NOTES TO THE UNAUDITED HALF YEAR ACCOUNTS

FOR THE SIX MONTHS ENDED 31 DECEMBER 2009

 

1.      This half-year financial report for the six months ended 31 December 2009 is unaudited.  The financial information set out above does not constitute statutory accounts within the meaning of S435 of the Companies Act 2006.

 

This half-year financial report, which includes a condensed set of financial statements of Radicle Projects and its subsidiary undertakings ("the Group") has been prepared in accordance with International Financial Reporting Standards ("IFRS"), including IAS 34 'Interim Financial Reporting', as adopted by the European Union ("EU"). 

 

The financial statements for the year ended 30 June 2009 have been delivered to the Registrar of Companies. The report of the auditors in respect of the year ended 30 June 2009 was (i) unqualified, (ii) did include a reference to going concern to which the auditors drew attention by way of emphasis without qualifying the report, (iii) did include a reference to the valuation of the BioForest Dual Income Project 2006 to which the auditors drew attention by way of emphasis without qualifying the report, and (iv) did not contain a statement under Section 498 (2) - (3) of the Companies Act 2006. The financial information for the six months ended 31 December 2009 and 31 December 2008 is unaudited.

 

The Group's shares are traded on the AIM market of the London Stock Exchange.

 

This interim report, including the consolidated financial information was authorised for issue by the Board of Directors on 31 March 2010.

 

The accounting policies applied in the preparation of these half year consolidated financial reports have been consistently applied to all the periods presented, except that biological assets are only revalued at the Group's year end (ie, at 30 June 2009). The significant accounting policies are set out below.

 

2.       There is no liability for corporation taxation arising in the period.

 

3.      The calculations of losses per share is based on the loss of £1,831,370 for the six months to 31 December 2009 (31 December 2008: £2,873,936; 30 June 2009: £6,132,704) and on the weighted average of 19,073,971 (six months to 31 December 2008: 19,073,971; year ended 30 June 2009: 19,073,971) ordinary shares in issue during the period, after deduction of 200,000 own shares held.

 

The diluted loss per share has been kept the same as the basic loss per share as the conversion of the convertible bond decreases the basic loss per share, thus being anti-dilutive.

 

4.      Going Concern

 

During the six months to 31 December 2009, the Group produced a loss before tax of £1,831,370.

 

During this period there was a shortfall of cash flow, with cash costs being higher than income from investments in biological assets.

 

As mentioned in previous trading updates, the Directors are dealing with this by reducing operating costs where appropriate.

 

In January 2010 Radicle completed a placing of new shares at 3p raising £822,000 in cash, (less placing costs).

 

This amount is not sufficient on its own to support Radicle's budgeted cash outgoings for the next twelve months.

 

The Board has made progress with asset sales which will meet coupon payments on the convertible note and allow for working capital support and debt reduction with the surplus proceeds. In order to meet the proposed deferred interest payment due on 30 June 2010, the Group will need to generate net cash inflows from asset disposals, prior to 30 June 2010, of  £1,500,000 based on current budgets. This amount will change depending on which assets are sold.

 

In June 2009 Radicle accrued expenses in relation to Timbercorp in the 2009 financial year for services which were not fully provided due to Timbercorp's administration.  In March 2010 Radicle has been credited with a payment from the 2009 crop proceeds, which has been offset against the net debt accrued.  Radicle's directors still expect a payment from the sale of the assets and have estimated the net cash return to Radicle from the sale of Timbercorp managed assets to be approximately £0.3m. There is uncertainty in relation to the size of the net return and the timing of this process as the liquidation of Timbercorp is outside of Radicle's control.

 

Radicle is currently in advanced discussions with a buyer of the Grain Co-Projection assets, as well as with potential buyers or partners for some of its other assets. The Board hopes to close asset sales at prices near to existing valuations within the next twelve months. In addition to meeting the interest payment due in 2010 of £1.208m plus the 31 December 2010 coupon payment of around £0.76m (depending on asset sales, bond buybacks and conversions by that time) these funds are expected to provide sufficient cash to further reduce debt. Radicle's Board will manage sales of assets so that proceeds can be applied to meet the Group's objectives. Radicle will need to sell assets in order to remain a "going concern" and pay interest coupons on the loan notes outstanding.

 

On this basis, the Directors believe that whilst there is some uncertainty about the timing of asset sales and consequent cashflows, following the deferral of the note interest payment on 31 December 2009 as anticipated, and after the proceeds of the 2009 placing are provided to the Group, it is appropriate to prepare the financial statements on a going concern basis.

 

5.   Segments

 

Following the introduction of IFRS 8 the Board has determined Radicle's segments to be paulownia, vineyards, other projects & investments and central/other.

 

The revenues and profit generated by each of Radicle's business segments are summarised as follows:

 

	Paulownia	Vineyards	Other Projects & Investments	Central Other	Total
	£	£	£	£	£
6 months to 31 Dec 2009 (Unaudited)
Revenue	5,086	-	26,944	158,975	191,006
Intersegment revenues	-	-	-	93,096	93,096
Segment operating profit	(169,945)	(325,191)	(805,688)	(89,440)	(1,390,265)
Total Assets	6,120,290	2,442,042	9,439,939	3,848,619	21,850,890
Consolidating items included in Central/Other
6 months to 31 Dec 2008 (Unaudited)
Revenue	2,205	-	246,475	(6,631)	242,049
Intersegment revenues	-	-	-	74,247	74,247
Segment operating profit	(145,571)	(142,629)	(1,153,353)	(1,317,049)	(2,758,602)
Total Assets	5,319,475	2,802,365	11,901,380	2,304,158	22,327,377
Consolidating items included in Central/Other
Year to 30 June 2009 (Unaudited)
Revenue	(85,215)	192,436	(389,686)	900,034	617,569
Intersegment revenues	-	-	-	148,493	148,493
Segment operating profit	(407,978	(817,292)	(3,552,534)	(1,046,936)	(5,824,739)
Total Assets	5,625,849	2,371,687	8,954,837	4,262,836	20,915,209
Consolidating items included in Central/Other
Segment operating profit can be reconciled to Group profit or loss as follows:
	6 months to 31 Dec 2009 (Unaudited)	6 months to 31 Dec 2009 (Unaudited)	6 months to 31 Dec 2009 (Unaudited)
Segment operating profit	(1,390,265)	(2,758,602)	(5,824,739)
Reconciling items
Share based payment expense		2,905	2,905
Elimination of intersegment profits	(441,105)	(118,239)	(310,870)
Group operating profit	(1,831,370)	(2,873,936)	(6,132,704)
Group operating profit before tax	(1,831,370)	(2,873,936)	(6,132,704)

 

6.   Biological Assets

 

Biological assets comprise of timber plantations (woodlots), olive groves, almond groves, apple orchards, wine grape vineyards, grain and mango (horticultural crops).

 

Biological assets are owned by the Group through investments in managed investment schemes or through direct investment in agricultural assets.

 

In accordance with IAS 41 "Agriculture", biological assets are measured on initial recognition and at each balance sheet date at fair value less estimated point of sale costs.  The gain or loss in fair value of these biological assets is recognised in the statement of comprehensive income. 

 

The fair values of the biological assets represent the net present values of estimated future cash flows relating to the biological assets owned by the entity, determined by application of assumptions made by independent valuation experts to cash flow models. The Valuers visit the sites as required and inspect operations, plant and equipment, interview management and take measurements of plants to confirm model assumptions and growth trends.   Valuations are carried out annually at the year end, and therefore not for the half year accounts.

 

Cashflows are gross of income tax and are expressed in real terms.

 

 

Significant assumptions made in determining the fair value of the biological assets at 30 June 2009 were:

 

(i)         Timber plantations are valued based on expected volumes of merchantable timber that could be obtained from existing plantations, given current management strategies and legislative and other externally imposed restrictions.

 

(ii)         The limit of the cash flow analysis is the expected rotation period for the current timber plantations which ranges from 3 years to 20 years. Plantations may be viable for longer than this.

 

(iii)        The ongoing costs of growing the trees are deducted in determining the net cash flows. In some projects producing processed products, harvest and milling costs are also included.

 

(iv)        Costs, prices, growth yields and sawn timber recovery rates are based on actual and expected rates. 

 

(v)         The valuations assume that all biological assets will be appropriately managed in the future to best silvicultural, forestry and agricultural practices.

 

(vi)        Nominal pre tax discount rates of 8%-12% per annum are applied to the estimated cash flows.  The discount rates take into account the cost of capital and the risk associated with that capital, and are based on cost of capital calculations with reference to industry standards. Agricultural risks are dealt with in the development of assumptions of future cash flows associated with each project and in scenario modelling.

 

The discount rates in respect of each group are as follows:

 

Woodlots - Paulownia:                                                       8.375%

Woodlots - BioForest Dual Income Project 2006:                 N/A-not valued using NPV approach

Vineyards - Adelaide Hills Vineyard Project:                        11.3%

AHM Early Season Apples:                                               10.6%

AHM Organic Apples:                                                        10.6%

Gumeracha Vineyards:                                                      comparison to market %

2008 Grain Co Production Units:                                        10.4%

 

The following assets were not valued using a discounted cash flow model at 30 June 2009, but were valued in the prior year using the following discount rates and then reduced this years as a result of Timbercorp Limited's liquidation:

 

Woodlots - Timbercorp Eucalypt:                                        10% to 14%

Olive groves - Timbercorp:                                                  15% to 17%

Almond groves - Timbercorp:                                              15% to 17%

 

(vii)       Continued water availability for projects exposed to high risk water catchments.

 

(viii)       A stable market environment throughout the life of each project.

 

(ix)        A continued high level of management quality for investments in biological assets.

 

(x)        The productive life of the asset.

 

(xi)        The period over which the asset will mature.

 

(xii)       The expected future sales price. Expected future sales prices for all biological assets are based on average current prices increased for inflation.

 

(xiii)      The costs expected to arise throughout the life of the asset, which are based on average costs throughout the period.

 

(xiv)      Inflation rates are estimated by the independent valuation experts, based on bank rates and economic indicators.  The estimates used range from 2.8% to 5%.

 

Additional assumptions made in determining the fair value of the Paulownia woodlots, which are:

 

(i)         The continued ability of management to grow Paulownia, and also harvest, process and market Paulownia products.

(ii)         Current market prices for Paulownia are maintained.

(iii)        Operational costs in future years are in line with the Directors' forecasts.

 

Valuation of Timbercorp and BioForest assets

 

The above valuation techniques apply to all Biological assets except for assets managed by Timbercorp and the BioForest Dual Income Project. In respect of biological assets managed by Timbercorp, management considered that the most appropriate basis for the valuation of their assets was to use the 2008 valuation reduced to around 33% of the 2008 valuation for the Eucalypt hardwood projects (based on a letter from the Timbercorp Liquidator providing expected returns for sale of these assets) and to around 20% of the 2008 valuations in respect of the Almond projects, based on comparable sales and an assessment of the likely split of proceeds between secured creditors and  Growers.  The value of the Olive assets has been reduced to nil.

 

These assessments are based on information arising from court decisions in Australia in relation to the administration of Timbercorp.

 

The BioForest Dual Income Project 2006 has been valued at 30 June 2009 at historical cost. The Valuer expressed a belief that this was the most appropriate methodology for this asset at 30 June 2009 and will reassess the project onsite during 2010.

 

Biological assets

 

	£
Group Carrying amount as at 1 July 2008 Exchange difference Increases due to purchases Loss arising from changes in fair value less point of sale costs Decrease in fair value of assets previously managed by Timbercorp	15,362,509 207,501 352,694 261,647 (1,837,257)
	__________
Carrying amount as at 30 June 2009 Exchange difference Increases due to purchases Gain arising from changes in fair value less point of sale costs	14,347,094 2,176,688 - -
	__________
Carrying amount as at 31 December 2009	16,523,782
	=========

 

The fair value of biological assets comprises the following elements:

 

	31 December 2009 £	31 December 2008 £	30 June 2009 £
Non-current assets      Woodlots*      Vineyards      Olive groves      Almond groves      Apple orchards      Mangos	7,110,715              924,319                        -              288,073           4,786,422                        -	6,568,598              724,510              128,990           1,717,631           2,763,635              108,519	6,177,270         803,001                   -         242,504      4,158,194                   -
	_________	_________	_________
	13,109,529	12,011,883	11,380,969
Current assets:      Wheat and barley	3,414,253	3,568,364	2,966,125
	_________	_________	_________
	16,523,782	15,580,247	14,347,094
	=========	=========	=========

 

*Includes £5,890,677 (December 2008: £5,102,198) (June 2009: £5,117,511) relating to Paulownia Woodlots.

 

Further details on the biological assets are shown in the 2009 Report and Accounts.

 

Commitments

At the period end, the Group had not entered into commitments to acquire or develop biological assets subsequent to the year end.

 

 

6.       Critical accounting estimates and judgements

 

The Group makes estimates and assumptions concerning the future.  The resulting accounting estimates and assumptions will, by definition, seldom equal the related actual results.  The estimates and assumptions that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year are discussed below.

 

Income taxes: Income tax estimates are based on the assumption that no adverse change will occur in income tax legislation.

 

Biological assets: Please refer to the note on 'Biological assets' above.

 

Investments:  Fair value of the unquoted Adelaide Hills and the unquoted Riverland Land and Water investments have been assessed following independent valuations provided by external Valuers.  Shares in Willmott Forests are listed on the Australian Stock Exchange and have been valued based on their market value as at 31 December 2009.  

 

 

7.       Borrowings

 

The Group issued 151 8% convertible bonds at a par value of £100,000 to raise £15,100,000 on 20 June 2007.  The bonds mature five years from the issue date at their nominal value, or can be converted into shares at the holders' option between 30 July 2007 and maturity.

 

On 16 September 2009 Radicle announced that it had reached "in principle" agreement with the holders of the bonds to make a number of changes to the terms of the bond.  These changes, which have since been ratified included the deferral of the interest coupon payable on 31 December 2009 to 30 June 2010 and a reduction in the face value of the convertible bond, with an escalation clause returning the note to full face value over the remaining term unless accelerated by a default.

 

The changes also had the effect of reducing the conversion price to 12p per share for existing holders.  

 

Covenants exist on the convertible bond as follows:

 

1.   The value of security (i.e. gross assets) should be at least 130% of the loan proceeds drawn down, as the Trustee does not release funds until they hold such security (notes 9, 10, 11 and 14).

 

2.   Within 90 days of the financial year end, the Trustee should receive, from an independent valuer, a certificate confirming the value of the designated investments held as security.

 

3.   The Group will maintain an EBITDA on a consolidated basis of at least 150% of the interest payable annually on the principal amount outstanding of the loan notes once the issuer has certified to the Trustee that the proceeds of the issue of the notes have been invested. (EBITDA being the consolidated net operating income before tax of Radicle Projects Plc and its subsidiaries as stated in its consolidated financial statements for the corresponding accounting period for the issuer, adjusted by adding back depreciation, interest, amortisation, and impairment losses).        

The EBITDA covenant only applies once all proceeds of the bond have been invested. At the balance sheet date, the proceeds of the bond had not been fully invested.

 

 

8.       Share Capital

 

	As at  31 Dec 2009 £	As at 31 Dec 2008 £	As at 30 June 2009 £
Authorised: 666,666,667 Ordinary Shares of 3p each	20,000,000	20,000,000	20,000,000
	=========	=========	=========
Allotted, issued and fully paid 19,273,971 Ordinary shares of 3p each	578,219	578,219	578,219
	=========	=========	=========

 

The Group did not issue any new shares in the six months to 31 December 2009.  Subsequent to 31 December the Group has finalised a capital raising program and issued 32,400,000 new ordinary shares of 3p each for a gross cash consideration of £822,000.

 

The Group holds 200,000 of its own shares. The consideration paid for these shares was recognised as a deduction from shareholders' equity as a separate reserve "own shares held".

 

9.       Dividend

 

No dividend was paid or proposed in respect of the year ended 30 June 2009 (2008: no dividend for the year to 30 June 2008).

 

10.     Interim Report

 

Copies of the Interim Report can be obtained from the Group's head and registered off:  19/20 Grosvenor Street, London W1K 4QH and are available to download from Radicle's website www.radicleprojects.com.