TechFinancials Inc. - Preliminary Results
RNS Number : 7338B
TechFinancials Inc.
06 April 2017
 

6 April 2017

TechFinancials Inc.

("TechFinancials", the "Company", or the "Group")

Preliminary Results for the year ended 31 December 2016

TechFinancials Inc. (AIM: TECH), a leading technology provider to financial trading brokers, today announces its results for the year ended 31 December 2016.

 

The Company also announces that in accordance with AIM Rule 20, electronic copies of its Annual Report and Accounts for the year ended 31 December 2016 are available from the Company's investor relations website at https://group.techfinancials.com/. Hard copies of the 2016 Annual Report and Accounts will be posted to shareholders on Wednesday 12th April.

 

Financial Highlights

 

·     Revenue increased by 57% to US$21.3 million (2015: US$13.6 million)

·     Core software licensing revenue increased by 22% to US$10.4 million (2015: US$8.6 million)

·     Trading platform revenues increased by 117% to US$10.9 million (2015: US$5.0 million)

·     Revenue from DragonFinancials of UD$9.3 million; net profit of US$5.6 million - Company holds a 51% stake in DragonFinancials

·     Net cash generated from operating activities increased to US$5.9 million (2015: US$0.1 million)

·     Gross margins increased to 78% (2015: 71%)

·     Operating profit increased to US$5.0 million (2015: operating loss US$0.1 million)

·     EBITDA attributable to shareholders was US$2.8 million (2015: US$0.6 million)

·     Pre-tax profit attributable to shareholders was US$1.3 million (2015: pre-tax loss of US$0.4 million)

·     Strong cash position of US$7.7 million as at 31 December 2016 (2015: US$3.4 million)

·     Basic earnings per share ('EPS') have increased to a profit of US$ 1.72 cents in 2016 from a loss of US$ 0.73 cents in 2015

·     DragonFinancials, the Company's 51% subsidiary, paid an interim dividend of US$2.0 million in November 2016 and an additional final dividend of US$3.0 million was paid in March 2017

·     Additional consideration of US$1.54 million payable in shares to owners of Optionfortune (non-controlling interest holders of TechFinancials) based on DragonFinancials' results for 2016 - contingent consideration of US$4.53 million payable on results for 2017   

 

Operational Highlights 

 

Software Licensing (B2B)

 

·     B2B software licensing division continued its strong performance with significant revenue growth

·     Launch of an add-on Contract For Difference ("CFD") trading platform in the second half of 2016

·     Continued international expansion - major push into the Asia Pacific region opening Chinese office to expand B2B services to China

·     R&D focused on solutions for Asian markets and on development of products to meet regulatory changes.

·     Strengthened R&D team in Ukraine

 

Trading Platform (B2C)

 

·     Returned to profitability in the B2C division through the successful integration and operation of DragonFinancials, a new B2C trading platform focused on the Asia Pacific Region

 

Asaf Lahav, Group Chief Executive Officer of TechFinancials, commented:

 

"The Group enjoyed a good year in which we have seen profitability restored as a result of the decisions we took as a Board to diversify our product offering and focus on high growth markets such as Asia

 

"However, going forwards we expect 2017 will be challenging due to the loss of our largest customer and the uncertain and tightening regulatory environment particularly in Europe. We anticipate these regulatory changes will have an impact on the B2B performance for the rest of 2017, both on its revenues and on earnings.

 

"Our focus in 2017 will be on mitigating the loss of our largest customer and adapting to the tougher regulatory environment by diversifying our product offering with the introduction of Forex and CFD online trading solutions and with plans to introduce further products in coming years. We will also build on the success achieved by our B2C offering and focus on Asia.

 

"We do feel that ultimately the regulatory changes will strengthen the industry and that there will be clarity by the end of 2017, and once that occurs, with a strong balance sheet, we will be well positioned to serve the market from 2018 onwards."

 

 

 

For further information:

TechFinancials, Inc.


Asaf Lahav, Group Chief Executive Officer


Yuval Tovias, Chief Financial Officer

Jeremy Lange, Chief Operations Officer / Investor Relations

www.group.techfinancials.com

 

Grant Thornton UK LLP (Nominated Adviser)


Colin Aaronson / Samantha Harrison / Carolyn Sansom

Tel: +44 (0) 20 7383 5100

 

Northland Capital Partners Limited (Broker)


Patrick Claridge / David Hignell / John Howes

Tel: +44 (0) 20 3861 6625

 

Peterhouse Corporate Finance (Joint Broker)


Lucy Williams / Eran Zucker

Tel: +44 (0) 20 7469 0932

 

Yellow Jersey PR Limited (Media Relations)

Felicity Winkles / Alistair de Kare-Silver

 

 

Tel: +44 (0) 7825 916 715

 

About TechFinancials 

 

TechFinancials plc (AIM: TECH) is a leading innovator and supplier of financial trading solutions for retail clients. The Group operates a B2B division licensing white label software solutions to online brokers. In addition, the Company operates a B2C division operating trading platforms worldwide and incorporating a strategic joint venture focusing on solutions for traders in the Asia Pacific region.

 

 

Further information can be found at http://techfinancials.com.

 

 

Chairman's Statement

 

I am delighted to report that we achieved record revenues and profitability in 2016. Overall, revenues have increased by 57% and profits attributable to shareholders were US$1.2 million against a loss of US$0.5 million in 2015. EBITDA attributable to shareholders grew from US$0.6 million in 2015 to US$2.8 million in 2016.

 

During the year, we successfully implemented many of our international expansion plans which have transformed our business and financial performance. Our strategy has been focused on the high growth markets in Asia where we successfully integrated our investment in DragonFinancials.

 

DragonFinancials is a partnership with the owners of Optionfortune Trade Limited to operate our B2C trading platform focused on the Asia Pacific region and the partnership has exceeded our expectations in its first year of operation. As a result, contingent consideration is payable as outlined in Note 8. The performance of DragonFinancials has restored the B2C division to profitability and generated excellent cash flows for the Group.

 

Our B2B software licensing business has continued to grow its revenues although EBITDA has declined as the Company has invested in building for the long-term. The simplified Forex platform and mobile and tablet trading solutions have continued to support growth across the business. In the second half of the year, we launched the CFD platform, our third trading platform, which expands our offering to spot traders.

 

An analysis of the financial performance of each segment of the Group's business is provided in Note 9 to the financial statements.

 

The improvement in the Group's financial performance has benefitted our cash flows and at the year-end our cash balances stood at US$7.7 million. These positive cash flows have supported a continued, and indeed enhanced, programme of R&D expenditure which, the Board believes, should support future revenue and growth opportunities.

 

We have completed our trading solution to comply with regulations in the Japanese market. At this stage the marketing of this product has been delayed until the Company decides whether to allocate resources to the Japanese market based on its prospects compared to alternative markets. Much of the R&D and technology development work is being applied to meet the European regulations likely to be adopted by CySEC and the FCA.

 

In the US, we had hoped to complete our trading solution to comply with US regulations in 2016. This has been delayed due to continuous discussions and work with Cantor Exchange around the business model that should apply to this market; however, like our Japanese project much of our development work is being applied to meet the European regulations likely to be adopted by CySEC and the FCA. This along with the Japanese trading solution developed should create further revenue opportunities toward the end of 2017 or at the beginning of 2018.

 

Regulation

 

The regulatory environment surrounding the marketing of binary options, forex and CFD trading in a number of countries is tightening and remains uncertain. Regulators in Europe have published consultation papers and until the conclusions are published the uncertainty will remain. It is also likely that regulatory changes will have an impact on our product offerings.

 

We expect this uncertainty will continue to be a challenge for the industry as a whole in 2017. As a Company we seek to operate to the highest regulatory standards and we will continue to work with the regulators and respond to consultation papers accordingly. As clarity is provided on various consultation papers we will update the market as appropriate.

 

In light of this we will continue in 2017 as we did in 2016 to take steps to mitigate the impact of these regulatory changes on our business. We have focused heavily on building and enhancing our technologies to the highest levels of compliance and diversifying and developing our product offering with Forex and CFD online trading solutions with plans to introduce further products in the coming years such as fixed strike options. We have enlarged our R&D team in Ukraine to support the ongoing adjustments to products as regulation tightens and to enhance the growth of the Asian markets through solutions that are relevant to this region.

 

Margins

 

We have once again been able to improve margins through control of expenditure and by efficiently controlling the cost of customer acquisitions. I am pleased to say that the improvement seen in the first half of the year continued in the second half of 2016. Our investment in new technologies has been an important element in improving our customers' user experience as well as enhancing operational efficiencies. The launch of the CFD platform should also have a beneficial impact on future margins.

 

Business summary and operational review

 

B2B

 

I am pleased to report that our core software licensing business enjoyed further strong growth this year, with revenues increasing by 22% to US$10.5 million, and revenues on a standalone basis increased by 27% to US$11.5 million. The simplified forex platform and mobile and tablet trading solutions which were introduced in 2015 have both performed strongly in 2016 and the launch of the add-on CFD platform in the second half of 2016 should contribute to revenues in 2017. Our focus on the Asian markets has proved to be a fruitful one and helped to drive higher revenues.

 

Our increasingly diversified product offering and geographic spread have helped us to continue to grow our customer base. The regulatory environment however, remains uncertain and challenging and we will need to be innovative and proactive in order to respond to these changes and to maintain our momentum and competitive edge. We have continued to invest in our R&D team and a programme of new products. Our R&D expenditure increased by 46% to US$3.3 million in 2016.

 

We have also increased our investment in selling and marketing activity and staff levels to support long term-growth. In the short term, these increased levels of expenditure have impacted the profitability of the B2B division, with EBITDA attributed to shareholders on a standalone basis falling from US$2.4 million in 2015 to US$1.3 million in 2016.

 

Whilst we have made progress on completing our US and Japanese compliant trading solutions, we have delayed their launch. The development work is instead being applied to our European operations in order for us to move quickly to adapt to changes likely to be adopted by CySEC and the FCA. We believe this will bring further growth opportunities.  

 

B2C

 

The B2C business has been transformed by the establishment of DragonFinancials, a partnership with the owners of Optionfortune, a B2C binary options trading platform focused on the Asia Pacific region, which began operating in January 2016.

 

Overall, revenues have increased by 117% to US$10.9 million. This includes revenues of US$9.3 million from DragonFinancials which commenced its trading platform activity in January 2016. Following a loss in 2015, the business has been transformed by the establishment of DragonFinancials. With increased operational efficiencies and careful control of overheads, the division achieved positive EBITDA attributed to shareholders of US1.5 million against negative EBITDA attributed to shareholders of US$1.8 million in 2015.

 

Under the terms of the agreement with the owners of Optionfortune, an additional consideration payment of US$1.54 million is payable in shares in respect of the results of DragonFinancials in 2016. A total of 3,868,615 Techfinancials shares were placed in escrow pending finalisation of the financial results of DragonFinancials and were transferred to the owners of Optionfortune on 22 March 2017.   

 

In addition, as part of the agreed contingent consideration arrangements, Techfinancials will make an additional payment of US$4.528 million, at its option, in either cash or shares calculated at a minimum of 27p per share, provided that DragonFinancials' net profit in the calendar year 2017 is at least US$4.176 million, representing 90% of the Eligible Profit achieved in 2016. The Company has therefore recognised a contingent consideration payable of US$4.528 million (see Note 8). Goodwill of US$5.0 million has been recognised as a non-current asset in relation to these arrangements.

 

In February 2016, we entered into an agreement with IBID, a company specialising in developing high growth online solutions. We established a new company, IBID Financials Ltd. ("the Partner"), focused on the European regulated markets. Our aim was to integrate Techfinancials' trading platform into the Partner's online marketing systems. However, in July 2016, the contract was cancelled as a result of breaches of the agreement by the Partner.

 

The Board does however remain committed to the European regulated markets and is continuously seeking alternative solutions to develop this market.

 

Dividends

 

The Board and Management's policy is to pay a progressive dividend. However, in light of the near term challenges as a result of the regulatory headwinds the Board will not be recommending a final dividend for FY2016. The Board's intention is to resume dividend payments when it is prudent to do so.

 

Outlook and current trading

 

The Group enjoyed a good year in which we have seen profitability restored as a result of the decisions we took as a Board to diversify our product offering and focus on high growth markets such as Asia.  This could not have been achieved without the skill, passion and hard work of all of our staff.  On behalf of the Board, I would like to thank them for their efforts during the year.

 

In February 2017, the Company received a notice of termination from its largest software licensee Richfield Capital, owner of www.24option.com ("Richfield"), to its current agreement with the Group with effect from 1 April 2017. While Richfield migrated most of its trading activity to its in-house system, as of the report date Richfield Capital continues trading activities in low volumes using the Company's product. The Company has agreed with Richfield effective 1 April 2017, the terms of a new license agreement that will support this decreased level of trading that Richfield performs on the Company's system.

 

Performance during the first quarter of 2017 is in line with management expectations. However, 2017 will be challenging due to the loss of the Group's largest customer and the uncertain and tightening regulatory environment particularly in Europe, which has already caused some of the Company's licensees to halt their operations. We anticipate business owners may choose to postpone additional or new investments until the results of regulatory consultations are published and clarity is restored. The Company believes that regulatory changes may also occur in the Asian market. We anticipate these changes will have an impact on the B2B performance for the rest of 2017, both on its revenues and on earnings.

 

Our focus in 2017 will be on mitigating the loss of our largest customer and adapting to the tougher regulatory environment by diversifying our product offering with the introduction of Forex and CFD online trading solutions and with plans to introduce further products in coming years. As a result of these product changes, we have become a provider of diversified online trading solutions rather than a binary options business. We will also build on the success achieved by our B2C offering and focus on Asia.

 

The Company's balance sheet is strong with US$7.7 million of cash as at 31 December 2016, and this allows us to plan for the long-term.

 

We do feel that ultimately the regulatory changes will strengthen the industry and that there will be clarity by the end of 2017, and once that occurs we will be well positioned to serve the market from 2018 onwards.

 

We remain committed to creating value for shareholders and I would like to thank our shareholders for their continued support.

 

We look forward to updating the market on our progress in due course. 

 

Christopher Bell

Independent Non-Executive Chairman

6 April 2017

 

 

Strategic Report

 

Financial Results

 

The Group generated revenues of US$21.3 million in the year ended 31 December 2016, (2015: US$13.6 million), a 57% increase from the prior year. The increase in revenues has led to a turnaround in results with the Group recording an operating profit of US$5.0 million (2015: operating loss of US$0.1 million). EBITDA attributable to shareholders has grown from US$0.6 million in 2015 to US$2.8 million in 2016.

 

The Group has continued to grow its core software licensing revenues which have increased from US$8.6 million to US$10.5 million in 2016, an increase of 22% on the previous year (on a standalone basis revenues have increased from US$9.1 million to US$11.5 million in 2016, a growth rate of 27%).

 

B2B revenue growth has been driven mainly by an increase in revenues from existing customers rather than an increase in the number of active brands using Techfinancials' platform. 

 

Revenues from the Company's B2C division have also grown, from US$5.0 million in 2015 to US$10.9 million in 2016, an increase of 117%, reversing the decline in 2015. This growth has been achieved through the successful integration of DragonFinancials, which runs our B2C trading platform in the Asia Pacific region. DragonFinancials started operations in January 2016 and produced revenue of US$9.3 million in its first year. The successful integration of DragonFinancials, coupled with improved operational and marketing efficiencies in Asia have transformed the financial performance of the division. This success means that additional contingent consideration is payable as outlined in Note 8.

 

Margins have also increased, reflecting the operational and marketing efficiencies implemented in 2016. The improvement in gross margins seen in the interim results has continued. Overall, the Group achieved a full year gross margin of 78%, up from 71% in 2015. B2C margins have responded positively to the focus on the Asia Pacific region where operating costs are lower than in Europe. Margins on a standalone basis have increased from 59.3% in 2015 to 75.3% in 2016. B2B margins on a standalone basis have improved from 73.0% to 73.4%.

 

Overall, profitability has benefitted from the increased level of revenues and margins and a semi-variable overhead cost structure which has seen overheads grow less quickly than revenues. In particular, whilst selling and marketing costs have remained stable at US$4.2 million, R&D expenditure increased by 47% to US$3.3 million, reflecting a continued focus on product innovation, regulation and improving customer experience. The Company successfully launched its CFD trading platform in the second half of 2016.

 

The amount of R&D expenditure capitalised was US$0.3 million compared with US$0.8 million in 2015. Further development expenditure was incurred on the CFD project and on trading solutions for the Asian markets. Further details are provided in Note 3 to the Financial Statements.

 

Administration costs increased by 27% to US$4.1 million which reflects performance related bonuses to staff and management, additional overheads to support the Group's geographical expansion and an increase in bad debts from US$332,000 to US$541,000.

 

The Group recognised a finance charge of US$558,000 in respect of the contingent consideration payable to the owners of Optionfortune as more fully described in Note 8.

 

Notwithstanding these increases in expenditure, the combination of increased revenues and enhanced margins has had a significant impact on the bottom line. The result before tax has improved from a pre-tax loss of US$0.4 million in 2015 to a pre-tax profit of US$4.1 million in 2016.

 

The increase in B2C trading platform revenues have resulted in positive EBITDA attributed to shareholders for the division of US$1.5 million on a standalone basis compared with a loss of US$1.8 million on standalone basis in 2015. The lower costs of operating in Asia have also contributed to improvement in profitability.

 

B2B licence income on a standalone basis has produced US$1.3 million of EBITDA attributed to shareholders compared with US$2.4 million in 2015. Increased R&D expenditure to support future growth, as well as higher selling, marketing and administration costs have offset the growth in revenues.

 

Detailed information on the financial performance of each segment is provided in Note 9 to the financial statements.

 

There is a tax expense of US$136,000 in 2016 (2015: US$100,000). A majority of the Group's profits have not been taxable as the profits generated by DragonFinancials are sourced from the Seychelles and are not subject to tax.  In Israel, the Group is taxable at a rate of 25.0% of assessable profits (2015: 26.5%) while in Cyprus the statutory rate of tax is 12.5%. Further details are provided in Note 6.

 

Basic earnings per share ('EPS') have increased from a loss of US$ 0.73 cents in 2015 to a profit of US$ 1.72 cents in 2016. On a diluted basis, EPS increased from a loss of US$ 0.73 cents in 2015 to a profit of US$ 1.70 cents.

 

The Group generated net cash from operating activities of US$5.9 million compared with US$0.1 million in 2015. This level of cash generation has allowed the Group to continue its investment in new products and services and regulatory infrastructure; cash outflows from investing activities was US$0.5 million (2015: US$1.3 million). 

 

The Group has continued to place great importance on strong controls over working capital and the collection of cash from operators. Debtor days at the end of 2016 were 28 days compared with 27 days at the end of 2015.

 

Cash outflows from financing activities were US$1.1 million compared with an inflow of US$3.1 million in 2015 when the Company received proceeds from its admission to AIM.

 

The Group's cash balances at the end of 2016 totalled US$7.7 million (2014: US$3.4 million).

 

Operations

 

The Group has benefitted from its R&D activities of recent years and its strategic focus on Asia during the past year.  The investment in DragonFinancials has transformed the B2C online trading platform and whilst the regulatory environment continues to tighten, the Group is well placed to meet these challenges.

 

We have launched our CFD trading platform and and are developing online trading solutions for the Asian markets. Our Asian focus will continue as we see considerable growth opportunities in the region.

 

Whilst our agreement with IBID Financials was not successfully concluded, we continue to explore alternative solutions to the European regulated markets.

 

We have delayed the completion of our trading solution to comply with US regulations and the marketing of the trading solution to comply with Japanese regulations, but the development work on these solutions should enable us to meet increased regulations in Europe where further changes are anticipated from CySEC and the FCA.

 

As previously noted, the Company's largest software licensee will terminate its current agreement with the Group with effect from 1 April 2017. This will have a negative impact on financial performance of the B2B segment but the Board has actively planned for this loss and its strategic focus on new revenue sources should serve to mitigate the shortfall.

 

Techfinancials will continue to develop new products and invest in its highly experienced R&D team. The regulatory and competitive environment is evolving quickly and the Board will seek to maximise the opportunities that come from these changes. Our cash reserves and strong balance sheet mean that we are well placed to capture growth from new products and markets.

 

The Directors have continued to build infrastructure to support the Group's long-term growth plans whilst keeping day-to-day overhead costs under control.

 

Key Performance Indicators

 

The Board monitors key performance indicators ('KPIs') on a monthly basis. The Board considers that the most important ones for the success of the business are:

 

·      Numbers of licensees using the Group's software: 34 (2015: 56). Whilst the number of brands has fallen due to the tightened regulations around the world, revenues per brand have grown and resulted in a 26% increase in licence revenues. 

·      Total number of trades executed through its licensees: 20.98 million (2015: 16.96 million).

·      Total revenues: US$21.3 million (2015: US$13.6 million)

·      EBITDA attributed to shareholders: US$2.8 million (2015: US$0.6 million)

·      Cash generation from operating activities: US$5.9 million (2015: US$0.078 million)

 

The Company's systems track trading volumes on a daily basis. These statistics provide an early and reliable indicator of current performance of the trading platform. Profitability of the business, with its relatively low fixed cost base, is managed primarily via a review of revenue and margins. Working capital is reviewed by measures of absolute amounts and debtor days.

 

Growth Strategy and Outlook

 

The Group's near term goals are to seek partners for its B2C division for expansion in Europe, diversify our product offering and build on the success achieved by our B2C oering in Asia. The Company believes that this strategy can successfully mitigate the effects of the loss of its largest B2B customer. We have successfully integrated DragonFinancials and will continue our focus on the high growth potential of Asian markets. 

 

We will continue to launch new trading platforms and other products to meet the changing demands of our global customer base. We will continue to target markets with high growth potential and develop solutions for newly regulated jurisdictions.

 

Investment in our brand is vital and our marketing activities will seek to strengthen further the Company's brand awareness. As the regulatory landscape continues to change, we have been diversifying our product offering with Forex and CFD online trading solutions with plans to introduce further products in coming years. As a result, we have become a provider of diversified online trading solutions rather than a binary options business. 

 

The anticipated changes coming from the European regulators have created an uncertainty in the market, leading business owners to postpone additional or new investments until the new regulatory requirements are published and, as a result, will result in lower short term demand for the Company's products in the EU territory. However, the Company believes that this situation will be resolved towards the end of the year, and is in process of making changes to its product line, so as to be well positioned to serve the market towards 2018.

 

We have achieved a significant improvement in financial performance in 2016 and are working on alternative solutions to meet the challenges that lie ahead in 2017. Regulatory challenges abound and whilst 2017 is likely to prove to be a challenging year, we believe that in the longer term the tightening of regulatory procedures governing financial trading will prove to be an opportunity to the Company.

 

We remain confident about the long-term prospects of the Group and continue to invest for the future and adapt to the evolving regulatory environment.

 

Asaf Lahav

Chief Executive Officer

6 April 2017

 

 

 

 

 

 

 

Consolidated Statement of Comprehensive Income
 
For the year ended 31 December 2016

 

 

 

 

 



2016

2015


Note

US$'000

US$'000





Revenue


21,325

13,575

Cost of sales


(4,675)

(3,983)





Gross profit


16,650

9,592





Other income


2

-

Research and development


(3,336)

(2,276)

Selling and marketing expenses


(4,202)

(4,247)

Administrative expenses


(4,077)

(3,214)

Operating profit/(loss)


5,037

(145)









Bank fee


(141)

(66)

Foreign exchange loss


(285)

(151)

Finance cost of contingent consideration


(558)

-

Other financials expenses


(2)

(14)

Financing expenses


(986)

(231)





Profit/ (loss) before taxation


4,051

(376)





Income tax expense

6

(136)

(100)

Profit/(loss) after taxation


3,915

(476)





Other comprehensive income


-

-





Total comprehensive income


3,915

(476)





Profit/ (loss) attributeable to:




Owners of the Company


1,179

(476)

Non-controlling interest

8

2,736

-

Profit (loss) for the period


3,915

(476)





Earnings per share attributable to owners of the parent during the year:




Basic (Cents USD)

7

1.72

(0. 73)

Diluted (Cents USD)

7

1.70

(0. 73)





 

 

 

 

 

 

 

 

Consolidated Statement of financial position

 

As at 31 December 2016                                                                                                                                         

 



31 December

31 December



2016

2015


Note

US$'000

US$'000

Non-current assets




Intangible assets

3

7,843

2,821

Property and equipment


510

471

Other long term assets


42

-



8,395

3,292

Current assets




Trade and other receivables


2,121

1,627

Restricted bank deposits


279

203

Cash and bank balances


7,651

3,391



10,051

5,221

Total Assets


18,446

8,513 

Current liabilities




Trade and other payables


4,546

1,474

Income tax payable


138

142



4,684

1,616





Non-current liabilities




Contingent consideration


4,058

-

Due to shareholders (nontrade)


-

281



4,058

281





Share capital

4

55

36

Share premium account


7,500

5,979

Treasury shares


(1,540)

-

Share-based payment reserve

5

925

877

Accumulated profits / (losses)


1,008

(276)

Equity attributable to owners of the Company


7,948

6,616

Non-controlling interests


1,756

-

Total equity


9,704

6,616



 

 

Total Equity and Liabilities


18,446

8,513





 

 

 

 

 

Consolidated statements of changes in equity

 

For the year ended 31 December 2016


Share capital- (Note 4)

Share

Premium-(Note 4)

Treasury Shares-(Note 4)

Share based payment reserve-(Note 5)

Accumulated profits/

(losses)

(Note 4)

Total

Non -controlling interests-

(Note 8)

Total


US$'000

US$'000

US$'000

US$'000

US$'000

US$'000

US$'000

US$'000










Balance at 1 January 2015

28

2,753

-

557

372

3,710

-

3,710










Total comprehensive income for the year

-

-

-

-

(476)

(476)

-

(476)

Dividends to owners

-

-

-

-

(172)

(172)

-

(172)

Share based payment

-

-

-

320

-

320

-

320

Issue of shares

8

3,226

-

-

-

3,234

-

3,234




























Balance at 31 December 2015

 

36

 

5,979

 

-

 

877

(276)

6,616

 

-

 

6,616










Total comprehensive income for the year

 

-

 

-

-

 

-

 

        1,179

1,179

 

2,736

 

   3,915

Dividends to owners

-

-

-

-

-

-

(980)

(980)

Share based payment

-

-

-

153

-

153

-

153

Transfer of Share based payment reserve on lapsed options

-

-

-

(105)

105

-

-

-

Issue of shares

19

1,521

-

-

-

1,540

-

1,540

Treasury shares

-

-

(1,540)

-

-

(1,540)

-

(1,540)










Balance at 31 December 2016

 

55

 

7,500

 

(1,540)

 

925

 

1,008

7,948

 

1,756

 

9,704

 

 

Consolidated statements of cash flows

 

For the year ended 31 December 2016

 

The consolidated statements of cash flows for the Group for the years ended 31 December 2015 and consolidated for the year ended 31 December 2016 are set out below:

 



Years ended 31 December



2016

2015



US$'000

US$'000





Cash Flows from operating activities



(Loss)/ Profit before tax for the period


4,051

(376)

Adjustment for:




Profit on disposal of property and equipment


3

2

Amortization of intangible assets

3

352

330

Depreciation of property and equipment


100

70





Share option charge

4

153

320

Operating cash flows before movements in working capital




(Increase)/decrease in trade and other receivables


(494)

(214)

(Increase) in long term receivables


(42)

-

(Decrease)/ increase in trade and other payables


1,799

(42)

Interest Expenses


2

-

Income tax paid


-

(12)

Net cash generated/ (used) from operating activities


5,924

78





Cash flows from investing activities



Proceeds from disposal of property, plant and equipment


10

15

Increase of restricted bank deposits


(76)

(163)

Development of intangible assets

3.1

(334)

(833)

Acquisition of property, plant and equipment


(146)

(344)

Net cash used in investing activities


(546)

(1,325)





Cash flows from financing activities



Interest Paid


(2)

-

Dividends paid


(980)

(172)

Repayment of borrowings


(92)

-

Investment in Equity


-

3,226

Net cash generated/(used) in financing activities


(1,074)

3,054





Net increase/ (decrease) in cash and cash equivalents


4,304

1,807

Cash and equivalents at beginning of period


3,391

1,663

Effect of changes in exchange rates on Cash


(44)

(79)

Cash and equivalents at end of period


7,651

3,391

 



NOTES TO THE FINANCIAL STATEMENTS

 

1.         General Information

 

Techfinancials Inc (the "Company") and its subsidiaries (together, the "Group") is engaged in the development and licensing of financials trading platforms to businesses and the provision of investment services through its trading platform. The Financial Statements present the consolidated results of the Group for each of the years ended 31 December 2016 and 2015.

 

The Group

 

Techfinancials Inc. (formerly Mika Holdings Inc.), a company incorporated in the British Virgin Islands on 16 June 2009 as a British Virgin Island company under the BVI Business Companies Act, 2004, is the holding company for the Group. The Company is listed on AIM. The Financial Statements of the Group includes the Financial Statements of B.O. TradeFinancials Limited a Cyprus Investment Firm (''CIF'') in accordance with license no. 216/13 granted by the Cyprus Securities and Exchange Commission (''CySEC'') on 27 September 2013, MarketFinancials Limited a company regulated by the Financial Services Authority in Seychelles under the license SD006 issued on 21 October 2014,  Techfinancials (Israel) 2014 Ltd, an Israeli incorporated company, DragonFinancials Limited a company incorporated on 27 October 2015 in Seychelles owned 51% by Techfinancials, Techfinancials Asia a dormant company incorporated in Hong Kong and Slidepoint Trading Limited, a dormant company incorporated in Cyprus. The companies within the Group are set out below, all of which are private companies limited by shares.

 

Registered office

County of registration or incorporation

percentage of ownership

Principal activity

Techfinancials, Inc.

British Virgin Islands


Development and licensing of financial trading platforms.

 

B.O. TradeFinancials Limited.

Cyprus

100%

The provision of investment services, being the operation of the OptionFair trading platform.

 

Techfinancials (Israel) 2014 Ltd.

Israel

100%

The provision of services to the Group from November 2014

 

MarketFinancials Ltd.

 

Seychelles

100%

Liquidity provider since January 2015. Providing Binary Option and Forex market maker services and risk management to the Group

DragonFinancials Ltd.

Seychelles

51%

The provision of marketing services, being the operation of the Option33 trading platform from January 2016.

Slidpoint Trading Ltd

Cyprus

100%

Dormant

Techfinancials Asia

Hong Kong

100%

Dormant

Capital Financials Ltd

Vanuatu

100%

Dormant

 

 

 



 

The registered offices for the companies within the Group are as follows:

 

Techfinancials, Inc.:                                           Craigmuir Chambers, PO Box 71, Road Town,
                                                                                   VG1110 Tortola, British Virgin Islands.

 

B.O.TradeFinancials Limited:                         1, Kosta Hadjikakou, Kyriakos Tower, 1st Floor

4107, Agios Athanasios, Limassol, Cyprus.

 

Techfinancials (2014) Israel Ltd:                    3 Hamada St. Herzliya, Israel.

 

DragonFinancials Ltd:                                       Francis Rachel St. Victoria, Mahe,
                                                                                   Seychelles

 

MarketFinancials Ltd:                                       Suite 3, Global Village, Jivan's Complex, Mont Fleuri,    
                                                                                    Mahe, Seychelles

 

Slidepoint Trading Ltd.:                                    6 Tassou Papadopoulou, office/flat 22, 2373 Ag.
                                                                                    Dometios, Nicosia,
Cyprus

 

Techfinancials Asia Ltd.:                                   Room 506A5/F, Tower 1, Admiralty Centre, 18
                                                                                    Harcourt Road, Hong Kong

 

Capital Financials Ltd.;                                       S.I.P Building, Rue Pasteur, Port Vila, Vanuatu

 

2.         Summary of significant accounting policies

 

Basis of preparation

 

The consolidated Financial Statements have been prepared in accordance with International Financial Reporting Standards as adopted by the European Union ("IFRS") issued by the International Accounting Standards Board ("IASB") including related interpretations issued by the International Financial Reporting Interpretations Committee ("IFRIC"). The consolidated Financial Statements have been prepared under the historical cost convention, as modified by the revaluation of financials assets and liabilities at fair value through the profit and loss.

 

The individual Financial Statements of each Group entity is measured and presented in the currency of the primary economic environment in which the entity operates (its functional currency). The consolidated financial statements are presented in US Dollars, which is the presentational currency for the financial statements, and all values are rounded to the nearest thousand ($000).

 

The preparation of Financial Statements in conformity with IFRS require the use of certain critical accounting estimation. It also requires management to exercise its judgment in the process of applying the Group's accounting policies.

 

Basis of consolidated reporting

 

The financial statements of the subsidiaries are prepared for the same reporting year as the parent Company using consistent accounting policies. Control is achieved where the Group is exposed, or has rights, to variable returns from its involvement with the investee entity and has the ability to

affect these returns through its power over the investee. Control is lost when the Group no longer has rights to variable returns from its involvement with an investee entity and no longer has the ability to affect those returns as it no longer has power over the investee. When control is lost the subsidiaries are de-recognised and no longer consolidated.

The results of subsidiaries acquired or disposed of during the year are included in the Consolidated Statement of Comprehensive Income from the effective date of acquisition or up to the effective date of disposal, as appropriate.

 

The Group uses the acquisition method of accounting to account for business combinations. The consideration transferred for the acquisition of a subsidiary is the fair values of the assets transferred, the liabilities incurred and the equity interests issued by the Group. The consideration transferred includes the fair value of any asset or liability resulting from a contingent consideration agreement. Acquisition related costs are expensed as incurred. Identifiable assets acquired and liabilities and contingent liabilities assumed in a business combination are measured initially at their fair values at the acquisition date. On an acquisition by acquisition basis, the Group recognises any non-controlling interest in the acquiree either at fair value or at the non-controlling interest's proportionate share of the acquiree's net assets.

 

The excess of the consideration transferred, the amount of any non-controlling interest in the acquiree and the acquisition date fair value of any previous equity interest in the acquiree over the fair value of the Group's share of the identifiable net assets acquired is recorded as goodwill. If this is less than the fair value of the net assets of the subsidiary acquired in the case of a bargain purchase, the difference is recognised directly in the Consolidated Statement of Comprehensive Income.

 

Investments in subsidiaries are accounted for at cost less impairment. Acquisition related costs are expressed as incurred. Cost is adjusted to reflect changes in consideration arising from contingent consideration amendments.

 

Inter-company transactions, balances and unrealised gains on transactions between Group companies are eliminated. Unrealised losses are also eliminated. Accounting policies of subsidiaries have been changed where necessary to ensure consistency with the policies adopted by the Group.

 

3.    Intangible assets

 



Year ended 31 December



2016


2015



US$'000


US$'000






Computer software


5


5

Development expenditure recognized as intangible assets


2,798


2,816

Goodwill*


5,040


-

 

 


7,843


2,821

* The amount of goodwill is remeasured and does not correspond to the figures in 2016 interim statements since adjustments to the final valuation of acquisition of DragonFinancials were made, as detailed in Note 8.

 

3.1      Intangible assets - development expenditure and computer software

 


Project A

Project B

Project C

Project D

Project E

Computer Software

Total


US$'000

US$'000

US$'000

US$'000

US$'000

US$'000

US$'000

As at 31 December 2015








Cost








At 1 January 2015

784

858

673

-

-

4

2,319

Additions

-

-

259

359

211

4

833

At 31 December 2015

784

858

932

359

        211

8

3,152









Accumulated amortisation








At 1 January 2015

-

-

-

-

-

1

1

Charge for the year

157

171

-

-

-

2

330

At 31 December 2015

157

171

-

-

-

3

331









Net book value








At 31 December 2015

627

687

932

                359

211

5

2,821

















As at 31 December 2016








Cost








At 1 January 2016

784

858

932

359

211

8

3,152

Additions

-

-

82

87

162

3

334









At 31 December 2016

784

858

1,014

466

373

11

3,486









Accumulated amortisation








At 1 January 2016

157

171

-

-

-

3

331

Charge for the year

157

171

-

-

21

3

352

At 31 December 2016

314

342

-

-

21

6

683









Net book value








At 31 December 2016

470

516

1,014

446

352

5

2,803









 

 

Project A - Forex trading solution.

 

Project B - Mobile and tablet native applications adjusted to different screen sizes.

 

Project C - Trading solution for the US market.

 

Project D - Trading solution for the Japanese market.

 

Project E - Trading solution for CFD.

 

Current estimates of useful economic live of intangible assets are as follows:

 

Development expenditure recognized as intangible assets

5 years

Goodwill

N/A

Computer software

3 years

 

The intangible assets are reviewed for impairment annually and whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable, the recoverable amount of intangible assets is determined based on a value in use calculation using cash flows forecasts derived from the most recent financial model information available.

 

The recoverable amounts of all the above have been determined from value in use calculations based on cash flows projections from formally approved budgets covering a five year period to 31 December 2020. The key assumptions used in these calculations include discount rates and turnover projections. Management estimates the discount rates using pre-tax rates that reflect current market assessments of the time value of money and risks specific to expected future projects.

 

 

Major assumptions are as follows:

 


2016


Project A

Project B

Project C

Project D

Project E

Computer software


US$'000

US$'000

US$'000

US$'000

US$'000

US$'000

Discount rate

-

-

15%

15%

15%

N/A

IRR

-

-

42%

57%

85%

N/A

 

A 25% increase in the discount rate would result in no impairment charge.

 

During 2016 the Company covered all its expenses recognised as intangible assets for projects A and B. 

 

3.2      Intangible assets - Goodwill arose on the acquisition of DragonFinancials Ltd.

 

This assessment of goodwill was done by comparing the gross profit to the value of goodwill for the entity whose acquisition gave rise to the goodwill. (see also Note 8)

 


 

Goodwill

Discount rate on future cash flows

 

40%

 



 

4.                 Share capital

            




As at 31 December




2016


2015

Authorised



Number of Shares


Number of Shares

The Company Ordinary share of US$0.0005



100,000,000


100,000,000

Authorised



100,000,000


100,000,000

                                                                                                                                                                               








As at 31 December




2016


2015

Issued and fully paid



US$'000


US$'000

The Company Ordinary share of US$0.0005



55


36








 

Ordinary shares issued and fully paid   

 



          US$'000

At 1 January 2016


36

Treasury shared issued


19

share based compensation exercise of options


-*

At 31 December 2016


55

 

*less than a thousand

 

Share Capital -Amount subscribed for share at nominal value.

 

Share Premium -Amount subscribed for share capital in exercise of nominal value.

 

Share-based payment reserve-The share-based payments reserve is used to recognise the value of equity-settled share-based payments provided to employees, including key management personnel, as part of their remuneration. Refer to Note 5 for further details of these plans.

 

Treasury Shares-On 8 June 2016, in accordance with the agreement with the owners of Optionfortune Trade Limited, the Company issued and allotted 3,868,615 Ordinary Shares (Treasury Shares) in certificated form in the name of Capita Trust Company Limited A/c 25379, being US$ 1.54 million at 27 pence, which are held in escrow pending the determination of the 2016 results.

 

 

5.                 Share-based payment transactions (Group)

 

During the years ended 31 December 2013 and 31 December 2014, the Group introduced two share-based payment arrangements ("2013 Plan") and ("2014 plan") which are summarised below.

 

Employee Stock Option Plan: 

 


Year ended 31 December 2015


Numbers of Option

Weighted Average Exercise Price (US$)

Balance at beginning of period

3,714,000

0.01

Granted

2,357,440

0.3080

Lapsed during the period

(4,175,160)

0.0645

Balance at end of period

1,896,280

0.0440


 


Year ended 31 December 2016


Numbers of Option

Weighted Average Exercise Price (US$)

Balance at beginning of period

1,896,280

0.0440

Granted

569,800

0.189

Lapsed during the period

(407 ,020)

0.211

Balance at end of period

2,059,060

0.151



 

Type Share Option Plan on behalf of certain senior employees of the Group

 

Date of Grant:                       8 June 2016 (2014 Plan)

Number Granted:                569,800 options to purchase ordinary shares of US$0.0005 each.

Contractual life:                   10 years

Vesting conditions:            330,441 on the first year of grant, 101,010 option a year after the date of grant,             87,628 after two years and 50,721 on the fourth year.

 

Earliest Exercise date:       8 June 2016

Exercise price:                      US$0.189

 

The model inputs for the 2016 grant were:

 

*              share prices at grant date US$0.189

*              weighted average exercise prices of US$ 0.189;

*              expected volatility of 55 per cent;

*              contractual life of 10 years; and

*              a risk-free interest rate of 4.5 per cent.

 

On 8 June 2016 the Company granted 569,800 options respectively, to purchase ordinary shares of the company to 35 employees under a new share-based plan adopted by the board of Directors in November 2014. The options vesting dates ranges from the date of grant and up to 4 years, and are exercisable for a period of 10 years with an exercise price of $0.189 per share.

 

On 11 November 2016, a former employee of the Company exercised 79,845 options pursuant to the 2014 employee share option plan, to acquire 45,329 ordinary shares of US$0.0005 ("Ordinary Shares") in the Company in consideration for the cancellation of the balance of 34,516 options.

 

 

This estimated fair value was calculated by applying a Black-Scholes option pricing model. In the absence of a liquid market for the share capital of the group the expected volatility of its share price is difficult to calculate. Therefore the Directors have considered the expected volatility used by listed entities in similar operating environments to calculate the expected volatility.

 

The expense and equity reserve arising from share based payment transactions recognised in the Year ended 31 December 2015 and 2016 was US$320,000 and US$153,000 respectively.

 

 

6.                 Income tax expenses

 



Years ended 31 December



2016

 

2015



US$'000


US$'000

Current income tax


 136


 100 



 136


 100 






 

A reconciliation of income tax expense applicable to the profit before taxation at the statutory tax rate to the income tax expense/(release) at the effective tax rate of the Group is as follows:

 


Years ended 31 December


2016


2015


US$'000


US$'000





Profit (Loss) before taxation and exceptional loss on group reorganisation.

3,915


(476)





Profit multiplied by standard rate of EIT of 0%

-


-

Effect of:




Different tax rates in different countries

136


100

Israeli tax rates 2015-2016: 26.5% -25%

Cyprus tax rates 2015-2016: 12.5%.





136


100





 

7.                 Earnings per share

 

The calculation of earnings per share is based on the following earnings and number of shares:

 



Years ended 31 December









2016


2015



US$'000


US$'000






Profit/(loss) attributable to equity holders

1,179


(476)

Weighted average number of shares basic*

68,634,680


65,494,411

 

 

 

Earnings/(loss) per share basic

0.0172


(0.0073)









Weighted average number of shares diluted

69,334,680


65,494,411







 

Earnings/(loss) per share diluted


0.0170


(0.0073)

 

*Including treasury shares held in escrow (see Note 4).

 

The difference between basic and diluted earnings per share is due to shared based compensation transaction. (see Note 5)

 

8.                 Business acquisition

 

On 20 October 2015, the Company entered into an agreement with the owners of Optionfortune Trade Limited, a company registered in Hong Kong ("Optionfortune owners") to operate a B2C binary options trading platform focused on the Asia Pacific region.

 

Under the terms of the agreement a new business entity, DragonFinancials Ltd, was incorporated, and is owned 51% by Techfinancials and 49% by Optionfortune owners.

 

On 1 January 2016 (the closing date) DragonFinancials started its trading platform activity.

 

Under the terms of the agreement on 22 March 2017, an amount of 3,868,615 Techfinancials shares, worth US$1.54 million, previously held in escrow, were transferred to the owners of Optionfortune.

 

Furthermore Techfinancials will make an additional payment, at its option, in either shares or cash worth of US$4.528 million, provided that DragonFinancials' net profit in the calendar year 2017 will be at least US$4.176 million, representing 90% of the net profit Eligible Profit achieved in 2016.

 

The estimates of the fair value of the assets acquired based on management assumptions:

 

Fair value of consideration:

         US$5.040 million

Acquired:


Assets:


Account receivable

         $0.2 million

Liabilities:


Trade payable

           ($0.2 million)



Net Assets acquired

US$NIL

Goodwill

        US$5.040 million

 



 

The Contingent consideration from this agreement amounts to US$5.040 million consisting of:

 



Period ended

31 December 2016



US$'000

Current liabilities - Value of consideration due to Optionfortune owners as a result of DragonFinancials milestone achievement in the calendar year 2016.

 


 

 

1,540

Long term liabilities- Assuming that profits in 2017 are at least 90% of the Eligible Profit of US$4.640 million in 2016. Long term liability represents the amount of US$4.528 million discounted at 6% over a period of one year.

 


 

 

 

4,058

Total Contingent liabilities*


US$5.598 million

 

* The difference of US$0.558 million between the contingent consideration and the contingent liabilities represents the PV as of 1 January 2016 discounted at 6% over a period of one year.

 

9.                 Segment Information

 

Business segment

 

IFRS 8 requires operation segments to be identified at the basis of internal report about component of the Group that are regularly reviewed by the Chief Financial Officer ("CFO"), and by the board. For this purpose's the Group's primary format for reporting segment information is business segments, with each segment representing a product category.

 

Geographical information has not been disclosed as it is not available and the cost to develop it would be excessive.

 

The segment information provided to management for the reportable segments for the year ended 31 December 2015 and 31 December 2016 is as follows:

 

Year ended 31 December 2015

 


B2C

Trading platform

B2B

Licence income

Services between segments

 

 

 

Total


US$'000

US$'000

US$'000

US$'000

Revenue and result:

 




Revenues from external customers

5,006 

9,070

(501)

13,575

Cost of sales

2,036

2,448

(501)

3,983

Gross profit

2,970

6,622

-

9,592

Research and development

-

2,276

-

2,276

Selling and marketing expenses

3,096

1,151

-

4,247

Administrative expenses

1,756

1,458

-

3,214

Finance expenses

115

116

-

231

Profit before tax from recurring activities

 (1,997) 

1,621


(376)

EBITDA*

(1,843)

2,418

-

575

EBITDA attributed to shareholders

(1,843)

2,418

-

575






Assets and liabilities





Assets

1,539

6,974

-

8,513

Liabilities

1,111

786

-

1,897

Depreciation and additions





Depreciation

35

35

-

70

 

Additions to property, plant and equipment

 

109

 

235

-

 

344

 

* Earnings before interest, tax, depreciation and amortisation and non-cash charges

 

Revenues from the Group's top three customers in 2015 represent approximately 34.6% of the total revenues. Most of the 34.6% is consisting of one customer.

 



 

Year ended 31 December 2016

 


B2C

Trading platform

B2B

Licence income

Services between segments

Acquisition related cost **

 

 

Total


US$'000

US$'000

US$'000

US$'000

US$'000

Revenue and result:






Revenues from external customers

10,870

11,527

 

(1,072)

 

-

21,325

Cost of sales

2,685

3,062

(1,072)

-

4,675

Gross profit

8,185

8,465

-

-

16,650

Other (income) expenses

-

(2)

-

-

(2)

Research and development

192

3,144

-

-

3,336

Selling and marketing expenses

2,350

1,852

-

-

4,202

Administrative expenses

1,358

2,719

-

-

4,077

Finance expenses

169

259

-

558

986

Profit before tax from recurring activities

4,116

493

-

(558)

4,051







EBITDA*

4,329

1,313

-

-

5,642

EBITDA attributed to  shareholders

1,523

1,313

-

-

2,836







Assets and liabilities






Assets

10,144

8,302

-

-

18,446

Liabilities

296

2,611

-

5,697

8,604

Depreciation and additions






Depreciation

31

69

-

-

100

Additions to property, plant and equipment

-

146

-

-

146


 

 

 

 

 

 

* Earnings before interest, tax, depreciation and amortisation and non-cash charges

** see Note 8

Revenues from the Group's top three customers in 2016 represent approximately 30.21% of the total revenues.

 

10.               Contingencies

 

The Company's Israeli subsidiary has recently undergone a tax audit for the year 2014-2016. No provision in relation to this matter has been recognised in the Financials Statements based on legal advice which indicates that it is not probable, at this stage, that a significant liability will arise.

 

11.               Subsequent events

 

In February 2017, the Company received a notice of termination from its largest software licensee Richfield Capital, owner of www.24option.com ("Richfield"), to its current agreement with the Group with effect from 1 April 2017. 

The Company has agreed with Richfield effective 1 April 2017, the terms of a new license agreement that will support this decreased level of trading that Richfield performs on the Company's system.

 

On 1 March 2017 the board of directors of DragonFinancials, the Company's 51% subsidiary, recommended the payment of a dividend of US$3.000.000, payable within 15 days from the approval. The Company received 51% of that amount.


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