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 5 Epistem Holdings Plc Annual Report 2015 Page Title at start:Content Section at start: 2015 Highlights The 2014/15 financial year saw excellent progress with Genedrive®, our novel Point of Care PCR instrument. In May, we announced the landmark Indian regulatory approval. We have made very good progress with the development of Genedrive® tests for Hepatitis C diagnosis and pharmacogenomic applications and we have initiated new projects in the fields of human pathogen detection and animal disease testing. The 2014/15 financial year saw the Company experience a difficult year in its established services operations. During the year, Dr Ian Gilham took over the role of Chairman from David Evans and was then appointed Interim CEO in August 2015 when it was announced that Matthew Walls would be leaving that position. Matthew resigned as a Director on 23 October 2015. Operating Financial • The award by The Drug Controller General of India • Total income broadly in line with expectations of £4.5m (DCGI) to our Indian distribution partner, Xcelris Labs, of an import licence in respect of our TB and associated antibiotic resistance test for use on the Genedrive® instrument. • Invoicing of the first Genedrive® product sales in advance of the programme of placing units and TB tests with Indian KOL’s in preparation for the phased launch of the TB test. • Excellent progress with the development of the Genedrive® ‘Hepatitis C’ (HCV) blood test. The programme continues to meet internal milestones with clinical trials anticipated to commence in 2015/16. • The commencement of clinical trials in collaboration with INSERM (Institute National de la Santé et de la Recherche Médicale) and The Pasteur Institute of the IL28b pharmacogenomic test using the Genedrive® platform. The IL28b project represents a significant proof of principle for Genedrive® in “patient stratification”/“therapy selection” applications. • Confirmation of £0.4m funding for the development of the Genedrive® platform in an aquaculture application, in collaboration with the Centre for Environment, Fisheries and Aquaculture Science (CEFAS). (2014: £5.8m) following a challenging year for the services operations. • Preclinical Research Services sales of £2.3m (2014: £2.9m). The US NIH/NIAID collaborative contract with the University of Baltimore (UMB) due for completion in September 2015. • The successful conclusion of the US Department of Defence assessment of Genedrive® for use in the detection of harmful human pathogens, followed by the announcement in August 2015 of funding of up to $7.8m (c.£5.0m) over five years, the first $2.4m (£1.5m) stage of which is due for completion during calendar year 2016. • Following the high levels of investment made in our Genedrive® technology, the Company reports an Operating loss of £4.0m (2014: £2.3m Operating loss). • $8m (c.£4.7m) collaborative funding agreement with The Global Health Investment Fund 1, LLC (GHIF) to support the development and use of Genedrive® applications as part of the Global Access Programme. • Cash reserves at 30 June 2015 of £4.9m (2014: £4.2m). Epistem Holdings Plc Annual Report 2015 Page Title at start:Content Section at start: Strategic Report Strategic Report Governance Governance Financial Statements Financial Statements Founded on ground-breaking research in epithelial stem cell biology, Epistem has evolved into a dynamic and successful enterprise enabling advances in medicine through the provision of innovative services and pioneering products. With our Genedrive® molecular diagnostic device, we are changing the way molecular medicine and diagnostics are delivered. Strategic Report 2 Genedrive® 4 Personalised Medicine: Diagnostics 10 Personalised Medicine: Pharmacogenomics Service 12 Preclinical Research Services 13 Novel Therapies: Knowledge and Intellectual Property 14 Chairman & CEO’s Statement 16 Our Business Model 17 Strategy 18 Financial Review 20 Key Performance Indicators 21 Principal Risks and Uncertainties Governance 22 Board of Directors 24 Directors’ Report 26 Directors’ Remuneration Report 29 Corporate Governance Report Financial Statements 31 Independent Auditors’ Report 33 Consolidated Statement of Comprehensive Income 34 Consolidated Statement of Changes in Equity 35 Consolidated Balance Sheet 36 Consolidated Statement of Cash Flows 37 Notes to the Financial Statements 60 Company Balance Sheet 61 Company Statement of Changes in Equity 62 Company Statement of Cash Flows 63 Notes to the Company Financial Statements 66 Directors, Secretary and Advisers Epistem Holdings Plc Annual Report 2015 1 1 Page Title at start:Content Section at start: Strategic Report Genedrive® Genedrive® Changing the way molecular diagnostics and Personalised Medicine are delivered Genedrive® is rapidly reconfigurable for specific assays and is suitable for use in a ‘Point of Care’ setting. Genedrive® analyses nucleic acids from fresh or stored samples in clinical and remote settings to provide near-patient diagnostics. At the heart of the Genedrive® technology is the plug-in assay cartridge, which allows the device to work across the following areas: Diagnostics: Rapid and accurate diagnosis of infectious disease facilitating immediate therapeutic treatment Pharmacogenomics: Allowing medicine to be personalised around an individual patient’s genotype Future applications: Genedrive® is being validated for use in the areas of pathogen detection & forensics, biosurveillance, veterinary science and agriculture/aquaculture 2 Epistem Holdings Plc Annual Report 2015 Page Title at start:Content Section at start: Strategic Report Governance Financial Statements Mobile: designed as a simple to use, handheld device Rapid: results in approximately 45-60 minutes Accurate: Molecular diagnostic for viral, bacterial and mutational analysis Genedrive® Assay Development Single use assay cartridges At the heart of the Genedrive® technology is the plug-in assay cartridge. Genedrive® tests use a simple assay cartridge with RFID capacity to programme the assay metrics into the Genedrive® unit. This significantly simplifies user operation enabling a single button operation. Epistem Holdings Plc Annual Report 2015 3 Page Title at start:Content Section at start: Personalised Medicine: Diagnostics Personalised Medicine: Diagnostics Low cost, disruptive, Point of Care molecular testing platform Genedrive® brings versatility, low cost and simplicity to Point of Care molecular diagnostics. With regulatory approval for TB in India announced in 2015, Epistem has a range of follow-on tests in development targeting infectious diseases using sputum, blood and swabs. The Genedrive® platform is being developed to harness PCR molecular technology to open up Point of Care patient stratification, pathogen detection and animal/ aquaculture capability. 1 2 3 4 The announcement on 23 April 2015 of Indian regulatory approval for the import into India of the Genedrive® TB test brought a key milestone for the Company foreshadowing the launch of the Genedrive® platform and the commencement of product sales and new income streams. We are acutely aware that the success of the India launch will impact decisively on the future value of Genedrive® and its adoption for other applications and in other markets. A careful strategy has been adopted to ensure that the TB test will be brought to market on the basis of substantive endorsement by Key Opinion Leaders, a process which has extended further than anticipated a year ago but which we anticipate will underpin a build-up of sales in 2016. The first phase of that strategy has been to build on the experience gained from trials undertaken using the Genedrive® TB test. The feedback from our Brazil and Africa trials of earlier protocols for Genedrive® highlighted levels of sensitivity lower than we had experienced in other trials. The variations can partially be accounted for by different levels of co-infection experienced in the different patient population groups. Data further pointed to variations in operator practice in different market conditions. We have paused our Africa trials, part of a programme towards WHO approval, whilst this programme of analysis has been undertaken. The increasing feedback from our product testing has allowed the steady compilation of data to support our test’s claims for the diagnosis of bacterial resistance to the first line antibiotic Rifampicin. We anticipate that a full body of field data to support this important product claim will be available during 2016. 4 Epistem Holdings Plc Annual Report 2015 Page Title at start:Content Section at start: EME (US, EU, Japan, Australia/NZ) = US$707m 339m TB Detection and monitoring Drug susceptibility 366m Detection of latent tuberculosis 2m Rest of World = US$327m 14m 2m Strategic Report Governance TB Detection and monitoring Financial Statements Drug susceptibility 311m Detection of latent tuberculosis Genedrive® India Regulatory Submission (n=300) 100 90 80 70 60 50 40 30 20 10 0 93% - 97% 94% - 99% Culture AFB Sensitivity (%) Sensitivity (%) Eradicate TB by 2020 The World Health Organisation through its Stop TB initiative, has provided the world with this vision $2.62 billion TB (Mycobacterium tuberculosis) The global TB testing market is expected to reach USD $2.62 billion by 2020 Ahmedabad, India (n=300 raw clinical sputa samples) Data represents 300 clinical samples processed independently as part of Indian clinical evaluation/regulatory study. Genedrive® POC ‘instructions for use’, training provided locally. Testing undertaken in a laboratory setting. Epistem Holdings Plc Annual Report 2015 5 Page Title at start:Content Section at start: Personalised Medicine: Diagnostics (continued) TB (Mycobacterium tuberculosis) test accessory pack We have developed fresh sputum sample collection protocols to allow for different testing environments. The final stage of the development process undertaken during this financial year has allowed us to position Genedrive® towards the decentralised testing environment which capitalises on the platform’s low cost, ease of use and speed to result. Our development also allows Genedrive® to be positioned in laboratory settings offering users access to high quality but low cost molecular TB testing. Genedrive® units and assays will be deployed in India as part of a rollout programme with KOL’s which we expect to facilitate KOL endorsement and deliver growing demand for Genedrive® units and TB tests and underscore the value of the Genedrive® platform. In all of this planning, we have worked closely with our India distribution partner, Xcelris Labs. Xcelris Labs placed their first order for Genedrive® units during the period, enabling us to book our first product sales before the year end. Whilst this does not at present signify a level of customer demand, it has initiated the start of our product sales and is encouraging. We continue to test the robustness of the Genedrive® supply chain and prepare for the scale up of manufacture as demand permits. 6 Epistem Holdings Plc Annual Report 2015 Page Title at start:Content Section at start: Strategic Report Governance Financial Statements EME (US, EU, Japan, Australia/NZ) = US$707m 339m 2m Rest of World = US$327m 14m 2m 366m 311m TB Detection and monitoring Drug susceptibility Detection of latent tuberculosis Epistem Holdings Plc Annual Report 2015 7 Genedrive® India Regulatory Submission (n=300) 100 93% - 97% V Culture/AFB 94% - 99% 90 80 70 60 50 40 30 20 10 0 Sensitivity (%) Sensitivity (%) Page Title at start:Content Section at start: Personalised Medicine: Diagnostics (continued) High Income North America Western Europe Eastern Europe Central Asia HCV genotype proportion 1 2 3 4 5 6 Caribbean Central Latin America North Africa and the Middle East Western Sub-Saharan Africa Central Sub-Saharan Africa Tropical Latin America Andean Latin America 55.5 million 14 million 3.9 million 1.7 million 486 thousand Southern Latin America Eastern Sub-Saharan Africa South Asia Southern Sub-Saharan Africa Northern Asia High Income Asia Pacific East Asia South East Asia Australia ~150-200m (known) cases globally The collaboration with INSERM, the French National Institute of Health and Medical Research, to develop a Hepatitis C diagnostic for use on Genedrive® is progressing well. The collaboration involved the development of our genotyping IL28b oral (buccal) swab test to confirm patients’ responsiveness to the drugs targeting Hepatitis C. The collaboration further involves the development of a blood based test for Hepatitis C infection. 4m infected each year 350,000 deaths / year Urgent requirement for PoC based HCV NAT Dx for resource limited settings We will report more fully on the background to our Hepatitis C test during the year but progress with the development of the test has been positive with internal testing indicating conformity with health agency target profiles. We expect to commence independent validation of the Hepatitis C test in collaboration with the Pasteur Institute in 2015/16. Crucially, the Hepatitis C test, which is qualitative to viral load, has been developed on a blood based platform. This platform may reasonably be expected to be adapted to the development of a test for the Hepatitis B and dengue viruses and HIV. We report that the IL28b test has entered clinical trials with The Pasteur Institute. Whilst the results will be unblinded in 2016, the test appears robust to date. Importantly, the IL28b test represents proof of principle of our ability to rapidly develop genotyping tests for operation on Genedrive® using buccal swab samples. We believe that this platform offers excellent scope for collaboration with drug development partners seeking to identify certain characteristics within patient populations (patient stratification) in planned clinical trials with potential for full clinical use in some instances. 8 Epistem Holdings Plc Annual Report 2015 Page Title at start:Content Section at start: Strategic Report Governance Financial Statements Important validation of Genedrive® has been secured during our work with the US Department of Defense which has assessed the use of Genedrive® in the detection of human pathogens in a variety of non-clinical sample types. During the financial year, the first phase bioplex detection assay (3 pathogens) successfully passed through its initial performance assessment. In our Pre-Close Trading update, we announced agreement with the US Department of Defense for the programme to be extended with work to a value of $2.4m (c.£1.5m) scheduled for completion in calendar 2016. The progress is difficult to position in terms of future product sales but we are pleased with the independent validation of Genedrive® versus other potential suppliers for this programme, as well as the profile given to Genedrive® within the US Government procurement infrastructure. During the year, approval was granted for £0.4m funding for a collaboration with the Centre for Environment, Fisheries and Aquaculture Science (CEFAS) to develop a Point of Need aquaculture test for the diagnosis of pathogens (White Spot Syndrome Virus, in particular) found to be harmful to shrimps and causing great damage to fish farms. As with the US Department of Defense collaboration, whilst it is difficult to assess the potential for future product sales, we do welcome the exposure which this programme gives to Genedrive®. In our view, both the US Department of Defense programme and the CEFAS project demonstrate the versatility of Genedrive® as a broadly applicable rapid Point of Care molecular testing system. We are encouraged that in both cases Genedrive® was selected from a range of possible competitive suppliers for these programmes and we remain confident of the very broad applicability of Genedrive® in a wide range of testing environments going forward. Diagnostics revenues for the year were £0.4m (2014: £0.5m) including £0.1m of maiden Genedrive® sales. 1 Blood Borne Viruses A. Venous phlebotomy B. Finger stick Blood sampling Plasma Isolation Blood sampling Plasma Isolation 2 Sample preparation Plasma pre-processing Genedrive® Cartridge Lyophilised HCV RT-PCR tube + RT-PCR 3 RT-PCR Genedrive® 4 Genedrive® Result Detected HCV Positive Control Epistem Holdings Plc Annual Report 2015 9 Page Title at start:Content Section at start: Personalised Medicine: Pharmacogenomics Service Personalised Medicine: Pharmacogenomics Service Our pharmacogenomics services offering provides highly sensitive molecular measures of biological processes which improve the understanding of patient response to drug therapies and assists validating new drug targets The Pharmacogenomics team engage the application of molecular expertise towards collaborative projects for pharmaceutical and biotechnology organisations engaged in drug development and the discovery of new biomarker targets. Our business model seeks to engage the client in a level of FTE based service commitment, supplemented with the potential for milestone income or the opportunity to deliver tests to patient populations in clinical trials and, if ultimately successful, as a companion diagnostic for a drug once approved. The team has built a significant expertise in laser capture microscopy (LCM) and is working to establish future collaborations with client partners for this expertise. Projects are largely dependent on the success of the drug development projects with which they are involved. During the year we continued to work closely with a key international pharma company on the clinical expansion of our oncogene test from blood myeloproliferative disorders. The testing programme continues to be well received and we anticipate the extension of our work as clinical trials for the drug are further rolled out. Revenues during the year amounted to £1.8m (2014: £2.4m). The outturn resulted from an unexpected project cancellation caused by factors unrelated to the data generated within the project. 10 Epistem Holdings Plc Annual Report 2015 Page Title at start:Content Section at start: Strategic Report Governance Financial Statements The pharmacogenomics platform builds on Epistem’s proprietary RNA and DNA amplification technology and high sensitivity amplification kits to offer multi system transcriptional profiling working with major pharmaceutical and biotech business groups in developing preclinical and clinical biomarkers to measure the effect of a drug on targeted tissue. The focused understanding of differing patient groups’ response to a drug treatment enable drug regimens to be personalised to a patient’s needs and enhances the successful outcome of a drug in trials. During the year we have continued to invest in our niche small tissue expertise and our LCM capability. This has allowed us to collaborate in target discovery programmes. At the same time, we continue to build up our service offering in oncogene detection from whole blood, with the prospect of developing a diagnostic for an oncogene therapy. Epistem Holdings Plc Annual Report 2015 11 Page Title at start:Content Section at start: Preclinical Research Services Preclinical Research Services The Preclinical Research Services division comprises an internationally recognised team of scientists skilled in preclinical efficacy testing in the areas of oncology, oncology supportive care, inflammatory bowel disease, rheumatoid arthritis and dermatology Preclinical Research Services generated revenues of £2.3m (2014: £2.9m). Whilst this was not a positive outcome, a full review and reorganisation of our business development focus has been undertaken. New processes have been established with improved quote levels now being evidenced. During the year, we learned that the NIH/NIAID will not be extending their funding to the University of Maryland Baltimore (UMB) beyond September 2015. With the contract having generated c.£1m annual revenues in recent years for the Company, this news represents a significant disappointment. However, our international reputation in the field of radiation sickness is anticipated to offer additional sub-contracting opportunities and, overall, we expect the net negative impact to be modest. The division delivers bespoke preclinical (and early clinical) services testing efficacy and specificity of client drugs. The team offers internally developed models and assays in the disease areas of oncology, oncology supportive care (mucositis), inflammatory bowel disease, rheumatoid arthritis and dermatology. Each disease area is served by specialist core technologies (imaging, FACS analysis, histopathology, immunohistochemistry and multiplexing) to support drug, target and protein biomarker validation. 12 Epistem Holdings Plc Annual Report 2015 Page Title at start:Content Section at start: Strategic Report Governance Financial Statements Novel Therapies: Knowledge and Intellectual Property Internationally recognised expertise in evaluating treatments for gastrointestinal damage Preclinical Research Services delivers successful but niche services to international drug development and Biotech companies. Whilst there have been setbacks during the year, the reputation of the team within the drug development industry remains strong, with key repeat business from large pharma, and there continues to be present good opportunities for useful synergies and business development going forward. The Division maintains a commitment to the development of its models with particular focus on its orthotopic oncology and rheumatoid arthritis models. Novel Therapies: Knowledge and Intellectual Property Expertise and intellectual property from research into the body’s own key regulators of epithelial stem cells and tissues We continue to retain the expertise and intellectual property of the Novel Therapies division. Although we have not incurred any fresh investment in the Novel Therapies division, we will continue to review our position in the light of growth in our core business. Epistem Holdings Plc Annual Report 2015 13 Page Title at start:Content Section at start: Chairman & CEO’s Statement Chairman & CEO’s Statement The year represented a decisive period of transition for Epistem with key steps in the development and launch of Genedrive® The year represented a decisive period of transition for Epistem with key steps in the development and launch of Genedrive®, our novel, versatile and rapid Point of Care molecular testing platform for use in diagnosing infectious diseases, patient stratification and other molecular diagnostic applications. The excellent progress with Genedrive® has, however, been partly tempered by reduced turnover in the established services business divisions of the Company, which to date has represented the majority of our revenues. The transition of the Company towards an increasing focus on the Genedrive® diagnostics system was the driving factor behind my becoming a director of Epistem and in May it became my privilege to have accepted the role as Chairman of the Company. The diagnostics industry has long sought simple, Point of Care, molecular testing capability to enable both qualitative and quantitative testing for infectious diseases which represent key unmet healthcare challenges and which allows more rapid and more accurate targeting of therapies for patients. In meeting this need, Genedrive® represents a significant breakthrough in low cost molecular testing technology, and design, and offers the prospect of a substantial and disruptive entry to the market for diagnostic devices. As shareholders are aware, the Company has taken time to develop this technology platform and has invested heavily but judiciously in developing its technical expertise, allowing us to address the challenges of delivering molecular testing results from small tissue samples where there is limited access to laboratory equipment. The first Genedrive® regulatory approval in India for the TB test, together with an expanding range of tests, particularly in Hepatitis C (and in due course Hepatitis B and HIV) will, in my view, secure for Genedrive® a key position in low cost Point of Care testing and the creation of substantial returns to shareholders given the opportunities we see in infectious diseases, patient stratification and other molecular diagnostic applications. It is our aim to build a significant global base of installed instruments offering a pipeline of high-value tests. In order to drive our commercial plans, we have recruited Gordon Powell, as our Global Commercial Director for Genedrive®. Gordon was formerly Global Commercial Director at Axis-Shield where he implemented the commercial strategy for the highly successful Afinion Point of Care testing instrument. During the year, the Company entered into a collaboration and $8m (£4.7m) funding agreement with the Global Health Investment Fund (GHIF) which is supported by the Bill and Melinda Gates Foundation. The issue of $8m (£4.7m) Convertible Bonds not only represents a significant financial step for the Company but also offers potential for collaboration with the GHIF’s significant support network. Operating Review The Personalised Medicine division is harnessing advances in molecular technology to identify and develop new diagnostic tests and biomarkers for use either on Epistem’s proprietary Genedrive® diagnostic platform or in collaboration with drug development partners. 14 Epistem Holdings Plc Annual Report 2015 Page Title at start:Content Section at start: Strategic Report Governance Financial Statements Molecular testing is crucial for diagnosing specific disease mutations including antibiotic resistance as well as identifying patient-specific variations. This in turn allows for selection of treatment regimens targeting the specific disease characteristics or which take into account a patient’s expected response to a drug. This drug orientated companion diagnostic testing and patient stratification is seen as key to the evolution of successful and efficient patient treatment now and in the future. Genedrive® represents a substantive breakthrough in molecular diagnostics technology. It allows rapid, low cost testing in near patient locations not presently available in the market. Within the division, the Diagnostics team is bringing Genedrive® to market initially for use with its test for the detection of TB and, in the future, across a broad spectrum of viral, bacterial, fungal, genomic genotypes and somatic mutations either independently, in partnerships or within grant funded collaborations, with a view to delivering a flow of instrument and test cartridge sales. I will continue to act as CEO in an interim capacity. The search for a new CEO is progressing well and I am committed to staying with the business as Non-executive Chairman once a new CEO is appointed. Outlook In Genedrive®, I believe that Epistem has created a significant new diagnostic platform targeting the exciting area of Point of Care diagnostics. This development has been achieved with very modest resources in comparison to peer developments and, whilst we have experienced delays, we have in the coming months the opportunity to redress the balance with the important launch of the TB test in India. In conjunction with developing our India distribution partners, we have to establish a strong and successful diagnostics commercial capability to match our existing development profile. We will not seek to raise external expectations until a track record of sales is established but anticipate updating shareholders at the announcement of the next Interim Results. The Pharmacogenomics team deploys its molecular expertise in a serviced based model aiming to collaborate with major pharmaceutical and biotechnology companies to develop biomarker and target discovery projects to deliver collaborative income and milestone payments. Successful validation of our TB test will allow us to reactivate programmes with various support agencies which have expressed strong interest in Genedrive®. In particular, we look forward to working with the GHIF and its support network in addressing global health challenges. Management Changes As noted earlier, I was appointed Chairman May 2015, taking over from David Evans. David is a highly experienced and successful business leader, playing a key role in the development of the Company since his appointment in 2005. In August 2015 we announced that Matthew Walls would be leaving his position as CEO and his resignation was confirmed on 23 October 2015. Matthew had been CEO since 2007 when the Company was listed on AIM. His period of office has been characterised by an outstanding work ethic together with an ability to initiate key developments for the Company. On behalf of the Company, I would like to thank both David and Matthew for their huge contribution in developing Epistem as a public company. Beyond launching our TB test, we have substantial development opportunities to progress, notably with Hepatitis C in collaboration with the Pasteur Institute and pathogen detection with the US Department of Defense. Our services operations require careful nurturing. With sensible management, we are optimistic that the net loss of revenues resulting from the loss of our UMB contract in the current period will be limited and that our ability to generate substantial returns from our niche services will in future periods be re-established. I would like to thank our investors, Board, management and employees for their help and solid support over the past year and I look forward to updating our investors on our progress over the coming weeks and months. Dr Ian Gilham Epistem Holdings Plc Annual Report 2015 15 Page Title at start:Content Section at start: Our Business Model Our Business Model Our Business and Strategy Our strengthening business model is based on sustaining future growth. Alongside our heritage ‘fee for service’ business we are preparing for the launch of our first diagnostic product. Our unrivalled knowledge of the behaviour of epithelial cells together with our proprietary amplification technologies will further strengthen our position in personalised medicine and disease diagnostics. Division Field Area of Income Discovery Pre-clinical Phase 1 Phase 2 Phase 3 Market Product Launch Personalised Medicine Market and pre-clinical & clinical programmes Product sales, fee for service, partnering and licensing Fee for service Preclinical Research Services Inflammatory bowel disease, dermatology, oncology, mucositis Novel Therapies Expertise and intertectual property Partnering and licensing Genedrive® Global Diagnostics Tuberculosis Hepatitis C Pharmacogenomics Patient stratification for personalised medicine Other Applications Pathogen detection Aquaculture 16 Epistem Holdings Plc Annual Report 2015 Page Title at start:Content Section at start: Strategy Strategic Report Governance Financial Statements Strategy Operational Strategic Goals Integrated business model Epistem’s complementary portfolio of divisions derives from a focus on scientific & technical know-how and strong intellectual property. Our strategy aims to ensure strong financial growth in each of our independent divisions to deliver new product sales as well as secure service and collaborative income. Partnering Programme Our key business processes will be developed with collaborative partners and major industry groups to ensure rapid access to global markets, security and flexibility of supply of products to our customers. We remain committed to developing and enhancing our scientific relationships to unlock the potential for our technologies. Internationally respected technology and expertise Our investments in technology and expertise are targeted at meeting the demands and aspirations of the market as well as addressing key global healthcare challenges. Our investment in technology remains a mainstay underpinning growth in all our divisions. Product focus Successful product launch of Genedrive® is central to our near-term strategy with resources to be deployed accordingly. Genedrive® has brought a new dimension to our profile and business model with applications across multiple aspects of the healthcare environment impacting on our management team, operational infrastructure and business partners. Delivery We aim to secure a strong market profile for Genedrive® based on reliability, quality and affordability. We will invest to support Key Opinion Leaders in India to establish for Genedrive® a key niche in the market for Point of Care testing of tuberculosis and support our distribution partner in a roll out programme. We aim, thereafter, to move rapidly to secure distribution in follow on markets and launch new tests. Technical reputation We aim to establish Genedrive® as the global leader in Point of Care molecular diagnostic testing. Epistem’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 pursue its goal of establishing sustainable and growing income streams whilst increasing the potential for substantial returns from its invested technologies. Investor The delivery of our Company objectives will establish Epistem as an attractive investment opportunity for both our existing and new investors. Demonstration of progress in delivering substantial and growing income streams will signal Epistem as a company with significant upside potential. Epistem Holdings Plc Annual Report 2015 17 Page Title at start:Content Section at start: Financial Review Financial Review As a personalised medicine and biotechnology Company, Epistem retains a mix of services operations supporting drug development organisations. As previously reported, the activities of the Company are detailed within three divisions, Personalised Medicine, Preclinical Research Services and Novel Therapies. The financial results for the Group presented in this statement reflect the Group’s trading for the year to 30 June 2015 and the comparative period to 30 June 2014. has reorganised its sales activities to address weaknesses experienced in the year in Europe and also, in the US to replace the fall off in income which will follow the ending of our collaboration with University of Maryland Baltimore (UMB) in Radiation Biodefence, on the completion of the existing five year contract in September 2015. During the year, the contract with UMB accounted for £0.9m (2014 £1.1m). Novel Therapies, for which we retain the portfolio of drug discovery IP, reported no sales for the period (2014: £nil). The Company reports turnover of £4.5m (2014: £5.8m). Within the divisions, Personalised Medicine delivered income of £2.2m (2014: £2.9m) and Preclinical Research Services income of £2.3m (2014: £2.9m) with Novel Therapies reporting no sales over the period (2014: £nil). The Income results for the Group reflect a weakness in demand for our Personalised Medicine and Preclinical Research Services, especially, for the latter, in UK/Europe. Validation of the Genedrive® platform is anticipated to be the engine generating growth income for Personalised Medicine, in the form of both Genedrive® product sales and collaborative income. Preclinical Research Services Consolidated geographical revenues were split US 45% (2014: 44%), EU 24% (2014: 20%), UK 20% (2014: 32%) and ROW 11% (2014: 4%). Preclinical Research Services reported a contribution of £0.1m (2014: £0.5m) reflecting the reduced turnover of the division. Personalised Medicine increased its investment in the development of the Genedrive® platform and reported a loss of £2.4m (2014: £0.7m loss). No development expenditure was incurred by the Novel Therapies division in the period. The headcount of Group at the year end was 71 (2014: 70). Central administration costs increased to £1.7m (2014: £1.5m) giving rise to an overall Operating loss for the year of £4.0m (2014: £2.3m). 18 Epistem Holdings Plc Annual Report 2015 Page Title at start:Content Section at start: Strategic Report Governance Financial Statements On 21 July 2014, Epistem entered a Collaboration and Convertible Bond Purchase Agreement with Global Health Investment Fund 1 LLC (GHIF). Under the terms of the agreement, Epistem issued to GHIF a five year convertible bond raising $8m (c.£4.7m) for the Company before costs of £0.1m and with a coupon of 5% per annum. The GHIF agreement contains provisions which allow the bond to be converted into ordinary Epistem shares using a fixed exchange rate and a fixed conversion price of 489p per share. As part of the collaborative funding agreement, the GHIF and Epistem have made global access commitments to mutually support and facilitate the introduction, distribution and sale of the Genedrive® platform and our expanding menu of infectious disease assays under development for low-and middle- income countries. The purpose of the agreement has been to provide funding to support the rollout of Genedrive® as the Company prepares for the launch of the TB assay whilst also supporting the development of new diagnostic tests aimed at tackling diseases which represent global health challenges such as TB and Hepatitis C. Financing income for the year which is detailed in the note amounted to £0.6m (2014: £0.1m loss). The surplus arises largely because under International Financial Reporting Standards the Convertible Bond is required to be treated as a derivative to be revalued at each accounts date. After tax credits for the year amounting to £0.4m (2014: £0.7m), the Group reported a loss after tax for the year of £3.0m (2014: £1.7m loss). The reported loss per share was 30.2p (2014: 17.4p loss per share). Cash balances at 30 June 2015 were £4.9m (2014: £4.2m). Following receipt of regulatory approval in India in respect of the Genedrive® TB test, the Group issued 491,228 ordinary shares of £0.015 each to the vendors of Visible Genomics Limited, in settlement of deferred consideration. The terms relating to the acquisition of Visible Genomics Limited were detailed in the 2014 Annual Report. The Company’s annual audit was undertaken in October 2015 by Haines Watts Chartered Accountants and their audit report is included with the 2015 Annual Report. John Rylands Epistem Holdings Plc Annual Report 2015 19 Page Title at start:Content Section at start: Key Performance Indicators Key Performance Indicators Epistem reports continued increased investment in its diagnostic platform, Genedrive®. Revenue generation in preclinical services and personalised medicine weakened in the period. Underlying financial resources were strengthened with the issue of £4.7m ($8.0m) convertible bond Group Revenue 45% United States 24% Europe 20% United Kingdom 11% Rest of World Group Revenues Preclinical Research Services Revenues Personalised Medicine & Novel Therapies Revenue Weak outturn from our services divisions Preclinical Research Services delivered £2.3m revenue £5.8m 2014 £4.5m 2015 Personalised Medicine delivered £2.2m revenue Novel Therapies produced £nil revenue in 2015 £2.9m 2014 £2.3m 2015 £2.2m 2015 £2.9m 2014 Results After Tax Cash Reserves After tax, Development and Admin Costs exceeded contribution from sales to report a loss of £3.0m Following the issue of the convertible bond, cash reserves at year end were £4.9m Discovery, Development and Admin Costs Discovery and Development costs charged to the P&L grew strongly in 2015 to £2.9m. Admin costs were £1.7m £4.9m 2015 £4.2m 2014 £4.6m 2015 £3.5m 2014 (£3.0m) 2015 (£1.7m) 2014 20 Epistem Holdings Plc Annual Report 2015 Page Title at start:Content Section at start: Principal Risks and Uncertainties Strategic Report Governance Financial Statements Principal Risks and Uncertainties For the year ended 30 June 2015 The Board meets regularly to review operations and to discuss risk areas. Details of the financial risks are disclosed in Note 21 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. 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. The Group’s services to clients relate to projects which are also subject to development risk. The Board regularly monitors the client profile and seeks to broaden the client base where possible. Further information on significant clients is detailed in Note 2 the Financial Statements. Financing risk In the forthcoming period, the Board anticipates that the Group’s investment in its development activities described above is likely to require additional equity investment into the Group. The Board maintains close dialogue with the Group’s advisers to monitor shareholder support for its investment programme and the Board is satisfied that it may reasonably expect to raise appropriate equity finance. However, there remains a risk that further equity fundraising will not be possible and, in this event, the Board will review the funding options available to the Group and the scope of its investment activities. Quality Assurance and Regulatory risk The Group operates in a regulated industry and maintains significant investment in its Quality Assurance systems. In respect of its services the Group is accredited with GCLP Certification. In respect of its products, the Group is registered to ISO 13485 Certification and has secured regulatory approval in India. 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. Manufacturing risk On commencement of the supply of products, (Genedrive® units and assays) the Group will be dependent on two key suppliers for the timely delivery of product at consistent quality and prices. One key supplier is based in the Far East and one key supplier is based in the UK. It is unlikely that dual sourcing of supply will be achievable in the short term. 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. Epistem Holdings Plc Annual Report 2015 21 Page Title at start:Content Section at start: Governance Board of Directors Board of Directors 22 Epistem Holdings Plc Annual Report 2015 Page Title at start:Content Section at start: Strategic Report Governance Financial Statements 1. Ian Gilham, Ph.D. Non-executive Chairman Ian was appointed on 24 November 2014, Non-executive Chairman on 11 May 2015 and as Interim CEO on 4 August 2015. He is currently non-executive chairman of three life sciences companies including AIM quoted Horizon Discovery Group plc, which provides gene-editing tools to support translational genomics and the development of personalised medicine, Multiplicom NV focused on the development and commercialisation of next generation DNA sequencing products and Biosurfit SA, focused on development and commercialisation of point-of-care diagnostic products. Dr Gilham was formerly Chief Executive Officer of Axis-Shield plc. 2. John Rylands 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. 3. Allan Brown, Ph.D. Chief Operating Officer, Diagnostics Allan has spent his career in the Life Sciences/diagnostics industry. During a seventeen year period with Tepnel Life Sciences plc, latterly as Divisional Managing Director, Allan’s technical management roles covered product development through to commercial product launch; his commercial management roles covered sales and business development and M&A. Allan left Tepnel in 2010 following its recommended US$132m cash offer by Gen-Probe Inc. in 2009. At the time of the offer by Gen- Probe Inc. Tepnel employed over 200 employees and had operations in the UK, US, Belgium and France. After leaving Tepnel/Gen-Probe, Allan joined the leading Sample & Assay Technologies company, QIAGEN N.V., in Manchester and managed the final development and launch of the company’s first US FDA approved products, helping secure the site as QIAGEN’s Global Centre of Excellence for molecular diagnostic product development. Allan was appointed to the Board on 1st February, 2014. 4. Catherine Booth, Ph.D. Managing Director, Contract Research Services Officer 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 the Epistem contract Research Service. Catherine received her Ph.D. from Emmanuel College, University of Cambridge. 5. Robert Nolan, Ph.D. 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 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. 6. Roger Lloyd, Ph.D. Non-executive Director Roger joined the Board as a Non-executive Director on 1 July 2007. Trained as a biochemist, Roger has 37 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. Epistem Holdings Plc Annual Report 2015 23 Page Title at start:Content Section at start: Directors’ Report Directors’ Report For the year ended 30 June 2015 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 2015. 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 33 to 36 of this report. Going concern After due consideration of the Financing Risk detailed on page 21, the Directors have a reasonable expectation that the Group will have access to adequate resources to continue in operational existence for the foreseeable future. Accordingly, the Directors 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: Ian Gilham (appointed 24 November 2014) David Evans (resigned 11 May 2015) Catherine Booth Allan Brown Roger Lloyd Robert Nolan John Rylands Matthew Walls (resigned 23 October 2015) 30 June 2015 1 July 2014 – – 987,568 2,154 – 5,065 197,466 13,213 n/a 98,845 985,984 – – 5,065 195,882 11,629 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: ODEY Asset Management Blackrock funds River and Mercantile Asset Management Prudential Plc group of companies ADM Investor Services Aerion Fund Management Henderson Global Investors Percentage holding 15% 9% 5% 5% 4% 3% 3% Directors’ and Officers’ liability insurance Qualifying indemnity insurance cover has been arranged in respect of the personal liabilities which may be incurred by directors and officers of the Group during the course of their service with the Group. This insurance has been in place during the year and on the date of this report. Research and development During the year ended 30 June 2015 the Group has incurred research Discovery and development costs of £2,942k (2014: £2,037k). 24 Epistem Holdings Plc Annual Report 2015 Page Title at start:Content Section at start: Strategic Report Governance Financial Statements Expenditure on Intangible assets (relating to research and development activities) was £550k (2014: £3,730k) as detailed in Note 10 to the Financial Statements. Additions to Intangible assets last year included research and development expenditure of £2,750k in respect of the recognition of the Visible Genomics Limited earnout consideration which is detailed on Page 63 of the Annual Report. A review of our Research and Development investment is included within the Strategic Report on pages 2 to 21. 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; • 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. Provision of information to auditors The Directors who were members of the Board at the time of approving the Directors’ Report are listed on page 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 18 November 2015 Epistem Holdings Plc Annual Report 2015 25 Page Title at start:Content Section at start: Directors’ Remuneration Report Directors’ Remuneration Report For the year ended 30 June 2015 Introduction This report has been prepared in accordance with the requirements of Schedule 2 Part 1 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 The Executive Directors have written terms of engagement with no fixed expiry date. 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. Executive Directors’ service contracts are subject to 6 months’ notice of termination other than Matthew Walls’s service contract which was subject to 12 months’ notice of termination. Executive Directors are entitled to accept appointments outside the Company providing the Board’s permission is sought. The remuneration of the Non-executive Directors is determined by the Board within limits set out in the Articles of Association. Non-executive Directors’ terms of engagement The Non-executive Directors have specific terms of engagement with no fixed expiry date. Their remuneration is determined by the Board. In the event that a Non-executive undertakes additional assignments for the Company, the Non-executive’s fee will be agreed by the Company in respect of each assignment. Audited information Aggregate Directors’ remuneration Executive Catherine Booth Allan Brown John Rylands Matthew Walls (resigned 23 October 2015) Non-executive Ian Gilham (appointed 24 November 2014) David Evans (resigned 11 May 2015) Roger Lloyd Robert Nolan Salary & fees £ 106,107 150,000 131,969 321,030 40,249 26,250 24,000 24,000 Bonus £ 5,000 5,000 5,000 16,200 – – – – Benefits in kind £ 394 542 1,249 999 – – – – Pension £ 2015 Total £ 2014 Total £ 32,060 143,561 3,000 158,542 2,629 140,847 5,962 344,191 134,747 63,429 134,406 305,180 – – – – 40,249 26,250 24,000 24,000 – 35,000 24,000 24,000 823,605 31,200 3,184 43,651 901,640 774,838 26 Epistem Holdings Plc Annual Report 2015 Page Title at start:Content Section at start: Strategic Report Governance Financial Statements Directors’ share options Details of the options for Directors who served during the year are as follows: As at 1 July 2014 Exercised/ Lapsed Options granted As at 30 June 2015 Exercise price Earliest exercise date Expiry date Executive Catherine Booth (2) John Rylands (3) John Rylands (1) Matthew Walls (4) 15,528 83,333 127,847 (resigned 23 October 2015) 177,653 Matthew Walls (5) (resigned 23 October 2015) 80,644 Matthew Walls (6) (resigned 23 October 2015) 254,631 Matthew Walls (6) (resigned 23 October 2015) 5,369 Matthew Walls (6) (resigned 23 October 2015) Allan Brown (2) Non-executive David Evans (1) 23,758 200,000 – – – – – – – – – – – – – – 15,528 83,333 127,847 1.20 1.20 1.20 Exit 04/04/2007 04/04/2007 09/01/2016 09/01/2016 09/01/2016 177,653 1.24 31/10/2010 04/02/2017 80,644 1.24 31/10/2010 04/02/2017 – 254,631 3.73 30/09/2013 04/02/2017 – 5,369 3.60 30/09/2013 04/02/2017 – 23,758 – 200,000 5.50 3.25 23/10/2015 25/03/2017 04/02/2017 25/03/2024 (resigned 11 May 2015) 62,112 62,112 – – 1.20 04/04/2007 09/01/2016 Ian Gilham (6) (appointed 24 November 2014) Roger Lloyd (6) Robert Nolan (1a) Robert Nolan (1) – – 78,000 15,528 – – – – 100,000 100,000 30,000 78,000 15,528 30,000 – – 2.78 2.78 1.29 1.20 17/12/2018 17/12/2018 31/05/2005 10/01/2006 16/12/2025 16/12/2025 30/03/2017 09/01/2016 1. Unapproved stand-alone agreement, no performance criteria. 1a. Unapproved stand-alone agreement, no performance criteria (on 30 March 2015 the expiry date was extended by 2 years). 2. EMI Company scheme, no performance criteria. 3. EMI stand-alone scheme, no performance criteria. 4. EMI and Unapproved stand-alone scheme exercisable prior to 4 February 2017. 5. EMI stand-alone scheme exercisable prior to 4 February 2017. 6. 2007 Epistem Share Option Scheme exercisable prior to 4 February 2017. 7. Gain on exercise of Directors’ share options. On 11 May 2015, David Evans exercised options of 62,112 shares. The gain of market price over exercise price was £122,677. Epistem Holdings Plc Annual Report 2015 27 Page Title at start:Content Section at start: Directors’ Remuneration Report continued For the year ended 30 June 2015 Share Investment Plan The details of the Epistem Share Investment Plan are outlined in Note 20 (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 2,523 718 2,523 2,523 Cost of Matching Shares £ 19,000 4,250 19,000 19,000 Matching Shares No. 5,045 1,436 5,045 5,045 Total SIP Shares 30 June 2015 No. 7,568 2,154 7,568 7,568 SIP Shares 30 June 2014 No. 5,984 570 5,984 5,984 Catherine Booth Allan Brown John Rylands Matthew Walls (resigned 23 October 2015) Approved by the Board I Gilham Chairman 18 November 2015 28 Epistem Holdings Plc Annual Report 2015 Page Title at start:Content Section at start: Corporate Governance Report Strategic Report Governance Financial Statements Corporate Governance Report For the year ended 30 June 2015 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 and membership of these committees and attendance at meetings is as follows: Non-executive Directors Ian Gilham (appointed 24 November 2014) David Evans (resigned 11 May 2015) Robert Nolan Roger Lloyd (Remuneration/Nominations Committees) Audit Remuneration Committee Committee Nominations Committee – 2 2 N/A 3 4 4 4 1 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 2015 29 Page Title at start:Content Section at start: Corporate Governance Report continued For the year ended 30 June 2015 Social, environmental and ethical matters The Board recognises the growing awareness of social, environmental 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. 30 Epistem Holdings Plc Annual Report 2015 Page Title at start:Content Section at start: Financial Statements Independent Auditors’ Report Strategic Report Governance Financial Statements Independent Auditors’ Report to the Members of Epistem Holdings Plc Year ended 30 June 2015 We have audited the group and parent company financial statements (the ‘Financial Statements) of Epistem Holdings Plc for the year ended 30 June 2015 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. 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 and to identify any information that is apparently materially incorrect based on, or materially inconsistent with, the knowledge acquired by us in the course of performing the audit. If we become aware of any apparent material misstatements or inconsistencies we consider the implications for our report. 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 2015, 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 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 Strategic Report and the Directors’ Report for the financial year for which the financial statements are prepared is consistent with the financial statements. Epistem Holdings Plc Annual Report 2015 31 Page Title at start:Content Section at start: Independent Auditors’ Report to the Members of Epistem Holdings Plc continued Year ended 30 June 2015 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 Haines Watts, Chartered Accountants & Statutory Auditor Bridge House 157 Ashley Road Hale Altrincham Cheshire WA14 2UT 18 November 2015 32 Epistem Holdings Plc Annual Report 2015 Page Title at start:Content Section at start: Consolidated Statement of Comprehensive Income Strategic Report Governance Financial Statements Consolidated Statement of Comprehensive Income For the year ended 30 June 2015 Revenue Other income – development grant funding Revenue and other Income Contract costs Discovery and development costs General administrative costs Operating (loss) Finance income and costs (Loss) on ordinary activities before taxation Taxation on ordinary activities Total Comprehensive Income for the financial year (Loss) per share (pence) – Basic – Diluted Notes 2 3 6 7 9 9 2015 £’000 3,703 814 4,517 (3,933) (2,942) (1,682) (4,040) 616 (3,424) 399 (3,025) 2014 £’000 4,497 1,264 5,761 (4,489) (2,037) (1,530) (2,295) (54) (2,349) 656 (1,693) (30.2)p (30.2)p (17.4)p (17.4)p 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. Epistem Holdings Plc Annual Report 2015 33 Page Title at start:Content Section at start: Consolidated Statement of Changes in Equity Consolidated Statement of Changes in Equity For the year ended 30 June 2015 Balance at 1 July 2013 Exercise of share options Forfeit of share options Purchase of own shares (SIP) Recognition of equity-settled share-based payments Total Comprehensive Income for the year Share capital £’000 146 Share premium account £’000 18,230 4 – – – – 386 – – – – Employee share incentive plan reserve £’000 (182) – – (46) – – Share options reserve £’000 1,013 (139) (58) – 216 – Other reserves £’000 Retained earnings £’000 Total £’000 (2,484) (4,668) 12,055 – – – – – 139 – – 390 (58) (46) – (1,693) 216 (1,693) At 30 June 2014 150 18,616 (228) 1,032 (2,484) (6,222) 10,864 Balance at 1 July 2014 150 18,616 (228) 1,032 (2,484) (6,222) 10,864 Allotment of ordinary shares Purchase of own shares (SIP) Exercise of share options Forfeit of share options Recognition of equity-settled share-based payments Total Comprehensive Income for the year 7 – 1 – – – 1,393 – 79 – – – – 32 – – – – – – (29) (11) 205 – – – – – – – – – 29 – 1,400 32 80 (11) – (3,025) 205 (3,025) At 30 June 2015 158 20,088 (196) 1,197 (2,484) (9,218) 9,545 34 Epistem Holdings Plc Annual Report 2015 Page Title at start:Content Section at start: Consolidated Balance Sheet Strategic Report Governance Financial Statements Consolidated Balance Sheet As at 30 June 2015 Non-current assets Intangible assets Plant and equipment Deferred taxation Current assets Inventories Trade and other receivables Tax receivables Cash and cash equivalents Liabilities Current liabilities Deferred income Trade and other payables Deferred consideration payable in shares Net current assets Total assets less current liabilities Liabilities payable in 1 – 5 years Convertible Bond 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 2015 £’000 2014 £’000 10 11 12 13 14 15 16 17 18 7,191 805 30 8,026 163 2,191 685 4,928 7,967 50 1,123 1,250 2,423 5,544 6,785 840 154 7,779 – 1,125 1,474 4,238 6,837 86 1,016 2,650 3,752 3,085 13,570 10,864 19 4,025 – 9,545 10,864 24 25 25 25 25 25 158 20,088 (196) 1,197 (2,484) (9,218) 150 18,616 (228) 1,032 (2,484) (6,222) 9,545 10,864 These financial statements were approved by the Directors and authorised for issue on 18 November 2015 and are signed on their behalf by: I Gilham Chairman H J J Rylands Finance Director Epistem Holdings Plc Company number: 06108621 Epistem Holdings Plc Annual Report 2015 35 Page Title at start:Content Section at start: Consolidated Statement of Cash Flows For the year ended 30 June 2015 Cash flows from operating activities Operating loss for the year Depreciation, amortisation and impairment Research credits Share based payment expense Operating loss before changes in working capital and provisions (Increase) in inventories (Increase)/decrease in trade and other receivables Increase in deferred income Increase/(decrease) in trade and other payables Net cash (outflow) from operations Tax received Net cash (outflow) from operating activities Cash flows from investing activities Finance income – interest received Acquisition of non-current assets Net cash outflow from investing activities Cash flows from financing activities Proceeds from issue of share options Proceeds from issue of convertible bond Costs of issue of convertible bond Finance costs – interest paid Purchase of own shares Net cash inflow from financing activities Net increase/(decrease) in cash equivalents Foreign exchange adjustments 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 Consolidated Statement of Cash Flows 2015 £’000 2014 £’000 (4,040) 387 (202) 194 (3,661) (163) (1,066) (36) 107 (4,819) 1,513 (2,295) 712 (211) 158 (1,636) – 881 (124) (791) (1,670) 578 (3,306) (1,092) 16 (758) (742) 15 (1,482) (1,467) 80 4,700 (100) (212) (22) 4,446 398 292 4,238 4,928 390 – – – (46) 344 (2,215) (69) 6,522 4,238 4,928 4,928 4,238 4,238 36 Epistem Holdings Plc Annual Report 2015 Page Title at start:Content Section at start: Notes to the Financial Statements Strategic Report Governance Financial Statements Notes to the Financial Statements For the year ended 30 June 2015 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 requires an assessment of the duration of the contract to which the deferred income and expenditure relates, which informed 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. • Determining the market value of the debt component of the Convertible Bond requires the Board to make a judgement about the market rate of interest to apply to an instrument of this nature. • Determining the value of an equity derivative requires a judgement as to the most appropriate evaluation model to be used. The Board seeks the opinion of experts in making this judgement. 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. Epistem Holdings Plc Annual Report 2015 37 Page Title at start:Content Section at start: 1. Significant accounting policies continued 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. Revenue Revenue is measured at the fair value of the consideration received or receivable and net of discounts and sales-related taxes. 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 and 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. c. Other income – development grant funding Income receivable in the form of government grants to fund product development is recognised as development grant funding over the periods in which the Group recognises, as expenses, the related eligible costs which the grants are intended to compensate and when there is reasonable assurance that the Group will comply with the conditions attaching to them and that the income will be received. Government grants whose primary condition is that the Group should purchase or otherwise acquire non-current assets are recognised as deferred revenue in the Consolidated Balance Sheet and transferred to the Consolidated Statement of Comprehensive Income on a systematic and rational basis over the useful lives of the related assets. 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. 38 Epistem Holdings Plc Annual Report 2015 Notes to the Financial Statements continuedFor the year ended 30 June 2015Page Title at start:Content Section at start: Strategic Report Governance Financial Statements 1. Significant accounting policies continued 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 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 19. Exchange differences arising on the settlement of monetary items and on the retranslation of monetary items are taken to the Consolidated Statement of Comprehensive Income. Exchange differences arising on non-monetary items, carried at fair value, are included in the income statement, 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. Epistem Holdings Plc Annual Report 2015 39 Page Title at start:Content Section at start: 1. Significant accounting policies continued 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 Matching Shares issued within the Share Incentive Plan have vesting conditions which require participants to remain employed with the Company and retain their investment in Epistem shares for at least three 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 Consolidated Statement of Comprehensive Income in the year in which they are payable. Inventories Inventories are stated at the lower of cost and net realisable value. Cost is calculated on a first in and first out basis and includes bought in cost and, where appropriate, other direct costs and attributable overheads. Net realisable value represents the estimated selling price less applicable selling costs. Where applicable, provision is made for slow-moving and obsolete inventory. 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 Statement of Comprehensive Income account when liabilities are derecognised 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. 40 Epistem Holdings Plc Annual Report 2015 Notes to the Financial Statements continuedFor the year ended 30 June 2015Page Title at start:Content Section at start: Strategic Report Governance Financial Statements 1. Significant accounting policies continued 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. Taxation credits which fall under the category of Above the Line Research & Development credits (‘ATL Research credit’) as detailed in the Finance Act 2013 are offset against the expenditure to which they relate and, in the Consolidated Statement of Comprehensive Income, are disclosed within Contract costs and Discovery and development costs. 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. Financial instruments (including Convertible Bond) 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. As disclosed in Note 19, the Company has in issue a Convertible Bond which is a financial instrument comprising a liability component, or debt host, and an equity derivative component, which are detailed as liabilities payable in 1–5 years. On initial recognition, convertible bonds are recorded at fair value net of issue costs. The initial fair value of the debt host is determined using the market interest rate applied by a market participant for an equivalent non-convertible debt instrument. Subsequent to initial recognition, the debt host is recorded using the effective interest method until extinguished on conversion or maturity of the bonds. The amortisation of the debt host and the interest payable in each accounting period is expensed as a finance cost. Equity derivatives embedded in the convertible instruments which are required to be recorded as financial liabilities are initially recognised at fair value. At each reporting date, the fair values of the derivative are reassessed by management. Where there is no market for such derivatives, the Company uses option pricing models to measure the fair value. The amortisation of the Debt host, interest payable in the period and gains or losses on the fair value of the Derivative are disclosed within Finance Income and costs detailed in Note 6. Epistem Holdings Plc Annual Report 2015 41 Page Title at start:Content Section at start: 1. Significant accounting policies continued Parent Company assets The assets of the parent Company are subject to impairment review in each financial period. New standards and interpretations not applied The International Accounting Standards Board (‘IASB’) and IFIRC have issued the following standards and interpretations that are not effective for the financial year beginning 1 July 2014 and have not been adopted early: • IAS 1 Disclosure Initiative – Amendments to IAS 1 • IAS 16 and IAS 38 Clarification of Accountable Methods of Depreciation and Amortisation • IAS 19 (AIP) • IFRS 9 • IFRS 1 Employee Benefits – Discount rate: regional market issue Financial instruments Revenue from Contracts with Customers The Directors do not anticipate that the adoption of these standards and interpretations will have a material effect on the Company’s financial statements in the period of initial application. 42 Epistem Holdings Plc Annual Report 2015 Notes to the Financial Statements continuedFor the year ended 30 June 2015Page Title at start:Content Section at start: Strategic Report Governance Financial Statements 2. Segment information For internal reporting, the Group is organised into operating divisions – Preclinical Research Services, Personalised Medicine and Novel Therapies. Preclinical Research Services provides pre-clinical testing services. Personalised Medicine specialises in molecular measures of biological effect and point of care molecular diagnostic testing. Novel Therapies holds intellectual property arising from investment aimed at 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 2015 Revenue Segment trading result Add research credits less depreciation and amortisation less equity-settled share-based payments) Operating profit/(loss) Twelve months ended 30 June 2014 Revenue Segment trading result Add Research credits less depreciation and amortisation Less fixed asset impairment Less equity-settled share-based payments) Operating profit/(loss) Personalised Medicine £’000 Novel Therapies £’000 Unallocated £’000 Total £’000 Preclinical Research Services £’000 2,322 135 111 (163) (15) 68 2,195 (2,204) 91 (173) (140) (2,426) 2,899 2,862 568 115 (133) – (8) 542 (640) 96 (109) – (29) (682) – – – – – – – (216) – (24) (385) – (625) – (1,593) – (50) (39) (1,682) – (1,349) – (60) – (121) (1,530) 4,517 (3,662) 202 (386) (194) (4,040) 5,761 (1,637) 211 (326) (385) (158) (2,295) 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 2015 £’000 912 1,061 2,034 510 4,517 2014 £’000 1,879 1,157 2,555 170 5,761 Epistem Holdings Plc Annual Report 2015 43 Page Title at start:Content Section at start: 2. Segment information continued Geographical segments continued Revenues from customers accounting for more than 10% of total revenue are detailed below: (a) £948k revenue was derived from the University of Maryland on behalf of the US Government with revenue included within Preclinical Research Services (2014: £1,134k); (b) £454k revenue was derived from international pharmaceutical company, Glaxo SmithKline, with revenue included within Preclinical Research Services (2014: £939k); (c) £513k revenue was received within Personalised Medicine for FP7 grants (2014: £709k). 3. Operating (loss) The Group operating loss is stated after charging: Discovery and development expenditure ATL Research Credits (Note 7) Amortisation of intangible assets Depreciation of owned tangible fixed assets Impairment of tangible and intangible assets Cost of inventories 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 Cost of SIP matching shares 2015 £’000 2,942 (202) 144 241 – 61 35 – 320 2015 No 39 18 14 71 2015 £’000 3,647 374 194 143 58 4,416 2014 £’000 2,037 (210) 101 227 384 – 25 – 235 2014 No 45 13 12 70 2014 £’000 3,492 396 158 102 46 4,194 44 Epistem Holdings Plc Annual Report 2015 Notes to the Financial Statements continuedFor the year ended 30 June 2015Page Title at start:Content Section at start: Strategic Report Governance Financial Statements 5. Directors’ remuneration (key management) Group Remuneration Pension contribution Equity-settled share-based payments Cost of SIP Matching Shares 2015 £’000 858 44 103 12 1,017 2014 £’000 722 31 136 12 901 Full details of the Directors’ remuneration and Directors’ options are contained in the Directors’ Remuneration Report. 6. Finance income and costs Group Finance income and costs – gain on issue of Convertible Bond (Note 19) – movement in fair value of derivative embedded in Convertible Bond (Note 19) – finance cost of Convertible Bond including interest payable (Note 19) – foreign exchange movement in Convertible Bond (Note 19) – interest receivable – foreign exchange surplus/(losses) 7. Taxation on ordinary activities (a) Recognised in the income statement Group Current tax: Research and development tax credits Less recognised as ATL Research Credit 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 Movement in provisions In respect of current year share options charges Tax withheld from ATL Research Credit Total deferred tax Total tax (credit) for the year Epistem Holdings Plc Annual Report 2015 2015 £’000 2014 £’000 1,004 73 (417) (298) 16 238 616 – – – – 15 (69) (54) 2015 £’000 2014 £’000 (688) 202 (486) (37) (742) 210 (532) (946) (523) (1,478) – – 133 (108) (4) 32 71 124 (399) 2 857 (201) 125 – 100 (61) 822 (656) 45 Page Title at start:Content Section at start: 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 20.75% (2014: 22.5%) Recognised as ATL Research Credit Tax withheld from ATL Research Credit Effect of difference in tax rate Movement in share options Movement in provisions Capital allowances in excess of depreciation Item not deductible/chargeable for tax purposes Adjustments in respect of research and development tax credits Tax loss for the year Adjustment relating to a previous year Total tax (credit) in income statement 2015 £’000 2014 £’000 (3,424) (2,349) (712) 202 71 – 43 (4) (102) 6 (462) 595 (36) 399 (528) 210 – 2 (2) – (114) 19 (259) 105 (89) (656) The Group had trading losses, as computed for tax purposes, of approximately £3,917k (2014: £4,297k) 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. Where eligible, these credits are disclosed partly as ATL Research Credits within Research and Development Costs. The total Research and development tax credit of the year ended 30 June 2015 is £688k (2014: £742k) which £202k (2014: £210k) was disclosed as ATL Research Credit deducted from Research and Development Costs with the balance of £486k (2014: £532k) disclosed within Taxation on ordinary activities as detailed above. 8. Profit attributable to members of the parent company The profit dealt with in the accounts of the parent company was £379k (2014: £14k). 46 Epistem Holdings Plc Annual Report 2015 Notes to the Financial Statements continuedFor the year ended 30 June 2015Page Title at start:Content Section at start: Strategic Report Governance Financial Statements 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 Weighted average number of SIP matching shares not vested Dilutive ordinary shares from options and warrants in issue Dilutive weighted average number of ordinary shares (Loss) per share – basic – diluted 2015 £’000 (3,025) 2015 No. 10,047,756 (36,415) 303,103 10,314,444 2014 £’000 (1,693) 2014 No. 9,757,923 (33,399) 805,034 10,529,558 (30.2)p (30.2)p (17.4)p (17.4)p As detailed in Note 19, the exercise of the Convertible Bond Agreement if exercised in full at the Fixed Rate of Exchange and at the Conversion Price, would lead to the issue of 967,298 ordinary shares of £0.015p. The shares potentially to be issued will not affect the diluted eps. Epistem Holdings Plc Annual Report 2015 47 Page Title at start:Content Section at start: 10. Intangible assets Group Cost At 1st July 2014 Additions At 30 June 2015 Amortisation At 1 July 2014 Charge for the year At 30 June 2015 Net book value At 30 June 2014 At 30 June 2015 Cost At 1st July 2013 Additions At 30 June 2014 Amortisation At 1 July 2013 Charge for the year Impairment charge At 30 June 2014 Net book value At 30 June 2013 At 30 June 2014 Acquired intellectual property £’000 Developed intellectual property £’000 Patents £’000 Total £’000 7,345 550 7,895 560 144 704 3,177 – 3,177 3,616 385 4,001 46 39 85 153 104 257 3,131 3,092 3,463 3,744 6,785 7,191 287 2,890 3,177 2,946 670 3,616 3,615 3,730 7,345 42 4 – 46 59 75 19 153 120 101 339 560 245 3,131 2,887 3,463 3,495 6,785 552 165 717 361 1 362 191 355 382 170 552 19 22 320 361 363 191 The net book value of Intangible assets principally relates to the Genedrive® unit and assays which have a carrying value of £6,384k (2014 – £6,314k). During the year to 30 June 2015, the cost of the Company’s Patents assessed as not being available for economic use amounted to £nil (2014: £320k). 48 Epistem Holdings Plc Annual Report 2015 Notes to the Financial Statements continuedFor the year ended 30 June 2015Page Title at start:Content Section at start: Strategic Report Governance Financial Statements 11. Plant and equipment Group Cost At 1 July 2014 Additions Disposals At 30 June 2015 Depreciation At 1 July 2014 Charge for the year Depreciation on disposed assets At 30 June 2015 Net book value At 30 June 2014 At 30 June 2015 Group Cost At 1 July 2013 Additions Disposals At 30 June 2014 Depreciation At 1 July 2013 Charge for the year Impairment of assets At 30 June 2014 Net book value At 30 June 2013 At 30 June 2014 Lab equipment £’000 Fixtures & fittings £’000 Other equipment £’000 1,908 24 (10) 1,922 1,142 191 (8) 1,325 766 597 58 73 – 131 39 11 – 50 19 81 253 111 – 364 198 39 – 237 55 127 Lab equipment £’000 Fixtures & fittings £’000 Other equipment £’000 1,536 372 – 1,908 930 167 45 1,142 606 766 50 8 – 58 30 9 – 39 20 19 231 22 – 253 147 51 – 198 84 55 Total £’000 2,219 208 (10) 2,417 1,379 241 (8) 1,612 840 805 Total £’000 1,817 402 – 2,219 1,107 227 45 1,379 710 840 Epistem Holdings Plc Annual Report 2015 49 Page Title at start:Content Section at start: 12. Deferred Taxation Recognised Group Tax losses carried forward Excess of tax allowances over depreciation & amortisation Share-based payment transactions Amount retained in respect of ATL Research Credit Other timing differences 2015 £’000 727 (681) (20) – 4 30 2014 £’000 859 (788) 12 71 – 154 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. Deferred tax assets include £nil required to be held in respect of the ATL Research Credit (2014 – £71k). This sum is eligible for offset against future taxation payable. The Group did not recognise deferred tax assets in respect of share-based payment transactions of £1,272k (2014: £1,485k). 13. Inventories Group Finished goods 14. Trade and other receivables Group Trade receivables Other receivables Prepayments Analysis of trade receivables Neither impaired nor past due Past due but not impaired Trade receivable 2015 £’000 163 163 2015 £’000 1,725 100 366 2,191 2015 £’000 1,384 341 1,725 2014 £’000 – – 2014 £’000 884 29 212 1,125 2014 £’000 714 170 884 50 Epistem Holdings Plc Annual Report 2015 Notes to the Financial Statements continuedFor the year ended 30 June 2015Page Title at start:Content Section at start: Strategic Report Governance Financial Statements Ageing 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: 2015 £’000 2014 £’000 Not later than one month Later than one month but not later than three months Later than three but not later than six months 15. Cash and cash equivalents Group Cash at bank and in hand Short term bank deposits 219 122 – 2015 £’000 1,382 3,546 4,928 152 11 7 2014 £’000 612 3,626 4,238 Cash and cash equivalents comprise current accounts held by the Group with immediate access and short term bank deposits with a maturity of three 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. 16. 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 17. Trade and other payables Group Trade payables Accruals Other payables Deferred consideration 2015 £’000 50 2015 £’000 696 346 81 – 2014 £’000 86 2014 £’000 522 325 119 50 1,123 1,016 Deferred consideration of £50k became payable when Epistem made a regulatory submission to the Drugs Controller General (India). 18. Deferred consideration payable in shares Group Payable in shares 2015 £’000 2014 £’000 1,250 2,650 Deferred consideration relates to the provision of £1,250k in respect of the issue of shares in the Company which is anticipated to be due following the revaluation of the earn-out payable in respect of the acquisition of Visible Genomics Limited in 2010 which is detailed on page 63. Epistem Holdings Plc Annual Report 2015 51 Page Title at start:Content Section at start: 18. Deferred consideration payable in shares continued During the year, deferred consideration of £1,400k (2014: £nil) became payable on confirmation of receipt from the Drugs Controller General (India) of regulatory approval for the Genedrive® TB test. This liability was settled by the issue on 8 June 2015 of 491,228 ordinary shares of £0.015. 19. Convertible Bond Group Derivative Debt host 2015 £’000 37 3,988 4,025 2014 £’000 – – – On 21 July 2014 the Company issued a Convertible Bond. The Convertible Bond has a principal of $8m and interest is payable half yearly at a coupon rate of 5% on the principal amount until the earlier of maturity (21 July 2019) or conversion. The Convertible Bond may be converted into ordinary shares as outlined below. If the Convertible Bond is converted at the initial conversion price of £4.89 at the fixed rate of Exchange of $1.6913:£1, this would result in the issue of 967,298 shares. The rate of exchange at 30 June 2015 was $1.57:£1. Whilst the bond holder has the option to convert into a fixed number of ordinary shares, due to the Convertible Bond being denominated in a different currency to the Company’s functional currency, IFRS requires the Convertible Bond to be accounted for at a compound instrument, comprising a Debt Host (liability component) and a Derivative (equity component). The Debt host is required to be recorded initially at fair value. Whilst the coupon is 5%, IFRS requires that the fair value is calculated based on the rate of interest which a market participant would lend to the Company. Given the nature of the Company’s activities, the Company has used a rate of 12% in calculating this liability. The fair value of the Debt host at the date of issue was £3,494k ($5,939k) which after taking into account value on issue of the Derivative detailed below of £102k ($173k) and transaction costs on £100k ($160k) gave rise to an initial gain of £1,004k ($1,727k) which IFRS requires is disclosed in the profit and loss account as detailed in Note 6. The Derivative has been valued using a Quanto Option Valuation model which takes account of the multicurrency aspects of the Convertible Bond. The variable used in running model are as follows: Volatility of the Company’s Share at 21 July 2014 Volatility of the Company’s Share Price at 30 June 2015 Expected life of the Derivative Expected life of the Derivative at 30th June 2015 Risk free interest rate at 21st July 2015 Risk free interest rate at 30 June 2015 Dividend yield 19% 21% 4.82 years 3.88 years 2.11% 1.53% 0% 52 Epistem Holdings Plc Annual Report 2015 Notes to the Financial Statements continuedFor the year ended 30 June 2015Page Title at start:Content Section at start: Strategic Report Governance Financial Statements Fair value on issue Increase/(decrease) in fair value Increase in liability caused by Foreign exchange movements Debt Host £’000 3,494 204 290 3,988 Derivative £’000 102 (73) 8 37 Convertible Bond £’000 3,596 131 298 4,025 Outline of Convertible Bond Agreement On 21 July 2014, the Company entered into a Collaboration and Convertible Bond Purchase Agreement (‘Agreement’) with the Global Health Investment Fund 1 LLC (‘GHIF’ or the ‘bond holder’). Under the terms of the Agreement, the Company has issued to GHIF a five-year Convertible Bond totalling $8.0m (£4.7m). Further, as part of the Agreement, GHIF and the Company entered into a Global Access Commitment. The purpose of the Agreement is to fund the Company’s development, production and commercialisation of Genedrive® to address Global Health Challenges and achieve Global Health Objectives. An outline (only) of the terms of the Agreement is detailed below: Unless previously converted or redeemed, the Convertible Bond will mature on 21 July 2019 and interest will be payable half yearly at the rate of 5% per annum. During a Purchaser Optional Conversion Period which runs from 15 January 2015 to 15 May 2019 (or earlier in the event of a change of control of the Company) the bond holder has the option to convert all (but not part only) of the Convertible Bond at the Conversion Price, initially £4.89 per Epistem Ordinary Share at the Fixed Rate of Exchange of $1.6913: £1. (The Conversion Price may be adjusted to take account of changes by the Company of its capital structure or payment of dividends etc.) The Company has an option conversion period running from 22 January 2015 to 08 July 2019, during which the Company may convert all (but not part only) of the Convertible Bond into Epistem Ordinary Shares at the Conversion Price, initially £4.89 per Epistem Ordinary Share at the Fixed Rate of Exchange of $1.6913:£1 if the current market prices equals or exceeds 1.2 times the Conversion Price. (The Conversion Price may be adjusted to take account of changes by the Company of its capital structure or payment of dividends etc.) The Company may redeem the whole of the Convertible Bond on any interest payment date from 22 July 2016. In this event, the bond holder may elect to receive full payment in Epistem Ordinary Shares based on a conversion ratio calculated as a function of the market price at the time of notice of Redemption. Without such an election, the bond will be redeemed at par in US dollars. Global Access Commitment Under the Global Access Agreement, the Company will undertake appropriate regulatory strategic steps and registrations to secure access for Genedrive® in developing countries in tuberculosis, malaria or other infectious diseases as agreed between the parties. The Company will establish a tiered pricing framework that is commercially reasonable and reflects the needs of poor patients in developing countries. The Company will, taking into account its profitability and other commercial interests, allocate sufficient capacity and product distribution to make Genedrive® and its assays accessible to people most in need in developing countries. Epistem Holdings Plc Annual Report 2015 53 Page Title at start:Content Section at start: 19. Convertible Bond continued GHIF will use commercially reasonable efforts through its global access network to ensure support for the Company in placing Genedrive® and its assays in global territories to reflect the needs and price sensitivity of poor patients in the developing world. Notwithstanding any early Conversion, Redemption or Termination of the agreement, the Global Access Commitment shall endure for 5 years from 22 July 2014. General Undertakings During the period of the Agreement, the Company has entered into undertakings commensurate with a Convertible Bond Agreement. These include: • Undertakings relating to incurring financial indebtedness & financial default; • Undertakings relating to maintenance of appropriate records; • Undertakings relating to standards of social responsibility and ethical behaviour. 20. Share-based payments (A) Share options outstanding at 30 June 2015 Prior to 28 November 2007, the Company operated a number of HMR&C 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 Share Warrants (Note 24) 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 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 198,554 78,000 29,824 143,375 98,861 8,200 80,644 177,653 23,103 57,727 16,050 38,750 30,000 254,631 5,369 10,750 24,153 23,758 83,350 50,000 200,000 38,500 20,000 130,000 Exercise price £ 1.61 1.292 1.203 1.20 1.20 1.20 1.24 1.24 1.67 1.60 1.77 4.03 3.60 3.73 3.60 3.60 5.50 5.50 3.22 3.20 3.25 3.25 3.25 2.78 Period within which options are exercisable Fair value per option Fair value £ 16 Mar 2005 to 21 Sep 2015 31 Mar 2005 to 30 Mar 2017 25 Nov 2005 to 24 Nov 2015 10 Jan 2006 to 09 Jan 2016 10 Jan 2006 to 09 Jan 2016 29 Sep 2006 to 28 Sep 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 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 2013 to 09 May 2021 10 Feb 2015 to 09 Feb 2022 28 Mar 2016 to 27 Mar 2023 26 Mar 2016 to 25 Mar 2023 29 Jan 2017 to 28 Jan 2024 27 Jan 2017 to 26 Jan 2024 25 Mar 2017 to 24 Mar 2024 12 Aug 2018 to 11 Mar 2025 20 Sep 2018 to 19 Sep 2025 17 Dec 2018 to 16 Dec 2025 £0.56p 111,389 35,022 £0.45p 13,168 £0.43p 88,359 £0.43p 42,510 £0.43p 3,526 £0.43p 33.870 £0.42p 74,615 £0.42p 9,010 £0.39p 20,782 £0.36p 6,308 £0.37p 64,534 £1.64p £1.46p 43,800 £1.51p 384,492 8,107 £1.51p 16,717 £1.46p 58,350 £2.23p £2.23p 52,980 £1.21p 104,483 £1.21p 60,600 £1.21p 242,000 23,100 £0.60p 12,000 £0.60p £1.21p 157,300 54 Epistem Holdings Plc Annual Report 2015 Notes to the Financial Statements continuedFor the year ended 30 June 2015Page Title at start:Content Section at start: Strategic Report Governance Financial Statements 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. Award 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 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 16 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 31 Jul 2008 10 Dec 2010 10 May 2011 29 Mar 2011 10 May 2011 10 Feb 2012 28 Mar 2013 26 Mar 2013 29 Jan 2014 27 Jan 2014 25 Mar 2014 12 Aug 2014 20 Sep 2014 17 Dec 2014 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 5 years 5 years 5 years 5 years Expected dividend yield % (Note b) Expected volatility % (Note c) Risk % rate Performance condition (Note d) 0 0 0 0 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 45 45 40 50 50 50 50 50 50 50 43 43 43 43 43 43 4.75 4.75 4.50 4.50 4.50 4.50 5.25 5.25 5.50 5.75 5.00 0.50 0.50 0.50 0.50 0.50 0.50 0.50 0.50 0.50 0.50 0.50 0.50 0.50 None None None Note (e) None None Note (f) Note (f) None Note (g) Note (h) Note (h) Note (h) Note (i) Note (h) Note (h) Note (h) Note (j) Note (h) Note (g) Note (h) Note (h) Note (g) Note (h) (a) The expected term used in the model is five 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 became exercisable when the Remuneration Committee determined that the Company had achieved regulatory approval in India for the Genedrive® TB test. (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 2015 55 Page Title at start:Content Section at start: 20. 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 2015 2014 1,707,377 1,820,570 336,350 (324,099) (125,444) 190,500 (68,312) (8,313) 1,821,252 1,707,377 Weighted average exercise price Weighted average remaining contracted life – Years 2015 2.04 2.91 1.18 3.86 2.27 2014 2015 2014 £1.82 3.23 1.20 1.82 2.04 4.41 4.26 Options exercisable at 30 June 1,251,491 1,270,303 1.18 1.87 2.00 2.87 The weighted average share price of options exercised at the exercise dates was £3.18 (2014: £3.28). (B) Share Investment Plan The Company operates a share investment plan, SIP, (The Epistem Share Investment Plan) which is open to Directors and employees in accordance with Inland Revenue 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 two 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 three 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) 2015 2014 33,858 67,713 27,528 55,054 2015 £’000 196 2014 £’000 227 56 Epistem Holdings Plc Annual Report 2015 Notes to the Financial Statements continuedFor the year ended 30 June 2015Page Title at start:Content Section at start: Strategic Report Governance Financial Statements 21. Financial risk management objectives and policies The Group holds or issues financial instruments in order to achieve two main objectives, being: (a) to finance its operations; (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 one or more of the financial risks described below. 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. 2015 Cash and cash equivalents 2014 Cash and cash equivalents Decrease in the basis points 25 25 Effect on loss before tax and equity £’000 5 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 (2014: £nil) to manage foreign currency risk. Epistem Holdings Plc Annual Report 2015 57 Page Title at start:Content Section at start: 21. Financial risk management objectives and policies continued Currency risk continued Balances which are denominated in US Dollars are detailed below: Group Trade and other receivables Cash and cash equivalents Less Convertible Bond 2015 £’000 383 462 (4,065) (3,220) 2014 £’000 119 2,233 – 2,352 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. 2015 Trade and other receivables Cash and cash equivalents Convertible Bond 2014 Trade and other receivables Cash and cash equivalents Increase in the currency rate Effect on loss before tax and equity £’000 5% 5% 5% 5% 5% 19 23 (203) 6 112 An increase in currency rate of 5% would have a similar opposite effect. Fair values of financial assets and liabilities The Convertible Bond is stated at fair value as detailed in Note 19. There is no material difference between the book value and the fair value of the Group’s financial assets or liabilities. 22. Commitments under operating leases At 30 June 2015 the Group had annual commitments under non-cancellable operating leases as set out below. Group Operating leases which expire: Within 1 year 1 year – 2 years Land and buildings 2015 £’000 – 232 2014 £’000 199 – The operating leases are in respect of the Company’s office and laboratories are held under short term leases. 23. Related party transactions At the balance sheet date, Other receivables included an amount of £24k (2014: £nil) due from former Director, M Walls. This is anticipated to be offset against amounts payable to M Walls in November 2015. 58 Epistem Holdings Plc Annual Report 2015 Notes to the Financial Statements continuedFor the year ended 30 June 2015Page Title at start:Content Section at start: Strategic Report Governance Financial Statements 24. Share capital Allotted and called up: Brought forward at 1 July Deferred Consideration shares Exercise of options Ordinary shares of £0.015 each 2015 No 10,004,906 491,228 68,312 10,564,446 2014 No 9,680,807 - 324,099 £’000 150 7 1 158 10,004,906 £’000 146 - 4 150 A schedule of options and warrants potentially leading to the issue of 1,821,252 shares (2014: 1,707,377) is detailed in Note 20. 198,554 warrants potentially exercisable on 21 September 2015 were not exercised. Note 19 details the terms of the Convertible Bond Agreement entered into on 21 July 2014. Under the terms of this agreement, if conversion occurs at the initial conversion price of £4.89 per ordinary share at the fixed rate of exchange of $1.6913:£1, this would result in the issue of 967,298 shares (2014: nil). 25. Reserves Balance as at 1 July 2013 Comprehensive income for the year Unamortised cost of Matching Shares Exercise of options Forfeit of options Recognition of equity settled share- based payments in the year Balance at 30 June 2014 Balance as at 1 July 2014 Comprehensive income for the year Allotment of ordinary shares Amortised cost of Matching Shares Exercise of options Forfeit of options Recognition of equity settled share- based payments in the year Balance at 30 June 2015 Employee share incentive plan reserve £’000 (182) – (46) – – – (228) (228) – – 32 – – Share premium account £’000 18,230 – – 386 – – 18,616 18,616 – 1,393 – 79 – Share options reserve £’000 1,013 – – (139) (58) 216 1,032 1,032 – – – (29) (11) Reverse acquisition reserve £’000 (2,484) – – – – – (2,484) (2,484) – – – – – Retained Earnings £’000 (4,668) (1,693) – 139 – – (6222) (6,222) (3,025) – – 29 – – – 205 – – (196) 20,088 1,197 (2,484) (9,218) 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. The employee share incentive plan reserve represents 67,713 shares in Epistem Holdings Plc (2014: 55,054 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 2015 was £186k (2014: £186k). The nominal value held at 30 June 2015 was £1,015 (2014: £825). Epistem Holdings Plc Annual Report 2015 59 Page Title at start:Content Section at start: Company Balance Sheet As at 30 June 2015 Non-current assets Investments Current assets Amounts receivable from Group undertakings and other receivables Cash and cash equivalents Current liabilities Other payables Deferred consideration payable in cash Deferred consideration payable in shares Net current assets Total assets less current liabilities Non-current liabilities Convertible Bond Net assets Capital and reserves Called-up equity share capital Share premium account Share options reserve Retained Earnings Total shareholders’ funds equity Company Balance Sheet Notes 2015 £’000 2014 £’000 a b c a a 6,398 6,228 17,516 3,707 14,627 2,042 21,223 16,669 99 – 1,250 1,349 3 50 2,650 2,703 19,874 13,966 26,272 20,194 19 4,025 – 22,247 20,194 24 25 25 158 20,088 1,365 636 22,247 150 18,616 1,171 257 20,194 These financial statements were approved by the Directors and authorised for issue on 18 November 2015 and are signed on their behalf by: I Gilham Chairman H J J Rylands Finance Director Epistem Holdings Plc Company number: 06108621 60 Epistem Holdings Plc Annual Report 2015 Page Title at start:Content Section at start: Company Statement of Changes in Equity Strategic Report Governance Financial Statements Company Statement of Changes in Equity For the year ended 30 June 2015 At 1 July 2013 Allotment of ordinary shares Recognition of equity settled share based payments Forfeit of options Profit for the year At 30 June 2014 Issue of ordinary shares Recognition of equity settled share based payments Exercise of share options Forfeit of share options Profit for the year Share capital £’000 146 4 – – – 150 7 – 1 – – Share premium account £’000 18,230 386 – – – 18,616 1,393 – 79 – – Share options reserve £’000 1,013 – 216 (58) – 1,171 – 205 – (11) – Retained earnings £’000 243 – – – 14 257 – – – – 379 Total £’000 19,632 390 216 (58) 14 20,194 1,400 205 80 (11) 379 At 30 June 2015 158 20,088 1,365 636 22,247 Epistem Holdings Plc Annual Report 2015 61 Page Title at start:Content Section at start: Company Statement of Cash Flows For the year ended 30 June 2015 Cash flows from operating activities Profit for the year Operating profit before changes in working capital and provisions (Increase) in amount receivable from Group companies (Decrease)/increase in trade and other payables Cash (outflow) from operations Cash flows from financing activities Proceeds from issue of share capital Proceeds from issue of Convertible Bond Costs of convertible Bond Interest received Interest paid 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 Net funds Company Statement of Cash Flows 2015 £’000 2014 £’000 – – – – (2,889) 46 (5,129) 2,703 (2,843) (2,426) 80 4,700 (76) 16 (212) 4,508 1,665 2,042 3,707 390 – – 14 – 404 (2,022) 4,064 2,042 3,707 3,707 2,042 2,042 62 Epistem Holdings Plc Annual Report 2015 Page Title at start:Content Section at start: Notes to the Company Financial Statements Strategic Report Governance Financial Statements Notes to the Company Financial Statements For the year ended 30 June 2015 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. 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. Following a variation of Purchase and Sales agreement agreed with the vendor of Visible Genomics Limited on 5 March, 2014, the following earnout deferred consideration payable to the vendors of Visible Genomics Limited remained outstanding: Group (a) Deferred consideration payable in cash • Following events relating to submission of Epistem products for regulatory approval (b) Deferred consideration payable in shares • Following receipt of regulatory approval for Genedrive® • Achievement of commercial milestones relating to Genedrive® sales 2015 £’000 – 2014 £’000 50 – 1,250 1,250 1,400 1,250 2,700 The commercial milestones amounting to £1,250k detailed above and outstanding at 30 June 2015 (2014: £1,250k) require the recognition of £5m of Genedrive® related income or contractual income commitments of a minimum combined value of £5m from any of a list of 16 IVD companies. The value at which Consideration shares are to be issued is to be calculated by reference to LSE daily share price over a 5 day period commencing 30 days after the date that the achievement of the milestone is announced. The Consideration shares are subject to a “lock-in” provision, under which the Vendor covenants not to sell Consideration shares for a period of up to 24 months without the consent of the Company, except in the event that an offer for the whole of the issued share capital of the Company is received and which is either recommended by the Board or becomes unconditional as to acceptances. Deferred consideration of £50k was paid in cash on submission of Epistem products for regulatory approval. Deferred consideration of £1,400k was paid by the issue of 491,228 ordinary shares at £0.015 following granting by Drug Controller General (India) of regulatory approval of Epistem products. Epistem Holdings Plc Annual Report 2015 63 Page Title at start:Content Section at start: Notes to the Company Financial Statements continued For the year ended 30 June 2015 a. Investments continued Company continued In the event that an offer for the whole of the issued share capital of the Company or for the Genedrive® business is received and which is either recommended by the Board or is declared unconditional as to acceptances, then, the Vendor will become entitled to be allotted shares in the Company up to a maximum value of £2.65m, save to the extent that Consideration shares, as detailed above, have already been issued. The value at which these shares are issued will be the relevant offer price. The Board is of the opinion that, as at 30 June 2015, the value of further consideration of £1.25m (2014: £2.65m) was capable of assessment and provision for this liability has been made in these accounts. Based on the share price of 275p at 30 June 2015, this would result in the issue of 454,545 shares. Year ended 30 June 2015 Cost At 1 July 2014 Additions At 30 June 2015 Net book value At 30 June 2015 At 30 June 2014 Year ended 30 June 2014 Cost At 1 July 2013 Additions At 30 June 2014 Net book value At 30 June 2014 At 30 June 2013 Investment in subsidiaries £’000 6,228 170 6,398 6,398 6,228 Investment in subsidiaries £’000 6,070 158 6,228 6,228 6,070 Additions in the year ended 30 June 2015 comprised the fair value of the share options issued to employees of the subsidiary undertaking during the year of £170k (2014: £158k). Full details of the share options issued are set out in Note 20 to the consolidated financial statements. 64 Epistem Holdings Plc Annual Report 2015 Page Title at start:Content Section at start: Strategic Report Governance Financial Statements b. Amounts receivable from Group undertaking and other receivables Company Amounts receivable from Group undertakings c. Cash and cash equivalents Company Cash at bank and in hand Short term bank deposits 2015 £’000 17,516 17,516 2014 £’000 14,627 14,627 2015 £’000 161 3,546 3,707 2014 £’000 242 1,800 2,042 Cash and cash equivalents comprise current accounts held by the Group with immediate access and short term bank deposits with a maturity of three 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 6,178 (2014: 17,851) shares in Epistem Holdings Plc on behalf of the Epistem Share Investment Plan at a cost of £21k (2014: £67k). 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 year (2014 – £nil). Epistem Holdings Plc Annual Report 2015 65 Page Title at start:Content Section at start: Directors, Secretary and Advisers Directors, Secretary and Advisers Directors Ian Gilham (appointed 24 November 2014) Catherine Booth Allan Brown Roger Lloyd Robert Nolan John Rylands David Evans (Resigned 11 May 2015) Matthew Walls (Resigned 23 October 2015) 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 111 Old Broad Street London EC2N 1PH Auditors Haines Watts Chartered Accountants Bridge House Ashley Road Hale Cheshire WA14 2UT Legal Advisers Pinsent Masons LLP Princes Exchange 1 Earl Grey Street Edinburgh EH3 9AQ Controlling life-long tissue renewal Epistem 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 66 Epistem Holdings Plc Annual Report 2015 Page Title at start:Content Section at start: Strategic Report Governance Financial Statements Notes Epistem Holdings Plc Annual Report 2015 67 Page Title at start:Content Section at start: Notes 68 Epistem Holdings Plc Annual Report 2015 Page Title at start:Content Section at start: Page Title at start:Content Section at start: 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 5 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 Page Title at start:Content Section at start: