ECO ANIMAL HEALTH GROUP PLC ANNUAL REPORT & ACCOUNTS FOR THE YEAR ENDED 31 MARCH 2019 ECO Animal Health Group Plc ECO ANIMAL HEALTH GROUP LTD DIRECTORS AND ADVISERS Directors Richard Wood Non-Executive Chairman (appointed 7 March 2019) Marc Loomes Chief Executive Kevin Stockdale Finance Director Brett Clemo Executive Director Julia Trouse Executive Director Andrew Jones Senior Non Executive Director Anthony Rawlinson Non Executive Director Secretary Julia Trouse Company Number 1818170 Registered Office Registered Auditors Registrars Lawyers Bankers Nominated Adviser And Broker Joint Broker 78 Coombe Road New Malden, Surrey KT3 4QS Kreston Reeves LLP Third Floor, 24 Chiswell Street, London EC1Y 4YX Share Registrars Limited The Courtyard, 17 West Street Farnham, Surrey GU9 7DR Mills and Reeve Monument Place, 24 Monument Street London EC3R 8AJ Natwest plc Tooting Branch, 30 High Street London SW17 0RG N+1 Singer One Bartholomew Lane London EC2N 2AX Peel Hunt Moor House, 120 London Wall London EC2Y 5ET 2 2 ECO Animal Health Group Plc | Annual Report 2018/19 ECO Animal Health Group Plc | Annual Report 2018/19 CONTENTS 4 6 Highlights Operations 10 Chairman’s Statement 12 Chief Executive’s Report 14 Finance Director’s Report 19 Strategic Report 20 Corporate Governance Report 38 Directors' Report 40 Independent Auditor Report 48 Consolidated Income Statement 49 50 Consolidated Statement Of Comprehensive Income Consolidated Statement Of Changes In Equity 51 Statement Of Changes In Equity 52 Statements Of Financial Position (Co. Number: 01818170) 53 Statement Of Cash Flows 54 Notes To The Consolidated Financial Statements 3 3 HIGHLIGHTS SALES 11% HIGHER AT £74.6m (2018: £67.2m) ADJUSTED EBITDA HIGHER AT £20.1m (2018: £19.6m) PROFIT BEFORE TAXATION 10% HIGHER AT £15.2m (2018: £13.9m) EARNINGS PER SHARE 24% HIGHER AT 17.60p (2018: 14.19p) 4 4 ECO Animal Health Group Plc | Annual Report 2018/19 ECO Animal Health Group Plc | Annual Report 2018/19 DIVIDEND 20% HIGHER AT 11.04p (2018: 9.2p) SPECIAL DIVIDEND OF 3.5p PAID IN JANUARY 2019 STRONG CASH GENERATION FROM OPERATIONS OF £13.3m (2018: £15.8m) NET CASH LOWER AT £18.1m (2018: £21.3m) 55 OPERATIONS DEMAND FOR AIVLOSIN® CONTINUED TO GROW STRONGLY, with new marketing authorisations gained in Europe, Vietnam and India. REVENUE IN CHINA FLAT DESPITE CHALLENGING MARKET CONDITIONS triggered by the African Swine Fever (ASF) outbreak. STRONG SALES GROWTH IN THE OTHER STRATEGICALLY IMPORTANT MARKETS; North America, Latin America, Thailand and India. FIVE NEW VACCINE AND PRODUCT DEVELOPMENT LICENSING AGREEMENTS SIGNED for pigs and poultry. ACCELERATED INVESTMENT IN VACCINE DEVELOPMENT PROGRAMME and people to drive future growth. 6 6 ECO Animal Health Group Plc | Annual Report 2018/19 ECO Animal Health Group Plc | Annual Report 2018/19 Marc Loomes, CEO of ECO Animal Health Group plc, commented: “These are credible results for a year that was adversely depressed by both ASF and a trade war between the USA and China, our two largest markets. We are confident that our accelerated development programmes in vaccines and other products will add long term growth. For the year ahead we expect to report continued growth and to perform in line with the Board’s expectations. ” 7 7 ECO GLOBAL OFFICES 8 8 ECO Animal Health Group Plc | Annual Report 2018/19 ECO Animal Health Group Plc | Annual Report 2018/19 SALES IN MORE THAN 70 COUNTRIES Head Office • New Malden, London Regional Offices • Southgate, London • Princeton, USA • Wilmington, USA • Ontario, Canada • Queretaro, Mexico • Sao Paulo, Brazil • Buenos Aires, Argentina • Dublin, Ireland • Shanghai, China • Zhejiang, China • Johannesburg, South Africa • Tokyo, Japan • Kuala Lumpur, Malaysia • Bangalore, India 99 CHAIRMAN’S STATEMENT FOR THE YEAR ENDED 31 MARCH 2019 I am delighted to have joined the Board in March 2019 as Chairman and look forward to leading the Board in the next exciting phase of the Group’s development. Although not involved with the business last year, I am pleased to be able to report that ECO had another successful year and the business is in good heart. Sales were 11 per cent higher than in 2017/8. Profit after taxation rose by 16 per cent to £13.6m, and earnings per share increased by 24 per cent to 17.6p. Dividends paid in the year totalled 12.7p per share including the ‘one off’ distribution in January 2019. The Group cash balance remained strong at the year-end at £18.1m. Our strategy of concentrating on growth opportunities in the important and growing markets of the USA, Latin America, China and the Far East paid off but the outbreak of African Swine Fever (ASF) in China curtailed sales in China in the second half of the year. This constraint is likely to continue in 2019 until the disease has been contained, at which point we would expect to see further market growth, as the herd is rebuilt. In the meantime, Chinese food shortages will probably be bridged by imports particularly from Latin America and the USA if trade restrictions are lifted, so opportunities in those markets should improve in tandem. Mid-year, when the Board was reviewing the potential of the Company’s R&D investment, the science team brought forward a compelling list of opportunities that convinced the Board that R&D expenditure should be increased to drive both medium term growth and business diversity. From the opportunities presented, the Board selected a mix of medium and long-term projects that comprise an affordable balance of risk and opportunity. For 2019/20, development expenditure will rise above £9 million (2019: £5.3 million) to accelerate the development of our new vaccine range. However, it should be noted that even with this new investment, the development and regulatory timelines are such that we do not expect to see sales before 2022/23. SALES FOR THE YEAR PROFIT AFTER TAXATION EARNINGS PER SHARE INCREASED 11 PER CENT ON LAST YEAR INCREASED 16 PER CENT ON LAST YEAR INCREASED 24 PER CENT ON LAST YEAR £74.6m £13.6m 17.6p 10 ECO Animal Health Group Plc | Annual Report 2018/19 Last year, the Board decided to recommend to shareholders that it should use some of the accumulated cash balances to pay a one-off exceptional dividend of 3.5p per share and that was paid to shareholders on 9 January 2019. There is no intention to repeat last year’s special distribution. The Board is now proposing a dividend for the year of 11.04p per share, which subject to shareholder approval will be paid on 16 October 2019 to shareholders on the register on 27 September 2019. The ex-dividend date will be 26 September 2019. This dividend represents an increase of 20 per cent over the previous year after finalisation, in line with our progressive dividend policy. We have completed the transfer of our Aivlosin® API manufacturing process to a new facility in China which has greater capacity and the latest environmental controls. The purpose- built plant was validated and approved by the EU and US regulators. After many years as a successful Chairman and continued substantial shareholder in the Company, Peter Lawrence, the founder of ECO, decided to retire during the final quarter of the year. The Board and the staff of the Company would like to thank him for his excellent stewardship during his tenure. Looking forward, I will be reviewing, with the Board, the three-year corporate strategy over the next six months and will report more to shareholders with the interim results. In my short time with the Company, I can report that the documenting of our corporate governance processes is well in hand and further work will continue during the current year. In this regard, we have already made some changes to our annual reporting and shareholders will see these changes in this report. Reporting will evolve further during 2019. The beginning of the year will remain challenging because of the continued impact of African Swine Fever in China but we believe that there will be some compensating buoyancy elsewhere as other “ nations move to fill the food shortages in China.” In closing, I would like to say how much I am looking forward to helping guide ECO through its next stage of business development and growth. Outlook The beginning of the year will remain challenging because of the continued impact of African Swine Fever in China but we believe that there will be some compensating buoyancy elsewhere as other nations move to fill the food shortages in China. We are excited by our accelerated development programmes in vaccines and other products which are expected to result in long term growth. For the full year ahead, we expect to report continued growth and to perform in line with the Board’s expectations. Richard Wood Chairman 18 June 2019 THE GROUP CASH BALANCE REMAINED STRONG AT YEAR END AT £18.1m 11 CHIEF EXECUTIVE’S REPORT FOR THE YEAR ENDED 31 MARCH 2019 Global revenue grew by 11 per cent to £74.6 million in a year dominated by an outbreak of African Swine Fever (ASF) in China and an ongoing trade war between the USA and China, our two principal markets. This year’s result, once again, demonstrated both the value of our global footprint, with sales generated in more than seventy countries, and the commoditised nature of pork and poultry production. Sales of Aivlosin®, our patented molecule for the treatment of economically important diseases in pigs and poultry, increased by 14 per cent, accounting for 78 per cent of total revenue. Sales of the smaller Ecomectin® anti- parasitic range, which were adversely affected by European manufacturing issues and altered distribution purchasing patterns, declined by 7 per cent. Sales of all other products rose by 6 per cent, principally driven by increased sales in Mexico. The Chinese subsidiary’s revenue was held at last year’s level, despite the ASF outbreak which exploded in August 2018 and spread rapidly throughout China. The severe movement restrictions, imposed by both the authorities and producers whose herds had remained free of disease, curtailed on-farm selling but our team found new and innovative ways to reach customers. Margins did soften and credit terms were adjusted to retain business during this period, resulting in Group debtors increasing by over £12 million during the year under review. Recent analysis by Rabobank indicates that China has lost up to 200 million pigs (30 per cent of Chinese swine production). This figure exceeds the total USA production of about 120 million pigs per year. The 30 per cent loss of the breeding herd equates to double the total number of sows in the USA. To combat this downturn and continued uncertainty in the short term, our focus for Aivlosin® in China has now shifted from being almost exclusively directed at the pig sector, to include poultry. In this new area, we are making good progress and look forward to reporting on developments. 12 North American revenue increased by 20 per cent. In the USA, revenue was 17 per cent higher, driven by Aivlosin® for use in Swine Respiratory Disease. Margins softened as market pig prices were low and swine producers were making trading losses, in what was a difficult year for farmers. However, by March 2019, the $20 loss per market pig being experienced at the end of 2018 had reversed to a $30 per pig profit, because of a combination of cheapening feed prices and global supply shortages brought about by ASF in China. Canadian revenue rose 27 per cent, buoyed by the introduction of new veterinary prescription regulations for in-feed medication and adjusted commercial terms. In South and Southeast Asia, revenue was 4 per cent higher. Highlights from the region included strong growth in India, Thailand and Pakistan. The improvement in India was a consequence of the establishment of ECO India and an adjustment to our route to market. For Thailand the improvement was as a result of implementing key account management strategies for both pig and poultry producers with our local third-party distributor. In Pakistan a number of accounts were switched to Aivlosin® from a competing product. These results were tempered by challenging conditions in Indonesia, Vietnam and Malaysia. In Indonesia a ban on all in-feed antimicrobial medication in early 2018 suspended trading for 8 months until Aivlosin® was successfully re- registered. Weak pork prices and the shutting of exports to China from Vietnam reduced potential in that territory. Latin America revenue rose strongly by 62 per cent, with buoyant trade through the subsidiaries in Mexico and in Brazil, up 34 per cent and 47 per cent respectively. In both cases the benefits of following key account management strategies were increasingly evident. New business was written in Chile, tenders were won in Cuba and Colombia also performed particularly strongly. European revenue declined by 4 per cent. Although sales in the United Kingdom, which represent just under 2 per cent of global revenue, rose 24 per cent, across all products. Aivlosin® sales were strong in key markets such as Denmark, Poland and Germany but were offset by a change in stock holding policy by a regional distributor for a number of other key markets such as Spain and Italy. This reduced sales potential from ECO but not on sales in the market. The total value of product supplied to European distributors before the end of March to mitigate any potential Brexit related supply interruption risks, was negated by production issues. These resulted in some sales being postponed into the new financial year. Delays to the inspection of manufacturing facilities and laboratories, and delays in receiving licences in Russia, also impacted negatively on revenue. These issues are expected to be fully resolved within the coming year. Sales in the Rest of the World rose 14 per cent, principally through increased sales of Aivlosin® for use in the poultry sector in Egypt and Aivlosin® sales for pigs in South Africa. Revenue in Japan rose by 14 per cent, driven by growth in the swine business to large producers. ECO Animal Health Group Plc | Annual Report 2018/19 Product pipeline The Board made a strategic decision to increase annual investment in product research and development to ensure that the new product pipeline has a mix of well-established concepts as well as novel, potentially highly competitive technologies and approaches. Rather than carry the significant cost of an in-house R&D function, the Company’s early stage R&D activities are outsourced to leading research institutions. However, all on-farm development work is managed in-house. External development expenditure in the year rose by 43 per cent to £5.3 million (2018: £3.7 million) and will be increased by more than 70 per cent to over £9 million in 2019/20. This will ensure that we have several mid and late stage projects able to deliver revenues from 2022/23. The pipeline is focused on pigs and poultry, targeting both viral and bacterial diseases of economic importance in both species. However, there will be a shift in emphasis towards developing a range of vaccines and new products to complement our existing antimicrobial business. During the year, two new international Aivlosin® marketing authorisations were secured, notably Aivlosin® 625 mg/g Water Soluble Granules (WSG) for chickens laying eggs for human consumption with a zero-day drug withdrawal period in India, and in Vietnam for the treatment of pigs and poultry. A further licence was obtained from the European Medicines Agency for the use of Aivlosin® WSG in breeding chickens just after the year end and this approval will now be rolled out beyond the EU into the multi-million-dollar international poultry markets. ECO established a joint venture called ECO- Pharm Limited, in the Republic of Ireland, with Pharmgate LLC of Wilmington, North Carolina, USA. The JV company will progress the registration and commercialisation of several swine vaccine products already licensed in the USA and Canada for use in the United Kingdom, the EU, the Commonwealth of Independent States, Brazil and Japan. A further four licensing deals have been signed (including University of Georgia in the USA and the University of Ghent, for poultry vaccine development, and with Agrinnovation and Yissum Research Development Company of the Hebrew University of Jerusalem for a swine antimicrobial). All of these opportunities are currently being taken through rigorous proof-of-concept evaluations in well-designed studies before any commitment to further development funding is made. Competition The veterinary market is consolidating rapidly at all levels. The top 10 veterinary pharmaceutical companies accounted for 88 per cent of the global market and had an average growth rate of 7 per cent in 2018. We believe that ECO’s key competition comes from the branded antimicrobial products for pig and poultry supplied by the major multinationals. During 2018/9, we believe that the Aivlosin® global market share rose by 2 per cent to 10 per cent. This gain arose from displacing older branded products in this sector. Brexit ECO has successfully transferred all EU marketing authorisations to a new European subsidiary, ECO Animal Health Europe Limited with registered address in Dublin, Republic of Ireland. All contingency planning is in place and the financial and operational impact of Brexit is expected to be minimal. People ECO’s achievements are a direct result of the hard work, dedication and professionalism of our staff, now numbering more than 200 globally. We would like to thank all our employees for their individual and team contributions to ECO’s continued success. Marc Loomes Chief Executive Officer 18 June 2019 LATIN AMERICA REVENUE ROSE BY 62% CANADIAN REVENUE ROSE BY 27% REVENUE IN JAPAN ROSE BY 14% 13 FINANCE DIRECTOR’S REPORT FOR THE YEAR ENDED 31 MARCH 2019 ECO has traded well in tough market conditions with revenues increasing 11 per cent to £74.6 million. Whilst some markets performed well, the trading challenges of ASF and the US trade war highlighted in the CEO’s report resulted in pressure on margins which fell 2.5 per cent to 45.4 per cent. The lower margins in China that arose from the challenging market conditions have also contributed in a lower tax charge when compared to last year. Profit after taxation rose 16 per cent to £13.6 million. The share of profit attributable to non-controlling interests (minorities) was £0.5 million lower so that profit attributable to the Group rose by the equivalent amount. Retained profit rose to £11.8 million compared to £9.3 million for 2018, an increase of over 26 per cent. Basic earnings per share rose by 24 per cent due to a lower minority charge. The Group invested just over £5 million in clinical trials for both existing and new projects. As we approach the end of the Aivlosin® development programme expenditure has started to shift away from Aivlosin® to other projects such as vaccines and other new products. As a result, amortisation will increase in future years, but this is necessary for the continued development and diversification of the business. The Group adopted IFRS 16 for the first time in the year. This brings most leased assets onto the balance sheet along with the corresponding lease liabilities. More details can be found in the notes to the financial statements. The effect on the Group’s reported profits and on net assets has not been significant. Group capital expenditure was £0.5 million (2018: £0.3 million), spent on IT systems and barcoding equipment to meet new Chinese product regulations. Management’s early intervention to control overheads minimised the impact on operating profit which rose by 4 per cent to £14.7 million (2018 £14.1 million). ASF reduced the Chinese subsidiary’s reported operating profit by over £1 million, to £5.2 million, (2018: £6.4 million). The Group’s global footprint enabled us to compensate for this as operating profit in the rest of the Group increased. Adjusted EBITDA (the profits before tax adjusted for share based payments, foreign exchange, net finance income, depreciation, amortisation and impairment charges) increased by 3 per cent to £20.1 million (2018: £19.6 million). Excluding the Chinese subsidiary’s adjusted EBITDA decrease of £1.0 million, the remainder of the Group contributed £1.5 million to the increase in adjusted EBITDA. An explanation of how adjusted EBITDA is calculated, and the rationale for each adjustment can be found in the accounts. Profit before taxation rose by 10 per cent to £15.2 million (2018: £13.9 million) supported by currency gains arising from the reversal of non- cash currency losses, particularly the US Dollar, from the previous year. As we purchase most of our raw materials in US Dollars, it is necessary to hold significant operational balances in that currency. These act as an economic hedge against movements in the exchange rate of Sterling against the Dollar. The taxation charge for the year of £1.7 million was 24 per cent lower than in 2018. The UK trading company makes significant use of enhanced tax allowances for R&D expenditure and, more recently, has used the Patent Box regulations on profits deriving from Aivlosin®, with the result that it currently has over £10 million of accumulated tax losses in the UK. 14 RETAINED PROFIT ROSE TO £11.8m THE GROUP INVESTED JUST OVER £5m IN CLINICAL TRIALS ECO Animal Health Group Plc | Annual Report 2018/19 The main processes used for achieving this are: • Updating 12 months cash flow forecasts every 3 months so that potential shortages are addressed in a timely manner • Working (with the sales function) to ensure that all amounts due to the Group are received in a timely manner • Ensuring as far as possible that all funds are held centrally, thus minimising the amounts held by subsidiaries, while not impeding their operations • Ensuring that all funds received are deposited with appropriate and financially stable institutions, while at the same time maximising returns on those deposits • Ensuring that funds are held only in currencies to the extent that it is anticipated those currencies will be required for use in the future, thus minimising foreign exchange risk • Ensuring that suppliers are paid promptly for goods and services rendered, which in turn ensures continuity of supply of those goods and services The Board keeps these procedures under review but is satisfied that the TMF worked effectively in the year. Inventory fell from £17.7 million at the end of financial year 2018 to £16.1 million as at 31 March 2019. As a Group, to act as a strategic buffer, we normally hold around 6 months’ sales of Aivlosin® in inventory but since March’s sales in the USA and in China were ahead of the levels achieved in March 2018, inventory levels at the year-end were reduced to under 5 months’ sales. Inventory has been restored to normal levels subsequent to the year end. Trade receivables increased from £15.8 million to £27.8 million predominately due to extended credit terms in China. The high USA sales before year-end also contributed to the increase. The year-end figure represented less than 3 months’ sales in respect of both 2018 and 2019. The Group’s cash balance was held at above £18 million, net of the special dividend of £2.4 million paid in January. In addition, the normal dividends were 20 per cent higher than 2018, in line with the Group’s stated progressive dividend policy. Together with dividend payments to the joint owners of the Chinese subsidiary and an £8 million investment in product development, the cash balance demonstrates the strong cash-generating capability of the Group. Having substantial cash reserves, the Group does not have any bank borrowing facilities. The Group’s Treasury Management Function (TMF) therefore seeks to ensure that funds necessary for the implementation of approved activities are always available. It also aims to increase the net worth of the Company by managing funds in the most appropriate manner. NORMAL DIVIDENDS 20% HIGHER THAN 2018 SPECIAL DIVIDEND OF £2.4M PAID IN JANUARY 15 FINANCE DIRECTOR’S REPORT (CONTINUED) FOR THE YEAR ENDED 31 MARCH 2019 Key performance indicators A summary of the KPIs is as follows: Revenues (£m) Gross Profit (£m) 76.0 74.0 72.0 70.0 68.0 66.0 64.0 62.0 49.0% 48.0% 47.0% 46.0% 45.0% 44.0% 22.0 21.0 20.0 19.0 18.0 17.0 16.0 11% 67.2 FY 18 74.6 FY 19 Gross Margin (%) 47.9% (5)% 45.4% 5% 32.2 FY 18 Adjusted EBITDA (£m) 3% 19.6 34.0 33.5 33.0 32.5 32.0 31.5 31.0 20.2 20.0 19.8 19.6 19.4 19.2 33.9 FY 19 20.1 FY 18 FY 19 FY 18 FY 19 Cash (£m) 21.3 (15.0)% 18.1 EPS (Pence) 17.60 14.19 24% 20.0 15.00 10.00 5.00 0.00 FY 18 FY 19 FY 18 FY 19 An explanation of the various trends in the KPIs above is included in the CEO’s and Finance Director’s reports. Post balance sheet event The Company paid a dividend of £2,697,725 on 12 April 2019 to its shareholders. Kevin Stockdale Finance Director 18 June 2019 16 ECO Animal Health Group Plc | Annual Report 2018/19 1717 18 18 ECO Animal Health Group Plc | Annual Report 2018/19 ECO Animal Health Group Plc | Annual Report 2018/19 STRATEGIC REPORT FOR THE YEAR ENDED 31 MARCH 2019 The business strategy is to generate shareholder value by achieving the maximum sales potential from the existing product portfolio whilst investing in Research and Development (R&D) for new products, particularly vaccines, and seeking to license-in new products. We also seek to diversify by acquisition. The Company will continue to invest in skilled people. Licensing and acquisition ECO seeks to both license-in new products for pigs and poultry and to diversify by acquisition to complement our organic growth and provide breadth in core markets. Skilled people ECO has highly professional and committed staff throughout the business. Our strategy is to build on this core strength and to develop an organisational culture that attracts and rewards top talent. Richard Wood Chairman 18 June 2019 Growth of existing product portfolio ECO prioritises sales and development activities for existing products through ECO companies in key growth markets, principally China, North America, South and Southeast Asia and selected Latin American countries. Third party distributors are used in smaller markets to contain costs, recognising that this approach does lead to margin sacrifice for ECO. The cost base is managed to reflect achievable growth rates particularly when individual markets experience slowdowns. In all markets, Key Account management frameworks are adopted with major producers. The primary competitive targets for our portfolio are branded, well established, first generation products, concentrating on the additional value added by our products. Increased investment in R&D ECO’s increase in R&D investment is focused on several late, mid and early stage projects which collectively provide a mix of well- established concepts and novel technologies and approaches. This investment in the pipeline will lead to additional approvals for Aivlosin® in key markets, an acceleration and broadening of the introduction potential for vaccines in pigs and poultry and to an expansion of the search for new products in collaboration with leading universities and research institutions where an exclusive position can be obtained for any invention made. ECO HAS HIGHLY PROFESSIONAL AND COMMITTED STAFF 19 CORPORATE GOVERNANCE REPORT FOR THE YEAR ENDED 31 MARCH 2019 A strong business requires strong governance The Board is committed to enhancing ECO’s Corporate Governance and will hasten the “ progress it has made to date. ” Chairman’s introduction Dear Shareholders I am delighted to have joined the Company Board in March 2019, as independent Non-Executive Chairman, and look forward to leading the Board in the next exciting phase of the Group’s development. I believe corporate governance to be a core consideration for the ECO Board and recognise its important role in promoting sound risk management and business performance. During the coming year, we will be striving to improve further the Group’s systems and resources. As growth continues, I believe strongly that our corporate governance practices should grow. Last year, in line with new AIM Rules, the Board adopted the new QCA Corporate Governance Code which provides a framework for considering the various governance keystones. During the reporting year, the Board made progress in addressing weaker areas but more remains to be done. Since I joined the Board in March, I have accelerated this process of improvement. However, we aspire beyond this and also expect to adopt key elements of the UK Corporate Governance Code in so far as they are appropriate for a business of our size and stage of development. I have already carried out a full Board effectiveness evaluation survey and will be looking to make changes to the composition and balance of the team so that Non- Executives will be in the majority, so that the Board will become fully independent. We have also appointed a Non-Executive Director as Senior Non-Executive Director. I have also introduced new operating and reporting systems to improve Board effectiveness. We have reviewed the composition and remits of all the Board Committees and have begun to enhance the risk management processes that will become embedded into the Company’s structure, including establishing an internal audit function. After many years of good service from Kreston Reeves as the Company’s external auditor, we have also decided to change firm prior to our next financial year end and will be looking to appoint a leading international audit firm to perform the Group’s audit as we enter the next phase of ECO’s development. People are key to our business. Accordingly, we will be reviewing whether we are making optimal use of the existing personnel and seeking to recruit additional specialists, where needed, to ensure effective succession planning. Training and personnel development programmes will also be reviewed. 20 The corporate governance report that follows includes details about the Board and its various responsibilities. Details are also provided on the composition of the Board Committees and the reports on their activities for the year. Your support as Shareholders is vital to our success and, in this respect, we intend to remain responsive to shareholders’ views and to engage with you so that the Company will deliver on its objectives. I very much look forward to updating you on the progress we have made at our AGM in September. Yours sincerely Richard Wood Chairman 18 June 2019 ECO Animal Health Group Plc | Annual Report 2018/19 One of the roles of the Non-Executive Directors under the leadership of the Chairman is to undertake detailed examination and discussion of strategies proposed by the Executive Directors so as to ensure that decisions are in the best long-term interests of all shareholders and that proper account has been taken of the interests of the Group’s other stakeholders. The Board will be reviewing a new three-year strategy for the Group during the coming year. The Chairman ensures that meetings are held between the Non-Executive Directors without the Executive Directors present and two such meetings have already been held under the new Chairmanship. Rules concerning the appointment of replacement Directors of the Company are contained in the Articles of Association. Amendments to the Articles must be approved by a special resolution of shareholders. Under the Articles, all Directors are subject to election by shareholders at the first annual general meeting following their appointment and to re- election thereafter at intervals of no more than three years. However, in line with best practice as reflected in the UK Corporate Governance Code (to which the Board aspires) all Directors will be standing for reappointment at the forthcoming AGM of the Company to be held on 19 September 2019. The Non-Executive Directors are appointed by the Board on terms which allow for termination on three months’ notice. Corporate governance report The Company’s shares are traded on the AIM market of the London Stock Exchange and as such, the Company is subject to the continuing requirements of the AIM Rules for Companies. As stated in the Chairman’s introduction, the Board adopted the QCA’s Corporate Governance Code in September 2018 but will also be looking to adopt elements of the UK Corporate Governance Code on a phased basis insofar as they are appropriate for the Company. The Board of Directors is committed to high standards of corporate governance and recognises that it is accountable to shareholders for the Group’s performance in this area. This report aims to address the main subject areas of the QCA Code, namely leadership, effectiveness, accountability and relations with shareholders. Remuneration is dealt with in the Remuneration Report on pages 33 to 36. The Board The Board currently comprises four Executive Directors and three Non-Executive Directors (including the Chairman). Dr Andrew Jones is Senior Independent Director. The biographical details of individual Directors are set out on pages 30 to 31. The Board considers both of the current Non-Executive Directors to be independent in judgement and character and considered the newly appointed Chairman, Richard Wood, to be independent on his appointment as Chairman in March 2019. The special position and role of the Chairman under the QCA Code is recognised by the Board and a written statement of the division of responsibilities of the Chairman and the Chief Executive Officer has been agreed. The Chairman is responsible for the leadership of the Board and ensuring its effectiveness in all aspects of its role. The Chief Executive Officer manages the Group and has the prime role with the assistance of the Board of developing and implementing business strategy. BOARD ADOPTED THE QCA’S CORPORATE GOVERNANCE CODE IN SEPTEMBER 2018 21 CORPORATE GOVERNANCE REPORT (CONTINUED) FOR THE YEAR ENDED 31 MARCH 2019 How the Board operates Examples of strategic and management issues include the following; The Chairman ensures, through the Company Secretary, that the Board agenda and all relevant information is provided to the Board sufficiently in advance of meetings and that adequate time is available for discussion of all agenda items, in particular strategic issues. Improvements are being made to the presentation of data so that it will be easier for the Board to home in on salient facts. The Chief Executive Officer and the Company Secretary discuss the agenda ahead of every meeting. At meetings, the Chairman ensures that all Directors are able to make an effective contribution and every Director is encouraged to participate and provide opinions on each agenda item. The Chairman always seeks to achieve unanimous decisions of the Board following due discussion of agenda items. The Non-Executive Directors review the Group’s operational performance and, with a view to reinforcing its oversight and control, the Board as a whole has agreed a reserved list of powers solely to itself which are not to be delegated to management. The list includes appropriate strategic financial organisation and compliance issues, including the approval of high-level announcements, circulars, the Annual Report and Accounts and certain strategic and management issues. • Approval of the annual operating budget and the three-year strategic plan • The extension of the Group’s activities into new business and their geographic areas (or their cessation) • Changes to the corporate or capital structure • Financial issues, including changes in accounting policy, the approval of dividends, bank facilities and guarantees • Changes to the constitution of the Board • The approval of significant contracts, for example the acquisition or disposal of assets worth more than £1,000,000 or the exposure of the Company or the Group to a risk greater than £1,000,000 • The approval of unbudgeted capital expenditure exceeding £250,000 • Consideration and approval of all proposed acquisitions or mergers. Each Director has full and timely access to all relevant information and the Board meets regularly with appropriate contact between meetings. Agreed procedures are in place for Directors, where necessary in the furtherance of their duties, to take independent professional advice at the Company’s expense and all Directors have access to the Company Secretary. The Company Secretary is responsible to the Board for ensuring that Board procedures and governance requirements are complied with. The removal of the Company Secretary is a decision for the Board as a whole. As at the date of this report, the Board comprised an Independent Non-Executive Chairman, four executive Directors and two Independent Non-Executive Directors. A brief biography of each Director in office is set out on pages 30 to 31. During the financial year under review, on 7 March 2019, Richard Wood was appointed to the Board as Non-Executive Chairman replacing Peter Lawrence in that role. The composition of the Board is monitored by the Nomination Committee. Subsequent to the Committee’s decision to appoint the new Chairman, the Non-Executive Directors with the CEO in attendance decided to reduce the size of the Board while ensuring that it retains an effective and appropriate balance of skills and experience, so that a majority of the Board comprises independent Non-Executive Directors. The Committee will ensure that the Board will comprise a suitable balance between independence and knowledge of the Group in order to enable it to discharge its duties and responsibilities effectively. All Directors are encouraged to apply their independent judgement and constructively challenge other Directors where appropriate. 22 ECO Animal Health Group Plc | Annual Report 2018/19 Committees of the Board Of particular importance in a governance context are the three Committees of the Board, namely the Remuneration Committee, the Nomination Committee and the Audit Committee. Each Committee operates under clear terms of reference, copies of which are available on our website www.ecoanimalhealthgroupplc.com. Detail of the operation of each Committee is provided within the relevant Committee report. The members of the Committees comprise the Chairman and both the Non-Executive Directors. The Non-Executive Directors regard the Chairman as adding significant value to the deliberations of the Committees. Anthony Rawlinson is Chairman of the Audit Committee. The Board is satisfied that Mr Rawlinson has recent relevant financial experience. Richard Wood is Chairman of the Nomination Committee but in accordance with the Committee’s terms of reference is not permitted to chair meetings when the Committee is dealing with matters relating to the Board Chairman position. Dr Andrew Jones is Chairman of the Remuneration Committee. Attendance at meetings All Committee and Board meetings held in the year were quorate. Director’s attendance during the year ended 31 March 2019 was as follows: Board Audit Committee Remuneration Committee Nomination Committee Peter Lawrence Marc Loomes Brett Clemo Kevin Stockdale Julia Trouse Anthony Rawlinson Andrew Jones Richard Wood (appointed 7 March 19) 4/4 4/4 4/4 4/4 4/4 4/4 4/4 - - - - - - 2/2 2/2 - 2/2 1/1 - - - 2/2 2/2 - 1/1 1/1 1/1 - - 1/1 1/1 - 23 CORPORATE GOVERNANCE REPORT (CONTINUED) FOR THE YEAR ENDED 31 MARCH 2019 The principal risks are listed on the following pages in order of significance by category. We have made this assessment by reference to the likelihood of each risk occurring and assessing the potential severity of impact it would have on the business from high to low. We have also assessed the future trend of each risk as far as we can predict. As there are a range of impacts in all areas which are mitigated to a high degree, the mitigations in the form of control structures are shown next to each identified risk. Procedures are in place to identify key business risks and to evaluate their potential impact on the Group. These risks are described within the Strategic Report on page 19. Principal risks and risk management The Group has an established process for the identification and management of risk, working within the governance framework. Ultimately, the management of risk is the responsibility of the Board of Directors, and our system of risk management, which is intended to be comprehensive and robust, continues to evolve as the Group and the environment in which it operates increases in size and complexity. The Board’s role in risk management includes promoting a culture that emphasises integrity at all levels of business operations and setting the overall policies for risk management and control. During the year the principal risks affecting the Group were comprehensively reviewed and re-categorised by the Executive Directors and approved by the Board. Each risk area continues to have priority controls allocated to it that are the responsibility of the Executive Directors to manage and review during the financial year. This process inherently manages risk by ensuring the principal risks are being mitigated by prioritised business activity. As we move forward, increased focus is being given to how effectively risk is also being mitigated by the control structures embedded throughout the Group. The Executive Directors are undertaking a quarterly review of the key risks and controls and will report any changes in trends to the Board. Performance evaluation The Board strives to improve its effectiveness and to this end has conducted a review of its performance and that of its Committees and the individual Directors. The 2019 Board evaluation process has been conducted internally using questionnaires. The process was led by the Chairman and facilitated by the Company Secretary. The questionnaire provided Directors with the opportunity to express their views on a variety of topics including: Board Leadership, Effectiveness and Accountability. The detailed findings of the evaluation have been reviewed and actions generated. The Board and Committee reviews are in progress. Accountability and audit The Board is in the process of updating its documentation of internal financial and non-financial controls. In addition, a process for identifying, evaluating and managing significant business risks faced by the Group is being formalised. This process was reviewed during the year and its implementation is being accelerated. This is another area where we aspire to the recommendations in the UK Corporate Governance Code. The Code requires that Directors review the effectiveness of the Group’s system of internal controls on a continuing basis. The scope of this review, which is ongoing, covers all controls including financial, operational and compliance controls as well as risk management. The Board, through the Audit Committee, keeps the systems under review and will consider their content and effectiveness on an annual basis. Such a process can provide only reasonable, but not absolute, assurance against material misstatements or losses. The Board is currently working on plans to provide for the creation of three-year plans and annual budgets with monthly reports to enable the Board to compare performance against budget and to take action where appropriate. 24 ECO Animal Health Group Plc | Annual Report 2018/19 2525 CORPORATE GOVERNANCE REPORT (CONTINUED) FOR THE YEAR ENDED 31 MARCH 2019 Strategy risks TABLE KEY: H = HIGH M = MEDIUM L = LOW Risk Likelihood Controls Impact Forward Trend High reliance on one supplier for key products Reliance placed on key staff High dependency on a single product Potential threat from Generic Producers Disease impact to growth in emerging markets M M M M H New API manufacturing plant built, commissioned and approved in China. Business Interruption insurance with 6 months' strategic safety stock in place. Investing in supply chain dual supply capacity. Performance management, structured Bonus and LTIP for staff and Executive Directors. Salary benchmarking and staff development. New RemCom policies being implemented. Innovation fund and pipeline of new products – vaccines and other products. Generic defence plans. Generic defence strategy – combining strong regulatory and legal stance in country with patent and trademark infringement enforcement. Experienced international and local management teams. Global organisation with driving strategy in other geographical territories. Strategy to increase focus on poultry. H H H M M Likelihood Controls Impact Forward Trend M L L L European legal entity established and marketing authorisations transferred. Pharmacovigilance, Site of Quality Control Testing and Site of Batch Release arrangements in place. Virtual supply chain – use of third parties limits our own exposure. Internal audits of third party facilities. Staff training. Regular competent authority. Independent and internal QA function. Audits of third party facilities. High calibre staff recruitment. Use of only reputable and well established laboratories and subcontractors. L H H M Operational risks Risk Brexit Operational activities result in environmental pollution Failure to achieve/maintain GMP quality standard Risk of trial failure impeding registration and approval of pipeline products 26 ECO Animal Health Group Plc | Annual Report 2018/19 Operational risks (continued) TABLE KEY: H = HIGH M = MEDIUM L = LOW Risk Likelihood Controls Impact Forward Trend Retained IT consultancy monitor, investigate and improve the IT infrastructure. Servers hosted on Azure cloud-based system with multiple daily back-ups to a second remote server. Active monitoring and correction of system issues. Roll out of laptop encryption. Business risk insurance cover. Business continuity plan. Cloud-based servers with immediate backup restoration. High level of staff with remote working capability. Maintain adequate health and safety procedures and insurances. Only responsible for one manufacturing plant, all other facilities are third party contracted services. Forecasting Project, Implementation of MRP on the SAGE ERP system, monthly Regional S&OP meetings, increased manufacturing capacity in USA, strategic review of lead times/responsiveness and the value benefit of last minute customisation. M M M M Continuity of IT services M Risk of business interruption due to fire, flood, explosion, natural disaster impacting ECO premises Risk of corporate manslaughter Seasonal demand impact on supply chain responsiveness L L M Financial risks Risk Likelihood Controls Impact Forward Trend Fraud and depletion of company funds Cyber attack Insufficient funding for business growth Currency Risk of bank deposits being lost through collapse of bank M M L M M Implementing robust systems and controls. Keep international cash balances to a minimum. Daily/weekly monitoring of all bank account cash balances with explanations for material increases and depletions of balances. Change overseas local bank accounts to international banks with internet access. Strong firewalls in place. Regular back up of data on duplicate servers. Continual review and strengthening of controls and security. Cashflow and working capital management. Close monthly monitoring of budget to actual results. Robust credit control in place. Monitoring of exchange rates and report in constant currency. Operationally transact in multiple currencies which are held and switched when appropriate. In-house treasury function to hedge when necessary. Daily monitoring of bank balances. Spread cash deposits over a number of stable and internationally recognised banks. M H H M M 27 CORPORATE GOVERNANCE REPORT (CONTINUED) FOR THE YEAR ENDED 31 MARCH 2019 THE BOARD RECOGNISES AN OPEN AND HONEST CULTURE IS KEY The Board has issued a Code of Conduct to all staff which reinforces the importance of a robust internal control framework throughout the Group. The Board recognises that an open and honest culture is key to understanding concerns within the business and to uncovering and investigating any potential wrongdoing. The Code of Conduct sets out the procedure whereby staff may raise concerns in matters of financial reporting or any other matter of concern with management and directly with the Chairman of the Audit Committee to ensure independent investigation and appropriate follow-up action. Although the Board itself retains the ultimate power and authority in relation to decision making, the Audit Committee meets at least twice a year with external auditors to review specific accounting, reporting and financial control matters. The Committee also reviews the interim and final accounts and has primary responsibility for making a recommendation on the appointment, reappointment and removal of external auditors. Internal controls There is a clearly defined delegation of authority from the Board to the business units, with appropriate reporting lines to individual Executive Directors. There are procedures for the authorisation of capital expenditure and investment, together with procedures for post- completion appraisal. Internal controls are in place which are intended to provide reasonable assurance of the maintenance of proper accounting records and the reliability of financial information used within the business. The process of documenting these controls is in progress as referred to in the Audit Committee Report. The Group Finance department manages the financial reporting process to ensure that there is appropriate control and review of the financial information including the production of the consolidated annual accounts. Group Finance is supported by the operational finance team throughout the Group, who have responsibility and accountability for providing information in keeping with the policies, procedures and internal best practices. 28 ECO Animal Health Group Plc | Annual Report 2018/19 regular dialogue with the Executive Directors. The results of all dialogue with shareholders are communicated to the Board and reviewed by all Non-Executive Directors. However, should shareholders have concerns, which they feel cannot be resolved through normal shareholder meetings, the Chairman and the Non-Executive Directors may be contacted through the Company Secretary. Disclosures and transparency rules (DTR) Disclosures in respect of the DTR requirements under DTR 7.2.6 are given in the Directors’ Report on pages 38 to 39 and have been included by reference. Going concern After making appropriate enquiries, the Directors have, at the time of approving the financial statements, formed a judgement that there is a reasonable expectation that the Company and Group have adequate resources to continue in operational existence for the foreseeable future. For this reason, the Directors continue to adopt the going concern basis in preparing the financial statements. This conclusion is based on a review of the resources available to the Group, taking account of the Group’s financial projections together with available cash and committed borrowing facilities. In reaching this conclusion, the Board has considered the magnitude of potential impacts resulting from uncertain future events or changes in conditions, the likelihood of their occurrence and the likely effectiveness of mitigating actions that the Directors would consider undertaking. Relations with shareholders The Directors regard regular communications with shareholders as extremely important. Members of the Board receive copies of analysts’ reports of which the Company is made aware. The Board reports to shareholders in a number of ways, including regulatory news announcements or press releases in response to events or routine reporting obligations, the Annual Report and Accounts and at the half year, the interim report. Regular dialogue takes place with institutional shareholders, including presentations after the Company’s preliminary announcements of the half and full year results. The Board receives comments from analyst meetings and shareholder meetings after both interim and final results and at other times during the year. Shareholders are given the opportunity to ask questions at the AGM and also have the opportunity to leave written questions with the Company Secretary for response by the Directors. The Directors also make themselves available after the AGM to talk informally to shareholders, should they wish to do so and respond throughout the year to any correspondence from individual shareholders. At the AGM on the 19 September 2019, the Board will be following the recommendations in the UK Corporate Governance Code regarding the constructive use of the annual general meetings. The agenda will include a presentation by the Chief Executive Officer on aspects of the Group’s business and an opportunity for shareholders to ask questions. The proxy votes received for each AGM resolution will be announced after the resolution has been dealt with on a show of hands, providing no poll has been called for. The Board has no plans to introduce poll voting on all business at general meetings as a substitute for using proxy votes. The Non-Executive Directors, having considered the guidelines in the UK Corporate Governance Code with regard to relations with shareholders, are of the view that it is most appropriate for the shareholders to have REGULAR DIALOGUE TAKES PLACE WITH INSTITUTIONAL SHAREHOLDERS 29 CORPORATE GOVERNANCE REPORT (CONTINUED) FOR THE YEAR ENDED 31 MARCH 2019 Richard Wood Non-Executive Independent Chairman Year of birth 1944 Marc Loomes Chief Executive Appointed 1 December 2005 Year of birth 1961 Kevin Stockdale Finance Director Appointed 3 August 2007 Year of birth 1965 Richard joined the Board as Non-Executive Independent Chairman on 7 March 2019. Marc joined ECO Animal Health in 2004, became MD in 2005 and CEO in 2010. Marc, a qualified veterinarian and Member of the Royal College of Veterinary Surgeons, has extensive international senior management experience of the animal health and crop protection industries obtained with blue chip multinational companies in South Africa, Germany, Switzerland and the UK. He brings the ability to balance strategic vision and operational delivery to the business. Richard has considerable global animal health experience having built Genus plc from a small Company privatised by the government, into a world-leading animal genetics Company. Richard currently sits on the Board of Anpario plc as Senior Independent Director. Richard was previously Senior Non-Executive Director of Avon Rubber plc and was also: Chairman of Ocean Harvest Technology Inc, a manufacturer of therapeutic animal feeds using seaweeds, Chairman of Atlantic Healthcare plc in IBS pharmaceutical development and Chairman of Silent Herdsman Ltd in information technology for agriculture. Kevin qualified as a Chartered Accountant in 1990 and was Finance Director of Interpet Ltd responsible for the audited accounts of Lawrence PLC while Interpet was a subsidiary Company in the Group. Interpet was sold in 2004 and Kevin remained with it as Finance Director. He rejoined the Group in September 2007 as Finance Director. Kevin has been a qualified Chartered Accountant for over 25 years, initially in practice but has spent more than 20 of those years in the companion animal and animal health industries. The initial training and the subsequent experience have left him in a position to report accurately on the Group’s current and projected performance and identify potential accounting, commercial and regulatory issues relating to the matters under discussion. Directors 30 ECO Animal Health Group Plc | Annual Report 2018/19 Brett Clemo Executive Director Appointed 1 December 2009 Year of birth 1962 Brett joined ECO Animal Health in 2006 as Director of Global Operations. He was appointed to the Board in 2009 and became Head of China and Japan in 2010. He has over 30 years’ experience in the life science sector in ICI, AstraZeneca and Syngenta and has held a number of senior international roles across Engineering, Manufacturing, Supply Chain and General Management. He is a results- orientated team leader who brings a wealth of experience in business processes and strategy. Julia Trouse Executive Director and Company Secretary Appointed 19 May 2004 Year of birth 1966 Anthony Rawlinson Independent Non-Executive Director Appointed 1 January 2015 Year of birth 1957 Julia joined the Group in 1993 as Financial Controller of Petworld Superstores Ltd and became Group Financial Controller of the Company in 1999 and Company Secretary in 2004. She joined the Board in August 2007. Julia has a wealth of management accounting experience and internal auditing. She is also on the Board of Zhejiang ECO Biok Animal Health Products Ltd in China and ECO Animal Health Japan Inc. and is the Group’s Internal Auditor. Anthony is a Chartered Accountant with over 30 years corporate finance experience advising smaller quoted companies. After spending 14 years at Henry Ansbacher & Co and Strand Partners, he co-founded Dowgate Capital Advisers in 2001 and led its growth and development. He was also Chairman of its AIM quoted parent Company, Dowgate Capital, which was sold to a competitor in a recommended transaction in 2009. In 2010 he co-founded Cairn Financial Advisers LLP, a Nominated Adviser to a number of AIM companies and a corporate advisory firm. Andrew Jones Senior Independent Non-Executive Director Appointed 1 December 2017 Year of birth 1960 Andrew has over 32 years of experience in international life science-based businesses including Syngenta AG., Arysta Lifesciences Inc. and Phoqus Pharmaceuticals Plc. During this time, he worked in product development, international sales and marketing, merger and acquisition and general management. He currently runs his own consulting Company, Trioza Limited, which provides strategic advice to the animal health, crop protection and seeds sectors. Andrew has a BSc degree and PhD in agricultural biology. Andrew brings substantial strategic marketing and business development experience and skills to the business. 31 CORPORATE GOVERNANCE REPORT (CONTINUED) FOR THE YEAR ENDED 31 MARCH 2019 Audit Committee report Committee report Dear Shareholder The Audit Committee comprises Anthony Rawlinson (Chairman), Dr Andrew Jones and from 16 April 2019 Richard Wood joined the Committee. All Committee members are independent Directors of the Company and have appropriate skills and expertise to enable them to carry out their role effectively. The Committee meets at least twice a year linked to the timing of the Company’s half year and full year results and also meets on an ad hoc basis. Terms of reference of the audit committee The terms of reference of the Committee are shown on the Company’s website. The Committee met with the external auditors during the course of the year to discuss various issues and monitor progress. The current year’s audit has been discussed and I am pleased to report that no significant issues were reported. Last year the Committee carried out an audit tender during the early summer and we would like to thank those firms who tendered. Following completion of the process and after careful deliberation, the Board decided not to change auditor for the 2019 accounts but instead to review the scope of work with the existing auditor and to request that they carry out additional work in areas where the Committee perceived significant potential exposures. This year additional work was carried out at the Group’s Chinese joint venture and we are pleased to report that no significant issues arose. The area of focus for next year will be decided over the course of the Summer and in discussion with the new audit firm. An internal audit function is in the process of being established and last year, terms of reference were adopted. The Audit Committee will now agree the work programme for the year together with the nature and frequency of the reports to the Committee. The internal audit function is intended to provide us with valuable insight into operating procedures and enable us to monitor and control risk more effectively. I am pleased to report that Richard Wood, who was recently appointed Independent Chairman of the Board, has also been appointed a member of the Audit Committee. The priorities for next year have been highlighted above. The Committee will continue its efforts to ensure a healthy and effective internal control environment and a challenging and effective external audit process. The Audit Committee operates within specific terms of reference including: As planned, the interim results were reviewed by the auditors prior to publication. Anthony Rawlinson Audit Committee Chairman 18 June 2019 • Considering the appointment of external auditors • Reviewing the relationship with external auditors • Reviewing the financial reporting and internal control procedures • Reviewing the management of financial matters and focusing upon the independence and objectivity of the external auditors and • Reviewing the consistency of accounting policies both on a year to year basis and across the Group The Audit Committee can call for information from the Executive management and consults with the external auditors directly if they are required to do so. Following completion of the audit for 2019, the Committee will initiate a second audit tender process, the outcome of which will be reported to shareholders in due course. We reported last year that a review of the Company’s financial controls and procedures had been initiated and this continues to be work in progress. Significant effort has been put into this in recent months but to some extent the work, which is reliant on inputs from key Executives, has been held in abeyance while the new SAGE accounting system is established and its extensive management reporting capabilities are realised, as highlighted in the Committee’s 2018 report. The plan is to document the latest systems and procedures following completion of this work. The Board will then review this document and request that the new auditors carry out an independent review. 32 ECO Animal Health Group Plc | Annual Report 2018/19 Remuneration Committee report Dear Shareholder On behalf of the Board, I am pleased to present the Remuneration Committee Report for the year ended 31 March 2019. The objective of the report is to provide shareholders with information on the Company’s remuneration policy to enable them to understand the link between remuneration structures and the Company’s financial performance. The responsibilities of the Remuneration Committee are summarised in the following report and are set out in full in the Terms of Reference for the Remuneration Committee which are available on the Company’s website. It has been some years since the current remuneration structure for Executive Directors has been put in place and so we have implemented a review and are in the process of making changes to the remuneration policy and remuneration structure during the financial year ending 31 March 2020. We are using published survey data as benchmarks, and the guiding principles in the review are: • Base salary levels to be competitive with median levels for companies of similar size on the AIM • An annual bonus opportunity, with a maximum pay-out defined, aimed at intensifying the efforts of the Executive team to deliver demanding new targets for the Company • A new Long Term Incentive Plan (LTIP) structure will be introduced which will aim to support the achievement of demanding targets in the new three-year strategy plan. The Company currently exceeds the recommended ceiling of 10 per cent of issued share capital for granted share options over a rolling 10 year period. We will consult with shareholders on a limited extension of the LTIP, based on nil or nominal cost options in a Performance Share Plan structure to reduce the impact of further dilution. Any extension will be subject to a proportion of shares being retained for a period after vesting and claw-back in certain circumstances The remuneration of Non-Executive Directors has been reviewed, again with reference to published survey data. In the past this has comprised a low salary and a small number of share options intended to equate to the balance of a market rate salary over a 3 year period. This policy was changed two years ago such that Non-Executive Directors are no longer granted options and this has prompted the need for a salary review as the final tranche of share options was exercised in 2018. The Report below sets out the existing remuneration policy and we will provide a full update of the new policy in next year’s Annual report. The Remuneration Committee believes that the actions it plans to take on remuneration matters in the coming year will support the Company’s strategy and long-term value creation and are in the best interests of shareholders. We hope that we will continue to receive your support at the forthcoming AGM. Committee report The Remuneration Committee, at the time of writing this report, is comprised of Andrew Jones (Chairman), Anthony Rawlinson and Richard Wood. Role of the Remuneration committee The Remuneration Committee reviews and determines on behalf of the Board and shareholders of the Company the pay, benefits and other terms of service of the Executive Directors of the Company and the broad pay strategy with respect to senior Company employees. Remuneration policy The objective of the Company’s remuneration policy is to facilitate the recruitment and retention of Executives of an appropriate calibre, to ensure that the senior Executives of the Company are provided with appropriate incentives to encourage enhanced performance and are, in a fair and responsible manner, rewarded for their individual contributions to the success of the Company. 33 CORPORATE GOVERNANCE REPORT (CONTINUED) FOR THE YEAR ENDED 31 MARCH 2019 In order to work towards meeting the recommendation, the Remuneration Committee therefore decided for the 2018-19 financial year to put in place a cash based scheme, payable in 2022, linked to EBITDA growth targets over the three financial years commencing April 2019. The CEO was not included in the cash scheme, but received a grant of 3,900 approved options from the Company and as, announced on 7 March 2019, a grant of options, from persons connected with Peter Lawrence, over 200,000 existing ordinary shares with vesting conditional on continued employment by the Company for three years from the date of grant. Strategic alignment The Remuneration Committee aim is that the reward that can be earned is appropriate for a Company of comparable size and complexity, at each level of performance. The delivery of the Company’s short term corporate goals is incentivised by offering a cash-settled bonus linked to the achievement of pre-defined levels of EBITDA, which is the key metric the Board considers in monitoring corporate performance. Long term value generation is underpinned by a Long Term Incentive Plan. All of the Executive Directors have significant exposure to the Company’s share price through shares and options over the Company’s shares. Remuneration in practice The remuneration that the Company offers to its Executive Directors has been based on the following components: • Basic Salaries – Basic salaries are determined by the Remuneration Committee bearing in mind the salaries paid in comparable businesses of similar size and complexity and other AIM-traded companies. • Other Compensation – Executive Directors benefit from private medical and critical illness insurance. In addition, all Executive Directors are covered under the Company’s life insurance policy. • Pensions – The government contribution scheme is available to all Executive Directors and employees. In addition, Kevin Stockdale has a defined contribution arrangement in place. • Short-term incentives – Bonuses are payable to staff (including the Executive Directors) according to the achievement by the Group of certain predetermined profit targets, principally EBITDA. The amount of bonus payable on achievement of the target is set at the level felt appropriate to provide the necessary incentive, with appropriate adjustments to the bonus payable in the event of over or under- achievement against those targets. In addition, bonuses may be adjusted for personal performance and the amount of bonus paid can also reflect any substantial periods of absence or unavailability of the employee. • Long-term incentives – The Company operates a share option scheme under which share options have been granted once in each year, or in some circumstances can be granted on promotion. Options vest on the third anniversary of the date of grant, approved options can then be exercised until the tenth anniversary of grant and unapproved options until the seventh anniversary of grant. The exercise price of the options is set at the market value of the Company’s shares at the time of grant, so that the individual only benefits if there has been share price growth. Employees are responsible for all taxes and NI (including those arising on the Company) arising on the exercise of options. The share option scheme is overseen by the Remuneration Committee which determines the terms under which eligible individuals may be invited to participate, including the level of awards. The scheme utilises HMRC approved options to the extent possible and tax unapproved options thereafter. As mentioned above, the number of share options issued over the last 10 years has exceeded the Investment Association guideline ceiling of 10 per cent of issued share capital in a rolling 10 year period. 34 ECO Animal Health Group Plc | Annual Report 2018/19 Directors' remuneration The aggregate remuneration payable to the Directors in respect of the period was as follows: Salary or Fees Other Pension Bonus Total Remuneration Share Based Payments Total 2019 2018 2019 2018 2019 2018 2019 2018 2019 2018 2019 2018 2019 2018 £000’s £000’s £000’s £000’s £000’s £000’s £000’s £000’s £000’s £000’s £000’s £000’s £000’s £000’s M. Loomes 222 216 99 85 117 - 4 16 25 - 95 81 146 - - 16 7 15 J. Trouse K. Stockdale B.Clemo P.Lawrence R.Wood A.Rawlinson A.Jones D.Danson Notes 2 1 12 1 - - - - - 2 1 11 1 - - - - - 10 1 5 - - - - - - 10 - 5 - - - - - - 342 376 83 83 93 93 576 184 185 150 172 268 - - - - - - - - - - - 4 16 25 - 604 189 190 319 - - 16 7 15 191 53 53 196 56 56 103 106 - - 4 - - - - 6 - 4 767 237 238 371 - 4 20 25 - 800 245 246 425 - - 22 7 19 • The bonus values are for payments made in the financial year 2018/19 for performance in the 2017/18 year. • Peter Lawrence retired from the Board on 7 March 2019. He received no remuneration from the Company for role as Chairman or any other role, but he and persons connected with him are substantial shareholders in the Company with holdings of 10 per cent at 31 March 2019. Richard Wood joined the Board on 7 March 2019. Directors’ interests Details of share options held by Directors as at 31 March are set out below: Option Price (pence per share) 31-Mar-19 31-Mar-18 M. Loomes B.Clemo K. Stockdale J. Trouse A.Rawlinson 545.0 435.0 312.5 265.0 200.5 435.0 312.5 265.0 200.5 435.0 312.5 265.0 200.5 435.0 312.5 265.0 200.5 265.0 200.5 3,900 400,000 350,000 - - 150,000 250,000 250,000 60,000 120,000 50,000 150,000 - 120,000 50,000 75,000 - - - - 400,000 350,000 400,000 100,000 150,000 250,000 250,000 60,000 120,000 50,000 150,000 40,000 120,000 50,000 150,000 40,000 30,000 30,000 35 CORPORATE GOVERNANCE REPORT (CONTINUED) FOR THE YEAR ENDED 31 MARCH 2019 The shareholdings held by Directors who served during the period, as at 31 March 2019, in the ordinary shares of the Company were as follows: Ordinary shares of 5p each 31-Mar-19 6,948,477 7,972 8,051 146 31-Mar-18 6,948,477 7,972 8,051 146 P Lawrence and family B Clemo and family K Stockdale and family J Trouse Other information All Executive Directors are employed under employment agreements. Remuneration of the Non-Executive Directors is determined by the Chairman and the Chief Executive Officer. The Non-Executive Directors are not entitled to annual bonuses, employee benefits or participation in the LTIP. The Chairman’s remuneration is determined by Remuneration Committee in conjunction with the Chief Executive Officer. However, the Chairman is not entitled to vote on the matter. The Non-Executive Directors are retained under Letters of Appointment. Andrew Jones Renumeration Committee Chairman 18 June 2019 36 ECO Animal Health Group Plc | Annual Report 2018/19 Nomination Committee report The Nomination Committee comprises all the Non-Executive Directors. Main responsibilities The main responsibilities of the Committee are as follows; • Regularly reviewing the structure, size and composition (including the skills, knowledge, experience and diversity) of the Board • Giving full consideration to succession planning • Keeping under review the leadership needs of the organisation • Being responsible for identifying and nominating for the approval of the Board, candidates to fill Board vacancies as and when they arise • Reviewing the results of the Board performance evaluation process that relate to the composition of the Board • Formulating plans for succession for both Executive and Non-Executive Directors The Nomination Committee is also responsible for the Board’s policy on diversity. The Board recognises the benefits of diversity. Diversity of skills, background knowledge, international and industry experience and gender, among many other factors, will be taken into consideration when seeking to appoint new Directors to the Board. Notwithstanding the foregoing, all Board appointments will always be made on merit. Activities during the year During the year the Committee focused on the work carried out within the business on succession planning, talent development and leadership at the senior management level. In addition, the Board discussed succession planning for the Chairman. The Committee agreed that all Directors should be put forward for re-appointment by shareholders on a three-year rotational basis as set out in the Articles of Association of the Company, taking into account the performance and value each Director has bought to the Board. However, in line with best practice as reflected in the UK Corporate Governance Code (to which the Board aspires) all Directors will be standing for reappointment at the forthcoming AGM of the Company to be held on 19 September 2019. • Nominating membership of the Audit and Remuneration Committees During the year, Peter Lawrence retired as Chairman and was succeeded by Richard Wood. • The re-election by shareholders of Directors under the annual re-election provisions of the retirement by rotation provisions in the Company’s Articles of Association • Any matters relating to the continuation in office of any Director at any time including the appointment or removal of any Director to Executive or other office Richard Wood Chairman 18 June 2019 37 DIRECTORS' REPORT FOR THE YEAR ENDED 31 MARCH 2019 The Directors present their report and financial statements for the year ended 31 March 2019. Directors The following Directors have held office since 1 April 2018: Richard Wood (appointed 7 March 2019) Non-Executive Chairman Peter Lawrence (retired 7 March 2019) Non-Executive Chairman Marc Loomes Kevin Stockdale Brett Clemo Julia Trouse Anthony Rawlinson Andrew Jones Chief Executive Finance Director Executive Director Executive Director Non-Executive Director Senior Non-Executive Director Principal activities Substantial shareholdings At 6 June 2019, the Company had been notified of the following holdings of 3 per cent or more of its issued share capital. Name No. of ordinary shares Per cent Liontrust Asset Management 8,850,399 13.12 P A Lawrence and family 6,948,477 10.30 AXA Investment Managers 6,411,506 M & G Investment Management 5,356,802 Schroder Investment Management 4,739,803 Aberdeen Standard Investments plc 3,637,188 Merian Global Investors 2,950,383 BlackRock Investment Management 2,939,123 Canaccord Genuity Group Inc 2,925,000 Dansk Bank A/S 2,098,832 9.51 7.94 7.03 5.39 4.37 4.36 4.34 3.11 The principal activities of the Group in the year under review were those of manufacturers and suppliers of animal health products. These activities were conducted on a global scale, through a network including both regional offices, (notably in Shanghai and Princeton) and overseas subsidiaries. Results and dividends The consolidated income statement for the year is set out on page 48. The profit for the year after tax was £13,567,000 (2018: £11,647,000). The Company has paid a dividend of 6p per share making a total for the year of 12.7p (2018: 7.10p), including a special distribution of 3.5p per share. Future developments The likely future development of the business is covered in the Chairman’s Statement and in the Strategic Report. 38 ECO Animal Health Group Plc | Annual Report 2018/19 Group research and development activities Statement of Directors’ responsibilities Statement of disclosure to auditors So far as each of the Directors at the date of approval of this report are aware; a. there is no relevant audit information of which the Company’s auditors are unaware, and b. they have taken all the steps that they ought to have taken as Directors in order to make themselves aware of any relevant audit information and to establish that the Company’s auditors are aware of that information. Forward-looking statements This document contains certain forward- looking statements. The forward-looking statements reflect the knowledge and information available to the Company and Group during preparation and up to the publication of this document. By their very nature, these statements depend upon circumstances and relate to events that may occur in the future and thereby involving a degree of uncertainty. Therefore, nothing in this document should be construed as a profit forecast by the Company or Group. On behalf of the Board Richard Wood Chairman 18 June 2019 The Directors are responsible for preparing the Annual Report and the financial statements in accordance with applicable law and regulations. Company law requires the Directors to prepare financial statements for each financial year. Under that law the Directors have prepared the Group and Parent Company financial statements in accordance with International Financial Reporting Standards (IFRS) as adopted by the European Union. Under Company law the Directors must not approve the financial statements unless they are satisfied that they give a true and fair view of the state of affairs of the Group and the Company and of the profit or loss of the Group for that period. In preparing these financial statements, the Directors are required to: • select suitable accounting policies and then apply them consistently • make judgements and accounting estimates that are reasonable and prudent • state whether applicable IFRSs as adopted by the European Union have been followed, subject to any material departures disclosed and explained in the financial statements • prepare the financial statements on the going concern basis unless it is inappropriate to presume that the Group will continue in business The Directors are responsible for keeping adequate accounting records that are sufficient to show and explain the Company’s transactions and disclose with reasonable accuracy at any time the financial position of the Company and the Group and enable them to ensure that the financial statements comply with the Companies Act 2006. They are also responsible for safeguarding the assets of the Company and the Group and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities. The Directors are responsible for the maintenance and integrity of the Company’s website. Legislation in the United Kingdom governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions. The Group is continually researching into and developing new products and markets. Details of expenditure incurred and written off during the year are shown in the notes to the financial statements. The Group remains committed to obtaining further authorisations of its Aivlosin® products in other key territories and for additional disease applications, while at the same time expanding its product offering to include vaccines and other biologicals relevant to the swine and poultry markets. Directors’ insurance The Company maintains Directors’ and Officers’ liability insurance for the benefit of its Directors which remained in place at 31 March 2019 and throughout the preceding year. Financial instruments The Group’s accounting policies for financial instruments and strategy for management of those financial instruments are given in notes 2 and 32 to the financial statements respectively. Internal financial controls The Board of Directors is responsible for the Group’s system of internal financial control. Internal control systems are designed to meet the particular needs of the companies concerned and the risks to which they are exposed. This provides reasonable, but not absolute, assurance against material misstatement or loss. Strict financial and other controls are exercised by the Group over its subsidiary companies by day to day supervision of the businesses by the Directors. Stockbrokers N+1 Singer were the Company’s nominated adviser and stockbroker at the year end. Peel Hunt is joint broker. The closing share price on 31 March 2019 was 440.0p per share (2018: 531.0p). During the year the average share price was 481.41p (2018: 587.34p). Auditors The auditors Kreston Reeves LLP are not being proposed for reappointment at the forthcoming Annual General Meeting of the Company. 39 INDEPENDENT AUDITOR REPORT TO THE SHAREHOLDERS OF ECO ANIMAL HEALTH GROUP PLC FOR THE YEAR ENDED 31 MARCH 2019 Opinion Conclusions relating to going concern Key audit matters Key audit matters are those matters that, in our professional judgment, were of most significance in our audit of the financial statements of the current period and include the most significant assessed risks of material misstatement (whether or not due to fraud) we identified, including those which had the greatest effect on: the overall audit strategy, the allocation of resources in the audit; and directing the efforts of the engagement team. These matters were addressed in the context of our audit of the financial statements as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters. This is not a complete list of all risks identified by our audit. We have nothing to report in respect of the following matters in relation to which the ISAs (UK) require us to report to you where: • • the Directors’ use of the going concern basis of accounting in the preparation of the financial statements is not appropriate; or the Directors have not disclosed in the financial statements any identified material uncertainties that may cast significant doubt about the group’s or the company’s ability to continue to adopt the going concern basis of accounting for a period of at least twelve months from the date when the financial statements are authorised for issue. An overview of the scope of our audit As part of designing our audit, we determined materiality and assessed the risks of material misstatement in the financial statements. In particular, we looked at where the Directors made subjective judgements, for example in respect of significant accounting estimates that involved making assumptions and considering future events that are inherently uncertain. As in all of our audits we also addressed the risk of management override of internal controls, including evaluating whether there was evidence of bias by the Directors that represented a risk of material misstatement due to fraud. We performed a full scope audit on the main components of the business representing 78% of the Group’s revenue and 99% of the Group’s net assets. Our audit approach is consistent with the previous year. We have audited the financial statements of ECO Animal Health Group plc (the ‘parent company’) and its subsidiaries (the ‘Group’) for the year ended 31 March 2019 which comprise the consolidated statement of comprehensive income, consolidated and company statements of financial position, consolidated and company statements of changes in equity, consolidated and company statements of cashflow and notes to the financial statements, including a summary of significant accounting policies. The financial reporting framework that has been applied in their preparation is applicable law and International Financial Reporting Standards (IFRSs) as adopted by the European Union in accordance with the provisions of the Companies Act 2006. In our opinion the financial statements: • give a true and fair view of the state of the Group’s and of the parent company’s affairs as at 31 March 2019 and of the Group’s profit for the year then ended; • have been properly prepared in accordance with IFRSs adopted by the European Union; and • have been prepared in accordance with the requirements of the Companies Act 2006. Basis for opinion We conducted our audit in accordance with International Standards on Auditing (UK) (ISAs (UK)) and applicable law. Our responsibilities under those standards are further described in the Auditor’s responsibilities for the audit of the financial statements section of our report. We are independent of the Group in accordance with the ethical requirements that are relevant to our audit of the financial statements in the UK, including the FRC’s Ethical Standard as applied to listed entities, and we have fulfilled our other ethical responsibilities in accordance with these requirements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion. 40 ECO Animal Health Group Plc | Annual Report 2018/19 KEY AUDIT MATTER HOW OUR AUDIT ADDRESSED THE KEY AUDIT MATTER We discussed the revenue recognition policies with management and independently with sales staff clarifying any discrepancies. For direct product sales a sample of order numbers were traced through to sales invoice and ledger confirming the treatment of VAT and exchange rate differences for each. In addition, a comprehensive analytical review was undertaken comparing reported sales in the year to both prior period and budgeted monthly sales development. The analysis by significant geographical sales markets was also reviewed with explanations for performance confirmed to be consistent with other audit evidence obtained. Revenue recognition The Group had one main source of revenue during the year (in the comparative period, there were two). a. Direct sales of animal pharmaceutical products into UK, European and global markets. The Group’s flagship patented product continuing to be Aivlosin® which accounted for 78% of total Group Sales. The Group recognised these sales on despatch of the goods, at which point the risks and rewards of ownership is substantially transferred to the buyer. b. Sundry income in the prior year financial statements is primarily from the profit on sale of assets and rents receivable. These were recognised on an accruals basis. There was no such income for the year ended 31 March 2019. We have focused on these income streams due to their value and the potential for misstatement of revenue whether caused by fraud or error. KEY AUDIT MATTER HOW OUR AUDIT ADDRESSED THE KEY AUDIT MATTER Ownership and valuation of intangibles Goodwill arose on the acquisition of subsidiaries and is included within the consolidated statement of financial position at cost less impairment. There is historical capitalised goodwill on the balance sheet totalling £17.9 million in relation to this. The Group also retains distribution rights as well as drug registrations, patents and capitalised licence costs. For internally generated and externally acquired assets the Group recognises these at cost less accumulated depreciation and impairment losses. For assets acquired as part of a business combination these are recognised at fair value. Drug registrations, patents and licences are amortised over a useful economic life of between 10 and 20 years, with distribution rights being amortised over 20 years. A breakdown of the goodwill by company was obtained and agreed to the nominal ledger and expectations. A comparison of the goodwill amount and the historical profitability/net assets figure of each company was undertaken and an initial assessment of any required impairment was noted. The Directors provided a paper on the impairment of goodwill taking into account forecasts for a period of 5 years looking at the profitability along with any potential impairment. Sensitivity analysis was undertaken on the forecasts to stress test different levels of revenue drop. Prior budgets and forecasts were compared to actual results and any inaccuracies in turnover or profits were also used to stress test the forecasts provided. The assumptions applied to generate the 5 year forecasts were reviewed and audited to help determine the accuracy of these forecasts. Schedules for other intangible assets were obtained and agreed to nominal ledger and expectation, useful economic lives assigned were reviewed to confirm as reasonable with amortisation charges recalculated. Assets were also assessed for indicators of impairment and forecasts were obtained and reviewed to confirm the assumption that assets will continue to generate income for the Group. 41 INDEPENDENT AUDITOR REPORT (CONTINUED) TO THE SHAREHOLDERS OF ECO ANIMAL HEALTH GROUP PLC FOR THE YEAR ENDED 31 MARCH 2019 KEY AUDIT MATTER HOW OUR AUDIT ADDRESSED THE KEY AUDIT MATTER Valuation of share options The Group operates an Executive share option scheme, with approved and unapproved share options granted to Directors and employees who devote at least 25 hours per week to the performance of duties or employment. The exercise price of the options is equal to the market price of the shares at the date of grant, with the options vesting after three years. For instances of an option holder ceasing employment during this time for any reason the option can be exercised 6 months after date of cessation with approval of the Board. We have focused on this area due to the increased complexity of accounting and exposure to higher risk accounting estimates in accounting for such a scheme. The company utilised external experts to assist with the accounting for share based payment. Their report was obtained and the qualifications and experience of the valuer assessed. Sensitivity analysis was undertaken on the report’s assumptions to stress test different levels of leaver rates to review for potentially material variances. The charge to the income statement was agreed to the audited report and it was confirmed all necessary disclosures were included in the accounts. KEY AUDIT MATTER HOW OUR AUDIT ADDRESSED THE KEY AUDIT MATTER Valuation and existence of inventory The Group held inventories valued at £16.1 million at the year end, this being in relation to raw materials and consumables (£10.5 million) and finished pharmaceutical products (£5.6 million). Such inventories are valued at the lower of cost and net realisable value; cost being determined using the first-in-first-out method. The cost of finished goods comprises raw materials as well as direct labour and other costs. The net realisable value is taken to be selling price for the product in the ordinary course of business. We have focused on this area due to the value of inventories held, and the fact that there was judgement involved in estimating the value of obsolete products. Stocktakes were attended at selected sites with material levels of inventory. A sample of stock was also selected for substantive valuation testing, confirming that inventory was held at the lower of cost and net realisable value. Third parties who have completed stocktakes were assessed to confirm their competence and the reliability of their results. Variance testing was performed where stock sheets at year end were agreed to stock listing obtained. A sample of the final March 2019 and first April 2019 sales were reviewed to determine cut-off was applied correctly. Inventory in transit was also reviewed to confirm it was accurately recorded as such at the year end. 42 ECO Animal Health Group Plc | Annual Report 2018/19 KEY AUDIT MATTER HOW OUR AUDIT ADDRESSED THE KEY AUDIT MATTER IFRS – Amendments to the standards There have been key changes within IFRS which were effective from 1 January 2018. In addition to this, the client has opted to early adopt IFRS 16: leases. We have focused on this area due to the potential scope for material error in the Initial implementation of these changes. IFRS 15: Revenue from contracts with customers. We have reviewed management’s assessment of the impact of this new standard on the financial statements and considered if this is appropriate. IFRS 9: Financial instruments. We have reviewed management’s consideration of the impact of the new standard on the classification of the financial instruments and assessed whether this was appropriate. Additionally, we have reviewed management’s calculation of expected credit losses over the life of its trade receivables and assessed the inputs considered and assumptions made within this calculation. IFRS 16: Leases – We have reviewed management’s calculation of the impact of IFRS 16 and vouched the various elements to the lease agreements. Additionally, assessed any assumptions made for appropriateness. How we tailored the audit scope • ECO Animal Health Limited (statutory audit) We tailored the scope of our audit to ensure that we performed sufficient work to be able to give an opinion on the financial statements as a whole, taking into account the structure of the Group and the parent company, the accounting processes and controls, and the industry in which they operate. Our scoping considerations for the Group audit were based both on financial information and risk. In addition to ECO Animal Health Group PLC the below subsidiaries were subject to a statutory or limited assurance audits: • Zhejiang ECO BIOK Animal Health Products Limited (statutory audit) • Pharmgate Animal Health LLC (statutory audit) • ECO Animal Health do Brasil Comercio de Productos Veterinarios (limited assurance) • ECO Animal Health (USA) Corporation (limited assurance) The remaining subsidiaries have been deemed immaterial to the Group and were not subject to audit procedures. 43 INDEPENDENT AUDITOR REPORT (CONTINUED) TO THE SHAREHOLDERS OF ECO ANIMAL HEALTH GROUP PLC FOR THE YEAR ENDED 31 MARCH 2019 Our application of materiality Overall Group Materiality £757,000 (2018: £692,000) How we determined it Rationale for benchmark 5 per cent of Group profit before tax Given the Group is AIM listed, the number of users and the level of interest in the financial statements is expected to be higher than average. Therefore, the significance of balances is expected to be greater and consequently 5 per cent of profit before tax has been assessed as the most appropriate basis for materiality. We reported all audit differences found in excess of performance materiality of £530,000 to the Directors and the management board. For each Group Company within the scope For each Group Company within the scope of our Group audit, we allocated a materiality of our Group audit, we allocated a materiality that is less than our overall Group materiality. that is less than our overall Group materiality. The range of materiality allocated across The range of materiality allocated across each Group Company was between £25,300 each Group Company was between £25,300 and £448,000. The scope of our audit was and £448,000. The scope of our audit was influenced by our application of materiality influenced by our application of materiality as we set certain quantitative thresholds as we set certain quantitative thresholds for performance materiality and use these for performance materiality and use these thresholds as a consideration tool to help thresholds as a consideration tool to help to determine the scope of our audit and to determine the scope of our audit and the nature, timing and extent of our audit the nature, timing and extent of our audit procedures on the individual financial procedures on the individual financial statement line items and disclosures and in statement line items and disclosures and in evaluating the effect of misstatements, both evaluating the effect of misstatements, both individually and in aggregate on the financial individually and in aggregate on the financial statements as a whole. statements as a whole. We determined component materiality for We determined component materiality for the parent Company to be 1 per cent of net the parent Company to be 1 per cent of net assets and for each of the trading Group assets and for each of the trading Group companies between 1-2 per cent of turnover companies between 1-2 per cent of turnover based upon the companies’ principal activities based upon the companies’ principal activities and risk profile. Performance materiality and risk profile. Performance materiality was set in the range of 70-80 per cent of was set in the range of 70-80 per cent of component materiality. component materiality. Other information Other information The Directors are responsible for the other The Directors are responsible for the other information. The other information comprises information. The other information comprises the information included in the annual report, the information included in the annual report, other than the financial statements and our other than the financial statements and our auditor report thereon. Our opinion on the auditor report thereon. Our opinion on the financial statements does not cover the financial statements does not cover the other information and, except to the extent other information and, except to the extent otherwise explicitly stated in our report, otherwise explicitly stated in our report, we do not express any form of assurance we do not express any form of assurance conclusion thereon. conclusion thereon. In connection with our audit of the financial In connection with our audit of the financial statements, our responsibility is to read the statements, our responsibility is to read the other information and, in doing so, consider other information and, in doing so, consider whether the other information is materially whether the other information is materially inconsistent with the financial statements inconsistent with the financial statements or our knowledge obtained in the audit or or our knowledge obtained in the audit or otherwise appears to be materially misstated. otherwise appears to be materially misstated. If we identify such material inconsistencies If we identify such material inconsistencies or apparent material misstatements, we or apparent material misstatements, we are required to determine whether there are required to determine whether there is a material misstatement in the financial is a material misstatement in the financial statements or a material misstatement of statements or a material misstatement of the other information. If, based on the work the other information. If, based on the work we have performed, we conclude that there we have performed, we conclude that there is a material misstatement of this other is a material misstatement of this other information, we are required to report that fact. information, we are required to report that fact. We have nothing to report in this regard. We have nothing to report in this regard. 44 ECO Animal Health Group Plc | Annual Report 2018/19 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 Matters on which we are required to report by exception In the light of our knowledge and understanding of the Group and parent Company and its environment obtained in the course of the audit, we have not identified material misstatements in the strategic report or the Directors’ report. We have nothing to report in respect of the following matters in relation to which the Companies Act 2006 requires us to report to you if, in our opinion: • adequate accounting records have not been kept by the parent Company, or returns adequate for our audit have not been received from branches not visited by us or • the parent Company financial statements are not in agreement with the accounting records and returns or • certain disclosures of Directors’ remuneration specified by law are not made or • we have not received all the information and explanations we require for our audit Responsibilities of Directors As explained more fully in the Directors’ responsibilities statement (set out on page 39), the Directors are responsible for the preparation of the financial statements and for being satisfied that they give a true and fair view, and for such internal control as the Directors determine is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error. In preparing the financial statements, the Directors are responsible for assessing the Group’s and parent Company’s ability to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless the Directors either intend to liquidate the Group or parent Company or to cease operations, or have no realistic alternative but to do so. 45 INDEPENDENT AUDITOR REPORT (CONTINUED) TO THE SHAREHOLDERS OF ECO ANIMAL HEALTH GROUP PLC FOR THE YEAR ENDED 31 MARCH 2019 Use of our report This report is made solely to the Company’s members, as a body, in accordance with Chapter 3 of Part 16 of the Companies Act 2006. Our audit work has been undertaken so that we might state to the Company’s members those matters we are required to state to them in an auditor report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the Company and the Company’s members as a body, for our audit work, for this report, or for the opinions we have formed. Stephen Tanner BSc (Econ) FCA (Senior Statutory Auditor) For and on behalf of Kreston Reeves LLP Statutory Auditor and Chartered Accountants London 18 June 2019 The maintenance and integrity of the Group’s website is the responsibility of the directors; the work carried out by the auditors does not involve consideration of these matters and, accordingly the auditors accept no responsibility for any changes that may have occurred to the financial statements since they were initially presented on the website. Auditor’s responsibilities for the audit of the financial statements Our objectives are to obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditor report that includes our opinion. Reasonable assurance is a high level of assurance but is not a guarantee that an audit conducted in accordance with ISAs (UK) will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these financial statements. As part of an audit in accordance with ISAs (UK), we exercise professional judgment and maintain professional scepticism throughout the audit. We also: • Identify and assess the risks of material misstatement of the financial statements, whether due to fraud or error, design and perform audit procedures responsive to those risks, and obtain audit evidence that is sufficient and appropriate to provide a basis for our opinion. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control • Obtain an understanding of internal control relevant to the audit in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Group’s internal control • Evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related disclosures made by the Directors • Conclude on the appropriateness of the Directors’ use of the going concern basis of accounting and, based on the audit evidence obtained, whether a material uncertainty exists related to events or conditions that may cast significant doubt on the Group’s or the parent Company’s ability to continue as a going concern. If we conclude that a material uncertainty exists, we are required to draw attention in our auditor’s report to the related disclosures in the financial statements or, if such disclosures are inadequate, to modify our opinion. Our conclusions are based on the audit evidence obtained up to the date of our auditor’s report. However, future events or conditions may cause the Group or the parent Company to cease to continue as a going concern • Evaluate the overall presentation, structure and content of the financial statements, including the disclosures, and whether the financial statements represent the underlying transactions and events in a manner that achieves fair presentation • Obtain sufficient appropriate audit evidence regarding the financial information of the entities or business activities within the Group to express an opinion on the consolidated financial statements. We are responsible for the direction, supervision and performance of the Group audit. We remain solely responsible for our audit opinion We communicate with those charged with governance regarding, among other matters, the planned scope and timing of the audit and significant audit findings, including any significant deficiencies in internal control that we identify during our audit. 46 ECO Animal Health Group Plc | Annual Report 2018/19 4747 CONSOLIDATED INCOME STATEMENT FOR THE YEAR ENDED 31 MARCH 2019 Notes 2,3 4 5 6 6 15 8 25 7 7 5 2019 2018 £’000’s £’000’s 74,578 (40,725) 33,853 35 (19,217) 14,671 631 (69) 562 14 14 15,247 (1,680) 13,567 11,755 1,812 13,567 17.60 17.35 20,087 67,201 (34,986) 32,215 436 (18,539) 14,112 138 (385) (247) 7 7 13,872 (2,225) 11,647 9,315 2,332 11,647 14.19 14.06 19,571 Revenue Cost of sales Gross profit Other income Administrative expenses Profit from operating activities Finance income Finance costs Net finance (cost)/income Share of profit of associate Profit before income tax Income tax (charge) Profit for the year Profit attributable to: Owners of the parent company Non-controlling interests Profit for the year Earnings per share (pence) Diluted earnings per share (pence) Earnings before Interest, Tax, Depreciation, Amortisation, Share Based Payments and Foreign Exchange Differences 48 ECO Animal Health Group Plc | Annual Report 2018/19 CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME FOR THE YEAR ENDED 31 MARCH 2019 2019 2018 Notes £’000’s £’000’s Profit for the year 13,567 11,647 Other comprehensive (losses) (net of related tax effects): Items that will or may be reclassified to profit/(loss) in future periods: Foreign currency translation differences Items that will not be reclassified: Defined benefit plan actuarial (losses) Other comprehensive (losses) for the year Total comprehensive income for the year Attributable to: Owners of the parent Company Non-controlling interest 22 25 (8) (36) (44) (372) (15) (387) 13,523 11,260 11,694 1,829 13,523 9,028 2,232 11,260 All items listed in other comprehensive income have gone through reserves and are shown in the consolidated statement of changes in equity. The notes on pages 54 to 98 form part of these financial statements. 49 CONSOLIDATED STATEMENT OF CHANGES IN EQUITY FOR THE YEAR ENDED 31 MARCH 2019 CONSOLIDATED Attributable to the owners of the Parent Share Capital Share Premium Account Revaluation Reserve Other Reserves Retained Earnings Total Non-controlling Interest Total Equity £000’s £000’s £000’s £000’s £000’s £000’s £000’s £000’s Balance as at 31 March 2017 3,271 58,154 664 2,449 29,293 93,831 4,342 98,173 Profit for the year Other comprehensive income: Foreign currency differences Actuarial (losses) on pension scheme assets Total comprehensive income for the year Transactions with owners recorded directly in equity Contributions by and distributions to owners - - - - - - - - Issue of shares in the year 20 693 - - - 693 58,847 - - - 20 3,291 - Share-based payments Transfers on expiry of options Dividends relating to 2018 Transactions with owners Balance as at 31 March 2018 Adjustment on implementation of IFRS 16 IFRS 16 adjusted balance as at 1 April 2018 Profit for the year Other comprehensive income: Foreign currency differences Actuarial (losses) on pension scheme assets Total comprehensive income for the year Transactions with owners recorded directly in equity Contributions by and distributions to owners Issue of shares in the year Share-based payments Transfers on expiry of options Dividends relating to 2019 Transactions with owners - - - - - - - - - - - - - - 778 (404) - 374 9,315 (272) 9,315 (272) 2,332 (100) 11,647 (372) (15) (15) - (15) 9,028 9,028 2,232 11,260 - - 404 713 778 - - - - 713 778 - (4,660) (4,660) (1,389) (6,049) (4,256) (3,169) (1,389) (4,558) 664 2,823 34,065 99,690 5,185 104,875 - - - (17) (17) 1 (16) 3,291 58,847 664 2,823 34,048 99,673 5,186 104,859 - - - - 81 - - - 81 - - - - 3,803 - - - 3,803 - - - - - - - - - - - - - - 631 (112) - 519 11,755 11,755 1,812 13,567 (17) (36) (17) (36) 9 - (8) (36) 11,702 11,702 1,821 13,523 - - 112 3,884 631 - - - - 3,884 631 - (8,485) (8,485) (1,643) (10,128) (8,373) (3,970) (1,643) (5,613) Balance as at 31 March 2019 3,372 62,650 664 3,342 37,377 107,405 5,364 112,769 50 ECO Animal Health Group Plc | Annual Report 2018/19 STATEMENT OF CHANGES IN EQUITY FOR THE YEAR ENDED 31 MARCH 2019 COMPANY Share Capital Share Premium Account Revaluation Reserve Other Reserves Retained Earnings Total £000’s £000’s £000’s £000’s £000’s £000’s Balance as at 31 March 2017 3,271 58,154 395 2,449 11,384 75,653 Profit for the year Other comprehensive income: Actuarial (losses) on pension scheme assets Total comprehensive income for the year Transactions with owners recorded directly in equity Contributions by and distributions to owners Issue of shares in the year Share-based payments Transfers on expiry of options Dividends relating to 2018 Transactions with owners Balance as at 31 March 2018 Profit for the year Other comprehensive income: Actuarial (losses) on pension scheme assets Total comprehensive income for the year Transactions with owners recorded directly in equity Contributions by and distributions to owners Issue of shares in the year Share-based payments Transfers on expiry of options Dividends relating to 2019 Transactions with owners Balance as at 31 March 2019 - - - - - - 20 693 - - - - - - 20 693 - - - - - - - - - - - - 778 (404) - 374 76 (15) 61 - - 404 76 (15) 61 713 778 - (4,660) (4,660) (4,256) (3,169) 3,291 58,847 395 2,823 7,189 72,545 - - - 81 - - - 81 - - - 3,803 - - - 3,803 - - - - - - - - - - - - 631 (112) - 519 3,372 62,650 395 3,342 15,041 15,041 (36) (36) 15,005 15,005 - - 112 (8,485) (8,373) 13,821 3,884 631 - (8,485) (3,970) 83,580 51 STATEMENTS OF FINANCIAL POSITION (CO. NUMBER: 01818170) AS AT 31 MARCH 2019 Non-current assets Intangible assets Property, plant and equipment Investment property Right of use assets Investments Amounts due from subsidiary Company Current assets Inventories Trade and other receivables Income tax recoverable Other taxes and social security Cash and cash equivalents Total current assets Liabilities Trade and other payables Income tax Other taxes and social security Amounts due under leases Dividends Current liabilities Net current assets Total assets less current liabilities Non-current liabilities Provisions Deferred tax Amounts due under leases TOTAL ASSETS LESS TOTAL LIABILITIES EQUITY Issued share capital Share premium account Revaluation reserve Other reserves Retained earnings Shareholders' funds Non-controlling interests Notes 11 12 13 14 15 17 16 17 19 20 27 18 27 24 26 25 Group Company 2019 £000’s 62,734 2,144 200 1,930 116 - 67,124 16,107 29,537 466 462 18,068 2018 £000’s 57,631 1,866 200 - 98 - 59,795 17,663 17,193 113 1,160 21,261 2019 £000’s - 769 200 30 20,077 58,510 79,586 - 46 - 145 4,236 64,640 57,390 4,427 (13,809) (1,000) (533) (415) (49) (15,806) 48,834 115,958 (1,616) (1,573) 112,769 3,372 62,650 664 3,342 37,377 107,405 5,364 112,769 (10,715) (152) (108) - (42) (11,017) 46,373 106,168 (1,293) - 104,875 3,291 58,847 664 2,823 34,065 99,690 5,185 104,875 (181) - (90) (16) (49) (336) 4,091 83,677 (85) (12) 83,580 3,372 62,650 395 3,342 13,821 83,580 - 83,580 2018 £000’s - 716 200 - 20,077 46,326 67,319 - 213 - 518 4,959 5,690 (234) - (98) - (42) (374) 5,316 72,635 (90) - 72,545 3,291 58,847 395 2,823 7,189 72,545 - 72,545 Approved by the Board and authorised for issue on 18 June 2019 Richard Wood, Chairman. The notes on pages 54 to 98 form part of these financial statements. 52 52 ECO Animal Health Group Plc | Annual Report 2018/19 ECO Animal Health Group Plc | Annual Report 2018/19 STATEMENT OF CASH FLOWS FOR THE YEAR ENDED 31 MARCH 2019 Notes 6 12, 14 13 11 22 15 15 23 12 11 6 Cash flows from operating activities Profit before income tax Adjustment for: Net finance cost/(income) Depreciation Revaluation of freehold property Revaluation of investment property Amortisation of intangible assets Pension payments Share of associate's results Impairment of investments Share based payments Operating cash flows before movements in working capital Change in inventories Change in receivables Change in payables Cash generated from/(absorbed by) operations Finance costs Income tax Net cash from/(absorbed by) operating activities Cash flows from investing activities Acquisition of property, plant and equipment Disposal of property, plant and equipment Purchase of intangibles Finance income Net cash (used in)/from investing activities Cash flows from financing activities Proceeds from issue of share capital Finance lease borrowings Finance lease repayments Dividends paid Net cash (used in) financing activities Net(decrease)/increase in cash and cash equivalents Foreign exchange movements Balance at 1 April 2018 Balance at 31 March 2019 19 A net debt reconciliation has been provided in note 21 Group 2019 £000’s Company 2018 £000’s 2019 £000’s 2018 £000’s 15,247 13,872 15,050 (562) 720 (55) - 3,982 (59) (14) - 631 19,890 1,556 (11,646) 3,540 13,340 (69) (862) 12,409 (566) 5 (9,085) 127 (9,519) 3,884 67 (406) (10,121) (6,576) (3,686) 493 21,261 18,068 247 297 - (15) 3,428 (39) (7) - 778 (937) 19 (55) - - (59) - - 631 18,561 14,649 2,012 (1,298) (3,432) 15,843 (14) (1,763) 14,066 (324) 1 (7,176) 138 (7,361) 713 - - (6,046) (5,333) 1,372 (713) 20,602 21,261 - (11,644) (39) 2,966 (2) (13) 2,951 (2) - - 938 936 3,884 1 (17) (8,478) (4,610) (723) - 4,959 4,236 89 (911) 17 - (15) - (39) - 5 778 (76) - (231) (373) (680) (3) (11) (694) (2) - - 914 912 713 - - (4,656) (3,943) (3,725) - 8,684 4,959 53 53 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 1. General information ECO Animal Health Group plc (“the Company”) and its subsidiaries (together “the Group”) manufacture and supply animal health products globally. The Company is traded on the AIM market of the London Stock Exchange and is incorporated and domiciled in the UK. The address of its registered office is 78 Coombe Road, New Malden, Surrey, KT3 4QS. 2. Summary of significant accounting policies 2.1 Basis of preparation The Group has presented its annual report and accounts in accordance with International Financial Reporting Standards (IFRS), as adopted by the European Union, IFRIC interpretations and the Companies Act 2006 applicable to companies reporting under IFRS. The preparation of financial statements, in conformity with IFRS as adopted by the European Union, 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 revenue and expenses during the reporting period. Although these estimates are based on management’s best knowledge of the amount, event or actions, actual results ultimately may differ from those estimates. The estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the period in which the estimate is revised if the revision affects only that period or in the period of the revision and future periods if the revision affects both current and future periods. The principal accounting policies of the Group are set out below and have been applied consistently in dealing with items which are considered material in relation to the Group’s financial statements. 2.2 Adoption of new and revised standards The following amendments to existing standards and interpretations were effective for periods beginning after 1 January 2018, but the adoption of these amendments to existing standards and interpretations did not have a material impact on the financial statements of the Group: • IFRS 2 – Classification and Measurement of Share Based Payment Transactions • IFRS 4 – Applying IFRS 9 Financial Instruments with IFRS 4 Insurance Contracts • IFRS 9 – Financial Instruments (see note 2.19) • IFRS 15 – Revenue from Contracts with Customers • IAS 40 – Transfers of Investment Property • IFRIC 22 – Foreign Currency Transactions and Advance Consideration • IFRS 1 and IAS 28 – Amendments under 2014-16 Cycle of Annual Improvements The following new standard has been implemented in the current period: • IFRS 16 – Leases Further details on the implementation of this standard and its effect on the reported results for the period can be found in note 2.15. 54 FOR THE YEAR ENDED 31 MARCH 2019ECO Animal Health Group Plc | Annual Report 2018/19 The following new standards, amendments and interpretations for existing standards have been published that are mandatory for accounting periods beginning after 1 January 2019 (unless otherwise stated) and have not been applied in preparing these consolidated financial statements. • IFRS 9 – Financial Instruments (amendments) • IFRS 17 – Insurance contracts (effective 1 January 2021) • IAS19 – Employee benefits • IAS 28 – Investments in associates and joint ventures • IFRIC 23 – Uncertainty over income tax • IFRS 3, IFRS 11, IAS 12 and IAS 23- Amendments under 2015-2017 Cycle of Annual Improvements The Directors do not expect that the adoption of the Standards and Interpretations listed above will have a material impact on the financial statements of the Group in future periods. Beyond the information above, it is not practicable to provide a reasonable estimate of the effect of these standards until a detailed review has been completed. 2.3 Basis of consolidation The consolidated financial statements comprise the accounts of the Company and its subsidiaries drawn up to 31 March 2019. An entity is classed as a subsidiary of the Company when as a result of contractual arrangements, the Company has the power to govern its financial and operating policies so as to obtain benefits from its activities. The purchase method of accounting is used to account for the acquisition of subsidiaries by the Group. The cost of an acquisition is measured, as the fair value of the assets given, equity instruments issued and liabilities incurred or assumed at the date of exchange. Identifiable assets acquired and contingent liabilities assumed in a business combination are measured initially at their fair values at the acquisition date, irrespective of the extent of any minority interest. The excess of the cost of acquisition over the fair value of the Group’s share of the identifiable net assets acquired is recorded as goodwill. If the cost of acquisition is less than the fair value, the difference is recognised directly in the income statement. Accounting policies have been changed where material to ensure consistency with the policies adopted by the Group. Although the subsidiaries in Brazil and China and the joint operations in the USA and Canada all have December year ends, the Group uses management accounts to the end of March to prepare the Group accounts. Subsidiaries are wholly consolidated from the date on which control is transferred to the Group. They are deconsolidated from the date that control ceases. Intercompany transactions, balances and unrealised gains on transactions between Group companies are eliminated on consolidation. 2.4 Segment reporting Operating segments are reported in a manner consistent with the internal reporting to the chief operating decision-maker. The chief operating decision-maker who is responsible for allocating resources and assessing performance of the operating segments has been identified as the Board. 55 FOR THE YEAR ENDED 31 MARCH 2019NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 2.5 Foreign currency translation (a) Functional and presentational currency Items included in the financial statements of each of the Group’s entities are measured using the currency of the primary economic environment in which the entity operates (“functional currency”). The consolidated financial statements are presented in Pounds Sterling, which is the Company’s functional and the Group’s presentational currency. (b) Transactions and balances Monetary assets and liabilities denominated in foreign currencies are translated into Pounds Sterling at the rates of exchange ruling at the date of the financial statements. Foreign currency transactions are translated into the functional currency using the exchange rates prevailing at the date of the transactions. Foreign exchange gains and losses resulting from the settlement of such transactions and from the translation at period end exchange rates of monetary assets and liabilities denominated in foreign currencies are recognised in the income statement. Foreign exchange gains and losses that relate to borrowing and cash and cash equivalents are presented in the income statement within finance income or finance costs. (c) Group companies The results and financial position of all Group entities that have a functional currency different from the presentation currency are translated into the presentation currency as follows: • assets and liabilities for each balance sheet presented are translated at the closing exchange rate at the date of the balance sheet • income and expenses for each income statement are translated at average exchange rates unless this average is not a reasonable approximation of the cumulative effect of the rates prevailing on the transaction dates, in which case the income and expenses are translated at the rate on the dates of the transaction and • all resulting exchange differences are recognised as a separate component of equity When a foreign operation is partially disposed or sold, exchange differences that were recognised in equity are recognised in the income statement as part of the gain or loss on sale. Goodwill and fair value adjustments arising on the acquisition of a foreign entity are treated as assets and liabilities of the foreign entity and translated at the closing exchange rate. 2.6 Financial instruments a) Non-derivative financial assets The Group initially recognises loans and receivables and deposits on the date that they are originated. All other financial assets (including assets designated at fair value through profit or loss) are recognised initially on the trade date at which the Group becomes a party to the contractual provisions of the instrument. The Group derecognises a financial asset when the contractual rights to the cash flows from the asset expire, or it transfers the rights to receive the contractual cash flows from the financial asset in a transaction in which substantially all the risks and rewards of ownership of the financial asset are transferred. Any interest in transferred financial assets that is created or retained by the Group is recognised as a separate asset or liability. Financial assets and liabilities are offset and the net amount presented in the statement of financial position when, and only when, the Group has a legal right to offset the amounts and intends to settle on a net basis or to realise the asset and settle the liability simultaneously. 56 FOR THE YEAR ENDED 31 MARCH 2019NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)ECO Animal Health Group Plc | Annual Report 2018/19 The Group has the following non-derivative financial assets: b) Loans and receivables Loans and receivables are financial assets with fixed or determinable payments that are not quoted in an active market. Such assets are recognised initially at fair value plus any directly attributable transaction costs. Subsequent to initial recognition, loans and receivables are measured at amortised cost using the effective interest method, less any impairment losses. Loans and receivables comprise trade and other receivables and cash and cash equivalents. Cash and cash equivalents comprise cash balances and call deposits with original maturities of three months or less. Bank overdrafts that are repayable on demand and form an integral part of the Group’s cash management are included as a component of cash and cash equivalents for the purpose of the statement of cash flows. c) Non-derivative financial liabilities All financial liabilities (including liabilities designated at fair value through profit or loss) are recognised initially on the date at which the Group becomes a party to the contractual provisions of the instrument. The Group derecognises a financial liability when its contractual obligations are discharged or cancelled or expire. The Group has the following non-derivative financial liabilities: bank overdrafts and trade and other payables. Such financial liabilities are recognised initially at fair value plus any directly attributable transaction costs. Subsequent to initial recognition these financial liabilities are measured at amortised cost using the effective interest method. 2.7 Goodwill Goodwill arising on the acquisition of an entity represents the excess of the costs of acquisition over the Group’s interest in the net fair value of the identifiable assets, liabilities and contingent liabilities of the entity recognised at the date of acquisition. Goodwill is initially recognised as an asset at cost and is subsequently measured at cost less any accumulated impairment losses. Goodwill is not subject to amortisation but is tested for impairment. Negative goodwill arising on an acquisition is recognised directly in the income statement. On disposal of a subsidiary or a jointly controlled entity, the attributable amount of goodwill is included in the determination of the profit or loss recognised in the income statement on disposal. Goodwill arising before the date of transition to IFRS, on 1 April 2004, has been retained at the previous UK GAAP amounts, subject to being tested for impairment at that date. Goodwill written off to reserves under UK GAAP prior to 1998 has not been reinstated and is not included in determining any subsequent profit or loss on disposal. 2.8 Other intangible assets Drug registrations, patents and licences The Group recognises internally generated or externally acquired intangible assets at cost and subsequently recognises them at cost less accumulated amortisation and impairment losses. Intangible assets acquired as part of a business combination are recognised at fair value. 57 FOR THE YEAR ENDED 31 MARCH 2019NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Expenditure on drug registrations and licences is recognised as an internally generated or externally acquired intangible asset only if all the following conditions are met: • an asset is created that can be identified • it is probable that the asset created will generate future economic benefits and • the development cost of the asset can be measured reliably All drug registrations and licences have previously been amortised on a straight-line basis over their useful economic life of 10 years. However, following the granting of Aivlosin’s first marketing authorisation in the USA in July 2012, which greatly increased the economic potential of the product, management revised their estimate of the useful life of the Aivlosin® drug registrations only from 10 to 20 years and in accordance with IAS 8 have amortised the remaining book value of the Aivlosin registrations over the remainder of the useful life of these registrations from that date. Distribution rights Distribution rights are recognised at cost and amortised on a straight line basis over their estimated useful economic life of 20 years. They are reviewed for impairment when any indication of potential impairment exists. 2.9 Property, plant and equipment and depreciation Plant and equipment are stated at cost less depreciation. Depreciation is provided at rates calculated to write off the cost less estimated residual value of each asset over its expected useful life, as follows; Plant and machinery 20% on cost Fixtures, fittings and equipment 20% on cost Motor vehicles 25% on cost Freehold land and buildings are stated at valuation less depreciation. The property is professionally valued by a qualified surveyor at least once every three years. Surpluses (which are not reversals of previous deficits) arising from the periodic valuations are taken to the Statement of Other Comprehensive Income, and deficits are taken to the income statement. Depreciation is provided at a rate calculated to write off the valuation less estimated residual value over the remaining useful life of the building at a rate of 2% per annum. Land is not depreciated. 2.10 Impairment of non-financial assets The carrying amounts of the Group’s assets are reviewed at each year end, to determine whether there is any indication of impairment. If any such indication exists, the asset’s recoverable amount is estimated in order to determine the impairment loss if any. The recoverable amount is the higher of its fair value and its value in use. For intangible assets with an indefinite useful life, an impairment test is performed at each year end. In assessing value in use, the expected future cash flows from the asset are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset. An impairment loss is recognised in the income statement whenever the carrying amount of an asset or its cash-generating unit exceeds its recoverable amount. A previously recognised impairment loss is reversed if the recoverable amount increases as a result of a change in the estimates used to determine the recoverable amount, but not to an amount higher than the carrying amount that would have been determined (net of depreciation) had no impairment loss been recognised in prior years. 58 FOR THE YEAR ENDED 31 MARCH 2019NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)ECO Animal Health Group Plc | Annual Report 2018/19 2.11 Investment property The investment property is property held either to earn rental income or for capital appreciation or for both, but not for sale in the ordinary course of business, use in the production or supply of goods or services or for administrative purposes. Investment property is measured at fair value. The property is professionally valued by a qualified surveyor at least once every three years. Surpluses and deficits arising from the periodic valuations are taken to the income statement. 2.12 Investments Non-current asset investments are stated at fair value. They are recognised or derecognised on the date when the contract for acquisition or disposal requires the delivery of that investment. Investments in subsidiaries are stated at cost less impairment in the Parent Company’s statement of financial position. An impairment is recognised in profit or loss when there is objective evidence that the asset is impaired and is measured as the difference between the investment’s carrying amount and the present value of estimated future cash flows discounted at the effective interest rate adjusted for a risk premium. Impairment losses are reversed in subsequent periods when an increase in the investment’s recoverable amount can be related objectively to an event occurring after the impairment was recognised, subject to the restriction that the carrying amount of the investment at the date the impairment is reversed shall not exceed what the amortised costs would have been had the impairment not been recognised. 2.13 Interest in joint operations A joint operation is a contractual arrangement whereby the Group and other parties undertake an economic activity that is subject to joint control; that is, when the strategic financial and operating policy decisions relating to the activities require the unanimous consent of the parties sharing control. The Group accounts for its interest in joint operations using proportional consolidation, as it has rights to substantially all of the economic benefits of the assets and obligations for the liabilities shown in these financial statements relating to those operations. The Group’s share of the assets, liabilities, income, expenses and cash flows of jointly controlled entities are combined with the equivalent items in the results on a line by line basis. 2.14 Investments in associates An associate is an entity in which an investor has significant influence but not control or joint control. Significant influence is defined as “the power to participate in the financial and operating policy decisions but not to control them”. The Group reports its interests in associates using the equity method of accounting. Under this method, an equity investment is initially recorded at cost (subject to initial fair value adjustment if acquired as part of the acquisition of a subsidiary) and is subsequently adjusted to reflect the Group’s share of the net profit or loss of the associate. If the Group’s share of losses of an associate equals or exceeds its “interest in the associate”, the Group discontinues recognising its share of further losses. If the associate subsequently reports profits, the investor resumes recognising its share of those profits only after its share of the profits equals the share of losses not recognised. 59 FOR THE YEAR ENDED 31 MARCH 2019NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 2.15 Leasing The Group leases certain property, plant and equipment. Assets obtained under finance leases, where the Group has substantially all the risks and rewards of ownership are capitalised as property, plant and equipment and depreciated over the shorter of the lease term and their useful lives. Obligations under such agreements are included in borrowings net of the financial charge allocated to future periods. The financial element of the rental payment is charged to the income statement so as to produce constant periodic rates of charge on the net obligations outstanding in each period. Leases in which a significant portion of the risks and rewards of ownership were retained by the lessor were classified as operating leases. Payments made under operating leases were charged to the income statement for the year end 31 March 2018 on a straight-line basis over the period of the lease. The Group has adopted the provisions of IFRS 16 – “Leases” during the year. All material leases with an initial term of more than one year are now classified as finance leases. The Group has elected to use the transitional arrangements specified in IFRS 16, in that it has not restated results from prior periods. Instead, it has introduced the assets held under qualifying leases as at the beginning of the period onto the Balance Sheet at cost less accumulated depreciation. The corresponding liability under the terms of the lease, (discounted at the Group’s marginal cost of borrowing) at the same date has also been introduced onto the Balance Sheet. The difference between these two figures has been shown as an adjustment to opening reserves. The following table gives details of the amounts introduced into the Group Balance Sheet at 1 April 2018, split by category of asset. Assets introduced: Cost: Accumulated Depreciation Net Book Value Finance Lease Liabilities Introduced Adjustment to opening reserves: Land and Buildings (freehold) Motor Vehicles Fixtures, fittings and equipment Total £’000’s £’000’s £’000’s £’000’s 2,297 (328) 1,969 (1,987) (18) 203 (70) 133 (132) 1 7 (2) 5 (5) - 2,507 (400) 2,107 (2,124) (17) The effect of the provisions of IFRS 16 “Leases” on net profit for the year was a reduction in reported profit of £43,000 and the effect on net assets as at 31 March 2019 was a reduction of £60,000. 2.16 Inventories Inventories are valued at the lower of cost and net realisable value. Cost is determined using the first-in, first- out method. The cost of finished goods comprises raw materials, direct labour and other direct costs. Net realisable value is the estimated selling price in the ordinary course of business, less any costs which would be incurred in completing the goods and rendering them ready for sale. 2.17 Trade receivables Trade receivables are initially measured at fair value and are subsequently measured at amortised cost using the effective interest rate method. Appropriate allowance for estimated, irrecoverable amounts are recognised in profit or loss when there is objective evidence that the asset is impaired. The allowance recognised is measured as the difference between the asset’s carrying amount and the present value of estimated future cash flows discounted at the effective interest rate computed at initial recognition. 60 FOR THE YEAR ENDED 31 MARCH 2019NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)ECO Animal Health Group Plc | Annual Report 2018/19 2.18 Cash and cash equivalents Cash and cash equivalents include cash in hand, deposits held on call with banks, other short-term highly liquid investments with original maturities of three months or less and bank overdrafts. Bank overdrafts are shown within borrowings in current liabilities in the statement of financial position. 2.19 Adoption of IFRS 9 financial instruments The Group has applied IFRS 9 for the year to 31 March 2019 and this did not have a material impact on the Group’s classification, measurement and impairment at or from the date of initial application namely 1 April 2018. This conclusion was reached after a review of the Group’s recent loss experience and an assessment of likely future market changes determined that the credit risk of the Group’s Financial Instruments has not increased since initial recognition, either over the next twelve months, or for the lifetime of the Financial Instrument concerned. 2.20 Financial liabilities and equity Financial liabilities and equity instruments are classified according to the substance of the contractual arrangements entered into. An equity instrument is any contract that evidences a residual interest in the assets of the Group after deducting all of its liabilities. 2.21 Bank borrowings and loans Interest-bearing bank loans and overdrafts are recorded as the proceeds received, net of direct issue costs (which equate to fair value). Finance charges including premiums payable on settlement or redemption and direct issue costs are accounted for on an accruals basis in profit or loss using the effective interest rate method and are added to the carrying amount of the instrument to the extent that they are not settled in the period in which they arise. 2.22 Trade payables Trade payables are initially measured at fair value and are subsequently measured at amortised cost using the effective interest rate method. 2.23 Provisions Provisions are recognised when the Group has a present obligation as a result of a past event and it is probable that the Group will be required to settle the obligation. Provisions are measured at the Directors’ best estimate of the expenditure required to settle the obligation outstanding at the year end and are discounted to present value where the effect is material. 2.24 Revenue recognition The Group has adopted IFRS 15 “Revenue from Contracts with Customers” for the year ended 31 March 2019 which did not have any material impact on the Group’s transactions or the Group’s reported revenue or profit before tax. Revenue comprises the fair value of the consideration received or receivable for the sale of goods in the ordinary course of the Group’s activities. Revenue is shown net of value added tax, returns, rebates and discounts and after eliminating sales within the Group. The performance obligation is recognised when control of the goods passes to the customer, which is normally upon shipment and when the amount of revenue can be measured reliably. No goods are despatched on a sale or return basis. Distributors trade on their own account and not as agents. 61 FOR THE YEAR ENDED 31 MARCH 2019NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) The Group also receives interest, rental income, royalty income and management charges in respect of accounting services supplied to certain ex-subsidiaries. The amounts are small and are recognised on an accruals basis. 2.25 Pensions Defined contribution scheme The pension costs charged against operating profits represent the amount of the contributions payable to the schemes in respect of the accounting period. Defined benefit scheme The regular cost of providing retirement pensions and related benefits is charged to the income statement over the employees’ service lives on the basis of a constant percentage of earnings. The present value of the defined benefit obligation less the fair value of the plan assets is disclosed as an asset or liability in the statement of financial position in accordance with IAS 19. The disclosure of a net defined benefit asset is limited to the present value of any economic benefit available in the form of refunds from the plan or reductions in future contributions to the plan. Actuarial gains or losses are taken directly to equity in the statement of comprehensive income. 2.26 Share-based payments The Group issues equity-settled share-based payments to certain employees in exchange for services from those employees. Equity-settled share-based payments are measured at fair value (excluding the effect of non-market based vesting conditions) at the date of grant. The fair value determined at the grant of such equity-settled share-based payments is expensed on a straight- line basis over the vesting period, based on the Group’s estimate of shares that will eventually vest and adjusted for the effect of non-market based vesting conditions (with a corresponding movement in equity). Fair value is measured by use of the Black-Scholes model. The expected life used in the model has been adjusted, based on management’s best estimate, for the effects of non-transferability, exercise restrictions and behaviour considerations. Further details of the inputs to the Black-Scholes model can be found in note 23 to the accounts. 2.27 Taxation Tax expense for the period comprises current and deferred tax. Current tax, including UK corporation tax and foreign tax is provided at amounts expected to be paid (or recovered) using the tax rates and laws that have been enacted or substantially enacted by the year end. Tax expenses are recognised in the income statement or statement of comprehensive income according to the treatment of the transactions which give rise to them. Deferred income tax is recognised, using the liability method, on temporary differences arising between the tax basis of assets and liabilities and their carrying amount in the financial statements. Deferred income tax is determined using tax rates (and laws) that have been enacted, or substantially enacted, by the date of the statement of financial position and are expected to apply when the related deferred tax asset is realised or deferred tax liability is settled. Deferred tax assets are recognised only to the extent that it is probable that future taxable profits will be available against which the temporary differences can be utilised. 62 FOR THE YEAR ENDED 31 MARCH 2019NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)ECO Animal Health Group Plc | Annual Report 2018/19 2.28 Equity 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. Amounts arising on the restructuring of equity and reserves to protect creditor interests are credited to the capital redemption reserve. The cost of its own shares bought into treasury by the Company is debited to retained earnings as required by the Companies Act 2006. A subsequent sale of these shares would result in this entry being wholly or partly reversed with any profit on the sale being credited to share premium. For each business combination, the Group elects to measure any non-controlling interest in the acquiree either at fair value or at their proportionate share of the acquiree’s identifiable net assets which are generally at fair value. Changes in the Group’s interest in a subsidiary that do not result in a loss of control are accounted for as transactions with owners in their capacity as owner. Adjustments to non-controlling interests are based on a proportionate amount of the net assets of the subsidiary. No adjustments are made to goodwill and no gain or loss is recognised in the statement of profit or loss. 2.30 Dividend distribution Final dividend distributions to the Company’s shareholders are recognised as liabilities in the financial statements in the period in which they are approved by the Company’s shareholders. Interim dividends are recognised when they are paid. 2.31 Critical accounting estimates and judgements The Group makes estimates and assumptions concerning the future. The resulting accounting estimates will, by definition, seldom equal the related actual results. The estimates and assumptions that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year are: • Estimated impairment value of intangible assets The Group tests annually whether intangible assets with indefinite life have suffered any impairment. Other intangible assets are reviewed for impairment when an indication of potential impairment exists. Impairment provisions are recorded as applicable based on Directors’ estimates of recoverable values. Details of the impairment reviews performed can be found in note 11 of the financial statements. • Income taxes The Group is subject to income taxes predominantly in the United Kingdom but also in other jurisdictions. Significant estimates are required in determining the provision for income taxes. There are some transactions and calculations for which the ultimate tax determination is uncertain. The Group recognises assets and liabilities based on estimates of the final agreed position. Where the final tax outcome of these matters is different from the amounts that were initially recorded, such differences will impact the income tax and deferred tax provisions in the period in which such determination is made. • Pension scheme The Group maintains one defined benefit pension scheme which has been accounted for according to the provisions of IAS 19. Although the assumptions were determined by a qualified actuary, any change in those assumptions may materially impact the financial position and results of the Group. Details of the assumptions used can be found in note 22 of the financial statements. • Share-based payments The charge to the Income Statement in respect of share-based payments has been externally calculated using management’s best estimates of the amount of options expected to vest and various other inputs to the Black-Scholes model, as disclosed in note 23. Any variation in those assumptions may have a material impact on the Group’s future results and financial position. 63 FOR THE YEAR ENDED 31 MARCH 2019NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 3. Segment information Management has determined the operating segments based on the reports reviewed by the Board that are used to make strategic decisions. The Board considers the business from a geographical perspective. Geographically, management considers the performance in the Corporate/UK and China and Japan, North America, South and South East Asia, Latin America, Europe and the Rest of the World. Management considers Earnings before Interest, Tax, Depreciation and Amortisation (“EBITDA”), adjusted for share-based payments. Corporate/ U.K. China & Japan North America S & SE Asia Latin America Europe Rest of World Total £000's £000's £000's £000's £000's £000's £000's £000's 1,422 - 35,861 (7,613) 31,230 (17,796) 11,038 - 14,287 (3,192) 7,594 - 1,747 - 103,179 (28,601) 1,422 28,248 13,434 11,038 11,095 7,594 1,747 74,578 1,422 - 1,422 (2,818) 22,272 28,248 13,434 11,038 11,095 - - - - 28,248 13,434 11,038 11,095 9,298 33,621 3,589 18,197 1,147 - 36,798 (9,198) 26,203 (14,990) 4,278 18,910 10,623 - 2,152 19,550 10,924 (4,088) 7,594 - 7,594 2,750 14,907 8,246 - 1,591 156 1,747 700 4,307 74,422 156 74,578 19,949 131,764 1,536 95,477 - (28,276) 1,147 27,600 11,213 10,623 6,836 8,246 1,536 67,201 1,147 - 1,147 (2,614) 24,429 27,600 - 27,600 9,908 29,466 11,213 - 11,213 4,118 12,179 10,623 6,836 8,246 - - - 10,623 6,836 8,246 3,942 17,209 791 15,609 1,880 14,499 1,329 207 1,536 576 3,794 66,994 207 67,201 18,601 117,185 Year ended 31 March 2019 Total segment revenue Inter-segment revenue Revenue from external customers Sale of goods Royalties Adjusted EBITDA Total Assets Year ended 31 March 2018 Total segment revenue Inter-segment revenue Revenue from external customers Sale of goods Royalties Adjusted EBITDA Total Assets 64 FOR THE YEAR ENDED 31 MARCH 2019NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)ECO Animal Health Group Plc | Annual Report 2018/19 Goodwill and other intangible assets are initially allocated to the geographical segments on the basis of the proportion of sales achieved by each segment. A reconciliation of adjusted EBITDA for reportable segments to profit before tax is provided as follows: Adjusted EBITDA for reportable segments Depreciation Revaluation of freehold property Revaluation of investment property 2019 £000's 19,949 (720) 55 - 2018 £000's 18,601 (298) - 15 Amortisation (3,982) (3,428) Share-based payment charges Finance income/(costs) Share of associate's results Profit before tax on continuing activities 4. Other income Management charges Rental income Sundry income (631) 562 14 15,247 2019 £000's 30 - 5 35 (778) (247) 7 13,872 2018 £000's 150 58 228 436 65 FOR THE YEAR ENDED 31 MARCH 2019NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 5. Result from operating activities Result from operating activities is stated after charging/(crediting) Cost of inventories recognised as an expense Employee benefits expenses Amortisation of intangible assets (note 11) Depreciation (notes 12 & 14) Revaluation of freehold property (note 12) Revaluation of investment property (note 13) Loss on foreign exchange transactions Research and development Operating lease rentals expensed Fees payable to the Company's auditor for the audit of the parent Company and Group annual accounts For the audit of the Company's subsidiaries Fees payable for audit of the Company's subsidiaries pursuant to legislation Earnings Before Interest, Tax, Depreciation, Amortisation and impairment, share-based payments and foreign exchange differences (adjusted EBITDA) Profit from operating activities Depreciation Revaluation of freehold property Revaluation of investment property Amortisation Share-based payments Foreign exchange differences Management believe that adjusted EBITDA is the most appropriate measure of the Group’s performance as it is the initial source for all re-investment and for all returns to shareholders. Investors, bankers and analysts all focus on this important measure of cash flow because it enables them to make judgements about the Group’s ability to generate sufficient cash to meet all the re-investment needs of the business while still providing adequate returns to shareholders. Therefore, adjusted EBITDA has a direct relationship with the value of the Group and is seen by our investors as a Key Performance Indicator for management. 66 2019 £000's 40,614 8,829 3,982 720 (55) - 138 49 - 18 52 14 2019 £000's 14,671 720 (55) - 3,982 631 19,949 138 20,087 2018 £000's 34,887 8,567 3,428 298 - (15) 970 81 495 17 42 14 2018 £000's 14,112 298 - (15) 3,428 778 18,601 970 19,571 FOR THE YEAR ENDED 31 MARCH 2019NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)ECO Animal Health Group Plc | Annual Report 2018/19 The following items are adjusted for in the calculation of adjusted EBITDA as defined by the Group. Item Rationale for Adjustment Depreciation and Amortisation Revaluation of Investment Property Gains and losses on Disposal of Fixed Assets and Impairment of Intangibles Share Based Payments Foreign Exchange differences These items are a result of past investments and therefore, although they are correctly recorded as a cost of the business, they do not reflect current or future cash outflows. Additionally, Depreciation and Amortisation calculations are subject to judgement regarding useful lives and residual values of particular assets and the adjustment removes the element of judgement. These are subject to judgement and do not reflect cash flows. These items are viewed as adjustments to depreciation and amortisation and therefore the rationale for depreciation and amortisation applies. This item is subject to judgement and will never be reflected in the Group’s cash flows. Since the key driver of this figure is the revaluation of monetary assets denominated in foreign currency at the period end, which often reverse later, taking this figure out of the EBITDA figure removes volatility from the performance measure. Foreign exchange movements are largely outside of the Group’s control, so this gives a better measure of the Group’s progress than statutory profit measures which include them. 6. Finance income/(costs) Finance income Interest received on short term bank deposits Foreign exchange differences on bank balances Finance costs Interest paid Interest paid on finance lease obligations Foreign exchange differences on bank balances 2019 £000's 2018 £000's 127 504 631 (1) (68) - (69) 562 138 - 138 (14) - (371) (385) (247) 67 FOR THE YEAR ENDED 31 MARCH 2019NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 7. Earnings per share The calculation of basic earnings per share is based on the post-tax profit for the year divided by the weighted average number of shares in issue during the year. 2019 2018 Earnings Weighted average number of shares Per share amount Earnings Weighted average number of shares Per share amount £000's 000's (pence) £000's 000's (pence) Earnings attributable to ordinary shareholders on continuing operations after tax Dilutive effect of share options Fully diluted earnings per share 11,755 66,794 - 11,755 943 67,737 17.60 (0.25) 17.35 9,315 - 9,315 65,646 605 66,251 Diluted earnings per share takes into account the dilutive effect of share options. 8. Taxation Current tax year Foreign corporation tax on profits for the year Withholding tax on intercompany dividend Research and development tax credits claimed in the year Research and development tax credits - adjustment for prior year Deferred tax Origination and reversal of temporary differences Due to change in effective rate Income tax charge 2019 £000's 1,655 92 (285) (104) 411 (89) 1,680 14.19 (0.13) 14.06 2018 £000's 1,852 78 (40) 69 266 - 2,225 68 FOR THE YEAR ENDED 31 MARCH 2019NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)ECO Animal Health Group Plc | Annual Report 2018/19 Factors affecting the tax charge for the year Profit on ordinary activities before taxation 2019 £000's 15,247 2018 £000's 13,872 Profit on ordinary activities before taxation multiplied by the applicable rate of UK corporation tax of 19% (2018: 19%) 2,897 2,636 Effects of: Non deductible expenses Non chargeable credits Withholding tax on inter-company dividends Enhanced allowance on research and development expenditure Different tax rate for foreign subsidiaries Reduced effective deferred tax rate Unused tax losses carried forward Patent box claim Income tax charge Applicable tax rate per UK legislation Effects of: Non deductible expenses Non chargeable credits Withholding tax on inter-company dividends Enhanced allowance on research and development expenditure Different tax rate for foreign subsidiaries Reduced effective deferred tax rate Unused tax losses carried forward Patent box claim Effective tax rate Future tax changes Changes to the UK corporation tax rates were substantively enacted as part of the Finance Bill 2016 (on 6 September 2016). These include reductions to the main rate to reduce the rate to 17% from 1 April 2020. Deferred taxes at the balance sheet date have been measured at this rate (2018: hybrid tax rate of 18%). 470 (984) 92 (928) 348 (89) 141 (267) 1,680 2019 % 19.00 3.08 (6.45) 0.60 (6.09) 2.28 (0.58) 0.93 (1.75) 11.02 305 (397) 78 (736) 451 - 90 (202) 2,225 2018 % 19.00 2.20 (2.86) 0.56 (5.31) 3.25 - 0.65 (1.45) 16.04 69 FOR THE YEAR ENDED 31 MARCH 2019NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 9. Profit for the financial year Parent Company's profit for the financial year 2019 £000's 15,041 2018 £000's 76 The Company has elected to take the exemption under Section 408 of the Companies Act 2006 not to present the Parent Company income statement. 10. Dividends Non-recurring dividend for the year ended 31 March 2019 of 3.5p per ordinary share Dividend for the year ended 31 March 2018 of 9.2p per ordinary share Dividend for the period ended 31 March 2017 of 7.1p per ordinary share 2019 £000's 2,350 6,135 - 8,485 2018 £000's - - 4,660 4,660 The Board is proposing a dividend of 7.04p per ordinary share in respect of the year ended 31 March 2019, which, when taken with the 4.0p per ordinary share paid in April 2019 will total 11.04p per ordinary share, not including the “one-off” dividend (of 3.5p per ordinary share) paid in January 2019. 70 FOR THE YEAR ENDED 31 MARCH 2019NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)ECO Animal Health Group Plc | Annual Report 2018/19 11. Intangible fixed assets Group Cost At 1 April 2017 Additions - internally generated At 1 April 2018 Additions - internally generated At 31 March 2019 Amortisation At 1 April 2017 Charge for the year At 1 April 2018 Charge for the year At 31 March 2019 Net Book Value At 31 March 2019 At 31 March 2018 At 31 March 2017 The amortisation and impairment charges are included within administrative expenses on the income statement. Entity Date of acquisition Distribution rights are amortised over their estimated useful life of 20 years and reviewed for impairment when any indication of potential impairment exists. The remaining amortisation period at the date of the financial statements ranged from 5 to 15 years. The carrying value of goodwill is attributable to the following cash generating units: ECO Animal Health Limited 1 October 2004 Zhejiang Eco Biok Animal Health Products Limited 1 April 2007 ECO Animal Health Japan Inc 24 December 2009 Goodwill Distribution rights Drug registrations, patents and licence costs Total £000's £000's £000's £000's 17,930 - 17,930 - 17,930 - - - - - 17,930 17,930 17,930 1,442 - 1,442 - 1,442 759 72 831 72 903 539 611 683 67,643 7,176 74,819 9,085 83,904 32,373 3,356 35,729 3,910 39,639 44,265 39,090 35,270 87,015 7,176 94,191 9,085 103,276 33,132 3,428 36,560 3,982 40,542 62,734 57,631 53,883 £000’s 17,359 94 477 17,930 71 FOR THE YEAR ENDED 31 MARCH 2019NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Goodwill acquired in a business combination is allocated at acquisition to the cash generating units (CGU’s) that are expected to benefit from the business combination. The recoverable amounts of the CGU’s are determined from value in use calculations. The key assumptions for the value in use calculations are those regarding discount rates, growth rates and the estimated remaining useful life of the asset which is maintained at 30 years through ongoing investment in the cash generating unit. The Group prepares cashflow forecasts derived from the most recent financial budgets and projections that are approved by management for the year ahead and then extrapolates them assuming a 3% annual growth rate which is well below the current performance of the existing business. The Directors believe that the long-term growth rate assumed does not exceed the average long-term growth rate for the relevant markets. Management estimates discount rates using the pre-tax rates that reflect current market assessments of the time value of money and the risks specific to the CGU’s. In the current year management estimated the applicable rate to be 11%. Management considers that there is adequate headroom when comparing the net present value of the cash flows to the carrying value of goodwill to conclude that no impairment is necessary this year. On current assumptions the excess of recoverable amount over carrying value is over £136 million (2018: £106 million). Management believes that the most significant assumption in the calculation of value in use is the estimated growth rate. However, even if the growth rate were to be zero, the recoverable amount would still be over £98 million more than the carrying value and no impairment would be necessary. The net book value of Drug registrations and licenses can be broken down as follows: Aivlosin® Ecomectin Others £000’s 39,082 2,743 2,440 44,265 Aivlosin is a highly effective antibiotic that treats a range of specific enteric (gut) and respiratory diseases in pigs and poultry, ensuring a rapid return to health. In addition to the welfare benefits, healthy animals gain weight faster, digest food more efficiently and get to market earlier which all bring economic benefit to the farmer. Substantial ongoing product development covering more formulations, species and diseases is expected to substantially further increase its revenue generating potential. The remaining useful life is from 4 to 20 years. Ecomectin is an endectocide that controls worms, ticks, lice and mange in grazing stock and pigs. The remaining useful life is 0 to 10 years. Drug registrations and licences are amortised over their estimated useful lives of 10 to 20 years, which is the Directors’ estimate of the time it would take to develop a new product allowing for the Group’s patent protection and the exclusivity period which comes with certain registrations. The Directors have conducted an impairment review in the current year by preparing cash flow projections for the year ahead and extrapolating the results for the remaining life of the registrations assuming zero growth and an 11% discount rate to establish value in use. On the current assumptions, (which assume a remaining life of only 5 years) the excess of the value in use over carrying value is almost £32 million (2018: £23 million). Fair value calculated as 10 times the annual current cash generated by the registrations gives an even higher value of £195 million and this higher figure determines the recoverable amount, so management has again concluded that no impairment is necessary. 72 FOR THE YEAR ENDED 31 MARCH 2019NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)ECO Animal Health Group Plc | Annual Report 2018/19 12. Property, plant and equipment Group Cost or valuation At 1 April 2017 Additions Foreign exchange movements Disposals At 31 March 2018 Additions Revaluation in the year Foreign exchange movements Disposals At 31 March 2019 Depreciation At 1 April 2017 Charge for the year Foreign exchange movements Disposals At 31 March 2018 Charge for the year Revaluation in the year Foreign exchange movements Disposals At 31 March 2019 Net Book Value At 31 March 2019 At 31 March 2018 At 31 March 2017 Land and Buildings (freehold) Plant and machinery Fixtures, fittings and equipment Motor Vehicles Total £000’s £000’s £000’s £000’s £000’s 730 - - - 730 - 30 - - 760 13 13 - - 26 - (26) - - - 760 704 717 1,541 106 (31) (14) 1,602 341 - 11 (68) 1,886 737 154 (13) (14) 864 171 - 6 (63) 978 908 738 804 865 218 - - 1,083 198 - 1 - 1,282 587 119 - - 706 154 - - - 860 422 377 278 75 - (9) (5) 61 27 - (6) - 82 9 12 (2) (5) 14 15 - (1) - 28 54 47 66 3,211 324 (40) (19) 3,476 566 30 6 (68) 4,010 1,346 298 (15) (19) 1,610 340 (26) 5 (63) 1,866 2,144 1,866 1,865 73 The freehold property at 78 Coombe Road, New Malden was valued on 4 June 2019 by Mr R Sworn of Kelion Sworn Chartered Surveyors and Valuers, London, W1. The fair value in use of the freehold property was determined at £760,000 by means of applying a 7.5% discount rate to the annual rental value of the property as determined by local market conditions. The property will continue to be valued on a regular basis. The value of non-depreciable land included within Land and Buildings is £180,000. FOR THE YEAR ENDED 31 MARCH 2019NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) The freehold property of 78 Coombe Road, New Malden is subject to a legal charge held by the Company’s bankers dated 20 March 1987. The value of the freehold property would have been recorded at £259,000 (2018: £270,000) on a historical cost basis giving rise to the current revaluation surplus of £360,000, net of deferred tax provision. This balance is not distributable to shareholders. Depreciation has been included in the administrative expenses line on the income statement, except for £110,000 (2018: £99,000) of depreciation of production equipment in the Chinese subsidiary ECO Biok, which is included within cost of sales. Company Land and Buildings (freehold) Fixtures, fittings and equipment Total Cost or valuation £000’s £000’s £000’s 730 - 730 - 30 760 12 13 25 - (25) - 760 705 718 163 2 165 2 - 167 150 4 154 4 - 158 9 11 13 893 2 895 2 30 927 162 17 179 4 (25) 158 769 716 731 At 1 April 2017 Additions At 1 April 2018 Additions Revaluation in the year At 31 March 2019 Depreciation At 1 April 2017 Charge for the year At 31 March 2018 Charge for the year Revaluation in the year At 31 March 2019 Net Book Value At 31 March 2019 At 31 March 2018 At 31 March 2017 74 FOR THE YEAR ENDED 31 MARCH 2019NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)ECO Animal Health Group Plc | Annual Report 2018/19 13. Investment property Group and Company Cost/Revaluation At 1 April 2017 Revaluation in 2018 At 31 March 2018 and 2019 Depreciation At 1 April 2017 Revaluation in 2018 At 31 March 2018 and 2019 Net Book Value At 31 March 2019 At 31 March 2018 At 31 March 2017 Land and Buildings (freehold) Total £000’s £000’s 189 11 200 4 (4) - 200 200 185 189 11 200 4 (4) - 200 200 185 The property in Western Road, Mitcham was valued at £200,000 as at 31 March 2018 by Mr R. Sworn of Kelion Sworn Chartered Surveyors, London W1. This property was previously the Head Office of Lawrence plc (now ECO Animal Health Group plc) and is occupied by a charity. The Directors believe that the open market value of this property is not significantly different to the carrying value. The value of the investment property would have been recorded at £133,000 on a historical cost basis. The current revaluation surplus is £36,000 net of deferred tax provision. This balance is not distributable to shareholders. 75 FOR THE YEAR ENDED 31 MARCH 2019NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Land and Buildings Motor Vehicles £000's £000's Other £000's 2,297 118 - 2,415 328 318 - 646 1,769 203 85 (19) 269 70 60 (19) 111 158 7 - - 7 2 2 - 4 3 Motor Vehicles £000's Other £000's 21 26 47 7 13 20 27 7 - 7 2 2 4 3 Total £000's 2,507 203 (19) 2,691 400 380 (19) 761 1,930 Total £000's 28 26 54 9 15 24 30 14. Right of use assets Group Cost Introduction on inception of IFRS 16 Additions Disposals At 31 March 2019 Depreciation Introduction on inception of IFRS 16 Charge for the year Disposals At 31 March 2019 Net Book Value At 31 March 2019 Company Cost Introduction on inception of IFRS 16 Additions At 31 March 2019 Depreciation Introduction on inception of IFRS 16 Charge for the year At 31 March 2019 Net Book Value At 31 March 2019 76 FOR THE YEAR ENDED 31 MARCH 2019NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)ECO Animal Health Group Plc | Annual Report 2018/19 15. Fixed asset investment Group At 1 April 2017 Share of associates' result for the year Foreign exchange differences At 31 March 2018 Share of associates' result for the year Foreign exchange differences At 31 March 2019 Company Cost At 1 April 2017 Written off in 2018 At 31 March 2018 and 2019 Impairment At 1 April 2017 Eliminated in 2018 At 31 March 2018 and 31 March 2019 Net Book Value At 31 March 2019, 2018 and 2017 Investment in Associate Unlisted investments (Equity) £000's (Cost) £000's 88 7 (6) 89 14 4 107 9 - - 9 - - 9 Unlisted investments (Subsidiaries) £000's 21,273 (1,196) 20,077 1,191 (1,191) - Total £000's 97 7 (6) 98 14 4 116 Total £000's 21,273 (1,196) 20,077 1,191 (1,191) - 20,077 20,077 77 FOR THE YEAR ENDED 31 MARCH 2019NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) The Company holds more than 20% of the share capital of the following companies: Company Registered office address Subsidiary undertakings held by Company Country of registration or incorporation Class Shares held % Zhejiang ECO Biok Animal Health Products Limited Zhongguan Industrial Area, Deqing, Zhejiang Province P. R. China Ordinary Shanghai ECO Biok Veterinary Drug Sale Company Ltd (via Zhejiang ECO Biok Animal Products Ltd) Room 1502-3, Imago Plaza, No. 99 Wuning Road, Ptro District, Shanghai 200063 P. R. China Ordinary 3 3 Petlove Limited ECO Animal Health Limited 78 Coombe Road, New Malden, Surrey, KT3 4QS 78 Coombe Road, New Malden, Surrey, KT3 4QS Great Britain Ordinary 91 Great Britain Ordinary 100 Subsidiary undertakings held by Group ECO Animal Health Southern Africa (Pty) Limited 228 Athol Road, Highlands North, Johannesburg 2192 South Africa Ordinary 100 Zhejiang ECO Biok Animal Health Products Limited Zhongguan Industrial Area, Deqing, Zhejiang Province P. R. China Ordinary 48 Shanghai ECO Biok Veterinary Drug Sale Company Ltd. (via Zhejiang ECO Biok Animal Products Ltd) Room 1502-3, Imago Plaza, No. 99 Wuning Road, Ptro District, Shanghai 200063 P. R. China Ordinary 48 ECO Animal Health do Brasil Comercio de Produtos Veterinarios Ltda Av. Dr. Cardoso de Melo, 1470, Cl311, Villa Olimpia, CEP 04548-005, Sao Paulo Brazil Ordinary 100 ECO Animal Health Japan Inc 1-2-1, Hamamatsu-cho, Minato-Ku, Tokyo Japan Ordinary 100 ECO Animal Health USA Corp Interpet LLC 344 Nassau Street, Princeton, New Jersey, 08540 3775 Columbia Pike, Ellicott City, Maryland, 21043 U.S.A. U.S.A. Ordinary 100 Ordinary 100 ECO Animal Health de Mexico, S de R.L. de C.V Av Techologico Sur 134-4, Unidad Habitacional Moderna, Queretaro, 76030 Mexico Ordinary 100 ECO Animal Health de Argentina S.A Calle 4 E 43/44 N: 581 P.6 D:B La Plata, Buenos Aires Argentina Ordinary 100 ECO Animal Health Malaysia Sdn. Bhd 10th Floor, Menara Hap Seng, No 1 & 3, Jalan P Ramlee, 50250 Kuala Lumpur Malaysia Ordinary 100 ECO Animal Health India (Private) Ltd No 33/5, Second Floor, Mount Kailash Building, Meanee Avenue Road, Ulsoor Bangalore, Karnataka, 560042 ECO Animal Health Europe Ltd 6 Northbrook Road, Dublin 6, Eire India Ordinary 100 Republic of Ireland Ordinary 100 78 FOR THE YEAR ENDED 31 MARCH 2019NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)ECO Animal Health Group Plc | Annual Report 2018/19 The principal activity of these undertakings for the last relevant financial year was as follows: ECO Animal Health Limited ECO Animal Health Southern Africa (Pty) Limited Petlove Limited Principal activity Distribution of animal drugs Non-trading Non-trading Zhejiang ECO Biok Animal Health Products Limited Manufacture of animal drugs drugs Shanghai ECO Biok Veterinary Drug Sale Company Ltd Distribution of animal drugs ECO Animal Health do Brasil Comercio de Produtos Veterinarios Ltda Distribution of animal drugs ECO Animal Health Japan Inc ECO Animal Health USA Corp Interpet LLC Distribution of animal drugs Distribution of animal drugs Non-trading ECO Animal Health de Mexico, S. de R. L. de C. V Distribution of animal drugs ECO Animal Health de Argentina S.A ECO Animal Health Malaysia Sdn. Bhd ECO Animal Health India (Private) Ltd ECO Animal Health Europe Ltd Non-trading Non-trading Non-trading Non-trading 79 FOR THE YEAR ENDED 31 MARCH 2019NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) The aggregate amount of capital and reserves and the results of these undertakings for the last relevant financial year were: ECO Animal Health Limited ECO Animal Health Southern Africa (Pty) Limited Zhejiang ECO Biok Animal Health Products Ltd ECO Animal Health do Brasil Comercio de Produtos Veterinarios Ltda. ECO Animal Health Japan Inc. ECO Animal Health de Mexico, S. de R. L. de C. V. ECO Animal Health USA Corp. ECO Animal Health India (Private) Ltd ECO Animal Health Europe Ltd ECO Animal Health Malaysia Sdn Bhd Equity 2019 £000's 21,670 276 10,942 312 1,254 127 (350) - - (21) Profit/(loss) for the year 2019 £000's 10,131 19 3,698 (163) 176 62 (496) - - (7) Equity 2018 £000's 26,556 258 10,576 525 1,081 64 142 - - (14) Profit/(loss) for the year 2018 £000's 7,950 23 4,758 (442) 36 (39) 122 (1) - (3) The equity and results of Shanghai ECO Biok Veterinary Drug Sale Company Ltd are included within those disclosed for Zhejiang ECO Biok Animal Health Products Limited. All of the subsidiaries listed above were included in the consolidation for the year. Zhejiang ECO Biok Animal Health Products Limited and ECO Animal Health do Brasil Comercio de Produtos Veterinarios Ltda both have 31 December year ends. The Group receives management accounts for the three months to 31 March for these subsidiaries for use in preparing the consolidated financial statements. Interpet LLC has been excluded from consolidation as it holds no assets or liabilities and has ceased trading. The following trading subsidiaries have no requirement for audit under local legislation: • ECO Animal Health do Brasil Comercio de Produtos Veterinarios Ltda • ECO Animal Health Japan Inc • ECO Animal Health USA Corp • ECO Animal Health de Mexico, S. de R. L. de C. V Joint operations The Group also holds (by means of its ownership of ECO Animal Health USA Corp.), a 50% interest in Pharmgate Animal Health LLC, which is resident in the U.S.A. Pharmgate Animal Health LLC distributes the Group’s products in the U.S.A. The Group also holds a 50% interest in Pharmgate Animal Health Canada Inc, which distributes its products into Canada. 80 FOR THE YEAR ENDED 31 MARCH 2019NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)ECO Animal Health Group Plc | Annual Report 2018/19 The Group also holds (by means of its ownership of ECO Animal Health Europe Limited) a 50% interest in ECO-Pharm Limited, based in the Republic of Ireland. ECO-Pharm Limited has not yet commenced trading. Both Pharmgate Animal Health LLC and Pharmgate Animal Health Canada Inc. have accounting years which end on 31 December. The Group’s holdings in each of the joint operations’ share capital is given in the table below: Pharmgate Animal Health Canada Inc Common Shares Class A Shares Class B Shares Pharmgate Animal Health Canada Inc Common Shares Class A Shares Class B Shares ECO-Pharm Limited Common Shares Class A Shares Class B Shares Holding (shares) Shares in issue Holding % 100 100 - 200 100 100 50 100 - Holding (shares) Shares in issue Holding % 100 100 - 200 100 100 50 100 - Holding (shares) Shares in issue Holding % 25,000 50,000 1 - 1 1 50 100 - In the case of Pharmgate Animal Health Canada Inc and Pharmgate Animal Health USA LLC, A shares carry the rights to dividends payable out of profits attributable to the Group. These are made up of profits made by products supplied by the ECO Group plus 50% of any profit relating to new products developed jointly by the partners to the joint operation. In the case of ECO-Pharm Limited, profits attributable to the Group are made up of profits made by products supplied by the ECO Group plus 33% of any profit relating to new products developed jointly by the partners to the joint operation. 81 FOR THE YEAR ENDED 31 MARCH 2019NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) The following amounts included in the Group’s financial statements are related to its interest in these joint operations. Pharmgate Animal Health LLC Pharmgate Animal Health Canada Inc 2019 £000's 2,065 (2,044) 9,685 (1,736) 2018 £000's 1,155 (1,130) 8,299 (1,386) 2019 £000's 1,082 (1,082) 3,764 (348) 2018 £000's 616 (615) 2,958 (335) Current assets Current liabilities Sales Expenses Associated Company The Group also holds (by means of its ownership of ECO Animal Health Japan Inc.) a 47.62% interest in EcoPharma.com which is resident in Japan. This Company distributes Animal Health products and other general merchandise within Japan. ECO Animal Health Japan Inc’s holding in EcoPharma.com is 10,000,000 shares out of a total of 21,000,000 shares. The following amounts included in the Group’s financial statements are related to its interests in this associated Company. Investments (share of net assets) At 1 April Share of results for the year Foreign exchange movement At 31 March 2019 £000's 2018 £000's 89 14 4 107 88 7 (6) 89 82 FOR THE YEAR ENDED 31 MARCH 2019NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)ECO Animal Health Group Plc | Annual Report 2018/19 16. Inventories Group Company 2019 2018 2019 2018 £000's £000's £000's £000's Raw materials and consumables 10,422 12,975 Finished goods and goods for resale Work in progress 5,561 124 4,380 308 16,107 17,663 - - - - - - - - The cost of inventories recognised as an expense and included in cost of sales in the period amounted to £40,614,000 (2018: £34,887,000). 17. Trade and other receivables Group Company Non-current 2019 2018 2019 2018 £000's £000's £000's £000's Amounts owed by Group undertakings - - 58,510 46,236 Current 2019 2018 2019 2018 £000's £000's £000's £000's Group Company Trade receivables 27,841 15,777 Amounts owed by joint operations Other receivables Prepayments and accrued income 888 339 469 361 488 567 29,537 17,193 - - 35 11 46 - - 186 27 213 The provisions of IFRS9 “Financial Instruments” have been adopted during the year, using the Expected Credit Loss Model. This has had no material impact on the results. 83 FOR THE YEAR ENDED 31 MARCH 2019NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) As at 31 March 2019, trade receivables of £2,592,000 (2018: £4,020,000) due to the Group and £nil (2018: £nil) due to the Company were past due but not impaired. These relate to long standing distributors with whom we have agreed settlement terms and with whom there is no history of default. The ageing analysis of these trade receivables is as follows: Up to 3 months past due 3 to 6 months past due Over 6 months past due Group Company 2019 2018 2019 2018 £000's £000's £000's £000's 1,547 3,469 515 530 345 206 2,592 4,020 - - - - - - - - As at 31 March 2019, trade receivables of £280,000 (2018: £470,000) were impaired and provided for. The impaired receivables mainly relate to historic debt for which recovery is still being sought. The Group mitigates its exposure to credit risk by extensive use of commercial credit reference agencies, close management of its customers’ trading against terms offered and use of retention of title clauses wherever possible. The ageing analysis of the impaired balances is as follows: Current debt Up to 3 months past due 3 to 6 months past due Over 6 months past due Group Company 2019 2018 2019 2018 £000's £000's £000's £000's 1 - 68 211 280 86 19 19 346 470 - - - - - - - - - - Movement on the Group provision for impairment of trade receivables is as follows: 2019 2018 £000's £000's 470 (33) (157) 280 501 (5) (26) 470 Group Balance at 1 April (Recovered) in the year Written off in the year Balance at 31 March 84 FOR THE YEAR ENDED 31 MARCH 2019NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)ECO Animal Health Group Plc | Annual Report 2018/19 The carrying amounts of trade and other receivables are denominated in the following currencies: Pounds Sterling Euros U S Dollars Chinese RMB Brazilian Real Japanese Yen Canadian dollars Mexican Pesos Other currencies Group Company 2019 2018 2019 2018 £000's £000's £000's £000's 1,146 4,423 10,940 8,923 965 696 817 1,505 122 29,537 805 3,420 7,314 3,210 363 153 346 1,457 125 17,193 46 213 - - - - - - - - - - - - - - - - 46 213 The carrying amounts of trade and other receivables are not significantly different to their fair values. 18. Deferred tax Group Deferred tax assets and liabilities are attributable to the following: Liabilities Net 2019 2018 2019 2018 £000's £000's £000's £000's Drug registration expenditure (3,265) (3,031) (3,265) (3,031) Freehold property Investment property Plant and equipment (75) (10) (49) (79) (11) (60) (75) (10) (49) (79) (11) (60) Tax losses carried forward 1,783 1,888 1,783 1,888 Amount (payable) after more than one year (1,616) (1,293) (1,616) (1,293) The movement on the deferred tax account can be summarised as follows: Drug registration expenditure Freehold property Investment property Plant and machinery Total £000's £000's £000's £000's £000’s At 1 April 2018 (Charge)/credit for the year through income statement At 31 March 2019 (1,143) (339) (1,482) (79) 4 (75) (11) 1 (10) (60) (1,293) 11 (323) (49) (1,616) 85 FOR THE YEAR ENDED 31 MARCH 2019NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) The tax losses carried forward are not expected to expire under current legislation. Any future dividend received from the Chinese subsidiary Zhejiang ECO Biok Animal Health Products Limited will be subject to a 5% withholding tax. The deferred tax liability in respect of this has not been recognised. Company Freehold property Investment property At 1 April Credit/charge for the year through income statement At 31 March 2019 £000's (79) 4 (75) 2019 £000's (11) 1 (10) Total 2019 £000's (90) 5 (85) Freehold property Investment property 2018 £000's (79) - (79) 2018 £000's (8) (3) (11) Total 2018 £000's (87) (3) (90) A credit of £5,000 (2018: charge of £3,000) was recognised in the Company’s income statement for the year. 19. Cash and cash equivalents Cash and cash equivalents comprise cash and short-term deposits held by the Group. The carrying amount of these assets are not significantly different to their fair value. Group Company 2019 2018 2019 2018 £000's £000's £000's £000's 18,068 18,068 21,261 21,261 4,236 4,236 4,959 4,959 Group Company 2019 2018 2019 2018 £000's £000's £000's £000's 12,012 8,860 1,303 494 1,374 481 13,809 10,715 17 132 32 181 33 178 23 234 Cash and cash equivalents Net funds per cash flow 20. Trade and other payables Trade payables Other payables Accruals and deferred income 86 FOR THE YEAR ENDED 31 MARCH 2019NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)ECO Animal Health Group Plc | Annual Report 2018/19 21. Cash, net of borrowings Reconciliation of net cash flow to movement in net cash Net (decrease)/increase in cash and cash equivalents New borrowings Repayment of borrowings Exchange differences on cash and cash equivalents Movement in net cash in period Cash, net of borrowings at start of period Adjustment on inception of IFRS 16 Restated cash net of borrowings at end of period Cash and cash equivalents Lease obligations Cash, net of borrowings Overdraft facility Group Company 2019 £000's (3,686) (270) 406 493 (3,057) 19,137 - 16,080 18,068 (1,988) 16,080 2018 £000's 1,372 - - (713) 659 20,602 (2,124) 19,137 21,261 (2,124) 19,137 2019 £000's (723) (26) 17 - (732) 4,940 - 4,208 4,236 (28) 4,208 2018 £000's (3,725) - - - (3,725) 8,684 (19) 4,940 4,959 (19) 4,940 The Group has the facility to overdraw in specific currencies but no net facility. The interest rate for all currency overdrafts is 2.75% over the relevant currency base rate and the borrowings are secured by two debentures held over all assets of the Company dated 28 January 1995 and 28 November 2006. 22. Pension and other post-retirement benefit commitments Defined contribution pension scheme The Group operates defined contribution pension schemes for the benefit of certain Directors and senior employees. The assets of the schemes are held separately from the Group and independently administered by insurance companies. The pension cost charge represents contributions payable to the funds in the year and amounted to £321,000 (2018: £274,000). Defined benefit pension scheme The Group operates a defined benefit scheme in the UK for ex-employees only. A full actuarial valuation was carried out at 6 April 2018 and updated 31 March 2019 for IAS 19 purposes by a qualified independent actuary. The major assumptions used by the actuary were: 31 March 1 April 2019 2018 Discount rate 2.15% 2.4% Rate of increase in pension payment Inflation assumption with a maximum of 5% p.a. 2.25% 2.05% 2.25% 3.05% Mortality rates No pre-retirement mortality is assumed (2018: none) 87 FOR THE YEAR ENDED 31 MARCH 2019NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Post retirement mortality is based on 100% of the SAPS “S2” normal tables, based on the members’ year of birth, improving in line with CMI 2018 projections with a 1.25% long term trend rate (2018: same basis). Defined contribution pension scheme Under these mortality assumptions, the expected future lifetime for a member retiring at age 65 at the year end would be 21.7 years for males (2018: 22.1 years) and 23.7 years for females (2018: 24.1 years). For members retiring in 20 years time, the expectation of life would be 23.0 years for males (2018: 23.4 years) and 25.2 years for females (2018: 25.6 years). The weighted average term of the liabilities is 10 years (2018: 10 years). The scheme is exposed to a number of risks including: • Interest rate risk: Movements in the discount rate used could affect the present value of the defined benefit pension obligations. • Longevity risk: Changes in the estimated mortality rates of former employees could affect the present value of the defined benefit pension obligations. • Investment risk: Variations in the actual return from the scheme’s investments could affect the scheme’s ability to meet its future pension obligations. Results 2019 2018 £000's £000's £000's £000's Assets at start of year Defined benefit obligation at start of year Net (liability) at 1 April Expected return on assets Interest cost Past service cost (Loss) on asset return Gain/(loss) on changes in assumptions Statement of other comprehensive income Employer contributions (gross) Net (liability) at 31 March 2019 Actual assets at end of year Actual defined benefit obligation at end of year 2,503 (2,603) 61 (62) (19) (38) 2 2,314 (2,435) (100) (121) 65 (68) - (6) (9) (3) (15) 39 (100) 2,503 (2,603) (20) (36) 59 (97) 1,802 (1,899) The pension fund assets are all held within a policy managed by an insurance company. 88 FOR THE YEAR ENDED 31 MARCH 2019NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)ECO Animal Health Group Plc | Annual Report 2018/19 Reconciliation of changes in the asset value during the year 2019 2018 £000's £000's £000's £000's Fair value of assets at 1 April Expected return on assets (Loss) on asset return Employer contributions (gross) (Decrease)/increase in secured pensioners' value due to scheme experience Benefits paid Fair value of assets at 31 March 2019 Reconciliation of changes in the liability value during the year Defined benefit obligation at 1 April Interest cost Past service cost Loss on changes in assumptions (Decrease)/increase in secured pensioners' value due to scheme experience Benefits paid 2,503 61 (38) 59 (783) - 2,603 62 19 (2) (783) - 2,314 65 (7) 39 93 (1) 1,802 2,503 2,435 68 - 8 93 (1) Defined benefit obligation at 31 March 2019 1,899 2,603 The expected contribution to be paid by the employer during the next accounting year is £59,000. Year ended 31 March 2019 2018 2017 2016 2015 Fair value of plan assets Present value of defined benefit obligation (Deficit)/Surplus in plan Experience (losses)/gains on plan liabilities £000's £000's £000's £000's £000's 1,802 1,899 (97) - 2,503 2,603 (100) - 2,314 2,435 (121) (300) 2,715 2,431 284 13 2,985 2,782 203 2 89 FOR THE YEAR ENDED 31 MARCH 2019NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Defined benefit obligation – sensitivity analysis The following amounts are the effect (on the defined benefit obligation) of reasonably possible changes to the key actuarial assumptions, as required by IAS 19. Actuarial assumption Reasonably Possible Change (Decrease)/Increase in Defined Benefit Obligation 2019 2018 £000's £000's £000's £000's Discount rate Members' life expectancy (+/- 1%) (+/- 1year) (170) 100 190 (110) (27) 7 32 (7) The Company has given a floating charge dated 1 December 2006 over all of its assets to the trustees of the pension fund to secure all present and future obligations and liabilities to the pension fund. 23. Share-based payments The measurement requirements of IFRS2 have been implemented in respect of share options that were granted after 7 November 2002. The expense recognised for share-based payments made during the year is shown in the following table: 2019 2018 £000's £000's Total expense arising from equity settled share-based transactions 631 778 The share-based payment plans are described below: Movements in issued share options during the year The following table illustrates the number and weighted average exercise prices (WAEP) of and movements in, share options during the period: Options Options 2019 000's 5,556 387 (33) (1,618) 4,292 2,279 2019 WAEP £ 3.26 3.82 3.54 2.40 3.62 2.78 2018 000's 5,593 365 - (402) 5,556 910 2018 WAEP £ 2.96 6.20 - 1.77 3.26 1.97 Outstanding at 1 April Granted during the period Expired/cancelled during the period Exercised during the period Outstanding at 31 March Exercisable at 31 March The average share price during the year was 481.41p (2018: 587.34p). The maximum aggregate number of shares over which options may currently be granted cannot exceed 10% of the nominal share capital of the Company on the grant date. The options outstanding at 31 March 2019 had a weighted average share price of £3.62 (2018: £3.26) and a weighted average contractual life of 4.4 years (2018: 4.8 years). 90 FOR THE YEAR ENDED 31 MARCH 2019NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)ECO Animal Health Group Plc | Annual Report 2018/19 ECO Animal Health Group plc executive share option scheme In accordance with the Executive Share Option Scheme, approved and unapproved share options are granted to Directors and employees who devote at least 25 hours per week to the performance of duties or employment with the Company. Details of options granted to Directors can be found in the Directors Report and notes 29 (Directors Emoluments) and 31 (Related Party Transactions). The exercise price of the options is equal to the market price of the shares at the date of grant. The options vest three years from the date of grant and if the option holder ceases to be a Director or employee of the Company due to injury, disability, redundancy or retirement on reaching pensionable age or any other age at which they are bound to retire at in accordance with the terms of their contract of employment, the option may be exercised within a period of six months after the option holders so ceasing, although the Board may, at its discretion, extend this period by up to 36 months after the date of cessation. If the option holder ceases employment for any other reason, the option may not be exercised unless the Board permits. The approved and unapproved options will be forfeited where they remain unexercised at the end of their respective contractual lives of ten and seven years. An analysis of the expiry dates of the outstanding options is given below: Date of grant 11 October 2011 09 July 2012 09 October 2013 09 October 2013 21 August 2014 21 August 2014 13 February 2015 13 February 2015 26 August 2015 26 August 2015 18 December 2015 18 January 2016 18 January 2016 17 February 2016 17 February 2016 01 March 2016 01 March 2016 12 September 2016 12 September 2016 15 September 2016 15 September 2016 11 October 2016 11 October 2016 21 September 2017 21 September 2017 12 April 2018 23 October 2018 23 October 2018 19 December 2018 19 December 2018 Unapproved Approved Exercise price (pence) Expiry date 30,000 13,050 14,000 147,100 822,500 700,000 300,800 400 40,400 438,050 777,250 4,000 305,775 294,800 2,200 3,890,325 11,000 23,340 32,900 41,900 57,000 10,200 24,600 9,600 26,950 12,750 6,000 55,225 3,900 78,200 7,800 401,365 186.50 222.50 196.00 196.00 161.50 161.50 200.50 200.50 265.00 265.00 312.50 315.00 315.00 312.50 312.50 312.50 312.50 432.50 432.50 435.00 435.00 492.50 492.50 620.00 620.00 545.00 380.00 380.00 380.00 380.00 11 October 2021 09 July 2019 09 October 2023 09 October 2020 07 August 2024 07 August 2021 13 February 2025 13 February 2022 26 August 2025 26 August 2022 18 December 2022 18 January 2026 18 January 2023 17 February 2026 17 February 2023 01 March 2026 01 March 2023 12 September 2026 12 September 2023 15 September 2026 15 September 2023 11 October 2026 11 October 2023 21 September 2027 21 September 2024 12 April 2028 23 October 2028 23 October 2025 19 December 2028 19 December 2025 The market price of the shares at 31 March 2019 was 440.0p with a range in the year of 367.0p to 581.0p. 91 The Company uses a Black-Scholes model to value share-based payments and the following table lists the inputs to this model for the last five years. 2019 2018 2017 2016 2015 Vesting period (years) 3 3 3 3 3 Option expiry (years) 7-10 yrs 7-10 yrs 7-10 yrs 7-10 yrs 7-10 yrs Dividends expected on the shares Risk free rate (average) Volatility of share price Weighted average fair value (pence) 1.90% 1.00% 20% 51.0 1.10% 1.00% 20% 98.6 1.50% 1.00% 20% 61.4 1.50% 2.0-2.3% 1.00% 1.00% 20% 43.0 15% 19.2 The risk-free rate has been based on the yield from UK Government treasury coupons. The volatility of the share price was estimated based on standard deviation calculations on the historic share price. 24. Share capital Authorised 2019 £000’s 2018 £000’s 68,100,000 Ordinary shares of 5p each 3,405 3,405 10,790 Deferred ordinary shares of 10p each 32,334 Convertible preference shares of £1 each 1 32 1 32 3,438 3,438 Allotted, called up and fully paid 67,443,126 (2018: 65,824,816) Ordinary shares of 5p each 3,372 3,291 During the year 1,618,310 shares were issued at a premium of £3,803,000 as a result of the exercise of options by employees. (2018: 402,110 shares at a premium of £693,000). 92 FOR THE YEAR ENDED 31 MARCH 2019NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)ECO Animal Health Group Plc | Annual Report 2018/19 25. Non-controlling (minority) interests 2019 2019 2018 2018 £000's £000's £000's £000's Balance at 1 April 5,185 4,342 Share of subsidiary's profit for the year 1,812 Share of adjustment to reserves on implementation of IFRS 16 Share of foreign exchange gain/(loss) on net investment 1 9 2,332 - (100) Share of dividend paid by subsidiary Balance at 31 March 26. Other reserves Group and Company At 1 April 2017 Share-based payments Transfer to retained earnings on expiry of options At 31 March 2018 Share-based payments Transfer to retained earnings on expiry of options At 31 March 2019 1,822 (1,643) 5,364 2,232 (1,389) 5,185 Capital redemption reserve £000’s Reserve for share-based payments £000’s 106 - - 106 - - 106 2,343 778 (404) 2,717 631 (112) 3,236 Total £000’s 2,449 778 (404) 2,823 631 (112) 3,342 The only material other reserve remaining at the year end is the reserve for share-based payments which records the total amount which has been charged to the Group’s results in respect of unexpired share-based payment arrangements. Included in the Group’s retained earnings are the following exchange movements which have been taken directly to reserves on consolidation of the subsidiaries and joint operations listed below: At 1 April 2018 £000’s Movement in the year £000’s At 31 March 2019 £000’s In respect of: Zhejiang ECO Biok Animal Health Products Limited ECO Animal Health do Brasil Comercio de Produtos Veterinarios Ltda ECO Animal Health Japan Inc ECO Animal Health USA Corp ECO Animal Health de Mexico, S. de R. L. de C. V Pharmgate LLC Foreign currency differences attributable to owner credited directly to reserves 845 (330) (22) (26) 14 3 484 9 (51) 17 5 1 2 (17) 854 (381) (5) (21) 15 5 467 93 FOR THE YEAR ENDED 31 MARCH 2019NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 27. Amounts payable under lease arrangements: Land and Buildings 2019 £000’s Motor Vehicles 2019 £000’s Other 2019 £000’s Total 2019 £000’s 342 619 868 1,829 2,704 427 72 84 - 156 165 29 1 2 - 3 3 5 415 705 868 1,988 2,872 461 Expiry date: Within one year Between the second and fifth year Over five years Undiscounted lease obligations Development lease obligations Development lease obligations relate to assets used for development purposes which are separately categorised within intangibles (note 11). 28. Capital commitments The Group had no authorised capital commitments as at 31 March 2019 (2018: Nil). 29. Directors’ emoluments Emoluments for qualifying services Company pension contributions to money purchase schemes Share-based payments Benefits in Kind 2019 £000’s 1,226 16 404 16 1,662 2018 £000’s 1,310 15 425 14 1,764 During the year the Directors exercised 715,000 (2018: 75,000) share options realising a gain of £1,861,800 (2018: £358,875). The highest paid Director received £767,000 (2018: £800,000) including £191,000 (2018: £196,000) of share-based payments and £10,000 (2018: £10,000) of pension contributions. 94 FOR THE YEAR ENDED 31 MARCH 2019NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)ECO Animal Health Group Plc | Annual Report 2018/19 30. Employees Number of employees The average number of employees (including Directors) during the year was: Directors Production and development Administration Sales Employment costs (including amounts capitalised) Wages and salaries Share-based payments Social security costs Other pension costs 2019 Number 2018 Number 7 70 47 93 217 2019 £000’s 10,254 631 963 353 12,201 7 73 45 82 207 2018 £000’s 9,971 778 786 286 11,821 31. Related party transactions During the year P Lawrence and his family received dividends to the value of £882,000 (2018: £562,000). The other Directors and their families received dividends to the value of £2,000 (2018: £1,000). During the year, the Group provided management services to Anpario plc, a Company in which P A Lawrence is a Director and holds share options. Fees of £7,000 (2018: £40,000) were charged. During the year, the Group employed two adult children of P A Lawrence and provided their services to Emmelle Construction Limited, a Company in which P A Lawrence is both a Director and shareholder. All employment costs of the two adult children, for five months of the year until August 2018 when the arrangement was terminated, of £18,000 (2018: £44,000) were fully recharged to Emmelle Construction Limited. Interest and management charges from Parent to the other Group companies During the year, the Company made management charges on an arm’s length basis to ECO Animal Health Limited amounting to £473,000 (2018: £374,000) and charged interest of £910,000 (2018: £900,000) to the Company. Both of these charges were made through the inter-company account and were eliminated on consolidation. During the year Zhejiang ECO Biok Animal Health Products Limited paid dividends of £131,000 to ECO Animal Health Group plc (2018: £111,000) and £1,578,000 to ECO Animal Health Limited (2018: £1,355,000). During the year ECO Animal Health Group plc received a dividend of £15,000,000 from ECO Animal Health Limited. (2018: £nil). 95 FOR THE YEAR ENDED 31 MARCH 2019NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Inter Company guarantee ECO Animal Health Group plc and ECO Animal Health Limited have each given a guarantee dated 28 January 1995 to the Company’s bankers in respect of the foreign currency overdraft facility which has been extended to them jointly. Key management compensation The Group regards the Board of Directors as its key management. 2019 £000’s 2018 £000’s Salaries and short term benefits 1,242 1,324 Retirement benefits 16 15 Share-based payments 404 425 1,662 1,764 The number of Directors for which retirement benefits are accruing is 3 (2018: 3). 32. Financial instruments The Group uses financial instruments comprising borrowings, cash and liquid resources and various items, such as trade receivables, trade payables etc. that arise directly from its operations. The main purpose of these financial instruments is to raise finance for the Group’s operations. The Directors are responsible for the overall risk management. The main risks arising from the Group’s use of financial instruments are capital and liquidity risk, credit risk and foreign currency risks and they are summarised below. The policies have remained unchanged throughout the year. Capital and liquidity risk The Group manages its capital to ensure continuity as a going concern whilst maximising returns through the optimisation of debt and equity. As part of this, the Board considers the cost and risk associated with each class of capital. The capital structure of the Group consists of cash and cash equivalents in note 19 and equity attributable to equity holders of the parent comprising issued capital, reserves and retained earnings as disclosed in the Group’s statement of changes in equity. Liquidity risk is managed by maintaining adequate reserves and banking facilities with continuous monitoring of the latest developments by management. Within one year or on demand Trade payables 2019 £000’s 2018 £000’s 12,012 8,860 12,012 8,860 At 31 March 2019 the Group was contractually obliged to make repayments as detailed below: Credit risk is that of financial loss as a result of default by a counterparty on its contractual obligations. The Group’s exposure to credit risk arises principally in relation to trade receivables from customers and on short term bank deposits. Customers’ creditworthiness is wherever possible checked against independent rating databases and filing authorities or otherwise assessed on the basis of trade knowledge and experience. Exposure and customer credit limits are continually monitored both on specific debts and overall. 96 FOR THE YEAR ENDED 31 MARCH 2019NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)ECO Animal Health Group Plc | Annual Report 2018/19 The credit risk in relation to short term bank deposits and derivatives is limited because the counterparties are banks with good credit ratings. The Group operates in certain geographical areas which are from time to time subject to restrictions in the free movement of funds. The Board seeks to minimise the Group’s exposure to these markets but the nature of our business makes it impossible to eliminate this exposure completely. Currency risk The Group operates in overseas markets particularly through its subsidiaries in China, Brazil, Mexico, the USA and Japan and its joint operation in Canada and is subject to currency exposure on transactions undertaken during the year. The Group does some simple economic hedging of receivables when the Board feels it is appropriate to do so and foreign exchange differences on retranslation of foreign monetary items are taken to the income statement. The table below shows the extent to which the Group companies have monetary assets and liabilities in currencies other than in Sterling: Foreign currency of Group operations 2019 US Dollar Euros Rand Chinese RMB Japanese Yen Brazilian Real Canadian Dollar Mexican Peso Other Sterling equivalent (£000’s) 2018 Sterling equivalent (£000’s) 8,296 4,611 112 8,669 741 1,452 1,631 1,755 27 8,025 4,163 178 7,659 448 723 1,506 1,531 (15) At 31 March 2019 the Group was mainly exposed to the Dollar, Euro, the Chinese RMB, the Japanese Yen, the Brazilian Real, the Canadian Dollar and the Mexican Peso. The following table details the effect of a 10% movement in the exchange rate of these currencies against sterling when applied to outstanding monetary items denominated in foreign currency as at 31 March 2019. A positive number indicates the decrease in profit which would arise from a 10% weakening of the foreign currency concerned. US Dollar Euro Chinese RMB Japanese Yen Brazilian Real Canadian Dollar Mexican Peso 2019 £000’s 2018 £000’s 754 419 788 67 132 148 160 730 378 696 41 66 137 139 97 FOR THE YEAR ENDED 31 MARCH 2019NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Analysis of financial instruments by category Group 2019 Loans and receivables £000’s Financial liabilities £000’s Trade and other receivables (excluding prepayments) 29,068 Cash and cash equivalents 18,068 - - Total £000’s 29,068 18,068 Amounts due under leases - (1,988) (1,988) 2018 Loans and receivables £000’s Financial liabilities £000’s Trade and other receivables (excluding prepayments) 16,626 Cash and cash equivalents 21,261 - - Company 2019 Trade and other receivables (excluding prepayments) Cash and cash equivalents Loans and receivables £000’s Financial liabilities £000’s 35 4,236 - - Amounts due under leases - (29) 2018 Trade and other receivables (excluding prepayments) Cash and cash equivalents Loans and receivables £000’s Financial liabilities £000’s 186 4,959 - - Total £000’s 16,626 21,261 Total £000’s 35 4,236 (29) Total £000’s 186 4,959 All financial liabilities in the Group’s and Company’s statements of financial position are classified as held at amortised cost for both the current and previous year. 33. Post balance sheet event The Company paid a dividend of £2,697,725 to shareholders on 12th April 2019. 98 FOR THE YEAR ENDED 31 MARCH 2019NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)ECO Animal Health Group Plc | Annual Report 2018/19 99 REGISTERED OFFICE 78 COOMBE ROAD, NEW MALDEN, SURREY KT3 4QS ENGLAND TEL: +44 (0)20 8336 2900 FAX: +44 (0)20 8336 0909 WWW.ECOANIMALHEALTHGROUPPLC.COM