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PSource Struct Debt (PSD)

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Monday 27 February, 2012

PSource Struct Debt

Half Yearly Report

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:

47075 (Registered in Guernsey)

Financial adviser and stockbroker to the Company:

Numis Securities Limited

The London Stock Exchange Building

10 Paternoster Square

London, EC4M 7LT

 

Directors:

William Scott, Independent Chairman

Soondra Appavoo

Peter Niven, Independent Director

Tim Jenkinson, Independent Director

Keith Dorrian, Independent Director

 

Auditors to the Company:

KPMG Channel Islands Limited

20 New Street

St Peter Port

Guernsey, GY1 4AN

Company Secretary and Administrator:

Praxis Fund Services Limited

Sarnia House

Le Truchot

St Peter Port

Guernsey, GY1 4NA

Solicitors to the Company:

Eversheds LLP

1 Wood Street

London,  EC2V 7WS

Registered office of the Company:

Sarnia House

Le Truchot

St Peter Port

Guernsey, GY1 4NA

Guernsey lawyers to the Company:

Mourant Ozannes

PO Box 186

1 Le Marchant Street

St Peter Port

Guernsey, GY1 4HP

 

Manager:

PSource Capital Guernsey Limited

Sarnia House

Le Truchot

St Peter Port

Guernsey, GY1 4NA

 

U.S. Counsel:

Alston & Bird LLP

90 Park Avenue

New York, NY 10016-1387

USA

Investment Manager:

Laurus Capital Management, LLC

875 Third Avenue, 3rd Floor

New York, NY 10022

USA

Bankers:

Investec Specialist Private Bank

Glategny Court,

Glategny Esplanade,

St Peter Port,

Guernsey, GY1 3LP

Effective 21 February 2012

Investment Consultant and Promoter:

PSource Capital Limited

126 Jermyn Street

London, SW1Y 4UJ

Custodian:

Wells Fargo Bank                 

45 Broadway,14th Floor        

New York, NY 10006             

USA                                       

Independent Valuation Consultant:

Clayton IPS Corporation

1700 Lincoln Street

Suite 1600

Denver, Colorado 80263

USA

Registrar:

Capita Registrars (Guernsey) Limited

Mont Crevelt House

Bulwer Avenue

St Sampson

Guernsey, GY2 4JN

Clearing Broker:

Albert Fried & Company, LLC

45 Broadway, 24th Floor   

New York, NY 10006

USA

 

 

Executing Broker:

GP Nurmenkari Inc.

6 East 39th Street

New York, NY 10016

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 Saïd 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 2008

Jul

Aug

Sep

Oct

Nov

Dec

Jan

Feb

Mar

Apr

May

Jun

Financial

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 2009

Jul

Aug

Sep

Oct

Nov

Dec

Jan*

Feb

Mar

Apr

May

Jun

Financial

YTD

NAV (p)

110.48

113.17

113.20

110.78

105.49

105.88

-

-

-

-

-

-

-

NAV (¢)*

-

-

-

-

-

-

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 2010

Jul

Aug

Sep

Oct

Nov

Dec

Jan

Feb

Mar

Apr

May

Jun

Financial

YTD

NAV (¢)

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 (¢)

-

-

-

-

-

-

-

-

-

-

-

-

-

 

* 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/£. 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 2011

Jul

Aug

Sep

Oct

Nov

Dec

Jan

Feb

Mar

Apr

May

Jun

Financial

YTD

NAV (¢)

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 (¢)

-

-

-

-

-

-

-

-

-

-

-


-

 

 

1 July 2011

to

30 June 2012

Jul

Aug

Sep

Oct

Nov

Dec

Jan

Feb

Mar

Apr

May

Jun

Financial

YTD

NAV (¢)

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 (¢)

-

-

-

-

-

-

-






-

 

 

§ 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 2011

Period end 31 December 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 2011

 


30 June 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 Share

13

US$1.2450


US$1.6562

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

to

31 December 2011


1 July 2010

to

31 December 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 Share

6

US$(0.4112)


US$(0.0975)






 

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

Premium

Distributable 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

Premium

Distributable 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

 to

31 December 2011


1 July 2010

 to

31 December 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 £600.  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 £150 million, 0.12% for the following £100 million and 0.10% thereafter, subject to a monthly minimum of £4,500.  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 £2.00 per shareholder (subject to an annual minimum maintenance fee of £5,000) 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 2011


30 June 2011


Annual Fee


Annual Fee


£


£

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 Loss Investments:

1 July 2011

to

31 December 2011


1 July 2010

to

30 June

2011


1 July 2010

to

31 December 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

to

31 December 2011


1 July 2010

to

30 June

2011


1 July 2010

to

31 December 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

to

31 December 2011


1 July 2010

to

30 June

2011


1 July 2010

to

31 December 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

to

31 December 2011


1 July 2010

to

30 June

2011


1 July 2010

to

31 December 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 2011


30 June 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 2011


30 June 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 2011


30 June 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 2011


30 June 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

to

31 December


1 July 2010

to

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 £26.53 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/£ 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


 

 

 

 

Fair Value

Percentage of net assets attributable to Ordinary Shareholders

 

 

 

 

Fair Value

Percentage of net assets attributable to Ordinary 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:

 

 

 

 

 

Period ended

31 December 2011

Movement in net unrealised

(losses)/gains and unrealised foreign exchange gains on translation

 

Net realised gains/(losses) on disposals/

conversion/loan repayments

 

 

 

Movement in

Impairment charge

 

Movement in unrealised losses on restructuring of loans


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:

 

 

 

 

 

 

Year ended 30 June 2011

Movement in net unrealised

gains/(losses) and unrealised foreign exchange gains on translation

 

Net realised (losses)/gains on disposals/loan repayments

 

 

 

Movement in

Impairment charge

 

Movement in unrealised losses on restructuring of loans


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)

 

 

 

 

 

Period ended

31 December 2010

Movement in net unrealised

(losses)/gains and unrealised foreign exchange gains on translation

 

Net realised gains/(losses) on disposals/loan repayments

 

 

 

Movement in

Impairment charge

 

Movement in unrealised loss on restructuring of loans


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 2011


30 June 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 2011


30 June 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 2011


30 June 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 year

1-3 years

3-5 years

5-10 years

> 10 years

No fixed maturity

Total

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 year

1-3 years

3-5 years

5-10 years

> 10 years

No fixed maturity

Total

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 effective interest rate

 

 

Total

Weighted average effective 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 2011

31 December 2011

31 December 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 1

Level 2

Level 3

Total


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 1

Level 2

Level 3

Total


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 on

Level 3:

Equity securities

Penny warrants

Total


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 on

Level 3:

Equity securities

Penny warrants

Total


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






Sensitivity range

Implied value per share US$

 

PSD holding value 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:





 

 

Name of investment

 

Book

Cost

 

Fair

Value

Percentage

of

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: 

 



 

Loans

&

 

Investments Held for

Fair Value Through Profit & Loss

 

 

No. of

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: 

 

 

 

US State


 

Loans

&

 

Investments Held for

Fair Value Through Profit & Loss

 

 

No. of

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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