Key Performance Indicators

The following Key Performance Indicators (KPIs) were selected to measure the performance of the Company in 2016:

•    number of new subsidiary businesses, strategic transactions, financing transactions and other validating events consummated

•    Group Subsidiary Ownership Adjusted Value (GSOAV);

•    Group revenue growth; and

•    the number of subsidiaries that achieve the majority of their financial, operational, technical and other performance milestones established by the Board.

Performance against 2016 KPIs is set out below:

Notes:

(1)         $416.2 million is GSOAV estimated as at 24 April 2017, following the Board's decision to discontinue funding at several subsidiary businesses.

As part of the appointment of Jill Smith as interim Chief Executive Officer, and the Group restructuring announced on 5 April 2017, the Board re-evaluated the previously selected KPIs. The Board, led by Ms. Smith, undertook a comprehensive review of the objectives of the Group, and re-set detailed management and Group objectives for 2017.  These revised objectives seek to link financial, operational, technical and other performance milestones established by the Board directly to remuneration and KPIs. As a result of the process, the following KPIs were selected to measure the performance of the Group in 2017:

•     Change in Group Subsidiary Ownership Adjusted Value (GSOAV); and

•     Change in percentage level of achievement of management by objectives (MBOs).

The 2017 MBOs, including financial, operational, technical and other performance targets and their weightings for the upcoming year were set at the start of 2017, and refined in April 2017, as follows:

Notes:

(1)  "Validating Events" represent various material achievements, such as fundraisings, mergers and acquisitions, development partnerships, strategic alliances, customer contracts and other significant corporate events.

(2)  "Technical Milestones" represent various research and development achievements, as well as advancement of clinical trials.

Portfolio Review and Developments

This section covers the Group's more advanced subsidiaries, and also includes by way of explanation those subsidiaries subject to material valuation write-downs at the end of 2016.

Corporate Partnerships

ABLS, LLC

ABLS is a drug discovery and development company created in August 2014 through a partnership between Allied Minds and BMS. The company's mission is to create novel drug candidates against serious diseases with large market potential. These include fibrosis, cardiovascular, immunescience, immuno-oncology, oncology, and genetically-defined disease, aligning to BMS's strategic areas of focus. BMS has the option to acquire drug compounds from ABLS upon completion of the lead optimisation phase for a pre-agreed multiple of invested capital, with Allied Minds retaining rights to potential milestone and royalty payments. 

ABLS sources new drug candidates from Allied Minds' network of institutional research partners and funds the initial feasibility study, typically requiring up to approximately $1 million of capital, through a newly formed subsidiary.  Consistent with Allied Minds' overall strategy, the ABLS model presents an opportunity for us, with BMS, to evaluate each ABLS subsidiary and determine at an early stage and with limited capital invested whether to continue development based on the results of such subsidiary's initial phase of research, development and testing, measured against objectives defined by ABLS and BMS. 

If the drug passes the initial feasibility stage, it will enter into the optimisation phase to develop and test a lead drug candidate, typically requiring further capital investment of up to $15.0 million. Funding for lead optimisation is provided by a combination of Allied Minds via ABLS Capital, LLC (ABLS Capital) (80.0%) and BMS (20.0%). The optimisation phase studies are in part carried out at a BMS R&D Site in India, called Biocon-BMS Research Center (BBRC).

ABLS Capital was formed to provide the majority of the capital required to fund up to ten (10) ABLS subsidiaries though the lead optimisation phase.  In April 2016 ABLS Capital secured commitments amounting to $80.0 million, including $40.0 million from Woodford Investment Management and $20.0 million from Invesco Perpetual. These funding commitments will be used to invest alongside the up to $20.0 million from BMS to fund these lead optimisation phases. 

The ABLS partnership aligns Allied Minds with a seasoned large pharmaceutical partner and creates a natural early stage (pre-clinical) acquirer of developing assets, potentially de-risking the drug development process for Allied Minds and providing attractive risk adjusted returns.

The company reviewed more than 245 technologies in 2016. As of this date, three subsidiaries have been launched, although one of these (ABLS I) ceased operations after the period end following Board determination that results from feasibility studies did not warrant progress to the lead optimisation phase.  Pre-clinical work is underway on the other two programmes in collaboration with BBRC.  Active negotiations are currently underway in relation to two potential new deals with scope to close in the first half of 2017.

ABLS I, LLC

ABLS I was a company formed in August 2015 pursuing pre-clinical development of a Yale University based technology: Antibody Recruiting Molecules.  As described above, the ABLS model is structured to allow decisions to be made early in development with little capital invested, lowering risk and helping to inform better capital allocation among the ABLS subsidiaries.  Consistent with this approach, upon review and assessment of the initial research and testing results completed in ABLS I's initial feasibility phase, ABLS and BMS resolved that the pre-set objectives were not met and accordingly, the lead optimisation phase for ABLS I was not approved and the company was dissolved post-period end.

ABLS II, LLC

ABLS II was formed in June 2015 to undertake pre-clinical discovery and development of molecules against a novel target (Prolyl tRNA Synthetase) for treatment of fibrotic diseases.  Harvard University researchers had earlier identified the mechanism of halofuginone (a natural product with anti-fibrotic properties) as an inhibitor of Prolyl tRNA Synthetase.  ABLS II's objective is to discover and develop halofuginone analogues with novel IP, better safety and superior efficacy.  ABLS II has synthesised various molecules and is evaluating them for safety and efficacy.  In May 2016 ABLS announced that ABLS II had successfully passed feasibility and in August ABLS II successfully raised $15.0 million of funding from ABLS Capital and BMS to fund the lead optimisation phase.

ABLS III, LLC, d/b/a iβeCa Therapeutics

iβeCa Therapeutics was formed in March 2016 with IP licensed exclusively from New York University (NYU) School of Medicine.   NYU researchers have identified novel inhibitors of nuclear beta catenin, a key player in the Wnt signaling pathway and a major driver of various cancers.  These molecules are targeted specifically against nuclear (vs cytoplasmic) beta catenin thereby potentially offering better safety and efficacy.  The company's objective is to develop molecules with improved potency, efficacy and better pharmaceutical properties.

Strategic Alliance with GE Ventures

Created in September 2016 to jointly identify and invest in technologies from Allied Minds' and GE Ventures' combined pipelines.

Other Subsidiary Businesses

BridgeSat, Inc.

BridgeSat is reinventing satellite communication with an advanced optical communications network that delivers fast, reliable and affordable data transmission to enable a new era of applications and services. Optical communications is an alternative to RF communications to meet the exponentially growing need for data downlinking from satellites, including LEO satellites. BridgeSat estimates that the immediate addressable optical downlink market is $1.5 billion annually, a sub-set of the $9.6 billion satellite network market. BridgeSat made good progress against its business plan over 2016, developing the three facets of its solution: space terminal, ground station, and management network, and post-period end secured agreement with The Swedish Space Corporation (SSC) to install its equipment at 3 of SSC's ground sites.

Federated Wireless, Inc.

Federated Wireless extends the access of carrier networks through sharing of wireless spectrum amongst multiple tiers of users through an innovative cloud-based wireless infrastructure solution. The allocation and management of spectrum employing a shared-economy model is hugely disruptive to the status quo of large spectrum block auctions. The Federated Wireless platform, consisting of a cloud based Spectrum Allocation System (SAS) and Environmental Sensing Capability (ESC), unlocks commercial access to spectrum in the 3.5 GHz band, called the CBRS, that is owned by the US military and is surplus to its requirements at a given point in time.

In February the company announced the formation of an alliance with other wireless industry leaders to build an ecosystem for the 3.5 GHz band. The other six founding companies in the CBRS Alliance are: Alphabet, Dell, Intel, Qualcomm, Nokia, and Ruckus Wireless (Brocade). The six companies together aim to build a robust ecosystem of industry participants and make CBRS solutions as widely available as possible.  The Alliance was formalised in August 2016 as the CBRS Alliance and membership quadrupled by year-end to include cable companies, carriers, and equipment providers.

In May 2016 Federated Wireless announced that it officially began the certification process with the FCC for its SAS. Certification is the final phase of the regulatory process as the company prepares its solution for commercial use. Conditional approval of certification was received in December 2016 and final approval is expected in mid-2017. Federated Wireless continues to work closely with the FCC and leads the WInnForum in helping to establish standards for the 3.5 GHz band and shared spectrum.

In June 2016 the first two partner agreements for Federated Wireless were announced with

Siemens and Telrad. Both companies currently operate in the 3.65 GHz band and will be early

adopters of the FCC's CBRS rules in order to evolve and expand their networks using the Federated Wireless CINQ XP product. In December, Federated Wireless and Alphabet's access team successfully demonstrated interoperability between their respective SASs; a requirement for FCC certification and an important milestone in validating the operational viability of CBRS.

During the year Federated Wireless completed trials with Alphabet, Dell and Qualcomm, and has trials with a 15 further ecosystem members signed or underway and 6 in pipeline. These collaborations re-affirm that the CBRS model is a commercially viable way to allocate and manage limited spectrum resources.

HawkEye 360, Inc.

HawkEye 360, formed in September 2015, is developing a space-based RF mapping and analytics system to be operated via a constellation of company developed formation-flying small satellites in LEO.

HawkEye 360 intends to be a leader in the emerging small satellite industry and its Pathfinder constellation of small satellites, which will be flown in formation 600 kilometres from the Earth's surface, aims to enable commercial applications such as allowing governmental entities and corporate customers to closely monitor transportation networks across air, land and sea to ensure normal and safe activity. For government regulators, telecommunications companies and satellite broadcasters, HawkEye 360's system is being designed with the ability to monitor RF spectrum usage to help identify areas of interference, better understand spectrum deployment, and avoid negative impact to operations. The system could also help to detect and locate activated emergency beacons to improve response times in life-threatening situations.

At the beginning of 2016 HawkEye 360 announced the formation of an Advisory Board including a former Director of the National Reconnaissance Office (NRO), former Director of National Geospatial-Intelligence Agency (NGA) and a former Secretary of Department for Homeland Security (DHS). Over the remainder of the year HawkEye 360 announced the selection of its satellite and payload manufacturers, with manufacturing now underway, and secured launch planned for Q1 2018.

Funds from HawkEye 360's $13.75 million series A round completed in February 2017 will be deployed to complete the development of the Pathfinder Cluster of three small satellites as well as to support the cost of testing and launch in early 2018, and to grow the company's engineering and business development teams. 

Precision Biopsy, Inc.

Existing prostate cancer diagnostics rely on biopsy procedures which are performed "blindly", sampling 12-14 cores at random.  Precision Biopsy's ClariCore™ live tissue identification technology directs the physician to sample only "suspicious" tissue, potentially reducing by up to 90% the number of core samples subject to pathology and providing immediate feedback to biopsied patients. ClariCore™ may also improve cancer diagnosis and detection rates by enabling the urologist to probe extra locations, including the anterior prostate, when all previous biopsy location have indicated as "normal".

Existing therapeutics for prostate cancer suffer in the same way as diagnostics from the inability to definitively localise the cancer tumour. Precision Biopsy has filed patents to develop and is currently developing a three-dimensional prostate mapping system utilising a variation of the ClariCore™ system. It is intended that this mapping system will accurately identify the tumour and selected margins to allow for focal treatment of the affected area of the prostate using RF ablation, HIFU, cryoablation, radiation, or other focal therapy technologies such as drug injection, potentially reducing the need for radical prostatectomy procedures and preserving healthy tissue. The company is also developing a focal therapy system which would enable the urologist to locally and focally ablate selective suspicious segments of the prostate utilising the ClariCore™ system to guide the therapy.

In mid-2016 Precision Biopsy received FDA IDE (Investigational Device Exemption) approval to test ClariCore™ in a Cohort A study intended to collect patient data to develop its commercial tissue classification algorithm.  This IDE approval has allowed the company to expand the clinical trial by adding a second arm to the study enrolling patients for the Transrectal Ultrasound (TRUS) and MR/Fusion study. To date, Precision Biopsy has completed over 100 patients in its Cohort A trial at six US clinical sites. A second clinical trial initiation, Cohort B, is planned and trial results are expected to support submission for approval, commercial release and system launch in the US and EU.

SciFluor Life Sciences, Inc.

SciFluor aims to develop a best-in-class portfolio of compounds principally through the strategic use of fluorine. It engages in drug discovery and development and is building a portfolio of proprietary compounds seeking to serve various billion dollar markets. SciFluor has evolved its current portfolio by adding fluorine to drug compounds with the intention of improving potency, selectivity, rates of absorption, metabolic stability, and half-life. These factors all improve the specific drugs and can positively impact delivery, dosing, side effects and more. For reference, approximately 25% of drugs currently marketed or in the pipeline contain fluorine. SciFluor's principal products are based on two patented lead compounds:

·     SF0166, a patented small molecule integrin antagonist wholly owned by SciFluor and intended to treat eye conditions, specifically retinal diseases including AMD, DME and retinal vein occlusion (RVO), representing an estimated 50 million patients worldwide and over $8.0 billion market value. What makes SF0166 potentially disruptive is that it is a topical drug delivered via eye drops and is intended to replace current drugs delivered via repeated injection into the back of the eye.

·     SF0034, a KCNQ2/3 modulator (a potassium channel activator), which is a fluorinated derivative of retagabine, is also patented and wholly owned by SciFluor. SF0034 could eliminate key safety issues associated with retigabine and could potentially serve markets totaling $5.0 billion in aggregate including: epilepsy/seizures; tinnitus; amyotrophic lateral sclerosis (ALS or Lou Gehrig's disease); and channelopathies (genetically-defined rare diseases based on mutations of the potassium channel).

In February 2016, SciFluor was granted U.S. Patent No. 9,266,884 covering methods of using SF0166 in the treatment of a range of diseases including AMD, DME and RVO. SciFluor had been previously granted U.S. Patent 8,901,144 covering compositions of matter that include SF0166.

In July 2016 the Investigational New Drug (IND) Application to the FDA went into effect for SF0166 Topical Ophthalmic Solution (SF0166). The company has initiated dosing in Phase I/II trials for both DME and wet-AMD in multiple centers in the US.

The company is also evolving a portfolio beyond its two lead compounds.

Spin Transfer Technologies, Inc. (STT)

STT engages in the development of OST -MRAM, an innovative memory integrated circuit technology originally sourced from NYU.

Electronic memory devices used in today's computers are specialised to handle different computing and data storage tasks. Non-volatile memories, such as Flash, retain information after power has been turned off, but Flash memory suffers from slow write speed and poor endurance. High-speed memories, such as Dynamic Random-Access Memory (DRAM), offer greater read and write performance, but DRAM is volatile and requires significantly higher power to operate. In addition, both Flash and DRAM have questionable scalability to finer process geometries than currently used in today's state of the art semiconductor micro lithography.

MRAM is a promising technology for the next generation of memory applications. OST- MRAM's potentially unique combination of fast write speed, low power, and virtually unlimited endurance is expected to enable it to address a wide range of applications in the standalone and embedded memory markets, which collectively had a combined estimated value of greater than $60 billion per annum worldwide.

During 2016 STT announced that it had successfully demonstrated its OST-MRAM technology through the production of a working prototype device. Supported by the 2015 completion of its wafer fabrication clean room used for developing and prototyping the new "magnetic" portion of the chip fabrication process, the company's engineering development cycles have accelerated markedly, reliably achieving under 2-3 week engineering cycle time for wafers, reduced by greater than 75% in comparison to the typical two month or longer cycle time that was the operating norm prior to the clean room completion. This has enabled the company to make rapid strides in its migration to perpendicular magnetic tunnel junction (pMTJ) technology, the so-called third generation of MRAM. As a result, in December 2016 the company began shipping samples of its "DM1" Diagnostic Memory chip to target customers.  The samples were prepared and screened to credible standards of function and reliability.

In addition, STT completed prototypes of memory array with megabit-level densities with accompanying performance and yield statistics. In doing so the company completed its first steps in advancing the capability of its pMTJ manufacturing process to support high-density, commercially relevant memory arrays. In September 2016 the company announced that it had fabricated pMTJs as small as 20nm - among the smallest MTJs ever reported. This 'megabit density' technology demonstration, along with the pMTJ DM1 samples, are essential enablers to the company's initial market outreach.

The above progress signals the impending completion of STT's first major phase of development, resulting in a 'baseline pMTJ technology' that the company believes will be both viable against competitors (with typical incremental improvements in time) and highly credible in securing an advanced CMOS (complementary metal-oxide semiconductor) manufacturing partner (with process capabilities compatible with even higher bit density memories, e.g. 20-45nm lithography-capable), strategic joint development partner(s), and early stage license agreements.

The company's early stage cooperative development arrangements with its Asian CMOS foundry partners has progressed as anticipated. STT plans to expand one or both of those relationships, as well as add additional relationships, enabled by the impending readiness of the 'baseline pMTJ technology'.

Discontinued Subsidiaries

Consistent with the Allied Minds' model, where a project has failed to deliver sufficient additional proof points for ultimate commercialisation and financial return, no longer supports on-going development and commercialisation activity, and cannot be successfully redirected to an alternative commercial path, Allied Minds will look to cease operations and terminate the project.

In 2016, Allied Minds ceased operations at its subsidiary SiEnergy having determined that the clean energy technology would not meet key milestones.

Post-period end ABLS I ceased operations and was dissolved following Board determination that it had not successfully completed initial feasibility studies, and Vatic Materials was closed following unsatisfactory due diligence outcomes. Also post-period end funding was discontinued at: Biotectix; Cephalogics; CryoXtract; Novare Pharmaceuticals; Optio Labs; RF Biocidics; SoundCure/Tinnitus Treatment Solutions, following Board determination that these subsidiaries were unlikely to generate appropriate returns and capital and management resource should be diverted to more promising areas of the portfolio and pipeline.

Financial Review

The financial results of the year reflect the Group's sustainable model of deploying capital into our portfolio of Group controlled businesses at the right pace. During 2016, $108.2 million was invested into new and existing portfolio companies. This included $60.2 million from subsidiary fundraisings (including $6.0 million raised in 2015 but received from investors in 2016), with $48.5 million coming from third-party investment, to further accelerate the development of four of the Group's existing companies, ABLS II, Federated Wireless, Precision Biopsy and HawkEye 360.  In addition to these fundraisings, $48.0 million was invested by the Group into new and other existing portfolio companies.

Consolidated Statement of Comprehensive Loss

For the years ended 31 December

Revenue decreased by $0.6 million, to $2.7 million in 2016 (2015: $3.3 million). This decrease is mainly attributable to the lower product revenue at RF Biocidics. The revenue in the early stage companies' segment decreased to $0.6 million in 2016 (2015: $1.1 million). Cost of revenue increased by $1.6 million to $5.6 million (2015: $3.9 million), reflecting write offs of inventory at RF Biocidics and CryoXtract.

Selling, general and administrative (SG&A) expenses increased by $8.6 million, to $55.5 million, for the year ended 31 December 2016 (2015: $46.9 million), largely due to the overall growth of the Group. Of this increase, $6.5 million relates to an increase in personnel expenses reflecting the increase in headcount and salaries as well as an increase in non-cash share-based compensation expense by $1.7 million.  The increase is also attributed to higher non-cash depreciation, amortisation and impairment charges which were higher by $3.8 million compared to prior year, offset by a $0.8 million decrease in sales and marketing cost, a $1.0 million decrease in occupancy and related expenses, and a $0.7 million decrease in professional services.

R&D expenses increased by $6.1 million to $55.3 million for the year ended 31 December 2016 (2015: $49.2 million). The increase is attributed to the overall growth of the Group's research and development activities, reflecting the acceleration of activities at a few companies as supported by third party financing rounds in 2015 and 2016 and ramping up full scale of R&D activities of companies created in late 2014 and into 2015.

Finance cost, net increased by $14.0 million to $15.3 million in 2016 (2015: $1.3 million) primarily due to the finance cost from fair value accounting adjustment of the subsidiary preferred shares liability balance of $17.6 million, offset by exchange rate profits of $1.3 million and interest income, net of interest expense, of $1.0 million.

As a result of the above discussed factors, total comprehensive loss increased by $30.8 million to $128.7 million for the year ended 31 December 2016 (2015: $97.9 million). Total comprehensive loss for the year attributed to the equity holders of the Group was $96.1 million (2015: $77.8 million) and $32.6 million (2015: $20.2 million) was attributable to the owners of non-controlling interests.

Consolidated Statement of Financial Position

As of 31 December

Significant performance-impacting events and business developments reflected in the Company's financial position at year end include: 

•    Property and equipment decreased by $2.3 million to $31.9 million as at 31 December 2016 (2015: $34.2 million), mainly reflecting depreciation expense of $5.7 million and impairment charges of $0.4 million, offset by purchases of approximately $3.8 million, of which $1.8 million relates to STT;

•    Intangible assets as of 31 December 2016 decreased by $1.6 million to $2.8 million (2015: $4.4 million) mainly as a result of amortisation expense of $0.9 million and impairment charges of $1.0 million, offset by additions of $0.3 million in capitalised development costs, acquired licenses and software assets;

•    Other investments, non-current decreased to $2.7 million (2015: $51.5 million) reflecting the investment of excess cash into fixed income government and corporate securities that have maturities longer than twelve months;

•    Cash and cash equivalents increased by $103.6 million to $209.2 million at 31 December 2016 from $105.6 million at 31 December 2015. The increase is mainly attributed to $128.1 million of cash from financing activities from the Company's equity placing in December 2016 and proceeds from subsidiary financing rounds, and $70.7 million cash from investing activities mainly reflecting the conversion of fixed income security investments into cash and cash equivalents. The overall increase in cash and cash equivalents was offset by $95.2 million of net cash used in operations;

•    Other investments, current decreased to $14.2 million (2015: $37.6 million) reflecting the investment of excess cash into fixed income government and corporate securities that have maturities shorter than twelve months;

•    Inventories increased by $1.1 million to $2.6 million as at 31 December 2016 (2015: $1.5 million) reflecting the purchases of inventories of $2.1 million, offset by cost of goods sold and other obsolescence charges of $1.0 million;

•    Trade and other receivables decreased by $1.4 million to $5.9 million at 31 December 2016 (2015: $7.3 million) as a result of decrease in prepaid and other current assets of $0.7 million mainly from write off of advance payments for inventory units at RFB, plus a net decrease of $0.7 million in trade receivables;

•    Subscription receivable of $6.0 million reflecting the second tranche of the Series A preferred round at Precision Biopsy due by third party investors was collected in 2016 and the balance decreased to nil as at 31 December 2016 (2015: $6.0 million);

•    The loans balance, current and non-current, decreased to $0.1 million as of 31 December 2016 (2015: $0.3 million) reflecting the repayment of the principal balance by CryoXtract Instruments;

•    Subsidiary preferred shares increased by $46.8 million to $140.9 million as of 31 December 2016 (2015: $94.1 million) as a result of Series A preferred rounds of $29.2 million at  Federated Wireless, Precision Biopsy and HawkEye 360 in 2016 as well as the fair value adjustment for the year of $17.6 million primarily at SciFluor and STT ;

•    Deferred revenue remained consistent at $0.5 million as of 31 December 2016, when compared to $0.4 million in prior year; and

•    Share capital and premium increased by $1.4 million to a combined $160.7 million at 31 December 2016 (2015: $159.3 million) primarily due to exercises of stock options under the U.S. Stock Option Plan. Merger reserve increased by $77.9 million due to the net proceeds from the Company's equity placing in December 2016. The increase in accumulated deficit of $96.6 million to $289.4 million (2015: 192.8 million) reflected the net comprehensive loss attributable to equity holders of the Group for the year of $96.1 million (2015: $77.8 million) and the effect from change in non-controlling interest of $6.2 million (2015: $3.2 million), offset by the share-based compensation expense charge for the year of $5.9 million (2015: $3.2 million).

Consolidated Statement of Cash Flows

For the years ended 31 December

The Group's net cash outflow from operating activities of $95.2 million in 2016 (2015: $81.9 million) was primarily due to the net operating losses for the year of $113.7 million, offset by the net effect from movement in working capital of $0.5 million, adjustment for non-cash items such as depreciation, amortisation, impairments and share-based expenses of $16.4 million and interest received net of paid and other finance charges of $1.6 million.

The Group had a net cash inflow from investing activities of $70.7 million in 2016 (2015: outflow of $75.0 million) mainly reflecting the disposal of fixed income investment securities of $72.3 million and $2.5 million from disposal of an equity accounted investee, offset by purchases or property and equipment net of disposals of $3.8 million, and purchases of intangible assets net of disposals of $0.3 million.

The Group's net cash inflow from financing activities of $128.1 million in 2016 (2015: $38.4 million) primarily reflects $78.1 million of net proceeds from the Company's equity placing in December 2016, $49.0 million proceeds from subsidiary financing rounds in ABLS II, Federated Wireless, HawkEye 360 and Precision Biopsy, and $1.2 million from exercises of stock options, offset by $0.2 million repayment of notes payable.

The Group's strategy is to maintain healthy, highly liquid cash balances that are readily available to support the activities of its subsidiaries by providing working capital, maintaining the level of research and development activities required to achieve the set milestone goals, and acquiring capital equipment where necessary to support research and development activities. To further minimise its exposure to risks the Group does not maintain any material borrowings or cash balances in foreign currency.

Risk Management

The execution of the Group's strategy is subject to a number of risks and uncertainties. A key focus for the Board is to formally identify the principal risks facing the Group and develop a robust and effective framework to ensure that the risks are both well understood and appropriate for the Company's risk appetite to achieve the stated corporate goals. This process needs to address both risks arising from the internal operations of the Group and those arising from the business environment in which it operates. It is possible that one or more of these identified risks could impact the Group in a similar timeframe which may compound their effects.

As an early-stage investor in start-ups, the Group inherently faces significant risks and challenges. The overall aim of the risk management policy is to achieve an effective balancing of risk and reward, although ultimately no strategy can provide an absolute assurance against loss.

The Board has carried out a robust assessment of the principal risks facing the Group, including those that would threaten its business model, future performance, solvency and/or liquidity. The major risks and uncertainties identified by the Board are set out below along with the consequences and mitigation strategy of each risk.

1.            The science and technology being developed or commercialised by the Group's businesses may fail and/or the Group's business may not be able to develop their intellectual property into commercially viable products or technologies. There is also a risk that some of the subsidiary businesses may fail or not succeed as anticipated, resulting in an impairment of the Group's value.

Impact: The failure of any of the Group's subsidiary businesses would impact the Group's value. A failure of one of the major subsidiary businesses could also impact on the perception of the Group as a builder of high value businesses and possibly make additional fund raising at the Group or subsidiary level more difficult.

Mitigation:

•    Before making any investment, extensive due diligence is carried out by the Group which covers all the major business risks including market size, strategy, adoption and intellectual property.

•    The initial seed round investment is typically quite small with additional investment only being made on successful completion of milestones.

•    A disciplined approach to capital allocation is pursued such that proof of concept has to be achieved before substantial capital is committed.

•    Members of the Group's management team who carry out the initial due diligence initially run the subsidiary in its incubation phase and subsequently move to becoming independent directors staying with the project to help ensure consistency of management. The Group's point of contact will stay in regular communication with the senior management of the subsidiary business.

•    Dedicated leadership with deep industry or sector knowledge is recruited and retained as appropriate, and the Group ensures that each subsidiary has independent directors and/or other advisors, as appropriate for the relevant stage of development.

•    During incubation stage, we closely monitor milestone developments and should a project fail to achieve sufficient progress, we terminate the investments.

•    The Company carries out face-to-face quarterly reviews with the management of each of the subsidiary businesses.

•    The shared services model provides significant administrative support to the subsidiary businesses whilst the budgetary and financial controls ensure good governance.

•    Within the Group there is a wealth of management expertise which can be called upon to support each of the subsidiary businesses where necessary.

•    The Group actively uses third party advisors and consultants, specific to the particular domain in which a subsidiary business operates, to assist on market strategy and direction. 

2.             The Group expects to continue to incur substantial expenditure in further research and development, product development and marketing activities of its businesses. There is no guarantee that the Group will become profitable prior to achieving a sale or other exit event, and, even if it does, it may be unable to sustain profitability. 

Impact: The strategic aim of the business is to generate profits for its shareholders through the investment into IP-based start-ups, delivering value through capital gain. As such, profits will be generated on exits. The timing and size of these potential inflows is uncertain and should exits not be forthcoming, or in the event that they are achieved but at values significantly less than the amount of capital invested, then it would be difficult to sustain the current levels of investment in the subsidiary businesses and continue to make new investments. This will lead to reduced activity across the Group. In turn this could make raising additional capital at the Group level difficult and it could ultimately lead to the failure of the Group as a whole.

Mitigation:

•    The Group retains significant cash balances in order to support its internal cash flow requirements, including to support the cash requirements for each subsidiary and for corporate resources.

•    The Group has close relationships with a wide group of investors, including its shareholder base to ensure it can continue to access the capital markets.

•    Senior management continually seek to create additional strategic relationships for the Group, and each subsidiary continually seeks to engage in strategic relationships relevant to their respective markets and to maintain current information on and awareness of potential exit strategies.

3.            If a significant number of the Group's relationships with US universities and federal government institutions were to break down or be terminated or expire, then the Group would lose any rights that it has to act as a private sector partner in the commercialisation of intellectual property being generated by such universities, other research intensive institutions or US federal research institutions.

Impact: Termination of certain of the Group's existing relationships would impact the quantity and potential quality of the Company's deal flow. This may in turn prevent the Company from completing promising new deals and reduce its opportunity to create new subsidiaries. This could potentially have an adverse effect on the Group's long term prospects and performance.

Mitigation:

•    The Group currently receives in excess of 2,700 items of intellectual property per year from its 207 partner institutions. The risk of losing deal flow through the termination of relationships is greatly lessened by the wide portfolio and geographic spread of our partners.

•    The Group continues to strengthen its partner network. The Group seeks to ensure that it has a diversity of relationships to ensure that no one university or US government laboratory has inordinate influence on our prospects, and at the same time we seek to develop deep relationships with select research institutions in order to strengthen the quality and quantity of new deal opportunities.

•    The Group dedicates resources to manage and expand the partner network.

•    The Group is fostering new relationships with strategic corporate partners to expand and strengthen its partner network and pipeline for opportunities.

4.            A majority of the Group's intellectual property relates to technologies originated in the course of research conducted in, and initially funded by, US universities or other federally-funded research institutions. Although the Group has been granted exclusive licenses to use this intellectual property, there are certain limitations inherent in these licenses, for example as required by the Bayh-Dole Act of 1980.

Impact: There are certain circumstances where the US government has rights to utilise the underlying intellectual property without any economic benefit flowing back to the Group. In the event this were to happen, this could impact the financial return to the Group on its investment in the applicable subsidiary businesses.

Mitigation:

•    To the Board's knowledge, while these so called "march in" rights exist, the US government has never had cause to use them.

•    The Group seeks to develop dual use capabilities for the technology it licenses and generally tends to avoid use cases directly applicable to government use.

•    This risk is also mitigated through employing experienced technology transfer experts supported by our legal team to assess risks that may arise out of this eventuality.

5.            The Group currently has in place cooperative research and development agreements with certain US Department of Defense laboratories and federal funded government institutions. Certain regulatory measures apply to these agreements which restrict the export of information and material that may be used for military or intelligence applications by a non-US person, and compliance with these regulatory measures may be complex and limit commercial alternatives.

Impact: If the Group were to breach restrictions on the use of certain licensed technologies, particularly those derived from federally funded research facilities, this could materially impact upon the Group's ability to license additional intellectual property from these establishments. In certain circumstances it may also lead to the termination of existing licenses. In the event that this were to happen, this could materially affect a number of the Group's businesses and potentially harm the reputation and standing of the Group and cause the termination of certain important relationships with federally funded research institutions.

Mitigation:

•    Prior to licensing any technology under these agreement, the Group's management seeks to identify the commercial and other alternatives available for products and services associated with such technology and innovations, and to ensure that there are sufficient markets available to justify the capital investment.

•    Prior to the commercialisation process, the Group's management seeks to obtain all the necessary clearances from applicable regulatory bodies to ensure that the export of products based upon the licensed IP is strictly in accordance with government guidelines.

•    The Group employs a number of individuals with experience in working with various government agencies.

•    Senior management is fully cognisant with the regulations and sensitivities in relation to this issue and in particular with International Traffic in Arms Regulations (ITAR) which regulate the use of technologies for export, and has numerous mitigating actions available should issues arise.

6.             The Group operates in complex and specialised business domains and requires highly qualified and experienced management to implement its strategy successfully. All of the operations of the Group and its subsidiary businesses are located in the United States, which is a highly competitive employment market. There is a risk that the Group may lose key personnel, or fail to attract or retain new personnel. Furthermore, given the relatively small size of the senior management at the corporate level, the Group is reliant on a small number of key individuals.

Impact: The loss of key personnel would have an adverse impact on the ability of the Group to continue to grow and may negatively affect the Group's competitive advantage.

Mitigation:

•    The Board annually seeks external expertise to assess the competitiveness of the compensation packages of its senior management.

•    Senior management continually monitor and assess compensation levels to ensure the Group remains competitive in the employment market.

•    While staff turnover has historically been low and the Group continues to attract highly qualified individuals, management encourages development and inclusion through coaching and mentoring programmes.

7.             A large proportion of the overall value of the Group's businesses may be concentrated in a small proportion of the Group's businesses. If one or more of the intellectual property rights relevant to a valuable business were terminated, this would have a material adverse impact on the overall value of the Group's businesses.

Impact: The termination of critical IP licenses would materially impact the value of the subsidiary business and have a consequent effect on the value of the overall Group.

Mitigation:

•    In each subsidiary, the management is specifically directed to pursue a policy of generating and patenting additional intellectual property to both provide additional protection and create direct IP ownership for the subsidiary business.

•    Where possible, the Group seeks to negotiate intellectual property ownership rights in any research and development agreement it enters into with a network partner, such that the Group becomes a part owner of the underlying IP.

•    The Group has a diversified portfolio of subsidiary businesses. The value of any one of its subsidiaries relative to the aggregate value of the Group is closely monitored to ensure that the concentration of risk of any one subsidiary is not disproportionate.

8.            Clinical studies and other tests to assess the commercial viability of a product are typically expensive, complex and time-consuming, and have uncertain outcomes. If the Company fails to complete or experiences delays in completing tests for any of its product candidates, it may not be able to obtain regulatory approval or commercialise its product candidates on a timely basis, or at all.

Impact: Significant delays in any of the clinical studies to support the appropriate regulatory approvals could significantly impact the amount of capital required for the subsidiary business to achieve final regulatory approval, which in turn may impact the value of such subsidiary. A critical failure in any stage of a clinical testing programme would probably necessitate a termination of the project and a loss of the Group's investment.

Mitigation:

•    The Group has dedicated internal resources to establish and monitor each of the clinical programmes in order to try and maximise successful outcomes.

•    During the evaluation and due diligence phase prior to the initial investment, focus is placed on an analysis of the risks of the clinical phase of development.

•    Prior to the launch of any clinical testing it will be normal for a dedicated management team (and in certain cases an advisory team to include key opinion leaders (KOLs)) to be hired, and experience with the management of clinical programmes would be a prerequisite qualification.

•    In the event of the outsourcing of these trials, care and attention is given to assure the quality of the Contract Research Organization (CRO) vendors used to perform the work.

9.            The Group expects to remain viable through December 2019 given its current cash and financial position.  However, if the Group is unable to raise capital, generate sufficient revenue, appropriately manage expenses, or exit any of its existing Group businesses prior to the end of such period, then the Group's business, financial condition, results of operations, prospects and future viability could be adversely affected.

Impact:  Lack of capital could restrict the Group's ability to further fund, develop and commercialise its existing businesses and prevent the Group from investing in attractive new opportunities.  In turn, this could ultimately lead to failure of individual subsidiaries and loss of investment as well as failure of the Group as a whole.  

Mitigation:

•    The Group maintains close relationships with its shareholder base, strategic partners, and a wide group of investors to ensure it continuous access to the capital markets.

•   The Group has historically had a strong financial position, including prior to its initial public offering (IPO), and holds significant control over the Company's investments and how subsidiary company working capital requirements are met.

•    The Company strives to maintain majority ownership and/or control over all of the subsidiary companies, so that it can seek to influence optimal capital allocation, use of cash, and fund-raising strategy.  

•   The Company has built a valuable portfolio of subsidiary companies since its inception.

•   The Company continuously and critically reviews the progress of its subsidiaries against pre-set milestones to ensure its financial capital and human resource is properly allocated to the more promising areas of its portfolio to help strengthen and accelerate the Group's path to monetisation.

Brexit

On 23 June 2016, the UK electorate voted to leave the European Union in a so-called "Brexit" referendum. The full consequences of the decision to leave the European Union will not be known for some time. The uncertainty surrounding the implementation and effect of Brexit has caused and is likely to continue to cause increased economic volatility. 

It is expected that companies based in the UK and with significant UK and EU operational focus will be the most directly impacted by Brexit.  All of the Group's subsidiary businesses are based in the US, and substantially all of the business and operations of the Group are conducted in the US.  However, the Group has raised significant capital in the UK and may need to raise additional capital in the UK in the future to support the growth and development of its subsidiaries.  The uncertainty caused by Brexit may result in the Group being unable to obtain additional capital on a timely basis on commercially acceptable terms. 

In addition, Brexit exposes the Group to increased foreign currency risk.  Foreign exchange risk is an exposure for the Group as it derives substantially all of its revenue in US dollars and the Group's businesses borrow, account in, and are valued in, US dollars, but its shares trade in amounts denominated in pounds sterling.  Any capital raised by the Group in the UK would be denominated in pounds sterling, but would be allocated to subsidiary businesses which operate in the US and whose functional currency is US dollars.

If the Group requires and fails to obtain sufficient capital on acceptable terms, it may be forced to curtail or abandon its planned growth activity and to forego further investment in developing certain of its current businesses, and otherwise be subject to a material adverse impact on the Group's business and financial condition.

Corporate and Social Responsibility

Details on the Group's policies, activities and aims with regard to its corporate and social responsibilities, including diversity, are included in the Sustainability section and are incorporated herein by reference.

This Strategic Report of the 2016 Annual Report has been approved by the Board of Directors.

ON BEHALF OF THE BOARD

Peter Dolan                                        Jill Smith

Chairman                                            Chief Executive Officer

27 April 2017

Consolidated Financial Information

The financial information set out below has been extracted from the 2016 Annual Report and is an abridged version of the full financial statements, not all of which are reproduced in this Annual Results Release.

Directors' Responsibilities Statement

The responsibility statement set out below has been reproduced from the 2016 Annual Report, which was published in April 2017, and relates to that document and not this announcement.

We confirm that to the best of our knowledge:

• the financial statements, prepared in accordance with the applicable set of accounting standards, give a true and fair view of the assets, liabilities, financial position and profit or loss of the Group and the parent Company and the undertakings included in the consolidation taken as a whole; and

• the Strategic Report of the 2016 Annual Report includes a fair review of the development and performance of the business and the position of the Group and the undertakings included in the consolidation taken as a whole, together with a description of the principal risks and uncertainties that they face.

We consider the 2016 Annual Report, taken as a whole, is fair, balanced and understandable and provides the information necessary for shareholders to assess the Group's position and performance, business model and strategy.

ON BEHALF OF THE BOARD

Peter Dolan                                        Jill Smith

Chairman                                            Chief Executive Officer

27 April 2017

FINANCIAL STATEMENTS

CONSOLIDATED STATEMENT OF COMPREHENSIVE LOSS

See accompanying notes to consolidated financial statements.

CONSOLIDATED STATEMENT OF FINANCIAL POSITION

⁽ⁱ⁾ The 2015 amounts have been reclassified. See note 1.

See accompanying notes to consolidated financial statements. 

Registered number: 8998697

The financial statements were approved by the Board of Directors and authorised for issue on 27 April 2017 and signed on its behalf by:

Jill Smith

Chief Executive Officer