EKF Diagnostics Holdings plc
Annual Report 2018

Plain-text annual report

INDEX 1 Strategic Review Financial and Operational Highlights At a Glance Chairman’s Statement Chief Executive’s Review Finance Director’s Review Board of Directors 2-14 2 3 8 9 11 13 2 Corporate Governance 15-27 Strategic Report Report of the Directors Corporate Governance Statement Report of the Remuneration Committee Independent Auditors’ Report 3 Financial Statements Consolidated Income Statement Consolidated Statement of Comprehensive Income Consolidated and Company’s Statements of Financial Position Consolidated and Company’s Statements of Cash Flows Consolidated Statement of Changes in Equity Company Statement of Changes in Equity Notes to the Financial Statements 4 Additional Information Notice of Annual General Meeting Company Information 15 18 20 22 23 28-64 28 29 30 31 32 33 34 65-68 65 68 Financial and Operational Highlights 3 Financial Highlights • Revenue up 2% to £42.5m (2017: £41.6m) • Gross profit broadly flat at £22.7m (2017: £22.9m) • Adjusted EBITDA* up 15% to £10.7m (2017: £9.3m) • Profit before tax £12.2m (2017: £4.3m), over 2.8 times higher • Basic Earnings per share of 2.21p (2017: 0.59p), underlying basic earnings (excluding exceptional items and share based payments) of 1.01p (2017: 0.58p) • Cash generated from operations of £9.9m (2017: £10.1m) • Cash at 31 December 2018 of £10.3m (31 Dec 2017: £8.2m), net cash of £9.4m (31 Dec 2017: £7.0m) * Excluding exceptional items and share based payments Operational Highlights • Successful flotation of Renalytix AI plc creating significant shareholder value • Achieved US FDA 510(k) clearance for point-of-care and CLIA waiver for the DiaSpect Tm • Major private label distribution agreement with McKesson for the Tm • US FDA 510(k) clearance for Quo-Test in clinical laboratory setting • Upgrade to Elkhart (Indiana, USA) enzyme facility and contract to supply enzymes to US biopharma Oragenics for use in their pharmaceutical products 2018 Revenue 2018 2017 +/- Revenue (£m) £42.5 £41.6 +2% Net cash (£m) £9.4 £7.0 +34% Adjusted EBITDA (£m) £10.7 £9.3 +15% £42.5 2018 £38.6 2017 £41.6 £37.1 2016 2014 2013 £31.8 2015* £30.0 2%Increase in revenues year on year 2012 £26.1 HEMOGLOBIN REVENUES DIABETES REVENUES *Restated Annual revenues £m CENTRAL LABORATORY REVENUES FY 2018 £13,728 (£k) FY 2018 £10,964 (£k) FY 2018 £13,289 (£k) + 6% - 5% + 5% FY 2017 £12,911 (£k) FY 2017 £11,547 (£k) FY 2017 £12,597 (£k) Annual Report 2018 | EKF Diagnostics Holdings plcStrategic Review1 4 At a Glance Background EKF Diagnostics is a global medical diagnostics business with a long history in point-of-care testing and manufacturing reagents for use in central laboratories. Our point-of-care (POC) products, most of which are designed and manufactured in Germany, have a hard earned reputation for ease of use, reliability and accuracy from professionals working in diabetes, blood banking and sports medicine. The POC business is built around a large installed base of analysers each of which generates a regular demand for tests, often for the entire life cycle of the analyser. In 2018 we sold an estimated 76 million tests. This approach – sometimes known as the ‘razor/razorblade’ model – permits a percentage of organic growth each year. The EKF Central Laboratory range includes clinical reagents and centrifuges which are manufactured at premises near San Antonio, Texas. Clinical chemistry reagents are sold for use on open channel systems or on EKF’s own brand of analysers. EKF Life Sciences, based in Elkhart, Indiana, manufactures diagnostic enzymes and contracted custom products for use in medical diagnostics, pharmaceuticals and industry. 2018 Sales ANALYSERS sold TESTS sold 2018 14,087 -3% 2017 14,556 2018 76,241,694 +9% 2017 70,217,529 Geographical Performance Elkhart, IN Leipzig, DE Magdeburg, DE APAC (£k) FY 2018 £4,867 Moscow, RU EMEA (£k) FY 2018 £15,498 Shanghai, CN San Antonio, TX Americas (£k) FY 2018 £22,178 Revenue FY 2018 FY 2017 +/- (£k) APAC EMEA 4,867 4,210 657 15,498 17,005 (1,507) AMERICAS 22,178 20,369 1,809 Annual Report 2018 | EKF Diagnostics Holdings plcStrategic Review1Point-of-Care: Hemoglobin Analysers 5 Product Portfolio The hemoglobin product range within EKF Diagnostics is the largest in terms of revenues and the number of users. A number of OEM arrangements with distribution partners has provided EKF with access to significant geographic markets and industry sectors that complement a strong and loyal customer base. Hemo ControlTM DiaSpect Tm DiaSpect Hemoglobin T Low • Uses ‘gold standard’ methodology (reagent filled microcuvettes) • Data management capability; provides a hematocrit calculation • Proven, robust analyser sold worldwide • Handheld analyser utilising reagent-free cuvette technology • One second time to result and an extended shelf-life of microcuvettes • Connectivity to a mobile phone application available • Tests serum, plasma, aqueous solutions or stored erythrocytes • Estimates the degree of hemolysis • Results in less than two seconds • Reagent-free microcuvettes UltraCritTM HemataStat IITM • Hematocrit analyser which uses unique ultrasound technology • Strong presence in US blood banking sector • Laboratory hematocrit centrifuge and analyser • Processes multiple samples Strategy The EKF Diagnostics portfolio of hemoglobin and hematocrit analysers is unique within the Point of Care diagnostics sector. Sales are primarily focused around two markets – public health initiatives such as anaemia screening programmes, and private practices where the cost of testing is paid for by an insurance company or the patient. To approach these markets EKF has two distinct strategies: Firstly, OEM partnerships with international distributor/ manufacturers such as Fresenius Kabi; and secondly, agreements with smaller distributors who are focused on the public health opportunities within their own countries. Sports medicine and veterinary medicine provide two additional niche sources of customer for EKF distributors. EKF believes that this portfolio can provide it with a competitive advantage to grow its market share. In 2018 EKF sold more than 25 million tests for the DiaSpect Tm range, and 22 million tests for Hemo Control and HemoPoint® H2. Annual Report 2018 | EKF Diagnostics Holdings plcStrategic Review1 6 Point-of-Care: Diabetes Analysers Product Portfolio EKF’s Diabetes Care range aims to provide affordable, easy-to-use technology that reduces the costs of long-term healthcare of the diabetic and pre-diabetic population. Diabetes has been at the core of EKF’s strategy for over a decade starting with the early models of the Biosen glucose analysers. Later, Quo-Test and Quo-Lab were launched to address the diabetes screening market. Although they do not strictly belong within a point-of-care framework, clinical chemistry reagents such as Glycated Albumin, Glycated Serum Protein and Beta- Hydroxybutyrate add further provenance to EKF’s claim to be a significant contributor to diabetes care worldwide. BiosenTM Quo-Lab® A1c Quo-Test® A1c • HbA1c testing (Glycated Hemoglobin) • Results in four minutes using a unique methodology • Semi-automated analyser aimed at cost-sensitive markets • HbA1c testing (Glycated Hemoglobin) • Same methodology as Quo-Lab but fully automated • Simple operation requires minimal training • Glucose and/or lactate measurement • Two models, each aimed at different settings • Strong presence in Eastern Europe and China in diabetes clinics and research • Used by professional and amateur sports clubs to test lactate thresholds Strategy Although glucose testing is the most commonly used method of determining glycaemic control within diabetics, HbA1c is the accepted long-term barometer of patient wellbeing and their compliance with treatment regimes. The growth in acceptance of HbA1c measurement has seen an increasing number of entrants to the point-of-care HbA1c market focused on GP surgeries and diabetes clinics. Since transferring manufacturing from the UK to Germany EKF has engaged in programmes to automate the production of cartridges to increase capacity and improve quality. In addition, these changes have allowed EKF Diagnostics to make significant operational savings through the centralisation of manufacturing, warehousing and logistics, and customer service. Annual Report 2018 | EKF Diagnostics Holdings plcStrategic Review1 Point-of-Care: Women’s Health & Sports Performance 7 Product Portfolio The Women’s Health product range focuses on specialist diagnostics used to address conditions and complications associated with pregnancy and child birth. Products include the Creamatocrit centrifuge but also the use of our hemoglobin meters that are used in Women and Infant Clinics, pregnancy test kits and HbA1c analysers used to diagnose gestational diabetes in pregnant women. Sports Performance range is primarily comprised of Lactate Scout 4, a handheld blood analyser used ‘in the field’ by sports scientists. Creamatocrit PlusTM Pregnancy Testing Lactate Scout 4 • Small lab centrifuge used in Women and Infant Clinics • Measures the lipid concentration and caloric density of breast milk • Allows professionals to guide mothers with underweight infants Strategy • Cassette rapid tests • Marketed for use in hospital settings • Handheld lactate analyser • Results in 10 seconds • Developed for use in sports medicine • New model launched in November 2018 Lactate Scout has been sold into sports medicine for over a decade. It has been a popular tool with athletes in endurance activities such as cross-country skiing, cycling and rowing. This market also contributes significantly to Biosen revenues in which the lactate testing function is used in the preparation of elite squads of athletes such as Premier League and Bundesliga football teams and Olympians. Lactate Scout 4 was introduced in November 2018 with new functionality and a specific focus on sports medicine. Today, EKF is developing new applications for Lactate Scout 4 in other markets including veterinary medicine. Annual Report 2018 | EKF Diagnostics Holdings plcStrategic Review1 8 Central Laboratory Product Portfolio EKF, through its wholly owned subsidiary Stanbio Laboratory, has had a presence within central laboratory dating back over 50 years. During this time it has built a global customer base for its clinical chemistry reagents that can be used on most open-channel analyser platforms. The Central Laboratory business also includes the manufacture of enzymes, produced at EKF Life Sciences in Elkhart, Indiana. From this facility EKF Life Sciences sells enzymes used in Stanbio’s clinical chemistry portfolio as well as providing contract manufacturing services for enzymes and proteins used in industrial applications. These are then sold in bulk or used in the production of in-vitro diagnostic devices (IVDs). EKF Life Sciences received a significant investment in plant in 2018 to allow it to grow the services and products it provides. AltairTM240 Beta-Hydroxybutyrate • Automated bench-top analyser • Runs up to 400 tests per hour and can handle up to 43 different reagents • Calibrated to run the Stanbio Chemistry range of reagents • Liquid reagent for the early detection of ketosis • Primarily sold in USA through national distribution networks Procalcitonin Lucica Glycated Albumin-L • Liquid reagent for the detection of sepsis • Targeted at certain European markets • Confirms changes in blood glucose 1-2 weeks treatment • EKF is the exclusive distributor in the USA Strategy The central laboratory market continues to experience relatively low levels of growth. This is in part because sales of chemistry reagents are often linked to the provision of the analysers on which the tests are performed. EKF Diagnostics’ approach to the clinical chemistry market changed in late 2015 with the launch of the Altair 240, a benchtop analyser calibrated to run the Stanbio Chemistry range of reagents. Further opportunities continue to exist in niche markets. Sales of Beta-Hydroxybutyrate Liquicolor reagent continue to be healthy with a strong performance from US distributors who have developed a market capitalising on the withdrawal of a previous method of testing for ketosis. More than 1,000 US hospitals now use EKF’s Beta-Hydroxybutyrate reagent. In 2019 EKF will launch its new, exclusive Glycated Albumin test which has been developed in partnership with Japan’s Asahi Kasei Pharma Corporation. Annual Report 2018 | EKF Diagnostics Holdings plcStrategic Review1 Chairman’s Statement 9 Results overview The Chief Executive’s and Finance Director’s statements contain a review of the year and an overview of the financial performance of the Group. Board and Corporate Governance The make-up of the Board has once again remained stable. The Non-executive Directors have again waived their salary but received an appropriate bonus to recognise the very significant contribution they make to the success of the Group over and above their duties as directors. The London Stock Exchange now requires AIM listed companies such as EKF to adopt a recognised corporate governance code and we have chosen that issued by the Quoted Companies Alliance. Further details of compliance can be found in the Corporate Governance Statement on pages 20-21, once published, and on the Company’s website in accordance with AIM Rule 26. Outlook This has been a very successful year, which has allowed us to provide significant rewards for shareholders. We are confident that we will continue to make progress in 2019. Trading in the first quarter to date has been satisfactory, in line with management expectations. Christopher Mills Non-executive Chairman 13 March 2019 It is a pleasure to report to shareholders on another successful year for EKF, with record revenue, earnings, and profits. Strategy Since I joined the business in April 2016, the Group has followed a consistent strategy of concentrating on its point-of- care diagnostics and central laboratory reagents business. While the task of simplification of the business was largely completed in 2017, we continue to actively seek cost saving opportunities through improved efficiency and targeted action plans, while seeking to position the business for further growth. Renalytix AI plc In January 2018 we announced our intention to create value from our sTNFR biomarker technology. In short order this process led to the development, founding, and successful flotation on AIM of an exciting developer of artificial intelligence-enabled diagnostics for kidney disease, including the raising of £22.25m for working capital. Of this, £3.1m was provided by EKF. As at the date of this statement, Renalytix AI plc (“Renalytix”) is valued at over £75m in its own right, and is making good progress towards its goals. shares ordinary EKF’s shareholding in Renalytix comprising 20,964,295 was distributed to relevant EKF shareholders in October 2018. The market value of those shares at the date of this statement, post admission to AIM, is circa £29.3m. As a requirement of Renalytix’s flotation, these shares are being held in escrow and share certificates will be sent to the underlying shareholders once the lock-in ends on 22 April 2019. This process has been extremely successful and has provided a very significant benefit to EKF shareholders. I would like to thank the EKF directors and staff who put an enormous amount of work into its achievement. We remain very excited about the future prospects for Renalytix and are confident that it will deliver further significant value to shareholders over the longer term. Share buy back The Group has continued to acquire its own shares in the market. During the year the Group has acquired and cancelled 3,461,409 shares representing 0.76% of the Ordinary shares in issue as at 1 January 2018, at a total cost of £940,000. Subject to continuing shareholder approval, the Group intends to continue to acquire shares for cancellation when it is appropriate to do so. Annual Report 2018 | EKF Diagnostics Holdings plcStrategic Review110 Chief Executive’s Review In 2018 we have been highly successful in achieving the operational goals we set ourselves at the beginning of the year. I am pleased to announce that we delivered 6.3% year on year organic growth excluding the effect of the completion of the Saudi Arabian Quo-Test contract which had contributed circa £1.6m more to revenues in 2017 than in 2018. The delivery of replacement revenues through new contract wins and additional organic sales growth has not only mitigated the impact of this source of revenue ending, but has allowed us to maintain overall revenue growth. DiaSpect Tm in point-of-care and CLIA waiver settings, we anticipate that future growth will be maintained globally. Once we had clearance, we signed a private label distribution agreement with McKesson Medical-Surgical Inc., an affiliate of McKesson Corporation, one of the largest companies in the US by revenue, and one of the largest distributors of medical supplies, who will sell the Tm as the McKesson Consult® Hb analyser. Whilst this partnership is in its infancy we have already opened over 25 new accounts in the US. Operations Diabetes In 2018 we promised to deliver in five main areas to ensure we maintain sustainable organic growth for the foreseeable future, which were: 1. DiaSpect Tm FDA 510(k) CLIA Waiver. 2. Delivery of a major contract alongside this clearance - the McKesson OEM contract in the US. 3. Upgrade of our Elkhart (Indiana, USA) enzyme facility. 4. Deliver a major contract alongside the upgrade - the Oragenics contract. 5. FDA 510(k) clearance of Quo-Test. Sales of diabetes products are down by 5% this year from £11.5m to £11.0m, due to the end of the Quo-Test contract in Saudi Arabia. Sales of Quo-Lab are up by 20%, and sales of Quo-Test excluding Saudi Arabia are up by 6%. We were pleased to announce that the Quo-Test analyser has received US Food and Drug Administration 510(k) clearance for professional use in a clinical laboratory setting. This will allow us to enter the US market with this product. Lactate Scout I am proud to say that we have delivered on all the above, although the Quo-Test 510(k) clearance crept into 2019. The OEM contract with McKesson in the US for the DiaSpect Tm gives us an opportunity to quickly expand our haemoglobin Point-of- Care franchise in the US where we already have a strong foothold. The Oragenics contract in Elkhart has enabled us to broaden our offering in pharmaceutical enzymes. The additional investment has to a significant led upgrade of the facility and we are now in a position to attract other partners alongside Oragenics. Our new Lactate Scout 4 hand-held lactate analyser for fast and accurate sports performance monitoring was launched at the Medica 2018 show. Lactate Scout 4 is designed for use in the field as a training companion for individuals or sports teams. We are working to adapt our existing lactate technology for use in clinical settings. Having taken professional guidance, and consultations with interest groups including potential end users, we are determined to deliver the right solution for this market, which will involve adapting the base product to ensure good usability in this market, and subsequently carrying out some limited clinical trials. Point-of-Care Central Laboratory involves One of the two main strands of EKF’s the development, business manufacture, and sale of instruments and related consumables for use in the diagnosis of conditions in situations which are near-patient. They have the advantage of giving rapid results which can be communicated and acted on immediately, yet offer equivalent accuracy to laboratory based analysers. Hematology In 2018, sales of haematology products have risen by 6% to £13.7m (2017: £12.9m). For many years our Hemo Control analyser range (sold in the USA as the HemoPoint H2) has been our best seller in this area. Following FDA 510(k) clearance for the The second main strand of EKF’s business is the supply of reagents for use on central laboratory analysers. As an adjunct to this, we also sell our own range of laboratory standard analysers. In 2018, Central Laboratory sales were £13.3m, an increase of 5%. During the year we signed a distribution agreement for Asahi Kasei’s Glycated Albumin products. This has now been launched in the US and the first orders have been received. We have continued performance Hydroxybutyrate from to see strong sales of Beta- Liquicolor (β-HB) Continue reading Annual Report 2018 | EKF Diagnostics Holdings plcStrategic Review1 Chief Executive’s Review (continuation) 11 participated in the fundraising. A company as at the date of this statement valued at circa £75m, post admission to AIM, has been created, which the Directors believe has the potential to be a game changer in the diagnosis and treatment of ESRD. Outlook 2018 has been a year in which we have achieved all our major milestones, including setting up a number of platforms for growth in 2019 and beyond. We are continuing to build a solid and reliable business with opportunities for significant growth, while ensuring excellent financial results. Julian Baines Chief Executive Officer 13 March 2019 and capacity reagent, which are up 10% in GBP terms. As mentioned earlier, our project to significantly increase upgrade our main wet chemistry site in Elkhart, Indiana has continued, and is expected to complete in 2019. The work we have done there has enabled us to sign an exclusive, multi-million dollar agreement with Oragenics, Inc., a Florida- based biopharmaceutical company, for the manufacturing of Oragenics’ lantibiotic bulk drug substances in the United States. Under the collaboration agreement, EKF Diagnostics will manufacture compounds intended for preclinical and early stage clinical trials. Regulatory update Our major successes in 2018 have been the achievement of FDA 510(k) clearances for the DiaSpect Tm and Quo-Test. In addition, we have received regulatory approval for β-HB in both Mexico and Colombia, as well as registration of DiaSpect Tm in India. In China, we have had some successes but continue to work on the complex process in place. We of getting registrations continue to work using our own resources and with our partners to extend the span of our registrations. sTNFR Project – Renalytix AI plc There has been a longstanding unmet need in the field of End Stage Renal Disease (“ESRD”). Kidney disease costs the US Healthcare system over $40bn per annum in dialysis alone. In 2017 we started looking for ways to maximise the value of our sTNFR biomarker technology based around this unmet need. It soon became clear that there was a significant opportunity to use this as the springboard for a unique business with the ultimate aim being to develop and sell artificial intelligence enabled diagnostics for ESRD. It was also clear that it was best that this should be progressed entirely outside EKF. A team was put in place to take the new business forward, led by James McCullough. This team rapidly assembled a set of partners including the world - leading centre in the care of kidney disease, the Icahn School of Medicine at Mount Sinai (“ISMMS”). In early November 2018, £22.5m was raised with ISMMS becoming a major shareholder. The funds are primarily being used for the acquisition of licences from ISMMS, to develop the company’s products and technology, for corporate purposes, and for general working capital. The Renalytix AI shares which EKF had received in return for its past investment and technology have been distributed to EKF shareholders, and the company has been floated separately on AIM. EKF retains an interest in the business having Annual Report 2018 | EKF Diagnostics Holdings plcStrategic Review112 Finance Director’s Review Revenue Revenue for 2018 was £42.5m (2017: £41.6m), which is an increase of 2%. At constant exchange rates, revenue for the year would have been 1% higher, so organic growth is over 3%, despite the ending of the large Saudi Arabia contract. Revenue by disease state, which is presented for illustrative purposes only, is as follows: FY 2018 £’000 FY 2017 £’000 +/- % Hematology 13,728 12,911 +6% Diabetes Care 10,964 11,547 (5%) Central Laboratory 13,289 12,597 +5% Other Total 4,562 4,529 +1% 42,543 41,584 +2% Gross profit Gross profit is broadly flat at £22.7m (2017: £22.9m), while the gross margin percentage on sales is 53.3% (2017: 55.0%). In 2017 there were releases of inventory provisions set in previous years; this did not recur in 2018. Administration costs and research and development the have Administration fallen costs substantially, to £10.6m (2017: £18.2m), reflecting focus on operational improvements. The biggest factor was the effect of exceptional items, which are again strongly positive in the year. The most important exceptional item this year is the substantial gain made on the Group’s shares in Renalytix AI plc as a result of its successful separate flotation. The gain recognised in EKF’s books is discounted to take account of the restrictions on the shares which were distributed to EKF’s shareholders prior to the flotation. In addition to Renalytix, there was an exceptional gain following the satisfactory conclusion to a loan agreement with a former employee, offset by business restructuring costs. Excluding the effect of exceptional items, administration costs reduced from £19.7m in 2017, to £17.0m in 2018. Research and development costs included in administration expenses were £1.6m (2017: £2.2m). A further £0.6m was capitalised as an intangible asset, bringing gross R&D expenditure for the year to £2.2m, a reduction from the expenditure in 2017 of £2.9m, largely caused by the completion of expenditure last year on the DiaSpect Tm FDA clearance process. The charge for depreciation of fixed assets intangible assets and amortisation of reduced to £4.0m (2017: £4.6m). 2017 included an impairment charge relating to the closure of our Polish operations in that year. Operating profit and adjusted earnings before interest, tax, depreciation and amortisation The Group made an operating profit of £12.2m (2017: £4.7m). This again reflects the significant exceptional gain on Renalytix and other items, without which operating profit would have been £5.8m, still an increase of 23.4%. We continue to consider that adjusted earnings before interest, tax, depreciation and amortisation, share-based payments and exceptional items (adjusted EBITDA) is a better measure of the Group’s progress because the Board believes it gives clearer comparability of operating performance between periods. In 2018 we achieved adjusted EBITDA of £10.7m (2017: £9.3m), an increase of 14.7%. The calculation of this non-GAAP measure is shown on the face of the income statement. It excludes the effect of non-cash share-based payment charges of £0.9m (2017: £1.5m), and exceptional profits of £6.5m (2017: £1.6m). The increase in adjusted EBITDA of £1.4m would be higher by £0.2m without the effect of exchange rates, with £1.6m therefore being attributable to improved underlying performance. Finance costs Net finance costs have reduced to £0.03m (2017: £0.42m). While interest costs on borrowings have continued to reduce, the main effect is a result of a lower charge associated with the change in fair value of deferred consideration. Tax There is an income tax charge of £1.9m, an increase from the 2017 charge of £1.4m. The charge is lower than would have been expected because of the utilisation of past tax losses. Balance sheet Property plant and equipment Additions to fixed assets were £1.2m (2017: £1.4m). The major programme has been the continuing work on the upgrading and refurbishment of the Group’s facility in Elkhart, USA, where many of the Group’s central laboratory products are manufactured, those being including supplied to Oragenics. Intangible assets The carrying value of intangible assets has continued to fall, from £43.6m in 2017 to £41.8m as at 31 December 2018. Continue reading Annual Report 2018 | EKF Diagnostics Holdings plcStrategic Review1Finance Director’s Review (continuation) 13 This is largely the result of the annual amortisation charge. There was a £0.6m disposal of capitalised development costs which were sold to Renalytix AI plc. Investments As part of the fund raising for the Renalytix project, EKF agreed to invest the sum of £3.1m for 4.79% of Renalytix’s enlarged (post IPO) share capital. Deferred consideration The remaining deferred consideration relates to a share-based payment to the former owner of EKF-Diagnostic GmbH, payment of which is subject to an offsetting warranty related claim, the value of which is held in receivables. Conclusion of the position has taken longer than anticipated but is expected during this year. Cash and working capital Despite the £3.1m investment in Renalytix and share buy-backs totalling £0.9m, net cash has increased from £7.0m to £9.4m. Gross cash has increased to £10.3m (2017: £8.2m). Borrowings, which were mainly used to fund a new building at our plant in Barleben, Germany, are reducing over the loan period to 2023, while the remaining balance of a loan from a former employee of EKF Molecular was written back. Inventory has increased slightly from £5.6m to £6.1m due to a number of strategic decisions to increase raw material holdings to ensure continuity of supply. Trade and other receivables have dipped slightly, largely for non-trading reasons. Trade payables have increased, chiefly because of the effect of the increased liability relating to the cash settled share- based payments. Richard Evans Finance Director and Chief Operating Officer 13 March 2019 Annual Report 2018 | EKF Diagnostics Holdings plcStrategic Review114 Board of Directors Executive Directors Julian Baines MBE Chief Executive Officer (aged 54) Julian was Group CEO of BBI where he undertook a management buyout in 2000, a flotation on AIM in 2004 and was responsible for selling the business to Alere Inc. (now part of Abbott Laboratories) in 2008 for circa £85 million. In December 2009 Julian became CEO of the Group and has subsequently successfully completed a number of fund raisings and the acquisition and subsequent integration of eight businesses in seven countries. In 2016 he was awarded an MBE for services to the life sciences industry. Julian is also Chairman of Renalytix AI plc. Richard Evans Chief Operating Officer and Finance Director (aged 61) Richard qualified as a Chartered Management Accountant in 1983 and holds a Bachelor of Commerce in Business Studies and Law from Edinburgh University and an MBA from INSEAD. Before joining EKF, Richard was Finance Director, General Manager and finally Global Account Director at Hitachi Data Systems GmbH. He has also held positions at Fisher Scientific, TRW Seat Belt Systems, Maxtor Corporation, United Technologies Carrier and Abbott Diagnostics GmbH in Germany. Richard is also a non-executive director of Renalytix AI plc. Annual Report 2018 | EKF Diagnostics Holdings plcStrategic Review1Board of Directors Non-Executive Directors 15 Christopher Mills Non-Executive Chairman (aged 66) Christopher founded Harwood Capital Management in 2011, a successor to its former parent company J.O. Hambro Capital Management, which he co-founded in 1993. He is Chief Executive and Investment Manager of North Atlantic Smaller Companies Investment Trust plc and Chief Investment Officer of Harwood Capital LLP. He is a Non-Executive Director of a number of companies including Renalytix AI plc. Christopher was a Director of Invesco MIM, where he was Head of North American Investments and Venture Capital, and of Samuel Montagu International. Christopher is a member of the Audit Committee and the Remuneration Committee. Adam Reynolds Non-Executive Director (aged 56) Adam is a former stockbroker specialising in corporate finance. He has built, rescued and re-financed a number of public companies. He is currently Chairman of Autoclenz Group Limited and Yourgene Health plc, and a director of several listed and private companies. Adam chairs the Audit Committee and Remuneration Committee. Carl Contadini Non-Executive Director (aged 70) Carl has been a director of numerous companies throughout his career, predominately focusing on the healthcare and electronics sectors. He is currently an Operational Adviser to Harwood Capital LLP, where he assists in sourcing, evaluating and monitoring investments. Carl also holds the position of Executive Chairman at Utitec Holdings Inc. and is a board member of Prospect Medical Waterbury Hospital. Carl has, in the past, also been a director of Bionostics Limited and Celsis Group Limited. He holds an Associate of Science degree in Business Administration and Marketing from Tunix Community College, Connecticut and a Batchelor of General Studies degree specialising in Human Resources from University of Connecticut. Annual Report 2018 | EKF Diagnostics Holdings plcStrategic Review116 Strategic Report for the year ended 31 December 2018 The Directors present their Strategic Report for the year to 31 December 2018. Review of the business the operations and the revenue of the Group. In particular the Group has significant revenue from customers in Russia which are ultimately largely funded by the Russian government. A review of the business is contained in the Chairman’s Statement on page 8, in the Chief Executive’s Review on pages 9 and 10, and the Finance Director’s Review on pages 11 and 12. The Group spreads the risk through seeking a portfolio of diversified revenue streams geographically with a mixture of distribution partners in developing and developed countries. Risk Management We recognise that effective risk management is essential to the successful delivery of the Group’s strategy. As we continue to grow our business we believe it is important to develop and enhance our risk management processes and control environment on an ongoing basis and ensure it remains fit for purpose. We continue to mature our approach to identifying and managing risks across the Group in a consistent and robust manner. Below we describe our risk management approach, the principal risks and uncertainties faced by the Group and the controls in place to manage them. Overview of risk management approach Each business area is responsible for identifying, assessing and managing the risks in their respective area. Risks are identified and assessed by all business areas on a periodic basis, and are measured against a defined set of criteria, considering likelihood of occurrence, and potential impact. The Executive Board members also conduct a strategic risk identification and assessment exercise to identify risks, including those that could impact the business model, future performance, solvency or liquidity. This risk information is combined with a consolidated view of the business area risks. The most significant risks identified are included in our Group Risk Profile, which is reported to the Executive Board for review and challenge, ahead of it being submitted to the Group Board for final review, challenge and approval. The Board has the overall accountability for ensuring that risk is effectively managed across the Group and therefore ensuring that it is comfortable with the nature and extent of the principal risks faced in achieving its strategic objectives. Principal risks and uncertainties Set out below are the principal risks which we believe could materially affect the Group’s ability to achieve its financial and operating objectives and control or mitigating activities adopted to manage them. The risks are not listed in order of significance. Key employees Lack of retention of key employees affects the continuity and effectiveness of on-going relationships with key customers and suppliers. This risk is minimised by ensuring that a minimum of two individuals manage every relationship with key customers and suppliers. In addition, in retaining the key employees, incentivisation packages are offered through a mixture of sales commission, and profit related bonuses. Main Board Directors are incentivised as detailed in the Directors’ Remuneration Report. Political risk A significant proportion of the Group’s revenues are accounted for by agreements in developing countries. Any instability in these countries could significantly affect the European Union Following (EU) membership referendum in 2016, the UK Government has commenced the process of withdrawal from the EU. Although at present the Group does not anticipate significant issues, the Group has employees, facilities, customers, and suppliers in both the United Kingdom and the EU, and therefore withdrawal may affect the Group’s operational abilities and costs. The Group seeks to manage this risk by monitoring events and taking mitigating actions if necessary. Supply chain continuity The Group relies on third party manufacturers for the supply of the majority of raw materials. Problems with obsolescence and manufacturer facilities may lead to delay and disruptions in the supply chain which could have a significant negative impact on the Group. The Group maintains a close dialogue with key suppliers and closely monitors its inventory status and customer demand to ensure that any problems with the supply chain can be managed, and back up sources of supply are maintained where possible. Regulatory risk There can be no guarantee that any of the Group’s products will be able to obtain or maintain the necessary regulatory approvals in any or all of the territories in respect of which applications for such approvals are made. Where regulatory approvals are obtained, there can be no guarantee that the conditions attached to such approvals will not be considered too onerous by the Group or its distribution partners in order to be able to market its products effectively. The Group seeks to reduce this risk by manufacturing the products to recognised standards, by keeping appraised with changes in the standards geographically, by seeking advice from regulatory advisers, consultations with regulatory approval bodies and by working with experienced distribution partners. Competition risk Due to the Group’s current and future potential competitors, such as major multinational pharmaceutical and healthcare companies, having substantially greater resources than those of the Group, the competitors may develop systems and products that are more effective or economic than any of those developed by the Group, rendering the Group’s products obsolete or otherwise non- competitive. confidentiality The Group seeks to mitigate this risk by securing patent registration protection for its products where appropriate, maintaining regarding the Group’s know-how and technology, monitoring technological developments and by selecting leading businesses in their respective fields as distribution partners capable of addressing significant competition, should it arise. agreements Annual Report 2018 | EKF Diagnostics Holdings plcCorporate Governance2Strategic Report (continuation) for the year ended 31 December 2018 17 Intellectual property risk Cyber security risk The commercial success of the Group and its ability to compete effectively with other companies depends, amongst other things, on its ability to obtain and maintain patents sufficiently broad in scope to provide protection for the Group’s intellectual property rights against third parties and to exploit its products. The absence of any such patents may have a material adverse effect on the Group’s ability to develop its business. The Group mitigates this risk by developing products where legal advice indicates patent protection would be available, seeking patent protection for the Group’s products, maintaining confidentiality agreements regarding Group know-how and technology and monitoring technological developments and the registration of patents by other parties. The commercial success of the Group also depends upon not infringing patents granted, now or in the future, to third parties who may have filed applications or who have obtained, or may obtain, patents relating to business processes which might inhibit the Group’s ability to develop and exploit its own products. Foreign exchange risk The Group has transactional currency exposures as the majority of revenues and expenditure and certain borrowings are denominated in foreign currencies. Fluctuations in exchange rates between the Group’s functional currency of Sterling and the currency of the overseas operations could adversely impact the financial results. In most cases the Group matches the currency receipts and expenditure of the overseas operations. The Group also endeavours to match the foreign currency assets of the foreign operations by funding through borrowings and loans denominated in the currency of the overseas operations, and to negotiate currency protection in major contracts. Reimbursement levels There is no guarantee that the Group may be able to sell its products or services profitably if the reimbursement level from third party payers, including government and private health insurers, is unavailable or limited. Third party payers are increasingly attempting to contain health care costs through measures that could impact the Group including challenging the prices charged for health care products and services, limiting both coverage and the amount of reimbursement for new diagnostics products and services, and denying or limiting coverage for products that are approved by the regulatory agencies but are considered experimental by third party payers. The Group uses computers extensively in its operations and has an online presence but does not trade online. It is at risk of attack through hacking or other methods. This risk is mitigated by the use of robust security measures, staff training, and back-up systems. The Group also has specific insurance cover. Review of strategy and business model The Board of Directors judge the Company’s financial performance by reference to the internal budget which it establishes at the beginning of each financial year. EKF’s strategy is to create a world class IVD business through organic growth. IVD has a wide spectrum, and within this spectrum we have chosen to concentrate on point-of-care, and our existing central laboratory business. We have identified and acquired businesses in these areas with strong product lines and distribution networks which can benefit from better, more professional management, greater resources, and from the synergistic benefits of being part of a larger group. We sell worldwide to over 100 countries. In many territories we sell through local distributors, however where appropriate we sell direct to end users which include hospitals, laboratories, and government agencies. Our distributors are supported by a network of regional sales managers and by product managers who are specialists in our product range. We manufacture the majority of the products we sell ourselves, but also distribute a number of carefully chosen products on behalf of others. We have product support centres in the USA and Germany. The Group works mainly on the principle of selling value priced instrumentation which generates long-term revenue streams from the subsequent sale of consumables. The Group has an existing portfolio of technologies which produce revenues and will add technologies which are strategically appropriate to this portfolio should they become available and providing the additions make economic sense. Future outlook The Chairman’s Statement on page 8 and the Chief Executive’s Review on pages 9 and 10 give information on the future outlook of the Group, including the main trends and factors likely to affect its future development. Key Performance Indicators (KPIs) The Group understands that due to third party dependency it is extremely difficult to eradicate this risk. However, the Group manages this risk with constant dialogue and educating the third party payers on the Group’s products and also developing new technologies in order to seek additional reimbursements. The key performance indicators currently used by the Group are revenue, gross margin, adjusted EBITDA and cash resources. The Group is working to establish other key performance indicators including non-financial measures. KPIs are discussed in more detail in the Finance Director’s review on pages 11 and 12. Financial reporting and disclosure Environment Due to the nature of the Group there is a requirement to report accurate financial information in compliance with accounting standards and applicable legislation. This risk is mitigated through the Group’s internal controls over the financial information and reporting, overseen by the local financial heads and then reviewed by the central finance team, including the Finance Director. The annual financial statements are also subject to audit by the Group’s external auditors. The Directors consider that the nature of the Group’s activities is not inherently detrimental to the environment. The Group is committed to minimising any effect on the environment caused by its operations. Employees The Group places great value on the involvement of its employees and they are regularly briefed on the Group’s activities. The Group closely monitors staff attrition rates which it seeks to keep at low levels and aims to structure Annual Report 2018 | EKF Diagnostics Holdings plcCorporate Governance218 Strategic Report (continuation) for the year ended 31 December 2018 staff compensation levels at competitive rates in order to attract and retain high calibre personnel. Disabled employees Applications for employment by disabled persons are always fully considered, bearing in mind the specific aptitudes of the applicant involved. It is the policy of the Group that the training, career development and promotion of disabled persons, as far as possible, be identical with that of other employees. Social, community, and human rights The Board recognises that the Group has a duty to be a good corporate citizen and to respect the laws, and where appropriate the customs and culture of the territories in which it operates. The Group has donated product to selected appropriate charities which operate within its area, and encourages staff to take part in charitable activities which are related to our business areas or customers. It contributes as far as is practicable to the local communities in which it operates and takes a responsible and positive approach to employment practices. The Group’s Modern Slavery Act statement is published on our website. The Strategic Report was approved by the Board on 13 March 2019 and signed on its behalf by: Richard Evans Finance Director and Chief Operating Officer Annual Report 2018 | EKF Diagnostics Holdings plcCorporate Governance2Report of the Directors for the year ended 31 December 2018 19 The Directors have pleasure in presenting this report together with the audited consolidated financial statements of EKF Diagnostics Holdings plc for the year ended 31 December 2018. Corporate details EKF Diagnostics Holdings public limited company is domiciled, incorporated, and registered in England and Wales with registration number 4347937. The registered office is Avon House, 19 Stanwell Road, Penarth, Cardiff CF64 2EZ. Directors The Directors who held office during the year and as at the date of signing the financial statements were as follows: • Christopher Mills • Julian Baines • Richard Evans • Adam Reynolds • Carl Contadini The Company Secretary is Salim Hamir. Principal activities During the year the principal activities of the Group and Company were the development, manufacture and supply of products into the in-vitro diagnostics (IVD) market place. Future developments and research and development activities are discussed in the Chairman’s Statement on page 8, the Chief Executive’s Review on pages 9 and 10, and the Finance Director’s Review on pages 11 and 12. Dividends and share buy back On 24 October 2018 the Company declared and paid a distribution in specie under which the Company’s shareholding in Renalytix AI plc was distributed to Relevant EKF shareholders at a rate of one Renalytix AI plc share for each 21.825 EKF shares held. The Company holds authorisation to acquire up to approximately 15% of its Ordinary Shares in order to reduce the number of shares in issue. During the year the Company acquired a total of 3,461,409 shares, which were subsequently cancelled. The Company intends to seek renewal of the authorisation at the next AGM. Going concern The Directors have considered the applicability of the going concern basis in the preparation of these financial statements. This included the review of internal budgets and financial results which show, taking into account reasonably probable changes in financial performance, that the Group should be able to operate within the level of its current funding arrangements. After making enquiries, the Directors have a reasonable expectation that the Group has adequate resources to continue in operational existence for the foreseeable future. The Group therefore continues to adopt the going concern basis of preparation for its consolidated financial statements. Financial risk management Financial risk management is discussed in Note 3 of the financial statements. Employee policies Directors’ interests The interests in the share capital of the Company of those Directors serving at 31 December 2018 and as at the date of signing of these financial statements, all of which are beneficial, were as follows: On 31 December 2018 Ordinary Shares of 1p each On 31 December 2017 Ordinary Shares of 1p each Christopher Mills 135,963,591 137,000,000 Julian Baines Richard Evans Adam Reynolds Carl Contadini 1,855,288 178,842 2,068,613 - 1,855,288 178,842 3,318,613 - Mr Mills’ interest in the Company’s shares is held through North Atlantic Smaller Companies Investment Trust PLC (“NAIT”) and Oryx International Growth Fund Limited (“Oryx”). Harwood Capital LLP (“Harwood”) is investment manager and investment adviser to NAIT and Oryx respectively. Christopher Mills is a partner and Chief Investment Officer of Harwood. Christopher Mills is also a director of Oryx and NAIT. He holds 2.16 per cent. of the shares in Oryx in his own name as well as a further 46.44 per cent. of the shares in Oryx via his 25.06 per cent. shareholding in NAIT. Oryx has sold Ordinary shares during the year as follows: on 19 November 53,423 shares; on 20 November 491,493 shares; on 21 November 170,954 shares; and on 7 December 320,539 shares. All of these shares were purchased by the Company for cancellation. Carl Contadini holds no shares personally, but acts as an Operational Advisor to Harwood which acts as investment manager and investment adviser to NAIT and Oryx respectively. On 9 November 2018, Adam Reynolds sold 1,250,000 Ordinary shares at 27.25p per share. Substantial shareholdings As at 13 March 2019, the following interests in 3% or more of the issued Ordinary Share capital had been notified to the Company: Number of shares Percentage of issued share capital Mr Christopher Mills 135,963,591 29.94% Lombard Odier Asset Management (Europe) Schroders Investment Management Canaccord Genuity Wealth Management Mr William Pippin Stock invest 43,975,206 9.68% 32,550,080 7.17% 24,152,899 16,189,675 13,669,000 5.32% 3.57% 3.01% Statement of Directors’ responsibilities in respect of the financial statements The directors are responsible for preparing the Annual Report and the financial statements in accordance with applicable law and regulation. Employee policies are discussed in the Strategic Report on pages 15 to 17. Company law requires the directors to prepare financial statements for each financial year. Under that law the Annual Report 2018 | EKF Diagnostics Holdings plcCorporate Governance220 Report of the Directors (continuation) for the year ended 31 December 2018 directors have prepared the group financial statements International Financial Reporting in accordance with Standards (IFRSs) as adopted by the European Union and parent company financial statements in accordance with International Financial Reporting Standards (IFRSs) as adopted by the European Union. Under company law the directors must not approve the financial statements unless they are satisfied that they give a true and fair view of the state of affairs of the group and parent company and of the profit or loss of the group and parent company for that period. In preparing the financial statements, the directors are required to: • select suitable accounting policies and then apply them consistently; • state whether applicable IFRSs as adopted by the European Union have been followed for the group financial statements and IFRSs as adopted by the European Union have been followed for the company financial statements, subject to any material departures disclosed and explained in the financial statements; of the development and performance of the business and the position of the group and parent company, together with a description of the principal risks and uncertainties that it faces. Directors’ liability insurance The Company has entered into deeds of indemnity for the benefit of each Director of the Company in respect of liabilities to which they may become liable in their capacity as Director of the Company and of any Company in the Group. Those indemnities are qualifying third party indemnity provisions for the purposes of Section 234 of the Companies Act 2006 and have been in force during the whole of the financial year and up to the date of approval of the financial statements. Independent auditors PricewaterhouseCoopers LLP has expressed their willingness to continue in office as auditors and a resolution to reappoint them will be proposed at the forthcoming Annual General Meeting. • make judgements and accounting estimates that are Disclosure of information to the Auditors The Directors who hold office at the date of approval of this report confirm that so far as they are each aware, there is no relevant audit information of which the Company’s auditors are unaware, and each Director has taken all the steps that they ought to have taken as a Director in order to make themselves aware of any relevant audit information and to establish that the Company’s auditors are aware of that information. Corporate governance The Company’s statement of corporate governance can be found in the Corporate Governance Statement on pages 20 to 21 of these financial statements. The Corporate Governance Statement forms part of this Report of the Directors and is incorporated into it by cross-reference. Annual General Meeting The resolutions to be proposed at the forthcoming Annual General Meeting are set out in the formal notice of the meeting, as set out on page 65 and 66. Recommendation The Board considers that the resolutions to be proposed at the Annual General Meeting are in the best interests of the Company and it is unanimously recommended that shareholders support these proposals as the Board intends to do in respect of their own holdings. The Report of the Directors was approved by the Board on 13th March 2019 and signed on its behalf by: Richard Evans Finance Director and Chief Operating Officer reasonable and prudent; and • prepare the financial statements on the going concern basis unless it is inappropriate to presume that the group and parent company will continue in business. The directors are also responsible for safeguarding the assets of the group and parent company and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities. The directors are responsible for keeping adequate accounting records that are sufficient to show and explain the group and parent company’s transactions and disclose with reasonable accuracy at any time the financial position of the group and parent company and enable them to ensure that the financial statements comply with the Companies Act 2006. The directors are responsible for the maintenance and integrity of the parent company’s website. Legislation in the United Kingdom governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions. The directors consider that the annual report and accounts, taken as a whole, is fair, balanced and understandable and provides the information necessary for shareholders to assess the group and parent company’s performance, business model and strategy. Each of the directors, whose names and functions are listed in the Report of the Directors confirm that, to the best of their knowledge: • the parent company financial statements, which have been prepared in accordance with IFRSs as adopted by the European Union, give a true and fair view of the assets, liabilities, financial position and loss of the company; • the group financial statements, which have been prepared in accordance with IFRSs as adopted by the European Union, give a true and fair view of the assets, liabilities, financial position and profit of the group; and • the Chairman’s Statement, Chief Executive’s Review and Finance Director’s Review include a fair review Annual Report 2018 | EKF Diagnostics Holdings plcCorporate Governance2 Corporate Governance Statement for the year ended 31 December 2018 21 Compliance The Company recognises the value of good corporate governance in every part of its business. In September 2018 the Board adopted the corporate governance principles of the 2018 Quoted Companies Governance Code. Details of the Code can be obtained from the Quoted Companies Alliance’s website (www.theqca.com). The following statement describes how the Group as at 31 December 2018 sought to address the principles underlying the Code. Board composition and responsibility The Board currently comprises two Executive Directors and three Non-Executive Directors. Christopher Mills was appointed as Non-Executive Chairman on 20 April 2016. It is the Board’s opinion that the two directors, Adam Reynolds and Carl Contadini, are independent in character and judgment and that there are no relationships or circumstances which could materially affect or interfere with the exercise of their independent judgement. Both Mr. Reynolds and Mr. Contadini have been appointed to the Boards of numerous companies, with Mr. Reynolds specialising in corporate finance matters and Mr. Contadini specialising in operations in the healthcare and electronics sectors. The Board is cognisant that Mr. Contadini serves as an operational adviser to Harwood Private Equity, an investment entity of which Christopher Mills is Managing Partner. The three Board members (other than Mr. Contadini and Mr. Mills) consider that Mr. Contadini’s decision-making on the EKF Board is driven by his relevant industry experience which underpins his independence. There is a majority of Board members unconnected to Mr. Mills such that it functions in a balanced manner. All Directors are subject to election by Shareholders at the first Annual General Meeting after their appointment, and are subject to re-election at least every three years. Non-Executive Directors are appointed for a specific term of office which provides for their removal in certain circumstances, including under section 168 of the Companies Act 2006. The Board does not automatically re-nominate Non-Executive Directors for election by Shareholders. The terms of appointment of the Non-Executive Directors can be obtained by request to the Company Secretary. The Board’s primary objective is to focus on adding value to the assets of the Group by identifying and assessing business opportunities and ensuring that potential risks are identified, monitored and controlled. Matters reserved for Board decisions include strategic long-term objectives and capital structure of major transactions. The implementation of Board decisions and day to day operations of the Group are delegated to Management. There is a division of responsibilities between the Non- Executive Chairman, who is responsible for the overall strategy of the Group and running the Board, and the CEO, who is responsible for implementing the strategy and day to day running of the Group. He is assisted by the Finance Director and Chief Operating Officer. The Board’s primary objective is to focus on adding value to the assets of the Group by identifying and assessing business opportunities and ensuring that potential risks are identified, monitored and controlled. Matters reserved for Board decisions include strategic long-term objectives and capital structure of major transactions. The implementation of Board decisions and day to day operations of the Group are delegated to Management. Board meetings 10 Board meetings were held during the year. The Directors’ attendance record during the year is as follows: Christopher Mills (Non-Executive Chairman) Julian Baines (Chief Executive Officer) Richard Evans (Chief Operating Officer and Finance Director) Adam Reynolds (Non-Executive Director) Carl Contadini (Non-Executive Director) 9 10 10 10 6 The Executive Directors work full time for the Group. The Non-executive Directors are expected to devote at least two days per month to the business of the Group, plus additional days for committee meetings. During the year the board has performed an evaluation of their performance and that of the Chairman, as well as the effectiveness of the Board committees. The Board intends to develop further its evaluation of the performance of the Board and Committees on an annual basis. The evaluation will include board composition, experience, dynamics and the board´s role and responsibilities for strategy, risk review and succession planning. The evaluations will involve a detailed questionnaire and individual discussions between the Non-executive Chairman and the Directors. Being a small listed company, the Board considers it unnecessary to have evaluations facilitated by an external consultant. Independent Director Adam Reynolds will conduct an evaluation of the Non-executive Chairman´s performance in conjunction with the other independent Director, Carl Contadini and input from the two Executive Directors. The outcome from these evaluations will be discussed by the Board at one of its Board meetings. The board evaluation covers areas including the makeup of the board, the way that it conducts discussions and takes decisions, the quality of board papers, the inputs from Executive and Non-executive Directors, and the effectiveness of board committees. In each case the evaluation found that performance was satisfactory, although some improvement was required in certain areas. More details on corporate governance including a compliance statement can be found on the Company’s website at www.ekfdiagnostics.com/investors.html. Audit Committee This comprises two Non-Executive Directors, Adam Reynolds (Chairman) and Christopher Mills. Adam Reynolds is the Senior Independent Director and has recent and relevant finance experience. The committee has responsibility over the following: • Recommend the appointment, re-appointment and removal of the external auditors • Ensure the objectivity and independence of the auditors including occasions when non-audit services are provided • Ensure appropriate ‘whistle-blowing’ arrangements are in place • The Non-Executive Directors may seek information from any employee of the Group and obtain external professional advice at the expense of the Company if considered necessary. Due to the relatively low number of personnel employed within the Group, the nature of the business and the current control Annual Report 2018 | EKF Diagnostics Holdings plcCorporate Governance2 22 Corporate Governance Statement (continuation) for the year ended 31 December 2018 and review systems in place, the Board has decided not to establish a separate internal audit department. substantially separate issue is the subject of a separate resolution and all Shareholders have the opportunity to put questions to the Board at the Annual General Meeting. The committee met once formally during 2018. There were no significant matters communicated to the Committee by the Auditors and no interaction with the Financial Reporting Council. Remuneration Committee The Company has established a formal and transparent procedure for developing policy on executive remuneration and for fixing the remuneration packages of individual in deciding his Directors. No Director own remuneration. involved is The Chair(s) of the Audit and Remuneration Committees normally attend the Annual General Meeting and will answer questions which may be relevant to their work. The Chairman advises the meeting of the details of proxy votes cast on each of the individual resolutions after they have been voted on in the meeting. The Chairman and the Non-Executive Directors intend to maintain a good and continuing understanding of the objectives and views of the Shareholders. Shareholders may contact the Company as follows: The remuneration committee is made up of Adam Reynolds (Chairman), and Christopher Mills. The committee considers the employment and performance of individual Executive Directors and determines their terms of service and remuneration. It also has authority to grant options under the Company’s Executive Share Option Scheme. Tel: 029 2071 0570 Fax: 029 20 705715 Email: investors@ekfdiagnostics.com Corporate social responsibility The Board recognises that the Group has a duty to be a good corporate citizen and is conscious that its business processes minimise harm to the environment, that it contributes as far as is practicable to the local communities in which it operates and takes a responsible and positive approach to employment practices. With effect from the financial year to 31 December 2016, the Group became subject to the requirements of the Modern Slavery Act 2015. The Group has published the required statement on its website. The Corporate Governance Statement was approved by the Board on 13th March 2019 and signed on its behalf by: Richard Evans Finance Director and Chief Operating Officer The Committee met once during 2018. Board appointments There is no formal Nominations Committee, the appointment of new Directors being considered by the full Board. Internal control The Directors are responsible for ensuring that the Group maintains a system of internal control to provide them with reasonable assurance regarding the reliability of financial information used within the business and for publication and that the assets are safeguarded. There are inherent limitations in any system of internal control and accordingly even the most effective system can provide only reasonable, but not absolute, assurance with respect to the preparation of financial reporting and the safeguarding of assets. The Group, in administering its business, has put in place strict authorisation, approval and control levels within which senior management operates. These controls reflect the Group’s organisational structure and business objectives. The control system includes clear lines of accountability and covers all areas of the organisation. The Board operates procedures which include an appropriate control environment through the definition of the above organisation structure and authority levels and the identification of the major business risks. The Group has commenced a project to enhance and formalise its internal controls including the establishment of a Risk Steering Committee. Internal financial reporting The Directors are responsible for establishing and maintaining the Group’s system of internal reporting and as such have put in place a framework of controls to ensure that on-going financial performance is measured in a timely and correct manner and that risks are identified as early as is practicably possible. There is a comprehensive budgeting system and monthly management accounts are prepared which compare actual results against both the budget and the previous year. They are reviewed and approved by the Board and revised forecasts are prepared on a regular basis. Relations with shareholders The Company reports to Shareholders twice a year. The Company dispatches the notice of its Annual General Meeting, together with a description of the items of special business, at least 21 clear days before the meeting. Each Annual Report 2018 | EKF Diagnostics Holdings plcCorporate Governance2Report of the Remuneration Committee for the year ended 31 December 2018 23 Statement of compliance This report does not constitute a Directors’ Remuneration Report in accordance with the Directors’ Remuneration Regulations 2007 which do not apply to the Company as it is not fully listed. This report sets out the Group policy on Directors’ remuneration, including emoluments, benefits and other share-based awards made to each Director. Policy on Executive Directors’ remuneration Remuneration packages are designed to motivate and retain Executive Directors to ensure the continued development of the Group and to reward them for enhancing value to shareholders. The main elements of the remuneration package for Executive Directors are basic salary or fees, performance-related bonuses, benefits and share based incentives. Directors’ remuneration - Audited The remuneration of the Directors for the year ended 31 December 2018 is shown below: Executive Directors Julian Baines Richard Evans Non-Executive Directors Christopher Mills Carl Contadini Adam Reynolds Total fees and emoluments Salary and fees £’000 Pension £’000 Benefits in kind £’000 Bonus £’000 2018 £’000 260 219 479 - - - - 479 13 6 19 - - - - 19 13 18 31 - - 5 5 36 60 40 100 25 25 25 75 175 346 283 629 25 25 30 80 709 2017 £’000 832 727 1,559 50 101 54 205 1,764 Directors’ share options and Long-Term Incentive Plan No director holds options under any share option plan. On 2 June 2016 two Directors were granted a cash settled share-based incentive award. During 2017 both the maximum and minimum amounts payable to each Director were reduced by £0.2m. The awards vest if a controlling interest in the Company is acquired by a third party prior to a revised date of 30 June 2020. In these circumstances a minimum amount of £0.3m is payable to each Director, which increases by reference to the sale price achieved. The fair value of this award has been calculated at £3,464,000 using a modified form of a Black Scholes model. The fair value has been spread over the assumed vesting period, with a charge of £775,000 (2017:£969,000) recognised in 2018. The key assumptions used in the model are disclosed in Note 30. Directors’ interests in the share capital of the Company are disclosed in the Directors’ Report on pages 18 and 19. Approved by the Board on 13 March 2019 and signed on its behalf by: Richard Evans Finance Director and Chief Operating Officer Annual Report 2018 | EKF Diagnostics Holdings plcCorporate Governance224 Report on the audit of the financial statements for the year ended 31 December 2018 Opinion In our opinion, EKF Diagnostics Holdings plc’s group financial statements and parent company financial statements (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 December 2018 and of the group’s profit and the group’s and the parent company’s cash flows for the year then ended; • have been properly prepared in accordance with International Financial Reporting Standards (IFRSs) as adopted by the European Union and, as regards the parent company’s financial statements, as applied in accordance with the provisions of the Companies Act 2006; and • have been prepared in accordance with the requirements of the Companies Act 2006. We have audited the financial statements, included within the Annual Report, which comprise: the Consolidated and Company’s Statements of Financial Position as at 31 December 2018; the Consolidated Income Statement and Consolidated Statement of Comprehensive Income, the Consolidated and Company’s Statements of Cash Flows, and the Consolidated and Company’s Statements of Changes in Equity for the year then ended; and the notes to the financial statements, which include a description of the significant accounting policies. Basis for opinion We conducted our audit in accordance with International Standards on Auditing (UK) (“ISAs (UK)”) and applicable law. Our responsibilities under ISAs (UK) are further described in the Auditors’ responsibilities for the audit of the financial statements section of our report. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion. Independence We remained independent of the group in accordance with the ethical requirements that are relevant to our audit of the financial statements in the UK, which includes the FRC’s Ethical Standard, as applicable to listed entities, and we have fulfilled our other ethical responsibilities in accordance with these requirements. Our audit approach Overview • Overall group materiality: £425,000 (2017: £415,000), based on 1% of group revenues for the year. • Overall parent company materiality: £403,000 (2017: £394,000), based on a component allocation of group materiality. • We performed full-scope audit procedures in respect of the group’s largest trading subsidiaries in the USA and in Germany, as well as EKF Diagnostics Holdings plc in the UK. • Our audit scope also included specified audit procedures in respect of Separation Technologies Inc. in the USA. • Our audit procedures covered entities contributing 90% of the group’s revenues for the year ended 31 December 2018. • Goodwill and intangible asset impairment assessments. (Group and parent). • Share-based payment transactions. (Group and parent). • Transactions associated with Renalytix AI Plc. (Group and parent). 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. Key audit matters Key audit matters are those matters that, in the auditors’ professional judgement, were of most significance in the audit of the financial statements of the current period and include the most significant assessed risks of material misstatement (whether or not due to fraud) identified by the auditors, including those which had the greatest effect on: the overall audit strategy; the allocation of resources in the audit; and directing the efforts of the engagement team. These matters, and any comments we make on the results of our procedures thereon, were addressed in the context of our audit of the financial statements as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters. This is not a complete list of all risks identified by our audit. Annual Report 2018 | EKF Diagnostics Holdings plcCorporate Governance2 Report on the audit of the financial statements (continuation) for the year ended 31 December 2018 25 Key audit matter How our audit addressed the key audit matter Goodwill and intangible asset impairment assessments (Group and parent) At 31 December 2018, the Consolidated Statement of Financial Position includes £41.8m of intangible assets (2017: £43.6m). In accordance with the requirements of IFRS, management has performed impairment reviews in relation to the goodwill held in the group’s cash generating units (CGUs). The book values of the intangible assets and goodwill are supported by multiple-year profitability projections based on the budget for 2019. Whilst sufficient headroom exists in respect of the impairment reviews conducted, is particularly sensitive to changes in the forecast growth rate assumptions, which are inherently uncertain. the DiaSpect impairment review The impairment reviews include significant estimates and judgements in respect of future growth rates and cash flows, the discount rate employed and profitability. Share-based payment transactions (Group and parent) During 2016, two directors were awarded a cash-settled share- based incentive, which will see a payment made if the Company is acquired by a third party before 30 June 2020. The amount payable under the award varies depending on the acquisition price, subject to a minimum amount payable. A senior employee has also been granted a cash settled share based incentive award, which vests if a controlling interest in the Company is acquired by a third party at any time while the holder remains an employee. The awards have been accounted for in accordance with IFRS 2 as cash-settled share based payments and the value of the liability recognised as at 31 December 2018 is £2.55m (2017: £1.72m). Management engaged an independent expert to value the share-based awards and the movement in the fair value of the year-end liability has been recognised in the Consolidated Income Statement within the charge for share-based payments. A number of assumptions have been made in valuing the awards, including the expected date of an acquisition, share-price volatility and the premium expected to be paid for acquiring the Company’s shares. Disclosure in respect of these awards is included in Note 30. Transactions associated with Renalytix AI Plc (Group and parent) During October 2018, the Group disposed of intangible assets with a carrying value of £0.6m to Renalytix AI Plc (“Renalytix”), a Company the Group held an investment in as an asset held for sale. The disposal was in exchange for 15.4m Renalytix shares. Management used an independent expert to value these shares, along with 5.5m shares in Renalytix that the group already held at the time of the intangible asset sale. The valuation of the shares reflected a number of associated risk factors and represented a discount to the subsequent IPO price. A gain of £6.4m has been recognised in respect of these items and is shown on the Consolidated Income Statement as an exceptional item. 20.9m Renalytix shares were distributed to EKF shareholders in October 2018 at a ratio of one Renalytix share for each 21.825 EKF shares held. This has been shown as a distribution in specie within the Statements of Changes in Equity and, using the same valuation approach, the distribution in specie has been valued at £7.0m. Renalytix listed on AIM in November 2018 and EKF acquired 4.79% of Renalytix’s share capital for £3.1m. This is shown in investments at 31 December 2018. We obtained the group’s cash flow forecasts supporting its assessments and evaluated the appropriateness of key assumptions, with a focus on DiaSpect, given the sensitivity to changes in future growth rates. We assessed the methodology used by management in performing the assessments and evaluated key inputs including: • the projected growth rates used, both over the short- term to 2023 and over the longer-term; • the discount rate used; • other key inputs, including the applicable tax rate, forecast capital expenditure and forecast margins. We also considered 2018 financial performance vs. budget and the performance in the first part of 2019. We performed a range of sensitivity analyses to assess the impact of alternative assumptions to those used by management. We concur with management’s assertion that no impairment charge is required in respect of goodwill and intangible assets but identified that if management is unable achieve planned results, this could reasonably be expected to give rise to an impairment in the future. Management has disclosed the results of sensitivity analyses in Note 17. We obtained the valuation of the share-based incentive awards and evaluated the independence and objectivity of management’s expert. We gained an understanding of and evaluated the assumptions and methods that are significant to the management’s expert’s work for their relevance and reasonableness. We challenged management in respect of the assumptions made, including the expected exit date and expected share- price volatility, and concluded that the assumptions made by management are reasonable. We concluded that the work of management’s expert is appropriate and concur with management’s accounting for the awards. We have also evaluated the explanatory disclosures made in Note 30 to the Financial Statements. We obtained the valuation of the Renalytix shares, which was carried out by an independent valuations expert. We evaluated the independence and objectivity of management’s expert. We gained an understanding of and evaluated the inputs and methods that are significant to the management’s expert’s work for their relevance and reasonableness. We have recalculated the exceptional gain recognised and challenged the disclosures that management has made in respect of the transactions in Note 29 to the financial statements and within the critical accounting estimates and judgements discussed in Note 4. The valuation applied to the shares is inherently judgemental and the adoption of alternative assumptions would result in changes to values attributed to the exceptional gain and distribution in specie. We have tested the investment made by EKF in Renalytix upon IPO to supporting documentation. Annual Report 2018 | EKF Diagnostics Holdings plcCorporate Governance2 26 Report on the audit of the financial statements (continuation) for the year ended 31 December 2018 How we tailored the audit scope We tailored the scope of our audit to ensure that we performed enough work to be able to give an opinion on the financial statements as a whole, taking into account the structure of the group and the parent company, the accounting processes and controls, and the industry in which they operate. The group has two main manufacturing centres in Germany and the USA, in addition to the Head Office function based in the United Kingdom (UK). The central finance and accounting team is located in the UK and is responsible for the financial reporting of EKF Diagnostics Holdings plc. Stanbio Laboratory (“Stanbio”) and EKF-diagnostic GmbH (“EKF Germany”) are assessed as financially significant components of the group, given the significant revenue earned by the group in these entities. An audit of these entities’ financial information has been carried out. The audit of Stanbio was conducted by the group engagement team and component auditors were engaged to audit EKF Germany. Full-scope audit procedures were performed for DiaSpect Medical GmbH by the component audit team and the group audit team performed full-scope audit procedures for EKF Diagnostics Holdings plc. The parent company audit was scoped in accordance with our parent company materiality. Our audit scope also included specified audit procedures in respect of Separation Technologies Inc. (STI) in the USA, where we designed audit procedures to gain coverage over certain financial statement line items. This work was performed by the group engagement team. Our audit addressed components making up 90% of the Group’s 2018 revenues. Where component auditors were engaged, we adopted procedures to ensure we were sufficiently involved in their audits. This included discussions with component audit teams during the planning, fieldwork and reporting phases, the issuance of comprehensive audit instructions and a review of key working papers. Materiality The scope of our audit was influenced by our application of materiality. We set certain quantitative thresholds for materiality. These, together with qualitative considerations, helped us to determine the scope of our audit and the nature, timing and extent of our audit procedures on the individual financial statement line items and disclosures and in evaluating the effect of misstatements, both individually and in aggregate on the financial statements as a whole. Based on our professional judgement, we determined materiality for the financial statements as a whole as follows: Overall materiality How we determined it Rationale for benchmark applied Group financial statements Parent company financial statements £425,000 (2017: £415,000). £403,000 (2017: £394,000). 1% of group revenues. Given the restructuring and refocusing of the business on its core point-of-care markets in recent years, growth is being delivered organically, meaning revenues remain a key focus for management and the directors. Limited to component allocation of group materiality. Since the materiality we would have employed to this entity on a standalone basis was in excess of the component allocation, materiality was capped at the component materiality allocation. For each component in the scope of our group audit, we allocated a materiality that is less than our overall group materiality. The range of materiality allocated across components was between £100,000 and £403,000. We agreed with the Audit Committee that we would report to them misstatements identified during our audit above £21,000 (Group audit) (2017: £21,000) and £20,000 (Parent company audit) (2017: £19,000) as well as misstatements below those amounts that, in our view, warranted reporting for qualitative reasons. Annual Report 2018 | EKF Diagnostics Holdings plcCorporate Governance2Report on the audit of the financial statements (continuation) for the year ended 31 December 2018 27 Conclusions relating to going concern ISAs (UK) require us to report to you when: • the directors’ use of the going concern basis of accounting in the preparation of the financial statements is not appropriate; or • the directors have not disclosed in the financial statements any identified material uncertainties that may cast significant doubt about the group’s and parent 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. We have nothing to report in respect of the above matters. However, because not all future events or conditions can be predicted, this statement is not a guarantee as to the group’s and parent company’s ability to continue as a going concern. For example, the terms on which the United Kingdom may withdraw from the European Union, which is currently due to occur on 29 March 2019, are not clear, and it is difficult to evaluate all of the potential implications on the group’s trade, customers, suppliers and the wider economy. Reporting on other information The other information comprises all of the information in the Annual Report other than the financial statements and our auditors’ report thereon. The directors are responsible for the other information. Our opinion on the financial statements does not cover the other information and, accordingly, we do not express an audit opinion or, except to the extent otherwise explicitly stated in this report, any form of assurance thereon. In connection with our audit of the financial statements, our responsibility is to read the other information and, in doing so, consider whether the other information is materially inconsistent with the financial statements or our knowledge obtained in the audit, or otherwise appears to be materially misstated. If we identify an apparent material inconsistency or material misstatement, we are required to perform procedures to conclude whether there is a material misstatement of the financial statements or a material misstatement of the other information. If, based on the work we have performed, we conclude that there is a material misstatement of this other information, we are required to report that fact. We have nothing to report based on these responsibilities. With respect to the Strategic Report and Report of the Directors, we also considered whether the disclosures required by the UK Companies Act 2006 have been included. Based on the responsibilities described above and our work undertaken in the course of the audit, ISAs (UK) require us also to report certain opinions and matters as described below. Strategic Report and Report of the Directors In our opinion, based on the work undertaken in the course of the audit, the information given in the Strategic Report and Report of the Directors for the year ended 31 December 2018 is consistent with the financial statements and has been prepared in accordance with applicable legal requirements. In light of the knowledge and understanding of the group and parent company and their environment obtained in the course of the audit, we did not identify any material misstatements in the Strategic Report and Report of the Directors. Annual Report 2018 | EKF Diagnostics Holdings plcCorporate Governance2 28 Report on the audit of the financial statements (continuation) for the year ended 31 December 2018 Responsibilities for the financial statements and the audit Responsibilities of the directors for the financial statements As explained more fully in the Statement of Directors’ responsibilities in respect of the financial statements set out on page 18, the directors are responsible for the preparation of the financial statements in accordance with the applicable framework and for being satisfied that they give a true and fair view. The directors are also responsible for such internal control as they determine is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error. In preparing the financial statements, the directors are responsible for assessing the group’s and the 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 the parent company or to cease operations, or have no realistic alternative but to do so. Auditors’ responsibilities for the audit of the financial statements Our objectives are to obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditors’ report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with ISAs (UK) will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these financial statements. A further description of our responsibilities for the audit of the financial statements is located on the FRC’s website at: www.frc.org.uk/auditorsresponsibilities. This description forms part of our auditors’ report. Use of this report This report, including the opinions, has been prepared for and only for the parent company’s members as a body in accordance with Chapter 3 of Part 16 of the Companies Act 2006 and for no other purpose. We do not, in giving these opinions, accept or assume responsibility for any other purpose or to any other person to whom this report is shown or into whose hands it may come save where expressly agreed by our prior consent in writing. Other required reporting Companies Act 2006 exception reporting Under the Companies Act 2006 we are required to report to you if, in our opinion: • we have not received all the information and explanations we require for our audit; or • adequate accounting records have not been kept by the parent company, or returns adequate for our audit have not been received from branches not visited by us; or • certain disclosures of directors’ remuneration specified by law are not made; or • the parent company financial statements are not in agreement with the accounting records and returns. We have no exceptions to report arising from this responsibility. Jason Clarke (Senior Statutory Auditor) for and on behalf of PricewaterhouseCoopers LLP Chartered Accountants and Statutory Auditors Cardiff 13 March 2019 Annual Report 2018 | EKF Diagnostics Holdings plcCorporate Governance2Consolidated Income Statement for the year ended 31 December 2018 Revenue Cost of sales Gross profit Administrative expenses Other income Operating profit Depreciation and amortisation Share-based payments Exceptional items EBITDA before exceptional items and share-based payments Finance income Finance costs Profit before income tax Income tax charge Profit for the year Profit attributable to: Owners of the parent Non-controlling interest 29 2017 £’000 41,584 (18,721) 22,863 (18,186) 52 4,729 (4,623) (1,514) 1,562 9,304 53 (475) 4,307 (1,367) 2,940 2,715 225 2,940 Pence 0.59 0.58 2018 £’000 42,543 (19,847) 22,696 (10,586) 89 12,199 (3,991) (939) 6,454 10,675 43 (77) 12,165 (1,866) 10,299 10,110 189 10,299 Pence 2.21 2.19 Notes 5 6 6 5 7 5 12 12 13 14 14 Earnings per Ordinary Share attributable to the owners of the parent during the year From continuing operations Basic Diluted The notes on pages 34 to 64 are an integral part of these consolidated financial statements. Annual Report 2018 | EKF Diagnostics Holdings plcFinancial Statements330 Consolidated Statement of Comprehensive Income for the year ended 31 December 2018 Profit for the year Other comprehensive income: Items that may be subsequently reclassified to profit or loss Currency translation differences Other comprehensive gain/(loss) for the year Total comprehensive gain for the year Attributable to: Owners of the parent Non-controlling interests Total comprehensive gain for the year 2018 £’000 10,299 1,383 1,383 11,682 11,526 156 11,682 2017 £’000 2,940 (622) (622) 2,318 2,096 222 2,318 Items stated above are disclosed net of tax. The income tax relating to each component of other comprehensive income is disclosed in note 13. The notes on pages 34 to 64 are an integral part of these consolidated financial statements. Annual Report 2018 | EKF Diagnostics Holdings plcFinancial Statements3Consolidated and Company’s Statements of Financial Position for the year ended 31 December 2018 31 Assets Non-current assets Property, plant and equipment Intangible assets Investments in subsidiaries Investments Trade and other receivables Deferred tax assets Total non-current assets Current assets Inventories Trade and other receivables Cash and cash equivalents Total current assets Total assets Equity attributable to owners of the parent Share capital Other reserve Foreign currency reserves Retained earnings Non-controlling interest Total equity Liabilities Non-current liabilities Borrowings Deferred tax liabilities Total non-current liabilities Current liabilities Trade and other payables Deferred consideration Current income tax liabilities Borrowings Total current liabilities Total liabilities Total equity and liabilities Notes Group 2018 £’000 Group 2017 £’000 Company 2018 £’000 Company 2017 £’000 16 17 18 20 21 27 22 21 23 28 31 25 27 24 26 25 12,469 41,773 - 3,271 - 36 12,121 43,600 - 152 - 47 1,411 334 30,521 3,271 18,099 23 1,460 538 30,521 152 20,894 34 57,549 55,920 53,659 53,599 6,115 7,434 10,282 23,831 81,380 4,541 143 6,309 52,536 63,529 375 5,638 7,396 8,203 21,237 77,157 4,576 108 4,892 50,394 59,970 528 - 229 3,721 3,950 - 2,569 710 3,279 57,609 56,878 4,541 4,576 102 - 43,579 48,222 - 67 - 45,403 50,046 - 63,904 60,498 48,222 50,046 695 3,179 3,874 10,094 1,104 2,219 185 13,602 17,476 81,380 872 3,490 4,362 9,429 1,062 1,473 333 12,297 16,659 77,157 - - - 7,713 1,104 570 - 9,387 9,387 - - - 5,770 1,062 - - 6,832 6,832 57,609 56,878 The notes on pages 34 to 64 are an integral part of these financial statements. The Company has elected to take the exemption under section 408 of the Companies Act 2006 not to present the Parent Company income statement. The profit for the Parent Company for the year was £6,143,000 (2017: loss of £1,741,000). The financial statements were approved and authorised for issue by the Board on 13 March 2019 and signed on its behalf by: Julian Baines Richard Evans Chief Executive Officer EKF Diagnostics Holdings plc Registered no: 04347937 Finance Director and Chief Operating Officer Annual Report 2018 | EKF Diagnostics Holdings plcFinancial Statements332 Consolidated and Company’s Statements of Cash Flows for the year ended 31 December 2018 Cash flow from operating activities Cash generated by operations Interest paid Income tax paid Net cash generated by operating activities Cash flow from investing activities Purchase of investments Purchase of property, plant and equipment (PPE) Purchase of intangibles Proceeds from sale of PPE Interest received Net cash used in investing activities Cash flow from financing activities Share based payments Share buy back Repayments on borrowings Dividend payment to non-controlling interest Net cash used in financing activities Net increase in cash and cash equivalents Cash and cash equivalents at beginning of year Exchange gains/(losses) on cash and cash equivalents Notes 34 34 Group 2018 £’000 9,861 (35) (1,503) 8,323 (3,119) (1,220) (632) - 43 Group 2017 £’000 Company 2018 £’000 Company 2017 £’000 7,048 4,270 10,118 (106) (959) 9,053 - (23) 7,025 - (3,119) (1,361) (852) 128 53 (12) - - 17 (4,928) (2,032) (3,114) (80) - (1,505) - (1,505) (241) (940) (940) (242) (309) 1,904 8,203 175 (1,491) (6,419) (4,458) (215) 602 7,874 (273) 8,203 - - (940) 2,971 710 40 3,721 (48) (19) 4,203 - (15) (65) - - (241) (4,141) - (5,887) (1,764) 2,567 (93) 710 Cash and cash equivalents at end of year 23 10,282 Annual Report 2018 | EKF Diagnostics Holdings plcFinancial Statements3Consolidated Statement of Changes in Equity 33 Share capital £’000 Share premium account £’000 Other reserves £’000 Foreign currency reserve £’000 Retained earnings £’000 Non- controlling interest £’000 Total £’000 Total equity £’000 4,643 95,393 41 5,609 (45,236) 60,450 521 60,971 Consolidated At 1 January 2017 Comprehensive income Profit for the year Other comprehensive income Currency translation differences Total comprehensive (expense)/income - - - - - - - - - - 67 - - - - 2,715 2,715 225 2,940 (717) (717) 98 (619) 2,813 2,096 (3) 222 (622) 2,318 - - - - - (3,121) (3,121) 95,393 - 545 - - 545 - - (215) - (3,121) - (215) 545 92,817 (2,576) (215) (2,791) Transactions with owners Proceeds from shares issued (67) Capital reconstruction Dividends to non-controlling interest Share-based payments - - - (95,393) - - Total distributions to owners (67) (95,393) 67 At 31 December 2017 and 1 January 2018 4,576 Comprehensive income Profit for the year Other comprehensive income Currency translation differences Total comprehensive income Transactions with owners Share cancellation Dividends to non-controlling interest Distribution in specie Total distributions to owners At 31 December 2018 - - - (35) - - (35) 4,541 - - - - - - - - - 108 4,892 50,394 59,970 528 60,498 - - - 35 - - 35 143 - 10,110 10,110 189 10,299 1,417 (1) 1,416 1,417 10,109 11,526 (33) 156 1,383 11,682 - - - - (940) (940) - - - (309) (940) (309) (7,027) (7,027) - (7,027) (7,967) (7,967) (309) (8,276) 6,309 52,536 63,529 375 63,904 Annual Report 2018 | EKF Diagnostics Holdings plcFinancial Statements334 Company Statement of Changes in Equity Company At 1 January 2017 Comprehensive income Loss for the year Total comprehensive income/(expense) Transactions with owners Proceeds from shares issued Capital reconstruction Share-based payments Share capital 4,643 Share premium £’000 95,393 - - (67) - - - - - (95,393) - Total contributions by and distributions to owners (67) (95,393) At 31 December 2017 and 1 January 2018 Comprehensive income Profit for the year Total comprehensive income Transactions with owners Share cancellation Distribution in specie Total contributions by and distributions to owners At 31 December 2018 4,576 - - (35) - (35) 4,541 - - - - - - - Other reserves £’000 Retained earnings £’000 Total £’000 - - - 67 - - 67 67 - - 35 - 35 (45,673) 54,363 (1,741) (1,741) (1,741) (1,741) (3,121) 95,393 545 92,817 45,403 6,143 6,143 (940) (7,027) (7,967) (3,121) - 545 (2,576) 50,046 6,143 6,143 (940) (7,027) (7,967) 102 43,579 48,222 Annual Report 2018 | EKF Diagnostics Holdings plcFinancial Statements3Notes to the Financial Statements for the year ended 31 December 2018 35 1. General information EKF Diagnostics Holdings Plc is a company incorporated and domiciled in the United Kingdom. The Company is a public limited company, which is listed on the AIM market of the London Stock Exchange. The address of the registered office is Avon House, 19 Stanwell Road, Penarth, Cardiff CF64 2EZ. The principal activity of the Group is the development, manufacture and supply of products and services into the in-vitro diagnostic (IVD) market place. The Group has presence in the UK, USA, Germany, Russia, and China, and sells throughout the world including Europe, the Middle East, the Americas, Asia, and Africa. The financial statements are presented in British Pounds Sterling, the currency of the primary economic environment in which the Company’s headquarters is operated. The Group comprises EKF Diagnostics Holdings plc and its subsidiary Companies as set out in note 18. The registered number of the Company is 04347937. 2. Summary of significant accounting policies The principal accounting policies applied in the preparation of these consolidated financial statements are set out below. The policies have been consistently applied throughout all years presented, unless otherwise stated. Basis of preparation The consolidated financial statements of EKF Diagnostics Holdings plc have been prepared in accordance with International Financial Reporting Standards as adopted by the European Union (IFRSs), IFRS IC interpretations and the Companies Act 2006 applicable to companies reporting under IFRS. Practice is continuing to evolve on the application and interpretations of IFRS. The consolidated financial statements have been prepared under the historical cost convention, as modified by the revaluation of certain financial liabilities at fair value through profit and loss. The preparation of financial statements in conformity with IFRS requires the use of certain critical accounting estimates. It also requires management to exercise its judgement in the process of applying the Group’s accounting policies. The areas involving a higher degree of judgement or complexity, or areas where assumptions and estimates are significant to the consolidated financial statements are disclosed in note 4. (a) New standards, amendments and interpretations adopted by the Group. The following standards have been adopted by the Group for the first time for the financial year beginning on or after 1 January 2018. They do not materially impact on the Group results, and therefore no changes have been made to comparative results: IFRS 9 Financial Instruments IFRS 15 Revenue from Contracts with Customers • • • Classification and Measurement of Share-based Payment Transactions – Amendments to IFRS 2 • Annual Improvements 2014-2016 cycle • Transfers to Investment Property – Amendments to IAS 40 • Interpretation 22 Foreign Currency Transactions and Advance Consideration (b) New standards, amendments and interpretations issued but not effective for the financial year beginning 1 January 2018, and not early adopted. A number of new standards and amendments to standards and interpretations are effective for annual periods beginning on or after 1 January 2018, and have not been applied in preparing these financial statements. None of these is expected to have a significant effect on the financial statements of the group or parent company, except the following, set out below: IFRS 16, ‘Leases’, addresses the definition of a lease, recognition and measurement of leases, and it establishes • principles for reporting useful information to users of financial statements about the leasing activities of both lessees and lessors. A key change arising from IFRS 16 is that most operating leases will be accounted for on balance sheet for lessees. The standard replaces IAS 17, ‘Leases’, and related interpretations. The standard is effective for annual periods beginning on or after 1 January 2019, and earlier application is permitted, subject to EU endorsement and the entity adopting IFRS 15, ‘Revenue from contracts with customers’, at the same time. Based on existing operating leases under IAS 17, the directors estimate that, if IFRS 16 were implemented on 1 January 2018, additional land and buildings of £0.5m (1 January 2017: £0.5m), and vehicles and machinery of £0.2m (1 January 2017: £0.1m) would be recognised, together with an additional lease liability of £0.7m (1 January 2017: £0.6m). In future periods, the operating lease charge would be replaced by a depreciation charge that, whilst lower over the life of the lease than the current operating lease charge, is not expected to make a material difference to profit, although adjusted EBITDA would have been higher in 2018 by £0.3m. Going concern The Group meets its day-to-day working capital requirements through the use of cash reserves and existing bank facilities. The Directors have considered the applicability of the going concern basis in the preparation of these financial statements. This included the review of internal budgets and financial results which show, taking into account reasonably probable changes in financial performance, that the Group should be able to operate within the level of its current funding arrangements. Annual Report 2018 | EKF Diagnostics Holdings plcFinancial Statements3 36 Notes to the Financial Statements (continuation) for the year ended 31 December 2018 The Directors believe that the Company and the Group have adequate resources to continue in operation for the foreseeable future. For this reason they have adopted the going concern basis in the preparation of the financial statements. Basis of consolidation The consolidated financial statements incorporate the financial statements of the Company and its subsidiary undertakings. Subsidiaries are all entities over which the Group has the power to govern their financial and operating policies generally accompanying a shareholding of more than fifty per cent of the voting rights. The existence and effect of potential voting rights that are currently exercisable or convertible are considered when assessing whether the Group controls another entity. Subsidiaries are fully consolidated from the date on which control is transferred to the Group. They are de-consolidated from the date that control ceases. The Group uses the acquisition method of accounting to account for business combinations. The consideration transferred for the acquisition of a subsidiary is the fair values of the assets transferred, the liabilities incurred and the equity interests issued by the Group. The consideration transferred includes the fair value of any asset or liability resulting from a contingent consideration agreement. Acquisition related costs are expensed as incurred. Identifiable assets acquired and liabilities and contingent liabilities assumed in a business combination are measured initially at their fair values at the acquisition date. On an acquisition by acquisition basis, the Group recognises any non-controlling interest in the acquiree either at fair value or at the non-controlling interest’s proportionate share of the acquiree’s net assets. The excess of the consideration transferred, the amount of any non-controlling interest in the acquiree and the acquisition date fair value of any previous equity interest in the acquiree over the fair value of the Group’s share of the identifiable net assets acquired is recorded as goodwill. If this is less than the fair value of the net assets of the subsidiary acquired in the case of a bargain purchase, the difference is recognised directly in the income statement. Investments in subsidiaries are accounted for at cost less impairment. Inter-Company transactions, balances and unrealised gains on transactions between Group companies are eliminated. Unrealised losses are also eliminated. Accounting policies of subsidiaries have been changed where necessary to ensure consistency with the policies adopted by the Group. 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 (the functional currency). The consolidated financial statements are presented in British Pounds Sterling, which is the Company’s functional and presentational currency. (b) Transactions and balances Foreign currency transactions are translated into the functional currency using the exchange rates prevailing at the dates of the transactions where items are re-measured. Foreign exchange gains and losses resulting from the settlement of such transactions and from the translation at year-end exchange rates of monetary assets and liabilities denominated in foreign currencies are recognised in the income statement within ‘administrative expenses’. (c) Group companies The results and financial position of all the Group entities (none of which has the currency of a hyper- inflationary economy) that have a functional currency different from the presentational currency are translated into the presentational currency as follows: • assets and liabilities for each balance sheet presented are translated at the closing rate at the date of that balance sheet; income and expenses for each income statement are translated at average exchange rates; and • • all resulting exchange differences are recognised in other comprehensive income. On consolidation, exchange differences arising from the translation of the net investment in foreign operations are taken to other comprehensive income. When a foreign operation is partially disposed of or sold, exchange differences that were recorded 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 rate. Segmental reporting Operating segments are reported in a manner consistent with the internal reporting provided to the chief operating decision-maker. The chief operating decision-maker, who is responsible for allocating resources and assessing performance of the operating segments, has been identified as the Executive Directors who make strategic decisions. The information used to assess performance is by geography as income statements by product are not available. Government grants Government grants receivable in connection with expenditure on property, plant and equipment are accounted for as deferred income, which is credited to the income statement over the expected useful economic life of the related assets, on a basis consistent with the depreciation policy. Revenue grants for the reimbursement of costs charged to the income statement are credited to the Income Statement in the year in which the costs are incurred. Annual Report 2018 | EKF Diagnostics Holdings plcFinancial Statements3 Notes to the Financial Statements (continuation) for the year ended 31 December 2018 37 Property, plant and equipment Property, plant and equipment are stated at historical cost less accumulated depreciation and any provision for impairment. Historical cost includes expenditure that is directly attributable to the acquisition of the asset and bringing the asset to its working condition for its intended use. Subsequent costs are included in the asset’s carrying amount or recognised as a separate asset, as appropriate, only where it is probable that future economic benefits associated with the asset will flow to the Group and the cost of the asset can be measured reliably. The carrying amount of the replaced part is derecognised. All other repairs and maintenance are charged to the income statement during the financial period in which they are incurred. Any borrowing costs associated with qualifying property plant and equipment are capitalised and depreciated at the rate applicable to that asset category. Land is not depreciated. Depreciation on other assets is calculated using the straight-line method or reducing balances method to allocate their cost to its residual values over their estimated useful lives, as follows Buildings Fixtures and fittings Plant and machinery Motor vehicles 2%–2.5% 20%–25% 20%–33.3% 25% The assets’ residual values and useful economic lives are reviewed regularly, and adjusted if appropriate, at the end of each reporting period. An asset’s carrying value is written down immediately to its recoverable amount if the asset’s carrying amount is greater than its estimated recoverable amount. Gains and losses on the disposal of assets are determined by comparing the proceeds with the carrying amount and are recognised in administration expenses in the income statement. Intangible assets (a) Goodwill Goodwill represents the excess of the cost of an acquisition over the fair value of the Group’s share of the net identifiable assets of the acquired subsidiary at the date of the acquisition. Goodwill on acquisitions of subsidiaries is included in ‘intangible assets’. Goodwill has an infinite useful life and is tested annually for impairment and carried at cost less accumulated impairment losses. Impairment losses on goodwill are not reversed. Gains and losses on the disposal of an entity include the carrying amount of goodwill relating to the entity sold. Goodwill is allocated to cash-generating units for the purpose of impairment testing. The allocation is made to those cash- generating units or groups of cash-generating units that are expected to benefit from the business combination in which the goodwill arose, identified according to operating segment. (b) Trademarks, trade names and licences Separately acquired trademarks and licences are shown at historical cost. Trademarks and licences acquired in a business combination are recognised at fair value at the acquisition date. Trademarks and licences have a finite useful life and are carried at cost less accumulated amortisation. Amortisation is calculated using the straight-line method to allocate the cost of trademarks and licences over their estimated useful lives of between 8 and 12 years and is charged to administrative expenses in the income statement. (c) Customer relationships Contractual customer relationships acquired in a business combination are recognised at fair value at the acquisition date. The contractual customer relationships have a finite useful life and are carried at cost less accumulated amortisation. Amortisation is calculated using the straight-line method over the expected life of the customer relationship of between 6 and 15 years and is charged to administrative expenses in the income statement. (d) Trade secrets Trade secrets, including technical know-how, operating procedures, methods and processes, acquired in a business combination are recognised at fair value at the acquisition date. Trade secrets have a finite useful life and are carried at cost less accumulated amortisation. Amortisation is calculated using the straight-line method to allocate the cost of trade secrets over their estimated useful lives of between 6 and 15 years and is charged to administrative expenses in the income statement. (e) Development costs Development costs acquired in a business combination are recognised at fair value at the acquisition date. Development costs have a finite useful life and are carried at cost less accumulated amortisation. Amortisation is calculated using the straight-line method over their estimated useful lives of 15 years and is charged to administrative expenses in the income statement. Expenditure incurred on the development of new or substantially improved products or processes is capitalised, provided that the related project satisfies the criteria for capitalisation, including the project’s technical feasibility and likely commercial benefit. All other research and development costs are expensed as incurred. Annual Report 2018 | EKF Diagnostics Holdings plcFinancial Statements338 Notes to the Financial Statements (continuation) for the year ended 31 December 2018 Development costs are amortised over the estimated useful life of the products with which they are associated, currently 4 to 5 years. Amortisation commences when a new product is in commercial production. The amortisation is charged to administrative expenses in the income statement. The estimated remaining useful lives of development costs are reviewed at least on an annual basis. The carrying value of capitalised development costs is reviewed for potential impairment at least annually and if a product becomes unviable and an impairment is identified the deferred development costs are immediately charged to the income statement. Impairment of non-financial assets Assets that have an indefinite life such as goodwill are not subject to amortisation and are tested annually for impairment. Assets that are subject to amortisation are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. An impairment loss is recognised for the amount by which the carrying amount exceeds its recoverable amount. The recoverable amount is the higher of an asset’s fair value less costs to sell and value in use. In assessing value in use, the estimated future cash flows 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 for which the estimates of future cash flows have not been adjusted. For the purposes of assessing impairment, assets are grouped at the lowest levels for which there are separately identifiable cash flows. Impairment losses recognised for cash-generating units, to which goodwill has been allocated, are credited initially to the carrying amount of goodwill. Any remaining impairment loss is charged pro rata to the other assets in the cash-generating unit. Where an impairment loss subsequently reverses, the carrying amount of the asset (cash-generating unit) is increased to the revised estimate of its recoverable amount, but so that the increased carrying amount does not exceed the carrying amount that would have been determined had no impairment loss been recognised for the asset (cash-generating unit) in the prior period. A reversal of an impairment loss is recognised in the income statement immediately. If goodwill is impaired however, no reversal of the impairment is recognised in the financial statements. Investments Investments where the Group does not have a controlling interest are initially recognised at cost. The carrying value is tested annually for impairment and an impairment loss is recognised for the amount by which the carrying amount exceeds its recoverable amount. Financial assets Classification The Company classifies its financial assets in the following categories: loans and receivables and financial assets at fair value through profit or loss. The classification depends on the purpose for which the financial assets were acquired and management determines the classification of its financial assets at initial recognition. (a) Loans and receivables Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. They are included in current assets, except for maturities greater than 12 months after the balance sheet date. These are classified as non-current assets. The Company’s loans and receivables comprise ‘trade and other receivables’ and cash and cash equivalents in the balance sheet. (b) Financial assets at fair value through profit or loss The Group classifies the following financial assets at fair value through profit or loss (FVPL): • debt investments that do not qualify for measurement at either amortised cost or fair value through Other Comprehensive Income • equity investments that are held for trading, and • equity investments for which the entity has not elected to recognise fair value gains and losses through Other Comprehensive Income. (c) Financial assets at fair value through other comprehensive income Financial assets at fair value through other comprehensive income comprise equity securities that are not held for trading and which the Group has irrevocably elected at initial recognition to recognise in this category. The Group considers this category to be more relevant for assets of this type. Inventories Inventories and work in progress are stated at the lower of cost and net realisable value. Cost is calculated on a first in and first out basis and includes raw materials, direct labour, other direct costs and attributable production overheads, where appropriate. Net realisable value represents the estimated selling price less all estimated costs of completion and applicable selling costs. Where necessary, provision is made for slow-moving and obsolete inventory. Inventory on consignment and their related obligations are recognised in current assets and payables respectively. Annual Report 2018 | EKF Diagnostics Holdings plcFinancial Statements3 Notes to the Financial Statements (continuation) for the year ended 31 December 2018 39 Trade and other receivables Trade receivables are amounts due from customers for goods sold or services performed in the ordinary course of business. Other than in the case of certain intercompany receivables, they are generally due for settlement within 30 days and therefore are all classified as current. Trade receivables are initially recognised at fair value, being the original invoice amount, and subsequently measured at amortised cost less provision for impairment. The group applies the IFRS 9 simplified approach to measuring expected credit losses which uses a lifetime expected loss allowance for all trade receivables. Trade receivables that are less than three months past due are not considered impaired unless there are specific financial or commercial reasons that lead management to conclude that the customer will default. Older debts are considered to be impaired unless there is sufficient evidence to the contrary that they will be settled. The amount of the provision is the difference between the asset’s carrying value and the present value of the estimated future cash flows. The carrying amount of the asset is reduced through the use of an allowance account, and the amount of the loss is recognised in the income statement within administrative expenses. When a trade receivable is uncollectible it is written off against the allowance account. Subsequent recoveries of amounts previously written off are credited against administrative expenses in the income statement. Cash and cash equivalents Cash and short-term deposits in the balance sheet comprise cash at bank and in hand and short- term deposits with an original maturity of less than three months, reduced by overdrafts to the extent that there is a right of offset against other cash balances. For the purposes of the consolidated cash flow statement, cash and cash equivalents consist of cash and short-term deposits as defined above net of outstanding bank overdrafts where there is a right of offset. Share capital Ordinary Shares are classified as equity. Proceeds in excess of the nominal value of shares issued are allocated to the share premium account and are also classified as equity. Incremental costs directly attributable to the issue of new Ordinary Shares or options are deducted from the share premium account. Where Ordinary Shares are acquired for cash and then cancelled, the nominal value of shares is deducted from the value of equity and credited to the Capital Redemption reserve. The amount paid is debited to reserves. Financial liabilities Debt is measured at fair value, being net proceeds after deduction of directly attributable issue costs, with subsequent measurement at amortised cost with the exception of deferred equity consideration which is categorised as a financial liability at fair value through profit and loss. Debt issue costs are recognised in the income statement over the expected term of such instruments at a constant rate on the carrying amount. Trade and other payables Trade payables are obligations to pay for goods or services that have been acquired in the ordinary course of business from suppliers. Accounts payable are classified as current liabilities if payment is due within one year or less (or in the normal operating cycle of the business if longer). If not, they are presented as non-current liabilities. Trade payables are recognised initially at fair value and subsequently measured at amortised cost using the effective interest method. Borrowings Borrowings are recognised initially at the fair value of proceeds received, net of transaction costs incurred. Borrowings are subsequently carried at amortised cost. Borrowings are classified as current liabilities unless the Group has an unconditional right to defer settlement of the liability for at least 12 months after the balance sheet date. Borrowing costs are expensed in the consolidated Group income statement under the heading ‘finance costs’. Arrangement and facility fees together with bank charges are charged to the income statement under the heading ‘administrative expenses’. Current and deferred income tax The tax expense comprises current and deferred tax. Tax is recognised in the income statement, except to the extent that it relates to items recognised in other comprehensive income where the associated tax is also recognised in other comprehensive income. The current income tax charge is calculated on the basis of the tax laws enacted or substantively enacted at the balance sheet date in the countries where the Company and its subsidiaries operate and generate taxable income. Management evaluates positions taken in tax returns with respect to situations in which applicable tax regulation is subject to interpretation and establishes provisions where appropriate on the basis of amounts expected to be paid to the tax authorities. Deferred tax is recognised, using the liability method, on all temporary differences at the balance sheet date between the tax bases of assets and liabilities and their carrying amounts for financial reporting purposes. Deferred tax liabilities are recognised in respect of all temporary differences except where the deferred tax liability arises from the initial recognition of goodwill in business combinations. Deferred tax assets are recognised for all deductible temporary differences, carry-forward of unused tax assets and tax losses, to the extent that they are regarded as recoverable. They are regarded as recoverable where, on the basis of available evidence, there will be sufficient taxable profits against which the future reversal of the underlying temporary differences can be deducted. Annual Report 2018 | EKF Diagnostics Holdings plcFinancial Statements340 Notes to the Financial Statements (continuation) for the year ended 31 December 2018 The carrying value of the amount of deferred tax assets is reviewed at each balance sheet date and reduced to the extent that it is no longer probable that sufficient taxable profit will be available to allow all, or part, of the tax asset to be utilised. Deferred tax assets and liabilities are measured at the tax rates that are expected to apply to the year when the asset is realised or the liability is settled, based on the tax rates (and tax laws) that have been substantively enacted at the balance sheet date. Deferred income tax assets and liabilities are offset when there is a legally enforceable right to offset current tax assets against current tax liabilities and when the deferred income tax assets and liabilities relate to income taxes levied by the same taxation authority on either the taxable entity or different taxable entities where there is an intention to settle the balances on a net basis. Provisions Provisions for legal claims are recognised when the Group has a present legal or constructive obligation as a result of a past event and it is probable that an outflow of resources will be required to settle the obligation and the amount can be reliably measured. Leases Leases which transfer substantially all the risks and rewards of ownership of an asset are treated as a finance lease. Assets held under finance leases are capitalised at their fair value at the inception of the lease and depreciated over the estimated useful economic life of the asset or lease term if shorter. The finance charges are allocated to the income statement in proportion to the capital amount outstanding. All other leases are classified as operating leases. Operating lease rentals are charged to the income statement in equal annual amounts over the lease term. Deferred consideration Deferred consideration is recognised at fair value. Where the value of deferred consideration is based on a future event, management estimate the likelihood of the consideration becoming payable. Deferred consideration is discounted to take account of the time value of money at rates based on those used for the valuation of related intangible assets. Employee benefits (a) Pension obligations Group companies operate various pension schemes all of which are defined contribution plans. A defined contribution plan is a pension plan under which the Group pays fixed contributions into a separate entity with the pension cost charged to the income statement as incurred. The Group has no further obligations once the contributions have been paid. (b) Share-based compensation The Group operates a number of equity-settled, share-based compensation plans, under which the Group receives services from employees and others as consideration for equity instruments of the Group. Equity-settled share-based payments are measured at fair value at the date of grant and are expensed over the vesting period based on the number of instruments that are expected to vest. For plans where vesting conditions are based on share price targets, the fair value at the date of grant reflects these conditions. Where applicable the Group recognises the impact of revisions to original estimates in the income statement, with a corresponding adjustment to equity for equity- settled schemes. Fair values are measured using appropriate valuation models, taking into account the terms and conditions of the awards. When the share-based payment awards are exercised, the Company issues new shares. The proceeds received net of any directly attributable transaction costs are credited to share capital (nominal value) and share premium. The Group operates a cash-settled compensation plan for certain senior employees. Cash-settled share-based payments are measured at fair value at each reporting date and are expensed over the expected vesting period. The fair value amount is recognised in liabilities. National insurance on share options To the extent that the share price at the balance sheet date is greater than the exercise price on options granted under unapproved share-based payment compensation schemes, provision for any National Insurance Contributions has been based on the prevailing rate of National Insurance. The provision is accrued over the performance period attaching to the award. Revenue recognition Revenue is accounted for in accordance with the principles of IFRS 15, which has been applied as follows: (a) Sale of goods Revenue for the sale of medical diagnostic instruments and reagents is measured at the fair value of the consideration received or receivable and represents the invoiced value for the sale of the goods net of sales taxes, rebates and discounts. Revenue from the sale of goods is recognised when control of the products has transferred which is when a Group Company has delivered products to the customer, the customer has accepted delivery of the products and collectability of the related receivables is reasonably assured. A receivable is recognised when the goods are delivered as this is the point in time that the consideration is unconditional because only the passage of time is required before the payment is due. Where contracts contain multiple deliverables, and the volume of each deliverable can be determined with reasonable certainty, then the transaction price will be allocated to each performance obligation based on the expected cost of each item. Annual Report 2018 | EKF Diagnostics Holdings plcFinancial Statements3Notes to the Financial Statements (continuation) for the year ended 31 December 2018 41 (b) Sale of services Revenue for the sale of services is measured at the fair value of the consideration received or receivable and represents the invoiced value for the sale of the services net of sales taxes, rebates and discounts. Revenue from the sale of services is recognised when a Group Company has completed the services and collectability of the related receivables is reasonably assured. (c) Royalty and licence income Royalty and licence income is recognised on an accruals basis in accordance with the substance of the relevant agreements. Interest income Interest income is accrued on a time basis, by reference to the principal outstanding and at the effective interest rate applicable, which is the rate that exactly discounts estimated future cash receipts through the expected life of the financial asset to that asset’s net carrying amount. Dividend distribution Dividend distributions to the Company’s shareholders are recognised as a liability in the Group’s financial statements in the period in which the dividends are approved by the Company’s shareholders. Interim dividends are recognised when paid. Distributions in specie are recognised at the fair value of the assets distributed. Other income Other income includes grant income and R & D tax credits passed through income where this is permitted by the relevant jurisdiction. Exceptional items These are items of an unusual or non-recurring nature incurred by the Group and include transactional costs and one off items relating to business combinations, such as acquisition expenses. 3. Financial risk management Financial risk factors The Group and Company’s activities expose it to a variety of financial risks: market risk (foreign exchange risk and cash flow interest rate risk), credit risk, liquidity risk, capital risk and fair value risk. The Group and Company’s overall risk management programme focuses on the unpredictability of the financial markets and seeks to minimise the potential adverse effects on the Group and Company’s financial performance. The Group and Company do not use derivative financial instruments to hedge risk exposures. Risk management is carried out by the head office finance team. It evaluates and mitigates financial risks in close co- operation with the Group’s operating units. The Board provides principles for overall risk management whilst the head office finance team provides specific policy guidance for the operating units in terms of managing foreign exchange risk, credit risk and cash and liquidity management. (a) Market risk (i) Foreign exchange – cash flow risk The Group and Company’s presentational currency is sterling although the Group operates internationally and is exposed to foreign exchange risk arising from various currency exposures, primarily between GBP, USD, the Euro, and Rouble, such that the Group’s cash flows are affected by fluctuations in the rate of exchange between GBP and the aforementioned foreign currencies. This exposure is managed by a natural currency hedge as the Group’s operating subsidiaries cost base is also denominated in USDs, Euros, and Roubles, as the Group has subsidiary businesses located in the USA, Germany, and Russia. Management do not use derivative financial instruments to mitigate the impact of any residual foreign currency exposure not mitigated by the natural hedge within the business model. The Group and Company do not speculate in foreign currencies and no operating Company is permitted to take unmatched positions in any foreign currency. (ii) Foreign exchange – Fair value risk Translation exposures that arise on converting the results of overseas subsidiaries are not hedged. Net assets held in foreign currencies are hedged wherever practical by matching borrowings in the same currency. The principal exchange rates used by the Group and Company in translating overseas profits and net assets into GBP are set out in the table below. Rate compared to GBP Euro Russian Rouble US Dollar Average rate 2018 Average rate 2017 Year end rate 2018 Year end rate 2017 1.129 83.197 1.332 1.145 75.689 1.295 1.114 88.514 1.276 1.125 77.963 1.350 Annual Report 2018 | EKF Diagnostics Holdings plcFinancial Statements342 Notes to the Financial Statements (continuation) for the year ended 31 December 2018 As a guide to the sensitivity of the Group’s results to movements in foreign currency exchange rates, a one cent movement in the Euro and US Dollars to Sterling rate would impact annual earnings by approximately £55,000 (2017: £45,000) and £73,000 (2017: £73,000) respectively. The Company’s results are not sensitive to changes in exchange rates. (iii) Cash flow and fair value interest rate risk The Group has interest-bearing assets in the form of cash and cash equivalents and interest- bearing liabilities which relate to borrowings and finance lease obligations mainly in the Group’s German subsidiary. Interest rates on cash and cash equivalents are floating whilst interest rates on certain borrowings have been fixed and therefore expose the Group to fair value interest rate risk. The Group and Company do not speculate on future changes in interest rates. Where overseas acquisitions are made, it is the Group’s policy to arrange any borrowings required in local currency. It is the Group and Company’s policy not to trade in financial instruments. The Group and Company do not use interest rate swaps. (b) Credit risk Credit risk is managed on a Group basis, except for credit risk relating to accounts receivable balances. Each local subsidiary and operating business unit is responsible for managing and analysing the credit risk for each of their new clients before standard payment and delivery terms and conditions are offered. It is the Group and Company policy to obtain deposits or require payment in advance from customers where possible, particularly overseas customers. In addition if possible the Group will seek confirmed letters of credit for the balances due. Credit risk is managed at the operating business unit level and monitored at the Group level to ensure adherence to Group policies. If there is no independent rating, local management assesses the credit quality of the customer, taking into account its financial position, past experience and other factors. Individual risk limits are set based on internal or external ratings in accordance with limits set by the Board. The utilisation of credit limits is regularly monitored. Where extended credit is granted, this is agreed by the Finance Director. Credit insurance is taken out where appropriate and cost effective. Credit risk also arises from cash and cash equivalents, derivative financial instruments and deposits with banks and financial institutions, as well as credit exposures to customers. (c) Liquidity risk Cash flow forecasting is performed in the individual operating entities of the Group and is aggregated by Group finance. Group finance monitors cash and cash flow forecasts and it is the Group and Company’s liquidity risk management policy to maintain sufficient cash and available funding through an adequate amount of cash and cash equivalents and committed credit facilities from its bankers. Due to the dynamic nature of the underlying businesses, the head office finance team aims to maintain flexibility in funding by keeping sufficient cash and cash equivalents available to fund the requirements of the Group and Company. The Group’s policy in relation to the finance of its overseas operations requires that sufficient liquid funds be maintained in each of its territory subsidiaries to support short and medium-term operational plans. Where necessary, short-term funding is provided by the holding company. In the UK, the management of liquid funds in excess of operational needs are controlled centrally. Typically excess funds are placed as short-term deposits, to provide a balance between interest earnings and flexibility, where the benefit outweighs the administrative cost. The table below analyses the Group’s non-derivative financial liabilities into relevant maturity groupings based on the remaining period at the balance sheet date to the contractual maturity date. The amounts disclosed in the table are the contractual undiscounted cash flows. Rate compared to GBP At 31 December 2018: Borrowings (inc. finance leases) Deferred consideration Trade and other payables At 31 December 2017: Borrowings (inc. finance leases) Deferred consideration Trade and other payables Less than one year £’000 Between 1 and 2 years £’000 Between 2 and 5 years £’000 More than 5 years £’000 185 1,104 8,591 188 1,062 9,792 185 - - 193 - - 510 - - 599 - - - - - 154 - - Total £’000 880 1,104 8,591 1,134 1,062 9,792 The maturity of the Company’s non-derivative financial liabilities is all less than one year. Annual Report 2018 | EKF Diagnostics Holdings plcFinancial Statements3Notes to the Financial Statements (continuation) for the year ended 31 December 2018 43 (d) Capital risk management The Group and Company’s objectives when managing capital are to safeguard the ability to continue as a going concern in order to provide returns for shareholders and benefits for other stakeholders and to maintain an optimal capital structure to reduce the cost of capital. The Group and Company monitors capital on the basis of the gearing ratio. This ratio is calculated as net debt divided by total capital. Net debt is calculated as total borrowings (including “current and non- current borrowings” as shown in the consolidated balance sheet) less cash and cash equivalents. Total capital is the sum of net debt plus equity. (e) Fair value estimation The Group and Company have no Level 1, 2 or 3 classified financial assets as at 31 December 2018 (2017: none). 4. Critical accounting estimates and judgements In the process of applying the Group’s accounting policies, management has made accounting judgements in the determination of the carrying value of certain assets and liabilities. Due to the inherent uncertainty involved in making assumptions and estimates, actual outcomes will differ from those assumptions and estimates. The following judgements have the most significant effect on the amounts recognised in the financial statements. (a) Legal disputes A dispute has arisen between EKF-diagnostic GmbH and a distributor involving disputed invoices from the distributor, relating mainly to the period prior to the acquisition of the company by the Group. The dispute is not covered by any outstanding warranty from the former owner. Earlier litigation in the UK has been settled in EKF’s favour, however litigation in Germany is continuing. Having taken legal advice the Directors believe that no settlement provision is required in relation to this dispute, however an accrual for legal costs has been set. A dispute with a customer in the USA is likely to go to arbitration. The Group has taken a provision against the outstanding debtor, and an accrual for legal costs, however the Directors do not believe any additional settlement provision is required. (b) Impairment of goodwill and intangible assets The Group tests annually whether goodwill and other intangible assets have suffered any impairment, in accordance with the accounting policy stated in note 2. The recoverable amounts of cash-generating units have been determined based on value-in-use calculations. These calculations require the use of estimates as set out in note 17. (c) Share-based payments A number of accounting estimates and judgements are incorporated within the calculation of the charge to the income statement in respect of share-based payments. These are described in more detail in note 30. (d) Renalytix AI plc The Group has calculated a fair value for the Renalytix AI plc shares distributed to Relevant EKF shareholders. The fair value of the shares was calculated based on the proposed flotation price, less a discount to account for the restrictions placed on the shares. The discount, which is an estimate, was calculated taking into account, amongst other factors, the 180 day lock up period, sector volatility, and that the shares were issued pre-admission.. An external valuer was used. Further details are provided in note 29. 5. Segmental reporting Management has determined the Group’s operating segments based on the monthly management reports presented to the Chief Operating Decision Maker (‘CODM’). The CODM is the Executive Directors and the monthly management reports are used by the Group to make strategic decisions and allocate resources. The principal activity of the Group is the design, development, manufacture and sale of diagnostic instruments, reagents and certain ancillary products, as well as central laboratory reagents. This activity takes place across various countries, such as the USA, Germany, Russia, and the United Kingdom, and as such the Board considers the business primarily from a geographic perspective. Although not all the segments meet the quantitative thresholds required by IFRS 8, management has concluded that all segments should be maintained and reported. The reportable segments derive their revenue primarily from the manufacture and sale of medical diagnostic equipment and reagents. Other services include the servicing and distribution of third party company products under separate distribution agreements. Currently the key operating performance measures used by the CODM are Revenue and adjusted EBITDA. Annual Report 2018 | EKF Diagnostics Holdings plcFinancial Statements344 Notes to the Financial Statements (continuation) for the year ended 31 December 2018 5. Segmental reporting continued The segment information provided to the Board for the reportable segments for the year ended 31 December 2018 is as follows: Germany £’000 USA £’000 Russia £’000 Other £’000 Total £’000 2018 Income statement Revenue Inter-segment External revenue Adjusted EBITDA* Exceptional items (Note 7) Share-based payments (Note 30) EBITDA Depreciation Amortisation Operating profit Net finance costs Income tax Retained profit Segment assets Operating assets Inter-segment assets External operating assets Cash Total assets Segment liabilities Operating liabilities Inter-segment liabilities External operating liabilities Borrowings Total liabilities Other segmental information Non-current assets – PPE Non-current assets – Intangibles PPE – additions Intangible assets – additions 23,478 - 23,478 2,687 - 2,687 5 - 5 7,824 762 (4,202) 21,937 (5,564) 16,373 6,291 (580) - 5,711 (847) (2,137) 2,727 (24) (327) 2,376 38,933 (99) 38,834 2,980 41,814 97 - 7,921 (271) (1,096) 6,554 - (1,064) 5,490 25,849 - 25,849 2,749 28,598 10,167 17,008 (5,000) (12,093) 5,167 880 6,047 6,204 27,026 501 506 4,915 - 4,915 4,779 13,638 659 126 48,107 (5,564) 42,543 10,675 6,454 (939) 16,190 (1,158) (2,833) 12,199 (34) (1,866) 10,299 6,937 (939) 1,796 (16) 413 2,193 (25) (305) 1,863 35,101 100,346 (29,149) (29,248) 5,952 3,855 9,807 18,540 (12,155) 6,385 - 6,385 1,413 1,018 13 - 71,098 10,282 81,380 45,844 (29,248) 16,596 880 17,476 12,469 41,773 1,220 632 - - 762 (24) (13) 725 15 (170) 570 463 - 463 698 1,161 129 - 129 - 129 73 91 47 - * Adjusted EBITDA excludes exceptional items and share-based payments. Annual Report 2018 | EKF Diagnostics Holdings plcFinancial Statements3Notes to the Financial Statements (continuation) for the year ended 31 December 2018 5. Segmental reporting (continued) 45 Germany £’000 USA £’000 Russia £’000 Other £’000 Total £’000 2017 Income statement Revenue Inter-segment External revenue Adjusted EBITDA* Exceptional items (Note 7) Share-based payments (Note 30) EBITDA Depreciation Amortisation Operating profit Net finance costs Income tax Retained profit Segment assets Operating assets Inter-segment assets External operating assets Cash Total assets Segment liabilities Operating liabilities Inter-segment liabilities External operating liabilities Borrowings Total liabilities Other segmental information Non-current assets – PPE Non-current assets – Intangibles PPE – additions Intangible assets – additions 22,856 - 22,856 2,742 - 2,742 4 - 4 7,730 686 (4,995) 21,006 (5,024) 15,982 5,883 (207) - 5,676 (808) (2,673) 2,195 (48) 476 2,623 19 - 7,749 (300) (1,036) 6,413 14 (1,322) 5,105 40,959 24,219 (168) 40,791 3,118 43,909 - 24,219 3,376 27,595 13,543 20,467 (8,294) (14,990) 5,249 1,056 6,305 6,443 28,461 1,033 293 5,477 - 5,477 4,164 13,638 290 484 46,608 (5,024) 41,584 9,304 1,562 (1,514) 9,352 (1,160) (3,463) 4,729 (422) (1,367) 2,940 1,750 (1,514) (4,759) (22) 274 (4,507) (425) (344) (5,276) 26,363 92,114 (22,992) (23,160) 3,371 715 4,086 4,472 124 4,596 149 4,745 1,461 1,382 15 75 68,954 8,203 77,157 38,614 (23,160) 15,454 1,205 16,659 12,121 43,600 1,361 852 - - 686 (30) (28) 628 37 (177) 488 573 - 573 994 1,567 132 - 132 - 132 53 119 23 - * Adjusted EBITDA excludes exceptional items and share-based payments. ‘Other’ primarily relates to the holding company and head office costs. Poland is included in Germany as a result of the closure of the Polish operations during the year. Annual Report 2018 | EKF Diagnostics Holdings plcFinancial Statements346 Notes to the Financial Statements (continuation) for the year ended 31 December 2018 5. Segmental reporting (continued) Disclosure of Group revenues by geographic location of customer is as follows: Americas United States of America Rest of Americas Europe, Middle East and Africa (EMEA) Germany United Kingdom Rest of Europe Russia Middle East Africa Asia and Rest of World China Rest of Asia New Zealand/Australia Total revenue 2018 £’000 18,253 3,925 6,208 324 3,583 2,687 1,467 1,229 994 3,751 122 42,543 No single external customer represented more than 10% of revenues in either 2018 or 2017. 6. Expenses – analysis by nature Disclosure of Group revenues by geographic location of customer is as follows: Inventories consumed in cost of sales Employee benefit expense (note 10) Employee costs capitalised as intangible assets Depreciation and amortisation Exceptional items (note 7) Research and development expenses Foreign exchange Operating lease payments Other expenses Total cost of sales and administrative expenses Included within the above expenses are exceptional items as set out in note 7. 2018 £’000 9,484 16,457 (359) 3,991 (6,454) 1,644 (83) 487 5,266 30,433 2017 £’000 17,174 3,195 6,016 300 3,423 2,743 2,912 1,611 915 3,168 127 41,584 2017 £’000 7,848 17,005 (364) 4,623 (1,562) 2,203 239 480 6,435 36,907 Annual Report 2018 | EKF Diagnostics Holdings plcFinancial Statements3Notes to the Financial Statements (continuation) for the year ended 31 December 2018 7. Exceptional items Included within administrative expenses are exceptional items as shown below: – Warranty claim – Business reorganisation costs – Cancellation of shares – A Webb loan – Net receipt from legal action – Renalytix Exceptional items 47 Note a b c d e f 2018 £’000 31 (120) - 90 97 6,356 6,454 2017 £’000 339 (183) 1,406 - - - 1,562 a. Estimated warranty claim in relation to the acquisition of EKF-diagnostic GmbH increased because of higher share price. b. Restructuring costs, mainly redundancy and notice costs, associated in 2018 with the closure of EKF’s Polish facility and other restructuring activities. c. Fair value of shares released to EKF by former shareholders of Selah Genomics Inc. which had been issued as part of the consideration for the acquisition of Selah, but held in escrow. These shares were subsequently been cancelled. d. Following settlement with Mr A Webb, the balance of the loan made by him in relation to the molecular diagnostic business has been written back. e. Receipt from legal action against a customer net of legal costs. f. The net profit made by the Group in relation to the Renalytix transaction. Full details are given in note 29. 8. Auditor remuneration During the year the Group (including its overseas subsidiaries) obtained the following services from the Company’s auditor and its associates: Fees payable to Company’s auditor and its associates for the audit of the parent Company and consolidated financial statements Fees payable to the Company’s auditor and its associates for other services: – The audit of Company’s subsidiaries – Other services – Tax compliance services 9. Directors’ emoluments 2018 £’000 32 70 36 12 150 2017 £’000 28 69 23 11 131 During the year the Group (including its overseas subsidiaries) obtained the following services from the Company’s auditor and its associates: Aggregate emoluments Share based payments Contribution to defined contribution pension scheme 2018 £’000 690 775 19 1,484 2017 £’000 1,745 969 19 2,733 Retirement benefits are accruing to 2 (2017: 2) current directors under a defined contribution scheme. See further disclosures within the Remuneration Report on page 23. The highest paid director received aggregate emoluments, including the effect of the share based payments charge, of £734,000 (2017: £1,317,000). Annual Report 2018 | EKF Diagnostics Holdings plcFinancial Statements3 48 Notes to the Financial Statements (continuation) for the year ended 31 December 2018 10. Employee benefit expense Wages and salaries Social security costs Share based payments granted to Directors and senior management (Note 30) Other pension costs (Note 32) Group 2018 £’000 13,332 1,979 939 207 Group 2017 £’000 13,304 2,019 1,514 168 Company 2018 £’000 Company 2017 £’000 1,919 149 939 45 2,177 240 1,514 45 3,976 Employee costs of £0.4m (2017: £0.4m) have been capitalised as part of development costs in the Group. 11. Monthly average number of people employed 16,457 17,005 3,052 Monthly average number of people (including Executive Directors) employed was: Administration Research and development Sales and marketing Manufacturing, production and after sales Group 2018 £’000 Group 2017 £’000 Company 2018 £’000 Company 2017 £’000 54 18 60 159 291 54 17 61 160 292 10 3 6 1 20 10 4 3 - 17 The total number of employees (FTEs) in the Group at 31 December 2018 was 300 (2017: 296), and in the Company was 20 (2017: 17). 12. Finance income and costs Finance costs: – Bank borrowings – Other interest – Financial liabilities at fair value through profit or loss Finance costs Finance income – Interest income on cash and short-term deposits – Other interest Finance income Net finance costs 2018 £’000 2017 £’000 25 10 42 77 9 34 43 34 83 23 369 475 14 39 53 422 Annual Report 2018 | EKF Diagnostics Holdings plcFinancial Statements3Notes to the Financial Statements (continuation) for the year ended 31 December 2018 49 13. Income tax Group Current tax: Current tax on profit/ the year Adjustments for prior periods Total current tax Deferred tax (note 27): Origination and reversal of temporary differences Total deferred tax Income tax charge 2018 £’000 2,248 5 2,253 (387) (387) 1,866 2017 £’000 2,045 (100) 1,945 (578) (578) 1,367 The Finance Act 2015 which was substantively enacted in 2015 included legislation to reduce the main rate of UK corporation tax to 19% from 1 April 2017 and the Finance Act 2016 which was substantively enacted in 2016 included legislation to reduce the main rate of UK corporation tax to 17% from 1 April 2020. The tax on the Group’s profit before tax differs from the theoretical amount that would arise using the standard tax rate applicable to the profits of the consolidated entities as follows: Profit before tax Tax calculated at domestic tax rates applicable to UK standard rate of tax of 19% (2017: 19.25%) Tax effects of: – Expenses not deductible for tax purposes – Remeasurement of deferred tax – change in future tax rate – Income not subject to tax – Utilisation of losses – Adjustment in respect of prior years – Impact of different tax rates in other jurisdictions – Other movements Tax charge There are no tax effects on the items in the statement of other comprehensive income. 2018 £’000 12,165 2,311 297 (19) (238) (1,069) 106 277 201 1,866 2017 £’000 4,307 829 31 (360) 267 (178) (100) 634 244 1,367 Annual Report 2018 | EKF Diagnostics Holdings plcFinancial Statements350 Notes to the Financial Statements (continuation) for the year ended 31 December 2018 14. Earnings per share (a) Basic Basic earnings per share is calculated by dividing the profit attributable to owners of the parent by the weighted average number of Ordinary Shares in issue during the year. Profit attributable to owners of the parent Weighted average number of Ordinary Shares in issue Basic profit per share (b) Diluted 2018 £’000 10,110 2017 £’000 2,715 457,207,272 463,098,526 2.21 pence 0.59 pence Diluted earnings per share is calculated by adjusting the weighted average number of Ordinary Shares outstanding assuming conversion of all dilutive potential Ordinary Shares. The Company has one category of dilutive potential ordinary shares being share options. Profit attributable to owners of the parent Weighted average number of Ordinary Shares in issue 2018 £’000 10,110 2017 £’000 2,715 461,489,617 469,343,547 Diluted profit per share 2.19 pence 0.58 pence Weighted average number of Ordinary Shares in issue Adjustment for: – Assumed conversion of share awards – Assumed payment of equity deferred consideration 2018 2017 457,207,272 463,098,526 238,405 2,201,081 4,043,940 4,043,940 Weighted average number of Ordinary Shares including potentially dilutive shares 461,489,617 469,343,547 15. Dividends On 24th October 2018 the Company made a distribution in specie whereby the Company’s shareholding in Renalytix AI plc, a developer of artificial intelligence enabled diagnostics for kidney disease, which has been floated separately from the Group, was distributed to ordinary shareholders of the Company. The rate was one Renalytix AI plc share for each 21.825 shares held in the company at a total value of £7,027,000 (2017: nil). The fair value per EKF share is 1.5357p, which has been calculated based on the market value of the Renalytix shares prior to the completion of the fundraising and their flotation on the AIM market, less a discount to account for the restrictions placed on the shares. Annual Report 2018 | EKF Diagnostics Holdings plcFinancial Statements3Notes to the Financial Statements (continuation) for the year ended 31 December 2018 16. Property, plant and equipment 51 Group Cost At 1 January 2017 Additions Exchange differences Disposals At 31 December 2017 Accumulated depreciation At 1 January 2017 Charge for the year Exchange differences Disposals At 31 December 2017 Net book value at 31 December 2017 Cost At 1 January 2018 Additions Exchange differences Disposals At 31 December 2018 Accumulated depreciation At 1 January 2018 Charge for the year Exchange differences Disposals At 31 December 2018 Net book value at 31 December 2018 Land and buildings £’000 Fixtures & fittings £’000 Plant and machinery £’000 Motor vehicles £’000 9,829 197 (265) (106) 9,655 1,107 278 (54) (61) 1,270 8,385 9,655 50 285 - 9,990 1,270 275 51 - 1,596 8,394 1,140 136 (39) (19) 1,218 783 181 (17) (19) 928 290 1,218 125 34 (4) 1,373 928 155 24 (4) 1,103 270 8,688 1,006 243 (267) 9,670 5,710 672 117 (226) 6,273 3,397 9,670 998 166 (55) 10,779 6,273 706 107 (42) 7,044 3,735 142 22 (2) (23) 139 75 29 - (14) 90 49 139 47 (16) - 170 90 22 (12) - 100 70 Total £’000 19,799 1,361 (63) (415) 20,682 7,675 1,160 46 (320) 8,561 12,121 20,682 1,220 469 (59) 22,312 8,561 1,158 170 (46) 9,843 12,469 Depreciation expense of £768,000 (2017: £733,000) has been charged to cost of sales and £390,000 (2017: £427,000) has been charged to administrative expenses. Annual Report 2018 | EKF Diagnostics Holdings plcFinancial Statements352 Notes to the Financial Statements (continuation) for the year ended 31 December 2018 16. Property, plant and equipment (continued) Company Cost At 1 January 2017 Additions At 31 December 2017 Accumulated depreciation At 1 January 2017 Charge for the year At 31 December 2017 Land and buildings £’000 Fixtures & fittings £’000 1,673 - 1,673 203 40 243 115 15 130 75 25 100 Total £’000 1,788 15 1,803 278 65 343 Net book value at 31 December 2017 1,430 30 1,460 Cost At 1 January 2018 Additions At 31 December 2018 Accumulated depreciation At 1 January 2018 Charge for the year At 31 December 2018 1,673 - 1,673 243 40 283 130 12 142 100 21 121 1,803 12 1,815 343 61 404 Net book value at 31 December 2018 1,390 21 1,411 The Company’s freehold property is in Germany and occupied by its subsidiary undertaking, EKF- diagnostic GmbH. EKF- diagnostic GmbH is paying rental income of €13,900 (£12,480) per month to the parent Company. €167,000 (£149,760) (2017: €167,000 (£148,400)) was paid to the parent Company for the year. Annual Report 2018 | EKF Diagnostics Holdings plcFinancial Statements3Notes to the Financial Statements (continuation) for the year ended 31 December 2018 53 17. Intangible assets Group Cost At 1 January 2017 Additions Elimination Exchange differences At 31 December 2017 Accumulated amortisation At 1 January 2017 Exchange differences Charge for the year Elimination Impairment At 31 December 2017 Net book value at 31 December 2017 Cost At 1 January 2018 Additions Disposals Exchange differences At 31 December 2018 Accumulated amortisation At 1 January 2018 Exchange differences Charge for the year At 31 December 2018 Net book value at 31 December 2018 Non- compete agreements £’000 Goodwill £’000 Trademarks, trade name and licences £’000 Customer relationships £’000 Trade secrets £’000 Development costs £’000 Total £’000 70 - (70) - - 70 - - (70) - - - - - - - - - - - - - 27,037 3,052 16,376 18,625 8,785 73,945 - - (38) 135 - (18) 26,999 3,169 2,228 1,897 42 - - 333 2,603 4 273 - - - - (655) 15,721 6,817 (246) 1,310 - - - - 362 717 (434) 142 852 (504) (207) 18,987 9,210 74,086 10,594 5,836 27,442 161 917 - - 124 356 (434) 274 85 2,856 (504) 607 2,174 7,881 11,672 6,156 30,486 24,396 995 7,840 7,315 3,054 43,600 26,999 3,169 15,721 18,987 - - 544 73 - 15 - - 573 - - 172 9,210 559 (646) 239 74,086 632 (646) 1,543 27,543 3,257 16,294 19,159 9,362 75,615 2,603 28 - 2,174 (18) 340 7,881 262 1,346 11,672 6,156 30,486 91 928 160 219 523 2,833 2,631 2,496 9,489 12,691 6,535 33,842 24,912 761 6,805 6,468 2,827 41,773 Amortisation charge of £63,000 (2017: £49,000) has been charged to cost of sales and £2,770,000 (2017: £2,807,000) has been charged to administrative expenses in the income statement (net of the profit on the sale of intangible assets) Goodwill is allocated to the Group’s cash–generating units (CGU’s) identified according to geographic operating segment. An operating segment-level summary of the goodwill allocation is presented below. Germany Russia USA Total 2018 £’000 17,742 88 7,082 24,912 2017 £’000 17,602 100 6,694 24,396 Annual Report 2018 | EKF Diagnostics Holdings plcFinancial Statements354 Notes to the Financial Statements (continuation) for the year ended 31 December 2018 Germany includes EKF-Diagnostic, Senslab, and DiaSpect, while the USA includes Stanbio and STI. Goodwill is tested for impairment at the balance sheet date. The recoverable amount of goodwill at 31 December 2018 was assessed on the basis of value in use. The assessed value exceeded the carrying value and no impairment loss was recognised. The key assumptions in the calculation to assess value in use are future revenues and the ability to generate future cash flows. The most recent financial results and initial budgets approved by the Board for the next year were used and forecasts for a further four years, followed by an extrapolation of expected cash flows at a constant growth rate for each unit and the calculation of a terminal value based upon the longer term growth rates set out below. The projected results were discounted at a rate which is a prudent evaluation of the pre-tax rate that reflects current market assessments of the time value of money and the risks specific to the cash-generating units. The discount rates applied reflect a risk-adjusted weighted average cost of capital. The key assumptions used in 2018 for the value in use calculations of cash generating units with significant goodwill are as follows: Longer-term growth rate Discount rate EKF Germany % 3 10 DiaSpect % Stanbio % 2 10 3 10 STI % 3 10 The discount rate used is based on a common risk profile across the Group. The impairment assessments for EKF Germany, Russia, Stanbio, and STI showed assessed values that exceeded the carrying values with significant headroom. For DiaSpect, the impairment assessment has been carried out over a 5 year period with a terminal value based on the long-term growth rate. The Directors estimate that growth rates in the 5 year period from the DiaSpect products will be high because they are relatively new products that will bring market benefits, which have recently received approval for sale in the USA. In Year 1 a growth rate of 24% has been used, reflecting the imminent launch of the product in the USA, followed by 17% in years 2-3, and 16% in years 4-5, reflecting a combination of continuing instrumentation sales and increasing consumable volumes as the established instrument base increases in the market. The forecast growth rates then fall to 2% thereafter. The Directors believe that market benefits will allow the product to be sold at a margin in excess of other products sold by the Group. A 4% increase in the discount rate or a reduction in forecast revenue growth rates in year 2-5 to 8% would result in an impairment. The remaining average useful lives of the intangibles are as follows: Trade name Customer relations Trade secrets Development costs 1–5 years 2–10 years 3–10 years 3-10 years The Company holds capitalised development costs with a cost and net value of £1,876,000 (2017: £1,876,000) and £334,000 (2017: £538,000) respectively. These are amortised over their useful life and an amortisation charge of £204,000 (2017: 65,000) has been recognised in the income statement in 2018. Annual Report 2018 | EKF Diagnostics Holdings plcFinancial Statements3Notes to the Financial Statements (continuation) for the year ended 31 December 2018 18. Investments in subsidiaries Company Shares in Group undertakings At 1 January and 31 December 2018 55 2018 £’000 30,521 2017 £’000 30,521 Investments in Group undertakings are recorded at cost, which is the fair value of the consideration paid, less any impairment. The subsidiaries of EKF Diagnostics Holdings plc as at 31 December 2018 are as follows: Name of Company Note Proportion Held EKF Diagnostics Limited (UK)* Quotient Diagnostics Limited* 360 Genomics Limited* EKF Molecular Diagnostics Limited* DiaSpect Medical AB DiaSpect Medical GmbH EKF-diagnostic GmbH Senslab GmbH EKF Diagnostyka Sp.z.o.o. 000 EKF Diagnostika EKF Diagnostics Inc Stanbio Laboratory LP Separation Technology, Inc 1261 N Main LP Stanlab Management LLC 1261 N Main Management LLC EKF POC, LLC Argutus Intellectual Property Limited EKF Diagnostics Limited (Ireland) EKF Diagnostics (Shanghai) Co. Ltd Notes 1 1 1 1 2 3 3 3 4 5 6 6 6 6 6 6 6 7 7 8 Class of Shareholding Ordinary Ordinary Ordinary Ordinary Nature of Business Head Office Sale of diagnostic equipment Sale of diagnostic equipment Manufacture and sale of diagnostic equipment Ordinary Head office and IP licencing 100% 100% 100% (indirect) 100% 100% 100% (Indirect) Ordinary 100% Ordinary 100% (indirect) Ordinary 100% (indirect) Ordinary Manufacture and sale of diagnostic equipment and consumables Manufacture and sale of diagnostic equipment and consumables Manufacture and sale of diagnostic equipment and consumables Manufacture and sale of diagnostic equipment and consumables 60% (indirect) 100% Ordinary Ordinary Sale of diagnostic equipment Intermediate holding company 100% (indirect) Partnership 100% (indirect) Ordinary 100% (indirect) Partnership 100% (indirect) 100% (indirect) 100% (indirect) 100% (indirect) 100% 100% Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Manufacture and sale of diagnostic equipment and consumables Manufacture and sale of diagnostic equipment and consumables Dormant Dormant Dormant Dormant Dormant Manufacture and sale of diagnostic equipment Dormant 1. Incorporated, registered and having its principal place of business in the United Kingdom, with its registered office being Avon House, 19 Stanwell Road, Penarth Vale of Glamorgan, CF64 2EZ. 2. Incorporated in Sweden. The principal place of business is in Germany. The registered address is Lytta Gard, 75593 Uppsala, Sweden. 3. Incorporated, registered, and having its principal place of business in Germany at Ebendorfer Chaussee 3, 39179 Barleben, Germany. 4. Incorporated, registered, and having its principal place of business in Poland at ul. Kazimierza Wielkiego 58, 32-400 Myślenice, Poland. 5. Incorporated, registered, and having its principal place of business in Russia at 117648, Moscow, PO Box: 30, District Severnoe Chertanovo, House 2, building 207. 6. Incorporated and registered, or formed, and having its principal place of business in the United States of America at 1261 North Main Street, Boerne, Texas, USA 78006. 7. Incorporated and registered in Ireland c/o Mazars, Harcourt Centre, Block 3, Harcourt Road, Dublin 2. Its principal place of business is in the United Kingdom. 8. Incorporated and registered in China, Suite 1202, Jin Hong Qiao International Center Building I, No. 523 Loushan-guan Road, Changning District, Shanghai, P.R.C.200051 Annual Report 2018 | EKF Diagnostics Holdings plcFinancial Statements3 56 Notes to the Financial Statements (continuation) for the year ended 31 December 2018 All subsidiaries are included in the consolidation. The proportions of voting shares held by the parent Company do not differ from the proportion of Ordinary Shares held. * All UK subsidiaries are exempt from the requirement to file audited financial statements by virtue of section 479A of the Companies Act 2006. As part of this process, the Company has provided statutory guarantees to these subsidiaries. 19. Financial instruments by category (a) Assets 31 December Assets as per balance sheet Financial assets at fair value through other comprehensive income Trade and other receivables excluding prepayments and corporation tax Cash and cash equivalents Total Group 2018 £’000 3,271 7,138 10,282 20,691 Group 2017 £’000 Company 2018 £’000 Company 2017 £’000 152 7,120 8,203 15,475 3,271 152 18,187 23,325 3,721 25,179 710 24,187 Receivables in the analysis above are all categorised as ‘loans and receivables’ for the Group and Company. (b) Liabilities 31 December Liabilities as per balance sheet Borrowings (excluding finance lease liabilities) Trade and other payables Deferred consideration Total Group 2018 £’000 880 8,833 1,104 10,817 Group 2017 £’000 Company 2018 £’000 Company 2017 £’000 1,205 9,320 1,062 11,587 - 7,713 1,104 8,817 - 5,718 1,062 6,780 Liabilities in the analysis above are all categorised as ‘other financial liabilities at amortised cost’ for the Group and Company, with the exception of deferred equity consideration totalling £1,104,000 (2017: £1,062,000) that is categorised as a financial liability at fair value through profit and loss. (c) Credit quality of financial assets The Group is exposed to credit risk from its operating activities (primarily for trade receivables and other receivables) and from its financing activities, including deposits with banks and financial institutions, foreign exchange transactions and other financial instruments. The Group’s maximum exposure to credit risk, due to the failure of counterparties to perform their obligations as at 31 December 2018 and 31 December 2017, in relation to each class of recognised financial assets, is the carrying amount of those assets as indicated in the accompanying balance sheets. Trade receivables The credit quality of trade receivables that are neither past due nor impaired have been assessed based on historical information about the counterparty default rate. The Group does not hold any other receivable balances with customers, whose past default has resulted in the recovery of the receivables balances. Cash at bank The credit quality of cash has been assessed by reference to external credit ratings, based on reputable credit agencies’ long-term issuer ratings: AA- Ratings lower than AA- or unrated Total 2018 £’000 4,053 6,229 10,282 2017 £’000 1,997 6,206 8,203 Annual Report 2018 | EKF Diagnostics Holdings plcFinancial Statements3Notes to the Financial Statements (continuation) for the year ended 31 December 2018 20. Investments Group and Company 1 January Additions 31 December 57 2018 £’000 152 3,119 3,271 2017 £’000 152 - 152 The investment consists of a 0.66% (2017: 0.66%) holding in Epinex Diagnostics Inc., a US based privately held company operating in the medical diagnostics industry; and a 19.90% holding in DX Economix, Inc., a Canadian based privately held company operating in the healthcare consultancy industry, the value of which has been 100% impaired, and a 4.79% holding in Renalytix AI plc an AIM listed developer of artificial intelligence enabled diagnostics for kidney disease. These equity securities are not held for trading. They are held as financial assets at fair value through other comprehensive income. 21. Trade and other receivables Non-current Amounts owed by subsidiary undertakings - - 18,099 20,894 Group 2018 £’000 Group 2017 £’000 Company 2018 £’000 Company 2017 £’000 Current Trade receivables Less: provision for impairment of trade receivables Trade receivables – net Prepayments Amounts owed by subsidiary undertakings Corporation tax receivable Other receivables 6,146 (487) 5,659 296 - - 1,479 7,434 5,476 (285) 5,191 272 - 4 1,929 7,396 - - - 140 - - 89 229 - - - 137 2,374 - 58 2,569 Due to their short term nature, the Directors consider that the carrying amount of trade and other receivables approximates to their fair value. As of 31 December 2018, trade receivables of £3,833,000 (2017: £1,286,000) were past due but not impaired. These relate to a number of independent customers for whom there is no recent history of default. The ageing analysis of these trade receivables is as follows: Up to 3 months 3 to 6 months Over 6 months Group 2018 £’000 3,659 78 96 Group 2017 £’000 761 525 - 3,833 1,286 Company 2018 £’000 Company 2017 £’000 - - - - - - - - As of 31 December 2018, trade receivables of £487,000 (2017: £285,000) were impaired and provided for. The ageing of these impaired receivables is as follows: Up to 3 months 3 to 6 months Over 6 months Total Group 2018 £’000 3 51 433 487 Group 2017 £’000 - - 285 285 Company 2018 £’000 Company 2017 £’000 - - - - - - - - Annual Report 2018 | EKF Diagnostics Holdings plcFinancial Statements3 58 Notes to the Financial Statements (continuation) for the year ended 31 December 2018 Movements on the provision for impairment of trade receivables are as follows: At 1 January Provision for receivables impairment Receivables written off during the year as uncollectible Unused amounts reversed Exchange differences At 31 December Group 2018 £’000 285 183 (1) 14 6 487 Group 2017 £’000 Company 2018 £’000 Company 2017 £’000 69 221 (4) - (1) 285 - - - - - - - - - - - - The other classes within trade and other receivables do not contain impaired assets. The carrying amounts of the Group’s trade and other receivables denominated in foreign currencies were as follows: UK Sterling Euros US dollar Russian rouble Polish zloty 22. Inventories Raw materials Work in progress Finished goods Group 2018 £’000 229 3,394 3,761 40 10 Group 2017 £’000 195 3,763 3,259 72 107 Company 2018 £’000 229 5,744 Company 2017 £’000 195 8,304 12,355 14,963 - - - - 7,434 7,396 18,328 23,462 Group 2018 £’000 4,440 590 1,085 6,115 Group 2017 £’000 3,763 582 1,293 5,638 Company 2018 £’000 Company 2017 £’000 – – – – – – – – The Directors are of the opinion that the replacement values of inventories are not materially different to the carrying values stated above. The carrying values above are stated net of impairment provisions of £2,024,000 (2017: £2,162,000). The cost of inventories recognised as expense and included in ‘cost of sales’ amounted to £9,484,000 (2017: £7,848,000). The Company held no inventories at 31 December 2018 or at 31 December 2017. 23. Cash and cash equivalents Cash at bank and in hand Cash and cash equivalents (excluding bank overdrafts) Group 2018 £’000 10,282 10,282 Group 2017 £’000 8,203 8,203 Company 2018 £’000 3,721 3,721 Company 2017 £’000 710 710 The Directors consider that the carrying amount of cash and cash equivalents approximates to their fair value. Annual Report 2018 | EKF Diagnostics Holdings plcFinancial Statements3Notes to the Financial Statements (continuation) for the year ended 31 December 2018 59 24. Trade and other payables Trade payables Amounts due to subsidiary undertakings Social security Other payables Accrued expenses and deferred income 25. Borrowings Non-current Bank borrowings Current Bank borrowings Convertible loan The maturity profile of borrowings was as follows: Amounts falling due Within 1 year Between 1 and 2 years Between 2 and 5 years More than 5 years Total borrowings (a) Bank borrowings Group 2018 £’000 1,226 - 114 2,758 5,996 10,094 Group 2017 £’000 1,492 - 109 1,926 5,902 9,429 Company 2018 £’000 Company 2017 £’000 156 3,728 53 2,547 1,229 7,713 123 3,060 52 1,722 813 5,770 Group 2018 £’000 Group 2017 £’000 Company 2018 £’000 Company 2017 £’000 695 695 185 - 185 Group 2018 £’000 185 185 510 - 880 872 872 184 149 333 Group 2017 £’000 333 184 550 138 1,205 - - - - - - – - - - Company 2018 £’000 Company 2017 £’000 - - - - - - - - - - Bank borrowings mature in 2023 and bear an average fixed coupon of 2.5% annually (2017: 2.5%). Bank borrowings are secured against certain assets of the Group. The Parent Company has also provided guarantees against those bank borrowings which are denominated in foreign currencies. The Euro denominated borrowings have covenants attached to them. The Group has been compliant with these covenants throughout the year. The bank borrowings are repayable by quarterly instalments. The Group is not exposed to interest rate changes or contractual re-pricing dates at the end of the reporting period, as the borrowings are fixed in nature. The fair value of both current and non-current borrowings equals their carrying amount, as the impact of discounting is not significant. The carrying amounts of the group’s bank borrowings are all denominated in euros. (b) Convertible loan In 2013 Andrew Webb loaned £200,000 to EKF Molecular Diagnostics Limited in return for a convertible loan note denominated in sterling. The note was redeemable on 31 December 2017 or convertible under certain circumstances on or before 30 November 2017. On 10 August 2018 following the completion of payment of the £102,000, Mr Webb waived all future rights, and the remaining balance of the loan was written back to income, as an exceptional item. Annual Report 2018 | EKF Diagnostics Holdings plcFinancial Statements360 Notes to the Financial Statements (continuation) for the year ended 31 December 2018 26. Deferred consideration Deferred income tax assets and liabilities are offset when there is a legally enforceable right to offset current tax assets against current tax liabilities and when deferred income tax assets and liabilities relate to income taxes levied by the same taxation authority on either the taxable entity or different taxable entities where there is an intention to settle the balances on a net basis. The amounts concerned are as follows: At 1 January Fair value adjustment At 31 December Group 2018 £’000 1,062 42 1,104 Group 2017 £’000 693 369 1,062 Company 2018 £’000 Company 2017 £’000 1,062 42 1,104 693 369 1,062 The deferred consideration consists of 4,043,940 Ordinary Shares originally valued at £605,000 to be issued as part of the consideration paid for the acquisition of EKF-diagnostic GmbH Germany. The value of the shares has been adjusted to its fair value at 31 December 2018 of £1,104,000. Whilst agreement has been reached in principle to conclude the position, the contract amendment has not yet been signed. All of the outstanding balance is current. 27. Deferred income tax Deferred income tax assets and liabilities are offset when there is a legally enforceable right to offset current tax assets against current tax liabilities and when deferred income tax assets and liabilities relate to income taxes levied by the same taxation authority on either the taxable entity or different taxable entities where there is an intention to settle the balances on a net basis. The amounts concerned are as follows: Group Deferred tax assets Deferred tax asset to be recovered within 12 months Deferred tax asset to be recovered after more than 12 months Deferred tax liabilities Deferred tax liability to be recovered after more than 12 months Deferred tax liability to be recovered within 12 months Deferred tax liabilities – net The gross movement on the deferred income tax account is as follows: At 1 January Exchange differences Income statement movement (note 13) At 31 December 2018 £’000 (13) (23) (36) 3,065 114 3,179 3,143 2018 £’000 3,443 87 (387) 3,143 2017 £’000 (13) (34) (47) 3,467 23 3,490 3,443 2017 £’000 4,105 (84) (578) 3,443 The movement in deferred income tax assets and liabilities during the year, without taking into consideration the offsetting of balances within the same tax jurisdiction, is as follows: Deferred tax liabilities At 1 January 2017 Credited to the income statement Exchange differences At 31 December 2017 At 1 January 2018 Credited to the income statement Exchange differences At 31 December 2018 Accelerated tax depreciation £’000 4,489 (915) (85) 3,489 3,489 (398) 88 3,179 Total £’000 4,489 (915) (85) 3,489 3,489 (398) 88 3,179 Annual Report 2018 | EKF Diagnostics Holdings plcFinancial Statements3Notes to the Financial Statements (continuation) for the year ended 31 December 2018 61 At 1 January 2017 Charged to the income statement Exchange differences At 31 December 2017 At 1 January 2018 Charged to the income statement At 31 December 2018 Tax losses £’000 (13) - - (13) (13) - (13) Other £’000 (371) 337 - (34) (34) 11 (23) Total £’000 (384) 337 - (47) (47) 11 (36) Deferred income tax assets are recognised to the extent that the realisation of the related tax benefit through future taxable profits is probable. The Group did not recognise deferred income tax assets of £533,000 (2017: £1,173,000) mainly in respect of tax losses amounting to £2,770,000 (2017: 6,092,000), primarily arising in the UK entities, that can be carried forward against future taxable income, as the likely timing of recovery is considered too remote. Company Deferred tax assets Deferred tax asset to be recovered after more than 12 months Deferred tax 28. Share capital Group and Company At 1 January 2018 Cancellation of Ordinary shares 31 December 2018 During the year the company has acquired and cancelled the following ordinary shares: 19 November 2018 20 November 2018 21 November 2018 7 December 2018 29. Renalytix AI plc 2018 £’000 2017 £’000 23 23 34 34 Number of Shares Share capital £’000 457,554,636 (3,461,409) 454,093,227 Number 178,423 4,576 (35) 4,541 Price (p) 26.15p 1,641,493 27.4348p 570,954 1,070,539 3,461,409 27p 27p During 2018, the Group founded Renalytix AI plc which, along with its subsidiary company Renalytix AI Inc., were floated separately from the Group in November 2018. The investment in Renalytix was previously held as an asset available for sale. Renalytix is a developer of artificial intelligence-enabled diagnostics for kidney disease. As part of the creation of a separate business, intangible assets with a net value of £646,000 were sold to Renalytix by the Group, and the Group’s wholly owned subsidiary Renalytix AI Inc. was sold to Renalytix AI plc, in return for shares in Renalytix AI plc. Following these transactions, EKF’s shareholding in Renalytix comprised 20,964,295 ordinary shares. The EKF holding was then distributed in specie to Relevant EKF shareholders, being those on the EKF register as at the date of record for the distribution in October 2018 at a rate of one Renalytix AI plc ordinary share (a “RENX share”) for each 21.825 EKF ordinary shares held. The fair value of the shares distributed to Relevant EKF shareholders was calculated based on the proposed flotation price, less a discount to account for the restrictions placed on the shares. The discount was calculated taking into account, amongst other factors, the 180 day lock up period, sector volatility, and that the shares were issued pre-admission. The total fair value of the distributed shares was calculated as £7,027,000 with the profit on disposal, which has been shown as an exceptional profit, being calculated net of expenses of £25,000 and the value of the intangible asset transferred of £6,356,000. Subsequent to the distribution, EKF invested £3.1m in the shares of Renalytix at the same price as other new investors and, as at the date of this announcement, holds 2,577,907 RENX shares. Annual Report 2018 | EKF Diagnostics Holdings plcFinancial Statements362 Notes to the Financial Statements (continuation) for the year ended 31 December 2018 30. Share options and share-based payments The share options and share incentive schemes in existence in the Group and Company were as follows: Unapproved share option scheme At 1 January Cancelled Expired At 31 December 2018 2017 Av. Exercise price per share (£) 0.252 0.376 - 0.247 Options (Number) 1,250,000 (50,000) - 1,200,000 Av. Exercise price per share (£) 0.197 0.179 0.349 0.252 Options (Number) 13,510,000 (11,360,000) (900,000) 1,250,000 The remaining unapproved share options include the following: • 650,000 options were issued on 7 July 2013 to senior employees at an exercise price of 27.25p per share. These options are exercisable from the third anniversary of grant with a maximum term of 10 years. These options have vested. • 50,000 options were issued on 21 January 2014 to senior employees at an exercise price of 37.625p per share. These options are exercisable from the third anniversary of grant with a maximum term of 10 years. These options have vested. • 500,000 options were issued to a third party on 17 May 2015 at an exercise price of 20p. The maximum term is 10 years from grant. These options vested during the year All share option awards are equity settled. Out of the 1,200,000 (2017: 1,250,000) outstanding options 1,200,000 (2017: 750,000) were exercisable at 31 December 2018. Share options outstanding at the end of the year have the following expiry date and exercise prices: Expiry Date 07.07.2023 21.01.2024 06.04.2025 2018 2017 Av. Exercise price per share (£) 0.2725 0.37625 0.200 Av. Exercise price per share (£) 0.2725 0.37625 0.200 Options (Number) 650,000 50,000 500,000 1,200,000 Options (Number) 650,000 100,000 500,000 1,250,000 On 2 June 2016 two Directors were granted a cash settled share-based incentive award. The awards vest if a controlling interest in the Company is acquired by a third party prior to 30 June 2020. In these circumstances a minimum amount of £0.3m is payable to each Director, which increases by reference to any sale price achieved. The fair value of this award has been calculated at £3,464,000 (2017: £3,351,000) using a modified form of a Black Scholes model. The key assumptions in the model included expected volatility of 36% (2017: 39%), a risk free rate of 0.74% (2017: (0.39%)) and an assumed acquisition premium and option life. The increase in the liability is largely due to the increase in share price over the period. On 9 October 2017, a senior employee was granted a cash settled share based incentive award. The award vests if a controlling interest in the Company is acquired by a third party at any time while the holder remains an employee. There is a minimum price level below which no amount is payable, with the amount payable rising based on the sale price achieved, up to a maximum of $700,000. The fair value of this award has been calculated at £90,000 (2017: nil), using a similar model and assumptions as noted above. £939,000 (2017: £969,000) has been recognised as an expense in administrative expenses in the current year, and £2,547,000 (31 December 2017: £1,722,000) is shown as a liability on the balance sheet at 31 December 2018 within trade and other payables. Annual Report 2018 | EKF Diagnostics Holdings plcFinancial Statements3Notes to the Financial Statements (continuation) for the year ended 31 December 2018 63 31. Other reserves Group At 1 January 2017 Shares cancelled At 31 December 2017 At 1 January 2018 Shares cancelled At 31 December 2018 32. Retirement benefit obligations Pension benefits Capital redemption reserve £’000 Other reserve £’000 - 67 67 67 35 102 41 - 41 41 - 41 Total £’000 41 67 108 108 35 143 The Company operates defined contribution pension schemes the assets of which are held separately from those of the Company in independently administered funds. The pension cost for the year represents contributions made by the Company to the funds and amounted to £207,000 (2017: £168,000). The value of pension contributions owed to pension providers at 31 December 2018 was £9,000 (2017: £9,000). 33. Commitments a) Capital commitments The Group has contracted £70,500 (2017: £166,000) capital expenditure at the end of the reporting period that had not yet been incurred. b) Operating lease commitments The Group leases various offices and manufacturing buildings under non-cancellable operating lease agreements. The lease terms are between one and five years. The Group also leases various office equipment and assets under non-cancellable operating lease agreements. The lease terms are between one and five years. The future aggregate minimum lease payments under non-cancellable operating leases are as follows: Group No later than 1 year Later than 1 year and no later than 5 years Later than 5 years Total Land and buildings Other 2018 £’000 199 200 44 443 2017 £’000 180 278 58 516 2018 £’000 132 67 - 199 2017 £’000 79 54 - 133 Annual Report 2018 | EKF Diagnostics Holdings plcFinancial Statements364 Notes to the Financial Statements (continuation) for the year ended 31 December 2018 34. Cash generated by operations Profit/(loss) before tax Adjustments for: – Depreciation – Amortisation – Warranty claim – Loss/(profit) on disposal of fixed assets – Share-based payments – Escrow cancellation – Profit on sale of Renalytix – Fair value adjustment – Foreign exchange – Bad debt written (back)/ down – Net finance (income)/costs – Loan write back Changes in working capital – Inventories – Trade and other receivables – Trade and other payables Net cash generated by operations 2018 £’000 12,165 1,158 2,833 (31) 13 939 - (6,356) 42 (83) - (8) (90) (461) 11 (271) 9,861 2017 £’000 4,307 1,160 3,463 (339) (33) 1,510 (1,371) - 369 233 - 53 - 306 1,535 (1,075) 10,118 Group Company 2018 £’000 6,747 61 204 - - 939 - (6,356) 42 (40) (514) 2017 £’000 (1,385) 65 65 - - 1,510 (1,371) - 369 93 374 (1,000) (1,031) - - 5,961 1,004 7,048 - - 5,608 (27) 4,270 2017 £’000 95 33 128 In the statement of cash flows, proceeds from the sale of property, plant and equipment comprise: Group Net book value (Loss)/profit on disposal of property, plant and equipment Proceeds from disposal of property, plant and equipment Non-cash transactions 2018 £’000 13 (13) - The principal non-cash transactions are: the creation of Renalytix AI plc and the subsequent distribution in specie, movements on deferred consideration provisions; the fair value adjustment relating to the deferred equity consideration in respect of EKF Germany, the warranty claim, and release of accruals no longer required. Annual Report 2018 | EKF Diagnostics Holdings plcFinancial Statements3Notes to the Financial Statements (continuation) for the year ended 31 December 2018 65 35. Related Party Disclosures Directors Christopher Mills’ controls 29.94% of the Company’s share capital through North Atlantic Smaller Companies Investment Trust PLC (“NAIT”) and Oryx International Growth Fund Limited (“Oryx”). Harwood Capital LLP (“Harwood”) is investment manager and investment adviser to NAIT and Oryx respectively. Christopher Mills is a partner and Chief Investment Officer of Harwood. Christopher Mills is also a director of Oryx and NAIT. He holds 2.16 per cent. of the shares in Oryx in his own name as well as a further 46.44 per cent. of the shares in Oryx via his 25.06 per cent. shareholding in NAIT. The Group was invoiced £18,000 (2017: £18,000) by J & K (Cardiff) Limited for property rent. Julian Baines is a Director of J & K (Cardiff) Limited. Carl Contadini acts as an Operational Advisor to Harwood which acts as investment manager and investment adviser to NAIT and Oryx respectively. Directors’ emoluments are set out in the Remuneration Committee report and in note 9. Other related party transactions Details of the Group’s transactions with Renalytix AI plc are described in note 29. In their positions as shareholders in the Company, certain directors received shares in Renalytix through the distribution in specie. Sergey Kots who is Chief Executive of OOO EKF Diagnostika (“EKF Russia”), owns 20% of the subsidiary’s share capital. During the year EKF Russia invoiced £545,000 (2017: £594,000) to OOO Laboratory Diagnostic Systems, a company of which Mr Kots’ brother is a director. Key management compensation Key management compensation for the year was as follows: Salaries and other short-term employee benefits Share-based payments Employer contribution to pension scheme 2018 £’000 690 775 19 1,484 2017 £’000 1,745 969 19 2,733 Key management includes the Directors of the Company only. The Company During the year the Company invoiced management charges of £2,383,000 (2017: £3,141,000) and interest of £984,000 (2017: £1,079,000) to its subsidiary companies. It purchased goods and services from subsidiaries totalling £201,000 (2017: £169,000). At 31 December 2018 the Company was owed £18,099,000 (2017: £23,268,000) by its subsidiaries and owed £3,728,000 (2017: £3,060,000) to other subsidiaries. Annual Report 2018 | EKF Diagnostics Holdings plcFinancial Statements366 Annual Report 2018 | EKF Diagnostics Holdings plc Annual Report 2018 | EKF Diagnostics Holdings plc 67 NOTICE OF ANNUAL GENERAL MEETING EKF Diagnostics Holdings PLC (Company) NOTICE IS HEREBY GIVEN that the Annual General Meeting (Meeting) of EKF Diagnostics Holdings plc (Company) will be held at the offices of Harwood Capital LLP, 6 Stratton Street, Mayfair, London, W1J 8LD on 2 May 2019 at 11.00 a.m. for the following purposes: Ordinary Resolutions 1. To receive and adopt the statement of accounts for the year ended 31 December 2018 together with the reports of the Directors and the auditors thereon. 2. To re-elect Christopher Mills, who retires by rotation, as a Director. 3. To re-elect Adam Reynolds, who retires by rotation, as a Director. 4. To re-appoint Messrs PricewaterhouseCoopers LLP as auditors to act as such until the conclusion of the next General Meeting of the Company at which the requirements of section 437 of the Companies Act 2006 are complied with and to authorise the Directors of the Company to fix their remuneration. 5. That in substitution for any existing such authority, the Directors be and are hereby generally and unconditionally authorised pursuant to section 551 of the Companies Act 2006 (the “2006 Act”) to allot Relevant Securities of the Company: i. up to a maximum nominal amount of £52,500 (in pursuance of the exercise of outstanding share options and other potential shares granted by the Company but for no other purpose); ii. up to an aggregate nominal amount of £454,093.23 (in addition to the authorities conferred in sub-paragraphs (i) above) representing approximately 10% of the Company’s Issued Share Capital, such authorities (unless previously renewed, revoked or varied) to expire at the conclusion of the next Annual General Meeting of the Company to be held in 2020, save that the Company may, before such expiry, make an offer or agreement which would or might require Relevant Securities to be allotted after such expiry and the directors may allot Relevant Securities in pursuance of such an offer or agreement as if the authority conferred hereby had not expired. Special Resolutions 6. That, subject to the passing of the above Resolution the Directors be given the general power to allot equity securities (as defined in section 560 of the 2006 Act) pursuant to the authority conferred by the Resolution above as if section 561(1) of the 2006 Act did not apply to any such allotments provided that this power shall be limited to: i. ii. the allotment of equity securities on the exercise of the share options granted by the Company; the allotment of equity securities (otherwise than pursuant to sub-paragraphs (i) above) for cash in connection with any rights issue or pre-emptive offer in favour of holders of equity securities generally; and iii. the allotment (otherwise than pursuant to sub-paragraphs (i) and (ii) above) of equity securities for cash up to an aggregate nominal amount of £454,093.23 representing approximately 10% of the Company’s Issued Share Capital; provided that such power (unless previously renewed, revoked or varied) shall expire at the conclusion of the Annual General Meeting of the Company to be held in 2020, save that the Company may, before such power expires, make an offer or enter into an agreement which would or might require equity securities to be allotted after such power expires and the Directors may allot equity securities in pursuance of any such offer or agreement notwithstanding that the power conferred by this resolution has expired. 7. That the Company be and is generally and unconditionally authorised for the purposes of section 701(1) of the Companies Act 2006 (the “Act”) to make one or more market purchases (within the meaning of section 693(4) of the Act) on the London Stock Exchange of ordinary shares of £0.01 each in the capital of the Company (“Ordinary Shares”) provided that: i. the maximum aggregate number of Ordinary Shares authorised to be purchased is 68,113,984 (representing approximately 15 per cent. of the Company’s issued ordinary share capital); ii. the minimum price (excluding expenses) which may be paid for such Ordinary Shares is £0.01 per share; iii. the maximum price (excluding expenses) which may be paid for an Ordinary Share shall not be more than 5 per cent. above the average of the middle market quotations for an Ordinary Share as derived from The London Stock Exchange Daily Official List for the five business days immediately preceding the date on which the Ordinary Share is purchased; Additional Information4 66 Annual Report 2018 | EKF Diagnostics Holdings plc Annual Report 2018 | EKF Diagnostics Holdings plc 67 NOTICE OF ANNUAL GENERAL MEETING (continuation) EKF Diagnostics Holdings PLC (Company) iv. unless previously renewed, varied or revoked, the authority conferred shall expire at the conclusion of the Company’s next annual general meeting or 30 June 2020, if earlier; and v. the Company may make a contract or contracts to purchase Ordinary Shares under the authority conferred prior to the expiry of such authority which will or may be executed wholly or partly after the expiry of such authority and may make a purchase of Ordinary Shares in pursuance of any such contract or contracts. 8. That the draft articles of association produced to the meeting be adopted as the articles of association of the Company in substitution for, and to the exclusion of, the Company’s existing articles of association. Registered Office Avon House 19 Stanwell Road Penarth CF64 2EZ 13 March 2019 BY ORDER OF THE BOARD Salim Hamir Company Secretary Additional Information4 68 Notes Annual Report 2018 | EKF Diagnostics Holdings plc Annual Report 2018 | EKF Diagnostics Holdings plc 69 1. The Company specifies that only those members registered on the Company’s register of members at close of business on 30 April 2019 or if this general meeting is adjourned, at close of business on the day two days prior to the adjourned meeting shall be entitled to attend and vote at the General Meeting. 2. If you are a member of the Company at the time set out in note 1 above, you are entitled to appoint a proxy to exercise all or any of your rights to attend, speak and vote at the General Meeting 3. A proxy does not need to be a member of the Company but must attend the General Meeting to represent you. If you wish your proxy to speak on your behalf at the General Meeting you will need to appoint your own choice of proxy (not the chairman) and give your instructions directly to them. 4. You may appoint more than one proxy provided each proxy is appointed to exercise rights attached to different shares. You may not appoint more than one proxy to exercise rights attached to any one share. To appoint more than one proxy, please contact the Company’s registrars at the address set out in note 5. 5. You can vote either by logging on to www.signalshares.com and following the instructions; or you may request a hard copy form of proxy directly from the registrars, Link Asset Services at enquiries@linkgroup.co.uk or on Tel: 0371 664 0300. Calls cost 12p per minute plus your phone company’s access charge. Calls outside the United Kingdom will be charged at the applicable international rate. Lines are open between 09:00 – 17:30, Monday to Friday excluding public holidays in England and Wales. In the case of CREST members, by utilising the CREST electronic proxy appointment service in accordance with the procedures set out below. In the case of joint holders, where more than one of the joint holders purports to appoint a proxy, only the appointment submitted by the most senior holder will be accepted. Seniority is determined by the order in which the names of the joint holders appear in the Company’s register of members in respect of the joint holding (the first-named being the most senior). 6. CREST members who wish to appoint a proxy or proxies through the CREST electronic proxy appointment service may do so for the Meeting (and any adjournment of the Meeting) by using the procedures described in the CREST Manual (available from www.euroclear.com/site/public/EUI). CREST Personal Members or other CREST sponsored members, and those CREST members who have appointed a service provider(s), should refer to their CREST sponsor or voting service provider(s), who will be able to take the appropriate action on their behalf. 7. In order for a proxy appointment or instruction made by means of CREST to be valid, the appropriate CREST message (a ‘CREST Proxy Instruction’) must be properly authenticated in accordance with Euroclear UK & Ireland Limited’s specifications and must contain the information required for such instructions, as described in the CREST Manual. The message must be transmitted so as to be received by the issuer’s agent (ID RA10) by 11 a.m. on30 April 2019. For this purpose, the time of receipt will be taken to mean the time (as determined by the timestamp applied to the message by the CREST application host) from which the issuer’s agent is able to retrieve the message by enquiry to CREST in the manner prescribed by CREST. After this time, any change of instructions to proxies appointed through CREST should be communicated to the appointee through other means. 8. CREST members and, where applicable, their CREST sponsors or voting service providers should note that Euroclear UK & Ireland Limited does not make available special procedures in CREST for any particular message. Normal system timings and limitations will, therefore, apply in relation to the input of CREST Proxy Instructions. It is the responsibility of the CREST member concerned to take (or, if the CREST member is a CREST personal member, or sponsored member, or has appointed a voting service provider(s), to procure that his CREST sponsor or voting service provider(s) take(s)) such action as shall be necessary to ensure that a message is transmitted by means of the CREST system by any particular time. In this connection, CREST members and, where applicable, their CREST sponsors or voting system providers are referred, in particular, to those sections of the CREST Manual concerning practical limitations of the CREST system and timings. The Company may treat as invalid a CREST Proxy Instruction in the circumstances set out in Regulation 35(5)(a) of the Uncertificated Securities Regulations 2001. 9. To change your proxy instructions simply submit a new proxy appointment using the methods set out above. Note that the cut-off time for receipt of proxy appointments (see above) also apply in relation to amended instructions; any amended proxy appointment received after the relevant cut-off time will be disregarded. Where you have appointed a proxy using the hard-copy proxy form and would like to change the instructions using another hard- copy proxy form, please contact Link Asset Services at the address noted in note 5 above. If you submit more than one valid proxy appointment, the appointment received last before the latest time for the receipt of proxies will take precedence. 10. In order to revoke a proxy instruction you will need to inform the Company by sending a signed hard copy notice clearly stating your intention to revoke your proxy appointment to Link Asset Services at PXS, 34 Beckenham Road, Kent, BR3 4TU. In the case of a member which is a company, the revocation notice must be executed under its common seal or signed on its behalf by an officer of the company or an attorney for the company. Any power of attorney or any other authority under which the revocation notice is signed (or a duly certified copy of such power or authority) must be included with the revocation notice. The revocation notice must be received by Link Asset Services no later than 11.00 a.m. on 30 April 2019. If you attempt to revoke your proxy appointment but the revocation is received after the time specified then, subject to the paragraph directly below, your proxy appointment will remain valid. Appointment of a proxy does not preclude you from attending the general meeting and voting in person. If you have appointed a proxy and attend the general meeting in person, your proxy appointment will automatically be terminated. 11. A corporation which is a member can appoint one or more corporate representatives who may exercise, on its behalf, all its powers as a member provided that no more than one corporate representative exercises power over the same share. 12. Voting on all resolutions will be conducted by way of a poll rather than on a show of hands. 13. As at 5.00 p.m. on the day immediately prior to the date of posting of this notice, the Company’s issued share capital comprised 454,093,227 Ordinary Shares of 1p each. Each ordinary share carries the right to one vote at a general meeting of the Company and, therefore, the total number of voting rights in the Company as at 5.00 p.m. on the day immediately prior to the date of posting of this notice is 454,093,227. Additional Information4 68 Annual Report 2018 | EKF Diagnostics Holdings plc Annual Report 2018 | EKF Diagnostics Holdings plc 69 Company information Directors: Christopher Mills (Non-Executive Chairman) Julian Baines MBE (Chief Executive Officer) Richard Evans (Chief Operating Officer and Finance Director) Carl Contadini (Non-Executive Director) Adam Reynolds (Non-Executive Director) Company Secretary: Salim Hamir Registered office and Head office: Avon House 19 Stanwell Road Penarth Cardiff CF64 2EZ Place of incorporation: England and Wales (Company number – 4347937) Independent Auditors: PricewaterhouseCoopers LLP Chartered Accountants and Statutory Auditors One Kingsway Cardiff CF10 3PW Nominated Advisor and Broker: N+1 Singer 1 Bartholomew Lane London EC2N 2AX Solicitors to the Company: Berry Smith LLP Haywood House Dumfries Place Cardiff CF10 3GA Registrars: Link Asset Services The Registry 34 Beckenham Road Beckenham Kent BR3 4TU If you have a query regarding your shareholding please call (from inside the UK) 0871 664 0300 (calls cost 12p per minute plus your phone company’s access charge), or (from outside the UK) +44 371 664 0300 or e-mail shareholderenquiries@linkgroup.co.uk Financial public relations: Walbrook PR Limited 4 Lombard Street London EC3V 9HD Investor relations email: investors@ekfdiagnostics.com 

Continue reading text version or see original annual report in PDF format above