AorTech International plc
Annual Report 2016

Plain-text annual report

AorTech International plc ANNUAL REPORT AND ACCOUNTS FOR THE YEAR TO 31 MARCH 2016 1 AorTech International plcCHAIRMAN’S STATEMENTANNUAL REPORT AND ACCOUNTS 2016 AorTech International plc CONTENTS Board of Directors and Advisors STRATEGIC REPORT Chairman’s Statement Definitions Operating and Financial Review Principal Risks and Uncertainties GOVERNANCE Corporate Governance Accountability and Audit Report of the Remuneration Committee CONSOLIDATED FINANCIAL STATEMENTS Report of the Directors Directors’ Responsibilities Statement Independent Auditor’s Report Consolidated Income Statement Consolidated Statement of Comprehensive Income Consolidated Balance Sheet Consolidated Cash Flow Statement Consolidated Statement of Changes in Equity Notes to the Consolidated Financial Statements PARENT COMPANY FINANCIAL STATEMENTS Independent Auditor’s Report on the Parent Company Financial Statements Parent Company Balance Sheet Parent Company Statement of Changes in Equity Notes to the Parent Company Financial Statements NOTICE OF THE ANNUAL GENERAL MEETING 04 05 07 08 08 10 10 11 13 15 16 17 18 19 20 21 22 38 39 40 41 46 2 3 ANNUAL REPORT AND ACCOUNTS 2016 BOARD OF DIRECTORS AND ADVISORS CHAIRMAN’S STATEMENT DIRECTORS W Brown E McDaid G Wright ......................... non-Executive Chairman and Finance Director ......................... Chief Executive ......................... non-Executive Director COMPANY SECRETARY J C D Parsons ACIS REGISTERED OFFICE c/o Kergan Stewart LLP 163 Bath Street Glasgow G2 4SQ HEAD OFFICE Level Two Springfield House 23 Oatlands Drive Weybridge Surrey KT13 9LZ web:www.aortech.net • email: info@aortech.net NOMINATED ADVISER AND BROKER finnCap Ltd 60 New Broad Street London EC2M 1JJ REGISTRARS Equiniti Registrars Scotland 1st Floor 34 South Gyle Crescent South Gyle Business Park Edinburgh EH12 9EB INDEPENDENT AUDITOR Grant Thornton UK LLP Statutory Auditor Chartered Accountants Regent House 80 Regent Road Leicester LE1 7NH Registered in Scotland, Company No.SC170071 Financial statements will be circulated to Shareholders and copies of the announcement will be made available from the Company’s registered office. Dealings permitted on Alternative Investment Market (AIM) of the London Stock Exchange. In the year to 31 March 2016, Revenue and Other Income increased from $857,000 to $901,000, an increase of just over 5%. Administrative expenses, before exceptional costs, foreign exchange differences and bad debt provisions, were maintained in line with the prior year, $773,000 (2015: $761,000), resulting in a net trading profit of $128,000. However, after bad debt provisions of $369,000 the net trading profit has been reduced to a net trading loss of $241,000. The Company incurred an overall operating loss of $575,000 after amortisation of intangible assets of $312,000 (2015: $332,000) after exceptional litigation costs of $80,000 (2015: $204,000) and exchange rate differences of $58,000 (2015: $15,000). Operating losses increased from $455,000 to $575,000 with the year-end cash balances reducing from $360,000 in 2015 to $314,000. This reduction was mainly due to the significant bad debt provisions required in respect of two major debtors. In addition, further investment was made in development costs of $168,000 during the year. Your Board has, however, continued to maintain close control on all of its overheads, as is demonstrated by maintaining the costs at the same level as the previous year. BAD DEBT PROVISION During the year, we had to provide for a sum of $150,000 due from SynCardia and $219,000 from iSense. The SynCardia debt had been the subject of a mediated settlement which was being repaid at the rate of $25,000 per month. Unfortunately, monthly payments ceased from October 2015 and appropriate legal action was immediately instigated for recovery. AorTech achieved an arrestment on the debtor’s bank account but then our recovery was frustrated due to SynCardia filing for bankruptcy under Chapter 11. The other substantial debt of $219,000 was due under the terms of a licence regarding the continuous glucose monitoring business. AorTech’s US attorneys, who were pursuing this debt on our behalf, have recently informed the Board that all of the assets of this company have been transferred to another company of a similar name, leaving the debtor company with substantial liabilities, including its debt obligations to AorTech. Your Board is taking advice from its US attorneys to determine what recovery options may be appropriate in respect of this debt. 4 5 ANNUAL REPORT AND ACCOUNTS 2016ANNUAL REPORT AND ACCOUNTS 2016STRATEGIC REPORTAorTech International plcAorTech International plcBOARD OF DIRECTORS AND ADVISORSCHAIRMAN’S STATEMENT CHAIRMAN’S STATEMENT (continued) LITIGATION AGAINST FRANK MAGUIRE AND OTHERS One of the key tasks assigned to Mr Maguire in the final two years of his employment at AorTech, in addition to the management and licensing of AorTech’s polymer intellectual property, was to seek a partner or funding for the polymer heart valve project. This was always viewed as an important area of business and of potential value to shareholders, and indeed Mr Maguire often reported to the Board the potential value of the heart valve IP and know-how. Mr Maguire tendered his resignation on 26 November 2013 providing the Company with three days’ notice. Since his resignation, Mr Maguire has worked with Foldax, Inc. as its CEO. LICENSES HEART VALVE PROJECT Shortly after his resignation, AorTech asked Mr Maguire to confirm that he had returned to the Company all files, data and confidential information. AorTech understands that at the time Mr Maguire possessed substantial amounts of AorTech information related to both its heart valve project and its polymers. Mr Maguire did not respond to this request. Given this lack of response and our growing concern over other issues related to Mr Inc., Maguire’s AorTech asked its legal representatives to write to Mr Maguire demanding return of all Company property. As a result of Mr Maguire’s lack of response, litigation ensued. To date, AorTech’s information has not been fully returned. involvement with Foldax, Our focus in the litigation is to ensure that AorTech has returned to it all of the confidential data misappropriated by Mr Maguire, that Mr Maguire’s new business does not use or benefit from that confidential information and that the manufacturing trade secrets for AorTech polymers and heart valve remain secret and are not used or disclosed in the future. LOAN NOTE SHARE ISSUE At last year’s AGM, shareholders authorised the Directors to take all steps necessary to allot shares to loan note holders in return for the surrender of their remaining rights under the notes issued in October 2012. These rights were extinguished in January 2016 by the issue of new shares in the Company. The dilution to ordinary shareholders amounted to 15% which, in the opinion of the Directors, is a level substantially less than would have been suffered if an equity issue had been undertaken in October 2012. Over the years, AorTech has made substantial investment in the development of bio stable polymers and medical device designs. The objective is to capitalise on this investment for the benefit of shareholders. The AorTech polymers have significant benefits for medical device companies and in certain cases facilitate the underlying performance of the devices. With our polymers being a critical component in the supply chain, the device manufacturers must have confidence in the long term supply of material. AorTech was neither large enough nor perceived as secure enough to allow a greater acceptance of the material, particularly by the larger device companies. AorTech recognized this limitation and rather than seek to continue as a small sub-scale supplier elected to license the rights to manufacture polymer to Biomerics. Biomerics is not only a polymer manufacturer but is an added value extruder, molder and sub-contract manufacturer of medical device components and devices itself. Over the past year, driven by customer contracts and market interest, Biomerics has transferred the Elast-Eon™ manufacture from a small scale set up into a fully validated, commercial scale facility. In partnership with Biomerics, AorTech has supported this scale up with an additional investment during the financial year of $168,000 paid from a share of gross margin on product sales. Biomerics have further developed upon the Elast-Eon™ family of materials and are now marketing a lower cost, potentially higher volume version of the material. Business development activities continue and a growing list of companies testing material is evidence of these efforts. Although some of AorTech’s licencees continue to experience delays in both the achievement and the increased commercialisation of their products, the performance of Elast-Eon™ is recognized as critical in our customers’ success. Significant funding has been achieved by AorTech in developing and commercialising their products with AorTech’s Elast-Eon™ seen as critical to their success. In one instance, funds in excess of $100 million have been raised to achieve successful commercialisation. We anticipate that with the renewed interest in our material being licencing partner, generated through our Biomerics, that additional licences may be completed during the course of the next twelve months. licencees We have previously announced a potential transaction with a new business established to commercialise the AorTech heart valve technology. Fund raising for the new project is continuing but is not yet finalised and any license will be dependent upon the new business being fully funded. The package of data and information that AorTech is able to deliver to the project is substantial. This ranges from specific manufacturing know how and trade secrets for the precise polymer best suited to a heart valve, detailed design files for a polymer valve with a stress/strain profile substantially less than the material mechanical properties, together with a fully documented manufacturing process that allows a clinical quality valve to be made on a repeatable basis. All of these processes have been developed over a number of years of trial and error and experimentation at considerable investment by AorTech. NEW ACCOUNTING FRAMEWORK APPLYING FOR THE YEAR ENDED 31 MARCH 2016 The Company has elected to adopt FRS 101 ‘Reduced Disclosure Framework’ (FRS 101) for its parent company financial statements for the year ended 31 March 2016. Following the application of FRS 101, the results, the financial position of the parent company, and disclosures are the same as, or follow closely, those reported under previous UK GAAP. The Company’s decision to adopt FRS 101 for its parent company’s financial statements does not require shareholder approval and therefore no resolution on this matter is being put to the Annual General Meeting. However, as stipulated in FRS 101, the Company is required to notify all shareholders of this election, and any shareholder or shareholders holding in aggregate 5 per cent or more of the total allotted shares in the Company may serve an objection. Objections must be served in writing and delivered to the Company Secretary at Level Two, Springfield House, 23 Oatlands Drive, Weybridge, Surrey, KT13 9LZ no later than 2 September 2016. This election will apply on an ongoing basis until such time as the Company notifies its shareholders of any change to its chosen accounting framework for the parent company financial statements. CONCLUSION The principal disappointment of the past year has been the requirement to provide for sums of money contractually due to AorTech. The ongoing litigation has also been a major consumption of management time and is likely to continue to be so. AorTech has sought to pursue an alternative dispute resolution route with the objective being to have our confidential information returned to us, the defendants precluded from using that information, and compensation for our time and costs incurred. The defendants are presently unwilling to engage in this process. While disputed by defendants, our conclusion is that the defendants have retained and are using or intend to use AorTech information in their business. We are however comfortable with how Biomerics the polymer manufacturing license and with the progress from other licenses. is developing W BROWN, CHAIRMAN 12 August 2016 DEFINITIONS “ARTICLES” the Articles of Association of the Company as at the date of this document; “DEFERRED SHARES” the 4,832,778 non voting deferred shares of 245 pence each in the capital of the Company created as part of the Share Capital Reorganisation; “EXISTING ORDINARY SHARES” the 5,557,695 Ordinary Shares of 5 pence each in issue as at the date of this document; “LOAN NOTES” the £1,210,000 Secured Loan Notes 2013 issued by the Company on 23 October 2012. “LOAN NOTE HOLDERS” the holders of the Secured Loan Notes; “NEW ORDINARY SHARES” the ordinary shares of 5 pence each in the capital of the Company created by the Share Capital Reorganisation; “SHARE CAPITAL REORGANISATION” the share capital reorganisation (approved by Shareholders at the 2015 Annual General Meeting) 6 7 ANNUAL REPORT AND ACCOUNTS 2016ANNUAL REPORT AND ACCOUNTS 2016STRATEGIC REPORTSTRATEGIC REPORTAorTech International plcANNUAL REPORT AND ACCOUNTS 2016 OPERATING AND FINANCIAL REVIEW PRINCIPAL ACTIVITIES The Company is an Intellectual Property (IP) holding company whose principal activitiy is exploiting the value of its IP and know-how. REVIEW OF BUSINESS AND FUTURE PRINCIPAL RISKS AND CURRENCY RISK INTEREST RATE RISK DEVELOPMENTS UNCERTAINTIES The consolidated Income Statement is set out on page 17 indicating the Group’s loss for the financial year of US$604,000 (2015: loss of US$370,000) which will be deducted from the reserves. On a Group basis, the business review and future prospects subsequent to the discontinuation of US operations are contained within the Chairman's Statement on pages 5 to 7. The Directors consider the Group financial key performance indicators to be revenue growth, control of operating expenses and the pre tax result. In addition the Directors consider the Group non financial key performance indicators to be the successful utilisation of patents and know- how by existing licensees and the signing of new licence agreements. The Directors consider the principal risks and uncertainties facing the Group at this stage of its development to be as follows: the success rate of several key customers utilising our products in various medical device fields; small customer base generating revenues; retention of key management; any adverse results which may arise during development and regulatory phases; product liability risks; competitive markets with changing technology and evolving industry standards. All of the above risks and uncertainties are considered fundamental to the achievement of the Group’s strategy as an IP focussed business and are being actively managed at Board level through regular review of progress, along with the internal control environment detailed on page 10. No dividends have been paid or proposed for the years ended 31 March 2016 and 31 March 2015. FINANCIAL RISKS The financial risks faced by the Group are as follows: MARKET RISK Market risk encompasses two types of risk, being currency risk and fair value interest rate risk. The Group’s policies for managing fair value interest rate risk are considered along with those for managing cash flow interest rate risk and are set out in the sub-section entitled “interest rate risk” below. The Group is exposed to translation and transaction foreign exchange risk. The majority of the Group’s sales are to customers in the United States. These sales are priced and invoiced in US dollars. The Group policy is to try to match the timing of the settling of these sales and purchase invoices so as to eliminate, as far as possible, currency exposures. The tables below show the extent to which the Group has residual financial assets and liabilities in foreign currencies (GB Pounds). Foreign exchange differences on retranslation of these assets and liabilities are taken to profit or loss of the Group, other than in respect of the retranslation of foreign subsidiary balances arising on consolidation and parent company equity balances which are recognised in other comprehensive income and accumulated in the foreign exchange reserve. 2016 US Dollars 2015 US Dollars GB Pounds US$000 36 50 LIQUIDITY RISK The Group seeks to manage liquidity risk by ensuring sufficient liquidity is available to meet foreseeable needs and by investing cash assets safely and profitably. As disclosed within the Report of the Directors, the Directors have set out their assessment of why they believe the Group continues to remain a going concern, including the assumptions they have made in this regard. The Group finances its operations through retained cash reserves, and seeks to strike a balance between liquidity and maximising the return on funds. Cash holdings are regularly reviewed by the Board. The interest rate exposure of the financial assets and liabilities of the Group as at 31 March 2016 is shown in the table below. The table includes trade receivables and payables as these do not attract interest and are therefore subject to fair value interest rate risk. Financial assets Cash and cash equivalents Trade and other receivables Financial liabilities Liabilities at amortised cost Fair value through profit or loss CREDIT RISK Fixed US$000 - - - - - - INTEREST RATE Floating US$000 Zero US$000 Total US$000 5 - 5 - - - 309 243 552 165 - 165 314 243 557 165 - 165 The Group’s principal financial assets are cash and trade receivables. The credit risk associated with the cash is limited as the counterparties have high credit ratings assigned by international credit-rating agencies. The principal credit risk arises therefore from trade receivables. The Directors regularly review the profile of trade receivables to minimise the Group’s exposure to bad debts. CAPITAL MANAGEMENT OBJECTIVES The Directors’ capital management objectives are to ensure the Group’s ability to continue as a going concern and to provide an adequate return to shareholders. The parent company’s Board meets regularly to review performance and discuss future opportunities and threats with the aim of optimising sustainable returns and minimising risk. Capital in the business is represented by the Company’s ordinary share capital. Success in meeting the capital management objectives are assessed by reference to the Group’s profitability, and, in turn, its share price. J C D PARSONS, ACIS AorTech International plc Company number SC170071 Weybridge 8 STRATEGIC REPORT STRATEGIC REPORT 9 ANNUAL REPORT AND ACCOUNTS 2016AorTech International plcGOVERNANCE AorTech International plc REPORT OF THE REMUNERATION COMMITTEE We do not comply with the UK Corporate Governance Code and we are not required to. However, we have reported on our Corporate Governance arrangements by drawing upon best practice available, including those aspects of the UK Corporate Governance Code we consider to be relevant to the Company and best practice. CORPORATE GOVERNANCE ACCOUNTABILITY AND AUDIT The Group currently has a reduced Corporate Governance structure, reflecting the present stage of development, the size of the business and the Directors’ assessment of the cost / benefit balance of full Corporate Governance. The situation will, however, continue to be kept under review in the light of ongoing corporate developments and scaling up of activities. The Board includes a detailed review of the performance of the Group in the Chairman’s Statement on pages 5 to 7. Reading this alongside the Strategic Report and the Report of the Directors on pages 5 to 9 and 13 to 14 the Board seeks to present a balanced and understandable assessment of the Group’s position and prospects. Directors The Company is controlled by the Board of Directors which, at 31 March 2016, comprised one Executive and two non-Executive Directors; one of whom is the non-Executive Chairman. All Directors are able to take independent advice in furtherance of their duties if necessary. Internal Control The Board has formalised the review and reporting of the main internal controls within the business. In previous periods, the Directors commissioned a risk review exercise in the course of which the key risk factors facing the Group were identified. These areas included regulatory, research and development, commercial, human resources and information technology. The Board will continue to review the system of internal controls within the Group. The Board of Directors is responsible for the Group’s system of financial controls. However, it should be recognised that such a system can provide only reasonable and not absolute assurance against material misstatement or loss. The principal elements of the system include: • A clearly defined structure which delegates authority, responsibility and accountability. • A comprehensive annual planning and budgeting programme. • A revision of annual forecasts on a periodic basis. is no There internal audit independent function. The Directors believe that such a function would not be cost effective given the current size of the Group but they will continue to monitor the situation as the Group goes forward. The Board has reviewed the effectiveness of the system of internal controls as outlined above and considers the Group has an established system which the Directors believe to be appropriate to the business. Audit Committee The Audit Committee, comprising the Directors and chaired by W Brown, meets at least twice per year and oversees the monitoring of the Group’s internal controls, accounting policies, financial reporting and provides a forum through which the external auditor reports, as well as ensuring the auditor remains independent of the Company. for • A system comprehensive reporting financial results. Actual results are measured monthly against budget which together with other a commentary on variances unusual items allows the Board to monitor the Group’s performance on a regular basis. and This report meets the relevant requirements of the AIM Rules and describes how the Board has applied the Principles of Good Governance relating to Directors’ remuneration. In accordance with best practice, notwithstanding that these regulations do not apply to AIM companies, a resolution to approve the report will be proposed at the Annual General Meeting of the Company at which the financial statements will be approved. REMUNERATION COMMITTEE REMUNERATION OF SALARIES AND BENEFITS At 31 March 2016 the Remuneration Committee comprised the non-Executive Directors as follows: G WRIGHT (CHAIRMAN) W BROWN NON-EXECUTIVE DIRECTORS The remuneration of the non-Executive Directors is determined by the Board with reference to the annual survey of independent Directors carried out by Independent Remuneration Solutions. The Remuneration Committee meets twice each year to consider and set the annual salaries and benefits for the Executive Director, having regard to personal performance and independent advice concerning comparable organisations. SHARE OPTIONS The Company formerly operated an Approved Share Option Scheme and an Unapproved Share Option Scheme. These Schemes have now been closed with the remaining Option holders having agreed to waive their rights under the Schemes. PENSIONS The Group made no contributions to a personal or Company pension plan during the year under review. As appropriate, the Committee may invite the Chief Executive to participate in some of its discussions. No Director plays a part in any discussion about his own remuneration. The non-Executive Directors do not receive any pension or other benefits from the Company, nor do they participate in any of the bonus schemes. The Committee is responsible for determining the terms and conditions of employment of Executive Directors. It is also responsible for considering management recommendations for remuneration and employment terms of the Group’s staff, incentive arrangements for bonus payments and grants of share options. including When setting its remuneration policy the Committee gives full consideration to the provisions and principles of the Code. In setting the policy it considers a number of factors including: • The basic salaries and benefits available to executive Directors and senior management of comparable companies. • The need to attract and retain Directors of an appropriate calibre. • The need to ensure Executive Directors’ commitment to the future success of the Group by means of incentive schemes. The non-Executive Directors have service agreements, which are reviewed by the Board annually, and they are also included in the one third of Directors subject to retirement by rotation at each Annual General Meeting. REMUNERATION OF EXECUTIVE DIRECTORS The Executive Director has a service contract, which can be terminated on three months’ notice by either party. The Remuneration Committee will review each case of early termination individually in order to ensure compensation settlements are made which are appropriate to the circumstances, taking care to ensure that poor performance is not rewarded. The most recent executed contract for the Executive Directors was for E McDaid on 10 May 2016. The Company’s remuneration policy for Executive Directors is to have regard to the individual’s experience and the nature and complexity of their work in order to pay a competitive salary that attracts and retains management of the highest quality. 10 GOVERNANCE GOVERNANCE 11 ANNUAL REPORT AND ACCOUNTS 2016ANNUAL REPORT AND ACCOUNTS 2016AorTech International plc REPORT OF THE REMUNERATION COMMITTEE (continued) REPORT OF THE DIRECTORS DIRECTORS’ EMOLUMENTS - AUDITED Details of individual Director’s emoluments for the year are as follows: Executive E McDaid Non-executive W Brown G Wright R Mitchell R Mitchell resigned as a Director on 31 May 2015. GOVERNANCE Salary & fees US$ 90,044 60,029 25,512 9,004 184,589 Pension contributions US$ - - - - - 2016 Total US$ 2015 Total US$ 90,044 138,802 60,029 25,512 9,004 184,589 19,368 20,982 58,103 237,255 W Brown is employed by Bluehone Investors LLP (‘Bluehone’) in the provision of services to the Company. All of the emoluments of W Brown above are represented by payments made by the Company to Bluehone in respect of these services. DIRECTORS’ INTERESTS IN SHARES The interests of Directors in shares of the Company are included in the Report of the Directors on page 13. DIRECTORS’ INTERESTS IN SHARE OPTIONS No Director holds share options. On behalf of the Board G WRIGHT, CHAIRMAN OF THE REMUNERATION COMMITTEE The Directors present their report and the audited financial statements for the year ended 31 March 2016. GOING CONCERN After considering the year end cash position, making appropriate enquiries and reviewing budgets and profit and cash flow forecasts to 31 March 2022, the Directors have formed a judgement at the time of approving the financial statements that there is a reasonable expectation that the Group has sufficient resources to continue in operational existence for the foreseeable future. For this reason the Directors consider the adoption of the going concern basis in preparing the Consolidated financial statements is appropriate. The future developments of the Group and an update on Research and Development activities are detailed in the Chairman’s Statement on pages 5 to 7. DIRECTORS AND THEIR INTERESTS At 31 March 2016 the Chairman of the Company was W Brown; the Chief Executive Director was E McDaid, and the non-Executive Director was G Wright. At each Annual General Meeting one third of the Directors shall be subject to retirement by rotation. G Wright retires from the Board at the Annual General Meeting and, being eligible, offers himself for re-election. The interests of the Directors at 31 March 2016 and 31 March 2015 in the ordinary share capital of the Company (all beneficially held) were as follows: E McDaid G Wright W Brown R Mitchell R Mitchell resigned as a Director on 31 May 2015. SUBSTANTIAL SHAREHOLDERS 31 March 2016 31 March 2015 Number of shares Number of shares 406,842 308,311 11,982 - 358,914 308,311 407 360,163 With the exception of the following shareholdings the Directors have not been advised of any individual interest or group of interests held by persons acting together which at 20 July 2016 exceeded 3% of the Company’s issued share capital: Mr Richard I Griffiths Mr Roy Mitchell and Mrs P Mitchell Mr E McDaid Mr Clive Titcomb Caricature Investments Limited* Mr Richard H Thomas Charles Stanley Private Client Broker Halifax Share Dealing Private Client Broker Number of shares % 812,294 14.62% 420,073 406,842 317,919 308,311 268,700 215,787 203,676 7.56% 7.32% 5.72% 5.55% 4.83% 3.88% 3.66% *Caricature Investments Limited is a company wholly owned by Mr G Wright, a Director of the Company. The percentage of shares not in public hands (as defined in the AIM rules) at 30 June 2016 was 13.08%. 12 GOVERNANCE FINANCIAL STATEMENTS 13 ANNUAL REPORT AND ACCOUNTS 2016ANNUAL REPORT AND ACCOUNTS 2016AorTech International plcAorTech International plc AorTech International plc REPORT OF THE DIRECTORS (continued) AorTech International plc DIRECTORS’ RESPONSIBILITIES STATEMENT INFORMATION CONTAINED WITHIN THE STRATEGIC REPORT The Directors have taken the option to include disclosures in relation to financial risk and dividends within the Strategic Report on pages 8 and 9 as these are deemed to have strategic importance to the Group. DIRECTORS’ INDEMNITY The Group maintains Directors and Officers liability insurance which gives appropriate cover against any legal action that may be brought against them. ANNUAL GENERAL MEETING The notice convening the Annual General Meeting for 11:00am on Tuesday, 27 September 2016 in the offices of Kergan Stewart LLP, 163 Bath Street, Glasgow G2 4SQ is set out on page 46. There are a number of resolutions to be passed and further information in relation to these resolutions is set out below. RESOLUTIONS 1 TO 6 Resolution 1 provides for the approval of the Company’s financial statements for the year ended 31 March 2016. Resolution 2 provides for approval of the Report of the Remuneration Committee for the year ended 31 March 2016. The vote is advisory and the Directors’ entitlement to remuneration is not conditional on the resolution being passed. Resolution 3 deals with the re-appointment of the Director required by the Company’s Articles of Association to retire this year. Resolution 4 deals with the re-appointment of Grant Thornton UK LLP as the Company’s auditor. Following assessment by the Audit Committee the Board considers the auditor to be effective and independent in their role. Resolution 5 provides under the Companies Act 2006 (Section 551) the Directors of a company may only allot shares if authorised to do so. Passing this Resolution will continue the Directors’ flexibility to act in the best interests of shareholders when opportunities arise by issuing new shares. In Resolution 5 the Company is seeking authority to allot shares with a nominal value of up to £92,628 which represents one third of the Company’s issued ordinary share capital. The Directors intend to use this authority, which will lapse at the conclusion of the next Annual General Meeting of the Company, for general corporate purposes. Resolution 6 provides if shares are to be alloted for cash, the Companies Act 2006 requires that those shares are offered first to the existing shareholders in proportion to the number of shares they hold at the time of the offer. However, it may sometimes be in the interests of the Company for the Directors to allot shares other than to shareholders in proportion to their existing holdings. At last year’s Annual General Meeting shareholders authorised the Board, subject to specified limits: • to allot shares in connection with a rights issue, defined in summary as an offer of equity securities to shareholders which is open for a period decided by the Board subject to any limits or restrictions which the Board thinks are necessary or appropriate. • to allot shares persuant to the rules of any share scheme approved by the shareholders in general meeting. This authority is required to be renewed annually. The Directors will be empowered by Resolution 6 to allot equity securities (within the meaning of Section 560 of the Companies Act 2006) for cash without complying with the statutory pre-emption rights of shareholders under section 561 of the Companies Act 2006, up to a maximum nominal amount of approximately £13,894. This disapplication is limited to allotments made to ordinary shareholders and holders of any other class of equity security in proportion (as nearly as may be) to their holdings and, otherwise, to allotments up to a maximum of 5% of the Company’s issued ordinary share capital. There are no current plans to allot shares. Resolutions 1 to 4 are termed ordinary business. Resolutions 5 and 6 are termed special business. J C D PARSONS, ACIS to allot shares not in connection with a rights • issue up to a specific amount so that the pre- emption requirement does not apply to the allotments of shares for cash up to that amount. AorTech International plc Company number SC170071 Weybridge 12 August 2016 RECOMMENDATION: An explanation of the resolutions to be proposed is set out on page 14 of this document. The Directors consider that all the resolutions to be put to the meeting are in the best interests of the Company and its shareholders as a whole. Your Board will be voting in favour of them and unanimously recommends that you do so as well. The Directors are responsible for preparing the Strategic Report and Directors’ Report, the Annual Report and the financial statements in accordance with applicable law and regulations. Company law requires the Directors to prepare financial statements for each financial year. Under that law the Directors have elected to prepare the parent company financial statements in accordance with United Kingdom Generally Accepted Accounting Practice (United Kingdom Accounting Standards and Applicable Laws including FRS 101 "Reduced Disclosure Framework") and to prepare the Group 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 and profit or loss of the company and group for that period. In preparing these financial statements, the Directors are required to: • select suitable accounting policies and then apply them consistently; • make judgements and accounting estimates that are reasonable and prudent; • state whether applicable UK Accounting Standards and IFRSs have been followed, subject to any material departures disclosed and explained in the financial statements; and • prepare the financial statements on the going concern basis unless it is inappropriate to presume that the Company will continue in business. The Directors are responsible for keeping adequate accounting records that are sufficient to show and explain the Company’s transactions and disclose with reasonable accuracy at any time the financial position of the Company and enable them to ensure that the financial statements and the Remuneration Report comply with the Companies Act 2006. They are also responsible for safeguarding the assets of the Company and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities. The Directors confirm that: • so far as each Director is aware, there is no relevant audit information of which the Company's auditor is unaware; and • the Directors have taken all the steps that they ought to have taken as Directors in order to make themselves aware of any relevant audit information and to establish that the auditors are aware of that information. The Directors are responsible for the maintenance and integrity of the corporate and financial information included on the Company's website. Legislation in the United Kingdom governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions. AUDITOR Grant Thornton UK LLP have expressed their willingness to continue in office as auditor and a resolution to reappoint them will be proposed at the Annual General Meeting. BY ORDER OF THE BOARD: J C D PARSONS, ACIS Weybridge 12 August 2016 14 FINANCIAL STATEMENTS FINANCIAL STATEMENTS 15 ANNUAL REPORT AND ACCOUNTS 2016ANNUAL REPORT AND ACCOUNTS 2016 INDEPENDENT AUDITOR’S REPORT TO THE MEMBERS OF AORTECH INTERNATIONAL PLC CONSOLIDATED INCOME STATEMENT We have audited the Consolidated financial statements of AorTech International Plc for the year ended 31 March 2016 which comprise the consolidated income statement, the consolidated statement of comprehensive income, the consolidated balance sheet, the consolidated cash flow statement, the consolidated statement of changes in equity and the related notes. The financial reporting framework that has been applied in their preparation is applicable law and International Financial Reporting Standards (IFRSs) as adopted by the European Union. This report is made solely to the Company’s members, as a body, in accordance with Chapter 3 of Part 16 of the Companies Act 2006. Our audit work has been undertaken so that we might state to the Company’s members those matters we are required to state to them in an auditor's report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the Company and the Company’s members as a body, for our audit work, for this report, or for the opinions we have formed. RESPECTIVE RESPONSIBILITIES OF DIRECTORS AND AUDITOR As explained more fully in the Directors’ Responsibilities Statement set out on page 15, the Directors are responsible for the preparation of the Consolidated financial statements and for being satisfied that they give a true and fair view. Our responsibility is to audit and express an opinion on the Consolidated financial statements in accordance with applicable law and International Standards on Auditing (UK and Ireland). Those standards require us to comply with the Auditing Practices Board’s Ethical Standards for Auditors. SCOPE OF THE AUDIT OF THE FINANCIAL STATEMENTS A description of the scope of an audit of financial statements is provided on the Financial Reporting Council's website at www.frc.org.uk/ auditscopeukprivate. OPINION ON FINANCIAL STATEMENTS In our opinion the Consolidated financial statements: • give a true and fair view of the state of the Group's affairs as at 31 March 2016 and of its loss for the year then ended; • have been properly prepared in accordance with IFRSs as adopted by the European Union; and • have been prepared in accordance with the requirements of the Companies Act 2006. OPINION ON OTHER MATTER PRESCRIBED BY THE COMPANIES ACT 2006 In our opinion the information given in the Strategic Report and the Report of the Directors for the financial year for which the Consolidated financial statements are prepared is consistent with the Consolidated financial statements. MATTERS ON WHICH WE ARE REQUIRED TO REPORT BY EXCEPTION We have nothing to report in respect of the following matters where the Companies Act 2006 requires us to report to you if, in our opinion: • certain disclosures of Directors’ remuneration specified by law are not made; or • we have not received all the information and explanations we require for our audit. OTHER MATTER We have reported separately on the parent company financial statements of AorTech International Plc for the year ended 31 March 2016. CHRISTOPHER FROSTWICK, SENIOR STATUTORY AUDITOR For and on behalf of GRANT THORNTON UK LLP STATUTORY AUDITOR, CHARTERED ACCOUNTANTS East Midlands 12 August 2016 YEAR ENDED 31 MARCH 2016 YEAR ENDED 31 MARCH 2015 Notes 3 Pre- exceptional items US$000 Exceptional items US$000 751 150 - - Pre- exceptional items US$000 Exceptional items US$000 844 13 - - Total US$000 751 150 Total US$000 844 13 Revenue Other income Administrative expenses (1,084) (80) (1,164) (776) (204) (980) Other expenses - amortisation of intangible assets Operating loss Finance (expense) / income Loss from continuing operations attributable to owners of the parent company Loss from discontinued operations Loss attributable to owners of the parent company Loss per share Basic and diluted (US cents per share) 11 (312) - (312) (332) - (332) 3 8 5 (495) (80) (575) (251) (204) (455) - (29) (29) - 129 129 (495) (109) (604) (251) (75) (326) 16 - - - (44) - (44) (495) (109) (604) (295) (75) (370) 10 (12.00) (7.66) 16 FINANCIAL STATEMENTS FINANCIAL STATEMENTS 17 ANNUAL REPORT AND ACCOUNTS 2016ANNUAL REPORT AND ACCOUNTS 2016AorTech International plcAorTech International plcCONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME CONSOLIDATED BALANCE SHEET Loss for the year Other comprehensive income: Exchange differences Income tax relating to other comprehensive income Other comprehensive income for the year, net of tax Total comprehensive income for the year, attributable to owners of the parent company No items of other comprehensive income can be subsequently reclassified to profit and loss. Year ended 31 March 2016 US$000 Year ended 31 March 2015 US$000 (604) (370) (35) - (35) (639) 17 - 17 (353) Assets Non current assets Intangible assets Total non current assets Current assets Trade and other receivables Cash and cash equivalents Total current assets Total assets Liabilities Current liabilities Trade and other payables Total current liabilities Non current liabilities Change of control redemption premium Total non current liabilities Total liabilities Net assets Equity Issued capital Share premium Other reserve Foreign exchange reserve Profit and loss account Total equity attributable to equity holders of the parent Year ended 31 March 2016 US$000 Year ended 31 March 2015 US$000 Notes 11 13 14 15 15 19 19 1,367 1,367 243 314 557 1,924 (165) (165) - - (165) 1,759 17,426 3,595 (2,881) 6,627 (23,008) 1,759 1,546 1,546 737 360 1,097 2,643 (192) (192) (53) (53) (245) 2,398 17,937 3,474 (2,974) 6,076 (22,115) 2,398 The Consolidated financial statements were approved by the Board on 12 August 2016 and were signed on its behalf by W BROWN, CHAIRMAN E MCDAID, DIRECTOR Company number SC170071 18 FINANCIAL STATEMENTS FINANCIAL STATEMENTS 19 ANNUAL REPORT AND ACCOUNTS 2016ANNUAL REPORT AND ACCOUNTS 2016AorTech International plcAorTech International plc CONSOLIDATED CASH FLOW STATEMENT CONSOLIDATED STATEMENT OF CHANGES IN EQUITY Cash flows from operating activities Group loss after tax Adjustments for: Amortisation of intangible assets Finance expense / (income) Decrease / (increase) in trade and other receivables Decrease in trade and other payables Net cash flow from continuing operations Net cash flow from discontinued operations Net cash flow from operating activities Cash flows from investing activities Purchase of intangible assets Net cash flow from continuing operations Net cash flow from discontinued operations Net cash flow from investing activities Net cash flow from financing activities Net decrease in cash and cash equivalents Cash and cash equivalents at beginning of year Cash and cash equivalents at end of year Year ended 31 March 2016 US$000 Year ended 31 March 2015 US$000 (604) (326) 312 29 494 (109) 122 - 122 (168) (168) - (168) - (46) 360 314 332 (129) (36) (125) (284) 2 (282) - - - - - (282) 642 360 Issued Share capital US$000 Share premium US$000 Other reserve US$000 Foreign exchange reserve US$000 Profit and loss account US$000 Total equity US$000 Balance at 31 March 2014 20,144 3,901 (3,340) 3,791 (21,745) 2,751 Transactions with owners Loss for the year Other comprehensive income - - - - - - - - - - (370) (370) Exchange difference on translating foreign operations (2,207) (427) 366 2,285 - 17 Total comprehensive income for the year (2,207) (427) 366 2,285 (370) (353) Balance at 31 March 2015 17,937 3,474 (2,974) 6,076 (22,115) 2,398 Changes in equity Issue of equity share capital Transactions with owners Loss for the year Other comprehensive income 54 54 - 235 235 - Exchange difference on translating foreign operations (565) (114) Total comprehensive income for the year (565) (114) - - - 93 93 - - - (289) (289) - - (604) (604) 551 551 - (35) (604) (639) Balance at 31 March 2016 17,426 3,595 (2,881) 6,627 (23,008) 1,759 20 FINANCIAL STATEMENTS FINANCIAL STATEMENTS 21 ANNUAL REPORT AND ACCOUNTS 2016ANNUAL REPORT AND ACCOUNTS 2016AorTech International plcAorTech International plcNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 1. BASIS OF PREPARATION General information AorTech International plc is the ultimate parent company of the Group, whose principal activities comprise exploiting the value of its IP and know-how. AorTech International plc is incorporated and domiciled in the UK and its registered office is c/o Kergan Stewart LLP, 163 Bath Street, Glasgow, G2 4SQ. Basis of preparation The Consolidated financial statements are for the year ended 31 March 2016. They have been prepared in compliance with IFRS International Financial Reporting Standards Interpretations Committee (IFRIC) interpretations as adopted by the European Union as at 31 March 2016. (IFRS) and The Consolidated financial statements have been prepared under the historical cost convention. The accounting policies remain unchanged from the previous year. Going concern After considering the year end cash position, making appropriate enquiries and reviewing budgets and profit and cash flow forecasts to 31 March 2022, the Directors have formed a judgement at the time of approving the financial statements that there is a reasonable expectation that the Group has sufficient resources to continue in operational existence for the foreseeable future. For this reason the Directors consider the adoption of the going concern basis in preparing the Consolidated financial statements is appropriate. Changes in accounting policies New accounting standards issued but not adopted: IFRS 9 Financial Instruments (2014) (effective date 1 January 2018) IFRS 15 Revenues from contracts with customers (change to IASB effective date 1 January 2018) IFRS 16 Leases (effective date 1 January 2019) Presentational currency The Group’s revenues, profits and cash flows are primarily generated in US dollars, and are expected to remain principally denominated in US dollars in the future. 2. PRINCIPAL ACCOUNTING POLICIES Basis of consolidation The Consolidated financial statements consolidate those of the Company and all of its subsidiary undertakings. Subsidiaries are entities over which the Group has the power to control the financial and operating policies so as to obtain benefits from its activities. The Group obtains and exercises control through voting rights. Unrealised gains on transactions between the Group and its subsidiaries are eliminated. Unrealised losses are also eliminated unless the transaction provides evidence of an impairment of the asset transferred. Amounts reported in the financial statements of subsidiaries have been adjusted where necessary to ensure consistency with the accounting policies adopted by the Group. Revenue Revenue is measured at the fair value of consideration received or receivable by the Group for goods supplied and services provided, excluding VAT and trade discounts, as follows: Standards, amendments and interpretations to existing standards that are not yet effective At the date of authorisation of these consolidated financial statements, certain new standards, amendments and interpretations to existing standards have been published but are not yet effective, and have not been adopted early by the Group. (a) Licence fees: Upfront payments in respect of licence revenues for access by third parties to the Group’s technology are recognised as revenue once a third party has a binding contractual obligation to the Group based on the specific contract terms and the Group has no remaining obligations to perform. (b) Royalty revenues: Royalty revenues are recognised as earned in accordance with third parties’ sales of the underlying products. Management anticipates that all of the pronouncements will be adopted in the Group’s accounting policies for the first period beginning after the effective date of the pronouncement. None of these new standards, amendments and interpretations are expected to have a significant impact on the Group’s financial statements. Interest Interest income is the interest earned on cash or cash equivalents held with the Group’s bankers and recognised within the period earned, accrued on a time basis by reference to the principal outstanding and at the effective rate applicable. Exceptional items Intangible assets Items considered significant by virtue of their size or nature are separately disclosed on the face of the Income Statement to enable a full understanding of the underlying performance of the Group. Profit or loss from discontinued operations A discontinued operation is a component of the Group that either has been disposed of, or is classified as held for sale, and: • represents a separate major line of business or geographical area of operations (a) Patents and trademarks (intellectual property): Patents and trademarks (intellectual property) are included at cost and are amortised on a straight line basis over their useful economic lives of 20 years, which corresponds to the lives of the individual patents. (b) Research and development: Research costs are expensed as incurred. An intangible asset arising from development expenditure on an individual project is recognised only when the Group can demonstrate all of the following: • is part of a single co-ordinated plan to dispose of a separate major line of business or geographical area of operations or • the technical feasibility of the intangible asset so that it will be available for use or sale. In practice this will be when the Group is satisfied that the appropriate regulatory hurdles have been or will be achieved. • is a subsidiary acquired exclusively with a view to resale • its intention to complete and its ability to use or sell the asset. Profit or loss from discontinued operations, including prior year components of profit or loss, is presented as a single amount in the income statement. This amount, which comprises the post-tax profit or loss of discontinued operations and the post-tax gain or loss resulting from the measurement and disposal of assets classified as held for sale, is further analysed in note 16. • how the asset will generate future economic benefits. • the availability of economic resources to complete the asset. • the ability to measure the expenditure during development. The disclosures for discontinued operations in the year relate to all operations that have been discontinued by the reporting date of the latest period presented. Following the initial recognition of the development expenditure, the cost model is applied requiring the asset to be carried at cost less any accumulated amortisation and accumulated impairment losses. Amortisation of the asset begins when development is complete and the asset is available for use. It is amortised over the period of expected future sales. Assets are tested for impairment when an impairment trigger occurs. Careful judgement by the Directors is applied when deciding whether the recognition requirements for development costs have been met. This is necessary as the economic success of any product development is uncertain and may be subject to future technical problems at the time of recognition. Judgements are based on the information available at each balance sheet date. Development costs capitalised during the year are being amortised over their useful economic lives of five years. Disposal of assets The gain or loss arising on the disposal of an asset is determined as the difference between the disposal proceeds and the carrying amount of the asset and is recognised in profit or loss. The gain or loss arising from the sale or revaluation of held for sale assets is included in "other income" or "other expense" in the income statement. 22 FINANCIAL STATEMENTS FINANCIAL STATEMENTS 23 ANNUAL REPORT AND ACCOUNTS 2016ANNUAL REPORT AND ACCOUNTS 2016AorTech International plc AorTech International plc NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued) Impairment testing of intangible assets Financial liabilities Taxation Share based employee compensation For the purposes of assessing impairment, assets are grouped at the lowest levels for which there are separately identifiable cash flows (cash-generating units). As a result some assets are tested individually for impairment and some are tested at a cash-generating unit level. Individual assets or cash-generating units that include intangible assets with an indefinite useful life, and those intangible assets not yet available for use are tested for impairment at least annually. All other individual assets or cash-generating units are tested for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. An impairment loss is recognised for the amount by which the asset's or cash-generating unit's carrying amount exceeds its recoverable amount. The recoverable amount is the higher of fair value, reflecting market conditions less costs to sell, and value in use based on an internal discounted cash flow evaluation. All assets are subsequently reassessed for indications that an impairment loss previously recognised may no longer exist. Financial assets Financial assets fall into the following category: Loans and receivables. All financial assets are recognised when the Group becomes a party to the contractual provisions of the instrument. Financial assets are recognised at fair value plus transaction costs. Trade and other receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. Trade and other receivables are initially measured at fair value and subsequently at amortised cost using the effective interest method, less provision for impairment. Any change in their value through impairment or reversal of impairment is recognised in profit or loss. Provision against trade receivables is made when there is objective evidence that the Group will not be able to collect all amounts due to it in accordance with the original terms of those receivables. The amount of the write-down is determined as the difference between the asset's carrying amount and the present value of estimated future cash flows discounted at the original effective interest rate. An assessment for impairment is undertaken at least at each balance sheet date. Cash and cash equivalents comprise cash on hand and demand deposits together with other short-term, highly liquid investments that are readily convertible into known amounts of cash and which are subject to an insignificant risk of changes in value. Financial liabilities fall into the following category: Financial liabilities at amortised cost and fair value through profit or loss. Current tax is the tax currently payable based on taxable profit for the accounting period. The Group operates equity settled share based compensation plans for the remuneration of its employees. Financial liabilities are obligations to pay cash or other financial assets and are recognised when the Group becomes a party to the contractual provisions of the instrument. All financial liabilities are recorded initially at fair value, net of direct issue costs. A financial liability is derecognised only when the obligation is extinguished, that is, when the obligation is discharged or cancelled or expires. Financial liabilities at amortised cost (trade payables and accruals) are subsequently recorded at amortised cost using the effective interest method, with interest related charges recognised as an expense in finance cost in the income statement. Finance charges, including premiums payable on settlement or redemption and direct issue costs (the capital value of which have now been settled), are charged to the income statement on an accruals basis using the effective interest method and are added to the carrying amount of the instrument to the extent that they are not settled in the period in which they arise. In the comparative period, financial liabilities at fair value through profit or loss represented the change of control redemption premium under loan notes, the capital value of which have been settled, which was considered to be an embedded derivative which is separable from the loan notes and therefore was accounted for as a separate instrument. Such financial liabilities were carried subsequently at fair value with gains or losses recognised in profit or loss. Fair value was determined by reference to the potential value of the change in control premium to be paid at some time in the future, which was estimated based on the Company’s market capitalisation at the balance sheet date, with a discount applied to reflect the probability of such a change of control happening (the effect of the liquidity restriction and the change of control clause) and to reflect an estimate of likely timescale. These estimates were reassessed at each balance sheet date. All changes in the instrument’s fair value are reported in profit or loss and included within finance costs. As explained more fully on page 42 the change of control redemption premium liability was settled during the year by the issue of shares. Deferred taxes are calculated using the liability method on temporary differences. Deferred tax is generally provided on the difference between the carrying amounts of assets and liabilities and their tax bases. However, deferred tax is not provided on the initial recognition of goodwill, nor on the initial recognition of an asset or liability unless the related transaction is a business combination or affects tax or accounting profit. Deferred tax on temporary differences associated with shares in subsidiaries is not provided if reversal of these temporary differences can be controlled by the Group and it is probable that reversal will not occur in the foreseeable future. In addition, tax losses available to be carried forward as well as other income tax credits to the Group are assessed for recognition as deferred tax assets. Deferred tax liabilities are provided in full, with no discounting. Deferred tax assets are recognised to the extent that it is probable that the underlying deductible temporary differences will be able to be offset against future taxable income. Current and deferred tax assets and liabilities are calculated at tax rates that are expected to apply to their respective period of realisation, provided they are enacted or substantively enacted at the balance sheet date. Changes in deferred tax assets or liabilities are recognised as a component of tax expense in profit or loss, except where they relate to items that are charged or credited directly to equity in which case the related deferred tax is also charged or credited directly to equity. Tax which relates to items recognised in other comprehensive income is recognised in other comprehensive income. All employee services received in exchange for the grant of any share based compensation are measured at their fair values. These are indirectly determined by reference to the fair value of the share option awarded. Their value is appraised at the grant date and excludes the impact of any non-market vesting conditions (e.g. profitability or sales growth targets). All share based compensation, where material, is ultimately recognised as an expense in the income statement with a corresponding credit to the other reserve, net of deferred tax where applicable. If vesting periods or other vesting conditions apply, the expense is allocated over the vesting period, based on the best available estimate of the number of shares options expected to vest. Non market vesting conditions are included in assumptions about the number of options that are expected to become exercisable. Estimates are subsequently revised if there is any indication that the number of share options expected to vest differs from previous estimates. No adjustment to expense recognised in prior periods is made if fewer share options ultimately are exercised than originally estimated. Upon exercise of share options, the proceeds received, net of any directly attributable transaction costs, up to the nominal value of the shares issued are allocated to share capital with any excess being recorded as share premium. At this time, the appropriate balance in the other reserve relating to the share options exercised is transferred to retained earnings by way of a transfer within reserves. Equity Equity comprises the following: • • • • “ISSUED CAPITAL” represents the nominal value of equity shares. "SHARE PREMIUM" represents the excess over nominal value of the fair value of cash consideration received for equity shares, net of expenses of the share issue. represents the difference arising on "OTHER RESERVE" consolidation between the nominal value of AorTech International Plc shares issued (£3,206,884) and the nominal value of AorTech Biomaterials Ltd (formerly AorTech Europe Ltd) shares acquired (£1,001,884) and the associated share premium account (£201,857) in the company. This acquisition was prior to the transition to IFRS. "FOREIGN EXCHANGE RESERVE" represents the differences arising on consolidation and from the translation of the AorTech International Plc balance sheet into US$. 24 FINANCIAL STATEMENTS FINANCIAL STATEMENTS 25 • "PROFIT AND LOSS ACCOUNT"represents retained profits. ANNUAL REPORT AND ACCOUNTS 2016ANNUAL REPORT AND ACCOUNTS 2016 AorTech International plc NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued) Foreign currencies Judgements in applying accounting policies: 3. SEGMENTAL REPORTING Items included in the financial statements of each of the Group’s entities are measured using the currency of the primary economic environment in which the entity operates (the functional currency). The Company’s functional currency is Sterling and the Group’s presentational currency is US Dollars. Transactions in foreign currencies are translated at the exchange rate ruling at the date of the transaction. Monetary assets and liabilities in foreign currencies are translated at the rates of exchange ruling at the balance sheet date. Non-monetary items that are measured at historical cost in a foreign currency are translated at the exchange rate at the date of the transaction. Non-monetary items that are measured at fair value in a foreign currency are translated using the exchange rates at the date when the fair value was determined. Any exchange differences arising on the settlement of monetary items or on translating monetary items at rates different from those at which they were initially recorded are recognised in profit or loss in the period in which they arise. Exchange differences on non-monetary items are recognised in other comprehensive income to the extent that they relate to a gain or loss on that non-monetary item taken to other comprehensive income, otherwise such gains and losses are recognised in profit or loss. The assets and liabilities in the financial statements of foreign subsidiaries and retranslation of the parent to the presentational currency, including equity items, are translated at the rate of exchange ruling at the balance sheet date. Income and expenses are translated at the average of exchange rates in force at the end of each month of the reporting period. All resulting exchange differences are recognised in other comprehensive income and accumulated in a separate component of equity. On disposal of a foreign operation the cumulative translation differences (including, if applicable, gains and losses on related hedges) are reclassified from equity to profit or loss as a reclassification adjustment as part of the gain or loss on disposal. The Group has taken advantage of the exemption in IFRS 1 and has deemed cumulative translation differences for all foreign operations to be nil at the date of transition to IFRS. The gain or loss on disposal of these operations excludes translation differences that arose before the date of transition to IFRS and includes later translation differences. (a) Capitalisation of development costs requires detailed analysis of the technical feasibility and commercial viability of the project. Prior to this financial year, the Group had written off all such development costs because the specific criteria for capitalisation had not been met. The Board regularly reviews this judgement in respect of specific development projects. During the prior year costs were incurred in relation to the Biomerics project which met the specific criteria for capitalisation. (b) The Directors must judge whether future profitability is likely in making the decision whether or not to recognise a deferred tax asset. At this stage the timing of future profits is insufficiently certain to warrant inclusion of a deferred tax asset. (c) Identification of functional currencies requires a judgement as to the economic environments of the subsidiaries of the Group and the selection of the presentational currency must reflect the requirements of the users of the financial statements. (d) Revenue recognition requires the Directors to assess the terms of contracts and to determine whether specific obligations have been met before recognising revenue in relation to licence fees and milestone payments. Specifically the Directors have assessed the restructured licence agreement and ensured all contract milestones have been met before recognising the relevant revenue in full in the March 2015 and March 2016 financial years. In addition, the Directors have assessed whether any provision for impairment is necessary against receivables through the estimation of future cash flows in both financial years. Sources of estimation uncertainty: (a) Estimates are required as to intangible asset carrying values and impairment charges. (b) Estimates of future profitability are required for the decision whether or not to create a deferred tax asset. (c( Amortisation rates are based on estimates of the useful lives and residual values of the assets involved. (d) The discount applied in determining the fair value of the change of control redemption premium in the prior year constitutes an estimate. Use of accounting estimates and judgements (e) Estimates as to recoverability of receivables, including future expected cash flows. Many of the amounts included in the financial statements involve the use of judgement and/or estimation. These judgements and estimates are based on management’s best knowledge of the relevant facts and circumstances, having regard to prior experience, but actual results may differ from the amounts included in the financial statements. Information about such judgements and estimation is contained in the accounting policies and/or the notes to the financial statements and the key areas are summarised below: The principal activity of the AorTech International Plc Group currently is exploiting the value of its IP and know-how. The Group’s operating segment is based on geographical location of operations. Analysis of revenue by products and services and by geographical area On sales from United Kingdom Supply of product Licence fees – services Royalty revenue 2016 2015 US$000 US$000 - 139 612 751 10 403 431 844 During the year ended 31 March 2016, 29.5% of the Group’s revenues depended upon a single customer (2015: 23.7%). The majority of the Group’s revenues are earned in the United States in both years. Analysis of result - operating loss Continuing operations United Kingdom USA Operating loss Finance income / (expenses) – all UK Loss on continuing operations before taxation Discontinued operations USA Loss on discontinued operations The operating loss disclosure above is after charging amortisation of $312,000 (all UK) (2015: $332,000 (all UK)). Analysis of non current assets by location United Kingdom USA 2016 2015 US$000 US$000 (575) (455) - - (575) (455) (29) 129 (604) (326) - - (44) (44) 2016 2015 US$000 US$000 1,367 1,546 - - 1,367 1,546 26 FINANCIAL STATEMENTS FINANCIAL STATEMENTS 27 ANNUAL REPORT AND ACCOUNTS 2016ANNUAL REPORT AND ACCOUNTS 2016 AorTech International plc NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued) 4. REMUNERATION OF DIRECTORS AND KEY MANAGEMENT PERSONNEL 7. EMPLOYEES Key Management Personnel Emoluments – short-term employee benefits Pension costs – post-employment benefits 2016 US$000 2015 US$000 185 - 185 237 - 237 The key management personnel whose remuneration is included in the table above for the current year and prior year comprise the three current Directors and one previous Director of the parent company. Please see the Report of the Remuneration Committee on page 12 for full details of Directors’ emoluments which have been audited. Included in the aggregate emoluments for the year ended 31 March 2016 are payments of $60,000 (2015: $19,000) made by the Company to third parties. The highest paid Director’s total emoluments were $90,000. (2015: $139,000). No pension contributions were paid during either year. 5. LOSS BEFORE TAXATION Loss before taxation has been arrived at after charging : Foreign exchange differences Amortisation of intangible assets Employee benefits expense: Employee costs (Note 7) Audit and non-audit services: Fees payable to the Company’s auditor and its associates for the audit of the parent and Group financial statements Fees payable to the Company’s auditor and its associates for other services : Tax services Other services 6. EXCEPTIONAL ITEMS 2016 US$000 2015 US$000 (58) 312 15 332 200 243 33 3 16 30 6 2 Exceptional items relate to the loan note redemption premium as explained in note 15, and legal fees incurred in relation to the departure of Frank Maguire (former CEO). Employee costs (including Directors): Wages and salaries Social security costs Pension costs The average number of employees (including Directors) during the year was made up as follows: Administration 8. FINANCE (EXPENSE) / INCOME 2016 US$000 2015 US$000 185 15 - 200 237 6 - 243 2016 Numbers 3 2015 Numbers 4 3 4 YEAR ENDED 31 MARCH 2016 YEAR ENDED 31 MARCH 2015 Pre- exceptional items US$000 Exceptional items US$000 Change of control redemption premium Credit / (charge) - - (29) (29) Pre- exceptional items US$000 Exceptional items US$000 - - 129 129 Total US$000 (29) (29) Total US$000 129 129 28 FINANCIAL STATEMENTS FINANCIAL STATEMENTS 29 ANNUAL REPORT AND ACCOUNTS 2016ANNUAL REPORT AND ACCOUNTS 2016 AorTech International plc NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued) 9. INCOME TAX EXPENSE No current tax or deferred tax expense arises on the loss for the year (2015: $nil). The tax assessed for the year differs from the standard rate of corporation tax as applied in the respective trading domains where the Group operates. The differences are explained below: Loss for the year before tax Loss for year multiplied by the respective standard rate of corporation tax applicable in each domain (average 20%; 2015 - 21%) Effects of: Expenses not deductible for tax purposes and other tax differences Deferred tax not recognised Adjust deferred tax to average rate Tax on loss for the year 2016 US$000 2015 US$000 (604) (370) (121) (78) 51 (68) 138 - 23 54 - - Unrelieved tax losses remain available to offset against future taxable profits. These losses have not been recognised as deferred tax assets within the financial statements as they do not meet the conditions required in accordance with IAS 12. Losses carried forward in the UK total $6,589,000 – tax effect is $1,318,000 (2015: $6,858,000 – tax effect $1,440,000). Losses in the USA total $nil (2015: $nil). 10. LOSS PER SHARE Loss for the year attributable to equity shareholders Loss per share Basic and diluted (US cents per share) From continuing operations From discontinued operations Shares Issued ordinary shares at start of the year Issued ordinary shares at end of the year Weighted average number of shares in issue for the year 2016 US$000 2015 US$000 (604) (370) (12.00) (6.75) - (0.91) (12.00) (7.66) 4,832,778 4,832,778 5,557,695 4,832,778 5,032,823 4,832,778 The diluted loss per share does not differ from the basic loss per share as the exercise of share options would have the effect of reducing the loss per share and is therefore not dilutive under the terms of IAS 33. There was no dilution in respect of the prior year. 11. INTANGIBLE ASSETS Gross carrying amount At 1 April 2014 Exchange differences At 31 March 2015 Additions Exchange differences At 31 March 2016 Amortisation and impairment At 1 April 2014 Exchange differences Charge for the year At 31 March 2015 Exchange differences Charge for the year At 31 March 2016 Net book value At 31 March 2015 At 31 March 2016 Development costs US$000 Intellectual property US$000 319 (28) 291 168 4,603 126 4,729 - Total US$000 4,922 98 5,020 168 (8) 451 11 (6) 63 68 (5) (148) (156) 4,581 5,032 3,050 87 269 3,406 (116) 3,061 81 332 3,474 (121) 73 136 239 3,529 312 3,665 223 1,323 315 1,052 1,546 1,367 30 FINANCIAL STATEMENTS FINANCIAL STATEMENTS 31 ANNUAL REPORT AND ACCOUNTS 2016ANNUAL REPORT AND ACCOUNTS 2016 AorTech International plc NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued) 12. FINANCIAL INSTRUMENTS Risk management The Group’s financial instruments comprise cash and cash equivalents, trade and other receivables, trade and other payables and a change of control redemption premium. These arise directly from the Group’s operations and it is the Group’s policy that no trading in financial instruments shall be undertaken. The Board reviews and agrees policies to manage risk to ensure that the entities within the Group will be able to continue as a going concern whilst maximising the return to stakeholders through the effective management of liquid resources raised through share issues. Categories of financial instrument Financial assets – loans and receivables Cash and cash equivalents Trade and other receivables Financial liabilities Liabilities at amortised cost Fair value through profit or loss 2016 US$000 2015 US$000 314 42 356 (165) - (165) 360 619 979 (192) (53) (245) All amounts are short-term (all payable within six months) with the exception of other payables greater than one year and their carrying values are considered reasonable approximations of fair value. Foreign currency risk The Group has non-trading Australian and US subsidiaries whose functional currencies are the Australian and US dollars along with the UK parent company whose functional currency is Sterling. Entities generally do not hold financial instruments in a currency other than their own functional currency, other than the UK parent company which has a trade receivable denominated in US dollars. Cash balances are carried within the Group in bank accounts, which comprise the following currency holdings: Sterling US dollars 2016 US$000 2015 US$000 36 278 314 50 310 360 The Group holds its cash balances in a mixture of Sterling and US dollars. As the Group reports in US dollars, there is translation risk in respect of such Sterling balances. Based on year-end balances held in Sterling, a 10% movement in the $ / £ exchange rate would have had a $3,000 (2015: $4,000) impact on net assets. Interest rate risk The Group finances its operations through equity fundraising and does not currently carry any borrowings, following the repayment of the loan notes during the year ended 31 March 2013. The cash balances and short term deposits are held at both fixed and floating rates as follows: Cash Short-term deposits Sensitivity analysis Interest rate % 0% 0.55% 2016 US$000 310 4 314 Interest rate % 0% 0.51% 2015 US$000 355 5 360 If, for example, there had been a rise or fall of interest rates over the year of 1%, this would have resulted in an increase/decrease in profit and equity of $nil (2015: $1,000), all other variables remaining constant. Credit risk Credit risk refers to the risk that a counterparty will default on its contractual obligations resulting in financial loss to the Group. In order to minimise this risk the Group endeavours only to deal with companies which are demonstrably creditworthy and this, together with the aggregate financial exposure, is continuously monitored. The maximum exposure to credit risk in the case of both the cash and short term deposits is the value of the outstanding amount. The Group has trade receivables resulting from sales and other receivables from provision of other services which the management consider to be of low risk other than the amounts due from two third parties where full provision has been made following a mediation and arbitration process. The management do not consider that there is any concentration of risk within either trade or other receivables, other than the amounts due from two third parties. The maximum exposure to credit risk on trade and other receivables is considered to be $25,000 (2015: $699,000). Liquidity risk The Group currently holds cash balances and short term deposits in Sterling and US dollars. These balances provide funding for the Group’s trading activities. There is no material difference between the fair values and the book values of these financial instruments. Details of the amount that was payable at an undetermined date in the future under the change of control clause on the loan notes are given in note 15, along with further details of the terms in note 7 to the parent company financial statements. 32 FINANCIAL STATEMENTS FINANCIAL STATEMENTS 33 ANNUAL REPORT AND ACCOUNTS 2016ANNUAL REPORT AND ACCOUNTS 2016 AorTech International plc NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued) 13. TRADE AND OTHER RECEIVABLES Current Trade receivables Other receivables Prepayments and accrued income Non -current Trade receivables 2016 US$000 2015 US$000 25 17 201 243 577 42 118 737 - - $nil (2015: $202,000) of net trade and other receivables were past due for payment but not impaired at 31 March 2016, of which $nil (2015: $202,000) was over 30 days and $nil (2015: $150,000) was over 90 days. A provision of $369,000 (2015: $nil) was recognised against trade receivables. Included in the above is $191,000 (2015: $79,000) of accrued income. 14. CASH AND CASH EQUIVALENTS Cash at bank and in hand 15. TRADE AND OTHER PAYABLES Current liabilities Trade payables Accruals and deferred income Non current liabilities Change of control redemption premium Included in the above is $9,000 (2015: $9,000) of deferred income. 2016 US$000 2015 US$000 314 314 360 360 2016 US$000 2015 US$000 12 153 165 - - - 192 192 53 53 Details of the loan notes issued and redeemed in the year ended 31 March 2013, the redemption premium paid, the change of control redemption premium payable in the future and the final settlement of this obligation can be found in note 7 of the parent company accounts. Related party disclosures are also provided in notes 7 and 11 of the parent company accounts as loan notes were issued in previous years to certain Directors. In accordance with IFRS, the Directors have included a financial liability for this derivative financial instrument totalling $nil (2015: $53,000) in the Consolidated accounts at 31 March 2016. In prior years this was based on the market capitalisation of the Group at each year end and an estimate by the Directors of the likelihood of the change of control and consideration of possible timescales. These estimates were reviewed and updated every six months for the purpose of the interim and year end accounts. In the year to 31 March 2016, shareholders approved by special resolution the Company’s approach to loan note holders with the intention of converting their right to a further redemption premium into ordinary shares. This was accepted by the loan note holders and ordinary shares were issued in full and final settlement of any future liability. As such, no liability remained at 31 March 2016. The change of control redemption premium constitutes a financial instrument measured at fair value under IFRS 13 “Fair value measurement”. The fair value at each balance sheet date was calculated by reference to 15% of the market capitalisation of the Group multiplied by a discount factor to reflect the Directors’ assessment of the likelihood and timing of any change of control of the Group. The Group’s market capitalisation constitutes a Level 1 input under the hierarchy in IFRS 13 (a quoted price in an active market). The discount factor is a Level 3 input (not based on observable data). The overall instrument is a Level 3 input due to the significance of the discount factor. Relevant inputs were: - Market capitalisation - Discount factor 2016 n/a n/a 2015 $1.78m 20% A discount factor of 10% or 30% would decrease / increase the prior year credit by $65,000. 16. Discontinued operations On 1 October 2013, the Group signed an agreement with Biomerics LLC for the manufacture and distribution of our patented materials, including to our existing licensees. In the opinion of the Directors, the Biomerics transaction transformed the Group into a pure intellectual property company. As a consequence, results attributable to manufacturing activity constitute a discontinued operation, and have been presented as such in the prior year figures in the Income Statement. The results of the discontinued manufacturing operations are shown in more detail below. Pre- exceptional items 2016 $000 Exceptional items 2016 $000 - - - - - - Total 2016 $000 - - - Revenue Other income Cost of sales Administrative expenses - - - Profit on disposal of property, plant and equipment Operating loss - - - - - - Pre- exceptional items 2015 $000 Exceptional items 2015 $000 - - (44) - - (44) - - - - - - Total 2015 $000 - - (44) - - (44) 34 FINANCIAL STATEMENTS FINANCIAL STATEMENTS 35 ANNUAL REPORT AND ACCOUNTS 2016ANNUAL REPORT AND ACCOUNTS 2016 AorTech International plc NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued) 17. OPERATING LEASE COMMITMENTS The Group had no commitments under non-cancellable operating leases at 31 March 2016 or 31 March 2015. 18. SHARE BASED PAYMENTS The Group has an approved share option plan for the benefit of employees resident in the UK and Executive Directors. All share options are denominated in Sterling and converted for disclosure purposes at £1 = $1.44 at 31 March 2016 (£1 = $1.48 at 31 March 2015). There were no options in issue at 31 March 2016 (31 March 2015: no options) The Group has an unapproved share option plan for the benefit of other employees. All share options are denominated in Sterling and converted for disclosure purposes at £1 = $1.44 at 31 March 2016 (£1 = $1.48 at 31 March 2015). There were no options in issue at 31 March 2016 (31 March 2015: 30,000 options) Details of the number of share options and the weighted average exercise price (WAEP) outstanding during the year are as follows: 2016 WAEP 2015 WAEP Number US$ Number US$ Outstanding at the beginning of the year Forfeited during the year Outstanding at the year end Exercisable at the year end 30,000 (30,000) - - $4.58 $4.44 - - 34,000 (4,000) 30,000 30,000 $5.25 $5.39 $4.58 $4.83 The options issued to date under both schemes will only be exercisable if the average mid market closing price of the Company’s shares on the five business days prior to the date of exercise exceeds the option price by 15% or more and after the elapse of three years from date of Option Grant. The fair value of options granted after 7 November 2002 but not vested at 1 April 2006 has been arrived at using an appropriate Black Scholes model. The assumptions inherent in the use of this model are as follows: • The option life is assumed to be at the end of the allowed period • There are no non-market vesting conditions • No variables change during the life of the option (e.g. dividend yield) • Volatility of share price has been calculated over the three years prior to the balance sheet date. Date of grant 01.09.06 16.12.11 Vesting Period (years) 3 3 Date of vesting 01.09.09 16.12.14 Exercise Price (US$) 5.42 5.00 Risk-free rate Share price at grant (US$) Volatility of Share price Fair value (US$000) Number outstanding 4.61% 4.00% 6.06 4.55 63% 31% 118 52 nil nil The Group has not recognised any expense related to equity-settled share based payment transactions during the year (2015: nil), on the grounds that the charge is not material. The Directors have also concluded that the cumulative position to date is also not material. 19. SHARE CAPITAL Ordinary shares of 250 pence each In issue at 1 April 2015 In issue at 31 March 2016 Ordinary shares of 5 pence each In issue at 1 April 2015 In issue at 31 March 2016 Deferred shares of 245 pence each In issue at 1 April 2015 In issue at 31 March 2016 Shares Number 4,832,778 - Shares Number - 5,557,695 Shares Number - 4,832,778 Nominal Value US$000 17,937 - Nominal Value US$000 - 400 Nominal Value US$000 - 17,026 Premium Net of costs US$000 3,474 - Premium Net of costs US$000 - 296 Premium Net of costs US$000 - 3,299 Total US$000 21,411 - Total US$000 - 696 Total US$000 - 20,325 At an EGM of Members held on 20 August 2007, the Company’s authorised share capital was increased from £14,000,000 (US$27,762,000) comprising 5,600,000 Ordinary shares of £2.50 (US$4.96) each to £17,500,000 (US$34,702,500), comprising 7,000,000 shares of £2.50 (US$4.96) each. At the AGM of Members held on 24 September 2015, the Members approved the Reorganisation of the Company’s share capital by sub-dividing the existing 250 pence ordinary shares into 5 pence ordinary shares and 245 pence deferred shares. The share premium attached to the existing shares has followed the new shares. The deferred shares have limited rights including no voting rights. The deferred shares are not admitted or listed on any stock exchange. At the same meeting the Directors were authorised to negotiate final settlement terms with Loan Note Holders. This resulted in a 15 per cent (724,917) increase in the issued share capital of the Company. Capital management objectives are set out in the Strategic Report on page 9. 20. CONTINGENT LIABILITIES There were no contingent liabilities at 31 March 2016 or at 31 March 2015. 21. RELATED PARTY TRANSACTIONS Related party transaction disclosures are included within note 7 to the parent company financial statements in respect of loan note holders, and within the Report of the Remuneration Committee. 36 FINANCIAL STATEMENTS FINANCIAL STATEMENTS 37 ANNUAL REPORT AND ACCOUNTS 2016ANNUAL REPORT AND ACCOUNTS 2016 AorTech International plc INDEPENDENT AUDITOR’S REPORT ON THE PARENT COMPANY FINANCIAL STATEMENTS AorTech International plc PARENT COMPANY BALANCE SHEET We have audited the parent company financial statements of AorTech International Plc for the year ended 31 March 2016 which comprise the parent company balance sheet, the parent company statement of changes in equity and the related notes. The financial reporting framework that has been applied in their preparation is applicable law and United Kingdom Accounting Standards (United Kingdom Generally Accepted Accounting Practice), including FRS 101 ‘Reduced Disclosure Framework’. This report is made solely to the Company’s members, as a body, in accordance with Chapter 3 of Part 16 of the Companies Act 2006. Our audit work has been undertaken so that we might state to the Company’s members those matters we are required to state to them in an auditor’s report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the Company and the Company’s members as a body, for our audit work, for this report, or for the opinions we have formed. Respective responsibilities of Directors and auditor As explained more fully in the Directors’ Responsibilities Statement set out on page 15. the Directors are responsible for the preparation of the parent company financial statements and for being satisfied that they give a true and fair view. Our responsibility is to audit and express an opinion on the parent company financial statements in accordance with applicable law and International Standards on Auditing (UK and Ireland). Those standards require us to comply with the Auditing Practices Board’s Ethical Standards for Auditors. Scope of the audit of the financial statements A description of the scope of an audit of financial statements is provided on the Financial Reporting Council’s website at www.frc.org.uk/ auditscopeukprivate. Opinion on financial statements In our opinion the parent company financial statements: • give a true and fair view of the state of the Company’s affairs as at 31 March 2016; • have been properly prepared in accordance with United Kingdom Generally Accepted Accounting Practice; and • have been prepared in accordance with the requirements of the Companies Act 2006. Opinion on other matter prescribed by the Companies Act 2006 In our opinion the information given in the Strategic Report and the Report of the Directors for the financial year for which the financial statements are prepared is consistent with the parent company financial statements. Matters on which we are required to report by exception We have nothing to report in respect of the following matters where the Companies Act 2006 requires us to report to you if, in our opinion: • adequate accounting records have not been kept by the parent company, or returns adequate for our audit have not been received from branches not visited by us; or the parent company financial statements are not in agreement with the accounting records and returns; or • • certain disclosures of Directors’ remuneration specified by law are not made; or • we have not received all the information and explanations we require for our audit. Other matter We have reported separately on the Consolidated financial statements of AorTech International Plc for the year ended 31 March 2016. CHRISTOPHER FROSTWICK, SENIOR STATUTORY AUDITOR For and on behalf of GRANT THORNTON UK LLP STATUTORY AUDITOR, CHARTERED ACCOUNTANTS East Midlands 12 August 2016 Assets Non current assets intangible assets Investment in subsidiary undertakings Total non current assets Current assets Trade and other receivables Cash and cash equivalents Total current assets Total assets Liabilities Current Liabilities Trade and other payables Total current liabilities Non current liabilities Change of control redemption premium Total non current liabilities Total liabilites Net assets Equity Issued Capital Share Premium Profit and loss account Total equity attributable to equity holders of the parent Notes 31 March 2016 £000 31 March 2015 £000 3 4 5 6 7 8 1,888 - 1,888 169 218 2,362 - 2,362 497 243 387 740 2,275 3,102 (115) (115) - - (115) 2,160 12,118 2,500 (12,458) 2,160 (129) (129) (179) (179) (308) 2,794 12,082 2,340 (11,628) 2,794 The parent company financial statements were approved by the Board on 12 August 2016 and were signed on its behalf by W BROWN, CHAIRMAN E MCDAID, DIRECTOR Company number SC170071 38 PARENT COMPANY FINANCIAL STATEMENTS PARENT COMPANY FINANCIAL STATEMENTS 39 ANNUAL REPORT AND ACCOUNTS 2016ANNUAL REPORT AND ACCOUNTS 2016 PARENT COMPANY STATEMENT OF CHANGES IN EQUITY AorTech International plc NOTES TO THE PARENT COMPANY FINANCIAL STATEMENTS Share Retained Shareholders’ Total 1. ACCOUNTING POLICIES At 1 April 2014 Transactions with owners Loss and total comprehensive income for the year At 31 March 2015 Changes in equity Issues of equity share capital Transactions with owners Loss and total comprehensive income for the year At 31 March 2016 12,118 2,500 Share capital £000 12,082 - - premium £000 2,340 - - earnings £000 (10,802) - (826) 12,082 2,340 (11,628) 36 36 - 160 160 - - - (830) (12,458) funds £000 3,620 - (826) 2,794 196 196 (830) 2,160 Statement of compliance The financial statements were prepared in accordance with FRS 101 ‘Reduced Disclosure Framework’. The company has elected to adopt the standard for the year ended 31 March 2016 for the first time. Basis of preparation These financial statements are the first financial statements in which the Company has adopted FRS 101 ‘Reduced Disclosure Framework’. The Company meets the definition of a qualifying entity under FRS 101. Accordingly, in the year ended 31 March 2016 the Company has undergone transition from reporting under UK GAAP to FRS 101 as issued by the Financial Reporting Council. The financial statements have therefore been prepared in accordance with FRS 101 as issued by the Financial Reporting Council. As permitted by FRS 101, for both periods presented, the Company has taken advantage of the disclosure exemptions available under that standard in relation to financial instruments, capital management, presentation of a cash flow statement, share based payments, fair value measurements, comparative reconciliations for tangible and intangible assets, standards not yet effective, related party transactions with other wholly-owned members of the Group and key management personnel compensation. Equivalent disclosures are, where required, given in the Group accounts of AorTech International plc. The Group accounts of AorTech International plc are available to the public. The financial statements have been prepared on the historical cost basis. Going concern After considering the year end cash position, making appropriate enquiries and reviewing budgets and profit and cash flow forecasts for a period to 31 March 2022, the Directors have formed a judgement at the time of approving the financial statements that there is a reasonable expectation that the parent company has sufficient resources to continue in operational existence for the foreseeable future. For this reason the Directors consider the adoption of the going concern basis in preparing the parent company financial statements is appropriate. Use of key accounting estimates and judgements Many of the amounts included in the financial statements involve the use of judgement and/or estimation. These judgements and estimates are based on management’s best knowledge of the relevant facts and circumstances, having regard to prior experience, but actual results may differ from the amounts included in the financial statements. Information about such judgements and estimation is contained in the accounting policies and/or the notes to the financial statements and the key areas are summarised below: Sources of estimation uncertainty • amortisation rates are based on estimates of the useful lives and residual values of the assets involved • bad debt provisions are based on the likely recoverability of such balances. Investments Investments held as fixed assets are stated at cost less provision for impairment. In the opinion of the Directors the value of such investments is not less than that shown at the balance sheet date. Deferred tax Deferred tax is recognised (on an undiscounted basis) on all timing differences where the transactions or events that give the Company an obligation to pay more tax in the future, or a right to pay less tax in the future, have occurred by the balance sheet date. Deferred tax assets are recognised when it is more likely than not that they will be recovered. Deferred tax is measured using rates of tax that have been enacted or substantively enacted by the balance sheet date. 40 PARENT COMPANY FINANCIAL STATEMENTS PARENT COMPANY FINANCIAL STATEMENTS 41 ANNUAL REPORT AND ACCOUNTS 2016ANNUAL REPORT AND ACCOUNTS 2016AorTech International plc AorTech International plc NOTES TO THE PARENT COMPANY FINANCIAL STATEMENTS Foreign currencies 3. INTANGIBLE ASSETS Assets and liabilities in foreign currencies are translated into sterling at the rates of exchange ruling at the balance sheet date. Transactions in foreign currencies are translated into sterling at the rate of exchange ruling at the date of transaction. Exchange differences are taken into account in arriving at the operating result. Share based payments All share based payment arrangements granted after 7 November 2002 that had not vested prior to 1 April 2006 are recognised in the financial statements. Debtors The amounts owed by Group undertakings are in respect of long term loans and have been treated as part of the net investment in the foreign entities, and included within debtors due in greater than one year. These balances have been treated as monetary assets and retranslated at the rate of exchange ruling at the balance sheet date. Exchange differences arising on these loans are taken into account in arriving at the operating result. The recoverability of these balances is reassessed at each balance sheet date, with an impairment provision recorded when considered necessary. Intangible assets Patents and trademarks (intellectual property) are included at cost less estimated residual amount and are amortised on a straight line basis over their remaining useful economic lives of 20 years, which corresponds to the lives of the individual patents. Some of these assets were transferred from the Australian subsidiary in 2011 at an independent valuation of £4,777,000 which has been used as deemed cost for these assets in the UK. Costs incurred in validating the Company’s polymers for manufacture on the Company’s behalf by Biomerics LLC are being amortised over 5 years. Loan notes & Redemption Premium policy The loan notes issued and redeemed during the year ended 31 March 2013 and redemption premium thereon are considered to be a single capital instrument in accordance with FRS 4. The loan notes issued and redeemed in the year ended 31 March 2013 and the redemption premium paid in the year ended 31 March 2013 have been accounted for based on the terms of the loan note trust deed (see note 7), with the redemption premium paid expensed as a finance cost in that year. During the year end 31 March 2016, shareholders approved by special resolution the Company’s approach to loan note holders with the intention of converting their right to a further redemption premium into ordinary shares. This was accepted by the loan notes holders and as such ordinary shares were issued in full and final settlement of any future liability. As such, no liability remains at 31 March 2016. 2. COMPANY PROFIT AND LOSS ACCOUNT The parent company has taken advantage of section 408 of the Companies Act 2006 and has not included its own profit and loss account in these financial statements. The parent company’s loss for the year ended 31 March 2016 was £830,000 (2015: loss of £826,000). Cost At 31 March 2015 Additions for the year At 31 March 2016 Amortisation At 31 March 2015 Charge for the year At 31 March 2016 Net book value At 31 March 2015 At 31 March 2016 Impairment of £600,000 was recognised in the prior year 4. FIXED ASSET INVESTMENTS Investment in subsidiary undertakings Cost Historical Cost Provision for Impairment Net book value at 31 March Interest in subsidiary undertakings Name of undertaking (i) AorTech Biomaterials Ltd (ii) AorTech Critical Care Limited (iii) AorTech Heart Valve Technologies Ltd (iv) AorTech Biomaterials Pty Limited (v) AorTech Polymers & Medical Devices, Inc (vi) River Clyde Marine, Inc Intellectual property Development costs £000 4,929 - 4,929 2,717 543 3,260 2,212 1,669 £000 196 118 314 46 49 95 150 219 Total £000 5,125 118 5,243 2,763 592 3,355 2,362 1,888 2016 US$000 2015 US$000 23,159 23,159 (23,159) (23,159) - - Country of registration or incorporation Description of shares held Ordinary £1 Scotland Ordinary £1 Scotland Ordinary £1 Scotland Australia Ordinary Aus. $1 USA Common US $1 USA Common US $1 Proportion of nominal value of shares held % 100 92 100 100 100 100 The principal business activities and country of operations of the above undertakings are: (i) A non-trading company in the UK (ii) A dormant company in the UK (iii) A non-trading company in the UK (iv) Ceased operations and placed into voluntary liquidation during year ended 31 March 2013 (v) Ceased operations and placed into voluntary liquidation during year ended 31 March 2014 (vi) Research into marine applications for biostable polyurethanes 42 PARENT COMPANY FINANCIAL STATEMENTS PARENT COMPANY FINANCIAL STATEMENTS 43 ANNUAL REPORT AND ACCOUNTS 2016ANNUAL REPORT AND ACCOUNTS 2016 AorTech International plc NOTES TO THE PARENT COMPANY FINANCIAL STATEMENTS (continued) 5. TRADE AND OTHER RECEIVABLES 5. TRADE AND OTHER RECEIVABLES Current Current Trade receivables Trade receivables Other receivables Other receivables Prepayments and accrued income Prepayments and accrued income Non -current Non -current Amounts owed by Group undertakings Amounts owed by Group undertakings Less: Provision* Less: Provision* 2016 2016 £000 £000 17 17 12 12 140 140 169 169 2015 2015 £000 £000 389 389 28 28 80 80 497 497 3,955 3,955 3,955 3,955 (3,955) (3,955) - - (3,955) (3,955) - - *A cumulative impairment charge of £3,955,000 as at 31 March 2016 (31 March 2015: £3,955,000) has been made to fully provide against the *A cumulative impairment charge of £3,955,000 as at 31 March 2016 (31 March 2015: £3,955,000) has been made to fully provide against the remaining amount of the inter-company loan account due as at 31 March 2016 to AorTech International plc by its American subsidiary, AorTech remaining amount of the inter-company loan account due as at 31 March 2016 to AorTech International plc by its American subsidiary, AorTech Polymers & Medical Devices, Inc. A provision of £322,000 (2015: £nil) was recognied against trade receivables. Polymers & Medical Devices, Inc. A provision of £322,000 (2015: £nil) was recognied against trade receivables. Included in the above is £133,000 (2015: £53,000) of accrued income. Included in the above is £133,000 (2015: £53,000) of accrued income. 6. TRADE AND OTHER PAYABLES 6. TRADE AND OTHER PAYABLES Trade payables Trade payables Accruals and deferred income Accruals and deferred income Included in the above is £6,000 (2015: £6,000) of deferred income. Included in the above is £6,000 (2015: £6,000) of deferred income. 7. NON CURRENT LIABILITIES 7. NON CURRENT LIABILITIES Change of control redemption premium Change of control redemption premium 2016 2016 £000 £000 8 8 107 107 115 115 2016 2016 £000 £000 - - - - 2015 2015 £000 £000 - - 129 129 129 129 2015 2015 £000 £000 179 179 179 179 On 26 October 2012 AorTech International plc created £1,250,000 of Secured Loan Notes (“the Notes”) and issued £1,210,000 ($1,914,000) On 26 October 2012 AorTech International plc created £1,250,000 of Secured Loan Notes (“the Notes”) and issued £1,210,000 ($1,914,000) of the Notes to existing investors including certain Directors (or members of their families). The Notes were repayable on or before 1 October of the Notes to existing investors including certain Directors (or members of their families). The Notes were repayable on or before 1 October 2013. The Notes did not bear any interest but were subject to a redemption premium of 100 per cent of the nominal value of the Notes if 2013. The Notes did not bear any interest but were subject to a redemption premium of 100 per cent of the nominal value of the Notes if repayment was made prior to 31 March 2013 and 150 per cent. if thereafter. repayment was made prior to 31 March 2013 and 150 per cent. if thereafter. The Notes attracted an additional redemption premium of 15 per cent. of the equity value on a change of control of AorTech at any time in the future, 15 per cent. of the value of a sale of any of its intellectual property rights while the Notes were outstanding, and 15 per cent. of the value of the net proceeds of any settlement of the dispute with St. Jude Medical or restructuring of the License and Supply Agreement with St. Jude Medical, after having taken into account the costs of settlement and the value of the notes redeemed and redemption premium paid. The Notes were secured by a floating charge over all of AorTech’s assets. The initial loan note subscriptions by Directors W Brown and E McDaid (or members of their families) and Active Capital Trust PLC which amounted to, in aggregate, £270,000, along with the 100 per cent redemption premiums paid of £270,000, and their share of any change of control redemption premiums payable in the future were deemed to be related party transactions for the purposes of Rule 13 of the AIM Rules and IAS 24. The Directors of AorTech (excluding W Brown and E McDaid) considered, having consulted with finnCap Limited, that the terms of the transaction were fair and reasonable so far as shareholders are concerned. The original sum subscribed in October 2012 for the Notes, together with an initial 100% premium due, was re-paid to the loan note holders prior to 31 March 2013. As no sale of intellectual property rights had occurred while the Notes were outstanding, no additional redemption premium under this clause was due. In addition, based on the value of the net proceeds of the settlement of the dispute with St Jude Medical, having taken into account the legal and other costs incurred, and the value of the loan notes redeemed and redemption premium paid, then no additional redemption premium was due under this clause. On change of control of the Company whether by means of a general offer to acquire the entire issued share capital of the Company or a scheme of arrangement, or on a return of capital to shareholders as part of a winding up of the Company, an additional premium became payable to noteholders equal to 15% of the sums payable to shareholders in relation to that event. Following agreement between the Company and the Loan Note Holders, authority for which negotiations had been granted by the Shareholders at the 2015 Annual General Meeting, this liability to the Company was extinguished following the issue of Ordinary shares equal to 15 per cent of the 4,832,778 Ordinary shares in issue at that time. 8. SHARE CAPITAL See Note 19 in the Consolidated financial statements which details the number of shares in issue at each period end and movements in the period. The nominal value of all shares in issue at 31 March 2016 is £12,118,000 (2015: £12,082,000). 9. SHARE BASED PAYMENTS See Note 18 in the Consolidated financial statements. 10. DIRECTORS AND EMPLOYEES The Directors are the only employees of the parent company. Disclosure of their emoluments is given in the audited section of the Report of the Remuneration Committee on page 12. 11. RELATED PARTY TRANSACTIONS The Company is exempt under the terms of FRS 101.8 from disclosing transactions with its wholly owned subsidiaries. There were no related party transactions during the year with non fully owned subsidiaries. Other related party transaction disclosures are included within note 7 to the parent company accounts in respect of loan note holders and within the Report of the Remuneration Committee. 12. FIRST TIME ADOPTION OF FRS101 The policies applied under the Company’s previous accounting framework are not materially different to FRS 101 and the adoption of the new framework has not impacted on equity or profit or loss. 44 PARENT COMPANY FINANCIAL STATEMENTS PARENT COMPANY FINANCIAL STATEMENTS 45 ANNUAL REPORT AND ACCOUNTS 2016ANNUAL REPORT AND ACCOUNTS 2016 AorTech International plc NOTICE OF THE ANNUAL GENERAL MEETING 1. 2. 3. 4. 5. 6. Notice is hereby given that the nineteenth Annual General Meeting of AorTech International Plc will be held in the offices of Kergan Stewart LLP, 163 Bath Street, Glasgow G2 4SQ on Tuesday, 27 September 2016 at 11:00am for the purpose of considering and if thought fit passing the following resolutions, numbers 1 to 5 as Ordinary Resolutions and number 6 as a Special Resolution: AS ORDINARY BUSINESS To receive and adopt the financial statements of the Company for the year ended 31 March 2016 together with the Strategic Report and the Reports of the Directors and Auditor thereon. To approve the Report of the Remuneration Committee for the year ended 31 March 2016. To re-elect G Wright, who is retiring by rotation. To re-appoint Grant Thornton UK LLP as auditor of the Company and to authorise the Directors to fix their remuneration. AS SPECIAL BUSINESS To consider, and if thought fit, pass the following resolution as an Ordinary Resolution: The Directors be hereby generally and unconditionally authorised for the purpose of section 551 of the Companies Act 2006 (“the Act”) to exercise all the powers of the Company to allot shares in the Company or to grant rights to subscribe for or convert any security into shares in the Company (“Rights”) up to an aggregate nominal amount of £92,628 (representing approximately one third of the Company’s issued ordinary share capital) which authority will expire at the conclusion of the next Annual General Meeting of the Company save that the Company may, before such expiry, make an offer or agreement which would, or might, require relevant securities to be allotted after such expiry and the Directors may allot such securities in pursuance of such offer or agreement as if the authority so conferred had not expired. This authority is in substitution for all previous authorities conferred on the Directors in accordance with section 80 of the Companies Act 1985 or section 551 of the Act but without prejudice to any allotment of shares or grant of Rights already made or agreed to be made pursuant to such authorities. To consider, and if thought fit, pass the following resolution as a Special Resolution: That subject to the passing of Resolution 5 above as an Ordinary Resolution, the Directors be and are hereby empowered until the conclusion of the next Annual General Meeting of the Company (“the period of the Section 570 power”), pursuant to Section 570 of the Act to allot equity securities (as defined by Section 560 of the Act) pursuant to the authority granted by Resolution 5 above in accordance with Section 551 of the Act as if Section 561(1) of the Act did not apply to such allotment, provided that this power shall be limited to: (a) the allotment of equity securities in connection with or pursuant to an offer by way of rights issue, open offer or any other pre-emptive offer in favour of ordinary shareholders and in favour of holders of any other class of equity security in accordance with the rights attached to such class where the equity securities respectively attributable to the interests of such persons on a fixed record date are proportionate (as nearly as may be) to the respective numbers of equity securities held by them or are otherwise allotted in accordance with the rights attaching to such equity securities subject to such exclusions or arrangements as the Directors may deem necessary or expedient to deal with fractional entitlements or legal or practical problems under the laws of any territories or requirements of any recognised regulatory body or stock exchange in any territory; (b) the allotment of equity securities pursuant to the terms of any share scheme for Directors and employees of the Company and/or its subsidiaries approved by the shareholders of the Company in general meeting; and (c) the allotment (otherwise than pursuant to sub-paragraphs (a) and (b) above) of equity securities having a nominal amount or giving the right to subscribe for or convert into relevant shares having a nominal amount, not exceeding in aggregate £13,894 (representing approximately five per cent of the issued ordinary share capital of the Company), or if less, five percent of the issued Ordinary share capital of the Company from time to time; but so that this power shall allow the Company to make an offer or enter into an agreement before the expiry of the period of the Section 570 power which would, or might, require equity securities to be allotted after such expiry and the Directors may allot equity securities in pursuance of any such offer or agreement as if the power conferred thereby had not expired. This resolution revokes and replaces all unexcercised powers previously granted to the Directors to allot equity securities as if either section 89(1) of the Companies Act 1985 or section 561(1) of the Act did not apply but without prejudice to any such allotment of equity securities made or agreed to be made pursuant to such authorities. By order of the Board, J C D PARSONS, ACIS COMPANY SECRETARY, Weybridge, Surrey KT13 9LZ 1. 2. 3. 4. 5. 6. 7. 8. 9. Members will only be entitled to attend and vote at the meeting if they are registered on the Company’s register of members at 6:30pm on 23 September 2016 or by 6.30pm two business days prior to the date of any adjournment of the meeting. Changes to entries on the Register of Members after that time shall be disregarded in determining the rights of any person to attend and vote at the meeting. If the meeting is adjourned, the time by which a person must be entered on the register of members of the Company in order to have the right to attend and vote at the adjourned meeting is 6:30pm on the day preceding the date fixed for the adjourned meeting. Changes to the register of members after the relevant times shall be disregarded in determining the rights of any person to attend and vote at the meeting. Any member of the Company who is entitled to attend and vote at the Annual General Meeting may appoint another person or persons (whether a member or not) as their proxy or proxies to attend, speak and vote on their behalf. To be valid, Forms of Proxy must be lodged with the Company’s Registrars, Equiniti Limited, Aspect House, Lancing, West Sussex, BN99 6DA not later than 48 hours (excluding non- working days) before the time appointed for the holding of the meeting or any adjourned meeting together with any documentation required. In the case of a corporation, the Form of Proxy should be executed under its common seal or signed by a duly authorised officer or attorney of the corporation. Details of how to appoint the Chairman of the Meeting or another person as your proxy or proxies using the proxy form are set out in the notes to the proxy form together with details as to how to change or teminate proxy appointments. A vote withheld is not a vote in law which means that the vote will not be counted in the calculation of votes for or againsat a resolution. If no voting indication is given your proxy will vote (or abstain from voting) as he or she thinks fit in relation to any other matter put before the meeting. Completing and returning a Form of Proxy will not prevent any member from attending the meeting in person and voting should they so wish. Any member or his proxy attending the meeting has a right to ask any question at the meeting relating to the business of the meeting. A corporation which is a member can appoint one or more corporate representatives who may exercise, on its behalf, all its powers as a member provided that no more than one corporate representative exercises powers over the same share. CREST members who wish to appoint a proxy or proxies through the CREST electronic proxy appointment service may do so by using the procedures described in the CREST Manual (available at https://www.euroclear.com). CREST personal members or other CREST sponsored members, and those CREST members who have appointed a voting service provider should refer to their CREST sponsors or voting service provider(s), who will be able to take the appropriate action on their behalf. In order for a proxy appointment or instruction made by means of CREST to be valid, the appropriate CREST message (a “CREST Proxy Instruction”) must be properly authenticated in accordance with Euroclear UK & Ireland Limited’s specifications and must contain the information required for such instructions, as described in the CREST Manual. The message must be transmitted so as to be received by the Company’s agent, Equiniti Limited (CREST Participant ID RA19), no later than 48 hours before the time appointed for the meeting. For this purpose, the time of receipt will be taken to be the time (as determined by the time stamp applied to the message by the CREST Application Host) from which the Company’s agent is able to retrieve the message by enquiry to CREST in the manner prescribed by CREST. CREST members and, where applicable, their CREST sponsor or voting service provider should note that Euroclear UK & Ireland Limited does not make available special procedures in CREST for any particular messages. Normal system timings and limitations will therefore apply in relation to the input of CREST Proxy Instructions. It is the responsibility of the CREST member concerned to take (or, if the CREST member is a CREST personal member or sponsored member or has appointed a voting service provider, to procure that his CREST sponsor or voting service provider takes) such action as shall be necessary to ensure that a message is transmitted by means of the CREST system by any particular time. In this connection, CREST members and, where applicable, their CREST sponsor or voting service provider are referred in particular to those sections of the CREST Manual concerning particular limitations of the CREST system and timings. The Company may treat as invalid a CREST Proxy Instruction in the circumstances set out in Regulation 35(5)(a) of the Uncertificated Securities Regulations 2001. As at noon on 5 August 2016 the Company’s issued share capital comprised 5,557,695 ordinary shares of £0.05 each. Each ordinary share carries the right to one vote at a general meeting of the Company and, therefore, the total number of voting rights in the Company as at noon on 5 August 2016 is 5,557,695. The following documents will be available at the office of the Company on any weekday (except Saturday) during normal business hours from the date of this notice until the date of the Annual General Meeting: A copy of the service agreement for the Executive Director. (a) A copy of the letters of appointment for the Non-Executive Directors. (b) (c) The Memorandum and Articles of Association of the Company. These documents will also be available for inspection during the Annual General Meeting and for at least fifteen minutes before it begins. Any member attending the meeting has the right to ask questions. The Company must cause to be answered any such question relating to the business being dealt with at the meeting but no such answer need be given if (a) to do so would interfere unduly with the preparation for the meeting or involve the disclosure of confidential information,(b) the answer has already been given on a website in the form of an answer to a question, or (c) it is undesirable in the interests of the Company or the good order of the meeting that the question be answered. If you have any general queries about the meeting please contact the Company Secretary at david@aortech.net or by calling on 01932 252123. You may not use any electronic address provided either in this notice of meeting or any related documents (including the Form of Proxy) to communicate for any purposes other than those expressly stated. 46 PARENT COMPANY FINANCIAL STATEMENTS PARENT COMPANY FINANCIAL STATEMENTS 47 ANNUAL REPORT AND ACCOUNTS 2016ANNUAL REPORT AND ACCOUNTS 2016AorTech International plc Level Two Springfield House 23 Oatlands Drive Weybridge Surrey KT13 9LZ tel: +44 (0) 1932 252 123 fax: +44 (0)1932 251 113 web: www.aortech.com email: info@aortech.com 48 ANNUAL REPORT AND ACCOUNTS 2016STRATEGIC REPORTAorTech International plcBOARD OF DIRECTORS AND ADVISORS

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