Eight Capital Ptnrs. - Restated Final Results for year ended 31 Dec 2021

12 September 2023

EIGHT CAPITAL PARTNERS PLC

("Eight Capital", "ECP" or "the Company")

 Annual Report and Financial Statements

For the year ended 31 December 2021

Eight Capital (AQSE: ECP), the investing company whose investment strategy focuses on technology, media, telecoms and financial services businesses, including listed investing companies, announced, further to its announcement of 3 July 2023, its reissued final results for the year ended 31 December 2021.

As announced on 3 July 2023, a delay in the audit process for the financial year to 31 December 2022 arose as a result of the directors' decision, in consultation with its auditors and the Financial Reporting Council (FRC), to reclassify the accounting treatment of its 1AF2 Ltd Sec. Bonds 21-24 fixed rate bonds.  The reclassification has resulted in the issue of these revised audited accounts for the year to 31 December 2021.

The delayed final results to 31 December 2022 will also be released shortly.

For further information, please visit www.eight.capital or contact:

About Eight Capital Partners:

Eight Capital partners plc is a financial services operating company that aims to grow revenue through businesses engaged in "Fintech" operations including in the digital banking and lending sectors.

ECP seeks to grow its group revenue in these high growth fintech sub-sectors, which it expects to also increase in value, such that they generate an attractive rate of return for shareholders, predominantly through capital appreciation.

www.eight.capital

Eight Capital Partners operates two subsidiary businesses:

Epsion Capital:

Epsion Capital is an independent corporate advisory firm based in London with an extensive experience in UK and European capital markets. The team of senior and experienced ECM and M&A professionals is specialised across multiple markets, sectors and geographies and it prides itself on a commercial approach that allows the clients to achieve their growth ambitions. www.epsioncapital.com

Innovative Finance:

Innovative Finance is a corporate finance advisory business that develops mergers and acquisitions and financing solutions across multiple sectors, primarily in Europe, with access to international transactions. It focuses on investments in Europe which are linked to technological developments in the financial services industry. www.innovfinance.com

Extract from the audited reissued report and accounts for the year ended 31 December 2021

Revision of Financial Statements by Replacement

The following Annual Report and Financial Statements replaces the original reports filed with the Registrar of Companies on 22 July 2022.  These are now the statutory accounts of the Company for the year ended 31 December 2021.  This replacement Annual Report and Financial Statements has been prepared at the date of the original accounts and not as at the date of this revision and accordingly does not deal with events between those dates.

Financial Reporting Council (FRC)

The Company was notified by the FRC that the Company's original FY 2021 Audited Annual Report and Financial Statements had been subject to a limited scope review in accordance with Part 2 of the FRC Corporate Reporting Review Operating Procedures.  A full review of the original FY 2021 Annual Report and Financial Statements was not undertaken and the review was subject to the following scope and limitations of the FRC review.

The FRC also provides no assurance that the revised annual report and accounts are correct in all material respects, including (but not limited to) the carrying amounts of the assets and liabilities affected by the revisions described below. The FRC has not verified the assumptions made by management or the information provided.

Scope and limitations of the FRC review

The FRC review is based on a review of the annual report and accounts and does not benefit from detailed knowledge of the Company's business or an understanding of the underlying transactions entered into.  It was however conducted by staff of the FRC who have an understanding of the relevant legal and accounting framework.  The FRC provides no assurance that the annual report and accounts are correct in all material respects, the FRC's role is not to verify the information provided but to consider compliance with reporting requirements.

Amendments to 2021 Audited Annual Report and Financial Statements arising from FRC review and additional review by the Company and its Auditor.

As a result of the FRC review and additional review carried out by the Company and its Auditor, several amendments have been agreed by the Board to be made to the Annual Audited Report and Financial Statements. 

Amendments arising from FRC review where the original Annual Audited Report and Financial Statements did not meet the requirements of the Companies Act 2006

1.      Correction of 2021 entries in the cash flow statement relating to the issue and redemption of loan liabilities, where the transactions were non-cash exchanges of bonds.

The consolidated and company cash flow statements reported an investing cash outflow of £33,620,000 and financing cash inflows of £20,969,000 and £13,185,000.  These non-cash transactions should have been excluded from cash inflows and outflows presented in the statements of cash flows.

2.      Correction of the hierarchy level in which the fair value measurement of the investment in bonds issued by 1AF2 Limited ('1AF2 Bonds') belongs, and additional disclosures required for Level 3 measurement in accordance with paragraphs 93(d), (e), (f), (g) and (h) of IFRS 13; correction of 2021 entries relating to the carrying amount of the 1AF2 Bonds at 31 December 2021 and recognition of fair value movements on the 1AF2 Bonds in the income statement.

The Directors had previously reviewed the 1AF2 Bonds and concluded that whilst the bonds benefitted from an exit fee based on the performance of the underlying securitised assets in a listed entity, they

considered the likelihood of achieving the exit fee to be remote, and as such did not take it into account as part of the assessment of the bonds.  The Directors took the view that the Bonds should have been held at amortised cost, whereas the FRC's view upon review is that they should have been held at fair value based on an appropriate valuation method.

Following a review with its Auditor, the Directors now consider that the fair value measurement of the 1AF2 Bonds should have been categorised within Level 3.  As part of the Level 3 disclosure it should have set out that there were no suitable quoted prices for trading in the 1AF2 Bonds.  The valuation method disclosed should then have explained the methodologies used to value the bonds based on 1) a valuation of the underlying securities and 2) a discounted cash flow analysis, which involve the use of significant unobservable inputs.

Underlying securities valuation methodology

Quoted shares were priced by the mid-point of the reporting date.

Unquoted shares, the valuation was based on an average of 4 scenarios which included a 3 and 5 year financial plan discounted using a Weighted Average Cost of Capital ('WACC').

The WACC included the following elements:

Risk-free rate - calculated as the 12 months weighted average value of the 10Y US Government Bond

Equity risk premium - sourced from Ashwath Damodaran, a Professor of Finance at the Stern School of Business at New York University who is recognised as a provider of comprehensive data for valuation purposes.

Beta - calculated as the median of the betas (2 years, weekly) observed in a panel of comparable listed companies operating in the regulatory and ICT industry

Small size premium - in order to take into account the different size of the Company compared to the comparable entities used in the management assessment of WACC.Execution risk premium - in order to reflect the risk related to the projections

Country risk premium - it reflects the risk related to the main regional areas where the company operates in each scenario

Cost of debt - equal to the sum of risk-free rate, the spread resulting from the S&P credit spreads of the comparable and the Italian default spread.

Tax rate - equal to the Italian corporate tax rate of 24%

WACC was converted from USD to EUR by using the inflation rates in both jurisdictions.

Each scenario produced a different WACC, ranging from 14.5% to 16.6%.

Long Term Growth Rate ('LTGR') was prudently set at 1.9%.

Using the Financial plans for each scenario applying the DCF method using the associated WACC and terminal value based on the LTGR, the valuations given for the Company's share of the underlying security package were between €40m and €63m.  The mid-range was taken as the average.

Weighted Average Cost of Capital

A summary of the unobservable inputs used in the WACC calculation is set out below:

Bond Discounted Cash Flow valuation Methodology ("DCF")

A DCF valuation on the bond incorporating the four monthly interest payments and repayment of the bond principal at 30 June 2024 was also carried out.  We used the Base scenario WACC of 14.5% which prudently includes an equity return as well as debt return.  When discounting the cashflows a value of €28.3m was computed (the element held by the Company).  The valuation did not include any upside that may be due as part of the Exit Fee.

The board acknowledged that a valuation of the security and a DCF valuation of the bond would meet the requirements of IFRS 13 and note this to be included in the 2022 accounts.

As a result of the change in valuation methodology, an additional loss of £9.8m was reported in the Consolidated Income Statement.

3.     Recognition of a loss on modification of the loan liabilities

During the year under review the Company undertook a restructuring of its debt liabilities to restructure a €40m 1.5% interest vendor loan issued by IWEP into €15m 4.8% five-year bonds and to modify the terms of the remaining €25m to remove the interest charge.  The Company had treated this transaction as part of the same facility as it was with the same lender and only arose due to a delay in the creation of the bond instrument.  Despite this, the FRC's view was that, while not a substantial modification in accordance with paragraph 3.3.2 of IFRS 9, 'Financial Instruments', the restructuring gave rise to a modification loss owing to an increase in the liability measured by discounting revised future cash flows at the original effective interest rate.

The Board has accepted the FRC's view and has calculated a €2.2m modification loss (£1.88m) that has been reported in the Consolidated Income Statement.  The modification loss was calculated by comparing the amortised cost value of the original loan with the discounted net present value of the new structure.   

4.      Commentary in the Strategic Reports, reflecting the revised performance and position as at 31 December 2021, so as to provide a fair, balanced and comprehensive review of each period.

The Board considers that the summary of results in the year in the Chairman's Statement that is referenced in the Strategic Report is the only commentary in the Strategic Reports that is required in conjunction with this new section that sets out the amendments required to the Accounts.

The updated commentary is as follows:

Results

Through its two subsidiaries, the Group recorded revenues for the year under review of £444,000 with a gross margin of over 70%. This income was further supplemented by ECP itself providing management services to certain investees and thereby recovering £128,000 of overhead costs.  Interest income less finance expense was a net deficit of £1.7m and the net movement in fair value of both realised and unrealised gains and losses on investments at fair value (explained further below) was a loss of £9.5m. Overheads were relatively high, at £0.7 million; partly a reflection of the substantial professional support for the change in status outlined in the September update, and the Group result for the year was a loss before tax of £11.5m.

Additional narrative has also been added to the Chairman's statement in relation to the Fair Value Adjustment on the 1AF2 bond, as follows:

Fair value adjustment on 1AF2 Bond

The valuation exercise undertaken on the 1AF2 Bond based on a valuation of the underlying securities and a discounted cash flow valuation assessed the value of the bond at €28.3m (£23.8m), resulting in a fair value loss in the accounts of £9.8m.

5.      Revision of the Consolidated Income Statement, Consolidated Statement of Changes in Equity and Consolidated Cash Flow Statement to correct the incorrect reporting of trading results for the period.

During the Company's and its Auditor's review of the 2021 Financial Statements following the FRC enquiries, it became apparent that the Consolidated Income Statement incorrectly included 12 months of trading for the two subsidiaries, when the effective date of consolidation upon the change in nature of the group from an investment group to an operating group was 1 July 2021, a shorter period.   For the period from 1 January 2021 to 30 June 2021, the Company was an investment vehicle and none of its investment met the requirement of IFRS 10 for an investment company. On 1 July 2021, the Company changed its status from an investment vehicle to an operating company, and as a result, the Company's investments in its subsidiaries have been consolidated from 1 July 2021.  The net effect was a reduction in the net loss before tax of £165,000.

The opening retained losses shown within the Consolidated Statement of Changes in Equity needed to be revised to £3,493,000 to align with the Company's 2020 retained losses.

This report was approved by the Board of Directors on 30 June 2022 and signed on behalf of the board by:

Dominic White

Chairman

Chairman's Statement

Dear Shareholder,

I am pleased to report on the Company's financial results for the year ended 31 December 2021 and on a number of far-reaching corporate developments that have occurred during the year, particularly during the second half and which have continued into the first half of 2022.

Change of status to an Operating Group

The most important development during the period under review, and announced in an extensive market update on 27 September 2021, was the change in status from being an investing company to becoming an operating Group with an effective date of 1 July 2021. This Report, therefore, for the first time, presents Eight Capital Partners Plc's ("ECP" or "Eight Capital") financial statements under IFRS reporting standards, consolidating the results and balance sheets of its wholly owned subsidiaries, Epsion Capital Limited ("Epsion"), and Innovative Finance Srl ("InnFin"), the latter acquired in May 2021 (together "the operating subsidiaries"), from the effective date of 1 July 2021 onwards.

ECP has therefore evolved into an international financial services operating Group, whereby Epsion and InnFin source, advise on, finance, and deliver transactions, primarily involving SME businesses within the technology, media, telecoms and financial services sectors and in which ECP itself will potentially invest.

Results

Through its two subsidiaries, the Group recorded revenues for the year under review of £444,000 with a gross margin of over 70%. This income was further supplemented by ECP itself providing management services to certain investees and thereby recovering £128,000 of overhead costs.  Interest income less expense was a net deficit of £1.7m and the net movement in fair value of both realised and unrealised gains and losses on investments at fair value (explained further below) was a loss of £9.5m. Overheads were relatively high, at £0.7 million; partly a reflection of the substantial professional support for the change in status outlined in the September update, and the Group result for the year was a loss before tax of £11.5m.

Subsidiary activities

Epsion, our wholly owned UK Corporate Finance subsidiary, concentrated on two related companies, providing advice ahead of potential standard listings, during the period since its results were consolidated upon the group becoming an operating group (1 July 2021 onwards).  If these companies are listed, there will be commensurate fee earnings derived from these clients.

Innovative Finance S.r.l ("InnFin") our wholly owned unregulated Italian Corporate Finance subsidiary, was acquired in May 2021 and has been consolidated since 1 July 2021, the effective date when the group became an operating group.  Infin concentrated in the period since consolidation on providing advice to investors and companies ahead of listing on the Standard List of the LSE. Approximately €350,000 of the fees are from advising investors and the remaining €50,000 are fees for initial consulting work for companies considering a listing.  If these companies are listed InnFin will earn appropriate fees.

Eight Capital: update on prior year's investments

ECP's investment portfolio now and as at 31 December 2021 is comprised exclusively of quoted companies. The private investments included in last year's report have either been sold (FPG - see below) or integrated into the Group (Epsion and InnFin).

Finance Partners Group ("FPG"): Financial Services

This investment was disposed of during the year, originally consisting of a receivable of €2 million with an ability to convert into equity acquired for €1.9 million.  The ability to convert was exercised and the resultant holding in FPG of 28.7% was sold for €2.15 million (equivalent to £1.83 million), of which €1.57 million (£1.34 million) was paid on closing and the balance of €580,000 (£487,000) payable in 2022. The gain on disposal figure included in these accounts is £130,000

Retained investments: combined loss in value recorded in these accounts: £116,000.

Supply@ME Capital Plc ("SYME): Inventory securitisation

SYME is an inventory monetisation business based on a novel asset securitisation concept, enabled by an innovative software platform. SYME is listed on the Standard List of the London Stock Exchange. SYME's share price has not performed well and ECP's £250,000 investment, acquired at a share price of £0.11 has seen a drop to £0.0017 at the year-end, with a total fall in value of over £200,000 since purchase. The movement during the year under review, included in the income statement, is a loss of £90,000. Although the share price reduction has been a source of concern, the Board recognises that the concept and possibilities for SYME were, and still are, interesting once a critical mass of investment capital to support securitisations can be delivered by SYME's management.

Evrima Plc ("EVA"): Mining and exploration investment

Evrima was formerly Sports Capital Group ("SCG") and ECP invested in a football related project from which SCG withdrew. They reverted to their previous sector of investment: mining and associated exploration and changed their name. The Company's investment was approximately £140,000 and is currently £131,000, based on its quote on AQSE Growth Market. We will dispose of this investment in due course.

Greencare Capital Plc ("GRE"): Investment in Cannabis health products and general wellness.

The Company invested both prior to and at IPO when GRE listed on the AQSE Growth Market in December 2019. The total investment was £280,000 and the average price paid per share was 10.9p.  The shares at the year-end - and currently - were quoted at 30.5p, having fallen slightly since the end of 2020. It was recently announced that Dominic White, Chairman of ECP, has become chairman of GRE. We await positive developments.

Fair value adjustment on contingent liability

The terms of the acquisition of InnFin included an earn-out formula contingent upon the attainment of certain levels of profitability in future years, creating a contingent liability towards the vendor at the date of acquisition in May 2021. The fair-valuing of this liability at 31 December 2021 has resulted in a positive adjustment in the income statement of £300,000.

Fair value adjustment on 1AF2 Bond

The valuation exercise undertaken on the 1AF2 Bond based on a valuation of the underlying securities and a discounted cash flow valuation assessed the value of the bond at €28.3m, resulting in a fair value loss in the accounts of £9.8m. 

Refined Growth Strategy

As part of its transformation into an operating group, ECP has recently refined its growth strategy to focus increasingly on those businesses engaged in "Fintech" operations, including the digitisation of banking services and blockchain-backed decentralised finance and other disruptive financial services technologies, all of which seek to improve and automate the delivery and use of financial services. Your Board also considers there to be many value creation opportunities for shareholders from the further aligning and expansion of the activities of Epsion and InnFin.

By combining their advisory and transactional expertise with the strategic utilisation of ECP's growing in-house capital resources, ECP is able to provide significant support to the transactions managed by the operating subsidiaries through the provision of early-stage and growth co-investment capital to growing companies seeking finance for expansion, development, consolidation or acquisition, or as pre-IPO/RTO funding.

The competitive advantage of ECP's new operating structure is its flexibility in terms of where it invests in the "capital stack" pyramid, being equally comfortable with private or public debt and/or equity positions, convertibles and structured equity or debt facilities. Much of the financial services advisory market only delivers third party capital and advice, without direct access to supportive in-house capital, or having access to in-house capital lines with a less flexible mandate.

Corporate Transactions during the year

Eight Capital successfully completed a number of corporate transactions during the year, each one forming part of its strategic objective to grow the market capitalisation of the Company towards and beyond £50 million, and establishing a strong balance sheet base from which to significantly expand its operations and its own equity valuation.

To this end, in May 2021, the Company acquired InnFin, based in Milan, which develops mergers and acquisitions and financing solutions across multiple sectors, primarily in Europe.

In August, ECP disposed of its investment in Finance Partners Group SPA ("FPG"), an Italian-based financial services business, realising €2.15million. The profitable sale of this minority stake has provided ECP with a better strategic alignment between the Company's two remaining wholly owned subsidiaries and its other activities with a primary focus on technological developments within the financial services industry, such as fintech SME funding solutions and digitisation of banking including decentralised finance technology, to be key growth areas.

As announced on 4 August 2021 the purchaser agreed to pay ECP a total of €2.15 million for the acquisition of FPG.  The cash element of €1.57 million was paid immediately.  Discussions are ongoing relating to the final part of the settlement €0.58 million, which remains due, and against which an extra amount of Euros 10,000 has been paid to ECP plus further asset security backing provided to support the receivable, to the benefit of the Company.  The agreed repayment is for 20 equal payments from 15 June 2023.