TIDMQOGT
RNS Number : 2221L
Quorum Oil and Gas Tech. Fund Ld
04 May 2010
Not for release, publication or distribution in, or into, the United States,
Canada, Australia or Japan.
+------------------------------------+------------------------------+
| Press Release | 4 May 2010 |
+------------------------------------+------------------------------+
Quorum Oil and Gas Technology Fund Limited
("Q-OGT" or "the Company")
Final Results
Quorum Oil and Gas Technology Fund Limited (LSE:QOGT), a closed-ended Guernsey
investment company traded on the London Stock Exchange, announces its final
results for the year ending 31 December 2009.
Highlights
+-------+-----------------------------------------------------------------+
| · | Successful placing on 6 October 2009 raised $10.2 million in |
| | gross proceeds |
+-------+-----------------------------------------------------------------+
| · | Strata Energy Services Inc. well placed to move forward in |
| | terms of market profile and position |
+-------+-----------------------------------------------------------------+
| · | WellPoint Systems Inc. had a significantly improved year with |
| | positive EBITDA |
+-------+-----------------------------------------------------------------+
| · | Dividends of $0.40 per share declared and paid in respect of |
| | the year |
+-------+-----------------------------------------------------------------+
Since 31 December 2009, the Company has:
+-------+-----------------------------------------------------------------+
| · | Paid dividends of $0.10 per share on 5 February and 23 April |
| | 2010 |
+-------+-----------------------------------------------------------------+
| · | Raised a further $4.8 million on 5 March 2010 via issuance of |
| | 476,458 shares at a price of $10.12 |
+-------+-----------------------------------------------------------------+
| · | Made an additional investment into Strata Energy Services of |
| | US$4.85 million in the form of a six month 12% promissory note |
+-------+-----------------------------------------------------------------+
| · | Issued a further 493,180 shares on 15 April 2010, raising gross |
| | proceeds of $4.93 million upon the exercise of warrants at |
| | $10.00 per share |
+-------+-----------------------------------------------------------------+
Tom Price, Chairman of Quorum Oil and Gas Technology Fund Limited, said: "The
Board and the Investment Managers would like to thank our Shareholders for the
confidence they have shown in the Company. We remain positive about the
prospects of the Company and its Investee Companies as well as our ability to
continue to deliver value to our shareholders."
In this Final Results statement all currency is assumed to be in the lawful
currency of the United States of America unless otherwise stated
For further information:
+----------------------------------------+--------------------------+
| Quorum Oil and Gas Technology Fund | |
| Limited | |
+----------------------------------------+--------------------------+
| Tom Price, Chairman | Tel: +44 (0) 20 7398 |
| | 7702 |
+----------------------------------------+--------------------------+
+----------------------------------------+--------------------------+
| Numis Securities | |
+----------------------------------------+--------------------------+
| Nathan Brown, Corporate Broking | Tel: +44 (0) 20 7260 |
| | 1426 |
+----------------------------------------+--------------------------+
Media enquiries:
+----------------------------------------+--------------------------+
| Abchurch | |
+----------------------------------------+--------------------------+
| Henry Harrison-Topham / Mark Dixon | Tel: +44 (0) 20 7398 |
| | 7702 |
+----------------------------------------+--------------------------+
| mark.dixon@abchurch-group.com | www.abchurch-group.com |
+----------------------------------------+--------------------------+
A copy of the Company's Annual Report will be posted to shareholders and will
shortly be available on the Q-OGT website: http://www.q-ogtfund.com
CHAIRMAN'S STATEMENT
I am delighted to introduce the second annual report for Quorum Oil and Gas
Technology Fund Limited ("the Company"). Your continued support led to the
successful fundraising in October 2009 and the accelerated bookbuilding and
warrant exercises earlier this year underlines your commitment to the Company. I
would like to express the Board's gratitude to those who have invested in these
rounds or acquired shares in the market.
INVESTMENTS
The Investment Managers have been further developing the investments of the
Company and the convertible secured debenture structure has also meant that the
Company has again received substantial interest income during its second year of
operations.
In particular I would like to say how pleased the Board is with progress by our
investees, in particular Strata Energy Services Inc. ("Strata"), whose
technology has proven itself in the market, and whose commercial strategy has
borne sufficient fruit that it looks in a position to make a major step forward
in terms of its market profile and position.
I am pleased that the effect of the revaluations as at 31 December 2009 compared
with the previous year was a net write up in the value of the investments of
$18.13 million to $86,646,565, the material components of which were a write up
of the investment in Strata from $20.0 million to $41.9 million and a partial
write down of the SQFive investment from $14.7 million to $11.0 million. The
Net Asset Value per share at 31 December 2009, calculated in accordance with
Canadian GAAP, was $12.06. This excludes any dilution through the management
share options and warrants, as the average price of the shares was below their
exercise price. The Net Asset Value per share, assuming exercise of all the
management stock options but not the post balance sheet warrants was $11.68 per
share. This is just below the range calculated on the same basis published in
earlier guidance of $11.75 to $12.15 per share. The reason why is principally
an increase in amount of a partial write down in SQFive in respect of its
investment in LxData. Taking into account the dilution of the management share
options and those warrants that were actually exercised, the Net Asset Value per
share is $11.59.
DIVIDENDS
The Company has paid dividends in respect of the 2009 financial year amounting
in the aggregate to $0.40 per share. The Board understands the importance of
these dividends to shareholders.
ANNUAL GENERAL MEETING
The Annual General Meeting of the Company will be held on 2 June 2010 at Ogier
House, St. Julian's Avenue, St. Peter Port, Guernsey and I look forward to
meeting those of you that can attend.
The Board and the Investment Managers are grateful to you, as one of our
Shareholders, for the confidence you have shown in your Company, notwithstanding
the distractions of what is happening in the global economy. Together I am
confident that we can all look forward to the continued growth and success of
the Company and its Investee Companies.
Thomas Price
Chairman
3 May 2010
Investment Managers' Report
I am delighted to write this 2009 year end letter for the Company's second year
of operations. Delight is my choice of description given the advancement of the
Company's portfolio in what was otherwise a global economy in great turmoil. We
were fortunate that the sector we operate in was relatively robust during this
period. We were also fortunate that the choices of our individual investments
proved overall to be solid performers in 2009, leading to an increase in net
asset value of approximately 47% year over year.
QOGT's aggregate investee yearly sales increased from $75.2 million in 2008 to
$77.0 million in 2009. More importantly, 60% of our investees significantly
increased their 2009 EBITDA performances. Aggregate EBITDA was negative $24.7
million in 2008 compared to positive $13.6 million this fiscal year. A further
important measure of value creation is increased intellectual property as nearly
a dozen new patents were filed by our investees during the year. Every investee
(except QMENA which is a non R&D entity) advanced their product offerings
through continuing research and development activities.
The Company raised additional capital in the fall of 2009 which went to QMENA to
lock up its exclusive license with entities such as Strata, as well as to
Ambercore and SR2020. WellPoint had a significantly improved year with both
sales growth and positive EBITDA even with the removal of extraordinary items
such as proceeds of insurance. Ambercore positioned itself well too with its 3D
search technology roll-out in the fall of 2009 which highlighted the need of
Ambercore to shift to higher margin businesses, and to exit its low margin
hardware business. We and Ambercore believe its 3D search technology may be one
of the world's first to show actual 3D data. This technology is in the process
of being patented.
While a letter of this sort generally looks backward, we would wish also to look
ahead to 2010. Our strategic focus on technologies involved in improving mature
oil field recovery was again proven correct in 2009 as a global theme. We see
this emphasis continuing well past this coming year. A variation on this theme,
the new industry focus on tight shale gas extraction is also benefiting most of
our investments. Strata is in the sweet spot of helping arrest declining oil
production and is in demand by a number of national and international oil
companies in this regard.
WellPoint's renewed operating stability in 2009 and growing sales pipeline has
poised it to raise new capital in 2010 to satisfy its 2010 debts coming due. Its
lenders which include other Quorum managed funds have signaled a willingness to
give WellPoint time in 2010 to attract new capital on an appropriately costed
basis.
After a slow start because of the US economy, SR2020 added several significant
new and repeat customers in 2009 such as Occidental Petroleum and Exxon. The
Company further developed new interpretive software for deep water subsalt oil
plays, an area which is generating attention recently, both off the coast of
Brazil and in the Gulf of Mexico.
LxData has, with the assistance of a major independent oil company, developed
what it believes to be one of the world's first multiple pressure and
temperature optical sensors in 2009. It is designed for use in harsh
environments such as oil sands, and for continuous downhole monitoring for tight
gas plays.
As is always the case, we, as the managers of the Fund remained focused on our
investees' execution of plans, for after all innovation is "10% inspiration and
90% perspiration", as the old saying goes.
Thank you for your on going support and we look forward to delivering quality
results for the coming year.
Wanda Dorosz
Chief Executive Officer
Quorum Funding Corporation on behalf of the Investment Managers
QOGT Inc. and Sefton Partners LLP
Toronto, Ontario
3 May 2010
Quorum Oil and Gas Technology Fund Limited
Statement of operations
For the year ending 31 December 2009 and comparatives
for the period from 20 November 2007 (incorporation) to 31 December 2008
+--------------------------------+----------+------------+------------+
| | Note | 2009 | 2008 |
+--------------------------------+----------+------------+------------+
| Investment Income | | US$ | US$ |
+--------------------------------+----------+------------+------------+
| Portfolio interest income | 2 | 4,772,295 | 2,695,497 |
+--------------------------------+----------+------------+------------+
| Non-portfolio interest income | | 611 | 316,705 |
+--------------------------------+----------+------------+------------+
| Realised gain on foreign | | (30,775) | 19,840 |
| exchange | | | |
+--------------------------------+----------+------------+------------+
| | | 4,742,131 | 3,032,042 |
+--------------------------------+----------+------------+------------+
| Expenses | | | |
+--------------------------------+----------+------------+------------+
| Management fees | 3,4 | 1,220,828 | 968,648 |
+--------------------------------+----------+------------+------------+
| Marketing expenses | | 301,391 | 414,798 |
+--------------------------------+----------+------------+------------+
| Advisory board fees and | | 247,784 | 259,842 |
| expenses | | | |
+--------------------------------+----------+------------+------------+
| Legal and professional fees | | 215,674 | 610,767 |
+--------------------------------+----------+------------+------------+
| Administration fees | | 193,944 | 339,645 |
+--------------------------------+----------+------------+------------+
| Stock based compensation | | 151,912 | - |
+--------------------------------+----------+------------+------------+
| Directors fees and expenses | 4 | 111,680 | 118,616 |
+--------------------------------+----------+------------+------------+
| Insurance expense | | 87,758 | 94,510 |
+--------------------------------+----------+------------+------------+
| Registrar and custodian fees | | 40,051 | 25,151 |
+--------------------------------+----------+------------+------------+
| Listing and licence fees | | 27,421 | 99,816 |
+--------------------------------+----------+------------+------------+
| Other expenses | | 18,780 | 24,113 |
+--------------------------------+----------+------------+------------+
| | | 2,617,223 | 2,955,906 |
+--------------------------------+----------+------------+------------+
| | | | |
+--------------------------------+----------+------------+------------+
| Net investment income | | 2,124,908 | 76,136 |
+--------------------------------+----------+------------+------------+
| | | | |
+--------------------------------+----------+------------+------------+
| Gains (losses) on investments | | | |
+--------------------------------+----------+------------+------------+
| Unrealised change in value of | | 18,251,195 | (116,428) |
| investments | | | |
+--------------------------------+----------+------------+------------+
| Net realised gain on | | 87,946 | - |
| investments | | | |
+--------------------------------+----------+------------+------------+
| Net income (loss) | | 20,464,049 | (40,292) |
+--------------------------------+----------+------------+------------+
| | | | |
+--------------------------------+----------+------------+------------+
| Average number of preferred | | 6,373,221 | 4,470,498 |
| shares | | | |
+--------------------------------+----------+------------+------------+
| Basic earnings (loss) per | 8 | 3.21 | (0.01) |
| share | | | |
+--------------------------------+----------+------------+------------+
| | | | |
+--------------------------------+----------+------------+------------+
| Average number of diluted | | 6,373,221 | 4,470,498 |
| preferred shares | | | |
+--------------------------------+----------+------------+------------+
| Diluted earnings (loss) per | 8 | 3.21 | (0.01) |
| share | | | |
+--------------------------------+----------+------------+------------+
| Dividends paid per preferred | 7 | 0.40 | 0.30 |
| share | | | |
+--------------------------------+----------+------------+------------+
| | | | |
+--------------------------------+----------+------------+------------+
The accompanying notes are integral to these financial statements.
Balance Sheet
As at 31 December 2009 and comparatives as at 31 December 2008
+--------------------------------+----------+------------+------------+
| | Note | 2009 | 2008 |
+--------------------------------+----------+------------+------------+
| | | US$ | US$ |
+--------------------------------+----------+------------+------------+
| | | | |
+--------------------------------+----------+------------+------------+
| Assets | | | |
+--------------------------------+----------+------------+------------+
| Cash and cash equivalents | | 5,024,318 | 5,125,917 |
+--------------------------------+----------+------------+------------+
| Accounts receivable and | | 186,034 | 83,755 |
| prepaid expenses | | | |
+--------------------------------+----------+------------+------------+
| Investments | 2,9 | 81,949,125 | 55,727,763 |
+--------------------------------+----------+------------+------------+
| | | 87,159,477 | 60,937,435 |
+--------------------------------+----------+------------+------------+
| Liabilities | | | |
+--------------------------------+----------+------------+------------+
| Accounts payable and accrued | 10 | 203,754 | 471,563 |
| liabilities | | | |
+--------------------------------+----------+------------+------------+
| Deferred interest income | 10 | 309,158 | 1,664,789 |
+--------------------------------+----------+------------+------------+
| | | 512,912 | 2,136,352 |
+--------------------------------+----------+------------+------------+
| | | | |
+--------------------------------+----------+------------+------------+
| Shareholders' equity | | | |
+--------------------------------+----------+------------+------------+
| Common (founder) shares of | | | |
| US$1 par. | 11 | 2 | 2 |
| Authorised 2 shares: issued 2 | | | |
| shares | | | |
+--------------------------------+----------+------------+------------+
| Participating redeemable | | | |
| preferred shares. | | | |
| Authorised 50,000,000 shares; | 11 | 7,186,707 | 6,122,469 |
| issued 7,186,707 (2008: | | | |
| 6,122,469) shares | | | |
+--------------------------------+----------+------------+------------+
| Contributed Surplus | 2,11 | 60,497,266 | 51,731,082 |
+--------------------------------+----------+------------+------------+
| Warrants | | 987,822 | 987,822 |
+--------------------------------+----------+------------+------------+
| Retained earnings (deficit) | | 17,974,768 | (40,292) |
+--------------------------------+----------+------------+------------+
| | | 86,646,565 | 58,801,083 |
+--------------------------------+----------+------------+------------+
| | | 87,159,477 | 60,937,435 |
+--------------------------------+----------+------------+------------+
| | | | |
+--------------------------------+----------+------------+------------+
The accompanying notes are integral to these financial statements.
+--------------------------------+----------+------------+------------+
| Net asset value per share | | 12.06 | 9.60 |
+--------------------------------+----------+------------+------------+
Approved by the Board of Directors and signed on its behalf by:
+----------------------+----------------------+
| Tom Price | Wanda Dorosz |
| Chairman | Director |
| 3 May 2010 | 3 May 2010 |
+----------------------+----------------------+
Statement of Cash Flows
For the year ending 31 December 2009 and comparatives
for the period from 20 November 2007 (incorporation) to 31 December 2008
+--------------------------------+----------+--------------+--------------+
| | | 2009 | 2008 |
+--------------------------------+----------+--------------+--------------+
| | Note | US$ | US$ |
+--------------------------------+----------+--------------+--------------+
| Net (outflow) inflow of cash | | | |
| related to the following | | | |
| activities | | | |
+--------------------------------+----------+--------------+--------------+
| | | | |
+--------------------------------+----------+--------------+--------------+
| Operating | | | |
+--------------------------------+----------+--------------+--------------+
| Net investment income | | 2,124,908 | 76,136 |
+--------------------------------+----------+--------------+--------------+
| Stock based compensation | | 151,912 | - |
+--------------------------------+----------+--------------+--------------+
| Net change in non-cash working | 10 | (1,725,719) | 2,052,597 |
| capital | | | |
+--------------------------------+----------+--------------+--------------+
| | | 551,101 | 2,128,733 |
+--------------------------------+----------+--------------+--------------+
| | | | |
+--------------------------------+----------+--------------+--------------+
| Investing | | | |
+--------------------------------+----------+--------------+--------------+
| Purchase of investments | 9 | (12,201,884) | (55,844,191) |
+--------------------------------+----------+--------------+--------------+
| Dispositions of investments | | 4,319,663 | - |
+--------------------------------+----------+--------------+--------------+
| | | (7,882,221) | (55,844,191) |
+--------------------------------+----------+--------------+--------------+
| | | | |
+--------------------------------+----------+--------------+--------------+
| Financing | | | |
+--------------------------------+----------+--------------+--------------+
| Issuance of share capital | 11 | 10,206,042 | 61,877,905 |
+--------------------------------+----------+--------------+--------------+
| Share issuance costs | 11 | (527,532) | (1,572,670) |
+--------------------------------+----------+--------------+--------------+
| Dividends paid | 7 | (2,448,989) | (1,463,860) |
+--------------------------------+----------+--------------+--------------+
| | | 7,229,521 | 58,841,375 |
+--------------------------------+----------+--------------+--------------+
| | | | |
+--------------------------------+----------+--------------+--------------+
| Net (decrease) increase in | | | |
| cash during the period | | (101,599) | 5,125,917 |
+--------------------------------+----------+--------------+--------------+
| Cash, beginning of period | | 5,125,917 | - |
+--------------------------------+----------+--------------+--------------+
| Cash, end of period | | 5,024,318 | 5,125,917 |
+--------------------------------+----------+--------------+--------------+
The accompanying notes are integral to these financial statements.
Statement of Changes in Shareholders' Equity
For the year ending 31 December 2009 and comparatives
for the period from 20 November 2007 (incorporation) to 31 December 2008
+--------------+-----------+----------+-------------+-------------+-------------+
| | Share | | Contributed | Retained | |
| | Capital | Warrants | surplus | earnings | Total |
| | US$ | US$ | US$ | US$ | US$ |
+--------------+-----------+----------+-------------+-------------+-------------+
| As at 31 | | | | | |
| December | 6,122,471 | 987,822 | 51,731,082 | (40,292) | 58,801,083 |
| 2008 | | | | | |
+--------------+-----------+----------+-------------+-------------+-------------+
| Issuance of | | | | | |
| shares and | 1,064,238 | - | 9,141,804 | - | 10,206,042 |
| warrants * | | | | | |
+--------------+-----------+----------+-------------+-------------+-------------+
| Share | | | | | |
| issuance | - | - | (527,532) | - | (527,532) |
| costs | | | | | |
+--------------+-----------+----------+-------------+-------------+-------------+
| Stock option | | | | | |
| expense | - | - | 151,912 | - | 151,912 |
+--------------+-----------+----------+-------------+-------------+-------------+
| Net income | - | - | - | 20,464,049 | 20,464,049 |
+--------------+-----------+----------+-------------+-------------+-------------+
| Dividends | - | - | - | (2,448,989) | (2,448,989) |
| paid | | | | | |
+--------------+-----------+----------+-------------+-------------+-------------+
| As at 31 | | | | | |
| December | 7,186,709 | 987,822 | 60,497,266 | 17,974,768 | 86,646,565 |
| 2009 | | | | | |
+--------------+-----------+----------+-------------+-------------+-------------+
| | | | | | |
+--------------+-----------+----------+-------------+-------------+-------------+
| As at 20 | | | | | |
| November | - | - | - | - | - |
| 2007 | | | | | |
+--------------+-----------+----------+-------------+-------------+-------------+
| Issuance of | | | | | |
| shares and | 6,122,471 | 987,822 | 54,767,612 | - | 61,877,905 |
| warrants | | | | | |
+--------------+-----------+----------+-------------+-------------+-------------+
| Share | | | | | |
| issuance | - | - | (1,572,670) | - | (1,572,670) |
| costs | | | | | |
+--------------+-----------+----------+-------------+-------------+-------------+
| Net income | - | - | - | (40,292) | (40,292) |
+--------------+-----------+----------+-------------+-------------+-------------+
| Dividends | - | - | (1,463,860) | - | (1,463,860) |
| paid | | | | | |
+--------------+-----------+----------+-------------+-------------+-------------+
| As at 31 | | | | | |
| December | 6,122,471 | 987,822 | 51,731,082 | (40,292) | 58,801,083 |
| 2008 | | | | | |
+--------------+-----------+----------+-------------+-------------+-------------+
The accompanying notes are integral to these financial statements.
* Please see note 15 for warrant details.
Statement of Investment Portfolio
As at 31 December 2009 and comparatives as at 31 December 2008
+-------------+------------------+------------+----------+------------+------------+------------+------------+
| | | Par | | | 2009 | | 2008 |
| | | Value | Dividend | 2009 | Estimated | 2008 | Estimated |
| Security | Security | (US$) / | / | Cost | Fair | Cost | Fair |
| Company | held | Number | Interest | US$ | Value | US$ | Value |
| | | of | Rate | | US$ | | US$ |
| | | Securities | | | | | |
+-------------+------------------+------------+----------+------------+------------+------------+------------+
| | | | | | | | |
+-------------+------------------+------------+----------+------------+------------+------------+------------+
| 1482747 | Convertible | | | | | | |
| Alberta | secured | 3,150,000 | 8.5% | 3,150,000 | 3,150,000 | - | - |
| Ltd* | debentures | | | | | | |
| (Holding | | | | | | | |
| company | | | | | | | |
| for | | | | | | | |
| Ambercore | | | | | | | |
| Software | | | | | | | |
| Inc.) | | | | | | | |
+-------------+------------------+------------+----------+------------+------------+------------+------------+
| | | | | | | | |
+-------------+------------------+------------+----------+------------+------------+------------+------------+
| Ambercore | | | | | | | |
| Software | Convertible loan | 1,200,000 | 8.0% | 1,200,000 | 1,200,000 | - | - |
| Inc. | | | | | | | |
+-------------+------------------+------------+----------+------------+------------+------------+------------+
| | | | | | | | |
+-------------+------------------+------------+----------+------------+------------+------------+------------+
| Quorum | Convertible | | | | | | |
| MENA | secured | 6,371,000 | 8.5% | 6,371,000 | 6,371,000 | 2,821,000 | 2,821,000 |
| Limited | debentures | 327,168 | 8.5% | 327,168 | 327,168 | - | - |
| | Promissory note | | | | | | |
+-------------+------------------+------------+----------+------------+------------+------------+------------+
| | | | | | | | |
+-------------+------------------+------------+----------+------------+------------+------------+------------+
| Seismic | Convertible | | | | | | |
| Reservoir | secured | 500,000 | 8.5% | 500,000 | 500,000 | - | - |
| 2020 Inc. | debenture | | | | | | |
+-------------+------------------+------------+----------+------------+------------+------------+------------+
| | | | | | | | |
+-------------+------------------+------------+----------+------------+------------+------------+------------+
| SQ Five | Convertible | | | | | | |
| Intelligent | secured | 11,943,751 | 8% -8.5% | 11,943,751 | 10,971,728 | 10,794,229 | 10,794,229 |
| Oilfield | debentures | | | 2,783,471 | | | |
| Solutions | Redeemable | 2,783,471 | 8% -8.5% | - | - | 3,833,471 | 3,833,471 |
| Ltd.* | convertible | - | - | | - | 350,000 | 350,000 |
| | preferred shares | | | | | | |
| | Promissory note | | | | | | |
+-------------+------------------+------------+----------+------------+------------+------------+------------+
| | | | | | | | |
+-------------+------------------+------------+----------+------------+------------+------------+------------+
| Strata | Convertible | | | | | | |
| Energy | secured | 20,000,000 | 8% | 20,000,000 | 41,890,372 | 20,000,000 | 20,000,000 |
| Services | debentures | | | | | | |
| Inc. | | | | | | | |
+-------------+------------------+------------+----------+------------+------------+------------+------------+
| | | | | | | | |
+-------------+------------------+------------+----------+------------+------------+------------+------------+
| WellPoint | Convertible | | | | | | |
| Systems | secured | 17,441,219 | 8.5% | 17,441,219 | 17,486,358 | 18,045,491 | 17,929,063 |
| | debentures | 47,826 | 8% | 47,826 | 52,499 | - | - |
| | Promissory note | | | | | | |
+-------------+------------------+------------+----------+------------+------------+------------+------------+
| | | | | 63,764,435 | 81,949,125 | 55,844,191 | 55,727,763 |
+-------------+------------------+------------+----------+------------+------------+------------+------------+
* At 31 December 2008, SQFive had underlying investments in Ambercore, SR2020
and LxData. After a restructuring at the SQFive level in 2009, the Ambercore
investment is now held through 1482747 Alberta Ltd. which is a non-operating
company used solely as an investment vehicle.
Notes to the Financial Statements
For the year ending 31 December 2009 and comparatives
for the period from 20 November 2007 (incorporation) to 31 December 2008
1. BUSINESS OPERATIONS AND REGISTRATION
The Quorum Oil and Gas Technology Fund Ltd (the "Company") is a closed ended
investment company incorporated and registered in Guernsey on 20 November 2007.
The Company's participating redeemable preference shares are listed on the
London Stock Exchange.
The nature of the Company's operations and its principal activities are set out
in the Directors' report. The address of the Company's Registered office is set
out on page 62 of the Annual Report.
QOGT Inc. and Sefton Partners LLP (the "Investment Managers") are the investment
managers of the Company. Quorum European Partners LLP has ceased to be a member
of the Quorum group and Quorum European Partners LLP has changed its name to
Sefton Partners LLP.
These financial statements are presented in United States Dollars as that is the
currency of the primary economic environment in which the Company operates.
The Directors believe it is appropriate to adopt the going concern basis in
preparing the financial statements as, after due consideration, the Directors
consider that the Company has adequate resources to continue in operational
existence for the foreseeable future. In making this assessment, the Directors
note that the investments are income generating, the Company has cash reserves,
no gearing and the shares are only redeemable at the discretion of the Company.
The Company is designated as authorised pursuant to the Authorised Closed-Ended
Investment Scheme Rules 2008.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
These financial statements have been prepared by the Company in accordance with
Canadian generally accepted accounting principles ("GAAP"). The Company is an
investment company and accounted for in accordance with the Canadian Institute
of Chartered Accountants Accounting Guideline 18 - Investment Companies. All
amounts are in the currency of the United States Dollar unless otherwise stated.
Use of Estimates
The preparation of financial statements in accordance with GAAP requires
management to make estimates and assumptions that affect the reported amounts of
assets, liabilities, income and expenses during the reporting period.
Significant estimates and judgments in these financial statements are required
principally in determining the reported estimated fair value of investments
since these determinations include estimates of expected future cash flows,
rates of return and the impact of future events. Actual results could differ
significantly from those estimates.
Accounting Policy
The Company adopted Canadian Institute of Chartered Accountants ("CICA")
Handbook-Accounting Section 3862, "Financial Instruments-Disclosures" ("Section
3862") and Section 3863, "Financial Instruments-Presentation" ("Section 3863").
These sections establish standards for comprehensive disclosure and presentation
requirements for financial instruments. The standards include new requirements
to quantify certain risk exposures and to provide sensitivity analysis for
certain risks. The additional disclosure can be found in note 13 to these
financial statements.
The Company also adopted the CICA Handbook Section 1535, "Capital Disclosures"
which establishes standards for disclosing information about the Company's
capital and how it is managed. The Company has included disclosures recommended
by this new Handbook section below. The adoption of this standard results in
additional disclosures but does not affect the Company's results or financial
position. The additional disclosures can be found in note 14 to these financial
statements.
The Company adopted the amendment to Canadian Institute of Chartered Accountants
("CICA") Handbook Section 3862 Financial Instruments - Disclosures ("Section
3862"). This amendment establishes a hierarchical disclosure framework which
prioritises and ranks the level of market price observability used in measuring
investments at fair value. Market price observability is impacted by a number of
factors, including the type of investment and the characteristics specific to
the investment. Investments with readily available quoted prices or for which
fair value can be measured from actively quoted prices generally will have a
higher degree of market price observability and a lesser degree of judgment used
in measuring fair value.
Investments measured and reported at fair value are classified and disclosed in
one of the following categories:
Level I - Unadjusted quoted prices in an active market for identical assets or
liabilities provides the most reliable evidence of fair value and is used to
measure fair value whenever available.
Level II - Inputs other than unadjusted quoted prices in active markets, which
are either directly or indirectly observable as of the reporting date, and fair
value is determined through the use of models or other valuation methodologies.
Level III - Inputs that are unobservable for the investment and include
situations where there is little, if any, market activity for the investment.
The inputs into the determination of fair value require significant management
judgment or estimation.
All of the investments for the Company are classified as Level III.
The CICA has announced that Canadian GAAP for publicly accountable enterprises
will be replaced with International Financial Reporting Standards ("IFRS") over
a transition period expected to end in 2011. The Company will begin reporting
its financial statements in accordance with IFRS on 1 January 2011.
Valuation of Investments
Generally, a combination of two methods, including a market multiple approach
that considers one or more financial measures, such as revenues, EBITDA,
adjusted EBITDA, EBIT, net income, net asset value, discounted cashflow or
liquidation analysis, are used to determine the estimated value of an
investment. Consideration may also be given to such factors as:
+--------+----------------------------------------------------------------+
| · | The company's historical and projected financial data; |
+--------+----------------------------------------------------------------+
| · | Valuations given to comparable companies; |
+--------+----------------------------------------------------------------+
| · | The size and scope of the company's operations; |
+--------+----------------------------------------------------------------+
| · | Expectations relating to the market's receptivity to an |
| | offering of the company's securities; |
+--------+----------------------------------------------------------------+
| · | Any control associated with interests in the company that are |
| | held by the Company; |
+--------+----------------------------------------------------------------+
| · | Information with respect to transactions or offers for the |
| | company's securities (including the transaction pursuant to |
| | which the investment was made and the year of time that has |
| | elapsed from the date of the investment to the valuation |
| | date); |
+--------+----------------------------------------------------------------+
| · | Applicable restrictions on transfer; |
+--------+----------------------------------------------------------------+
| · | Industry information and assumptions; |
+--------+----------------------------------------------------------------+
| · | General economic and market conditions; and |
+--------+----------------------------------------------------------------+
| · | Other factors deemed relevant. |
+--------+----------------------------------------------------------------+
The Company notes that the valuations assume the ongoing operations of the
investee companies. In certain cases this may require refinancing of existing
debt or additional financing from the Company or other investors. Because of
the inherent uncertainty of the valuation process, the fair value may differ
materially from the actual value that would be realised if such investments were
sold in an orderly disposition. Further information regarding the Company's
investments can be found in Note 9.
Other Financial Assets and Liabilities
Other financial assets and financial liabilities are recorded at cost. Since
these assets and liabilities are short-term in nature, their carrying values
approximate fair values.
Investment Transactions and Income
Investment transactions are accounted for as of the trade date. Interest income
is recorded on an accrued basis. Realised and unrealised gains and losses from
investment transactions are calculated on an average cost basis. Interest income
received in advance is recorded as deferred interest income on the balance sheet
as a liability.
Translation of Foreign Currencies
Investments and other financial assets and liabilities denominated in foreign
currencies are translated into United States Dollars at the exchange rates
prevailing on each valuation day. Purchases and sales of investments, income
and expenses are translated into United States Dollars at the exchange rate
prevailing on the respective dates of such transactions.
Issuance Costs
Issuance costs incurred to form the Company are deducted directly from
contributed surplus.
Stock- Based Payments
The Company has granted stock options to the Investment Manager and Investment
Advisory Committee. CICA Handbook Section 3870 - Stock-based Compensation and
other Stockbased Payments requires recognition of an expense of option awards
using the fair value method of accounting. Under this method, the fair value of
an award at the grant date is recognised as an expense. The effect of actual
forfeitures of previously granted options are recognised as they occur.
3. MATERIAL AGREEMENTS
Under the terms of the Investment Management Agreement dated 27 December 2007, a
management fee is payable to the Investment Managers for investment management
services. These are paid monthly in arrears and are subject to a maximum of 2 %
per annum of the net asset value.
4. RELATED PARTY TRANSACTIONS
The Investment Managers and the Directors are regarded as related parties. For
certain investments other funds managed by the Quorum Group co-invest alongside
the Company. These are described in the review of the Principal Investments.
The fees and expenses payable to the Investment Managers are explained in Note 3
and are detailed in the Statement of Operations.
During the year, the Company exercised its put option to assign Cdn$600,000 of
its debentures in WellPoint Systems Inc. to Quorum Investment Pool Limited
Partnership, which is managed by an entity ultimately controlled by one of the
Investment Managers of the Company. In consideration, the Company is entitled to
receive a put fee in the amount of Cdn$100,000 in cash or in kind in the form of
WellPoint common shares.
5. SEGMENT INFORMATION
The Directors are of the opinion that the Company is engaged in a single segment
of business, being investment management, therefore no segmental reporting is
required.
6. TAX
The Company has been granted exemption from income tax in Guernsey under the
Income Tax (Exempt Bodies) (Bailiwick of Guernsey) Ordinance, 1989 for which it
pays an annual fee of GBP600 (2008: GBP600). As such it will not be liable to
income tax in Guernsey other than on Guernsey source income (excluding deposit
interest on funds deposited with a Guernsey bank). No withholding tax is
applicable to distributions to shareholders by the Company.
With effect from 1 January 2008, Guernsey abolished some aspects of the exempt
company regime. As a publicly available fund, it will continue to be eligible
to apply for exempt status however, and liable to the annual fee if it chooses
to do so. The Company has taken advantage of this exemption for the current
year and expects to do so for future years.
7. DIVIDENDS
Dividends of $0.10 per participating redeemable preference share were paid on 18
February 2009, 20 May 2009, 19 August 2009 and 9 October 2009 respectively.
Total dividends paid during the year ending 31 December 2009 were $2,448,989
(2008 - $1,463,860).
Under Guernsey Law, companies can pay dividends in excess of accounting profit
provided they satisfy the solvency test prescribed under the Companies
(Guernsey) Law, 2008. The solvency test considers whether a company is able to
pay its debts when they fall due; and whether the value of a company's assets is
greater than its liabilities. The Company passed the solvency test for each
dividend payments in 2009.
8. BASIC AND DILUTED EARNINGS (LOSS ) PER SHARE
Earnings (loss) per share is computed by dividing net income available to
preferred shareholders by the weighted average number of preferred shares
outstanding for the year. Diluted earnings (loss) per share reflects the
potential dilution that could occur if additional preferred shares are issued
under warrants and stock options that entitle their holders to obtain common
shares in the future, to the extent such entitlement is not subject to
unresolved contingencies. The number of additional shares for inclusion in
diluted loss per share calculations is determined using the treasury stock
method. Under this method, warrants and stock options whose exercise price is
less than the average market price of the preferred shares are assumed to be
exercised with the proceeds used to repurchase preferred shares at the average
market price for the period. The incremental number of preferred shares issued
under warrants and stock options and repurchased from proceeds is included in
the calculation of diluted earnings per share. For both the year ended 31
December 2009 and the period ended 31 December 2008 the Company excluded
potential share equivalents comprised of stock options and warrants for the
diluted loss per share as these would be considered anti-dilutive.
+----------+---------------------------------------+------------+-----------+
| Basic earnings per share | 2009 | 2008 |
| | US$ | US$ |
+--------------------------------------------------+------------+-----------+
| | Net income | 20,464,049 | (40,292) |
+----------+---------------------------------------+------------+-----------+
| | Average number of preferred shares | 6,373,221 | 4,470,498 |
+----------+---------------------------------------+------------+-----------+
| | Basic earnings per share | 3.21 | (0.01) |
+----------+---------------------------------------+------------+-----------+
| | | |
| Diluted earnings per share | | |
+--------------------------------------------------+------------+-----------+
| | Net income | 20,464,049 | (40,292) |
+----------+---------------------------------------+------------+-----------+
| | Warrants | - | - |
+----------+---------------------------------------+------------+-----------+
| | Stock options | - | - |
+----------+---------------------------------------+------------+-----------+
| | Average number of diluted preferred | 6,373,221 | 4,470,498 |
| | shares | | |
+----------+---------------------------------------+------------+-----------+
| | Diluted earnings per share | 3.21 | (0.01) |
+----------+---------------------------------------+------------+-----------+
9. INVESTMENTS
(a) 1482747 Alberta Ltd.
1482747 Alberta Ltd. is a non-operating company used solely as an investment
vehicle through which QOGT invests indirectly into Ambercore. At 31 December
2008 SQFive had underlying investments in Ambercore, SR2020 and LxData. After a
restructuring at the SQFive level in 2009, the Ambercore investment is now held
through 1482747 Alberta Ltd. The convertible secured debenture in the principal
amount of $3,150,000 matures on 29 May 2013 and bears an annual interest rate of
8.5%. The 1482747 Alberta Ltd. investment was valued using a comparable company
multiples approach which led to a valuation approximately equal to the cost of
the investment.
(b) Ambercore Software Inc. ("Ambercore")
The convertible loan in the principal amount of $1,200,000 bears an annual
interest rate of 8% and is repayable upon the sale of certain assets of
Ambercore along with a bonus payment of $250,000 which has not been recognized
by the Company. The Ambercore investment was valued using a comparable company
multiples approach which led to a valuation approximately equal to the cost of
the investment.
(c) Quorum MENA Ltd. ("QMENA")
The convertible secured debenture in the principal amount of $6,371,000 matures
on 17 December 2013 and bears an annual interest rate of 8.5%. The debenture is
convertible at the Company's option at any time into common shares of QMENA at a
conversion price of $1.00 per share. The promissory note in the principal amount
of $327,168 bears an annual interest rate of 8.5% and has the same terms and
conditions as the convertible secured debenture. The QMENA investment has been
valued at cost based on the licence agreements it has obtained, this is
considered to be the investment's fair value.
(d) SQFive Intelligent Oilfield
The convertible secured debentures in the aggregate principal amount of
$11,943,751 mature on dates ranging from 25 April 2013 to 31 December 2013, and
bear annual interest rates ranging from 8% to 8.5%. The debentures are
convertible at the Company's option at any time into common shares of SQFive at
a conversion price ranging from $0.52 to $0.78 per share. The convertible
preferred shares in the aggregate par value of $2,783,471 bear annual dividend
rates ranging from 8% to 8.5%. The preferred shares are convertible at the
Company's option at any time into common shares of SQFive at a conversion price
ranging from $0.52 to $0.78 per share. At 31 December 2008 SQFive had underlying
investments in Ambercore, SR2020 and LxData. After a restructuring at the SQFive
level in 2009, the Ambercore investment is now held through 1482747 Alberta Ltd.
which is a non-operating company used solely as an investment vehicle. The
SQFive investment was valued using a comparable company multiples approach of
the two underlying companies, SR2020 and LxData. This approach led to a partial
write down of the SR2020 and LxData components in 2009 of $775,053 and
$1,984,683 respectfully. A write down of $995,758, which represented the total
funds left at the SQFive level was also taken due to the winding up of the
SQFive operations, leading to a total write down in SQFive of $3,755,494. The
write down was marked against the convertible preference shares in the first
instance, and the remaining write down against the debentures in line with
security ranking. SQFive is now solely a vehicle through which QOGT invests into
underlying companies.
On March 16, 2009 a claim was filed against Seismic Reservoir 2020, Inc., SR2020
Inc. (the successor company to Seismic Reservoir 2020, Inc.), a director of the
Quorum Oil and Gas Technology Fund Limited, and against two other individuals
employed by SQFive and SR2020 Inc. The claim was filed by a former employee and
shareholder of Seismic Reservoir Inc. in the amount of $2.2 million seeking
relief for wrongful dismissal and deprivation of shareholders' rights. The
Company believes that the claim is without merit and accordingly is defending
the claim vigorously.
As the claim is not considered likely to succeed by the Company and it and its
directors have in force directors' and officers' liability insurance coverage of
$5 million, no accrual has been recorded for the potential liability as a result
of this claim.
(e) Seismic Reservoir 2020 Inc.
The convertible secured debenture in the principal amount of $500,000 matures on
29 May 2013 and bears an annual interest rate of 8.5%.
The SR2020 investment was valued using a comparable company multiples approach
which led to a valuation equal to the cost of the investment. As this investment
was made after the time of the SR2020 investment through SQFive, a more
favourable conversion price was granted. For is the reason, there was no write
down of the direct SR2020 investment as opposed to the SR2020 investment held
through SQFive, which was partially written down.
(f) Strata Energy Services Inc. ("Strata")
The convertible secured debenture in the principal amount of $15,000,000 matures
on 25 February 2013, bearing an annual interest rate of 8% is convertible into
31.4% of Strata common shares.
The convertible secured debenture in the principal amount of $5,000,000 matures
on 1 August 2013, bearing an annual interest rate of 8% is convertible into
10.5% of Strata common shares.
The Strata investment was valued using both a comparable company multiples
approach as well as a discounted cash flow approach. The combination of these
two approaches led to a substantial write up of the investment in the amount of
$21,890,372.
(g) WellPoint Systems Inc. ("WellPoint")
The convertible secured debentures in the principal amounts of $15,200,000,
$2,000,000 and Cdn$300,000 mature on 10 April 2013, 30 January 2014, and 1
October 2010, bearing an annual interest rate of 8.5%. The debentures are
convertible at the Company's option at any time into common shares of WellPoint.
The conversion price for the common shares range from $0.2872 to $0.35 per
share for the United States Dollar denominated debentures and $0.35 per common
share for the Canadian Dollar denominated debenture. Under certain
circumstances, WellPoint may prepay the entire principal amount of the
debentures, subject to a right by the Company to exercise its conversion right
into common shares of WellPoint. Additionally, under certain circumstances,
WellPoint may compel a conversion of its debentures into common shares of its
company.
The promissory note in the amount of Cdn$55,000 matures on 26 June 2010 and
bears an annual interest rate of 8%.
The WellPoint investment was valued using a comparable company multiples
approach which led to a valuation equal to the cost of the investment.
WellPoint has a working capital deficit of $15.9 million. Approximately $14.4
million of this working capital deficit is related to debt that is coming due in
2010, of which $5.5 million is due to other funds managed by the Quorum Group.
WellPoint will likely not generate enough cash from operations in order to fund
these debt obligations. As such, WellPoint will require the continued
cooperation of its lenders, including the Company, to renegotiate or refinance
its debt obligations.
The valuation of WellPoint has been prepared assuming that WellPoint will
continue as a going concern. This assumes that WellPoint will continue in
operation for the foreseeable future and accordingly will be able to realize its
assets and discharge its liabilities in the normal course of operations. The
valuation does not include any adjustments that might be necessary should
WellPoint be unable to continue future operations.
During the year ending 31 December 2009, the reconciliation of investments
measured at fair value using unobservable inputs (Level 3) is presented as
follows:
+----------------------------+----------------+-----------------+
| Fair level disclosure by | 31 December | 31 December |
| fair value hierarchy | 2009 | 2008 |
| level: | Level 3 | Level 3 |
| | US$ | US$ |
+----------------------------+----------------+-----------------+
| Investments | 81,949,125 | 55,727,763 |
+----------------------------+----------------+-----------------+
| | | |
+----------------------------+----------------+-----------------+
| Reconciliation of | 31 December | 31 December |
| Level 3 fair values: | 2009 | 2008 |
| | Trading | Trading |
| | Securities US$ | Securities |
| | | US$ |
+----------------------------+----------------+-----------------+
| Opening balance | 55,727,763 | - |
+----------------------------+----------------+-----------------+
| Total unrealised gains | | |
| (losses) | 18,251,195 | (116,428) |
| in net income (Footnote 1) | | |
+----------------------------+----------------+-----------------+
| Additions | 12,201,884 | 55,844,191 |
+----------------------------+----------------+-----------------+
| Disposals | (4,231,717) | - |
+----------------------------+----------------+-----------------+
| | 81,949,125 | 55,727,763 |
+----------------------------+----------------+-----------------+
Footnote 1: Total unrealised gains in net income are presented in the Statement
of Operations under unrealised change in valuation of investments.
The key valuation assumption is the multiple used. A change in the EBITDA factor
of +/- 1.0 would result in an aggregate change in the unrealised gains in
investments of approximately +/- $1.45 million.
10. LIABILITIES
+-----------------------------+----------------+------------------+
| | 2009 | 2008 |
| | US$ | US$ |
+-----------------------------+----------------+------------------+
| | | |
+-----------------------------+----------------+------------------+
| Accounts payable and | 203,754 | 471,563 |
| accrued liabilities | | |
+-----------------------------+----------------+------------------+
| Deferred interest income | 309,158 | 1,664,789 |
+-----------------------------+----------------+------------------+
| | 512,912 | 2,136,352 |
+-----------------------------+----------------+------------------+
The deferred interest income relates to interest payments received from investee
companies in advance.
11. SHAREHOLDERS' EQUITY
+--------------------------+------------+------------+------------+------------+
| Authorised | Number | 2009 | Number | 2008 |
| | | Nominal | | Nominal |
| | | Value | | Value |
| | | (US$) | | (US$) |
+--------------------------+------------+------------+------------+------------+
| | | | | |
+--------------------------+------------+------------+------------+------------+
| Common (founder) shares | 2 | 2 | 2 | 2 |
+--------------------------+------------+------------+------------+------------+
| Unclassified shares | 50,000,000 | 50,000,000 | 50,000,000 | 50,000,000 |
+--------------------------+------------+------------+------------+------------+
| Issued | | | | |
+--------------------------+------------+------------+------------+------------+
| Common (founder) shares | 2 | 2 | 2 | 2 |
+--------------------------+------------+------------+------------+------------+
| Participating redeemable | 7,186,707 | 7,186,707 | 6,122,469 | 6,122,469 |
| preference shares | | | | |
+--------------------------+------------+------------+------------+------------+
| Warrants | 851,571 | 987,822 | 851,571 | 987,822 |
+--------------------------+------------+------------+------------+------------+
The shares may be allotted and issued as one of more classes of shares, being
participating redeemable preference shares in the Company. To qualify as
participating redeemable preference shares, the shares are required under
Guernsey Law to have a preference over another class of share capital. The
participating redeemable preference shares may be redeemed at the option of the
Company subject to the discretion of the Directors. The common or founder shares
have been created so that the participating redeemable preference shares may be
issued. The common or founder shares are not redeemable and do not carry any
right to vote or receive dividends and are only entitled to participate in the
assets of the Company on a winding-up. On 6 October 2009, the Company issued an
additional 1,064,238 participating redeemable preference shares at an issuance
price of $9.59 per share for total gross subscription proceeds of $10,206,042.
On 25 July 2008 the Company issued 851,571 warrants to record holders of the
same date on the basis of one warrant for every five participating redeemable
preference shares held. Upon the issuance of the warrants, a reclassification
was made in the amount of $987,822 from contributed surplus to warrants. The
warrants were exercisable at a price of $10.00 each on 1 April 2009 and 1 April
2010 following which date rights under the warrants will lapse. The key
assumptions used in the pricing of the warrants were a risk free interest rate
of 3.53%, expected dividend yield of 4.00% and expected share volatility of 18%.
Refer to note 15 for post year subsequent events.
12. STOCK-BASED PAYMENTS
The Company has the ability to issue stock options representing 20% of the fully
diluted capital of the Company under its stock option plan. As at 31 December
2009, options had been granted to the Investment Managers in respect of 20% of
the fully diluted share capital of the Company at exercise prices of $10.00,
$10.35 and $9.59 per share increasing by 8% per annum subject to reductions in
any dividends paid. The options are exercisable in three equal tranches on the
first three anniversaries of the grant date and have a 10 year life. As at 31
December 2009, 865,045 (2008 - nil) of the options were exercisable, with a
weighted average exercise price of $10.20.
+----------------------------------+-------------+-----------+
| Summary of Stock Option Activity | | Weighted |
+----------------------------------+-------------+-----------+
| | | average |
+----------------------------------+-------------+-----------+
| | Number | exercise |
| | | price |
+----------------------------------+-------------+-----------+
| | of options | (US$) |
+----------------------------------+-------------+-----------+
| As at 20 November 2007 | - | - |
+----------------------------------+-------------+-----------+
| Granted | 1,530,618 | 10.28 |
+----------------------------------+-------------+-----------+
| Exercised | - | - |
+----------------------------------+-------------+-----------+
| Cancelled | - | - |
+----------------------------------+-------------+-----------+
| As at 31 December 2008 | 1,530,618 | 10.28 |
+----------------------------------+-------------+-----------+
| Granted | 266,059 | 9.59 |
+----------------------------------+-------------+-----------+
| Exercised | - | - |
+----------------------------------+-------------+-----------+
| Cancelled | - | - |
+----------------------------------+-------------+-----------+
| As at 31 December 2009 | 1,796,677 | 10.17 |
+----------------------------------+-------------+-----------+
The Company recognises the expense for option-based payments using the fair
value method of accounting utilising the binomial options pricing model. The
weighted average fair value of options granted during the year is estimated to
be $151,912. The following assumptions were used:
+--------------------------------+----------------+------------+
| Binomial Options Pricing Model Assumptions | |
+-------------------------------------------------+------------+
| | 2009 | 2008 |
+--------------------------------+----------------+------------+
| Weighted average assumptions | | |
+--------------------------------+----------------+------------+
| Risk-free interest rate | 3.34% | 3.53% |
+--------------------------------+----------------+------------+
| Expected dividend yield | 4.00% | 4.00% |
+--------------------------------+----------------+------------+
| Expected share price | 14% | 18% |
| volatility | | |
+--------------------------------+----------------+------------+
| Expected life of option | 8.42 | 9.19 |
| (years) | | |
+--------------------------------+----------------+------------+
13. FINANCIAL RISK MANAGEMENT
In the normal course of business, the Company is exposed to a variety of
financial risks: credit risk, liquidity risk and market risk (including interest
rate risk, currency risk and other price risk). The value of investments within
the Company's portfolio can fluctuate on a daily basis as a result of changes in
interest rates, economic conditions, the market, and, company news related to
specific securities within the Company. The level of risk depends on the
Company's investment objective and the type of securities it invests in. The
investment objective of the Company is to provide interest income and capital
appreciation by investing in secured convertible debentures, convertible loans,
and promissory notes of public and private companies. On a quarterly basis, the
Company performs a formal review of its investments, which includes, but not
limited to, an assessment of the global macro environment, the outlook for
credit, and the amount of active risk being taken in the Company. The Company's
overall risk management program seeks to minimise the potentially adverse effect
of risk on the Company's financial performance in a manner consistent with the
Company's investment objective.
Credit Risk
Credit risk is the risk that the counterparty to a financial instrument will
fail to discharge an obligation or commitment that it has entered into with the
Company.
The Company is exposed to credit risk in respect of the investment portfolio,
with a maximum exposure equal to the value of the loans advanced. Credit risk is
mitigated by the Company's Investment Managers performing satisfactory due
diligence on prospective investments. Under the terms of the convertible secured
debenture, should the principal not be repaid by the maturity date or if there
is a default in the debenture covenants, the debenture is secured by a charge of
the Investee Companies' assets or may be converted into ordinary shares of the
borrower. However, the Company may not be able to recover all or some of the
value of the debenture through realisation of the Investee Companies' assets or
shares. Given the current status of the Investee Companies and their respective
financial positions, the recoverability of these investments is, in some cases,
predicated on the performance of the companies. As of 31 December 2009, all
investee companies were current on their interest payments.
The Company's investments are focused solely in the oil and gas technology
sector. The Company attempts to mitigate its exposure by investing in companies
that sell their products internationally.
The Company is exposed to credit risk in respect to its cash and cash
equivalents, arising from possible default of the relevant counterparty, with a
maximum exposure equal to the carrying value of those assets. The credit risk on
liquid funds is limited because the counterparties are banks with high
credit-ratings assigned by international credit-rating agencies. The Company
monitors the placement of cash balances on an ongoing basis. The Company only
invests its cash and cash equivalents with its banker and custodian, the Royal
Bank of Canada (Channel Islands) Ltd.
Liquidity Risk
Liquidity risk is defined as the risk that the Company may not be able to settle
or meet its obligations on time or at a reasonable price.
The Company's exposure to liquidity risk is concentrated in the investments of
private secured convertible debentures, convertible loans and promissory notes.
The Company primarily invests in securities that are not traded in active
markets and cannot be readily disposed. To compensate for this, the Company
retains sufficient cash and cash equivalent positions to maintain liquidity to
meeting operating expenses and distributions. Furthermore, it is mitigated by
the fact that the participating redeemable preference Shares of the Company are
redeemable only at the Company's discretion.
The Company has sufficient cash on hand to meet all current liabilities as at 31
December 2009.
Interest Rate Risk
Interest rate risk arises from the possibility that changes in interest rates
will affect future cash flows or fair values of financial instruments. Interest
rate risk arises when the Company invests in interest-bearing financial
instruments. The Company is exposed to the risk that the value of such financial
instruments will fluctuate due to changes in the prevailing levels of market
interest rates. The company seeks to mitigate this risk by monitoring the
placement of cash balance on an ongoing basis in order to maximise the interest
rates obtained.
Sensitivity to movements in interest rates is limited by the fact that the
Company's investments bear interest at a fixed rate and the fair value of the
debt is not sensitive to changes in interest rates.
To gauge the duration of the debt instruments, their maturities on a cost basis
are as follows:
Other Price Risk
Other price risk is the risk that the market value or future cash flows of
financial instruments will fluctuate because of changes in market prices other
than those arising from interest rate risk. It represents the potential loss
that the Company might suffer through holding interests in unquoted private
companies whose value may fluctuate and which may be difficult to value or to
realise.
All investments represent a risk of loss of capital. The Investment Managers
moderate this risk through a careful selection and diversification of securities
and other financial instruments within the limits of the Company's investment
objective and strategy, as well as by establishing a clear exit strategy for all
potential investments. The Company's overall market positions are monitored on a
quarterly basis by the portfolio manager. Financial instruments held by the
Company are susceptible to market price risk arising from uncertainties about
future prices of the instruments. If the value of the Company's investment
portfolio were to decline by 10%, it would represent a loss of $8.2 million.
This would cause the net asset value of the Company to fall by 9.5%.
Currency Risk
Currency risk is the risk that the value of a financial instrument will
fluctuate due to changes in foreign exchange rates.
Currency risk arises from financial instruments (including cash and cash
equivalents) that are denominated in a currency other than United States
Dollars, which represents the functional currency of the Company. The Company
has 0.5% of its investments not denominated in the functional currency. As such,
currency risk is not considered to be a material risk to the Company.
+--------------------+----------------+------------+
| Debt Instruments | | |
+--------------------+----------------+------------+
| by Maturity Date* | 2009 Cost | 2008 |
| | | Cost |
+--------------------+----------------+------------+
| | US$ | US$ |
| | Equivalent | Equivalent |
+--------------------+----------------+------------+
| Less than 1 year | 1,489,045 | - |
+--------------------+----------------+------------+
| 1 - 3 years | - | 845,491 |
+--------------------+----------------+------------+
| 3 - 5 years | 59,491,919 | 49,165,229 |
+--------------------+----------------+------------+
| Greater than 5 | - | 2,000,000 |
| years | | |
+--------------------+----------------+------------+
| Total | 60,980,964 | 52,010,720 |
+--------------------+----------------+------------+
| | | |
+--------------------+----------------+------------+
| * Excludes cash and cash equivalents and |
| preferred shares, as applicable |
+--------------------+----------------+------------+
14. CAPITAL MANAGEMENT
The Company considers Shareholders' Equity to be its capital, The Company does
not have any externally imposed capital requirements. The capital is to be used
by the Company to invest in secured convertible debentures, convertible loans
and promissory notes worldwide. The Company though does have specific
restrictions on how it can deploy its shareholders' capital; the Company will
not invest more than 30% of its total assets in any one company (this
restriction is calculated at the time of the relevant investments on a cost
basis).
The investment objective of the Company is to seek long-term capital
appreciation with a target return of 20% over a five-year time horizon. The
Company aims to deliver its objective by investing available cash and generating
portfolio interest income while maintaining sufficient liquidity to meet ongoing
expenses and dividend payments.
15. SUBSEQUENT EVENTS
Dividends of $0.10 per participating redeemable preference share were paid on 5
February 2010 to shareholders on record of 29 January 2010, and on 23 April 2010
to shareholders on record of 6 April 2010.
Between 24 February 2010 and 1 March 2010, the Company completed an additional
issuance of 476,458 participating redeemable preference shares at a price of
US$10.12 per share for total gross consideration proceeds of $4,821,755. The
purpose of the share offering is to make further investments in Strata Energy
Services Inc.
On 10 March 2010, the Company made an additional investment in Strata Energy
Services Inc. in the amount of $4,850,000 in the form of a six-month 12%
promissory note.
On 15 April 2010, an additional 493,180 participating redeemable preferred
shares were issued upon the exercise of warrants at a price of US$10.00 per
preferred share, for gross proceeds of $4,931,800. The remaining unexercised
warrants have lapsed.
- Ends-
This information is provided by RNS
The company news service from the London Stock Exchange
END
FR UOUBRRBAVRAR
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