AVN.L Regulatory News (AVN)

20 December 2016

AVANTI COMMUNICATIONS GROUP PLC

2016 Full Year Results

Avanti Communications Group plc ("Avanti" or the "Group"), a leading provider of satellite data communications services in Europe, the Middle East and Africa, issues the following results for the financial year ended 30 June 2016.

Highlights

· Revenue of $82.8m for the full year (2015: $85.2m)

· Revenue from capacity, services & equipment up 24% to $74.5m (2015: $60.1m)

· Contract wins with key target customers including Everything Everywhere

· Cash at year end $56.4m (2015: $122.2m)

· Net debt¹ at year-end of $588.9m (2015: $406.2m)

· Loss for the year $69.2m (2015: $73.3m)

· Top-20 Customer Bandwidth Revenue Growth3 of 50% (2015: 54%)

· Year-end fleet utilisation2 up to the 25% to 30% band (2015: 20% to 25%)

· Pro-forma current fleet utilisation4 was 35% to 40% (2015: 20% to 25%)

1 Net debt comprises current and non-current loans and borrowings less cash and cash equivalents

2 Year-end fleet utilisation helps to track capacity uptake and gives an indication of revenue potential when Avanti's fleet is mature. It is calculated by expressing utilised capacity as a percentage of total available capacity for the fleet of HYLAS 1(3 GHz), HYLAS 2 (11 GHz) and ARTEMIS (1 GHz)

3 Top-20 Customer Bandwidth Revenue Growth is defined on page 16 

4 Including full pro forma impact of future contracted customer ramps on the current fleet as described in note 2 above

David William's Avanti's CEO said:

'Despite the headwinds of the last six months, Avanti has the most advanced technology platform in our region, delivering outstanding service quality across many application areas from broadband to defence, at prices that fundamentally change market demand. Our distribution platform in existing geographies is now mature, with success in signing the largest telecoms operators in most of our key markets. Thus the conditions for growth have now been demonstrated, with cash flows expected to build as customer growth compounds."

For further information please contact:

Avanti: David Williams, +44 (0)207 749 1600

Cenkos Securities: Max Hartley Nicholas Wells, +44 (0)207 397 8900

Montfort: Nick Miles / James Olley, +44 (0)203 770 7909

Redleaf: Hannah Nicolas, +44 (0)207 382 4734

Chairman's statement

Avanti made good progress in winning new key accounts in its Carrier and Government business, and the reduction in competition in both Europe and Africa has helped the broadband business. As announced in July 2016, the economic backdrop for the year was challenging and both currency depreciation and credit terms impacted on the Group's working capital position. Post period end, Avanti's financial position suffered disruption when the additional debt facilities sought were not forthcoming on suitable terms in the aftermath of the EU referendum vote.

However, after a period of very hard work, our existing bondholders have supported the Company with commitments for the proposed refinancing transaction as announced on 20 December 2016 (the "Refinancing Transaction").Subject to completion for the Refinancing Transaction process in January, Avanti will have the runway it needs to launch HYLAS 4 and realise its ambition to fill its fleet.

Notwithstanding this unwelcome distraction, Avanti's business made some good progress in 2016 in developing its markets. The network continues to perform at a very high level, meaning that customers are pleased with quality of service, and the Company is able to solve customer issues and requirements to a standard that competitors are not able to meet.

The best example of this was the landmark contract win with Everything Everywhere (EE). As part of the Home Office's Emergency Services Network programme, Avanti is providing to EE satellite connectivity at almost 1,000 base stations in the UK in a seven-year contract to help deliver a ubiquitous nationwide 4G service. We believe this is the largest satellite 4G backhaul project of its kind in the world. It clearly demonstrates Avanti's pioneering service in changing the role that satellite technology plays in the telecoms market.

We have now invested over $1.2bn in developing a business that can meet the huge latent demand for affordable connectivity in high growth markets across EMEA. Africa is expected to be the fastest growing data market in the world and with the majority of its capacity dedicated to Africa, Avanti is playing an important role and has developed strong partnerships with the largest telcos in our core markets. A successful conclusion to the proposed Refinancing Transaction will provide the capital for Avanti to meet its business plan and I look forward to putting a turbulent year behind us and resuming our focus on growth.

During the year John Brackenbury and Matthew O'Connor left the board and I would like to thank them for their long years of service. I would also like to thank our employees, customers, suppliers and investors for their ongoing support.

Operating review

Chief executive's review

Our satellites provide high performance, affordable connectivity to governments, businesses and individuals across EMEA either directly through satellite dishes installed at the user location, or by providing backhaul connectivity to mobile networks.

Avanti reaches end users through national and international Service Providers and we count many of the biggest and best telecoms network operators as core customers.

We made encouraging progress in each of our target market sectors this year.

Chief executive's review continued

In Broadband we won significant new business in Europe, in deals to migrate over 15,000 end user customers away from competitor networks as well as winning new subscribers. Spain and Italy are markets that showed strong improvement in the year. The sale by a competitor of its Ka-band satellite for use in other markets resulted in new broadband customers joining our network. Prospective competition also decreased in Africa when one of two competing Ka-band satellites for West Africa failed. The launch of a new 30Mb service is also now making a positive impact on growth in the UK and Germany. In Africa, we are deploying a broadband product called ECO ("Every Child Online") which provides a very low cost broadband service, whilst also providing connectivity to schools. ECO is a wi-fi hot spot hosted by the school. Community users can use a proprietary Avanti app which works on low cost smart phones to buy, or trade, peer to peer credits which enable them to buy very small units of broadband access. We have won contracts to deploy this in over 2,500 schools and expect growth in 2017.

In Government we had an encouraging year. Our defence business grew significantly, with several country-contract customers now signed up for sizeable secure services applications. In civil, we are providing large scale connectivity to government offices in all of our core markets in Africa. The market for connectivity in schools is expected to grow strongly and we won several national schools projects (for simple connectivity, not just ECO).

In Enterprise our network providing digital transmission to cinemas is now in over 300 venues. We won new business in Africa to support remote mining and energy sites, and machine to machine communications - the "internet of things" - is becoming a significant market.

In Carrier Services, our contract with EE is a landmark transaction. As part of the British Government's Emergency Services Network, Avanti is providing 4G backhaul services to almost 1,000 mobile towers. Connecting a 4G network to a satellite network is highly sophisticated engineering and Avanti was the only company in Europe capable of delivering the services. It is a valuable multi year contract but also provides Avanti with a major marketing advantage around the EMEA region.

During the year our distribution strategy evolved, mainly in Broadband and Enterprise. We are seeing welcome consolidation in our distribution channels, as large service providers buy the customer bases of smaller ones. In some regions we are actively encouraging this as it generates an economy of scale benefit for Avanti in servicing fewer service providers who make larger commitments. In some cases we have, and will continue to offer Master Distribution or quasi exclusive status to Service Providers who can buy substantially all of the capacity in a beam or territory and several such deals are under negotiation.

An example of this in 2016 was the purchase by Eurona Wireless Telecom ("Eurona"), a Spanish based ISP, of the exclusive rights in perpetuity to sell capacity on any Avanti platform in Iberia specifically for use in the consumer broadband market. Eurona have a very large and well established customer base in the region and this arrangement provided them with an opportunity to strengthen their position in their local market and segment. Following this deal, Eurona have acquired one of their main regional competitors and a number of smaller players. This arrangement was the first step for Avanti in securing Eurona as a significant new partner and lays strong foundations to making significant headway in the Iberian market.

Chief executive's review continued

To win volume in certain markets where end-customers are highly price sensitive - such as broadband in Europe - we adjusted our prices during the year. Our products are sold as Mb or managed accounts or as fully integrated projects but we calculate the Price, or Yield, per MHz per month. Yield was in the $1,600-$1,800 band during 2016 (2015: $1,800-$2,000).

Demand is growing from an increasingly high quality customer base and a demand and supply balance is emerging.

Net working capital increased during the year with receivables increasing to $79.5m (2015: $35.5m) and payables increasing to $82.8m (2015: $31.9m). The receivables balance increased mainly as a result of contracts reaching milestones at the end of the final quarter which resulted in invoicing or revenue accruals. Of the receivables balance, $27.7m was accounted for by accrued income (2015: $10.6m), $16.4 m of which was due from investment grade counter parties, either Government customers or large corporate customers where the underlying customer is a Government.

As announced in July 2016, the economic backdrop for the year was challenging and both currency depreciation and credit terms impacted on the Group's working capital position. Post period end, Avanti's financial position suffered disruption when the additional debt facilities sought were not forthcoming on suitable terms in the aftermath of the EU referendum vote.

However, after a period of very hard work, our existing bondholders have supported the Company with commitments for the proposed refinancing transaction as announced on 20 December 2016 (the "Refinancing Transaction"). Subject to completion of the proposed Refinancing Transaction process expected to complete in January, Avanti will have the runway it needs to launch HYLAS 4 and realise its ambition to fill its fleet.

The financial uncertainty of 2016 has impacted Avanti's short term growth rate but with strong support from long term investors, on completion of the financial restructuring, we will have what we need to realise our ambitions.

Finally, our founder Director Alan Foster, who retired in 2015, passed away this year. He is greatly missed.

Our strategy

Avanti's strategy is founded on the assumptions that data usage will continue to grow strongly for the foreseeable future; that terrestrial infrastructure will not satisfy demand; and that high growth markets offer the highest returns.

Avanti sells a managed service for fixed data connectivity. The go to market strategy is to sell to telecoms companies and specialist Service Providers for use in the Broadband, Enterprise, Government and Carrier Services verticals.

The Group sells mainly through direct field sales with strong engineering pre-sales support.

Outlook

As described in the Chief Executive's Statement, the business suffered from financial uncertainty in 2016 slowing its growth rate but over the medium term it expects to generate constant currency continuing business growth rate1 of at least 35% against a base of the current financial year's total revenue of $82.8m.

1Constant currency continuing business growth rate is a measure which refers to revenue for the year, excluding any large, infrequently occurring items with non-USD components of revenue figures for each year in question calculated at the most recent relevant foreign exchange rate.

Avanti has a largely fixed cash cost base. There will be a modest increase in costs in 2017 as further investments are made in sales and marketing and ground operations ahead of the launches of HYLAS 3 and HYLAS 4.

Management expects that the combination of revenue growth and largely fixed cash cost base will lead to strong operating cash flows in the medium-term.

Financial Review

Going concern and post balance sheet events

On 7 July 2016, the Company announced that it was probable that additional funding would be required in order to ensure that the Group had sufficient liquidity to complete and launch HYLAS 4 in FY17. Avanti had based its funding plan on cash to be generated from the business which had grown more slowly than expected.

On 11 July 2016, the Company announced the undertaking of a strategic review (the "Strategic Review") to consider all financial and strategic options. As part of this exercise, Avanti conducted an in-depth review of its business plan, financial position and strategic options, including various routes to strengthen the Company's balance sheet.

The output of the strategic review and the additional liquidity that is expected to be forthcoming from a proposed Refinancing Transaction has allowed the Directors to prepare the accounts on a Going Concern basis. This is explained in further detail in note 2.

In summary, the Directors have concluded that based on the Group's expectation that the Consent Solicitation for the proposed Refinancing Transaction will be successful, in addition to the forecasts and launch of HYLAS 4, the Directors believe that the Group will be able to have sufficient liquidity and comply with the financial covenants under the amended and new Notes, and will be able to meet its obligations as they fall due, and accordingly have formed the judgement that it is appropriate to prepare the financial statements on a going concern basis. There can, however, be no certainty that the required consents will be received or that the proposed Refinancing Transaction will be successfully completed. Accordingly, successful completion of the proposed Refinancing Transaction and the substantial achievement of cash flow forecasts to enable the settlement of certain interest payments by the issue of Notes represent a material uncertainty that may cast significant doubt on the Group and the parent Company's ability to continue as a going concern.

Revenue

Revenue in the year decreased 3% to $82.8m (2015: $85.2m). Revenue from capacity, services and equipment increased by 24% to $74.5m (2015: $60.1m). There was no revenue recognised from Spectrum co-ordination in the year (2015: $25.1m) and $8.3m from the sale of exclusivity rights (2015: $nil).

On a constant currency basis total revenue fell by less than 1% to $82.8m ($83.1m). (i.e. translating 2015 non-USD revenues at the average rate for 2016).

Costs

Cash costs increased to $77.0m (2015: $71.3m). The costs of the business are largely fixed irrespective of the amount of capacity sold on the satellites. Costs will increase when a new satellite is launched when new ground infrastructure is brought online. Most of the staff costs and other operating expenses are incurred in pounds Sterling but reported in US Dollars, which can lead to some variation from period to period.

The cost of sub-contractors required to deliver value-added services to Government customers fell from $11.4m to $7.8m as a result of the nature of projects undertaken during the year. This movement was broadly offset by an increase in costs related to the purchase of equipment for resale from $6.8m in 2015 to $13.5m in 2016 as a result of higher levels of equipment sales, for example as a result of the initial roll-out of the Group's operations with EE.

EBITDA

Earnings before interest, tax, depreciation and amortisation ("EBITDA") fell to $7.3m (2015: $15.3m) as a result of the mix of revenue and increases in other operating expenditures to $16.3m (2015: $13.3m).

Loss

The loss for the year reduced marginally to $69.2m (2015: $73.3m). Despite positive EBITDA in both 2016 and 2015 the income statement is still materially affected by the depreciation charge, primarily from the satellites of $47.3m (2015: $47.9m) and finance charges arising from the high level of debt of $40.9m (2015: $40.5m).

With the launch of HYLAS 4 in 2017 the depreciation charge will increase. Similarly, the finance expense will also increase as the interest capitalised during construction will fall to the income statement.

Loss per share

Loss attributable to shareholders of $68.7m (2015: $73.1m), which included a net interest expense of $27.0m (2015: $40.5m), results in a loss per share of 49.27 cents (2015: loss per share of 61.50 cents).

Cash flow

Net cash outflow from operating activities during the year ended June 30, 2016 was $92.3m as compared to $62.5m during the year ended June 30, 2015. The increase of $29.8m primarily relates to changes in working capital and in particular deferred payment terms on contracts closed in the final quarter. It is also relevant that the consideration received for sale of spectrum rights in 2015 was a payload (HYLAS-2B) as opposed to cash. 

Net cash used in investing activities during the year ended June 30, 2016 was $93.5m as compared with $96.7m during the year ended June 30, 2015. The decrease of $3.2m is due to lower capital milestones during the current year.

Net cash flow from financing activities during the year ended June 30, 2016 was $121.4m as compared with $85.2m during the year ended June 30, 2015. The increase of $36.2m is as a result of the proceeds from the bond and equity issues in the year ($125.7m) compared to the $90.6m raised in the prior year.

Balance sheet

Total equity fell to $201.5m (2015: $304.7m) as a result of the loss for the year of $69.2m, the issue of share capital ($10.7m) and foreign exchange losses ($45.1m) arising from the re-translation of quasi-equity intercompany balances.

Total assets increased to $942.3m (2015: $881.8m) primarily as a result of investments in satellite and ground assets.

Net working capital increased during the year with trade and other receivables increasing to $79.5m (2015: $35.5m) and trade and other payables increasing to $82.8m (2015: $31.9m). The receivables balance increased mainly as a result of contracts reaching milestones at the end of the final quarter which resulted in invoicing or revenue accruals. Of the receivables balance $27.7m was accounted for by accrued income (2015: $10.6m), $16.4m of which was due from investment grade counter parties, either Government customers or large corporate customers where the underlying customer is a Government.

Insurance

Avanti maintains a full suite of insurance policies covering not only space assets, but also business interruption associated with the failure of its ground earth stations. The HYLAS 1 in orbit insurance policy was renewed in November 2015 with an insured value of £112m and the HYLAS 2 policy was renewed in August 2015 for $306.0m. Artemis is insured for $30m.

Backlog

Our backlog comprises our customers' committed contractual expenditure under existing contracts for the sale of bandwidth, satellite services, consultancy services and equipment sales over their current terms. Backlog does not include the value arising from potential renewal beyond a contract's current term or projected revenue from framework contracts. We do include projected revenue from consultancy services provided to government customers at the rate of $3.3m per year, based on the average revenue generated by these services for the last five fiscal years. Our backlog totalled $290.4m as of June 30, 2016.

Our backlog by end market as of June 30, 2016 was as follows:

Principal risks and uncertainties

The Group faces a number of risks and uncertainties that may adversely affect our business, operations, liquidity, financial position or future performance, not all of which are wholly within our control or known to us. Some such risks may currently be regarded as immaterial and could turn out to be material. We accept risk is an inherent part of doing business, and we manage the risks based on a balance of risk and reward determined through careful assessment of both the potential likelihood and impact as well as risk appetite. The Group faces a number of ongoing operational risks including credit and foreign exchange risk.

Global economy

The global economy remains fragile and it continues to be difficult to predict customer demand. Avanti is susceptible to decreased growth rates within high growth markets and/or continued economic and market downturn in developing markets. The effects could lead to a decline in demand and deteriorating financial results, which in turn could result in the Group not realising its financial targets.

Foreign exchange risk

We operate internationally and are exposed to foreign exchange risk arising from various currency exposures, primarily with respect to the pound Sterling and the Euro. In order to hedge the foreign currency risk we enter into forward contracts or natural hedges as considered appropriate. These risks are assessed on a continual basis. Our reported results of operations and financial condition are affected by exchange rate fluctuations due to both transaction and translation risks.

Interest rate risk

We borrow in US Dollars and pounds Sterling at fixed rates of interest and do not seek to mitigate the effect of adverse movements in interest rates. Cash and deposits earn interest at fixed rates based on banks' short-term treasury deposit rates. Short-term trade and other receivables are interest free.

Credit risk

Credit risk is the risk of financial loss arising from counterparty's inability to repay or service debt in accordance with contractual terms. Credit risk includes the direct risk of default and the risk of deterioration of creditworthiness. We believe we currently have no significant concentrations of credit risk. We assess the credit quality of major customers before trading commences, taking into account customers' financial position, past experience and other factors. Generally when a balance becomes more than 90 days past its due date, we consider that the amount will not be fully recoverable.

Liquidity risk

Liquidity risk is the risk that we may have difficulty in obtaining funds in order to be able to meet both our day-to-day operating requirements and our debt servicing obligations. We manage our exposure to liquidity risk by regularly monitoring our liabilities. Cash and cash forecasts are monitored on a daily basis, and our cash requirements are met by a mixture of short term cash deposits, debt and finance leases.

Future liquidity is also affected by the rate at which we fill the satellites and the yield achieved.

See the going concern and post balance sheet section of this financial review in addition to the going concern accounting policy in Note 2 for a discussion of the planned financial restructuring and commentary of the Group's medium term funding that this will provide on completion. 

Consolidated Income Statement

Year ended 30 June 2016

1 There were no directly attributable costs related to the sale of spectrum rights or exclusivity rights

2 Earnings before interest, tax, depreciation and amortisation

Consolidated Statement of Comprehensive income

Year ended 30 June 2016

Consolidated Statement of Financial Position

As at 30 June 2016

Consolidated Statement of Cash Flows

Year ended 30 June 2016

Consolidated Statement of Changes in Equity

Year ended 30 June 2016

Notes to the preliminary statement

1. Basis of preparation

The financial information set out above does not constitute the Group's statutory financial statements for the years ended 30 June 2016 or 2015. Statutory consolidated financial statements for the Group for the year ended 30 June 2015, prepared in accordance with adopted IFRS, have been delivered to the Registrar of Companies and those for 2016 will be delivered in due course. The auditors have reported on those accounts: their report on the accounts for 2016 was (i) unqualified and (ii) drew attention by way of emphasis without qualifying their report to a material uncertainty in respect of going concern and (iii) did not contain a statement under section 498 (2) or (3) of the Companies Act 2006. Their report on the accounts for 2015 was (i) unqualified, (ii) did not include a reference to any matters to which the auditors drew attention by way of any emphasis without qualifying their opinion and (iii) did not contain a statement under Section 498 (2) or (3) of the Companies Act 2006.

This financial information for the year ended 30 June 2016 has been prepared by the directors based upon the results and position that are reflected in the consolidated financial statements of the Group.

 The consolidated financial statements of Avanti Communications Group plc and its subsidiaries have been prepared in accordance with International Financial Reporting Standards as adopted by the EU as relevant to the financial statements of Avanti Communications Group plc.

2. Principal accounting policies

Full disclosure of the group accounting policies can be found in the 2015 Annual Report and Accounts as presented on the Avanti Communications Group plc website. These have been consistently applied throughout the 2016 financial year and the disclosures made in this statement. See below for additional disclosure with regard to going concern.

Going concern

The financial statements have been prepared on a going concern basis. In reaching their assessment, the Directors have considered a period extending at least 12 months from the date of approval of these financial statements. This assessment has focused on the status of the financial restructuring announced by the Group on 20 December as well as those factors considered on an annual basis such as forecast trading performance of the Group for the foreseeable future, key assumptions, sensitivities and available cash balances and facilities. As at the date of approval of these financial statements, the successful completion of the financial restructuring is conditional upon the Consent Solicitation process and while the Directors believe that this process will be completed successfully, there remains a material uncertainty until the remaining consents have been received.

On 7 July 2016, the Company announced that it was probable that additional funding would be required in order to ensure that the Group had sufficient liquidity to complete and launch HYLAS 4 in the 2017 financial year. Avanti had based its funding plan on cash to be generated from the business which had grown more slowly than expected. On 11 July 2016, the Company announced the undertaking of a strategic review (the "Strategic Review") to consider all financial and strategic options. As part of this exercise, Avanti conducted an in-depth review of its business plan, financial position and strategic options, including various routes to strengthen the Company's balance sheet.

Going concern continued

On 17 October 2016, the Company announced the result of a successful consent solicitation process ("September Consent Solicitation") as the first step in its two-phase funding strategy. The Company received consents from holders of 89.5% of its Senior Secured Notes to permit paying the interest due on 1 October 2016 in respect of consenting holders' Senior Secured Notes in the form of additional Senior Secured Notes on the same terms as the existing Senior Secured Notes in lieu of cash. In order to further support the strategic review process, the Company also entered into binding agreements with certain suppliers to defer approximately $39m of capital expenditure payments relating to HYLAS 4 to the third quarter of the fiscal year ending 30 June 2017.

Following completion of the September Consent Solicitation, the Company continued negotiations with the manufacturer of HYLAS 4, Orbital Sciences ("Orbital"), and its largest holders of Senior Secured Notes regarding phase 2 of the funding strategy. The second phase of the planned restructuring of the Company's outstanding indebtedness is to seek a long-term solution to its working capital needs and to ensure that the Company can continue to operate as a going concern in the future. The major components of the planned restructuring which provide the Group with substantial additional liquidity are:

1. New Money Notes - Issue of up to $132.5m of Senior Secured Notes in three tranches by the Company to provide additional funds for the Group. $82.5m will be issued on closing of the restructuring with the ability to issue a further $15m on 30 June 2017 and $35m on 30 November 2017.

2. Amended Existing Notes - Amendments to the Existing notes, which are described in more detail in Note 10, which include capitalising (i.e settling through the issue of further Notes rather than cash) the April 2017 coupon and the ability to capitalise the October 2017 coupon for the $685m of Amended Existing Notes conditional on certain cash forecast targets. In addition the amendments allow for the ability to capitalise the April 2018 coupon for approximately $485m of the Amended Existing Notes conditional on certain cash forecast targets and extended maturity dates which range between October 2021 and October 2022.

The restructuring, which is described in more detail in note 10, culminated on 20 December 2016 when a Restructuring Agreement was signed by the Company with a group of its largest holders of Senior Secured Notes ("Initial Consenting Creditors"). The Company and the Initial Consenting Creditors, representing approximately 73% of the aggregate principal amount of the existing Senior Secured Notes ("Existing Notes"), entered into the Restructuring Agreement on 20 December 2016 pursuant to which the Initial Consenting Creditors contractually agreed to approve the Existing Notes restructuring by delivering Consents in connection with the Solicitation, tendering their Existing Notes in the Exchange Offer and voting in favour of the Scheme.

The Company and the Initial Consenting Creditors also entered into the Backstop Purchase Agreement on 20 December 2016 pursuant to which the Initial Consenting Creditors committed to fund up to the entirety of the New Money Offer, subject to reduction for the level of pro rata participation by the remaining Existing Note holders that elect to participate in the New Money Offer.

The Consent Solicitation will commence on 21 December 2016 and will run for a maximum of 20 business days. This process will result in one of the three following outcomes:

1. Receipt of consents from note holders equating to at least 90% of the Existing Notes by number and value. This will result in the terms of the restructuring being approved and applied to 100% of the Existing Notes. The Initial Consenting Creditors are contractually committed to providing their consents and equate to 73% of the Existing Notes.

2. Receipt of consents greater than or equal to 75% but less than 90%. In this case, the consenting Existing Noteholders will enter into a Scheme of Arrangement with the Company whereby they agree to the terms of the restructuring being applied to their Existing Notes. In addition, with 75% or more acceptance, the $132.5m new money component of the restructuring and the restructured notes would be approved. The terms of the non-consenting Existing Note holders would remain unchanged.

3. Consents will be received amounting to less than 75% of the Existing Noteholders. This is considered extremely unlikely given that the Initial Consenting Creditors are contractually committed to providing their consents and equate to 73% of the Existing Notes. In this scenario, the restructuring would fail and the Group would need to successfully complete an alternative restructuring or raise new money in order to have sufficient resources to continue in operational existence for the foreseeable future.

Following the signing of the Restructuring Agreement, which is the platform for a successful Consent Solicitation and which will in turn complete the Group's funding strategy, and in order to prepare and approve these Financial Statements, the Directors have assessed forecast future cash flows for the foreseeable future. In assessing the Group's ability to meet its obligations as they fall due, management prepared cash flow forecasts based on the business plan for a period in excess of 24 months. Management considered various downside scenarios to test the Group's resilience against operational risks including:

· Adverse movements in Sterling and Euro exchange rates against US Dollar

· Delays in the launch of HYLAS 4

· Lower yield on capacity

· Slower build in fleet/ satellite utilisation

Management concluded that the Group's Capital Structure after the planned debt facilities amendments and new money notes, together with the ability to PIK certain interest coupons, conditional on certain cash flow forecasts, provides sufficient headroom to cushion against downside operational risks and reduces the risk of breaching the new debt covenants.

In summary, the Directors have concluded that, based on the Group's expectation that the Consent Solicitation for a financial restructure will be successful, in addition to the forecasts and launch of HYLAS 4, the Directors believe that the Group will be able to have sufficient liquidity and comply with the financial covenants under the amended and new Notes, and will be able to meet its obligations as they fall due, and accordingly have formed the judgement that it is appropriate to prepare the financial statements on a going concern basis. There can, however, be no certainty that the required consents will be received or that the refinancing will be successfully completed. Accordingly, successful completion of the refinancing and the substantial achievement of cash flow forecasts to enable settlement of certain interest payments by the issue of Notes represent a material uncertainty that may cast significant doubt on the group and the parent company's ability to continue as a going concern. The Group and the parent company may, therefore, be unable to continue realising their assets and discharging their liabilities in the normal course of business, but the financial statements do not include any adjustments that would result if the going concern basis of preparation is inappropriate.

3. Revenue

The Group generates its revenues from the commercial exploitation of its space assets, namely its spectrum rights, satellites, intellectual property and ground station assets. These revenues include, inter alia, the sale of satellite broadband capacity, the sale of services, typically to Government customers, the sale of terminals and other satellite communications equipment and the sale and leasing of spectrum rights.

The Avanti Executive Board, which is the chief operating decision-maker in the Group's corporate governance structure, manage the business and the allocation of resources on the basis of the utilisation of its space assets, resulting in one segment.

Revenue generated for the year was as follows:

The majority of total revenue for the year represents the sale of satellite broadband capacity, related services and the sale of terminals and other satellite communications equipment to external customers. Of this $13.2m (2015: $5.7m) relates to the sale of terminals and other satellite communications equipment.

Sale of exclusivity rights

$8.3m was recognised during the financial year from the sale of exclusivity rights.

During the financial year, the Group entered into an agreement with Eurona Wireless Telekom SA ("Eurona"), a Spanish based Internet Service Provider, under which Eurona were sold the exclusive rights in perpetuity to the provision of services to the consumer broadband market in Spain and Portugal ("Iberia") from any existing or future Avanti Satellite.

Eurona are required to pay a fixed, non-refundable fee of €7.5m ($8.3m) under a non-cancellable agreement in consideration for the rights. As a result, Eurona have sole rights to sell capacity directed over Iberia on any Avanti satellite for use in delivering service to the consumer broadband market.

The exclusivity right does not convey or include any satellite capacity, which must be purchased separately.

At the same time, Eurona entered into an agreement to purchase substantial initial capacity over Iberia with a value of €17.2m over a 10 year period. The provision of capacity commenced in the 2017 financial year and as a result no capacity revenue was recognised in these financial statements. The sale of €2.5m of satellite communications equipment was recognised during the financial year and is included within revenue from the sale of capacity, services and equipment.

The agreement with Eurona was assessed under the Group's accounting policy for multiple deliverable arrangements. An assessment was made over whether the sale of exclusivity rights, capacity and equipment represented separate units of account. This assessment concluded that each component was separable on the basis that each deliverable has stand-alone value to Eurona and the fair-value of the item can be objectively and reliably determined.

Sale of exclusivity rights continued

The fair value of the undelivered components (residual value method) was used to assess the fair value of the exclusivity rights. This assessment led to the conclusion that there was no material difference between the contractual value of $8.3m (€7.5m) and the fair value of the exclusivity component.

Spectrum revenue

In June 2015, the Group entered into an agreement to sell, in perpetuity, certain spectrum rights related to geographic markets in which the Group does not seek to operate. The indefeasible right to use ("IRU") a 3 GHz Ka-band payload over its estimated remaining life of 13 years was received in consideration. The IRU arrangement has a fixed cost payable per annum and a variable cost based on the capacity of the payload that is sold. The payload can be directed over the Group's core market of Europe, the Middle East and Africa and increased the Group's current satellite capacity by approximately 20%. Revenue of $Nil (2015: $25.1m) was recognised for this transaction related to the utilisation of the Group's space assets.

The revenue recognised was based on the fair value of the consideration received, in this case the IRU of the Ka-band payload. The IRU was valued on a replacement cost basis which took into account the cost of building and launching a comparable payload with equivalent capacity and a 13 year remaining life. The Group used the costs that it has experienced in constructing and launching its existing satellite fleet, including those under construction, as a benchmark to reach this accounting estimate. The IRU valuation also takes into account the fixed cost payable per annum under the IRU agreement discounted at the Group's estimated cost of capital of 10%.

The Group derived $19.9m (2015: $36.5m) of its turnover from European countries outside the United Kingdom, $39.7m (2015: $27.2m) from countries outside Europe and $23.2m (2015: $21.5m) from the United Kingdom.

As disclosed in the highlights on page 1, the Top-20 Customer Bandwidth Revenue Growth metric helps to track Avanti's growth trajectory from core service sales. It is calculated by comparing the revenues from current leading customers on a last 12 month and constant currency basis, to the 12 months preceding that. Revenues from this customer group were 50% higher in the 2016 financial year ($32.4m) versus 2015 ($21.5m).

4. Income Tax

Income tax continued

The tax on the Group's loss before tax differs from the theoretical amount that would arise using the weighted average tax rate applicable to profits of the consolidated entities as follows:

The standard rate of corporation tax in the UK fell from 21% to 20% with effect from 1 April 2015. Accordingly, the Group's profits for this accounting period are taxed at an effective rate of 20% (2015: 20.75%).

The income tax charge of $2.2m (2015: nil) equates to an effective tax rate of (3)% (2015: 0%). This effective rate differs from the standard rate of corporation tax of 20% due to a number of items shown above. The rate is primarily driven by the Group not recognising a credit in respect of tax losses arising in the year due to the unpredictability of future profit streams against which these losses can be offset.

Factors that may affect future tax charges

Changes to the UK corporation tax rates were announced in the Chancellor's Budget on 16 March 2016. The change announced is to reduce the main rate to 17% from 1 April 2020. Changes to reduce the UK corporation tax rate to 19% from 1 April 2017 and to 18% from 1 April 2020 had already been substantially enacted on 26 October 2015. As the change to 17% had not been substantively enacted at the balance sheet date its effect is not included in these financial statements. The deferred tax balance as at the year-end has been recognised at 18% (2015: 20%).

Tax losses

At the balance sheet date the Group has unrecognised deferred tax assets of $37.2m (2015: $30.9m) available for offset against future profits. A deferred tax asset has been recognised in respect of $28.1m (2015: $30.5m). No deferred tax asset has been recognised in respect of the remaining losses and other temporary differences due to the unpredictability of future profit streams against which these losses could be offset. Under present tax legislation, these losses and other temporary differences may be carried forward indefinitely.In the future when these assets are recognised there will be a positive impact to the Group's effective tax rate.

5. Loss per share

The calculation of basic and diluted loss per share is based on the earnings attributable to ordinary shareholders divided by the weighted average number of shares in issue during the year.

6. Property, plant and equipment

Property, plant and equipment under finance lease

At 30 June 2016, the Group held assets under finance lease agreements with a net book value of $47.8m (2015: $46.7m). A depreciation charge for the year of $1.7m (2015: $1.3m) has been provided on these assets. These assets are included in satellites in operation and network assets.

Satellites in operation

Satellites in operation include the following:

· HYLAS 1 - Came into service on 1 April 2011

· HYLAS 2 - Came into service on 1 October 2012

· HYLAS 2B - Payload received as consideration on 24 June 2015 and came into service on 7 November 2016

· ARTEMIS - Acquired on 31 December 2013

All 4 satellites and their related ground infrastructure have been depreciated from the date that they came into operational service.

HYLAS-2B

Satellites in operation includes a Ka-band payload that the Group operates under an indefeasible right of use ("IRU") agreement entered into in June 2015 for the estimated remaining useful life of the payload of 13.5 years. This payload is known as HYLAS-2B and Note 3 provides more detail on the transaction through which this payload was received. The IRU agreement is accounted for as a finance lease and a Net Book Value ("NBV") of $35.1m is included within satellites in operation and also within the assets held under finance lease disclosure provided above.

The IRU of HYLAS-2B was initially recognised at its fair value of $35.1m. This asset value will subsequently be depreciated over the life of the IRU agreement from the date it commences operational service. The IRU was valued on a depreciated replacement cost basis. This was determined to be the most appropriate valuation technique as it had the most observable inputs into the model. Under this approach, the fair value was calculated as the cost of constructing and bringing into service an asset that could provide equivalent capacity. The fair value was reached by aggregating the estimated fair value of the cost to build the payload and the cost of launching the payload, including insuring the launch, in addition to the cost of designing and managing the procurement of the asset. Each of the four inputs have been classified as level 2 inputs within the fair value hierarchy. The Group obtained third party quotations for some elements and applied rates known from the existing fleet of satellites for other elements.

Satellite in construction

The satellites in construction assets of $296.7m relate to HYLAS 3 and HYLAS 4 (2015: $144.6m in relation to HYLAS 3 and HYLAS 4).

Capitalised finance costs

Included in the satellites in operation and satellites in construction are capitalised finance costs of $97.4m (2015: $72.0m) related to the HYLAS 2 and HYLAS 4 satellites.

HYLAS 1 satellite impairment review

HYLAS 1 is a 3 Ghz Ka-band High Throughput Satellite that came into operational service on 1 April 2011. An impairment review was conducted and disclosed in the prior year as a result of growth in revenues being slower than forecast.

Significant and long term new business was won during FY16 on HYLAS 1. Nevertheless, an impairment review was conducted on the HYLAS 1 satellite and associated network infrastructure ("HYLAS 1"), together representing the cash-generating unit ("CGU"), at 30 June 2016 to update this assessment. The review showed that the carrying value of the assets is supported and therefore no impairment has been recorded.

The recoverable amount of the CGU is determined using value in use, which is calculated by using the discounted cash flow method. This method considers the forecast cash flows of the HYLAS 1 satellite and associated network infrastructure over the remaining useful economic life of the CGU of 11 years.

Estimates of future cash flows originate from the detailed budget for the year to 30 June 2017 as reviewed and approved by the Board. Forecasts for the subsequent periods assume a ramp-up of satellite capacity sold over the remaining useful life of the CGU, derived from a combination of contractual ramps, development of existing customer relationships, and a modest underlying growth assumption in utilisation in addition to those factors of approximately 1.5% per annum. When the ramps with signed contracts mature over the coming 12-18 months, the HYLAS 1 satellite will be approximately 60% utilised. Further growth from new and existing customers is expected in addition to this and has been included within the forecast cash flows. The present value of cash flows is calculated by discounting the cash flow at 10%.

The estimate of future cash flows resulted in significant headroom over the carrying value of the CGU. Sensitivity analysis was carried out by management over assumptions made in the impairment model relating to yield, growth in utilisation and the discount factor applied. It was identified that, all other assumptions being consistent, headroom would be eliminated by a:

· 70% increase in discount factor applied; or

· 40% decrease in forecast yield ($/MHz per month); or

· scenario in which uncontracted capacity is sold at a significantly slower rate than forecast.

The above scenarios are not considered likely and the risks that they represent are considered to have been appropriately included in the impairment review.

There are no indicators of impairment for any other assets within Property, plant and equipment. As a part of management's assessment of the presence of any indicators of impairment, consideration was given to the current market capitalisation of the Group in addition to the financial restructuring process underway to support the construction of HYLAS 4. Management noted that the estimated enterprise value of the Group was well in excess of the carrying value of its assets and that the current value of the equity represented by the market capitalisation differed from the enterprise value, primarily due to the debt funding on the Group balance sheet in addition to a risk element that would be present until the restructuring is completed.

7. Trade and other receivables

Net trade receivables and accrued income increased mainly as a result of contracts reaching milestones at the end of the final quarter which resulted in invoicing or revenue accruals. Of the accrued income balance of $27.7m, $16.4m was due from investment grade customers who are either Government's or very well established corporations whose underlying customer is a government. The credit terms associated with the components within accrued income are largely consistent to the Group's trade receivables which are in the range of 30 to 90 days.

Included in the Group's trade receivables balance at 30 June 2016 is a long term receivable of $7.2m (2015: $8.5m). 31% of the original balance has already been collected, with the remainder payable in instalments due every three months such that the receivable will be fully repaid by 30 June 2019. In addition to the instalments payable, interest is payable at 5.25% per annum.

8. Loans and borrowings

(i) Finance lease obligations are secured by retention of title to the related assets. The borrowings are on fixed interest rate debt with repayment periods between 3 and 13.5 years.

High yield bonds

The Company issued 10% Senior Secured Notes of $370.0m, $150.0m and $125.0m on 1 October 2013, 17 June 2014 and 17 August 2015 respectively.

High yield bonds continued

The high yield bonds are disclosed in non-current loans and borrowings as detailed below:

The fair value of the High Yield Bonds, which are listed on the Irish Stock Exchange (Level 1 in the fair value hierarchy), at 30 June 2016 was $0.75 for each bond with a face value of $1(2015: $0.95). See Note 10 for details of a restructuring of the existing Senior Secured Notes after the balance sheet date and the issue of new Senior Secured Notes.

9. Cash absorbed by operations

10. Post balance sheet events

As described in the going concern accounting policy in Note 2, on 7 July 2016, the Company announced that it was probable that additional funding would be required in order to ensure that the Group had sufficient liquidity to complete and launch HYLAS 4 in the 2017 financial year. Avanti had based its funding plan on cash to be generated from the business which had grown more slowly than expected. On 11 July 2016, the Company announced the undertaking of a strategic review (the "Strategic Review") to consider all financial and strategic options. As part of this exercise, Avanti conducted an in-depth review of its business plan, financial position and strategic options, including various routes to strengthen the Company's balance sheet.

On 17 October 2016, the Company announced the result of a successful consent solicitation process ("September Consent Solicitation") as the first step in its two-phase funding strategy. The Company received consents from holders of 89.5% of its Senior Secured Notes to permit paying the interest due on 1 October 2016 in respect of consenting holders' Senior Secured Notes in the form of additional Senior Secured Notes on the same terms as the existing Senior Secured Notes in lieu of cash. The cash coupon of $3.4m was paid to the 10.5% of holders from whom consent was not received in October 2016.

Post balance sheet events continued

In order to further support the strategic review process, the Company also entered into binding agreements with certain suppliers to defer approximately $39m of capital expenditure payments relating to HYLAS 4 to the third quarter of the fiscal year ending 30 June 2017.

Following completion of the September Consent Solicitation, the Company continued negotiations with the manufacturer of HYLAS 4, Orbital Sciences ("Orbital"), and its largest holders of Senior Secured Notes regarding phase 2 of the funding strategy. The second phase was a restructuring of the Company's outstanding indebtedness in order to seek a long-term solution to its working capital needs and to ensure that the Company could continue to operate as a going concern in the future.

The restructuring drew towards its conclusion on 20 December 2016 when a Restructuring Agreement was signed by the Company with a group of its largest holders of Senior Secured Notes ("Initial Consenting Creditors"). The Company and the Initial Consenting Creditors, representing approximately 73% of the aggregate principal amount of the existing Senior Secured Notes ("Existing Notes"), entered into the Restructuring Agreement on 20 December 2016 pursuant to which the Initial Consenting Creditors contractually agreed to approve the Existing Notes restructuring by delivering Consents in connection with the Solicitation, tendering their Existing Notes in the Exchange Offer and voting in favour of the Scheme.

The Company and the Initial Consenting Creditors also entered into the Backstop Purchase Agreement on 20 December 2016 pursuant to which the Initial Consenting Creditors committed to fund up to the entirety of the New Money Offer, subject to reduction for the level of pro rata participation by the remaining Existing Note holders that elect to participate in the New Money Offer.

The major components of the restructuring, which will provide the Group with substantial additional liquidity, are:

1. New Money Notes - Issue of up to $132.5m of Senior Secured Notes in three tranches by the Company to provide additional funds for the Group. $82.5m will be issued on closing of the restructuring with the ability to issue a further $15m on 30 June 2017 and $35m on 30 November 2017.

2. Amended Existing Notes - Amendments to the Existing notes which include capitalising the April 2017 coupon and the ability to capitalise the October 2017 coupon for the $685m of Amended Existing Notes based on certain cash forecast targets. In addition the amendments allow for the ability to capitalise the April 2018 coupon for approximately $485m of the Amended Existing Notes based on certain cash forecast targets and extended maturity dates which range between October 2021 and October 2022.