Final Results

RNS Number : 7055R

Orchard Funding Group PLC

31 October 2019

 

31 October 2019

Orchard Funding Group PLC

("Orchard Funding Group" or the "company" or the "group")

Full Year Results

For the 12 months ended 31 July 2019

Orchard Funding Group PLC, the finance company which specialises in insurance premium finance and the professions funding market, is pleased to announce its audited full year results for the year ended 31 July 2019.

Highlights

·     Revenues increased by 6.19% to £5.48 million for the 12 months to 31 July 2019 (31 July 2018 £5.17 million)

·     The loan book grew by 3.84% year on year to £32.14 million as we continue to apply our disciplined approach to lending. This year saw the adoption of IFRS 9 which necessitated further impairment provisions

·     Profit after tax rose from £1.51 million to £1.63 million - an increase of 7.95%

·     Earnings Per Share ("EPS") rose in the period by 8.19% to 7.66p (31 July 2018 7.08p)

·     The group lent £72.99 million to clients in the 12 months to 31 July 2019, an increase of 6.20% (31 July 2018 £68.73 million)

·     We are again proposing a final dividend of 2.0 pence per share which means a full year dividend per share of 3.0 pence

·     Barclays Bank and Conister Bank have again renewed our facilities at £17 million and £2 million respectively

·     We have further strengthened the board with the appointment of Ketan Malde as non-executive director in September 2019

 Ravi Takhar, Chief Executive Officer of the company, stated:

"We have delivered growth in profits and NAV year on year since our flotation in 2015. We have developed and implemented our own IT system to give direct benefit to the business and enable us to test adjacent markets to increase our lending in those areas. We believe we are well placed to obtain a banking licence, which will significantly enhance our ability to grow in the future. Our exciting future is all due to the commitment and hard work of our staff who provide excellent service to our valued customers and the support of our shareholders, to whom we give many thanks."

For further information, please contact:

Orchard Funding Group PLC                                                        [phone]

Ravi Takhar, Chief Executive Officer

Liberum (Nomad and Broker)                                                        [phone]

Neil Patel

Richard Bootle 

Laura Hamilton

For Investor Relations please go to: www.orchardfundinggroupplc.com

Group financial highlights

Our first full financial year as a listed company ended on 31 July 2016. Over a period of three years ending 31 July 2019, Orchard has year on year significantly grown its business. We have materially increased lending, income and profits and maintained strict control over costs. We would like to thank our staff, funders and shareholders for supporting the successful growth of our business.

Since 31 July 2016:

Lending volume has increased by 50.32%.

Revenue has increased by 58.21%

PAT has increased by 63.00%.

Comparing lending, income and profit for 2019 with 2018:

Lending volume	UP	from £68.73m in 2018 to £72.99m in 2019	6.20% increase
Loan book	UP	from £30.95m in 2018 to £32.14m in 2019	3.84% increase
Revenue	UP	from £5.17m in 2018 to £5.48m in 2019	5.93% increase
Gross profit	UP	from £4.64m in 2018 to £4.85m in 2019	4.53% increase
Profit before tax	UP	from £1.89m in 2018 to £2.02m in 2019	6.88% increase
Profit after tax	UP	from £1.51m in 2018 to £1.63m in 2019	7.95% increase
EPS (pence)	UP	from 7.08p in 2018 to 7.66p in 2019	8.19% increase

Comparing costs for 2019 with 2018:

Direct costs	UP	from £0.53m in 2018 to £0.63m in 2019	18.87% increase
Expenses	UP	from £2.75m in 2018 to £2.84m in 2019	3.27% increase

Further detail on the above is given throughout the Group strategic report on pages 5 to 12 of the full financial statements.

 

Chairman's statement

Orchard Funding Group plc has had another good year. I am pleased to report that this success has once again been driven by a continued increase in overall lending volumes, which grew by 6.20% to £72.99m. This in turn fed through to an increase in group revenues of 5.93% to £5.48m. The position at the year-end showed a 6.62% increase in shareholders' equity from £14.04m to £14.97m.

Investment in staff and systems meant that expenses in the business grew by 3.271% to £2.84m. These increases in investment are important and necessary to ensure that the business continues to support and delight our customers and continues to provide them with the levels of service that they have, rightly, come to expect of us.

The group's profit before tax rose by 6.88% to £2.02m. Group earnings per share rose by 8.19% to 7.66p (2018 7.08p), a more than respectable outcome for the year.

The level and growth of dividends announced by any company is a balance between retention for future investment and rewarding shareholders for the confidence they have shown in the business. It is no different for Orchard Funding Group. However, with cash required for our own plans, and uncertainties surrounding Brexit, we feel it prudent to propose that the annual dividend (including the interim dividend) is held at 3.00p.

The group's main focus of operations is the insurance premium finance market, currently an area growing well and showing every sign of continuing to so do. This has always been at our core. Along with the professional fee funding market, we have moved into adjacent markets this year (school fee funding, park homes funding and sports membership funding as examples). The response from our partners in these new areas has been extremely positive.

The macro background remains as uncertain for the group as it does for the rest of the economy. Interest rates in the UK still remain relatively low but should they rise further in the future the group is well placed to react quickly. Loans are generally for a 10-month period and not longer than 12 months in duration.

We have again seen strong competition in some areas of our focus with pressure being put upon rates. The largest players in the accountancy fee funding market continue to aggressively protect their market positions. The same can be said of the insurance premium finance market. That said, we believe that we are in a strong position to continue to grow our lending volumes at acceptable rates.

The board remains focused on the cost of our own borrowing and continually looks to seek out new ways in which to keep this as low as possible. Potential sources of liquidity for the group are always examined and we continue to keep all our options under review. With this in mind, you will note our CEO's comments on the banking licence application in his review. It is the way forward for the group.

We continue to support our partners through the development of our own IT system. All our finance company clients now use this system and it has enabled us to offer the new products mentioned earlier.

We were approached by Accolade Education Finance Limited, with a view to helping them raise finance and give them our experience and support as a lending company. In return, in September last year, we acquired a 20% stake in the company at no cost. In June this year we made two investments - a 30% stake in Open B Gateway Limited and a 35% stake in Zebra Finance Limited. The investment in Open B Gateway Limited was made because of our strong belief that IT will be the most significant factor in the financial services sector over the coming years, particularly in open banking systems. Our CEO gives more detail on this in his review. Our stake in Zebra Finance Limited was in the nature of a strategic investment - there was a perceived mutual, longer term benefit to operating closely together. Unfortunately, as a result of events after the acquisition within the company, we believe that the fair value of the investment was £nil and we are carrying it at that value.

The board is very satisfied with the progress of the group to date. The financial highlights on page 1 show how far we have come in the last three years in terms of lending, revenue and profit after tax.  We will continue to examine all appropriate strategic avenues for the group and will also continue to make the investments necessary to ensure continuing success while, at the same time, remaining focused on the cost of our borrowing, the rates returned and the size and quality of the loans we provide.

We should like to welcome Ketan Malde, the former Chief Financial Officer of Hampshire Trust Bank PLC, who joined the board on 1 September 2019.

We should also like to thank Jonathan Shearman for all his hard work on behalf of the group since he joined the board in 2015. Jonathan will be standing down at the next AGM on 12 December this year. We wish him well.

We look to the future with confidence.

Gary Jennison

Chairman

30 October 2019

Chief executive's review

We are very happy to be able to report another successful year to our staff, funders and shareholders. Our first full financial year as a listed company ended on 31 July 2016. Over a period of three years ending 31 July 2019, Orchard has year on year significantly grown its business. We have materially increased lending, income and profits and maintained strict control over costs.

We are still a small player in a very large market dominated by two huge and aggressive financial institutions, who have dominated the market for over 20 years and between them lent over £6 billion per year in the market in 2018. Despite very aggressive competition from the two market leaders, we have continued to grow our business.

We have also seen the rise of new forms of liquidity in the market, from peer to peer lenders to challenger banks. We continue to run our own race, looking after our clients and writing business prudently and carefully as our philosophy has always been to be a prudent and conservative lender.

We are supported by a great and loyal staff from our offices in Luton. We continue to grow staff numbers in a controlled manner, supporting our senior managers who have worked in the business for over ten years. We believe their quality and loyalty is a great benefit to our business and enables us to continue to deliver a very high level of service to our clients.

The quality and commitment of our staff has enabled us to develop our own bespoke IT system, Lend XP. As well as supporting our business, Lend XP is now used by all of our finance company clients. Lend XP enables us to integrate effectively and efficiently with 3^rd party IT systems. This has already increased our operational efficiency and has increased our ability to conduct business with introducers, for whom IT integration is a pre-condition to doing business. Notwithstanding the development, testing and implementation of a new in-house IT system, we have increased our profits on a year on year basis. This again exemplifies our philosophy of spending and investing money prudently and only in the best interests of our business and our stakeholders.

The development of our own IT system has also enabled us to offer new products, which are adjacent to our existing product offering. This is a very exciting development in our business and has great potential benefits for the business in the future. Through our own IT system, we have been testing lending in the following finance markets: school fees, golf fees, sport season tickets and other similar markets. All of these markets have similar credit characteristics to our core markets, thus providing significant potential to increase our lending in the future without increasing our risk profile.

We believe that IT will be the most significant factor in the financial services sector over the coming years. As stated, we have already taken the initiative on this point by developing our own IT system. We have also entered into a venture where we hold 30% in a new open banking software company, Open B Gateway Limited. We are very excited about this investment for a number of reasons. Regulatory rules require affordability assessments to be conducted in respect of each borrower. We believe the only way to conduct effective affordability assessments is through a review of a borrower's bank statements. This is usually impractical for short-term point of sale financing and can only be achieved through sophisticated IT solutions. Orchard's open-banking venture will provide this ability in real time and form a key part of Orchard's underwriting process. This solution will be invaluable to Orchard but will also be an attractive service to other lenders in the lending market, who have already expressed interest in conducting trials on Orchard's open-banking solution. The open-banking solution will also offer benefits to Orchard before it enters new markets as the real-time solution will ensure that credit offered to borrowers is effectively underwritten.

With respect to new lending in the business, we have successfully completed a trial in the school fee finance market and recently signed a contract with a leading park homes operator to fund its future annual site fees. We believe that schools fees and the park homes market represent a significant opportunity for lending growth in the future. We will be seeking to take advantage of these opportunities in the current financial year.

We would like to provide thanks to Barclays Bank PLC and Conister Bank PLC for our current liquidity lines. We have adequate liquidity for our near-term lending aspirations. As shareholders are aware, we are keen to obtain a banking licence for Orchard's business. After considering the acquisition of a business with an existing banking licence, we have determined that the inherent risk in buying a bank with a legacy loan book is not attractive to Orchard. We are therefore refreshing our banking documentation and plan to re-submit our application in the current financial year. We will need to bolster our senior management team to support our application and have already started this process with the recent appointment of Ketan Malde, the former Chief Financial Officer of Hampshire Trust Bank PLC to the Board. As with all benefits, there are costs. This is the same for a bank licence. Whilst a bank licence will vastly expand liquidity available to Orchard and substantially reduce the costs of Orchard's funding, there are also costs to having a bank licence relating to banking advisor costs, IT system costs, regulatory costs, legal costs and additional staff costs.

In summary, we have delivered growth in profits and NAV year on year since our flotation in 2015. Without impacting profits, we have developed and implemented our own IT system for the future benefit of the business. With the benefit of our new IT system we have the ability and have tested adjacent markets, which can substantially increase our lending over time. We have embraced the importance of IT to improve our underwriting and created a venture to benefit from open banking software. We believe we are well placed to obtain a banking licence, which will significantly enhance our ability to grow in the future. Our exciting future is all due to the commitment and hard work of our staff and the support of our shareholders, to whom we give many thanks.

We paid a dividend of 2p per share in December 2018 and an interim of 1p per share in April 2019. I am happy to announce that the board has proposed a final dividend of 2p per share to be paid in December 2019, subject to shareholder approval.

Ravi Takhar

Chief executive officer

30 October 2019

 

Group strategic report

Strategy and objectives

The group's principal objective is to increase our profitability in a prudent, sustainable manner. The reason for this is that our stakeholders (employees, shareholders, partners, other customers, creditors, regulators and other parts of government) will all benefit from profit growth in the group.

We have six strategic drivers behind this objective:

·      to differentiate our business from that of our competitors, based on service excellence, correct pricing and robust underwriting procedures;

·      to increase lending;

·      to undertake safe lending for our sources of liquidity;

·      to innovate;

·      to continually improve our IT systems;

·      to support our excellent sales team in their work.

The directors believe that lending increases will come from increasing the number of our partners who fit in with our business values (brokers, accountants and other third party introducers) as well as by increasing the volume of business from these partners.

The bank application process was withdrawn for reasons given in the development and performance of the business section. In the same section we explain that the process has been restarted. This long-standing strategic goal will enable us to increase our access to liquidity as well as reducing the costs of funding further and reduce our reliance on commercial lenders as we build our customer deposit base.

As far as innovation is concerned, we constantly strive to examine markets which we can service based on our philosophy of safe lending and good returns. This is the first year that we have treated adjacent product lines outside of those in which we traditionally operated - insurance broking and professional fees.

Our IT system is now completely in-house, providing stability for our future business, the ability to increase lending in our core markets where IT system integration is required and the ability to enter new markets.

Our sales team are our first line in dealing with our partners, arranging prospect meetings and, where required, making use of senior personnel to help them close a deal. Care of our partners is of paramount importance in our business culture and this aspect is a constant part of training for all staff. Feedback from our partners in this area has been positive.

The aim going forward is to build strongly on both our core markets and those which assist in achieving our principal objective.

Our business model

The group's business is providing credit to businesses and consumers to enable them to spread the cost of their insurance premiums, professional or other fees.

In the past, the group has reported in terms of there being two core areas - insurance premium funding and funding for professionals. As explained last year, we no longer differentiate. The nature of all our products is so similar in terms of risk, reward and processes that any segregation would not give meaningful information to users of the financial statements. Segregated information will only be reported on if required by regulation.

Bexhill borrows up to 75% of the amount advanced to each of its clients (up to a maximum of £17m) from its bankers, Barclays Bank plc. There are lending covenants which Bexhill has always upheld. Orchard has a borrowing facility of £2m with Conister Bank. £15.68m of the Barclays facility was in use at the year and £0.50m of the Conister facility. The balance of lending is provided by these companies from their own cash resources. At 31 July 2019 the group had capital and reserves of £14.97m. Both subsidiaries have operated within a disciplined lending environment since their inception. Barclays performs regular reviews and supplements these with an audit of our covenants with the bank every six months by external independent auditors. Conister requires information on lending to be sent on a regular basis. Lending limits to our supporting partners and to the end borrowers are set by reference to financial (credit reports, regulatory and other requirements) and other qualitative information for both. In addition, an annual review process, including regulatory permissions and credit checks, is conducted for each partner and each partner is monitored monthly for the company's financial exposure to that entity.

The group's average cost of finance was approximately 3.63% in the financial year to 31 July 2019 (3.34% on the same basis in the year to 31 July 2018). Barclays borrowing is based on LIBOR which, on average, has increased over the previous year.

 

 

Principal risks and uncertainties

The group's activities expose it to a variety of risks. The board has identified the following Key Risk Indicators (KRIs):

·      credit risk;

·      liquidity risk;

·      interest rate risk;

·      systems risk and

·      conduct risk.

The group's overall risk management programme focuses on reducing the effect of these risks on the group's financial performance. First, it establishes a risk appetite for the key risk areas. This is the level at which risk is accepted by the group before action needs to be taken. A regular assessment of the principal risks affecting the group is carried out by the board of directors. It identifies, evaluates and mitigates financial risks and has written policies for all risk areas.

The principal risks, an explanation of what they are, their impact on the group and how they are mitigated, are shown in Tables 1 and 2 below. Our sole business is lending money and therefore the risks apply to this area.

There are other risks associated with general financial uncertainty in this business (or in any other business), e.g. loss of staff and insurance risk. These have been reviewed but are not considered key or principal risks.

We are committed to maintaining the highest standards of ethics and integrity in the way we do business. We adopt a zero tolerance approach to bribery and fraud and expect our business partners to do the same. Our staff are encouraged to contact the board if they have any concerns in this regard.

Table 1 principal risks - explanation, impact and year on year assessment

Risk	Explanation of risk	Impact on the group	Assessment of change in risk year-on-year
Credit risk	The risk that debtors will default.	A major loss could have a serious effect on group profit.	This is an ongoing situation.  Despite mitigation there is still risk that significant bad debts may occur.
Liquidity risk	A lack of funding to finance our business.	If our funding had been halved for the whole of the 2019 year, our lending would have reduced proportionately. Had there been no changes in overheads, there would still have been a pre-tax profit. Headroom is good.	This is an ongoing situation. There has been no change in this risk.
Interest rate risk	An increase in bank rate means that loans already made need to be covered by new borrowing at a higher rate.	Loans already made will be effectively charged at a lower margin for part of the borrowing term. In any realistic scenario, liquidity and solvency would not be significantly affected.	This is an ongoing situation. Despite an increase in rates this year, there has been no significant change in this risk.
Systems risk	Disruption to or failure of our IT systems.	Persistent failures would have an enormous impact on our business and could lead to its collapse. Clearly, this would affect solvency.	This is an ongoing situation. Our new system will give us more control but will not effect any change in this risk.
Conduct risk	Any action that leads to customer detriment or has an adverse effect on market stability or effective competition.	Failing to bring conduct risk in line faces regulatory action, fines, and reputational damage, which can harm us for years beyond the event.	This is an ongoing risk.

 

Table 2 principal risks - risk appetite and mitigation

Risk	Risk appetite	Mitigation of risk
Credit risk	Our aim is to limit credit losses to below 1% of assets.	Money is only lent for periods up to one year mainly through introducers who guarantee the loans. Borrowing limits are set based on prudent underwriting principles. Impairment reviews are regularly conducted to identify potential problems early.
Liquidity risk	We aim to have 5% more than would be sufficient to enable our plans to be met.	Our principal bankers have supported us since 2002 and increased our funding at the beginning of the year by an additional £2m to £17m. They have renewed our facility for another year and have indicated, so far as they are able, that they have no wish to withdraw that support. We also have additional banking facilities from Conister Bank plc to support our loan book. Excess available credit and our own cash balances amounted to £4.96m at 31 July 2019.
Interest rate risk	This is outside our control but any estimate of a likely increase in rates in excess of 50% of what we are currently paying would require action to be taken.  50% seems a high figure but had rates increased by 50% and had we been unable to pass this on to borrowers, PBT would still have been £1.8m	Management is in regular contact with its bankers and routinely reviews the financial situation in the economy. Loans made are relatively short term (no more than twelve months with the average at ten) so any increase is likely to have a fairly short-term impact.
Systems risk	There is no risk appetite for systems failure.	Our controls are such that even a minor disruption is very quickly picked up and action taken. Systems are covered by a support contract which enables quick identification of any problems. Remote support access enables prompt resolution of incidents. Internet connection provides guaranteed access.
Conduct risk	The board has no appetite for non-compliance with regulation or for any instance of fraud.	The board sets the minimum standards required and provides oversight to monitor that these risks are managed effectively and escalated where appropriate. The CEO manages development of and needs to recommend new products for board approval. Initial and ongoing recorded training is provided to staff. Due diligence is conducted on all partners and reviewed on at least an annual basis.

In summary:

·      credit risk is reduced by a robust system of checks on introducers, borrowers and by third party guarantees;

·      liquidity risk is alleviated by funding lines from our bankers;

·      interest rate risk is mitigated by the fact that loans are short term and by regular interaction with our bankers;

·      risk from disruption of the IT system is avoided by thorough business continuity procedures; and

·      conduct risk is mitigated by staff training and board oversight.

The nature of the business is that loans are made either to introducer finance companies or to clients of our introducing partners. Although there is some significant lending to individual finance companies, (at 5 September 2019, the latest date of review, the largest nominal exposure was £4.86m representing 15.15% of our loans), the individual debts making up these loans are collected by Orchard and assigned to Orchard.  The reality, therefore, is that our exposure is low. At 5 September 2019 total outstanding loans were £32.07m, of which the highest individual loan (not a block loan to a premium finance company) was £0.21m, representing 0.66% of the outstanding amounts. This was the realistic level of our highest exposure at that date. The situation was similar throughout the year and is expected to remain so for the foreseeable future.

We have experienced late payments in the past. The majority of these are through clients of our introducers (or the introducers themselves) changing banking details. Where there are other issues which cause late payment, we investigate these.

The main uncertainty is the level of potential bad debt. We review debts for impairment (using several indicators) and make provision where necessary. In this respect IFRS9 has had little impact, as our debt is short term (less than one year) and we have already been using a model similar to the expected credit loss model in providing for potential bad debts. As part of this process, we have provided for £0.11m during the year to 31 July 2019, net of reversal of previous provisions and items written off against those provisions (£0.29m in the year to 31 July 2018). The provision this year is £0.42m carried forward at 31 July 2019 (£0.34m at 31 July 2018).

The business environment

The insurance premium finance market in which the group operates is still expected by the board to grow over the next five years in line with the general insurance market. We believe that most of our premium finance growth will come from the direct insurance side rather than from broker premium funding companies, although the premium funding company activities will remain the largest part of the business for the foreseeable future. The market for professional fee finance has continued to slow, but the additional and adjacent product lines now account for approximately 2.75% of our lending. We are still witnessing an aggressive response from our competitors, particularly in the area of professional funding, and this has meant a lot of hard work to get to where we are. We continue to look at new product lines and continue to follow the same vigorous, disciplined approach when looking at any sectors.

At the time of writing, there is, still, the continuing uncertainty attaching to the UK leaving the European Union, which applies to many businesses.  However, the board believes that the direct effect of this on Orchard will not be significant in the short to medium term. Conditions arising from this process have had little impact on us so far. If interest rates rise further, the nature of the business will allow us to react reasonably quickly as our loans are on average of ten months duration with none over twelve. Increases in interest rates will also lead to availability of liquidity becoming more important for businesses and consumers and the board believes that this will bring further opportunities for Orchard. Reductions in the value of the pound against other traded currencies may well have a more damaging impact in the wider economy. If there is a substantial number of business failures and job losses, there may be negative implications for the group.

Development and performance of the business

Overview

In general, business is continuing to grow with loans, revenue and profit before tax all up year on year. Product lines already introduced and potential new lines are reviewed regularly to evaluate the impact they are having on the business. To date that impact has been positive.

The group is keen to obtain a banking licence to protect its access to liquidity. This was reported last year. During the financial year to 31 July 2019, the board looked at acquiring an existing bank with a licence. Consequently, in April this year we announced that we had withdrawn our application for our own banking licence. After conducting due diligence to determine whether it should acquire the bank, the acquisition was not pursued. The process of obtaining our own licence has therefore been restarted and is progressing. The board anticipates re-submitting its bank application in this financial year.

During the year we made three investments. The first was in Accolade Education Finance Limited. We were gifted shares in Accolade so that it had an already well established finance company as a shareholder. This added weight in its case for raising finance from a third party and gave it the benefit of using Orchard's experience in lending.

The second was Open B Gateway Limited. Ravi Takhar had originally taken a 30% stake in this (300 shares). This holding was transferred to Orchard Funding Group plc at par value of £300 on 11 June 2019. This company had not traded at 31 July 2019 but will be involved in business software development. This investment fits well with the rest of our business, as explained in the Chief executive's review.

The third was on 17 June 2019 and was in Zebra Finance Limited, a short-term finance company that operates in markets adjacent to the group's markets. The stake taken was 35% at a cost of £56,000. This acquisition was in the nature of a strategic investment. It was never intended that we have board representation, take part in financial decisions, exchange managerial personnel or transact any material business between this company and the group. It was therefore intended to treat this as a trade investment rather than an associate. The group made an irrevocable election on acquisition to have any gains or losses on holding the investment reflected in the Consolidated statement of other comprehensive income.  However, since purchase, certain events have occurred within Zebra Finance Limited which called into question the value of the investment. The board believes the fair value of this investment to be £nil, and it is being carried at that value. The reduction has therefore been included in the Consolidated statement of other comprehensive income.

In summary, the plan for the coming year is to increase our sales in existing markets, expand into new and adjacent markets, and re-apply for our banking licence, whilst continuing to keep costs in line with our plans.

Financial indicators

The fundamental function of the business is to lend money safely. To do this the group has relied on obtaining funding from its bankers to provide loans to our partners and clients of our partners. The ability to provide this money is crucial to the business and availability of funds is a key area to enable future growth. This is the major reason for applying for a banking licence.

The ability to find borrowers is also key to the business. This was discussed at the beginning of this report. We have continued with our more formal and extensive marketing plan. This continues to work well (albeit that economic conditions are still very challenging). Our sales team has been further enhanced during the year.

Our margin is another key area. Upward changes in base rate could erode our margins (but only in the short term). For example, if rates increased immediately after we had provided finance to or through a partner at a particular rate, we should have to bear the increase over the term of that loan. Rates for new lending could, however, be increased. Our own analysis indicates that the influence on our business would be negligible (see Table 2 principal risks - risk appetite and mitigation). Indeed, the changes in bank rate during this and the previous year have had no real impact.

Overheads in this business are relatively stable. We have increases resulting from an increased sales function, increasing our bank borrowings, investment in the banking licence and enhancements to our IT systems. Other overheads have not altered significantly.

KPIs

The directors consider the following financial indicators as KPIs:

·      Lending;

·      Gross rate on loans made;

·      Return on equity (ROE);

·      Borrowing and other capital resources;

·      Cost of borrowing.

The table below gives a breakdown of group KPIs. This also includes those items not considered KPIs but which give a better understanding of the figures.

The increase in loans made in the year and the increase in average rate over the previous year has resulted in increases in reported turnover of £0.32m to £5.49m (2018 £0.61m to £5.17m). As stated earlier the market has been competitive. The directors are pleased with the growth over last year and results.

As would be expected, this increase in lending has led to an increase in borrowing requirement as well as cost of achieving the increase.

Financial summary - key performance indicators

	2019	2018	2017	2016
Lending volume	£72.99m	£68.73m	£63.35m	£48.56m
Average gross rate on loans made	6.34%	6.29%	6.06%	6.22%
Return on equity	10.93%	10.76%	10.16%	8.14%
Level of borrowing	£16.23m	£16.06m	£13.79m	£9.23m
Own capital resources	£14.97m	£14.04m	£13.17m	£12.34m
Cost of borrowing	£0.56m	£0.45m	£0.33m	£0.24m

Financial summary - other performance indicators

Loan book	£32.15m	£30.95m	£28.42m	£21.8m
Revenue	£5.49m	£5.17m	£4.56m	£3.47m
Gross profit	£4.85m	£4.64m	£4.15m	£3.15m
Profit before tax	£2.02m	£1.89m	£1.64m	£1.27m
Profit after tax	£1.63m	£1.51m	£1.34m	£1.00m
EPS (pence)1	7.66	7.08	6.26	4.70
DPS (pence)2	3.00	3.00	3.00	2.81
Return on capital employed	7.24%	6.58%	6.73%	6.41%

1.     There are no factors which would dilute earnings therefore fully diluted earnings per share are identical.

2.     Dividends per share are based on interim dividends paid in the year and proposed final dividend for the year.

 

Non-financial indicators

Staffing

In terms of non-financial indicators, the most important of these is quality of management and staff.

Our senior members of staff have been with us for many years, working through various aspects of the business over that time.

All our staff are fully trained for the role which they take. Customer care is of paramount importance in our business culture and this aspect is a constant part of training for all staff members. Feedback from our partners in this area has been very positive. Performance targets set for our staff have all been met.

People are happy to contribute towards our success and their views are always listened to by senior management. In many cases ideas which come forward are put into action and explanations are always given when this does not happen.

Partner retention

Partner retention is extremely important in our business. This couples well with another non-financial indicator, brand preference. As our partner base grows, so does awareness of who we are and what we do. We review our partner base regularly to establish whether they are increasing or decreasing the amount of business they do with us. Action is quickly taken if business from one source is dropping.

Innovation

One of our key strategies is non-financial - innovation. Innovation is the ability to continually evolve and grow our business in our chosen markets. For example, we have tested adjacent credit markets. When looking at new products we stay within our risk parameters and examine whether the returns justify the resources expended. If new products fit our return and risk expectations, we proceed with testing our lending on the product.

Quality of lending

Our lending has been based on sound underwriting since we began - we carefully assess any person or body to whom we lend. In addition, we receive at least one instalment before we pay out (eliminating first payment default), the direct debit establishes timely collection and electronic link to borrower, our partners guarantee the payment should the end borrower default and, if the partner fails, we have the financial services compensation scheme to fall back on.

 

Going concern

The financial statements have been prepared on a going concern basis which assumes that the group will be able to continue its operations for the foreseeable future.

The directors continually assess the prospects of the group. Forecasts are prepared for a three-year period, on a rolling basis. These are also subject to sensitivity analysis, the main aspect of which is the value of loans made. In all scenarios, there is no indication that there will be a problem in continuing as a going concern. However, it is important to appreciate that the further away in time the estimate, the less reliable it is. The forecasts last year were prepared on the basis that bank base rate will rise by 0.25% pa over the next three years.

This was based on an indication by Mark Carney, Governor of the Bank of England at that time. Given the continuing, inherent uncertainty surrounding leaving the EU, it is impossible to assess what is likely to happen going forward. We have therefore continued forecasting assuming a 0.25% increase in the next two years.

Should this be the case we are in a position to react within a short period of time (as mentioned in the section on interest rate risk in this report) and with relatively little impact on our margins.

The key assumptions and bases used in the forecasts are:

·    Loans through our partners will grow from circa £73m in 2019 to circa £90m in 2021;

·    Liquidity will be available to fund those loans;

·    Margins will remain stable on both corporate and direct business;

·    Overheads will increase at the rate of inflation with stepped increases at certain points, e.g. when capacity constraints are hit or when project spending is required (as an example, the bank licence);

·    The funding system will be able to accommodate the increased business.

The Consolidated statement of financial position shows the situation at the 31 July 2019 in detail.

The directors have prepared and reviewed the financial projections covering a period of three years from the date of signing of these financial statements. Based on the level of existing cash and the projected income and expenditure, the directors have a reasonable expectation that the company and group have adequate resources to continue in business for the foreseeable future. Accordingly, the going concern basis has been used in preparing the financial statements.

 

Environmental, social responsibility, community, human rights issues and gender diversity

The group is a small group. The impact of the group on the environment consists of power used in an office environment and fuel used for getting to and from work. Environmental issues are therefore negligible.

The group operates out of an office in Luton. Most of our employees are based in the local area. We therefore contribute to the economy of the local community. None of our employees earn less than £10 per hour (before any bonuses). We provide health club membership and childcare vouchers for any staff who wish it. We review the background of our suppliers and will not use any supplier which, as far as we are aware, breaches our own high standards as regards human rights.

The main board of directors is currently all male. The main reason for this situation is that the group took in outside board members who were best suited to the positions. The board of the two subsidiaries consist of one male and two females each. Males make up 68.00% of the employees in total (57.89% in 2018).

The board of directors is currently all male. The main reason for this situation is that the group took in outside board members who were best suited to the positions. The board of the two subsidiaries consist of one male and two female directors each.

Approved by the directors and signed by order of the board

Liam McShane,

Company secretary

30 October 2019

Consolidated income statement      

		2019	2018 (as restated)
	Notes	£000	£000
Continuing operations
Interest revenue	4	4,624	4,325
Other revenue	4	857	848
Total revenue		5,481	5,174
Finance costs	6	(558)	(452)
Other operational costs	5	(72)	(83)
Gross profit		4,851	4,639
Administrative expenses	5	(2,726)	(2,456)
Net impairment losses on financial and contract assets	10	(111)	(290)
Net gain on financial assets at fair value through consolidated income		6	-
Operating profit		2,020	1,893
Interest receivable on bank balances		5	-
Interest payable		(4)	-
Profit before tax		2,021	1,893
Tax		(387)	(381)
Profit for the year from continuing operations attributable to the owners of the parent		1,634	1,512
Earnings per share attributable to the owners of the parent during the year (pence)
Basic and diluted	9	7.66	7.08

The comparatives in the Consolidated income statement have been restated for revised disclosures in respect of income, interest and impairments.  

 

Consolidated statement of other comprehensive income

		2019	2018
	Notes	£000	£000
Profit for the year from continuing operations attributable to the owners of the parent		1,634	1,512
Items that will not be reclassified to profit or loss:
Changes in the fair value of equity investments at fair value through other comprehensive income:
Changes in fair value of investments		(56)	-
Total comprehensive income for the year from continuing operations attributable to the owners of the parent		1,578	1,512

An equity investment was acquired in June 2019. The group has made an irrevocable election to adjust changes in fair values through other comprehensive income. The investment has been reduced to its estimated fair value of £nil.

Consolidated statement of financial position

		2019	2018 (as restated)
	Notes	£000	£000
Assets
Non-current assets
Property, plant and equipment		29	31
Right of use assets		58	28
Intangible assets		42	42
Deferred tax asset		10	-
Investment accounted for using the equity method		-	-
Investment at fair value through consolidated income		6	-
Investment at fair value through other comprehensive income		-	-
Other receivables	10	12	18
		157	119
Current assets
Trade and other receivables	10	32,297	31,084
Cash and cash equivalents:
Bank balances		2,139	1,286
		34,436	32,370
Total assets		34,593	32,489
Equity and liabilities
Equity attributable to the owners of the parent
Called up share capital		214	214
Share premium		8,692	8,692
Merger reserve		891	891
Retained earnings		5,173	4,240
Total equity		14,970	14,037
Liabilities
Non-current liabilities
Borrowings	12	15	49
Deferred tax liabilities		5	5
		20	54
Current liabilities
Trade and other payables	13	3,015	2,051
Borrowings	12	16,218	16,008
Tax payable		370	339
		19,603	18,398
Total liabilities		19,623	18,452
Total equity and liabilities		34,593	32,489

The comparatives in the Consolidated statement of financial position have been restated in respect of right of use assets previously included as property, plant and equipment.

 

Consolidated statement of changes in equity

 

		Called up
		share	Retained	Share	Merger	Total
		capital	Earnings	Premium	reserve	equity
	Notes	£000	£000	£000	£000	£000
Balance at 1 August 2017		214	3,369	8,692	891	13,166
Changes in equity
Profit and total comprehensive income		-	1,512	-	-	1,512
Transactions with owners:
Dividends paid		-	(641)	-	-	(641)
Balance at 31 July 2018		214	4,240	8,692	891	14,037
Change in accounting policy	2	-	(4)	-	-	(4)-
Restated total equity at the beginning of the financial year		214	4,236	8,692	891	14,033
Changes in equity
Profit for the period		-	1,634	-	-	1,634
Movement in equity investments at fair value through other comprehensive income		-	(56)	-	-	(56)
Total comprehensive income for the period		-	1,578	-	-	1,578
Transactions with owners:
Dividends paid		-	(641)	-	-	(641)
Balance at 31 July 2019		214	5,173	8,692	891	14,970

Retained earnings consist of accumulated profits less losses of the group. They represent the amounts available for further investment in group activities. Only the element which constitutes profits of the parent company are available for distribution. There are no restrictions on payment of dividends by the subsidiaries to the parent or by the parent to shareholders.

The share premium account arose on the IPO on 1 July 2015 at a premium of 95p per share. Costs of the IPO have been deducted from the account as permitted by IFRS.

The merger reserve arose through the formation of the group on 23 June 2015 using the capital reorganisation method.

 

Consolidated statement of cash flows

		2019	2018
	Notes	£000	£000
Cash flows from operating activities:
Operating profit		2,020	1,893
Adjustment for depreciation and amortisation		83	56
Hire purchase interest		-	2
		2,103	1,951
Increase in trade and other receivables		(1,211)	(2,556)
Increase/(decrease) in trade and other payables		970	(1,131)
		1,862	(1,736)
Tax paid		(364)	(323)
Net cash generated from/(absorbed by) operating activities		1,498	(2,059)
Cash flows from investing activities
Purchases of property, plant and equipment		(16)	(1)
Purchase of intangible fixed assets		(36)	(5)
Purchase of investment accounted for using the equity method (associate)		-	-
Purchase of investment at fair value through other comprehensive income		(56)	-
Net cash absorbed by investing activities		(108)	(6)
Cash flows from financing activities
Dividends paid		(641)	(641)
Net proceeds from borrowings		684	2,276
Borrowings repaid		(541)	-
Borrowings in respect of right of use assets repaid		(31)	-
Hire purchase repaid		(8)	(12)
Net cash (absorbed by)/generated from financing activities	12	(537)	1,623
Net increase/(decrease) in cash and cash equivalents		853	(442)
Cash and cash equivalents at the beginning of the year		1,286	1,728
Cash and cash equivalents at the end of year		2,139	1,286

Notes to the consolidated financial statements

1.   Preliminary announcement

Orchard Funding Group plc ("Orchard") is a public limited company incorporated and domiciled in England

and Wales, whose shares are publicly traded on the AIM market of the London Stock Exchange. The registered

office is 721 Capability Green, Luton, Bedfordshire LU1 3LU and the principal place of business is the United

Kingdom.

The preliminary announcement set out above does not constitute Orchard's statutory financial statements for

the years ended 31 July 2019 or 2018 within the meaning of section 434 of the Companies Act 2006 but is

derived from those audited financial statements. The auditor's report on the consolidated financial statements

for the years ended 31 July 2018 and 2017 is unqualified and does not contain statements under s498(2) or

(3) of the Companies Act 2006.

Subject to the disclosures in note 2 below, the accounting policies used for the year ended 31 July 2019 are unchanged from those used for the statutory financial statements for the year ended 31 July 2018. The 2019 statutory accounts will be delivered to the Registrar of Companies following the company's Annual General Meeting.

2.   Compliance with accounting standards

While the financial information included in this preliminary announcement has been computed in accordance with IFRS, this announcement does not itself contain sufficient information to comply with IFRS.

Accounting standards adopted in the year

The group adopted IFRS 9 Financial Instruments (as revised in 2014), IFRS 15 Revenue from contracts with customers and early adopted IFRS 16 Leases.

The effect of the adoption of IFRS 9 led to accounting for an investment at fair value through the income statement, and the adoption of the expected credit loss model as opposed to the incurred credit loss model. There were no other material differences between the measurement of these instruments under IAS 39 and under FRS 9.

The effect of the adoption of IFRS 15 led to enhanced disclosures. There were no material adjustments needed in respect of measurement.

The adoption of IFRS 16 has resulted in the recognition of an additional asset and liability together with an accumulated reduction in retained earnings up to 1 August 2018. The full impact is shown below. The impact over the next two years will be to have a higher charge for interest payable and a lower one for administrative expenses than would have been the case under IAS 17. Profit before tax will be unaffected while the tax charge will be affected by the reversal of part of the applicable deferred tax asset. This will not be material.

The adoption of the above standards has resulted in consequential disclosure amendments to IAS 1 Presentation of financial statements and IFRS 7 Financial Instruments: Disclosure. There is no other material impact on the group's financial performance or financial position.

Changes in accounting policy

The group leases its premises under a five year, non-cancellable lease. Until 2018, this was treated as an operating lease. The group has adopted the provisions of IFRS 16 early and this lease has therefore been reclassified as a finance lease. Accordingly, the property has been brought on to the Consolidated statement of financial position at the present value of the minimum lease payments on 1 August 2018, as this is lower than the fair value of the asset. It is shown above as an adjustment to the opening position on property, plant and equipment. In this respect the group has opted to apply the standard retrospectively with the cumulative effect as an adjustment to the opening balance of retained earnings as shown in the Consolidated statement of changes in equity. The discount rate used in determining the value of the liability on initial application of IFRS 16 is the group's incremental borrowing rate of 4.99%.

There is no need to restate comparatives and no need for an additional column in the Consolidated statement of financial position.

 

The table below shows the effect of the adoption of IFRS 16 on the Consolidated statement of financial position.

	As previously stated at 31 July 2018	IFRS 16 amendments	As restated at 1 August 2018
	£000	£000	£000
Non-current assets
Property, plant and equipment	59	-	59
Right of use assets	-	60	60
Intangible assets	42	-	42
Deferred tax asset	-	1	1
Financial assets at amortised cost	18	-	18
Current assets
Trade and other receivables	31.084	(4)	31,080
Cash and cash equivalents	1,286	-	1,286
Total assets	32,489	57	32,546
Equity
Share capital and other reserves	9,797	-	9,797
Retained earnings	4,240	(4)	4,236
	14,037	(4)	14,033
Non-current liabilities
Borrowings	49	40	89
Deferred tax liabilities	5		5
Current liabilities
Trade and other payables	2,051	(7)	2,044
Borrowings	16,008	28	16,036
Tax payable	339	-	339
Total liabilities	18,452	57	18,513
Total equity and liabilities	32,489	57	32,546

3.  Going concern

      The financial statements have been prepared on a going concern basis which assumes that the group will be able to continue its operations for the foreseeable future.

The directors have prepared and reviewed financial projections covering a period of just under three years from the date of signing of these financial statements. Based on the level of existing cash and the projected income and expenditure, the directors have a reasonable expectation that the company and group have adequate resources to continue in business for the foreseeable future.

Accordingly, the going concern basis has been used in preparing the financial statements. This is discussed more fully in the Group strategic report. Orchard Funding group plc ("the company") and its subsidiaries (together "the group") provide funding and funding support systems to insurance brokers and professional firms through the trading subsidiaries. The group operates in the United Kingdom.

4.       Segment information

The group operates wholly within the United Kingdom therefore there is no meaningful information that could be given on a geographical basis. Since 2017 the board has only recognised one segment - lending. This is because the risks, rewards and management in all aspects of lending are so similar that any segregation (other than central costs) would not give meaningful information to users of the financial statements.

The board therefore assesses the entire business based on operating profit (before tax and exceptional items, but after finance costs which are a cost of sale). Revenue consists of income which is recognised at a single point in time and that which occurs over a given period (up to one year). No income is receivable in more than one year.

 

2019

	Total	Central	Financing
	£000	£000	£000
Revenue
Other income - interest receivable using the effective interest rate method	4,671	-	4,671
Revenue from contracts with customers - other revenue	810	-	810
	5,481	-	5,481
Timing of revenue recognition:
At a point in time - direct debit charges	360	-	360
At a point in time - non utilisation fees	306	-	306
Over time - licence fees	144	-	153
Over time - interest revenue outside the scope of IFRS 15	4,671	-	4,671
	5,481	-	5,481
Interest payable	(558)	-	(558)
Operational costs and administrative expenses	(2,902)	(723)	(2,179)
Profit before tax	2,021	(723)	2,744
Current tax expense	(387)	(1)	(386)
Profit/(loss) for the year after tax	1,634	(724)	2,358

2018

	Total	Central	Financing
	£000	£000	£000
Revenue
Other income - interest receivable using the effective interest rate method	4,367	-	4,367
Revenue from contracts with customers - other revenue	807	-	807
	5,174	-	5,174
Timing of revenue recognition:
At a point in time - direct debit charges	384	-	384
At a point in time - non utilisation fees	270	-	270
Over time - licence fees	153	-	153
Over time - interest revenue outside the scope of IFRS 15	4,367	-	4,367
	5,174	-	5,174
Interest payable	(452)	-	(452)
Operational costs and administrative expenses	(2,829)	(658)	(2,171)
Profit before tax	1,893	(658)	2,551
Current tax expense	(381)	-	(381)
Profit/(loss) for the year after tax	1,512	(658)	2,170

The comparatives have been restated for revised disclosures in respect of income.

Other revenue consists primarily of bank charges paid on behalf of an agent company, Associated Premium Funding Limited, and recovered from that company together with fees to customers who do not use the financing facility offered (non-use fees).

 

5.       Expenses by nature

		2019	2018 (as restated)
		£000	£000
Interest payable in cost of sales		558	452
Other operational costs		72	83
Employee costs (including directors)	(note	1,100	1,002
Advertising and selling costs		413	273
Bank fees		545	553
Professional and legal fees		198	198
Impairment losses		111	290
IT costs		91	66
Depreciation and amortisation		80	56
Fair value gains on investments		(6)	-
Interest payable on hire purchase contracts		1	2
Interest payable on leased assets		3	-
Other expenses		294	306
Total cost of sales, other operational costs, administrative expenses, impairment losses and finance costs		3,460	3,281

6.       Finance income and costs

The group's income comes from making loans.

Interest payable on borrowings to finance these loans is therefore included as a cost of sale (Finance costs). The amount included was £558k (2018 £452k).

7.       Tax expense

7.1       Current year tax charge

	2019	2018
	£000	£000
Current tax expense	396	365
Adjustment re previous year tax expense	-	18
Deferred tax expense relating to the origination and reversal of temporary differences	(9)	(2)
	387	381

7.2       Tax reconciliation

The tax assessed for the year differs from the main corporation tax rates in the UK (19%, 2018 - 19%).

The differences are explained below.

	2019	2018
	£000	£000
Profit before tax for the financial year	2,020	1,893
Applicable rate - 19.00% (2018 19.00%)	19.00%	19.00%
Tax at the applicable rate	384	360
Effects of:
Expenses not deductible for tax	2	3
Adjustment re previous year tax expense	-	18
Reduced rate of tax on reversing timing differences	1
Tax charge for the period	387	381

 

8.          Dividends

	2019	2018
	£000	£000
Amounts recognised as distributions to equity holders in the period:
Final dividend for the year ended 31 July 2018 of 2p (2017 1.405p) per share	427	427
Interim dividend for the year ended 31 July 2019 of 1p (2018 1p) per share	214	214
	641	641
Proposed final dividend for the year ended 2019 of 2p (2018 2p) per share	427	427

9.          Earnings per share

Earnings per share is based on the profit for the year of £1.63m (2018 £1.51m) and the weighted average number of the ordinary shares in issue during the year of 21.35m (2018 21.35m). There are no options or other factors which would dilute these therefore the fully diluted earnings per share is identical.

10.     Trade and other receivables

	2019		2018
	Group	Company	Group	Company
	£000	£000	£000	£000
Non-current
Financial assets at amortised cost
Other receivables	12	-	18	-
	12	-	18	-
Current
Trade receivables
Trade receivables (gross)	32,563	-	31,288	-
Impairment provision	(422)	-	(343)	-
	32,141	-	30,945	-
Other financial assets at amortised cost
Intercompany receivables	-	10,338	-	9,469
Other receivables	134	-	111	-
	134	10,338	111	9,469
Prepayments	22	6	28	2
	32,297	10,344	31,084	9,471

Trade receivables are held to obtain a return by collecting the contractual cash flows on a solely interest and principal basis. They are therefore measured at amortised cost. Standard credit terms for trade receivables are based on the length of the loan but repayments are due on a monthly basis. As part of the impairment review process (and among other evaluation methods), debts on which no repayment has been received in the last 30 days are assessed.

Debts within this 30 day period are not considered past due. Any debts for which repayments are still outstanding after 30 days would be considered overdue and subject to an impairment review. The amount of debts past due but not impaired, for which no provision had been made, at the year-end is shown below. The directors consider that the carrying amount of trade and other receivables approximates to their fair value. There are impaired debts at the year-end amounting to £422k (2018 £343k) against which £53k (net of reversals and amounts written off against the provision) was charged in the year (2018 £290k). Provision has been made in full for these.

 

11.    

The expected credit losses on receivables not past due have been assessed as very low, because of the following factors:

·      No loan is made until the first repayment has been received by the group;

·      In the event of default, the group has recourse to the underlying borrower;

·      In the case of insurance receivables, the Financial Services Compensation Scheme provides additional cover to the group; and

·      For insurance receivables, the cover ceases, premiums paid are refunded, and the group has access to these refunds.

The directors' assessment of the expected credit losses for receivables not past due is that an average impairment rate of 0.2% should be applied. This has resulted in an additional charge of £58k which has included in these financial statements.

Trade receivables can be analysed as follows:

	2019		2018
	Group	Company	Group	Company
	£000	£000	£000	£000
Amount receivable not past due	31,772	-	30,945	-
Amount receivable past due but not impaired	369	-	-	-
Amount receivable impaired (gross)	422	-	343	-
Less impairment	(422)	-	(343)	-
	32,141	-	30,944	-

Amounts shown as past due but not impaired are either covered by the financial services compensation  scheme or there is no expected loss on these debts (after review).

12.     Borrowings

	2019		2018
	Secured	Unsecured	Secured	Unsecured
	£000	£000	£000	£000
Non-current:
Other loans	-	-		41
Hire purchase liabilities	3	-	8	-
Leasing liabilities arising from right of use assets	12	-	-	-
	15	-	8	41
Current:
Bank loans	16,184	-	16,000	-
Other loans	-	-	-	-
Hire purchase liabilities	6	-	8	-
Leasing liabilities arising from right of use assets	28	-	-	-
	16,218	-	16,008	-

12.1     Terms and debt repayment schedule

Barclays Bank borrowings are secured by a fixed and floating charge over all the assets of Bexhill, bear interest at rates of 2.90% above LIBOR plus any associated costs. They are repayable within one year of the advances. The loans are provided on a revolving 12 monthly basis under a facility which was renewed on 29 July 2019. The maximum drawdown on the facility is currently £17m of which £1.32m was undrawn at the year-end (2018 all was drawn). The directors consider that the terms of this facility closely match the maturity dates of the group's receivables.

Conister Bank borrowings are secured over the assets of Orchard Funding, bear interest at a rate of 5% pa and are repayable within one year of the advance. The maximum drawdown facility is currently £2m of which £1.50m was undrawn at the year-end (2018 £1.00m undrawn).

Other loans were unsecured and bore interest at varying rates between 4.00% and 6.25%. They were paid off during the year.

 

The minimum payments under hire purchase liabilities are as follows:

	2019	2018
	Group	Group
	£000	£000
Within 1 year	6	8
Later than 1 year but no later than 5	3	9
	9	17
Future finance charges	(-)	(1)
	9	16

The present value of hire purchase liabilities are as follows:

Within 1 year	6	8
Later than 1 year but no later than 5	3	8
	9	16

Hire purchase liabilities are secured on the assets that they finance and bear interest at varying rates.

The minimum payments under other leasing liabilities are as follows:

	2019	2018
	Group	Group
	£000	£000
Within 1 year	30	-
Later than 1 year but no later than 5	12	-
	42	-
Future finance charges	(2)	-
	40	-

The present value of hire purchase and finance lease liabilities are as follows:

Within 1 year	28	-
Later than 1 year but no later than 5	12	-
	40	-

The lease is secured on the right of use asset that it finances. The liability is discounted using a rate of 4.99%.

 

12.2     Reconciliation of liabilities arising from financing activities

The information given below relates to the group. The parent has no cash-flows from financing activities as all its costs are paid for by its subsidiaries.        

	At 1 August 2017	Cash-flows	At 31 July 2018	Change in accounting policy (note 2)	At 1 August 2018 Restated	Cash-flows	At 31 July 2019
	£000	£000	£000	£000	£000	£000	£000
Non-current:
Other loans	41	-	41	-	41	(41)	-
Hire purchase liabilities	16	(8)	-	40	40	(28)	12
Leasing liabilities	-	-	8	-	8	(5)	3
	57	(8)	49	40	89	(74)	15
Current:					-	-
Bank loans	13,520	2,480	16,000	-	16,000	184	16,184
Other loans	204	(204)	-	-	-	-	-
Hire purchase liabilities	10	(2)	8	-	8	(2)	6
Leasing liabilities contracts	-	-	-	28	28	-	28
	13,734	2,274	16,008	28	16,036	182	16,218
Total liabilities from financing activities	13,791	2,266	16,057	68	16,125	108	16,233
Hire purchase interest included in liabilities		(2)				(4)
Cashflows from financing activities		2,264				104
Comprising:
Net proceeds from borrowings		2,276				684
Borrowings repaid		(12)				(580)
		2,264				104

12.3     Non-cash financing activities

The change in accounting policy of treating operating leases as finance leases has led to a non-cash financing transaction of £68k.

13.     Trade and other payables

	2019		2018
	Group	Company	Group	Company
	£000	£000	£000	£000
Trade payables	2,554	-	1,710	-
Other payables	70	-	51	-
Other tax and social security costs	40	23	33	16
Accrued expenses	351	71	257	35
	3,015	94	2,051	51

Trade payables are unsecured and are usually paid within 30 days of recognition.

14.     Financial instruments

The company is exposed to the risks that arise from its use of financial instruments. The objectives, policies and processes of the company for managing those risks and the methods used to measure them are shown in full detail in the full financial statements.

 

14.1     Principal financial instruments

The principal financial instruments used by the company, from which financial instrument risk arises, are as follows:

● Cash and cash equivalents

● Trade and other receivables

● Trade and other payables

● Borrowings

14.2     Financial instruments by category

The Group held the following financial assets at the reporting date:

	2019		2018
	Group	Company	Group	Company
	£000	£000	£000	£000
Investments: - amortised cost - fair value through profit or loss	- 6	2,813 -	- -	2,807 -
Trade and other receivables:
Other receivables measured at amortised cost: non-current	12	-	18	-
Trade and other receivables: current	32,275	10,338	30,945	9,469
Cash and cash equivalents:
Bank balances and cash in hand	2,139	-	1,286	-
	34,432	13,151	32,360	12,276

The group held the following financial liabilities at the reporting date:

	2019		2018
	Group	Company	Group	Company
	£000	£000	£000	£000
Financial liabilities at amortised cost:
Interest bearing loans and borrowings:
Borrowings payable: non-current	15	-	49	-
Borrowings payable: current	16,218	-	16,008	-
Trade and other payables	2,975	71	2,018	35
	19,208	71	18,075	35

14.3     Fair value of financial instruments

The fair values of the financial assets and liabilities are not materially different to their carrying values due to the short-term nature of the current assets and liabilities.

14.4     Financial risk management

The group's activities expose it to a variety of financial risks. These risks are dealt with in detail in the Group strategic report under Principal risks and uncertainties.

15.     Treatment of borrowings

The group borrows money from its bankers and lends this on, together with its own funds, to its customers.

Any increase in activity leads to an increase in debtors and an associated increase in borrowings. If the company was one which bought and sold goods or services the money borrowed would be similar to the company's stock in trade and the change in creditors would be shown as part of operating cash flows. However, accounting standards require cash flows from financing to be shown separately and this means that there appears to be a large outflow of cash from the company's operations which is then covered by borrowings. For reasons stated above this is not the case.

 

16.     Major non-cash transactions.

The group adopted IFRS 16 early, as a result of which an asset and liability were introduced onto the Consolidated statement of financial position.  In addition, the group received shares at no cost from Accolade Education Finance Limited during the year. The fair value of these was £6k at the year-end.

 

END

 

 

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