (30 June
2011: US$9,270,719) were subordinated.
Liquidity Risk:
Liquidity risk is the risk that the Group will encounter in
realising assets or otherwise raising funds to meet financial
commitments.
The Group invests in loan notes and warrants that are not liquid
and there may not be any secondary market for these instruments.
Even though the warrants are generally convertible into securities
listed on the national securities exchanges, quoted on NASDAQ or
traded in the over-the counter markets or other markets (eg pink
sheets), the instruments themselves are not liquid. In addition,
the Group's assets (including the loan notes) may, at any given
time, include securities and other financial instruments or
obligations which are very thinly traded or for which no market
exists or which are restricted as to their transferability under
applicable securities laws. The sale of any such investments may be
possible only at substantial discounts. Further, such investments
may be extremely difficult to value with any degree of
certainty.
PSOURCE STRUCTURED DEBT LIMITED
Notes to the Financial Statements, continued
For the period ended 31 December 2011
15. Financial Risk Management, continued:
Liquidity Risk, continued:
The Group may also invest in private placements and other
similar issues of securities (including investments in privately
held companies). This may involve a high degree of business and
financial risk that can result in substantial losses. In addition,
there is no existing market for the purchase and sale of such
investments and the Group may not be able to readily sell such
investments. Such investments may be subject to greater economic,
business and market risks than the marketable securities of more
well-established companies.
While the Investment Manager will attempt to spread the Group's
assets among a number of investments in accordance with the
investment policies adopted by the Group, at times the Group may
hold a relatively small number of investments each representing a
relatively large portion of the Group's net assets. Losses incurred
in such investments could have a materially adverse effect on the
Group's overall financial condition. Whilst the Group's portfolio
is diversified in terms of the companies in which it invests, the
investment portfolio of the Group may be subject to more rapid
change in value than would be the case if the Group were required
to maintain a wide diversification among types of securities,
countries and industry groups.
In particular the Group is exposed to its large holdings in
Petrotech Holdings/Parabel Inc (formerly PetroAlgae) which
constitutes 79.95% (30 June 2011: 76.47%) of the investment
portfolio as at 31 December 2011.
At any given time, the Group may have significant investment in
smaller and medium sized companies of a less seasoned nature whose
securities are traded in the over-the-counter market. These
"secondary" securities often involve significantly greater risks
than the securities of larger, better known companies. Such
securities may not be liquid and there may be only a limited market
for such securities.
The Group's portfolio and investment strategy is reviewed
continuously by the Investment Manager and on a quarterly basis by
the Board. In addition, the Directors will seek to review capital
requirements on an annual basis.
PSOURCE STRUCTURED DEBT LIMITED
Notes to the Financial Statements, continued
For the period ended 31 December 2011
15. Financial Risk Management, continued:
Liquidity Risk, continued:
The following table details the maturity profile of the Group's
financial instruments:
Maturity Analysis
At 31 December 2011 less than 1-3 years 3-5 years 5-10 years > 10 years No fixed Total
1 year maturity
--------------------------- ------------ ---------- ---------- ----------- ----------- ----------- ------------
Assets US$ US$ US$ US$ US$ US$ US$
Financial assets at
fair value
through profit or
loss:
Listed equity
securities - - - - - 1,685,106 1,685,106
Unlisted equity
securities - - - - - 60,413,523 60,413,523
Warrants 4,676 143,723 26,071 9,783 62,253 - 246,506
Penny warrants - - - - 4,979 - 4,979
4,676 143,723 26,071 9,783 67,232 62,098,629 62,350,114
------------ ---------- ---------- ----------- ----------- ----------- ------------
Cash and cash
equivalents 1,068,337 - - - - - 1,068,337
Loans and
receivables:
Loans 3,399,747 1,306,839 - - - 8,416,581 13,123,167
Other receivables 3,414,833 - - - - - 3,414,833
7,887,593 1,450,562 26,071 9,783 67,232 70,515,210 79,956,451
============ ========== ========== =========== =========== =========== ============
Liabilities
Other payables (5,800,018) - - - - - (5,800,015)
(5,800,018) - - - - - (5,800,015)
============ ========== ========== =========== =========== =========== ============
PSOURCE STRUCTURED DEBT LIMITED
Notes to the Financial Statements, continued
For the period ended 31 December 2011
15. Financial Risk Management, continued:
Liquidity Risk, continued:
The following table details the maturity profile of the Group's
financial instruments:
Maturity Analysis
At 30 June 2011 less than 1-3 years 3-5 years 5-10 years > 10 years No fixed Total
1 year maturity
------------------------- ------------- ---------- ---------- ----------- ----------- ----------- -------------
Assets US$ US$ US$ US$ US$ US$ US$
Financial assets
at fair value
through profit or
loss:
Listed equity
securities - - - - - 2,285,132 2,285,132
Unlisted equity
securities - - - - - 81,524,576 81,524,576
Warrants 363,540 514,362 31,590 20,714 91,477 - 1,021,683
Penny warrants - - 7,417 70,097 111,540 - 189,054
363,540 514,362 39,007 90,811 203,017 83,809,708 85,020,445
------------- ---------- ---------- ----------- ----------- ----------- -------------
Cash and cash
equivalents 280,038 - - - - - 280,038
Loans and
receivables:
Loans 11,100,719 5,114,482 312,750 - - 4,598,398 21,126,349
Unsettled
investment
sales 392,930 - - - - - 392,930
Other
receivables 2,423,435 - - - - - 2,423,435
14,560,662 5,628,844 351,757 90,811 203,017 88,408,106 109,243,197
============= ========== ========== =========== =========== =========== =============
Liabilities
Cash and cash
equivalents
(Bank
overdraft) (790,281) - - - - - (790,281)
Loans and
receivables:
Loans (3,867,480) - - - - - (3,867,480)
Other payables (5,935,327) - - - - - (5,935,327)
(10,593,088) - - - - - (10,593,088)
============= ========== ========== =========== =========== =========== =============
PSOURCE STRUCTURED DEBT LIMITED
Notes to the Financial Statements, continued
For the period ended 31 December 2011
15. Financial Risk Management, continued:
Interest Rate Risk:
The Group is exposed to risks associated with the effects of
fluctuations in the prevailing levels of market interest rates on
its financial instruments and future cash flows.
The Group is exposed to interest rate risk as it invests in loan
instruments bearing interest at both fixed and floating interest
rates. Other financial assets and liabilities exposed to interest
rate risk include borrowings which are invested at long term
interest rates and cash and cash equivalents which are invested at
short term rates. The Investment Manager manages the Group's
exposure to interest rate risk daily in accordance with the Group's
investment objectives and policies, as disclosed on page 3. The
Group's overall exposure to interest rate risk is monitored
regularly by the Board of Directors.
The table below summarises the Group's exposure to interest rate
risk:
31 December 2011 30 June 2011
Weighted average Weighted average
effective effective
interest rate Total interest rate Total
---------------------------------- ----------------- ------------ ----------------- -------------
Assets % US$ % US$
Fixed rate equity
(preference share
holdings) 9.00 7,198,510 9.00 7,198,510
Fixed interest rate
unlisted loan instruments 5.82 6,093,651 6.14 8,135,236
Floating interest
rate unlisted loan
instruments 7.14 7,029,516 5.30 12,991,113
Floating interest
rate cash and cash
equivalents 0.00 1,068,337 0.23 280,038
Non-interest bearing - 58,566,437 - 80,638,300
------------ -------------
Total assets 79,956,451 109,243,197
============ =============
Liabilities
Floating interest
rate cash and cash
equivalents - - 5.41 (790,281)
Floating interest
rate loan - - 6.19 (3,867,480)
Non-interest bearing - (5,800,015) - (5,935,327)
------------ -------------
Total liabilities (5,800,015) (10,593,088)
============ =============
The analysis below has been determined based on the Group's
exposure to interest rates for interest bearing assets and
liabilities (included in the interest rate exposure table above) at
the reporting date.
The Group's interest bearing assets are comprised of fixed rate
equity preference share instruments, fixed and floating rate loan
instruments and floating rate cash and cash equivalents. The
floating rate assets are generally indexed on US Prime. As of 31
December 2011, 100% (30 June 2011: 59%) of the floating rate loans
have an interest rate floor, with an average floor of 7.34% (30
June 2011: 7.48%). In contrast, the interest rate of these loans in
absence of the floor provisions would have been 2.14% (30 June
2011: 2.28%) lower. Therefore, the majority of the interest income
generated by the Group is not sensitive to normal changes in
interest rates. An immediate 200 basis point drop in US Prime would
cause the yield on the interest bearing assets to fall by 0.01
basis points or US$45 (30 June 2011: 0.10 basis points or US$644).
Conversely, an immediate 200 basis point increase in US Prime would
cause the yield on the interest bearing assets to increase by 2.90
basis points or US$21,367 (30 June 2011: 0.60 basis points or
US$5,601).
During the prior year, the Group's interest bearing liabilities
are comprised of floating rate cash and cash equivalents and
floating rate loans. The floating rate loans are comprised of loans
that are indexed on US LIBOR with a margin of 600 basis points, and
reset either monthly or quarterly. The change in yield on these
liabilities therefore changes directly with changes in US LIBOR.
The 3 month US LIBOR as at 30 June 2011: 0.19% an immediate drop to
zero in the US LIBOR on the interest bearing liabilities would have
caused net assets attributable to equity holders as at 30 June 2011
to increase by US$8,643 or 0.01% on an annualised basis due to the
reduction in interest payable on floating rate interest bearing
liabilities.
PSOURCE STRUCTURED DEBT LIMITED
Notes to the Financial Statements, continued
For the period ended 31 December 2011
15. Financial Risk Management, continued:
Interest Rate Risk, continued:
Conversely, as at 30 June 2011 an immediate 200 basis point
increase in US LIBOR would cause net assets attributable to equity
holders to decrease by US$93,155 or 0.09% on an annualised basis
due to the increase in interest payable on floating rate interest
bearing liabilities. As at 31 December 2011, the Group had no
interest bearing liabilities.
As a result of low interest rates generally causing the floating
rate loan asset yields to be based upon their floor rates, marginal
increases of interest rates up to approximately 3 percent would
only marginally increase income on interest bearing assets.
Foreign Currency Risk:
Foreign currency risk is the risk that the fair value of future
cash flows of a foreign currency financial instrument will
fluctuate because of changes in foreign exchange rates.
As at 31 December 2011, the Group's assets are invested
predominately in securities and other investments that are
denominated in the same currency as the reporting currency.
Accordingly the Group is at low risk to fluctuations in foreign
exchange rate. However, should this change the Group has the
ability to manage any significant exposure to foreign currencies
through forward foreign exchange contracts to hedge its exposure
back to US Dollar. As at 31 December 2011, there was no open
currency hedging (30 June 2011: none).
Currency Exposure:
As at 31 December 2011, the majority of the net assets of the
Group are denominated in US Dollars. The carrying amounts of these
assets and liabilities are as follows:
Assets Liabilities Net
31 December 31 December 31 December
2011 2011 2011
----------- ----------- -----------
US$ US$ US$
British Pound 31,546 (114,553) (83,007)
Canadian Dollar 7,520 - 7,520
Euro 8 - 8
US Dollars 79,917,377 (5,685,462) 74,231,915
79,956,451 (5,800,015) 74,156,436
=========== =========== ===========
Assets Liabilities Net
30 June 2011 30 June 2011 30 June 2011
------------ ------------ ------------
US$ US$ US$
British Pound 23,032 (208,928) (185,896)
Canadian Dollar 41,624 (1) 41,623
Euro 9 - 9
US Dollars 109,178,532 (10,384,159) 98,794,373
109,243,197 (10,593,088) 98,650,109
============ ============ ============
The Group has no significant currency risk. The Group has the
ability to implement a policy of currency hedging.
As at 31 December 2011,the Group's sensitivity to foreign
currency risk is low due to the majority of the net assets of the
Company are denominated in US Dollars.
PSOURCE STRUCTURED DEBT LIMITED
Notes to the Financial Statements, continued
For the period ended 31 December 2011
15. Financial Risk Management, continued:
Concentration Risk
The Investment Manager spread the Group's assets among a number
of investments at the time of investment in accordance with the
original investment policies adopted by the Group.
The current balance of the Group's portfolio has partly resulted
from the requirement to monetise liquid assets to enable the Group
to repay bank debt. Please refer to the Analysis of Significant
Investments and Portfolio Analysis that follows the Notes to the
Financial Statements.
In particular the Group is exposed to its large holdings in
Petrotech Holdings/Parabel Inc which constitutes 79.95% (30 June
2011: 76.47%) of the investment portfolio as at 31 December
2011.
Classification of Fair Value Measurements
The Company has adopted the amendment to IFRS 7, effective 1
January 2009. This 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); and
-- 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, the 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.
The following table analyses within the fair value hierarchy the
Company's financial assets (by class) measured at fair value at 31
December 2011:
Fair Value as at 31 December 2011
Level Level 2 Level 3 Total
1
---------- -------- ----------- -----------
US$ US$ US$ US$
Financial assets at fair
value through profit or
loss:
Equity securities 1,678,973 6,132 60,413,524 62,098,629
Warrants - 246,506 - 246,506
Penny warrants - 4,979 - 4,979
---------- -------- ----------- -----------
1,678,973 257,617 60,413,524 62,350,114
========== ======== =========== ===========
PSOURCE STRUCTURED DEBT LIMITED
Notes to the Financial Statements, continued
For the period ended 31 December 2011
15. Financial Risk Management, continued:
Classification of Fair Value Measurements, continued
Fair Value as at 30 June 2011
Level Level 2 Level 3 Total
1
---------- ---------- ----------- -----------
US$ US$ US$ US$
Financial assets at fair
value through profit or
loss:
Equity securities 2,253,964 31,168 81,524,576 83,809,708
Warrants - 1,021,683 - 1,021,683
Penny warrants - 118,957 70,097 189,054
---------- ---------- ----------- -----------
2,253,964 1,171,808 81,594,673 85,020,445
========== ========== =========== ===========
Investments whose values are based on quoted market prices in
active markets, and therefore classified within level 1, include
active listed equities. No adjustments are made to the quoted price
for these instruments. The level 1 amount above relates to a single
investment that had previously been categorised as a level 2
investment in the prior year. During the prior year, whilst this
investment was listed it was in the process of bankruptcy and
therefore there was not active market for the trading of its
shares. During the current period, the investment restructured,
came out of bankruptcy and now has active trading of its shares. As
a result this investment has been transferred from a level 2 to a
level 1 investment.
Financial instruments that trade in markets that are not
considered to be active but are valued based on quoted market
prices, dealer quotations or alternative pricing sources supported
by observable inputs are classified within level 2. As level 2
investments may include positions that are not traded in active
markets and/or are subject to transfer restrictions, valuations may
be adjusted to reflect illiquidity and/or non-transferability,
which are generally based on available market information.
Investments classified within level 3 have significant
unobservable inputs, as they trade infrequently. Level 3
instruments include unquoted equity instruments which the Company
values in accordance with the International Private Equity and
Venture Capital valuation guidelines or any other valuation model
and techniques which can provide a reasonable estimate of fair
value of the investment involved. The Company considers liquidity,
credit and other market risk factors.
The tables below provides a reconciliation from brought forward
to carried forward balances of financial instruments categorised
under level 3 during the year:
31 December 2011
Assets at Fair Value based Equity securities Penny warrants Total
on
Level 3:
------------------ --------------- --------------
US$ US$ US$
Fair value brought forward 81,524,576 70,097 81,594,673
Purchases - - -
Sales - - -
Equity converted from warrants/penny
warrants 5,806,274 - 5,806,274
Movement in net unrealised
losses on fair value through
profit or loss investments (26,727,835) (70,097) (26,797,932)
Realised losses on disposals (189,491) - (189,491)
------------------ --------------- --------------
Fair value carried forward 60,413,524 - 60,413,524
================== =============== ==============
PSOURCE STRUCTURED DEBT LIMITED
Notes to the Financial Statements, continued
For the period ended 31 December 2011
15. Financial Risk Management, continued:
Classification of Fair Value Measurements, continued
30 June 2011
Assets at Fair Value based Equity securities Penny warrants Total
on
Level 3:
------------------ --------------- ------------
US$ US$ US$
Fair value brought forward 87,521,003 166,978 87,687,981
Purchases 171,835 - 171,838
Sales (2,461,630) - (2,461,630)
Equity converted to loans (3,157,331) - (3,157,334)
Movement in net unrealised
losses on fair value through
profit or loss investments (549,301) (96,881) (646,182)
------------------ --------------- ------------
Fair value carried forward 81,524,576 70,097 81,594,673
================== =============== ============
16. Dividends:
At inception, it was the Group's intention to pay an annual
dividend (paid gross quarterly) of not less than 5 pence per
Ordinary Share (or its equivalent in US Dollars) in its first year
growing by 0.5 pence per Ordinary Share (or its equivalent in US
Dollars) per annum in its second and third years. Although this was
achieved in respect of the first accounting period of the Group, a
breach of the Group's banking facilities led to the suspension of
dividends during the current period and prior year.
All dividends in prior periods were paid from the Group's
reserves.
17. Significant Investment Holding:
Parabel Inc./PetroTech Holdings Inc.
The Group has a significant holding in Parabel Inc (formerly
PetroAlgae Inc), a food and renewable energy company based in
Florida, through its holding in PetroTech Holdings Inc. The holding
structure and some of the commercial progress of Parabel Inc
("Parabel") is discussed below.
Holding structure and change of name
The Group has a significant holding in PetroTech Holdings Inc, a
Delaware corporation. PetroTech Holdings Inc is a privately held
holding company whose principal asset at 31 December 2011 was
100,000,000 shares (30 June 2011: 100,000,000 shares) of the common
stock of Parabel. PetroTech Holdings Inc is owned jointly by the
Group, Laurus Master Fund and Valens (which are funds managed by
the Investment Manager) as at 31 December 2011. Through its holding
in PetroTech Holdings, the Group has an effective interest in
approximately 7% of the common shares in Parabel at the valuation
price.
Parabel is registered with the SEC and quoted on OTC Link
(PALG.US), following a reverse merger into a quoted shell in
December 2008. OTC Link is an electronic quotation system that
displays quotes from broker dealers for many over-the-counter
securities.
In February 2010, Parabel announced its intention to migrate to
a higher exchange. On 11 August 2010, Parabel filed an S-1
registration statement for a proposed IPO with Goldman Sachs, UBS
and Citi as the lead underwriters. On 1 December 2011, the company
filed a significantly amended S-1 with the same lead underwriters.
There have also been a number of positive steps forward in the
commercialisation of Parabel's technologies. Not least of these has
been research by the universities of Idaho and Minnesota into the
non-energy applications of Parabel's micro-crop biomass. As a
consequence of the increased understanding of the opportunities in
the food and animal industries and to avoid the perception that
Parabel's product applications are predominantly or solely in the
fuel sector, the company changed its name from PetroAlgae Inc to
Parabel Inc on 9 February 2012.
PSOURCE STRUCTURED DEBT LIMITED
Notes to the Financial Statements, continued
For the period ended 31 December 2011
17. Significant Investment Holding, continued:
Technology and Commercial progress
Parabel provides renewable technology and solutions to address
the global demand for new economical sources of feed, food and
fuel.
Parabel's objective is to be the leading global provider of
technology and processes for the commercial production of
micro-crop biomass. Parabel has developed proprietary technology,
which it believes will allow customer licensees to grow aquatic
micro-crops at accelerated rates for conversion into products for
both agriculture and energy markets. It seeks to license this
renewable technology to meet the significant and growing demand in
these markets in both emerging and developed economies.
Furthermore, it expects that its solution will deliver strong and
consistent economic returns to its customer licensees as a
consequence of continuous, predictable, year-round operations
without the need for government subsidies.
Parabel's strategy is to license and provide management support
for micro-crop production facilities in equatorial regions around
the world. Its solution is scalable and flexible, which will allow
customer licensees to expand in order to meet market demand. The
company intends to generate revenue from licensing fees and
royalties primarily from customer licensees. Its licensing approach
is designed to minimize its capital expenditures, because customer
licensees will be expected to invest in the development and
construction of the production facilities.
The company's proprietary technology uses indigenous micro-crops
that are not genetically modified and demonstrate an optimal growth
profile for a particular geography and environment. These
micro-crops will then be grown, harvested and processed in a manner
that will optimize the production of micro-crop biomass, which
licensees can use to produce three products:
-- Lemna Protein Concentrate, or LPC: LPC is a free-flowing
powder containing a minimum 65% crude protein. Parabel expects that
its customer licensees will manufacture LPC for use in both animal
and, potentially, human markets. Based on internal and third-party
testing, Parabel believes that LPC is similar in quality to fish
meal and represents a potentially viable protein source for feed
formulations in multiple industries, including aquaculture and
swine. Parabel believes that LPC can also be used as an alternative
to kelp meal in fertilizer applications.
-- Lemna Meal, or LM: LM is a carbohydrate-rich free-flowing
powder containing a minimum 15% crude protein. Parabel expects that
licensees will manufacture LM for use in animal feed markets. Based
on internal and third-party testing, Parabel believes that LM is
similar in quality to alfalfa meal and represents a potentially
viable feed ingredient for formulations in multiple industries,
including dairy and swine. Parabel also believes that LM could be
used in fertilizer and animal bedding applications.
-- Biocrude: With a small change in process parameters (but not
equipment), Parabel's processing system can produce Biocrude rather
than LM. Biocrude is a renewable energy feedstock.
Parabel's proposition to customers is based on licensees
building large farm units in suitable locations (typically in warm
climates with sufficient rainfall). Parabel anticipates these units
being from 600 hectares to 4,800 hectares in size.
Valuation
The Group owns 8.24% (30 June 2011: 8.24%) of the common stock
and US$7.2 million (30 June 2011: US$7.2 million) in preferred
stock in PetroTech Holdings Inc. The preferred stock is held at par
plus accrued interest. The common stock is valued based on an
assessment of the realisable value of Parabel.
PSOURCE STRUCTURED DEBT LIMITED
Notes to the Financial Statements, continued
For the period ended 31 December 2011
17. Significant Investment Holding, continued:
Valuation, continued
The PSD Board has undertaken a review of the valuation of
Parabel as at 31 December 2011. It has set the valuation at
US$60,343,583 based on a value per share of US$8.70 (US$11.56 at 31
December 2010). In addition, as at 31 December 2011, the Company
had recognised US$2,625,902 (30 June 2011: US$1,933,332) of accrued
income in relation to the preferred stock held in PetroTech Holding
Inc. This amount is included in other receivables (note 9). As at
the period end, the Company's aggregate exposure to its investment
in Parabel is US$62,969,485.
In coming to this assessment of value, the Board, with advice
from the Independent Valuation Agent and the Investment Consultant
have taken the following factors into account:
-- Public trading of stocks on OTC Link
-- Valuation of comparable companies
-- Model based valuations
The shares of Parabel are traded on OTC Link. The trading is
irregular and volumes traded are very limited. The Directors note
the public trading but do not principally rely upon it for
valuation purposes. The Volume Weighted Average Price of the shares
traded during the 6 months ended 31 December 2011 was US$10.98 per
share (year ended 30 June 2011: US$14.40).
There are no directly comparable companies to Parabel. However,
the Directors note that several IPO's have occurred in the United
States of companies in similar markets to Parabel, and at a similar
stage in development.
The Directors have looked at model based discounted cash flow
valuations. The models used have been based on the latest Parabel
management forecasts. Any such valuation is sensitive to valuation
inputs. In particular changes in assumptions of license fees,
royalty rates, implementation rates and discount rates have a
significant impact on valuation. The sensitivity of the model to
changing these main assumptions are show in the table below:
Impact of key sensitivities on value of
Parabel Inc holding
Implied value
Sensitivity per share PSD holding value
range US$ US$
Base case
assumption Low High Low High Low High
--------------------- ------------ ------ ------ ------- ------- ------------ ------------
Discount rate 16% 18% 14% 6.77 11.54 49,492,471 82,809,826
Mid term revenue
growth assumptions 20% 10% 30% 6.69 11.24 48,913,422 80,663,353
Investor discount
to management
forecasts 50% 60% 40% 6.96 10.44 50,813,804 75,125,167
Marketability
discount 25% 30% 10% 8.12 10.44 58,938,545 75,152,108
--------------------- ------------ ------ ------ ------- ------- ------------ ------------
Base case value per share - US$8.70
Risks
Parabel is a development stage company with a limited operating
history. Parabel faces many risks in implementing its business
plans. These risks include, but are not limited to, the
following:
-- Parabel is materially a pre-revenue company and in the
absence of continued debt or equity funding faces the risk of a
substantial diminution of shareholder value.
-- Parabel may be unable to acquire and retain licensees. In
addition, during the next year or so, Parabel will be dependent
upon a limited number of customers.
-- Parabel has entered into several contracts and MOUs with
prospective customer licensees, MOUs are not binding agreements and
they might not result in any enforceable contracts or generate any
revenue.
-- Initial contracts will be conditioned on the demonstration
facilities deployed by licensees meeting certain levels of
productivity, and the failure to meet those levels may lead to the
termination of these contracts.
-- The market may not accept the end-products produced by Parabel's technology.
PSOURCE STRUCTURED DEBT LIMITED
Notes to the Financial Statements, continued
For the period ended 31 December 2011
17. Significant Investment Holding, continued:
Risks, continued
-- The revenue and returns licensees will realize from Parabel's
technology are highly dependent on the market price of the biocrude
and protein end-products produced using Parabel's technology, and
those prices will be considerably lower if Parabel fails to receive
certain regulatory or industry approvals or if those markets are
unavailable for other reasons.
-- The end-products produced by Parabel's technology are subject
to industry and regulatory testing.
-- Parabel's long-term success depends on future royalties paid
by customer licensees, and Parabel faces the risks inherent in a
royalty-based business model.
-- If a competitor were to achieve a technological breakthrough,
Parabel's operations and business could be negatively impacted.
-- Parabel has filed patent applications. However, these may not
be granted which may negatively affect revenues.
-- Parabel may not be able to manage its growth. In particular,
the company may not be able to recruit sufficient, qualified
staff.
-- Parabel does business in developing economies with less
developed legal frameworks. This may affect the enforceability of
contracts and intellectual property.
-- PSD is dependent on the proposed IPO or other transaction to
realize the value of its shares. There is no guarantee that such a
transaction will occur. In particular, any such transaction is
highly dependent upon the state of the equity markets.
Prospects
The Directors continue to monitor Parabel with a view to its
commercial progress and the liquidity in the stock. In particular,
the Directors will look to any significant capital markets or
private transactions that Parabel may undertake in the future as an
important indicator of value.
PSource Capital Guernsey Limited, the Manager of the Company, is
acting as an advisor to Parabel in its proposed IPO.
18. Post Period End Events:
There are no other significant post period end events that
require disclosure in these consolidated financial statements.
PSOURCE STRUCTURED DEBT LIMITED
Analysis of Significant Investments
As at 31 December 2011
The ten largest holdings of the Group, by underlying investment
company as at 31 December 2011 are set out below:
Percentage
Book Fair of
Name of investment Cost Value NAV
----------------------------------------- ---------- ---------- ----------
US$ US$ %
Petrotech Holdings Corp 7,198,509 60,343,583 81.37%
Biovest International 8,781,715 5,204,391 7.02%
Creative Vistas, Inc 3,646,617 3,646,633 4.92%
Mascon Global Limited 3,069,867 3,069,867 4.14%
North Texas Steel 1,068,613 1,190,316 1.61%
Accentia Biopharmaceuticals 437,569 562,249 0.76%
Presilient, LLC 837,529 527,654 0.71%
JTM Acquisition Corp 2,972,441 286,905 0.39%
JMAR Technologies 3,467,914 223,500 0.30%
GPSI Holdings, LLC 1,432,844 91,669 0.12%
14 other underlying investment companies 25,447,556 326,514 0.44
---------- ---------- ----------
58,361,174 75,473,281 101.78
========== ========== ==========
In compliance with current UK Listing Authority requirements,
the Company intends to disclose only its ten largest
investments.
Parabel/PetroTech Holdings Inc.
We set out below additional commercial information with regard
to the Group's largest investment.
Parabel
Customer Licensees
Parabel is currently negotiating agreements with prospective
customer licensees, including, among others, state-owned
enterprises and multinational food companies. Parabel expects that
the successful execution of early projects will help validate its
technology and ultimately enhance its ability to enter into
commercial-scale agreements with other customer licensees.
AIQ
On 25 October 2011, PA LLC entered into an amended and restated
license agreement, or the AIQ Agreement, with AIQ. The AIQ
Agreement provides for the construction of a pilot-scale bioreactor
in the Republic of Chile and a framework for the subsequent
build-out of a commercial-scale facility in South America, subject
to the parties' agreement that the pilot-scale bioreactor has been
operated successfully.
The AIQ Agreement provides for three separate phases: the
Preliminary Phase, Phase I and Phase II. In the Preliminary Phase,
AIQ will construct and operate a pilot-scale bioreactor of 0.75
hectares to test and demonstrate the growth and harvesting aspects
of Parabel's technology. Parabel will grant AIQ a license to
construct and operate the pilot-scale bioreactor in the Preliminary
Phase in consideration for a limited license fee from AIQ.
If the parties agree that the Preliminary Phase has been
operated successfully, Parabel and AIQ will proceed to Phase I,
during which the first commercial-scale unit increment of 150
hectares, including growth, harvesting and processing modules, will
be constructed. Parabel has agreed to construct the 150 hectare
commercial growth unit on a turnkey basis, in return for payments
from AIQ, billed on a progress basis, not to exceed a prescribed
limit. After completion of Phase I, the parties will proceed to
Phase II. In Phase II, AIQ will continue to expand the project in
150 hectare unit increments, including growth, harvesting and
processing modules, until the facility forms a unit of up to 5,000
hectares. Under the AIQ Agreement, Parabel will grant AIQ a license
to use its technology to plan, construct and operate the Phase I
and Phase II units and to sell the end products produced by these
units in South America. Parabel will receive a royalty on net sales
of the products generated from every unit and unit increment during
the 20-year term of the license.
PSOURCE STRUCTURED DEBT LIMITED
Analysis of Significant Investments, continued
As at 31 December 2011
Parabel/PetroTech Holdings Inc., continued
Key Milestones
In 2006, Parabel began the research and development of its
growth and harvesting technologies. Its efforts focused on
experimentation and testing, developing processes and equipment,
and building the infrastructure and databases necessary to support
its technology.
During 2007 and 2008, Parabel developed its proprietary growth
algorithms - the complex mathematical formulas it uses to determine
the correct harvesting density and sunlight exposure of the
biomass.
In 2009, it completed its fully operational demonstration
facility and established its business development team. This
facility consists of a large bioreactor (approximately one hectare)
and three smaller bioreactors that display Parabel's technology and
processes.
In November 2009, the Indonesian Ministry of Agriculture
approved Parabel's LPC product as an approved raw material for use
in animal feed.
In May 2011, Parabel entered into an agreement for the
construction of a pilot-scale bioreactor in the Republic of
Suriname. The construction of this bioreactor was completed in
October 2011 and testing is ongoing.
In October 2011, Parabel entered into a license agreement with
AIQ, a customer licensee in South America, with initial
construction of a pilot-scale bioreactor having begun in September
2011.
In November 2011, CECEP, a prospective Chinese customer licensee
with which Parabel is currently negotiating a license agreement,
began construction of a pilot-scale bioreactor.
Industry and Test results
The food, feed and fuel markets are global and significant in
size and the demand in these markets is expected to grow rapidly.
Parabel believes that its products will meet a portion of that
growing demand. It also believe that Parabel's technology will
deliver high production yields, particularly in equatorial regions,
in which it expect the demand for Parabel's feed and food
substitutes will be strong, and will enable Parabel's customer
licensees to address the needs of the following markets.
Animal Feed
Fish Meal: Fish meal, most of which is produced by the
commercial fishing of wild schools of small fish, is a critical
ingredient in the diets of nursery animals and aquaculture stocks.
The fish meal supply is currently limited due to the effects of
overfishing, while the demand for fish meal as a source of protein
in animal diets continues to rise sharply. Global fish meal demand
for aquafeed is expected to reach approximately 7 million metric
tonnes in 2012 and to rise every year thereafter to approximately
16 million metric tonnes in 2020, a rate which is expected to
significantly outpace supply. As a consequence, there is a large
and growing need for an alternative protein to address this supply
and demand imbalance.
Based on research conducted by the University of Idaho, Parabel
believes that LPC is strongly positioned as a fish meal alternative
due to its nutritive qualities. Parabel expects that Parabel's
ability to locate production near source of demand will provide
Parabel's customer licensees with several commercial advantages,
including the potential to reduce freight and duty import expenses,
along with the ability to offer continuous production and
just-in-time inventory management. Based on these factors, the
company expects the market price of LPC to be comparable to fish
meal.
Alfalfa Meal: Alfalfa meal is a premium forage ingredient, used
to meet nutrition and growth requirements in numerous animal diets.
The supply of alfalfa is limited due to the concentration of
production in specific areas, such as the United States and Europe.
Meanwhile, demand is continuing to rise, particularly in Asia. For
dairy and swine alone, the global demand for alfalfa meal will be
approximately 254 million metric tonnes in 2012, rising every year
thereafter to approximately 262 million metric tonnes in 2020.
Trials conducted by the University of Minnesota demonstrated
that LM is a high quality alternative for alfalfa meal in diets for
dairy cattle. Third-party testing is continuing with other animals
that are customarily fed alfalfa, such as swine and horses. Based
on LM's nutritional similarity with alfalfa meal, Parabel expects
that its market price will be comparable.
PSOURCE STRUCTURED DEBT LIMITED
Analysis of Significant Investments, continued
As at 31 December 2011
Parabel/PetroTech Holdings Inc., continued
Fertilizer
Kelp and other high nitrogen biomass can be used as organic
fertilizers. However, the production of kelp is costly due to the
limited areas in which it grows in the wild, as well as
environmental regulations that limit the scale of its harvesting.
Parabel believes that LPC can be a lower-cost, potentially
higher-value alternative to kelp. Parabel also believes that LM
could be used as a nitrogen source in organic fertilizers. Parabel
believes that LPC will be competitive in the specialty turf
fertilizer market given its favorable chemical composition and the
opportunity it presents to reduce potential environmental pollution
as compared to other alternatives.
Fortification of Basic Human Food Products
Parabel is developing its technology to address the rising
demand for human food, a market of particular relevance in the
equatorial regions in which it believes Parabel's technology will
be well-suited to grow. It believes that LPC can eventually serve
the global market for fortification of basic food ingredients for
malnourished populations, particularly in developing and emerging
countries. Given the rapidly growing populations in regions such as
South Asia, Africa and South America, the company believes that
there is a clear need for an alternative supply of high quality and
economical protein to supplement and enhance basic foods, such as
breads, tortillas, noodles and crackers.
Specialty Markets for Prepared Foods
In the long term, Parabel believes it can develop a higher
protein content product from lemna using alternative separation
techniques. This would allow Parabel's customer licensees to access
specialty markets for prepared foods for human consumption, such as
baked goods, meats and frozen foods. Third-party research is
continuing to validate Parabel's results and enhance Parabel's
understanding of these properties. While this process change would
increase the capital expenditure and operating costs associated
with Parabel's technology, the company anticipates that the
increased value of the end product produced would in many cases
justify the additional expenses.
Renewable Fuels
Parabel expects that third-party technology will lead to the
conversion of Biocrude into drop-in fuels. The company anticipates
that Parabel's customer licensees will have the ability to create
products that address the significant and continuing global demand
for renewable fuel.
Parabel's Solution and Customer Licensee Approach
Parabel believes that its solution will result in the commercial
scale production of renewable products specifically for the feed,
food and fuel industries. Parabel's technology platform primarily
consists of Parabel's components: micro-crop selection and testing,
growth and harvesting techniques, processing technology, and
control systems. Parabel's technology includes the selection of
indigenous micro-crops that demonstrate an optimal profile for a
particular geography and environment, which Parabel believes will
allow Parabel's customer licensees to grow, harvest and process
these micro-crops efficiently and profitably. It has developed a
scalable and flexible model based on micro-crop growth units of 150
hectare increments. This model is designed to be attractive to a
wide range of entities, including agricultural customers with an
interest in the sustainable production of feed products, larger
operators of renewable fuel production facilities and financial
investment groups.
The estimated capital expenditure for a 150 hectare facility as
an entry point is US$12 million (excluding the cost of land and
improvements) - a model that Parabel believes involves manageable
costs, risks and build-out times, while also enabling Parabel's
customer licensees to evaluate the commercial potential of the
technology on a larger scale. Due to economies of scale, Parabel
believes that a 600 hectare unit would deliver an attractive
internal rate of return on Parabel's customer licensees'
investment. Ultimately, the company expects that Parabel's customer
licensees will expand their facilities in 150 hectare increments at
similar costs in order to complete facilities of up to 5,000
hectares. Depending on economies of scale, Parabel expects that the
capital expenditure for a 5,000 hectare facility will be
approximately US$375 million (excluding the cost of land and
improvements). The company believes that a license unit of this
size will enable Parabel's customer licensees to deliver
significant volumes of product to
market, thereby maximizing internal rates of return on their
investments.
PSOURCE STRUCTURED DEBT LIMITED
Analysis of Significant Investments, continued
As at 31 December 2011
Parabel/PetroTech Holdings Inc., continued
Management
Parabel has strengthened its management team in the last 12
months. In particular, the company has appointed (or promoted) the
following experienced key team members:
-- CEO - Tony Tiarks appointed 16 June 2011 as CEO and appointed
as Chairman of the company on 9 February 2012
-- CFO - Jim Dietz promoted 28 July 2011
-- COO - Peter Sherlock appointed 28 July 2011
PSOURCE STRUCTURED DEBT LIMITED
Portfolio Analysis
As at 31 December 2011
An analysis of the portfolio by industry at 31 December 2011 is
set out below:
Fair Value
Loans Investments Through
& Held for Profit & No. of
Loss
Industry Total Receivables Trading Investments companies
------------------- ----------- ------------ ------------- ------------ ----------
US$ US$ US$ US$ No.
Biotech 5,855,759 4,087,667 89,119 1,678,973 4
Business Services 52,526 - 47,366 5,160 2
Computers 590,498 527,625 62,252 621 2
Consulting 3,069,867 3,069,867 - - 1
Energy 23,481 - 4,555 18,926 3
Industrial 1,195,430 1,189,676 5,754 - 2
IT 8,546 - 8,546 - 1
Renewable Energy 60,343,583 - - 60,343,583 1
Other 105 - 95 10 -
Security 3,646,633 3,646,633 - - 1
Software 2,496 - 2,496 - 1
Technology 396,891 314,794 30,741 51,356 4
Transport 287,466 286,905 561 - 2
75,473,281 13,123,167 251,485 62,098,629 24
=========== ============ ============= ============ ==========
PSOURCE STRUCTURED DEBT LIMITED
Portfolio Analysis, continued
As at 31 December 2011
An analysis of the portfolio by geography at 31 December 2011 is
set out below:
Fair Value
Loans Investments Through
US State & Held for Profit & No. of
Loss
or Country Total Receivables Trading Investments companies
---------------- ----------- ------------ ------------- ------------ ----------
US$ US$ US$ US$ No.
Arizona 94,165 91,294 2,496 375 2
California 270,866 223,500 47,366 - 2
Canada 3,654,153 3,646,633 7,520 - 2
Colorado 528,242 527,625 - 617 1
Florida 66,115,383 4,087,667 - 62,027,716 4
Illinois 3,074,981 3,069,867 5,114 - 2
Israel 8,546 - 8,546 - 1
Minnesota 50,981 - - 50,981 1
North Carolina 82,160 - 82,160 - 2
New Hampshire 30,741 - 30,741 - 1
New Jersey 62,252 - 62,252 - 1
Other 108 - 94 14 -
Texas 1,213,798 1,189,676 5,196 18,926 4
Washington 286,905 286,905 - 1
75,473,281 13,123,167 251,485 62,098,629 24
=========== ============ ============= ============ ==========
This information is provided by RNS
The company news service from the London Stock Exchange
END
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