E p i s t e m H o l d i n g s P l c A n n u a l R e p o r t 2 0 1 3 Delivering a new dimension in healthcare Epistem Holdings Plc Annual Report 2013 Welcome to Epistem “The 2013 year saw continued progress in Preclinical Research Services and Personalised Medicine, whilst we continued our development of Genedrive® to gain regulatory approval for its launch into the clinically regulated marketplace.” David Evans Chairman About Us Epistem is a biotechnology and personalised medicine company commercialising its expertise in epithelial stem cells and infectious disease. Epistem develops innovative therapeutics, biomarkers and diagnostic products alongside providing preclinical research services for drug development companies. The Group’s core expertise comprises a detailed understanding of the regulation of adult stem cells and novel and proprietary next generation molecular tools for use in patient stratification and personalised medicine. Highlights • Total sales of £5.4m (2012: £5.6m) driven by a firm performance from our Preclinical Research Services and Personalised Medicine Divisions. • Following high levels of investment in our Personalised Medicine technology (Genedrive®), the Company reports a loss of £1.2m (2012: £0.2m loss after tax). • Preparation for the final stages of Tuberculosis (TB) clinical testing and Indian regulatory submission with launch of Genedrive® expected in H2 2014. Initial TB clinical papers submitted for publication. • Successfully completed first patient stratification assessments in clinical trials for Genedrive® pharmacogenomic applications. • Announcement of Euro 1.5m ‘Hepatitis C’ collaboration with INSERM and the Pasteur Institute. • Preclinical Research Services sales of £2.9m (2012: £2.9m) with expanded offering in biodefence, leukemia imaging and rheumatoid arthritis. • Ongoing investment in Novel Therapies lead discovery programme. • £4.2m cash placing completed in December 2012 resulting in strengthened cash balances of £6.5m as at 30 June 2013. Strength Core business driven by a solid performance from Preclinical Research Services with emerging strength in our Personalised Medicine Division. Technology Increased investment in our leading technologies accelerated their advancement over the reporting period with particular emphasis on our Genedrive® platform and continued investment in Novel Therapies lead discovery programme. Financial A placing of shares during the period strengthening the Company cash reserves. Investor Clear investor communication of the Company’s strategy and performance remains key to our success. Our Divisions 1 Company Overview 02 Preclinical Research Services 04 Personalised Medicine 06 Personalised Medicine: Pharmacogenomics 08 Personalised Medicine: Diagnostics 10 Novel Therapies Business Review 12 Our Business and Strategy 13 Guiding Principles 14 Highlights 2013 16 Chairman’s Statement 18 Chief Executive’s Review Governance 22 Board of Directors 24 Directors’ Report 27 Directors’ Remuneration Report 29 Corporate Governance Report Financials 31 Independent Auditors’ Report 32 Consolidated Statement of Comprehensive Income 33 Consolidated Statement of Changes in Equity 34 Consolidated Balance Sheet 35 Consolidated Statement of Cash Flows 36 Notes to the Financial Statements 54 Company Balance Sheet 55 Company Statement of Changes in Equity 56 Company Statement of Cash Flows 57 Notes to the Company Financial Statements Our Preclinical Research Services Division provides pre- clinical efficacy testing, advanced immunohistochemistry services and cell biology expertise in the areas of oncology, oncology supportive care (mucositis), inflammatory bowel disease and dermatology. Our Personalised Medicine: Pharmacogenomics Division provides highly sensitive molecular measures of biological processes that improve precision in drug development and disease treatment. The group provides a broad technology offering to discover, develop and translate biomarkers for clinical drug development. Our Personalised Medicine: Diagnostics Division is changing the way healthcare and personalised medicine are delivered. Our innovative Genedrive® platform is preparing for initial product sales in infectious disease in 2014. Our Novel Therapies Division is discovering the body’s own key regulators of epithelial stem cells and tissues. Based on our highly sensitive molecular techniques and core cell biology expertise, we discover and develop our own novel drug agents. Page 2 Page 6 Page 8 Page 10 Epistem Holdings Plc Annual Report 2013Company OverviewBusiness ReviewGovernanceFinancials 2 Preclinical Research Services A global approach to drug development Expansion of US biodefence contract Growth in inflammatory bowel disease services New orthotopic and rheumatoid arthritis models Epistem Holdings Plc Annual Report 2013 3 + The Preclinical Research Services Division provides preclinical efficacy testing, advanced immunohistochemistry services and cell biology expertise in the areas of oncology, oncology supportive care (mucositis), inflammatory bowel disease and dermatology. During the year, Preclinical Research Services delivered a 27% operating margin on sales of £2.9m (2012: £2.9m). New model development The Division provides a high margin, niche, preclinical service offering across our core disease areas of oncology, mucositis, inflammatory bowel disease and dermatology. Alongside developing our cornerstone biodefence models for the US National Institutes of Health, the Division continues to strengthen its service model offering and during the year continued the development of its orthotopic and rheumatoid arthritis models. We look to extend our internal imaging capabilities, especially in leukemia, along with further investment in our inflammatory bowel disease models. Biodefence Our collaboration with the US National Institutes of Health’s biodefence programme continues to expand and accounts for roughly a third of the Division’s revenues. We have collaborated as a partner to this programme for over 7 years and provide a role as ‘Subject Matter Experts’ (SME) in radiation exposure. Alongside a broadening client base, we are currently preparing to extend our service capability to set up a small laboratory facility in Baltimore to engage more closely with US government departments and our local US east coast clients. The US government remains committed to targeting treatment of radiation sickness following a nuclear incident/event. Outlook Over the coming year, we expect to build on our new oncology (imaging) services, rheumatoid arthritis and inflammation models from which we expect to see continued ongoing growth. Epistem Holdings Plc Annual Report 2013Company OverviewBusiness ReviewGovernanceFinancials 4 Personalised Medicine Pharmacogenomics: Identification of genomic markers of drug and disease effect to guide patient-specific drug treatment strategies Molecular Technology Genedrive® Customers Pharma and Biotech DNA Amplification RNA Amplification (RNA AMP®) Patient applications (Companion Diagnostics) Patient Stratification Patient genotypic characteristics Oncogene/ Identification Diagnostics: Identification of bacterial, viral, fungal and gene mutations for tailored treatment, preventative action or human identification Molecular Technology Genedrive® DNA Amplification Molecular Technology Genedrive® DNA Amplification Customers Diagnostic partners Customers Diagnostic partners Patient applications (Point of Care) Tuberculosis (TB) Hepatitis C (HCV) Dengue/Malaria STIs Applications (Point of Need) Crops & agriculture Veterinary Food processing Forensics ForensicsEpistem Holdings Plc Annual Report 2013Infectious DiseaseBiosurveillance 5 Guide to treatment Patient therapeutic treatment (predominantly based on human genomic markers) “We believe that the launch of our first Genedrive® product in TB coupled with the earlier reported India supply agreement provides very attractive growth opportunities. We are continuing to progress a range of partner discussions across multiple potential applications” David Evans Chairman “We expect to see molecular diagnostics begin to dominate the next generation of diagnostic testing and to change the speed accuracy and workflows in near patient ‘Point of Care’ assessment” Matthew H Walls Chief Executive Officer Guide to treatment Patient therapeutic treatment (predominantly targeting disease pathogens) Guide to treatment DNA, Pathogen or other target identity for treatment, preventative action and/or human identification Epistem Holdings Plc Annual Report 2013Company OverviewBusiness ReviewGovernanceFinancials 6 Personalised Medicine: Pharmacogenomics Continued development in patient stratification and personalised medicine Major pharmaceutical collaborations Ongoing development of oncogene mutation analysis Successful completion of initial clinical studies for patient stratification Epistem Holdings Plc Annual Report 2013 7 + Our pharmacogenomic offering provides highly sensitive molecular measures of biological processes that improve the precision with which we guide drug development and disease treatment. Following last year’s strong growth, this year’s revenues remained steady at £2.1m underpinned by our molecular studies for GlaxoSmithKline, Novartis and Sanofi Aventis. These studies utilise Epistem’s proprietary RNA amplification technology and oncology (cancer) bioinformatics to provide biomarker discovery and molecular analysis for drug development in oncology and fibrosis drug discovery programmes. The Pharmacogenomics Division (formerly Biomarkers) works with major pharmaceutical and biotech business groups to provide a suite of preclinical and clinical pharmacodynamic biomarkers to measure the effect of a drug on targeted tissue, identifying gene activated pathways. Our expertise in defining the consequences of gene target modulation in epithelial tissue continues to advance, with the discovery of several key oncology target signatures over the past year as well as continuing to be utilised in key target identification programmes for our business partners. Patient stratification We are now developing our pharmacogenomics Genedrive® applications with major pharmaceutical strategic partners. We are working closely with Novartis on the clinical expansion of our oncogene identification from whole blood and with GlaxoSmithKline for the rapid assessment of genotypes for ‘patient stratification’ for therapeutic treatment. During the year we successfully completed 2 Genedrive® clinical assessments for ‘on the spot’ stratification of patients based on their genotypic characteristics. The identification of genotypic and/or target mutations will allow patients to be ‘stratified’ at the ‘Point of Care’ facilitating rapid administration of the correct course of ‘personalised’ therapeutic treatment. Over the coming year, we will continue our work developing Genedrive® for use as a highly sensitive screening tool for identification and monitoring of the presence of mutation targets in blood. Outlook The broadening adoption of Genedrive® for use in pharmacogenomics applications is anticipated to lift the forecast sales of the Personalised Medicine Division over the coming year. Epistem Holdings Plc Annual Report 2013Company OverviewBusiness ReviewGovernanceFinancials 8 Personalised Medicine: Diagnostics A new dimension in healthcare Case study: Hepatitis C (HCV): Between 150 and 180 million people (2.2-3.0% global population) live with HCV infection and together with Hepatitis B infection these infections cause around 1 million deaths per annum. Hepatitis C is asymptomatic giving rise to liver cirrhosis, hepatocellular carcinoma and is the leading cause for liver transplantation and recognised as having a significant global healthcare and economic burden. Epistem Holdings Plc Annual Report 2013 9 Genedrive® is a novel, disruptive and highly sensitive molecular diagnostic tool with the capability of providing near patient testing at low cost with a rapid results across a broad spectrum of infectious disease areas. 1 2 3 4 Our key priority in this financial year is to gain approval for launch of Genedrive® into a clinically regulated TB marketplace whilst continuing the broad menu of developments in clinical and non-clinical fields. We expect to see molecular diagnostics featuring strongly in the next generation of diagnostic testing, enabling speed, accuracy and workflows in near patient ’Point of Care’ assessment. Over the coming year, we intend to accelerate our product developments through increased investment in our manpower resource and expertise, enhance our manufacturing and regulatory control and further develop our channel partner distribution strategy to take advantage of the substantial growth opportunities open to us. Tuberculosis and channel partner strategy Over the past year, we have designed a TB assay capable of establishing a new standard in antibiotic resistance testing. The assay possesses several important technical advantages over competitor products and coupled with an industry-leading speed to result, ease of use and pricing, will, we believe, deliver a highly competitive product to market. We are beginning to build our case for World Health Organisation recommendation of our TB assay and over the coming months we will be publishing the first clinical data on our TB test and how this compares to industry leaders in addressing the US$1bn TB diagnostics market. Hepatitis C (HCV) We recently announced a Euro1.5m, three (3) year collaboration with INSERM the French National Institute of Health and Medical Research, starting from September 2013, to develop a Point of Care predictive and prognostic test that will enable tangible improvements in the health and quality of life of chronic hepatitis C (HCV) patients. Technical completion of the assay is scheduled for mid way through 2014 with an expected launch in 2015. We will be seeking strategic partnerships with non- governmental organisations, national health and development agencies. Other infectious diseases We are advancing our assay development across a range of other infectious diseases, with tests under development in malaria, dengue and a range of sexually-transmitted diseases. We expect to supply and distribute these high volume tests through our channel partner strategy. Biosurveillance Alongside healthcare applications, we continue to see opportunities for the use of Genedrive® for biosurveillance and forensic targets. We are working closely with the US government on a number of programmes to identify biothreats and infectious diseases in military settings. We are preparing to continue to the next phase of our US Government contract with the Defence Threat Reduction Agency (DTRA) for pathogen detection. We anticipate up to US$0.6m in development funding over the next 6 months and if successful, extend into broader US Department of Defence use. We expect further growth in the US Department of Defence areas over the coming year. Epistem Holdings Plc Annual Report 2013Company OverviewBusiness ReviewGovernanceFinancials 10 Novel Therapies Ongoing development Ongoing investment in lead validation Advanced protein synthesis programme Extensive development of in vitro screening tools Epistem Holdings Plc Annual Report 2013 11 The Novel Therapies Division is discovering the body’s own key regulators of epithelial stem cells and tissue. Based on our highly sensitive molecular techniques and core cell biology expertise, our mission is to discover and develop our own novel drug agents. From our comprehensive mapping and gene expression profiling of epithelial tissue, Epistem scientists have begun to identify the key regulators of proliferation, differentiation, apoptosis and self-renewal. These novel key regulators of cells and tissue are responsible for restoring damaged tissue and for maintaining life-long tissue renewal. Technology development The Novartis collaboration was completed in March 2013 and we now retain intellectual property rights over our collaborative leads and continue to progress discussions with partner groups over the development of our Novel Therapies lead programme. We have continued to define the mechanism of action of our lead candidates – understanding the cell biology and signalling pathways which regulate the cell/ stem cells in the areas of regenerative medicine and oncology and we are considering small molecule partnerships to establish a portfolio of agents which regulate signalling pathways and cell biology. We will evaluate other drug discovery and development opportunities with major industry players to identify new lead developments and to expand our discovery and early stage development platform. Outlook Given the investment requirements of our Genedrive® programme, we will maintain a controlled approach to ongoing investment in our Novel Therapies lead programme. The timing of a license opportunity and/or funding support remains difficult to judge, although we remain confident in our development programme. + Epistem Holdings Plc Annual Report 2013Company OverviewBusiness ReviewGovernanceFinancials 12 Our Business and Strategy Forward thinking Our business model is based on developing technologies and sustaining future growth. Epistem has an unrivalled knowledge of the behaviour of epithelial tissue which together with our proprietary amplification technologies and emerging first products will further strengthen our position in personalised medicine and disease diagnostics. Matthew H Walls Chief Executive Officer Division Field Area of Income Discovery Pre-clinical Phase 1 Phase 2 Phase 3 Market Preclinical Research Services Inflammatory bowel disease, dermatology, oncology, mucositis Fee for service Novel Therapies Discovery hits/ leads and early stage development Partnering and licensing Personalised Medicine Pre-clinical, clinical and market programmes Fee for service, partnering, licensing, product sales + + Infectious Disease Pharmacogenomics + Biosurveillance RNA Amp® Genedrive® Epistem Holdings Plc Annual Report 2013 Guiding Principles 13 Operational Strategic Integrated business model Epistem’s independent Divisions bring together a strong and complementary portfolio of business units rarely seen in a biotechnology business model. Our strategy is focussed on the scientific, technical and financial growth of each of our independent Divisions with the potential for significant financial gain driven by our investment in leading technologies targeted at delivering healthcare advances in areas of unmet medical need. Partnering programme We work closely with our collaborative partners and major industry groups to build on and nurture greater collaborative development in conjunction with our partners. As our business changes, we expect our partners to change and evolve too, but we remain committed to developing and enhancing our scientific relationships to unlock the potential of our technologies and further develop the growth of our Company. Internationally respected technology and expertise Our investments in technology and expertise are targeted at meeting the aspirations of the market and leading international companies in our industry. Our investment in technology remains a key mainstay underpinning the growth of our Divisions. Product focus The development of our first diagnostic product Genedrive® within the Company portfolio brings a fresh dimension to the Company’s profile and business model. Genedrive’s® application across multiple disease areas is providing a new growth driver in our integrated business model as well as complementing our more established technology and service offerings. Strategic Goals Delivery The launch of our first product Genedrive® will bring a new profile to our business, based on globally leading technology, high quality and technical reliability. The enhancement and recruitment of new scientists and operational teams with recognised expertise will be an on-going feature of our business in order to enable the Company to achieve its growth potential. Technical reputation The company’s leading industry presence in epithelial stem cells, personalised medicine and disease diagnostics will be developed by on-going investment in our core technologies of cell and molecular biology. Financial The Company will continue to pursue its goal of establishing sustainable and growing income streams whilst increasing the potential for substantial financial growth from its invested technologies. Investor We strive to deliver on our Company objectives and the realisation of our plans to provide an increasingly attractive investment opportunity for both our existing and new investors. Substantial and growing income streams from our pharmacogenomics and diagnostics offering will signal Epistem as a company with significant upside potential. Epistem Holdings Plc Annual Report 2013Company OverviewBusiness ReviewGovernanceFinancials 14 Highlights Strengthening investment for future growth Epistem reports increased investment in its diagnostic platform, Genedrive®, and in new pharmacogenomic and infectious disease assays with product launches expected in 2014. Revenue generation in Preclinical Services and Personalised Medicine remain a key cornerstone in the Company’s diversified business model. Group Revenues Preclinical Research Services Revenues Personalised Medicine & Novel Therapies Revenue Overall steady year on year sales with continued improvement in UK performance. Preclinical Research Services delivered £2.9m revenue, as in 2012. Continued US NIH growth. £5.4m 2013 £5.6m 2012 Personalised Medicine Revenue slightly reduced in 2013 following rapid growth in 2012. Revenue includes £0.4m Genedrive® development income (2012: £0.4m). Novel Therapies Revenue produced £nil revenue in 2013 (2012: £nil). £2.9m 2013 £2.9m 2012 £2.5m 2013 £2.7m 2012 Epistem Holdings Plc Annual Report 2013 15 Turnover £5.4m £1.2m Loss after Tax Genedrive® molecular diagnostic • 2013 figures reflect significant uplift in our investment in Genedrive®. • Revenues from Genedrive® product sales are anticipated to accrue from 2014. United States 59% 27% 14% United Kingdom Europe (ex UK)/ROW Discovery, Development and Admin Costs Discovery and Development costs charged to the P&L grew strongly in 2013 to £1.7m (2012: £1.0m). Reflecting our Genedrive® investment. Admin costs steady at £1.4m (2012: £1.3m). £3.1m 2013 £2.3m 2012 Results After Tax Cash Reserves After tax, Development and Admin Costs exceeded contribution from sales by £1.2m (2012: £0.2m). Including £4.2m proceeds of placing of shares in December 2012, cash reserves strengthened to £6.5m. £6.5m 2013 £4.7m 2012 (£1.2m) 2013 (£0.2m) 2012 Intangible Asset Investment Additional to Discovery & Development costs above, the Company invested £1.4m in intellectual property assets (2012: £1.1m). £1.4m 2013 £1.1m 2012 Epistem Holdings Plc Annual Report 2013Company OverviewBusiness ReviewGovernanceFinancials 16 Chairman’s Statement Major progress “I remain wholly convinced that through our investors’ funding and support we have developed a strategically valuable asset of real importance to those operating in the field of molecular diagnostics.” In the results for the year ended 30 June 2013, we report a steady trading position which alongside a strengthened and accelerated investment in the advancement of our molecular diagnostic technology Genedrive® has resulted in widening reported losses. It had been our intention to finalise the prelaunch stages of our TB assay on the Genedrive® platform during the 2013 financial year and to recognise milestone payments, but due to technical and manufacturing issues we are disappointed that this was not achieved as part of the collaboration with Becton Dickinson (BD). Whilst we failed to meet the milestones in the timescale agreed with BD, resulting in the termination of our supply and distribution agreement, we remain in dialogue with the group. We are now finalising the technical development and scale up of our Genedrive® platform for its first application in Tuberculosis (TB) diagnosis. We expect to complete the work necessary to enter into the Indian TB regulatory process over the coming months in preparation for a market launch in the second half of 2014. We are also in discussions with prospective distribution partners in relation to tests from our broader infectious disease and pharmacogenomic portfolio. Our key priority at the current time is to resolve the outstanding technical and manufacturing issues we have had with Genedrive® and we are confident that these issues, which are small in number, are resolvable and that we will be in a position to have our TB assay independently field tested around the end of 2013. We believe that the launch of our first Genedrive® product in TB coupled with the earlier reported India supply and distribution agreement with Xcelris provides very attractive growth opportunities and we are continuing to progress a range of partner discussions across multiple potential applications. Financial Results Further details of the results for the period are covered in the Chief Executive’s review, but financially the year to 30 June 2013 saw the Company deliver revenues of £5.4m (2012: £5.6m). Following high levels of investment made in our Personalised Medicine (Genedrive®) and Novel Therapies programmes, the Company reported a loss of £1.2m (2012: £0.2m loss after tax). After the successful completion of the £4.2m cash placing in December 2012, cash reserves at 30 June 2013 were £6.5m (2012: £4.7m). Reported cash reserves at the end of June 2013 included the BD upfront technology access fee payment of £0.6m, subsequently returned to BD on termination of the agreement post the year end. Unaudited cash reserves at 30 September 2013 were £5.4m. The Company continues to make progress across each of its 3 Divisions as outlined below: • Preclinical Research Services revenues remained steady over the year at £2.9m (2012: £2.9m). We continue to develop our range of high-margin service offerings alongside our cornerstone US government bio-defence contract. The Division is building and extending its core scientific strengths, especially in the US, to maintain a solid platform for future growth. • Following last year’s significant step up in growth, Personalised Medicine revenues remained broadly flat at £2.5m (2012: £2.7m), supported by our ongoing pharmaceutical collaborations and an increased investment in our Genedrive® developments. Epistem Holdings Plc Annual Report 2013 17 In addition to gearing up Genedrive® for use in TB and infectious diseases, the Division is preparing tests for pharmacogenomic analysis including near patient clinical management in areas such as cancer treatment, Hepatitis C therapeutic intervention and ‘patient stratification’ for clinical trials. We are also pleased to report on the successful completion of our first 2 patient stratification clinical studies which we expect to see emerge as an exciting area of growth for the Company. Further details are set out in the Chief Executive’s Review. The reported Personalised Medicine revenues for the year included Genedrive® development income, primarily from our work with the US department of defence, of £0.4m (2012: £0.4m). • Our Personalised Medicine Division also recently announced the initiation of a three (3) year, Euro 1.5m ‘Hepatitis C’ collaboration with INSERM and the Pasteur Institute for development of ‘Hepatitis C’ (HCV) Point-of-Care test. The global need for this test is substantial and we will be developing this test as part of our expanding menu of infectious disease assays. • We are in the final stages of completing our Genedrive® unit testing and TB assay manufacturing scale up. GE Healthcare have commenced scale up of our TB assay product and the final phase of the Genedrive® unit testing is now underway in preparation for independent field testing and our India clinical trials. We anticipate sales of Genedrive® in the second half of 2014 which will mark the beginning of Epistem’s first product- related revenues and disrupt traditional methods of TB diagnosis by offering the ability to undertake ‘near patient’ Point-of-Care molecular diagnosis. The Board believes that Genedrive® will bring about a breakthrough in rapid, high sensitivity and low cost molecular (DNA) diagnostic testing across a broad range of disease areas. • Novel Therapies’s drug development programme continues and we are carefully investing in a limited number of leads with the Division reporting nil revenues for the year (2012: £0.0m). Collaborative discussions with potential partners are ongoing to progress our leads in the areas of Regenerative Medicine and Oncology. • Based on the ongoing investment in our Genedrive® and Novel Therapies programmes, the Company reports a loss for the year of £1.2m (2012: £0.2m loss for the year) and loss per share of 12.5p (2012: 2.9p loss per share). I remain wholly convinced that through our investors’ funding and support we have developed a strategically valuable asset of real importance to those operating in the field of molecular diagnostics. To be able to realise this value we need not only to resolve the current technical issues, which I believe are resolvable, but to invest further in resource and infrastructure to support our future partnerships. We will need to demonstrate our ability to scale up production and have sufficient depth in management to ensure deliverability as we move from the innovation phase to the industrial phase – these processes take time and extreme diligence, issues of which we are fully aware given the recent BD experience. Over the coming months we are targeting the following key objectives in relation to Genedrive® and within the wider Personalised Medicine group: • Entering into the final stages of Indian regulatory approval and completion of the TB clinical trial process. • Entering Genedrive® into preliminary clinical studies for TB as a forerunner to a WHO recommendation. • The strengthening of management in Diagnostics with the appointment of a domain relevant COO for that Division with main Board representation. • Progress with the HCV and other core development programmes. • Progress our discussions with potential pharmaceutical partners in relation to the use of Genedrive® for use in clinical trials re patient stratification. We are dedicated to driving the process with Genedrive® so that we can crystallise the strategic value of this technology. Whilst the outlook is naturally dominated by Genedrive®, I see the continued solid progress in Preclinical Research Services and the pharmacogenomics offering within Personalised Medicine helping to underpin the fundamentals of Epistem and whilst we have scaled back our investment into Novel Therapies we continue to examine ways in which we can realise the value and heritage of this key area. I would like to thank the CEO for his support and leadership, the Board and our employees for their effort and commitment in driving Epistem’s progress over the past year, as well as our investors whose support has provided a stable platform for our continued growth plans. Outlook Our key priority in this financial year is to gain approval for the launch of Genedrive® into a clinically-regulated marketplace whilst continuing its broad menu of development in clinical and non-clinical fields. David Evans Chairman 22 October 2013 Epistem Holdings Plc Annual Report 2013Company OverviewBusiness ReviewGovernanceFinancials 18 Chief Executive’s Review Continuing innovation and new product development “Our business model continues to balance a heritage of service- based revenue growth with emerging new and disruptive product technologies capable of delivering significant investor returns.” Whilst we continue to develop and strengthen our service-based revenue generating businesses, the delays around the completed development of our first product Genedrive® have weighed heavily on our anticipated outturn and market expectations for the year. The financial results for the Group presented in this announcement reflect the Group’s trading for the year to 30 June 2013 and for the comparative period to 30 June 2012. Financial review The Company reports a turnover of £5.4m (2012: £5.6m) for the year ended 30 June 2013. Revenues were underpinned by the Preclinical Research Services Division, which delivered sales of £2.9m (2012: £2.9m). The Personalised Medicine Division delivered sales of £2.5m (2012: £2.7m), with the Novel Therapies Division reporting no sales over the period. Consolidated territory revenues were split US 59% (2012: 68%), EU/ROW 14% (2012: 19%) and UK 27% (2012: 13%). Year-on-year Preclinical Research Services sales remained steady delivering a similar year-on-year operating profit of £0.8m (2012: £0.8m). Personalised Medicine sales were broadly similar to last year, which alongside our increased resource and investment in Genedrive® saw the Division report an operating loss of £0.1m (2012: £0.4m profit) over the year. Novel Therapies, investing in its lead development programme, reported an operating loss of £0.8m (2012: operating loss £0.8m) with central administration costs largely unchanged over the year at £1.4m (2012: £1.3m) giving rise to an overall group operating loss for the year of £1.5m (2012: loss £0.8m). The benefit of a £0.3m R&D and other tax credits saw the Group report a loss after tax for the year of £1.2m (2012: loss £0.2m) with year-end headcount in the Company at 67 (2012: 63). Epistem Holdings Plc Annual Report 2013 19 Cash balances at the end of June 2013 were £6.5m (2012: £4.7m) following the completion of the £4.2m cash placing in December 2012. Reported cash reserves at the end of June 2013 included the BD upfront technology access fee payment of £0.6m, subsequently returned to BD on termination of the agreement. Unaudited cash reserves at 30 September 2013 were £5.4m. Reported loss per share was 12.5p (2012: 2.9p loss per share). The Company’s annual audit was completed in October 2013 by HW Chartered Accountants and their audit report will be included with the annual accounts which are expected to be distributed to shareholders shortly. Operating review Preclinical Research Services Preclinical Research Services delivered a steady year-on- year revenue performance whilst maintaining a 27% operating margin (£0.8m operating profit). The Division provides a high margin, niche, preclinical service offering across our core disease areas of oncology, mucositis, inflammatory bowel disease and dermatology. The year saw the initiation of our first rheumatoid arthritis (RA) and oncology imaging leukaemia models, strong demand for our inflammatory bowel disease models and attainment of GcLP accreditation for our histology services. Our collaboration with the US National Institutes of Health’s biodefence programme continues to expand and accounts for roughly a third of the Division’s revenues. We have collaborated as part of this programme for over 7 years and provide a role as ‘Subject Matter Experts’ (SME) in radiation exposure. Alongside a broadening client base, we are currently preparing to extend our service capability to set up small laboratory facility in Baltimore to engage more closely with the US government departments and our local US East Coast clients. The US government remains committed to targeting treatment of radiation sickness following a nuclear incident/event. Over the coming year, we expect to build on our new oncology (imaging) services, RA and inflammation models from which we expect to see continued ongoing growth. Personalised Medicine Pharmacogenomics Following the previous year’s strong uplift in revenues, this year’s revenues remained steady at £2.1m (2012: £2.3m) underpinned by our molecular studies for GlaxoSmithKline, Novartis and Sanofi Aventis. These studies utilise Epistem’s proprietary RNA amplification technology and oncology (cancer) bioinformatics to provide biomarker discovery (hair and other tissues) and translational support for oncology drug development and fibrosis drug discovery programmes. The Pharmacogenomics Division (formerly Biomarker Division) works with major pharmaceutical and biotech business groups to provide a suite of preclinical and clinical pharmacodynamic biomarkers to measure the effect of a drug on targeted tissue (gene activated pathways). Our expertise in defining the consequences of gene target modulation in epithelial tissue continues to advance, with the addition of several key oncology target signatures over the past year as well as being utilised in key target identification programmes with business partners. We are now beginning to implement our pharmacogenomics Genedrive® applications with major pharmaceutical strategic partners. We are working closely with Novartis on the clinical expansion of our oncogene identification from whole blood for myeloproliferative disorders and with GlaxoSmithKline for the rapid assessment of genotypes for ‘patient stratification’ for therapeutic treatment. During the year we successfully completed 2 Genedrive® clinical assessments for ‘on the spot’ stratification of patients based on their genotypic characteristics. The identification of genotypic and/or target mutations will allow patients to be ‘stratified’ for ‘Point of Care’ administration of the correct course of ‘personalised’ therapeutic treatment. Over the coming year we will continue our work developing Genedrive® for use as a highly sensitive screening tool for identification and monitoring of the presence of mutation targets in blood. The broadening adoption of Genedrive® for use in pharmacogenomics applications is anticipated to present additional revenue generating opportunities over the coming year. Epistem Holdings Plc Annual Report 2013Company OverviewBusiness ReviewGovernanceFinancials 20 Chief Executive’s Review continued We have also recently announced a Euro1.5m, three (3) year collaboration with INSERM the French National Institute of Health and Medical Research, starting from September 2013, to develop a Point-of-Care predictive and prognostic test that will enable tangible improvements in the health and quality of life of chronic hepatitis C (HCV) patients. Technical completion of the assay is scheduled for mid way through 2014 with an expected launch in 2015. Alongside retaining full freedom to operate for our HCV test, we will be seeking strategic partnerships with non-governmental organisations, national health and development agencies. Between 150 and 180 million people live with HCV infection globally and together with HBV infection – these infections cause around 1 million deaths each year. Diagnostics Genedrive® is a novel, disruptive and highly sensitive molecular diagnostic tool with the capability of targeting a near patient, low cost and rapid turnaround diagnosis (30-60mins including sample preparation) across a broad spectrum of bacterial, viral, fungal and somatic mutational disease areas. We expect to see molecular diagnostics begin to dominate the next generation of diagnostic testing and to change the speed, accuracy and workflows in near patient ’Point of Care’ assessment. Over the coming year, we intend to accelerate our product developments through increased investment in our manpower resource and expertise, enhance our manufacturing and regulatory control and further develop our channel partner distribution strategy to take advantage of the substantial growth opportunities open to us. Despite the recent setback with the Becton Dickinson agreement, we are focused on finalising our core Genedrive® developments with the objective of promptly gaining Indian regulatory approval and the launch of our first major infectious disease assay in Tuberculosis (TB). During the year we worked closely with the Xcelris and Becton Dickinson teams to prepare our first product for market. Unfortunately we have experienced assay manufacturing delays and more recently Genedrive® unit technical problems, which are being resolved and are undergoing final phase validation. The assay manufacturing delays were in relation to scale up of manufactured product, which after a detailed and thorough assessment of the manufacturing process with GE Healthcare has yielded a product which is operating consistently under analytical, clinical and field testing conditions. More recently, we identified unit problems related to firmware and software arising from our internal stress testing of the unit. We are carefully and diligently working through these identified problems to ensure that verification and validation of our unit is assured. This has delayed our final submission for Indian regulatory approval which we anticipate in H1 2014. We maintain an ongoing dialogue with Becton Dickinson and we will be extending our discussions with other potential partners as appropriate. The Xcelris Indian commercial collaboration alone (supply and distribution arrangement in Tuberculosis) includes escalating annual volume requirements for units and assays is capable of delivering significant revenues to Epistem over the next 3-5 years from H2 2014 which is when we expect to commence commercial sales. TB represents our first significant revenue prospect and the initial opportunity to see the application of our Genedrive® platform used both inside and outside laboratory settings enabling ‘near patient’ testing or testing in remote field locations. Over the past year, we have designed a TB assay capable of establishing a new standard in antibiotic resistance testing. The assay possesses several important technical advantages over competitor products and coupled with an industry leading speed to result, ease of use and pricing, will we believe deliver a highly competitive product to market. We are also working with the Foundation for Innovative New Diagnostics (FIND, Geneva) to build our case for WHO recommendation of our TB assay. Over the coming months we will be publishing our first clinical data on our TB test and how this compares to the industry leaders in addressing the US$1bn TB diagnostics market. We are advancing our assay development across a range of other infectious diseases, with tests under development in malaria, dengue and a range of sexually transmitted diseases. We expect to supply and distribute these high volume tests through our channel partner strategy. Alongside healthcare applications, we continue to see opportunities for the use of Genedrive® for biosurveillance and forensic targets. We are working closely with the US government on a number of programmes to identify biothreats and infectious diseases in military settings. We are preparing to continue to the next phase of our US Government contract with the Defence Threat Reduction Agency (DTRA) for pathogen detection. This has been recently delayed due to the US government budgetary issues, but is anticipated to generate up to USD$0.6m in development funding over the next 6 months and if successful, extend into broader US Department of Defence use. We anticipate further growth in the US Department of Defence areas over the coming year. Epistem Holdings Plc Annual Report 2013 21 Alongside the continued growth of our Preclinical Research Services and Pharmacogenomic Divisions, we will be advancing our new HCV programme with INSERM/Pasteur and other ongoing programmes with the US Department of Defence, alongside the development of Genedrive® for use in clinical trials for patient stratification. Our business model continues to balance a heritage of service-based revenue growth with new and disruptive product technologies capable of delivering significant investor returns. Alongside the growth of the group, we expect to strengthen our Board and management of the Diagnostics Division with the appointment of a Chief Operating Officer with relevant sector expertise. We will also bolster our staff and senior management with individuals who fit with the culture and dynamism of the Company. I would like to thank the Board, management and employees for their help and support over the past year and I look forward to updating our investors on our progress in the coming months. Matthew H Walls Chief Executive Officer 22 October 2013 Novel Therapies The Novartis collaboration was completed in March 2013 and we now retain intellectual property rights over our collaborative leads and continue to progress discussions with partner groups over the development of our Novel Therapies lead programme. Given the investment requirements of our Genedrive® programme, we will maintain a controlled approach to our ongoing investment in our Novel Therapies lead programme. The timing of a license opportunity and/or funding support remains difficult to judge although we remain confident in our development programme. We have continued to define the mechanism of action of our lead candidates – understanding the cell biology and signalling pathways which regulate the cell/stem cells in the areas of regenerative medicine and oncology and we are considering small molecule partnerships to establish a portfolio of agents which regulate signalling pathways and cell biology. We will evaluate our other drug discovery and development opportunities with major industry players to identify new lead developments and to expand our discovery and early stage development platform. Integrated business model The establishment of our independent Divisions has created a portfolio of revenue-driven business units. Epistem’s objective is to provide a financially robust business, whilst offering the potential for significant financial upside from the development of our Personalised Medicine, Novel Therapies and Preclinical Research Services Divisions. We continue to enhance and exploit our competence in epithelial cell biology, gene pathways and molecular (personalised) medicine, whilst retaining a high degree of commercial independence across each Division. Outlook Over the coming months we will be focusing on the resolution of the technical issues with the Genedrive® unit before entering the process of Indian regulatory assessment for our TB assay. We will also commence initial evaluation studies as a forerunner to targeting a WHO recommendation, as well as completing our Indian trials in preparation for launch of our TB assay in H2 2014. Epistem Holdings Plc Annual Report 2013Company OverviewBusiness ReviewGovernanceFinancials 22 Board of Directors A team with experience David Evans (53) Chairman John Rylands (59) Finance Director John originally joined Epistem as an investor and Non-executive Director, and in 2005, he took over his current role. John provided corporate finance advice to private companies before joining Epistem. Prior to 1999 he was an investor in and consultant to the SDS group of companies. John holds a degree in Economics and Accountancy from Manchester University and is a fellow of ICAEW. David joined Epistem as a Non-executive Director in June 2005 and became Executive Chairman in March 2006 until the flotation in April 2007, when he reverted to a non-executive position. David, a qualified accountant, has many years’ experience both as an executive and as a non-executive of publicly listed diagnostic and life science companies. In addition to his chairmanship of Epistem, he is currently Non-executive Chairman of the following AIM listed companies: EKF Diagnostics plc, Omega Diagnostics Group plc and Scancell Holdings Plc. Matthew Walls (49) Chief Executive Officer Matthew joined Epistem in February 2007 as Chief Executive Officer. He is an experienced CEO, most recently with Oxford Biosignals Limited, where he led the strategic collaboration with Rolls Royce Plc and Covance Inc. Matthew spent the early part of his career with ICI Plc, progressing through to AstraZeneca Plc prior to its plant crop biotechnology group merger with Novartis to form Syngenta Plc. Matthew has led the growth of several technology and biotechnology companies as CEO, including Internexus Limited and Zylepsis Limited. He holds a non-executive post at The REPIN Group and Riyada Oxford Investments Limited and is a chartered accountant and a member of CIMA. Epistem Holdings Plc Annual Report 2013 23 Catherine Booth, Ph.D. (48) Managing Director, Contract Research Services Roger Lloyd, Ph.D. (65) Non-executive Director Roger joined the Board as a Non-executive Director on 1 July 2007. Trained as a biochemist, Roger has 36 years’ experience in the healthcare and biotechnology sector, particularly in the areas of strategic planning and business development. International business management with ICI Plc and AstraZeneca Plc included living and working in the United States and Germany, and having territorial responsibilities for Europe, Japan, Korea, Mexico and the Middle East. As Executive Director of Global Licensing at AstraZeneca he personally completed 24 transactions. He operates as a Board Adviser in the Biotech sector. Catherine is a co-founder of Epistem and prior to starting Epistem she worked for ten years with Prof. Chris Potten at the Paterson Institute. Whilst at the Paterson Institute she developed many pre-clinical assays. This knowledge is at the core of the Epistem Contract Research Service. Catherine received her Ph.D. from Emmanuel College, University of Cambridge. Robert Nolan, Ph.D. (70) Non-executive Director Robert has been a Non-executive Director of the Company since 2004. Having gained US post doctoral experience at Dartmouth Medical School and MIT, he joined the SANDOZ Forschungsinstitut in Vienna in 1972 to work on mechanism of antibiotic action and was also coopted on to Sandoz global strategic planning group. He joined ICI pharmaceuticals (which became AstraZeneca) in 1979 to head up a natural products discovery programme and subsequently joined their product licensing group. He brings with him a wealth of expertise in partnering and licensing negotiations with both small biotechnology and large pharmaceutical companies. Prior to his retirement he was Director, Global Licensing, at AstraZeneca. He is also a Non-executive Director of Phico Therapeutics Ltd. i B u s n e s s R e v e w i G o v e r n a n c e Epistem Holdings Plc Annual Report 2013Company OverviewFinancials 24 Directors’ Report For the year ended 30 June 2013 The Directors present their report for Epistem Holdings Plc (‘the Company’) and its subsidiaries (together ‘Epistem’ or ‘the Group’) for the year ended 30 June 2013. Principal activities and review of the business The principal activity of the Group during the year was the provision of services to the biotechnology and pharmaceutical industries, covering preclinical testing and gene biomarker & diagnostic services and the development of novel therapeutics for partner companies. The trading activities of the Group are currently principally undertaken in the subsidiary undertaking, Epistem Limited, and a detailed overview of these activities is outlined in the Business Overview on the inside front cover to page 11 of this report. The Group operates a US office in Boston, MA, trading through its wholly owned subsidiary Epistem Inc. A review of the business during the year which summarises overall progress, research and development, on going research and future development and key performance indicators, as well as risks and developments is detailed in the Business Review on pages 12–21 of this report. Results and dividends The trading results for the year and the Group’s financial position at the end of the financial year are shown in the financial statements on pages 32–58 of this report. The Directors do not recommend payment of a final dividend. Going concern After due consideration, the Directors have a reasonable expectation that the Group has adequate resources to continue in operational existence for the foreseeable future. For this reason, they continue to adopt the going concern basis in preparing the accounts. Directors and their interests in shares The Directors of the Company who held office throughout the year, unless otherwise stated, and their interests in the share capital of the Company, including family and pension scheme trust interests, were as follows: David Evans Chris Potten (died 3 August 2012) Catherine Booth Roger Lloyd Jeffrey Moore (resigned 10 October 2013) Robert Nolan John Rylands Matthew Walls * As at 3 August 2012. 30 June 2013 1 July 2012 80,645 80,645 519,320* 519,320 983,884 984,727 – – 16,209 14,052 5,065 5,065 193,782 194,625 9,529 10,372 Epistem Holdings Plc Annual Report 2013 25 Significant shareholdings In addition to the Directors’ holdings, the Company has been advised of the following interests of over 3% of the issued ordinary shares: Blackrock Investec ODEY Asset Management M&G Investments Calculus Capital Aerion Liquid Capital Henderson Investment Management Percentage Holding Percentage holding 913,023 702,000 664,000 531,623 495,926 370,857 354,500 318,224 9% 7% 7% 5% 5% 4% 4% 3% Policy on payments to suppliers It is the policy of the Company in respect of all of its suppliers, where reasonably practicable, to settle the terms of payment with those suppliers when agreeing the terms of each transaction, to ensure that those suppliers are made aware of the terms of payment, and to abide by those terms. The Group has complied with this policy during the year. The average number of creditor days for the Group was 45 (2012: 64) based on the average monthly amount invoiced by suppliers during the year. Statement of Directors’ responsibilities The Directors are responsible for preparing the Annual Report, the Directors’ Remuneration Report and the financial statements in accordance with applicable law and regulations. Company law requires the Directors to prepare financial statements for each financial year. Under that law the Directors have prepared the Group financial statements in accordance with International Reporting Standards (IFRSs) as adopted by the European Union. In preparing those financial statements, the Directors are required to: • select suitable accounting policies and then apply them consistently; • make suitable judgements and estimates that are reasonable and prudent; • state that the financial statements comply with IFRSs as adopted by the European Union, subject to any material departures being adequately disclosed and explained; and • prepare the financial statements on the going concern basis unless it is inappropriate to presume that the Group will continue in business. The Directors confirm that they have complied with the above requirements in preparing the financial statements. The Directors are responsible for keeping adequate accounting records that are sufficient to show and explain the Company’s transactions and disclose with reasonable accuracy at any time the financial position of the Group and enable them to ensure that the financial statements comply with the Companies Act 2006 and Article 4 of the IAS Regulation. They are also responsible for safeguarding the assets of the Group and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities. The Directors are responsible for the maintenance and integrity of the corporate and financial information included on the Company’s website. Legislation in the United Kingdom governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions. Epistem Holdings Plc Annual Report 2013Company OverviewBusiness ReviewGovernanceFinancials 26 Directors’ Report continued For the year ended 30 June 2013 Principal risks The Board meets regularly to review operations and to discuss risk areas. The Review of the Year on pages 12–21 report on the factors which are key to the on-going development of the Company. The Corporate Governance Report contains details of the Group’s system of internal control. Details of the financial risks are disclosed in Note 18 to the financial statements. The Directors regularly assess and monitor the business risks faced by the Group. Risk is an inherent feature of business and set out below are some key risks, together with associated mitigating factors. This list does not purport to be exhaustive. Development risk The Group undertakes significant activity with the aim of launching new products, therapies and services. There can be no guarantee that the development activity will enable the programmes to meet the technical and intellectual property hurdles required for a commercial launch to be undertaken in advance of competing technologies coming to market. The Group seeks to mitigate this risk by ensuring that development programmes are planned and undertaken by staff with the requisite skills. The Group monitors industry trends and customer needs to ensure that its development targets remain relevant. Regulatory risk There can be no guarantee that the Group’s products or services will be able to obtain or maintain the necessary approval for the orderly conduct of its business. Approvals can require evaluation of data relating to safety, quality and efficacy standards. The Group seeks to mitigate regulatory risk by conducting its operations within recognised quality assurance standards and by undergoing external assessment. Management & Employees The Group’s future success is dependent on its management team and staff. There is an on-going risk that staff will leave to join competitor companies. The Group seeks to mitigate this risk by establishing effective management organisation and leading staff incentive schemes. Economic risk The Group’s programmes are targeted to meet the commercial requirements of its clients. In the current economic climate, clients’ plans may be subject to changes which may adversely affect the financial performance of the Group. The Group seeks to mitigate this risk by operating a diversified business model across various technologies and territories. Provision of information to auditors The Directors who were members of the Board at the time of approving the Directors’ Report are listed on pages 22 and 23. Having made enquiries of fellow Directors and of the Group’s auditors, each of these Directors confirms that: • to the best of each Director’s knowledge and belief, there is no information (that is, information needed by the Group’s auditors in connection with preparing their report) of which the Group’s auditors are unaware; and • each Director has taken all the steps that a Director might reasonably be expected to be taken to be aware of relevant audit information and to establish that the Group’s auditors are aware of that information. Approved by the Board H J J Rylands Company Secretary 22 October 2013 Epistem Holdings Plc Annual Report 2013 27 Directors’ Remuneration Report For the year ended 30 June 2013 Introduction This report has been prepared in accordance with the requirements of Schedule 2 Pt1 to the Companies Act 2006 (‘the Schedule’) and also meets the relevant requirements of the Listing Rules of the Financial Services Authority and describes how the Board has applied the Principles of Good Governance relating to Directors’ Remuneration. In accordance with Section 439 of the Companies Act 2006 (‘the Act’), a resolution to approve the report will be proposed at the Annual General Meeting of the Company at which the financial statements are to be approved. Section 497 of the Act requires the auditors to report to the Company’s members on the ‘auditable part’ of the Directors’ Remuneration Report and to state whether, in their opinion, that part of the report has been properly prepared in accordance with Part 3 of the Schedule. This report has therefore been divided into separate sections for audited and unaudited information. Unaudited information Remuneration policy Executive remuneration packages are prudently designed to attract, motivate and retain Directors of the necessary calibre and to reward them for enhancing value to shareholders. The performance measurement of the Executive Directors and key members of senior management and the determination of their annual remuneration package is undertaken by the Remuneration Committee. The remuneration of the Non-executive Directors is determined by the Board within limits set out in the Articles of Association. Executive Directors are entitled to accept appointments outside the Company providing the Board’s permission is sought. Non-executive Directors’ terms of engagement The Non-executive Directors have specific terms of engagement. Their remuneration is determined by the Board. In the event that a Non-executive Director undertakes additional assignments for the Company, the Non-executive Director’s fee will be agreed by the Company in respect of each assignment. Audited information Aggregate Directors’ remuneration Executive Catherine Booth Jeffrey Moore (resigned 10 October 2013) John Rylands Matthew Walls Non-executive David Evans Chris Potten (died 3 August, 2012) Roger Lloyd Robert Nolan Salary & fees £ Bonus £ Pension £ 2013 total £ 2012 total £ 99,138 128,269 125,000 200,000 5,000 – 5,000 100,000 29,431 – – – 133,569 128,269 130,000 300,000 138,568 130,000 140,000 300,000 35,000 – 24,000 24,000 – – – – – – – – 35,000 – 24,000 24,000 35,000 13,964 24,000 24,000 635,407 110,000 29,431 774,838 805,532 Epistem Holdings Plc Annual Report 2013Company OverviewBusiness ReviewGovernanceFinancials 28 Directors’ Remuneration Report continued For the year ended 30 June 2013 Directors’ share options Details of the options for Directors who served during the year are as follows: As at 1 July 2012 Exercised/ Lapsed Options granted Executive Catherine Booth(2) Jeffrey Moore(3) Jeffrey Moore(1) Jeffrey Moore(1) Jeffrey Moore(1) John Rylands(3) John Rylands(1) Matthew Walls(4) Matthew Walls(5) Matthew Walls(6) Matthew Walls(6) Matthew Walls(7) Non-executive David Evans(1) Robert Nolan(1) Robert Nolan(1) Chris Potten(8) 15,528 54,333 100,000 83,333 83,333 83,333 127,847 177,653 80,644 254,631 5,369 – 62,112 78,000 15,528 – – – – – – – – – – – – – – – (died 03 August, 2012) 15,528 15,528 – – – – – – – – – – – 23,758 – – – – As at 30 June 2013 15,528 54,333 100,000 83,333 83,333 83,333 127,847 177,653 80,644 254,631 5,369 23,758 62,112 78,000 15,528 Exercise price Earliest exercise date Expiry date £1.20 £1.20 £1.20 £1.20 £1.20 £1.20 £1.20 £1.24 £1.24 £3.73 £3.60 £5.50 £1.20 £1.29 £1.20 £1.20 Exit 04/04/2007 04/04/2007 01/09/2007 01/09/2008 04/04/2007 04/04/2007 31/10/2010 31/10/2010 30/09/2013 30/09/2013 26/03/2016 09/01/2016 09/01/2016 09/01/2016 09/01/2016 09/01/2016 09/01/2016 09/01/2016 27/03/2017 27/03/2017 29/03/2021 10/05/2021 25/03/2024 04/04/2007 31/05/2005 10/01/2006 09/01/2016 30/03/2015 09/01/2016 n/a n/a 1. Unapproved stand-alone agreement, no performance criteria. 2. EMI Company scheme, no performance criteria. 3. EMI stand-alone scheme, no performance criteria. 4. EMI and Unapproved stand-alone scheme, with performance criteria which were satisfied in 2010. 5. EMI stand-alone scheme, with performance criteria as detailed in (5) above. 6. 2007 Epistem Share Option Scheme, with performance criteria which allow the options to vest when the Remuneration Committee determine that the Company has achieved a compound annual growth in EBITDA of at least 15% for the three-year period commencing 01 July 2010. 7. 2007 Epistem Share Option Scheme, with performance criteria determined by the Remuneration committee and which correlate to shareholder value. 8. Gain on exercise of Directors’ share options. In 2013 Chris Potten exercised options over 15,528 shares. The gain of market price over exercise price was £44,255. In 2012, Jeffrey Moore exercised options over 29,000 shares. The gain of market price over exercise price was £66,700. Share Investment Plan The details of the Epistem Share Investment Plan are outlined in Note 17 (b) to the accounts. The Directors’ interests in the shares of the Company include shares acquired under the Share Investment Plan as follows: Partnership Shares No 1,576 1,576 1,576 1,576 Cost of Matching Shares £ 13,000 13,000 13,000 13,000 Matching Shares No 3,151 3,151 3,151 3,151 Total SIP Shares 30 June 2013 No 4,727 4,727 4,727 4,727 No SIP Shares 30 June 2012 No 3,884 3,884 3,884 3,884 Catherine Booth Jeffrey Moore John Rylands Matthew Walls Approved by the Board D E Evans Chairman 22 October 2013 Epistem Holdings Plc Annual Report 2013 29 Corporate Governance Report For the year ended 30 June 2013 The Group is subject to the continuing requirements of the AIM Rules and is committed to adhering to corporate governance standards appropriate for a company of its size. The Group follows the Quoted Companies Alliance guidelines and has Remuneration, Audit and Nomination committees with written terms of reference and a schedule of matters reserved for the Board, which generally meets each month. The Board has established an Audit Committee, a Remuneration Committee and a Nomination Committee. The membership of these committees and attendance at meetings is as follows: David Evans (Non-executive Chairman) Robert Nolan (Non-executive Director) Roger Lloyd (Non-executive Director), Remuneration/Nominations Committees only Audit Committee Remuneration Committee Nominations Committee 2 2 na 3 3 3 1 1 1 Remuneration Committee The Remuneration Committee reviews the scale and structure of the Executive Directors’ and senior management’s remuneration and the terms of their service contracts. The remuneration and terms of appointment of the Non-executive Directors are set by the Board. The Remuneration Committee also approves the issue of share options under schemes approved by the Board. None of the Committee members have any personal financial interest (other than as shareholders), conflicts of interest arising from cross-directorships, or day-to-day involvement in the running of the business. No Director plays a part in any discussion about his or her own remuneration. Audit Committee The Audit Committee has responsibility for receiving accounts and reviewing reports from the management and the Company’s auditors, relating to Annual and Interim Accounts and the accounting and internal controls in place throughout the Group. At this stage of the Group’s size and development the Committee has decided that an internal audit function is not required as the Group’s internal controls system in place is appropriate for its size. The Audit Committee has met twice during the year. Nomination Committee The Nomination Committee has responsibility for reviewing the size, structure and composition of the Board, as well as retirements and appointments of replacement and additional Directors, and for making appropriate recommendations to the Board. Relations with shareholders The Group recognises the importance of communicating with its shareholders to ensure that its strategy and performance is understood and that it remains accountable to shareholders. The Board as a whole is responsible for ensuring that a satisfactory dialogue with shareholders takes place, while the Chairman and Chief Executive ensure that the views of the shareholders are communicated to the Board as a whole. The Board ensures that the Group’s strategic plans have been carefully reviewed in terms of their ability to deliver long-term shareholder value. Internal controls The Board acknowledges its responsibility for establishing and maintaining the Group’s system of internal controls and will continue to ensure that management keeps these processes under regular review and improves them where appropriate. The system of internal controls is designed to manage, rather than eliminate, the risk of failure to achieve business objectives and can provide only reasonable and not absolute assurance against material misstatement or loss. Epistem Holdings Plc Annual Report 2013Company OverviewBusiness ReviewGovernanceFinancials 30 Corporate Governance Report continued For the year ended 30 June 2013 Social and ethical matters The Board recognises the growing awareness of social and ethical matters and it endeavours to take into account the interests of the Group’s stakeholders, including its investors, employees, suppliers and business partners, when operating the business. Employment At a subsidiary level the individual company has established policies which address key corporate objectives in the management of employee relations, communications and employee involvement, training and personal development and equal opportunities. Health, safety and environmental issues The Board recognises its legal responsibilities to ensure the well-being, safety and welfare of its employees and to maintain a safe and healthy working environment for them and for its visitors and sub-contractors. Health and Safety is on the agenda for regularly scheduled Board meetings. By their nature, the Group’s regular operations are judged to have a low environmental impact and are not expected to give rise to any significant, inherent environmental risks over the next 12 months. The Group is committed to maintaining high standards in implementing appropriate health, safety and environmental protection policies. Waste materials are recycled where possible, and hazardous waste is catalogued and handled by licensed specialist disposal companies. Epistem Holdings Plc Annual Report 2013 31 Independent Auditors’ Report to the Members of Epistem Holdings Plc Year Ended 30 June 2013 We have audited the group and parent company financial statements (the ‘Financial Statements) of Epistem Holdings Plc for the year ended 30 June 2013 which comprise the consolidated statement of comprehensive income, the consolidated and parent company balance sheets, the consolidated and parent company statement of cash flows, the consolidated and parent company statements of changes in equity and the related notes. The financial reporting framework that has been applied in their preparation is applicable law and International Financial Reporting Standards (IFRSs) as adopted by the European Union. This report is made solely to the company’s members, as a body, in accordance with Chapter 3 of Part 16 of the Companies Act 2006. Our audit work has been undertaken so that we might state to the company’s members those matters we are required to state to them in an auditor’s report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the company and the company’s members as a body, for our audit work, for this report, or for the opinions we have formed. Opinion on financial statements In our opinion: • the financial statements give a true and fair view of the state of the group’s and the parent company’s affairs as at 30 June 2013, and of the group’s loss for the year then ended; • the group financial statements have been properly prepared in accordance with IFRSs as adopted by the European Union; and • the financial statements have been prepared in accordance with the requirements of the Companies Act 2006. Opinion on other matters prescribed by the Companies Act 2006 In our opinion: • the part of the Directors’ Remuneration Report to be audited has been properly prepared in accordance with the Companies Act 2006; and • the information given in the Directors’ Report for the financial year for which the financial statements are prepared is consistent with the financial statements. Respective responsibilities of Directors and auditors As explained more fully in the Statement of Directors’ responsibilities set out in the Directors Report the Directors are responsible for the preparation of the financial statements and for being satisfied that they give a true and fair view. Our responsibility is to audit and express an opinion on the financial statements in accordance with applicable law and International Standards on Auditing (UK and Ireland). Those standards require us to comply with the Auditing Practices Board’s (APB’s) Ethical Standards for Auditors. Scope of the audit of the financial statements An audit involves obtaining evidence about the amounts and disclosures in the financial statements sufficient to give reasonable assurance that the financial statements are free from material misstatement, whether caused by fraud or error. This includes an assessment of: whether the accounting policies are appropriate to the group’s and the parent company’s circumstances and have been consistently applied and adequately disclosed; the reasonableness of significant accounting estimates made by the directors; and the overall presentation of the financial statements. In addition, we read all the financial and non-financial information in the Annual Report to identify material inconsistencies with the audited financial statements. If we become aware of any apparent material misstatements or inconsistencies we consider the implications for our report. Matters on which we are required to report by exception We have nothing to report in respect of the following matters where the Companies Act 2006 requires us to report to you if, in our opinion: • adequate accounting records have not been kept by the parent company, or returns adequate for our audit have not been received from branches not visited by us; or • the parent company financial statements and the part of the Directors’ Remuneration Report to be audited are not in agreement with the accounting records and returns; or • certain disclosures of Directors’ remuneration specified by law are not made; or • we have not received all the information and explanations we required for our audit. Carol Graham FCA (Senior Statutory Auditor) For and on behalf of HW, Chartered Accountants & Statutory Auditor Bridge House 157 Ashley Road Hale Altrincham Cheshire WA14 2UT 22 October 2013 Epistem Holdings Plc Annual Report 2013Company OverviewBusiness ReviewGovernanceFinancials 32 Consolidated Statement of Comprehensive Income For the year ended 30 June 2013 Revenue Contract costs Discovery and development costs General administrative costs Operating (loss) Finance income (Loss) on ordinary activities before taxation Taxation on ordinary activities Total Comprehensive Income for the financial year Loss per share (pence) – Basic – Diluted All of the activities of the Group are classed as continuing. The Company has taken advantage of section 408 of the Companies Act 2006 not to publish its own Income Statement. Notes 2 3 6 7 9 9 2013 £’000 5,356 (3,800) (1,679) (1,396) (1,519) 60 (1,459) 296 (1,163) 2012 £’000 5,560 (4,112) (996) (1,287) (835) 109 (726) 482 (244) (12.5)p (12.5)p (2.9)p (2.9)p Epistem Holdings Plc Annual Report 2013 Consolidated Statement of Changes in Equity For the year ended 30 June 2013 Share premium account £’000 Employee share incentive plan reserve £’000 Share capital £’000 Balance at 1 July 2011 119 11,206 Allotment of ordinary shares Share issue costs Purchase of own shares (SIP) Exercise of options Lapse of options Recognition of equity-settled share-based payments Total comprehensive income for the year 12 – – 2 – – – 2,765 (60) – 96 – – – (88) – – (48) – – – – At 30 June 2012 133 14,007 (136) Allotment of ordinary shares Share issue costs Purchase of own shares (SIP) Exercise of options Lapse of options Recognition of equity-settled share-based payments Total comprehensive income for the year 12 – – 1 – – – 4,312 (140) – 51 – – – – – (46) – – – – Share options reserve £’000 Reverse acquisitions reserve £’000 Retained earnings £’000 691 (2,484) (3,262) – – – (14) (1) 171 – 847 – – – (13) (8) 187 – – – – – – – – – – – – 1 – (244) (2,484) (3,505) – – – – – – – – – – – – At 30 June 2013 146 18,230 (182) 1,013 (2,484) (4,668) 12,055 – (1,163) 187 (1,163) 33 Total £’000 6,182 2,777 (60) (48) 84 – 171 (244) 8,862 4,324 (140) (46) 39 (8) Epistem Holdings Plc Annual Report 2013Company OverviewBusiness ReviewGovernanceFinancials 34 Consolidated Balance Sheet As at 30 June 2013 Non-current assets Intangible assets Plant and equipment Deferred taxation Current assets Trade and other receivables Tax receivables Cash and cash equivalents Liabilities Current liabilities Deferred income Trade and other payables Net current assets Total assets less current liabilities Non-current liabilities Liabilities payable 1–5 years Net assets Capital and reserves Called-up equity share capital Share premium account Employee share incentive plan reserve Share options reserve Reverse acquisition reserve Retained earnings Total shareholders’ equity Notes 2013 £’000 2012 £’000 10 11 12 13 14 15 16 21 22 22 22 22 22 3,495 710 977 5,182 2,006 362 6,522 8,890 210 1,807 2,017 6,873 12,055 2,189 573 1,002 3,764 1,978 41 4,684 6,703 198 1,407 1,605 5,098 8,862 – – 12,055 8,862 146 18,230 (182) 1,013 (2,484) (4,668) 133 14,007 (136) 847 (2,484) (3,505) 12,055 8,862 These financial statements were approved by the Directors and authorised for issue on 22 October 2013 and are signed on their behalf by: D E Evans Chairman H J J Rylands Finance Director Epistem Holdings Plc Company number: 06108621 Epistem Holdings Plc Annual Report 2013 Consolidated Statement of Cash Flows For the year ended 30 June 2013 Cash flows from operating activities Operating (loss) for the year Depreciation, amortisation and impairment Share-based payment expense Operating (loss) before changes in working capital and provisions (Increase) in trade and other receivables Increase in deferred income Increase/(decrease) in trade and other payables Net cash (outflow) from operations Finance income Finance costs Tax received Net cash (outflow) from operating activities Cash flows from investing activities Acquisition of non-current assets Net cash (outflow) from investing activities Cash flows from financing activities Proceeds from issue of share capital Expenses of share issue Purchase of own shares Movement in borrowings Net cash inflow from financing activities Net increase in cash equivalents Cash and cash equivalents at beginning of year Cash and cash equivalents at end of year Analysis of net funds Cash at bank and in hand Net funds 35 2013 £’000 2012 £’000 (1,519) 284 179 (1,056) (28) 12 400 (672) 60 – – 60 (835) 193 171 (471) (68) 123 (40) (456) 109 – 76 185 (612) (271) (1,727) (1,313) (1,727) (1,313) 4,363 (140) (46) – 4,177 1,838 4,684 6,522 2,861 (60) (48) (105) 2,648 1,064 3,620 4,684 6,522 6,522 4,684 4,684 Epistem Holdings Plc Annual Report 2013Company OverviewBusiness ReviewGovernanceFinancials 36 Notes to the Financial Statements For the year ended 30 June 2013 1. Significant accounting policies Basis of accounting The consolidated financial statements have been prepared in accordance with International Financial Reporting Standards (‘IFRS’) as adopted by the European Union and therefore comply with Article 4 of the EU IAS Regulation, International Financial Reporting Interpretations Committee (‘IFRIC’) interpretations and with those parts of the Companies Act 2006 applicable to companies reporting under IFRS. Epistem Holdings Plc is a company incorporated in the UK. The consolidated financial statements consolidate those of the Company and its subsidiaries (together referred to as the ‘Group’). They are presented in pounds sterling and all values are rounded to the nearest one thousand (£k) except where otherwise indicated. The consolidated financial statements have been prepared and approved by the Directors in accordance with International Financial Reporting Standards as adopted by the EU. The accounting policies set out below have, unless otherwise stated, been applied consistently to all periods represented in these consolidated financial statements. The preparation of the financial statements requires management to make judgements, estimates and assumptions that affect the application of accounting policies and the reported amounts of assets, liabilities, duration of contracts, income & expenses and taxation. • Determining the value of deferred income and expenditure requires an assessment of the duration of the contract to which the deferred income and expenditure relates, which informs decisions as to when to recognise revenue and whether to carry forward costs. • Determining the value of intangible assets requires a judgement about the extent to which the relevant asset will be brought into economic use by the Company. The filing of a Patent will generally lead to a judgement that the cost of filing the Patent will have future economic use. Research and Development expenditure will generally be expensed unless associated income can be identified. • Determining the value of the deferred tax asset requires an estimation of future taxable profits against which the accumulated tax losses may be utilised. Actual results may differ from these estimates. Estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the period in which the estimate is revised and in any future periods affected. Basis of consolidation Subsidiaries are entities controlled by the Group. Control exists when the Group has the power, directly or indirectly, to govern the financial and operating policies of an entity so as to obtain benefits from its activities. In assessing control, potential voting rights that are currently exercisable or convertible are taken into account. The financial statements of subsidiaries are included in the consolidated financial statements from the date that control commences until the date that control ceases. Transactions between Group companies are eliminated on consolidation. On 16 March 2007, Epistem Holdings Plc merged with Epistem Limited, and on that date the shareholders of Epistem Limited exchanged their shares for equivalent shares in Epistem Holdings Plc. As Epistem Holdings Plc was newly incorporated at the time of the transaction under the terms of IFRS 3 ‘Business Combinations’, this transaction has been accounted for as a reverse acquisition, on the basis that the shareholders of Epistem Limited gained a controlling interest in the Group. The financial statements therefore represent a continuation of the financial statements of Epistem Limited, which continues as a trading subsidiary. Revenue Revenue is measured at the fair value of the consideration received or receivable, net of discounts and sales-related taxes. Epistem Holdings Plc Annual Report 2013 37 1. Significant accounting policies continued Revenue recognition a. Contract revenue Contract revenue is recognised by reference to the stage of completion of the related transaction at the end of the reporting period. b. Collaboration & licensing revenue Contractually agreed upfront payments and similar non-refundable payments in respect of collaboration or licence agreements which are not directly related to on-going research activity are recorded as deferred income and recognised as revenue over the anticipated duration of the agreement. Where the anticipated duration of the agreement is modified, the period over which revenue is recognised is also modified. Non-refundable milestone and other payments that are linked to the achievement of significant and substantive technological or regulatory hurdles in the research and development process are recognised as revenue upon the achievement of the specified milestone. Income which is related to on-going research activity is recognised as the research activity is undertaken, in accordance with the contract. Segment reporting A segment is a group of assets, liabilities and operations engaged in providing products or services that are subject to risks and returns that are different from those of other parts of the business. Research and development Research expenditure is written off as it is incurred. Development expenditure is written off as it incurred up to the point of technical and commercial validation. Thereafter, costs are carried forward as intangible assets, subject to having met the following criteria – technical feasibility, intention and ability to sell the product or model and the availability of resources to complete the development. All intangible assets are subject to impairment review and amortisation in each financial reporting period. In assessing value in use, the estimated future cash flows are discounted to their net present values using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to that asset. Intangible assets Intangible assets are stated at cost less accumulated amortisation and any accumulated impairment losses. Amortisation is calculated so as to write off the cost of an intangible asset, less its estimated residual value, over the useful economic life of that asset, as follows: • Acquired intellectual property – the shorter of 5% straight-line basis or their estimated useful life • Developed intellectual property – the shorter of 10% straight-line basis or their estimated useful life • Patents – over the shorter of 17 years or their estimated useful lives on a straight-line basis No amortisation is charged on those assets which are not yet available for use. Plant and equipment Plant and equipment are stated at cost less accumulated depreciation and any accumulated impairment losses. Depreciation is calculated so as to write off the cost of an asset, less its estimated residual value, over the useful economic life of that asset as follows: • Plant & machinery – 25% reducing balance basis • Fixtures & fittings – 25% reducing balance basis • Equipment – 25% reducing balance basis Finance lease agreements Assets held under finance lease agreements are capitalised and disclosed under tangible fixed assets at their fair value. The capital element of the future payments is treated as a liability and the interest is charged to the consolidated income account so as to produce a constant periodic rate of interest on the remaining balance of the liability. Epistem Holdings Plc Annual Report 2013Company OverviewBusiness ReviewGovernanceFinancials 38 Notes to the Financial Statements continued For the year ended 30 June 2013 1. Significant accounting policies continued Operating lease agreements Rentals applicable to operating leases where substantially all of the benefits and risks of ownership remain with the lessor are charged against profits over the period of the lease. Foreign currencies Transactions in foreign currencies are translated at the exchange rate ruling at the date of the transaction. Monetary assets and liabilities denominated in foreign currencies are retranslated at the rate of exchange ruling at the balance sheet date. Non-monetary items carried at fair value and denominated in foreign currencies are retranslated at the rates prevailing on the date when fair value is determined. The foreign currency risks relating to assets and liabilities are detailed in Note 18. Exchange differences arising on the settlement of monetary items and on the retranslation of monetary items are taken to the income account. Exchange differences arising on non-monetary items, carried at fair value, are included in the income account, except for such non-monetary items in respect of which gains and losses are recorded in equity. Share-based payments The Group issues equity-settled share-based payments to certain employees (including Directors). Equity-settled share-based payments are measured at fair value at the date of grant. The fair value determined at the grant date of the equity-settled share-based payments is expensed on a straight line basis over the vesting period, together with a corresponding increase in equity, based upon the Group’s estimate of the shares that will eventually vest. Fair value is measured using the Black-Scholes pricing model. The expected life used in the model has been adjusted, based on management’s best estimate, for the effects of non-transferability, exercise restrictions and behavioural considerations. Where the terms of an equity settled transaction are modified, as a minimum an expense is recognised as if the terms had not been modified. In addition, an expense is recognised for any increase in the value of the transaction as a result of the modification, as measured at the date of modification. Where an equity settled transaction is cancelled, it is treated as if it had vested on the date of the cancellation, and any expense not yet recognised for the transaction is recognised immediately. However, if a new transaction is substituted for the cancelled transaction, and designated as a replacement transaction on the date that it is granted, the cancelled and new transactions are treated as if they were a modification of the original transaction, as described in the previous paragraph. The issuance by the Company of share options to employees of its subsidiary represents additional capital contributions and the fair value of such options and awards is therefore recognised as an increase in the Company’s investment in Group undertakings with a corresponding increase in total equity shareholders’ funds. Share Incentive Plan The Company operates a HMRC qualifying Share Incentive Plan. Under the scheme, the Company will contribute Matching shares to employees who elect to invest in Epistem shares under the scheme. The Matching shares have vesting conditions which require participants to remain employed with the Company and retain their investment in Epistem shares for at least 3 years. The cost of the Matching shares is expensed as and when the vesting conditions have been satisfied. Pension Contributions Contributions to personal pension plans of employees on a defined contributions basis are charged to the income statement in the year in which they are payable. Financial instruments Financial instruments are classified and accounted for, according to the substance of the contractual arrangement, as either financial assets, financial liabilities or equity instruments. An equity instrument is any contract that evidences a residual interest in the assets of the Company after deducting all of its liabilities. Epistem Holdings Plc Annual Report 2013 39 1. Significant accounting policies continued Trade and other receivables Trade and other debtors are recognised and carried forward at invoiced amounts less provisions for any doubtful debts. Bad debts are written off when identified. Cash and cash equivalents Cash and cash equivalents are included in the balance sheet at cost. Cash and cash equivalents comprise cash at bank and in hand and short-term deposits with an original maturity of three months or less. Interest-bearing loans and borrowings All loans and borrowings are recognised initially at cost, which is the fair value of the consideration received, net of issue costs associated with the borrowing. After initial recognition, interest-bearing loans and borrowings are measured at amortised cost using the effective interest method. Gains or losses are recognised in the consolidated income account when liabilities are de-recognised or impaired, as well as through the amortisation process. Investments Investments in subsidiaries are stated at cost less any provisions for impairment. An impairment is recognised when the recoverable amount of the investment is less than the carrying amount. Taxation Current tax is provided at amounts expected to be paid (or recovered) using the tax rates and laws that have been enacted, or substantially enacted, by the balance sheet date. Deferred tax is recognised in respect of all temporary differences identified at the balance sheet date, except to the extent that the deferred tax arises from the initial recognition of goodwill (if amortisation of goodwill is not deductible for tax purposes) or the initial recognition of an asset or liability in a transaction which is not a business combination and at the time of the transaction affects neither accounting profit nor taxable profit and loss. Temporary differences are differences between the carrying amount of the Group’s assets and liabilities and their tax base. Deferred tax liabilities may be offset against deferred tax assets within the same taxable entity. Any remaining deferred tax asset is recognised only when, on the basis of all available evidence, it can be regarded as probable that there will be suitable taxation profits, within the same jurisdiction, in the foreseeable future against which the deductible temporary difference can be utilised. Deferred tax is provided on temporary differences arising in subsidiaries, jointly controlled entities and associates, except where the timing of reversal of the temporary difference will not reverse in the foreseeable future. Deferred tax is measured at the average tax rates that are expected to apply in the periods in which the asset is realised or liability settled, based on tax rates and laws that have been enacted or substantially enacted by the balance sheet date. Measurement of deferred tax liabilities and assets reflects the tax consequence expected to fall from the manner in which the asset or liability is recovered or settled. Parent Company Assets The assets of the parent Company are subject to impairment review in each financial period. Epistem Holdings Plc Annual Report 2013Company OverviewBusiness ReviewGovernanceFinancials 40 Notes to the Financial Statements continued For the year ended 30 June 2013 1. Significant accounting policies continued New standards and interpretations not applied The International Accounting Standards Board (‘IASB’) and IFIRC have issued the following standards and interpretations with an effective date for financial years beginning on or after 1 July 2013: • • • • • • • • • • • IAS 19 (revised) Employee benefits IAS 27 (revised) Consolidated financial statements IAS 28 (revised) Joint arrangements IAS32 (revised) Financial instruments: presentation IFRS 1 (revised) Government loans IFRS 7 (revised) Financial instruments set-off of assets and liabilities IFRS 9 (revised) Financial instruments classification and measurement IFRS 10 IFRS 11 IFRS 12 IFRS 13 Consolidated financial statements Joint arrangements Disclosure of interests in other entities Fair value measurement The Directors do not anticipate that the adoption of these standards and interpretations will have a material effect on the Group’s financial statements in the period of initial application. 2. Segment information For internal reporting, the Group is organised into 3 operating Divisions – Preclinicial Research Services, Personalised Medicine and Novel Therapies. Preclinical Research Services provides preclinical testing services. Personalised Medicine specialises in molecular measures of biological effect and point of care molecular diagnostic testing. Novel Therapies is discovering key regulators of epithelial stem cells. The results of the operating Divisions of the Company are detailed below. Business segments Twelve months ended 30 June 2013 Revenue Segment trading result less depreciation and amortisation less equity-settled share-based payments Operating profit/(loss) Twelve months ended 30 June 2012 Revenue Segment trading result less depreciation and amortisation less equity-settled share-based payments Operating profit/(loss) Twelve months ended 30 June 2013 Segment assets Segment capital expenditure Twelve months ended 30 June 2012 Segment assets Segment capital expenditure Personalised Medicine £’000 Novel Therapies £’000 Unallocated £’000 Total £’000 Preclinical Research Services £’000 2,851 878 (108) (13) 757 2,895 856 (68) (6) 782 1,330 68 2,505 15 (79) (33) (97) 2,665 503 (48) (31) 424 4,249 1,569 1,352 2,598 343 763 – (718) (62) (3) (783) – (700) (52) (2) (754) 431 39 505 171 – (1,231) (35) (130) 5,356 (1,056) (284) (179) (1,396) (1,519) – (1,130) (25) (132) (1,287) 5,560 (471) (193) (171) (835) 8,062 14,072 51 1,727 6,012 10,467 36 1,313 Epistem Holdings Plc Annual Report 2013 41 2. Segment information continued Geographical segments The Group’s operations are located in the United Kingdom. The following table provides an analysis of the Group’s revenue by geographical market: United Kingdom Europe United States of America Asia 2013 £’000 1,491 563 3,144 158 5,356 2012 £’000 720 977 3,778 85 5,560 Revenues from customers accounting for more than 10% of total revenue are detailed below: (a) £1,016k revenue was derived from the University of Maryland on behalf of the US Government with revenue included within Preclinical Research Services (2012 – £922k); (b) £736k revenue was derived from international pharmaceutical company, Sanofi Aventis, with revenue included within Preclinical Research Services and Personalised Medicine (2012 – £1,674k); and (c) £714k revenue was derived from international pharmaceutical company, Glaxo SmithKline, with revenue included within Preclinical Research Services and Personalised Medicine (2012 – £249k). 3. Operating (loss) The Group operating loss is stated after charging: Discovery and development expenditure Amortisation of intangible assets Depreciation of owned tangible fixed assets Loss in disposal of fixed assets Auditors’ remuneration – as auditors – for other services Operating lease costs – property rent 4. Particulars of employees The average number of staff employed by the Group during the financial year amounted to: Contract services Research and development Administrative The aggregate employee costs (including Directors) were: Wages and salaries Social security costs Equity settled share-based payments Pension payments 2013 £’000 1,679 74 180 30 25 – 175 2013 No 43 13 9 65 2013 £’000 3,030 339 179 74 3,622 2012 £’000 996 8 185 – 23 – 189 2012 No 41 12 9 62 2012 £’000 2,708 286 171 65 3,230 Epistem Holdings Plc Annual Report 2013Company OverviewBusiness ReviewGovernanceFinancials 42 Notes to the Financial Statements continued For the year ended 30 June 2013 5. Directors’ remuneration (key management) Group Remuneration Pension contribution Equity-settled share-based payments 2013 £’000 745 29 135 909 2012 £’000 778 29 131 938 One Director (2012: 1) accrues benefits in a money purchase pension scheme. Full details of the Directors’ remuneration and Directors’ options are contained in the Directors’ Remuneration Report. 6. Finance income and costs Group Finance income – interest receivable – foreign exchange surpluses 7. Taxation on ordinary activities (a) Recognised in the income statement Group Current tax Research and development tax credits Adjustments in respect of prior periods Total current tax Deferred tax Impact of tax rate change on brought forward deferred tax balances Prior year tax losses now recognised Current year tax losses Current year capital allowances in excess of depreciation Revenue recognition of items prior to amortisation In respect of current year share options charges Total deferred tax Total tax (credit) for the year 2013 £’000 15 45 60 2013 £’000 (191) (131) (322) 30 284 (733) 345 102 (2) 26 (296) 2012 £’000 15 94 109 2012 £’000 – – – 91 (196) (860) 224 216 43 (482) (482) Epistem Holdings Plc Annual Report 2013 7. Taxation on ordinary activities continued (b) Reconciliation of the total tax charge Group Loss before taxation Tax using the UK corporation tax rate of 23% (2012: 24%) Effect of difference in tax rate Movement in share options Revenue recognition of items prior to amortisation Capital allowances in excess of depreciation Item not deductible/chargeable for tax purposes Adjustments in respect of research and development tax credits Adjustment relating to a previous year Total tax in income statement 43 2012 £’000 (726) (174) 91 – 216 – 38 (457) (196) (482) 2013 £’000 (1,459) (336) 30 42 102 (7) (5) (276) 154 (296) At 30 June 2013, the change in the corporation tax rate to 23% had been substantially enacted and therefore the deferred taxation assets included within these results have been calculated using a UK corporation tax rate of 23%. The Group had trading losses, as computed for tax purposes, of approximately £8,581k (2012: £6,577k) available to carry forward to future periods. In accordance with the provisions of the Finance Act 2000 in respect of research and development allowances, the Group is entitled to claim tax credits for certain research and development expenditure. The amount included in the financial statements in respect of the year ended 30 June 2013 is £191k (2012: £nil). 8. Profit attributable to members of the parent company The profit dealt with in the accounts of the parent company was £15k (2012: £14k). 9. Earnings per share The basic earnings per share is calculated by dividing the earnings attributable to ordinary shareholders for the year by the weighted average number of ordinary shares in issue during the year. The diluted earnings per share is calculated by adjusting the weighted average number of ordinary shares outstanding to assume conversion of all dilutive potential ordinary shares in relation to share options and share warrants and also the weighted average Matching Shares held by the Epistem SIP which are not yet vested. The number of share options has been adjusted to take into account the issue price and the fair value, consistent with IAS 33, ‘Earnings per share’. Group (Loss) for the year after taxation Group Weighted average number of ordinary shares in issue Dilutive ordinary shares from options and warrants in issue Dilutive weighted average number of ordinary shares (Loss) per share – basic – diluted 2013 £’000 (1,163) 2013 Number 2012 £’000 (244) 2012 Number 9,299,263 1,172,965 8,471,693 996,381 10,472,228 9,468,074 (12.5)p (12.5)p (2.9)p (2.9)p Epistem Holdings Plc Annual Report 2013Company OverviewBusiness ReviewGovernanceFinancials 44 Notes to the Financial Statements continued For the year ended 30 June 2013 10. Intangible assets Group Cost At 1 July 2012 Additions At 30 June 2013 Amortisation At 1 July 2012 Charge for the year At 30 June 2013 Net book value At 30 June 2012 At 30 June 2013 Cost At 1 July 2011 Additions At 30 June 2012 Amortisation At 1 July 2011 Charge for the year At 30 June 2012 Net book value At 30 June 2011 At 30 June 2012 Acquired Intellectual Property £’000 Developed Intellectual property £’000 Patents £’000 Total £’000 2,235 1,380 3,615 46 74 120 1,579 1,367 2,946 – 59 59 1,579 2,887 2,189 3,495 627 952 1,579 1,113 1,122 2,235 – – – 38 8 46 369 13 382 8 11 19 361 363 199 170 369 4 4 8 287 – 287 38 4 42 249 245 287 – 287 34 4 38 195 361 253 249 627 1,579 1,075 2,189 During the year to 30 June 2013, the cost of the Company’s Patents assessed as not being available for economic use amounted to £334k (2012 – £322k). Epistem Holdings Plc Annual Report 2013 11. Plant and equipment Group Cost At 1 July 2012 Additions Disposals At 30 June 2013 Depreciation At 1 July 2012 Charge for the year Depreciation on disposed assets At 30 June 2013 Net book value At 30 June 2012 At 30 June 2013 Group Cost At 1 July 2011 Additions At 30 June 2012 Depreciation At 1 July 2011 Charge for the year At 30 June 2012 Net book value At 30 June 2011 At 30 June 2012 45 Total £’000 1,658 347 (188) 1,817 1,085 180 (158) 1,107 573 710 Total £’000 1,467 191 1,658 900 185 1,085 567 573 Lab equipment £’000 Fixtures & fittings £’000 Other Equipment £’000 1,428 296 (188) 1,536 943 145 (158) 930 485 606 31 19 – 50 24 6 – 30 7 20 199 32 – 231 118 29 – 147 81 84 Lab equipment £’000 Fixtures & fittings £’000 Other Equipment £’000 1,274 154 1,428 783 160 943 491 485 30 1 31 20 4 24 10 7 163 36 199 97 21 118 66 81 Epistem Holdings Plc Annual Report 2013Company OverviewBusiness ReviewGovernanceFinancials 46 Notes to the Financial Statements continued For the year ended 30 June 2013 12. Deferred Taxation Recognised Group Tax losses carried forward Excess of tax allowances over depreciation Excess of revenue recognition over amortisation Share-based payment transactions Other timing differences 2013 £’000 1,974 (804) (309) 115 1 977 2012 £’000 1,578 (478) (216) 118 – 1,002 Deferred tax assets are recognised to the extent that the Directors, having reviewed expectations of future profitability, consider it is probable that there will be sufficient profit available against which the deferred tax asset may be utilised. The Group did not recognise deferred tax assets in respect of share-based payment transactions of £2,755k (2012 – £2,942k). 13. Trade and other receivables Group Trade receivables Accrued income Other receivables Prepayments Analysis of trade receivables Neither impaired nor past due Past due but not impaired Trade receivable 2013 £’000 1,746 – 65 195 2,006 2013 £’000 1,088 658 1,746 2012 £’000 1,188 565 146 79 1,978 2012 £’000 892 296 1,188 Aging of past due but not impaired trade receivables There is no other class of financial assets that is past due but not impaired except for trade receivables. The Group’s credit period generally ranges up to 60 days. The age analysis of the trade receivables have been considered from the date of the invoice and, net of allowances that are past due, is given below: Not later than 1 month Later than 1 month but not later than 3 months Later than 3 months 2013 £’000 345 91 222 2012 £’000 107 132 57 Epistem Holdings Plc Annual Report 2013 14. Cash and cash equivalents Group Cash at bank and in hand Short-term bank deposits 47 2013 £’000 65 6,457 6,522 2012 £’000 73 4,611 4,684 Cash and cash equivalents comprise current accounts held by the Group with immediate access and short-term bank deposits with a maturity of 3 months or less. Market rates of interest are earned on such deposits. The credit risk on such funds is limited because the counter parties are banks with high credit ratings assigned by international credit rating agencies. 15. Deferred income The items recorded as Deferred income are to be recognised over future periods as follows: Group Amounts to be recognised within 1 year 16. Trade and other payables Group Trade payables Accruals Other payables 2013 £’000 210 2013 £’000 751 306 750 2012 £’000 198 2012 £’000 609 587 211 1,807 1,407 Epistem Holdings Plc Annual Report 2013Company OverviewBusiness ReviewGovernanceFinancials 48 Notes to the Financial Statements continued For the year ended 30 June 2013 17. Share-based payments (a) Share options outstanding at 30 June 2013 Prior to 28 November 2007, the Company operated a number of HMRC approved and unapproved share option schemes for employees (including Directors). The original options were granted by Epistem Limited but, following the acquisition by Epistem Holdings Plc, these were released in exchange for equivalent options over the ordinary shares of Epistem Holdings Plc. On 28 November 2007, the Company established the 2007 Epistem Share Option Scheme. Share Options Award EMI – Approved Share Warrants (Note 21) EMI – Unapproved EMI – Approved EMI – Unapproved EMI – Approved EMI – Approved EMI – Approved EMI – Unapproved EMI – Approved EMI – Unapproved 2007 Epistem Share Option Scheme 2007 Epistem Share Option Scheme 2007 Epistem Share Option Scheme 2007 Epistem Share Option Scheme 2007 Epistem Share Option Scheme 2007 Epistem Share Option Scheme 2007 Epistem Share Option Scheme 2007 Epistem Share Option Scheme 2007 Epistem Share Option Scheme Number of awards Exercise price 4,400 198,554 78,000 30,624 472,153 153,194 8,200 80,644 177,653 24,703 57,727 71,918 63,550 40,600 30,000 254,631 5,369 14,700 30,192 23,758 £0.75 £1.61 £1.29 £1.20 £1.20 £1.20 £1.20 £1.24 £1.24 £1.67 £1.60 £1.53 £1.77 £4.03 £3.60 £3.73 £3.60 £3.60 £5.50 £5.50 Period within which options are exercisable 21 Jul 2004 to 20 Jul 2014 18 Mar 2005 to 17 Mar 2015 31 Mar 2005 to 30 Mar 2015 25 Nov 2005 to 24 Nov 2015 10 Jan 2006 to 09 Jan 2016 10 Jan 2006 to 09 Jan 2016 29 Sept 2006 to 28 Sept 2016 28 Mar 2007 to 27 Mar 2017 28 Mar 2007 to 27 Mar 2017 27 Jul 2007 to 26 Jul 2017 15 Oct 2007 to 14 Oct 2017 03 Mar 2011 to 02 Mar 2018 31 Jul 2011 to 30 Jul 2018 10 Dec 2013 to 09 Dec 2020 10 May 2014 to 09 May 2021 29 Mar 2014 to 28 Mar 2021 10 May 2014 to 09 May 2021 10 Feb 2015 to 09 Feb 2022 26 Mar 2016 to 25 Mar 2024 26 Mar 2016 to 25 Mar 2024 Fair value per option Fair value £ £0.27p £0.56p £0.45p £0.43p £0.43p £0.43p £0.43p £0.42p £0.42p £0.39p £0.36p £0.36p £0.37p £1.64p £1.46p £1.51p £1.51p £1.46p £2.23p £2.23p 1,188 111,389 35,022 13,168 201,137 65,873 3,526 33.870 74,615 9,634 20,782 25,890 23,514 66,584 43,800 384,492 8,107 21,462 67,328 52,980 Option valuations The options were valued using the Black-Scholes option-pricing model. Where appropriate, performance conditions were included in the fair value calculations. The fair value per option granted and the assumptions used in the calculations are in the table below. The Group’s effective date for IFRS 2, (‘Share-Based Payments’) implementation is 1 July 2006 and the IFRS has been applied to all options granted after 7 November 2002 which have not been vested by this effective date. Epistem Holdings Plc Annual Report 2013 49 17. Share-based payments continued Award EMI – Approved Share Warrants EMI – Unapproved EMI – Approved EMI – Unapproved EMI – Approved EMI – Approved EMI – Approved EMI – Unapproved EMI – Approved EMI – Unapproved 2007 Epistem Share Option Scheme 2007 Epistem Share Option Scheme 2007 Epistem Share Option Scheme 2007 Epistem Share Option Scheme 2007 Epistem Share Option Scheme 2007 Epistem Share Option Scheme 2007 Epistem Share Option Scheme 2007 Epistem Share Option Scheme 2007 Epistem Share Option Scheme Grant date 21 Jul 2004 18 Mar 2005 31 Mar 2005 25 Nov 2005 10 Jan 2006 10 Jan 2006 29 Sept 2006 28 Mar 2007 28 Mar 2007 27 Jul 2007 15 Oct 2007 03 Mar 2008 31 Jul 2008 10 Dec 2010 10 May 2011 29 Mar 2011 10 May 2011 10 Feb 2012 26 Mar 2013 26 Mar 2013 Expected term (Note a) 5 years 5 years 5 years 5 years 5 years 5 years 5 years 5 years 5 years 5 years 5 years 5 years 5 years 5 years 5 years 5 years 5 years 5 years 5 years 5 years Expected dividend yield % (Note b) Expected volatility % (Note c) Risk % rate (Note d) Performance condition 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 60 60 60 60 60 60 60 60 60 45 45 45 45 40 50 50 50 50 50 50 4.50 4.75 4.75 4.50 4.50 4.50 4.50 5.25 5.25 5.50 5.75 5.75 5.25 5.00 0.50 0.50 0.50 0.50 0.50 0.50 None None None None Note (e) None None Note (f) Note (f) None Note (g) Note (g) Note (h) Note (h) Note (h) Note (i) Note (h) Note (h) Note (h) Note (j) (a) The expected term used in the model is 5 years and is based upon the Directors’ best estimates for the effects of exercise restrictions and behavioural considerations. (b) The dividend yield of 0% reflects the absence of a history of paying dividends and a clear dividend policy at the relevant grant dates. (c) Prior to 2011, the expected volatility was estimated by the Directors after inspection of the financial statements of comparable businesses in the same business sector as the Group. Thereafter, the expected volatility has been calculated by reference to the historic share price of the Company. (d) The risk free rate used is based upon the prevailing UK bank base rate at the date of the grant. (e) These options vest on dates dependant on anniversaries of commencing employment with the Group which commenced 1 September 2005 with the final tranche vesting on 1 September 2008. (f) The performance conditions for these options to vest were satisfied in 2010. (g) These options are subject to performance criteria which are appropriate to the option holders’ role within the Company and which are assessed by the Remuneration Committee. (h) These options may be exercised following the third anniversary of grant and are subject to performance criteria which are appropriate to the option holders’ role within the Company and which are assessed by the Remuneration Committee. (i) These options may be exercised when the Remuneration Committee determine that the Company has achieved a compound annual growth in EBITDA of at least 15% for the three-year period commencing 01 July 2010. (j) These options may be exercised on achievement of performance criteria determined by the Remuneration committee which correlate to shareholder value. Epistem Holdings Plc Annual Report 2013Company OverviewBusiness ReviewGovernanceFinancials 50 Notes to the Financial Statements continued For the year ended 30 June 2013 17. Share-based payments continued The number of options and their weighted average exercise prices are as follows: Group Outstanding as at 1 July Granted during the year Exercised during the year Lapsed during the year Outstanding as at 30 June Number Weighted average exercise price Weighted average remaining contracted life – Years 2013 2012 2013 2012 2013 2012 1,808,098 1,918,548 18,450 (123,400) (5,500) 54,525 (36,628) (5,425) 1,820,570 1,808,098 £1.78 £5.50 £1.04 £3.89 £1.82 £1.41 £3.60 £0.69 £1.06 £1.78 – – – – – – – – 4.03 4.83 Options exercisable at 30 June 1,304,402 1,341,030 £1.30 £1.31 2.75 3.80 The weighted average share price at the exercise dates was £4.89 (2012 – £3.53). (b) Share Investment Plan The Company operates a share investment plan, (The Epistem Share Investment Plan or SIP) which is open to Directors and employees in accordance with HMRC approved rules. Under the terms of the SIP, Directors and employees may invest up to £125 per month to be invested in ordinary shares (‘Partnership Shares’) in the Company at the prevailing market price. At the same time as each monthly subscription, a maximum of 2 Matching Shares for each Partnership Share will be acquired on behalf of the SIP’s participants. Both the Partnership and the Matching Shares are purchased on behalf of the scheme’s participants by Epistem SIP Trustee Limited, a wholly owned subsidiary of the Company. Participants, who must be employed by the Company, may withdraw their Matching Shares once their associated Partnership Shares have been held for 3 years. The cost of the Matching Shares is expensed as and when this vesting condition is met. Partnership shares held at 30 June Matching Shares held at 30 June Group Unamortised cost of Matching shares (Comprising Employee SIP reserve) 2013 2012 21,578 43,153 18,092 36,181 2013 £’000 2012 £’000 182 136 18. Financial risk management objectives and policies The Group holds or issues financial instruments in order to achieve 2 main objectives, being: (a) to finance its operations; and (b) to manage its exposure to interest and currency risks arising from its operations and from its sources of finance. In addition, various financial instruments (e.g. trade receivables, trade payables, accruals and prepayments) arise directly from the Group’s and the Company’s operations. Transactions in financial instruments result in the Group assuming or transferring to another party 1 or more of the financial risks described below. Epistem Holdings Plc Annual Report 2013 51 18. Financial risk management objectives and policies continued Interest rate risk The Group currently finances its operations through reserves of cash and liquid resources and does not have a borrowing requirement. Surplus cash at bank is placed on deposits at variable rates. The Board monitors the financial markets and the Group’s own requirements to ensure that the policies are exercised in the Group’s best interests. The following table demonstrates the sensitivity to a possible change in interest rates on the Group’s profit before tax through the impact of floating rate cash balances. 2013 Cash and cash equivalents 2012 Cash and cash equivalents Decrease in the basis points Effect on loss before tax and equity £’000 25 25 12 5 An increase in 25 basis points would have a similar opposite effect. Credit risk The Group monitors credit risk closely and considers that its current policies of credit checks meet its objectives of managing exposure to credit risk. The Group has no significant concentrations of credit risk. Amounts shown in the balance sheet best represent the maximum credit risk exposure in the event that other parties fail to perform their obligations under financial instruments. Liquidity risk The Board’s policy aims to ensure that sufficient funds are held on a short-term basis in order to meet operational needs. Currency risk The Group’s functional currency is sterling. The exposure to currency risk relates to licence income and those short-term trade receivables which are not invoiced in sterling. There are no significant costs incurred that involve payments in foreign currency. The Group has no forward contracts at the year end (2011 – nil) to manage foreign currency risk. Balances which are denominated in US Dollars are detailed below: Group Trade and other receivable Cash and cash equivalent 2013 £’000 764 1,392 2,156 2012 £’000 702 1,694 2,396 Epistem Holdings Plc Annual Report 2013Company OverviewBusiness ReviewGovernanceFinancials 52 Notes to the Financial Statements continued For the year ended 30 June 2013 18. Financial risk management objectives and policies continued The following table demonstrates the sensitivity to a possible change in currency rates on the Group’s loss before tax through the impact of sterling weakening against the US dollar. 2013 Trade and other receivable Cash and cash equivalents 2012 Trade and other receivable Cash and cash equivalents Decrease in the currency rate Effect on loss before tax and equity £’000 5% 5% 5% 5% 38 70 35 85 An increase in currency rate of 5% would have a similar opposite effect. Fair values of financial assets and liabilities There is no material difference between the book value and the fair value of the Group’s financial assets or liabilities. 19. Commitments under operating leases At 30 June 2013 the Group had annual commitments under non-cancellable operating leases as set out below. Group Operating leases which expire: Within 1 year Land and buildings 2013 £’000 2012 £’000 180 157 The operating leases are in respect of the company’s office and laboratories are held under short-term leases. 20. Related party transactions At the balance sheet date, the amounts owed to the following Director, D Evans, was £9k (2012: £9k.) The transactions during the year with these related parties relate entirely to Directors’ remuneration for the year and the amounts for each are detailed in the Directors’ Remuneration Report. 21. Share capital Allotted and called up share capital: Brought forward at 1 July Private placing Exercise of options Ordinary shares of £0.015 each 2013 No 8,850,781 793,398 36,628 9,680,807 2013 £’000 133 12 1 146 2012 No 7,933,983 793,398 123,400 8,850,781 2012 £’000 119 12 2 133 On 16 March 2007, the Company entered into a warrant instrument in respect of the subscription for up to 198,554 ordinary shares of £0.015 each in Epistem Holdings Plc. This warrant instrument replaced a previous warrant instrument created by Epistem Limited on 18 March 2005. Each warrant confers the right to subscribe for 1 ordinary share at a subscription price of £1.61 per ordinary share. The subscription rights under the warrants may be exercised up to 21 September 2015. Epistem Holdings Plc Annual Report 2013 22. Reserves Balance as at 1 July 2011 Comprehensive income for the year Allotment of ordinary shares Share issue costs Unamortised cost of Matching Shares (SIP) Exercise of options Lapse of options Recognition of equity settled share-based payments in the year Balance at 30 June 2012 Balance as at 1 July 2012 Comprehensive income for the year Allotment of ordinary shares Share issue costs Unamortised cost of Matching Shares (SIP) Exercise of options Lapse of options Recognition of equity settled share-based payments in the year Employee share incentive plan reserve £’000 (88) – – – (48) – – – Share premium account £’000 11,206 – 2,765 (60) – 96 – – (136) 14,007 (136) – – – (46) – – – 14,007 – 4,312 (140) – 51 – – 53 Retained Earnings £’000 (3,262) (244) – – – – 1 – Share options reserve £’000 Reverse acquisition reserve £’000 (2,484) – – – – – – – 691 – – – – (14) (1) 171 847 847 – – – – (13) (8) 187 (2,484) (3,505) (2,484) – – – – – – – (3,505) (1,163) – – – – – – Balance at 30 June 2013 (182) 18,230 1,013 (2,484) (4,668) The reverse acquisition reserve arises as a difference on consolidation under merger accounting principles and is solely in respect of the merger of the Company and Epistem Limited on 16 March 2007. The employee share incentive plan reserve represents 43,153 shares in Epistem Holdings Plc (2012: 36,181 shares) all of which are held by Epistem SIP Trustee Limited. These shares are listed on the Alternative Investment Market and their market value at 30 June 2013 was £248k (2012: £140k). The nominal value held at 30 June 2013 was £647 (2012: £526). Epistem Holdings Plc Annual Report 2013Company OverviewBusiness ReviewGovernanceFinancials 54 Company Balance Sheet As at 30 June 2013 Non-current assets Investments Current assets Amounts receivable from Group undertakings and other receivables Cash and cash equivalents Current liabilities Corporation taxation Net current assets Total assets less current liabilities Capital and reserves Called-up equity share capital Share premium account Share options reserve Retained Earnings Total shareholders’ funds equity Notes 2013 £’000 2012 £’000 a b c 6,070 5,891 9,498 4,064 13,562 6,458 2,867 9,325 – 13,562 – 9,325 19,632 15,216 21 22 146 18,230 1,013 243 133 14,007 847 229 19,632 15,216 These financial statements were approved by the Directors and authorised for issue on 22 October 2013 and are signed on their behalf by: D E Evans Chairman H J J Rylands Finance Director Epistem Holdings Plc Company number: 06108621 Epistem Holdings Plc Annual Report 2013 Company Statement of Changes in Equity For the year ended 30 June 2013 At 1 July 2011 Allotment of ordinary shares Share issue costs Recognition of equity settled share-based payments Exercise of options Lapse of options Profit for the year At 30 June 2012 Allotment of ordinary shares Share issue costs Recognition of equity settled share-based payments Exercise of options Lapse of options Profit for the year Share capital £’000 119 12 – – 2 – – 133 12 – – 1 – – Share premium account £’000 11,206 2,765 (60) – 96 – – 14,007 4,312 (140) – 51 – – Share options reserve £’000 Retained earnings £’000 691 – – 171 (14) (1) – 847 – – 187 (13) (8) – 215 – – – – 1 13 229 – – – – – 14 55 Total £’000 12,231 2,777 (60) 171 84 – 13 15,216 4,324 (140) 187 39 (8) 14 At 30 June 2013 146 18,230 1,013 243 19,632 Epistem Holdings Plc Annual Report 2013Company OverviewBusiness ReviewGovernanceFinancials 56 Company Statement of Cash Flows For the year ended 30 June 2013 Cash flows from operating activities Profit for the year Operating profit before changes in working capital and provisions (Increase) in trade and other receivables (Decrease) in trade and other payables Cash (outflow) from operations Interest received Tax (paid)/received Net cash outflow from operating activities Cash flows from financing activities Proceeds from issue of share capital Expenses of share issue Net cash inflow from financing activities Net (decrease)/increase in cash equivalents Cash and cash equivalents at beginning of year Cash and cash equivalents at end of year Analysis of net funds Cash at bank and in hand Bank overdrafts Net funds 2013 £’000 2012 £’000 – – – – (3,040) – (2,390) – (3,040) (2,390) 14 – 14 14 – 14 (3,026) (2,377) 4,363 (140) 4,223 1,197 2,867 4,064 4,064 – 4,064 2,861 (60) 2,801 425 2,442 2,867 2,867 – 2,867 Epistem Holdings Plc Annual Report 2013 57 Notes to the Company Financial Statements For the year ended 30 June 2013 a. Investments Company The Company is the holding company of the Group. The Company owns 100% of the issued share capital of Epistem Limited, Epistem SIP Trustees Limited and Visible Genomics Limited (companies registered in England and Wales) and Epistem Inc. incorporated in the United States of America. The principal activities of the subsidiary companies are: • Epistem Limited and Epistem Inc. – the provision of services to the biotechnology and pharmaceutical industries; • Epistem SIP Trustees Limited – to act as trustee to the Epistem Share Incentive Plan; and • Visible Genomics Limited – a dormant company dissolved 14 August 2012. On 28 July 2010, Epistem Holdings Plc acquired 100% of the share capital of Visible Genomics Limited, whose principal activity had been the development of diagnostic assays and equipment. The assets of Visible Genomics Limited on 27 July 2010 are summarised below: Acquired intangible assets Short-term liabilities Long-term liabilities £’000 100 (25) (75) – On 28 July 2010, the above assets and liabilities were hived into Epistem Limited and Visible Genomics Limited ceased to trade. The consideration payable to the vendors of Visible Genomics Limited is related to performance (an earnout) during the three-year period to 30 June 2013 and is capped at £2.85m. The Directors have assessed the performance during the period since 28 July 2010 and have concluded that the criteria will not be met and, accordingly, that no consideration would be payable. However, the performance criteria are currently being reviewed with new criteria being considered. If agreed, these criteria are likely to be met during the current financial period, leading to the full amount of the earnout (£2.85m) becoming payable. The consideration may be paid either by the issue of shares in Epistem Holdings Plc or by the issue of loan notes. Year ended 30 June 2013 Cost At 1 July 2012 Additions net of lapsed shares At 30 June 2013 Net book value At 30 June 2013 Investment in subsidiaries £’000 5,891 179 6,070 6,070 Epistem Holdings Plc Annual Report 2013Company OverviewBusiness ReviewGovernanceFinancials 58 Notes to the Company Financial Statements continued For the year ended 30 June 2013 a. Investments continued Year ended 30 June 2012 Cost At 1 July 2011 Additions At 30 June 2012 Net book value At 30 June 2012 Investment in subsidiaries £’000 5,721 170 5,891 5,891 Additions in the year ended 30 June 2013 comprised the fair value of the share options issued to employees of the subsidiary undertaking during the year of £179k (2012: £170k). Full details of the share options issued are set out in note 17 to the consolidated financial statements. b. Amounts receivable from Group undertaking and other receivables Company Amounts receivable from Group undertaking c. Cash and cash equivalents Company Cash at bank and in hand Short-term bank deposits 2013 £’000 9,498 9,498 2013 £’000 128 3,936 4,064 2012 £’000 6,458 6,458 2012 £’000 89 2,778 2,867 Cash and cash equivalents comprise current accounts held by the Group with immediate access and short-term bank deposits with a maturity of 3 months or less. Market rates of interest are earned on such deposits. The credit risk on such funds is limited because the counter parties are banks with high credit ratings assigned by international credit rating agencies. d. Related party transactions During the course of the year, Epistem SIP Trustee acquired 15,548 (2012: 19,910) shares in Epistem Holdings Plc on behalf of the Epistem Share Investment Plan at a cost of £87k (2012: £71k). e. Impairment review The carrying value of Investments and Amounts Receivable are subject to an annual impairment review. In the view of the Directors, no impairment provision has been required during the period (2012 – nil). Epistem Holdings Plc Annual Report 2013 Directors, Secretary and Advisers 59 Directors David Evans Matthew Walls Catherine Booth Roger Lloyd Robert Nolan John Rylands Company Secretary John Rylands Registered Office 48 Grafton Street Manchester M13 9XX United Kingdom Registrars Neville Registrars Limited 18 Laurel Lane Halesowen B63 3DA Principal Banker Natwest Commercial Banking 1 Spinningfields Square Deansgate Manchester M3 3AP Nominated Adviser & Broker Peel Hunt Limited LLP Moor House 120 London Wall London EC2Y 5ET Auditors HW Chartered Accountants Bridge House Ashley Road Hale Cheshire WA14 2UT Legal Advisers Pinsent Masons LLP Princes Exchange 1 Earl Grey Street Edinburgh EH3 9AQ Epistem Holdings Plc Annual Report 2013Company OverviewBusiness ReviewGovernanceFinancials 60 Notes Epistem Holdings Plc Annual Report 2013 E p i s t e m H o l d i n g s P l c A n n u a l R e p o r t 2 0 1 3 Epistem Holdings Plc 48 Grafton Street Manchester M13 9XX United Kingdom T +44 (0)161 606 7258 F +44 (0)161 606 7348 www.epistem.co.uk +