Animalcare Group plc Annual Report 2017

Plain-text annual report

Animalcare Group plc ANNUAL REPORT for the year ended 31st December 2017 Developing a stronger future together A n i m a l c a r e G r o u p p l c A n n u a l r e p o r t a n d a c c o u n t s F o r t h e y e a r e n d e d 3 1 D e c e m b e r 2 0 1 7 s t www.animalcaregroup.co.uk Stock Code: ANCR 26011 18/05/2018 Proof 4 WELCOME TO ANIMALCARE GROUP PLC Animalcare Group plc is focused on growing its veterinary business. Contents STRATEGIC REPORT Our Business Our Highlights Chairman’s Statement Our Investment Case Our Group at a Glance Our Marketplace Our Stronger Business Model How will the acquisition benefit the Group? Our Strategy Our Performance Our Key Performance Indicators Chief Executive Officer’s Review Chief Financial Officer’s Review Our Principal Risks 01 02 03 04 06 08 09 10 12 13 17 24 OUR GOVERNANCE Board of Directors 26 Corporate Governance Statement 28 Audit Committee Report 32 Nomination and Remuneration Committee Report Directors’ Remuneration Report Annual Remuneration Report Directors’ Report Statement of Directors’ Responsibilities 34 35 36 38 40 Animalcare Group plc is a UK AIM listed veterinary sales, marketing and product development company resulting from the integration of Animalcare and Ecuphar. We invest in developing our own pharmaceuticals products as well as seeking distribution partnerships and product acquisitions. Our vision is to become a leading pan-European veterinary pharmaceutical business. We develop and sell goods and services to veterinary professionals for use in companion and production animals with direct sales in 7 countries Europe. We have two divisions: { PHARMACEUTICALS { WHOLESALE READ ABOUT OUR DIVISIONS ON PAGE 05 47 48 OUR FINANCIALS Independent Auditors’ Report 41 Consolidated Income Statements 46 Consolidated Statement of Comprehensive Income Consolidated Statement of Financial Position Consolidated Statement of Changes in Equity 49 Consolidated Cash Flow Statements 50 Notes to the Consolidated Financial Statements Company Balance Sheets Company Statements of Changes in Shareholders’ Equity Company Cash Flow Statements Notes to the Accounts Advisers 92 93 94 IBC 52 91 Read about our performance at: www.animalcaregroup.co.uk/year-in-review LOOK OUT FOR THESE ICONS WHEN NAVIGATING THIS REPORT See further content online at www.animalcaregroup.co.uk View more content within this report 26011 18/05/2018 Proof 4 OUR HIGHLIGHTS Revenue (£m) +22.4% 83.7 68.4 Underlying* EBITDA (£m) +11.9% 10.0 8.9 Underlying* Basic EPS (p) −24.6% 16.7 12.6 2016 2017 2016 2017 2016 2017 *Underlying measures exclude non-underlying items as analysed in note 5. READ ABOUT OUR PERFORMANCE ON PAGES 13 TO 25 FINANCIAL PERFORMANCE { Revenue growth of 22.4% at AER (9.6% on a proforma basis) with strong growth in Companian Animals and Production Animals. { Underlying EBITDA increased by 11.9% at AER however declined by 8.5% on a proforma basis due to in particular changing sales mix and overhead investment. { Reported operating profit decreased to £1.2m (2016:£6.0m) { Net debt at £25.9m representing 2.2 times proforma Underlying EBITDA. { Propose a total dividend of 6.7p, consistent with total dividends for the previous year ended 30th June 2017. OPERATING PROGRESS { Distribution contracts ended to bring cross selling opportunities in house from Q4 2018. { Integration is wide-ranging and in progress, with priority focus on supply chain, systems (HR & IT) and product development. NPD projects have been prioritised to maximise return on investment. { Personnel reorganisation underway, with internal promotions made to lead Technical and Commercial Development and Export late in the year. Post year-end, new Country Managers have been recruited into our UK and Spanish operations. 01 26011 18/05/2018 Proof 4Animalcare Group plc Annual Report 2017www.animalcaregroup.co.ukStock Code: ANCRSTRATEGIC REPORT OUR BUSINESSCHAIRMAN’S STATEMENT “ We believe we have created a platform for strong future growth” JAN BOONE NON EXECUTIVE CHAIRMAN READ ABOUT OUR GROUP AT A GLANCE ON PAGES 04 AND 05 READ ABOUT OUR CORPORATE GOVERNANCE ON PAGES 28 TO 31 02 2017 was a transformational year for Animalcare Group plc. Whilst characterised by continued organic growth, the most dominant factor during the year was the reverse acquisition of Ecuphar NV (“Ecuphar”). The transaction completed on 13th July 2017 and our statutory results for the year ended December 2017 reflect a full 12 months contribution from Ecuphar and five and a half months of Animalcare Group plc (“Animalcare”), as previously constituted. 2016 comparatives are only for the Ecuphar business. Financial Trading Group revenue increased by 22.4% to £83.7m (2016: £68.4m) with 11.3% organic growth within the Ecuphar business which contributed £76.1m to overall Group revenues and £7.6m from the original Animalcare business. Underlying EBITDA (which excludes fair value adjustments on acquired inventory, amortisation of acquired intangibles and acquisition and integration costs) increased by 11.9% to £10.0m (2016: £8.9m) with £1.6m contributed by the Animalcare business. This performance primarily reflects the impact of lower gross margins, investments to support future growth and the disposal of Nutriscience which Ecuphar sold in October 2016. Including non-underlying items, the Group’s profit before tax decreased to £0.5m (2016: £5.1m). The Group generated £2.6m (2016: £9.3m) net cash from operations which included a cash outflow from non-underlying items totalling £3.8m. Further details on business performance can be found in the CEO Review and CFO Review respectively. Board Following the acquisition, the executive Directors comprised Chris Cardon, who took on the role of Chief Executive Officer for the enlarged group, supported by Iain Menneer as Chief Operating Officer and Walter Beyers as Chief Financial Officer. In September 2017 Chris Brewster, who at the time of the acquisition stood down as a Board Director but remained within the business, was reappointed to the Board as Chief Financial Officer, replacing Walter Beyers who resigned to pursue other interests. More recently Iain Menneer stood down as Chief Operating Officer. I would like to take the opportunity to recognise both Iain’s and Walter’s contributions and we wish them well for the future. Dividend The Board is proposing a final dividend of 2.0 pence per share, which when added to the second interim dividend of 4.7 pence per shares gives a total dividend of 6.7 pence per share since the reverse acquisition. This final dividend is subject to shareholder approval at the Annual General Meeting on 27th June 2018 and will be paid on 6th July 2018 to shareholders on the register at the close of business on 8th June 2018. Product Development A key strategy for growth remains the continued cultivation of a strong new product development pipeline. In 2017 we launched Acecare, a sedative, from Animalcare’s original UK pipeline and sales have performed in line with internal forecasts. We have deliberately focused the development team on 17 active projects and we have a steady flow of products that are going through registration and are expected to launch in 2018 and 2019. Summary and Outlook Having brought together two highly complementary businesses, in particular with regard to our respective geographic markets, product portfolios and product development pipelines, we are growing a successful pan- European animal health business. We have the opportunity to continue this growth through further strategic acquisitions, but also through organic growth focused on existing products and our product development pipeline, as well as the synergies and benefits of cross-selling which we expect to see impacting our Q4 2018 performance and more meaningfully in 2019. We believe we have created a platform for strong future growth and I look forward to updating on our progress. JAN BOONE NON-EXECUTIVE CHAIRMAN 26011 18/05/2018 Proof 4OUR INVESTMENT CASE We believe there are five compelling reasons to invest in Animalcare Group plc: Animalcare benefits from its transformational acquisition Bringing together two highly complementary businesses, with regard to their geographic markets, product portfolios and new product development pipelines, the reverse acquisition provides enhanced scale and capabilities for long-term growth. READ ABOUT OUR GROUP AT A GLANCE ON PAGES 04 AND 05 Animalcare is a sustainable growing business in a growing market Unaudited pro forma aggregated financials for the year ended 31 December 2017 show combined revenues of £91.1m and underlying EBITDA of £11.8m with double digit profit growth expected against these results. Animalcare is cash generative and in a strong financial position to invest in future growth. Animalcare is dividend paying and given its strong balance sheet expects to maintain its current dividend policy whilst continuing to invest in new product development. Animalcare has a clear strategy for growth through an enhanced geographic footprint and sales, marketing and distribution network, and a strong product development pipeline. READ ABOUT OUR STRATEGY ON PAGES 10 AND 11 03 26011 18/05/2018 Proof 4Animalcare Group plc Annual Report 2017www.animalcaregroup.co.ukStock Code: ANCRSTRATEGIC REPORT OUR BUSINESSOUR GROUP AT A GLANCE Animalcare Group plc is a pan-European sales, marketing and product development company serving the Animal Health market. OUR GEOGRAPHICAL REACH DIRECT SALES IN 7 COUNTRIES { York, UK { Barcelona, Spain { Bruges, Belgium { Lisbon, Portugal { Milan, Italy { Greifswald, Germany { Breda, Netherlands OUR HEAD OFFICE OWN OPERATIONS DISTRIBUTION NETWORK OUR TURNOVER* BY TERRITORY SALES MIX BY REVENUE* 34% 23% 15% BENELUX SPAIN UK GERMANY EXPORT PORTUGAL ITALY 9% 9% 5% 5% PHARMACEUTICALS 74% 26% WHOLESALE * Based on 2017 pro-forma financial information. READ ABOUT OUR MARKETPLACE ON PAGES 06 AND 07 04 26011 18/05/2018 Proof 4OUR NEW GROUP Our business is divided into two divisions: pharmaceuticals and wholesale. PHARMACEUTICALS WHOLESALE Overview Products are supplied to animal health professionals both directly or through national distribution networks and fall into two categories: regulated pharmaceuticals and over the counter products. Products are either owned by the Group or on distribution from third parties. The Group invests significantly in its in-house development pipeline. The portfolio is very broad with over 300 products including pharmaceuticals, vaccines, biocides and nutraceuticals. The Group focuses on certain niche therapy areas including odontology, dermatology, otology and surgery/anaesthesia. Overview Medini is the wholesaling division based close to Bruges, supplying medical, veterinary and paramedical products to veterinary professionals throughout Belgium. The business has been trading for 25 years and is well established in this stable market. The extensive range of over 5,000 products includes own label and branded items ranging from small disposable items to larger capital equipment and diagnostic instruments. The company is a specialist in the supply of surgical instruments. 71% 29% Revenue £59.7m Revenue £23.9m Performance Z Strong revenue growth of 28.4% to £59.7m reflecting 12.1% internal growth and 16.3% from acquisition. Z Represents 97% of Group underlying EBITDA with EBITDA margin of 15.6%. Performance Z 9.7% organic sales growth versus 2017 to £23.9m. Z Gross margin remained stable compared to 2016 at 10.1%. Z Represents 3% of Group underlying EBITDA. READ ABOUT OUR PERFORMANCE ON PAGES 13 TO 25 05 26011 18/05/2018 Proof 4Animalcare Group plc Annual Report 2017www.animalcaregroup.co.ukStock Code: ANCRSTRATEGIC REPORT OUR BUSINESSOUR MARKETPLACE Over the last five years sales of medicines for companion animals have overtaken sales of farm animal products, rising from 47% to 53% of the European market, with sales in 2017 of approximately €3.17bn (www.animalhealtheurope.eu). One in three homes in Europe is estimated to keep a pet prompting total care spending of €38bn. Pet numbers increased by 10% between 2012 and 2015 to 623 million in contrast to a decline in farm animal numbers by 9% to 296 million. Of the European medicines sector, valued at approximately €6bn in 2017, sales of vaccines and parasiticides represent 30% each, €1.8bn, with antimicrobials falling to 13% market share. The market as a whole grew by 9% in that period. Animal health markets in both Europe and the US are now dominated by their respective companion animal sectors. The latter valued at approximately $5.9bn (www.ahi.org). Our Primary Market The enlarged Group now generates 57% of its revenues from its sales in the Companion Animal and Equine sector and is therefore well placed to benefit from the rise in European pet ownership and spend. The Group still generates strong sales from the Production Animal sector in niche, profitable product areas. The Group comprises direct sales and marketing operations in 7 European territories (see graphic on page 4). Distribution to European and Rest of World geographic territories is managed by our export team. The pharmaceutical licensing is managed through our in-house regulatory team or local consultants where necessary. Our revenue from export sales has increased steadily in recent years and offers great potential for future growth. The Group will continue to serve the Small and Large Animal markets and bring new products to each segment where there is a commercial and strategic fit. OUR MARKETS BY GEOGRAPHY The export business continued its strong growth in 2017 with sales improving 24% versus prior year. Animalcare Group now exports to 38 countries in Europe, Asia, Australasia, Africa and South America through 86 different distribution partners. The addition of the Animalcare Ltd small animal products has created a well-balanced export portfolio of Farm Animal, Equine, Small Animal and OTC brands. To facilitate the increased complexity of the export business and to help drive further growth, a dedicated export division has been formed with Martin Gore, Group Head of Export. The export division has associates from all three exporting centres in the business (Animalcare Ltd (UK), Ecuphar Veterinaria (ES) and Ecuphar NV (BE)) with over 40 years’ combined experience in the Animal Health market between them. We believe with the formation of this team and the increased focus and resources on exports, the export business will continue to contribute strongly to the Group’s sales and profits. During the year there was significant growth in the key core export markets of the UK, France, the Nordics and Ireland supported by growth in newer markets including New Zealand and Taiwan. The growth of recently launched products (Aqupharm and Isocare) were ahead of management expectations, while sales of core established brands Danilon, Otoclean and Caniquantel all showed double digit growth. Dinalgen sales were behind prior year but this was largely down to phasing of purchasing patterns in major markets. Looking forward, there will be some natural slippage in the short term for the export business as sales through distribution partners in countries where we have a direct sales force are moved in-house. While this decreases export sales it will be profit enhancing for the Group. This has not affected the export division in 2017 and will have minimal effect in 2018, but notice has now been served on distribution partners in Germany, Spain, Portugal, Italy and Belgium with the full benefits being gained from 2019 onwards. The focus for 2018 is on ‘quick wins’, especially expanding the OTC business and rationalising distributors. Contracts have been signed for OTC products in new markets in the Middle East and China with sales expected to come on line mid 2018 (assuming no regulatory issues). Longer term we see good opportunities for growth in our pharmaceutical exports, especially in the fast growing Asian market. There are continued concerns surrounding the use of antibiotics in Western and Northern Europe countries that may affect future sales of our antibiotics range. In summary, the export business is now a significant contributor to the Group and by creating a dedicated export division we see potential for long-term growth. 06 26011 18/05/2018 Proof 4Revenue own Country Organisation: 91% Revenue Export: 9% OUR HEAD OFFICE Market trends and what this means for Animalcare { Increase in demand for new treatments and medicines – extension of current vaccine development programme { Decrease in use of anti-infectives across Western Europe – is both a risk in some areas but an opportunity in others, such as increased use of vaccines { Unmet needs of small animals – incontinence and anxiety market is growing { Minor species – rabbits become important PHARMACEUTICALS WHOLESALE Market trends and what this means for Animalcare { More consolidation -our personal veterinary clinic approach becomes more appreciated { Product lines increase -resulting in a slight increase of working capital 07 26011 18/05/2018 Proof 4Animalcare Group plc Annual Report 2017www.animalcaregroup.co.ukStock Code: ANCRSTRATEGIC REPORT OUR BUSINESSOUR STRONGER BUSINESS MODEL Our key resources OUR PEOPLE Our People are key to our continued growth READ ABOUT OUR PEOPLE ON PAGE 15 RELATIONSHIPS We have strong relationships with distribution partners, strategic alliances, wholesalers, CMOs and distributors LICENCES Animalcare owns around 50 licensed drugs. We have greatly increased the depth and diversity of our licensed product range KNOWLEDGE We have knowledge of regulations and business development CAPITAL Capital supports the product development pipeline and enables us to make investments that support our growth Enable us to undertake our key activities IN-HOUSE PRODUCT DEVELOPMENT ACQUIRED PRODUCTS LICENSED-IN PRODUCTS OWNED & LICENSED PRODUCTS – CONTRACT MANUFACTURED OWNED & LICENSED PRODUCTS DISTRIBUTED BY 3RD PARTIES ROW WAREHOUSE PRODUCTS FOR DISTRIBUTION WHOLESALER VET CLINIC Underpinned by our competitive advantage SCALE We will be able to leverage cross-selling opportunities that have been enabled through our acquisition. We also have a larger geographical presence that creates a pan-European animal health platform STRONGER GROUP Our transformational acquisition enhances our capabilities and our offering. We have a broader product pipeline OUR PEOPLE Our experienced management team, as well as our well-trained employees, provide us with the capabilities to deliver future growth READ ABOUT OUR GROUP AT A GLANCE ON PAGES 04 AND 05 We create value for our stakeholders EMPLOYEES We provide training and development and talent management SHAREHOLDERS We are a cash generative, dividend paying, growing company with a solid pipeline of new products END USERS We provide our end users with increased depth and diversity of the licensed veterinary medicines product range DISTRIBUTION PARTNERS We create value through a strong relationship, providing fair negotiation and visibility on revenues 08 26011 18/05/2018 Proof 4HOW WILL THE ACQUISITION BENEFIT THE GROUP? The integration of Animalcare and Ecuphar has the potential to create significant long-term value. BUSINESS MODEL { Combination of own products and licences { Focus on both NPD and sales & marketing { Experienced and capable management enhanced GEOGRAPHICAL SALES OPPORTUNITIES { Cross-selling through higher margin own sales channels { Expanding export territories and Product Portfolio READ ABOUT OUR MARKETPLACE ON PAGES 06 AND 07 COMMERCIAL ADVANTAGES OF CRITICAL MASS { Critical scale in the large and growing animal health market { Appealing distribution partner { Potential significant operating efficiencies once integration complete { Opportunities in fragmented market for value-enhancing acquisitions 09 26011 18/05/2018 Proof 4Animalcare Group plc Annual Report 2017www.animalcaregroup.co.ukStock Code: ANCRSTRATEGIC REPORT OUR BUSINESSOUR STRATEGY Animalcare will continue to focus on delivering growth both organically and through selective acquisitions to accelerate its overarching strategy of becoming a leader in the European animal health market. The Group’s core areas of strategic focus will be on: STRATEGIC OBJECTIVE DESCRIPTION PERFORMANCE FOCUS AND GOALS FOR 2018 1 Initiating cross-selling { Initiate opportunities to cross-sell both Animalcare’s and Ecuphar’s products across existing customers and distribution channels 2 Implementing effective business integration { Combining product development activities, providing the technology and systems to drive product quality improvement programmes and by optimising the Enlarged Group’s supply chain 3 Developing relationships 4 Identifying acquisitions { Developing the Enlarged Group’s wider network of partnerships and strategic alliances in order to increase its exposure, as licensor and licensee, to global animal health leaders { Leveraging its platform by identifying selective value- accretive acquisitions that can broaden the pan-European sales, marketing and distribution platform of the Enlarged Group Ecuphar UK Sales transferred to Animalcare UK team Contracts terminated with former Animalcare Distribution Partners in Germany, Spain, Portugal and Italy to allow direct sales through Ecuphar sales teams Full portfolio of 50 licensed drugs, eight vaccines and over 100 care and nutraceuticals to be sold direct in seven countries and exported to 50 markets globally Fully utilise 100 sales representatives and 28 agents across Europe New distribution partners in NZ and Taiwan established in 2017 In-house product development pipeline projects to prioritise 17 projects to maximise return on investment R&D Group consolidated with full audit of the regulatory, quality, technical support and product development Focus on supply change management and the opportunity to leverage larger critical mass Introduction of a scalable and cost- effective finance structure Consolidation of export markets, through cancellation of former Animalcare distribution contracts in regions where the enlarged group sell directly The Enlarged group has a well- established footprint that will prove attractive to US / Asia companies seeking European market entry First licensing agreement signed with US-based Nutramax Distribution of Cosequin, a nutritional supplement for canine joint health Acquisition of Ecuphar NV by Animalcare Group plc constituting a reverse takeover Acquisition provides direct access to UK markets for the first time, in addition to Belgium, Spain, Portugal, Italy, Germany, and the Netherlands 10 Z Impact of successful cross-selling strategy to be seen in Q4 2018, with a meaningful impact on profit margins in 2019 Z Ramp up sales of full portfolio with new distribution partners in NZ and Taiwan, including Aqupharm and Isocare which have just gained regulatory approvals Z Seeking additional regulatory approvals for our existing products in new territories Z Appointed new distribution partners for territories not currently covered Z Roll-out of Companion Animal Identification products beyond the UK Z R&D consolidation to be completed and synergies delivered Z Finalisation of new product development for launch in 2019 Z Group-wide introduction of common supply chain management systems to best manage stock and working capital Z New finance structure to optimise tax efficiency and fulfil governance requirements Z Further consolidation of distributors, suppliers and centralised export back office functions Z Introduction of Group-wide communications and IT platforms Z Align sales and marketing areas of excellence focusing on higher margin products Z Four major projects are expected to be licensed-in for distribution Z Further development of licensing partnerships to provide further growth Z Acquisitions pipeline identified Z Currently looking at a number of opportunities although focus is on current integration Z Areas of interest would include France, Ireland and Scandinavia Z Acquisitions should have their own direct sales and own products to cross-sell, a pipeline of new products and be profitable and immediately earnings enhancing 26011 18/05/2018 Proof 4STRATEGIC OBJECTIVE DESCRIPTION PERFORMANCE FOCUS AND GOALS FOR 2018 5 Diversifying the Enlarged Group’s portfolio { Diversifying the Enlarged Group’s portfolio of products into additional therapeutic areas within the companion animal, as well as production animal and equine, markets Product portfolio expanded to over 300 products including pharmaceuticals, vaccines, biocides and nutraceuticals New products launched during 2017, including Acecare and Enrocare The Group has a well-established development pipeline for new veterinary pharmaceutical products One centralised registration was submitted in 2017 { Continuing the shift towards broadening the Enlarged Group’s pipeline innovations to include novel therapies We have reviewed and prioritised the pipeline on current development projects which will allow us to focus on novel developments in the future. 6 Broaden the Enlarged Group’s pipeline innovations Z Further progress of the pipeline to continue Z Continued registration of relevant new products through 2018 Z Expected launch of new products where registration has already been submitted Z Ongoing progress with product improvement and maintenance projects Z New registrations and launches for existing products in new territories Z Focus on new areas such as surgery, pain relief, anti-inflammatories and vaccines Z Further progress to broaden the product development pipeline to include novel therapies OUR OBJECTIVES IN THE SHORT, MEDIUM AND LONG-TERM MID-TERM { Develop wider network partnership opportunities { Leverage platform with accretive opportunities { Diversify the product portfolio into additional therapeutic areas LONGER-TERM { Shift towards broadening pipeline to include novel therapies READ ABOUT OUR KPIS ON PAGE 12 SHORT-TERM { Initiate cross selling opportunities { Implement business integration. This will involve combining product development activities and optimising the supply chain 11 26011 18/05/2018 Proof 4Animalcare Group plc Annual Report 2017www.animalcaregroup.co.ukStock Code: ANCRSTRATEGIC REPORT OUR BUSINESSOUR KEY PERFORMANCE INDICATORS KPI WHY THIS IS IMPORTANT PERFORMANCE (STATUTORY) RELEVANCE TO STRATEGY Revenue growth Our revenue growth encompasses all aspects of our strategy and demonstrates our success in key areas including leveraging our platform both organically and via selective acquisitions and the delivery of revenue from new products launched from our product development pipeline. Basic Underlying Earnings per share (“EPS”) The measure of how successful we are in growing our business organically and by acquisition coupled with strong financial disciplines, including those related to tax and capital allocation, is captured in the Group’s underlying earnings per share. Through maximising existing portfolio revenues, delivering new products from our pipeline and via our network of partnerships, we aim to achieve organic growth in excess of our blended market growth rate, broadly matching revenue and profit growth in the medium term. Acquired businesses have to be a good fit with our operating culture and strategy in addition to being value-enhancing financially. Underlying EPS is a key measure of our overall performance and the return we generate for shareholders before exceptional items. We aim to grow the business from 2018 to deliver year-on-year earnings enhancement. (£m) 2016 2017 68.4 83.7 The Group delivered total revenue growth of 22.4%, of which 11.3% was from the continuing Ecuphar business. (p) 2016 16.7 2017 12.6 The decrease reflects the significant increase in the adjusted weighted average number of shares following the reverse acquisition. Cash generated from operations Cash generation is a measure of the quality of earnings and having strong operating cash flow enables the business to generate the funds we need to invest in our business to enhance future growth, maintain its strong balance sheet and deliver dividend flow. (£m) 2016 2017 2.4 9.3 Our stated aim is to deliver strong cash generation which provides the Group with freedom to pursue its strategic goals of organic growth, acquisitions and continue dividends without becoming highly leveraged. The decrease reflects the significant cash outflow from non-underlying items and increased working capital. Research and Development expenditure (including additions to intangibles) Sustainable investment in research and development contributes significantly to organic growth. (£m) 2016 2017 New product launches underpin certain elements of the Group strategy including diversification of the product portfolio and continuing the shift towards broadening innovation to include novel therapies. 4.3 3.9 READ ABOUT OUR PERFORMANCE ON PAGES 13 TO 25 READ ABOUT OUR STRATEGY ON PAGES 10 AND 11 12 26011 18/05/2018 Proof 4CHIEF EXECUTIVE OFFICER’S REVIEW “ The key aim for our business is to create a cash- generative, growing pan- European animal health company” CHRIS CARDON CHIEF EXECUTIVE OFFICER Introduction and Summary of the Group The key aim for our business is to create a cash-generative, growing pan-European animal health company and in July 2017 Animalcare Group plc completed the acquisition of Ecuphar NV (“Ecuphar”), an acquisition that constituted a reverse takeover. This brought together two businesses to create an enlarged group focused on the development and marketing of innovative products providing significant benefits to animal health. The business now has a considerably enlarged footprint and sales network with direct sales teams in 7 European countries and an export network that covers over 38 countries across Europe, Asia, Australasia, Africa and South America through 86 different distribution partners. Within our product portfolio we have 50 licensed drugs, eight vaccines and over 100 care and nutraceutical products employing around 100 sales representatives and 28 agents marketing these products to our global customer base. Shareholders in Animalcare are now invested in a substantially increased pan-European animal health platform with the following characteristics and strategic objectives: { Delivering double digit profit growth: We expect to deliver further incremental organic growth across revenues, EBITDA and underlying net earnings with the potential to achieve double-digit profit growth. { Cash generative: Continuing focus on cash generation allows us to maintain dividend payments as well as invest in our business to drive future growth. { Strong organic growth potential: We now have an increased geographic footprint for cross-selling; we expect to extract further synergies taking effect in 2018 but with a more meaningful impact in 2019, and we expect to deliver further growth through our new product development pipeline. { Acquisitive growth potential: Our strong balance sheet and scale also opens opportunities for value-accretive acquisitions which would allow us to target direct sales in other geographical territories. Business Review The Group is focused on the development and sale of veterinary products in the companion animal, production animal and equine markets and is divided into two segments: Pharmaceuticals and Wholesale. Pharmaceuticals The Pharmaceuticals segment develops and markets veterinary pharmaceutical products which are supplied to animal health professionals both directly and through our international distribution network. Our products fall into two categories: regulated pharmaceuticals and over the counter products. Products are either owned by the Group or licensed on long-term distribution agreements with third parties. We have a very broad portfolio of over 300 products including pharmaceuticals, vaccines, biocides and nutraceuticals and the Group focuses on certain niche therapy areas including odontology, dermatology, otology and surgery/anaesthesia. As a Group we invest significantly in our in-house development pipeline which I discuss later on in my report. 13 26011 18/05/2018 Proof 4Animalcare Group plc Annual Report 2017www.animalcaregroup.co.ukStock Code: ANCRSTRATEGIC REPORT OUR PERFORMANCECHIEF EXECUTIVE OFFICER’S REVIEW Following the acquisition this segment now includes the products that were previously categorised as Licensed Veterinary Medicines, Animal Welfare and Companion Animal Identification. Based on the statutory results for the year ended 31st December 2017, sales in this division (net of intercompany sales) increased by 28.4% to £59.7m (2016: £46.5m), which now accounts for 71.4% of total revenues. The £13.2m year-on-year increase is attributable to an additional £7.6m of sales derived from acquisition growth, with the balance generated through organic growth within the Ecuphar business. Organic growth was driven by a number of factors including a very strong performance from sales into the Production Animals market, as well as strong growth from Companion Animals. In the division our top 20 pharmaceutical products, which account for 51% of this division’s total sales, grew by 15.1% in 2017. Looking at our direct sales markets, Orozyme, the first product of the Company that was developed, continues to hold a strong position in the Oro-dental area. Direct sales for this product grew by 11% and we expect to see further growth in this area through the launch of new innovative products in 2018. Leisguard, our treatment against leishmaniosis in dogs, showed strong sales across our Mediterranean footprint and we expect to see future growth for this product in 2018 in Scandinavia. Prazitel and Caniquantel, which both play an important role in the area of anti-parasitic treatment, also grew well in 2017. We were pleased with the performance across our export network. Our key core export markets of France, the Nordics and UK and Ireland showed significant growth and we expect to benefit from ongoing direct sales in the UK now following the acquisition. During the period we signed new distribution agreements to cover New Zealand and Taiwan and both regions granted regulatory approval to sell Aqupharm (intravenous fluid range) and Isocare (anaesthesia), our recently launched products for use in surgery. This contributed to the growth of Aqupharm and Isocare sales, which were ahead of management expectations, and sales of core established brands such as Danilon (anti-inflammatory), Otoclean (dermatology) and Caniquantel (anti-parasitics) all showed double digit growth. Dinalgen (anti-inflammatory) sales were behind prior year but this was largely down to phasing of purchasing patterns in major markets. The positive impact of the cross-selling opportunity was minimal during the year. We expect to see this contribute to our organic growth during Q4 2018, later than originally anticipated, with a more meaningful contribution in 2019. The underlying EBITDA performance of our Pharmaceuticals division increased by 15.1% to £9.7m (97.1% of the Group’s underlying EBITDA) with reported EBITDA reducing to £7.5m (2016: £10.2m). Whilst this underlying growth was driven by the contribution of the acquisition, the organic performance in this division was impacted by lower gross margins, mainly due to a changing sales mix following higher growth from lower margin Production Animal products and export sales, as well as pricing pressures in a competitive market and the disposal of Nutriscience in 2016 which generated £1.3m of sales at margins in excess of 50%. Whilst the impact of a changing sales mix and competitive pricing pressures are likely to persist over the rest of 2018 we expect to deliver at least double digit growth in underlying EBITDA in this division and to see further strong sales growth driven by a growing portfolio of products and a wider geographical sales reach for these products. Wholesale Our Wholesale division focuses on the sale of third-party veterinary pharmaceuticals, supplies and instruments in Belgium. Based close to Bruges, in the North West of Belgium, this business supplies veterinary professionals across the country and has been trading for 25 years and is well established in a stable market. The extensive range of over 5,000 products includes own label and branded items ranging from small disposable items to larger capital equipment and diagnostic instruments. The division also specialises in the supply of surgical instruments. Revenues increased by 9.7%, entirely through organic growth, to £23.9m (2016: £21.8m) with this division representing 28.6% of total Group sales. This division delivered underlying and reported EBITDA of £0.3m (2016: £0.5m) reflecting the investment made in sales staff to drive future growth. Growth was driven by the addition of new customers, as well as expanding the range of products sold to existing customers. Product Development Pipeline The focus on building value within our product development pipeline continues. As an enlarged business our development team is located across a number of sites providing extensive skills and capabilities across Belgium, Germany, Spain and UK. Karolyn Tapper, previously Director of Business Development for Animalcare Ltd, has been appointed to the new role of Group Head of Technical and Commercial Development to structure and integrate the teams to ensure that we continue to grow through investing in and attracting new product opportunities. 14 26011 18/05/2018 Proof 4A project rationalisation and prioritisation process for all projects across the Group has been undertaken. Within the context of the enlarged Group, technical feasibility, development costs and commercial forecasts have been reviewed thoroughly to determine which projects would be continued. The Company is currently focused on 17 active new product development pipeline projects within Spain and UK. In 2017 we launched Acecare, a sedative, from the original UK pipeline. Sales have been in line with the original project forecast. One centralised registration was submitted in 2017 and launch of this product is planned in late 2018. Progress of the pipeline continues and in 2018 three new products have already been registered across Europe with additional submissions planned throughout the year. Alongside the new product development pipeline, a number of product improvement and product maintenance projects are ongoing. Several registrations to expand the global presence of our products were made in 2017 and launch within new territories is planned at the end of 2018 and during 2019. New Products through Strategic Alliances and Partnerships In addition to broadening our product portfolio through our own development pipeline, we are aware that our wide geographical footprint is attractive to similar companies in the US and Asia who are seeking routes to market for their products across Europe. During the period we have seen the first result of this strategy with an agreement with US-based Nutramax, to provide Europe- wide distribution of their nutritional supplement Cosequin, which promotes canine joint health. People We currently have 100 sales representatives and 28 agents across Europe, having invested in an additional 6 sales representatives and support roles during the year. As a result of changes in senior and executive management in the Company it was necessary to find and appoint new Country Managers in Spain and the UK, the two key territories in the Group. This has been completed with the new recruits now in post in the weeks following the year end. Internal appointments have also been made in the important areas of Technical and Product Development and Export. These new roles will progress the integration of the Group and help us to realise commercial opportunities more quickly. It is clear that an appointment in supply chain management will be required in the near future to ensure the operational efficiencies of the Group within this area are achieved. In addition, we announced at the end of April that Iain Menneer has stood down from his role as Chief Operating Officer. We are very grateful for all of Iain’s work on the integration of Animalcare and Ecuphar and we wish him well for the future. Iain’s role as COO will not be replaced and has been redistributed within the senior management team that he was accountable for, who will take on further responsibilities and report directly to myself. The key component to ensuring we continue to deliver on our long-term growth strategy is to continue to attract and retain the highest calibre people to drive forward our development. I would like to extend my thanks to all of our staff for their hard work. Brexit The details of how the UK pharmaceutical regulations will be extracted from the current harmonised European structure are not yet clear. The Veterinary Medicines Directorate (UK Government agency) is looking for close cooperation to enable a smooth transition to ensure animal welfare and food safety. The recent acquisition has enabled the new Group to start restructuring its pharmaceutical licence ownership with legal entities in the UK and Europe post-Brexit to allow uninterrupted commercial supply of product. We will continue to monitor the situation and take the necessary action to ensure business continuity. 15 26011 18/05/2018 Proof 4Animalcare Group plc Annual Report 2017www.animalcaregroup.co.ukStock Code: ANCRSTRATEGIC REPORT OUR PERFORMANCECHIEF EXECUTIVE OFFICER’S REVIEW Further growth is expected through the execution of a clear strategy for growth via both organic sales growth and through targeted acquisitions. Our strategy for growth includes: { Cross-selling opportunities across customers and distribution channels { More synergies delivered through further integration of the businesses { Enhancing geographic footprint and sales, marketing and distribution network { Developing network of partnerships / strategic alliances to increase exposure to new opportunities { Identifying selective value-accretive acquisitions { Diversifying the portfolio of products into additional therapeutic areas within companion animal as well as production animal and equine markets { Broadening the product development pipeline to include novel therapies We expect growth in revenues to be driven by the launch of new products from our development pipeline, additional regulatory approvals for our existing products in new territories and the distribution of new products for US or Asia based third parties across our European footprint. We also expect margin improvement to be seen as the opportunity to cross-sell products fully impacts as existing distribution agreements held by our UK business for Germany, Spain, Portugal, Italy and Belgium are exited and replaced by our own direct sales network. We believe we are on track to deliver double digit profit growth during 2018 and enhancement to profit margins will be driven by further synergies and cross-selling opportunities, which will start to take effect late in 2018 as integration progresses, but will deliver a more meaningful impact on profit margins during 2019 as the full effect of these changes are felt. We believe the business is well positioned for future growth and the Directors remain confident of delivering long-term shareholder value. CHRIS CARDON CHIEF EXECUTIVE OFFICER Post-period end – Le Vet purchase by Dechra On 13th February, Dechra plc acquired Le Vet Beheer B.V. (“Le Vet”), a business which has developed a portfolio of products, and established a network of marketing partners across Europe. Le Vet has been a long-term partner of Animalcare and Ecuphar with distribution agreements in four territories. Whilst certain distribution arrangements will not change, it is clear that this will not be the case across all of them. We are taking action now to mitigate against any material change which could adversely impact trading part way through 2019. Strategy and Outlook The strategy of the business remains focused on building long- term shareholder value by creating a growing, profitable and highly cash generative pan-European animal health platform, capable of investing in a steady flow of new products and rewarding shareholders with dividend payments. 16 26011 18/05/2018 Proof 4CHIEF FINANCIAL OFFICER’S REVIEW CHIEF FINANCIAL OFFICER’S REVIEW “ The reverse acquisition will provide a number of opportunities for growth and long-term value creation for our shareholders” CHRIS BREWSTER CHIEF FINANCIAL OFFICER Presentation of Results On 13th July 2017, Animalcare Group plc completed the acquisition of Ecuphar NV, a European Animal Health Company headquartered in Belgium. The acquisition constituted a reverse takeover for the purposes of Rule 14 of the AIM Rules for Companies. This business combination has been treated as a reverse acquisition in accordance with IFRS 3. Under the provisions of IFRS 3 the results for the year ended 31st December 2017 are reported as a continuation of Ecuphar NV with the results of Animalcare Group plc consolidated from the date of acquisition. Accordingly, the statutory results for the year end 31st December 2017 reflect 12 months of Ecuphar NV and approximately five and a half months of Animalcare Group plc as previously constituted. To help shareholders to assess the Group, an unaudited Pro forma Consolidated Income Statement has been provided, which reflects 12 months of trading from both entities. The Board believes that these statements provide the most appropriate basis for future comparison of operating performance. Underlying and Statutory Results To provide comparability across reporting periods, the Group presents its results on both an underlying and statutory (IFRS) basis. The Directors believe that presenting our financial results on an underlying basis, which exclude non – underlying items, provides a clearer understanding of business performance. IFRS results include these items to provide the statutory results. All figures are reported at actual exchange rates (AER) unless otherwise stated. Commentary will include references to constant exchange rates (CER) to identify the impact of foreign exchange movements A reconciliation between underlying and statutory results is provided at the end of this financial review prior to the pro- forma information as described above. 17 26011 18/05/2018 Proof 4Animalcare Group plc Annual Report 2017www.animalcaregroup.co.ukStock Code: ANCRSTRATEGIC REPORT OUR PERFORMANCECHIEF FINANCIAL OFFICER’S REVIEW Overview of Underlying Results To assist with the understanding of our underlying financial results, the Group results presented below are split between continuing operations (Ecuphar NV) and acquisition, being Animalcare Group plc from 13th July 2017. Revenue Underlying Gross Profit Gross Margin % Underlying Operating Profit Underlying EBITDA Underlying EBITDA margin % Underlying Profit after tax Basic Underlying EPS (p) 2017 Continuing £’000 2017 Acquisition £’000 76,118 30,408 39.9% 6,229 8,415 11.1% 3,824 – 7,558 4,256 56.3% 1,530 1,572 20.8% 1,460 – 2017 Total £’000 83,676 34,664 41.4% 7,759 9,987 11.9% 5,284 12.6p 2016 Total £’000 68,361 28,275 41.4% 6,720 8,914 13.0% 3,964 16.7p % Change at AER Continuing % 11.3% 7.5% (1.2%) (7.3%) (4.2%) (1.9%) (3.5%) – Total % 22.4% 22.6% – 15.5% 11.9% (1.3%) 33.3% (24.6%) The Group delivered total revenue of £83.7m, an increase of 22.4% versus the prior year. This included £76.1m from the continuing Ecuphar business, an increase of 11.3% (3.8% at CER) and £7.6m contribution from the acquired Animalcare operations. Underlying EBITDA increased by 11.9% to £10.0m (2016: £8.9m) including a £1.6m contribution from acquisition business. Ecuphar’s continuing business underlying EBITDA decreased by 5.6% to £8.4m primarily reflecting the lower gross margins, investments in our infrastructure and people to support future growth and the disposal of NutriScience which Ecuphar sold in October 2016 which contributed profits of approximately £0.2m. More details regarding operational performance are provided within the Trading Performance section. Basic underlying EPS decreased by 24.6% to 12.6 pence (2016: 16.7 pence). The 33.3% increase in profit after tax was offset by the significant increase in the weighted average number of shares from 23.8 million (which has been adjusted for the merger ratio of 63:37 as described in note 9) to 42.0 million. Trading Performance The following table sets out Group underlying trading performance by operating segment (see note 5 for more detail) analysed between continuing and acquisition businesses. This analysis will evolve over time as we integrate the two businesses. Revenue by Segment Pharma Wholesale Total Underlying Gross Profit by Segment Pharma Wholesale Total Underlying EBITDA Pharma Wholesale Total 2017 Continuing £’000 2017 Acquisition £’000 52,180 23,938 76,118 27.993 2,415 30,408 8,126 289 8,415 7,558 – 7,558 4,256 – 4,256 1,572 – 1,572 2017 Total £’000 59,738 23,938 83,676 32,249 2,415 34,664 9,698 289 9,987 2016 Total £’000 % Change at AER Continuing % 46,530 21,831 68,361 26,003 2,272 28,275 8,429 485 8,914 12.1% 9.7% 11.3% 7.7% 6.3% 7.5% (3.6%) (40.4%) (5.6%) Total % 28.4% 9.7% 22.4% 24.0% 5.8% 22.6% 15.1% (40.4%) 11.9% 18 26011 18/05/2018 Proof 4Wholesale segment Our wholesale segment, which comprises the purchase and re-sale of veterinary pharmaceuticals, supplies and instruments in Belgium, delivered revenue of £23.9m, representing an increase of 9.7% on the prior year. Whilst gross margins at 10.1% remained broadly comparable with prior year (2016: 10.4%), underlying and reported EBITDA reduced from £0.5m to £0.3m mainly due to increased employee costs to drive product sales and services growth. Revenue by Product Category Companion Animals Production Animals Equine Other products and services Total 2017 £’000 42,791 28,390 4,718 7,777 83,676 2016 £’000 30,799 22,668 5,567 9,327 68,361 % Change at AER % 38.9% 25.2% (15.3%) (16.6%) 11.3% Companion Animals revenue increased by 38.9% to £42.8m and, following the reverse acquisition of Animalcare Group plc, now represents 51.1% of total business, up from 45.1% in the prior year. Animalcare revenues generated 24.5% of the growth with the balance of 14.4% delivered by existing business, primarily driven by increased export sales, increased wholesale sales and market penetration of core pharmaceuticals. Production Animals revenue grew by 25.2% on prior year despite ongoing pressure on antibiotic usage. This growth largely came from full year sales of new products launched in 2016, in particular rabbit vaccines, and continued growth of core products in both our established markets as well as newer geographies such as Italy. Equine revenues reduced to £4.7m due to the prior year one-off benefit of horse vaccine sales in Germany as a result of competitor supply issues. Reported Financial Results Given the significant changes to the Group following the reverse acquisition, the financial results contain a number of non- underlying items comprising the fair value uplift of inventory acquired, amortisation and impairment of acquired intangibles and acquisition and integration costs. Pharma segment Revenue in our pharma segment grew by 28.4%, 12.1% of which was delivered by the continuing Ecuphar business. This growth was primarily driven by very strong growth in Production Animals revenue which as an overall category increased by 25.2% versus prior year to £28.4m together with a strong contribution from the Companion Animals category. Further detail on revenue by product category is given below. Underlying EBITDA improved by 15.1% to £9.7m however declined by 3.6% from continuing business to £8.1m (2016: £8.4m), representing an EBITDA margin of 15.6% (2016: 18.1%). This decline was driven by a combination of lower gross margins which fell by 2.3% to 53.6% and a £2.3m increase in operating costs. Gross margins in our continuing business have fallen for three main reasons: { Lower margin sales mix primarily reflecting higher growth in our Production Animal product category and export markets. { Maintaining market share in a competitive environment, at some expense to margins. { Disposal of NutriScience in October 2016 which generated £1.3m sales at margins in excess of 50%. Operating costs have increased by £2.3m to £19.9m (2016: £17.6m) representing 38.2% (2016: 37.8%) of sales. Approximately £1.5m of this increase relates to investment in our infrastructure (in particular IT and R&D), people and marketing to position the business for future growth. The balance of £0.8m reflects higher distribution costs as a result of significantly increased vaccine sales together with higher inventory write offs. Reported EBITDA, which includes £2.2m non-underlying items as analysed in note 5, reduced to £7.5m (2016: £10.2m). 19 26011 18/05/2018 Proof 4Animalcare Group plc Annual Report 2017www.animalcaregroup.co.ukStock Code: ANCRSTRATEGIC REPORT OUR PERFORMANCECHIEF FINANCIAL OFFICER’S REVIEW A reconciliation of underlying results to reported results is provided below: Revenue Gross Profit Selling, general & administrative expenses Research & development expenses Net other operating income (expenses) Operating Profit Net finance expenses Profit before tax Taxation Profit after tax Basic EPS (p) 2017 Underlying results £’000 Fair value adjustment on acquired inventory £’000 Amortisation and impairment of acquired intangibles £’000 Acquisition and integration costs £’000 83,676 34,664 (24,912) (2,048) 55 7,759 (656) 7,103 (1,819) 5,284 12.6p – (401) – – – (401) – (401) 76 (325) – – – (3,590) (751) – (4,341) – (4,341) 972 (3,369) – – – – – (1,817) (1,817) – (1,817) 411 (1,406) – 2017 Reported results £’000 83,676 34,263 (28,502) (2,799) (1,762) 1,200 (656) 544 (360) 184 0.4p 2016 Reported results £’000 68,361 28,275 (22,347) (1,776) 1,887 6,039 (891) 5,148 (1,632) 3,516 14.8p Including non-underlying items, the Group’s profit after tax fell to £0.2m (2016: £3.5m). Non-underlying items incurred in the year are summarised below (all figures are pre-tax): { Fair value adjustment of acquired inventory of £0.4m – this is a non-cash uplift to the value of acquisition inventory as a result of the fair value exercise carried out in accordance with IFRS 3 ‘Business Combinations’. { Amortisation and impairment of acquired intangibles totalling £4.3m – this comprises £1.7m charge arising on the acquired intangibles relating to the Animalcare reverse acquisition and £2.6m in relation to previous acquisitions made by Ecuphar NV, principally Esteve SA which was acquired on 30th April 2015. { Acquisition and integration costs of £1.8m – this principally includes the transaction costs borne by Ecuphar NV in relation to the reverse acquisition of Animalcare Group plc and post-acquisition integration costs including the internal transfer of Animalcare Ltd to Ecuphar NV and the set-up of a new long-term incentive plan which the Board is seeking to implement during 2018. Earnings per Share and Dividend Basic underlying EPS decreased by 24.6% to 12.6pence (2016: 16.7 pence). The 33.3% increase in profit after tax was offset by the significant increase in the weighted average number of shares from 23.8 million (which has been adjusted for the merger ratio of 63:37 as described in note 8) to 42.0 million. The reported basic EPS, which incorporates non-underlying items, decreased to 0.4 pence (2016: 14.8 pence) The Board is proposing a final dividend of 2.0 pence per share, added to the second interim dividend of 4.7 pence per share paid in November 2017, giving a total dividend of 6.7 pence per share since the reverse acquisition. This final dividend is subject to shareholder approval at the Annual General Meeting on 27th June 2017. The Board will continue to maintain the current dividend policy and timing of payments whilst continuing to invest for future growth. Cash Flow, Net Debt and Borrowing Facilities Net debt at 1st January 2017 Net cash generated from operations Net capital expenditure Acquisition of subsidiaries net of cash acquired Receipts from issue of share capital Net finance expenses Dividends paid Other cash movements Foreign exchange on cash and borrowings Net debt at 31st December 2017 £’000 (23,782) 2,425 (2,532) (26,852) 29,402 (657) (2,816) (45) (1,051) (25,908) 20 26011 18/05/2018 Proof 4The Group generated £2.4m net cash from operations (2016: £9.3m) which includes a cash outflow from non-underlying items totalling £3.8m. Working capital increased by £5.6m principally reflecting the payment of £2.5m non-underlying items which were recognised (accrued) at the time of the reverse acquisition, £2.0m increase in trade receivables due to strong growth in the final quarter and £1.4m investment in stock. This stock increase was mainly within our wholesale operation due to anticipated further antibiotic restrictions with the balance largely in our high-growth territories. Net capital expenditure of £2.5m largely comprises investment in our product development pipeline from which a significant number of new products launches are expected in 2019 and 2020. The £33.1m cash consideration for the acquisition of Ecuphar NV was funded using £4.0m of cash held by Animalcare Group plc and £29.1m of equity raised through a placing net of £0.9m expenses. As part of the reverse acquisition, the Group agreed to maintain the existing Ecuphar NV borrowing facilities (the Facilities) through four banks which comprised (i) €41.5m revolving credit facility (RCF), (ii) €10m term facility to finance permitted acquisitions (Term Loan A) and (iii) €4.08m quarterly amortising term facility (Term Loan B). There are three covenants governing the facilities: (i) a minimum adjusted solvency ratio of 30% measured as consolidated adjusted equity to consolidated adjusted total assets; (ii) a maximum leverage ratio of 3.5 times measured as consolidated net debt to consolidated EBITDA; (iii) a minimum interest coverage ratio of 4 times measured as consolidated EBITDA to consolidated interest expenses. Based on the 12 months unaudited pro-forma underlying EBITDA of £11.8m (see below), the Group’s net debt: underlying EBITDA leverage ratio was 2.2 times. At 31st December 2017, total facilities were £48.4m, of which £33.5m, net of cash balances, was being utilised leaving headroom of £14.9m. These bank facilities, together with the Group’s operational cash flow, indicate that the Group has sufficient facilities available to fund its operations and allow for future expansion. Summary The transformational reverse acquisition of Ecuphar has created critical scale for the Group within the European animal health market, providing a strengthened position to capitalise on growth in the market to deliver long-term shareholder value. To support this value creation, and to maximise the commercial, operational and financial synergies, the Group must deliver a wide- ranging and comprehensive integration. The historical growth of Ecuphar was complemented by a series of acquisitions including the largest and most significant acquisition of Esteve in 2015. Prior to the reverse, limited integration of these operations was undertaken. This has presented additional challenges resulting in the current process to integrate the businesses taking longer than expected. From a financial performance perspective, we have delivered strong revenue growth; however, this has not translated through to our operating profit as we have experienced competitive market pressures and changing sales mix, leading to margin decline in the second half of 2017. Against this backdrop, our priorities for the current year are: { Increasing sales of new products from our distribution network and expanding our geographic footprint { Focusing on gross margin and EBITDA development in order to deliver anticipated profit growth { Improving operating cash generation, important in providing the business with the funds to continue the momentum in our product development pipeline together with dividend flow { Delivering integration to unlock scale benefits and support EBITDA We remain firm in our belief that the reverse acquisition will provide a number of opportunities for growth. Delivering the comprehensive integration to realise the synergies and benefits available is key. Ultimately, to create value the combination of our businesses must become more than the sum of the parts. We expect to see some benefits of the integration in the current year but a more meaningful impact on profit in 2019. Once fully integrated, we believe this will provide a strong platform for long-term value creation for our shareholders. 21 26011 18/05/2018 Proof 4Animalcare Group plc Annual Report 2017www.animalcaregroup.co.ukStock Code: ANCRSTRATEGIC REPORT OUR PERFORMANCECHIEF FINANCIAL OFFICER’S REVIEW Proforma Consolidated Financial Information (unaudited) As noted previously, to help shareholders to assess the Group, an unaudited Proforma Consolidated Income Statement has been produced, which reflects 12 months of trading from both entities as below. Pro forma information has been prepared in a manner consistent with the accounting policies adopted by the Group in preparing the audited financial statements for the year ended 31st December 2017. Proforma Consolidated Income Statement (unaudited) Revenue Gross Profit Operating expenses Operating Profit Depreciation, amortisation & impairment Non-underlying items Underlying EBITDA Net financial (expenses)/income (Loss)/profit before tax Taxation Net (loss)/profit Underlying net profit Underlying basic EPS (p) Animalcare 2017 £’000 15,825 8,720 Ecuphar 2017 £’000 76,118 30,408 Total 2017 £’000 91,943 39,128 (8,696) (28,475) (37,171) 24 280 3,045 3,349 (40) (16) (104) (120) 2,769 – 1,933 4,843 1,639 8,415 (617) 1,316 (724) 592 3,824 – 1,957 5,123 4,684 11,764 (657) 1,300 (828) 472 6,593 11.0p Animalcare 2016 £’000 15,556 8,722 (5,353) 3,369 403 172 3,944 36 3,405 (466) 2,939 3,139 – Ecuphar 2016 £’000 68,361 28,275 Total 2016 £’000 83,917 36,997 (22,236) (27,589) 6,039 4,689 (1,814) 8,914 (891) 5,148 (1,632) 3,516 3,964 – 9,408 5,092 (1,642) 12,858 (855) 8,553 (2,098) 6,455 7,103 11.8p Compared to the statutory results, the unaudited proforma consolidated income statement includes an additional 28 weeks of Animalcare Group plc’s results prior to the reverse acquisition which has the impact of increasing revenue and underlying EBITDA by £8.3m and £1.8m respectively. This is shown in further detail in the reconciliation section below. The proforma results are yet to reflect the benefits from leveraging the Group’s enlarged platform which include commercial synergies, operating efficiencies and optimisation of the R&D function. We will continue to deliver the integration throughout 2018 to deliver more significant value creation from 2019. On the proforma basis, revenue increased by 9.6% (3.4% at CER) to £91.9m however underlying EBITDA decreased by 8.5% (12.9% decrease at CER) to £11.8m. The principal drivers for the financial performance of the existing Ecuphar business are described earlier in the Trading Performance section. For the acquired Animalcare business, revenues increased 1.7% to £15.8m, driven by £0.6m growth within export offset by a £0.4m reduction in sales from our microchipping business, the latter primarily as a result of the £0.3m incremental sales benefit observed in 2016 following the introduction of compulsory microchipping in the UK. Gross profit was flat at £8.7m largely reflecting the changing sales mix towards lower margin export business. Operating expenses excluding non-underlying items increased by £0.4m of which approximately half relates to higher central costs, including the enlarged Board. The balance primarily relates to investment in our UK trading business staff base. As a result, underlying EBITDA fell by £0.6m to £3.3m. 22 26011 18/05/2018 Proof 4Reconciliation of Pro forma Consolidated Income Statement A reconciliation of the statutory results to the Pro forma results is shown below: Fair value adjustment on acquired inventory(1) 2017 £’000 Acquisition and integration costs(2) 2017 £’000 – 401 – 401 – – 401 – 401 (76) 325 – – – – – 1,817 1,817 – – – – Amortisation of Animalcare acquired intangibles(3) Animalcare pre-acquisition(4) 2017 £’000 – – 1,645 1,645 (1,645) – – – 1,645 (310) 1,335 2017 £’000 8,267 4,464 (5,753) (1,289) 199 2,867 1,777 (1) (1,290) (82) (1,372) Pro forma results 2017 £’000 91,943 39,128 (37,171) 1,957 5,123 4,684 11,764 (657) 1,300 (828) 472 Reported results 2017 £’000 83,676 34,263 (33,063) 1,200 6,569 – 7,769 (656) 544 (360) 184 Revenue Gross profit Operating expenses Operating profit/(loss) Depreciation, amortisation & impairment Non-underlying items EBITDA Net financial (expenses)/income Profit/(loss) before tax Taxation Net profit/(loss) Notes 1. See description within the reconciliation of underlying to statutory results. 2. See description within the reconciliation of underlying to statutory results. 3. See description within the reconciliation of underlying to statutory results – this is net of £40k amortisation of acquired intangibles relating to the previous reverse acquisition of Animalcare Ltd in January 2008. 4. Pre-acquisition results of Animalcare Group plc from 1st January 2017 to 12th July 2017. CHRIS BREWSTER CHIEF FINANCIAL OFFICER 23 26011 18/05/2018 Proof 4Animalcare Group plc Annual Report 2017www.animalcaregroup.co.ukStock Code: ANCRSTRATEGIC REPORT OUR PERFORMANCEOUR PRINCIPAL RISKS Risk Management Framework The Board is responsible for maintaining and reviewing the effectiveness of our risk management activities, intended to monitor and mitigate, rather than eliminate, the significant risks that the Group is exposed to. In accordance with our governance practices, the Audit Committee supports the Board of Directors in monitoring the Group’s risks and is responsible for reviewing the effectiveness of the risk management and internal control systems. Our Risks A summary of the principal risks together with an explanation of how the Group mitigates each risk their trend and linkage to our strategy are set out in the table below. RISK Competitor risk Launch of competitor products, for example other generic or more superior product profile. Our product portfolio is broad however contains products with strong market share which is attractive to competitors. Market risk In certain geographies the veterinary market continues to see the emergence and growth of buying groups and corporate customers who are looking for value from the products and services we provide. Integration risk The integration of Ecuphar and Animalcare is wide- ranging and may fail to deliver expected returns due to integration challenges. Product development risk Pharmaceutical development is complex, involving technical, regulatory and financial risk. Failure to successfully deliver new product development projects could have a material impact on the Group’s results and damage our market position and relationship with our customers. ALIGNMENT TO STRATEGY 3 4 5 6 POTENTIAL IMPACT MITIGATION TREND Revenues and gross margins may be adversely affected should competitors launch competing generic or superior (novel) products. Operating costs may increase to protect market share. We monitor new product registrations and competitor launches and develop commercial and marketing responses accordingly. Diversification of our product portfolio and geographies will lessen the impact on our business. 1 3 4 5 6 The emergence and growth of corporate customers and buying groups represents an opportunity for sales volume growth but may result in lower margins. We continue to develop and strengthen our sales and marketing teams in respect of key account support and achieve our goal to better serve our changing customer base, both on a national and in future a European basis. 1 2 5 6 Failure to deliver the integration to the expected timetable together with anticipated commercial and operational synergies will inhibit growth and lead to higher costs and lower than expected profits. Complete failure of a project or failure to meet commercial expectations due to for example competitor launches (generic or novel) would result in impairment of capitalised development costs. An integration plan has been prepared and is being implemented across key work streams including supply chain, technical & product development, finance, HR, export and IT. Following careful selection of development strategy, each new product development project undergoes rigorous review by the cross-discipline senior management team with final sign-off by the Board. The pipeline is reviewed regularly, with corresponding updates provided to the Board, to ensure each project is progressing according to plan. 24 Key Up Down Same 26011 18/05/2018 Proof 4RISK Reliance on third parties risk The supply of products to our customers in a timely manner is vital to the success of the Group. The Group does not manufacture any of its own products and is solely reliant on an increasing third party supplier and contract manufacturer base across the UK and Europe. Regulatory risk Continuing pressure to reduce antibiotic usage and resistance. In certain countries this has led to increasing government intervention to limit the use of antibiotics in food producing animals. People risk The Group has a small Executive and senior management team whose skills, knowledge, experience and performance make a large contribution to the success of the Group. ALIGNMENT TO STRATEGY 3 4 5 6 POTENTIAL IMPACT MITIGATION TREND Any disruption to the relationship with our key supply partners, whether commercial or via change of control, or interruption to the supply chain could result in significant loss of revenue and damage the Group’s reputation with its customers. Given the increasing complexity and diversity in our supply chain, we have identified the need for increased specialist resource in this area which will form part of the integration. We monitor supplier performance and maintain adequate inventories, including safety stock held by our suppliers, based on risk assessments. Decline in sales of our antibiotic product range. 3 4 5 6 Regular dialogue is maintained with relevant authorities in each country to ensure we maintain a thorough understanding of regulatory changes. We aim to sell products that minimise antimicrobial resistance concerns. 2 3 4 5 6 Failure to retain and attract high calibre individuals in key roles could impact the successful implementation of our strategy and adversely impact on our results. The Nomination Committee leads the process for all potential appointments to the Board. Remuneration packages are reviewed annually to help ensure that the Group has the right mix of base salary, and short-term and long-term incentives to attract, retain and reward key employees to execute our growth strategy. 25 26011 18/05/2018 Proof 4Animalcare Group plc Annual Report 2017www.animalcaregroup.co.ukStock Code: ANCRSTRATEGIC REPORT OUR PERFORMANCEBOARD OF DIRECTORS JAN BOONE NON-EXECUTIVE CHAIRMAN CHRIS CARDON CHIEF EXECUTIVE OFFICER CHRIS BREWSTER CHIEF FINANCIAL OFFICER AND COMPANY SECRETARY MARC COUCKE NON-EXECUTIVE DIRECTOR Jan was appointed Non-Executive Chairman of the Group on 13th July 2017 following the acquisition of Ecuphar NV. Committee membership Member of the Audit Committee and the Nomination and Remuneration Committee Relevant skills and experience Jan is Chief Executive Officer of Lotus Bakeries which is listed on Euronext Brussels. He started his career in the audit department at PricewaterhouseCoopers and holds a Master’s degree in Applied Economics from KU Leuven and a Master’s degree in Audit from the University of Mons-Hainaut in Belgium. Between 2000 and 2005, Jan served as Head of Corporate Controlling and Member of the Executive Committee of Omega Pharma NV. He became Managing Director of Lotus Bakeries in 2005 and Chief Executive Officer in 2011 and also serves as a Non-Executive Director of Club Brugge. Chris was appointed Chief Executive Officer of the Group on 13th July 2017 following the acquisition of Ecuphar NV where he was Chief Executive Officer. Committee membership By invitation Relevant skills and experience Chris founded Ecuphar NV as Chris Cardon NV in 2001 to capitalise on opportunities identified in the animal health industry and grew the company through a successful focus on product portfolio development. Chris graduated as a pharmacist from the University of Ghent in 1993 after which he took over his family’s pharmacy business. In 1995, he completed an MBA at the Vlerick Leuven- Gent Management School. Chris has a strong entrepreneurial background in human OTC product development and in 1996, he established Mooss-Pharma NV, a company which developed human OTC products that were exclusively distributed by pharmacists and became a key player in the Belgian market. In 2001, the OTC assets of Mooss-Pharma were acquired by Omega Pharma NV. Chris received the prestigious award “Export Lion of Flanders 2005” in the Young Exporters category. Chris was appointed Chief Financial Officer in June 2012. Chris resigned as Chief Financial Officer on 13th July 2017 following the acquisition of Ecuphar NV and took on the role of UK Country Manager for the Group. He was reappointed as Chief Financial Officer on 25th September 2017. Committee membership By invitation Relevant skills and experience Chris has a broad range of experience gained during his ten years working across a number of functions at KPMG and through his role as Group Accounting Manager at Findus Group. Since joining Animalcare, Chris has developed the systems, controls and management information needed to support the growth and strategy of the business. More recently Chris has taken responsibility for supporting the changes required within the supply chain function to provide a robust platform for growth and the integration of the Ecuphar business into the Group. Marc was appointed as a Non- Executive Director on 13th July 2017 following the acquisition of Ecuphar NV. Committee membership Member of the Nomination and Remuneration Committee Relevant skills and experience Marc founded Omega Pharma NV in 1987, developing the company into a leading pan-European OTC health and personal care business and serving as both Chairman and Chief Executive Officer. Following the sale of Omega Pharma in 2015 to Perrigo Company plc, he invests via his private investment firm, Alychlo NV, in several listed and non-listed companies. He currently serves as Chairman of Mithra Pharmaceuticals and as Non- Executive Director of Fagron, both Belgian companies, in addition to a number of private companies. Marc graduated as a pharmacist from the University of Ghent after which he completed an MBA at the Vlerick Leuven-Gent Management School. As Chief Executive Officer of Omega Pharma, he was awarded the EY Flemish Entrepreneur of the Year in 2002. 26 26011 18/05/2018 Proof 4NICK DOWNSHIRE NON-EXECUTIVE DIRECTOR EDWIN TORR NON-EXECUTIVE DIRECTOR SENIOR INDEPENDENT DIRECTOR JAMES LAMBERT NON-EXECUTIVE DIRECTOR Nick joined the Board of Animalcare in 2008 when it was acquired by Ritchey plc for whom he was a director from 1998 Committee membership Chairman of the Audit Committee Relevant skills and experience Nick is a qualified chartered accountant who worked in corporate finance and venture capital before becoming the finance director of a software company. He has held non- executive directorships in a diverse range of businesses in the insurance, agricultural, hospitality, education and technology sectors. Nick runs an estate in Yorkshire and is a former Chairman of the CLA for Yorkshire, as well as acting as a Trustee for a number of charitable and land related trusts. He is a council member and chairs the Audit Committee for the Duchy of Lancaster. His experience with other organisations and his professional background assist him in chairing the Audit Committee and bringing objectivity and analysis to the Remuneration Committee. James was appointed Chairman of Animalcare in 2008 when it was acquired by Ritchey plc, for whom he was Chairman from 2005 and a Non-Executive Director from 2003. He stood down as Chairman on 13th July 2017 following the acquisition of Ecuphar NV. Committee membership Chairman of the Nomination and Remuneration Committee Relevant skills and experience In 1985, James co-founded R&R Ice Cream where he was Chief Executive Officer for 28 years and retired as Executive Chairman in 2014. He was appointed Chairman of Burton’s Biscuits in 2013, Chairman of Inspired Pet Nutrition in 2015, Chairman of Whitman Howard in 2016 and Non-Executive Director of Story Homes in 2016. James has spent his career helping build, develop and manage successful businesses, enabling them to reach their full potential and give them strategic direction. He won the EY UK Entrepreneur of the Year award in 2014 and represented the UK in the EY World finals. Edwin was appointed as a Non- Executive Director and Senior Independent Director on 13th July 2017 following the acquisition of Ecuphar NV. Committee membership Member of the Audit Committee and Nomination and Remuneration Committee Relevant skills and experience Edwin has significant experience of international veterinary and animal health markets, gained over a period of more than 20 years, during which time he has worked for ICI, Pitman Moore, Alfa Laval Agri and Dechra Pharmaceuticals. He was part of the management buyout team that set up Dechra Veterinary Products in 1997 and was an executive director on the board of the Dechra entity listed on the London Stock Exchange from 2000 until 2013. During this time, he was responsible for business development and managing the European business unit, and was instrumental in setting up the US business. Since 2014, Edwin has independently advised various companies on sales and marketing structures, M&A opportunities, ‘in’ and ‘out’ licensing of products and investment opportunities within the veterinary and animal health market sector. 27 26011 18/05/2018 Proof 4Animalcare Group plc Annual Report 2017www.animalcaregroup.co.ukStock Code: ANCROUR GOVERNANCECORPORATE GOVERNANCE STATEMENT “ As a Board, we recognise that applying sound governance principles is essential to the successful running of the Group, and supports its long-term success and strategy for growth.” JAN BOONE NON-EXECUTIVE CHAIRMAN Our Board and Committee Structure An Introduction from our Chairman I have pleasure in introducing the Corporate Governance Statement. This report summarises our approach to governance and provides information about how the Board and its committees operate. As a Board, we recognise that applying sound governance principles is essential to the successful running of the Group, and supports its long-term success and strategy for growth. It is our goal therefore to continue to improve and develop our governance structures. As a company listed on AIM, we are not required to comply with the UK Corporate Governance Code 2016 (“the UK Code”). We consider that the Quoted Companies Alliance’s Corporate Governance Code for small and mid-size quoted companies (“the QCA Code”) is more relevant for AIM companies such as Animalcare and we apply wherever possible, and as appropriate to the size, nature and resources of the Group, the QCA code. The policies and procedures we have put in place following the acquisition of Ecuphar NV in July 2017 give us a firm foundation for our governance structures and we will continue to build on these. JAN BOONE NON-EXECUTIVE CHAIRMAN 15th May 2018 28 26011 18/05/2018 Proof 4BOARD OF DIRECTORSCEOSENIOR MANAGEMENT TEAMNOMINATIONAND REMUNERATION COMMITTEEAUDITCOMMITTEEThe Role of the Board The Board is responsible to the shareholders and sets the Group’s strategy for achieving long-term success. It is also ultimately responsible for the management, governance, controls, risk management, direction and performance of the Group. The Composition of the Board The composition of the Board has been structured to ensure that no one individual can dominate its decision-making processes. Following completion of the acquisition of Ecuphar NV on 13th July 2017, the Board was restructured to take account of the activities of the enlarged Group. Before that date, the Board comprised the Non-Executive Chairman, James Lambert, two Non- Executive Directors, Nick Downshire and Ray Harding, and two Executive Directors, the Chief Executive Officer Iain Menneer and the Chief Financial Officer Chris Brewster. On 13th July 2017, the Board was restructured as follows: { James Lambert stepped down from his role as Non- Executive Chairman but remained on the Board as Non- Executive Director. { Jan Boone was appointed as Non-Executive Chairman. { Iain Menneer stepped down from his role as Chief Executive Officer but remained on the Board as Chief Operation Officer. { Chris Cardon was appointed as Chief Executive Officer. { Chris Brewster stepped down as Chief Financial Officer. { Walter Beyers was appointed as Chief Financial Officer. { Ray Harding resigned as a Non-Executive Director. { Marc Coucke and Edwin Torr were appointed as Non- Executive Directors. On 25th September 2017, Walter Beyers resigned as Chief Financial Officer and Chris Brewster was reappointed as Chief Financial Officer. On 26th April 2017, Iain Menneer resigned as Chief Operating Officer. The Board currently comprises two Executive Directors and five Non-Executive Directors. The Non-Executive Chairman Jan Boone and Senior Independent Director Edwin Torr are considered to be independent and therefore the Board is compliant with the QCA Code, having at least two independent Non-Executive Directors. Nick Downshire and James Lambert have been directors of the Company for more than ten years and were significant shareholders of the Group, holding over 3% of issued share capital, prior to the acquisition of Ecuphar NV in July 2017. Following the increase in issued share capital following the Placing in July 2017, their shareholdings have been diluted and they are no longer classed as significant shareholders. Notwithstanding their length of tenure and their interests in the share capital of the Company, the Board also considers Nick Downshire and James Lambert to be independent in character and judgement. On completion of the acquisition of Ecuphar NV, 23.1% of the issued share capital of the Company is held by Ecuphar Invest NV, an entity controlled by Chris Cardon, and a further 23.1% of the issued share capital is held by Alychlo NV, an entity wholly owned by Marc Coucke. The Board is aware of its duty to hear the voices of, and protect the interests of, minority shareholders and has put in place contractual arrangements with Ecuphar Invest NV and Alychlo NV, in the form of a relationship agreement in order to protect minority shareholder interests. A copy of the relationship agreement is available on the Company’s website (www.animalcaregroup.co.uk). Appointments to the Board and re-election The Board has delegated to the Nomination and Remuneration Committee the tasks of reviewing Board composition, searching for appropriate candidates and making recommendations to the Board on candidates to be appointed as Directors. Further details on the role of the Nomination and Remuneration Committee may be found in its report on page 34. The Directors have the power to appoint Directors during the year but any person so appointed must stand for election at the next Annual General Meeting as required by the Company’s Articles of Association (“Articles”). Under the Articles, any Director who was not elected or re-elected at either of the two preceding Annual General Meetings must retire by rotation at the next Annual General Meeting, and at each Annual General Meeting, at least one third of the Directors must retire and be eligible for re-election. In accordance with the Articles, Jan Boone, Chris Cardon, Marc Coucke, Edwin Torr, Chris Brewster and Nick Downshire will retire and offer themselves for re-election at the next Annual General Meeting. The Board considers that each of these Directors offering themselves for re-election continues to make a valuable contribution to the Board and continues to demonstrate commitment. 29 26011 18/05/2018 Proof 4Animalcare Group plc Annual Report 2017www.animalcaregroup.co.ukStock Code: ANCROUR GOVERNANCECORPORATE GOVERNANCE STATEMENT Development, information and support The Company Secretary ensures that all Directors are kept abreast of changes in relevant legislation and regulations, with the assistance of the Company’s advisers where appropriate. Executive Directors are subject to the Company’s performance development review process through which their performance against predetermined objectives is reviewed and their personal and professional development needs considered. Non-Executive Directors are encouraged to raise any personal development or training needs with the Chairman or Company Secretary. Performance Evaluation An informal Board evaluation process was conducted using a questionnaire and self-assessment in August 2016. Given the changes on the Board in 2017, it was not felt appropriate to conduct an evaluation. However, the Board intends to evaluate its performance and that of its committees on an annual basis. Independent Professional Advice Directors have access to independent professional advice at the Company’s expense. In addition, they have access to the advice and services of the Company Secretary who is responsible for advice on corporate governance matters to the Board. Directors’ and Officers’ Liability Insurance The Company has purchased Directors’ and officers’ liability insurance during the year as allowed by the Company’s articles. How the Board operates The Board is responsible for the Group’s strategy and for its overall management. The operation of the Board is documented in a formal schedule of matters reserved for its approval, which sets out the Board’s responsibilities. These include matters relating to: { the Group’s strategic aims and objectives { the structure and capital of the Group { financial reporting, financial controls and dividend policy { internal control, risk and the Group’s risk appetite { the approval of significant contracts and expenditure { effective communication with shareholders { any changes to Board membership or structure The Board meets at regular intervals and Non-Executive Directors communicate directly with Executive Directors and senior management between formal Board meetings. The Board held a focused meeting on strategy in December 2017 and intends to continue to schedule similar meetings annually. An agenda and accompanying detailed papers, including reports from the Executive Directors and other members of senior management, are circulated to the Board in advance of each Board meeting. Directors are expected to attend all meetings of the Board and the Committees on which they sit, and to devote sufficient time to the Group’s affairs to enable them to fulfil their duties as Directors. This requirement is also included in their letters of appointment. In the event that Directors are unable to attend a meeting, their comments on papers to be considered at the meeting will be discussed in advance with the Chairman so that their contribution can be included in the wider Board discussion. Directors are encouraged to question and voice any concerns they may have on any topic put to the Board for debate. The Board is supported in its work by Board Committees, which are responsible for a variety of tasks delegated by the Board. There is also an Executive Committee composed of the Chief Financial Officer and representatives from senior management whose responsibilities are to implement the decisions of the Board and review the key business objectives and status of projects. Board decisions and activity during the year There are a number of standing and routine items included for review on each Board agenda. These include the CEO’s report and operations reports, financial reports, consideration of reports from the Board Committees and investor relations updates. In addition, key areas put to the Board for consideration and review included: { Strategy presentations { Presentations from various parts of the business { Consideration of financing structures { Approval of annual report and financial statements { Review of Budget { Going concern and cash flow { Briefing and review of conflicts of interest { Review of AGM business { Market Abuse Regulation Compliance { Share Dealing Code 30 26011 18/05/2018 Proof 4Relations with shareholders The Group maintains communication with institutional shareholders through individual meetings with Executive Directors, particularly following publication of the Group’s interim and full year results. Private shareholders are encouraged to attend the Annual General Meeting at which the Group’s activities are considered and questions answered. General information about the Group is also available on the Group’s website (www.animalcaregroup.co.uk). This includes an overview of activities of the Group and details of all recent Group announcements. The Non-Executive Directors are available to discuss any matter stakeholders might wish to raise, and the Chairman and independent Non-Executive Directors will attend meetings with investors and analysts as required. A review of the share register is a standing item on the Board’s agenda. Annual General Meeting The Company’s Annual General meeting will be held at 11.30 a.m. on Wednesday 27th June 2018 at the offices of Panmure Gordon & Co, 1 New Change, London, EC4M 9AF. The Notice of Annual General meeting including the resolutions to be proposed is set out in a separate Notice of Meeting which accompanies this report and is available on the Company’s website (www.animalcaregroup.co.uk). The Board Committees There are two Board Committees, the Audit Committee and the Nomination and Remuneration Committee, both consisting of at least two independent Non-Executive Directors. Each Board Committee has approved Terms of Reference setting out their responsibilities. The Terms of Reference were approved and reviewed by the Board during the year and are available on the Company’s website (www.animalcaregroup.co.uk). Details of the operation of the Board Committees are set out in their respective reports below. All of the Board Committees are authorised to obtain, at the Company’s expense, professional advice on any matter within their Terms of Reference and to have access to sufficient resources in order to carry out their duties. Accountability The Company has in place a system of internal financial controls commensurate with its current size and activities, which is designed to ensure that the possibility of misstatement or loss is kept to a minimum. These procedures include the preparation of management accounts, forecast variance analysis and other ad hoc reports. There are clearly defined authority limits throughout the Group, including those matters that are reserved specifically for the Board. Risks throughout the Group are considered and reviewed on a regular basis. Risks are identified and mitigating actions put into place as appropriate. Principal risks identified are set out in the Strategic report on pages 24 and 25. Internal control and risk management procedures can only provide reasonable and not absolute assurance against material misstatement. The internal control procedures were in place throughout the financial year and up to the date of approval of this report. 31 26011 18/05/2018 Proof 4Animalcare Group plc Annual Report 2017www.animalcaregroup.co.ukStock Code: ANCROUR GOVERNANCEDuties The main duties of the Committee are set out in its Terms of Reference which are available on the Company’s website (www. animalcaregroup.co.uk) and include the following: { To monitor the integrity of the financial statements of the Company and any formal announcements relating to the Company’s financial performance, reviewing significant financial reporting judgements contained in them; { To review the Company’s internal financial controls and, unless expressly addressed by a separate Board committee composed of independent directors, or by the Board itself to review the Group’s internal control and risk management systems; { To monitor and review the requirement for, and if established, the effectiveness of the Group’s internal audit function; { To make recommendations to the Board, for it to put to the shareholders for their approval in general meeting, in relation to the appointment, reappointment and removal of the external auditors and to approve the remuneration and terms of engagement of the external auditors; { To review and monitor the external auditors’ independence and objectivity and the effectiveness of the audit process, taking into consideration relevant UK professional and regulatory requirements; { To develop and implement policy on the engagement of the external auditors to supply non-audit services, taking into account relevant ethical guidance regarding the provision of non-audit services by the external audit firm; and to report to the Board, identifying any matters in respect of which it considers that action or improvement is needed and making recommendations as to the steps to be taken; and { To report to the Board on how it has discharged its responsibilities. AUDIT COMMITTEE REPORT Members of the Committee Prior to the acquisition of Ecuphar in July 2017, the Audit Committee comprised two Non-Executive Directors, Nick Downshire and James Lambert. Following the Board restructure in July 2017, the Audit Committee (‘the Committee’) now comprises three Non-Executive Directors: Nick Downshire (Chairman) Jan Boone Edwin Torr The Board is satisfied that Nick Downshire, as Chairman of the Committee, has recent and relevant financial experience, being a qualified chartered accountant who has worked in corporate finance and venture capital. The Committee oversees the Group’s and its subsidiaries’ internal financial controls and risk management systems, recommends the half and full year financial results to the Board and monitors the integrity of all formal reports and announcements relating to the Group’s financial performance. The Committee challenges both the external auditors and the management of the Group and reports the findings and recommendations of the external auditors to the Board. The Committee will meet to review the proposed audit work, review the results of the audit work and consider any recommendations arising from the audit. The Committee will meet at least three times a year and at such other times during the year as is necessary to discharge its duties. Although only members of the Committee have the right to attend meetings, the Chief Executive Officer, Chief Financial Officer and external advisers, may be invited to attend for all or a part of the meeting. 32 26011 18/05/2018 Proof 4Principal Activities during the Year The main activities of the Committee during the year included: { review of the financial statements and Annual Report { consideration of the external audit report and management representation letter { going concern review { a retendering exercise for the appointment of the external auditors { review of the 2017 audit plan and audit engagement letter { review of the risk management and internal control systems { review and approval of the interim results { assessment of the need for an internal audit function; and { meeting with the external auditors without management present Tender Process for the Appointment of the external auditors Following the acquisition of Ecuphar NV in July 2071, the Committee considered it appropriate to retender for the provision of external audit services to the enlarged Group. A competitive tender process was conducted in late 2017, resulting in the appointment of PricewaterhouseCoopers LLP as the Company’s external auditor with effect from 15th January 2018. Role of the external auditors The Committee monitors the relationship with the external auditors to ensure that auditor independence and objectivity are maintained. As part of its review the Committee monitors the provision of non-audit services by the external auditors. The breakdown of fees between audit and non-audit services is provided in note 22 to the Group’s Consolidated Financial Statements. The Committee also assesses the auditors’ independence and performance. Having reviewed the auditors’ independence and performance, the Committee recommends that PricewaterhouseCoopers LLP be reappointed as the Group’s auditors at the next Annual General Meeting. Internal Audit At present the Group does not have an internal audit function and the Committee believes that management is able to derive assurance as to the adequacy and effectiveness of internal controls and risk management procedures without one. Audit Process The external auditors prepares an audit plan for its review of the full year financial statements. The audit plan sets out the scope of the audit, areas to be targeted and audit timetable. This plan is reviewed and agreed in advance by the Audit Committee. Following its review, the external auditors presented their findings to the Audit Committee for discussion. No major areas of concern were highlighted by the external auditors during the year; however, areas of significant risk and other matters of audit relevance are regularly communicated. Risk Management and Internal Controls The Group has established a framework of risk management and internal control systems, policies and procedures. The Audit Committee is responsible for reviewing the risk management and internal control framework and ensuring that it operates effectively. During the year, the Committee has reviewed the framework and the Committee is satisfied that the internal control systems in place are currently operating effectively. Whistleblowing The Company has a whistleblowing procedure under which staff may report any suspicion of fraud, financial irregularity or other malpractice to any Executive Director. NICK DOWNSHIRE CHAIRMAN OF THE AUDIT COMMITTEE 15th May 2018 33 26011 18/05/2018 Proof 4Animalcare Group plc Annual Report 2017www.animalcaregroup.co.ukStock Code: ANCROUR GOVERNANCENOMINATION AND REMUNERATION COMMITTEE REPORT Principal activities during the year { Recommending to the Board the appointment of new Directors following the acquisition of Ecuphar NV { Consideration of Executive Directors’ bonuses and salaries { Consideration of Non-Executive Directors’ fees { Review of share option plans { Succession planning Diversity The Group has in place anti-discrimination policies and encourages the promotion of women into senior management positions. This will widen the pool of executives from which to make senior appointments. The Board believes that appointments to the Board should be made relative to various criteria including diversity of background and personal attributes as well as gender, along with the appropriate skills, experience and expertise. All appointments are made taking these criteria into account. JAMES LAMBERT CHAIRMAN OF THE NOMINATION AND REMUNERATION COMMITTEE 15th May 2018 Members of the Nomination and Remuneration Committee Prior to the acquisition of Ecuphar in July 2017, the Nomination Committee comprised two Non-Executive Directors, Ray Harding and James Lambert, and the Remuneration Committee comprised two Non-Executive Directors, Ray Harding and Nick Downshire. Following a review of the Group’s governance framework after the acquisition of Ecuphar NV, it was considered appropriate to constitute a joint Nomination and Remuneration Committee (“the Committee”). This comprises five Non-Executive Directors: James Lambert (Chairman) Jan Boone Marc Coucke Nick Downshire Edwin Torr The Committee works closely with the Board to formulate remuneration policy and to consider succession plans and possible internal candidates for future Board roles, having regard to the views of shareholders. Duties The main duties of the Committee are set out in its Terms of Reference which are available on the Company’s website (www.animalcaregroup.co.uk) and include the following key responsibilities: Nomination { Leading the process for all potential appointments to the Board and making recommendations to the Board in relation to potential appointments; { Evaluating the balance of skills, experience, independence and knowledge on the Board; and { In the light of any evaluation, prepare a description of the role and capabilities required for a particular appointment. Remuneration { Setting remuneration for all Executive Directors and the Chairman, including pension rights and any compensation payments; and { Recommending and monitoring the level and structure of remuneration for senior management. 34 26011 18/05/2018 Proof 4DIRECTORS’ REMUNERATION REPORT This report covers the period from 1st July 2016 to 31st December 2017 which represents 18 months of remuneration paid to the Directors of Animalcare Group plc and includes the remuneration of the Directors who were appointed on 13th July 2017 following completion of the acquisition of Ecuphar NV. The disclosures in this report are made to support the Board’s goals of working towards best practice governance standards as an AIM company and to promote transparency about how our Directors are rewarded. The Nomination and Remuneration Committee The Board has delegated certain responsibilities for executive remuneration to the Nomination and Remuneration Committee. Details of the Nomination and Remuneration Committee, its remit and its activities are set out on page 34. The Nomination and Remuneration Committee (“the Committee”) is, among other things, responsible for setting the remuneration policy for Executive Directors and the Chairman and recommending and monitoring the level and structure of remuneration for senior management. Remuneration policy In formulating remuneration policy for the Executive Directors, the Committee considers a number of factors designed to: { have regard to the Director’s experience and the nature and complexity of their work in order to pay a competitive salary, in line with comparable companies, that attracts and retains Directors of the highest quality; { reflect the Director’s personal performance; and { link individual remuneration packages to the Group’s long-term performance and continued success of the Group through the award of annual bonuses and share-based incentive schemes. The objective of the remuneration policy is to promote the long-term success of the Company, having regard to the views of shareholders and stakeholders. Executive Directors Current components of the Executive Directors’ remuneration are base salary, annual bonus and share-based incentive schemes. Base salary Base salary is reviewed annually by the Committee. Annual bonus The Committee has agreed performance conditions for the annual bonuses of the Executive Directors based on the achievement of certain financial and operational KPIs. Each Executive Director has performance conditions related to the profitable growth of the Group and has additional performance conditions relevant to their own areas of responsibility. Other benefits A range of benefits may be provided including private medical insurance, life assurance, long-term disability insurance, general employee benefits and travel and related expenses. The Committee also retains the discretion to offer additional benefits as appropriate, such as assistance with relocation, tax equalisation and overseas tax advisory fees. Service agreements and termination payments Details of the Executive Directors’ service agreements are set out below. Director Chris Cardon Chris Brewster Date of contract Unexpired term 23rd June 2017 24th January 2012 Rolling contract Rolling contract Notice period by Company Notice period by Director 12 months 12 months 6 months 6 months Iain Menneer resigned as a director on 26th April 2018. The Executive Directors may be put on gardening leave during their notice period, and the Company can elect to terminate their employment by making a payment in lieu of notice of up to the applicable notice period. Employees’ pay Employees’ pay and conditions across the Group are considered when reviewing remuneration policy for Executive Directors. Non-Executive Directors The remuneration payable to Non-Executive Directors (other than the Chairman) is decided by the Chairman and Executive Directors. Fees are designed to ensure the Company attracts and retains high calibre individuals. They are reviewed on an annual basis and account is taken of the level of fees paid by other companies of a similar size and complexity. Non-Executive Directors do not participate in any annual bonus, share options or pension arrangements. The Company repays the reasonable expenses that Non-Executive Directors incur in carrying out their duties as Directors. Terms of appointment Each of the Non-Executive Directors signed a letter of appointment on 23rd June 2017 for a period of three years which can be terminated by either party giving to the other one month’s prior written notice. 35 26011 18/05/2018 Proof 4Animalcare Group plc Annual Report 2017www.animalcaregroup.co.ukStock Code: ANCROUR GOVERNANCEANNUAL REMUNERATION REPORT This report covers the period from 1st July 2016 to 31st December 2017 which represents 18 months of remuneration paid to the Directors of Animalcare Group plc and includes the remuneration of the Directors who were appointed on 13th July 2017 following completion of the acquisition of Ecuphar NV. This report also sets out details of the Executive Directors’ share options and the Directors’ interests in the share capital of the Company. Directors’ remuneration table (audited) Director Executive Directors Chris Brewster (resigned on 13th July 2017, reappointed on 25th September 2017) Chris Cardon (appointed 13th July 2017) Iain Menneer Walter Beyers (appointed 13th July 2017, resigned 25th September 2017) Non-Executive Directors Jan Boone (appointed 13th July 2017) Marc Coucke (appointed 13th July 2017) Nick Downshire Ray Harding (resigned 13th July 2017) James Lambert Edwin Torr (appointed 13th July 2017) Base salary £’000 Benefits in kind £’000 Pensions £’000 Annual performance bonus £’000 Compensation for loss of office Total 18 month period to 31st December 2017 £’000 Total 2016 (12 months) £’000 184 205 282 71 35 19 43 24 55 19 12 – 15 – – – 5 – – – 22 – 34 – – – – – – – 46 – 63 – – – – – – – – – – 45 – – – 12 – – 264 205 394 116 35 19 48 36 55 19 137 – 186 – – – 26 23 35 – Share option schemes Prior to the acquisition of Ecuphar NV on 13th July 2017, the Company operated three share option schemes: the Executive Share Option scheme under the Enterprise Management Incentive (EMI) scheme, the Savings Related Share Option scheme (SAYE) and a Long Term Incentive Plan (LTIP). Non-Executive Directors are not eligible to participate in the Company’s share option schemes. Details of the options held by the Executive Directors under the Executive Share Option Scheme, EMI and SAYE at the beginning and the end of the period and details of options exercised during the period are set out below. All vested options were exercised following completion of the acquisition of Ecuphar NV on 13th July 2017. EMI EMI EMI Unapproved SAYE Unapproved EMI SAYE Total £1.30 22nd June 2012 £1.30 2nd Aug 2012 £1.325 20th Nov 2012 £1.40 21st Feb 2013 £1.03 22nd May 2013 £1.415 20th June 2013 £1.415 20th June 2013 £1.05 28th Nov 2014 – – – 60,000 (60,000) – 50,000 (50,000) – 90,000 (90,000) – 30,000 (30,000) 30,000 (30,000) – – – – – – – 4,377 (4,377) – 8,754 (8,754) – 90,000 (90,000) – – – – 5,142 5,142 299,519 – (294,377) 5,142 – – – 40,000 (40,000) – 8,571 117,325 (8,571) (108,754) 8,571 8,571 Scheme Exercise Price Date of Grant Iain Menneer Outstanding at 1st July 2016 Exercised during the period Open at 31st December 2017 Chris Brewster Outstanding at 1st July 2016 Exercised during the period Open at 31st December 2017 36 26011 18/05/2018 Proof 4The Group previously operated a Long Term Incentive Plan which was introduced in June 2014 (“LTIP 2014”) and was implemented via a subscription for growth shares in the capital of Animalcare Ltd, a subsidiary of the Company. This is closed to new members and no further options will be granted under the LTIP 2014. In 2014, Iain Menneer and Chris Brewster were granted the following options { Iain Menneer – 31,955 A Ordinary Shares of £1.00 each (“A Shares”) for a total cash subscription of £31,955, representing 5.2% of Animalcare Ltd’s issued share capital; and { Chris Brewster – 19,173 A Shares, representing 3% of Animalcare Ltd’s issued share capital and 11,800 B Ordinary Shares of £1.00 each (“B Shares”), representing a further 2% of Animalcare Ltd’s issued share capital, for a total cash subscription of £30,973. The total cash subscriptions were, based on independent valuation, considered to be equal to fair value at the time of acquisition. Both Directors had the right to sell their A Shares to the Company at any time after 27th June 2017 in exchange for Ordinary Shares of 20 pence each in the Company (“Ordinary Shares”). Their rights to sell the A Shares are subject to, amongst other provisions, the Company having a market capitalisation in excess of £39.0m (“the Hurdle”) at the time of sale. The Hurdle was determined by the Remuneration Committee and broadly represented a 20% premium to the Company’s market capitalisation on 27th June 2014. Each holder of A Shares would, on a sale of his entire holding to the Company, be entitled to receive Ordinary Shares representing a percentage of the increase in the Company’s market capitalisation above the Hurdle; being 5% for Iain Menneer and 3% for Chris Brewster. Holders of the A Shares did not have a right to receive a dividend, except for any amounts distributed on the winding up of the Company or on an asset sale. Holders of the B Shares were not entitled to participate in any increase in the value of the Company above the Hurdle but can be exchanged for Ordinary Shares of an equal value at any time after 27th June 2017. Holders of the B Shares had a right to an annual dividend (on a non-fixed coupon basis), calculated by applying a rate of LIBOR + 2% to the nominal value of the B Shares. In June 2017, it was agreed between the Company, Iain Menneer and Chris Brewster that the options under the LTIP 2014 did not become exercisable as a result of the acquisition of Ecuphar NV. The Company however determined that it was appropriate to offer the right to exchange their shares in Animalcare Limited for Ordinary Shares shortly before completion of the acquisition, and each took up that right. As a consequence, 918,896 new Ordinary Shares were issued to Iain Menneer and Chris Brewster on 12th July 2017. The number of new Ordinary Shares issued pursuant to the exercise of these rights was determined using the lower of the closing middle market price for an Ordinary Share on 22nd June 2017, being the dealing day before the date the offer to exchange was made and the average of the closing middle market prices for an Ordinary Share over the dealing days in the 30 day period before that date, being 392.5 pence. A new Long Term Incentive Plan, the Animalcare Group plc Long Term Incentive Plan 2017 (“the New LTIP”) was approved by the Board in June 2017. A summary of the New LTIP was set out in the circular sent to shareholders on 24th June 2017 which is available on the Company’s website (www.animalcaregroup.co.uk). No options have been granted under the New LTIP as at the date of this report. The Nomination and Remuneration Committee will consider the grant of options to Executive Directors under the New LTIP during the current financial year. Directors’ Interests in the Share Capital of the Company The Directors’ interests in the share capital of the Company as at 31st December 2017 and the movements during the period covered by this report are set out below: Director Jan Boone Chris Brewster Chris Cardon Marc Coucke Nick Downshire James Lambert Iain Menneer Edwin Torr Number of shares held as at 1st July 2016 – 4,079 Acquired/ (disposed) during the period 50,171 276,434 – – 13,857,297 13,857,297 1,109,583 1,313,691 17,739 – (77,992) – 584,193 107,455 Number of shares held as at 31st December 2017 Percentage of ISC as at 31st December 2017 50,171 280,513 13,857,297 13,857,297 1,031,591 1,313,691 601,932 107,455 0.08 0.47 23.09 23.09 1.72 2.19 1.00 0.18 In addition, as at 1st July 2016, Nick Downshire had a non-beneficial interest of 310,446 held via the Downshire 1992 Settlement Trust. On 16th August 2017, The Downshire 1992 Settlement Trust disposed of 120,000 shares. As at 31st December 2017, Nick Downshire had a non-beneficial interest of 190,446 shares. JAMES LAMBERT CHAIRMAN OF THE NOMINATION AND REMUNERATION COMMITTEE 15th May 2018 37 26011 18/05/2018 Proof 4Animalcare Group plc Annual Report 2017www.animalcaregroup.co.ukStock Code: ANCROUR GOVERNANCEDIRECTORS’ REPORT The Directors present their report on the Group and Company, together with the audited Consolidated Financial Statements of the Group for the year ended 31st December 2017 and the audited Financial Statements of the Company for the 18 month period ended 31st December 2017. Principal Activities Animalcare Group plc is a public limited company incorporated in England and Wales with registered number 01058015, which is listed on the Alternative Investment Market (“AIM”) of London Stock Exchange. The principal activity of the Group during the period was the development, sale and distribution of licensed veterinary pharmaceuticals and identification products and services to companion animal veterinary markets. Statutory Information contained elsewhere in the Annual Report Information required to be part of the Directors’ report can be found elsewhere in this document, as indicated, and is incorporated into this report by reference: Results and dividend in the Chairman’s Statement on page 02. Corporate Governance and the Group’s financial risk management objectives in the Corporate Governance report on pages 28 to 39. Details of the salaries, bonuses, benefits and share interests of Directors in the Directors’ remuneration report on page 36 and 37. Directors’ responsibility statements on page 40. Likely future events and all post-balance sheet events are disclosed within the Strategic report on pages 10 to 25. Directors and Directors’ Interests The names of the current Directors of the Company and their biographical details are shown on pages 26 to 27. Changes to directorships during the reporting period are shown on page 29. Details of Directors’ interests in the shares of the Company are shown on page 37. This information is incorporated into this report by reference. Research and Development Our new product development programme is key to the future long-term growth and success of the Group and we are committed to the development of new and innovative products to meet the needs of our customers. Further information in relation to product development can be found in the Chief Executive Officer’s Review. During the period under review, the Group incurred research and development expenditure including additions to intangibles of £3.9m (2016: £4.3m). Articles of Association Any amendments to the Articles of Association of the Company may be made by Special Resolution of the shareholders. Financial Instruments and Risk Management Disclosures regarding risk management and financial instruments are provided within the Strategic Report and in note 23 to the Consolidated Financial Statements on page 86. Share capital The Company’s issued share capital as at 31st December 2017 was £11,982,780 divided into 59, 913,900 ordinary shares of 20 pence each. Further details of changes to the Company’s issued share capital during the financial period are provided in note 21 to the Consolidated Financial Statements on page 84. Since the end of the financial period, the Company allotted 100,619 ordinary shares of 20 pence each on 22nd February 2018, in respect of its Save As Your Earn (SAYE) Share Option Scheme. The Company’s issued share capital as at 9th May 2018, being the latest practicable date before the publication of this report, was 60,014,519 ordinary shares of 20 pence each. The Company’s ordinary shares rank pari passu in all respects with each other, including for voting purposes and for all dividends. Further information on the voting and other rights of shareholders are set out in the Company’s Articles of Association which are available on the Company’s website (www.animalcaregroup.co.uk). Directors’ Liability Insurance The Group purchases and maintains Directors’ and Officers’ liability insurance for the benefit of its Directors, which was in place throughout the period ended 31st December 2017 and remains in place at the date of this report. Political Donations No political donations were made during the year (2016: £nil). Employees The Board recognises that the Group’s performance and success are directly related to our ability to attract, retain and motivate high calibre employees. We are committed to linking reward to business and individual performance, thereby giving employees the opportunity to share in the financial success of the Group. Employees are typically provided with financial incentives related to the performance of the Group in the form of annual bonuses. The Board also recognises employees for their contribution through the use of employee incentive plans and share plans within overall remuneration. Applications for employment by disabled persons are given full and fair consideration. When existing employees become disabled every effort is made to provide continuing employment wherever possible. 38 26011 18/05/2018 Proof 4Significant Shareholdings The Company has been notified of the following interests or is otherwise aware of the following interests,representing 3% or more of the issued share capital of the Company as at 30th April 2018, a date not more than one month before the date of the notice of the Annual General Meeting: Name of holder Alychlo NV Ecuphar Invest NV Liontrust Asset Management Hargreave Hale No. of ordinary shares 13,857,297 13,857,297 4,724,689 2,188,591 % holding 23.09 23.09 7.87 3.65 Relationship Agreement On 23rd June 2017, the Company entered into the Relationship Agreement with Panmure Gordon,the Company’s nominated adviser and broker and Alychlo NV and Ecuphar Invest NV (“the Substantial Shareholders”). The Substantial Shareholders together own more than 40% of the Group’s total issued share capital. The Relationship Agreement is intended to ensure that the Company will at all times be capable of carrying on the business independently of each of the Substantial Shareholders and their respective Shareholder Groups (being the Associate of the Substantial Shareholders) and all transactions and arrangements between i) the Company and ii) each of the Substantial Shareholders and the members of their respective Shareholder Groups will be at arm’s length and on normal commercial terms. The Board confirms that, at all times since it was entered into: { the Company has complied with its obligations under the Relationship Agreement; and { so far as the Company is aware, the Substantial Shareholders and their respective Shareholder Groups have complied with the provisions of the Relationship Agreement. Going Concern The principal risks and uncertainties facing the Group are set out on pages 24 to 25. For the purposes of their assessment of the appropriateness of the preparation of the Group’s accounts on a going concern basis, the Directors have considered the current cash position and forecasts of future trading including working capital and investment requirements. During the year the Group met its day-to-day general corporate and working capital requirements through existing cash resources. At 31st December 2017 the Group had cash on hand of £7.1m (30th June 2015: £5.8m). Overall, the Directors believe the Group is well placed to manage its business risks successfully and continue to be profitable and cash generative. The Group’s forecasts and projections, taking account of reasonable possible changes in trading performance, show that the Group should have sufficient cash resources to meet its requirements for at least the next 12 months. Accordingly, the adoption of the going concern basis in preparing the financial statements remains appropriate. Auditors Each of the persons who is a Director at the date of this Annual Report confirms that: { So far as the Director is aware, there is no relevant audit information of which the Company’s auditor is unaware; and { The Director has taken all the steps that he ought to have taken as a Director in order to make himself aware of any relevant audit information and to establish that the Group’s auditor is aware of that information. This confirmation is given and should be interpreted in accordance with the provisions of s418 of the Companies Act 2006. A resolution to reappoint PricewaterhouseCoopers LLP as auditors and to authorise the Directors to determine their remuneration will be put to the members at the forthcoming Annual General Meeting. Annual General Meeting The Company’s Annual General meeting will be held at 11.30 a.m. on Wednesday 27th June 2018 at the offices of Panmure Gordon, 1 New Change, London, EC4M 9AF. The Notice of Annual General meeting including the resolutions to be proposed is set out in a separate Notice of Meeting which accompanies this report and is available on the Company’s website www.animalcaregroup.co.uk Approval The Strategic report on pages 01 to 25 and this Directors’ report on pages 38 to 39 were approved by the Board on 15th May 2018. Approved by the Board and signed on its behalf CHRIS BREWSTER CHIEF FINANCIAL OFFICER AND COMPANY SECRETARY 15th May 2018 39 26011 18/05/2018 Proof 4Animalcare Group plc Annual Report 2017www.animalcaregroup.co.ukStock Code: ANCROUR GOVERNANCESTATEMENT OF DIRECTORS’ RESPONSIBILITIES The directors are responsible for preparing the Annual Report and the financial statements in accordance with applicable law and regulation. The directors are also responsible for safeguarding the assets of the group and company and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities. Company law requires the directors to prepare financial statements for each financial period. Under that law the directors have prepared the group financial statements in accordance with International Financial Reporting Standards (IFRSs) as adopted by the European Union and company financial statements in accordance with International Financial Reporting Standards (IFRSs) as adopted by the European Union. Under company law the directors must not approve the financial statements unless they are satisfied that they give a true and fair view of the state of affairs of the group and company and of the profit or loss of the group and company for that period. In preparing the financial statements, the directors are required to: { select suitable accounting policies and then apply them consistently; { state whether applicable IFRSs as adopted by the European Union have been followed for the group financial statements and IFRSs as adopted by the European Union have been followed for the company financial statements, subject to any material departures disclosed and explained in the financial statements; { make judgements and accounting estimates that are reasonable and prudent; and { prepare the financial statements on the going concern basis unless it is inappropriate to presume that the group and company will continue in business. The directors are responsible for keeping adequate accounting records that are sufficient to show and explain the group and company’s transactions and disclose with reasonable accuracy at any time the financial position of the group and company and enable them to ensure that the financial statements comply with the Companies Act 2006 and, as regards the group financial statements, Article 4 of the IAS Regulation. The directors are responsible for the maintenance and integrity of the company’s website. Legislation in the United Kingdom governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions. The directors consider that the annual report and accounts, taken as a whole, is fair, balanced and understandable and provides the information necessary for shareholders to assess the group and company’s performance, business model and strategy. Each of the directors, whose names and functions are listed in the Board of Directors section confirm that, to the best of their knowledge: { the company financial statements, which have been prepared in accordance with IFRSs as adopted by the European Union, give a true and fair view of the assets, liabilities, financial position and profit of the company; { the group financial statements, which have been prepared in accordance with IFRSs as adopted by the European Union, give a true and fair view of the assets, liabilities, financial position and profit of the group; and { the Directors’ Report includes a fair review of the development and performance of the business and the position of the group and company, together with a description of the principal risks and uncertainties that it faces. CHRIS BREWSTER CHIEF FINANCIAL OFFICER AND COMPANY SECRETARY 15th May 2018 40 26011 18/05/2018 Proof 4INDEPENDENT AUDITORS’ REPORT TO THE MEMBERS OF ANIMALCARE GROUP PLC Report on the audit of the financial statements Opinion In our opinion, Animalcare Group plc’s Group financial statements and Company financial statements (the “financial statements”): { give a true and fair view of the state of the Group’s and of the Company’s affairs as at 31st December 2017 and of the Group’s profit and the Group’s and the Company’s cash flows for the period then ended; { have been properly prepared in accordance with IFRSs as adopted by the European Union and, as regards the Company’s financial statements, as applied in accordance with the provisions of the Companies Act 2006; and { have been prepared in accordance with the requirements of the Companies Act 2006. We have audited the financial statements, included within the Annual Report, which comprise: the Group and parent Company statements of financial position as at 31st December 2017; the Group income statement and statement of comprehensive income, the Group and parent Company statements of cash flows, and the Group and parent Company statements of changes in equity for the period then ended; and the notes to the financial statements, which include a description of the significant accounting policies. Basis for opinion We conducted our audit in accordance with International Standards on Auditing (UK) (“ISAs (UK)”) and applicable law. Our responsibilities under ISAs (UK) are further described in the Auditors’ responsibilities for the audit of the financial statements section of our report. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion. Independence We remained independent of the Group in accordance with the ethical requirements that are relevant to our audit of the financial statements in the UK, which includes the FRC’s Ethical Standard, as applicable to listed entities, and we have fulfilled our other ethical responsibilities in accordance with these requirements. Our audit approach Overview Materiality Audit scope Key Audit Ma�ers { Overall Group materiality: £255,000, based on 2.5% of Adjusted EBITDA. { Overall Company materiality: £100,000, based on the lower of component and statutory materiality (statutory materiality based on 0.5% of net assets). { We, as the Group engagement team, audited the two components based in the UK - being Animalcare Group plc and Animalcare Limited. { The components based overseas - being Ecuphar NV, Medini NV, Othopaedics and Ecuphar Spain - have been audited by PwC component auditors. We were heavily involved at all stages of their audits by virtue of numerous communications throughout the process, including the issuance of detailed audit instructions, review and discussion of audit findings, in particular over our areas of focus. { As a result of this scoping we obtained coverage over 77% of the Group’s external revenues and 88% of the Group’s EBITDA. { Accounting for the reverse acquisition of Ecuphar NV (Group and parent). { Accounting for complex customer arrangements (Group). { Carrying value of intangibles in relation to New Product Development (Group). The scope of our audit As part of designing our audit, we determined materiality and assessed the risks of material misstatement in the financial statements. In particular, we looked at where the Directors made subjective judgements, for example in respect of significant accounting estimates that involved making assumptions and considering future events that are inherently uncertain. As in all of our audits we also addressed the risk of management override of internal controls, including evaluating whether there was evidence of bias by the Directors that represented a risk of material misstatement due to fraud. 41 26011 18/05/2018 Proof 4Animalcare Group plc Annual Report 2017www.animalcaregroup.co.ukStock Code: ANCROUR FINANCIALS INDEPENDENT AUDITORS’ REPORT TO THE MEMBERS OF ANIMALCARE GROUP PLC Key audit matters Key audit matters are those matters that, in the auditors’ professional judgement, were of most significance in the audit of the financial statements of the current period and include the most significant assessed risks of material misstatement (whether or not due to fraud) identified by the auditors, including those which had the greatest effect on: the overall audit strategy; the allocation of resources in the audit; and directing the efforts of the engagement team. These matters, and any comments we make on the results of our procedures thereon, were addressed in the context of our audit of the financial statements as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters. This is not a complete list of all risks identified by our audit. Key audit matter How our audit addressed the key audit matter We obtained and read the relevant terms of the purchase agreements to inform our further audit procedures to test the accounting for the acquisition. We tested the recognition in the Consolidated Financial Statements of the fair value of the assets and liabilities acquired (and residual goodwill). In doing so, we: { tested the valuation of the acquired intangibles by testing if the assumptions used in the calculations were consistent with our understanding of the acquisition and through agreement to supporting evidence. In addition, we utilised our internal valuation experts to assess the reasonableness of the valuation methodology and other key assumptions driving the valuation, specifically the discount rate applied. We found no inconsistencies in the assumptions used in the valuation; and { considered whether any other intangible assets should have been identified, based on our understanding of the transaction, our knowledge of the business, the purchase agreements and discussions with the Directors; we did not identify any. We have also reviewed the financial statement disclosures to ensure that the reverse acquisition is appropriately disclosed in line with IFRS; we did not identify any issues. To test customer rebates, we: { recalculated, for a sample of customers, the customer rebate expense recognised within the Income Statement in the year, and provided for at the Balance Sheet date, finding them to be broadly consistent; { tested whether any rebate arrangements had been omitted from the amounts charged in the year, and liabilities held at the Balance Sheet date, by checking the contractual arrangements with the Group’s most significant customers to make sure that all rebate arrangements had been identified by the Directors and did not identify any that had been omitted; and { agreed amounts settled with customers post period end to source documentation (credit notes and cash payment) to check they had been accounted for in the right accounting period, and found no instances of amounts recorded in the wrong period. Accounting for the reverse acquisition of Ecuphar N.V. On 13th July 2017 the Group acquired 100% of the share capital of Ecuphar NV via a share-for-share exchange. In line with the requirements of IFRS 3, this is being accounted for as a reverse acquisition given the relative size of Ecuphar NV in comparison to Animalcare Group plc. We focused on this area because the accounting for acquisitions involves judgement and estimates that have a material impact on the amounts recognised in the Group Financial Statements, including: { determining the fair value of intangible assets acquired, which largely consists of Animalcare Group plc’s proprietary product portfolio and pipeline of new products, and the useful economic lives of these identified intangibles; { determining the fair value of other assets and liabilities acquired; and { determining the appropriate disclosures and accounting treatment in relation to the reverse acquisition. Accounting for complex customer arrangements The Group provide rebate discounts and equipment deals to buying groups, corporate owned veterinary practices and independent veterinary practices. These are contractual and vary by customer and product type. We focused on this area because the amount of customer rebates payable in respect of the year is determined by the contract terms for each customer, which are negotiated separately and, as a result, differ from one another. This means that the calculation of the rebates recognised in the Income Statement, and as a payable at the year end, relies on a manual process, which is inherently more prone to error than systems- based processes. We also focused on the completeness of the Income Statement charge and year end provision due to the risk of potential omission given the manual nature of the process. 42 26011 18/05/2018 Proof 4Key audit matter How our audit addressed the key audit matter Carrying value of intangibles in relation to New Product Development New Product Development expenditure is capitalised and amortised over the estimated economic life of the product when the relevant criteria of IAS 38 “Intangible assets” are met. Judgement is required when assessing the technical and commercial feasibility of New Product Development projects, including whether regulatory approval will be achieved. Given the level of judgement involved we have focused on this area. The risk we focused on is that the carrying value of these intangibles may be overstated and that an impairment charge may be required. To assess the carrying value of intangibles in relation to New Product Development we have: { tested a sample of costs capitalised during the year to assess whether these have been appropriately treated in line with the Group’s accounting policy and accounting standards, most notably IAS 38 “Intangible assets”, and noted no issues; { met with management responsible for the particular costs to obtain an understanding of the associated project and to independently assess whether project costs meet the criteria for capitalisation as set out in accounting standards; we agreed with management’s judgements; { reviewed management’s feasibility analysis for ongoing new product development projects, which considers the payback period, being the point in time when the New Product Development will turn a profit based on its expected future earnings potential. This has been reviewed to assess the carrying value of the related intangible assets with no issues noted; and { determined that the disclosure detailed within note 10 is consistent with the requirements of IAS 38 “Intangible assets”. How we tailored the audit scope We tailored the scope of our audit to ensure that we performed enough work to be able to give an opinion on the financial statements as a whole, taking into account the structure of the Group and the Company, the accounting processes and controls, and the industry in which they operate. The Group operates through 13 components in a number of different countries. The procedures performed over the components (either by the Group team or PwC component audit teams) accounted for 77% of the Group’s external revenues and 88% of the Group’s EBITDA. We, as the Group engagement team, tailored the scope of our audit to ensure that we performed enough work to be able to give an opinion on the financial statements as a whole, taking into account the geographic structure of the Group, the accounting processes and controls, and the industry in which the Group operates. We, as the Group engagement team, performed an audit of the complete financial information for the two UK components – Animalcare Group plc and Animalcare Limited. For the remaining components of the Group, being Ecuphar NV, Medini NV, Othopaedics and Ecuphar Spain, PwC component auditors, under our instructions, performed an audit of their complete financial information. Where the work was performed by PwC component auditors we determined the level of involvement we needed to have in the audit work at those components to be able to conclude whether sufficient appropriate audit evidence had been obtained as a basis for our opinion on the Group financial statements as a whole. We were involved at all stages of their audits by virtue of numerous communications throughout the process, including the issuance of detailed audit instructions, review and discussion of audit findings, in particular over our areas of focus. We, as the Group engagement team, were also responsible for other head office activities such as the Purchase Price Allocation in relation to the reverse acquisition of Ecuphar and the financial statement disclosures. The procedures performed over the components (either by the Group team or PwC component audit teams) accounted for 77% of the Group’s external revenues and 88% of the Group’s EBITDA. Materiality The scope of our audit was influenced by our application of materiality. We set certain quantitative thresholds for materiality. These, together with qualitative considerations, helped us to determine the scope of our audit and the nature, timing and extent of our audit procedures on the individual financial statement line items and disclosures and in evaluating the effect of misstatements, both individually and in aggregate on the financial statements as a whole. 43 26011 18/05/2018 Proof 4Animalcare Group plc Annual Report 2017www.animalcaregroup.co.ukStock Code: ANCROUR FINANCIALSINDEPENDENT AUDITORS’ REPORT TO THE MEMBERS OF ANIMALCARE GROUP PLC Based on our professional judgement, we determined materiality for the financial statements as a whole as follows: Group financial statements Company financial statements Overall materiality £255,000 £100,000 How we determined it 2.5% of Adjusted EBITDA. Based on the lower of component and statutory materiality (statutory materiality based on 0.5% of net assets). Rationale for benchmark applied Based on the benchmarks used in the Annual Report, EBITDA is the primary measure used by the shareholders in assessing the performance of the Group, and is a generally accepted auditing benchmark. We believe that net assets is considered to be appropriate as it is not a profit-oriented company. The Company holds the investments in subsidiaries and therefore net assets is deemed a generally accepted auditing benchmark. For each component in the scope of our Group audit, we allocated a materiality that is less than our overall Group materiality. The range of materiality allocated across components was between £100,000 and £240,000. We agreed with the Audit Committee that we would report to them misstatements identified during our audit above £13,000 (Group audit) and £13,000 (Company audit) as well as misstatements below those amounts that, in our view, warranted reporting for qualitative reasons. Conclusions relating to going concern We have nothing to report in respect of the following matters in relation to which ISAs (UK) require us to report to you when: { the Directors’ use of the going concern basis of accounting in the preparation of the financial statements is not appropriate; or { the Directors have not disclosed in the financial statements any identified material uncertainties that may cast significant doubt about the Group’s and Company’s ability to continue to adopt the going concern basis of accounting for a period of at least twelve months from the date when the financial statements are authorised for issue. However, because not all future events or conditions can be predicted, this statement is not a guarantee as to the Group’s and Company’s ability to continue as a going concern. Reporting on other information The other information comprises all of the information in the Annual Report other than the financial statements and our auditors’ report thereon. The Directors are responsible for the other information. Our opinion on the financial statements does not cover the other information and, accordingly, we do not express an audit opinion or, except to the extent otherwise explicitly stated in this report, any form of assurance thereon. In connection with our audit of the financial statements, our responsibility is to read the other information and, in doing so, consider whether the other information is materially inconsistent with the financial statements or our knowledge obtained in the audit, or otherwise appears to be materially misstated. If we identify an apparent material inconsistency or material misstatement, we are required to perform procedures to conclude whether there is a material misstatement of the financial statements or a material misstatement of the other information. If, based on the work we have performed, we conclude that there is a material misstatement of this other information, we are required to report that fact. We have nothing to report based on these responsibilities. With respect to the Strategic Report and Directors’ Report, we also considered whether the disclosures required by the UK Companies Act 2006 have been included. Based on the responsibilities described above and our work undertaken in the course of the audit, ISAs (UK) require us also to report certain opinions and matters as described below. 44 26011 18/05/2018 Proof 4 Strategic Report and Directors’ Report In our opinion, based on the work undertaken in the course of the audit, the information given in the Strategic Report and Directors’ Report for the year ended 31 December 2017 is consistent with the financial statements and has been prepared in accordance with applicable legal requirements. In light of the knowledge and understanding of the Group and Company and their environment obtained in the course of the audit, we did not identify any material misstatements in the Strategic Report and Directors’ Report. Responsibilities for the financial statements and the audit Responsibilities of the Directors for the financial statements As explained more fully in the Statement of Directors’ Responsibilities, the Directors are responsible for the preparation of the financial statements in accordance with the applicable framework and for being satisfied that they give a true and fair view. The Directors are also responsible for such internal control as they determine is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error. In preparing the financial statements, the Directors are responsible for assessing the Group’s and the Company’s ability to continue as a going concern, disclosing as applicable, matters related to going concern and using the going concern basis of accounting unless the Directors either intend to liquidate the Group or the Company or to cease operations, or have no realistic alternative but to do so. Auditors’ responsibilities for the audit of the financial statements Our objectives are to obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditors’ report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with ISAs (UK) will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these financial statements. A further description of our responsibilities for the audit of the financial statements is located on the FRC’s website at: www.frc.org.uk/auditorsresponsibilities. This description forms part of our auditors’ report. Use of this report This report, including the opinions, has been prepared for and only for the Company’s members as a body in accordance with Chapter 3 of Part 16 of the Companies Act 2006 and for no other purpose. We do not, in giving these opinions, accept or assume responsibility for any other purpose or to any other person to whom this report is shown or into whose hands it may come save where expressly agreed by our prior consent in writing. Other required reporting Companies Act 2006 exception reporting Under the Companies Act 2006 we are required to report to you if, in our opinion: { we have not received all the information and explanations we require for our audit; or { adequate accounting records have not been kept by the Company, or returns adequate for our audit have not been received from branches not visited by us; or { certain disclosures of Directors’ remuneration specified by law are not made; or { the Company financial statements are not in agreement with the accounting records and returns. We have no exceptions to report arising from this responsibility. IAN MORRISON (SENIOR STATUTORY AUDITOR) FOR AND ON BEHALF OF PRICEWATERHOUSECOOPERS LLP CHARTERED ACCOUNTANTS AND STATUTORY AUDITORS LEEDS 15th May 2018 45 26011 18/05/2018 Proof 4Animalcare Group plc Annual Report 2017www.animalcaregroup.co.ukStock Code: ANCROUR FINANCIALSCONSOLIDATED INCOME STATEMENT Y E A R E N D E D 31 S T D E C E M B E R 2017 Non- underlying (note 5) Underlying Total 2017 £’000 83,676 (49,413) 34,263 (2,799) 2017 £’000 − (401) (401) (751) − (14,098) Non- underlying (note 5) 2016 £’000 − − − (272) − Underlying 2016 £’000 68,361 (40,086) 28,275 (1,504) (9,740) Total 2016 £’000 68,361 (40,086) 28,275 (1,776) (9,740) (3,590) (14,404) (10,384) (2,223) (12,607) (1,817) (6,559) − − (6,559) 1,459 (5,100) (1,762) 1,200 (747) 91 544 (360) 184 73 6,720 (988) 97 5,829 (1,864) 3,965 1,814 (681) − − (681) 232 (449) 1,887 6,039 (988) 97 5,148 (1,632) 3,516 Notes 6 7.1 7.2 7.3 7.4 7.5 7.8 7.9 7.10 2017 £’000 83,676 (49,012) 34,664 (2,048) (14,098) (10,814) 55 7,759 (747) 91 7,103 (1,819) 5,284 5,284 (5,100) 184 3,965 (449) 3,515 8 8 12.6p 12.5p 0.4p 0.4p 16.7p 16.7p 14.8p 14.8p Revenue Cost of sales Gross profit Research and development expenses Selling and marketing expenses General and administrative expenses Net other operating income/ (expenses) Operating profit/(loss) Financial expenses Financial income Profit/(loss) before tax Income tax Net profit/(loss) Net profit/(loss) attributable to: The owners of the parent Earnings per share attributable to ordinary owners of the parent Basic Diluted In order to aid understanding of underlying business performance, the Directors have presented underlying results before the effect of exceptional and other items. These exceptional and other items are analysed in detail in note 5 to these financial statements. The accompanying notes form an integral part of the consolidated financial information. 46 26011 18/05/2018 Proof 4 CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME Y E A R E N D E D 31 S T D E C E M B E R 2017 Net profit for the year Other comprehensive income Financial instruments at fair value through OCI * Cumulative translation differences * Other comprehensive income, net of tax Total comprehensive income for the year, net of tax Total comprehensive income attributable to: The owners of the parent * May be reclassified subsequently to profit & loss. 2017 £’000 184 − 664 664 848 848 2016 £’000 3,516 (5) 2,515 2,510 6,026 6,026 47 26011 18/05/2018 Proof 4Animalcare Group plc Annual Report 2017www.animalcaregroup.co.ukStock Code: ANCROUR FINANCIALSCONSOLIDATED STATEMENTS OF FINANCIAL POSITION Y E A R E N D E D 31 S T D E C E M B E R 2017 Assets Non-current assets Goodwill Intangible assets Property, plant & equipment Deferred tax assets Other financial assets Other non-current assets Total non-current assets Current assets Inventories Trade receivables Available-for-sale financial assets Other current assets Cash and cash equivalents Total current assets Total assets Liabilities Current liabilities Borrowings Trade payables Tax payables Accrued charges & deferred income Other current liabilities Total current liabilities Non-current liabilities Borrowings Deferred tax liabilities Deferred income Provisions Total non-current liabilities Total Liabilities Net Assets Equity Share capital Share premium Reverse acquisition reserve Retained earnings Other reserves Equity attributable to the owners of the parent Non-controlling interest Total equity Notes 9 10 11 7.10 12 13 20 13 14 16 15 18 19 16 7.10 18 17 21 21 21 2017 £’000 2016 £’000 51,413 54,037 825 1,603 72 − 107,950 16,795 16,680 464 1,934 7,579 43,452 151,402 (633) (14,128) (2,741) (2,116) (1,980) (21,598) (32,854) (6,454) (780) (72) (40,160) (61,758) 89,644 11,983 132,588 (56,762) (1,347) 3,180 89,642 2 89,644 9,959 21,246 719 1,269 69 1 33,263 13,254 10,781 423 1,191 951 26,600 59,863 (631) (10,012) (1,774) (812) (2,237) (15,466) (24,102) (224) − (216) (24,542) (40,008) 19,855 4,244 6,687 5,146 1,258 2,518 19,853 2 19,855 The accompanying notes form an integral part of these consolidated financial statements. The financial statements of Animalcare Group Plc, registered number 1058025, were approved by the board of directors and authorized for issue on 15th May 2018. They were signed on behalf by: CHRIS CARDON CHIEF EXECUTIVE OFFICER CHRIS BREWSTER CHIEF FINANCIAL OFFICER 48 26011 18/05/2018 Proof 4 CONSOLIDATED STATEMENT OF CHANGES IN EQUITY Y E A R E N D E D 31 S T D E C E M B E R 2017 At 1st January 2017 Net profit Other comprehensive income Total comprehensive income Dividends paid Shares issued as consideration Share capital £’000 4,244 Share premium £’000 6,687 − − − − − − − − 5,750 94,880 Exercise of share options 275 3,953 Share issue cost Arising on reverse acquisition − − (1,218) − Issue of new shares 1,714 28,286 Share-based payments − − At 31st December 2017 11,983 132,588 Attributable to the owners of the parent Treasury shares £’000 Retained earnings £’000 Reverse acquisition reserve £’000 Other reserve £’000 Non- controlling interest £’000 Total £’000 1,258 184 − 184 (2,816) − − − − − 27 5,146 2,518 19,853 − − − − − − − (61,908) − − − 184 662 662 662 846 − − − − − − − (2,816) 100,630 4,228 (1,218) (61,908) 30,000 27 2 − − − − − − − − − − Total equity £’000 19,855 184 662 846 (2,816) 100,630 4,228 (1,218) (61,908) 30,000 27 At 1st January 2016 Net profit Other comprehensive income Total comprehensive income Dividends paid Capital increase in cash Share capital £’000 7,256 − − − − − − At 31st December 2016 7,256 8,821 Arising on reverse acquisition (3,012) (2,134) At 31st December 2016 4,244 6,687 (1,347) (56,762) 3,180 89,642 2 89,644 Attributable to the owners of the parent Share premium £’000 Treasury shares £’000 Retained earnings £’000 Reverse acquisition reserve £’000 8,821 (646) − − − − − − (142) 3,515 − 3,515 (1,469) 646 (646) − − − − − 1,258 − 1,258 − − − − − − − − 5,146 5,146 Other reserve £’000 8 − 2,510 2,510 − − − Total £’000 15,297 3,515 2,510 6,025 (1,469) − − 2,518 19,853 − − 2,518 19,853 Non- controlling interest £’000 Total equity £’000 2 15,299 − − − − − − 2 − 2 3,515 2,510 6,025 (1,469) − − 19,855 − 19,855 − − − − − − − − − − − − − − − − Reverse acquisition reserve Reverse acquisition reserve represents the reserve that has been created upon the reverse acquisition of Animalcare Group plc. Other reserve Other reserve mainly relates to currency translation differences. These exchange differences arise on the translation of subsidiaries with a functional currency other than Sterling. 49 26011 18/05/2018 Proof 4Animalcare Group plc Annual Report 2017www.animalcaregroup.co.ukStock Code: ANCROUR FINANCIALS CONSOLIDATED CASH FLOW STATEMENT Y E A R E N D E D 31 S T D E C E M B E R 2017 Operating activities Profit before tax Non-cash and operational adjustments Depreciation of property, plant and equipment Amortisation of intangible assets Share-based payment expense Loss/(gain) on disposal of property, plant and equipment Movement in allowance for bad debt and inventories Financial income Financial expense Impact of foreign currencies Gain from sale of subsidiaries Other Movements in working capital Increase in trade receivables Decrease /(increase) in inventories (Decrease)/increase in payables Income tax paid Net cash flow from operating activities Investing activities Purchase of property, plant and equipment Purchase of intangible assets Proceeds from the sale of property, plant and equipment (net) Payments to acquire subsidiaries Cash and cash equivalents acquired under reverse acquisition Proceeds from sale of subsidiary Purchase available for sale financial investments Net cash flow used in investing activities Notes 2017 £’000 2016 £’000 544 5,148 11 10 7.9 7.8 4 11 10 4 4 4 327 6,053 27 2 652 (91) 747 25 − (30) (2,079) (1,359) (2,115) (278) 2,425 (184) (2,379) 31 (33,145) 6,293 − (45) (29,429) 326 3,982 − (1) 536 (97) 988 1,787 (2,432) 30 (1,447) (890) 2,530 (1,172) 9,288 (463) (1,185) 74 − – 3,211 (409) 1,228 50 26011 18/05/2018 Proof 4 CONSOLIDATED CASH FLOW STATEMENT CONTINUED Y E A R E N D E D 31 S T D E C E M B E R 2017 Financing activities Proceeds from loans and borrowings and convertible debt Repayment of loans and borrowings Receipts from issue of share capital Dividends paid Interest paid Other financial expense Net cash flow from financing activities Net increase of cash and cash equivalents Cash and cash equivalents at beginning of the year Exchange rate differences on cash and cash equivalents Cash and cash equivalents at end of the year Reconciliation of net cash flow to movement in net debt Net increase in cash and cash equivalents in the year Cash flow from (increase)/decrease in debt financing Foreign exchange differences on cash and borrowings Movement in net debt in the year Net debt at the start of the year Net debt at the end of the year Notes 2017 £’000 2016 £’000 8,298 (649) 29,402 (2,816) (528) (129) 33,578 6,574 951 54 7,579 6,574 (7,649) (1,051) (2,126) (23,782) (25,908) 15,852 (23,925) − (1,469) (663) (241) (10,446) 70 749 132 951 70 8,073 (4,045) 4,098 (27,880) (23,782) 14 14 51 26011 18/05/2018 Proof 4Animalcare Group plc Annual Report 2017www.animalcaregroup.co.ukStock Code: ANCROUR FINANCIALS NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS Y E A R E N D E D 31 S T D E C E M B E R 2017 { The retained earnings and other equity balances recognised in the Group financial statements reflect the retained earnings and other equity balances of Ecuphar NV immediately before the business combination { The results of the period from 1st January 2017 to the date of the business combination are those of Ecuphar NV; { The equity structure appearing in the Group financial statements reflects the equity structure of the legal parent, including the equity instruments issued under the share- for-share exchange to effect the business combination and adjusted in accordance with IFRS 3. This results in the creation of a “reverse acquisition reserve” as at 1st January 2017, being the difference between the Company equity structure and that of Ecuphar NV. The consolidated financial statements cover the year ended 31st December 2017. The financial statements for the comparative year ended 31st December 2016 represent the substance of the reverse acquisition and are those of Ecuphar NV. 3 Summary of Significant Accounting Policies Going concern An analysis of the factors likely to impact on the Group’s future business activities, performance and strategy are set out in the Chief Executive’s Review and Chief Financial Officer’s Review. The principal risks and uncertainties facing the Group are set out in the Strategic Report on pages 01 to 25. For the purposes of their assessment of the appropriateness of the preparation of the Group’s accounts on a going concern basis, the Directors have considered the current cash position and forecasts of future trading including working capital and investment requirements. During the year, the Group met its day-to-day general corporate and working capital requirements through existing cash resources. At 31st December 2017 the Group had cash on hand of £7,579k (2016: £951k). Overall, the Directors believe the Group is well placed to manage its business risks successfully. The Group’s forecasts and projections, taking account of reasonable possible changes in trading performance, show that the Group should have sufficient cash resources to meet its requirements for at least the next 12 months. Accordingly, the adoption of the going concern basis in preparing the financial statements remains appropriate. Basis for consolidation The consolidated financial statements comprise the financial statements of the Group and its subsidiaries. 1 Financial Information Animalcare Group plc (“the Company”) is a public company incorporated in the United Kingdom under the Companies Act 2006 and is domiciled in the United Kingdom. The Group comprises Animalcare Group plc and its subsidiaries. The nature of the Group’s operations and its principal activities are set out in note 6 and within the Directors’ Report. Details of the subsidiaries can be found in note 27. 2 Basis of Preparation The Group financial statements have been prepared and approved by the Directors under the historical cost convention, except for the revaluation of certain financial instruments, in accordance with International Financial Reporting Standards (“IFRS”) as adopted by the European Union (“adopted IFRSs”), the Companies Act 2006 as applicable to companies reporting under IFRS and the IFRS Interpretations Committee (IFRIC) interpretation. They have also been prepared in accordance with the requirements of the AIM Rules. The consolidated financial statements are presented in thousands of pound sterling (£K or thousands of £) and all “currency” values are rounded to the nearest thousand (£000), except when otherwise indicated. The preparation of financial statements in compliance with adopted IFRS requires the use of certain critical accounting estimates. It also requires Group management to exercise judgement in applying the Group’s accounting policies. The areas where significant judgement and estimates have been made in preparing the financial statements and their effect are disclosed in Note 3. The accounting policies have been applied consistently. On 13th July 2017 the Company acquired the entire issued ordinary share capital of Ecuphar NV and became the legal parent of Ecuphar NV. The accounting policy adopted by the Directors applies the principles of IFRS 3 (Revised) “Business Combinations” in identifying the accounting parent as Ecuphar NV and the presentation of the Group consolidated statements of the Company (the legal parent) as a continuation of financial statements of the accounting parent or legal subsidiary (Ecuphar NV). This policy reflects the commercial substance of this transaction as follows: { The original shareholders of the legal subsidiary undertaking were the most significant shareholders following admission to AIM, owning 46.9% of the issued share capital; { The assets and liabilities of the legal subsidiary Ecuphar NV are recognised and measured in the Group financial statements at the pre-combination carrying amounts without restatement to fair value; 52 26011 18/05/2018 Proof 4Entities are fully consolidated from the date of acquisition, which is the date when the Group obtains control, and continue to be consolidated until the date when such control ceases. The financial statements of the entities are prepared for the same reporting period as the parent Company, using consistent accounting policies. All intra-Group balances, transactions, unrealised gains and losses resulting from intra-Group transactions and dividends are fully eliminated. The Group attributes profit or loss and each component of other comprehensive income to the owners of the parent Company and to the non-controlling interest based on present ownership interests, even if the results in the non-controlling interest have a negative balance. A change in the ownership interest of a subsidiary, without a loss of control, is accounted for as an equity transaction. If the Group loses control over the subsidiary, it will derecognise the assets (including goodwill) and liabilities of the subsidiary, any non- controlling interest and the other components that are equity- related to the subsidiary. Any surplus or deficit arising from the loss of control is recognised in profit or loss. If the Group retains an interest in the previous subsidiary, then such interest is measured at fair value at the date the control is lost. The proportion allocated to the parent and non-controlling interests in preparing the consolidated financial statements is determined based solely on present ownership interests. Non-underlying items Non-underlying items are material items of income or expense which, because of their nature and the expected frequency of the events giving rise to them, merit separate disclosure. Other items relates to the amortisation of acquired intangible assets and fair value movements on foreign exchange hedging instruments. The separate presentation of exceptional and other items enables the users of the accounts to better understand the elements of trading performance during the year and hence to better assess trends in that performance. Non-controlling interests The Group has the choice, on a transaction by transaction basis, to initially recognise any non-controlling interest in the acquiree which is a present ownership interest and entitles its holders to a proportionate share of the entity’s net assets in the event of liquidation at either acquisition date fair value or, at the present ownership instruments’ proportionate share in the recognised amounts of the acquiree’s identifiable net assets. Other components of non-controlling interest such as outstanding share options are generally measured at fair value. The Group has not elected to take the option to use fair value in acquisitions completed to date and currently only has minor non-controlling interest resulting from business combinations. Segment reporting Operating segments are reported in a manner consistent with the internal reporting provided to the chief operating decision- maker. The chief operating decision-maker, who is responsible for allocating resources and assessing performance of the operating segments, has been identified as the Executive Committee. Operating segments are aggregated when they have similar economic characteristics which is the case when there is similarity in terms of: (a) the nature of the products and services; (b) the nature of the production processes; (c) the type or class of customer for their products and services; (d) the methods used to distribute their products or provide their services; and (e) if applicable, the nature of the regulatory environment. The Group has two operating segments: Pharmaceutical and Wholesale. Foreign currency translation Functional and presentation currency The Group’s consolidated financial statements are presented in Pounds Sterling (GBP) which is the Group’s presentational currency. For each entity, the Group determines the functional currency, and items included in the financial statements of each entity are measured using the functional currency. The functional currency of most subsidiaries of the Group is Euros. The statement of financial position is translated into GBP at the closing rate on the reporting date and their income statement is translated at the average exchange rate at year-end. Differences resulting from the translation of the financial statements of the parent and the subsidiaries are recognised in other comprehensive income as “cumulative translation differences”. Foreign currency transactions Transactions denominated in foreign currencies are translated into Euros at the exchange rate at the end of the previous month- end. Monetary items in the statement of financial position are translated at the closing rate at each reporting date and the relevant translation adjustments are recognised in financial or operating result depending on its nature. Business combinations Business combinations are accounted for using the acquisition method at the acquisition date, which is the date at which the Group obtains control over the entity. The cost of an acquisition is measured as the amount of the consideration transferred to the seller, measured at the acquisition date fair value, and the amount of any non-controlling interest in the acquiree. 53 26011 18/05/2018 Proof 4Animalcare Group plc Annual Report 2017www.animalcaregroup.co.ukStock Code: ANCROUR FINANCIALSNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS CONTINUED Y E A R E N D E D 31 S T D E C E M B E R 2017 3 Summary of Significant Accounting Policies (continued) 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. The Group recognises any non-controlling interest in the acquired entity on an acquisition-by-acquisition basis either at fair value or at the non-controlling interest’s proportionate share of the acquired entity’s net identifiable assets. The Group measures goodwill initially at cost at the acquisition date, being: { the fair value of the consideration transferred to the seller, plus { the amount of any non-controlling interest in the acquiree, plus { if the business combination is achieved in stages, the fair value of the existing equity interest in the acquiree remeasured at the acquisition date, less { the fair value of the net identifiable assets acquired and assumed liabilities. Goodwill is recognised as an intangible asset with any impairment in carrying value being charged to the consolidated income statement. Where the fair value of identifiable assets, liabilities and contingent liabilities exceed the fair value of consideration paid, the excess is credited in full to the consolidated income statement on acquisition date. Acquisition costs incurred are expensed and included in general and administrative expenses. Property, plant and equipment Property, plant and equipment is stated at cost, net of accumulated depreciation and/or accumulated impairment losses, if any. Such cost includes borrowing costs directly attributable to construction projects if the asset necessarily takes a substantial period of time to get ready for its intended use, it is probable that they will result in future economic benefits to the Group and the cost can be measured reliably. When significant parts of property, plant and equipment are required to be replaced at intervals, the Group recognises such parts as individual assets with specific useful lives and depreciates them accordingly. Likewise, when a major inspection is performed, its cost is recognised in the carrying amount of the property, plant and equipment as a replacement if the recognition criteria are satisfied. All other repair and maintenance costs are recognised in the income statement as incurred. Depreciation is calculated on a straight-line basis over the estimated useful lives of the assets as follows: { Equipment { Office furniture and office equipment 5 years 3–5 years or lease term if shorter A leased asset is depreciated over the useful life of the asset. However, if there is no reasonable certainty that the Group will obtain ownership by the end of the lease term, the asset is depreciated over the shorter of the estimated useful life of the asset or the lease term. An item of property, plant and equipment and any significant part initially recognised is derecognised upon disposal or when no future economic benefits are expected from its use or disposal. Any gain or loss arising on derecognition of the asset (calculated as the difference between the net disposal proceeds and the carrying amount of the asset) is included in the income statement when the asset is derecognised. The assets’ residual values, useful lives and methods of depreciation are reviewed at each financial year-end and adjusted prospectively, if appropriate. Leases The determination of whether an arrangement is, or contains, a lease is based on the substance of the arrangement at the inception date, whether fulfilment of the arrangement is dependent on the use of a specific asset or assets or the arrangement conveys a right to use the asset, even if that right is not explicitly specified in an arrangement. Finance leases which transfer to the Group substantially all the risks and benefits incidental to ownership of the leased item, are capitalised at the commencement of the lease at the fair value of the leased item or, if lower, at the present value of the minimum lease payments. Lease payments are apportioned between finance charges and reduction of the lease liability so as to achieve a constant rate of interest on the remaining balance of the liability. Finance charges are recognised as financial expenses in the consolidated income statement. Where substantially all of the risks and rewards incidental to ownership are not transferred to the Group (an “operating lease”), the total rentals payable under the lease are charged to the consolidated income statement on a straight-line basis over the lease term. The aggregate benefit of lease incentives is recognised as a reduction of the rental expense over the lease term on a straight-line basis. Intangible assets Intangible assets comprise the acquired product portfolios, in-process research and development, licensing and distribution rights and customer acquired in connection with business combinations, product portfolios and product development costs and capitalised software. { Leased equipment { Leasehold improvements Land is not depreciated. 4–5 years 5 years or lease term if shorter 54 26011 18/05/2018 Proof 4 5 years; 7–12 years; Not amortised. Not amortised; The useful life of the intangible assets is as follows: { Capitalised software: { Patents, distribution rights and licenses: { Product portfolios and product development: 10 years; { In-process research and development: { Goodwill: Intangible assets acquired separately Intangible assets with finite useful lives which are acquired separately are carried at cost less accumulated amortisation and accumulated impairment losses. Intangible assets with finite lives are amortised over their useful economic lives and assessed for impairment whenever there is an indication that the intangible asset may be impaired. The amortisation period and the amortisation method for an intangible asset with a finite useful life are reviewed at least at the end of each reporting period. The amortisation expense on intangible assets with finite lives is recognised in the consolidated income statement based on its function which may be “cost of sales”, “sales and marketing expenses”, “research and development expenses” and “general and administrative expenses”. Intangible assets with indefinite useful lives that are acquired separately are carried at cost less accumulated impairment losses. Goodwill Goodwill is not amortised but it is tested for impairment annually, or more frequently if events or changes in circumstances indicate that it might be impaired, and is carried at cost less accumulated impairment losses. Gains and losses on the disposal of an entity include the carrying amount of goodwill relating to the entity sold. Goodwill is allocated to cash-generating units for the purpose of impairment testing. The allocation is made to those cash- generating units or groups of cash-generating units that are expected to benefit from the business combination in which the goodwill arose. The units or groups of units are identified at the lowest level at which goodwill is monitored for internal management purposes, being the operating segments. Internally generated intangible assets - research and development expenditures Research and development includes the costs incurred by activities related to the development of software solutions (new products, updates and enhancements), guides and other products. Expenditures in research and development activities are recognized as an expense in the period in which they are incurred. Development activities involve the application of research findings or other knowledge to a plan or a design of new or substantially improved (software) products before the start of the commercial use. Internal development expenditures on an individual project are recognised as an intangible asset when the Group can demonstrate: { the technical feasibility of completing the intangible asset so that the asset will be available for use or sale; { its intention to complete and its ability to use or sell the asset; { how the asset will generate future economic benefits; { the availability of resources to complete the asset; { the ability to measure reliably the expenditure during development. Internal development expenditures not satisfying the above criteria and expenditures on the research phase are recognised in the consolidated income statement as incurred. Subsequent to initial recognition, internally generated intangible assets are reported at cost less accumulated amortisation and accumulated impairment losses, on the same basis as intangible assets which are acquired separately. Intangible assets acquired in a business combination Intangible assets acquired in a business combination and recognised separately from goodwill are initially recognised at their fair value at the acquisition date (which is regarded as their cost). Subsequent to initial recognition, intangible assets acquired in a business combination are measured at cost less accumulated amortisation and accumulated impairment losses, on the same basis as intangible assets which are acquired separately. Impairment of non-financial assets Impairment tests on goodwill and other intangible assets with indefinite useful economic lives are undertaken annually at the financial year end. Other non-financial assets are subject to impairment tests whenever events or changes in circumstances indicate that their carrying amount may not be recoverable. Where the carrying value of an asset exceeds its recoverable amount (i.e. the higher of value in use and fair value less costs to sell), the asset is written down accordingly. Where it is not possible to estimate the recoverable amount of an individual asset, the impairment test is carried out on the smallest group of assets to which it belongs for which there are separately identifiable cash flows; its cash-generating units (“CGUs”). Goodwill is allocated on initial recognition to each of the Group’s CGUs that are expected to benefit from the synergies of the combination giving rise to the goodwill. 55 26011 18/05/2018 Proof 4Animalcare Group plc Annual Report 2017www.animalcaregroup.co.ukStock Code: ANCROUR FINANCIALSNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS CONTINUED Y E A R E N D E D 31 S T D E C E M B E R 2017 3 Summary of Significant Accounting Policies (continued) The Group bases its impairment calculation on detailed budgets and forecast calculations, which are prepared separately for each of the Group’s CGUs to which the individual assets are allocated. These budgets and forecast calculations generally cover a period of five years. For longer periods, a long-term growth rate is calculated and applied to future cash flows projected after the fifth year. Impairment charges are included in profit or loss, except, where applicable, to the extent they reverse gains previously recognised in other comprehensive income. An impairment loss recognised for goodwill is not reversed. Where goodwill forms part of a cash-generating unit and part of the operation within that unit is disposed of, the goodwill associated with the operation disposed of is included in the carrying amount of the operation when determining the gain or loss on disposal of the operation. Goodwill disposed of in this circumstance is measured based on the relative values of the operation disposed of and the portion of the cash-generating unit retained. Inventories Inventories are valued at the lower of cost and net realisable value. Costs incurred in bringing each product to its present location and condition are accounted for as follows: { Raw materials: purchase cost on a first in, first out basis; { Goods purchased for resale: purchase cost on a first in, first out basis. Net realisable value is the estimated selling price in the ordinary course of business, less estimated costs of completion and the estimated costs necessary to make the sale. Financial assets Financial assets include loans, deposits, receivables measured at amortised cost and available-for-sale financial investments measured at fair value. Financial assets measured at amortised cost The Group has loans and receivables that are measured at amortised cost. The Group’s loans and receivables comprise trade and other receivables, other financial assets and cash and cash equivalents in the consolidated statement of financial position. Cash and cash equivalents includes cash in hand, deposits held at call with banks, other short-term highly liquid investments with original maturities of three months or less, and – for the purpose of the statement of cash flows – bank overdrafts. Bank overdrafts are shown within loans and borrowings in current liabilities on the consolidated statement of financial position. Financial assets that are classified as loans and receivables are initially measured at fair value plus transaction costs and subsequently at amortised cost using the effective interest rate method (EIR). Amortised cost is calculated by taking into account any discount or premium on acquisition and fees or costs that are an integral part of the EIR. The EIR amortisation is included under financial income in the consolidated income statement. The losses arising from impairment are recognised in the consolidated income statement under other operating expenses or financial expenses. Available-for-sale financial assets measured at fair value Available-for-sale financial assets relate to investments that are not initially acquired in view of a short-term sale (shares and securities) and that are not fully consolidated nor equity consolidated. Assets in this category are measured at fair value with the resulting gains and losses being directly recognised in other comprehensive income (equity). Assets in this category are measured at cost when there is no price input available in an active market and the fair value cannot be measured reliably by applying alternative valuation methods. Impairment of financial assets The Group assesses at each reporting date whether there is any objective evidence that a financial asset or a group of financial assets is impaired. A financial asset or a group of financial assets is to be impaired if there is objective evidence of impairment as a result of one or more events that has occurred after the initial recognition of the asset (an incurred “loss event”) and that loss event has an impact on the estimated future cash flows of the financial asset or the group of financial assets that can be reliably estimated. In cases of available-for-sale financial assets, objective evidence would include a significant or prolonged decline in the fair value of the investment below its cost. If there is objective evidence that an impairment loss has been incurred, 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 yet been incurred) or its current fair value, in cases of available-for-sale financial assets. The present value of the estimated future cash flows is discounted at the financial asset’s original effective interest rate. If a loan has a variable interest rate, the discount rate for measuring any impairment loss is the current effective interest rate. The carrying amount of the asset is reduced through the use of an allowance account and the amount of loss is recognised in the income statement. In the event of an impairment loss for available-for-sale financial assets, the accumulated impairment loss is removed from other comprehensive income and recognised in the consolidated statement of profit or loss. Impairment losses on available-for-sale financial assets are not reversed. 56 26011 18/05/2018 Proof 4Financial liabilities The Group has financial liabilities measured at amortised cost which include loans and borrowings, trade payables and other payables and financial liabilities resulting from an interest rate swap (classified as held for trading). Financial liabilities at amortised cost Those financial liabilities are recognised initially at fair value plus directly attributable transaction costs and are measured at amortised cost using the effective interest rate method. Gains and losses are recognised in the income statement when the liabilities are derecognised as well as through the effective interest rate method amortisation process. Derivative financial liabilities The Group uses derivative financial instruments to hedge the exposure to changes in interest rates, however the use of derivatives is limited and does not represent significant amounts. Derivative financial instruments are initially measured at fair value. After initial recognition, the financial instruments are measured at fair value on the balance sheet date. Such hedging transactions do not qualify for hedge accounting criteria, although they offer economic hedging according to the Group’s risk policy. Changes in the fair value of such instruments are recognised directly in the consolidated statement of profit or loss. Derecognition A financial liability is derecognised when the obligation under the liability is discharged or cancelled or expires. Offsetting of financial instruments Financial assets and financial liabilities are offset and the net amount is reported in the consolidated statement of financial position if there is a currently enforceable legal right to offset the recognised amounts and there is an intention to settle on a net basis, or to realise the assets and settle the liabilities simultaneously. Share capital Financial instruments issued by the Group are classified as equity only to the extent that they do not meet the definition of a financial liability or financial asset. The Group’s ordinary shares are classified as equity instruments. Dividends Dividends paid are recognised within the statement of changes in equity only when an obligation to pay the dividends arises prior to the year end. Share-based payments The Group issues equity-settled share-based payments to certain employees. Equity-settled share-based payments are measured at fair value (excluding the effect of non-market-based vesting conditions) at the date of grant. The fair value determined at the grant date of such equity-settled share-based payments is expensed on a straight-line basis over the vesting period, based on the Group’s estimate of shares that will eventually vest and adjusted for the effect of non-market-based vesting conditions (with a corresponding movement in equity). Fair value is measured by use of the Black–Scholes model. The expected life used in the model has been adjusted, based on management’s best estimate, for the effects of non-transferability, exercise restrictions, and behavioural considerations. The fair value of the shares issued under the new Long Term Incentive Plan were valued on a discounted cash flow basis in conjunction with a third party valuation specialist. Provisions Provisions are recognised when the Group has a present obligation (legal or constructive) as a result of a past event, it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation and a reliable estimate can be made of the amount of the obligation. Employee benefits Short-term employee benefits The Group has short-term employee benefits which are recognised when the service is performed as a liability and expense. The short-term employee benefit is the undiscounted amount expected to be paid. Management incentive plans The Group has implemented an incentive plan for some of its employees. The liability recognised is the undiscounted amount expected to be paid. Post-employment benefits The Group has a defined contribution obligation where the Group pays contributions based on salaries to an insurance company, in accordance with the laws and agreements in each country. The Belgian defined contribution pension plans are by law subject to minimum guaranteed rates of return, currently 3.25% on employer contributions and 3.75% on employee contributions. These rates have been modified by the law of 18th December 2015 and effective for contributions paid as from 2016 to a new variable minimum return based on the Belgian government bonds, with a minimum of 1.75% and a maximum of 3.75%. 57 26011 18/05/2018 Proof 4Animalcare Group plc Annual Report 2017www.animalcaregroup.co.ukStock Code: ANCROUR FINANCIALSNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS CONTINUED Y E A R E N D E D 31 S T D E C E M B E R 2017 3 Summary of Significant Accounting Policies (continued) These plans qualify as a defined benefit plan as from 1st January 2016 considering the modified law. Previously, the Group has adopted a retrospective approach whereby the net liability recognised in the statement of financial position is based on the sum of the positive differences, determined by individual plan participant, between the minimum guaranteed reserves and the benefits accrued at the closing date based on the actual rates of return. Sales of services When the outcome of a transaction involving the rendering of services is estimated reliably, revenue associated with the transaction is recognised when the services are rendered. The outcome of a transaction is estimated reliably when all of the following four conditions are satisfied: { The amount of revenue is measured reliably; { It is probable that the economic benefits associated with the transaction will flow to the Group; The impact of the defined contribution plans accounted for as a defined benefit plan is not material. { The stage of completion of the transaction at the balance sheet date can be measured reliably; and Contributions are recognized as expenses for the period in which employees perform the corresponding services. Outstanding payments at the end of the period are shown as other current liabilities. Employee benefits – pensions The Group operates a stakeholder pension scheme available to all eligible employees. Payments to this scheme are charged as an expense as they fall due. Revenue recognition Sales of goods Revenue is measured at the fair value of the consideration received or receivable, and represents amounts receivable for goods supplied, stated net of discounts, returns and value added taxes. Revenue from the sale of goods is recognised when all of the following five conditions are met: { The Group transfers to the buyer the significant risks and rewards of ownership of the goods; { The Group retains neither continuing managerial involvement to the degree usually associated with ownership nor effective control over the goods sold; { The Group can measure reliably the amount of revenue; { It is probable that the economic benefits associated with the transaction will flow to the Group; and { The Group can measure reliably the costs incurred or to be incurred in respect of the transaction. Trade goods include goods produced for the purpose of sale and goods purchased for resale. The Group bases its estimate of returns on historical results, taking into consideration the type of customer, the type of transaction and the specifics of each arrangement. { The costs incurred for the transaction and the costs to complete the transaction are measured reliably. In general, these services are invoiced as they are performed and the amounts directly recognised in the income statement and do not require the measurement of the stage of completion. Upfront income received in relation to long-term service contracts is deferred and subsequently recognised over the life of the relevant contracts. Interest income For all financial instruments measured at amortised cost, interest income is recorded using the effective interest rate, which is the rate that exactly discounts the estimated future cash payments or receipts over the expected life of the financial instrument or a shorter period, where appropriate, to the net carrying amount of the financial asset or liability. Interest income is included under financial income in the income statement. Financing costs Financing costs relate to interests and other costs incurred by the Group related to the borrowing of funds. Such costs mostly relate to interest charges on short- and long-term borrowings as well as the amortisation of additional costs incurred on the issuance of the related debt. Financing costs are recognised in profit and loss for the period or capitalised in case they are related to a qualifying asset. Other financial income and expenses Other financial income and expenses include mainly foreign currency gains or losses on financial transactions and bank-related expenses. Taxes Current income tax Income tax assets and liabilities for the current period are measured at the amount expected to be recovered from or paid to the taxation authorities. The tax rates and tax laws used to compute the amount are those that are enacted or substantively enacted, at the reporting date. 58 26011 18/05/2018 Proof 4Current income tax relating to items that are recognised directly in equity is recognised in equity and not in the income statement. Management periodically evaluates positions taken in the tax returns with respect to situations in which applicable tax regulations are subject to interpretation and establishes provisions where appropriate. Deferred tax Deferred tax is calculated using the liability method on temporary differences at the reporting date between the tax bases of assets and liabilities and their carrying amounts for financial reporting purposes. Deferred tax liabilities are recognised for all taxable temporary differences. Deferred tax assets are recognised for all deductible temporary differences, carry forward of unused tax credits and unused tax losses, to the extent that it is probable that taxable profit will be available against which the deductible temporary differences, and the carry forward of unused tax credits and unused tax losses can be utilised. The carrying amount of deferred tax assets is reviewed at each reporting date and reduced to the extent that it is no longer probable that sufficient taxable profit will be available to allow all or part of the deferred tax asset to be utilised. Unrecognised deferred tax assets are reassessed at each reporting date and are recognised to the extent that it has become probable that future taxable profits will allow the deferred tax asset to be recovered. Deferred tax assets and liabilities are measured at the tax rates that are expected to apply in the year when the asset is realised or the liability is settled, based on tax rates (and tax laws) that have been enacted or substantively enacted at the reporting date. Deferred tax assets and deferred tax liabilities are offset, if a legally enforceable right exists to set off current tax assets against current income tax liabilities and the deferred taxes relate to the same taxable entity and the same taxation authority. Fair value measurements Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The fair value measurement is based on the presumption that the transaction to sell the asset or transfer the liability takes place either in the principal market for the asset or liability or in the absence of a principal market, in the most advantageous market for the asset or liability. The principal or the most advantageous market must be accessible by the Group. The fair value of an asset or a liability is measured using the assumptions that market participants would use when pricing the asset or liability, assuming that market participants act in their economic best interest. All assets and liabilities for which fair value is measured or disclosed in the financial statements are categorised within the fair value hierarchy, described as follows, based on the lowest level input that is significant to the fair value measurement as a whole: { Level 1 — Quoted (unadjusted) market prices in active markets for identical assets or liabilities { Level 2 — Valuation techniques for which the lowest level input that is significant to the fair value measurement is directly or indirectly observable { Level 3 — Valuation techniques for which the lowest level input that is significant to the fair value measurement is unobservable Events after balance sheet date Events after the balance sheet date which provide additional information about the Company’s position as at the balance sheet date (adjusting events) are reflected in the financial statements. Events after the balance sheet date which are not adjusting events are disclosed in the notes if material. New and revised standards not yet adopted Standards and interpretations applicable for the annual period beginning on 1st January 2017: { Amendments to IAS 7 Statement of Cash Flows – Disclosure Initiative , effective 1st January 2017 { Amendments to IAS 12 Income Taxes – Recognition of Deferred Tax Assets for Unrealised Losses, effective 1st January 2017 { Annual Improvements Cycle - 2014-2016 – Amendments to IAS 12, effective 1st January 2017 The application of those IFRS standards had no material effect on the 2017 consolidated financial statements of the Group. The standards and interpretations that are issued, but not yet effective, up to the closing date of the Group’s financial statements are disclosed below. IFRS 9 Financial Instruments and subsequent amendments The final version of IFRS 9 replaces IAS 39 Financial Instruments: Recognition and Measurement. IFRS 9 brings together all three aspects of the accounting for financial instruments project: classification and measurement, impairment, and hedge accounting. IFRS 9 is effective for annual periods beginning on or after 1st January 2018. Early application is permitted by applying all of the requirements in this standard at the same time. Alternatively, entities may elect to early apply only the requirements for the presentation of gains and losses on financial liabilities designated as FVTPL without applying the other requirements in the standard. Except for hedge accounting, retrospective application is required but providing comparative information is not compulsory. For hedge accounting, the requirements are generally applied prospectively, with some limited exceptions. 59 26011 18/05/2018 Proof 4Animalcare Group plc Annual Report 2017www.animalcaregroup.co.ukStock Code: ANCROUR FINANCIALSNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS CONTINUED Y E A R E N D E D 31 S T D E C E M B E R 2017 3 Summary of Significant Accounting Policies (continued) The Group plans to adopt the new standard on the required effective date. The Group has performed an impact assessment of all three aspects of IFRS 9. Overall, the Group expects no significant impact on its balance sheet and equity of applying the impairment requirements of IFRS 9. IFRS 15 Revenue from Contracts with Customers IFRS 15 specifies how and when a company will recognise revenue as well as requiring such entities to provide users of financial statements with more informative, relevant disclosures. The standard provides a single, principles-based five-step model to be applied to all contracts with customers as follows: { Identify the contract(s) with a customer; { Identify the performance obligations in the contract; { Determine the transaction price; { Allocate the transaction price to the performance obligations in the contract; and { Recognise revenue when (or as) the entity satisfies a performance obligation. Under IFRS 15, revenue is recognised at an amount that reflects the consideration to which an entity expects to be entitled in exchange for transferring goods or services to a customer. The new revenue standard will supersede all current revenue recognition requirements under IFRS. Either a full retrospective application or a modified retrospective application is required for annual periods beginning on or after 1st January 2018. Early adoption is permitted. The Group plans to adopt the new standard on the required effective date using the full retrospective method. During 2017, the Group performed an assessment of IFRS 15. This analysis showed that there is no material impact on the results of the Group. IFRS 16, Leases IFRS 16 sets out the principles for the recognition, measurement, presentation and disclosure of leases and requires lessees to account for all leases under a single on-balance sheet model similar to the accounting for finance leases under IAS 17 Leases. The standard includes two recognition exemptions for lessees – leases of “low-value” assets (e.g. personal computers) and short- term leases (i.e. leases with a lease term of 12 months or less). At the commencement date of a lease, a lessee will recognise a liability to make lease payments (i.e. the lease liability) and an asset representing the right to use the underlying asset during the lease term (i.e. the right-of-use asset). Lessees will be required to separately recognise the interest expense on the lease liability and the depreciation expense on the right-of-use asset. Lessees will be also required to remeasure the lease liability upon the occurrence of certain events (e.g. a change in the lease term, a change in future lease payments resulting from a change in an index or rate used to determine those payments). The lessee will generally recognise the amount of the remeasurement of the lease liability as an adjustment to the right-of-use asset. Lessor accounting under IFRS 16 is substantially unchanged from today’s lessor accounting under IAS 17. Lessors will continue to classify all leases using the same classification principle as in IAS 17 and distinguish between two types of leases: operating and finance leases. IFRS 16 also requires lessees and lessors to make more extensive disclosures than under IAS 17. The new standard is effective for annual periods beginning on or after 1st January 2019. Early application is permitted, but not before an entity applies IFRS 15 Revenue from Contracts with Customers. A lessee can choose to apply the standard using either a full retrospective or a modified retrospective approach. The standard’s transition provisions permit certain reliefs. As at the reporting date, the Group has non-cancellable operating lease commitments of £3,302k, see note 22. However, the Group has not yet determined to what extent these commitments will result in the recognition of an asset and a liability for future payments and how this will affect the Group’s profit and classification of cash flows. The other standards, interpretations and amendments issued by the IASB (all of them still subject to endorsement by the European Union) but not yet effective are not expected to have a material impact on the Group’s future consolidated financial statements, and those applicable for the Group are listed below: { Amendments to IFRS 2 Share-based Payment - Classification and Measurement of Share-based Payment Transactions (applicable for annual periods beginning on or after 1st January 2018). { Amendments to IFRS 4 Insurance Contracts – Applying IFRS 9 Financial Instruments with IFRS 4 Insurance Contracts (applicable for annual periods beginning on or after 1st January 2018). { IFRS 9 Financial Instruments (applicable for annual periods beginning on or after 1st January 2018). { Amendments to IFRS 9 Prepayment Features with Negative Compensation (applicable for annual periods beginning on or after 1st January 2019, but not yet endorsed in the EU). { IFRS 15 Revenue from Contracts with Customers, including amendments to IFRS 15: Effective date of IFRS 15 and Clarifications to IFRS 15 Revenue from Contracts with Customers (applicable for annual periods beginning on or after 1st January 2018). { IFRS 16 Leases (applicable for annual periods beginning on or after 1st January 2019). { IFRS 17 Insurance Contracts (applicable for annual periods beginning on or after 1st January 2021, but not yet endorsed in the EU). 60 26011 18/05/2018 Proof 4 { Amendments to IAS 40 Investment Property – Transfers of Investment Property (applicable for annual periods beginning on or after 1st January 2018). { IFRIC 22 Foreign Currency Transactions and Advance Consideration (applicable for annual periods beginning on or after 1st January 2018, but not yet endorsed in the EU). { IFRIC 23 Uncertainty Over Income Tax Treatments (applicable for annual periods beginning on or after 1st January 2019, but not yet endorsed in the EU). { Annual Improvements Cycle - 2014-2016 – Amendments to IFRS 1 and IAS 28 (applicable for annual periods beginning on or after 1st January 2018). { Amendments to IAS 28 Long-term Interests in Associates and Joint Ventures (applicable for annual periods beginning on or after 1st January 2019, but not yet endorsed in the EU). { Annual Improvements Cycle – 2015-2017 (applicable for annual periods beginning on or after 1st January 2019, but not yet endorsed in the EU). { Amendments to IAS 19: Plan Amendment, Curtailment or Settlement (applicable for annual periods beginning on or after 1st January 2019, but not yet endorsed in the EU). Significant accounting judgements, estimates and assumptions The preparation of the Group’s consolidated financial statements requires management to make judgements, estimates and assumptions that affect the reported amounts of revenue, expenses, assets and liabilities, and the accompanying disclosures. Uncertainty about these assumptions and estimates could result in outcomes that require a material adjustment to the carrying amount of assets or liabilities for future periods. On an ongoing basis, the Group evaluates its estimates, assumptions and judgements, including those related to revenue recognition, development expenses, income taxes, impairment of goodwill, intangible assets and property, plant and equipment and business combinations. The Group based its assumptions and estimates on parameters available when the consolidated 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. Internally developed intangible assets Under IAS 38, internally generated intangible assets from the development phase are recognised if certain conditions are met. These conditions include the technical feasibility, intention to complete, the ability to use or sell the asset under development, and the demonstration of how the asset will generate probable future economic benefits. The cost of a recognised internally generated intangible asset comprises all directly attributable cost necessary to make the asset capable of being used as intended by management. In contrast, all expenditures arising from the research phase are expensed as incurred. Determining whether internally generated intangible assets from development are to be recognised as intangible assets requires significant judgement, particularly in determining whether the activities are considered research activities or development activities, whether the product enhancement is substantial, whether the completion of the asset is technically feasible considering a company-specific approach, and the probability of future economic benefits from the sale or use. Management has determined that the conditions for recognising internally generated intangible assets from product development activities are not met until shortly before the developed products are available for sale. This assessment is monitored by the Group on a regular basis. Capitalised software expenditure The Group has historically capitalised software projects and developments. Expenditure on a bespoke web-based system, designed to facilitate online ordering of its products and services, is currently capitalised in the Group’s financial statements as the Directors have adjudged it to meet the relevant criteria. The rate of depreciation on capitalised software is set so as to reflect the pattern of usage and the level of pace of change within the global information technology market. Income taxes Deferred tax assets are recognised for unused tax losses to the extent that it is probable that taxable profit will be available against which the losses can be utilised. Significant management judgement is required to determine the amount of deferred tax assets that can be recognised, based upon the likely timing and the level of future taxable profits together with future tax planning strategies. As at 31st December 2017, the Group had £664k (2016: £255k) of tax losses carried forward and other tax credits such as investment tax credits and notional interest deduction. These losses relate to the subsidiaries that have a history of losses, do not expire and may not be used to offset taxable income elsewhere in the Group. The Group may also be required to evaluate some uncertainty surrounding potential liability in relation to uncertain tax positions. Uncertain tax positions (whether assets or liabilities) are recognised using a “probable” threshold in accordance with IAS 12, and they are reflected at the amount expected to be recovered from, or paid to, the taxation authorities. It may also include interpretations of complex tax laws as well as transfer pricing considerations which could be disputed by tax authorities. Assessing uncertain tax positions requires significant judgement from management. 61 26011 18/05/2018 Proof 4Animalcare Group plc Annual Report 2017www.animalcaregroup.co.ukStock Code: ANCROUR FINANCIALSNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS CONTINUED Y E A R E N D E D 31 S T D E C E M B E R 2017 4 Business Combinations and Disposals of Subsidiaries Business combinations Reverse acquisition of Animalcare Group plc On 13th July 2017 Animalcare Group plc acquired 100% of the share capital of Ecuphar NV for a total consideration of £133,775k, satisfied through a combination of a share-for-share exchange and £33,145k in cash net of commissions. The acquisition of Ecuphar NV by Animalcare Group plc is deemed to be a reverse acquisition under the provisions of IFRS 3 “Business Combinations”. In accounting for a reverse acquisition (rather than an acquisition) the combined financial statements are deemed to be a continuation of the books of the legal acquiree (Ecuphar NV) rather than a continuation of those of the legal acquirer (Animalcare Group plc). The assets and liabilities of Ecuphar NV are recognised and measured in the Group financial statements at the pre- combination carrying amounts, without restatement to fair value and no goodwill arises in relation to them. Conversely, the assets of Animalcare Group plc and Animalcare Ltd are consolidated at their fair values. The overall effect is that the consolidated financial statements are prepared from an Ecuphar NV perspective rather than Animalcare Group plc, and in summary this means: { the comparative consolidated financial information is that of Ecuphar NV rather than that of Animalcare Group plc; { the result for the year and consolidated cumulative profit and loss reserves are those of the Ecuphar NV plus the post- acquisition results of the Animalcare Group plc; { a reverse acquisition reserve of (£56,762k) has been created; { the share capital and share premium account are that of Animalcare Group plc; and { the cost of the combination has been determined from the perspective of Ecuphar NV. Goodwill arises on the reverse acquisition when comparing the deemed fair value consideration of Animalcare Group plc acquiring the shares of Ecuphar NV. The fair value of the consideration is the market capitalisation of Animalcare Group plc at the acquisition date based on the closing share price on 12th July of 355p per share. 3 Summary of Significant Accounting Policies (continued) Impairment of goodwill The Group has goodwill for a total amount of £51,413k (2016: £9,959k) which has been subject to an impairment test. The goodwill is tested for impairment based on the Fair Value Less Costs of Disposal (FVLCD) method which uses sales and EBITDA multiples. The key assumptions used to determine the recoverable amount for the different CGU’s are disclosed and further explained in note 9. No impairment charges have been recorded during the reported periods. Impairment of slow-moving and obsolete inventory The Group performs regular stockholding reviews, in conjunction with sales and market information, to help determine any slow- moving or obsolete lines. Where identified, adequate provision is made in the financial statements for writing down or writing off the value of such lines in order to reflect the realisable value of its stock. Business combinations The Group determines and allocates the purchase price of an acquired business to the assets acquired and liabilities assumed as of the business combination date. The purchase price allocation process requires the Group to use significant estimates and assumptions, including: { estimated fair value of the acquired intangible assets; { estimated fair value of property, plant and equipment; While the Group is using its best estimates and assumptions as part of the purchase price allocation process to accurately value assets acquired and liabilities assumed at the date of acquisition, our estimates and assumptions are inherently uncertain and subject to refinement. Examples of critical estimates in valuing certain of the intangible assets the Group has acquired or may acquire in the future include but are not limited to: { future expected cash flows from customer contracts and relationships, software licence sales and maintenance agreements; { the fair value of the plant and equipment; { the fair value of the deferred revenue; { discount rates; and { the determination of useful lives and amortisation period of acquired intangible assets. 62 26011 18/05/2018 Proof 4Reverse acquisition – Animalcare Group plc Assets Historical goodwill Intangible assets Tangible assets Deferred tax asset Inventory Trade receivables Other current assets Cash Liabilities Financial debts Deferred tax liabilities Trade payables Other liabilities Total identified assets and liabilities Goodwill Fair value of consideration Carrying value at acquisition date £’000 Fair value adjustments £’000 Fair value at acquisition date £’000 12,711 4,658 227 149 2,014 3,392 559 6,293 (12,711) 30,957 − 885 401 − − − − 35,615 227 1,034 2,415 3,392 559 6,293 30,003 19,532 49,535 − (414) (3,948) (4,040) (8,402) 21,601 − (6,843) − − (6,843) 12,689 − − − (7,257) (3,948) (4,040) (15,245) 34,290 41,048 75,338 The acquisition consideration, net assets and goodwill are based upon the reverse acquisition of Animalcare Group plc by Ecuphar NV. The fair value of the consideration is the market capitalisation of Animalcare Group plc at the closing share price of 355p per share on 12th July 2017. Transaction costs of equity transactions relating to the issue and readmission of the Company’s shares are accounted for as a deduction from equity where they relate to the issue of new shares. The fair value of the net assets acquired and shown in the table above was £34,290k. The fair value of the consideration was £75,338k resulting in goodwill on reverse acquisition of £41,048k. In addition, the fair value uplift of inventory amounted to £401k, and the fair value uplift of the identified intangibles amounted to £30,957k. Deferred tax assets and liabilities respectively were increased by £885k and (£6,843k). 63 26011 18/05/2018 Proof 4Animalcare Group plc Annual Report 2017www.animalcaregroup.co.ukStock Code: ANCROUR FINANCIALS NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS CONTINUED Y E A R E N D E D 31 S T D E C E M B E R 2017 Disposal of subsidiaries Nutriscience On 31st October 2016 the Group entered into a share purchase agreement with Swedencare AB regarding the sale of one of its subsidiaries, Nutriscience Ltd. The consideration received by the Group amounts to £3,507k and this resulted in a gain of £2,432k. The effect of this transaction on the financial position and cash flows of the Group is as follows: Nutriscience Assets Goodwill Property, plant and equipment Inventories Trade receivables Other receivables Cash and cash equivalents Liabilities Financial debts Trade payables Other payables Total assets and liabilities Gain on sale of Nutriscience Selling price received in cash Cash flow from sale Cash and cash equivalents transferred Selling price Total cash flow Carrying value at selling date £’000 419 53 407 419 37 296 1,631 − (315) (241) (556) 1,075 2,432 3,507 (296) 3,507 3,211 This disposal did not meet the IFRS 5 criteria as a component of a group, as a separate major line of business or as a geographical area of operations. Therefore, discontinued operations and asset held for sale disclosures were not required. 64 26011 18/05/2018 Proof 4 5 Non-underlying Items Amortisation of acquisition-related intangibles Classified within Research and development expenses Classified within General and administrative expenses Total amortisation of acquisition-related intangibles Fair value uplift of inventory acquired through reverse acquisition Acquisition and integration costs Gain on sale of Nutriscience Other non-underlying items Total non-underlying items before taxes Tax impact Total non-underlying items after taxes 2017 £’000 751 3,590 4,341 401 1,454 − 362 6,559 (1,459) 5,100 2016 £’000 272 2,223 2,495 − − (2,432) 618 681 (232) 449 The amortisation charge of acquisition-related intangibles largely relates to the Esteve acquisition of £2,017k (2016: £1,880k) and the reverse acquisition of Animalcare Group plc of £1,685k. 6 Segment Information For management purposes, the Group is organised into two segments: the Pharmaceuticals and the Wholesale segments. The Pharmaceuticals segment is active in the development and marketing of innovative pharmaceutical products that provide significant benefits to animal health. The Wholesale segment focuses on the sale of veterinary pharmaceuticals, supplies and instruments in the Belgian market. The measurement principles used by the Group in preparing this segment reporting are also the basis for segment performance assessment. The Board of Directors of the Group is considered as the Chief Operating Decision Maker. As a performance indicator, the Chief Operating Decision Maker controls performance by the Group’s revenue, gross margin, underlying EBITDA and EBITDA. EBITDA is defined by the Group as net profit plus finance expenses, less financial income, plus income taxes and deferred taxes, plus depreciation, amortisation and impairment. Underlying EBITDA equals EBITDA plus non-underlying items. 65 26011 18/05/2018 Proof 4Animalcare Group plc Annual Report 2017www.animalcaregroup.co.ukStock Code: ANCROUR FINANCIALSNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS CONTINUED Y E A R E N D E D 31 S T D E C E M B E R 2017 The following table summarises the segment reporting for each of the reportable periods ending 31st December. As management’s controlling instrument is mainly revenue-based, the reporting information does not include assets and liabilities by segment and is as such not presented per segment. Pharma £’000 Wholesales £’000 Total segments £’000 Adjustments and eliminations £’000 Consolidated £’000 For the year ended 31st December 2017 Revenues Gross Margin Gross Margin % Segment underlying EBITDA Segment underlying EBITDA % Segment EBITDA Segment EBITDA % For the year ended 31st December 2016 Revenues Gross Margin Gross Margin % Segment underlying EBITDA Segment underlying EBITDA % Segment EBITDA Segment EBITDA % 62,291 31,924 51% 9,698 16% 7,496 12% 48,355 26,007 54% 8,420 17% 10,235 21% 23,938 2,415 10% 289 1% 273 1% 21,831 2,272 10% 485 2% 484 2% 86,229 34,339 40% 9,987 12% 7,769 9% 70,186 28,279 40% 8,905 13% 10,719 15% The segment EBITDA is reconciled with the consolidated net profit of the year as follows: Segment EBITDA Depreciation, amortisation and impairment Operating profit Financial expenses Financial income Income taxes Deferred taxes Net profit 66 (2,553) (76) − − (1,825) (4) 8 8 2017 £’000 7,769 (6,569) 1,200 (747) 91 (643) 283 184 83,676 34,263 41% 9,987 12% 7,769 9% 68,361 28,275 41% 8,913 13% 10,727 16% 2016 £’000 10,727 (4,689) 6,038 (988) 97 (1,305) (327) 3,515 26011 18/05/2018 Proof 4 Non-current assets excluding deferred tax assets and financial instruments located in Belgium, Spain, Portugal, the United Kingdom and other geographies are as follows: Belgium Spain Portugal UK Other Non-current assets excluding deferred tax assets and financial instruments Revenue by product category: Companion animals Production animals Horses Pet food, instrumentals and services Total Revenue by geographical area: Europe Belgium The Netherlands United Kingdom Germany Spain Italy Portugal European Union – other Asia Middle East and Africa Other Total 2017 £’000 19,691 2,170 4,101 76,010 4,375 106,347 2017 £’000 42,791 28,390 4,718 7,777 83,676 2017 £’000 82,803 29,501 1,726 9,459 8,930 20,909 4,458 4,514 3,306 473 47 353 2016 £’000 21,378 2,229 3,913 − 4,474 31,994 2016 £’000 30,799 22,668 5,567 9,327 68,361 2016 £’000 67,842 27,797 1,434 2,516 6,714 18,695 3,559 4,044 3,083 309 5 205 83,676 68,361 67 26011 18/05/2018 Proof 4Animalcare Group plc Annual Report 2017www.animalcaregroup.co.ukStock Code: ANCROUR FINANCIALSNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS CONTINUED Y E A R E N D E D 31 S T D E C E M B E R 2017 Revenue by category: Product sales Services sales Total 7 Income and Expenses 7.1 Cost of sales Cost of sales includes the following expenses: Purchase of goods and services Inventory and other write-downs Payroll expenses Other expenses Total 7.2 Research and development expenses Research and development expenses include the following: Amortisation and depreciation Payroll expenses Other Total 7.3 Selling and marketing expenses Selling and marketing expenses include the following: Transport costs of sold goods Promotion costs Payroll expenses Amortisation and depreciation Other Total 68 2017 £’000 83,314 362 83,676 2017 £’000 48,156 478 417 362 2016 £’000 67,656 705 68,361 2016 £’000 38,917 682 242 245 49,413 40,086 2017 £’000 749 1,958 92 2,799 2017 £’000 979 2,438 9,089 25 1,567 14,098 2016 £’000 269 1,507 − 1,776 2016 £’000 907 2,002 6,081 23 727 9,740 26011 18/05/2018 Proof 47.4 General and administrative expenses General and administrative expenses include the following: Amortisation and depreciation Payroll expenses Other Total 7.5 Net other operating (expense) income The net other operating (expense) income can be detailed as follows: Re-invoicing costs Losses on disposals of fixed assets Other operating income Impairments Other operating expenses Total 2017 £’000 5,552 2,826 6,026 2016 £’000 3,962 3,448 5,197 14,404 12,607 2017 £’000 5 (2) 262 (35) (1,992) (1,762) 2016 £’000 11 − 2,453 (29) (548) 1,887 Other operating expenses for 2017 mainly relate to the reverse acquisition of Animalcare Group plc. Other operating income for 2016 mainly relates to a gain of £2,432k on the sale of Nutriscience Ltd on 31 October 2016. Impairments were recorded in 2017 and 2016 on certain intangible assets of £35k and £29k respectively. Other operating expenses incurred during 2016 mostly relate to the loss on disposal of intangibles related to Nutriscience Ltd and Sogeval. 7.6 Expenses by nature Other operating lease rentals Employee expenses Depreciation and amortisation Transport costs of sold goods Promotion costs Other operating expense/(income) – see note 7.5 Other expenses Total expenses 2017 £’000 1,899 13,873 6,381 979 2,668 1,762 5,501 33,063 2016 £’000 1,365 11,036 4,254 1,046 2,207 (1,887) 4,215 22,236 69 26011 18/05/2018 Proof 4Animalcare Group plc Annual Report 2017www.animalcaregroup.co.ukStock Code: ANCROUR FINANCIALSNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS CONTINUED Y E A R E N D E D 31 S T D E C E M B E R 2017 7.7 Payroll expenses The following table shows the breakdown of payroll expenses for 2017 and 2016: Wages and salaries Social security expenses Other employee expenses Total Average registered employees during the year 2017 £’000 10,655 2,197 1,440 14,292 265 2016 £’000 8,421 1,875 982 11,278 179 Key management following the reverse acquisition comprises the Board of Directors. Details of the remuneration, share options and shareholdings are included in the Annual Remuneration Report on pages 36 to 37. Emoluments of the Directors for the year ended 31st December 2017 in accordance with the basis of preparation were as follows: W Beyers1 J Boone* (appointed 13th July 2017) C Brewster (appointed 26th September 2017) C Cardon2 M Coucke*3 Lord Downshire*4 J S Lambert*4 Dr I D Menneer4 E Torr* (appointed 13th July 2017) J Bastijns P Derks L Vanmullem E Gil Total * Indicates Non-Executive Directors Salary £’000 Bonus £’000 Company pension contributions £’000 Benefits £’000 177 35 54 345 45 19 19 110 19 224 − 152 208 1,407 − − − − − − − − − 16 − 16 51 83 − − 6 − − − − 13 − − − − 13 32 − − 3 − − 2 − 5 − − − − 57 67 Termination benefits £’000 70 − − − − − − − − − 60 − − 130 Total 2017 £’000 247 35 63 345 45 21 19 128 19 240 60 168 329 1,719 1. W Beyers was a Director of the newly formed Group from 13th July 2017 to 26th September 2017, and a Director of Ecuphar NV from 1st January 2017. The remuneration included above is for the period from 1st January 2017 to 26th September 2017. 2. C Cardon was a Director of the newly formed Group from 13th July 2017 and a Director of Ecuphar NV for the year. The remuneration included above is for the year ended 31st December 2017. 3. M Coucke was a Director of the newly formed Group from 13th July 2017 and a Director of Ecuphar NV for the year. The remuneration included above is for the year ended 31st December 2017. 4. Were Directors of Animalcare Group plc from 1st January 2017 to 31st December 2017. The remuneration included above is for the period from 13th July 2017 to 31st December 2017. 70 26011 18/05/2018 Proof 4For the year ended 2016, the emolument of key management personnel of Ecuphar NV was as follows: C Cardon J Bastijns P Derks W Beyers L Vanmullem E Gil M Couke* Total Salary Bonus Company pension contributions Compensation for loss of office Benefits 373 225 243 174 142 191 98 1,377 22 18 18 − − 106 − 164 − − − − − − − − − − − − − − − − − − − − − − − − Total 395 243 261 174 142 297 98 1,610 * Indicates Non-Executive Directors All Company pension contributions relate to defined contribution pension schemes. Benefits consist of company car and private medical insurance. Share options: I D Menneer Scheme Exercise price Date of grant Acquired during the year Exercised during the period Open at 31st December 2017 C J Brewster Scheme Exercise price Date of grant Acquired during the year Exercised during the period Open at 31st December 2017 EMI Unapproved Unapproved £1.325 £1.40 £1.415 SAYE £1.05 Total 20th November 2012 21st February 2013 20th June 2013 28th November 2014 50,000 (50,000) − 90,000 (90,000) − 90,000 (90,000) 5,142 235,142 − (230,000) − 5,142 5,142 EMI £1.30 EMI £1.415 SAYE £1.05 Total 2nd August 2012 20th June 2013 28th November 2014 30,000 (30,000) − 40,000 (40,000) − 8,571 − 8,571 78,571 (70,000) 8,571 In connection with the reverse acquisition of Ecuphar NV, all vested options were exercised following completion on 13th July 2017. 71 26011 18/05/2018 Proof 4Animalcare Group plc Annual Report 2017www.animalcaregroup.co.ukStock Code: ANCROUR FINANCIALS NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS CONTINUED Y E A R E N D E D 31 S T D E C E M B E R 2017 Long Term Incentive Plan (LTIP) Under the Animalcare Group plc LTIP, which was introduced in June 2014, the Directors’ interests in the LTIP, which was implemented via a subscription for growth shares in the capital of Animalcare Ltd, a subsidiary of the Company, are as follows: { Iain Menneer – 31,955 A Ordinary Shares of £1.00 each (“A Shares”) for a total cash subscription of £31,955, representing 5.2% of Animalcare Ltd’s issued share capital; and { Chris Brewster – 19,173 A Shares, representing 3% of Animalcare Ltd’s issued share capital and 11,800 B Ordinary Shares of £1.00 each (“B Shares”), representing a further 2% of Animalcare Ltd’s issued share capital, for a total cash subscription of £30,973. The total cash subscriptions were, based on independent valuation, considered to be equal to fair value at the time of acquisition. Dr Menneer and Mr Brewster had the right to sell their A Shares to the Company at any time after 27th June 2017 in exchange for Ordinary Shares of 20 pence each in the Company (“Ordinary Shares”). Their rights to sell the A Shares are subject to, amongst other provisions, the Company having a market capitalisation in excess of £39.0m (“the Hurdle”) at the time of sale. The Hurdle was determined by Animalcare’s Remuneration Committee and broadly represented a 20% premium to the Company’s market capitalisation on 27th June 2014. Each holder of A Shares would, on a sale of his entire holding to the Company, be entitled to receive Ordinary Shares representing a percentage of the increase in the Company’s market capitalisation above the Hurdle; being 5% for Dr Menneer and 3% for Mr Brewster. The A Shares do not have a right to receive a dividend, except for any amounts distributed on the winding up of the Company or on an asset sale. The B Shares are not entitled to participate in any increase in the value of the Company above the Hurdle but can be exchanged for Ordinary Shares of an equal value at any time after 27th June 2017. The B Shares have a right to an annual dividend (on a non-fixed coupon basis), calculated by applying a rate of LIBOR + 2% to the nominal value of the B Shares. Further details of the Plan, including the Hurdle, anti-dilution and other provisions, are set out in Animalcare Ltd’s articles of association, which is available within the Investors section (constitutional documents) of the Company’s website at http://www.animalcaregroup.co.uk. It was agreed between the Company, Dr Menneer and Mr Brewster, that the put options did not become exercisable as a result of the reverse acquisition of Ecuphar NV. The Company however, determined that it was appropriate to offer the right to exchange their shares in Animalcare Ltd for Ordinary Shares shortly before completion of the reverse acquisition, and each took up that right. As a consequence, 918,896 new Ordinary Shares were issued to Dr Menneer and Mr Brewster. The number of new Ordinary Shares issued pursuant to the exercise of these rights was determined using the lower of the closing middle market price for an Ordinary Share on 22nd June 2017, being the dealing day before the date the offer to exchange was made and the average of the closing middle market prices for an Ordinary Share over the dealing days in the 30th day period before that date, being 392.5 pence. 7.8 Financial expenses Financial expenses include the following elements: Interest expense Foreign currency losses Change in fair value – losses on financial instruments Other financial expenses Total 2017 £’000 528 118 – 101 747 2016 £’000 663 81 – 244 988 72 26011 18/05/2018 Proof 47.9 Financial income Financial income includes the following elements: Foreign currency exchange gains Change in fair value – gains on financial instruments Other financial income Total 7.10 Income tax expense Income tax The following table shows the breakdown of the tax expense for 2017 and 2016: Current tax Current tax charge Tax adjustments in respect of previous years Total current tax charge Deferred tax Deferred tax – origination and reversal of temporary differences Total tax expense for the year The total tax expense can be reconciled to the accounting profit as follows: Profit before tax Income tax at weighted average tax rate Non-deductible expenses Income not subject to tax Other tax credits and tax deductions Other permanent tax differences Other taxes Tax adjustments in respect of previous year Changes in statutory enacted tax rate Withholding taxes on acquisition treasury shares Income tax expense as reported in the consolidated income statement 2017 £’000 69 − 22 91 2017 £’000 (821) 178 (643) 283 (360) 2017 £’000 544 (4) (212) 66 (1) (56) (37) 178 (294) − (360) 2016 £’000 28 18 51 97 2016 £’000 (1,335) 30 (1,305) (327) (1,632) 2016 £’000 5,147 (1,310) (90) − 62 (73) (29) 30 (68) (154) (1,632) The tax credit of £1,459k (2016: £232k) shown within “non-underlying items” on the face of the consolidated income statement, which forms part of the overall tax charge of £360k (2016: £1,632k) relates to the items analysed in note 5. 73 26011 18/05/2018 Proof 4Animalcare Group plc Annual Report 2017www.animalcaregroup.co.ukStock Code: ANCROUR FINANCIALSNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS CONTINUED Y E A R E N D E D 31 S T D E C E M B E R 2017 The tax rates used for the 2017 and 2016 reconciliation above are the corporate tax rates of 33.99% (Belgium), 25% (the Netherlands), 29% (Germany), 33% (France), 25% (Spain), 34% in 2017 and 24% in 2016 (Italy), 21% (Portugal) and 19% in 2017 and 20% in 2016 (the United Kingdom). These taxes are payable by corporate entities in the above mentioned countries on taxable profits under tax law in that jurisdiction. Changes to the UK corporation tax rate were substantially enacted as part of the Finance Bill 2017 (on 6th September 2016). They include reductions to the main rate to reduce the rate to 17% from 1st April 2020. A similar tax reform in Belgium was substantially enacted in December 2017. The tax rate will gradually decrease from 33.99% (current) to 29.58% in 2018 and 2019 and to 25% from 2020 onwards. Deferred taxes at the balance sheet date have been measured using the enacted tax rates and reflected in these financial statements. Deferred tax (a) Recognised deferred tax assets and liabilities Goodwill Intangible assets Property, plant and equipment Financial fixed assets Inventory Trade and other payables Accruals and deferred income Tax losses carried forward Total (b) Movements during the year Movement of deferred taxes during 2017: £’000 Goodwill Intangible assets Property, plant and equipment Financial fixed assets Inventory Trade and other payables Accruals and deferred income Tax losses carried forward Gross profit 2017 £’000 (7) 515 28 1 51 297 19 699 Assets 2016 £’000 44 175 13 1 43 565 173 255 2017 £’000 (362) (6,118) (25) − (24) − 75 − 1,603 1,269 (6,454) Balance at 31st December 2016 £’000 Recognised in income £’000 (220) 175 13 1 46 565 173 292 1,045 (138) 565 27 − 53 (285) (331) 392 283 Liabilities 2016 £’000 (264) − 3 − − − − 37 (224) Acquired through business combinations £’000 − (6,356) (38) − (76) − 247 − (6,223) 2017 £’000 (369) (5,603) 3 1 27 297 94 699 Total 2016 £’000 (220) 175 16 1 43 565 173 292 (4,851) 1,045 Foreign exchange adjustments £’000 Balance at 31st December 2017 £’000 (11) 13 1 − 3 18 5 15 44 (369) (5,603) 3 1 26 298 94 699 (4,851) 74 26011 18/05/2018 Proof 4Movement of deferred taxes during 2016: £’000 Goodwill Intangible assets Property, plant and equipment Financial fixed assets Inventory Trade and other payables Accruals and deferred income Derivatives Borrowings Tax losses carried forward Gross profit Balance at 31st December 2015 £’000 Recognised in income £’000 Acquired through business combinations £’000 Foreign exchange adjustments £’000 Balance at 31st December 2016 £’000 (7) 194 2 1 26 759 103 6 23 89 1,196 (205) (44) 11 − 15 (304) 51 (6) (26) 181 (327) − − − − − − − − − − − (8) 25 − − 5 110 19 − 3 22 176 (220) 175 13 1 46 565 173 − − 292 1,045 (c) Tax losses The Group has unused tax losses, tax credits and notional interest deduction available in an amount of £2,636k for 2017 (2016: £1,045k). Deferred tax assets have been recognised on all available tax losses carried forward, resulting in amounts recognised of £699k (2016: £292k). This was based on management’s estimate that sufficient positive taxable basis will be generated in the near future for the related legal entities with fiscal losses. 8 Earnings Per Share Basic earnings per share amounts are calculated by dividing the net profit for the year attributable to ordinary equity holders of the parent Company by the weighted average number of ordinary shares outstanding during the year. The weighted average number of ordinary shares outstanding during 2016 has been calculated by multiplying the existing Ecuphar NV ordinary shares of 13,957,720 by the merger ratio of 63:37 Ecuphar/Animalcare (after taking into account dilution from the exercise of certain Animalcare share incentive arrangements) giving a total adjusted weighted average of 23,765,858 shares. Diluted earnings per share amounts are calculated by dividing the net profit attributable to ordinary equity holder of the parent Company by the weighted average number of ordinary shares outstanding during the year plus the weighted average number of ordinary shares that would be issued on conversion of all potential dilutive ordinary shares. 75 26011 18/05/2018 Proof 4Animalcare Group plc Annual Report 2017www.animalcaregroup.co.ukStock Code: ANCROUR FINANCIALSNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS CONTINUED Y E A R E N D E D 31 S T D E C E M B E R 2017 The following income and share data was used in the earnings per share computations: Net profit attributable to ordinary equity holders of the parent adjusted for the effect of dilution Weighted average number of ordinary shares for basic earnings per share Dilutive potential ordinary shares Weighted average number of ordinary shares adjusted for effect of dilution Earnings per share are as follows: Underlying 2017 £’000 Underlying 2016 £’000 5,284 3,965 Total 2017 £’000 184 Total 2016 £’000 3,515 2017 Number 2016 Number 2017 Number 2016 Number 41,998,692 23,765,848 41,998,692 23,765,858 178,191 − 178,191 − 42,176,883 23,765,848 42,176,883 23,765,858 Earnings per share attributable to ordinary owners of the parent Basic Diluted 9 Goodwill Goodwill has been allocated to the cash-generating units (“CGU”) as follows: 2017 Pence 12.6p 12.5p 2016 Pence 16.7p 16.7p CGU: Pharmaceuticals CGU: Wholesale Total The changes in the carrying value of the goodwill can be presented as follows for the years 2017 and 2016: Gross £’000 8,974 (419) 1,403 9,958 41,048 406 51,413 At 1st January 2016 Disposals Currency translation At 31st December 2016 Additions Currency translation At 31st December 2017 76 2017 Pence 0.4p 0.4p 2017 £’000 50,856 557 51,413 Impairment £’000 − − − − − − − 2016 Pence 14.8p 14.8p 2016 £’000 9,425 534 9,959 Total £’000 8,974 (419) 1,403 9,958 41,048 406 51,413 26011 18/05/2018 Proof 4In addition to currency translation effects, the goodwill balance increased as a result of the reverse acquisition of the Animalcare business in 2017 by £41,048k and decreased as a result of the disposal of Nutriscience Ltd in 2016 by £419k (see note 4). As of 31st December 2017, goodwill allocated to the Pharmaceuticals CGU includes goodwill recognised as a result of past business combinations of Esteve, Equipharma NV, Ecuphar BV, Cardon Chemicals NV and the reverse acquisition of Animalcare Group plc in 2017. As of 31st December 2017, goodwill allocated to the Wholesale CGU includes goodwill recognised as a result of the past business combinations of Medini NV and Orthopaedics NV. The Group has performed an impairment test based on a discounted cash flow model including cash flows derived from the three-year budget plan and residual value as of the fourth year. Both the Pharmaceuticals and Wholesale CGUs are included in their respective reportable segment Pharmaceuticals and Wholesale. CGU Pharmaceuticals The recoverable amount of this cash-generating unit is based on the Fair Value Less Costs of Disposal “FVLCD” which uses a multiples model. For the calculation of the FVLCD we used both the sales and EBITDA multiples. The multiples used in the model are based on the most conservative multiples used by Rothschild for the purpose of valuing both Ecuphar and Animalcare at the time of the acquisition. The sales multiples for 2018 of the old Animalcare and Ecuphar businesses are respectively 3.5 and 1.6. The EBITDA multiples used are 13.8 for Animalcare and 10.9 for Ecuphar. From 2019 onwards, the multiples are determined for the combined businesses. The sales multiple is 1.9 and the EBITDA multiple is 11.5. EBITDA and sales are based on the 2018 and 2019 budget provided by management. Based on the sales multiple model, the value of the Pharmaceuticals segment is determined at £179,479k, leaving a headroom of £65,882k. The value of the Pharmaceuticals segment is determined at £153,489k when using the EBITDA multiples approach. This leaves a headroom of £39,893k. CGU Wholesale The recoverable amount of this cash-generating unit is based on the Fair Value Less Costs of Disposal “FVLCD” which uses a multiples model. For the calculation of the FVLCD we used both the sales and EBITDA multiples. The multiples used in the model are based on the most conservative multiples used by Rothschild for the purpose of valuing both Ecuphar and Animalcare at the time of the acquisition. The sales multiples for 2018 of the old Animalcare and Ecuphar businesses are respectively 3.5 and 1.6. The EBITDA multiples used are 13.8 for Animalcare and 10.9 for Ecuphar. From 2019 onwards, the multiples are determined for the combined businesses. The sales multiple is 1.9 and the EBITDA multiple is 11.5. EBITDA and sales are based on the 2018 and 2019 budget provided by management. Based on the sales multiple model, the value of the Wholesale segment is determined at £53,061k, leaving a headroom of £51,106k. The value of the Wholesale segment is determined on £5,602k when using the EBITDA multiples approach. This leaves a headroom of £3,647k. 77 26011 18/05/2018 Proof 4Animalcare Group plc Annual Report 2017www.animalcaregroup.co.ukStock Code: ANCROUR FINANCIALS NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS CONTINUED Y E A R E N D E D 31 S T D E C E M B E R 2017 10 Intangible Assets The changes in the carrying value of the intangible assets can be presented as follows for the years 2017 and 2016: Acquisition value At 1st January 2016 Additions Disposals Transfers Currency translation Other At 31st December 2016 Additions Change due to business combinations Disposals Currency translation Other At 31st December 2017 Amortisation At 1st January 2016 Additions Disposals Transfers Currency translation Other At 31st December 2016 Additions Currency translation Other At 31st December 2017 Net carrying value At 31st December 2017 At 31st December 2016 Patents, distribution rights and licences £’000 Product portfolios and product development costs £’000 In-process R&D £’000 Capitalised software £’000 2,451 − − − 388 − 2,839 550 10,013 − 116 − 11,065 1,735 (2,090) − 1,736 (9) 12,437 187 4,561 (29) 510 19 13,735 1,036 − − 2,219 (34) 16,956 1,174 21,041 − 704 − − − − 179 8 − 187 468 − − 14 48 Total £’000 27,251 2,771 (2,090) 179 4,351 (43) 32,419 2,379 35,615 (29) 1,344 67 13,518 17,685 39,875 717 71,795 (160) (268) − − (39) − (467) (751) (23) − (1,820) (2,256) 2,016 − (299) 8 (2,351) (2,523) (124) 8 (5,856) (1,457) 7 (1) (991) − (8,298) (2,589) (359) 5 (1,241) (4,990) (11,241) 12,277 2,372 12,695 10,086 28,634 8,658 − − − (55) (2) − (57) (190) (5) (34) (286) 431 130 (7,836) (3,981) 2,023 (56) (1,331) 8 (11,173) (6,053) (511) (21) (17,758) 54,037 21,246 In-process Research & Development relates to acquired development projects as part of the Esteve business combination in 2015, the reverse acquisition of Animalcare Group plc in 2017 and external and internal in-process R&D costs for which the capitalisation criteria are met. 78 26011 18/05/2018 Proof 4 Patents, distribution rights and licences include amounts paid for exclusive distribution rights as well as distribution rights acquired as part of the Esteve business combination in 2015 and the reverse acquisition of Animalcare Group plc in 2017. Product portfolios and product development costs relate to amounts paid for acquired brands as well as external and internal product development costs capitalised on the development projects in the pipeline for which the capitalisation criteria are met. The total amortisation charge for 2017 is £6,053k (2016: £3,981k) which is included in lines cost of sales, research and development expenses, sales and marketing expenses and general and administrative expenses of the consolidated income statement. 11 Property, Plant and Equipment The changes in the carrying value of the property, plant and equipment can be presented as follows for the years 2017 and 2016: Acquisition value At 1st January 2016 Additions Change due to business combinations Disposals Transfers Currency translation At 31st December 2016 Additions Change due to business combinations Disposals Currency translation At 31st December 2017 Depreciation At 1st January 2016 Depreciation charge for the year Disposals Transfers Change due to business combinations Currency translation At 31st December 2016 Depreciation charge for the year Disposals Change due to business combinations Currency translation At 31st December 2017 Net book value At 31st December 2017 At 31st December 2016 Equipment £’000 Office furniture and equipment £’000 Finance leases £’000 Leasehold improvements £’000 428 25 (196) − − 60 317 25 383 (1) 15 739 (303) (37) − − 149 (43) (234) (50) − (274) (9) (567) 172 83 1,014 391 (59) (23) (174) 166 1,315 134 195 (9) 55 1,690 (632) (234) 17 52 57 (105) (845) (215) 3 (169) (37) (1,263) 427 470 52 − − − − 8 60 − − − 2 62 (10) (11) − − − (2) (23) (12) − − (1) (36) 26 37 370 47 (164) − − 53 306 25 184 − 13 528 (257) (44) − − 160 (36) (177) (50) − (93) (8) (328) 200 129 Total £’000 1,864 463 (419) (23) (174) 287 1,998 184 762 (10) 85 3,019 (1,202) (326) 17 52 366 (186) (1,279) (327) 3 (536) (55) (2,194) 825 719 The investment in property, plant and equipment in 2017 amounted to £184k (2016: £463k) and mainly related to the acquisitions of IT and office equipment. 79 26011 18/05/2018 Proof 4Animalcare Group plc Annual Report 2017www.animalcaregroup.co.ukStock Code: ANCROUR FINANCIALS NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS CONTINUED Y E A R E N D E D 31 S T D E C E M B E R 2017 The Group realised a net result on disposals of property, plant and equipment of £nil in 2017 (2016: £nil). No impairment of property, plant and equipment was recorded. Finance leases The carrying value of assets held under finance leases at 31st December 2017 was £26k (2016: £37k). Finance leases mainly relate to leased trucks. Borrowing costs No borrowing costs were capitalised during the year ended 31st December 2017 or 31 December 2016. 12 Inventories Inventories include the following: Raw materials Goods purchased for resale Total inventories (at cost or net realisable value) 2017 £’000 1,062 15,733 16,795 2016 £’000 966 12,288 13,254 The amount of inventory recognised as an expense during 2017 amounts to £48,156k (2016: £38,918k). Inventory write-downs during 2017 amounted to £680k (2016: £523k). 13 Trade Receivables and Other Current Assets Trade receivables include the following: Trade receivables Allowance on trade receivables Total 2017 £’000 16,811 (131) 16,680 2016 £’000 10,904 (123) 10,781 Trade receivables are non-interest-bearing and are generally on payment terms of between 30 to 90 days. As at 31st December 2017, trade receivables of an initial value of £131k (2016: £123k) were impaired and fully provided for. The table below shows the changes in the allowance of receivables. At 1st January 2016 Additional impairments Change due to business combinations Exchange difference Other movement At 31st December 2016 Additional impairments Change due to business combinations Reversal impairment Exchange difference Other movement At 31st December 2017 80 £’000 (23) (102) 9 (8) 1 (123) (84) (14) 26 (5) 69 (131) 26011 18/05/2018 Proof 4Other current assets include the following: Other receivables Deferred charges Total 2017 £’000 1,118 816 1,934 Other current assets amount to £1,934k (2016: £1,191k) at the end of the reporting period. Deferred charges mainly include prepayments totalling £562k (2016: £nil). 14 Cash and Cash Equivalents Cash and cash equivalents include the following: Cash at bank Cash equivalents Total 2017 £’000 7,577 2 7,579 2016 £’000 956 235 1,191 2016 £’000 945 6 951 Cash and cash equivalents comprise cash and short-term bank deposits with an original maturity of three months or less. There were no restrictions on cash during 2017 and 2016. 15 Trade Payables Trade payables Total The Directors consider that the carrying amount of trade payables approximates to their fair value. 16 Borrowings The loans and borrowings include the following: Other loans Revolving credit facilities Roll over investment facility Acquisition loan Total loans and borrowings of which: non -current current Interest rate 1.56% Maturity EURIBOR +1.50% March 22 EURIBOR +1.50% March 22 EURIBOR +1.75% March 22 2017 £’000 14,128 14,128 2017 £’000 51 26,768 2,676 3,992 33,487 32,854 633 2016 £’000 10,012 10,012 2016 £’000 75 21,482 3,176 − 24,733 24,102 631 81 26011 18/05/2018 Proof 4Animalcare Group plc Annual Report 2017www.animalcaregroup.co.ukStock Code: ANCROUR FINANCIALS NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS CONTINUED Y E A R E N D E D 31 S T D E C E M B E R 2017 Revolving credit facilities and roll over investment facilities In mid-2016, the Group refinanced all of its outstanding investment loans with different banks. Financing arrangements were entered into with four Belgian banks. These financing arrangements have been split equally amongst these four banks. The new agreements consist of: { €41.5m revolving credit facilities { €10m available acquisition financing { €4.08m investment loans The loans have a variable, EURIBOR based interest rate, increased with a margin of 1.5% or 1.75%. The revolving credit facilities and the acquisition financing have a bullet maturity in March 2022. The investment loans are repaid in 23 monthly instalments. 17 Provisions Provisions consist of the following: Provisions for redundancy Provisions for risks and charges Total 2017 £’000 − 72 72 2016 £’000 20 196 216 Provisions for risks and charges amount to £72k in December 2017 (2016: £196k) and relate to various obligations which are not individually significant. The assessment of the accounting treatment of the Belgian employee benefit contribution plans with a minimal guaranteed return was based on actuarial calculations which resulted in an immaterial impact as only a limited number of individuals can benefit from the plan given the limited fixed amount which is being covered per covered individual. No provision has been recognised as at 31st December 2017 and 2016. As a result no further disclosures have been provided. 18 Deferred Income and Accrued Charges Deferred income and accrued charges consists of the following: Accrued charges Deferred income – due within one year Other Total due within one year Deferred income – due after one year 2017 £’000 1,868 219 29 2,116 780 2016 £’000 806 − 6 812 − Accrued charges mainly relate to accrued product development expenses of £757k, accrued management bonuses in Ecuphar NV of £93k (2016: £350k) and several accrued charges relating to commissions and bonuses in Ecuphar Veterinaria for an amount of £333k (2016: £318k). Deferred income arises from certain services sold by the Group’s subsidiary Animalcare Ltd. In return for a single upfront payment, Animalcare Ltd commits to a fixed term contract to provide certain database, pet reunification and other support services to customers. There is no contractual restriction on the amount of times the customer makes use of the services. At the commencement of the contract, it is not possible to determine how many times the customer will make use of the services, nor does historical evidence provide indications of any future pattern of use. As such, income is recognised evenly over the term of the contract, currently between 8 and 14 years. 82 26011 18/05/2018 Proof 4Movements in the Group’s deferred income liabilities during the current year are as follows: Balance at the beginning of the year Acquired through business combinations Income deferred to following periods Release of income deferred from previous periods Balance at the end of the year The deferred income liabilities fall due as follows: Within one year After one year Balance at the end of the year 19 Other Current Liabilities Other current liabilities include the following: Payroll-related liabilities Other current liabilities Total £’000 − 925 181 (107) 999 £’000 219 780 999 2016 £’000 572 1,665 2,237 2017 £’000 1052 928 1,980 Other current liabilities mainly relate to outstanding payables at the year-end for expected contractual pay-outs under a licence agreement for £763k as at 31st December 2017 (2016: £1,665k). 20 Fair Value Financial assets The carrying value and fair value of the financial assets for 31st December 2017 and 2016 are presented as follows: Financial assets measured at fair value Assets available for sale at FV through OCI Loans and receivables measured at amortised cost Trade and other receivables (current) Other financial assets (non-current) Other current assets Cash and cash equivalents Total loans and other receivables Carrying value 2016 £’000 423 11,737 69 1,191 951 13,948 2017 £’000 464 17,798 72 1,934 7,579 27,383 2017 £’000 464 17,798 72 1,934 7,579 27,383 Fair value 2016 £’000 423 11,737 69 1,191 951 13,948 83 26011 18/05/2018 Proof 4Animalcare Group plc Annual Report 2017www.animalcaregroup.co.ukStock Code: ANCROUR FINANCIALS NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS CONTINUED Y E A R E N D E D 31 S T D E C E M B E R 2017 The fair value of the financial assets has been determined on the basis of the following methods and assumptions: { The carrying value of the cash and cash equivalents and the current receivables approximate their fair value due to their short-term character. { The fair value of the financial assets at fair value through other comprehensive income is derived from market observable data, namely stock and foreign exchange market data (Level 1 inputs). The Group has no financial instruments carried at fair value in the statement of financial position on 31st December 2017 and 2016 except for an investment in a company through publicly listed shares. The fair value of this investment is determined based on Level 1 inputs. { Trade and other receivables are being evaluated on the basis of their credit risk and interest rate. Their fair value is not different from their carrying value on 31st December 2017 and 2016. Financial liabilities The carrying value and fair value of the financial liabilities for 31st December 2017 and 2016 are presented as follows: Financial liabilities measured at amortised cost Borrowings Trade payables Other liabilities Total financial liabilities measured at amortised cost Financial liabilities measured at fair value Derivative financial instruments at FV through PL Total financial liabilities measured at fair value Total non-current Total current Carrying value 2016 £’000 24,733 10,012 4,822 39,567 – – 24,102 15,465 2017 £’000 33,487 14,128 6,837 54,452 – – 32,854 21,598 2017 £’000 33,487 14,128 6,837 54,452 – – 32,854 21,598 Fair value 2016 £’000 24,733 10,012 4,822 39,567 – – 24,102 15,465 The fair value of the financial liabilities has been determined on the basis of the following methods and assumptions: { The carrying value of trade payables and other liabilities approximates their fair value due to the short-term character of these instruments. { Loans and borrowings are evaluated based on their interest rates and maturity date. Most interest-bearing debts have floating interest rates and their fair value approximates to their amortised cost value. Fair value hierarchy The Group has no financial instruments carried at fair value in the statement of financial position on 31st December 2017 and 2016 except for an investment in a company through publicly listed shares. The fair value of this investment is a Level 1 fair value. 21 Equity Share capital Allotted, called up and fully paid Ordinary Shares of 20p each 2017 Number of shares 2016 Number of shares 59,913,900 21,222,110 84 26011 18/05/2018 Proof 4 Allotted, called up and fully paid Ordinary Shares of 20p each The following share transactions have taken place during the year ended 31st December 2017: At 1st July 2016 Issued as consideration for business combinations Exercise of share options At 31st December 2017 2017 £’000 11,983 2017 Number of shares 21,222,110 37,322,894 1,368,896 59,913,900 2016 £’000 4,244 2016 £’000 4,244 7,465 274 11,983 On 13th July 2017, the Group announced that it had completed the reverse acquisition. In aggregate, 37,322,894 new Ordinary Shares were allotted and issued, comprising 8,571,428 new placing shares and 28,751,466 consideration shares. During the year a total of 1,368,896 shares were issued in respect of the exercise of share options. This comprised a total of 1,218,896 shares issued to certain Directors as described in note 7.7, with the balance of 150,000 shares issued in relation to the grant of options over the Company’s share by Animalcare Ltd under the Animalcare Group plc Executive Share Option Scheme and the Save As You Earn (SAYE) Share Option Scheme referred to in note 25. Dividends The Group paid an ordinary interim dividend of 4.7p per share, totalling £2,816k, on 24th November 2017. During the year ended 31st December 2016, the Group paid a final dividend of £1,469k. The proposed final dividend of 2.0 pence per share is subject to approval of shareholders at the Annual General Meeting and has not been included as a liability as at 31st December 2017, in accordance with IAS 10 “Events After the Balance Sheet Date”. Non-controlling interest The non-controlling interest is £2k at 31st December 2017 (2016: £2k). This non-controlling interest represents 0.2% of the share capital of Medini NV and 0.02% of Orthopaedics.be NV which are held by third parties. 22 Commitments and Contingent Liabilities Operating lease commitments The Group has operating lease commitments mainly related to buildings as follows: Within one year Between two and three years Between four and five years More than five years Total 2017 £’000 767 1,467 576 492 3,302 2016 £’000 510 884 678 687 2,759 The total operating lease payments recognised in the consolidated income statement in 2017 are £1,899k (2016: £1,365k). 85 26011 18/05/2018 Proof 4Animalcare Group plc Annual Report 2017www.animalcaregroup.co.ukStock Code: ANCROUR FINANCIALSNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS CONTINUED Y E A R E N D E D 31 S T D E C E M B E R 2017 Finance lease commitments The Group has finance leases for building and various other items of plant and equipment. Future minimum lease payments under finance leases with the present value of the net minimum lease payments are, as follows: Within one year Between two and three years Between four and five years More than five years Total Less finance charges Present value of minimum lease payments 31st December 2017 31st December 2016 Minimum lease payments £’000 Present value of payments £’000 Minimum lease payments £’000 Present value of payments £’000 27 23 − − 50 2 52 28 24 − − 52 − 52 25 40 8 − 73 2 75 26 41 8 − 75 − 75 23 Risks In the exercise of its business activity, the Group is exposed to credit, liquidity and market risks. Credit risk As at 31st December 2017, the Group’s maximum exposure to credit risk is £16,680k, which is the amount of the trade receivables in the consolidated accounts (2016: £10,781k). To control this risk, the Group has set up a strict credit collection process. Historically, no major bad debts have been recorded. The Group has no individual customers who represent a significant part of the consolidated turnover, nor of the trade receivables at year-end. The following is an ageing schedule of trade receivables: 31st December 2017 31st December 2016 Total £’000 16,680 10,781 Non-due £’000 11,994 9,966 < 30 days £’000 31–60 days £’000 61–90 days £’000 91–180 days £’000 > 181 days £’000 3,241 710 516 25 418 44 196 10 315 26 Liquidity risk Liquidity risk is the risk that the Company may not be able to meet its financial obligations as they fall due. The Group expects to meet its obligations related to the financing agreements through operating cash flows. Additionally, the Group ensures there is sufficient headroom on the existing credit lines to have an additional working capital buffer. As at 31st December 2017, the Group had the following sources of liquidity available: { Cash and cash equivalents: £7,579k { Undrawn credit facilities with several banks: £10,052k { Undrawn acquisition financing: £4,880k 86 26011 18/05/2018 Proof 4The table below provides an analysis of the maturity dates of the financial liabilities: At 31st December 2017 Borrowings Trade payables Other current liabilities Total At 31st December 2016 Borrowings Trade payables Other current liabilities Total < 1 year £’000 1 – 3 years £’000 4–5 years £’000 > 5 years £’000 Total £’000 (633) (1,307) (31,547) (14,128) (1,980) (16,741) − − − − (1,307) (31,547) − − − − (33,487) (14,128) (1,980) (49,595) < 1 year £’000 1 – 3 years £’000 4–5 years £’000 > 5 years £’000 Total £’000 (631) (1,259) (1,210) (21,633) (10,012) (2,237) (12,880) − − − − − − (1,259) (1,210) (21,633) (24,733) (10,012) (2,237) (36,982) The Group’s indebtedness and its restrictions and covenants agreed upon in the financing agreements may adversely affect the Group’s liquidity position. Any breach of covenants can lead to loans being immediately due and payable. The Company has an international cash pool with different banks to limit excess cash. The Company closely monitors cash balances within the Group and uses short-term withdrawals on the credit lines to minimise the cash balances. Foreign exchange risk The Group undertakes transactions denominated in foreign currencies which give rise to the risks associated with currency exchange rate fluctuations. Exposures are managed by a combination of matching foreign currency income and expenditure, maintaining foreign currency deposits and the use of forward contracts. The carrying values of the Group’s foreign currency assets and liabilities including intercompany balances at the reporting date were: EUR/GBP EUR/USD GBP/USD Assets 2017 £’000 670 − 205 Assets 2016 £’000 68 − − Liabilities 2017 £’000 Liabilities 2016 £’000 658 155 87 13 72 − The cumulative effect of the foreign currency translation effects is reported under other comprehensive income in the statement of financial position and amounts to £3,183k (2016: £2,003k). At the end of the reporting period, the Group is mainly exposed to the EUR and the USD. The following table details the effect of a 10% increase and decrease in the exchange rate of these currencies against sterling when applied to outstanding monetary items denominated in foreign currency as at 31th December 2017. A positive number indicates that an increase in profit would arise from a 10% change in value of sterling against these currencies, and a negative number indicates that a decrease would arise. EUR USD Strengthening £’000 Weakening £’000 9 3 (11) (4) 87 26011 18/05/2018 Proof 4Animalcare Group plc Annual Report 2017www.animalcaregroup.co.ukStock Code: ANCROUR FINANCIALS NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS CONTINUED Y E A R E N D E D 31 S T D E C E M B E R 2017 Interest rate risk The maturity dates and interest rates of the financial debts and liabilities are detailed in note 12. The exposure to interest rate risks is mainly related to existing borrowing facilities. The current loans of credit institutions have variable interest rates. There are no significant differences between the nominal interest rates as listed in note 12 and the effective interest rates of the loans. If the interest rates would have been 100 bp higher/lower, the financial result would have been £330k lower/higher in 2017 and £ 287k lower/higher in 2016. Forward foreign exchange contracts The Group had two (2016: none) open foreign exchange contracts at the end of the year. The values are shown below: Principal value Fair value 2017 £’000 − 4 2016 £’000 − − Capital management The primary objective of the Group’s shareholders’ capital management strategy is to ensure it maintains healthy capital ratios to support its business and maximize shareholder value. Additionally, minimum solvency ratios are agreed upon in the financing agreements. Capital is defined as the Group shareholder’s equity which amounts to £89,644k as at 31st December 2017 (2016: £19,853k). The Group consistently reviews its capital structure and makes adjustments in light of changing economic conditions and performances of the Group. The Group made no changes to its capital management objectives, policies or processes during the years ended 31st December 2017 and 2016. 24 Remuneration paid to the Company’s Auditors Fees payable to the Company’s auditors for the audit of the Company’s annual accounts The audit of the Company’s subsidiaries pursuant to legislation Total audit fees Tax services Other services Total non-audit fees Total auditors’ remuneration 2017 £’000 19 99 118 16 144 160 278 2016 £’000 18 35 53 31 68 99 152 88 26011 18/05/2018 Proof 425 Share-based Payments During the year the Company operated two share option schemes and one Long Term Incentive Plan as described below: Animalcare Group plc Executive Share Option Scheme Under this scheme, options may be granted to certain executives and senior employees of the Group to subscribe for new shares in the Company at a fixed price equal to the market value at the time of grant. The options are exercisable three years after the date of grant. Once vested, options must be exercised within six years of the date of grant. The exercise of these options is not subject to any performance criteria. SAYE Option Scheme This scheme is open to all UK employees to encourage share ownership. Share options are granted at an option price fixed at a 20% discount to the market value at the start of the savings period. The SAYE options vest and are exercisable three years after the date of grant and must ordinarily be exercised within six months of the completion of the relevant savings period. Details of the movement in these share option schemes during the year are as follows: Share options acquired during the year Lapsed during the year Exercised during the period Open at 31st December 2017 Exercisable at the end of the year Options £ 460,000 (47,500) (270,000) 142,500 57,500 EMI Price £ 1.578 1.860 1.408 1.916 1.555 Options £ SAYE Price £ Options £ 199,864 1.567 180,000 Unapproved Price £ 1.408 − − − − 199,864 − − − 1.567 − (180,000) 1.408 − − − − The weighted average inputs into the Black–Scholes model at the time of grant were as follows: Weighted average share price Weighted average exercise price Expected volatility Expected life Risk-free rate EMI Scheme SAYE Scheme Unapproved Scheme 152p 152p 53% 195p 157p 42% 141p 141p 56% 3.1 years 3.1 years 3.0 years 0.5% 0.5% 0.5% Expected volatility was determined by calculating the historical volatility of the Company’s share price over the previous three years. The expected lives used in the model were estimated based on management’s best estimate for the effects of non-transferability, exercise restrictions, and behavioural considerations. The Company recognised a total charge in respect of share-based payments of £27k (2016: £nil). Long Term Incentive Plan (LTIP) Information relating to the LTIP, which was exercised during the year, is set out in note 7.7. The charge for the year to the income statement in respect of the LTIP is £nil (2016: £nil). 89 26011 18/05/2018 Proof 4Animalcare Group plc Annual Report 2017www.animalcaregroup.co.ukStock Code: ANCROUR FINANCIALSNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS CONTINUED Y E A R E N D E D 31 S T D E C E M B E R 2017 26 Related Party Transactions This disclosure provides an overview of all transactions with related parties. Transactions between the Company and its subsidiaries, which are related parties, are eliminated in the consolidated accounts and no information is provided hereon in this section. Remuneration of the Directors, who are the key management personnel of the Group, is included in the Annual Remuneration Report on page 36 and in note 37. Transactions with shareholders accounted for a total amount of £nil in 2017 (2016: £60k). These amounts were recognised as an expense during the reporting period. 27 Overview of Consolidated Entities Name Ecuphar NV Medini NV Country of incorporation Registered address Belgium Legeweg 157i, 8020 Oostkamp Belgium Legeweg 157i, 8020 Oostkamp % equity interest 2017 £’000 100% 99.8% 2016 £’000 100% 99.8% Orthopaedics.be NV Belgium Legeweg 157i, 8020 Oostkamp 99.98% 99.98% Ecuphar BV The Netherlands Verlengde Poolseweg 16, 4818 CL Breda Ecuphar Veterinary Products BV Ornis SA Ecuphar GmbH Euracon Pharma Consulting und Trading GmbH The Netherlands Verlengde Poolseweg 16, 4818 CL Breda France Rue de Roubaix 33, 59200 Tourcoing Germany Brandteichstraße 20, 17489 Greifswald Germany Max-Planck Str. 11, 85716 Unterschleißheim 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% Ecuphar Veterinaria SA Spain Avenida Río de Janeiro, 60 – 66, planta 13, 08016 100% 100% Barcelona Ecuph Italia Belphar Italy Viale Francesco Restelli, 3/7, piano 1, 20124 Milan Portugal R. Carlos Alberto da Mota Pinto, Nº 17 - 3ºA, 1070-313 Lisbon Animalcare Ltd United Kingdom Unit 7, 10 Great North Way, York Business Park, Nether Poppleton, York, YO26 6RB 100% 100% 100% 100% 100% 0% 90 26011 18/05/2018 Proof 4 COMPANY BALANCE SHEETS P E R I O D E N D E D 31 S T D E C E M B E R 2017 Non-current assets Other intangible assets Investments in subsidiary companies Deferred tax asset Current assets Trade and other receivables Cash and cash equivalents Total assets Current liabilities Trade and other payables Net current assets/(liabilities) Total liabilities Net assets Capital and reserves Called up share capital Share premium account Retained earnings Equity attributable to equity holders of the parent Included within retained earnings is profit after tax of £6,028,000 (2016: loss £399,000). As at 31 Dec 2017 £’000 As at 30 June 2016 £’000 Notes 6 7 11 8 9 10 12 12 – 147,743 12 147,755 635 2,109 2,744 150,499 (3,684) (3,684) (940) (3,684) 146,815 11,983 132,588 2,244 146,815 4 14,361 105 14,470 332 1,576 1,908 16,378 (5,217) (5,217) (3,309) (5,217) 11,161 4,212 6,506 443 11,161 91 26011 18/05/2018 Proof 4Animalcare Group plc Annual Report 2017www.animalcaregroup.co.ukStock Code: ANCROUR FINANCIALSCOMPANY STATEMENT OF CHANGES IN SHAREHOLDERS’ EQUITY P E R I O D E N D E D 31 S T D E C E M B E R 2017 Balance at 30th June 2015 Total comprehensive loss for the year Transactions with owners of the Company, recognised in equity: Dividends paid Issue of share capital Share-based payments Balance at 1st July 2016 Total comprehensive profit for the period Transactions with owners of the Company, recognised in equity: Dividends paid Issue of share capital net costs of issue Consideration shares Exercise of share options Share-based payments Balance at 31st December 2017 Notes 3 5 12 12 12 13 Share capital £’000 4,204 – – 8 – Share premium account £’000 6,461 – – 45 – 4,212 6,506 – – 1,714 5,750 307 – – – 27,068 94,880 4,134 – Retained earnings £’000 2,078 (399) Total £’000 12,743 (399) (1,283) (1,283) – 47 443 6,028 (4,237) – – – 10 53 47 11,161 6,028 (4,237) 28,782 100,630 4,441 10 11,983 132,588 2,244 146,815 92 26011 18/05/2018 Proof 4COMPANY CASH FLOW STATEMENTS P E R I O D E N D E D 31 S T D E C E M B E R 2017 Comprehensive income/(loss) for the year before tax Adjustments for: Amortisation of intangible assets Finance income Share-based payment expense Operating cash flows before movements in working capital Decrease/(increase) in receivables (Decrease)/increase in payables Cash generated by operations Income taxes (paid)/received Net cash flow from operating activities Investing activities: Payments to acquire subsidiaries Disposal of subsidiaries Interest received Net cash (used in)/generated by investing activities Financing: Receipts from issue of share capital Equity dividends paid Net cash used in financing activities Net increase/(decrease) in cash and cash equivalents Cash and cash equivalents at start of year Cash and cash equivalents at end of year Comprising: Cash and cash equivalents Note 3 13 8 10 7 7 12 5 18 month period to 31st Dec 2017 £’000 5,608 12 month period to 30th June 2016 £’000 (507) 4 (4) 10 5,618 (8) (1,315) 4,295 – 4,295 (33,145) 4,000 4 (29,141) 29,616 (4,237) 25,379 533 1,576 2,109 2 (11) 47 (469) (3) 1,691 1,219 – 1,219 – – 11 11 53 (1,283) (1,230) – 1,576 1,576 9 2,109 1,576 93 26011 18/05/2018 Proof 4Animalcare Group plc Annual Report 2017www.animalcaregroup.co.ukStock Code: ANCROUR FINANCIALSInvestments in subsidiaries Investments in Group companies are stated at cost less provisions for impairment losses. Dividends Dividends paid are recognised within the statement of changes in equity only when an obligation to pay the dividend arises prior to the year end. Share-based payments The Company issues equity-settled share-based payments to certain employees. Equity-settled share-based payments are measured at fair value (excluding the effect of non-market based vesting conditions) at the date of grant. The fair value determined at the grant date of such equity-settled share-based payments is expensed on a straight-line basis over the vesting period, based on the Company’s estimate of shares that will eventually vest and adjusted for the effect of non-market based vesting conditions (with a corresponding movement in equity). Fair value is measured by use of the Black–Scholes model. The expected life used in the model has been adjusted, based on management’s best estimate, for the effects of non-transferability, exercise restrictions, and behavioural considerations. The fair value of the shares issued under the Long Term Incentive Plan were valued on a discounted cash flow basis in conjunction with a third party valuation specialist. Taxation The tax expense represents the sum of the tax currently payable and deferred tax. The tax currently payable is based on taxable profit for the year. Taxable profit differs from net profit as reported in the statement of comprehensive income because it excludes items of income or expense that are taxable or deductible in other years and it further excludes items that are never taxable or deductible. The Company’s liability for current tax is calculated using tax rates that have been enacted or substantively enacted by the balance sheet date. NOTES TO THE ACCOUNTS P E R I O D E N D E D 31 S T D E C E M B E R 2017 1 Significant Accounting Policies The following accounting policies have been applied consistently in dealing with items which are considered material in relation to the financial statements of the Company. Basis of preparation The Company financial statements cover the period of 18 months from 1st July 2016 to 31st December 2017. The financial statements have been prepared and approved by the Directors under the historical cost convention, except for the revaluation of certain financial instruments, in accordance with International Financial Reporting Standards (“IFRS”) as adopted by the European Union (“adopted IFRSs”) and the Companies Act 2006 as applicable to companies reporting under IFRS. They have also been prepared in accordance with the requirements of the AIM Rules. Under section 408 of the Companies Act 2006 the Company is exempt from the requirement to present a separate Profit and Loss account in these separate financial statements. The profit dealt with in the accounts of the Company was £6,028,000 (2016: loss £399,000). The accounting policies of the Company are the same as for the Group where applicable. Going concern The Directors have assessed the Company’s ability to continue in operational existence for the foreseeable future in accordance with FRC Going Concern and Liquidity Risk guidance (October 2009). It is considered appropriate to continue to prepare the financial statements on a going concern basis. Intangible assets The Company recognises intangible assets at cost less accumulated amortisation and impairment losses. Intangible assets arise both as a result of applying IFRS 3 which requires the separate recognition of intangible assets from goodwill on all business combinations from 1st January 2004, and from the purchase of software (that is separable from any associated hardware). Intangible assets are amortised on a straight-line basis over their useful economic lives as follows: Software Estimated useful life – 4 years Operating leases Rentals payable under operating leases are charged to income on a straight-line basis over the term of the relevant lease. Employee benefits – Pensions The Company operates a stakeholder pension scheme available to all eligible employees. Payments to this scheme are charged as an expense as they fall due. 94 26011 18/05/2018 Proof 41 Significant Accounting Policies (continued) Deferred tax is the tax expected to be payable or recoverable on differences between the carrying amounts of assets and liabilities in the financial statements and the corresponding tax bases used in the computation of taxable profit and is accounted for using the balance sheet liability method. Deferred tax liabilities are generally recognised for all taxable temporary differences and deferred tax assets are recognised to the extent that it is probable that taxable profits will be available against which deductible temporary differences can be utilised. Such assets and liabilities are not recognised if the temporary difference arises from the initial recognition of goodwill or from the initial recognition (other than in a business combination) of other assets and liabilities in a transaction that affects neither the tax profit nor the accounting profit. The carrying amount of deferred tax assets is reviewed at each balance sheet date and reduced to the extent that it is no longer probable that sufficient taxable profits will be available to allow all or part of the asset to be recovered. Deferred tax is calculated at the tax rates that are expected to apply in the period when the liability is settled or the asset is realised. Deferred tax is charged or credited in the statement of comprehensive income, except when it relates to items charged or credited directly to equity, in which case the deferred tax is also dealt with in equity. 2 Exceptional and Other Items Professional and other fees relating to the reverse acquisition Legal fees relating to Director resignation Reorganisation and integration costs Total exceptional and other items Deferred tax assets and liabilities are offset when there is a legally enforceable right to set off current tax assets against current tax liabilities and when they relate to income taxes levied by the same taxation authority and the Company intends to settle its current tax assets and liabilities on a net basis. Financial instruments Financial assets and financial liabilities are recognised in the Company’s balance sheet when the Company becomes a party to the contractual provisions of the instrument. Cash and cash equivalents Cash and cash equivalents comprise cash on hand, deposits repayable on demand, and other short-term highly liquid investments that are readily convertible to a known amount of cash and are subject to an insignificant risk of changes in value. Financial liabilities and equity Financial liabilities and equity instruments are classified according to the substance of the contractual arrangements entered into. An equity instrument is any contract that evidences a residual interest in the assets of the Company after deducting all of its liabilities. Finance income and expense Finance income comprises interest receivable on funds invested that are recognised in the income statement. Notes 7 4 2017 £’000 2,791 17 105 2,913 2016 £’000 – – – – The Company presents certain items as exceptional income or expense that, in the judgement of the Directors, merit separate disclosure by virtue of their nature, size and incidence. The majority of the £2,913,000 exceptional costs included in the Company’s result for the period relate to the reverse acquisition of Ecuphar NV which completed on 13th July 2017 (see note 7 for further details). The transaction costs totalling £2,791,000 largely comprise professional fees including corporate finance, legal, accounting and taxation advice. Reorganisation and integration costs totalling £105,000 relate to professional fees associated with the reorganisation of the Group structure (see note 7) and initial costs in respect of the set-up of a new Long Term Incentive Plan which is expected to be implemented during 2018. 95 26011 18/05/2018 Proof 4Animalcare Group plc Annual Report 2017www.animalcaregroup.co.ukStock Code: ANCROUR FINANCIALSNOTES TO THE ACCOUNTS CONTINUED P E R I O D E N D E D 31 S T D E C E M B E R 2017 3 Total Comprehensive Income/(Loss) for the Period Total comprehensive income/(loss) for the period/year has been arrived at after charging/(crediting): Amortisation of intangible assets Finance income Dividend income received from subsidiary – Animalcare Ltd Dividend income received from subsidiary – Ecuphar NV 2017 £’000 4 (4) 7,789 1,789 2016 £’000 2 (11) – – The above items are those charged/credited to total comprehensive income/(loss) only. Full details on items charged/(credited) to exceptional and other items are contained in note 2. The analysis of remuneration paid to the Company’s auditors for the audit of the Company’s financial statements is as follows: Fees payable to the Company’s auditors for the audit of the Company’s annual accounts Total audit fees 4 Directors’ Remuneration and Interests Emoluments The various elements of remuneration received by each Director were as follows: 2017 £’000 19 19 Period ended 31st December 2017 W Beyers1 J Boone* (Appointed 13th July 2017) C Brewster2 C Cardon (Appointed 13th July 2017) M Coucke* (Appointed 13th July 2017) Lord Downshire* R B Harding* (Resigned 13th July 2017) J S Lambert* Dr I D Menneer E Torr* (Appointed 13th July 2017) Total * Indicates Non-Executive Directors. Salary £’000 11 35 184 16 19 43 24 55 282 19 688 Company pension contributions £’000 Bonus £’000 Compensation for loss of office £’000 Benefits £’000 – – 46 – – – – – 63 – 109 – – 22 – – – – – 34 – 56 – – 12 – – 5 – – 15 – 32 – – – – – – 12 – – – 12 1. W Beyers was appointed 13th July 2017 and resigned 26th September 2017. 2. C Brewster resigned 12th July 2017 and then appointed 26th September 2017. 2016 £’000 13 13 Total £’000 11 35 264 16 19 48 36 55 394 19 897 96 26011 18/05/2018 Proof 44 Directors’ Remuneration and Interests (continued) Year ended 30th June 2016 J S Lambert* Lord Downshire* R B Harding* Dr I D Menneer C J Brewster Total * Indicates Non-Executive Directors. Salary £’000 35 23 23 143 102 326 Company pension contributions £’000 Bonus £’000 Benefits £’000 – – – 18 17 35 – – – 17 12 29 – 3 – 7 6 16 Total £’000 35 26 23 186 137 406 All Company pension contributions relate to defined contribution pension schemes. Benefits consist of company car and private medical insurance. Share options The Directors had the following beneficial options granted by the Company: EMI Unapproved SAYE Unapproved I D Menneer Scheme Exercise Price Date of Grant Outstanding at 1st July 2016 EMI £1.30 2nd August 2012 60,000 £1.325 £1.40 20th November 2012 21st February 2013 50,000 90,000 Exercised during the period (60,000) (50,000) (90,000) Open at 31st December 2017 – – – £1.03 22nd May 2013 4,377 (4,377) – £1.415 20th June 2013 90,000 (90,000) Total SAYE £1.05 28th November 2014 5,142 299,519 – (294,377) – 5,142 5,142 EMI Unapproved SAYE Unapproved SAYE Total C J Brewster Scheme Exercise Price Date of Grant EMI £1.30 22nd June 2012 Outstanding at 1st July 2016 30,000 £1.30 2nd August 2012 30,000 Exercised during the period (30,000) (30,000) Open at 31st December 2017 – – £1.03 22nd May 2013 8,754 (8,754) – £1.415 £1.05 20th June 2013 40,000 (40,000) 28th November 2014 8,571 117,325 – (108,754) – 8,571 8,571 In connection with the reverse acquisition of Ecuphar NV, all vested options were exercised following completion on 13th July 2017. For the Directors’ interests in the shares of the Company as at 31st December 2017 please refer to the table on page 37 in the Annual Remuneration Report. 97 26011 18/05/2018 Proof 4Animalcare Group plc Annual Report 2017www.animalcaregroup.co.ukStock Code: ANCROUR FINANCIALSNOTES TO THE ACCOUNTS CONTINUED P E R I O D E N D E D 31 S T D E C E M B E R 2017 4 Directors’ Remuneration and Interests (continued) Long Term Incentive Plan (LTIP) Under the Animalcare Group plc LTIP, which was introduced in June 2014, the Directors’ interests in the LTIP, which was implemented via a subscription for growth shares in the capital of Animalcare Ltd, a subsidiary of the Company, are as follows: { Iain Menneer – 31,955 A Ordinary Shares of £1.00 each (“A Shares”) for a total cash subscription of £31,955, representing 5.2% of Animalcare Ltd’s issued share capital; and { Chris Brewster – 19,173 A Shares, representing 3% of Animalcare Ltd’s issued share capital and 11,800 B Ordinary Shares of £1.00 each (“B Shares”), representing a further 2% of Animalcare Ltd’s issued share capital, for a total cash subscription of £30,973. The total cash subscriptions were, based on independent valuation, considered to be equal to fair value at the time of acquisition. Dr Menneer and Mr Brewster had the right to sell their A Shares to the Company at any time after 27th June 2017 in exchange for Ordinary Shares of 20 pence each in the Company (“Ordinary Shares”). Their rights to sell the A Shares are subject to, amongst other provisions, the Company having a market capitalisation in excess of £39.0m (“the Hurdle”) at the time of sale. The Hurdle was determined by Animalcare’s Remuneration Committee and broadly represented a 20% premium to the Company’s market capitalisation on 27th June 2014. Each holder of A Shares would, on a sale of his entire holding to the Company, be entitled to receive Ordinary Shares representing a percentage of the increase in the Company’s market capitalisation above the Hurdle; being 5% for Dr Menneer and 3% for Mr Brewster. The A Shares do not have a right to receive a dividend, except for any amounts distributed on the winding up of the Company or on an asset sale. The B Shares are not entitled to participate in any increase in the value of the Company above the Hurdle but can be exchanged for Ordinary Shares of an equal value at any time after 27th June 2017. The B Shares have a right to an annual dividend (on a non-fixed coupon basis), calculated by applying a rate of LIBOR + 2% to the nominal value of the B Shares. Further details of the Plan, including the Hurdle, anti-dilution and other provisions, are set out in Animalcare Ltd’s articles of association, which is available within the Investors section (constitutional documents) of the Company’s website at http://www.animalcaregroup.co.uk. It was agreed between the Company, Dr Menneer and Mr Brewster, that the put options did not become exercisable as a result of the reverse acquisition of Ecuphar NV. The Company, however, determined that it was appropriate to offer the right to exchange their shares in Animalcare Limited for Ordinary Shares shortly before completion of the reverse acquisition, and each took up that right. As a consequence, 918,896 new Ordinary Shares were issued to Dr Menneer and Mr Brewster. The number of new Ordinary Shares issued pursuant to the exercise of these rights was determined using the lower of the closing middle market price for an Ordinary Share on 22 June 2017, being the dealing day before the date the offer to exchange was made and the average of the closing middle market prices for an Ordinary Share over the dealing days in the 30 day period before that date, being 392.5 pence. 5 Dividends Ordinary final dividend paid for the year ended 30th June 2015 of 4.3p per share Ordinary interim dividend paid for the year ended 30th June 2016 of 1.8p per share Ordinary final dividend paid for the year ended 30th June 2016 of 4.7p per share Ordinary interim dividend paid for the year ended 30th June 2017 of 2.0p per share Second ordinary interim dividend for the year ended 30th June 2017 of 4.7p per share 2017 £’000 – – 997 425 2,815 4,237 2016 £’000 904 379 – – 1,283 The proposed final dividend of [2.0] pence per share is subject to approval of shareholders at the Annual General Meeting and has not been included as a liability as at 31st December 2017, in accordance with IAS 10 “Events After the Balance Sheet Date”. 98 26011 18/05/2018 Proof 46 Other Intangible Assets Cost At 1st July 2016 and 31st December 2017 Amortisation At 1st July 2015 Charge for the year At 30th June 2016 Charge for the period At 31st December 2017 Carrying value At 31st December 2017 At 30th June 2016 7 Investments in Subsidiaries Subsidiary undertakings Cost At 1st July 2015 and 1st July 2016 Acquisition of Ecuphar NV Investment in Animalcare Ltd following exercise of LTIP Transfer of Animalcare Ltd to Ecuphar NV At 31st December 2017 Capitalised software £’000 Total £’000 7 1 2 3 4 7 – 4 7 1 2 3 4 7 – 4 2017 £’000 14,361 133,775 3,607 (4,000) 147,743 Details in respect of the reverse acquisition of Ecuphar NV, which was completed on 13th July 2017, are shown in note 4 to the Consolidated Financial Statements. On 13th July 2017, following exercise of the LTIP as detailed in note 4, the Company acquired the remaining 10% of Animalcare Ltd that it did not own for a consideration of £3,607,000. This was satisfied by the issue of 918,896 new Ordinary Shares at a price of 392.5 pence per share. On 19th July 2017, Animalcare Ltd was transferred to Ecuphar NV as part of a post-completion restructuring of the Group. The consideration was £4,000,000 in cash. This intra-group transaction was accounted for at book value hence the £4,000,000 cash consideration was deducted from the overall investment carrying value so to result in a £nil effect on net assets. 99 26011 18/05/2018 Proof 4Animalcare Group plc Annual Report 2017www.animalcaregroup.co.ukStock Code: ANCROUR FINANCIALSNOTES TO THE ACCOUNTS CONTINUED P E R I O D E N D E D 31 S T D E C E M B E R 2017 7 Investments in Subsidiaries (continued) The Company has the following interests in subsidiaries: Name Ecuphar NV Medini NV Country of incorporation Registered address Belgium Legeweg 157i, 8020 Oostkamp Belgium Legeweg 157i, 8020 Oostkamp Orthopaedics.be NV Belgium Legeweg 157i, 8020 Oostkamp Ecuphar BV The Netherlands Verlengde Poolseweg 16, 4818 CL Breda Ecuphar Veterinary Products BV Ornis SA Ecuphar GmbH Euracon Pharma Consulting und Trading GmbH The Netherlands Verlengde Poolseweg 16, 4818 CL Breda France Rue de Roubaix 33, 59200 Tourcoing Germany Brandteichstraße 20, 17489 Greifswald Germany Max-Planck Str. 11, 85716 Unterschleißheim Ecuphar Veterinaria SA Spain Avenida Río de Janeiro, 60 – 66, planta 13, 08016 Barcelona Ecuph Italia Belphar Italy Viale Francesco Restelli, 3/7, piano 1, 20124 Milan Portugal R. Carlos Alberto da Mota Pinto, Nº 17 - 3ºA, 1070-313 Lisbon 2017 £’000 100% 99.8% 99.98% 100% 100% 100% 100% 100% 100% 100% 100% % equity interest 2016 £’000 – – – – – – – – – – – Animalcare Ltd United Kingdom Unit 7, 10 Great North Way, York Business Park, Nether 100% 100% Poppleton, York, YO26 6RB 8 Other Financial Assets Trade and other receivables Corporation tax – Group relief Other receivables Prepayments and accrued income The Directors consider that the carrying amount of trade and other receivables approximates to their fair value. 9 Cash and Cash Equivalents Cash and cash equivalents 2017 £’000 604 7 24 635 2017 £’000 2,109 2016 £’000 308 7 17 332 2016 £’000 1,576 Cash and cash equivalents comprise cash and short-term bank deposits with an original maturity of three months or less. 100 26011 18/05/2018 Proof 410 Other Financial Liabilities Trade payables Amounts payable to subsidiaries Other taxes and social security costs Other creditors Accruals 2017 £’000 277 2,793 295 27 292 3,684 2016 £’000 97 4,991 56 20 53 5,217 The Directors consider that the carrying amount of trade and other payables approximates to their fair value. 11 Deferred Tax The following are the major components of the deferred tax assets recognised by the Company, and the movements thereon, during the current and prior reporting period: Balance at 1st July 2015 Charge/(credit) to income Balance at 30th June 2016 Charge to income At 31 December 2017 Accelerated tax depreciation £’000 Share-based payments £’000 (9) 2 (7) 2 (5) (77) (19) (96) 91 (5) Other £’000 (2) – (2) – (2) Total £’000 (88) (17) (105) 93 (12) Deferred tax balances have been calculated at an effective rate of 17%, being the substantively enacted rate at 31 December 2017. 12 Share Capital Allotted, called up and fully paid Ordinary Shares of 20p each Allotted, called up and fully paid Ordinary Shares of 20p each The following share transactions have taken place during the period ended 31st December 2017: At 1st July 2016 Issued as consideration for business combinations Exercise of share options At 31st December 2017 2017 No. 2016 No. 59,913,900 21,059,636 2017 £’000 11,983 2017 No. 21,059,636 37,322,894 1,531,370 59,913,900 2016 £’000 4,212 2016 No. 4,212 7,465 306 11,983 101 26011 18/05/2018 Proof 4Animalcare Group plc Annual Report 2017www.animalcaregroup.co.ukStock Code: ANCROUR FINANCIALSNOTES TO THE ACCOUNTS CONTINUED P E R I O D E N D E D 31 S T D E C E M B E R 2017 12 Share Capital (continued) On 13th July 2017 the Company announced that it completed the reverse acquisition of Ecuphar NV. In aggregate, 37,322,894 new Ordinary Shares were allotted and issued comprising 8,571,428 new placing shares and 28,751,466 consideration shares. During the period a total of 1,531,370 shares were issued in respect of the exercise of share options. This comprised a total of 1,322,027 shares issued to certain Directors as described in note 4, with the balance of 209,333 shares issued in relation to the grant of options over the Company’s share by Animalcare Ltd under the Animalcare Group plc Executive Share Option Scheme and the Save As You Earn (SAYE) Share Option Scheme referred to in note 13. 13 Share-based Payments During the year the Company operated two share option schemes and one Long Term Incentive Plan as described below: Animalcare Group plc Executive Share Option Scheme Under this scheme, options may be granted to certain executives and senior employees of the Group to subscribe for new shares in the Company at a fixed price equal to the market value at the time of grant. The options are exercisable three years after the date of grant. Once vested, options must be exercised within six years of the date of grant. The exercise of these options is not subject to any performance criteria. SAYE Option Scheme This scheme is open to all UK employees to encourage share ownership. Share options are granted at an option price fixed at a 20% discount to the market value at the start of the savings period. The SAYE options vest and are exercisable three years after the date of grant and must ordinarily be exercised within six months of the completion of the relevant savings period. Details of the movement in these share option schemes during the period are as follows: Outstanding at 1st July 2016 Granted during the period Lapsed during the year Exercised during the period Open at 31st December 2017 Exercisable at the end of the year EMI SAYE Unapproved Options 550,000 – (47,500) (360,000) 142,500 57,500 Price £ 1.578 – 1.860 1.408 1.916 1.555 Options 192,462 87,531 (7,835) (72,474) 199,684 – Price £ 1.041 2.280 1.607 1.028 1.567 – Options 180,000 – – (180,000) 180,000 – Price £ 1.408 – – 1.408 1.408 – 102 26011 18/05/2018 Proof 413 Share-based Payments (continued) The weighted average inputs into the Black–Scholes model at the time of grant were as follows: Weighted average share price Weighted average exercise price Expected volatility Expected life Risk-free rate EMI Scheme 152p 152p 53% SAYE Scheme Unapproved Scheme 195p 157p 42% 141p 141p 56% 3.1 years 3.1 years 3.0 years 0.5% 0.5% 0.5% Expected volatility was determined by calculating the historical volatility of the Company’s share price over the previous three years. The expected lives used in the model were estimated based on management’s best estimate for the effects of non-transferability, exercise restrictions, and behavioural considerations. The Company recognised a total charge in respect of share-based payments of £10,200 (2016: £47,000). Long Term Incentive Plan (LTIP) Information relating to the LTIP, which was exercised during the period, is set out in note 4. The charge for the period to the income statement in respect of the LTIP is £nil (2016: £nil). 14 Related Party Transactions Trading transactions During the period ended 31st December 2017, the following trading transactions took place between the Company and its UK subsidiary, Animalcare Ltd. 2017 Management charges levied 2016 Management charges levied Remuneration of key management personnel The remuneration of the Directors, who are the key management personnel, is provided in note 4. Animalcare Ltd £’000 120 Animalcare Ltd £’000 240 Total £’000 120 Total £’000 240 103 26011 18/05/2018 Proof 4Animalcare Group plc Annual Report 2017www.animalcaregroup.co.ukStock Code: ANCROUR FINANCIALSSHAREHOLDERS NOTES 104 26011 18/05/2018 Proof 4ADVISERS Directors C Cardon C J Brewster E Torr J Boone J S Lambert Lord Downshire M Coucke Secretary C J Brewster Company Number 1058015 Registered Office Auditor Unit 7, 10 Great North Way York Business Park Nether Poppleton York YO26 6RB PricewaterhouseCoopers LLP Central Square 29 Wellingotn Street Leeds LS1 4DL Bankers Barclays Bank PLC Solicitors Nominated Advisor and Broker Registrars PO Box 190 1 Park Row Leeds LS1 5WU Squire Pattern Boggs (UK) LLP 6 Wellington Place Leeds LS1 4AP Panmure Gordon & Co One New Change London EC4M 9AF Capita Asset Services 34 Beckenham Road Beckenham Kent BR3 4TU IBC 26011 18/05/2018 Proof 4Animalcare Group plc Annual Report 2017www.animalcaregroup.co.ukStock Code: ANCROUR FINANCIALS A n i m a l c a r e G r o u p p l c A n n u a l r e p o r t a n d a c c o u n t s F o r t h e y e a r e n d e d 3 1 D e c e m b e r 2 0 1 7 s t ADDRESS 10 Great North Way York Business Park, York YO26 6RB CONTACT T: +44 (0) 1904 487687 F: +44 (0) 1904 487611 E: Investors@animalcare.co.uk W: www.animalcaregroup.co.uk 24942.04 13/10/2016 Proof 4

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