Report & Accounts 2016 Contents Highlights .................................................................................. 2 Business Model ........................................................................ 3 Chairman’s Statement .............................................................. 5 Operating Review ..................................................................... 8 Financial Review ......................................................................12 Strategic Report ......................................................................15 Directors ..................................................................................16 Secretary & Advisers ...............................................................17 Directors’ Report .....................................................................18 Independent Auditors’ Report to the Members of Deltex Medical Group Plc ..................................22 Consolidated Statement of Comprehensive Income .............24 Consolidated Balance Sheet ..................................................25 Consolidated Statement of Changes in Equity ......................26 Consolidated Statement of Cash Flows .................................27 Notes to the financial statements ...........................................28 Independent Auditors’ report to the Members of Deltex Medical Group Plc ..................................54 Parent Company Balance Sheet .............................................56 Parent Company Statement of Changes in Equity ................57 Notes to the Parent Company financial statements ..............58 Notice of Annual General Meeting ..........................................62 Shareholder’s letter .................................................................63 Notice of Annual General Meeting ..........................................65 Deltex Medical Development ..................................................68 Highlights Key performance measures ■ US probe revenues up 40% to £1.9m (25% growth in local currency) • Weaker sterling held back US profitability by £0.1m with reported costs and revenues up £0.3m and £0.2m respectively • 28 of 30 target platform accounts at year-end, target of 30 met in January 2017 Statutory results ■ Revenue flat at £6.3m (2015: £6.4m) ■ Gross margins improved to 68% (2015: 63%) ■ Operating loss reduced to £2.4m (2015: £3.5m) ■ Cash at 31 December 2016 of £0.6m. An additional £0.4m raised in March 2017. • Primary focus now shifted to probe growth in US platform accounts; redeploying resources to support best growth opportunities • Continued strong growth in Q1 2017 together with reduced costs, meant that March 2017 was the first month where the contribution from US probe sales covered fixed US sales staff costs. Nigel Keen, Chairman of Deltex Medical, commented: “2016 was a transitional year for Deltex Medical and our progress means we have entered 2017 with considerable confidence. Sales are growing well in the USA and other export markets which resulted in 2016 probe revenues up 40% and 24% respectively. Furthermore, we have seen positive signs of the UK business stabilising.” ■ International probe revenues up 25% at £1.7m • 15% increase in volume with an additional net £0.1m revenue growth from currency movements and sales mix ■ UK probe revenues down 26% at £1.9m. Trend improving: H1 down 36%, H2 down 17% • Down 10% in Q1 2017 with monitor and third party sales meaning that total UK revenues in Q1 2017 are slightly ahead of Q1 2016 ■ Monitor income down to £0.4m from £0.6m ■ Second half operating loss, before non-cash costs, of £0.2m (2015: £1.0m). Operating Highlights ■ New, easier to use, TruVue probes introduced globally ■ Excellent results presented from largest ever randomised controlled trial of ODM ■ EU R&D grant awarded for pilot project with new Velocity Pressure Loop displays ■ Successful field trials completed of additional non-invasive haemodynamic monitoring modality; launch pending. “Q1 2017 sales in the USA, including a small number of monitor sales, were over 50% ahead of the equivalent period in 2016 in local currency, those international distributors who order probes monthly are all running ahead of or at the same levels of last year and UK revenues were marginally ahead of 2016. We have continued to make small cost reductions as opportunities present themselves and in addition we have temporarily reduced our US staff costs as we move to deploy our resources closer to the best growth opportunities. Since January 2017, we are now fully benefiting from the full impact of manufacturing improvements with anticipated savings of over £30,000 a month”. “We have completed a key phase in our US expansion plan with the attainment of a critical mass of 30 platform accounts. We are focusing our resources on driving increased use of our probes in these accounts, whilst continuing to add new platform accounts in the existing territories. March 2017 was the first month where fixed US sales staff costs were covered by the gross margin on that month’s probe sales. We are now fully benefiting from investments already made in margin improvement and, with the pending launch of the first of a range of new products, expect to generate additional revenues from investments made in research and development as we move towards our next generation haemodynamic workstation platform.” 2 Deltex Medical Group plc Report & Accounts 2016 Business Model What we do? Deltex Medical exploits its proprietary technology to develop, design, manufacture and market medical equipment that deploys low frequency ultrasound to visualise and measure blood flow in the central circulation. Doing this enables doctors to optimise blood flow in patients undergoing surgery and in critical care. Robust clinical evidence shows that, if central blood flow is optimised, the risk of complications is reduced contributing to both more complete, faster recoveries for patients and lower costs of care for the healthcare provider. The use of the company’s technology, Oesophageal Doppler Monitoring (ODM) is the gold standard in the provision of such care. No other intra-operative fluid management (IOFM) technology enables the anaesthetist to manage the patient’s haemodynamic status during surgery either as precisely or as rapidly as with ODM and no other technology has been able to generate an equivalent evidence base of either patient or economic benefit. In certain circumstances, the clinician may choose methodologies other than ODM to acquire data to aid IOFM. In such situations, Deltex Medical offers other technologies required to satisfy the clinical need. What we sell? Our ODM technology comprises two main components; the patient monitor and a single use disposable probe which is placed in the oesophagus in a simple, minimally invasive process. Together they provide the clinician with real time information about the flow of blood around the body from deep inside the central circulation. If the flow of blood around the body is compromised, which occurs commonly during surgery, then the amount of oxygen delivered to tissues is reduced, increasing the risk of organ under- perfusion and harm. Periods of poor blood supply to organs including the gut, kidneys and liver increase the risk of developing a complication which requires additional treatment and often leads to an increase in the time spent in the hospital and eventually to an overall shortened life expectancy. For the healthcare provider, complications arising as a result of surgery lead to additional costs that need to be met both immediately and over the longer term. The use of our technology reduces these risks and the consequential costs associated with them. How do we make money? Our sales proposition to customers comprises both a capital purchase (the monitor) and a revenue purchase (the disposable probe). Due to the often protracted procurement times for capital items, we frequently need to place our monitors in hospitals at no cost to the hospital, which can lead to the faster adoption of our technology into a hospital’s practice and, therefore, a quicker use of revenue generating probes. There are over 3,400 monitors installed worldwide. The more probes that are used, the more revenue we generate. Our ODM is designed and manufactured in the UK giving us good control over both product quality and profit margins. Our gross margin earned in markets where we sell direct, namely the UK, USA, Canada and Spain, is higher than in those markets (over 30 countries) in which we sell through distributors (where we do not incur direct selling costs). Our gross margin earned on probes is typically over 75% in the UK, around 85% in the USA and 55% to 60% in our distributor led business. The existence of a large installed base of monitors enables the group to introduce complementary technologies without the need to incur the cost of creating a new installed base. Who are our customers? In the UK, our key customers are NHS Foundation Trusts and NHS Trusts (NHS). The Department of Health (DH) decided to adopt our technology “at pace and scale” subsequent to the 2011 National Institute for Health and Care Excellence (“NICE”) recommendation of our CardioQ-ODM products for over 800,000 patients a year undergoing higher risk surgery in NHS hospitals. However, the DH is a highly de-centralised organisation and its efforts to implement ODM nationally from 2013 were not successful with the main financial incentive provided by DH withdrawn early in 2014. Certain hospitals that purchased our equipment with the incentive of receiving additional funding reduced their usage following the withdrawal of the funding programmes. To respond to this, our sales efforts are now focused on those NHS Hospitals that want to support individual anaesthetists or groups of anaesthetists who choose to deliver the clinical benefits to patients of intra-operative fluid management using ODM with the concurrent economic benefits to the hospital. In the USA, recognition of the importance of modern ‘Enhanced Recovery’ approaches to surgery is growing at a hospital level as it becomes recognised that improving the quality of care provided to patients leads to better patient outcomes, lower costs of care and higher profits for the hospital care providers. Our focus in the USA has been to identify major hospitals that wish to implement evidence-based intra-operative fluid management, often as part of an enhanced recovery programme, and partner with them to help them to achieve their objectives. Business Model Continued We define these hospitals as ‘Platform Programme Accounts’. These accounts generally have the potential to consume at least 100 probes per month as the use of ODM spreads across surgical disciplines in that hospital. The programme typically involves one area of surgery which in that hospital adopts ODM into its protocols, measuring the changes in desired outcomes that are defined at the start of the project. This evidence is then used to develop similar protocols for use in other surgical procedures with the goal that the use of ODM becomes the routine in all of the operating rooms in that hospital. Our US market development plan, launched in 2013, was to have 30 such hospitals enrolled. We achieved this target during Q1 2017. Our main focus, in our distributor led markets is to work with those countries that have recognised the benefits of IOFM and/or enhanced recovery protocols and have a desire to implement these programmes nationally. This process usually starts with establishing contact with local Key Opinion Leaders in the countries who have the ability to implement at both hospitals and health-care systems’ level. This requires support from Deltex Medical, as although we work closely with local distributors, they usually do not have the knowledge or background to drive these change programmes. What is our goal? Our goal is to see the adoption of our products as the standard of care for all patients undergoing high-risk surgery. This we believe will be achieved through doctors understanding the clinical benefits of fluid management. Eventually, we seek to monitor a patient’s haemodynamic status from the time the patient presents to the healthcare system through to the point of discharge. *The global market opportunity for haemodynamic monitoring equipment, of which a large proportion relates to disposables, is expected to reach US$1.1 billion by 2021 at a CAGR of 4.3% during the forecast period. Deltex Medical with its ‘Gold Standard’ ODM technology is well placed to grow through wider acceptance of the fact that too much or too little fluid given to patients intra-operatively can cause harm and, therefore, it is important to get the amount of fluid given ‘just right’ for each and every patient. This can only be achieved through the use of our products. * Market and Markets. Hemodynamic Monitoring System Market – Analysis and Global Forecast to 2021. 4 Deltex Medical Group plc Report & Accounts 2016 Chairman’s Statement Deltex Medical’s Vision Deltex Medical’s goal is to build a major business that generates substantial returns for its shareholders, by providing medical technologies which help doctors deliver better outcomes for their patients while lowering the costs of care. Clinical and economic need established Deltex Medical has built a robust evidence base establishing that there is a clinical and economic need for its core oesophageal Doppler monitoring (‘ODM’) technology. ODM uses ultrasound to measure blood flow in the central circulation of patients and allows clinicians to use fluids and drugs to optimise the patient’s haemodynamic status during the trauma of surgery by protecting their tissues and organs. Clinical trials have shown that optimising haemodynamic status in this way reduces the patient’s length of stay in the hospital by reducing post-surgical complications. ODM is increasingly being recognised as a standard of care for intra-operative fluid management (‘IOFM’) in major surgery and critical care. Advanced haemodynamic management is also now becoming widely accepted as an important new medical modality. Deltex Medical is focused on maximising value from the opportunities presented as advanced haemodynamic management is adopted into routine clinical practice around the world. The emerging market for advanced haemodynamic management is seeking solutions in a broadening range of clinical conditions and settings and Deltex Medical’s product development strategy is focused on providing a haemodynamic workstation which will take the form of a multi-modal monitoring platform, allowing clinicians to choose from a single supplier the inputs, parameters and treatment strategies most appropriate to the individual patient’s circumstances. Our plan is to add selected new technologies to our existing platform, which will allow us both to enhance clinical utility and to establish revenue streams from the new modalities, while concurrently working to integrate them into the new monitoring platform which we are developing. The Board believes that our haemodynamic workstation offers considerable advantages to clinicians. This approach provides high quality versions of all the main technologies currently available together with the Company’s proprietary ODM technology. ODM is demonstrably superior to all other technologies for patient outcomes in higher risk clinical situations. Export led return to growth in second half Continuing growth in export markets meant that Group revenues, excluding clinical research based barter sales, returned to growth in the second half of 2016. Consumable revenues in the second half were 14% ahead of the equivalent period in 2015. Probe sales outside the UK of £3.8m in 2016 comprised 66% of total probe revenues, with probe revenues from our key target US market (£1.87m) surpassing those from the UK (£1.86m) for the first time. Compared to last year, US probe revenues were up £0.5m (40%) and international probe revenues increased by £0.3m (25%) with both benefiting from the weaker pound in the second half of the year. UK probe revenues, by contrast, were £0.6m (26%) lower than in 2015, the third successive year of reductions because of the NHS responding to its financial challenges by concentrating on reducing its spend on variable costs. Following disappointing UK ODM sales in the first half of 2016 which were £0.4m (36%) lower than the first half of 2015, underlying UK probe performance improved in the second half of the year (17% lower than 2015) following the introduction of enhanced TruVue probes in May and the presentation of important new clinical trials in June and July. UK sales have continued to stabilise to date in 2017 (10% lower than 2016). The Board believes that these trends, combined with the planned introduction of additional revenue streams from new advanced haemodynamic monitoring products, means that there is potential for the UK business to return to growth before the end of 2017. All our new monitors incorporate Pulse Pressure Waveform Analysis (‘PPWA’) as well as ODM. We have recently completed successful field trials of a third, entirely non- invasive, modality based on electrical impedance and expect to release this in the UK and a small number of international distributor markets on the CardioQ-ODM+ platform in the first half of 2017. Adding this technology means we will be offering the three best established modern advanced haemodynamic monitoring technologies on our monitor platform, allowing us to target wider groups of patients and clinicians. In addition, we are testing prototype non-invasive suprasternal Doppler probes and assessing a number of approaches to non-invasive blood pressure monitoring with the intention of adding these new modalities to our platform once they have been verified. France remains our largest export market by volume and we saw continued growth in sales to our French distributor who purchased 13,450 probes (2015: 12,300), around 45% (2015: 48%) of the total International probe sales. Markets such as France, Peru, Scandinavia and South Korea, where the use of our products is the most developed, contributed the largest growth in our international distributor business. In addition, we continue to develop other markets. Our progress in Canada and Spain, where we sell direct, has been slower than we had hoped due to both elongated procurement pathways and local clinical barriers. Chairman’s Statement Continued However, both retain the potential to develop into substantial markets over time. Until this happens, we are focusing our resources on markets likely to generate more rapid returns. Revenues from the sale of monitors remain under pressure due to severe restrictions on capital budgets in many healthcare systems and our policy is to place monitors on loan to hospitals where the investment is justified by potential returns from high margin probe sales. Monitor revenues, including clinical research based barter income of £0.2m in 2015, were £0.2m lower than in 2015 at £0.4m. A small number of monitor orders originally expected in 2016 have been received in the first quarter of 2017 with the result that the 2017 year to date monitor revenues by the end of March 2017 were already approaching 60% of the 2016 full year total. Overall Group revenues were broadly flat at £6.3m (2015: £6.4m including £0.2m of clinical research based barter sales). US expansion programme continues to drive forward The USA is our key focus market and in January 2017, we passed a key milestone in our expansion plan when we achieved our target of opening our 30th platform programme account, up from 17 in January 2016 and 6 in January 2015. Having achieved this milestone, we are now focusing our resources on supporting the increased use of our probes in these accounts with the goal of replicating our success in the ten largest such accounts which together accounted for over 75% of the underlying US probe run-rate coming into 2017. To expedite this, we are redeploying our resources geographically to best match the current growth potential. We intend to manage and expand our new account pipeline within our established sales territories, primarily in major hospitals but also in smaller hospitals which are members of healthcare systems where we already have a presence. Reduced losses Consumable gross margin improved from 70% to 74% over the year as we started to see the benefit of bringing probe tip assembly in-house in the second half of the year as well as the shift in probe revenues from the UK to the higher average selling price in the US market. The H2 2016 consumable gross margin was 78% compared to 68% in H2 2015 and also reflected the impact of exchange rate movements on US Dollar and Euro sales. Since January 2017, all new probe tip manufacture is in-house and this together with the impact of substantial manufacturing process improvements will, we expect contribute to continued increases in probe margins in 2017. Cash costs at £6.2m were £0.5m (7%) lower than in 2015. The full year effect of annualised cost reductions came through in the second half before being partially offset by exchange movements affecting primarily our US operating costs. Operating losses for the year reduced by £1.1m (32%) to £2.4m (2015: £3.5m). 6 Deltex Medical Group plc Report & Accounts 2016 Improving operating cash performance The Group’s primary short-term priority remains to get the business past the operating cash breakeven point and we have made considerable progress towards achieving this in 2016 through increased traction in export markets, progress towards stabilising the UK business and significant cost reductions. In the second half, the loss before non-cash costs reduced by over 70% to £0.4m (H2 2015: £1.4m) and total cash consumption in the second half reduced to £0.4m. Cash at the end of the year was £0.6m (2015: £0.6m). Since the year-end, we have raised an additional £0.4m to give us greater flexibility in managing our working capital balances. Prospects 2016 was a transitional year for Deltex Medical and our progress means we have entered 2017 with considerable confidence. Sales are growing well in the USA and other export markets which resulted in 2016 probe revenues up 40% and 25% respectively. Furthermore, we have seen positive signs of the UK business stabilising. Q1 2017 sales in the USA, including a small number of monitor sales, were over 50% ahead of the equivalent period in 2016 in local currency, those international distributors who order probes monthly are all running ahead of or at the same levels of last year and UK revenues were marginally ahead of 2016. We have continued to make small cost reductions as opportunities present themselves and in addition we have temporarily reduced our US staff costs as we move to deploy our resources closer to the best growth opportunities. Since January 2017, we are now fully benefiting from the full impact of manufacturing improvements with anticipated savings of over £30,000 a month. We have completed a key phase in our US expansion plan with the attainment of a critical mass of 30 platform accounts. We are focusing our resources on driving increased use of our probes in these accounts, whilst continuing to add new platform accounts in the existing territories. March 2017 was the first month where fixed US sales staff costs were covered by the gross margin on that month’s probe sales. We are now fully benefiting from investments already made in margin improvement and, with the pending launch of the first of a range of new products, expect to generate additional revenues from investments made in research and development as we move towards our next generation haemodynamic workstation platform. Nigel Keen Chairman 26 April 2017 Operating Review Pro-forma results Consumable revenues Probes Other Total consumable revenue Cost of sales- consumable Gross profit consumables Monitor and sundry income Sundry income/(expense) * Net monitor income less costs ** 2016 £’000 2015 £’000 5,458 331 5,789 (1,483) 4,306 (5) 28 23 5,230 259 5,489 (1,634) 3,855 (6) (15) (21) Cash costs Loss before non-cash and US market development and exceptional items (6,176) (6,716) (1,847) (2,882) Net non- cash costs *** (522) (253) Loss before US market development costs US market development costs Operating loss (2,369) (3,135) - (2,369) (351) (3,486) *Included in Sundry income/(expense) are 3rd party revenues of £44k (2015: £86k). **Net monitor income less costs comprises: Revenue from monitors sold Maintenance revenue Cost of sales – monitors Depreciation of loan monitors Total 2016 £’000 360 74 (181) (225) 28 2015 £’000 400 70 (284) (201) (15) ***Net non-cash costs in 2015 included £0.2m of clinical research based income. 8 Deltex Medical Group plc Report & Accounts 2016 Operating Review Continued Pro-forma results The Group publishes a pro-forma results statement which enables the reader to better understand the key performance indicators of the Group. This pro-forma presentation does not alter the total revenue, costs or results for the year. Its objective is to communicate the results of the Group in an easier to understand format. Consumables revenue in 2016 was £300,000 (5%) ahead of 2015 at £5,789,000 with the second half £366,000 (14%) ahead. Gross profit on consumables was £451,000 (12%) higher than 2015 at £4,306,000. Gross margin on consumables was 74% (2015: 70%). The improvement in gross margin reflects higher average selling prices for probes with a higher proportion of sales in the USA, favourable exchange movements in the second half of 2016 and early returns on bringing probe tip assembly in-house as part of manufacturing process improvements. The Group made satisfactory progress with export probe sales which totalled £3,593,000, an increase of £877,000 (32%) over 2015 (£2,716,000). The USA contributed £536,000, 61%, of the total increase in export probe revenues. Export probe revenue gains exceeded by £228,000 a £649,000 (26%) decline in UK probe sales and thus enabled the Group’s probe revenues to return to growth in the second half. Third party revenues, primarily sales of the CASMED cerebral oximetry system in the UK, grew by £40,000 (13%) with reduced second half margins following the rise in US Dollar import prices in the second half. Monitor and other income was £302,000 lower than 2015 reflecting a £218,000 fall in monitor revenue to £360,000. In total, the Group sold 122 monitors in 2016 and placed a further 98 units. Cash costs were £540,000 (8%) lower at £6,176,000 reflecting the net effect of increased expenditure on US field team expansion and reductions in other costs of over £100,000 a month. The annualised net savings of c£1m a year were realised in the second half before being offset by the adverse exchange impact on non-sterling costs-notably US operating costs which continued to exceed US revenues. The operating loss was £2,369,000 (2015: £3,486,000), a reduction of £1,117,000 (32%). The second half operating loss of £646,000 which was less than half that in the second half of 2015 (£1,340,000) and included £469,000 of non- cash costs. Total cash at 31 December 2016 was £582,000 (2015: £575,000) after £2,473,000 of net new finance in the year. Cash consumption in the second half was significantly reduced and totalled £386,000. This reduced cash consumption is consistent with the Group’s key priority to get the business past the cash break-even point at the operating level. The Group made substantial progress towards achieving this in 2016 and estimates the underlying monthly cash burn at the end of 2016 to have been around £90,000 compared to over £200,000 at the start of the year. Since the year-end, the underlying cash burn has been further reduced by the full effect of the manufacturing process improvements (expected to save over £30,000 a month), certain reductions to the cost base and continuing growth of sales in the USA and major international markets. In addition, the process of redeploying US resources to support the areas with highest potential growth has reduced costs and going forward the Group plans broadly to match new hires to increases in the monthly probe revenue run-rate. The Group going forward expects further progress on reducing the cash burn to come from new product releases starting in the first half of 2017. Statutory results Revenue as reported in the Consolidated Statement of Comprehensive Income was broadly flat at £6,331,000 (2015: £6,405,000 including £178,000 of clinical research based barter sales). Increases in revenue from export sales of £795,000 and UK third party sales of £40,000 were largely offset by a £731,000 reduction in revenues from ODM products in the UK. Gross margins were higher at 68% (2015: 63%) with the benefit of higher margin sales in the USA replacing UK probe sales and improved manufacturing efficiency. Probe margins were higher at 77% (2015: 72%) and are expected to continue to improve as North American sales grow and the effect of margin improvement initiatives comes through. Costs were kept under tight control with total charges reduced by 11% at £6,698,000 (2015: £7,496,000). Increased spending on US staff was offset by savings made in overheads. Overall, the operating loss of £2,369,000 was £1,117,000 lower (2015: £3,486,000). US market US probe revenues increased by 25% in local currency and 40% in sterling to £1,869,000. The reported volume increase of 1,595 probes (15%) to 12,025 probes is distorted by a few sales incentives in 2015 to accelerate transition to the enhanced performance TruVue probes where additional probes were sold at minimal or no marginal revenue. Since 2012, our strategy in the USA has been to build a platform for future national roll-out of ODM by developing a small number of prestigious hospital accounts where our products are being embedded broadly and deeply into routine usage across a number of major surgical procedures. Our goal has been to establish a core platform of 30 such accounts and we passed this key milestone in January 2017. Operating Review Continued In addition, we have built a pipeline of additional accounts and expect to continue to open these going forward but with less resource being absorbed on pipeline development than over the last three years. Around 80% of underlying probe consumption in 2016 came from the ten best established platform accounts. Encouragingly, UK sales in the first quarter of 2017 have continued the more positive trends and total UK revenue for the quarter was marginally ahead of 2016. First quarter sales benefited from the largest monitor order since 2014 worth just over £80,000, which we announced on 23 February 2017. 2017 Since January 2017, we have been focusing on expanding probe consumption in the key platform accounts. To facilitate this, we have redeployed our field staff resources to best reflect the growth opportunities open to us now that the core platform has been established. In the short term, this has reduced our fixed monthly US field staff costs to close to the gross margin on regular monthly probe sales with March 2017 being the first month in which the gross margin on probe revenues has exceeded fixed monthly field staff costs. Our plan is to phase recruitment from now on to broadly match US staff costs to revenues and, therefore, bring to an end the heavy investment we have made in building our US team since 2012, which peaked at approximately $150,000 a month. UK Market Deltex Medical had a third consecutive disappointing year of declining ODM sales in the UK. Probe sales of £1,865,000 were £649,000 (26%) lower than in 2015. Monitor sales were £15,000 lower than in 2015. Maintenance revenues were £4,000 higher than 2015 at £74,000. Third party revenues from lower margin distributed products were £40,000 ahead of 2015. Following a review of our UK business in the second half of 2015, we refocused our efforts in the UK market on to the considerable number of doctors who are both committed to making ODM a standard of care and who work in those NHS hospitals with C-suite support for implementing cost-saving quality improvement programmes. Our marketing efforts focused on highlighting the enhanced performance of the TruVue probes which we launched in May, the impressive results presented in June from a major multi-centre randomised controlled trial of ODM use during surgery in Spain and the results presented from a major UK NHS hospital of the first trial comparing ODM to a competing IOFM technology during surgery which confirmed the superior patient outcomes expected from ODM, based on previous trials. Following disappointing ODM sales in the first half, the second half of 2016 showed a marked improvement in trend in the UK with third quarter probe revenues ahead of the second quarter and the fourth quarter ahead of the third. The 17% decline in probe revenues in H2 compared to 2015 compares to a 36% H1 decline and did not reflect underlying trends because there were no orders in the second half from two of our largest UK customers as they worked their way through probe stocks. Both have ordered probes since the year-end. International markets Our international business comprising all export markets, excluding the USA, made good progress in a number of areas in 2016. Probe revenues increased by 25% on a volume increase of 14%; second half sales benefited from weaker sterling against both the Euro and US Dollar. We sold 13,450 probes to our French distributor, an increase of 9% over 2015, maintaining France as our largest export market by volume. In our other more developed markets, we sold 2,600 probes to Scandinavia (up 55%) and 4,500 probes to Peru (broadly flat with 2015). Other significant volumes were achieved in less developed markets for our products including South Korea where we sold 4,800 probes (up 586%). In these earlier stage markets, there is inherent uncertainty over the time between stocking orders and regular repeat orders pulled by traction in the market. However, we are encouraged by the South Korean government’s decision since the year-end to broaden significantly its reimbursement coverage for ODM. Progress with our Canadian operation has remained slower than we would have liked due to the often protracted time delays between clinical evaluations and purchase for both monitors and probes. There is a good potential business pipeline which, once it starts converting into revenues, is expected to be sufficient to support organic growth from locally generated cash. In the meantime, we are minimising the resource we allocate to Canada in favour of supporting markets with greater prospects of more rapid returns. In Spain, we have invested over several years in supporting clinical leaders to introduce enhanced recovery surgery programmes which are driving growth in several markets. Clinical guidelines for 10 surgical disciplines were published in 2015 and are now supported by the key professional bodies and regional and national health administrators. Our strategy is to focus on a small number of hospitals at first to build recurring revenue and to review additional investment in the context of cash returns generated from these. Progress to date has been slow and we continue to review our ongoing level of investment in this market. We expect the opportunity in Spain to be boosted after publication of the results of the successful multi-centre trial of ODM and understand that the draft paper has been submitted to a peer reviewed medical journal. Prospects Deltex Medical made considerable progress in 2016 in reshaping its business for the next stage of its development. We grew well in our export markets and started to see some stability return to the challenging UK market. We reduced costs, launched a significantly improved Doppler probe and 10 Deltex Medical Group plc Report & Accounts 2016 Operating Review Continued increased gross margins. Since the end of the year, we have started to deliver substantial further manufacturing cost savings, passed the key milestone in the USA of opening our 30th platform account and have field tested a major new advanced haemodynamic monitoring modality on our existing monitor platform. These developments, together with a refocusing of our US resources to match the platform account growth opportunities mean that we have made further substantial progress towards our key short-term priority of getting the business past the operating cash break-even point. Ewan Phillips Chief Executive 26 April 2017 Financial Review Statutory results Consolidated Statement of Comprehensive Income (SOCI) Revenue as reported in the SOCI of £6,331,000 was £74,000 lower than the prior year. Consistent with prior years, revenue has been categorised between probes and other revenues which is reflective of the Group’s operating segments. More information concerning probes revenue is given later in this report. Detailed market information can be found in the Operating Review on pages 8 to 11. Other income comprised: Monitors sold Clinical research income Distributed product sales Maintenance revenue Other 2016 £’000 360 - 355 74 84 873 2015 £’000 400 178 345 70 182 1,175 Monitor sold income fell by £40,000 during the year reflecting the continuing difficulty to make capital sales, particularly within the UK to the NHS. However, the reduction in the number of units sold of 54 was to some extent offset by higher revenues per monitor sold. In the UK, this was achieved through slightly better sales prices and in the USA and our international markets predominantly through the benefit of the weakness of sterling compared to both the Euro and the US Dollar following the result of the EU referendum in June 2016. Gross Margin The Group’s overall gross margin for the year was 68% compared to 63% last year. The main changes in the margin are shown in the table below: The product contribution from probes has improved during the year reflecting the move to becoming more reliant on crystal assemblies built internally rather than sourced from a more expensive third party as well as the benefit that will have flowed through from both increases in selling prices and the benefit from the change in foreign exchange rates. The monitor product contribution has fallen due to the weakening of sterling against both the US Dollar and the Euro leading to an increase in the cost of production of a monitor of c.8% as well as a slight increase in the labour and overhead absorption rate. This increase in unit cost was partially offset by slightly higher sales revenues. The increase in the depreciation cost of placed monitors reflects the increase in the size of the installed base. Production variances decreased compared to last year as the new manufacturing processes were embedded. Foreign exchange Following the significant falls in both the US Dollar and Euro exchange rates in the second half of the year because of the results of the EU referendum, the re-translation of costs and revenues of our overseas operations increased by £329,000 and £230,000 respectively. International sales that are usually denominated in either US Dollars or Euros also benefitted from a more favourable rate of exchange compared to 2015 which contributed £0.3m. This benefit would have been to some extent offset by travel and subsistence costs incurred by the International Sales team. Costs Administration expenses were £412,000 lower than last year. This reduction reflects the focus that the Group has had on reducing expenditure across all areas of the business. Sales and marketing expenses were broadly flat compared to the prior year. The full benefit in 2016 of the significant cost reductions made in the UK during 2015 have been offset principally by both the increased investment in the size of the US sales team as well as the impact of the weakness of Sterling compared to the US Dollar following the EU referendum in June. The effect has been to reduce the average rate of exchange used to translate US Dollar denominated income and expenses from 1.5296 to 1.3525, a fall of 12% for the year. Product margin 2016 Product margin - 2015 Probes Monitors Other % 55 % 50 % 82 Total Probes Monitors Other % 39 % 77 % 60 % 79 - - (5) 77 (67) - (5) (22) - (10) (6) 39 (5) (1) (3) 68 - - (7) 72 (33) - (7) 20 - (12) (5) 22 Total % 73 (3) (1) (6) 63 Product contribution Depreciation of placed monitors Shipping costs Production variances 12 Deltex Medical Group plc Report & Accounts 2016 Financial Review Continued US Market development costs As reported last year, the specific US market development activities were completed during 2015. All marketing related expenses incurred in 2016 have been categorised as sales and marketing expenses. US marketing costs categorised within sales and marketing expenditure incurred in 2016 were £173,000 (2015: £207,000). Exceptional costs The exceptional costs reported in 2015 related to the steps taken to respond to the declining UK market. Similar action was not undertaken during 2016. Taxation The Group expected to receive approximately £125,000 relating to the surrender of current year tax losses under the Government’s Research and Development Tax Credit Scheme. However, following finalisation of the 2015 claim the Group received £160,000 (2015: £150,000) during the year. The Group expects to be able to claim approximately £107,000 relating to its 2016 activity. Probe revenue Probe revenue continues to be a key performance indicator for the Group. Probe revenues were £228,000 higher than last year. (2015: £41,000 lower). Further information on key developments can be found in the Operating Review on pages 8 to 11. Cash costs Cash costs decreased by £540,000 during the year which reflects the activity taken during the year to reduce cash expenditure across all operations. The full benefit of the changes implemented in 2016 will flow through into 2017. Non-cash costs Equity settled share based payment expense Accrued holiday pay Equity settled transaction costs Net clinical research income Depreciation and amortisation expense 2016 £’000 2015 £’000 120 73 129 - 425 747 127 - 85 (162) 404 454 The net increase in non-cash costs is principally due to the fact that there was no net clinical research income received in 2016 and the recognition of an accrual for holiday pay. Balance Sheet Property, plant and equipment (PPE) The decrease in the carrying value of PPE is as a result of the depreciation charge for the year exceeding the cost of the placed monitors added to the installed base during the year. Net monitor income Monitors sold Maintenance revenue Cost of monitor production Depreciation of placed monitors 2016 £’000 2015 £’000 360 74 (181) (225) 28 400 70 (284) (201) (15) Intangible assets The Group continues to invest in research and development activity as it continues with its objective to develop a new monitor that will give the clinician a choice as to which fluid monitoring technology to use. It is expected that a small number of additional products that will seamlessly integrate with the existing ODM monitor will be released during 2017. Net monitor income increased compared to the prior year principally to the beneficial effect on reported revenue from the foreign exchange rate movements during the year. As noted earlier, the activity related to the re-design of the probe tip and the manufacturing technique was completed during the year and the full benefits from the manufacturing change is expected to be seen in 2017. As noted earlier in this report, the full benefit of the cost savings made in the probe manufacturing process should be seen during 2017. Jonathan D Shaw Group Finance Director 26 April 2017 Financial Review Continued Inventory The carrying value of inventory fell slightly compared to the previous year due to a combination of factors, of these the most significant was the continued focus on working capital management to ensure that inventory builds were more closely matched to sales forecasts. This focus will continue and will be helped in 2017 by the planned reduction in the range of probes that will be manufactured. Borrowings The movement in borrowings is largely due to a decrease in the amount that has been drawn down under the Group’s invoice discounting facility of £88k and the continued reduction in the amounts owed under finance lease obligations offset by the increase in the amount outstanding under the new convertible loan that was arranged in February 2016. Trade and other payables Trade payables and other payables were reduced compared to the previous year albeit slightly higher than planned as the Group managed its cash flow in the light of sales activity towards the end of the year. Social security and other taxes were lower as the amount of VAT payable at the end of the year was lower largely due to the sales mix in December. PAYE outstanding remained at similar levels due to the timing of payments of payroll taxes in the UK. Accrued expenses remain at similar levels from the prior year. Included in this balance are amounts owing in relation to staff bonuses earned over a number of years that have not yet been settled. These amounted to approximately £705k (2015: £610k). Cash flow The Group’s main funding requirements continue to be: ■ Funding of operating losses to cash break-even; ■ Funding working capital requirements; and ■ Funding investments. Operating costs The cash loss in 2015 of £2,651,000 before US market development costs and exceptional items has reduced by £1,029,000 during the year. The main contributors being the benefit of full year cost reductions made in 2015, the cost reductions that were also made in February 2016 and the continuing relentless focus on controlling cash expenditure across all of the Group’s activities. 14 Deltex Medical Group plc Report & Accounts 2016 Strategic Report For the year ended 31 December 2016 The Directors have pleasure in presenting their Strategic Report for the year ended 31 December 2016. The report provides a review of the Group’s business and describes the principal risks and uncertainties that it faces. The report includes an analysis of the performance of the Group during the financial year and its position at the year-end including how this is assessed using key performance indicators (KPI). The Chairman’s Statement, Operating Review and Financial Review form part of this Strategic Report. Principal risks and uncertainties The Group’s strategy has been and continues to be the establishment of guided fluid management using the CardioQ-ODM as a standard of care firstly in the Group’s home market of the UK, and secondly in the USA and other major markets for medical technology, both through direct sales and marketing and, where appropriate, distribution partnerships. The Group regularly reviews its strategic options and financing arrangements to reflect circumstances encountered from time to time. The directors have, therefore, identified the following as being the principal risks and uncertainties facing the Group: ■ Government policy changes and spending plans. ■ Lower than anticipated rates of adoption of the Group’s products in existing key markets. ■ Not yet established rates of adoption of the Group’s products in identified new key markets. ■ The availability to the Group of resources, including cash, to pursue its strategy. ■ Exposure to political risks in certain territories. The Group has established internal controls to assess the impact, or potential impact, of actual developments affecting these risks. The Group has developed internal reporting processes that are used to carefully manage cash flow, production scheduling and stock holdings. A faster or slower than expected change in the adoption of the Group’s products could expose the Group to supply chain and production capacity risks. In addition, supply chain disruptions such as delays or losses of inventory also present a potential risk to the Group’s ability to progress its strategic aims. The Group mitigates these risks through effective supplier selection, management and procurement practices. Government policy changes and spending plans will continue to impact the Group. We have implemented plans to increase the revenues and margin from the UK business with distributor agreements for the sale of third party products to take advantage of our established clinical sales team. Key performance indicators The key performance indicators that are used to monitor performance of the Group are set out in the table below and are discussed in more detail in both the Operating Review, on pages 8 to 11 and the Financial Review, on pages 12 to 14. Key performance indicator Probe revenues (£’000) Monitor revenues (£’000) Third party revenues (£’000) Gross profit percentage UK probe volumes sold (units) US probe volumes sold (units) Cash at bank 2016 2015 5,458 5,230 360 355 68% 578 345 63% 20,385 28,770 12,025 10,430 582 575 Going concern The Group meets its day-to-day working capital requirements through a combination of operational cash flows, an invoice discounting facility and the raising of additional finance if required. The directors have examined detailed budgets and forecasts until 30 June 2018 which incorporate the post balance sheet fundraising detailed in the Directors’ Report. This review indicates that the Group has sufficient liquidity to continue as a going concern. Further details of the Group’s cash flows are given in the Financial Review on pages 12 to 14 and the Basis of preparation note on page 31. The Board has a reasonable expectation that the Group will have adequate resources to continue in operational existence for the foreseeable future and accordingly continues to adopt the going concern basis in preparing the financial statements as detailed in note 1. The Strategic Report on pages 5 and 15 has been approved by the Directors and signed: By order of the Board. Jonathan D Shaw Company Secretary 26 April 2017 Christopher Jones Chris Jones joined the board in June 2015 and brings over 25 years of experience in Fortune 500 and VC funded healthcare companies in both the UK and importantly throughout the US. Executive Chairman of Mologic Ltd, Executive Chairman of Elasmogen Ltd, and Non-executive Director of MediSieve and Health Enterprise East, Mr Jones is a US national who came to the UK in 2008 to become CEO of GlySure. Prior to joining GlySure he was CEO of Tensys Medical developing and commercialising a novel continuous, non-invasive blood pressure monitor resulting in the sale of the company in 2008. Mr Jones also spent nine years with Nellcor Inc, a division of Tyco Healthcare, most recently as VP of Marketing responsible for the $700M WW pulse oximetry and critical care businesses. Mr Jones is a graduate of Yale University with a Bachelor of Science Degree in Molecular Biophysics and Biochemistry. Executive directors Ewan Phillips MA ACA Chief Executive Ewan joined Deltex Medical as Group Finance Director in August 2001 with a background in corporate finance. He took on responsibility for UK sales in October 2002 and was appointed managing director of the UK subsidiary in November 2005 before being appointed Chief Executive in September 2009. Jonathan D Shaw ACIB FCCA Group Finance Director Jonathan Shaw joined the board in September 2015. He has spent the majority of his career working at either director or senior manager level in professional accounting and auditing firms most recently with Grant Thornton UK LLP in London and including PricewaterhouseCoopers LLP in Southampton where he was Deltex Medical’s senior audit manager for nearly four years. During his career, Jonathan has undertaken a number of secondments to industry or government and spent almost three years at the Financial Reporting Council, the UK’s independent regulator responsible for promoting high quality corporate governance and reporting to foster investment. Directors Non-executive directors Nigel Keen MA FCA FI ET Chairman Nigel has been involved with Deltex Medical since 1988 and Chairman since 1996. He is also Chairman of the following companies; Syncona Investment Management Limited (SIML), a company which manages Syncona Ltd, an evergreen investment company developing advanced medical products; he is also a non-executive director of SIML’s parent company, Syncona Ltd, a company that is listed on the London Stock Exchange; Oxford University Innovation Ltd, the technology transfer group for Oxford University; and Oxford Academic Health Science Network, established by the National Health Service in England to align the interests of patients in its region with academia, industry and the healthcare system. His career has encompassed venture capital, industry and banking. He has a degree in engineering from Cambridge University, is a Fellow of the Institute of Chartered Accountants, a Fellow of the Institute of Engineering and Technology and has been involved in the formation and development of high technology businesses for more than thirty years. Nigel is Chairman of the Remuneration Committee. Julian Cazalet MA FCA Julian joined the Board in April 2008 and is the Chairman of the Audit Committee. He was until 2007 a Managing Director — Corporate Finance of JPMorgan Cazenove. After graduating in Economics from Cambridge, he qualified as a Chartered Accountant before joining Cazenove in 1973. He became a Partner in 1978. From 1989 he worked in Corporate Finance, firstly in Equity Capital Markets and subsequently advising listed companies. He is Chairman of Herald Investment Trust plc, a director of Private Equity Investor plc, The Lindsell Train Investment Trust plc and of a number of charities. Professor Sir Duncan Nichol Duncan has been an influential figure in the provision of acute health services in the UK throughout his career. He worked for the NHS for nearly 30 years in a number of senior management roles and was its Chief Executive from 1989 to 1994. Duncan was the Deputy Chairman of the Christie NHS Foundation Trust from 2008 to 2012 and is currently Chairman of the Countess of Chester NHS Foundation Trust. Mark Wippell Mark, formerly a Partner with Allen & Overy LLP, has significant experience advising international companies on their strategic transactions. His experience includes public and private M&A, business reorganisations, complex joint ventures, demergers and securities offerings. Mark is qualified as a lawyer in both the UK and the US and has worked extensively with North American based businesses. Mark is Chairman of American European Business Association. 16 Deltex Medical Group plc Report & Accounts 2016 Secretary & Advisers Company Secretary & Registered office Principal bankers The Royal Bank of Scotland plc 62 – 63 Threadneedle Street PO Box 412 London EC2R 8LA Financial PR advisers IFC Advisory Limited 73 Watling Street London EC4M 9BJ Registrars Capita Registrars Limited The Registry 34 Beckenham Road Beckenham Kent BR3 4TU Jonathan D Shaw ACIB FCCA Terminus Road Chichester West Sussex PO19 8TX Nominated adviser Arden Partners plc 125 Old Broad Street London EC2N 1AR Independent Auditors PricewaterhouseCoopers LLP Chartered Accountants and Statutory Auditors Savannah House 3 Ocean Way Ocean Village Southampton SO14 3TJ Solicitors Laytons Solicitors LLP 2 More London Riverside London SE1 2AP Directors’ Report For the year ended 31 December 2016 Registered No. 03902895 The directors present their report and the audited consolidated financial statements for the year ended 31 December 2016. Future developments The Group’s business activities, together with the factors likely to affect its future developments, performance and position are set out in the Chairman’s Statement on pages 5 and 6 and the Operating Review on pages 8 to 11. Financial risk management The Financial Risk Management objectives and policies of the Group, including the exposure to interest rate risk, liquidity risk and currency risk are set out in note 25 to the financial statements on pages 50.to 53. Dividends The directors cannot propose the payment of a dividend (2015: £nil) for 2016. Directors The directors of the Group who served during the year are shown below. Biographical details are given on page 16 of the annual report and accounts. Nigel Keen .........................................................Non-executive Chairman Ewan Phillips ..........................................................................Chief Executive Jonathan D Shaw ........................................... Group Finance Director Julian Cazalet ...................................................... Non-executive Director Chris Jones .......................................................... Non-executive Director Sir Duncan Nichol ............................................ Non-executive Director Mark Wippell ........................................................ Non-executive Director Company Secretary On 30 December 2016, Jonathan D Shaw was appointed company secretary following the resignation of the previous office holder. Directors’ remuneration The following information has been disclosed to satisfy the disclosure requirement set out in rule 19 of the AiM Rules for Companies: 2016 Total £ 33,333 2015 Total £ 33,333 Salary & Fees Nigel Keen Ewan Phillips Jonathan D Shaw Julian Cazalet Chris Jones Sir Duncan Nichol Mark Wippell Cash settled £ - Equity settled £ 33,333 200,000 123,333 - 18,000 - - - - 24,000 - 24,000 24,000 Benefits £ - 7,500 7,500 Pension £ - 8,000 5,949 - - - - - - - - 215,500 136,782 24,000 18,000 24,000 24,000 Tim Irish (resigned 31 March 2015) Paul J Mitchell (resigned 2 April 2015) Notes *from 1 September 2015 ** from 1 June 2015 341,333 105,333 15,000 13,949 475,615 - - - - - - - - - - 341,333 105,333 15,000 13,949 475,615 215,500 42,366* 24,000 10,500** 24,000 24,000 373,699 6,000 42,279 421,978 1. Non-executive Directors do not have a permanent place of work specified in their service contracts. Therefore, all reasonable and properly incurred expenses incurred in performance of duties as Board Members are reimbursed by the Company. Bonuses Included in accruals at 31 December 2016, is an amount of £144,200 owed to Ewan Phillips relating to contractual bonuses that had been earned in the three years ended 31 December 2014. No bonuses have been accrued in respect of the years ended 31 December 2015 and 31 December 2016. In accordance with its usual practice, the Board intends to settle this outstanding amount when appropriate to do so under the Company’s Enterprise Management Incentive Scheme. 18 Deltex Medical Group plc Report & Accounts 2016 Directors’ Report For the year ended 31 December 2016 – Continued Interests in share schemes Ewan Phillips’ interests in share options is detailed below. At 1 January 2016 Granted. Exercised Expired At 31 December 2016 Exercise price Exercise period Number Number Number Number Number £ from to 2001 Executive share option scheme 400,000 400,000 500,000 500,000 - - - - 2011 Executive Share Option Scheme 1,000,000 500,000 1,250,000 - - - - - - - - - - 2003 Enterprise Management Incentive Scheme 92,700 510,638 43,478 31,250 34,884 690,104 20,270 13,636 507,692 277,174 115,385 6,887,211 - - - - - - - - - - - - - - - - - - - - - - - - (400,000) - 0.2075 28th Mar-09 27th Mar-16 - - - - - - - - - - - - - - - - - 400,000 0.295 29th Jun-10 28th Jun-17 500,000 0.185 30th Jun-11 29th Jun-18 500,000 0.1275 12th Jun-12 11th Jun-19 1,000,000 0.1725 28th Sep-14 27th Sep-21 500,000 0.24 10th Oct-15 9th Oct-22 1,250,000 0.11 10th Jun-18 9th Jun-25 92,700 0.01 30th Jun-08 29th Jun-18 510,638 0.01 12th Jun-09 11th Jun-19 43,478 31,250 0.01 30th Dec-09 29th Dec-19 0.01 24th Mar-10 23rd Mar-20 34,884 0.01 25th Jun-10 24th Jun-20 690,104 0.01 13th Oct-10 12th Oct-20 20,270 0.01 23rd Dec-10 23rd Dec-20 13,636 0.01 19th Apr-11 18th Apr-21 507,692 0.01 27th Sep-11 26th Sep-21 277,174 0.01 10th Oct-12 9th Oct-22 115,385 0.01 23rd Dec-13 22nd Dec-23 (400,000) 6,487,211 Jonathan D Shaw did not have an interest in share options during either 2016 or 2015. Directors’ Report For the year ended 31 December 2016 – Continued Directors’ indemnities As permitted by the Companies Act 2006, the Company has indemnified the directors in respect of proceedings brought by third parties and qualifying third party indemnity insurance was in place throughout the year and up to the date of approval of the financial statements. Research & development activities Deltex Medical Limited, a subsidiary, undertakes research and development work in support of its principal manufacturing activities. Further information on the Group’s research and development activities can be found throughout the strategic report. The directors are responsible for keeping adequate accounting records that are sufficient to show and explain the group and parent company’s transactions and disclose with reasonable accuracy at any time the financial position of the group and parent company and enable them to ensure that the financial statements comply with the Companies Act 2006 and, as regards the group financial statements, Article 4 of the IAS Regulation. The directors are also responsible for safeguarding the assets of the group and parent company and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities. Events after the balance sheet date On 22 March 2017, the company raised £400,000 through subscriptions for 11,034,482 new ordinary shares at 3.625p per share. The directors are responsible for the maintenance and integrity of the parent company’s website. Legislation in the United Kingdom governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions. Statement of directors’ responsibilities in respect of the financial statements The directors are responsible for preparing the Annual Report and the financial statements in accordance with applicable law and regulation. Company law requires the directors to prepare financial statements for each financial year. Under that law the directors have prepared the group financial statements in accordance with International Financial Reporting Standards (IFRSs) as adopted by the European Union and parent company financial statements in accordance with United Kingdom Generally Accepted Accounting Practice (United Kingdom Accounting Standards, comprising FRS 101 “Reduced Disclosure Framework”, and applicable law). Under company law the directors must not approve the financial statements unless they are satisfied that they give a true and fair view of the state of affairs of the group and parent company and of the profit or loss of the group and parent company for that period. In preparing the financial statements, the directors are required to: ■ select suitable accounting policies and then apply them consistently; ■ state whether applicable IFRSs as adopted by the European Union have been followed for the group financial statements and United Kingdom Accounting Standards, comprising FRS 101, have been followed for the company financial statements, subject to any material departures disclosed and explained in the financial statements; ■ make judgements and accounting estimates that are reasonable and prudent; and ■ prepare the financial statements on the going concern basis unless it is inappropriate to presume that the group and parent company will continue in business. The directors consider that the annual report and accounts, taken as a whole, is fair, balanced and understandable and provides the information necessary for shareholders to assess the group and parent company’s performance, business model and strategy. Each of the directors, whose names and functions are listed in directors report confirm that, to the best of their knowledge: ■ the parent company financial statements, which have been prepared in accordance with United Kingdom Generally Accepted Accounting Practice (United Kingdom Accounting Standards, comprising FRS 101 “Reduced Disclosure Framework”, and applicable law), give a true and fair view of the assets, liabilities, financial position and profit of the company; ■ the group financial statements, which have been prepared in accordance with IFRSs as adopted by the European Union, give a true and fair view of the assets, liabilities, financial position and loss of the group; and ■ the Pro-forma results includes a fair review of the development and performance of the business and the position of the group and parent company, together with a description of the principal risks and uncertainties that it faces. In the case of each director in office at the date the Directors’ Report is approved: ■ so far as the director is aware, there is no relevant audit information of which the group and parent company’s auditors are unaware; and ■ they have taken all the steps that they ought to have taken as a director in order to make themselves aware of any relevant audit information and to establish that the group and parent company’s auditors are aware of that information. 20 Deltex Medical Group plc Report & Accounts 2016 Directors’ Report For the year ended 31 December 2016 – Continued Independent auditors The auditors; PricewaterhouseCoopers LLP have indicated their willingness to continue in office and a resolution concerning their reappointment will be proposed at the Annual General Meeting. Annual General Meeting The notice convening the Annual General Meeting, which will take place on 9 June 2017 at 11.00am at Laytons Solicitors LLP, 2 More London Riverside, London SE1 2AP, can be found at the back of this publication. By order of the Board Jonathan D Shaw Company Secretary 26 April 2017 Independent Auditors’ Report to the Members of Deltex Medical Group plc Report on the group financial statements Our opinion In our opinion, Deltex Medical Group plc’s group financial statements (the “financial statements”): ■ give a true and fair view of the state of the group’s affairs as at 31 December 2016 and of its loss and cash flows for the year then ended; ■ have been properly prepared in accordance with International Financial Reporting Standards (“IFRSs”) as adopted by the European Union; and ■ have been prepared in accordance with the requirements of the Companies Act 2006. What we have audited The financial statements, included within the Report & Accounts (the “Annual Report”), comprise: ■ the Consolidated Statement of Comprehensive Income for the year then ended; ■ the Consolidated Balance Sheet as at 31 December 2016; ■ the Consolidated Statement of Changes in Equity for the year then ended; ■ the Consolidated Statement of Cash Flows for the year then ended; and ■ the notes to the financial statements, which include a summary of significant accounting policies and other explanatory information. The financial reporting framework that has been applied in the preparation of the financial statements is IFRSs as adopted by the European Union, and applicable law. In applying the financial reporting framework, the directors have made a number of subjective judgements, for example in respect of significant accounting estimates. In making such estimates, they have made assumptions and considered future events. Opinions on other matters prescribed by the Companies Act 2006 In our opinion, based on the work undertaken in the course of the audit: ■ the information given in the Strategic Report and the Directors’ Report for the financial year for which the financial statements are prepared is consistent with the financial statements; and ■ the Strategic Report and the Directors’ Report have been prepared in accordance with applicable legal requirements. In addition, in light of the knowledge and understanding of the group and its environment obtained in the course of the audit, we are required to report if we have identified any material misstatements in the Strategic Report and the Directors’ Report. We have nothing to report in this respect. Other matters on which we are required to report by exception Adequacy of information and explanations received Under the Companies Act 2006 we are required to report to you if, in our opinion, we have not received all the information and explanations we require for our audit. We have no exceptions to report arising from this responsibility. Directors’ remuneration Under the Companies Act 2006 we are required to report to you if, in our opinion, certain disclosures of directors’ remuneration specified by law are not made. We have no exceptions to report arising from this responsibility. Responsibilities for the financial statements and the audit Our responsibilities and those of the directors As explained more fully in the Statement of directors’ responsibilities set out on page 20, the directors are responsible for the preparation of the 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 financial statements in accordance with applicable law and International Standards on Auditing (UK and Ireland) (“ISAs (UK & Ireland)”). Those standards require us to comply with the Auditing Practices Board’s Ethical Standards for Auditors. This report, including the opinions, has been prepared for and only for the parent company’s members as a body in accordance with Chapter 3 of Part 16 of the Companies Act 2006 and for no other purpose. We do not, in giving these opinions, accept or assume responsibility for any other purpose or to any other person to whom this report is shown or into whose hands it may come save where expressly agreed by our prior consent in writing. What an audit of financial statements involves We conducted our audit in accordance with ISAs (UK & Ireland). An audit involves obtaining evidence about the amounts and disclosures in the financial statements sufficient to give reasonable assurance that the financial statements are free from material misstatement, whether caused by fraud or error. This includes an assessment of: ■ whether the accounting policies are appropriate to the group’s circumstances and have been consistently applied and adequately disclosed; ■ the reasonableness of significant accounting estimates made by the directors; and ■ the overall presentation of the financial statements. 22 Deltex Medical Group plc Report & Accounts 2016 Independent Auditors’ Report to the Members of Deltex Medical Group plc – Continued We primarily focus our work in these areas by assessing the directors’ judgements against available evidence, forming our own judgements, and evaluating the disclosures in the financial statements. Other matter We have reported separately on the parent company financial statements of Deltex Medical Group plc for the year ended 31 December 2016. We test and examine information, using sampling and other auditing techniques, to the extent we consider necessary to provide a reasonable basis for us to draw conclusions. We obtain audit evidence through testing the effectiveness of controls, substantive procedures or a combination of both. In addition, we read all the financial and non-financial information in the Annual Report to identify material inconsistencies with the audited financial statements and to identify any information that is apparently materially incorrect based on, or materially inconsistent with, the knowledge acquired by us in the course of performing the audit. If we become aware of any apparent material misstatements or inconsistencies we consider the implications for our report. With respect to the Strategic Report and Directors’ Report, we consider whether those reports include the disclosures required by applicable legal requirements. Matthew Hall (Senior Statutory Auditor) for and on behalf of PricewaterhouseCoopers LLP Chartered Accountants and Statutory Auditors Southampton 26 April 2017 Consolidated Statement of Comprehensive Income For the year ended 31 December 2016 Total revenue Total cost of sales Gross profit Administrative expenses Sales & distribution costs Research, Development, Quality & Regulatory US market development costs Exceptional costs Total costs Operating loss before US market development costs and exceptional items US market development costs Exceptional costs Operating loss* Finance income Finance costs Loss before taxation Tax credit on loss Loss for the year Other comprehensive income Items that may be subsequently reclassified to profit or loss: Net translation differences on overseas subsidiaries Other comprehensive income for the year, net of tax Total comprehensive loss for the year Total comprehensive loss for the period attributable to: Owners of the Parent Non-controlling interests Loss per share basic and diluted *Operating loss comprises: Cash loss US market development costs Exceptional items Non – cash charges (net) Operating loss Notes 3.2 Probes £’000 5,458 (1,250) 4,208 Other £’000 873 (752) 121 4 4 4 4 4 4 6 6 7 9 4 2016 Total £’000 6,331 (2,002) 4,329 (2,197) (4,037) (464) - - (6,698) (2,369) - - (2,369) 1 (150) (2,518) 142 (2,376) 234 234 (2,142) (2,137) (5) (2,142) (0.9p) (1,622) - - (747) (2,369) Probes £’000 5,230 (1,470) 3,760 Other £’000 1,175 (925) 250 2015 Total £’000 6,405 (2,395) 4,010 (2,500) (4,036) (609) (198) (153) (7,496) (3,135) (198) (153) (3,486) 1 (110) (3,595) 135 (3,460) 32 32 (3,428) (3,347) (81) (3,428) (1.6p) (2,681) (198) (153) (454) (3,486) The notes on pages 28 to 53 form an integral part of these consolidated financial statements. 24 Deltex Medical Group plc Report & Accounts 2016 Consolidated Balance Sheet as at 31 December 2016 Assets Non – current assets Property, plant and equipment Intangible assets Total non-current assets Current assets Inventories Trade and other receivables Current income tax recoverable Cash and cash equivalents Total current assets Total assets Liabilities Current liabilities Borrowings Trade and other payables Total current liabilities Non-current liabilities Borrowings Provision for liabilities Total non-current liabilities Total liabilities Net assets Equity Share capital Share premium account Capital redemption reserve Other reserves Translation reserve Convertible loan note reserve Accumulated losses Equity attributable to owners of the Parent Non-controlling interests Total equity Notes 10 11 13 14 15 16 18 16 19 21 21 27 27 27 27 2016 £’000 431 2,396 2,827 760 2,499 107 582 3,948 6,775 (858) (2,414) (3,272) (967) (119) (1,086) (4,358) 2,417 2,849 32,268 17,476 4,685 260 84 2015 £’000 573 2,006 2,579 805 2,621 125 575 4,126 6,705 (1,864) (2,766) (4,630) (34) (117) (151) (4,781) 1,924 2,196 30,394 17,476 4,661 26 - (55,037) (52,666) 2,585 (168) 2,417 2,087 (163) 1,924 The notes on pages 28 to 53 form an integral part of these consolidated financial statements. The financial statements on pages 24 to 53 were approved by the Board of Directors and authorised for issue on 26 April 2017 and were signed on its behalf by: Nigel Keen Chairman Jonathan D Shaw Group Finance Director Consolidated Statement of Changes in Equity For the year ended 31 December 2016 Equity attributable to owners of the Parent Group Share capital £’000 Share premium account £’000 Capital redemption reserve £’000 Other reserve £’000 Convertible loan note reserve £’000 Balance at 1st January 2015 2,130 30,323 17,476 4,318 Comprehensive income Loss for the year Other comprehensive income Exchange movements taken to reserves Total comprehensive income for the year Shares issued during the year Premium on shares issued during the year Credit in respect of service cost settled by award of options Balance at 31 December 2015 Comprehensive income Loss for the year Other comprehensive income Exchange movements taken to reserves Total comprehensive income for the year Shares issued during the year Premium on shares issued during the year Issue expenses Equity element of convertible loan note Credit in respect of service cost settled by award of options Balance at 31 December 2016 - - - 66 - - - - - - 71 - - - - - - - - - - - - 343 2,196 30,394 17,476 4,661 - - - 653 - - - - - - - - 1,992 (118) - - - - - - - - - - - - - - - - - 24 2,849 32,268 17,476 4,685 - - - - - - - - - - - - - - 84 - 84 Translation reserve £’000 Accumulated losses £’000 (6) (49,287) Total £’000 4,954 Non- controlling interest £’000 Total equity £’000 (82) 4,872 - (3,379) (3,379) (81) (3,460) 32 - 32 - 32 32 (3,379) (3,347) (81) (3,428) - - - - - - 66 71 343 - - - 66 71 343 26 (52,666) 2,087 (163) 1,924 - (2,371) (2,371) (5) (2,376) 234 - 234 - 234 234 (2,371) (2,137) (5) (2,142) - - - - - - - - - - 653 1,992 (118) 84 24 - - - - - 653 1,992 (118) 84 24 260 (55,037) 2,585 (168) 2,417 The notes on pages 28 to 53 form an integral part of these consolidated financial statements. 26 Deltex Medical Group plc Report & Accounts 2016 Consolidated Statement of Cash Flows For the year ended 31 December 2016 Cash flows from operating activities Net cash used in operations Interest paid Income taxes received Net cash used in operating activities Cash flows from investing activities Purchase of property, plant and equipment Capitalised development expenditure Interest received Net cash used in investing activities Cash flows from financing activities Issue of ordinary share capital Expenses in connection with share issue Proceeds from (decrease)/increase in invoice discounting facility Repayment of borrowings Proceeds from borrowings Expenses in connection with new borrowings Repayment of obligations under finance leases Net cash generated from/(used in) financing activities Net decrease in cash and cash equivalents Cash and cash equivalents at beginning of the year Exchange gain on cash and cash equivalents Cash and cash equivalents at end of the period Note 2016 £’000 23 (1,880) (96) 160 (1,816) (26) (533) 1 (558) 2,508 (118) (109) (1,000) 1,125 (42) (37) 2,327 (47) 575 54 582 11 21 21 16 16 16 17 15 2015 £’000 (1,708) (130) 150 (1,688) (68) (408) 1 (475) 59 - (226) - - - (34) (201) (2,364) 2,934 5 575 The notes on pages 28 to 53 form an integral part of these consolidated financial statements. Notes to the financial statements For the year ended 31 December 2016 1. Principal accounting policies Presented below are those accounting policies that relate to the financial statements as a whole and includes details of new accounting standards that are or will be effective for 2016 or later years. To facilitate the understanding of each note to the financial statements those accounting policies that are relevant to a particular category are presented within the relevant notes. These policies have been consistently applied to all the years presented, unless otherwise stated. 1.1. General information These financial statements are the consolidated financial statements of Deltex Medical Group plc, a public company limited by shares registered in England and Wales, and its subsidiaries (‘the Group’). Deltex Medical Group plc is listed on AIM. The address of the registered office is Deltex Medical Group plc, Terminus Road, Chichester, PO19 8TX, registered number 03902895. 1.2. Basis of reporting The consolidated financial statements have been prepared in accordance with International Financial Reporting Standards (IFRS) as adopted by the European Union (EU), with interpretations issued by the International Financial Reporting Interpretations Committee (IFRS IC) and with those parts of the Companies Act 2006 applicable to companies reporting under IFRS. The consolidated financial statements have been prepared under the historical cost convention, with the exception of fair value accounting for share based payments, and on a going concern basis as discussed in more detail under the ‘Basis of Preparation’ section of this note. No new accounting standards have become effective during the year. However, the following standards, amendments to standards and interpretations which have been endorsed by the EU have been adopted with effect from 1 January 2016 or as stated below. No changes to previously published accounting policies or other adjustments were required on their adoption. ■ Annual improvements 2010-2012 (effective 1 July 2014) (endorsed for 1 Feb 2015) ■ Annual improvements 2012-2014 (effective 1 January 2016) ■ Amendment to IAS 19, ‘Employee benefits’, on defined benefit plans (effective 1 July 2014) (endorsed for 1 Feb 2015) ■ Amendment to IFRS 11,’Joint arrangements’ on acquisition of an interest in a joint operation’, (effective 1 January 2016) ■ Amendment to IAS 16,’Property, plant and equipment’ and IAS 38,’Intangible assets’, on depreciation and amortisation (effective 1 January 2016) 28 ■ Amendments to IAS 16, ‘Property, plant and equipment’ and IAS 41, ‘Agriculture’ on bearer plants (effective 1 January 2016) ■ Amendments to IAS 27, ‘Separate financial statements’ on equity accounting (effective 1 January 2016) ■ Amendments to IFRS 10, ‘Consolidated financial statements’ and IAS 28,’Investments in associates and joint ventures’ on applying the consolidation exemption (effective 1 January 2016) ■ Amendments to IAS 1,’Presentation of financial statements’ disclosure initiative (effective 1 January 2016) (subject to EU endorsement) Accounting standards not yet effective Certain new standards and amendments to existing standards have been published that are mandatory for future accounting periods, subject to EU endorsement. Those which the Group has not adopted early and effective date (periods beginning) are as follows: New accounting standards ■ IFRS 9, ‘Financial instruments’ (effective 1 January 2018) ■ IFRS 14, ‘Regulatory deferral accounts’ (effective 1 January 2016)* ■ IFRS 15, ‘Revenue from contracts with customers’ (effective 1 January 2018) ■ IFRS 16, ‘Leases’ (effective 1 January 2019 or when apply IFRS 15) * The European Commission has decided not to launch the endorsement process of this interim standard and to wait for the final standard. Amendments ■ Amendments to IFRS 4 - Amendments regarding implementation of IFRS 9 (effective 1 January 2018) (subject to EU endorsement) ■ Amendment to IFRS 11, ‘Joint arrangements’ on acquisition of an interest in a ‘joint operation’, (effective 1 January 2016) ■ Amendment to IAS 16, ‘Property, plant and equipment’ and IAS 38,’Intangible assets’, on depreciation and amortisation (effective 1 January 2016) ■ Amendment to IAS 19, ‘Employee benefits’, on defined benefit plans (effective 1 July 2014) (endorsed for 1 Feb 2015) ■ Amendment to IFRS 9, ‘Financial instruments’, on general hedge accounting (effective date 1 Jan 2018) ■ Annual improvements 2010-2012 (effective 1 July 2014) (endorsed for 1 Feb 2015) Deltex Medical Group plc Report & Accounts 2016 Notes to the financial statements For the year ended 31 December 2016 – Continued ■ Annual improvements 2011-2013 (effective 1 July 2014) (endorsed for 1 Jan 2015) ■ Annual improvements 2012-2014 cycle (effective 1 January 2016) ■ Annual improvements 2014-2016 cycle (effective 1 January 2018) (subject to EU endorsement) ■ Amendments to IAS 16, ‘Property, plant and equipment’ and IAS 41, ‘Agriculture’ on bearer plants (effective 1 January 2016) ■ Amendments to IAS 27, ‘Separate financial statements’ on equity accounting (effective 1 January 2016) ■ Amendments to IFRS 10, ‘Consolidated financial statements’ and IAS 28,’Investments in associates and joint ventures’ on applying the consolidation exemption (effective 1 January 2016) ■ Amendments to IAS 1, ‘Presentation of financial statements’ disclosure initiative (effective 1 January 2016) ■ Amendments to IAS 12,’Income taxes’ on Recognition of deferred tax assets for unrealised losses (effective 1 January 2017) ■ Amendments to IAS 7, ‘Statement of cash flows’ (effective 1 January 2017) ■ Amendments to IFRS 15, ‘Revenue from contracts with customers’ - Clarifications (effective 1 January 2018) ■ Amendments to IFRS 2, ‘Share-based payments’ - Classification and measurement (effective 1 January 2018) (subject to EU endorsement) ■ Amendments to IAS 40, ‘Investment property’ transfer of property (effective 1 January 2018) (subject to EU endorsement) New IFRICs ■ IFRIC 22, ‘Foreign currency transactions and advance consideration’ (effective 1 January 2018) The Group is assessing the impact of the above accounting standards and amendments not yet effective. With the exception of IFRS 16, ‘Leases’ which will lead to the recognition of a lease obligation on the balance sheet in respect of the current operating lease over the Chichester factory, the adoption of the above standards are not expected to have a material effect on the Group’s financial statements. 1.3. Basis of consolidation The consolidated financial statements include the financial statements of the parent Company and all of its subsidiaries. All intra-group transactions, balances, income and expenses are eliminated on consolidation. Consistent accounting policies have been adopted across the Group. Subsidiaries are all entities over which the group has control. The group controls an entity when the group is exposed to, or has rights to, variable returns from its involvement with the entity and has the ability to affect those returns through its power over the entity. Subsidiaries are fully consolidated from the date on which control is transferred to the Group. They are de-consolidated from the date that control ceases. The group applies the acquisition method to account for business combinations. The consideration transferred for the acquisition of a subsidiary is the fair values of the assets transferred, the liabilities incurred to the former owners of the acquiree and the equity interests issued by the group. The consideration transferred includes the fair value of any asset or liability resulting from a contingent consideration arrangement. Identifiable assets acquired and liabilities and contingent liabilities assumed in a business combination are measured initially at their fair values at the acquisition date. The group recognises any non-controlling interest in the acquiree on an acquisition- by-acquisition basis, either at fair value or at the non- controlling interest’s proportionate share of the recognised amounts of acquiree’s identifiable net assets. 1.4. Foreign currency translation The functional and presentational currency for the parent Company is UK pounds sterling. Group companies use their local currency as their functional currency. Transactions denominated in currencies other than the functional currency are recorded at the rates of exchange prevailing on the dates of the transactions. At each balance sheet date, monetary assets and liabilities that are denominated in foreign currencies are re-translated at the rates prevailing on the balance sheet date, with any gains or losses being included in the net profit or loss of the period. Exchange differences arising on non-monetary assets and liabilities are recognised directly in equity. On consolidation, the assets and liabilities of the Group’s overseas operations are translated at exchange rates prevailing on the balance sheet date. Income and expense items are translated at the average exchange rates for the period. Exchange differences arising, if any, are dealt with through the Group’s reserves, until such a time as the subsidiary is sold whereupon the cumulative exchange differences relating to the net investment in that foreign subsidiary are recognised as part of the profit or loss on disposal in the Consolidated Statement of Comprehensive Income. However, cumulative exchange differences arising prior to 1 January 2006 remain in equity as permitted by IFRS 1. Goodwill and fair value adjustments arising on the acquisition of a foreign entity are treated as assets and liabilities of the foreign entity and Notes to the financial statements For the year ended 31 December 2016 – Continued translated at the closing rate. The Group has elected to treat goodwill and fair value adjustments arising on acquisitions before the date of transition to IFRS as sterling denominated assets and liabilities. The following are the principal foreign exchange rates that have been used in the preparation of the financial statements: unit) is estimated to be less than its carrying amount, the carrying amount of the asset (cash generating unit) is reduced to its recoverable amount. Non-financial assets other than goodwill which have suffered an impairment are reviewed for possible reversal of impairment at each reporting date. GBP / US Dollar GBP / Euro GBP / Canadian Dollar GBP / US Dollar GBP / Euro GBP / Canadian Dollar 2016 Average Rate 1.3545 1.2255 1.8067 2015 Average Rate 1.5296 1.3791 1.9557 Closing rate 1.2333 1.1720 1.6579 Closing rate 1.4745 1.3569 2.0398 1.5. Loans and receivables Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. They are included in current assets except for maturities greater than 12 months after the balance sheet date. Such assets are carried at amortised cost using the effective interest method. Gains and losses are recognised in the statement of comprehensive income when the loans and receivables are de-recognised or impaired, as well as through the amortisation process. 1.6. Loans and borrowings All loans and borrowings are initially recognised at the fair value of the consideration received less directly attributable transaction costs. After initial recognition, interest-bearing loans and borrowings are subsequently measured at amortised cost using the effective interest method. Gains and losses are recognised in net profit or loss when the liabilities are de-recognised as well as through the amortisation process. Borrowing costs are recognised as an expense when incurred. 1.7. Impairment of property, plant and equipment and intangible assets At each Balance Sheet date the Group reviews the carrying amounts of its property, plant and equipment and intangible assets to determine whether there is any indication that those assets have suffered an impairment loss. If any such indication exists, the recoverable amount of the asset is estimated to determine the extent of any impairment loss. The recoverable amount is the higher of the asset’s value in use and its fair value less costs to sell. Value in use is calculated using cash flow projections for the asset (or group of assets where cash flows are not identifiable for specific assets) discounted at the Group’s cost of capital. If the recoverable amount of an asset (or cash generating 30 1.8. Clinical and other trials The cost of trialling for clinical, economic and other purposes to support the Group’s sales and promotional activity, or the cost of purchasing the rights to the use of the data arising from such trials, is written off as the trial is delivered. At each Balance Sheet date any asset relating to prepaid clinical and other trials, or prepayments recognised from barter transactions, are assessed for impairment and where necessary an impairment loss is recognised as an expense in the Consolidated Statement of Comprehensive Income. Prepaid clinical and other trials amounts are included within prepayments and accrued income in trade and other receivables in the Consolidated Balance Sheet. 1.9. Significant judgements, assumptions and estimates In the process of applying the Group’s accounting policies, the directors have made a number of judgements. In addition, the preparation of financial statements in conformity with generally accepted accounting principles requires the use of estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Although these estimates are based on the directors’ best knowledge of the amount, event or actions, actual results ultimately may differ from those estimates. The key assumptions at the balance sheet date that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year are discussed below. Clinical trial data The Group exchanges goods for trial data and this exchange is treated as revenue under a barter transaction. These represent non-cash transactions. Where the fair value of the trial data cannot be reliably measured, the clinical trial cost is measured at the fair value of the goods being supplied. The determination of this fair value involves some judgement of what is an appropriate comparable sales value. The timing of completion of the trials is estimated at the start of the trial, and the prepaid costs split accordingly between non-current and current assets. However, unforeseen future events may adversely impact on the value and timing of the trials which would result in potential impairments or changes in balance sheet classification of the assets. Deltex Medical Group plc Report & Accounts 2016 Notes to the financial statements For the year ended 31 December 2016 – Continued Valuation of share-based payments In order to determine the value of share-based payments, management are required to make an estimation of the effects of non-transferability, exercise restrictions and behavioural considerations. Fair value is measured by use of a Black– Scholes model and the inputs are set out in note 22. Trade receivables recoverability The Group uses international distributors in a number of overseas territories. Judgements have been made in respect of these various overseas territories, in order to assess the recoverability of receivables from these territories, to see whether an impairment provision is required. In addition, in order to assist the distributors in developing their markets, these distributors may be given extended trade terms. Extended trade terms, by their nature can increase the credit risk to the Group. Such risks are carefully managed through direct relationships with the distributors and knowledge of their markets. Research and development Costs for research and development activities are only capitalised as intangible assets if the qualification criteria are met. These criteria are met only when the technical as well as commercial feasibility can be demonstrated and cost can be measured reliably. The amounts capitalised represents the Group’s estimate of what costs have met this criteria. There is a risk that the intangible asset will not generate the required future economic benefits and therefore could result in potential impairments. 1.10. Alternative financial measures The Group uses a number of alternative (non-Generally Accepted Accounting Practice (non-GAAP)) financial measures, which are not defined by IFRS. The directors use these measures in order to assess the underlying operational performance of the Group and as such these measures are important and should be considered alongside the IFRS measures. The following non-GAAP measures are referred to in these Financial Statements. Pro-forma results - Chairman’s statement This presents our progress against key performance indicators: probe sales and margins, cash costs, net income from or cost of increasing the installed base, profit before and after non-cash items and profit before investment in the US Market development activities. Adjusted operating loss beneath the Consolidated Statement of Comprehensive Income This is defined as operating loss before non-cash charges to the Consolidated Statement of Comprehensive Income. Non-cash costs comprise Share based payments, equity settled costs, clinical trial charges arising from non-cash barter transactions and depreciation and amortisation. A reconciliation of the operating loss to the adjusted operating loss is shown beneath the Consolidated Statement of Comprehensive Income. 1.11. Basis of preparation In common with many companies of its size and which are at its stage of development, the directors manage carefully the Group’s limited resources to develop the opportunities open to it without over stretching the funding capabilities of the business. The funds the Group has available to it are impacted by the results of its commercial activities and through the new funding provided to it by the capital markets and secured lending. The Group invests in its development of the market in keeping with this level of funding, having sufficient flexibility in its cost structure to tailor expenditure to accord with income levels. As noted in the Directors’ Report, in preparing these financial statements the directors have reviewed detailed budgets and cash flow forecasts until 30 June 2018. This review indicates that the Group is expected to continue trading at current levels as a going concern based on increasing net cash inflows from sales over expenditure of the Group. The directors believe it is appropriate to prepare the financial statements on the going concern basis. 2. Revenue recognition 2.1. Accounting policy Revenue is measured at the fair value of the consideration receivable and represents amounts receivable for goods and services provided in the normal course of business, net of discounts, VAT and other sales related taxes and excludes intercompany sales. Monitor and probe revenue Revenue on monitors and probes is recognised at the point when substantially all of the risks and rewards of ownership are transferred to the customer; for UK customers normally this is when the goods are accepted at the customers specified delivery address and for international customers this is normally on dispatch. Bill and hold A small number of customers request “Bill and hold” arrangements, where the Group holds the goods sold to the customer on their behalf until the customer is ready to receive them. Revenue is only recognised on a bill and hold basis when a formal contract is in place, the goods are on hand and ready for delivery, the customer has acknowledged formal acceptance of the bill and hold transaction and normal payment terms apply. Notes to the financial statements For the year ended 31 December 2016 – Continued Clinical trial data Where goods are exchanged for trial data, the exchange is treated as revenue under a barter transaction. The revenue is measured at fair value of the trial data or at the fair value of the goods supplied, where the fair value of the trial data cannot be reliably measured. The corresponding asset is recorded as a prepayment (see clinical trials accounting policy). Managed care service contracts Where contracts exist which provide for a specified number of probes over a period of time for a total contract fee, revenue is recognised on a ‘per probe’ basis. Variations between this percentage of completion accounting and the monthly contract fee charged is recognised as deferred or accrued income on the balance sheet. Other service contracts and maintenance In respect of service contracts and other agreements for ongoing support, revenue is recognised in equal monthly instalments over the period of the contract to match the benefits to the customer. 3. Operating segments 3.1. Accounting policy An operating segment is a component of the Group that engages in business activities for which discrete financial information is available. The principal activity of the Group is the sale of probes in all countries, with the geographical split a secondary segment. The Group has a single group of related products and services, being the supply of probes and other related services. Segment information is provided on the basis of probe revenue and other, which is the basis on which the Group Chief Operating Decision Maker manages its worldwide activities. The Chief Operating Decision Maker is the Group’s Chief Executive Officer. Note The segmental operating result is the measure of operating revenue generated by probes and other products. 32 Deltex Medical Group plc Report & Accounts 2016 Probes £’000 5,458 Other £’000 873 Probes £’000 5,230 Other £’000 1,175 Total £’000 6,331 (2,002) (6,698) (2,369) 1 (150) (2,518) 142 (2,376) Total £’000 6,405 (2,395) (7,496) (3,486) 1 (110) (3,595) 135 (3,460) Notes to the financial statements For the year ended 31 December 2016 – Continued 3.2. Segment results The reportable segment results for the year ended 31 December 2016 are: Revenue from customers Reconciliation to result for the year: Cost of goods sold Total costs Operating loss Finance income Finance costs Loss before taxation Tax credit on loss Loss for the year The reportable segment results for the year ended 31 December 2015 are: Revenue from customers Reconciliation to result for the year: Cost of goods sold Total costs Operating loss Finance income Finance costs Loss before taxation Tax credit on loss Loss for the year 34 Deltex Medical Group plc Report & Accounts 2016 Notes to the financial statements For the year ended 31 December 2016 – Continued The following table provides an analysis of the Group’s sales by revenue stream and markets. 2016 Probes Units† 2016 Monitors Units† 2016 Probes £’000 2016 Monitors £’000 2016 Other £’000* 2016 Total £’000 2015 Probes Units† 2015 Monitors Units† 2015 Probes £’000 2015 Monitors £’000 2015 Other £’000* 2015 Total £’000 Direct markets UK USA Spain Canada Distributor markets Rest of Europe Rest of the World 20,385 12,025 420 445 9 3 - - 1,865 1,869 44 55 69 45 - - 470 2,404 28,770 7 - 8 1,921 10,430 44 63 700 575 21 9 - 4 2,514 1,333 65 71 33,275 12 3,833 114 485 4,432 40,475 34 3,983 19,425 10,615 30,040 63,315 28 82 110 122 1,082 543 1,625 5,458 91 155 246 360 14 14 28 1,187 18,080 712 7,720 1,899 25,800 513 6,331 66,275 22 120 142 176 893 354 1,247 5,230 84 141 - 57 282 95 201 296 578 497 3,095 44 1,518 - 3 65 131 544 4,809 11 42 53 999 597 1,596 597 6,405 † Unaudited * Included in other revenue for the UK and Rest of the World are 3rd party revenues of £355,000 (2015: £315,000) and £nil (2015: £30,000) respectively. The following table provides an analysis of the Group’s non-current assets by its country of domicile and other foreign countries 2016 UK £’000 2016 Other £’000 2016 Total £’000 2015 UK £’000 2015 Other £’000 2015 Total £’000 Non-current assets Property, plant and equipment Intangible assets 225 2,396 2,621 206 - 206 431 2,396 2,827 366 2,006 2,372 4. Expenses 4.1. Expenses by nature Changes in inventories and work in progress Raw materials and consumables used Employee benefit costs Other employee costs Non executive directors fees Exceptional items – redundancy and reorganisation costs Depreciation and amortisation charges (notes 10 and 11) Net research and development expenditure Net clinical trial costs Operating lease rentals Net foreign exchange (gain) / loss Audit and accountancy costs Meeting and other PR costs Professional and consultancy fees US market development costs (excluding employee costs) Other 207 - 207 2016 £’000 20 1,468 4,545 714 123 - 425 144 - 103 (69) 140 150 309 - 628 8,700 573 2,006 2,579 2015 £’000 (432) 1,862 4,611 861 122 153 404 101 15 109 32 111 246 498 37 1,161 9,891 Notes to the financial statements For the year ended 31 December 2016 – Continued 4.2. Auditors’ remuneration During the year the group (including its overseas subsidiaries) obtained the following services from the Group’s auditors at cost as detailed below: Group Fees payable to company’s auditors for the audit of the parent company and consolidated financial statements Under-accrual in respect of prior years Fees payable to the company’s auditors for other services: The audit of the company’s subsidiaries 5. Employees 5.1. Employee benefit expense Wages and salaries Social security costs Pension costs – defined contribution plans Share-based payment expense, including bonus accruals Less amounts capitalised as research and development costs 5.2. Average monthly number of people employed Number of employees Average monthly number of people (including executive directors) employed: Sales and marketing Production Office and management Quality and regulatory Research and development Total average headcount 5.3. Directors’ emoluments Aggregate emoluments Sums paid to third parties for directors’ services Contributions to directors’ personal pension schemes Benefits are accruing to two (2015: two) directors under personal pension plans. 36 2016 £’000 2015 £’000 31 9 40 68 108 30 - 30 69 99 2016 £’000 4,286 434 96 120 4,936 (391) 4,545 2015 £’000 4,193 426 89 343 5,051 (287) 4,764 2016 No 2015 No 83 40 16 16 5 6 83 84 45 14 18 3 4 84 2016 £’000 411 2015 £’000 364 51 14 476 44 14 422 Deltex Medical Group plc Report & Accounts 2016 Notes to the financial statements For the year ended 31 December 2016 – Continued Loss on ordinary activities before tax Loss on ordinary activities multiplied by the standard rate in the UK of 20% (2015: 20.25%) Effects of: 2016 £’000 (2,518) 2015 £’000 (3,595) (504) (728) Expenses not deductible for tax purposes 47 69 Losses carried forward for which no deferred tax asset has been recognised Other movements in unrecognised deferred tax Tax rate on difference on receivable research and development tax credit Difference on tax rate on payable research and development tax credit Adjustment in respect of prior years Total Tax Credit on Loss 444 (53) 530 52 (81) (98) 40 (35) 50 (10) (142) (135) Sums paid to third parties for the services of a director comprise: Third party payee Imperialise Limited Director Nigel Keen Rockridge Medical Limited Chris Jones 5.4. Highest paid director Third party payee Aggregate emoluments Contributions to director’s personal pension scheme 2016 £’000 33 18 51 2015 £’000 33 11 44 2016 £’000 208 2015 £’000 208 8 216 8 216 There were no director share sales or the exercise of share options during 2016 or 2015. 6. Finance income and costs Third party payee Finance income - Bank interest receivable Invoice discount facility Convertible loan note 2007 Loan note 2019 Finanance lease liability Finance costs 2016 £’000 (1) 2015 £’000 (1) 20 16 107 7 150 12 85 - 13 110 7. Tax credit on loss 7.1. Accounting policy The tax credit represents the sum of current tax and deferred tax. Tax is recognised in profit or loss in the Consolidated SOCI except to the extent that it relates to items recognised in equity in which case it is recognised in other comprehensive income in the Consolidated SOCI. The current tax is based on taxable results for the year calculated using tax rates that have been enacted or substantively enacted by the Balance Sheet date. 7.2. Income Tax Credit Current tax Research and development tax credit Adjustment in respect of prior years Total Current Tax Total Deferred Tax 2016 £’000 (107) (35) (142) - 2015 £’000 (125) (10) (135) - Total Tax Credit on Loss (142) (135) The taxable credit on the loss for the year is lower (2015: lower) than the effective rate of corporation tax in the UK of 20% (2015: 20.25%) applied to the Group’s loss on ordinary activities before tax. The differences are explained in the next table: Notes to the financial statements For the year ended 31 December 2016 – Continued 8. Deferred tax 8.1. Accounting policy Deferred tax is provided using the Balance Sheet date liability method on temporary differences between the carrying amounts of assets and liabilities in the financial statements and the corresponding tax bases used in the computation of taxable profit. In principle, deferred tax liabilities are recognised for all taxable temporary differences and deferred tax assets are recognised to the extent that it is probable that taxable profits will be available against which deductible temporary differences can be utilised. Such assets and liabilities are not recognised if the temporary difference arises from goodwill or from the initial recognition (other than in a business combination) of other assets or liabilities in a transaction that affects neither the tax profit nor the accounting profit. The carrying amount of deferred tax assets is reviewed at each Balance Sheet date and reduced to the extent that it is not probable that sufficient taxable profits will be available to allow all or part of the asset to be recovered. Deferred tax is calculated at the tax rates that are expected to apply in the period when the liability is settled or the asset is realised. Tax assets and liabilities are offset when there is a legally enforceable right to offset current tax assets against current liabilities and when the deferred income taxes relate to the same fiscal authority. 8.2. Note At 31 December 2016, the Group had tax losses of £29,866,000 (2015: £29,118,000) and an unrecognised potential deferred tax asset of £7,354,000 (2015: £7,377,000) representing accumulated trading losses carried forward which are available against future profits and share option charges of £94,000 (2015: £97,000) with an unrecognised deferred tax asset of £16,000 (2015: £18,000). Changes to UK Corporation tax rates were substantively enacted as part of the Finance Act 2015 (on 26 October 2015) and Finance Act 2016 (on 6 September 2016). These include reductions to the main rate to reduce the rate to 19% from 1 April 2017 and to 17% from 1 April 2020. Deferred taxes at the balance sheet date have been measured using these enacted tax rates and reflected in these financial statements. Loss relief is available indefinitely in the UK and for 20 years in the USA. Trading losses in the USA do not begin to expire until 2028. 38 The movement in deferred income tax assets and liabilities during the year, without taking into consideration the offsetting of balances within the same jurisdiction is set out below: Deferred tax liabilities Development costs Accelerated capital allowances At 1 January Effect of tax rate change Charged to profit or loss At 31 December Deferred tax asset At 1 January Effect of tax rate change Credited to profit and loss At 31 December 2016 £’000 396 2015 £’000 369 61 457 461 (49) 45 457 92 461 485 (46) 22 461 Tax losses 2016 £’000 (461) 2015 £’000 (485) 49 (45) 46 (22) (457) (461) 9. Basic and diluted loss per share The loss per share calculation is based on the loss of £2,371,000 and the weighted average number of shares in issue of 270,435,477. For 2015, the loss per share calculation was based upon the loss of £3,379,000 and weighted average number of shares in issue of 216,742,606. Whilst the Company is loss-making the diluted loss per share and the loss per share are the same. 10. Property, plant and equipment 10.1. Accounting policy Property, plant and equipment is stated at cost, net of depreciation and any provision for impairment. The cost of purchased assets includes the original purchase price together with any incidental expenses of acquisition. Depreciation is calculated to write down property, plant and equipment to their estimated realisable values, by equal annual instalments over their expected useful economic lives at the following periods: ■ Leasehold property and improvements five years or to the end of the lease term, if shorter ■ Plant and equipment three to five years ■ Machines loaned to customers five years Deltex Medical Group plc Report & Accounts 2016 Notes to the financial statements For the year ended 31 December 2016 – Continued ■ Fixtures and fittings three to five years ■ Estimated residual values and useful lives are reviewed annually and adjusted where necessary. Machines loaned to customers In order to support key accounts and increased probe usage, monitors may be placed on long-term loan with customers. Where these monitors are expected to be placed for a period longer than 12 months, the monitors are transferred at book value to property, plant and equipment and depreciated over five years. Where monitors are placed on a short-term loan of less than 12 months and it is expected that the monitors will be sold thereafter, the monitors are included within inventories. Leasehold property and improvements £’000 Plant and equipment £’000 Fixtures and fittings £’000 Machines loaned to customers £’000 Total £’000 Cost At 1 January 2015 Exchange difference Additions Disposals At 31 December 2015 Exchange difference Additions Transferred from inventory Disposals At 31 December 2016 Accumulated depreciation At 1 January 2015 Exchange differences Depreciation charge Disposals At 31 December 2015 Exchange differences Depreciation charge Disposals At 31 December 2016 Net book value At 1 January 2015 At 31 December 2015 At 31 December 2016 236 - - - 236 - - - - 236 233 - 1 - 234 - 1 - 235 3 2 1 676 2 45 - 723 6 19 - - 748 534 1 55 - 590 5 56 - 651 142 133 97 55 1 - - 56 5 7 - - 68 55 1 - - 56 5 - - 61 - - 7 1,467 2,434 34 48 (65) 1,484 97 - 121 (79) 37 93 (65) 2,499 108 26 121 (79) 1,623 2,675 875 14 201 (44) 1,697 16 257 (44) 1,046 1,926 81 225 (55) 1,297 592 438 326 91 282 (55) 2,244 737 573 431 Notes to the financial statements For the year ended 31 December 2016 – Continued Depreciation charges have been included in the following expenses in profit or loss in the Consolidated SOCI: Cost of sales Administration expenses Research and development expenses 2016 £’000 2015 £’000 250 19 13 282 216 31 10 257 11. Intangible assets 11.1. Accounting policy Development expenditure — internally generated Costs for self-initiated research and development activities are assessed as to whether they qualify for recognition as internally generated intangible assets. Apart from complying with the general recognition requirements below and initial measurement of an intangible asset, qualification criteria are met only when technical as well as commercial feasibility can be demonstrated and cost can be measured reliably. It must also be probable that the intangible asset will generate future economic benefits and that it is clearly identifiable and allocable to a specific product. Further to meeting these criteria, only such costs that relate solely to the development phase of a self-initiated project are capitalised. Any costs that are classified as part of the The net book value of property, plant and equipment includes amounts of £46,000 (2015: £71,000) in respect of assets held under finance lease arrangements. research phase of a self-initiated project are expensed as incurred. If the research phase cannot be clearly distinguished from the development phase, the respective project related costs are treated as if they were incurred in the research phase only. Amortisation is calculated so as to write down the value of the intangible assets by equal annual instalments over their expected useful economic lives of five years. The costs in respect of trialling for clinical, economic and other purposes is not considered to be research and development expenditure. The accounting policy for this is detailed in Note 1. 11.2. Note Cost At 1 January 2015 Additions At 31 December 2015 Amounts written off Additions At 31 December 2016 Accumulated amortisation At 1 January 2015 Amortisation expense At 31 December 2015 Amounts written off Amortisation expense At 31 December 2016 Net book value At 1 January 2015 At 31 December 2015 At 31 December 2016 Development expenditure £’000 Goodwill £’000 2,255 408 2,663 (25) 533 3,171 576 147 723 (25) 143 841 1,679 1,940 2,330 66 - 66 - - 66 - - - - - - 66 66 66 Total £’000 2,321 408 2,729 (25) 533 3,237 576 147 723 (25) 143 841 1,745 2,006 2,396 Amortisation of £143,000 (2015: £147,000) has been categorised as research and development expenditure in profit or loss in the Consolidated SOCI. 40 Deltex Medical Group plc Report & Accounts 2016 Notes to the financial statements For the year ended 31 December 2016 – Continued 12. Subsidiary undertakings Details of the Group’s subsidiaries are set out below. In all cases the direct holding is 100% of the ordinary shares unless otherwise stated: Name Deltex Medical Limited Deltex Medical, SC, Inc Deltex Medical Espana SL Country of incorporation and place of business UK USA Spain Deltex Medical Canada Limited Canada Deltex Medical Holdings Inc Deltex Inc Digital QI Limited Deltex Medical Inc 13. Inventories USA USA UK USA Nature of business Manufacture and marketing of medical devices Marketing and sales of medical devices in the USA Marketing and sales of medical devices in Spain Marketing and sales of medical devices in Canada Dormant Dormant Dormant Dormant Proportion of ordinary shares held directly by the parent % Proportion of shares held by non-controlling interests % - - - 49 100 100 100 51 100 100 100 100 13.1. Accounting policy Inventories are stated at the lower of cost and net realisable value. Cost is determined on a first in, first out basis. Work in progress and finished goods are included on a basis appropriate to their stage of completion of the various individual items taking account of production materials and components together with an appropriate share of directly attributable labour and overheads. Net realisable value represents the estimated selling price in the normal course of business, less all estimated costs of completion and applicable variable selling expenses. Provision is made for obsolete, slow-moving or defective items where appropriate. 13.2. Note Included within finished goods are third party products for resale of £151,000 (2015: £149,000). Based on inventory holdings and sales history, there are specific provisions for slow-moving inventory of £40,000 (2015: £40,000), which have been categorised as third party goods held for resale. Raw materials and consumables Work in progress Finished goods 2016 £’000 2015 £’000 140 52 568 760 165 28 612 805 The registered address of the UK incorporated subsidiaries is: Terminus Road, Chichester, West Sussex PO19 8TX. The registered address of the US incorporated subsidiary is: 330 East Coffee St., Greenville, South Carolina. The registered address of the Spanish incorporated subsidiary is C/ del Mirador, 3A, 17250 Playa de Aro, Girona, Spain. The registered address of the Canadian incorporated subsidiary is: Baine Johnston Centre, 10 Fort William Place, St. John’s NL A1C 5W4 Notes to the financial statements For the year ended 31 December 2016 – Continued 14. Trade and other receivables 14.1. Accounting policy Trade receivables are recognised initially at fair value and subsequently measured at amortised cost using the effective interest method less provision for impairment. A provision for impairment of trade receivables is established when there is objective evidence that the Group will not be able to collect all amounts due according to the original terms of the receivables. Significant financial difficulties of the debtor, probability that the debtor will enter bankruptcy or financial reorganisation, and default or delinquency in payments (more than 60 days overdue) are considered indicators that the trade receivable may be impaired. The amount of the provision is the difference between the asset’s carrying amount and the present value of estimated future cash flows, discounted at the original effective interest rate. The carrying amount of the asset is reduced through the use of an allowance account, and the amount of the loss is recognised in the Consolidated Statement of Comprehensive Income within ‘sales and distribution’ costs. When a trade receivable is uncollectable, it is written off against the allowance account for trade receivables. Subsequent recoveries of amounts previously written off are credited against ‘sales and distribution’ costs in the Consolidated SOCI. Trade and other receivables are classified as ‘loans and receivables’. 14.2. Note Current Trade receivables 2016 £’000 2015 £’000 2,207 2,247 Less: provision for impairment of trade receivables (330) (329) At 31 December 2016, specific trade receivables of £330,000 (2015: £329,000) had been identified as impaired and were fully provided for. The ageing of these receivables was as follows: 2016 £’000 2015 £’000 More than twelve months overdue 330 329 The carrying amounts of the Group’s trade receivables are denominated in the following currencies: Current Sterling Euros US dollars Canadian dollars 2016 £’000 2015 £’000 575 383 893 26 1,877 701 379 806 32 1,918 Movements on the Group provision for impairment of trade receivables are as follows: Current At 1 January Foreign exchange Impairment losses recognised Amounts recovered At 31 December 2016 £’000 329 5 - (4) 330 2015 £’000 265 - 64 - 329 Other receivables Other receivables - Prepayments 1,877 1,918 352 260 270 2,499 443 2,621 Impairment losses recognised and amounts written off during the year as uncollectible have been categorised as administrative expenses in profit or loss in the Consolidated SOCI. Trade receivables that are less than two months past due are considered to be recoverable. At 31 December 2016, trade receivables of £190,000 (2015; £26,000) were more than two months past due but not impaired. These related to a number of independent customers for whom there is no recent history of default. The ageing of these balances is set out below: The other financial assets categorised as trade and receivables do not contain impaired assets. The directors consider that the carrying amounts of trade and other receivables approximate to their fair values. The maximum exposure for trade and other receivables to credit risk is the carrying value of each class of financial asset shown above. The Group does not hold any collateral as security. Current Three to six months overdue Six to twelve months overdue More than twelve months overdue 2016 £’000 2015 £’000 10 157 23 190 8 9 9 26 42 Deltex Medical Group plc Report & Accounts 2016 2016 £’000 2015 £’000 739 827 90 29 1,000 37 858 1,864 963 4 967 - 34 34 1,825 1,898 Notes to the financial statements For the year ended 31 December 2016 – Continued 15. Cash and cash equivalents 15.1. Accounting policy Cash and cash equivalents includes cash in hand and deposits held with banks with an original maturity of less than three months. 15.2. Note Cash and cash equivalents comprise solely of cash at bank and in hand held by the Group. 16.2. Note Current borrowings Invoice discounting facility Convertible loan note Finance lease liabilities 16. Borrowings 16.1. Accounting policy Borrowings are recognised initially at fair value, net of transaction costs incurred. Borrowings are subsequently stated at amortised cost; any difference between the proceeds (net of transaction costs) and the redemption value is recognised in profit or loss in the Consolidated SOCI over the period of the borrowing using the effective interest method. Borrowings are classified as current liabilities unless the Group has an unconditional right to defer settlement of the liability for at least 12 months after the balance sheet date. Compound financial instruments issued by the Group comprise convertible loan notes that can be converted to share capital at the option of the holder, and the number of shares to be issued does not vary with changes in their fair value. Non-current borrowings Convertible loan note Obligations under finance lease liabilities 16.3. Invoice discounting facility The amount shown represents the cash drawn down under an invoice discounting facility; £16,000 remained undrawn (2015: £nil). The amount outstanding under this facility is secured by way of a fixed charge over the Group’s UK and a proportion of the international trade receivables. Amounts drawn down under the facility are repayable from the end of the month of invoice. This is an ongoing facility and is separated into three accounts being Sterling, US$ and Euro currencies. The facility is subject to six months’ notice on either side and is not subject to annual review. The liability component of a compound financial instrument is recognised initially at the fair value of a similar financial liability that does not have an equity conversion feature. The equity component is recognised initially as the difference between the fair value of the compound financial instrument as a whole and the fair value of the financial liability component Any directly attributable finance costs are allocated to the financial liability and equity components in proportion to their initial carrying amounts. Subsequent to initial recognition, the financial liability component is measured at amortised cost using the effective interest method. The equity component of a compound financial instrument is not re-measured subsequent to initial recognition except on conversion or expiry. 16.4. Convertible loan note On 26 February 2016, the 2007 convertible loan notes were repaid in full. On the same day, the company issued £1,125,000 unsecured convertible loan notes 2019 (loan notes 2019) which carry a coupon of 8% per annum payable quarterly in arrears. The loan notes are repayable in full on 25 February 2019 or may, at the option of the holder, be converted at any time into ordinary shares of the Company at a conversion price of £0.04 per share. The value of both the liability component and the equity conversion element was determined when the loan notes 2019 were issued. Notes to the financial statements For the year ended 31 December 2016 – Continued The convertible loan note recognised in the balance sheet is calculated as: Face value of unsecured convertible loan notes 2019 issued on 26 February 2016 Less issue costs Value of liability and equity component on initial recognition at 26 February 2016 Interest expense (note 6) Interest payable Liability £’000 Equity £’000 Total £’000 1,037 (38) 88 (4) 1,125 (42) 999 107 (53) 84 1,083 - - 107 (53) Carrying amounts at 31 December 2016 1,053 84 1,137 The directors consider the carrying value of the fixed rate borrowings approximate to market rate and the floating rate borrowings are at market rate and therefore these borrowings approximate to their fair value. 17. Obligations under finance lease arrangements 17.1. Accounting policy Where property, plant and equipment are financed by finance lease agreements, which transfer to the Group substantially all the benefits and risks of ownership, the assets are treated as if they had been purchased outright and are included in property, plant and equipment. Assets held under finance leases are depreciated over the lower of the useful lives and the term of the lease. The capital element of the finance lease commitment is shown as obligations under finance leases within borrowings. The finance lease payments are treated as consisting of capital and interest elements. The capital element is applied to reduce the outstanding obligations and the interest element is charged to profit or loss in the Consolidated SOCI on a straight-line basis over the lease term. 16.5. Borrowings in foreign currencies The carrying amounts of the Group’s borrowings are denominated in the following currencies: 17.2. Note Lease liabilities are effectively secured as the rights to the leased asset revert to the lessor in the event of default. Gross finance lease liabilities – minimum lease payments No later than one year Later than one year and no later than five years Less future finance charges on finance lease liabilities 2016 £’000 2015 £’000 31 5 36 (3) 33 45 36 81 (10) 71 The present value of finance lease liabilities is as follows: No later than one year Later than one year and no later than five years 2016 £’000 2015 £’000 29 4 33 37 34 71 2016 £’000 2015 £’000 1,485 1,549 134 206 118 231 1,825 1,898 2016 % 2015 % 2.92 2.76 3.87 8.0 3.00 2.80 3.63 8.54 15.00 15.00 2016 £’000 2015 £’000 33 1,053 1,086 71 - 71 739 - 739 827 1,000 1,827 Pounds US dollars Euros The average effective interest rates paid were as follows: Invoice discount facility - - - Sterling Euro US Dollar Convertible loan note Finance leases Borrowings are held under both fixed and floating rates as follows: Fixed rates Finance leases Convertible loan notes Floating rates Invoice discounting facility Convertible loan notes 44 Deltex Medical Group plc Report & Accounts 2016 Notes to the financial statements For the year ended 31 December 2016 – Continued National insurance The provision for Employer’s National Insurance may become payable on gains on share options that are exercisable over the next one to ten years and is, therefore, classified as a non-current liability. Dilapidation provision Under the terms of the operating leases over land and buildings, predominantly in the UK, the Group has an obligation to return the property in a specified condition at the end of the lease. As the unexpired lease term is more than one year, the provision has been classified as a non-current liability. It is expected that the provision will be utilised within the next 10 years. 18. Trade and other payables 18.1. Accounting policy Trade payables are recognised initially at fair value and subsequently measured at amortised cost using the effective interest method. 18.2. Note Current liabilities Trade payables Social security and other taxes Other payables Deferred income Accrued expenses 2016 £’000 2015 £’000 1,007 1,265 205 46 100 261 74 133 1,056 2,414 1,033 2,766 Trade payables are non-interest bearing and typically have settlement terms of between 30 and 60 days. The directors consider that the carrying amount of trade payables approximates to their fair value. 19 Provision for Liabilities 19.1. Accounting policy Provisions are recognised when the Group has a present legal or constructive obligation in respect of a past event and it is probable that settlement will be required of an amount that can be reliably estimated. Provisions are measured at the present value of the expenditures expected to be required to settle the obligation using a pre-tax rate that reflects current market assessments of the time value of money and the risks specific to the obligation. The increase in the provision due to passage of time is recognised as an interest expense in profit or loss in the consolidated SOCI. A provision for national insurance that may become payable on share option gains is calculated based on the closing share price. 19.2. Note At 1 January 2016 Charged to profit or loss in the Consolidated SOCI Amounts utilised in the year At 31 December 2016 National Insurance £’000 Dilapidation provision £’000 Total £’000 17 - - 17 100 117 2 - 2 - 102 119 Notes to the financial statements For the year ended 31 December 2016 – Continued 20. Retirement benefits 20.1. Accounting policy The Group provides pension arrangements to the majority of full-time UK employees through a money purchase (defined contribution) scheme. Contributions and pension costs are based on pensionable salary and are charged as an expense as they fall due. The Group has no further payment obligations once the contributions have been paid. 20.2. Note The Group operates a defined contribution pension scheme for its UK employees. The assets of the scheme are held separately from those of the Group in independently administered funds. The Group also maintains a defined contribution Salary Reduction Simplified Employee Pension Plan (‘SARSEP’) for US employees. Under the terms of the SARSEP, the Group may make discretionary contributions on behalf of the employees. The pension cost represents the At 1 January 2015 Shares issued to Non-Executive Directors in lieu of fees Employee share option Schemes Enterprise Management Incentive scheme At 31 December 2015 Shares issued to Non-Executive Directors in lieu of fees Shares issued to third parties as payment for services rendered Share issues - 25 February 2016 - 10 March 2016 - 1 July 2016 Share issue expenses - 25 February 2016 At 31 December 2016 Net proceeds from share issues, after expenses of £118k, were £2,390,000 22. Share-based payments 22.1. Accounting policy The Group awards directors, employees and certain of the Company’s distributors and advisers equity-settled share- based payments, from time to time, on a discretionary basis. In accordance with IFRS 2 ‘Share-based payments’, equity-settled share-based payments are measured at fair value at the time of grant. Fair value is measured by use of a Black–Scholes model. The fair value determined at the grant date of the equity-settled share-based payments is expensed on a straight-line basis over the vesting period, based on the Group’s estimate of the number of shares that will eventually vest. The options are subject to vesting conditions of up to six years, and their fair value is recognised as an expense with a corresponding increase in ‘other reserves’ equity over 46 contributions paid and payable by the Group to these schemes and in aggregate amounted to £96,000 (2015: £89,000). 21. Share capital and share premium 21.1. Accounting policy Ordinary shares are classified as equity. Incremental costs directly attributable to the issue of new shares or options are shown in equity as a deduction, net of tax, from the proceeds. 21.2. Note At 1 January 2016 and 31 December 2016, the authorised share capital of the Company comprised 6,568,546,210 ordinary shares with a nominal value of £0.01 each. The movement in the Company’s issued share capital is set out below: Number of shares (thousands) 213,018 Ordinary shares £’000 2,130 Share premium £’000 30,323 Total £’000 32,453 706 5,861 219,585 1,851 1,566 38,568 12,900 10,465 - 284,935 7 71 78 59 2,196 18 16 385 129 105 - 2,849 - 30,394 59 32,590 56 47 74 63 1,157 1,542 387 345 516 450 (118) (118) 32,268 35,117 the vesting period. The proceeds received net of any directly attributable transaction costs are credited to share capital (nominal value) and share premium when the options are exercised.At each balance sheet date, the entity revises its estimates of the number of options that are expected to vest. It recognises the impact of the revision to original estimates, if any, in the consolidated statement of comprehensive income, with a corresponding adjustment to equity. The fair value of the equity-settled share-based payment is recharged by the Group company to the subsidiary operating company at fair value. The expense is, therefore, recognised in the subsidiary operating company, with the equity reserve being recognised in the Group company. Deltex Medical Group plc Report & Accounts 2016 Notes to the financial statements For the year ended 31 December 2016 – Continued 22.2. Note The Group has three share option schemes: ■ Deltex Medical Group plc 2001 Executive Share Option Scheme (ESOS) (HMRC Approved Scheme); ■ Deltex Medical Group 2011 Executive Share Option Scheme (HMRC Approved Scheme); and ■ Deltex Medical 2003 Enterprise Management Incentive plan (‘EMI’). Options granted under the Approved Share Option Schemes are valued at the market price on the date of grant. Options are conditional on the employee completing three years’ service (the vesting period). The options are exercisable starting three years from the grant date, subject to the Group achieving certain performance conditions; the options have a contractual term of ten years. The Group has no legal or constructive obligation to repurchase or settle the options in cash. Options granted under the EMI scheme are granted at 1p per option. Options are granted in lieu of cash for bonuses or salary obligations relating to past achievement; therefore, there is no vesting period. The options have a contractual term of ten years. The Group has no legal or constructive obligation to repurchase or settle the options in cash. Details of share options outstanding during the year for the Group’s share option schemes are as follows: Options outstanding at 1 January 2015 Number of options No. 4,277,300 Granted during the year - Lapsed during the year (59,000) Exercised during the year - Options outstanding at 31 December 2015 Granted during the year Lapsed during the year Expired during the year Options outstanding at 31 December 2016 Options exercisable at 1 January 2015 Options exercisable at 31 December 2015 Options exercisable at 31 December 2016 2001 ESOS Weighted average exercise price £ 0.20 - 0.17 - 0.20 - 0.21 0.21 2011 ESOS Weighted average exercise price £ 2003 EMI Weighted average exercise price £ Number of options No Total No 0.20 0.11 0.16 3,935,045 0.01 12,762,345 5,268,382 (232,976) 0.01 10,160,882 0.01 (586,726) Number of options No. 4,550,000 4,892,500 (294,750) - - (5,861,053) 0.01 (5,861,053) 9,147,750 - (135,000) - 0.15 - 0.21 - 3,109,398 0.01 16,475,448 207,560 (42,064) (17,222) 0.01 0.01 0.01 207,560 (229,864) (925,222) 4,218,300 - (52,800) (908,000) 3,257,500 0.20 9,012,750 0.15 3,257,672 0.01 15,527,922 4,277,300 0.20 2,777,000 0.20 3,935,045 0.01 10,989,345 4,218,300 0.20 4,379,000 0.20 3,109,398 0.01 11,706,698 3,257,500 0.20 4,244,000 0.20 3,257,672 0.01 10,759,172 The weighted average market price of the Group’s shares at the date of exercise for options under the 2003 EMI scheme was £0.06 in 2015. No share options were exercised during 2016. The middle-market closing price of the Company’s shares was £0.0388 (2015: £0.0425). Notes to the financial statements For the year ended 31 December 2016 – Continued 22.3. Information for share options awards granted during the year No share options were granted under the 2011 ESOS during 2016. Those granted in 2015 had an estimated fair value of £0.0122 per share £59,689 in aggregate. Share options granted under the 2003 EMI had an estimated weighted average fair value of £0.035 (2015: £0.0563) and £7,209 in aggregate (2015: £275,960). The fair value of share option awards made under both schemes is determined using a Black-Scholes option pricing model. The key assumptions used in determining the fair value of the options granted under the 2003 EMI scheme were: Share price Exercise price Expected volatility Expected option life (expressed as weighted average life used in modelling) Risk free interest rate Fair value at measurement date For both schemes, the expected volatility has been based on the historical volatility over a period of the same length as the expected option length and ending on the grant date. December 2016 September 2016 3.9p 1.0p 5.1p 1.0p June 2015 6.63p 1.0p 60.00% 55.00% 55.00% 1 year 0.55% 2.9p 1 year 0.46% 4.1p 1 year 0.46% 5.63p December 2013 November 2013 14.00p 1.0p 41.30% 1 year 0.39% 13.00p 14.62p 1.0p 38.60% 1 year 0.34% 13.62p The fair value of the equity-settled share-based payment is recharged by the Group Company to the subsidiary operating company at fair value. The expense, therefore, is recognised in the subsidiary operating company with the equity reserve recognised in the parent company. 48 Deltex Medical Group plc Report & Accounts 2016 Notes to the financial statements For the year ended 31 December 2016 – Continued 22.4. Share options outstanding Share options outstanding at the end of the year have the following expiry date and exercise prices: Current and past employees Contractors Exercise period from Exercise period to Exercise price £ Number of Options 2016 01-Mar-11 28-Feb-18 0.1875 252,000** 01-Nov-10 31-Oct-17 16-Apr-10 15-Apr-17 1-May-14 30-Apr-23 0.215 0.235 0.145 250,000* 100,000** 250,000** 852,000 2015 252,000 250,000 100,000 250,000 852,000 *Options are exercisable in whole on any one occasion during the exercise period **Options are exercisable in part or in whole at any time during the exercise period Exercise period from Exercise period to Exercise price £ Number 2016 28-Mar-09 27-Mar-16 0.2075 19-May-06 19-May-16 29-Jun-07 29-Jun-17 0.01 0.01 - - 34,908 Number 2015 917,000 17,222 34,908 29-Jun-10 28-Jun-17 0.2950 1,042,000 1,048,000 01-Jul-11 30-Jun-18 0.1850 1,116,000 1,138,000 30-Jun-08 30-Jun-18 0.01 114,128 128,414 12-Jun-12 12-Jun-19 0.1275 1,099,500 1,115,300 12-Jun-09 11-Jun-19 30-Dec-09 30-Dec-19 24-Mar-10 24-Mar-20 25-Jun-10 25-Jun-20 13-Oct-10 13-Oct-20 23-Dec-10 23-Dec-20 15-Apr-11 15-Apr-21 27-Sep-11 27-Sep-21 27-Sep-11 29-Sep-21 0.01 0.01 0.01 0.01 0.01 0.01 0.01 0.01 0.01 531,915 531,915 43,478 31,250 34,884 43,478 31,250 34,884 740,105 767,883 20,270 13,636 538,163 46,154 20,270 13,636 538,163 46,154 27-Sep-14 27-Sep-21 0.1725 2,591,000 2,678,000 10-Oct-12 10-Oct-22 0.01 549,801 549,801 10-Oct-15 10-Oct-22 0.2400 1,653,000 1,701,000 20-Nov-13 20-Nov-23 23-Dec-13 23-Dec-23 23-Jun-15 22-June-25 0.01 0.01 0.01 36,035 115,385 200,000 36,035 115,385 200,000 10-Jun-15 10-Jun-25 0.1100 4,768,750 4,768,750 30-Sep-16 29-Sep-26 30-Dec-16 29-Dec-17 0.01 0.01 97,560 110,000 - - 15,527,922 16,475,448 Notes to the financial statements For the year ended 31 December 2016 – Continued 23. Notes to the Consolidated Statement of Cash Flows Loss before taxation Adjustments for: Net finance costs Depreciation of property, plant and equipment Amortisation of intangible assets Effect of exchange rate fluctuations Loss on disposal of property, plant and equipment Share-based payment expense Operating cash flow before movements in working capital balances Decrease in inventories Decrease in trade and other receivables (Decrease)/Increase in trade and other payables Increase in provisions Net cash used in operations 24. Commitments – operating lease The Group leases land and buildings and various items of plant and machinery under non-cancellable operating lease agreements. The majority of the lease agreements are renewable at the end of the lease term at a prevailing market rent. No later than one year Later than one year and no later than five years Later than five years 2016 £’000 (2,518) 2015 £’000 (3,595) 149 282 143 (30) 23 25 (1,926) 53 447 (455) 1 (1,880) 109 257 147 - 21 343 (2,718) 476 141 392 1 (1,708) The lease expenditure charged to profit or loss in the Consolidated SOCI is disclosed in note 4. The future aggregate minimum lease payments under non-cancellable leases are as follows: 2016 £’000 96 304 357 757 2015 £’000 85 311 431 827 The lease over UK land and buildings has a break clause at four and eight years. The annual rent is subject to upward only rent reviews, every four years, based on open market rents at that time. 25. Financial Instruments 25.1. Accounting policy Compound financial instruments issued by the Group comprise convertible notes that can be converted to share capital at the option of the holder, or subject to certain conditions at the option of the Group and the number of shares to be issued does not vary with changes in their fair value. The liability component of a compound financial instrument is recognised initially at the fair value of a similar liability that does not have an equity conversion option. The equity component is recognised initially as the difference between the fair value of the compound financial instrument as a whole and the fair value of the liability component. Any directly attributable transaction costs are allocated to the liability and equity components in proportion to their initial carrying amounts. 50 Subsequent to initial recognition, the liability component of a compound financial instrument is measured at amortised cost using the effective interest method. The equity component of a compound financial instrument is not re-measured subsequent to initial recognition except on conversion or expiry. Borrowings are classified as current liabilities unless the Group has an unconditional right to defer settlement of the liability for at least 12 months after the end of the reporting period. Deltex Medical Group plc Report & Accounts 2016 Notes to the financial statements For the year ended 31 December 2016 – Continued developing their markets, these distributors may be given extended trade terms. Extended trade terms, by their nature can increase the credit risk to the Group. Such risks are carefully managed through direct relationships with the distributors and knowledge of their markets. The maximum credit risk exposure at the balance sheet date is represented by the carrying value of financial assets and there are no significant concentrations of credit risk. See note 13 for further details. For banks and financial institutions only independently related parties with a minimum rating of ‘A’ are accepted. As at the date of signing the financial statements all cash and cash equivalents are held with institutions with an ‘A’ rating as per Standard & Poors. Interest Rate Risk The Group has both interest-bearing assets and interest- bearing liabilities. The Group’s policy is to seek the highest possible return on interest-bearing assets without bearing significant credit risk, and to minimise the rate payable on interest-bearing liabilities. The Group places its cash balances on deposit at floating rates of interest. Surplus cash balances are placed on short-term deposit (less than three months). No interest rate swaps are used. Interest rate risk comprises both the interest rate price risk that results from borrowing at fixed rates of interest and also the interest cash flow risk that results from borrowing at variable rates. At this time, the majority of the Group’s borrowings attract floating rates of interest and therefore the Group’s principal interest rate risk is a cash flow risk. Capital risk The Group’s objectives when managing capital (ordinary shares) are to safeguard the Group’s ability to continue as a going concern in order to provide future returns to shareholders and benefits for other stakeholders and to maintain optimal capital structure. 25.2. Note The Group’s financial instruments comprise some cash and various items, such as trade receivables and trade payables that arise directly from its operations. It is, and has been throughout the period under review, the Group’s policy that no trading in financial instruments shall be undertaken. The Board reviews and agrees policies for managing liquidity risk, currency risk, credit risk, interest rate risk and capital risk. The policies have remained unchanged throughout the year and are summarised below: Liquidity risk The Group is managed to ensure that sufficient cash reserves and credit facilities are available to meet liquidity requirements. The Group has available to it an invoice discounting facility with the Group’s bankers to supplement working capital needs. From time to time, additional funding is raised to allow the Group to invest in its strategic projects to develop the business in its chosen markets. Management monitors rolling forecasts of the Group’s liquidity reserves which comprises undrawn invoice discounting facilities and cash and cash equivalents on the basis of expected cash flows. Currency risk The Group has overseas subsidiaries in the USA, Spain and Canada and as a result the Group’s sterling balance sheet can be affected by movements in the US Dollar, Euro and Canadian dollar exchange rates. The Group also has transactional currency exposures. Such exposures arise from sales and purchases by operating units in currencies other than the unit’s functional currency. In general all overseas operating units trade and hold assets and liabilities in their functional currency. The Group does not engage in any hedging in respect of currency risks. Credit risk The Group is exposed to credit related losses in the event of non-performance by counter parties in connection with financial instruments. The Group takes actions to mitigate this exposure by ensuring adequate background on credit risk is known about counterparties prior to contracting with them and through selection of counterparties with suitable credit ratings and monitors its exposure to credit risk on an ongoing basis. The Group is also exposed to credit related losses and territory specific credit risk in the event of non-performance by counterparties in connection with financial instruments. The Group uses international distributors in a number of overseas territories. In order to assist the distributors in Notes to the financial statements For the year ended 31 December 2016 – Continued Ordinary shares are classified as equity. Incremental costs directly attributable to the issue of ordinary shares and share options are recognised as a deduction from equity, net of any tax effects. The Board’s policy is to maintain a strong capital base so as to maintain investor, creditor and market confidence and to sustain future development of the business. The Board of directors monitors the demographic spread of shareholders. The Board encourages employees to hold shares in the Company. This has been carried out through the Company’s various executive share option plans. Full details of these schemes are given in note 21. The Board seeks to maintain a balance between the higher returns that might be possible with higher levels of borrowings and the advantages and security afforded by a sound capital position and discusses these at regular Board meetings. There were no changes to the Group’s approach to capital management during the year. Neither the Company nor any of its subsidiaries are subject to externally imposed capital requirements. Liabilities – by maturity Financial Instruments principally comprise the Group’s borrowings under an invoice discounting facility with the Royal Bank of Scotland, trade and other payables, net obligations under finance leases and long-term loans. Interest on the invoice discounting facility is payable at floating rate of 2.5% to 3.25% above LIBOR. The table below summarises the Group’s financial liabilities into the relevant maturity groupings based upon the remaining period at the balance sheet to the contractual maturity date. The amounts disclosed are the undiscounted cash flows. 2016 2015 Less than 1 year £’000 Between 1 and 2 years £’000 Between 2 and 5 years £’000 Less than 1 year £’000 Between 1 and 2 years £’000 Between 2 and 5 years £’000 Invoice discounting facility Convertible loan note Finance lease liabilities Trade and other payables 739 90 31 2,105 2,965 - 90 5 - 95 - 1,139 - - 1,139 827 1,016 44 2,372 4,259 - - 31 - 31 Fair value of financial assets and liabilities There is a close approximation between book and fair value of all the Group’s financial assets and liabilities. All such fair value measures would be categorised as level 3 fair values in the fair value hierarchy. - - 5 - 5 The Group’s financial assets and liabilities are categorised as follows: 2016 2015 Loans and receivables £’000 Financial liabilities at amortised cost £’000 Total carrying amount £’000 Loans and receivables £’000 Financial liabilities at amortised cost £’000 Total carrying amount £’000 1,877 352 582 2,811 - - - - - - - - - 2,109 739 1,053 33 3,934 1,877 1,918 352 582 - 575 2,811 2,493 2,109 739 1,053 33 3,934 - - - - - - - - - 2,372 827 1,000 71 4,270 1,918 - 575 2,493 2,372 827 1,000 71 4,270 Financial assets Trade receivables Other receivables Cash and cash equivalents Financial liabilities Trade and other payables Invoice discounting facility Convertible loan note Finance lease liabilities 52 Deltex Medical Group plc Report & Accounts 2016 Notes to the financial statements For the year ended 31 December 2016 – Continued Sensitivities The following table details the Group’s sensitivities to changes in sterling against the respective foreign currencies. The sensitivities represent management’s assessment of the effect on monetary assets of the possible changes in foreign exchange rates. The sensitivities analysis of the Group’s exposure to foreign currency risk at the year-end has been determined based upon the assumption that the increase in Euro, US Dollar and Canadian Dollar exchange rates is effective throughout the financial year and all other variables remain constant. An increase of 10% has been used as a maximum exposure expectation for exchange rate sensitivities. 26.2. Other transactions Leading on from the strategic review of the UK sales operation that was completed in October 2015, Rockridge Medical Limited, a company partly owned by CM Jones, a non-executive director, was engaged by the Group to provide sales and marketing related consultancy support to the UK sales team. This work approximated to around 2 days per month. The total amount due for these consultancy services was £15,343.53 (2015: £16,392.48) excluding VAT, of this £8,815.61 was outstanding at the year-end (2015: £16,392.48). In addition, an amount of £4,300 (2015: £nil) was included within accruals at the year-end. 2016 2015 27. Capital and reserves The Capital reserve represents the nominal value of shares that were re-purchased and subsequently cancelled during the year ending 31 December 2001. The other reserve represents the reserve for cumulative share-based payment charges since 1 November 2002. The translation reserve comprises of all foreign exchange differences arising since 1 January 2006, from the translation of the Group’s net investments in foreign subsidiaries into sterling. The convertible loan note reserve relates to the residual value attributed to the equity conversion right at the time of issue of the 2019 loan notes. 28. Events after the balance sheet date On 22 March 2017, the company raised £400,000, before expenses, through subscriptions for 11,034,482 new ordinary shares at 3.625p per share. Sensitivity % Profit £’000 Equity £’000 Profit £’000 Equity £’000 Euros US Dollar Canadian Dollar 10 10 10 (127) (127) 78 (9) 78 (9) (93) 113 (4) (93) 113 (4) The following table shows the Group’s sensitivity to a reasonably possible change in interest rates throughout the year, with all other variables remaining constant. 2016 2015 Sensitivity % Profit £’000 Equity £’000 Profit £’000 Equity £’000 Euros US Dollar Canadian Dollar 1 1 1 (2) (2) (2) (2) (2) (2) (9) (1) (1) (9) (1) (1) 26. Related party transactions 26.1. Key management compensation Short-term employee benefits Short term benefits paid to third parties Post-employment benefits Share-based payments 2016 £’000 461 51 14 5 531 2015 £’000 401 44 14 17 476 Independent auditors’ report to the Members of Deltex Medical Group plc Report on the parent company financial statements Our opinion In our opinion, Deltex Medical Group plc’s parent company financial statements (the “financial statements”): ■ give a true and fair view of the state of the parent company’s affairs as at 31 December 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. What we have audited The financial statements, included within the Report & Accounts (the “Annual Report”), comprise: ■ the Parent Company Balance Sheet as at 31 December 2016; ■ the Parent Company Statement of Changes in Equity for the year then ended; and ■ the notes to the financial statements, which include a summary of significant accounting policies and other explanatory information. The financial reporting framework that has been applied in the preparation of the financial statements is United Kingdom Accounting Standards, comprising FRS 101 “Reduced Disclosure Framework”, and applicable law (United Kingdom Generally Accepted Accounting Practice). In applying the financial reporting framework, the directors have made a number of subjective judgements, for example in respect of significant accounting estimates. In making such estimates, they have made assumptions and considered future events. Opinions on other matters prescribed by the Companies Act 2006 In our opinion, based on the work undertaken in the course of the audit: ■ the information given in the Strategic Report and the Directors’ Report for the financial year for which the financial statements are prepared is consistent with the financial statements; and ■ the Strategic Report and the Directors’ Report have been prepared in accordance with applicable legal requirements. In addition, in light of the knowledge and understanding of the parent company and its environment obtained in the course of the audit, we are required to report if we have identified any material misstatements in the Strategic Report and the Directors’ Report. We have nothing to report in this respect. 54 Other matters on which we are required to report by exception Adequacy of accounting records and information and explanations received Under the Companies Act 2006 we are required to report to you if, in our opinion: ■ we have not received all the information and explanations we require for our audit; or ■ adequate accounting records have not been kept by the parent company, or returns adequate for our audit have not been received from branches not visited by us; or ■ the financial statements are not in agreement with the accounting records and returns. We have no exceptions to report arising from this responsibility. Directors’ remuneration Under the Companies Act 2006 we are required to report to you if, in our opinion, certain disclosures of directors’ remuneration specified by law are not made. We have no exceptions to report arising from this responsibility. Responsibilities for the financial statements and the audit Our responsibilities and those of the directors As explained more fully in the Statement of directors’ responsibilities set out on page 20, the directors are responsible for the preparation of the 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 financial statements in accordance with applicable law and International Standards on Auditing (UK and Ireland) (“ISAs (UK & Ireland)”). Those standards require us to comply with the Auditing Practices Board’s Ethical Standards for Auditors. This report, including the opinions, has been prepared for and only for the parent company’s members as a body in accordance with Chapter 3 of Part 16 of the Companies Act 2006 and for no other purpose. We do not, in giving these opinions, accept or assume responsibility for any other purpose or to any other person to whom this report is shown or into whose hands it may come save where expressly agreed by our prior consent in writing. What an audit of financial statements involves We conducted our audit in accordance with ISAs (UK & Ireland). An audit involves obtaining evidence about the amounts and disclosures in the financial statements sufficient to give reasonable assurance that the financial statements are free from material misstatement, whether caused by fraud or error. This includes an assessment of: Deltex Medical Group plc Report & Accounts 2016 Independent auditors’ report to the Members of Deltex Medical Group plc – Continued ■ whether the accounting policies are appropriate to the parent company’s circumstances and have been consistently applied and adequately disclosed; ■ the reasonableness of significant accounting estimates made by the directors; and ■ the overall presentation of the financial statements. We primarily focus our work in these areas by assessing the directors’ judgements against available evidence, forming our own judgements, and evaluating the disclosures in the financial statements. We test and examine information, using sampling and other auditing techniques, to the extent we consider necessary to provide a reasonable basis for us to draw conclusions. We obtain audit evidence through testing the effectiveness of controls, substantive procedures or a combination of both. In addition, we read all the financial and non-financial information in the Annual Report to identify material inconsistencies with the audited financial statements and to identify any information that is apparently materially incorrect based on, or materially inconsistent with, the knowledge acquired by us in the course of performing the audit. If we become aware of any apparent material misstatements or inconsistencies we consider the implications for our report. With respect to the Strategic Report and Directors’ Report, we consider whether those reports include the disclosures required by applicable legal requirements. Other matter We have reported separately on the group financial statements of Deltex Medical Group plc for the year ended 31 December 2016. Matthew Hall (Senior Statutory Auditor) for and on behalf of PricewaterhouseCoopers LLP Chartered Accountants and Statutory Auditors Southampton 26 April 2017 Parent Company Balance Sheet as at 31 December 2016 Fixed assets Intangible assets – Goodwill Investments Trade and other receivables Current assets Trade and other receivables Cash and cash equivalents Creditors – amounts falling due within one year Net current liabilities Total assets less current liabilities Creditors – amounts falling due after more than one year Net assets Equity Share capital Share premium account Capital redemption reserve Other reserve Convertible loan note reserve Accumulated losses At 1 January Profit for the year Accumulated losses Total shareholders’ funds Note 2016 £’000 2015 £’000 5 6 7 7 8 9 10 66 27,583 6,342 33,991 10 236 246 (303) (57) 33,934 (963) 32,971 2,849 32,268 17,476 4,685 84 - 25,667 5,505 31,172 27 156 183 (1,285) (1,102) 30,070 - 30,070 2,196 30,394 17,476 4,661 - (24,657) (25,380) 266 723 (24,391) (24,657) 32,971 30,070 The notes on pages 58 to 61 form an integral part of these financial statements. The financial statements on pages 56 to 61 were approved by the Board of Directors and authorised for issue on 26 April 2017 and were signed on its behalf by: Nigel Keen Chairman 56 Jonathan D Shaw Group Finance Director Deltex Medical Group plc Report & Accounts 2016 Parent Company Statement of Changes in Equity for the year ended 31 December 2016 Share capital £’000 2,130 Share premium account £’000 30,323 Capital redemption reserve £’000 17,476 Other reserve £’000 4,318 Convertible loan note reserve £’000 - Accumulated losses £’000 (25,380) Total equity £’000 28,867 Group Balance at 1 January 2015 Comprehensive income Profit for the year Total comprehensive income for the year Shares issued during the year Premium on shares issued during the year Credit in respect of service cost settled by award of options - - 66 - - - - - 71 - - - - - - - - - - 343 Balance at 31 December 2015 2,196 30,394 17,476 4,661 Comprehensive income Profit for the year Total comprehensive income for the year Shares issued during the year Premium on shares issued during the year Issue expenses Equity element of convertible loan note Credit in respect of service cost settled by award of options - - 653 - - - - - - - 1,992 (118) - - - - - - - - - - - - - - - 24 Balance at 31 December 2016 2,849 32,268 17,476 4,685 The notes on pages 58 to 61 form an integral part of these parent company financial statements. - - - - - - - - - - - 84 - 84 723 723 - - - 723 723 66 71 343 (24,657) 30,070 266 266 - - - - - 266 266 653 1,992 (118) 84 24 (24,391) 32,971 Notes to the Parent Company financial statements 1. Principal accounting policies 1.1. Basis of preparation These financial statements are the financial statements for Deltex Medical Group plc, the parent of the Deltex Medical Group, which operates as a group holding company. It is a public company, limited by shares and is incorporated in England and Wales. It is listed on the Alternative Investment Market. The financial statements have been prepared in accordance with Financial Reporting Standard 101, ‘Reduced Disclosure Framework’ (FRS 101). They have been prepared on the going concern basis under the historical cost convention and in accordance with the Companies Act 2006 as applicable to companies using FRS 101. The preparation of financial statements in conformity with FRS 101 requires the use of certain critical accounting estimates. It also requires management to exercise its judgement in the process of applying the company’s accounting policies. The areas involving a higher degree of judgement or complexity, or areas where assumptions and estimates are significant to the financial statements are disclosed below. No income statement is presented by the Company as permitted by Section 408 of the Companies Act 2006. The following exemptions from the requirements of IFRS have been applied in the preparation of these financial statements, in accordance with FRS 101: ■ The requirements of paragraphs 62, B64(d), B64(e), B64(g), B64(h), B64(j) to B64(m), B64(n)(ii), B64 (o)(ii), B64(p), B64(q) (ii), B66 and B67of IFRS 3, ‘Business Combinations’; ■ The requirements of IFRS 7 ‘Financial Instruments: Disclosures’; ■ The requirements of paragraphs 91-99 of IFRS 13, ‘Fair Value Measurement’; ■ The requirement in paragraph 38 of IAS 1, ‘Presentation of Financial Statements’ to present comparative information in respect of: • paragraph 79(a)(iv) of IAS 1; • paragraph 73(e) of IAS 16, ‘Property, Plant and Equipment’; • Paragraph 118(e) of IAS 38, ‘Intangible Assets’; ■ The requirements of paragraphs 10(d), 10(f), 39(c) and 134-136 of IAS 1; ■ The requirements of IAS 7, ‘Statement of Cash Flows’; ■ The requirements of paragraphs 30 and 31 of IAS 8, ‘Accounting Policies, Changes in Accounting Estimates and Errors’; ■ The requirements of paragraph 17 of IAS 24, ‘Related Party Disclosures’; and ■ The requirements in IAS 24 to disclose related party transactions entered into between two or more members of a group, provided that any subsidiary which is a party to the transaction is wholly owned by such a member. 58 1.2. Judgements and key sources of estimation uncertainty The company has funded the trading activities of its principal subsidiaries by way of inter-company loans. The amounts advanced did not have any specific terms relating to their repayment, were unsecured and were interest free. In the light of the above, management have had to determine whether such loan balances should be accounted for as loans and receivables in accordance with IAS39, ‘Financial Instruments: Measurement’, or whether, in fact, it represents an interest in a subsidiary which is outside the scope of IAS39 and accounted for in accordance with IAS27, ‘Separate Financial Statements’. Management have concluded that, in substance, the loans represent an interest in a subsidiary as the funding provided is considered to provide the subsidiary with a long term source of capital. Therefore the loans are accounted for in accordance with IAS27 and are carried at their historical cost less provision for impairment, if any. The carrying amount of these loans are tested for impairment if events occur which may indicate that these assets are impaired. The carrying value of these loans are compared to the value in use of the relevant subsidiary which is also the cash generating unit (CGU). The estimation of the value in use of a CGU requires the Group to make an estimate of the expected future cash flows from the CGU and also the selection of a suitable pre-tax discount rate to calculate the present value of those cash flows. 1.3. Significant accounting policies. The accounting policies set out below have been consistently applied in both 2016 and 2015. Investments Investments which comprise investments in share capital and inter-company loan balances are stated at cost less any provisions for impairment in value. At each balance sheet date the Company reviews the carrying amount of the investments to determine whether there is any indication that those assets have suffered an impairment loss. If any such indication exists, the recoverable amount of the asset is estimated to determine the extent of any impairment loss. The recoverable amount is the higher of the investments value in use and its fair value less costs to sell. Value in use is calculated using cash flow projections for the investments discounted at the Company’s cost of capital. If the recoverable amount of the investment is estimated to be less than its carrying amount, the carrying amount of the investment is reduced to its recoverable amount. An impairment loss is recognised in profit and loss in the Statement of Comprehensive Income (SOCI), unless the relevant investment is carried at a revalued amount, in which case the impairment loss is treated as a revaluation decrease. Deltex Medical Group plc Report & Accounts 2016 Notes to the Parent Company financial statements Continued Deferred taxation Deferred income tax is recognised on all temporary differences arising between the tax bases of assets and liabilities and their carrying amounts in the financial statements, with the following exceptions: When the deferred tax liability arises from the initial recognition of goodwill or an asset or liability in a transaction that is not a business combination and, at the time of the transaction, affects neither the accounting profit nor taxable profit or loss. (nominal value) and share premium when the options are exercised. Provision for National Insurance payable on such gains is recognised in accordance with UITF 25. The fair value of the equity-settled share-based payment is recharged by the Company to the subsidiary operating company at fair value. The expense is therefore recognised in the subsidiary operating company, with the equity reserve being recognised in the Group company. Deferred income tax assets are recognised only to the extent that it is probable that taxable profit will be available against which the deductible temporary differences, carried forward tax credits or tax losses can be utilised. Deferred income tax assets and liabilities are measured on an undiscounted basis at the tax rates that are expected to apply when the related asset is realised or liability is settled, based on tax rates and laws enacted or substantively enacted at the balance sheet date. The carrying amount of deferred income tax assets is reviewed at each balance sheet date. Deferred income tax assets and liabilities are offset, only if a legally enforcement right exists to set off current tax assets against current tax liabilities, the deferred income taxes relate to the same taxation authority and that authority permits the company to make a single net payment. Foreign currency translation Foreign currency monetary assets and liabilities are translated into sterling at the rate of exchange ruling at the balance sheet date. Transactions in overseas currencies are translated at the rate of exchange ruling on the date of the transaction or at a contracted rate if applicable. Any gains or losses arising during the year have been dealt with in profit or loss in the SOCI. Share-based payments The Company awards directors, employees and certain of the Group’s distributors and advisors equity-settled share- based payments, from time to time, on a discretionary basis. In accordance with IFRS 2 ‘Share-based payments’, equity-settled share-based payments are measured at fair value at the time of grant. Fair value is measured by use of a Black-Scholes model. The fair value determined at the grant date of the equity-settled share-based payments is expensed on a straight-line basis over the vesting period, based on the Company’s estimate of the number of shares that will eventually vest. The options are subject to vesting conditions of up to six years, and their fair value is recognised as an expense with a corresponding increase in ‘other reserves’ equity over the vesting period. At each balance sheet date, the entity revises its estimates of the number of options that are expected to vest. It recognises the impact of the revision to original estimates, if any, in the income statement, with a corresponding adjustment to reserves. The proceeds received net of any directly attributable transaction costs are credited to share capital Related party transactions The Company is the ultimate parent undertaking of the Deltex Medical Group plc and is therefore included in the consolidated financial statements of that Group, which are on pages 24 to 53 of the Annual Report & Accounts 2016. Cash and cash equivalents Cash and cash equivalents includes cash in hand and deposits held with banks. Share capital Ordinary shares are classified as equity. Incremental costs directly attributable to the issue of new shares or options are shown in equity as a deduction, net of tax, from the proceeds. Terms of loans to subsidiaries The Company uses its cash to fund the operations of its subsidiaries until such a time that the subsidiaries are in a position to return the monies to Group. These loans are interest free and have no fixed repayment date, apart from a £3,000,000 10% fixed interest bearing loan. Compound financial instruments Compound financial instruments issued by the Group comprise convertible notes that can be converted to share capital at the option of the holder, or subject to certain conditions at the option of the Group and the number of shares to be issued does not vary with changes in their fair value. The liability component of a compound financial instrument is recognised initially at the fair value of a similar liability that does not have an equity conversion option. The equity component is recognised initially as the difference between the fair value of the compound financial instrument as a whole and the fair value of the liability component. Any directly attributable transaction costs are allocated to the liability and equity components in proportion to their initial carrying amounts. Subsequent to initial recognition, the liability component of a compound financial instrument is measured Notes to the Parent Company financial statements Continued at amortised cost using the effective interest method. The equity component of a compound financial instrument is not re-measured subsequent to initial recognition except on conversion or expiry. Borrowings are classified as current liabilities unless the Group has an unconditional right to defer settlement of the liability for at least 12 months after the end of the reporting period. 2. Operating profit As permitted by Section 408 of the Companies Act 2006 the Company has elected not to present its own SOCI for the year. Deltex Medical Group plc reported a profit for the financial year ended 31 December 2016 of £266,000 (2015: £723,000). 3. Auditors remuneration The audit fee in respect of the Parent Company’s financial statements was £31,000 (2015: £30,000) 4. Directors’ remuneration Aggregate emoluments Short term benefits paid to third parties 2016 £’000 72 51 123 2015 £’000 78 44 122 There are no (2015: Nil) benefits accruing to directors under personal pension plans. Included in the above figure are amounts payable to the employing company, Imperialise Limited, of £33,332 (2015: £33,332), and Rockridge Medical Limited of £18,000 (2015: £10,500), for the services of those directors. Remuneration, including Executive directors, is disclosed on page 36 of this Reports & Accounts. All Executive directors in office at the year-end receive their emoluments from Deltex Medical Limited, a subsidiary undertaking of the Group. Except for financing activities, their services to the Company are incidental to their services to the Group as a whole. The average number of Non-executive directors by function was categorised as administrative for both years was 5 (2015: 5). 5. Intangible fixed assets – Goodwill This amount represents the goodwill that arose in 2013 on the acquisition of the trade and assets of Deltex Medical Canada Limited which had been incorrectly accounted for in the accounting records of Deltex Medical Limited. This error came to light during the preparation of the statutory accounts of Deltex Medical Limited for the year ended 31 December 2015 and was corrected in those accounts. As the amount involved is considered by the directors to be immaterial in the context of the company’s accounts they have chosen not to restate the prior year’s balance sheet. 6. Investments The directors consider that the carrying value of the investments is supported by their future cash flows. These loans have, therefore, been treated as part of Deltex Medical Group plc net investment in these subsidiaries. Loans to subsidiary undertakings in the amount of £27,146,000 relate to long-term balances with Deltex Medical Limited and Deltex Medical SC Inc. The directors consider that these balances are intended to be, for all practical purposes, permanent as equity and do not expect them to be repayable in the foreseeable future. During the year, additional long-term debtor balances have been reclassified as long-term investments as this follows the substance of the underlying transactions. Details of the Company’s subsidiary undertakings are set out on page 41 of this Report & Accounts. 2016 2015 Investments in subsidiary undertakings £’000 437 Loans to subsidiary undertakings £’000 25,230 Total £’000 25,667 Investments in subsidiary undertakings £’000 437 Loans to subsidiary undertakings £’000 23,504 Total £’000 23,941 - 437 1,916 1,916 27,146 27,583 - 437 1,726 1,726 25,230 25,667 At 1 January Additions At 31 December 60 Deltex Medical Group plc Report & Accounts 2016 Notes to the Parent Company financial statements Continued 7. Trade and other receivables Amounts falling due within one year 2016 £’000 2015 £’000 Deferred tax liabilities At 1 January 2015 Foreign exchange £’000 79 Total £’000 79 Other receivables 10 27 Charged to profit or loss in the SOCI Amounts falling due after more than one year At 31 December 2015 Amounts owed by subsidiary undertaking 6,342 5,505 Charged to profit or loss in the SOCI 6,352 5,532 At 31 December 2016 In 2013, the Group reclassified £3,000,000 of the long-term investments by Group in Deltex Medical Limited as a long- term loans. This loan is being charged interest at a rate of 10% per annum, is unsecured and falls due for repayment on 1 January 2018. The remaining amount relates to group recharges and accrued interest which are unsecured and non-interest bearing. 8. Creditors: amounts falling due within one year Deferred tax asset At 1 January 2015 Credited to profit or loss in the SOCI At 31 December 2015 Credited to profit or loss in the SOCI At 31 December 2016 (12) 67 (12) 55 (12) 67 (12) 55 Tax losses £’000 (79) Total £’000 (79) 12 (67) 12 (55) 12 (67) 12 (55) 12. Ultimate controlling party There are no shareholders with overall control of the Company as at 31 December 2016 or 31 December 2015. 13. Related party transactions Exemption has been taken under FRS 101 paragraph 8(k) from disclosing related party transactions between the Company and its subsidiary undertakings and from paragraph 8(j) from disclosing key management compensation. The Directors of Deltex Medical Group plc had no other material transaction with the Company during the year, other than as a result of service agreements. Details of the directors’ remuneration is disclosed in the Directors’ Report in the Consolidated Financial Statements on page 18. Trade payables Accruals Convertible loan notes 2016 £’000 117 96 90 303 2015 £’000 186 99 1,000 1,285 9. Creditors: amounts falling due after more than one year Convertible loan notes 2016 £’000 963 2015 £’000 - Information relating to the convertible loan note is in note 16.4 of the Consolidated Financial Statements. 10. Share capital See notes 21 and 22 of the Consolidated Financial Statements on pages 46 to 49 for full details of the share capital and share option schemes operated by the Company. 11. Deferred tax The movement in deferred income tax assets and liabilities during the year, without taking into consideration the offsetting of balances within the same tax jurisdiction, is as follows: Notice of Annual General Meeting THIS DOCUMENT IS IMPORTANT AND REQUIRES YOUR IMMEDIATE ATTENTION. If you are in any doubt as to the action you should take, you are recommended immediately to seek your own personal financial advice from your stockbroker, bank manager, solicitor, accountant or other independent financial adviser authorised under the Financial Services and Markets Act 2000. If you have sold or otherwise transferred all of your shares in Deltex Medical Group plc, you should pass this document, the accompanying form of proxy and the annual report and accounts of Deltex Medical Group plc for the financial year ended 31 December 2016 without delay to the stockbroker, bank or other person who arranged the sale or transfer so they can pass these documents to the person who now holds the shares. This document should be read in conjunction with the accompanying Form of Proxy. DELTEX MEDICAL GROUP plc (Incorporated in England, registered number 3902895) NOTICE OF ANNUAL GENERAL MEETING Notice of an annual general meeting of Deltex Medical Group plc (the “Company”) to be held at Laytons Solicitors, 2 More London Riverside, London SE1 2AP at 11:00am on 9 June 2017 (the “AGM”) is set out on pages 65 and 66 (inclusive) of this document. To be valid as a proxy in respect of the AGM, the form of proxy accompanying this document must be completed and returned in accordance with the instructions thereon so as to be received by the Company’s registrars, Capita Asset Services, PXS, 34 Beckenham Road, Beckenham, Kent, BR3 4TU not later than 48 hours before the time of the meeting. 62 Deltex Medical Group plc Report & Accounts 2016 Directors Nigel Keen (Chairman) Ewan Phillips Jonathan D Shaw Julian Cazalet Christopher Jones Sir Duncan Nichol Mark Wippell Deltex Medical Group plc Terminus Road, Chichester West Sussex, PO19 8TX United Kingdom Head Office: +44 (0)1243 774 837 Facsimile: +44 (0)1243 532 534 Customer Service: 0845 085 001 26 April 2017 To holders of ordinary shares of 1p each (“Ordinary Shares”) in the capital of Deltex Medical Group plc (the “Company”) Dear Shareholder, Notice of Annual General Meeting of the Company and annual accounts for the year ended 31 December 2016 I am pleased to send you details of arrangements for our annual general meeting, together with the annual accounts of the Company, which contain the reports of the directors and the auditors, for the year ended 31 December 2016. The formal notice of the annual general meeting of the Company, which will take place at Laytons Solicitors, 2 More London Riverside, London SE1 2AP at 11:00am on 9 June 2017 (the “AGM”), is set out on pages 65 and 66 (inclusive) of this document. The purpose of this letter is to explain certain aspects of the business of the AGM to you. Resolution 1 - Receipt of audited financial statements Resolution 1 deals with the receipt of the directors’ and auditors’ reports and the accounts of the group for the financial year ended 31 December 2016. Resolutions 2, 3 and 4 - Re-election of directors Resolution 2 proposes the re-election of Sir Duncan Nichol as a director, Resolution 3 proposes the re-election of Mark Wippell and Resolution 4 proposes the re-election of Ewan Phillips as a director. The Company’s articles of association require that at each annual general meeting one third of the directors (excluding directors being elected for the first time) must retire by rotation; accordingly, Sir Duncan Nichol, Mark Wippell and Ewan Phillips offer themselves for re-election as proposed by resolutions 2, 3 and 4. Biographical details of Sir Duncan Nichol, Mark Wippell and Ewan Phillips are set out on page 16 of the Report and Accounts 2016. The Board considers that the experience of these directors will continue to be beneficial to the Company. Resolution 5 – Re-appointment of auditors PricewaterhouseCoopers LLP have expressed their willingness to continue as the Company’s auditors. Resolution 5 proposes their Re-appointment and authorises the directors to determine their remuneration. Resolution 6 – Power to allot and issue shares The directors are not permitted to allot new shares (or to grant rights over shares) unless authorised to do so by the shareholders of the Company. At the annual general meeting of the Company held on 12 May 2016 (the “2015 AGM”), the directors were given authority to allot relevant securities up to a maximum nominal amount of £908,732 (being one-third of the then issued ordinary share capital of the Company) and to allot a further one-third pursuant to a rights issue. This authority expires at the conclusion of the 2016 Annual General Meeting and the directors are seeking a fresh shareholder authority to allot relevant securities. Accordingly, it is proposed that the directors are given general authority to allot relevant securities up to an aggregate nominal amount of £989,129 (being one-third of the issued ordinary share capital as at 21 April 2017) and in addition to allot relevant securities only in connection with a Rights Issue (as defined in the resolution) up to a further nominal value of £989,129. Accordingly if this resolution is passed the Directors will have the authority in certain circumstances to allot new shares and other relevant securities up to a total nominal value of £1,978,258, representing a total amount equal to two-thirds of the Company’s issued share capital as at 21 April 2017. Although the directors have no present intention of exercising this authority, the general authority to allot shares will provide flexibility for the Company to allot shares and to grant rights to subscribe for or to convert into shares when they consider it to be in the Company’s interests to do so. The authority will expire on the conclusion of the Annual General Meeting of the Company to be held in 2018 or on 17 August 2018, whichever is earlier, but it is the intention of the directors to seek renewal of this authority annually. Registered in England & Wales No. 03902895 VAT No. 615400089 www.deltexmedical.com Resolution 7 – Disapplication of the statutory rights of pre-emption Section 561 of the Companies Act 2006 gives holders of equity securities (within the meaning of that Act) certain rights of preemption on the issue for cash of new equity securities (other than in connection with an employees’ share scheme). The directors believe that it is in the best interests of the shareholders that the directors should have limited authority to allot Ordinary Shares (or rights to convert into or subscribe for Ordinary Shares, or sell any Ordinary Shares which the Company elects to hold in treasury) for cash without first having to offer such shares to existing shareholders in proportion to their existing holdings. Resolution 7 proposes, in substitution for the power that was granted to the directors at the 2016 AGM, that power be granted to allot securities for cash on a non-pre-emptive basis up to a maximum nominal amount equal to £296,742 (representing approximately ten per cent. of the nominal issued share capital of the Company as at 21 April 2017). The resolution also disapplies the pre-emption rights to the extent necessary to facilitate rights issues, open offers and similar transactions without having to follow the specific statutory procedures that would otherwise apply to such issues. The authority will expire on the conclusion of the Annual General Meeting of the Company to be held in 2018 or on 17 August 2018, whichever is earlier, but it is the intention of the directors to seek renewal of this authority annually. Resolution 7 will be proposed as a special resolution. ACTION TO BE TAKEN It is important to the Company that shareholders have the opportunity to vote even if they are unable to attend the AGM. You will receive, by post, a form of proxy for use at the AGM. Whether or not you propose to attend the AGM in person, you are requested to complete the form of proxy and return it to the Company’s registrars, Capita Asset Services, PXS, 34 Beckenham Road, Beckenham, Kent, BR3 4TU so as to arrive no later than 11.00am on 7 June 2017 or 48 hours before any adjournment of the meeting. The completion and return of the form of proxy will not affect your right to attend and vote in person at the AGM if you so wish. Your attention is drawn to the notes endorsed on the enclosed form of proxy. RECOMMENDATION Your directors believe that all the proposals to be considered at the AGM are in the best interests of the Company and its shareholders as a whole and recommend that shareholders vote in favour of the resolutions, as they intend to do in respect of their own beneficial shareholdings of 39,662,000 Ordinary Shares in aggregate, representing approximately 13.37 per cent of the Ordinary Shares currently in issue. Yours sincerely Nigel J Keen Chairman 64 Deltex Medical Group plc Report & Accounts 2016 Deltex Medical Group plc Notice Of Annual General Meeting NOTICE is hereby given that the ANNUAL GENERAL MEETING of Deltex Medical Group plc will be held at Laytons Solicitors, 2 More London Riverside, London SE1 2AP at 11:00am on 9 June 2017 to transact the following business: Ordinary Business As ordinary business, to consider and if thought fit pass the following resolutions, which will be proposed as ordinary resolutions: 1. To receive the Company’s audited financial statements for the year ended 31 December 2016, together with the reports of the directors and of the auditors thereon. 2. To re-elect as a director Sir Duncan Nichol 3. To re-elect as a director Mark Wippell 4. To re-elect as a director Ewan Phillips 5. To re-appoint PricewaterhouseCoopers LLP as auditors of the Company to hold office until the conclusion of the next general meeting at which accounts are laid before the Company and that their remuneration be fixed by the directors. granted after the authority ends and the Directors may allot shares or grant rights to subscribe for or convert securities into shares in pursuance of such offer or agreement as if the authority had not ended. In this resolution “Rights Issue” means an offer of equity securities by way of rights, open offer or otherwise to holders of ordinary shares in the capital of the Company on the register on a record date fixed by the directors in proportion as nearly as may be to the respective numbers of Ordinary Shares held by them, but subject to such exclusions or other arrangements as the directors may deem necessary or expedient to deal with any treasury shares, fractional entitlements or legal or practical issues arising under the laws of, or the requirements of any recognised regulatory body or any stock exchange in, any territory. To transact any other ordinary business of the Company. 7. THAT, subject to the passing of resolution 6 set out Special Business As special business, to consider and if thought fit pass the following resolutions, of which resolution 6 will be proposed as an ordinary resolution and resolution 7 as a special resolution: 6. THAT the directors be generally and unconditionally authorised pursuant to section 551 of the Companies Act 2006 (the “Act”) (in substitution for any existing such authority save to the extent of the allotment of shares pursuant to an offer or agreement made before expiry of such existing authority) 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: a. comprising equity securities (as defined by section 560 of the Act) up to an aggregate nominal amount of £1,978,258 (such amount to be reduced by the nominal amount of any relevant securities allotted under paragraph (b) below) in connection with an offer of such securities by way of a Rights Issue (as defined below); and b. in any other case, up to an aggregate nominal amount of £989,129 (such amount to be reduced by the nominal amount of any equity securities allotted under paragraph (a) above in excess of £989,129). Provided that, unless previously revoked, varied or extended by the Company in general meeting, this authority shall expire on the earlier of the conclusion of the next annual general meeting of the Company and 17 August 2018 save that the Company may, before such expiry, make offers or agreements which would or might require shares to be allotted or rights to subscribe for or convert securities into shares to be in the Notice of the Annual General Meeting dated 26 April 2017 (“Resolution 6”), the directors be empowered pursuant to section 570(1) of the Act to allot equity securities (as defined in section 560 of the Act and including the sale of treasury shares) for cash pursuant to the general authority conferred by Resolution 6 as if section 561 of the Act did not apply to such allotment, such power to expire on the earlier of the conclusion of the next annual general meeting of the Company and 17 August 2018 unless previously revoked, varied or extended by the Company in general meeting, but so that the Company may, before such expiry, make offers or agreements which would or might require equity securities to be allotted or treasury shares to be sold after such expiry, and the directors may allot equity securities and sell treasury shares in pursuance of any such offer or agreement as if the power conferred by this resolution had not expired, provided that this power shall be limited to: a. the allotment of equity securities in connection with an offer of, or invitation to apply for, equity securities (but in the case of an allotment or sale permitted by the authority granted under paragraph (a) of Resolution 6, only by way of a Rights Issue as defined in Resolution 6); b. in the case of the authority granted under paragraph (b) of Resolution 6 and/or in the case of any transfer of treasury shares which is treated as an allotment of equity securities under section 560(3) of the Act, the allotment (otherwise than under paragraph (a) of this resolution) of equity securities up to an aggregate nominal amount of £296,742. Deltex Medical Group plc Notice Of Annual General Meeting By order of the Board Jonathan D Shaw Company Secretary 26 April 2017 Registered office Terminus Road Chichester West Sussex PO19 8TX Notes: 1. Any member entitled to attend and vote at the annual general meeting is entitled to appoint one or more proxies (who need not be a member of the Company) to attend and, on a poll, to vote instead of the member. Completion and return of a form of proxy will not preclude a member from attending and voting at the meeting in person, should he subsequently decide to do so. 2. In order to be valid, any form of proxy and power of attorney or other authority under which it is signed, or a notarially certified or office copy of such power or authority, must reach the Company’s registrars, Capita Asset Services, PXS, 34 Beckenham Road, Beckenham, Kent, BR3 4TU not less than 48 hours before the time of the meeting or of any adjournment of the meeting. 3. To be entitled to attend and vote at the annual general meeting (and for the purpose of the determination by the Company of the votes they may cast), shareholders must be registered in the register of members of the Company at 6pm on 7 June 2017 (or in the case of any adjournment, on the date which is forty-eight hours before the time of the adjourned meeting). Changes to the register of members after the relevant deadline shall be disregarded in determining the rights of any person to attend and vote at the annual general meeting. 4. A copy of this notice, within the Annual Report & Accounts 2016, can be found on the Company’s website www.deltexmedical.com. 5. Shareholders can, at no cost, obtain copies of the audited financial statements of the Company for the year ended 31 December 2016 and the directors’ and auditors’ reports on those financial statements by application to the Company Secretary at the registered office of the Company. 6. Biographical details of each Director who is being proposed for re-election or election by shareholders are set out in the Company’s annual report and accounts for the year ended 31 December 2016. 66 Deltex Medical Group plc Report & Accounts 2016 7. To appoint a proxy or to give or amend an instruction to a previously appointed proxy via the CREST system, the CREST message must be received by the issuer’s agent RA10 not later than 11.00am on 7 June 2017 or, in the case of any adjournment, on the date which is forty- eight hours before the time of the adjourned meeting. For this purpose, the time of receipt will be taken to be the time (as determined by the timestamp applied to the message by the CREST Applications Host) from which the issuer’s agent is able to retrieve the message. After this time any change of instructions to a proxy appointed through CREST should be communicated to the proxy by other means. CREST Personal Members or other CREST sponsored members, and those CREST Members who have appointed voting service provider(s) should contact their CREST sponsor or voting service provider(s) for assistance with appointing proxies via CREST. For further information on CREST procedures, limitations and system timings please refer to the CREST Manual. We may treat as invalid a proxy appointment sent by CREST in the circumstances set out in Regulation 35(5) (a) of the Uncertified Securities Regulations 2001. In any case your proxy form must be received by the Company’s registrars no later than 48 hours before the time of the meeting or of any adjourned meeting excluding any part of day that is not a working day. 8. As at 21 April 2017 the Company’s issued share capital consists of 296,741,733 ordinary shares of 1 pence each, carrying one vote each. No shares are held in treasury. Deltex Medical Wins EU Grant to Develop TruVue Deltex Medical has won a Horizon2020 grant for the development and promotion of TruVue. TruVue is the first system to display in real time the relationship of blood flow velocity and blood pressure throughout every heartbeat. In the EU Horizon2020 submittal, Deltex Medical described how worldwide 234 million patients undergo major surgery and 1 million die within 30 days from perioperative complications. A further 42 million simply die up to 13 years sooner than they would have done had they not suffered complications post operatively. 51% of these deaths turn out to be due to suboptimal haemodynamic management. The TruVue system is a result of research with a network of interested clinicians in 19 centres in Europe, the USA and the Far East. The most original piece of work emanating from the group was the concept of plotting aortic blood flow velocity directly and simultaneously against aortic blood pressure, to create a Velocity-Pressure Loop (VP Loop). The methodology was invented by clinicians at Lariboisière Hospital in Paris. The system we now call TruVue is the first haemodynamic system to show simultaneously true flow and true pressure in the patient’s aorta. TruVue has significant potential as a simple visual guide to fluid and drug management in surgery and intensive care medicine. The VP Loops work was first presented in 2015 in Brussels at the International Society of Intensive Care and Emergency Medicine (ISICEM). A Aortic pressure Aortic flow velocity B e r u s s e r p c i t r o A D AA A B C D Time (s) Aortic flow velocity To construct the VP Loop the system plots the aortic flow velocity simultaneously with the aortic pressure. C The basic waves are shown to the left in A; B ■ Point A is the pressure prior to heart contraction; ■ Point B is the plot of flow and pressure at the point of maximum flow velocity; ■ Point C is the plot at maximum pressure; ■ and Point D is the end of the ejection. A VP loop can have various visual aspects depending on vascular resistance and patient characteristics. The three loops on the right show visually three blood flow and pressure states. ■ Loop A is a high blood pressure state here there is risk of stroke or heart failure ■ Loop B is a more normal state with optimal flow and optimal pressure ■ Loop C is a low blood pressure state, here there is risk of kidney injury or heart attack. l A o r t i c B o o d P r e s s u r e 190 170 150 130 110 90 70 50 A C B 0 100 200 300 400 500 600 Aortic Flow Velocity Deltex Medical Wins EU Grant to Develop TruVue Continued Basic research complete The basic research is now complete and monitors are in use at Lariboisiere Hospital, Paris. Leading customers will be engaged in the Horizon 2020 Phase 1 project. During Phase 1 we will work with users to define a world- class user interface, design the study protocol and recruit the centres necessary for a large multicentre study. This will lay the ground for a Phase 2 submittal in which we will request further funding to study the clinical benefits in over 20 centres of excellence in Europe and the USA. The work will generate publications, finalise a customer driven user interface design and build clinical momentum. Deltex VP Loops display on ODM+ monitor* Average Loop Plot Flow Results VP Loops Results Pressure Results PATIENT DATA 1234567 40yrs 70 kg (154lb) 170 cm (66 in) ADULT BMI=24.22 kg/m2 BSA = 1.81 m2 100 cm/s Scrolling Velocity Wave Scrolling Aortic Pressure Wave A B P CO l/min SV 2.4 FTc 252 ms PV 42 71 ml GALA cm/s S2 43 63 º BP mmHg 139/40 MAP=76 % ESP mmHg 83 HR 60 bpm MA 16.9 m/s2 2374/3778 Velocity Pressure Loops Monitoring Mode g H m m 139 83 76 41 CO 2.7 GALA 39 MAP 72 cm/s Fri Dec 09, 2017 15:49 DP240 probe 6 days Average 5 cycles Filter OFF 5 Gain Monitoring Mode Title Trend Charts Hospital / SN: 9051-31414+ User 3 Freeze Data input & recording Change Mode Refinements Trend display Select results * Screens currently at a development stage How does the TruVue VP Loops system differ from currently available devices? The TruVue VP Loops system provides immediate visual information on patient haemodynamics as well as important numerical values in real time. No other system currently available is capable of displaying aortic blood flow velocity and aortic blood pressure simultaneously throughout every heartbeat. The system is truly novel and is protected by an Intellectual Property filing. Terminus Road Chichester PO19 8TX United Kingdom Tel ...........+44 (0)1243 774837 Fax .........+44 (0)1243 532534 www.deltexmedical.com 7 1 0 2 M D - 2 0 0 r e b m u N b o J Registered in England & Wales Company No: 3902895