Final results

23 March 2021

Nucleus Financial Group plc

("Nucleus" or the "group")

Final audited results for the year ended 31 December 2020

Nucleus delivers resilient financial performance and strong AUA growth in face of challenging market conditions

Nucleus (AIM: NUC) , a leading independent wrap platform provider, is pleased to announce its audited annual results for the year ended 31 December 2020.

Full year financial highlights

· AUA increased 7.9% year-on-year to £17.4bn despite the impact of the Covid-19 pandemic on investor sentiment and market volatility throughout the year. This compared to a FTSE All-Share Index decrease of 12.5% year-on-year.

· Net revenue grew by 1.6%, with a reduction in blended revenue yield as expected, and due to several factors including improved terms for a small number of large adviser firms.

· Adjusted EBITDA recovered strongly in H2 as markets reclaimed some of the lost ground in Q1 to finish the year at £5.7m with EBITDA margin following a similar pattern of outperformance in the second half of the year (H1 9.6%, H2 15.1%).

· A strong balance sheet was retained with £17.5m of cash, no borrowings and £9.6m of capital in excess of the group's pillar I minimum regulatory requirement.

· As a result of the offer by James Hay Holdings to acquire the entire issued share capital of Nucleus, the directors have resolved not to recommend a final dividend in respect of the 2020 financial year.

Full year operational highlights

· Successful acquisition of the business and assets of OpenWealth as they pertain to Nucleus, which is expected to be earnings enhancing in 2021 and increasingly accretive in future years.

· New model portfolio service, Nucleus IMX, was soft launched in Q4 2020 and has since been fully rolled out to all Nucleus users. Through the post reporting period (from 1 January 2021 to date), IMX has been the third highest DFM for net inflows on the Nucleus platform.

· Continued investment in the platform throughout the year saw the introduction of new and enhanced products and features strengthening the core proposition and resulting in Nucleus being awarded CoreData's 'Best medium-sized platform' for 2020, a 5-star rating at the Financial Adviser Service Awards and a highly-commended second place at Schroder's 'Platform of the Year' awards.

· The increase in investment has also been reflected in Nucleus achieving its highest ever net promoter score of +41, a clear indication that investment has been made in key areas benefitting users and increasing satisfaction.

· The number of active advisers using the platform was broadly flat year on year while new firm momentum picked up towards the end of the year with the signing of a new Enterprise relationship agreement with an adviser network.

· 4.3% increase in customer numbers from 96,857 to 101,029, over the previous year.

David Ferguson, founder and CEO of Nucleus, commented:

"We entered 2020 in great shape and enjoyed a strong Q1 before the rapid development of Covid-19 and volatile markets saw inflows dip and AUA growth stall through the height of the pandemic. I've commented before on how our people adjusted brilliantly to maintain our online and offline services, and I would reiterate how magnificent they've been throughout this extraordinary period."

"Despite the environment, we kept investing in the things that matter to our users in the expectation that momentum would return, as it did through late summer and particularly through Q4. Net inflows increased by 42% year-on-year, meaning AUA increased by 7.9% to close the year at £17.4bn."

"Our continued investment in the business delivered several major product enhancements, we completed the acquisition of the relevant OpenWealth assets (welcoming 130 new staff into the business in the process), landed our first Enterprise firm and started the rollout of our new model portfolio service, Nucleus IMX, which since launch has the third highest net inflows of all DFMs on the platform, all while maintaining operations and service levels throughout the crisis."

"The positive AUA and inflow momentum flowed directly from our highest ever people engagement and our highest ever net promoter score (+41), each of which underscored our confidence in the growth prospects for the business."

"The Q4 2020 recovery in inflows has continued strongly through Q1 2021 with gross and net inflows already up on the whole of the prior quarter and taking us to increased AUA of £17.8bn (Q4 2020: £17.4bn) as at 21 March. With the last part of March (normally our busiest time of the year) still to come, I expect the coming days to round off our best ever quarter for new business activity."

~ Ends ~

* Industry-specific financial performance measures.

Included within this results announcement are alternative measures that the directors believe help to inform the results and financial position of the group.

· Blended revenue yield is calculated by dividing annualised revenue by Average AUA.

· Adjusted EBITDA and adjusted profit before tax excludes non-operating income, AIM admission costs, exceptional items and share based payments.

· Full year dividend per share represents the post admission combined interim and final dividends for the financial year.

The definitions and calculations are included at the end of the document, where other technical terms are also defined.

For further information please contact:

Nucleus

David Ferguson, CEO Tel: +44 (0)13 1226 9800

Stuart Geard, CFO

Shore Capital (Nominated Adviser and Broker)

Hugh Morgan Tel: +44 (0)20 7408 4090

Edward Mansfield

Daniel Bush 

Camarco (Media enquiries)

Jennifer Renwick Tel: +44 (0)20 3757 4994

Jake Thomas  

Forward looking statements

This announcement includes statements that are, or may be deemed to be, "forward-looking statements". By their nature, forward-looking statements involve known and unknown risks and uncertainties since they relate to future events and circumstances. Actual results may, and often do, differ materially from any forward-looking statements.

Any forward-looking statements in this announcement reflect Nucleus' view with respect to future events as at the date of this announcement. Save as required by law or by the AIM Rules for Companies, Nucleus undertakes no obligation to publicly revise any forward-looking statements in this announcement following any change in its expectations or to reflect events or circumstances after the date of this announcement.

Notes to Editors

About Nucleus

Nucleus is a wrap platform provider founded in 2006 by advisers committed to aligning their interests with their clients to alter the balance of power in the industry and put client interests centre stage. Its technology and data-oriented platform has been built in partnership with users and now provides services to more than 1,400 active adviser users from a total user base of some 2,877 advisers from 861 financial advice firms as at 21 March 2021. It is responsible for over £17.8bn of AUA on behalf of more than 101,000 customers.

 The multi award-winning platform offers a range of custody, trading, payment, reporting, fee-handling, research and integration services across a variety of tax wrappers and more than 6,500 asset choices including cash, OEICs, unit trusts, offshore funds, structured products and listed securities, including ETFs and investment trusts. The platform currently facilitates over 1.1 million customer account transactions on average per month.

 Nucleus has been awarded CoreData's 'Best medium sized platform' for 2020 (and the last nine years). It has also been awarded a 5-star service rating at the 2019 and 2020 Financial Adviser Awards, the Schroders 'Platform of the Year' award for 2016, 2017 and 2018 (and highly-commended 2020 runner up) and won 'Best Platform' and 'Best Platform Innovation' at the 2018 Money Marketing Awards.

Chief executive's report

Overview

Since last year's report, Covid-19 has had an extraordinary impact on our lives, financial markets and global systems. 2020 was simply a year like no other and that makes me especially proud of the material progress achieved over the period. Our people and their welfare are always in focus and never more so than when Covid-19 hit. I was moved to see everyone adjusting so brilliantly to maintain our online and offline services, to develop new digital services and to achieve a successful soft launch of IMX, our new model portfolio service. Overall, their efforts led to a 42% increase in net inflows, a 4% increase in customers and closing AUA of £17.4bn.

Toward the end of the year, we were able to reach agreement with Genpact to acquire the business and assets of OpenWealth as they pertained to our business, giving us greater control over our operations, more flexibility over product and service improvements and a transformational outlook for margins as we grow AUA.

Overall, we closed the year with our highest ever net promoter score, our best ever people engagement score and were awarded CoreData's 'best medium platform' for the ninth successive year.

Since the close of the financial year (and following a process initiated by our majority shareholder), the board has recommended a cash offer to shareholders from James Hay Holdings valuing the company at £144.62m. Becoming part of this enlarged group gives Nucleus a key role in a much bigger story where we can create a leading independent platform of scale with a high tech, high touch proposition and philosophy. I think the combination of our people's talents and the size of the opportunity can see us carefully navigate the roadmap to deliver on this collective medium-term goal.

Regardless of our ownership, I hope we are able to build on the successes of last year and the positive momentum we have enjoyed in early 2021 which has resulted in us now being responsible for £17.8bn AUA.

Operational performance

Inflows began the year strongly as investor sentiment improved following the decisive general election result and our Q1 net inflows were up 100% over the previous year, a marked improvement that would have been better still were it not for the onset of the pandemic in March. Adviser and customer activity slowed materially through Q2 before beginning to recover through Q3 and then accelerate through Q4. Overall we increased our market share of retail advised net inflows from 2.3% to 2.9%, and these were up 42% over 2019, a good result in the circumstances even if our pre-pandemic expectations had been greater. Outflows continued to fall through the year, a positive trend exacerbated by the pandemic.

We had another strong year on product development and operations, responding quickly to working from home and adapting processes in March and delivering notable enhancements, including the delivery of digital signatures, better tax reporting, phased drawdown automation and enhanced bulk tools through the year.

We also entered into a long-term agreement to move the hosting of the platform into the cloud. This work will be carried out in collaboration with our long-term partners Bravura Solutions and is expected to result in our platform being hosted in AWS by the end of this year. This infrastructure change is expected to improve our flexibility, resilience and scalability.

We also achieved a soft-launch of IMX, our new model portfolio service which aims to improve the probability of customers achieving their financial goals. We have partnered with Hymans Robertson to engineer a product which promotes better alignment between customer goals and the way portfolios are constructed and the combination of low costs and this more personal approach has been well received.

Sector pricing trends are developing broadly as expected with larger adviser firms continuing to exert pressure on behalf of their customers. We have refreshed our pricing strategy and developed a new enterprise sales channel to target larger firms (including IFA consolidators) and have now established two new relationships (one since the end of December) and a pipeline of other potential opportunities.

In addition to securing our latest CoreData award, we received an FT Adviser 5-star service award, posted successive and substantial improvements in our Platforum ranking and landed a highly commended second place at the Schroders platform of the year awards.

Financial performance and dividend

Our 2020 profit was impacted by three pandemic-driven themes.

Firstly, income was hit by the fall in markets (and AUA) and despite the subsequent recovery and our improvement in inflows, net revenue was only marginally up to £46.0m. Secondly, we benefitted from substantial savings in some cost lines, especially in travel and entertainment, marketing and recruitment fees. Thirdly and perhaps most significantly, we made a clear and early decision to continue to invest through the pandemic and while this has contributed to improved user sentiment (and outlook) it had a predictably negative impact on profit in the short term. I am entirely comfortable this was the right decision and although adjusted Ebitda was down 27.9% to £5.7m most of that was achieved in H2 during which we outperformed our expectations.

Following last year's decision to not recommend a final dividend in respect of 2019, we were pleased to reinstate our dividend with an interim 2020 payment made in October. Our capital position continued to improve through H2 and I suspect that we may have revisited the 2019 dividend had our capital requirement not increased by a broadly-equivalent amount following the OpenWealth acquisition. In light of the recommended offer by James Hay Holdings Limited, no final dividend will be recommended in respect of 2020.

Our people

The resilience of our systems and our people allowed us to make a prompt and seamless move to working from home and throughout the rest of the year almost all of us worked from our kitchens, lounges and spare rooms. I am indebted to the way in which everyone responded, a sentiment that extends to the 154 new colleagues we welcomed in the course of the year, including the 130 who joined us through the OpenWealth transaction.

We made substantial effort to ensure the wellbeing of our people through the difficult circumstances and continue to encourage our leaders to monitor this area closely as the impact of the pandemic and lockdown wearies us all. We now operate a 'work from anywhere' policy and will continue with this model post-pandemic expecting perhaps 40-50% of working time to be spent in one of our offices in the medium term.

We continue our controlled shift toward technology roles and by the end of the year, 85% of our 384-strong team were involved in product management, platform operations or directly servicing our audience.

Following a restructure of the executive team and some other senior management changes, I am sorry to say that our gender pay gap widened for the upper pay quartile. This is regrettable and is being actively addressed with new focus with a view to improving our performance in this important area.

Prior to the announcement of the potential change to our ownership, overall people engagement was at an all-time high with 93% considering themselves proud to work here. There has been a notable improvement in service since the OpenWealth transaction completed and I hope this will be maintained. We achieved all the objectives detailed in our people strategy and continue to invest in learning and development to support the growth of the business.

Although perhaps not really 'our people' I also remain grateful to the members of our advisory board, platform development group and regional practice development groups - the individual and collective input is greatly valued. I will also take this opportunity to thank Mike Seddon who has chosen to step down as chair of our advisory board for all he has contributed in various roles (including on the main board) over the years.

Last and far from least we were terribly sorry to lose our much-loved friend and colleague, Mike Wallis, to MND. He remains greatly missed.

Climate change

We recognise the threat posed by climate change and our responsibility to help the UK transition to a low-carbon economy and also believe that action in this area is an important consideration for our people and our attractiveness as an employer. It is our intention to address these challenges by adopting and promoting low-energy technologies and working practices, and to help hold other organisations to account through more transparent reporting and particularly through the climate-related elements of our IMX investment beliefs.

Strategic development and outlook

The advised platform sector remains buoyant and our important role in improving value for money for customers remains as valid as ever. The market remains competitive with a combination of established and new participants and there is a growing trend toward consolidation. This has been building for a while but we have only recently seen the first transactions where profitable platforms are being acquired. Scale is becoming an important sectoral consideration but we continue to see scalability and value for money as equally important medium/long-term drivers of success.

We have now completed the reshaping of our operating model and subject to any changes that may be triggered by a change in ownership I believe we are very well positioned for further growth. The combination of our online product and offline service is increasingly competitive and the inflow momentum we expect from our core and enterprise audiences is expected to deliver the scale that is required to expand our operating margins from what is now a largely fixed cost base. Pricing pressure is expected to continue (and perhaps accelerate) but the shape of the organisation and the scalability we've achieved through automation mean we are well-prepared for that challenge.

Our combination of agility, scalability and resilience should allow us to continue to improve the sentiment of existing users and to grow our user base. This can then be expected to accelerate inflow growth, adding to AUA and driving future revenue growth. The operational gearing in the business model is expected to result in a substantial majority of revenue growth falling through to profit, and margins can be expected to grow further if we are able to achieve scale with IMX.

The regulatory environment for adviser platforms remains benign although the ongoing scrutiny of the advice and asset management sectors may trigger a need for us to respond. We also expect to have to make product changes triggered by the review of the UK tax system and by Brexit. The scope of these remains unclear but we expect to be able to meet any new requirements in a timely and cost-effective manner.

David Ferguson

Founder and chief executive

Chief financial officer's report

In a year that was dominated by the Covid-19 pandemic, Nucleus' financial performance proved resilient. After the Covid-19-induced slow down over the spring and summer, net inflows recovered strongly in Q4 and AUA rose in line with the recovery in global markets to end the year at £17.4bn. Similarly, underlying profitability, which was negatively impacted in H1 by the sharp fall in market levels, increased steadily towards the end of the year, with the company now well-positioned to grow its operating margin off an increasingly fixed cost base.

1 Industry-specific financial performance measures. Included within this results announcement are alternative measures that the directors believe help to inform the results and financial position of the group.

*Adjusted EBITDA excludes non-operating income, exceptional items and share-based payments, and includes ROU asset depreciation and ROU lease liability interest. It is included within the strategic report as the directors believe this is a better representation of the underlying performance of the business.

**Blended revenue yield is calculated by dividing annualised revenue over average AUA.

Revenue

Having opened the year at £16.1bn, AUA continued to increase in the first quarter on the back of relatively stable market levels and recovering net inflows. This positive momentum reflected the rebound in investor sentiment post the general election and Brexit withdrawal agreement, as well as a number of Nucleus-specific factors, such as the continued growth of some of our largest supporting IFA firms, the development of a number of new relationships and a sustained period of service and proposition delivery.

After the very positive start to the year, which saw net inflows of £268 million increasing by 100% on the same quarter of the prior year, markets and, as a consequence, AUA fell sharply towards the end of March as the Covid-19 pandemic hit. Although markets recovered much of their losses over the next two quarters, it was not until the final quarter of the year that the development of a Covid-19 vaccine, resolution of the US presidential elections and the expectation of a UK-EU trade deal pushed investor sentiment, market levels and AUA above the level seen at the start of the year.

The year ended strongly, with AUA closing at £17.4bn, a net increase of 7.9% over the prior year, compared to a decrease in the FTSE All-share index of 12.5% over the same period. The £1.3bn increase in AUA reflects the impact of the market fall and subsequent recovery (£0.5bn), as well as net inflows for the period of £723m, which, whilst a 42% uplift on 2019, were unsurprisingly reflective of the volatile external environment. As such, the full year's result consisted of the very positive first quarter, the Covid-19 impacted Q2 and Q3, and the encouraging recovery in the final quarter.

The trading environment in Q1 2021 to date remains uncertain, with expectations of a post-pandemic recovery being tempered by the risk associated with bringing the virus under control and the enormous economic cost associated of the pandemic to date.

Average AUA, which increased by 4.6% over the year from £15.2bn to £15.9bn, captures the impact of market volatility throughout the year. As Nucleus' revenue accrues on a daily basis, average AUA is a better indicator of top-line growth and compares to growth in net revenue for the year of 1.6% (from £45.2m in 2019 to £46.0m in 2020). The lower rate of growth in net revenue resulted in a blended revenue yield for the year of 28.9 basis points (2019: 29.8 basis points), with the decrease being mainly due to the existence of improved terms for a small number of large adviser groups.

Costs

The most important event of the year from a cost base perspective was the completion, in December, of the transaction with Genpact. This resulted in the termination of the wrap administration services agreement (and hence the AUA-related fees historically payable to Genpact), the transfer of 130 employees (including 16 fixed-term contractors) to Nucleus, the transfer of a number of contracts and licences required to service the acquired operations, and the entering into of a transitional services agreement with Genpact, under which Genpact will continue to provide hosting and production support, IT and office services to Nucleus for a limited period of time.

The impact of the transaction is a shift out of AUA-related costs and into staff, other direct platform and other costs (although less than one month of these costs were incurred in the year under review) and results in the cost base of the group becoming increasingly fixed in nature.

In the year under review, staff costs increased by 13.7% from £14.6m in 2019 to £16.6m in 2020. Full-time equivalent permanent headcount increased from 236 to 356 over the year, of which 113 transferred to the group from Genpact in mid-December. The balance of the increase in employee numbers represents net recruitment into the business, principally in technology and change-related roles. With the OpenWealth acquisition now complete, we expect total staff numbers to stabilise and that, within the overall headcount, there will be a continued increase in technology-related roles and a reduction in certain operational roles.

AUA-related costs, comprising principally the fees paid to Genpact (for administration services) and Bravura (for the licence of Sonata) increased by 1.7% from £10.2m in 2019 to £10.4m in 2020, at an average cost of 6.53 basis points (2019: 6.72 basis points). This overall result includes, up until the date of completion of the OpenWealth transaction, a lower level of 'fixed discounts' that formed part of the Genpact contract renegotiation in 2018, offset to some extent by the impact of service credits. Looking forward, this category of costs will be substantially less significant in amount and we may look to integrate it within other direct platform costs in future reporting.

Other direct platform costs increased from £3.4m to £4.1m, primarily as a result of 2020 including the full-year costs of platform hosting and platform-related printing and posting. This increase in costs remains consistent with guidance given previously and represents an increase in the fixed cost base of the group since August 2019. Platform hosting services will continue to be provided by Genpact (on the same cost basis) under the transitional services agreement with them until Nucleus completes its planned migration to a more flexible and modern cloud-based solution, expected towards the end of 2021 or the beginning of 2022. The balance of other direct platform costs relates to surround platform licence fees, bank charges and compensation costs. These costs decreased from £2.3m in 2019 to £1.8m in 2020, mainly as a result of lower than expected compensation costs.

Platform development expenditure of £3.0m was in line with our expectations, prior year and our stated plans. The positive momentum established in this area of our business means that we intend to target similar levels of expenditure on platform development in future years, and may even look to accelerate this over the next 18 months should market conditions stabilise.

Other costs of £6.2m decreased marginally for the second year in a row. These costs, which include the overhead costs of the operations acquired from Genpact from mid-December, were positively affected by the reduction of expenditure in some areas as a result of the Covid-19 pandemic (such as recruitment, travel and entertainment and marketing) and negatively affected in others (for example, materially higher FCA and FSCS levies), but otherwise were generally in line with our expectations.

Operating margin

Our operating margin (as reflected by the adjusted EBITDA margin) decreased from 17.5% in 2019 to 12.4% in 2020, primarily as a result of lower than expected revenue (as a result of the external environment's impact on markets, inflows and therefore AUA), whilst the cost base of the group remained largely in line with our expectations, except to the extent that individual cost lines were directly impacted by the pandemic.

We took the decision, at the start of the pandemic, to continue to execute on our strategy of investing in our platform and people should the external environment not deteriorate to such an extent that mitigating actions were deemed necessary. The lower operating margin (which was 9.6% in H1 2020 and 15.1% in H2 2020), demonstrates the increased operational leverage that is now present in the business, in particular subsequent to the OpenWealth transaction and the earlier restructuring of the contract with Genpact, and this operational leverage should translate into a higher operating margin when and to the extent that market levels recover and then increase.

Similarly, adjusted EBITDA decreased by 28% from £7.9m to £5.7m, a result we consider to be resilient given the abnormal trading environment and the continued investment in the business, and we continue to anticipate an operating margin in excess of 20% in 2022.

Profit before tax

Adjusted profit before tax decreased by 30% over the previous year, reflecting a similar result to the operating margin above. Statutory profit before tax, meanwhile, decreased by 42% to £4.0m, as a result of the incurrence of £0.3m exceptional items (relating to the OpenWealth acquisition transaction costs and the costs incurred in 2020 in relation to the process that led to the announcement in February by James Hay Holdings of its offer to acquire the company) and a higher charge for share-based payments of £0.8m.

Taxation

The group's effective tax rate of 21.1 per cent (2019: 15.0 per cent) incorporates the impact of expenses that are non-tax deductible of £0.2m (2019: £0.1m). These costs relate primarily to the OpenWealth acquisition and other costs incurred by the group in 2020 relating to the offer to acquire the company. The prior year's effective tax rate , which was lower than the standard 19 per cent rate, benefitted from the inclusion of qualifying research and development (R&D) expenditure under the SME R&D scheme for which the group qualified at the time.

Dividend

At the time of release of our 2019 results and in light of the exceptional uncertainty caused by the Covid-19 pandemic, the directors decided, in the interests of prudence, not to recommend a final dividend for the year ended 31 December 2019. At the time of release of our 2020 interim results, we reported that the directors did not believe that the downside risk of Covid-19 had reduced sufficiently to declare a second interim dividend in respect of the 2019 financial year at that stage.

However, the directors did resolve to pay a 2020 interim dividend of £0.8m (or 1.0 pence per share) in October in line with our dividend policy.

This compares to dividends paid in the prior year of £3.8m, comprising a final dividend in respect of the 2018 financial year in June 2019 of £2.7m (or 3.6 pence per share) and an interim dividend in October 2019 of £1.1m (or 1.5 pence per share).

Given the proposed acquisition of the business, the board has resolved not to recommend a final dividend relating to the financial year ending 31 December 2020.

Cash flow

We continue to achieve a high conversion rate of operating profit to cash before payment of dividends and investing activities. Whereas the group did not pay a final 2019 dividend in the first half of the year, the timing, nature and scale of the OpenWealth acquisition, together with the improving Covid-19 impacted operating environment in the second half of the year, meant that the headline £1.5m OpenWealth acquisition was financed using internal resources in December, and a 2020 interim dividend of £0.8m was paid in October.

Financial position

Nucleus continues to be funded entirely by equity capital and has no borrowings, save for in respect of the lease of our Edinburgh headquarters, which is recognised as a lease liability under IFRS16 Leases.

Intangible assets increased over the course of 2020 and now comprise the costs incurred in the development and licencing of Nucleus IMX (recognised in accordance with IAS38) and goodwill arising from the OpenWealth acquisition.

All surplus capital not required for working capital purposes continues to be held in cash and is governed by an embedded capital management policy. At the end of the financial year, the group had £17.5m of cash and cash equivalents, representing 77.2% (2019: 94.0%) of the group's net assets. In addition, the group has retained access to a £5.0m uncommitted overdraft facility from RBS International that remains undrawn and has not been accessed for the last four years.

At the end of the financial year, the group had a pillar I statutory capital ratio of 15.1% (2019: 19.7%), amounting to £9.6m of capital in excess of the 8% minimum regulatory capital requirement. The solvency position as at 31 December 2020 includes the audited profits for the year as well as the increased capital requirement pursuant to the OpenWealth acquisition, whilst goodwill arising from the acquisition does not qualify for solvency purposes.

The group's capital requirements are reviewed on a quarterly basis and are also subject to periodic stress testing to evidence that its regulatory capital requirements can continue to be met in a range of stressed scenarios (including macro-economic shocks, company-specific shocks and a combination of simultaneous internal and external shocks). The output of the stress testing is subject to a set of mitigating actions, applied as appropriate to each scenario. In all scenarios incorporating a significant shock to financial markets, the nature of Nucleus' revenue (ongoing annuity-type revenue derived from asset classes that are not equally correlated to equity markets) acts as an inherent mitigant.

The group's robust capital structure, solvency position, high conversion rate of profit to cash, no borrowings and available liquidity mean that it remains well-positioned to absorb the impact of a sustained collapse in equity markets. In consideration of the ongoing uncertainty in relation to Covid-19, the group will consider and implement identified mitigating actions should these be required (including in respect of expense management and dividend payments) but will seek to not take actions that might constrain the strategic development of the business unless conditions deteriorate to the extent that this is required.

Going concern

The directors consider that the group has adequate resources to remain in operation for the foreseeable future and have therefore continued to adopt the going concern basis in preparing the annual financial statements.

However, as set out in note 12 events after the reporting period below, the group is the subject of an all cash offer from James Hay Holdings that, if successful, is expected to complete in the next 12 months. Whereas the directors note the intentions of James Hay Holdings as set out in the Scheme Circular and whereas they do not have any reason to believe that James Hay Holdings would not continue to support the group and company or would materially change their activities in the next 12 months, they are not party to the detailed intentions of the acquirer. Although this does not change the directors' conclusion as to the appropriateness of preparing the financial statements of the group and the company on a going concern basis, it is considered to create a material uncertainty which may cast significant doubt on the group and company's ability to continue as a going concern,and the financial statements contain disclosures to this effect.

Stuart GeardChief financial officer

Consolidated statement of comprehensive income

Consolidated statement of financial position

Consolidated statement of changes in equity

Consolidated statement of cash flows

Notes to the consolidated financial statements

1. Accounting policies

Basis of preparation

These financial statements have been prepared in accordance with international accounting standards in conformity with the requirements of the Companies Act 2006 ('IFRS') and with international financial reporting standards adopted pursuant to Regulation (EC) No 1606/2002 as it applies in the European Union. The financial statements have been prepared on a going concern basis, under the historical cost convention as modified by the recognition of certain financial assets measured at fair value. Unless otherwise stated, the accounting policies set out below have been applied consistently in both years presented in these financial statements.

The preparation of the financial statements in compliance with iinternational accounting standards requires the use of certain critical accounting estimates. It also requires management to exercise judgement in applying the group and company's accounting policies. The areas where significant judgements and estimates have been made in the preparation of the financial statements are detailed below.

Section 435 of the Companies Act 2006 statement

The financial information contained within this document does not constitute statutory accounts. It is based on statutory accounts which have been audited by PricewaterhouseCoopers LLP (PwC). The 2019 statutory accounts have been filed with the registrar of companies, and the 2020 statutory accounts will be filed in due course. The auditor, PwC, has reported on those accounts.

PwC's audit report on the 2019 accounts was (i) unqualified, (ii) did not reference to any matters to which the auditor drew attention by way of emphasis without qualifying the report, and (iii) did not contain a statement under section 498 (2) or (3) of the Companies Act 2006. PwC's audit report on the 2020 accounts was also (i) unqualified and (ii) did not contain a statement under section 498 (2) or (3) of the Companies Act 2006, however it did contain a reference to the material uncertainty created by the potential change in ownership of the group that may cast significant doubt on the group and company's ability to continue as a going concern.

Basis of consolidation

The consolidated financial statements comprise the financial statements of the company and all its subsidiary undertakings.

Subsidiaries are entities controlled by the company. Control is achieved where the group has existing rights that give it the current ability to direct the relevant activities that affect the returns and exposure or rights to variable returns from the entity. Subsidiaries are included in the consolidated financial statements of the group from the date control of the subsidiary commences until the date that control ceases. Intragroup balances, and any unrealised gains and losses or income and expenses arising from intragroup transactions, are eliminated in preparing the consolidated financial statements.

Uniform accounting policies have been applied across the group.

Going concern

After reviewing the group and the company's forecasts and projections, together with the results of modelled severe but plausible stress tests on both liquidity and regulatory capital adequacy,and the current operating and trading environment, the directors have a reasonable expectation that the group and the company has adequate resources to continue in operational existence for at least 12 months from the date of signing of the financial statements. The group and the company therefore continue to adopt the going concern basis in preparing their financial statements.

Material uncertainty in relation to going concern

A set out in note 12 events after the reporting period below, the group is the subject of an all cash offer from James Hay Holdings that, if successful, is expected to complete in the next 12 months. Whereas the directors note the intentions of James Hay Holdings as set out in the Scheme circular and whereas they do not have any reason to believe that James Hay Holdings would not continue to support the group and company or would materially change their activities in the next 12 months, they are not party to the detailed intentions of the acquirer. Although this does not change the directors' conclusion as to the appropriateness of preparing the financial statements of the group and the company on a going concern basis, it is considered to create a material uncertainty which may cast significant doubt on the group and company's ability to continue as a going concern. Accordingly, the financial statements do not include the adjustments that would result if the group or company were unable to continue as a going concern.  

Segmental reporting

Operating segments are reported in a manner consistent with the internal reporting provided to the executive committee (the chief operating decision maker). The board tasks responsibility to the executive committee to assess the financial performance and the position of the group and make strategic decisions and allocate resources.

Nucleus' principal activities are the provision of wrap administration services and there is only one reporting and operating segment as defined under IFRS 8 Operating Segments. This is reviewed on a regular basis. It is considered appropriate that management review the performance of the group by reference to total results against budget.

The main financial performance measures are assets under administration on the platform, gross and net inflows onto the platform, revenue, adjusted EBITDA, profit for the year, dividend paid, adjusted EBITDA margin, consolidated operating profit, consolidated profit after tax and consolidated net assets. These are disclosed in the chief financial officer's report, where non-Gaap financial performance measures are also identified. The operating profit to adjusted EBITDA reconciliation is presented within the Consolidated statement of comprehensive income. Non Gaap measures are also defined in the definitions and glossary section of the financial statements.

Revenue

Revenue comprises fees earned by the group from the provision of a wrap platform service to UK financial advisers and their clients. Fees are recognised exclusive of Value Added Tax and net of large case discounts. They are recorded in the year to which they relate and can be reliably measured. Platform fees are calculated monthly using contractual basis point rate cards applied to the daily valuation of assets under administration on the platform. Performance obligations are satisfied as the wrap platform service is provided to customers over time. Accrued income represents fees that are collected in the following month.

New standards effective for the first time in the 2020 financial statements

Future standards, amendments to standards and interpretations not early-adopted in the 2020 financial statements

New accounting standards and interpretations have been published that are not mandatory for adoption in the 2020 financial statements.

The adoption of these standards is not expected to have a material impact on the group.

Critical accounting judgements and key sources of estimation uncertainty, and restatements

Estimates and judgements are continually evaluated and are based on historical experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances. The critical accounting judgements and the key sources of estimation uncertainty are as follows:

Income taxes

The group is subject to income taxes. Judgement is required in determining the extent to which it is probable that taxable profits will be available in future against which deferred tax assets can be utilised. Based on forecasts, the group expects to materially recover its deferred tax assets within the next two years.

Share-based payments

The group assesses the fair value of shares under the LTIP scheme at the grant date using appropriate valuation models, depending upon the nature of the performance criteria. At the end of each reporting period, the company revises its estimate of the number of options and shares under the LTIP scheme that are expected to vest to reflect latest expectations on the group's ability to achieve the specified performance criteria and actual or anticipated leavers from the schemes. For non-market related performance criteria, the company recognises the impact of any revision to the prior year's estimates in the statement of comprehensive income, with a corresponding adjustment to equity.

Business combinations

The acquisition method of accounting is used to account for all business combinations, regardless of whether equity instruments or other assets are acquired. The consideration transferred for the acquisition of a business combination comprises the:

· fair values of the assets transferred,

· liabilities incurred to the former owners of the acquired business, and

· fair value of any asset or liability resulting from a contingent consideration arrangement,

Identifiable assets acquired and liabilities and contingent liabilities assumed in a business combination are, with limited exceptions, measured initially at their fair values at the acquisition date.

Acquisition-related costs are expensed as incurred.

The excess of the:

· consideration transferred, and

· acquisition-date fair value of any previous equity interest in the acquired entity

over the fair value of the net identifiable assets acquired is recorded as goodwill. If those amounts are less than the fair value of the net identifiable assets of the business acquired, the difference is recognised directly in profit or loss as a bargain purchase.

Where settlement of any part of cash consideration is deferred, the amounts payable in the future are discounted to their

present value as at the date of exchange. The discount rate used is the entity's incremental borrowing rate, being the rate at which a similar borrowing could be obtained from an independent financier under comparable terms and conditions.

Contingent consideration is classified as a financial liability. Amounts are subsequently remeasured to fair value, with changes in fair value recognised in profit or loss.

Goodwill

Goodwill arises on consolidation and represents the excess of the purchase consideration for a business over the fair value of any identifiable assets and liabilities acquired. Goodwill is not amortised but is tested annually for impairment or more frequently where impairment indicators exist. Impairment losses are recorded in the consolidated statement of comprehensive income, and any recorded losses are not subsequently reversed.

Provisions

The group has recognised provisions in respect of client compensation, outsourced service, dilapidations and share incentive plans. Further detail on these provisions, the rationale behind their recognition and the timing of future cash flow is included in note 3.

2. Financial instruments

The principal financial instruments, from which financial instrument risk arises, are as follows:

· Trade and other receivables

· Cash and cash equivalents

· Investments in securities

· Trade and other payables

Financial assets and liabilities have been classified into categories that determine their basis of measurement and, for items measured at fair value, whether changes in fair value are recognised in the statement of comprehensive income. In adopting IFRS 9 all previously classified loans and receivables were re-classified as financial assets at amortised cost, with no change to measurement, and all financial assets previously classified at fair value through other comprehensive income were reclassified as financial assets at fair value through profit and loss, as this is the residual category under IFRS 9. The following tables show the carrying values of assets and liabilities for each of these categories.

*Prepayments of £1,713k and social security and other taxes of £372k are not considered to be financial assets and liabilities per IAS 32 but were previously disclosed as such, and have been re-presented as non-financial assets and non-financial liabilities.

Financial instruments measured at fair value - fair value hierarchy

The table below classifies financial assets that are categorised on the statement of financial position at fair value in a hierarchy that is based on significance of the inputs used in making the measurements.

Investments in securities are held for the benefit of platform functionality and are reported on a separate line in the statement of financial position. The assets are held at fair value with any gains or losses being taken to the statement of comprehensive income.

The following tables show the group's financial assets measured at fair value through profit and loss, classed according to the level of the fair value hierarchy.

Credit risk

The group holds the surplus of corporate cash balances over and above its working capital requirements on deposit with its corporate banking services providers, The Royal Bank of Scotland plc, Bank of Scotland plc and Investec Bank plc. The group is therefore exposed to counterparty credit risk and a failure of any of these banks would impact the group's resources and its ability to meet its solvency and liquidity requirements. Credit risk is managed within the risk appetites set by the board on an annual basis.

The supply of wrap platform services to clients results in trade receivables which the management consider to be of low risk. Other receivables are likewise considered to be low risk. Management do not consider that there is any concentration of risk within either trade or other receivables.

Included in other receivables is a balance of cash prefunded on the wrap platform. Where these amounts are not received within normal operational timeframes, our experience is that the risk of non-recovery increases, and we provide to our expectation of the most likely outcome. The provision as at 31 December 2020 was £188,768 (2019: £230,410).

Liquidity risk

The group's liquidity position is subject to a range of factors that may generate liquidity strain in the short or medium term. The group manages its liquidity risk through an ongoing evaluation of its working capital requirements against available cash balances and credit facilities. The group maintains actual liquid resources above the minimum cash buffers prescribed in the liquidity management policy for foreseeable funding requirements (including under stressed conditions) and reserve liquidity for unforeseen events, unless a different amount is agreed by the board. Detailed risk appetite limits are prescribed in the liquidity management framework and reviewed annually by the board.

Solvency risk

The group's solvency position is subject to a range of factors that may influence it in the short or medium term. The group maintains risk appetite limits for solvency risk and capital and has in place a capital management policy to manage against those. This is managed through an ongoing capital evaluation programme and is reported regularly to the board.

Exposure to securities markets

The group's income is derived from a tiered basis point fee that is applied to client assets under administration. This income is exposed to the value of the underlying investment assets which can be affected by market movements. Although some of this risk is mitigated within components of the cost base, the group is ultimately exposed to volatility in its financial results because of market movements beyond its control.

Operational risk

The nature of the activities performed by the group is such that a degree of operational risk is unavoidable in relation to losses that could be incurred by the group or by others because of errors or omissions for which the group is ultimately liable.

Particular operational risks for the group are considered to be:

· People risks - we consider that the two most significant risks are the risk of failure to attract and retain core skills and knowledge in the company, and people-related errors in core processes;

· Operational control failures in core processes - there is always a risk of failure in core processes, either directly by the company and/or by third parties which would result in operational losses, poor client outcomes and reputational damage; and

· Systems-related risks including cyber-attacks, data leakage and business continuity events.

During 2020, the business was proven to be operationally resilient with very limited impact to service as a result of the move to working arrangements in response to Covid-19. The significant majority of our staff were able to work from home whilst maintaining business operations and delivering the group's change programme. However, as noted across the industry, the group has monitored and mitigated increased potential risks from unsophisticated cyber-attack attempts, attempted financial crime and failure to manage core business processes.

The following tables show an analysis of the financial assets and financial liabilities by remaining expected maturities.

*Prepayments of £1,713k and social security and other taxes of £372k are not considered to be financial assets and liabilities per IAS 32 but were previously disclosed as such, with maturities of < 3 months, and have been re-presented as non-financial assets and non-financial liabilities.

Client compensation

The group remediates customers affected by errors on the platform and calculates any amounts due in line with guidance given by the Financial Ombudsman Service in respect of the type of customer loss, distress and inconvenience for which customers should be compensated. Where actual trading losses are suffered by customers, these are calculated in accordance with Mifid II best execution rules to ensure customers are restored to the position they would have been in had the error or omission not been made. Amounts are provided and utilised against the administrative expenses line in the statement of comprehensive income and the majority of the outstanding issues are expected to be resolved in the first half of 2021.

Outsourced service

The commercial agreement with its outsourced BPO service provider terminated on 11 December 2020. Under that agreement should any key performance criteria not have been met, then the group was entitled to receive a discount on the wrap administration fees charged. Where these were agreed, they were deducted from the invoiced fee and the net expense was charged through the statement of comprehensive income. Where these were uncertain or in dispute with the service provider, a provision was booked in recognition of the uncertainty regarding the outcome. Now that the outsourcing service has been brought in-house and there are no related outstanding claims or disputes the outsourced service provision has been fully reversed.

Dilapidations

The dilapidations provision relates to the group's office premises at Greenside, Edinburgh. This is calculated using the Building Cost Information Service survey (part of the Royal Institution of Chartered Surveyors) of average settlement figures for offices, adjusted for inflation, and the square footage of the company's leasehold premises. The provision has been classified as non-current due to the likelihood of its utilisation at the end of the lease in 2027.

Share incentive plans

Provisions for share incentive plans relate to the LTIP which is a HMRC unapproved equity-settled scheme. The company is liable to pay employers' NIC upon exercise of the options. The provision is calculated using the applicable employers' NIC rate applied to the number of share awards expected to vest, valued at the share price at the reporting date. The provision is recognised over the vesting period of the shares awarded.

Business combination

As part of the agreement to acquire OpenWealth, Nucleus is required to pay additional consideration in relation to certain contracts. The final amount due will be determined on actual costs incurred by OpenWealth. The fair value of the consideration as at 31 December 2020 has been based on the value of the costs expected to be incurred.

Operational platform prefunding includes prefunding of client pension tax relief and temporary funding required under the client money and client assets rules.

The weighted average number of ordinary shares reflect the number of shares in issue following the listing of the Company on 26 July 2018.

The company grants long-term incentive awards in the form of nil-cost options over its ordinary shares to the executive directors and other persons discharging managerial responsibility under its long-term incentive plan. The total number of shares over which the awards were granted was 4,315,596 of which 248,043 have lapsed. The vesting of each of the awards is subject to the satisfaction of performance conditions that have been set by the remuneration and HR committee. These conditions, which will be assessed over prescribed three-year periods, relate to the achievement of specific targets in relation to earnings per share, net-inflow of assets under administration and total shareholder return. Vesting will also normally be dependent on the continued employment of the participant within the group.

Employee benefits trusts hold a total of 674,704 shares (2019: 611,255).

11. Business combination

On 11 December 2020 Nucleus Financial Group plc acquired the UK business and assets of Genpact Wealth Management UK Limited (which operates under the trading name OpenWealth) as they pertain to Nucleus. In November 2018 Nucleus unbundled its technology arrangements from OpenWealth, contracting directly with Bravura Solutions (UK) Ltd.

The board of Nucleus believes that the acquisition of the assets that pertain to Nucleus will allow the group to:

· further accelerate its product development and automation programme,

· provide scope to enhance the level and efficiency of its offline service,

· create new growth opportunities for its people, and

· accelerate the expansion of its operating margin as it grows AUA.

Details of the purchase consideration, the net assets acquired and goodwill are as follows: