Zenium Topco Limited

Financial Statements for the year ended 31 December 2017

Contents

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Report of Independent Auditors    3

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Consolidated statement of financial position 5

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Consolidated statement of comprehensive income 6

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Consolidated statement of changes in equity 7

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Consolidated statement of cash flows 8

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Notes to the consolidated financial statements 9

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Report of Independent Auditors

To the Directors of Zenium Topco Limited

We have audited the accompanying consolidated financial statements of Zenium Topco Limited and its subsidiaries, which comprise the consolidated statement of financial position as of 31 December 2017, and the related consolidated statement of comprehensive income, consolidated statement of cash flows and consolidated statement of changes in equity for the year then ended.

Management's Responsibility for the Consolidated Financial Statements

Management is responsible for the preparation and fair presentation of the consolidated financial statements in accordance with International Financial Reporting Standards as issued by the International Accounting Standards Board; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of consolidated financial statements that are free from material misstatement, whether due to fraud or error.

Auditors’ Responsibility

Our responsibility is to express an opinion on the consolidated financial statements based on our audit. We conducted our audit in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free from material misstatement.

An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on our judgment, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, we consider internal control relevant to the Company's preparation and fair presentation of the consolidated financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.

Opinion

In our opinion, except for the exclusion of comparative information as discussed in Note 2.1, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Zenium Topco Limited and its subsidiaries as of 31 December 2017, and the results of their operations and their cash flows for the year then ended in accordance with International Financial Reporting Standards as issued by the International Accounting Standards Board.

Emphasis of matter

As discussed in Note 2.1, the accompanying consolidated financial statements do not include comparative figures for the prior period as required by IAS 1, "Presentation of financial statements". In our opinion,

inclusion of comparative figures is necessary to obtain a proper understanding of the current period's financial statements. Our opinion is not modified with respect to this matter.

/s/ PricewaterhouseCoopers LLP

London

United Kingdom

31 October 2018

The notes on pages 9 to 46 are an integral part of these consolidated financial statements.

The financial statements on pages 5 to 46 were authorised for issue by the board of directors on

31 October 2018 and were signed on its behalf by:

The notes on pages 9 to 46 are an integral part of these consolidated financial statements.

Consolidated statement of cash flows

Notes to the consolidated financial statements

1    General information

The Company is a limited liability company incorporated and domiciled in Cayman Islands. The address of its registered office is 27 Hospital Road, George Town, Grand Cayman, KY1-9008.

The principal activity of the Group throughout the year was data centre development in Frankfurt and the UK, with Turkish operations being disposed of. The Group specialises in the delivery of wholesale data solutions to the data centre market. The Group typically enters into agreements with tenants to provide bespoke facilities that facilitate high specification data storage and ongoing facility maintenance and operation services.

2    Summary of significant accounting policies

The principal accounting policies applied in the preparation of these consolidated financial statements are set out below.

2.1    Basis of preparation

Statement of compliance

These consolidated financial statements of the Group have been prepared in accordance with International Financial Reporting Standards as issued by the International Accounting Standards Board (IFRS), except that the consolidated financial information do not include comparative figures for the prior period as required by IAS 1 "Presentation of Financial Statements". The purpose of these financial statements is to meet the reporting requirements of Regulation S-X of Securities and Exchange Commission (SEC).  

Preparation of the consolidated financial statements

The consolidated financial statements have been prepared on a going concern basis, applying a historical cost convention, except for the measurement of derivative financial instruments that have been measured at fair value (note 3) and the share based payment scheme (note 9 and 10) is based on the fair value at the year end for cash settled schemes and at the date of grant for equity settled schemes. The preparation of consolidated financial statements in conformity with IFRS required the use of certain critical accounting estimates. It also required the Directors to exercise their judgment in the process of applying the Group’s accounting policies. The Directors have considered the Group’s accounting policies and results to date and have concluded there was only one change to significant accounting estimates and critical judgments in applying the Group’s accounting policies, see section 2.10, Share-based payments for discussion of this change.

These financial statements were previously issued privately to the directors of Zenium Topco Limited on 1 March 2018. Management has subsequently identified a small number of revisions relating to the classification of certain items on the balance sheet which they do not consider to be material. These immaterial revisions (which relate to deferred tax, classification of accrued income and classification of accrued interest) have been recognised in these revised financial statements.

Going concern

A Share Purchase Agreement (“SPA”) with CyrusOne completed on 24 August 2018 to acquire the share capital of Zenium TopCo Limited. Given this transaction and the Group’s financial position, the Board is satisfied that the Group will be able to operate with its current level of resources to meet its working capital requirements for at least 12 months from the date of signing these financial statements and funding is available, if required, to meet future uncommitted fit out works.

Notes to the consolidated financial statements (continued)

2    Summary of significant accounting policies (continued)

New and amended standards adopted by the Group

The Group has applied the following standards and amendments for the first time:

Amendments to IAS 7, Statement of cash flows on disclosure initiative (effective for annual periods beginning on or after 1 January 2017). The amendments introduce an additional disclosure that will enable users of financial statements to evaluate changes in liabilities arising from financing activities. This disclosure has been included within note 11 for both finance leases and bank borrowings.

Amendments to IAS 12, ‘Income taxes’ on Recognition of deferred tax assets for unrealised losses (effective for annual periods beginning on or after 1 January 2017). These amendments on the recognition of deferred tax assets for unrealised losses clarify how to account for deferred tax assets related to debt instruments measured at fair value. See note 6 for presentation of deferred tax.

New standards and interpretations not yet adopted

Standards issued but not yet effective or amended up to the date of issuance of the Company’s consolidated financial statements are listed below. This listing is of standards and interpretations issued, which the Company reasonably expects to be applicable at a future date.

In July 2014, the IASB issued the final version of IFRS 9 Financial Instruments which reflects all phases of the financial instruments project and replaces IAS 39 Financial Instruments: Recognition and Measurement and all previous versions of IFRS 9. IFRS 9 is effective for annual periods beginning on or after 1 January 2018, IFRS addresses the classification, measurement and derecognition of financial assets and financial liabilities, introduces new rules for hedge accounting and a new impairment model for financial assets. The new impairment model requires the recognition of impairment provisions based on expected credit losses (ECL) rather than only incurred credit losses as is the case under IAS 39. It applies to financial assets classified at amortised cost, debt instruments measured at FVOCI, contract assets under IFRS 15 Revenue from Contracts with Customers, contract receivables, loan commitments and certain financial guarantee contracts. The Company has assessed the impact of the adoption of this standard on its consolidated financial statements and it is not material.

In May 2014, the IASB issued IFRS 15, Revenue from Contracts with Customers, which establishes a single comprehensive model of accounting for revenue arising from contracts with customers that an entity will apply to determine the measurement of revenue and timing of when it is recognized. IFRS 15 supersedes current revenue recognition guidance, which is found currently across several standards and interpretations including IAS 11, Construction Contracts and IAS 18, Revenue. The core principle of IFRS 15 is that an entity recognizes revenue to depict the transfer of promised goods and services to customers in an amount that reflects the amount an entity expects to be entitled to in exchange for those goods and services. The new standard will also result in enhanced disclosures about revenue that would result in an entity providing comprehensive information about the nature, amount, timing and uncertainty of revenue and cash flows arising from the entity’s contracts with customers. This amendment is applicable for annual periods beginning on or after 1 January 2018. The Group has assessed the impact of the adoption of this standard of its consolidated financial statements. There will be no material financial impact on the Group’s accounting for revenue, as the current revenue recognition policies are in line with new requirements where revenue has been recognised only as services are rendered, and the performance obligation has been satisfied. Contract prices are fixed and are not subject to adjustments arising from variable considerations due to discounts, credits or other constraints on revenue. Management will adopt on a prospective basis.

 

Notes to the consolidated financial statements (continued)

2    Summary of significant accounting policies (continued)

New standards and interpretations not yet adopted (continued)

On 13 January 2016 the IASB issued IFRS 16, Leases. The new standard is effective for annual periods beginning on or after 1 January 2019. Earlier application is permitted for entities that apply IFRS 15 at or before the date of initial adoption of IFRS 16. IFRS 16 will replace IAS 17, Leases ("IAS 17"). This standard introduces a single lessee accounting model and requires a lessee to recognize assets and liabilities for all leases with a term of more than 12 months, unless the underlying asset is of low value. A lessee is required to recognize a right-of-use asset representing its right to use the underlying asset and a lease liability representing its obligation to make lease payments. This standard substantially carries forward the lessor accounting requirements of IAS 17, while requiring enhanced disclosures to be provided by lessors. Other areas of the lease accounting model have been impacted, including the definition of a lease. This is expected to result in a significant increase in both assets and liabilities recognised. The costs of operating leases currently included within operating costs will be split and the financing element of the charge will be reported within finance expense. Finance lease obligations at 31 June 2018 are set out in Note 10, ‘Borrowings’ and the undiscounted commitments under non-cancellable operating leases are set out in Note 19, ‘Contingencies and commitments’. The Group is continuing to assess and quantify the potential impact of IFRS 16.

The new standard also introduces expanded disclosure requirements and changes in presentation. These are expected to change the nature and extent of the group’s disclosures about its financial instruments particularly in the year of the adoption of the new standard.

2.2    Consolidation

Subsidiaries

Subsidiaries are all entities over which the Group has control. The Group controls an entity when the Group is exposed to, or has rights to, variable returns from its involvement with the entity and has the ability to affect those returns through its power over the entity. Subsidiaries are fully consolidated from the date on which control is transferred to the Group. They are deconsolidated from the date that control ceases. 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 subsidiary is the fair values of the assets transferred, the liabilities incurred to the former owners of the acquiree and the equity interests issued by the Group. The consideration transferred includes the fair value of any asset or liability resulting from a contingent consideration arrangement. Identifiable assets acquired and liabilities and contingent liabilities assumed in a business combination are measured initially at their fair values at the acquisition date. The Group recognises any non-controlling interest in the acquiree on an acquisition-by-acquisition basis, either at fair value or at the non-controlling interest's proportionate share of the recognised amounts of acquiree's identifiable net assets. Acquisition-related costs in a business combination are expensed as incurred in line with IFRS 3. The excess of the consideration transferred, the amount of any non-controlling interest in the acquiree and the acquisition-date fair value of any previous equity interest in the acquiree over the fair value of the identifiable net assets acquired is recorded as goodwill. If the total of consideration transferred, non-controlling interest recognised and previously held interest measured is less than the fair value of the net assets of the subsidiary acquired in the case of a bargain purchase, the difference is recognised directly in the consolidated statement of comprehensive income.

Intercompany transactions, balances and unrealised gains on transactions between group companies are eliminated. Unrealised losses are also eliminated unless the transaction provides evidence of an impairment of the transferred asset. Accounting policies of subsidiaries have been changed where necessary to ensure consistency with the policies adopted by the group. Non-controlling interests in the results and equity of subsidiaries are shown separately in the consolidated statement of profit or loss, statement of comprehensive income, statement of changes in equity and balance sheet respectively.

Notes to the consolidated financial statements (continued)

2    Summary of significant accounting policies (continued)

2.3    Foreign currency translation

Items included in the financial statements of each of the Group’s entities are measured using the currency of the primary economic environment in which the entity operates (the ‘functional currency’). The consolidated financial statements are presented in US$, which is the Company’s functional currency and the Group’s presentation currency.

Foreign currency transactions are translated into the functional currency using the exchange rates prevailing at the dates of the transactions. Foreign exchange gains and losses resulting from the settlement of such transactions and from the translation at year-end exchange rates of monetary assets and liabilities denominated in foreign currencies are recognised in the consolidated statement of comprehensive income for the year.

Foreign exchange gains and losses are presented net in the consolidated statement of comprehensive income, with those relating to the retranslation of the subsidiary statement of financial positions at the year-end date, recognised in the currency reserve and other comprehensive income.

The results and financial position of all the Group entities (none of which has the currency of a hyperinflationary economy) that have a functional currency different from the presentation currency are translated into the presentation currency as follows:

Goodwill and fair value adjustments arising on the acquisition of a foreign entity are treated as assets and liabilities of the foreign entity and translated at the closing rate. Exchange differences arising are recognised in other comprehensive income.

All property, plant and equipment (‘PPE’) is stated at cost less accumulated depreciation less impairment. The cost of PPE comprises their purchase cost together with directly attributable costs, including those incurred during construction and interest on borrowings for assets under construction. Directly attributable costs also include the cost of replacing part of existing PPE at the time that cost is incurred if the recognition criteria are met; and exclude the costs of day-to-day servicing of an item of PPE.

When PPE is acquired as part of a business combination, the cost of such assets is deemed to be their fair value at the date of acquisition. Purchase costs incurred as a consequence of a business combination are expensed to the consolidated statement of comprehensive income.

Notes to the consolidated financial statements (continued)

Subsequent costs are included in the asset’s carrying amount or recognised as a separate asset, as appropriate, only when it is probable that future economic benefits associated with the item will flow to the Group and the cost of the item can be measured reliably. The carrying amount of those parts that are replaced are derecognised. All other repairs and maintenance are charged to the consolidated statement of comprehensive income during the financial period in which they are incurred.

Depreciation, based on a component approach, is calculated using the straight-line method to allocate the cost over the assets’ estimated useful lives, as follows:

Depreciation of the above assets is calculated from the date an asset becomes available for use, so as to write off the difference between the cost and the residual value over its expected useful economic life.

Depreciation in relation to plant, infrastructure and equipment is classified within cost of sales and all other depreciation is held within administrative expenses. See note 15 for further details.

Assets in the course of construction are not depreciated until they are operational. At this time such assets are transferred into the appropriate asset class and depreciated over the expected useful economic lives referred to above.

The gain or loss arising on the disposal or retirement of an asset is determined as the difference between the sale proceeds and the carrying amount of the asset and is recognised in the consolidated statement of comprehensive income.

Customer contracts acquired in a business combination are recognised at fair value at the acquisition date. They have a finite useful life and are subsequently carried at cost less accumulated depreciation, amortisation and impairment losses. The Group amortises intangible assets with a finite useful life using the straight-line method. Customer contracts included in intangible assets are amortised over their finite life of 8 years and 10 years respectively. See note 5 for further details.

2.6     Leases

Leases in which a significant portion of the risks and rewards of ownership are retained by another party, the lessor, are classified as operating leases. Payments, including pre-payments, made under operating leases (net of any incentives received from the lessor) are charged to consolidated statement of comprehensive income on a straight-line basis over the period of the lease.

Assets held under finance leases in which a significant portion of the risks and rewards of ownership are transferred to the Group are capitalised as tangible fixed assets and are depreciated over the shorter of the lease terms and their useful lives. The capital elements of lease obligations are recorded as liabilities, while the interest elements are charged to the profit and loss account over the period of the leases to produce a constant rate of charge on the balance of capital repayments outstanding.

Notes to the consolidated financial statements (continued)

Assets that are subject to depreciation or amortisation are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. An impairment loss is recognised for the amount by which the asset’s carrying amount exceeds its recoverable amount. The recoverable amount is the higher of an asset’s fair value less costs of disposal and value in use. For the purposes of assessing impairment, assets are grouped at the lowest levels for which there are separately identifiable cash flows (cash-generating units). Non-financial assets that suffer impairment are reviewed for possible reversal of the impairment at each reporting date.

As at 31 December 2017, consistent with prior years, and taking into account the Group’s current activities and its operating locations, the Directors manage the Group’s data centres by each data centre structure. However this may evolve if multiple data centres are built within the same country because the financial performance of data centres within a country is expected to be highly inter-dependent. At 31 December 2017, consistent with prior years, the Directors’ have determined that the cash-generating unit for impairment-testing purposes is a single data centre.

Financial assets are, at initial recognition, classified as financial assets at fair value through profit or loss (derivatives held for trading) and loans and receivables, as appropriate. When financial assets are recognised initially, they are measured at fair value, plus, in the case of investments not at fair value through profit or loss, directly attributable transaction costs.

Trade and other receivables, restricted cash, cash and cash equivalents are classified as loans and receivables. They are subsequently measured at amortised cost less any provision for impairment. Cash and cash equivalents include cash in hand or short-term deposits held at call with banks.

Derivative financial liabilities are comprised of an interest rate swap. The Group does not apply hedge accounting in accordance with IAS 39. The derivative is recognised when the contract is entered into and subsequently measured at fair value. Gains or losses on interest rate swaps are recognised in finance costs in the consolidated statement of comprehensive income.

Financial assets are derecognised only when the contractual rights to the cash flows from the financial asset expire or the Group transfers substantially all risks and rewards of ownership.

The Group assesses at each financial position date whether there is objective evidence that a financial asset or group of financial assets is impaired. If there is objective evidence (such as significant financial difficulty of the obligor, breach of contract, or it becomes probable that the debtor will enter bankruptcy), the asset is tested for impairment. The amount of the loss is measured as the difference between the asset’s carrying amount and the present value of estimated future cash flows (excluding future expected credit losses that have not been incurred) discounted at the financial asset’s original effective interest rate (that is, the effective interest rate computed at initial recognition). The carrying amount of the asset is reduced through use of a bad debt provision account. The amount of the loss is recognised in the consolidated statement of comprehensive income.

In relation to trade receivables, a provision for impairment is made when there is objective evidence (such as the probability of insolvency or significant financial difficulties of the debtor) that the Group will not be able to collect all of the amounts due under the original contractual terms of the transaction. Impaired debts are derecognised when they are assessed as uncollectible.

Notes to the consolidated financial statements (continued)

2    Summary of significant accounting policies (continued)

If in a subsequent period the amount of the impairment loss decreases, and the decrease can be related objectively to an event occurring after the impairment was recognised, the previously recognised impairment loss is reversed, to the extent that the carrying value of the asset does not exceed its anticipated amortised cost at the reversal date. Any subsequent reversal of an impairment loss is recognised in the consolidated statement of comprehensive income.

Liabilities within the scope of IAS 39 are classified as financial liabilities at fair value through profit or loss or other liabilities, as appropriate. A financial liability is derecognised when the obligation under the liability is discharged or cancelled or expires.

All borrowings are classified as financial liabilities. Initial recognition is at fair value less directly attributable transaction costs. After initial recognition, interest-bearing borrowings are subsequently measured at amortised cost using the effective interest method.

Financial liabilities included in trade and other payables are recognised initially at fair value and subsequently at amortised cost using the effective interest method. The fair value of a non-interest bearing liability is its discounted repayment amount. If the due date of the liability is less than one year, discounting is omitted.

Ordinary and preference shares are classified as equity when there is no obligation to transfer cash or other assets.

2.10     Share-based payments

The Company operates one share-based compensation plan.

The Group receives employee services from certain members of its key management in consideration for A and B ordinary shares of the Company. The fair value of the employee services received in exchange for the grant of the awards is recognised as an expense within employee benefits. The total amount to be expensed is determined by reference to the fair value of the awards granted. It excludes the impact of any service and non-market performance vesting conditions (for example profitability and sales growth targets).

At the end of each reporting period, the Group revises its estimates of the number of awards that are expected to vest based on the non-market vesting conditions and service conditions. It recognises the impact of the revision to the original estimates, if any, in the consolidated statement of comprehensive income, with a corresponding adjustment to reserves. This is a change in accounting estimate from the prior year when the fair value was held within provisions as the shares were deemed to be cash settled.

The change occurred following the SPA with CyrusOne that was signed on 21 December 2017 to acquire the share capital of Zenium TopCo Limited. The ordinary shares are therefore expected to vest on completion and these shares are expected to be equity settled. As such, the charge of US$1,163,000 has also been accelerated as the shares are expected to vest shortly after year-end, on the transaction completing. The provision held in the prior year of US$470,000 has therefore been reversed and the movement recognised within reserves. Further details are included in notes 9 and 10. This transaction, which triggered the acceleration and change in treatment of the share based payments, formally completed on 24 August 2018.

Notes to the consolidated financial statements (continued)

2    Summary of significant accounting policies (continued)

2.10     Share-based payments (continued)

The Company issues the awards at the date of grant and these are held as ‘restricted shares’ by the employee until all vesting conditions are satisfied. Each award has a nil exercise price. The fair value of employee services received, measured by reference to the fair value of the instruments granted at each reporting period end, is recognised over the period from grant date to expected termination of the existing Investment Agreement. This termination date is considered a significant management estimate.

Certain B preference shareholders are entitled to additional B preference shares when additional funds are invested in the Company in exchange for A preference shares as set out in the Company’s Investment Agreement.

The additional B preference shares when issued to Directors or employees are expensed within employee benefits on grant date and credited to share capital and share premium as equity settled share-based payments.

Borrowings are recognised initially at fair value, net of transaction costs incurred. Borrowings are subsequently stated at amortised cost; any difference between the proceeds (net of transaction costs) and the redemption value is recognised as finance cost over the period of the borrowings using the effective interest method. Transaction and loan origination fees paid on the establishment of loan facilities are capitalised where they meet the recognition criteria and amortised over the life of the debt facility.

Interest on borrowings that is directly attributable to construction and fit out costs is added to the cost of the asset and all other interest from external borrowings is expensed to the statement of comprehensive income. Borrowings are classified as current liabilities unless the Group has an unconditional right to defer settlement of the liability for at least 12 months after the date of the statement of financial position.

The tax expense for the period comprises current and deferred tax. Tax is recognised in the consolidated statement of comprehensive income, except to the extent that it relates to items recognised directly in other comprehensive income or equity - in which case, the tax is also recognised in other comprehensive income or equity.

The current income tax charge is calculated on the basis of the tax laws enacted or substantively enacted at the date of the statement of financial position in the countries where the Group operates. Directors periodically evaluate positions taken in tax returns with respect to situations in which applicable tax regulation is subject to interpretation, and establishes provisions where appropriate on the basis of amounts expected to be paid to the tax authorities.

Deferred income tax is provided in full, using the liability method, on temporary differences arising between the tax bases of assets and liabilities and their carrying amounts in the consolidated financial statements. However, deferred income tax is not accounted for if it arises from initial recognition of an asset or liability in a transaction other than a business combination that at the time of the transaction affects neither accounting nor taxable profit or loss. Deferred income tax is determined using tax rates (and laws) that have been enacted or substantially enacted by the date of the statement of financial position and are expected to apply when the related deferred income tax asset is realised or the deferred income tax liability is settled. Deferred income tax assets are recognised to the extent that it is probable that future taxable profit will be available against which the temporary differences can be utilised.

Notes to the consolidated financial statements (continued)

2    Summary of significant accounting policies (continued)

Provisions are recognised when:

Provisions are measured at the present value of the expenditures expected to be required to settle future obligations using a pre-tax rate that reflects current market assessments of the time value of money and the risks specific to the obligation. Any increase in the provisions due to passage of time is recognised as finance cost.

Revenue includes income generated from rental space, office, storage and other space, equipment supply, service charges and management charges. See breakdown and future committed revenue discussed further in note 14.

Revenue represents invoiced value for services supplied for the year in relation to data centre services, excluding value added tax and sales between companies in the Group. Revenue for services are recognised when the service has been provided.

The Group independently procures the power that is subsequently provided to customers to power their rack space. The risks and rewards remain with the Group in relation to the supply of such power. The Group is also the primary obligator responsible for providing the related space and services to the customer and is therefore acting as the principal from the perspective of the customer. As a result, based on the assessment in line with IAS 18, the company recognises the gross revenue received from contracts with customers as revenue in its consolidated financial statements.

Income from contracts is recognised on a straight-line basis over the contract term as the services are provided. When the Group provides incentives to its tenants, such as rent-free periods, the cost of incentives is recognised on a straight-line basis as a reduction of rental income over the contract term.

2.15     Exceptional items

Items which are material either because of their size or their nature, and material items which are non-recurring are presented in the consolidated statement of comprehensive income as a separate line item. The separate reporting of exceptional items helps provide a better picture of the Group’s underlying performance. Items which are included within exceptional items include:

The primary activity of the Group is not the acquisition and disposal of subsidiary companies, such transactions are deemed to be exceptional items as they are not recurring on an annual basis.

Interest income and expense are recognised within finance income and finance costs in the consolidated statement of comprehensive income using the effective interest rate method. Finance income and expense also includes foreign exchange gains and losses on the translation of foreign currency inter-group borrowings which do not eliminate on consolidation.

Notes to the consolidated financial statements (continued)

2    Summary of significant accounting policies (continued)

2.16    Finance income and expense (continued)

The effective interest rate method is a method of calculating the amortised cost of a financial asset or financial liability and of allocating the interest income or interest expense over the relevant period. The effective interest rate is the rate that exactly discounts estimated future cash payments or receipts throughout the expected life of the financial instrument, or a shorter period where appropriate, to the net carrying amount of the financial asset or financial liability. When calculating the effective interest rate, the Group estimates cash flows considering all contractual terms of the financial instrument (for example, pre-payment options) but does not consider future credit losses.

The calculation includes all fees and points paid or received between parties to the contract that are an integral part of the effective interest rate, transaction costs and all other premiums or discounts.

Administrative expenses include marketing, professional, office and administration, travel and other costs, as well as employee benefits, depreciation, amortisation and foreign exchange gains and losses in relation to trading. They are recognised in the consolidated statement of comprehensive income in the period in which they are incurred on an accruals basis.

Contributions to defined contribution schemes are recognised in the interest of comprehensive income in the year in which they became payable.

A discontinued operation is a component of the Group’s business that represents a subsidiary or subsidiaries that have been disposed of. The operations and cash flows of which can be clearly distinguished from the rest of the Group and the comparative statement of profit or loss and other comprehensive income is re-presented as if the operation had been discontinued from the start of the comparative year.

Classification as a discontinued operation occurs at the earlier of disposal or when the operation meets the criteria to be classified as held-for-sale.

The preparation of the Group’s financial statements requires management to make judgements, estimates and assumptions that affect the reported amounts of revenues, expenses, assets and liabilities at the end of the reporting period. Uncertainty about these assumptions and estimates could result in outcomes that require a material adjustment to the carrying amount of the asset or liability affected in future periods.

Judgements

The key assumptions concerning the future and other key sources of estimation uncertainty at the reporting date are described below. The Group based its assumptions and estimates on parameters available when the financial statements were prepared. Existing circumstances and assumptions about future developments, however, may change due to market changes or circumstances arising beyond the control of the Group. Such changes are reflected in the assumptions when they occur.

Notes to the consolidated financial statements (continued)

Accounting for share-based payments:

The Group issues ordinary and preference shares to key management. These are accounted for as share-based payments in line with IFRS 2. The determination of whether these shares are accounted for as cash settled or equity settled is considered to be a key judgement given the complexity around this and changes in triggers which have required a change in accounting estimate in the current year and prior year. There is also judgement around the exit date on which vesting of the share-based payment charge is spread over.

Impairment of non-financial assets:

Assets that are subject to depreciation are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. Impairment exists when the carrying value of an asset exceeds its recoverable amount, which is the higher of its fair value less costs to sell and its value in use. The fair value less costs to sell calculation is based on available data from transactions on an arm’s length basis. Assumptions are used to determine the recoverable amount of the non-financial assets such as the discount rate applied, growth rates and future cash inflows and outflows.

Legal settlement accounting:

The Imtech legal case commenced in January 2015 and was settled in February 2017. This legal case was in relation to an ongoing case surrounding the fit out works in Frankfurt One. In 2016 a receivable of US$1,966,000 was recognised in relation to payment for future fit out works paid under the terms of a Letter of Intent (“LOI”) with a contractor. This LOI was terminated due to non-performance and an impairment of US$586,000 recognised against this receivable to $1,380,000.

The receivable was then fully impaired in the year ended 31 December 2016, following commencement of court proceedings which deemed recoverability no longer virtually certain, an impairment of US$1,335,000 was recognised.

The court later ruled in Zenium’s favour and therefore in 31 December 2016 financial statements, the provision was written-back to US$nil. The court ordered Commerzbank to pay €2,142,000 to Zenium in relation to the payment for future fit out works, this was fully recognised in the current year, 31 December 2017, once the Court proceedings were final and the period for appeal had ended. The court ruling triggered the requirement for Zenium to settle the associated VAT payable of US$1,417,000 which was previously provided for.

During 31 December 2017, the final settlement occurred with the Group receiving a net amount of US$2,391,000 as detailed in note 18.  Provision of US$30,000 remains in relation to final legal fees not yet billed, see note 13.

Business combination and acquisition accounting:

In accordance with IFRS 3 identifiable assets and liabilities acquired are measured initially at fair value at acquisition date. In assessing this fair value valuation judgements are applied depending on the nature of the asset or liability. These judgements are disclosed in note 20.

Estimates

Useful economic lives on intangible and tangible assets:

Judgement is associated with the useful economic lives attributed to intangible and tangible assets. These are based on management’s best estimate of the relevant asset and how many years they are considered to be in use for, which is judgemental in nature.

3    Financial risk management

Financial risks are risks arising from financial instruments to which the Group is exposed to during or at the end of the reporting year.

The significant financial instruments of the Group are cash and cash equivalents, trade and other receivables, borrowings and trade and other payables. Although the Group uses interest rate swaps and caps to mitigate its interest rate risk (note 11), the fair value liability as at 31 December 2017 is not considered material at US$54,000.

Financial risk comprises market risk (including currency risk, interest rate risk and other price risk), credit risk and liquidity risk. The primary objectives of financial risk management are to ensure that exposure to risks are at acceptable levels. The Directors monitor the performance of the Group and its risk exposures.

Market risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in market prices. The Group’s market risks arise from open positions in (a) foreign currencies and (b) interest-bearing assets and liabilities, to the extent that these are exposed to general and specific market movements.

Market risk also comprises economic risk which is risk that the demand for wholesale data centre space will fluctuate due to changes in the macro-economic outlook for the sector and also due to changes in supply in the local markets where the Group operates its data centres.

Sensitivities to market risks included below are based on a change in one factor while holding all other factors constant. In practice, this is unlikely to occur, and changes in some of the factors may be correlated - for example, changes in interest rates and changes in foreign currency rates.

The Group operates internationally and is exposed to foreign exchange risk, primarily with respect to the Pound Sterling (£) and the Euro (€). Foreign exchange risk arises in respect of those recognised monetary financial assets and liabilities that are not in the functional currency of the respective Group entity.

The Group primarily manages foreign currency risk where possible by matching its cash outflows to the currency in which the principal cash inflows or future cash inflows (such as rental and other revenue) are denominated. This is generally achieved by raising capital and loan financing in the same currency as the rental or future rental revenue and incurring costs in the same currency of the entity.

Notes to the consolidated financial statements (continued)

3     Financial risk management (continued)

The functional currency of the Company is the US Dollar (“US$”); the functional currencies of the Group’s principal subsidiaries are the Euro (€), Pound Sterling (£) and US$. The currency exposure from the Euro and the Pound Sterling is generated primarily from translation of the respective Euro and Pound Sterling functional currencies to US$ presentation currency for Group reporting purposes, these translation reserve differences are reflected in other comprehensive income.

Foreign exchange gains and losses arising from the retranslation of inter-group loans denominated in foreign currencies do not eliminate on consolidation.

The Group’s significant financial assets denominated in foreign currencies are cash and trade and other payables that arise directly from its day to day operations. At 31 December 2017 the Group’s foreign currency exposure was as follows:

If exchanges rates increased / decreased by 5% then equity and profit would decrease / increase by US$655,000.

The Group has exposure to price risk on the basis of fluctuations in supply and demand with respect to data center space in the Turkish, German and UK markets. The Group primarily manages this risk by being in control of the negotiation process with prospective tenants. Additionally, to a lesser extent, the Group deals with large international customers that have less sensitivity to pricing concerns.

As the Group’s interest-bearing assets do not generate significant amounts of interest, changes in market interest rates do not have any significant direct effect on the Group’s income. The Group’s interest rate risk principally arises from long-term borrowings (note 11) which are in some instances, issued at a variable rate and expose the Group to cash flow interest rate risk. The overall impact to income in a given year is mitigated where possible by the capitalisation of borrowing costs associated with assets under construction.

The Group’s policy is to fix the interest rate on its variable interest borrowings. To manage this, the Group enters into interest rate swaps or buys interest rate caps in which the Group agrees to exchange, at specified intervals, the difference between fixed and variable rate interest amounts calculated by reference to an agreed upon notional principal amount or limits the interest rate applied respectively.

At 31 December 2017 the Group’s borrowings, through the interest rate swap and cap, are at a fixed rate of interest. Based on the Group’s current activities, interest rate risk is not a significant risk to the Group.

Notes to the consolidated financial statements (continued)

3     Financial risk management (continued)

Credit risk is the risk that one party to a financial instrument will cause a financial loss for the other party by failing to discharge an obligation. The Group has no significant concentrations of credit risk. Credit risk arises from cash and cash equivalents and restricted cash held at banks and trade and other receivables, including rental receivables from customers.

The Group has policies in place to ensure that rental contracts are entered into only with customers with good industry reputation and that have an appropriately strong credit history.

Cash balances are held with financial institutions that have a strong international reputation.

Analysis by credit quality of financial assets is as follows:

As at 31 December 2017 no impairments were recognised. The Directors do not consider there to be any doubt over recoverability based on the credit quality of customers.

Prudent liquidity risk management implies maintaining sufficient cash, the availability of funding through an adequate amount of committed credit facilities. The maturity analysis of financial instruments at the year end is as follows:

Notes to the consolidated financial statements (continued)

3     Financial risk management (continued)

3.2    Capital management

The Group’s objectives when managing capital are to safeguard the Group’s ability to continue as a going concern in order to provide returns for shareholders and benefits for other stakeholders; and to maintain an optimal capital structure to reduce the cost of capital.

Per the Company’s Investment Agreement between its shareholders, the shareholders agreed to commit funds in the form of preference shares into the Company. As of 31 December 2017, US$244,346,282 had been invested into the Company and US$265,346,282 was committed to.

In order to maintain or adjust the capital structure, the Group may return capital to shareholders, issue new shares or sell assets to reduce debt.

3.3    Fair value estimation

The Group’s financial instruments carried at fair value have been analysed into three levels each determined by its valuation method. The different levels are defined as follows:

At 31 December 2017 the Group has interest rate swaps and interest rate caps as its only financial instruments measured at a fair value of US$54,000. It was classified as Level 2. The valuation has been obtained from the counterparty.

The Group’s other financial instruments not carried at fair value are its cash and cash equivalents, restricted cash, trade and other receivables, trade and other payables and borrowings, but excluding all tax related balances included within those items. The carrying values of these instruments are a reasonable approximation of fair value and all have been assessed as Level 2 instruments.

During the year the Group incurred development expenditure of US$86,292,000 on data centre infrastructure and equipment costs pertaining to ongoing fit out costs to meet the requirements of new tenants and to enhance the overall specifications of the data centre.

During the year depreciation in relation to plant, infrastructure and equipment of US$5,623,000 was included within cost of sales: US$4,682,000 of this relates to continuing operations and US$941,000 relates to discontinued operations.

All other depreciation of US$5,349,000 is included in administrative expenses: US$5,004,000 relating to continuing operations and US$345,000 relates to discontinued operations. At 31 December 2017 the Directors have determined there is no indication of impairment of the property, plant and equipment.

Goodwill was generated on the acquisition of Zenium UK2 Limited in the year, see note 20. This is reassessed for impairment at each reporting period and no indicators of impairment are considered to exist. Zenium UK2 Limited is considered to be the cash generating unit to which the goodwill is allocated to.

The fair value less costs to sell was calculated to assess the recoverable amount of the Zenium UK2 Limited CGU based on an earnings multiple, given the expected disposal of the Group in the short-term, which had exchanged but not completed at the year end. Judgement exists within this valuation around the earnings multiple which when sensitised, would need to reduce by 47% to create an impairment risk. The EBITDA used in calculating the value in use is also judgemental and this assumption would need to reduce by 48% to trigger an impairment. Committed spend is not considered to be judgemental as this is known amounts and hence has not been sensitised.

Customer contracts comprise of the fair value of the contracts acquired as part of the Zenium Germany GmbH acquisition in 2014 and the recent acquisition of Zenium UK2 Limited, also see note 20. The customer contracts are amortised over the useful life of the contracts to which they relate, in this case being 8 years for Germany and 10 years for London Two as determined on the date of acquisition.

At 31 December 2017 the Directors have determined there is no indication of impairment of the intangible assets.

Notes to the consolidated financial statements (continued)

6    Income tax (credit)/ charge

2017

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US$’000    

2017

Continuing operations        US$’000    

Loss before income tax for continuing operations         (13,218)    

Tax calculated at the Company’s statutory rate (0%)

Tax effect on:

Effect of different tax rates in countries in which the Group operates          (564)

Tax effect on:

Effect of different tax rates in countries in which the Group operates        446

Tax losses for which no deferred tax asset has been recognised        (446)

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Income tax (credit)/charge on discontinued operations        -

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Total income tax (credit)/charge                (53)

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The loss in the current year includes US$10,697,000 of transaction costs relating to the disposal of the Group, see note 18, which are taxable at 0%.

The Company provides for income taxes based upon amounts reported in the financial statements and the provisions of currently enacted tax laws. The Company is registered in the Cayman Islands and is subject to Cayman law with respect to taxation. Under current Cayman law, the Company is not taxed on any Cayman income or capital gains.

Notes to the consolidated financial statements (continued)

6 Income tax (credit)/ expense (continued)

The Group did not recognise deferred tax assets of US$4,954,000 relating to continuing operations in respect of losses that can be carried forward against future taxable income.

The analysis of deferred tax assets and liabilities is as follows:

Deferred tax assets and liabilities will be recovered after more than 12 months. Deferred tax liabilities in relation to the business combination are included above.

7     Other receivables: non-current assets

2017

US$’000    

Accrued income                 1,113

Other receivables                 3,927

Total other non-current receivables                5,040

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Notes to the consolidated financial statements (continued)

7     Other receivables: non-current assets (continued)

Included in other receivables is a rent deposit for the Grosvenor Street, London UK offices of US$146,000, a deposit of US$1,533,000 for the long-leasehold signed in the prior year for the Slough data centre, a deposit for the long-leasehold acquired as part of the Stockley Park data centre for US$2,243,000 and a security deposit within Germany of US$5,000. The rent deposits are recoverable on termination or expiration of the respective leases subject to no claims being made for liabilities such as damage to the property. The full amount has been recognised as no damages have occurred to date and any potential future damages would be remedied.

Non-current accrued income predominantly includes $853,000 of accrued income in Zenium UK2 Limited and the remainder relates to other accrued income expected to be unwound in over a year.

8    Trade and other receivables: current assets

2017    

US$’000    

Total other receivables                9,186

Total trade and other receivables                11,230

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Other tax receivables are comprised of VAT due to the following Group companies, Zenium Germany GmbH (US$1,337,000), Zenium UK Limited (US$630,000), Zenium UK2 Limited (US$1,167,000) and Zenium Technology Partners Limited (US$250,000).

9    Share capital and share premium

The total number of issued and authorised shares and associated rights of the respective shares as at 31 December are included below:

The table above shows the number of preference shares in issue at 31 December 2017. The share premium represents the difference between the issue price and the par value. US$59,000 of share premium remains in relation to the share buy back in 2016 being the difference between the purchase price of US$219,000 and the nominal value of US$278,000.

Notes to the consolidated financial statements (continued)

9    Share capital and share premium (continued)

The A and B preference shares constitute one class of share and are a separate class of share to the Ordinary shares. Each preference share carries the right to one vote. The preference shares have no redemption entitlement. On winding up, the preference shareholders have priority before all other classes of shares. Payments out of the Company’s reserves can only be made in accordance with the Company’s waterfall distribution terms as set out in the Company’s Investment Agreement.

The authorised A preference shares were increased to 252,500,000 after the signing of the third investment agreement on 20 January 2017.

The A and B preference shares were issued for cash consideration of US$1.00 per share as follows: