Konecranes
Annual Report 2019

Plain-text annual report

KCR RESIDENTIAL REIT plc Annual Report for the year ended 30 June 2019 Registered Number: 09080097 (England and Wales) CONTENTS Company Information Chairman’s Letter Chief Executive’s Letter Group Strategic Report Report of the Directors Report of the Independent Auditor Consolidated Statement of Comprehensive Income Consolidated Statement of Financial Position Company Statement of Financial Position Consolidated Statement of Changes in Equity Company Statement of Changes in Equity Consolidated Statement of Cash Flows Company Statement of Cash Flows Note to the Statements of Cash Flows Notes to the Financial Statements 2 3 5 8 11 23 29 30 31 32 33 34 35 36 37-68 1 COMPANY INFORMATION DIRECTORS SECRETARY REGISTERED OFFICE BUSINESS ADDRESS Michael D M Davies Dominic A White Russell Naylor (appointed 6 August 2019) James F Thornton (appointed 6 August 2019) Non-executive director Non-executive director Richard J Boon (appointed 6 August 2019) Non-executive chairman Chief executive Executive director (responsible for finance) R J Roberts 82 St. John Street London EC1M 4JN 44/48 Old Brompton Road South Kensington London SW7 3DY REGISTERED NUMBER 09080097 (England and Wales) INDEPENDENT AUDITOR SOLICITORS NOMINATED ADVISER AND BROKER BANKERS REGISTRARS BDO LLP 55 Baker Street London W1U 7EU Fladgate LLP 16 Great Queen Street London WC2B 5DG Arden Partners Plc 125 Old Broad Street London EC2N 1AR Metro Bank plc One Southampton Row London WC1A 5HA Share Registrars Limited The Courtyard 17 West Street, Farnham Surrey GU9 7DR WEBSITE www.kcrreit.com Blake Morgan LLP 6 New Street Square London EC4A 3DJ Barclays Bank plc Level 25, 1 Churchill Place Canary Wharf London E14 5HP 2 CHAIRMAN’S LETTER for the year ended 30 June 2019 Dear shareholder I am pleased to introduce the 2019 Annual Report for KCR Residential REIT plc (“KCR” or the “Company”). During the financial year under review, we carried out ongoing property operations that generated an improvement in revenue, and, in particular in the second half of the year, focused on delivering the corporate transaction with the Torchlight Fund LP (“Torchlight” and the “Transaction”) that was announced in July (RNS 12 July 2019 - Subscription and Strategic Agreement) and closed on 6 August 2019. KCR maintained high levels of occupancy at all its sites and achieved further rental growth across the portfolio, including achieving full occupancy at its new-build property at Deanery Court, Southampton. There was one material property transaction: in December, KCR sold the Cygnet special purpose vehicle that owned two supermarkets. The supermarkets were acquired from Inland Homes at the same time as the Southampton property and were considered non-core. Following an inability to raise additional equity capital to assist with completing this transaction, the supermarkets were sold back to Inland Homes. As I mention above, the second half of the year focused on delivering the Transaction, which we completed shortly after the year-end. The introduction of a significant new shareholder, Torchlight, able to advance the Company is a major step forward for KCR and for its ability to create shareholder value. It has delivered both immediate access to equity capital and new relationships with significant global investors. The Transaction has enabled repayment of certain outstanding loans and assisted in the ability to pursue refinancing of the portfolio debt on more favourable terms. The investor and the business relationships that Torchlight brings to the partnership will, the directors believe, enable the Company to grow more rapidly in the short to medium term. The ability to access additional equity capital via the Torchlight Option will also support the ability to make ongoing acquisitions. KCR has historically employed a “Buy-to-Rent” model, acquiring existing residential properties at below market value while implementing asset-management strategies to improve rental and capital value. Looking forward, to reduce acquisition cost and to control quality, KCR intends to include in its strategy a “Build-to-Rent” approach to portfolio construction where it will directly and indirectly develop residential units to rent out. Direct development is where KCR itself acquires and develops appropriately permitted ‘raw land’ into completed residential units. This approach lowers the acquisition cost per unit and allows KCR to achieve a higher yield on those assets that it develops. KCR intends to grow its investment in build-to-rent assets through strategic partnerships with homebuilders. KCR may also increase and strengthen its role in development by taking direct equity positions in residential homebuilders. This would be expected to provide value by sharing in the development margin and security of the pipeline through part-ownership of key producers of completed properties. While the focus is currently on rearranging and then building the UK residential portfolio, over time the strategy is expected to extend to international markets. 3 The Transaction saw a reshaping of the board of directors, and I was delighted to welcome Russell Naylor, James Thornton and Richard Boon to the board. The board comprises investment professionals with a long experience of investing into and managing several billion pounds of real estate internationally. They have a strong background in real estate, finance and money management in global institutions such as Morgan Stanley, Henderson Global Investors, UBS and Merrill Lynch Investment Management, and have successfully executed multiple M&A and corporate finance activities in real estate, in both private and public equity markets. I would like to place on record my sincere thanks to retiring directors Tim James, Oliver Vaughan and James Cane, who have been directors since 2014 and were key to the IPO in 2015. We look forward to updating you as we reinforce the financial position of the Company and reposition it for growth. Michael Davies Chairman 31 January 2020 4 CHIEF EXECUTIVE’S LETTER for the year ended 30 June 2019 Dear shareholder I have pleasure in reporting to you on the progress of the Group for the year to 30 June 2019. In my previous annual statement, I noted that KCR’s objective was to grow the size of its rented portfolio to deliver an increase in revenue that resulted over time in both profitability and an ability to pay dividends. At the same time, we would focus on growing net asset value per share. Although it has been a difficult year in the UK with strong headwinds, the recently completed transaction with Torchlight has proved to be a significant positive step forward for KCR and its ability to deliver on these objectives. Property portfolio Property transactions during the year KCR did not make any property acquisitions during the year. As reported in the interims, two supermarkets that formed part of two newly built residential buildings in Leighton Buzzard and West Drayton (held in KCR (Cygnet) Limited) were sold to Inland Homes on 12 December 2018. The sale proceeds were used to reduce the Company’s indebtedness. Although the Cygnet transaction was below acquisition value, the combined transaction with Inland Homes, which also included the acquisition of Deanery Court, Southampton by KCR (Southampton) Limited, was positive in terms of generating significant levels of new rental income and adding to KCR’s net asset value. Existing portfolio The existing portfolio continues to perform in line with expectations. • The Ladbroke Grove portfolio (owned by KCR (Kite) Limited) that consists of 16 one- and two-bedroom flats in three buildings, and one stand-alone flat in Harrow Road, has increased its annual rental income from £256,780 at acquisition in June 2018 to £283,790 at 30 June 2019, an increase of 10.5 per cent. Units have been refurbished when tenants leave and are then let at higher levels in the private market. • A block of 27 units at Deanery Court, Chapel Riverside (owned by KCR (Southampton) Limited) was acquired for £5.8 million in June 2018. At 30 June 2019, the block was valued at £6.4 million, an increase of 10.3 per cent. The property was vacant at acquisition and now delivers £345,000 of annual rental income. • The block at Coleherne Road, held within K&C (Coleherne) Limited, which comprises ten studio and one-bedroom flats, continues to be in strong demand for letting. Occupancy has been maintained at close to 100 per cent; where there have been renewals, rents have continued to increase at least in line with inflation. • The Osprey portfolio (K&C (Osprey) Limited) consists of 159 flats and 13 houses let on long leases in six locations, together with an estate consisting of 30 freehold cottages in Marlborough where Osprey delivers estate management and sales services. The portfolio generated higher income from sales commissions from leaseholders’ sales, management fees and lease-renewal premium income than in the previous year. The portfolio has held its value and is expected to provide a medium-term value- adding opportunity as the terms of the long-leasehold flats shorten. The Company is also investigating the potential to enhance value through redevelopment and roof extensions at three of the seven sites. 5 Financial Revenue in this financial year increased to £777,827 (2018 – £265,936) as Deanery Court completed its let-up phase. Further increases at Southampton will be delivered in the next financial year as the full impact of the property achieving 100 per cent occupancy in April 2019 flows into the income statement. Run-rate revenue is now considerably higher across the Company’s portfolio. The Group reports an operating loss before non-cash and separately disclosed items of £878,213 (2018 – £1,875,266 profit as restated). The operating loss was £3,014,023 (2018 – £251,079 operating profit). The loss before taxation was £3,737,372 (2018 – £67,574). A large part of the operating loss (£1,387,441) is attributable to a non-cash accounting item relating to KCR’s preference-share structure (share-based payment charge); the restricted preference share scheme was cancelled post year-end as part of the Transaction. The focus in the second half of the year was on maximising revenue from the existing portfolio and the successful execution of the corporate transaction with Torchlight, both which have been achieved. Total assets at 30 June 2019 decreased to £24.1 million (2018 – £27.4 million) following the disposal of the Cygnet SPV. Net assets decreased to £9.58 million (2018 – £9.95 million as restated), predominantly due to several creditors converting their debt into equity, and new shares being issued to settle an asset acquisition made in the previous financial year. Net asset value per share decreased to 60.67p (2018 – 100.95p as restated). Post-balance sheet events Torchlight transaction On 12 July 2019, KCR announced the subscription from, and strategic agreement with, Torchlight. The key ingredients of the Transaction, which were subsequently implemented, are in summary as follows (detail is included in the Notes to these Accounts and in the announcement dated 12 July 2019): • Torchlight subscribed for 9,000,000 Ordinary Shares at 45 pence per share. The £4.05 million of capital raised was mainly used to reduce leverage from 65 per cent of property assets to 41 per cent, reduce portfolio interest cost and for working capital. • The Company granted Torchlight an Option to subscribe for up to an additional 50,000,000 Shares at a price per share of: • for any notice of exercise served on the Company on any date up to and including 31 December 2019,the Issue Price; and • for any notice of exercise served on the Company from 1 January 2020 until the end of the Option Period (6 August 2022), the higher of (i) the price per Option Share which is equivalent to 95 per cent. of the 30-Day VWAP for the Ordinary Shares and (ii) the par value of each Ordinary Share. • The Option is only exercisable by Torchlight during the Option Period and if the Option is not exercised prior to the expiry of the Option Period, it will lapse. Any exercise of the Option by Torchlight shall be for not less than 2,000,000 Option Shares. • Exercise of the option in full by Torchlight before 31 December 2019 would have delivered a further £22.5 million of equity to the Company. 6 • To simplify the Company’s share structure, the Company unwound its preference share scheme through the cancellation of all Restricted Preference shares in exchange for the issue of a significantly smaller number of Ordinary shares to Restricted Preference shareholders. • All convertible loan notes held by management and related parties were converted into equity. On 2 January 2020, trading of the shares of KCR Residential REIT plc was temporarily suspended pending publication of the 2019 annual audited accounts. Further details on post-balance sheet events are contained within note 24 of the financial statements. Prospects The Transaction with Torchlight that completed in August 2019 is, we believe, the most significant event for KCR since the IPO. It enabled the restructuring of the balance sheet, provides a solid base for refinancing the portfolio, and opens up numerous channels to further equity for portfolio expansion. We expect to update shareholders further in the coming months as the restructuring and positive refinancing processes complete post-year end. We are excited about the potential for the Company to grow as it works with Torchlight and its representative directors to capitalise on its new opportunities. Dominic White Chief executive 31 January 2020 7 GROUP STRATEGIC REPORT for the year ended 30 June 2019 The directors present the strategic report of KCR Residential REIT plc (‘KCR’ or the ‘Company’) and its subsidiaries (together, the ‘Group’) for the year ended 30 June 2019. PRINCIPAL ACTIVITY The Group carries on the business of acquiring, developing and managing residential property predominantly for letting to third parties on long and short leases. At the year-end, the Group consisted of the Company, which is a public company limited by shares, and its wholly owned subsidiaries. 1. K&C (Coleherne) Limited owns a freehold residential property in Chelsea, London containing ten studio flats 2. K&C (Osprey) Limited owns the freehold of several retirement properties let on long leases to residents and provides management services in respect of these properties and to third-party landlords 3. KCR (Kite) Limited owns three freehold residential properties in Ladbroke Grove, London (16 flats) and a flat on Harrow Road 4. KCR (Southampton) Limited owns a long leasehold block of 27 two-bedroom apartments at Chapel Riverside, Southampton 5. K&C REIT Limited (dormant, dissolved 9 July 2019) 6. K&C (Newbury) Limited owns no property and is now effectively dormant. The valuation of the company has been written down to nil via an impairment provision set out in note 13. GROUP STRATEGY The directors intend to build a significant presence in the residential letting market, primarily through the acquisition of land with planning permission that will be developed into residential property and the acquisition of existing residential property. Assets are predominantly acquired with the purpose of letting to third parties. RESULTS The Group reports a consolidated operating loss of £3,014,023 for the year to 30 June 2019 (2018 – profit £251,079). REVIEW OF BUSINESS AND FINANCIAL PERFORMANCE The Board has reviewed whether the Annual Report, taken as a whole, presents a fair, balanced and understandable summary of the Group’s position and prospects, and believes that it provides the information necessary for shareholders to assess the Group’s position, performance, and strategy. As reported in the Chief Executive’s letter, revenue in this financial year increased to £777,827 (2018 – £265,936) as the Deanery Court property completed its let-up phase. Further increases at Southampton will be delivered in the next financial year as the full impact of the property achieving 100 per cent occupancy in April 2019 flows into the income statement. Run-rate revenue is now considerably higher across the Company’s portfolio. 8 The Group reports an operating loss before separately disclosed items of £878,213 (2018 – £1,875,266 profit as restated). Operating loss was £3,014,023 (2018 – profit £251,079). Loss before taxation was £3,737,372 (2018 – loss £67,574). A large part of the loss (£1,387,441) is attributable to a non-cash accounting item relating to KCR’s preference-share structure; the Restricted Preference shares were cancelled post-year-end as part of the Transaction. Total assets at 30 June 2019 decreased to £24.1 million (2018 – £27.4 million) following the disposal of the Cygnet SPV. Net assets decreased to £9.58 million (2018 – £9.95 million as restated), predominantly due to several creditors converting their debt into equity, and new shares being issued to settle an asset acquisition made in the previous financial year. Net asset value per share decreased to 60.67p as shown on the face of balance sheet (2018 – 100.95p as restated). KEY PERFORMANCE INDICATORS The directors and management team monitor key performance indicators relevant to each of the subsidiaries to improve Group performance. Management reports to the board if data show significant variances against expected outcomes and proposes mitigation action as necessary. Examples of the KPIs used to monitor aspects of performance include: 1. At property level 1.1. Vacancy rate in terms of number of units available and potential rental income Target occupancy of at least 90 per cent achieved 1.2. Outstanding rents as a percentage of rental income Target debtor balance of less than 10 per cent of rental revenue achieved. 2. At Group level 2.1. Gross assets under management The target of £40 million of gross assets by 30 June 2019 was not achieved. However, the restructuring of the business following an investment by Torchlight Fund LP, which started in August 2019, has significantly improved the prospects of profitable growth for the Company over the next 12 months. Near-term focus is on reducing costs, enhancing revenue and growing the business to achieve a cash break-even position to provide a stable base to grow from. RISKS AND UNCERTAINTIES The Board regularly reviews the risks to which the Group is exposed and ensures through its meetings and regular reporting that these risks are minimised as far as possible. The principal risks and uncertainties facing the Group at this stage in its development are: • Financing and liquidity risk The Company has an ongoing requirement to fund its activities through the equity markets and in future to obtain finance for property acquisition and development. Although there is no certainty that such funds will be available when needed, the Company has plans in place with KCR’s new capital partner regarding ongoing funding, and, the directors continue to focus on developing the Group’s capital structure. 9 • Financial instruments Details of risks associated with the Group’s financial instruments are given in note 22 to the financial statements. The directors seek to mitigate these risks in manners appropriate to the risk. • Valuations The valuation of the investment property portfolio is inherently subjective as it is made on the basis of assumptions used by the valuer that may not prove to be accurate. The outcome of this judgment is significant to the Group in terms of its investment decisions and results. The directors, who have long experience of property, seek to mitigate this risk by employing independent valuation experts such as Lambert Smith Hampton to review values of the assets in the portfolio. • Brexit The negative impact arising from the uncertainty about Brexit which has been impacting the UK property market is expected to improve following the election outcome. The board believes that the Company operates in a sector of the market, and with the advantage of REIT status, such that it will be able to build market share, income and net asset per share value over the coming years. FORWARD-LOOKING STATEMENTS This Annual Report contains certain forward-looking statements that have been made by the directors in good faith based on the information available at the time of the approval of the annual report and financial statements. By their nature, such forward-looking statements involve risks and uncertainties because they relate to events and depend on circumstances that will or may occur in the future. Actual results may differ from those expressed in such statements. OUTLOOK The Group has continued to investigate the purchase of residential property assets that will be able to support an increasing income yield. As last year, the Group is currently investigating several potential acquisitions. To achieve these, the Group may be required to raise more capital and it is working closely with funding sources, both equity and debt providers, to achieve this objective. ON BEHALF OF THE BOARD: Dominic White Director 31 January 2020 10 REPORT OF THE DIRECTORS for the year ended 30 June 2019 The directors present their report with the financial statements of the Company and the Group for the year ended 30 June 2019. A review of the business, risks and uncertainties and future developments is included in the Chairman’s Letter, the Chief Executive’s Letter, the Group Strategic Report, and in note 22 to the financial statements. DIVIDENDS The directors do not recommend payment of a dividend for the year (2018 – £nil). Political donations The Group made no political donations during the year (2018 – £nil). Corporate governance statement During the year to 30 June 2019, KCR Residential REIT plc, while an AIM listed company, was a family office operating with five directors and three employees. In September 2018, it adopted the QCA code but with such a tightly controlled operational and risk environment was not able to, in all areas, fully comply with the principles. During the current year the, directors will continue to update the website to comply as far as possible with the following QCA code principles, noting areas where the small scope of operations limit their ability to fully comply. Establish a strategy and business model which promote long-term value for shareholders The Company’s objective is to build a substantial property portfolio predominantly in the residential sector that generates both secure income flow from rents and increasing net asset value for shareholders. The Company acquires or develops blocks of studio, one-and two-bed apartments that are close to transport links, shopping and leisure, mostly in London, its surrounds and the South East. These blocks are focused on attracting tenants seeking affordable rental accommodation. The Company brings its property corporate finance expertise to the identification and execution of these acquisitions. The Company looks to acquire properties at below market value to improve yield on cost and enhance net asset value. It aims to achieve this through acquisition strategies including: • • using the REIT’s inherent tax advantages; acquiring properties in corporate structures with embedded capital appreciation and deferred tax liabilities which are reduced to zero as the corporate becomes part of the REIT group, and acquiring permitted land, funding the development process and retaining the developer’s profit. Over the medium to long term, the Company expects rental and property values to increase in line with inflation. These increases coupled with new acquisitions are designed to enable the Company, once it has reached scale, to pay dividends from cash flow generated by rents and deliver net asset value increases through positive property revaluations. Active asset management of the properties may also deliver value increases. The Company as a REIT is required to distribute 90 per cent of its rental profits. It is the Company’s paramount intention to conduct its activities in a professional and responsible manner for the benefit of its shareholders, its employees and the communities where it operates. 11 Further detail on the key challenges that the Board addresses are set out under Risks and Uncertainties in the Strategic Report. Seek to understand and meet shareholder needs and expectations On 31 July 2019, a major equity re-capitalisation brought in £4.05m of capital and a substantial new shareholder, Torchlight Fund LP. This transaction was designed to stabilise and re-position the Company so that it can move forward in a way that all existing and new shareholders may benefit from future uplifts to profitability and increases in net asset value. The Company remains committed to engaging with its shareholders to ensure its strategy and performance are clearly understood. Feedback from investors is obtained through direct interaction between the chief executive and Executive Director and shareholders following the Company’s full and half-year results and certain other ad hoc meetings between executive management and shareholders that take place during the year. The Company seeks to communicate with its shareholders on a timely and transparent basis at all times. Announcements through RNS are as comprehensive as possible. Digital communications platforms such as Vox Markets are used from time to time to communicate via video and podcast. Use of these platforms is limited to senior executives such as the chief executive and only once appropriate media training has been completed. As part of the Company’s repositioning, the intention is to improve the speed of reporting of the interim and full-year results to shareholders. The chief executive, Dominic White, attends and presents at investor forums from time to time, as well as holding discussions with analysts, shareholders and investment managers. It is apparent from such interaction that shareholders have several concerns, including: • How do the directors propose to expand operations without dilution to existing shareholdings? Since property companies are capital-intensive, the Company will raise equity over time to fund the acquisition of new properties. Torchlight Fund LP exercising its option rights as approved by shareholders will be dilutive to existing shareholders, with this dilution having already being accepted and approved by shareholders. The board will aim to maximise the issuance price of any additional equity offerings such that issuances are accretive or, if that is not possible, offer all shareholders the opportunity to participate in the offering on an equal access. • When will the Company become profitable? Based on current overheads and interest forecasts, the Company may become profitable and cash flow positive once it has approximately £50m of investments generating satisfactory rental income. Executive management is focused on achieving this objective as soon as possible. This is naturally dependent on the availability of suitable transactions and the ability to complete the acquisitions either via raising additional equity capital or debt. Shareholder liaison is managed by Dominic White (info@kcrreit.com). Take into account wider stakeholder and social responsibilities and their implications for long-term success The company currently operates in the UK. It identifies the main stakeholders in the UK as being investors, tenants, and suppliers of services (accountant, nomad, broker, lawyers), employees, directors, third-party property managers, banks and other debt providers and property agents introducing investment opportunities). 12 The Company has an important social responsibility in its role as a landlord of residential housing. We commit to delivering great service to our tenants, which includes providing safe and high-quality residential units, at market prices, managed in a professional way. Treating all our stakeholders well, and in particular our key customers - our tenants, is key to growing a sustainable business that will have long-term success. Embed effective risk management, considering both opportunities and threats, throughout the organisation The board is responsible for setting the risk framework within which the Company operates and ensuring that suitable risk- management controls and reporting structures are in place throughout the Group. The board seeks to minimise risk in the management of its operations. The Company uses third-party advisors to address specific issues that arise during operations where they bring complementary expertise and experience. Maintain the board as a well-functioning, balanced team led by the chair The board comprises a balance of independent and non-independent directors with collective, specific and complementary skills that enable the Company to manage and direct its affairs in a professional manner, with embedded corporate governance procedures that are fit for purpose. Full Board meetings are held on a quarterly basis and all necessary documentation is provided to the board in advance, so that they can understand the issues under review and make well-considered decisions. During the year, between full Board meetings, the Board convenes whenever necessary to consider and if appropriate approve the execution and completion by executive management of key matters that fall within the Board’s defined remit as set out below. The board has audit and remuneration sub-committees that are chaired by non-executive directors. All of the directors devote such time to the Company’s affairs as the Board considers appropriate. During the 2019 financial year, the sole non-executive director was Michael Davies who was regarded as Independent by the Board and shareholders. During the 2020 financial year, following the Torchlight Transaction completed on 6 August 2019, two Torchlight directors Russell Naylor (executive director in charge of finance) and Richard Boon joined the Board. Richard Boon is regarded as a non-independent non- executive director. James Thornton also joined the Board at that time as an independent non-executive director. During the 2019 financial year, each of Michael Davies, Dominic White, James Cane, Timothy James, Oliver Vaughan attended all six Board meetings in person or by conference call, as permitted by the company’s articles. During the 2020 financial year, one Board meeting has been held, attended by all current directors. The involvement of non-executive directors varies month by month but is estimated at 3-10 days a month. 13 Ensure that between them the directors have the necessary up-to-date experience, skills and capabilities The Board maintains up-to-date skills, knowledge and experience to enable it to direct and manage the Company’s operations, finances and its interface with investors, the public markets and its other stakeholders. It takes great care to appoint managers and staff with the appropriate skills and experience, and is aware of the importance of encouraging diversity among its workforce. The Board works as a team and regularly reviews its procedures and composition. During 2019, the directors consisted of highly experienced property professionals working tightly together in a family office. For 2020, the relevant experience and skills of the current directors is set out in detail in the Circular relating to the Torchlight Transaction. Each director is involved in other organisations which keep their professional skills sharpened and up to date. In due course, the details as they pertain to the directors will be added to the website but are included in the Circular of 12 July 2019. Evaluate Board performance based on clear and relevant objectives, seeking continual improvement Following the transaction approved by the directors of KCR as at 31 July 2019, the Board of KCR now comprises: Name Michael Davies Dominic White Russell James Naylor Richard James Boon James Thornton Role Appointed Status Non-executive chairman Chief executive Executive director Non-Executive director Non-Executive director 12 November 2015 Independent 1 January 2017 Non-independent 6 August 2019 Non-independent 6 August 2019 Non-independent 6 August 2019 Independent In accordance with its obligations under the QCA code, the Board will review internally its collective performance and the performance of its committees and Board members. At this stage of its evolution and in view of the size of the Board, the Directors do not believe that it is practical to undertake an external or a wide-ranging evaluation of the performance of Board members. The primary tasks of the chief executive, Dominic White, have been and will continue to be to grow the Company’s asset base and revenue through the delivery of additional assets to the portfolio. This has included developing capital and asset partnerships and finding ways to raise appropriately priced and structured debt finance to support transactions and equity capital in an uncertain equity market. He is a key point of contact for the capital markets. In these tasks he will be supported by Russell Naylor, Executive Director, who is additionally responsible for internal financial controls, financial management, capital planning and overseeing the preparation of financial reports to shareholders. The primary task of the Chairman, Michael Davies, has been to ensure that the Board has performed its role correctly, that governance is adhered to, and that the Company works towards delivering value to shareholders in accordance with the Company’s strategy. He is also a point of contact with many of the Company’s shareholders and professional advisers. Succession planning remains an important issue for the Board, and in particular the chairman. 14 Promote a corporate culture that is based on ethical values and behaviours The Board strives to promote a corporate culture based on sound ethical values and behaviours. The Company has adopted a code for directors’ and employees’ dealings in securities, which is appropriate for a company whose securities are traded on AIM. The code is in accordance with the requirements of the Market Abuse Regulation that came into effect in 2016. The Board is also aware that the tone and culture it sets will greatly impact all aspects of the Company and the way that employees behave, as well as the achievement of corporate objectives. A significant part of the Company’s activities is centred upon an open dialogue with shareholders, employees and other stakeholders. Therefore, the importance of sound ethical values and behaviours is crucial to the ability of the Company to successfully achieve its corporate objectives. Maintain governance structures and processes that are fit for purpose and support good decision-making by the Board The board is committed to high standards of corporate governance. No system of internal control can completely eliminate the risk of process or individual failures. To an extent, the corporate governance structures which the Company is able to operate are limited by the size of the executive management team and the small number of executive directors, which is itself dictated by the current size of the Company’s operations. Within this limitation, necessitated by the current small size of the business, the Board is dedicated to having strong internal control systems in place to enable it to maintain the highest possible standards of governance and probity. The chairman, Michael Davies: • • • • leads the Board and is primarily responsible for the effective working of the Board; in consultation with the Board, ensures good corporate governance and sets clear expectations with regards to Company culture, values and behaviour; sets the Board’s agenda and ensures that all Directors are encouraged to participate fully in the activities and decision-making process of the Board; takes responsibility for relationships with the Company’s professional advisers and major shareholders. The chief executive, Dominic White: • • • • is primarily responsible for developing the Company’s strategy in consultation with the Executive Director and the Board, for its implementation and for the operational management of the business; is primarily responsible for new projects and expansion; runs the Company on a day-to-day basis; implements the decisions of the Board; • monitors, reviews and manages key risks; • is the Company’s primary spokesperson, communicating with external audiences, such as investors, analysts and the media. 15 The executive director, Russell Naylor: • works with the chief executive to develop and execute the Company’s strategy; • • is primarily responsible for the systems of financial controls in operation for the Company and each of its subsidiaries; is primarily responsible for all financial management and financial planning matters; • monitors, reviews and manages key risks as they relate to financial impact; • implements the financial and internal control decisions of the Board. On 28 October 2019, the Group established a Remuneration Committee chaired by Michael Davies, chairman that comprises Michael Davies and Richard Boon, non-independent non-executive director, which meets on an ad hoc basis when necessary. During the year to 30 June 2019, the audit committee comprised Michael Davies, the chairman. From 28 October 2019, the audit and risk committee is chaired by James Thornton, independent non-executive director and comprises James Thornton and Michael Davies. Russell Naylor is invited to attend as appropriate. The audit and risk committee is comprised of independent non-executive directors. It normally meets twice each financial year to consider the interim and final results. In the latter case, the auditors are present and the meeting considers and takes action on any matters raised by the auditors arising from their audit. The chair of each of the Committee may invite executive management and Board members to attend any meeting. Matters reserved for the Board include: • Vision and strategy • Review of budgets, asset plans and trading results • Approving financial statements • Financing strategy, including debt strategy • Business planning relating to acquisitions, divestments and major refurbishments not already agreed in the strategy and asset plans • Capital expenditure in excess of agreed budgets • Corporate governance and compliance • Risk management and internal controls • Appointments and succession plans at senior management level • Directors’ remuneration. 16 Communicate how the Company is governed and is performing by maintaining a dialogue with shareholders and other relevant stakeholders The company website sets out the principal approach of the Company to governance. It contains all relevant documents and information for shareholders, including all RNS announcements, Financial Reports, Shareholder Circulars, and the Company’s articles. Shareholders are additionally encouraged to participate at the AGM, to ensure that there is a high level of accountability and identification with the Group’s strategy and goals. During 2019, the Audit Committee reviewed and recommended to the Board the sign-off of the 30 June 2018 and interim 31 December 2018 financial statements. During 2020, the new Audit Committee met to review and recommend to the Board the sign-off of the 30 June 2019 financial statements. During 2019, the Remuneration Committee met to review salaries and restricted preference share grants. DIRECTORS The following directors served during the year to 30 June 2019 and up to the date of approval of this Annual Report: Name Michael Davies Dominic White James Cane resigned 6 August 2019 Timothy James resigned 6 August 2019 Oliver Vaughan resigned 6 August 2019 Russell Naylor appointed 6 August 2019 Richard Boon appointed 6 August 2019 James Thornton appointed 6 August 2019 The beneficial interests of the directors holding office at 30 June 2019 in the issued share capital of the Company were as follows: Ordinary Shares Name Michael Davies Dominic White Timothy James Oliver Vaughan James Cane At 30 June 2018 No. Issued in the year No. Restricted Preference Shares converted in year At 30 June 2019 No. 195,428 – 475,921 73,065 1,318 – 57,143 28,571 – – – 500,000 320,000 270,000 10,000 195,428 557,143 824,492 343,065 11,318 17  Restricted Preference Shares Name Michael Davies Dominic White Timothy James Oliver Vaughan James Cane At 30 June 2018 No. Shares issued in year No. Converted to ordinary shares in the year No. At 30 June 2019 No. – 1,500,000 960,000 810,000 30,000 – 265,357 265,357 265,357 10,000 – (500,000) (320,000) (270,000) (10,000) – 1,265,357 905,357 805,357 30,000 The beneficial interests of the directors holding office at 31 January 2020 in the issued share capital of the Company were as follows: Ordinary Shares Name Michael Davies Dominic White Russell Naylor James Thornton Richard Boon At 30 June 2019 No. 195,428 557,143 – – – Issued in the period Restricted Preference Shares At 31 January 2020 No. converted in period No. – 96,558 – 22,222 – – 486,675 – – – 195,428 1,140,376 – 22,222 – Restricted Preference Shares Name Michael Davies Dominic White At 30 June 2019 No. – 1,265,357 Converted to ordinary shares No. – (486,675) Gifted to Company At 31 January 2020 No. No. – (778,682) – – Further information regarding the post-year-end movements on Restricted Preference shares is contained within note 24 of the financial statements. 18 SUBSTANTIAL SHAREHOLDINGS As at 31 January 2020, the directors had been notified that the following shareholders owned a disclosable interest of three per cent or more in the Ordinary shares of the Company: Name Interest % Torchlight Fund LP 32.64% Energiser Investments Limited 8.83% Moore House Holdings Limited 8.56% Poole Investments Limited 6.53% Venaglass Limited 5.74% Timothy James 4.36% Dominic White & White Amba Pension Scheme 4.34% Oliver Vaughan 3.35% DIRECTORS’ REMUNERATION The directors have received the following remuneration for their services during the year: 2019 2018 Remuneration Benefits-in-kind Remuneration Benefits-in-kind Name £ £ £ £ Michael Davies – – – – Dominic White 278,200 – 151,000 – James Cane 87,700 – 60,000 – Timothy James 90,200 – 80,000 – Oliver Vaughan 30,200 – 30,000 – 486,300 – 321,000 – In addition, during the year, the Group paid DGS Capital Partners LLP, a limited liability partnership of which Michael Davies is a member, fees of £43,200 (2018 – £43,200) (including irrecoverable VAT). During the year, a number of directors converted Restricted Preference shares into Ordinary shares. The total gain made by the directors was £484,000 (2018 – £nil). INTERNAL CONTROLS AND RISK MANAGEMENT The directors are responsible for the Group’s system of internal control. Although no system of internal control can provide absolute assurance against material misstatement or loss, the Group’s system is designed to provide reasonable assurance that problems are identified on a timely basis and dealt with appropriately. 19 In carrying out their responsibilities, the directors have put in place a framework of controls to ensure as far as possible that (i) ongoing financial performance is monitored in a timely manner, (ii) where required, corrective action is taken and (iii) risk is identified as early as practically possible. The directors have reviewed the effectiveness of internal controls. The Board, subject to delegated authority, reviews, among other things, capital investment, property sales and purchases, additional borrowing facilities, guarantees and insurance arrangements. Details of financial risk management are included within the Risks and Uncertainties section of the Group strategic report on page 64. BRIBERY RISK The Group has adopted an anti-corruption policy and whistle-blowing policy under the Bribery Act 2010. Notwithstanding this, the Group may be held liable for offences under that Act committed by its employees or subcontractors, whether or not the Group or the directors had knowledge of the commission of such offences. OTHER MATTERS i. Environmental The Group understands the importance of operating its business in a manner that minimises any risks to the environment. Its policies seek to ensure that it achieves this goal. ii. Group employees The Group considers its employees to be its most valuable assets and ensures that it deals with them fairly and constructively at all times. iii. Social matters The Group is aware that it has a responsibility to the communities where it operates and seeks to respect them at all times. iv. Respect for human rights The Group always respects the human rights of its stakeholders. v. Contributions to pension schemes No pension scheme benefits are being accrued by the directors. DIRECTORS’ INDEMNITIES AND INSURANCE The Company has made qualifying third-party indemnity provisions for the benefit of its directors during the year and they remain in force at the date of approval of this Annual Report. GOING CONCERN The directors have adopted the going-concern basis in preparing the financial statements. 20 Since the balance sheet date, Torchlight Fund LP has entered into a legally binding agreement with KCR Residential REIT plc, to the extent that it may become necessary, to exercise their option sufficiently to ensure that the company’s liabilities will be satisfied as they fall due during the next 12 months. See note 2 to the financial statements. POST-BALANCE SHEET EVENTS Post-balance sheet events are detailed further in the Chief Executive’s letter and note 24 of the financial statements. STATEMENT OF DIRECTORS’ RESPONSIBILITIES The directors are responsible for preparing the Annual Report and the financial statements in accordance with applicable law and regulations. Company law requires the directors to prepare financial statements for each financial year. Under that law, the directors have elected to prepare the financial statements in accordance with International Financial Reporting Standards as adopted by the European Union (“IFRS”). Under company law, the directors must not approve the financial statements unless they are satisfied that they give a true and fair view of the state of affairs of the Company and the Group and of the profit or loss of the Group for that period. In preparing these financial statements, the directors are required to: • select suitable accounting policies and then apply them consistently; • make judgments and accounting estimates that are reasonable and prudent; • • state that the financial statements comply with IFRS; prepare the financial statements on the going-concern basis unless it is inappropriate to presume that the Group will continue in business. The directors are responsible for keeping adequate accounting records that are sufficient to show and explain the Company’s and the Group’s transactions and disclose with reasonable accuracy at any time the financial position of the Company and the Group and enable them to ensure that the financial statements comply with the Companies Act 2006. They are also responsible for safeguarding the assets of the Company and the Group and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities. The directors are responsible for the maintenance and integrity of the corporate and financial information included on the Company’s website. Legislation in the United Kingdom governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions. STATEMENT AS TO DISCLOSURE OF INFORMATION TO THE AUDITOR So far as the directors are aware, there is no relevant audit information (as defined by Section 418 of the Companies Act 2006) of which the Group’s auditor is unaware, and each director has taken all the steps that he ought to have taken as a director in order to make himself aware of any relevant audit information and to establish that the Group’s auditor is aware of that information. 21 AUDITOR On 1 February 2019, Moore Stephens LLP merged its business with BDO LLP. As a result, Moore Stephens LLP resigned as auditor and the directors appointed BDO LLP as auditor in their place. ON BEHALF OF THE BOARD Dominic White Director 31 January 2020 22 INDEPENDENT AUDITOR’S REPORT TO THE MEMBERS OF KCR RESIDENTIAL REIT plc for the year ended 30 June 2019 Opinion We have audited the financial statements of KCR Residential REIT Plc (the ‘Parent Company’) and its subsidiaries (the ‘Group’) for the year ended 30 June 2019 which comprise the Consolidated Statement of Comprehensive Income, the Consolidated and Company Statements of Financial Position, the Consolidated and Company Statements of Changes in Equity, the Consolidated and Company Statements of Cash Flows and notes to the financial statements, including a summary of significant accounting policies. The financial reporting framework that has been applied in their preparation is applicable law and International Financial Reporting Standards (IFRSs) as adopted by the European Union and, as regards the Parent Company financial statements, as applied in accordance with the provisions of the Companies Act 2006. In our opinion: • • • • the financial statements give a true and fair view of the state of the Group’s and of the Parent Company’s affairs as at 30 June 2019 and of the Group’s loss for the year then ended; the Group financial statements have been properly prepared in accordance with IFRSs as adopted by the European Union; the Parent Company financial statements have been properly prepared in accordance with IFRSs as adopted by the European Union and as applied in accordance with the provisions of the Companies Act 2006; and the financial statements have been prepared in accordance with the requirements of the Companies Act 2006. Basis for opinion We conducted our audit in accordance with International Standards on Auditing (UK) (ISAs (UK)) and applicable law. Our responsibilities under those standards are further described in the Auditor’s responsibilities for the audit of the financial statements section of our report. We are independent of the Group and the Parent Company in accordance with the ethical requirements that are relevant to our audit of the financial statements in the UK, including the FRC’s Ethical Standard as applied to listed entities, and we have fulfilled our other ethical responsibilities in accordance with these requirements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion. Conclusions relating to going concern We have nothing to report in respect of the following matters in relation to which the ISAs (UK) require us to report to you where: • • the directors’ use of the going concern basis of accounting in the preparation of the financial statements is not appropriate; or the directors have not disclosed in the financial statements any identified material uncertainties that may cast significant doubt about the Group or the Parent Company’s ability to continue to adopt the going concern basis of accounting for a period of at least twelve months from the date when the financial statements are authorised for issue. Key audit matters Key audit matters are those matters that, in our professional judgement, were of most significance in our audit of the financial statements of the current period and include the most significant assessed risks of material misstatement (whether or not due to fraud) we identified, including those which had the greatest effect on: the overall audit strategy, the allocation of resources in the 23 audit; and directing the efforts of the engagement team. These matters were addressed in the context of our audit of the financial statements as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters. Key audit matter Valuation of investment properties The Group holds investment properties (Accounting policies Note 2 and Note 12) which comprise properties held for rental income. Investment properties, held at fair value, are valued by independent external valuers whose details are disclosed in Note 12 with input from the Directors. The valuation of investment properties requires significant judgement as each valuation requires consideration of the individual nature of the property, its location, its cash flows and comparable market transactions. Additionally, the valuation of the Group’s investment properties requires significant judgements to be made by the external valuers in relation to the appropriate market capitalisation yields and estimated rental values and appropriate input information provided by management in relation to the passing rents and lease particulars. Any input inaccuracies or unreasonable valuation judgements could result in a material misstatement of the statement of comprehensive income and statement of financial position. Going concern The group has a loss after tax of £3,737,372 and net current liabilities of £4,522,928 and will need fund raising either through equity injection from Torchlight or through bank refinancing during the year to 30 June 2020. Given these uncertainties, we treated going concern as a key audit matter. We draw attention to Note 2 in the financial statements which indicates that the Group may need support from Torchlight in the coming 12 months to be able to continue as a going concern. How we addressed the key audit matter in the audit In this area our audit procedures included: • All inputs to the valuation model were checked against market indices and other inputs such as rents and lease terms and any significant variances investigated and agreed back to tenancy agreements. • We held a discussion with the external valuers to challenge the key assumptions based on our analysis of market indices and value of similar properties, gain a better understanding of their independence and quality control procedures and their approach to valuation. • We assessed the competency, qualifications, independence and objectivity of the external valuers engaged by the Group and reviewed the terms of their engagement for completeness and to check that there was no evidence of management bias. Key observation Based on the procedures performed, we identified no material misstatements in the valuation of investment properties. 24 In this area our audit procedures included: • Critically assessed management’s financial forecast models. In doing so we considered key assumptions including the Group’s unavoidable cost base and agreed back to supporting documentation. • Undertook sensitivity analysis in respect of the key assumptions underpinning the forecasts including the level of non- discretionary expenditure. • Reviewed management’s assumptions in relation to anticipated fund raising activities, corroborating commentary in relation to success of previous fund raises to the fund raises themselves. • Review of the adequacy of the Directors’ disclosures in the Directors’ Report and notes the financial statements. • Assessment of the legally binding deed from Torchlight. Key observation Based on the procedures performed, we identified no material misstatements in the Directors’ going concern assessment. Our application of materiality We set certain thresholds for materiality. These helped us to determine the nature, timing and extent of our audit procedures and to evaluate the effect of misstatements, both individually and on the financial statements as a whole. We consider materiality to be the magnitude by which misstatements, including omissions, could influence the economic decisions of reasonable users that are taken on the basis of the financial statements. Importantly, misstatements below these levels will not necessarily be evaluated as immaterial as we also take account of the nature of identified misstatements, and the particular circumstances of their occurrence, when evaluating their effect on the financial statements as a whole. We determined the materiality for the Group financial statements as a whole to be £301,000 (2018: £396,700), calculated with reference to a benchmark of Group total assets, of which it represents 1.25%. Total assets is considered an appropriate benchmark as the Groups’ primary activity is that of investment value appreciation. In addition, we set a specific materiality level of £187,000 (2018: £168,000) for items within pre-tax loss calculated at 5% of loss before tax adjusted for fair value movement on capital items. The Parent Company’s materiality was calculated at £154,000 (2018: £203,000) based on the same as group basis. Whilst materiality for the financial statements of a whole was £301,000 (2018: £396,700), each component of the Group was audited to a lower level of materiality. Significant component materiality ranged from £93,000 to £54,000. Performance materiality is the application of materiality at the individual account or balance level set at an amount to reduce to an appropriately low level the probability that the aggregate of uncorrected and undetected misstatements exceeds materiality for the financial statements as a whole. The Group’s and parent performance materiality was determined as 68-45 % of materiality for the financial statement as a whole based on our assessment of risk. We reported to the Audit Committee all potential adjustments in excess of £15,000 (2018: £19,800). We also agreed to report differences below these thresholds that, in our view, warranted reporting on qualitative grounds. 25 An overview of the scope of our audit As part of designing our audit, we determined materiality and assessed the risks of material misstatement in the financial statements. In particular, we looked at where the Directors made subjective judgements, for example in respect of the valuation of unlisted investments which have a high level of estimation uncertainty involved. We considered the risk of the financial statements being misstated or not prepared in accordance with the underlying legislation or standards. We then directed our work toward areas of the financial statements which we assessed as having the highest risk of containing material misstatements, including those set out above. There are five significant components in the Group, which are all registered and operate in the UK. The whole group is subject to a full scope audit by BDO LLP. There were insignificant components identified and these were tested through analytical procedures. There were no significant changes to this approach during the year. We gained an understanding of the legal and regulatory framework applicable to the Group and the industry in which it operates, and considered the risk of acts by the Group which were contrary to applicable laws and regulations, including fraud. These included but were not limited to compliance with Companies Act 2006, the AIM rules, the principles of the QCA Corporate Governance Code and IFRS as adopted by the European Union. Other information The Directors are responsible for the other information. The other information comprises the information included in the annual report and financial statements, other than the financial statements and our auditor’s report thereon. Our opinion on the financial statements does not cover the other information and, except to the extent otherwise explicitly stated in our report, we do not express any form of assurance conclusion thereon. In connection with our audit of the financial statements, our responsibility is to read the other information and, in doing so, consider whether the other information is materially inconsistent with the financial statements or our knowledge obtained in the audit or otherwise appears to be materially misstated. If we identify such material inconsistencies or apparent material misstatements, we are required to determine whether there is a material misstatement in the financial statements or a material misstatement of the other information. If, based on the work we have performed, we conclude that there is a material misstatement of this other information, we are required to report that fact. We have nothing to report in this regard. Opinions on other matters prescribed by the Companies Act 2006 In our opinion, based on the work undertaken in the course of the audit: • • the information given in the Strategic Report and the Directors’ Report for the financial year for which the financial statements are prepared is consistent with the financial statements; and the Strategic Report and the Directors’ Report have been prepared in accordance with applicable legal requirements. Matters on which we are required to report by exception In the light of the knowledge and understanding of the Group and the Parent Company and its environment obtained in the course of the audit, we have not identified material misstatements in the Strategic Report or the Directors’ Report. 26 We have nothing to report in respect of the following matters in relation to which the Companies Act 2006 requires us to report to you if, in our opinion: • • • adequate accounting records have not been kept by the Parent Company, or returns adequate for our audit have not been received from branches not visited by us; or the Parent Company financial statements are not in agreement with the accounting records and returns; or certain disclosures of Directors’ remuneration specified by law are not made; or • we have not received all the information and explanations we require for our audit. Responsibilities of Directors As explained more fully in the Statement of Directors’ Responsibilities, the Directors are responsible for the preparation of the financial statements and for being satisfied that they give a true and fair view, and for such internal control as the Directors determine is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error. In preparing the financial statements, the Directors are responsible for assessing the Group’s and the Parent Company’s ability to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless the Directors either intend to liquidate the Group or the Parent Company or to cease operations, or have no realistic alternative but to do so. Auditor’s responsibilities for the audit of the financial statements Our objectives are to obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditor’s report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with ISAs(UK) will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these financial statements. A further description of our responsibilities for the audit of the financial statements is located on the Financial Reporting Council’s website at: www.frc.org.uk/auditorsresponsibilities. This description forms part of our auditor’s report. 27 Use of our report This report is made solely to the Parent Company’s members, as a body, in accordance with Chapter 3 of Part 16 of the Companies Act 2006. Our audit work has been undertaken so that we might state to the Parent Company’s members those matters we are required to state to them in an auditor’s report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the Parent Company and the Parent Company’s members as a body, for our audit work, for this report, or for the opinions we have formed. Paul Fenner (Senior Statutory Auditor) for and on behalf of BDO LLP, Statutory Auditor London, UK 31 January 2020 BDO LLP is a limited liability partnership registered in England and Wales (with registered number OC305127). 28 CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME for the year ended 30 June 2019 30 June 2018 30 June 2019 (as restated*) Notes £ £ CONTINUING OPERATIONS Revenue 3 777,827 265,936 Cost of sales (212,743) (191,420) GROSS PROFIT 565,084 74,516 Administrative expenses (1,446,565) (1,317,971) Fair value through profit and loss - Revaluation of investment properties 12 3,268 3,118,721 OPERATING (LOSS)/PROFIT BEFORE SEPARATELY DISCLOSED ITEMS (878,213) 1,875,266 Separately disclosed administrative items Share-based payment charge 20 (1,387,441) (950,188) Costs associated with third-party fundraising and issue of shares 6 (407,616) (47,173) Costs associated with aborted fundraising 6 – (626,826) Loss on disposal of property SPV 13 (340,753) – OPERATING (LOSS) / PROFIT (3,014,023) 251,079 Finance costs 5 (732,984) (325,688) Finance income 5 9,635 7,035 LOSS BEFORE TAXATION 6 (3,737,372) (67,574) Taxation 7 – – LOSS FOR THE YEAR (3,737,372) (67,574) TOTAL COMPREHENSIVE EXPENSE FOR THE YEAR (3,737,372) (67,574) Loss attributable to owners of the parent (3,737,372) (67,574) Loss per share expressed in pence per share 8 Basic (24.66) (1.02) Diluted (24.66) (1.02) * The acquisitions of KCR (Kite) Limited and KCR (Cygnet) Limited in the prior period were previously accounted for as business combinations resulting in a gain on bargain purchase and costs of acquisition being recognised separately within operating profit. These acquisitions have been restated as asset acquisitions. The gain on bargain purchase and the costs of acquisition previously recognised have consequently been reclassified to Revaluation of investment properties. Further details can be found in note 13. Costs relating to aborted fundraising in 2018 were previously classified as Costs associated with third-party fundraising. The costs have now been presented separately to more accurately describe their nature. The notes form part of these financial statements 29 CONSOLIDATED STATEMENT OF FINANCIAL POSITION 30 June 2019 30 June 2018 30 June 2019 (as restated*) Notes £ £ ASSETS NON-CURRENT ASSETS Property, plant and equipment 11 61,370 38,993 Investment properties 12 23,923,000 26,695,000 23,984,370 26,733,993 CURRENT ASSETS Trade and other receivables 14 77,078 703,427 Cash and cash equivalents 15 29,298 6,425 106,376 709,852 TOTAL ASSETS 24,090,746 27,443,845 EQUITY SHAREHOLDERS’ EQUITY Share capital 16 2,029,178 1,435,721 Share premium 10,018,986 7,358,244 Unissued share capital 17 – 1,260,299 Capital redemption reserve 67,500 67,500 Other reserves 14,930 29,862 Retained earnings (2,550,496) (200,565) TOTAL EQUITY 9,580,098 9,951,061 LIABILITIES NON-CURRENT LIABILITIES Interest-bearing loans and borrowings 19 9,881,344 8,749,702 CURRENT LIABILITIES Trade and other payables 18 2,737,010 7,072,249 Interest-bearing loans and borrowings 19 1,892,294 1,670,833 4,629,304 8,743,082 TOTAL LIABILITIES 14,510,648 17,492,784 TOTAL EQUITY AND LIABILITIES 24,090,746 27,443,845 Net asset value per share (pence) 8 60.67 100.95 The financial statements were approved and authorised for issue by the Board of Directors on 31 January 2020 and were signed on its behalf by: Dominic White Director *In the prior period, unissued share capital was presented within current liabilities. This has been restated in the current period to re-classify the balance to equity. Further details can be found in note 17. The notes form part of these financial statements 30 COMPANY STATEMENT OF FINANCIAL POSITION 30 June 2019 30 June 2018 30 June 2019 (as restated*) Notes £ £ ASSETS NON-CURRENT ASSETS Property, plant and equipment 11 2,348 3,984 Investments 13 10,706,081 12,086,858 10,708,429 12,090,842 CURRENT ASSETS Trade and other receivables 14 1,813,404 919,064 Cash and cash equivalents 15 3,334 77 1,816,738 919,141 TOTAL ASSETS 12,525,167 13,009,983 EQUITY SHAREHOLDERS’ EQUITY Share capital 16 2,029,178 1,435,721 Share premium 10,018,986 7,358,244 Unissued share capital 17 – 1,260,299 Capital redemption reserve 67,500 67,500 Other reserves 14,930 29,862 Retained earnings (7,592,921) (5,431,915) TOTAL EQUITY 4,537,673 4,719,711 LIABILITIES NON-CURRENT LIABILITIES Interest-bearing loans and borrowings 19 4,756,956 5,558,770 CURRENT LIABILITIES Trade and other payables 18 1,338,244 1,109,875 Interest-bearing loans and borrowings 19 1,892,294 1,621,627 3,230,538 2,731,502 TOTAL LIABILITIES 7,987,494 8,290,272 TOTAL EQUITY AND LIABILITIES 12,525,167 13,009,983 As permitted by Section 408 of the Companies Act 2006, the income statement of the Company is not presented as part of these financial statements. The Company’s loss for the financial year was £(3,548,447) (2018 – £(3,089,541) as restated). The financial statements were approved and authorised for issue by the Board of Directors on 31 January 2020 and were signed on its behalf by: Dominic White Director *In the prior period, unissued share capital was presented within current liabilities. This has been restated in the current period to re-classify the balance to equity. Further details can be found in note 17. The notes form part of these financial statements 31 CONSOLIDATED STATEMENT OF CHANGES IN EQUITY for the year ended 30 June 2019 Unissued share Capital Total Share Share capital redemption Other Retained equity capital premium (as restated*) reserve reserve earnings (as restated*) £ £ £ £ £ £ £ Balance at 1 July 2017 877,518 4,660,322 – 67,500 – (1,083,179) 4,522,161 Changes in equity Transactions with owners: Issue of share capital 558,203 2,697,922 – – – – 3,256,125 Unissued share capital – – 1,260,299 – – – 1,260,299 Share-based payments – – – – – 950,188 950,188 Total transactions with owners 558,203 2,697,922 1,260,299 – – 950,188 5,466,612 Equity element of loan finance – – – – 29,862 – 29,862 Total comprehensive expense – – – – – (67,574) (67,574) Balance at 30 June 2018 1,435,721 7,358,244 1,260,299 67,500 29,862 (200,565) 9,951,061 Changes in equity Transactions with owners: Issue of share capital 593,457 2,660,742 (1,260,299) – – – 1,993,900 Share-based payments – – – – – 1,387,441 1,387,441 Total transactions with owners 593,457 2,660,742 (1,260,299) – – 1,387,441 3,381,341 Equity element of loan finance – – – – (14,932) – (14,932) Total comprehensive expense – – – – – (3,737,372) (3,737,372) Balance at 30 June 2019 2,029,178 10,018,986 – 67,500 14,930 (2,550,496) 9,580,098 * In the prior period, unissued share capital was presented within current liabilities. This has been restated in the current period to re-classify the balance to equity. Further details can be found in note 17. The notes form part of these financial statements 32 COMPANY STATEMENT OF CHANGES IN EQUITY for the year ended 30 June 2019 Unissued share Capital Retained Total Share Share capital redemption Other earnings equity capital premium (as restated*) reserve reserve (as restated*) (as restated*) £ £ £ £ £ £ £ Balance at 1 July 2017 877,518 4,660,322 – 67,500 – (3,292,562) 2,312,778 Changes in equity Transactions with owners: Issue of share capital 558,203 2,697,922 – – – – 3,256,125 Unissued share capital – – 1,260,299 – – – 1,260,299 Share-based payments – – – – – 950,188 950,188 Total transactions with owners 558,203 2,697,922 1,260,299 – – 950,188 5,466,612 Equity element of loan finance – – – – 29,862 – 29,862 Total comprehensive expense – – – – – (3,089,541) (3,089,541) Balance at 30 June 2018 1,435,721 7,358,244 1,260,299 67,500 29,862 (5,431,915) 4,719,711 Changes in equity Transactions with owners: Issue of share capital 593,457 2,660,742 (1,260,299) – – – 1,993,900 Share-based payments – – – – – 1,387,441 1,387,441 Total transactions with owners 593,457 2,660,742 (1,260,299) – – 1,387,441 3,381,341 Equity element of loan finance – – – – (14,932) – (14,932) Total comprehensive expense – – – – – (3,548,447) (3,548,447) Balance at 30 June 2019 2,029,178 10,018,986 – 67,500 14,930 (7,592,921) 4,537,673 * In the prior period, unissued share capital was presented within current liabilities. This has been restated in the current period to re-classify the balance to equity. Further details can be found in note 17. The notes form part of these financial statements 33 CONSOLIDATED STATEMENT OF CASH FLOWS for the year ended 30 June 2019 2018 2019 (as restated*) Note £ £ Cash flows from operating activities Cash used in operations A (4,960,666) (1,776,564) Interest paid (732,984) (325,688) Net cash used in operating activities (5,693,650) (2,102,252) Cash flows from investing activities Purchase of property, plant & equipment (40,451) (43,515) Purchase of investment properties (24,732) (2,046,594) Acquisition of property assets – (5,596,459) Disposal of property SPV 1,140,000 – Interest received 9,635 7,035 Net cash generated from/(used in) investing activities 1,084,452 (7,679,533) Cash flows from financing activities Loan repayments in year (796,079) (1,131,525) New loans in year 3,434,250 7,739,858 Shares issued 1,993,900 2,156,125 Net cash generated from financing activities 4,632,071 8,764,458 Increase/(decrease) in cash and cash equivalents 22,873 (1,017,327) Cash and cash equivalents at beginning of year 6,425 1,023,752 Cash and cash equivalents at end of year 29,298 6,425 * The prior-period cash used in operations and cash flows from acquisition of subsidiaries have been restated due to a reclassification of costs upon acquisition of subsidiaries. Further details can be found in note 13. The notes form part of these financial statements 34 COMPANY STATEMENT OF CASH FLOWS for the year ended 30 June 2019 2019 2018 Note £ £ Cash flows from operating activities Cash used in operations A (2,165,998) (1,904,323) Interest paid (428,185) (316,544) Net cash used in operating activities (2,594,183) (2,220,867) Cash flows from investing activities Purchase of property, plant & equipment – (3,519) Purchase of property assets – (5,596,459) Disposal of property SPV 1,140,000 – Interest received 9,619 7,019 Net cash generated from/(used in) investing activities 1,149,619 (5,592,959) Cash flows from financing activities Loan repayments in year (546,079) (1,131,525) New loans in year – 5,799,720 Shares issued 1,993,900 2,156,125 Net cash generated from financing activities 1,447,821 6,824,320 Increase/(decrease) in cash and cash equivalents 3,257 (989,506) Cash and cash equivalents at beginning of year 77 989,583 Cash and cash equivalents at end of year 3,334 77 * The prior-period cash used in operations and cash flows from purchase of subsidiary undertakings have been restated due to a reclassification of costs upon acquisition of subsidiaries. Further details can be found in note 13. The notes form part of these financial statements 35 NOTE TO THE STATEMENTS OF CASH FLOWS for the year ended 30 June 2019 A) RECONCILIATION OF LOSS BEFORE TAXATION TO CASH USED IN OPERATIONS 2018 2019 (as restated) Group £ £ Loss before taxation (3,737,372) (67,574) Depreciation charges 18,074 6,365 Revaluation of investment properties (3,268) (3,118,721) Loss on disposal of property SPV 340,753 – Share-based payment charge 1,387,441 950,188 Finance costs 732,984 325,688 Finance income (9,635) (7,035) (1,271,023) (1,911,089) Decrease/(increase) in trade and other receivables 626,349 (590,502) (Decrease)/increase in trade and other payables (4,315,992) 725,027 Cash used in operations (4,960,666) (1,776,564) 2019 2018 Company £ £ Loss before taxation (3,548,447) (3,089,541) Depreciation charges 1,636 1,211 Impairment of investments – 75,000 Loss on disposal of property SPV 241,585 – Share-based payment charge 1,387,441 950,188 Finance costs 428,185 316,544 Finance income (9,619) (7,019) (1,499,219) (1,753,617) Increase in trade and other receivables (894,340) (891,568) Increase in trade and other payables 227,561 740,862 Cash used in operations (2,165,998) (1,904,323) The notes form part of these financial statements 36 NOTES TO THE FINANCIAL STATEMENTS for the year ended 30 June 2019 1. Presentation of financial statements Statement of compliance The consolidated financial statements have been prepared in accordance with International Financial Reporting Standards (“IFRS”) as issued by the International Accounting Standards Board and as adopted by the European Union. Functional and presentation currency These consolidated financial statements are presented in Pounds Sterling (‘GBP’), which is considered by the directors to be the functional currency of the Group. Changes in accounting policies Adoption of new and revised standards The Group has applied the following accounting standards that are mandatorily effective for accounting periods commencing on or after 1 January 2018: IFRS 9 Financial Instruments IFRS 15 Revenue from Contracts with Customers Clarifications to IFRS 15 (Apr 2016) Clarifications to IFRS 15 Revenue from Contracts with Customers The application of these standards has not had a material impact on the amounts reported in these financial statements. New standards in issue but not yet effective As at 30 June 2019, the Group has not applied the following new and revised standards that have been issued but are not yet effective: IFRS 16 Leases The directors do not anticipate that the adoption of IFRS 16 will have a significant impact on the financial statements of the Group in future periods. Changes in accounting policies for standards implemented in the year are as follows: IFRS 15 Revenue from Contracts with Customers (as amended in April 2016) The standard is effective for periods beginning on or after 1 January 2018. The standard has been developed to provide a comprehensive set of principles in presenting the nature, amount, timing and uncertainty of revenue and cash flows arising from a contract with a customer. IFRS 15 introduces a five-step approach to recognising revenue: 1. 2. Identify the contract with the customer; Identify the performance obligations in the contract; 3. Determine the transaction price; 4. Allocate the transaction price; and 5. Recognise revenue when a performance obligation is satisfied. 37 NOTES TO THE FINANCIAL STATEMENTS for the year ended 30 June 2019 1. Presentation of financial statements (continued) The Group has applied IFRS 15 in accordance with the fully retrospective transitional approach. The Group accounting policies in relation to revenue are detailed in the accounting policies below. Apart from providing more extensive disclosures, the application of IFRS 15 has not had an impact on the financial position and/or financial performance of the Group. IFRS 9 Financial Instruments The standard is effective for periods beginning on or after 1 January 2018. The Group has applied the standard in the year. Classification and measurement The standard makes substantial changes to the classification of financial assets. There will only be three categories of financial assets whereby financial assets are recognised at either fair value through profit and loss, fair value through other comprehensive income or measured at amortised cost. Classification of financial assets is based on whether the business model is to collect the contractual cash flows, sell the financial assets, or both, and whether the contractual cash flows are solely payments of principal and interest. There is no change in the accounting for any financial liabilities. Impairment The impairment model under IFRS 9 reflects expected credit losses, as opposed to only incurred credit losses under IAS 39. As such, where there are expected to be credit losses, they are recognised in the profit and loss. The Group’s assessment of this new standard is that it does not give rise to any significant adjustments in the Group financial statements or in the parent company financial statements in respect of group balances. IFRS 16 Leases IFRS 16 introduces a comprehensive model for the identification of lease arrangements and accounting treatments for both lessors and lessees. IFRS 16 will supersede the current lease guidance including IAS 17 Leases and the related interpretations when it becomes effective for accounting periods beginning on or after 1 January 2019. The Group expects to adopt IFRS 16 for the year ended 30 June 2020. IFRS 16 distinguishes leases and service contracts on the basis of whether an identified asset is controlled by a customer. Distinctions of operating leases (off balance sheet) and finance leases (on balance sheet) are removed for lessee accounting, and are replaced by a model where a right-of-use asset and a corresponding liability have to be recognised for all leases by lessees except for short-term leases and leases of low value assets. In contrast to lessee accounting, however, IFRS 16 substantially carries forward existing lessor accounting from IAS 17. As lessor, the Group has no finance leases. 38 1. Presentation of financial statements (continued) The Group has a small number of operating leases concerning office premises and plant and equipment. As set out in note 10, the minimum lease payments falling due within five years total £56,951. IFRS 16 provides an exemption for short-term operating leases and leases of low value. The Company will take advantage of the exemption rather than establishing a right-to-use asset. 2. Accounting Policies Basis of preparation The consolidated financial statements have been prepared on the historical cost basis other than as set out in the following policies. Going concern After preparing detailed forecasts including the raising of new funds, the directors have formed a judgment that, as at the date of approving the financial statements, there is reasonable expectation that the Group has adequate resources to continue in operational existence in the foreseeable future. Since the balance sheet date, Torchlight Fund LP has entered into an agreement with KCR Residential REIT plc, to the extent that it may become necessary, to exercise their Option sufficient to ensure that the Company’s liabilities will be satisfied as they fall due during the next 12 months. For these reasons, the directors have adopted the going-concern basis in preparing the financial statements. Basis of consolidation The financial statements include the financial statements of the Company and its subsidiary undertakings. The subsidiaries included in the consolidated financial statements, from the effective date of acquisition, are K&C (Newbury) Limited, K&C (Coleherne) Limited, K&C (Osprey) Limited, KCR (Kite) Limited, KCR (Cygnet) Limited and KCR (Southampton) Limited. Business combinations are accounted for using the acquisition method as at the acquisition date, which is the date on which control is transferred to the Group. Control is the power to govern the financial and operating policies of an entity so as to obtain benefit from its activities. In assessing control, the Group takes into consideration potential voting rights that currently are exercisable. Transaction costs, other than those of a capital nature and those associated with the issue of debt or equity securities that the Group incurs in connection with a business combination, are expensed as incurred. Both KCR (Kite) Limited and KCR (Cygnet) Limited were acquired in the previous financial year. Further details are shown in note 13. KCR (Southampton) Limited was incorporated on 26 June 2018. The acquisition of KCR (Kite) Limited and KCR (Cygnet) Limited have been accounted for as asset purchases rather than business combinations. This has resulted in a prior period adjustment, details of which are contained in note 13. KCR (Cygnet) Limited was disposed of by the Group in December 2018. Further details can be found in note 13. 39 NOTES TO THE FINANCIAL STATEMENTS for the year ended 30 June 2019 2. Accounting policies (continued) Intra-group balances and transactions, and any unrealised income and expenses arising from intra-group transactions, are eliminated in preparing consolidated financial statements. Investments Investments in subsidiaries are held at cost less provision for impairment. Revenue recognition Revenue of the Group for the year was derived mainly from its principal activity, being the letting to third parties of, and management of, property assets owned by the Group. This income includes rental income, management fees and sales commissions. Revenue from contracts with customers is recognised when control of the goods or services are transferred to the customer at an amount that reflects the consideration to which the Group expects to be entitled in exchange for those goods or services net of discounts, VAT and other sales-related taxes. The Group concludes that it is the principal in its revenue arrangements, because it typically controls the goods or services before transferring them to the customer. Contracts with customers do not contain a financing component or any element of variable consideration. The Group does not offer an option to purchase a warranty. Rental income from operating leases is recognised periodically in line with the time for which the property is rented. Rental income received in advance is recognised in deferred income. Management fees derived from the management of property assets owned by third parties is recognised as the services are provided. Revenue from sales commissions is recognised at the point in time when control of the asset is transferred to the customer. Separately disclosed administrative items Separately disclosed items are those that are deemed to be exceptional by size or nature in relation to the activities of the Group. In the case of share-based payment charges, these are included as a separately disclosed administrative item as a significant non-cash item. Finance costs Finance costs comprise interest expense on borrowings. Borrowing costs that are not directly attributable to the acquisition, construction or production of a qualifying asset are recognised in profit or loss using the effective interest method. 40 2. Accounting policies (continued) Property, plant and equipment Property, plant and equipment are stated at cost less accumulated depreciation. Depreciation is provided at the following annual rates in order to write off each asset over its estimated useful life. Fixtures and fittings Computer equipment – – 5% and 25% on cost 25% on cost Investment properties Investment properties comprise properties owned by the Group which are held for capital appreciation, rental income or both. Investment properties are initially measured at cost, including expenditure that is directly attributable to the acquisition of the asset. Investment properties are revalued on acquisition by independent external valuers and then by the directors or independent valuers annually thereafter. Acquisitions and disposals are recognised on exchange of contracts. Any gain or loss arising from a change in fair value is recognised in profit or loss. Further details of the investment property valuation methodology are contained in note 12. Subsequent expenditure is capitalised only when it is probable that the future economic benefits associated with the expenditure will flow to the Group. Ongoing repairs and maintenance are expensed as incurred. Cash and cash equivalents Cash and cash equivalents comprise cash balances and balances held with banking institutions. Financial assets Recognition and derecognition Financial assets are recognised initially on the date that the Group becomes a party to the contractual provisions of the instrument. The Group derecognises a financial asset when the contractual rights to the cash flows from the asset expire, or it transfers the rights to receive the contractual cash flows in a transaction in which substantially all the risks and rewards of ownership of the financial assets are transferred. Financial assets and liabilities are offset and the net amount presented in the statement of financial position only when the Group has a legal right to offset the amounts and intends either to settle on a net basis or to realise the asset and settle the liability simultaneously. Classification and initial recognition of financial assets Except for trade receivables that do not contain a significant financing component and are measured at the transaction price in accordance with IFRS 15, all financial assets are initially measured at fair value plus adjusted for any directly attributable transaction costs. 41 NOTES TO THE FINANCIAL STATEMENTS for the year ended 30 June 2019 2. Accounting policies (continued) Financial assets are classified into the following categories: • • • Amortised cost Fair value through profit or loss (FVTPL) Fair value through other comprehensive income (FVOCI) The classification is determined by both: • • The entity’s business model for managing the asset The contractual cash flow characteristics of the financial asset All income and expenses relating to financial assets that are recognised in profit or loss are presented within finance costs, finance income or other financial items, except for impairment of trade receivables which is presented within administrative expenses. Subsequent measurement of financial assets Financial assets are measured at amortised cost if the assets meet the following conditions (and are not designated as FVTPL): • • They are held within a business model whose objective is to hold the financial assets and collect its contractual cash flows The contractual terms of the financial assets give rise to cash flows that are solely payments of principal and interest on the principal amount outstanding After initial recognition, these are measured at amortised cost using the effective interest method. Discounting is omitted where its effect is immaterial. The Group’s cash and cash equivalents, trade and most other receivables fall into this category. Financial assets which are designated as FVTPL are measured at fair value with gains or losses recognised in profit or loss. The fair values of financial assets in this category are determined with reference to active market transactions or using a valuation technique where no active market exists. The Group’s investment properties are designated as FVTPL assets. Impairment of financial assets IFRS 9’s impairment requirements use forward-looking information to recognise expected credit losses – the ‘expected credit loss (ECL) method’. Recognition of credit losses is no longer dependent on first identifying a credit loss event, but considers a broader range of information in assessing credit risk and credit losses including past events, current conditions, reasonable and supportable forecasts that affect the expected collectability of the future cash flows of the instrument. The Group makes use of a simplified approach in accounting for trade and other receivables and records the loss allowance as lifetime expected credit losses. These are the expected shortfalls in contractual cash flows, considering the potential for default at any point during the life of the financial instrument. In calculating, the Group uses its historical experience, external indicators and forward-looking information to calculate the expected credit losses. 42 2. Accounting policies (continued) Financial liabilities Financial liabilities are recognised initially on the date that the Group becomes a party to the contractual provisions of the instrument. The Group derecognises a financial liability when its contractual obligations are discharged, cancelled or expire. The Group classifies non-derivative financial liabilities into the ‘other financial liabilities’ category. Such financial liabilities are recognised initially at fair value adjusted for directly attributable transaction costs. Subsequent to initial recognition, these financial liabilities are measured at amortised cost using the effective interest method. ‘Other financial liabilities’ comprise trade and other payables and other short-term monetary liabilities. Bank and other borrowings are initially recognised at the fair value of the amount advanced net of any transaction costs directly attributable to the issue of the instrument. Such interest-bearing liabilities are subsequently measured at amortised cost using the effective interest method. Interest expense in this context includes initial transaction costs and premium payable on redemption, as well as any interest or coupon payable while the liability is outstanding. Financial liabilities and equity instruments are classified according to the substance of the contractual arrangements entered into. An equity instrument is any contract that evidences a residual interest in the assets of the Group after deducting all of its liabilities. Share capital Ordinary shares are classified as equity. Costs directly attributable to the issue of ordinary shares are recognised as a deduction from equity. Unissued share capital relates to partial consideration on the acquisition of a property SPV and is disclosed in more detail in note 17. Taxation Tax expense comprises current and deferred tax. Current and deferred tax is recognised in profit or loss except to the extent that it relates to a business combination, or items recognised directly in equity or in other comprehensive income. As a REIT, the Group is generally not liable to corporation tax. Deferred tax would be recognised in respect of temporary difference between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for taxation purposes. Deferred tax is recognised for: • • • temporary differences on the initial recognition of assets or liabilities in a transaction that is not a business combination and that affects neither the accounting nor taxable profit or loss; temporary differences related to investments in subsidiaries and jointly controlled entities to the extent that it is probable that they will not reverse in the foreseeable future; and taxable temporary differences arising on the initial recognition of goodwill. 43 NOTES TO THE FINANCIAL STATEMENTS for the year ended 30 June 2019 2. Accounting policies (continued) Deferred tax is measured at the tax rates that are expected to be applied to temporary differences when they reverse, using tax rates enacted or substantively enacted at the reporting date. Deferred tax assets and liabilities are offset if there is a legally enforceable right to offset current tax liabilities and assets, and they relate to taxes levied by the same tax authority on the same taxable entity, or on different tax entities, but they intend to settle current tax liabilities and assets on a net basis or their tax assets and liabilities will be realised simultaneously. A deferred tax asset is recognised for unused tax losses, tax credits and deductible temporary differences to the extent that it is probable that future taxable profits will be available against which they can be utilised. Deferred tax assets are reviewed at each reporting date and are reduced to the extent that it is no longer probable that the related tax benefit will be realised. Provisions A provision is recognised if, as a result of a past event, the Group has a present legal or constructive obligation that can be estimated reliably, and it is probable that an outflow of economic benefits will be required to settle the obligation. Provisions are determined by discounting the expected future cash flows at a pre-tax rate that reflects current market assessments of the time value of money and the risks specific to the liability. The unwinding of the discount is recognised as finance cost. Share-based payments The Group allowed certain directors and other individuals to acquire shares in the parent company until the scheme was disbanded on 6 August 2019. The grant date fair value of share-based payment awards granted is recognised as an employee expense with a corresponding increase in equity, over the period that the employees become unconditionally entitled to the awards. The fair value of the options granted is measured using an option-pricing model, taking into account the terms and conditions upon which the options were granted. The fair value was charged as an expense in the income statement over the vesting period and the charge adjusted each year to reflect the expected and actual level of vesting. No adjustment is made to the charge after the vesting date. Critical accounting estimates and judgments The preparation of the consolidated financial statements in conformity with IFRS requires management to make judgments, estimates and assumptions that affect the application of accounting policies and the reported amount of assets, liabilities, income, and expenses. Actual results may differ from these estimates. Estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the period in which the estimates are revised and in any future years affected. 44 2. Accounting policies (continued) Information about critical estimates and assumptions that have the most significant effect on the amounts recognised in the consolidated financial statements and/or have a significant risk of resulting in a material adjustment within the next financial year is as follows:  Investment properties The Group’s investment properties are valued, on the basis of market value, on acquisition by independent external valuers and then by the directors or independent valuers annually thereafter. The Group’s investment properties were all valued independently at 30 June 2019 at £23,923,000. The directors are of the opinion that the estimates and assumptions that they have used in the valuation of investment properties are appropriate. Further details of the valuation methodology are contained in note 12.  Share-based payments The total amount to be expensed is determined by reference to the fair value of the options granted. The fair values were estimated using the Black-Scholes valuation model. In arriving at the charge for the period, assumptions are made on the number of options likely to be exercised, the current market value of the shares and the volatility of the market value of the shares. Further details regarding share-based payments are contained in note 20.  Determination of fair values A number of the Group’s accounting policies and disclosures require the determination of fair value, for both financial and non-financial assets and liabilities. Fair values have been determined for measurement and/or disclosure purposes based on the following methods. When applicable, further information about the assumptions made in determining fair values is disclosed in the notes specific to that asset or liability. Investment properties The fair value of investment properties is based either on independent professional valuations in accordance with the Royal Institution of Chartered Surveyors’ Appraisal and Valuation Standards 2014 as amended or by the directors, based on market prices for similar items. 3. Revenue The Group is involved in UK property ownership, management and letting and is considered to operate in a single geographical and business segment. The total revenue of the Group for the year was derived from its principal activities, being the letting to third parties and management, of property assets owned by the Group, and, in certain cases, the management of property assets owned by third parties. The Group’s investment property consists of residential housing for the private rented sector and therefore has multiple tenants and as a result does not have any significant customers. 45 NOTES TO THE FINANCIAL STATEMENTS for the year ended 30 June 2019 4. Employees and directors Group 2019 2018 £ £ Wages and salaries 657,793 455,118 Social security costs 86,735 45,681 Pension costs (506) 106,157 744,022 606,956 The average monthly number of employees during the year was as follows Directors and management 5 7 Administration 3 2 8 9 2019 2018 £ £ Directors’ remuneration (as per Report of the Directors) 486,300 321,000 Share-based payment charge relating to directors 974,199 686,953 Remuneration of the highest-paid director 278,200 151,000 Amounts paid into a pension scheme of the highest-paid director – 100,000 The Group directors are considered to be key management personnel. Certain directors and others have received Restricted Preference shares in the Company, further details of which are contained in note 20 and note 23 of the financial statements. Company 2019 2018 £ £ Wages and salaries 597,700 395,000 Social security costs 78,320 43,492 Pension costs (2,630) 104,880 673,390 543,372 46 4. Employees and directors (continued) The average monthly number of employees during the year was as follows 2019 2018 Directors and management 5 5 Administration 1 1 6 6 5. Finance income and costs 2019 2018 £ £ Finance costs Loan interest 732,984 325,688 Finance income Bank interest 9,635 7,035 6. Loss before taxation The loss before taxation is stated after charging: 2019 2018 £ £ Hire of plant and machinery 8,230 2,034 Other operating leases 23,052 13,140 Depreciation – owned assets 18,074 6,365 Auditors’ remuneration for the Group – audit services for parent company 38,000 44,100 – audit services for subsidiaries 10,000 15,000 – taxation advisory services 29,675 13,560 – abortive corporate finance services – 150,106 Separately disclosed items During the year, the Group incurred significant costs relating to third-party fundraising and issue of shares. The costs to the Group totalled £407,616. In 2018, the Company incurred costs relating to third-party fundraising and issue of shares of £47,173 and incurred costs of £626,826 relating to an aborted fundraising transaction. It is considered that the size and nature of these costs are such that they should be disclosed on the face of the Consolidated Statement of Comprehensive Income. Further information on the share-based payments, which are shown on the face of the Consolidated Statement of Comprehensive Income, can be found in note 20. 47 NOTES TO THE FINANCIAL STATEMENTS for the year ended 30 June 2019 7. Taxation Analysis of tax 2019 2018 Current tax £ £ UK corporation tax – – Deferred tax – – Total tax – – Factors affecting the tax expense The tax assessed for the year is higher than the standard rate of corporation tax in the UK. The difference is explained below: 2019 2018 £ £ Loss on ordinary activities before taxation (3,737,372) (67,574) Loss on ordinary activities multiplied by the standard rate of corporation tax in the UK of 19% (2018 – 19%) (710,101) (12,839) Effects of Expenses not deductible 444,191 445,885 Income not taxable (64,455) (633,530) Capital losses 23,238 – Losses not recognised in deferred tax 307,127 200,484 Tax credit – – 8. Loss per share and net asset value Basic loss per share is calculated by dividing the loss attributable to ordinary shareholders by the weighted average number of Ordinary shares outstanding during the year. Fully diluted earnings per share is calculated using the weighted average number of shares adjusted to assume the conversion of all dilutive potential Ordinary shares. In the opinion of the directors, all of the outstanding share options are anti-dilutive and, hence, basic and fully diluted loss per share are the same. 48 8. Loss per share and net asset value (continued) 2019 Weighted average number Per share Loss of shares amount £ No. Pence Loss attributable to ordinary shareholders (3,737,372) 15,156,059 (24.66) Effect of dilutive securities – – – 2018 Weighted average number Per share Loss of shares amount £ No. Pence Loss attributable to ordinary shareholders (67,574) 6,598,018 (1.02) Effect of dilutive securities – – – The net asset value is calculated by dividing the equity attributable to ordinary shareholders by the number of Ordinary shares in issue at the balance sheet date. 2019 Number of Per share Equity shares amount £ No. Pence Net asset value 9,580,098 15,791,777 60.67 2018 Number of Per share Equity shares amount £ No. Pence Net asset value 9,951,061 9,857,207 100.95 49 NOTES TO THE FINANCIAL STATEMENTS for the year ended 30 June 2019 9. Future minimum lease payments receivable The Group leases residential units within certain of its investment properties under operating leases. The future minimum lease payments receivable under non-cancellable leases are as follows: 30 June 30 June 2019 2018 £ £ Within one year 508,096 253,551 Between one and five years 469,846 572,386 More than five years 53,969 1,193,517 Total 1,031,911 2,019,454 Lease revenue is generated from properties owned by K&C (Coleherne) Limited, KCR (Southampton) Limited and KCR (Kite) Limited that are let on short-term tenancy agreements. 10. Leasing agreements Minimum lease payments, under non-cancellable operating leases, fall due as follows: 30 June 30 June 2019 2018 £ £ Within one year 29,784 21,758 Between one and five years 27,167 – Total 56,951 21,758 50 11. Property, plant and equipment Fixtures, fittings & computer equipment Group £ COST At 1 July 2017 5,596 Additions 43,515 At 30 June 2018 and 1 July 2018 49,111 Additions 40,451 At 30 June 2019 89,562 DEPRECIATION At 1 July 2017 3,753 Charge for year 6,365 At 30 June 2018 and 1 July 2018 10,118 Charge for year 18,074 At 30 June 2019 28,192 NET BOOK VALUE At 30 June 2019 61,370 At 30 June 2018 38,993 Fixtures, fittings & computer equipment Company £ COST At 1 July 2017 3,017 Additions 3,519 At 30 June 2018 and 1 July 2018 6,536 At 30 June 2019 6,536 51 NOTES TO THE FINANCIAL STATEMENTS for the year ended 30 June 2019 11. Property, plant and equipment (continued) Fixtures, fittings & computer equipment Company £ DEPRECIATION At 1 July 2017 1,341 Charge for year 1,211 At 30 June 2018 and 1 July 2018 2,552 Charge for year 1,636 At 30 June 2019 4,188 NET BOOK VALUE At 30 June 2019 2,348 At 30 June 2018 3,984 12. Investment properties Total £ Group (as restated) COST At 1 July 2017 7,242,000 Additions 16,334,279 Revaluations 3,118,721 At 30 June 2018 and 1 July 2018 26,695,000 Additions 24,732 Disposals (2,800,000) Revaluations 3,268 At 30 June 2019 23,923,000 NET BOOK VALUE At 30 June 2019 23,923,000 At 30 June 2018 26,695,000 The investment properties disposed of in the year arose from the sale of a property SPV (KCR Cygnet). 52 12. Investment properties (continued) In August 2019, and updated in November 2019, all material properties were valued by professionally qualified independent external valuers in accordance with the Royal Institution of Chartered Surveyors’ Appraisal and Valuation Standards 2014 as amended. The Group has included a valuation of £23,923,000 in the financial statements. Fair value is based on current prices in an active market for similar properties in the same location and condition. The current price is the estimated amount for which a property could be exchanged between a willing buyer and willing seller in an arm’s length transaction after proper marketing wherein the parties had each acted knowledgeably, prudently and without compulsion. Valuations are based on a market approach which provides an indicative value by comparing the property with other similar properties for which price information is available. Comparisons have been adjusted to reflect differences in age, size, condition, location and any other relevant factors. The fair value for investment properties has been categorised as a Level 3 inputs under IFRS 13. The valuer visited all material properties and his valuations were based on both internal and external site visits. The valuation technique used in measuring the fair value, as well as the significant inputs and significant unobservable inputs, are summarised in the following table – Fair Value Significant Hierarchy Valuation Technique Significant Inputs Used Unobservable Inputs Level 3 Income capitalisation and/or capital value on a Adopted gross yield 3.29% – 5.39% per square foot basis Adopted rate per square foot £332 – £825 The fair value would increase if market rents were higher and/or the rates per square foot were higher and/or capitalisation rates were lower. The fair values would decrease if market rents were lower and/or the rates per square foot were lower and/or capitalisation rates were higher. The revenue earned by the Group from its investment properties and all direct operating expenses incurred on its investment properties are recorded in the Consolidated Statement of Comprehensive Income. The total rental income in relation to investment properties for the Group equated to £619,906 (2018 – £133,001). The total rental expenses in relation to investment properties for the Group equated to £183,977 (2018 – £50,122). 53 NOTES TO THE FINANCIAL STATEMENTS for the year ended 30 June 2019 13. Investments Shares in group undertakings £ Company (as restated*) COST At 1 July 2017 5,305,000 Additions 6,856,858 Impairments (75,000) At 30 June 2018 and 1 July 2018 12,086,858 Disposals (1,380,777) At 30 June 2019 10,706,081 NET BOOK VALUE At 30 June 2019 10,706,081 At 30 June 2018 12,086,858 As at 31 January 2020, the Company’s investments comprise the following: Holding Subsidiaries % K&C (Coleherne) Limited Registered office: UK 100.00 Nature of business Class of shares Property letting Ordinary K&C (Osprey) Limited Registered office: UK 100.00 Nature of business Class of shares Property letting and property management Ordinary KCR (Kite) Limited Registered office: UK 100.00 Nature of business Class of shares Property letting Ordinary KCR (Southampton) Limited Registered office: UK 100.00 Nature of business Class of shares Property letting Ordinary K&C (Newbury) Limited Registered office: UK 100.00 Nature of business Class of shares Dormant Ordinary 54 13. Investments (continued) Acquisition of KCR (Kite) Limited On 28 June 2018, the Company acquired the entire issued share capital of a property SPV, KCR (Kite) Limited, for £5,475,981, satisfied by cash. Net assets acquired were as follows: £ Investment property 5,535,879 Trade and other receivables 22,148 Trade and other payables (33,686) Taxation payable (48,360) Net assets 5,475,981 Total Consideration 5,475,981 Satisfied by cash 5,475,981 Net cash outflow arising on acquisition: Cash consideration (5,475,981) Bank and cash balances acquired – (5,475,981) Acquisition of KCR (Cygnet) Limited On 28 June 2018, the Company acquired the entire issued share capital of a property SPV, KCR (Cygnet) Limited, for total consideration of £1,380,777 satisfied by cash of £120,478 and the issuance of Ordinary shares to the value of £1,260,299. Net assets acquired were as follows: £ Investment property 2,680,777 Bank loans (1,300,000) Net assets 1,380,777 Total consideration 1,380,777 Satisfied by cash 1,380,777 Net cash outflow arising on acquisition: Cash consideration (120,478) (120,478) The acquisition of KCR (Kite) Limited and KCR (Cygnet) Limited were accounted for as business combinations in the 2018 financial statements. In 2019, the Directors’ reconsidered the nature of the acquisitions and concluded the limited processes within the acquired entities meant they should have been accounted for as asset acquisitions. 55 NOTES TO THE FINANCIAL STATEMENTS for the year ended 30 June 2019 13. Investments (continued) This has led to a restatement of a number of comparative figures. As the values of the investment properties acquired, upon acquisition of the subsidiaries, exceeded the cost to the Group, under the original accounting treatment, the Group recognised a gain on bargain purchase of £2,201,639 in the Statement of Comprehensive Income. The group also recognised costs relating to the acquisition of £318,295 as an expense in the Statement of Comprehensive Income. Under the restated accounting treatment, the properties have been included as additions to investment property at cost including directly attributable costs, with an increase in fair value of £1,883,344 being included within Revaluation of Investment Properties in the Statement of Comprehensive Income. KCR (Southampton) Limited KCR (Southampton) Limited was incorporated on 26 June 2018 and, in the 2018 financial year, entered into an agreement to acquire a 999 year-long leasehold interest in Block B, Chapel Riverside, a new-build block of flats in Southampton. The total consideration for the transaction was £5.8 million, which was owed to the vendor and included in other creditors at 30 June 2018. During 2019, the Company settled £4.2 million of the amount owed to the vendor. At 30 June 2019, £1.6 million was outstanding and this was settled post-year-end. Disposal of KCR (Cygnet) Limited On 20 December 2018, the Company sold the entire issued share capital of KCR (Cygnet) Limited for total consideration of £1,140,000, satisfied by cash of £1,140,000. The assets and liabilities of the subsidiary at the date of disposal were: £ Investment property 2,800,000 Debtors 43,427 Bank loan (1,293,286) Other creditors (69,388) Net assets disposed of 1,480,753 Loss on disposal of property (340,753) Total consideration 1,140,000 Satisfied by cash 1,140,000 56 14. Trade and other receivables Group Company 2019 2018 2019 2018 £ £ £ £ Trade debtors 3,000 70 – – Amounts owed by group undertakings – – 1,787,239 263,980 Other debtors 34,773 634,045 7,500 594,293 VAT 12,271 1,336 – – Prepayments 27,034 67,976 18,665 60,791 77,078 703,427 1,813,404 919,064 The Group and Company’s exposure to credit risk is disclosed in note 22. There is no material difference between the fair value of trade and other receivables and their book value. Amounts owed by group undertakings are repayable on demand and are considered fully recoverable based on property assets that could be realised. 15. Cash and cash equivalents Group Company 2019 2018 2019 2018 £ £ £ £ Cash in hand 40 40 – – Bank accounts 29,258 6,385 3,334 77 29,298 6,425 3,334 77 57 NOTES TO THE FINANCIAL STATEMENTS for the year ended 30 June 2019 16. Share capital 30 June 30 June Allotted, issued and fully paid 2019 2018 Number Class Nominal value £ £ 15,791,777 Ordinary £0.10 1,579,178 985,721 4,500,000 Restricted Preference £0.10 450,000 450,000 2,029,178 1,435,721 At 1 July 2018, the Company had 9,857,207 Ordinary shares of £0.10 each in issue. On 31 July 2018, the Company issued 4,434,570 Ordinary shares of £0.10 each. The shares were issued at premium of £0.60 per share. On 5 September 2018, the Company issued 1,500,000 Restricted Preference shares of £0.10 each. The shares were issued at par. During the year, 1,500,000 Restricted Preference shares of £0.10 each were converted to Ordinary shares. The Restricted Preference shares carry no voting or dividend rights. On a winding-up or a return of capital, the holders of the Restricted Preference shares shall rank pari passu with the holders of the Ordinary shares save that, on a distribution of assets, the amount to be paid to the holder shall be limited to the nominal capital paid up or credited as paid up. 17. Unissued share capital Unissued share capital related to shares which were to be issued as partial consideration for the purchase of KCR (Cygnet) Limited. The purchase of KCR (Cygnet) Limited took place in the 2018 financial year and the aforementioned shares were issued on 31 July 2018. In the prior year, the unissued share capital (£1,260,299) was presented within current liabilities. This has been corrected retrospectively in the current year to present the balance within equity. There is no impact on the Statement of Comprehensive Income. 58 18. Trade and other payables Group Company 2018 2018 2019 (as restated) 2019 (as restated) £ £ £ £ Trade creditors 358,567 618,321 351,060 618,321 Amounts owed to group undertakings – – 423,840 197,330 Corporation tax – 48,360 – – Other taxes and social security 45,253 47,901 33,291 45,231 Other creditors 1,779,710 6,126,929 8,063 52,588 Accruals and deferred income 553,480 230,738 521,990 196,405 2,737,010 7,072,249 1,338,244 1,109,875 Other creditors include £1,738,076 (2018 – £6,038,317) owed on the purchase of the investment property within KCR (Southampton) Limited. The Group’s and Company’s exposure to liquidity risk related to trade and other payables is disclosed in note 22. There is no material difference between the fair value of trade and other payables and their book value. Amounts owed to group undertakings are repayable on demand. 59 NOTES TO THE FINANCIAL STATEMENTS for the year ended 30 June 2019 19. Financial liabilities – Borrowings Group Company 2019 2018 2019 2018 £ £ £ £ Current Bank overdraft – 55,259 – 55,259 Bank loans 82,224 140,574 82,224 91,368 Other loans 1,810,070 1,475,000 1,810,070 1,475,000 1,892,294 1,670,833 1,892,294 1,621,627 Non-current Bank loans 4,756,956 6,089,426 4,756,956 4,838,632 Other loans 5,124,388 2,660,276 – 720,138 9,881,344 8,749,702 4,756,956 5,558,770 Terms and debt repayment schedule More than 1 year or less 1-2 years 2-5 years 5 years Totals Group £ £ £ £ £ Bank loans 82,224 97,642 314,689 4,344,625 4,839,180 Other loans 1,810,070 – 1,940,138 3,184,250 6,934,458 1,892,294 97,642 2,254,827 7,528,875 11,773,638 Company Bank loans 82,224 97,642 314,689 4,344,625 4,839,180 Other loans 1,810,070 – – – 1,810,070 1,892,294 97,642 314,689 4,344,625 6,649,250 Details of the principal loans are as follows: a) On 28 June 2018, the Company took out a new loan of £4,930,000, with Metro Bank plc, repayable by 300 instalments of £22,145 and a final instalment of £1,239,328. The loan was secured by a first debenture over all assets and undertakings of the Company, a first legal charge over the freehold properties known as 272 Ladbroke Grove, 282 Ladbroke Grove and 284 Ladbroke Grove and the leasehold premises known as Flat 9 Lomond Court, and a cross-guarantee over the aforementioned properties. It was also secured by a cross-guarantee from K&C (Coleherne) Limited over the freehold property known as 25 Coleherne Road and a debenture over the assets and undertakings of K&C (Coleherne) Limited. The loan was also secured by a pledge of shares of K&C (Coleherne) Limited and KCR (Kite) Limited. The balance outstanding as at 30 June 2019 was £4,839,180. 60 19. Financial liabilities – Borrowings (continued) b) A three-year loan of £1,995,000 was entered into during the previous year. The loan is repayable by 36 monthly instalments of £9,144 and a final instalment of £1,940,138. The monthly instalments are interest payments and do not include any capital repayments. Interest is charged at 5.50 per cent per annum. The loan is secured by a fixed and floating charge over all the property and assets of K&C (Osprey) Limited, including the property known as Heathside, 562 Finchley Road. The balance outstanding at 30 June 2019 was £1,940,138. c) On 24 June 2018, the Company entered into a new loan agreement arranged by DGS Capital Partners LLP, a limited liability partnership in which Michael Davies is a member, with certain investors. The loan was for £1,475,000 and was subject to an interest rate of 12 per cent per annum. The loan was to be repaid within 300 days of the initial drawdown date of 29 June 2018. During the financial year, the lenders agreed to extend the loan by a further 300 days. The loan was repaid on 22 August 2019. Fees of £17,250 were charged by the lender to the Company for the extension and are included in accruals at the year end. At the date of extension, the interest rate was increased to 14 per cent per annum. The balance outstanding at 30 June 2019 was £1,475,000. d) At the year-end, the Company had issued several convertible loan notes, totalling £200,000, the debt element of which totalled £185,070. The convertible loan notes have a redemption date of 30 June 2020. The debt balance outstanding at 30 June 2019 was £185,070. £100,000 of the convertible loan notes was converted to Ordinary shares at £0.10 per share on 6 August 2019. e) During the year, Oliver Vaughan, a director of the Company, loaned the Company £150,000. The loan was unsecured and was due for repayment on 15 May 2019. The loan was extended in June 2019. Upon extension of the loan, the lender charged the Company a fee of £10,000, which is included in accruals at the year end. The total liability at 30 June 2019 totalled £160,000. The loan was interest free. £110,000 of the loan was repaid via the issue of Ordinary shares in the Company on 6 August 2019. The remaining £50,000 was repaid on 8 August 2019. f) On 4 December 2018, KCR (Southampton) Limited took out a new loan of £3,184,250 with Lendco Limited. The term of the loan was ten years. The monthly instalments are interest payments and do not include any capital repayments. Interest is charged at 3.19 per cent for the first 24 months. Interest for the remainder of the term will be charged at 4.79 per cent above LIBOR. The loan was secured by a first legal mortgage and a first fixed charge over the land at Block B, Chapel Riverside, Endle Street, Southampton. The balance outstanding as at 30 June 2019 was £3,184,250. Reconciliation of net movement in cash Net cash Loans Other Net cash at 1 July received Repayments non cash at 30 June 2018 Cash flow in year in year movements 2019 £ £ £ £ £ £ Cash at bank and in hand 22,873 6,425 – – – 29,298 Borrowings (10,420,535) – (3,434,250) 796,079 1,285,068 (11,773,638) Total financial liabilities (10,397,662) 6,425 (3,434,250) 796,079 1,285,068 (11,744,340) 61 NOTES TO THE FINANCIAL STATEMENTS for the year ended 30 June 2019 20. Share-based payment transactions During the year ended 30 June 2019, the Company had one share-based payment arrangement in place, which is described below: Restricted Preference shares Outstanding at 1 July 2018 4,500,000 Exercised during the year (1,500,000) Granted during the year 1,500,000 Outstanding at 30 June 2019 4,500,000 Restricted Preference shares: Restricted Preference shares have been acquired by certain directors and other senior managers. Details of the Restricted Preference shares held by the directors, along with movements in the year, can be found further in this note and also in the Report of the Directors. Upon the achievement by the Group of certain defined milestones, the Restricted Preference shares were able to be converted into Ordinary shares at £0.10 each. The following table shows the shares held at the year end, along with movements in the year: Restricted Preference Shares Converted to ordinary At 30 June Shares issued shares in At 30 June 2018 in year the year 2019 Name No. No No. No. Dominic White 1,500,000 265,357 (500,000) 1,265,357 Timothy James 960,000 265,357 (320,000) 905,357 Oliver Vaughan 810,000 265,357 (270,000) 805,357 James Cane 30,000 10,000 (10,000) 30,000 Timothy Oakley 300,000 265,357 (100,000) 465,357 Christopher James 600,000 214,286 (200,000) 614,286 Employees 300,000 214,286 (100,000) 414,286 Total 4,500,000 1,500,000 (1,500,000) 4,500,000 62 20. Share-based payment transactions (continued) The estimated fair value of each Restricted Preference share acquired is as follows: Restricted Preference shares Fair value of share option/warrant (£) 0.688-0.787 The fair values were estimated using the Black-Scholes valuation model. The following table lists the inputs to the model used: Restricted Preference shares Share price at grant date (£) 0.8-0.9 Exercise price (£) 0.1 Dividend yield (%) 0.00 Expected volatility (%) 51.86-63.79 Risk-free interest rate (%) 0.88-1.57 Expected life of share options/warrants (years) 1.3-8.8 The expected lives of the Restricted Preference shares were based on historical data and then-current expectations and are not indicative of exercise patterns that may occur. The expected volatility reflects the assumption that the historical volatility of comparator companies over the period similar to the life of the Restricted Preference shares is indicative of future trends, which may not necessarily be the actual outcome. On 6 August 2019, 1,730,765 of the Restricted Preference shares were converted into Ordinary shares. The remaining 2,769,235 Restricted Preference shares were gifted back to the Company for no consideration. Further details can be found in note 24. The expense recognised during the year is shown in the following table: 30 June 30 June 2019 2018 £ £ Expense arising from share options – 10,325 Expenses arising from Restricted Preference shares 1,387,441 903,756 Expense arising from warrants – 36,107 Total expense from share-based payments 1,387,441 950,188 63 NOTES TO THE FINANCIAL STATEMENTS for the year ended 30 June 2019 21. Financial instruments The Group’s financial assets, as defined under IFRS 9, and their estimated carrying amount, are as follows: Group Company 2019 2018 2019 2018 £ £ £ £ Carrying amount of financial assets at amortised cost Trade and other receivables 77,078 703,427 1,813,404 919,064 Cash at bank and in hand 29,298 6,425 3,334 77 22. Financial risk management The Company’s directors have overall responsibility for the establishment and oversight of the Group’s risk management framework. The Company’s and Group’s risk-management policies are established to identify and analyse the risks faced by the Company and Group, to set appropriate risk limits and controls, and to monitor risks and adherence to limits. Risk-management policies and systems are reviewed regularly to reflect the changes in market conditions and the Group’s activities. The Company and Group, through its training and management standards and procedures, aim to develop a disciplined and constructive control environment in which all employees understand their roles and obligations. The Company and Group have exposure to the following risks arising from financial instruments:  credit risk  liquidity risk  market risk. Capital risk management The Company and Group’s objective when managing capital is to safeguard its accumulated capital in order to provide an adequate return to shareholders by maintaining a sufficient level of funds, in order to support continued operations. The Company and Group consider its capital to comprise equity capital less accumulated losses. The share premium reserve includes premiums received on the issue of share capital during the year. 64 22. Financial risk management (continued) Credit risk Credit risk is the risk of financial loss to the Group if a customer or counterparty to a financial instrument fails to meet its contractual obligations. The Group has no significant concentration of credit risk, with exposure spread over a large number of counterparties and customers. The carrying amount of financial assets represents the maximum credit exposure. The maximum exposure to credit risk is as reported in the statement of financial position. Liquidity risk Liquidity risk is the risk that the Company and Group will encounter difficulty in meeting the obligations associated with its financial liabilities that are settled by delivering cash or another financial asset. The Company’s and Group’s approach to managing liquidity is to ensure, as far as possible, that it will always have sufficient liquidity to meet its liabilities when due, under both normal and stressed conditions, without incurring unacceptable losses or risking damage to the Company’s and Group’s reputation. The contractual maturities of financial liabilities are disclosed in note 19. Market risk Market risk is the risk that changes in market prices, such as interest rate and equity prices, will affect the Group and the Company’s income or the value of its holdings of financial instruments. The objective of market risk management is to manage and control market risk exposure within acceptable parameters, while optimising the return. Sensitivity Interest rate sensitivity: At 30 June 2019, if interest rates had been 0.5 percentage point higher and all other variables were held constant, it is estimated that the Group’s loss before tax would increase to £3,803,492 (2018 – £157,775). This is attributable to the Group’s exposure on its borrowings and is based on the change taking place at the beginning of the financial year and held constant throughout the reporting period. 65 NOTES TO THE FINANCIAL STATEMENTS for the year ended 30 June 2019 23. Related parties On 24 June 2018, the Company entered into a loan agreement arranged by DGS Capital Partners LLP, a limited liability partnership in which Michael Davies is a member, with certain investors. The loan was for £1,475,000 and was subject to an interest rate of 12 per cent per annum. The loan was to be repaid within 300 days of the initial drawdown date of 29 June 2018. The loan was extended during the financial year and from 10 April 2019, the interest rate was increased to 14 per cent per annum. The balance outstanding at 30 June 2019 was £1,475,000. Interest of £179,506 was charged to the Company in the year, of which £45,826 was outstanding and included in accruals at the year end. The loan and outstanding interest were repaid on 22 August 2019. The repayment consisted of £1,425,000 cash and £95,826 of Ordinary shares. During the year, the Group paid DGS Capital Partners LLP, a limited liability partnership in which Michael Davies is a member, fees of £36,000 plus VAT of £7,200 (2018 – £36,000 and VAT of £7,200). At the year end, £14,400 was outstanding and included in accruals. During the year, Oliver Vaughan, a director of the Company, loaned the Company £150,000. The loan was unsecured and was due for repayment on 15 May 2019. The loan was extended in June 2019. Upon extension of the loan, the lender charged the Company a fee of £10,000. The total liability at 30 June 2019 totalled £160,000. The loan was interest free. £110,000 of the loan was repaid via the issue of Ordinary shares in the Company on 6 August 2019. The remaining £50,000 was repaid on 8 August 2019. During the year, the Company issued £50,000 of convertible loan notes to Kimono Investments Limited, an entity in which Oliver Vaughan’s children have a financial interest. The Company was charged £2,616 interest in the year. At the year end, the total loan notes and interest outstanding totalled £52,616. The principal loan was repaid on 22 August 2019. The repayment consisted of £50,000 of Ordinary shares. During the year, the Company issued convertible loan notes to the White Amba Pension Scheme of £25,000. The Company was charged £1,050 interest in the year. At the year end, the total loan notes and interest outstanding totalled £26,050. The principal loan was repaid on 22 August 2019. The repayment consisted of £25,000 of Ordinary shares. During the year, the Company issued convertible loan notes to Katie James, relative of Timothy James, of £25,000. The Company was charged £1,050 interest in the year. At the year end, the total loan notes and interest outstanding totalled £26,050. The principal loan was repaid on 22 August 2019. The repayment consisted of £25,000 of Ordinary shares. During the year, Timothy Oakley, a director of a number of subsidiary companies, received remuneration of £30,200 (2018 – £30,000). £15,000 of this remuneration was included in accruals at the year end. During the year, Timothy Oakley also loaned the Company £50,000 as part of the loan arranged by DGS Capital Partners LLP, as detailed above. Interest of £6,247 was charged to the Company in the year. The loan was repaid on 22 August 2019. The repayment consisted of £50,000 of Ordinary shares. During the year, Christopher James, a director of a number of subsidiary companies, received remuneration of £51,200 (2018 – £14,000). £44,000 of this remuneration was included in accruals at the year end. 66 24. Post-balance sheet events The following events have taken place since 1 July 2019: • • A flat at Heathside was sold for £538,000 in line with its carrying value and £353,950 was applied for part-repayment of the £1,940,138 loan referred to in note 19(b). Loans of £1,475,000 from DGS Capital LLP were repaid on 22 August 2019. The repayment consisted of £1,425,000 cash repayment and £50,000 Ordinary shares in the Company. The £50,000 Ordinary shares were issued to Timothy Oakley. Further details are contained further in this note. On 6 August 2019, the Transaction was completed to enable the Torchlight Fund LP to become a significant shareholder in the Company pursuant to Rule 9 of the Takeover Code following a poll of shareholders on 29 July 2019. The following describes the principal elements of the Transaction (announced on 12 July 2019 and detailed on the Company’s website) which are also included where appropriate in these financial statements: Torchlight Fund LP subscribed in cash of £4.05 million for 9,000,000 ordinary shares of 10p each at the issue price per share of 45p (“the Issue Price”). The Company granted Torchlight an Option to subscribe for up to an additional 50,000,000 Shares at a price per share of : • • for any notice of exercise served on the Company on any date up to and including 31 December 2019, the Issue Price; and for any notice of exercise served on the Company from 1 January 2020 until the end of the Option Period (6 August 2022), the higher of (i) the price per Option Share which is equivalent to 95 per cent. of the 30-Day VWAP for the Ordinary Shares and (ii) the par value of each Ordinary Share. The Option is only exercisable by Torchlight during the Option Period and if the Option is not exercised prior to the expiry of the Option Period, it will lapse. Any exercise of the Option by Torchlight shall be for not less than 2,000,000 Option Shares. Restricted Preference shares of 10p each held by the directors, other management and related parties totalling 4,500,000 shares outstanding were redesignated as Ordinary shares in part and the balance gifted back to the Company for nil consideration. This resulted in the conversion in aggregate of 1,730,765 Restricted Preference shares into 1,730,765 Ordinary shares. Outstanding loans and fees of £160,000 to Oliver Vaughan were satisfied by issuing 244,444 Ordinary shares at the Issue Price and a cash repayment of £50,000. Outstanding convertible loan notes of £100,000 loan principal to Kimono Investment Holdings, Katie James and White Amba were converted into 222,222 Ordinary shares at the Issue Price. Outstanding remuneration due in respect of salary and bonuses to directors and employees of the Company were settled by the issue of 243,342 Ordinary shares at the Issue Price. 67 NOTES TO THE FINANCIAL STATEMENTS for the year ended 30 June 2019 24. Post-balance sheet events (continued) Settlement amount payable in respect of the resignation on 12 July 2019 of Timothy Oakley in an amount due of £22,500 in part in cash and in part by the issue of 27,500 Ordinary shares of 10p at the Issue Price. In respect of a loan from an investment group of which Timothy Oakley was a member, £50,000 was repaid at par by the issue of 111,111 Ordinary shares. The shares were issued to Timothy Oakley. The remaining lenders were allotted 176,247 Ordinary shares of 10p in respect of the loan outstanding due to them plus unpaid interest outstanding. The issue of 22,222 Ordinary shares of 10p at the Issue Price for cash to James Thornton, an independent non-executive director. Following the Transaction, the Allotted, Issued and Fully Paid Ordinary Share Capital of the Company was 27,569,931 shares of 10p. On 2 January 2020, trading of the shares of KCR Residential REIT plc was temporarily suspended pending publication of the 2019 annual audited accounts. 68 Perivan 257925 

Continue reading text version or see original annual report in PDF format above