Haydale Graphene Industries plc
Annual Report 2018

Plain-text annual report

Haydale Graphene Industries Plc Annual Report And Accounts For the year ended 30 June 2018 Creating Material Change Contents STRATEGIC REPORT Chairman’s Statement Strategic Report GOVERNANCE Board of Directors Directors’ Report Corporate Governance Statement Directors’ Remuneration Report Statement of Directors’ Responsibilities FINANCIAL STATEMENTS Independent Auditor’s Report Consolidated Statements Consolidated Statement of Comprehensive Income Consolidated Statement of Financial Position Consolidated Statement of Changes in Equity Consolidated Statement of Cash Flows Notes to the Consolidated Financial Statements Parent Company Statements Company Balance Sheet of Haydale Graphene Industries Plc Company Statement of Changes in Equity Notes to the Company Financial Statements SHAREHOLDER INFORMATION Corporate Directory 1 3 9 11 13 18 22 23 27 28 29 30 31 62 63 64 69 251936 Haydale AR pp01-pp08.qxp 27/11/2018 18:38 Page 1 Haydale Graphene Industries plc | Annual Report & Accounts 2018 Chairman’s Statement Introduction I am pleased to present the Haydale Graphene Industries Plc’s (“Haydale”, the “Group” or the “Company”) full year audited results to 30 June 2018 (“FY18”). The year under review has been a busy one for Haydale, building on the foundations of the previous year, integrating, investing in and growing the revenues of the two acquisitions made in the prior year, launching a specialist graphene ink operation facility in Taiwan and opening new markets for our advanced graphene and nanomaterials products. At the beginning of the year we split the Group’s customer facing operations into two sales generating strategic business units (SBU) which has proved to be a beneficial stepping stone in our operational development, increasing our revenues across both SBUs from those generated in the prior year ended 30 June 2017 (“FY17”). Summary financials Total income for FY18 of £4.23 million (FY17: £3.91 million), comprised commercial revenues of £3.40 million (FY17: £3.00 million) and grant income of £0.83 million (FY17: £0.90 million). We continued to invest in increasing our know-how, knowledge and understanding of mixing and dispersion techniques alongside our industry-leading collaboration partners; being the bedrock for successful commercial sales. As a leader in the graphene industry, an important KPI for Haydale is the amount of income that we generate from the sale of our graphene-related products and services. In FY18, I’m pleased that this figure remained in excess of £1.0 million for the second successive year, but more importantly it was made up from sales to more than 50 different customers across our countries of operation, almost double that of the prior year. We expect to be able to build further on this figure in the coming years. Operations During the year under review we set up a graphene and specialty ink manufacturing facility in Taiwan, targeting the $15 billion biomedical screen-printed sensors for the self-monitoring blood glucose market. This now takes our international operating sites to six, with two in the UK and one in each of the USA, Thailand, South Korea and Taiwan. Our Thailand operation is going from strength to strength and expects to build further on its improving sales in the current financial year ending 30 June 2019 (“FY19”). In particular, following successful functionalisation trials, we are delighted to have secured the sale of one of our HT60 plasma reactors to one of Thailand’s leading Petro- chemical processors (final commissioning is due in Q1 of FY19), as well as long-term consulting contracts. The customer intends to add value to certain bi-products arising from their manufacturing process using our functionalisation capabilities. Our USA facility, which was successfully rebranded to Haydale Ceramic Technologies (“HCT”) during the year, manufactures a range of our proprietary silicon carbide micro-fibres (“SiC”) which 1 add strength, toughness and anti-scratch properties to existing materials. Despite taking longer than we had expected, HCT has now signed a number of long-term supply contracts with world- wide businesses that incorporate HCT’s SiC in the manufacture of their hard-edged cutting tools and, as of 10 September 2018, had a long-term order book of approximately £4.15 million ($5.46 million) for delivery over the coming years, providing excellent revenue visibility. HCT has been developing new markets for its products and has successfully integrated its SiC into a major US-based paint and coatings customer where sales commenced in October 2017 and were approximately £0.22 million in FY18. Pleasingly, sales volumes in current financial year to this customer are continuing at higher monthly rates than in FY18. Our South Korean sales office has secured SiC orders of approximately £0.09 million from industrial giant, Taegu Tec Ltd, based in South Korea. that we expect to increase in FY19. We have received positive feedback from a major oil conglomerate on the benefits of our SiC as a structural enhancer of their catalysts, a crucial part in the petrochemical refining process. We have high hopes of developing this new market opportunity in FY19 as our product offers a real benefit to an industry-wide problem. Rather than just sell SiC “powder”, we took the decision in FY18 to add value to our SiC micro fibres by investing in our own in- house US manufacturing capabilities to address a growing market in selling our proprietary SiC cutting tools (“blanks”). We generated maiden sales of approximately £0.1 million in FY18, initially through selling third-party contract manufactured SiC blanks, but encountered supply chain issues from our European contractors which led to us deciding to accelerate our investment in our own capabilities. Our in-house manufacturing equipment is expected to be commissioned by the end of this calendar year with sales of product coming through in H2 of FY19. During the year, we delivered phase 1 of a project to build a novel Automotive panel production line for Everpower in China. The sales value for phase 1 was approximately £0.28 million and phase 2 is expected to commence in Q3 of FY19, where the target application is initially focussed on internal car panels for the burgeoning Chinese auto industry. The graphene teams in Loughborough and Ammanford have been working tirelessly during the year to enhance a number of customers’ products through the appropriate functionalisation, mixing and dispersion of the correct commercially available graphene into their existing products. An excellent example of this was the strong commercial progress they have made over the last year with a global composite materials group to enhance mechanical properties for selected lines within their product range. The global customer paid approximately £0.11 million to Haydale in FY18 as we delivered various formulations of graphene enhanced masterbatches for trials. T R O P E R C G E T A R T S I E C N A N R E V O G S T N E M E T A T S L A C N A N I F I N O I T A M R O F N I R E D L O H E R A H S 251936 Haydale AR pp01-pp08.qxp 27/11/2018 18:38 Page 2 STRATEGIC REPORT Chairman’s Statement continued Overall progress for the Group this year has been solid, albeit we are disappointed that we did not achieve the revenue growth we had anticipated and we have previously updated the market on the reasons for this. We now believe that we have made the necessary changes to address those issues. There are significant growth opportunities with the new and adapted approach of using our global footprint as one team, with cross-selling and cross R&D focus, and a re-orientation to organic growth and cost monitoring. Business development surrounding the major advances we have seen in the core skills on inks, functionalisation and dispersion of graphene, in conjunction with the new market segment of SiC, sets Haydale up for the next phase of evolution and scale up. I would like to thank the staff, our advisors and my fellow Board members for their hard work and dedication in positioning the Group for the next stage of its growth. I would also like to thank our shareholders for their continued support. David Banks Interim Executive Chairman 17 September 2018 In collaboration with GKN, Cobham and BAE Systems, we have successfully increased the electrical conductivity of an aircraft aileron by 600% to defeat lighting strike and potentially reduce the need for heavy “parasitic copper” in a composite built aircraft. Whilst we acknowledge that material revenues from the commercial aircraft market will be longer term, its application in the fast-growing drone market is potentially considerable. We were delighted to be involved with the University of Central Lancaster, to develop the world’s first graphene skinned plane which was unveiled at the Farnborough Airshow in July 2018. Management As recently announced, Keith Broadbent, who has been with Haydale for just over a year as Managing Director of the Resins, Polymers and Composites business unit, has now stepped up and joined the Board of Directors as Chief Operating Officer. Keith brings extensive operational experience in driving sales and will have overall responsibility for delivery of the Group’s budgets. This allows Ray Gibbs, formerly CEO and now President, Business Development, to concentrate on global sales opportunities and focus on our key markets of ceramics, composites, conductive inks and elastomers. I have also taken on the role of Interim Executive Chairman during this important phase of the Group’s development. All businesses face challenges as they grow and develop and we have not been immune to a number of these challenges, specifically around sales order delays caused by the actions outside of our control by multi-national corporates. However, we now believe that we have in place an improved management structure capable of minimising these types of issues in the future. Outlook We enter FY19 with cautious optimism. The recently announced five-year SiC contract extension with an existing cutting tool customer has provided even more sales visibility for our US operation and our steadily increasing graphene ink sales to several print houses for the bio-medical sensor market is an encouraging start to the financial year. We are delighted to be a Tier-1 partner to the new Graphene Engineering Innovation Centre (GEIC) at the University of Manchester, where we will install and showcase one of our HT60 plasma reactors. The enhanced functionalisation now being generated from upgrades we have made to the reactor makes for exciting product improvement opportunities for the myriad of companies now looking at collaborating with the GEIC and its Tier-1 Graphene partners. The facility officially opens in December 2018. 2 251936 Haydale AR pp01-pp08.qxp 27/11/2018 18:38 Page 3 Haydale Graphene Industries plc | Annual Report & Accounts 2018 Strategic Report The directors present their Strategic Report for the year ended 30 June 2018. PRINCIPAL ACTIVITIES Haydale Graphene Industries Plc (“Haydale” or the “Group”) is the AIM listed group that uses tailored advanced materials, including graphene and silicon carbide micro-fibre (SiC). The Group’s vision is to use its knowledge of advanced materials and dispersion to become one of the World’s foremost creators of material change, enabling its customers to improve the performance of their products. The Group has developed regulatory approved proprietary graphene-based and other speciality inks and coatings for the print and biomedical sensor markets, as well as enhanced resins for the pre-preg carbon fibre market. In the USA, Haydale manufactures proprietary SiC micro-fibres and whiskers that strengthen ceramics and enable highly scratch and wear resistant coatings. Applications for SiC include corrosion barriers for oil and gas pipelines and hard-edged cutting tools for fashioning jet engine turbine blades from solid super alloy billets. The Group has operational activities in its six chosen geographies worldwide. In summary, these are: Haydale subsidiary Haydale Limited Location Principal activities Ammanford, Wales Haydale Composite Solutions Limited (“HCS”) Loughborough, England Haydale Technologies (Korea) Limited (“HTK”) Seoul, South Korea Haydale Technologies (Thailand) Company Limited (“HTT”) Bangkok, Thailand Haydale Technologies, Inc. (“HTI”) South Carolina, USA Haydale Technologies Taiwan Ltd (“HTW”) Kaohsiung, Taiwan resins, R&D operation, supporting polymers and composites strategic business unit, developing ink production capability the Principally consulting on advanced composites and elastomers design, R&D and testing specialist, full product covering development lifecycle the Dedicated sales servicing the fast-moving Korean, Chinese and Japanese markets Provides low-cost, high-value R&D and plasma functionalisation facilities, servicing the APAC region and supporting the Far East sales teams. Haydale Ceramic Technologies (formerly ACM) is HTI’s wholly owned operating subsidiary which produces and sells novel SiC micro fibres and whiskers Established in July 2017 as the production facility and technical centre for sales of speciality inks initially into the biomedical sensor market Evolution of Strategic Business Units From 1 July 2017, we created two strategic business units (SBU’s) within the Group, each with their own dedicated management teams to focus on and deliver our anticipated sales growth: 1. 2. Resins, Polymers and Composites (“RPC”); and Advanced Materials (including SiC and inks) (“AMAT”) The RPC SBU increased its commercial revenues in the year to £1.02 million from £0.87 million in FY17, whilst AMAT’s revenue increased to £2.39 million from £2.13 million in the prior year. RPC’s revenues include those generated by the three UK entities, whereas the revenue from AMAT is derived from the Group’s operations in the US and the Far East. The setting up of two business units, as detailed in last year’s strategic report, has delivered some success and ensured growth in all areas of the global business, albeit it did not deliver on our expected sales targets for the year. Accordingly, the dynamic nature of the growth requirement has necessitated an evolution in this approach, and consequently performance reporting for FY19 will see the three regional areas of: (1) USA; (2) UK (and Europe); and (3) Far East being brought together as a team under the newly created position of Group’s Chief Operating Officer, with Keith Broadbent, the UK’s MD for Resins, Polymers & Composites, having recently been promoted into the role, and becoming an executive director of Haydale Graphene Industries Plc. 3 T R O P E R C G E T A R T S I E C N A N R E V O G S T N E M E T A T S L A C N A N I F I N O I T A M R O F N I R E D L O H E R A H S 251936 Haydale AR pp01-pp08.qxp 27/11/2018 18:38 Page 4 STRATEGIC REPORT Strategic Report continued This change is designed to facilitate greater cross-selling and accountability across the Group, and success has already been seen with commercial activities on coatings with SiC now in progress in the UK, and graphene initiatives being targeted with major players in the US. The combination of our ink expertise in the UK with that in our Taiwan facility is also bearing fruit, not just on the technology side, but also sharing best operational practice on Health and Safety, Quality (ISO9001) and Production techniques. The Group’s US MD, Trevor Rudderham, has very recently decided to step away from the business for family reasons and, whilst his contribution to Group’s growth has been appreciated, his decision will allow the Group’s transition from SBU focus to global focus. This position will not be replaced. Plasma functionalisation and enhanced performance During the year we have successfully completed several key research and development projects to enhance Haydale’s capabilities and product offerings through the HDPlasTM process. We have made significant investments into capital equipment and our team’s knowledge base to enhance our HT60 plasma reactors’ performance and yield increased functionalisation levels to improve the concentration of bonded functional groups. Improving our product offering to compete in the advanced materials markets has been critical. Our ability to now offer enhanced functionalisation, including amines, means we can tailor functionalisation levels to further improve the dispersion characteristics of nanomaterials in wide ranging matrices. This has resulted in some significant graphene-related sales contracts being secured and delivered in the year under review. The UK In the UK, where RPC is principally situated, we have two operational facilities: Ammanford, South Wales; and Loughborough, East Midlands. We also opened a Group Head Office in Harwell Business Park, Oxfordshire in June 2018, to provide a central location for business development alongside significant potential customers operating in the aerospace and advanced materials sectors. Ammanford is primarily a R&D operation which also sources, handles, functionalises and processes nanomaterials using a suite of prototyping and analytical equipment, as well as its own patented plasma reactors (HT60s and HT200s). Ammanford is responsible for installing, commissioning and maintaining the plasma reactors used internally and by third parties. The aim is to provide the Group with sustainable commercially available graphene and other nanomaterials for both internal product development and third-party customers. In addition, we have recently recruited a dedicated technical sales person with a track record in growing conductive inks. In Loughborough, we are focussed on producing applications engineering solutions in composite and elastomer materials to enhance their mechanical properties (strength and stiffness), electrically conductive properties, and their thermally conductive properties. The USA Our US operation delivered the bulk of AMAT’s revenues for FY18, with sales of SiC at £2.11 million (FY17: £2.05 million). We rebranded the operation from Advanced Composite Materials (“ACM”) to Haydale Ceramic Technologies (“HCT”) during the year, having acquired ACM in the autumn of 2016. The SiC comparative sales figure for FY17 represents the sales generated in the period from acquisition to 30 June 2017, which is the same as that generated in the full 12 months to 30 June 2017. During the year, we began an investment programme to instal a new product line in HCT to add value to its proprietary SiC micro fibres by incorporating them with aluminium oxide to enable us to manufacture our own cutting tool blanks. Revenues from this new product line are expected to start in the second half of FY19. We also successfully opened up new markets for our SiC in the powder-coating anti-corrosion market where we generated maiden sales of approximately £0.22 million in FY18 and which have continued into the current year. Although sales in this market are at a lower gross profit margin than sales into the cutting tools market, the market size is potentially significantly larger. We also received encouraging feedback from a major oil conglomerate that has tested our SiC as a structural enhancer of catalysts which are a crucial part in the petrochemical refining process. HCT has a long-term sales order book for delivery of SiC which was added to post year end with a new five-year supply contract extension and, as at 10 September 2018, stood at approximately £4.15 million ($5.46 million). The Far East We now have three operational sites in the Far East: a sales office in Seoul, South Korea (HTK); an R&D and consulting facility in Bangkok, Thailand (HTT); and an ink formulation and manufacturing facility in Kaohsiung, Taiwan (HTW). HTT has quickly established itself as a technical and sales support service for our Korean and Taiwan activities. In FY18, HTT generated revenues of £0.23 million, up from £0.07 million in the prior year from a mixture of commercially funded contract research projects and the sale of an HT60 reactor to leading Thai petrochemical processor, IRPC, for functionalisation of some of its bi-products. Our high-class facility in the prestigious Thailand Science Park in Bangkok houses two of our patented plasma HT60 graphene functionalisation reactors, with one being owned by IRPC. The commissioning of IRPC’s reactor straddled the end of the financial year so some revenues associated with its sale will fall into FY19. 4 251936 Haydale AR pp01-pp08.qxp 27/11/2018 18:38 Page 5 Haydale Graphene Industries plc | Annual Report & Accounts 2018 Other developing graphene-related opportunities include PATit, Haydale’s software driven anti-counterfeiting device that “reads” our unique conductive transparent and opaque inks when printed onto a product label, proving the authenticity (or otherwise) of the goods. The specialist ink uses graphite block from our collaboration partner, Talga Resources. To date, we have signed a LOI with one of Thailand’s leading security printers. HTW was established in July 2017 and commenced providing graphene and other speciality inks samples principally to leading biomedical sensor printers in the diabetes testing market. The time that customers take to evaluate our graphene inks has proven to take longer than we originally anticipated yet, pleasingly, we are now receiving regular repeat orders from customers, albeit still in relatively small quantities. Once our existing facility is operating at maximum capacity and our commercial revenues are fully established, our intention is to relocate production to a larger 10,000sq ft unit. OPERATING REVIEW The Group’s key objective now is to accelerate the transition of the business from an R&D focussed operation into a sales and marketing organisation. The improvements in our analysis, testing and characterisation expertise, both in-house and in collaboration with external partners in academia and industry, have increased the pace at which customer solutions can be obtained as well as giving potential for additional IP owned products. We have invested heavily in our UK teams’ understanding of dispersion technologies, developing our knowledge of dispersibility of Nano materials into a wide range of polymer systems. This has included equipment and personnel, and the sharing of best practice throughout our company turning Haydale into a learning organisation. Haydale has been working with its key OEM, to plan and design the next generation of HDPlas™ reactors , which will provide the ability to meet commercial volumes in anticipation of the breakthrough driven by the increasing scope of the core and patented technology. Following the sale of a HT60 reactor to the Centre for Process Innovation (CPI) in 2015, CPI continues to assist Haydale to be at the forefront of graphene enhanced development in a range of applications. Working closely with Haydale’s technical team through grant funded projects, Haydale and CPI, have developed filter technology for oil/water separation, desalination and industrial waste water, evaluation of which will continue during the current financial year. At the end of June 2018, we were pleased to have been selected as one of the core Tier-1 partners of the University of Manchester’s recently completed £60 million Graphene Engineering Innovation Centre (GEIC) where one of our patented HT60 plasma reactors is to be housed. This will help further functionalisation and applications knowledge across a range of graphene and other 2D materials where correct chemical bonding is a key part ensuring graphene disperses uniformly within its host material. In the UK, our work on inks over the past year has been focused on the commercialisation of our patented pressure sensor and screen printable inks. Over the next 12 months, Haydale will continue to focus on bringing innovative and novel printed solutions to the market and has invested in it sales team to realise this potential. Other ink applications include wearables, focussed around a contract with The English Institute of Sport, as announced today. Non-regulated markets, such as sporting goods, provide potentially significant short-term revenue opportunities for Haydale. An example of which has been supply during the year of graphene-enhanced carbon fibre pre-preg to a high specification bespoke UK bicycle manufacturer, which has met with some success. Progress on two other longer-term projects continues, albeit slower than originally anticipated. Testing by Flowtite A/S of graphene-enhanced resins for their glass reinforced pipe systems took longer than anticipated and, whilst it showed certain improvements, there remains the need for further testing. Importantly, progress has been made but the incorporation of lab-based improvements into a full-blown production process is the key challenge, with functionalisation and dispersion in harmony with the manufacturing process still requiring further work. The Haydale and Flowtite teams are regrouping next month to determine next steps. Results from the work carried out with Huntsman has subsequently significantly benefited other trials carried out with specific applications for component pre-preg in less regulated markets such as sports goods (cycles) and low volume automotive components. We continue to work on improvements in incorporating Haydale’s graphene dispersions into Huntsman specific high value, specialist applications. Grant Funded Projects During the year under review, the Group has been busy progressing R&D programmes with important commercial partners where development of commercially viable end products is a pre-requisite of securing each projects’ funding. Income from such projects totalled £0.83 million for the year under review (FY17: £0.91 million) and, as at 10 September 2018, the Group had secured grant funded projects worth approximately £0.86 million for delivery over the coming years. 5 T R O P E R C G E T A R T S I E C N A N R E V O G S T N E M E T A T S L A C N A N I F I N O I T A M R O F N I R E D L O H E R A H S 251936 Haydale AR pp01-pp08.qxp 27/11/2018 18:38 Page 6 STRATEGIC REPORT Strategic Report continued Management and Personnel We have continued to invest in our people across the Group during the year, which now employs 79 people across five countries (FY17: 70). In July 2017, David Banks replaced John Knowles as non-executive Chairman and, since the year end, has become the Group’s Interim Executive Chairman. We further strengthened other key management with the recruitment in July 2017 of Keith Broadbent as MD of the RPC SBU. Keith has successfully demonstrated his operational and commercial capabilities during the past year such that, post year end, Keith has been promoted to the newly created role of the Group’s Chief Operating Officer and as a director of the Company. In June 2018, Ray Gibbs, who has served as the Company’s Chief Executive Officer since 2013, informed the Board of his intention to step down as CEO in order to concentrate on the Group’s business development activities. Ray was appointed to his new role as President, Business Development in early September 2018. Patents, IP and Licensing Our patents are process patents in key selected strategic territories where their use is as a blocking prior art tool. We are aware of one patent application by a third party where the examiner threw out their claims citing Haydale’s patents as prior art. Our critical IP however, is our processing, mixing and dispersion knowledge and know-how derived from the work we have carried out in conjunction with Huntsman, together with the FDA approved ink formulations that have been developed in the Far East. We are in the process of documenting our knowledge and know-how IP, including ink recipes and masterbatching techniques. The Group currently holds patents in the US, UK, Europe, China, Japan and Australia. Key Performance Indicators (“KPIs”) The Group’s KPIs are its financial metrics are its revenues, graphene related income, gross profit margin, grant income, adjusted EBITDA, cash position, total borrowings and long-term sales order book as follows: FINANCIAL REVIEW The Financial Review should be read in conjunction with the consolidated financial statements of the Group and the notes thereto. The consolidated financial statements are presented under International Financial Reporting Standards as adopted by the European Union and are set out on pages 27 to 61. The financial statements of the Company continue to be prepared in accordance with FRS 101 and are set out on pages 62 to 68. Statement of Comprehensive Income In the year under review, the Group’s three principal areas of income were: (i) graphene-enhanced and advanced composite consulting services; (ii) sale of silicon carbide whiskers and fibres; and (iii) long-term graphene-related grant funded projects. The Group’s total income for the year ended 30 June 2018 of £4.23 million (FY17: £3.91 million), comprised commercial revenues of £3.40 million (FY17: £3.00 million) and grant income of £0.83 million (FY17: £0.90 million). Although the Group has made significant progress during the year, the 8 per cent. increase in income year-on-year was than management’s expectations. The Group’s income suffered in the second half of FY18 from a combination of specific customers requesting to defer shipment of product into the current financial year and longer than anticipated lead times by customers to reach commercial volumes. lower The Group’s gross profit, which excludes the income from grant funded projects was £2.0 million (FY17: £2.1 million) delivering a gross profit margin of 59% (FY17: 70%). The reduction in margin was primarily due to a different sales mix from the Group’s US operations as it looks to expand the markets for its products. The Group’s adjusted EBITDA (adjusted for share-based payment charges, profit/loss on disposal of property, plant and equipment and profit/loss on disposal of intangible assets) was a loss of £4.89 million (FY17: £4.19 million). The Directors consider that adjusted EBITDA is a more useful measure of the Group’s performance and comparative performance than EBITDA because it is a closer measure to operating cashflow and it reduces the effects of one-off transactions and other non-cash items. FY18 (£’000) FY17 (£’000) Revenue 3,403 3,004 Gross profit margin 59% 70% Income from graphene related products and services 1,070 1,020 Adjusted EBITDA (4,892) (4,193) Cash position 5,092 2,091 Borrowings 896 1,270 Long-term sales order book* 4,674 5,400 * The figure increased to £5.19 million as at 10 September 2018 At the year end, the Group’s contracted order book stood at £4.67 million (FY17: £5.40 million) and, since the year end, additional long term orders have been secured resulting in an order book as at 10 September 2018 of £5.19 million to be delivered over the coming years. Total administrative costs increased approximately 6 per cent. In the year to £8.85 million (FY17: £8.35 million). During the year, we continued to invest in increasing our know-how, knowledge and understanding of mixing and dispersion techniques alongside our industry leading collaboration partners. Overall R&D spend for the year was £1.05 million (FY17: £1.15 million), of which £0.88 million was expensed during the year (FY17: £0.91 million), with the balance of £0.18 million being capitalised, (FY17: £0.24 6 251936 Haydale AR pp01-pp08.qxp 27/11/2018 18:38 Page 7 Haydale Graphene Industries plc | Annual Report & Accounts 2018 million). This internal funded development expenditure is expected to lead to sales of new products in future financial years. The Group’s other administrative costs for the year totaled £7.68 million (FY17: £7.09 million), the increase reflecting the investment in our Far East operations during the year, specifically in Taiwan. Overall, the loss from before tax for the year was £6.12 million (FY17: £5.64 million loss), and included non-cash items of £1.17 million (FY17: £1.14 million). The loss per share for the year reduced marginally to £0.22 (FY17: £0.28 loss). Statement of Financial Position and Cashflows As at 30 June 2018, net assets amounted to £12.54 million (2017: £8.91 million), including cash balances of £5.09 million (2017: £2.10 million). Other current assets decreased to £2.56 million at the year end (2017: £2.89 million), and current liabilities reduced to £2.51 million as at 30 June 2018 (2017: £2.89 million). Deferred consideration of £0.47 million was settled during the year, being amounts due to the vendors following the acquisition of ACM in 2016. Net cash outflow from operating activities, before working capital movements for the year was £4.86 million (2017: £4.19 million), the principal contributing factor being the loss from operations activities of £6.02 million (2017: £5.34 million). Expenditure on capital equipment again utilised a significant portion of cash during the year at £0.72 million (FY17: £0.42 million). Capital Structure and Funding As at 30 June 2018, the Company had 27,328,773 ordinary shares in issue (2017: 19,597,713). During the year, the Company issued 7,731,060 new ordinary shares, in connection with the Company’s placing and offer for subscription which raised £9.28 million (before expenses) and was completed on 30 October 2017. No options were exercised into ordinary shares during the year (FY17: 39,500). The Group repaid borrowings of £0.47 million during the year (FY17: £2.82 million), principally in relation to the Group’s US borrowing facilities which are secured on the Group’s US based tangible assets. This in turn reduced Haydale’s financing costs in the year to £0.1 million from £0.3 million in the prior year. The Group’s total borrowings at the year end were £0.90 million (2017: £1.27 million), all of which were held by the Group’s US subsidiaries. Haydale’s objectives when managing capital are to safeguard the Group’s ability to continue as a going concern in order to provide return to equity holders of the Company and benefits to other stakeholders and to maintain an optimal capital structure to reduce the cost of capital. The Group manages this objective through tight control of its cash resources to meet its forecast future cash requirements. PRINCIPAL RISKS AND UNCERTAINTIES The Board considers that the principal risks and uncertainties facing the Group may be summarised as follows: Health and Safety Many of the Group’s products of advanced materials are nano in size and, although there is little actual evidence of any health risks associated with the handling of the Group’s products, there is a theoretical risk that the Group’s products could be a danger to health if an individual is exposed to and/or inhales/ingests some of the Group’s products. The Group takes health and safety very seriously and manages the potential health and safety risk by regular staff training and restricting activities to only certain qualified individuals. Acceptance of the Group’s Products The success of the Group will depend on the market’s acceptance of, and attribution of value to, advanced materials technology developed by the Group based on successfully mixing and dispersing raw, mined graphite and other synthetically produced graphenes into customers’ existing products in order to improve the mechanical, thermal or electrical properties of the customers’ existing products. Notwithstanding the technical merits of the processes developed by the Group, and the extensive market and product research carried out by management to assess the likelihood of acceptance of the Group’s products, there can be no guarantee that its targeted customer base for the processes will ultimately purchase the Group’s products. Rapidity of product take up While the Group makes every effort to establish sensible timelines for customer engagement and purchasing of Haydale products, there is often unforeseen delays (by both parties) in forecasting the commencement of sales. There may be regulatory hurdles to overcome and end customer risk aversion in accepting a new nanomaterial enhanced product. Additionally, a change of senior management or a corporate event such as a merger can cause revisions in customer requirements and often cessation of product development. IP portfolio, covering Intellectual Property Risk The Group’s success will depend in part on its ability to maintain adequate protection of its its manufacturing process, additional processes, products and applications, including in relation to the development of specific functionalisation of graphene and other types of carbon-based nanomaterials for use in particular applications. The IP on which the Group’s business is based is a combination of granted patents, patent applications and confidential know-how. 7 T R O P E R C G E T A R T S I E C N A N R E V O G S T N E M E T A T S L A C N A N I F I N O I T A M R O F N I R E D L O H E R A H S 251936 Haydale AR pp01-pp08.qxp 27/11/2018 18:38 Page 8 STRATEGIC REPORT Strategic Report continued The Group aims to mitigate any risk that any of the Group’s patents will not be held valid if challenged, or that third parties will claim rights in, or ownership of, the patents and other proprietary rights held by the Group through general vigilance, regular international IP searches as well as monitoring activities and regulations for developments in copyright/intellectual property law and enforcement. Growth Risk Expansion of the business of the Group may place additional demands on the Group’s management administrative and technological resources and marketing capabilities, and may require additional capital expenditure. The Group monitors the additional demands on resources on a regular basis and strengthens resources as necessary. If the Group is unable to manage any such expansion effectively, then this may adversely impact the business, development, financial condition, results of operations, prospects, profits, cash flow and reputation of the Group. Competition Risk The Group’s current and potential competitors include companies and academic institutions, many of whom have significantly greater financial resources than the Group and management regularly reviews the competitive landscape. There can be no assurance that competitors will not succeed in developing products that are more effective or economic than any developed by the Group or which would render the Group’s products non-competitive or obsolete. Dependence on Key Personnel The Group’s business, development and prospects are dependent upon the continued services and performance of its Directors. The experience of the Group’s personnel helps provide the Group with a competitive advantage. The Directors believe that the loss of services of any existing key executives, for any reason, or failure to attract and retain necessary additional personnel, could adversely impact on the business, development, financial condition, results of operations and prospects of the Group. The Group aims to mitigate this risk by providing well-structured and competitive reward and benefit packages that ensure our ability to attract and retain key employees. The impact of Brexit The UK vote to leave the EU (Brexit) has not had a direct material impact on the Group’s performance in the current reporting period. However, Brexit is likely to bring uncertainty in the following areas: • Materials: the ability of the Group to import graphene and export its products, together with fluctuations in the value of Sterling may, have an impact on the Group’s operations. • • Regulations: the Group is subject to the relevant regulations, including materials handling, within the jurisdictions that it operates, which include the EU. Any material adverse changes to the requirement for UK based business to adopt additional regulations as a result of Brexit may have a detrimental effect on the Group’s operations. Grant income: the Group has previously benefitted from EU grant funds, specifically the Horizon 2020 Research and Innovation programme. However, the Group has, in the last 18 months, offset the loss of access to Horizon 2020, with additional grant awards from Innovate UK. The Group will respond to the challenges that Brexit brings once negotiations are at an advanced stage. By order of the Board David Banks Interim Executive Chairman 17 September 2018 8 251936 Haydale AR pp09-pp26.qxp 27/11/2018 18:38 Page 9 Haydale Graphene Industries plc | Annual Report & Accounts 2018 Board of Directors The Haydale board consists of experienced commercial directors from a range of industries that include engineering, retail, finance and accounting, high technology and the petro-chemical industries. Brief biographies of each of the directors are set out below. 1. David Doidge Richard Banks, Interim-executive Chairman David Banks started in Stock Broking in Birmingham in 1979 with Harris, Allday, Lea and Brooks before moving to London and becoming an Institutional Salesman at Panmure Gordon where he was acclaimed in the Automotive, Engineering, Aerospace and Motor Distributors sectors. He subsequently became a Corporate Broker advising many companies on their Corporate Structure, Strategy, Messaging and Presentations. He also raised the Capital for many of these Companies both at IPO and in Secondary fund raises. David joined Haydale as Non-executive Chairman in July 2017 and was appointed as Interim-Executive Chairman on 5 September 2018 2. Keith Broadbent; Chief Operating Officer Keith joined Haydale in July 2017 as head of its Resins, Polymers and Composites Strategic Business Unit (RPC SBU) and as Managing Director of Haydale Composites Solutions Ltd. Prior to joining Haydale, Keith held a number of senior operational and commercial positions which covered aerospace, automotive, defence, automotive, marine and medical sectors. His experience includes significant multi-site responsibilities in both the UK and internationally. The companies he has worked for include Princess Yachts International, Sunseeker, TT Electronics and most recently at Ultra Electronics. Keith has demonstrated a strong track record in the delivery of budgets, high level customer service and enhancing shareholder value. Keith was appointed as the Group’s Chief Operating Officer on 5 September 2018. 3. Raymond (Ray) John Gibbs BA (Hons) FCA, President, Business Development Ray Gibbs is a Chartered Accountant, and former Deloitte audit and corporate finance partner for 9 years. He has spent the last 21 years in industry as CFO or commercial director of high technology and fast-moving consumer goods businesses both in the quoted and private arenas with sales ranging from £0.5 million to £500 million. He was a former CFO of Chemring Group Plc. Ray is a Board Member of the USA based National Graphene Association and is the UK Chairman of the UK and China Joint Working Group on Graphene Standardisation, organised by the BSI Group. Ray was part of the original Haydale Graphene Industries’ management team that acquired Haydale Limited in 2010, was its CEO between 2013 and 2018, and was appointed as President, Business Development on 5 September 2018. 9 4. Matthew (Matt) Graham Wood BA (Hons) FCA, Finance Director and Company Secretary Matt Wood is a Chartered Accountant and experienced finance director and corporate finance professional with a background in advising quoted growth companies for almost 20 years. A former nomad, since 2006, Matt has worked as a finance and non-executive director of AIM companies since 2006 and joined Haydale in early 2014 before its AIM IPO. Matt brings a wealth of experience of Plc financial reporting, corporate governance and general board advisory. Matt is an approved person by the Financial Conduct Authority and holds a first-class degree in Economics. 5. Roger Anthony Smith BSc (Hons), Executive Director Roger Smith has over 30 years of experience in building and developing technology-based businesses having graduated with a degree in Physics. Roger has managed and, as their Managing Director, led two start up businesses to profitable multi-million pound revenue postions with successful exits. Roger has served as Commercial Director with Bureau Veritas SA, a French industrial services business, and most recently as Senior Vice President of Petrofac, a global oilfield services group. Roger was one of the original Haydale Graphene Industries' management team that acquired Haydale Ltd in 2010 and acted as one of its non-excective director until July 2017. From July 2017 Roger has been using his background in business development and account management to assist Haydale to accelerate its graphene sales. Roger is Non Executive Chairman of SRJ Technologies Ltd and a Non Executive Director of Inductosense Ltd. 6. Roger James Humm MBA BSc (Hons) FCA, Senior Independent Non-Executive Director Roger Humm is an experienced Commercial and Finance Director with extensive knowledge of high-growth technology companies. He brings experience of financial reporting, corporate governance, internal control and risk management from multiple board roles in both public and private companies. He currently acts as Chief Financial Officer at Boxarr Limited and G-Volution Limited, is a Trustee Director of the Oxford Instruments pension scheme and chairs the Investment Committee of the University of Bristol Enterprise Funds. In these roles he provides general support to management teams to ensure effective performance and good communication with all stakeholders. Roger has previously held corporate, financial and senior management roles with Oxford Instruments plc both in the UK and USA, including responsibility for corporate development, intellectual property management and establishing a corporate venturing portfolio. Roger gained his BSc in microbiology and virology from Warwick University before qualifying as a chartered accountant with Grant Thornton. He has an MBA from the University of Bath. T R O P E R C G E T A R T S I E C N A N R E V O G S T N E M E T A T S L A C N A N I F I N O I T A M R O F N I R E D L O H E R A H S 251936 Haydale AR pp09-pp26.qxp 27/11/2018 18:38 Page 10 GOVERNANCE Board of Directors continued Board of Directors 7. Graham Dudley Eves MA, Non-Executive Director Graham Eves joined GKN plc in 1967 where he spent 13 years operating across multiple overseas jurisdictions including, for the last 5 years, setting up and running a special operation for GKN plc’s head office in Switzerland. He returned to the UK in 1980 to work in venture capital and establish his own international business consultancy. His main activities covered advising a range of German, North American and Japanese automotive component/technology suppliers and he co-founded and was chairman of an automotive technology company, Mechadyne (now part of KolbenschmidtPierburg AG). Graham is a non- executive director of AB Dynamics plc. He was on the AIM advisory committee of the London Stock Exchange for 6 years and has a Master of Arts degree in Modern and Medieval Languages from the University of Cambridge. 10 251936 Haydale AR pp09-pp26.qxp 27/11/2018 18:38 Page 11 Haydale Graphene Industries plc | Annual Report & Accounts 2018 Directors’ Report The directors present their report and the audited financial statements for Haydale Graphene Industries Plc (the “Company”), a public company incorporated and registered in England and Wales under the Companies Act 2016 with company number 7228939, and its subsidiaries (together the “Group”) for the year ended 30 June 2018. There are a number of items required to be included in the Directors’ Report which are covered elsewhere in the annual report. Details of directors’ remuneration and share options are given in the Directors’ Remuneration Report, details of the use of financial instruments and financial risk management objectives and policies are given in note 22 of the financial statements and the following are covered in the Strategic Report: • • • • Principal Activities Review of the Business and Future Developments Key Performance Indicators Principal Risks and Uncertainties Research and development During the year ended 30 June 2018, the Group invested £0.88 million (2017: £0.91 million) in research and development activities which were expensed during the year, together with a further £0.18 million (2017: £0.24 million) of development expenditure which has been capitalised. A review of this expenditure is included in the Strategic Report. Dividends The directors do not propose the payment of a dividend (2017: nil). Substantial Shareholdings As at 30 June 2018, the Company had been advised by the following shareholders, other than the directors, that they held interests of 3% or more in the Company’s ordinary share capital: Name of Shareholder Number of Ordinary Shares % of Share Capital Advanced Waste & Water Technology Environmental Ltd* Credit Suisse Group AG Legal & General Group Plc 1,958,451 1,427,735 1,050,000 7.17 5.22 3.84 * shares transferred from Everpower International Holdings Co. Ltd, part of the same group. In addition to those shareholders set out in the table above who had informed the Company of their holding of Ordinary Shares, as they are required to due pursuant to the Companies Act and under the AIM Rules for Companies, as at 30 June 2018, the Company’s registered shareholders with interests of 3% or more in the Company’s ordinary share capital was as follows: Name of Shareholder Number of Ordinary Shares % of Share Capital Lynchwood Nominees Limited Advanced Waste & Water Technology Environmental Ltd Credit Suisse Group AG Cheviot Capital (Nominees) Ltd HSBC Global Custody Nominee (UK) Limited Hargreaves Lansdown (Nominees) Limited J M Finn Nominees Limited 2,128,584 1,958,451 1,427,735 1,221,519 1,050,000 1,009,749 948,170 7.79 7.17 5.22 4.47 3.84 3.69 3.47 Directors The following directors have held office since 1 July 2017 and up to the date of signing the financial statements: David Banks (Appointed 13 July 2017) Graham Eves Raymond Gibbs Roger Humm Roger Smith Matthew Wood John Knowles (retired 13 July 2017) Keith Broadbent (Appointed 5 September 2018) 1111 T R O P E R C G E T A R T S I E C N A N R E V O G S T N E M E T A T S L A C N A N I F I N O I T A M R O F N I R E D L O H E R A H S 251936 Haydale AR pp09-pp26.qxp 27/11/2018 18:38 Page 12 GOVERNANCE Directors’ Report continued Directors’ Interests in Ordinary Shares The directors, who held office at 30 June 2018, had the following interests in ordinary shares of the Company: Director Ray Gibbs Roger Smith David Banks Roger Humm1 Matthew Wood Number of Shares at 30 June 2018 % of Share Capital 494,686 288,455 41,667 48,776 18,154 1.81 1.06 0.15 0.18 0.07 1. Includes 42,526 ordinary shares held by his wife, Wendy Humm. Between 30 June 2018 and the date of this report there has been no change in the beneficial interests of directors in shares or share options as disclosed in this report. 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. Post Balance Sheet Events Since 30 June 2018, there has been the following changes to the Board of directors of the Company: • • • • The appointment of David Banks as Interim Executive Chairman in September 2018; The appointment of Keith Broadbent as the Group’s Chief Operating Officer and a member of the Board in September 2018; The appointment of Roger Humm as Senior Independent Non-executive Director in September 2018; and The appointment of Ray Gibbs as President, Business Development, in September 2018, having previously held the position of the Group’s Chief Executive Officer. From 1 July 2018, the Group changed its internal reporting system to set up a third profit-centric strategic business units (“SBUs”) known as “RPC”, “AMAT” & “APAC”. For the current financial year and beyond, the Group intends to report sales and profits under these three SBUs. Foreign Currency, Interest Rate, Credit and Liquidity Risk The directors do not consider any of these potential risks to pose a significant risk to the Group or its operations over the coming year. See note 22, Financial Instruments, for further details. Disclosure of information to auditors All of the current directors have taken all the steps that they ought to have taken to make themselves aware of any information needed by the Company’s auditors for the purposes of their audit and to establish that the auditors are aware of that information. The directors are not aware of any relevant audit information of which the auditors are unaware. Independent auditors The auditors, BDO LLP have expressed their willingness to continue in office and a resolution concerning their re-appointment will be proposed at the annual general meeting. Statement by the Directors The Directors consider the annual report and accounts, taken as a whole is fair, balanced and understandable and provides the information necessary for shareholders to assess the Company’s position and performance, business model and strategy. By order of the Board David Banks Interim Executive Chairman 17 September 2018 12 251936 Haydale AR pp09-pp26.qxp 27/11/2018 18:38 Page 13 Haydale Graphene Industries plc | Annual Report & Accounts 2018 Corporate Governance Statement Overview As Chairman of the Board of Directors of Haydale Graphene Industries Plc (Haydale or the Company/Group as the context requires), it is my responsibility to ensure that Haydale has both sound corporate governance and an effective Board. This is achieved by maintaining a corporate governance framework that includes regular meetings of the board and its committees, with informative, relevant and timely management information flow. We have introduced effective Board evaluation practices and will carry out a regular review of our governance processes to ensure we are constantly improving. The Board members have extensive experience of managing AIM Companies, including detailed knowledge of the AIM Rules and the Market Abuse Regulations. Haydale has decided to adopt the Quoted Companies Alliance Corporate Governance (QCA Code) and this statement follows the structure of these guidelines and summarises how we have applied the guidance. The Board considers that the Group complies with the QCA Code in all respects. A full overview of the Company’s compliance with the QCA Code is provided on the Company’s website at www.haydale.com. The Board believes that corporate governance is more than just a set of guidelines; rather it is a framework which underpins the core values for running the business in which we all believe, including a commitment to open and transparent communications with stakeholders. We believe that good corporate governance improves long-term success and performance, whilst reducing or mitigating risks. Changes that have been made to the Board’s composition that have had an impact on our corporate governance framework in the year ended 30 June 2018 and since the year end, include: • • • • • The appointment in July 2017 of David Banks as non-executive Chairman, replacing the retiring John Knowles; The appointment of Keith Broadbent as the Group’s Chief Operating Officer and a member of the Board in September 2018; The appointment of David Banks as Interim Executive Chairman in September 2018; The appointment of Roger Humm as Senior Independent Non-executive Director in September 2018; and The appointment of Ray Gibbs as President, Business Development, in September 2018, having previously held the position of the Group’s Chief Executive Officer. Board changes are discussed with the Company’s major shareholders in advance, where possible. In June 2018, the Board formed a Nominations Committee, the whole Board having previously carried out that function. The members of the Nominations Committee are myself, as Chair, Graham Eves and Roger Humm. Following my appointment as Interim Executive Chair in September 2018, I stepped down as a member of the Company’s Remuneration Committee. As part of our adoption of the QCA Code, we are in the planning stages of adopting a Group-wide employee evaluation process, including the Board, and an employee engagement survey, to commence in January 2019. The Company summarises how it complies with the 10 principles of the QCA below. A full explanation can be found on the Company’s website at www.haydale.com. Establish a strategy and business model which promotes long-term value for shareholders QCA Principles 1. The Board has concluded that the highest medium and long-term value can be delivered to its shareholders by the adoption of a single strategy for the Company; To use our knowledge of advanced materials and dispersion to be one of the World’s foremost creators of material change, enabling our customers to improve the performance of their products. To achieve this vision the Company aims to grow organically and, if necessary, by acquisition to extend the Group’s client base and geographical penetration, and use its existing expertise and global reach to generate synergies in the high growth advanced materials industry. Haydale’s business model is set out with the Strategic Report on pages 3-8 of this report and accounts. The Company intends to deliver shareholder returns initially through capital appreciation and eventually through distributions via dividends. Seek to understand and meet shareholder needs and expectations 2. The Board is committed to maintaining good communication and having constructive dialogue with its shareholders by providing effective communications through our Interim and Annual Reports along with Regulatory News Service announcements. We also use the Company’s website, www.haydale.com for both financial and general news relevant to shareholders. The Directors meet shareholders and other investors or potential investors at regular intervals during the year, especially during the Annual and Interim Results cycles. The Company also hosts broker and analyst meetings. David Banks is the Director appointed as the main point of contact for shareholder liaison. The Directors respond to all shareholder requests for meetings, and take on board 13 T R O P E R C G E T A R T S I E C N A N R E V O G S T N E M E T A T S L A C N A N I F I N O I T A M R O F N I R E D L O H E R A H S 251936 Haydale AR pp09-pp26.qxp 27/11/2018 18:38 Page 14 GOVERNANCE Corporate Governance Statement continued shareholder views. Roger Humm, the Senior Independent Non-executive Director (“SID”), will carry out shareholder liaison if the Chairman is not available or as an alternative. The Board keeps in mind the proportions of direct, nominee and institutional shareholders, and distributes communications accordingly. The whole Board attends the AGM. The AGM is regarded as an opportunity to meet, listen and present to shareholders and shareholders are encouraged to attend. In addition, the Company seeks feedback from key stakeholders, taking action where appropriate. The Company’s broker and NOMAD, Arden Partners, is briefed regularly and updates the Board during the year on shareholder expectations. Take into account wider stakeholder and social responsibilities and their implications for long-term success 3. The Board recognises that the long-term success of the Company is reliant upon the efforts of the employees of the Company and its collaboration partners, suppliers, regulators and other stakeholders. The Board has put in place a range of processes and systems to ensure that there is close oversight and contact with its key resources and relationships. The Company prepares a detailed budget annually which takes into account the Group’s long term strategy and its available key resources including staffing, working capital, production capacity and functionalisation capabilities. Everyone within the Group is a valued member of the team, and our aim is to help every individual achieve their full potential. We offer equal opportunities regardless of race, gender, gender identity or reassignment, age, disability, religion of sexual orientation. The Group is in the process of implementing a Company-wide policy to conduct employee engagement surveys, which will seek to understand any issues within the workforce which will be in place within the coming months. Embed effective risk management, considering both opportunities and threats, throughout the organisation 4. The Board recognises the need for an effective and well-defined risk management process, and whilst it oversees and regularly reviews the current risk management and internal control mechanisms, has delegated this responsibility primarily to the Audit Committee and senior management. The Company is in the process of adopting a risk register, which will be reviewed regularly by senior management and the Audit Committee. This report and accounts outlines the key risks to the business, see pages 7-8. The status of the key risks to the Company will be shared regularly with the Board, and the Board intends to thoroughly review the Company’s risk register to the Company on an annual basis. The Board does not currently deem it necessary for an internal audit function, having put in place experienced financial controllers in each of its key operational entities and jurisdictions. The Company went through an extensive Group audit tender process in the spring of 2018, which provided insight into areas where the Group could improve its financial reporting framework. Consequently, the Board believes that it now has in place effective governance and risk management processes, however, it will continue to monitor closely and regularly, assessing its effectiveness and will implement any changes that it deems appropriate. Maintain the board as a well-functioning, balanced team led by the Chair 5. The Board comprises five executive directors and two non-executive directors as follows: Executives • • • • • Interim Executive Chairman: Chief Operating Officer: Finance Director: President, Business Development: Executive Director: Non-executives • • Senior Independent Non-executive: Independent Non-executive: David Banks; Keith Broadbent; Matt Wood; Ray Gibbs; and Roger Smith. Roger Humm; and Graham Eves. Biographical details of the Directors can be found on pages 9 to 10 of this report and on the Company’s website at www.haydale.com. 14 251936 Haydale AR pp09-pp26.qxp 27/11/2018 18:38 Page 15 Haydale Graphene Industries plc | Annual Report & Accounts 2018 The full Board meets 8 times in the year according to the schedule of future meetings agreed at the beginning of each year, and also as and when required. In order to be efficient, the Directors meet formally and informally both in person and by telephone. Board and Committee document authors are made aware of proposed monthly deadlines through the schedule of meetings agreed at the beginning of the year. Board papers are prepared by the relevant personal (Chair, COO, FD, Business Development) and circulated to the Board at least 48 hours before meetings, allowing time for consideration and necessary clarifications before the meetings. During the year ended 30 June 2018, the Company held 12 board meetings (FY2017: 11), with each member’s attendance as follows: Director David Banks (appointed July 2017) Raymond Gibbs Matthew Wood Graham Eves Roger Humm Roger Smith John Knowles (retired July 2017) Anthony Belisario (retired December 2016) Dr Christopher Spacie (resigned July 2016) Number of board meetings attended FY2018 FY2017 12 12 12 11 12 12 – – – – 11 11 10 10 10 11 5 1 Attendance at the Company’s audit, remuneration and nomination committee meetings during the year ended 30 June 2018 was as follows: Number of committee meetings attended Committee member Audit Remuneration Nomination David Banks Graham Eves Roger Humm 3 3 4 2 2 2 1 1 1 Ensure that between them the Directors have the necessary up-to-date experience, skills and capabilities 6. The Non-executive Directors have both a breadth and depth of skills and experience to fulfil their roles. The Company believes that the current balance of skills in the Board as a whole, reflects a very broad range of personal, commercial and professional skills across geographies and industries and the Board has experience of public markets. Details of the Directors’ experience and areas of expertise are outlined on pages 9-10 of this report and accounts. The Non-executive Directors meet without the presence of the Executive Directors during the year, and also maintain ongoing communications with Executives between formal Board meetings. Evaluate board performance based on clear and relevant objectives, seeking continuous improvement 7. Every other year the Board expects to carry out an internal Board and Committee evaluation exercise, including that of the Chairman. The exercise will be led by Roger Humm, the SID. The areas of evaluation covered include Board structure and knowledge, operating effectiveness, operating efficiency, quality of information and ongoing professional development. Individual reviews of Non-executive Director performance will also be carried out by the SID, and the Chairman will undertake a review of the performance of the SID. The SID will also chair meetings of the non-executive directors, where necessary. 15 T R O P E R C G E T A R T S I E C N A N R E V O G S T N E M E T A T S L A C N A N I F I N O I T A M R O F N I R E D L O H E R A H S 251936 Haydale AR pp09-pp26.qxp 27/11/2018 18:38 Page 16 GOVERNANCE Corporate Governance Statement continued Promote a corporate culture that is based on ethical values and behaviours 8. The Board recognises that its decisions regarding strategy and risk will impact the corporate culture of the Company as a whole and that this will impact the performance of the Company. The Board is very aware that the tone and culture set by the Board will greatly impact all aspects of the Company as a whole and the way that employees behave. The corporate governance arrangements that the Board has adopted are designed to ensure that the Company delivers long-term value to its shareholders, and that shareholders have the opportunity to express their views and expectations for the Company in a manner that encourages open dialogue with the Board. Maintain governance structures and processes that are fit for purpose and support good decision-making by the board 9. The Board is committed to, and ultimately responsible for, high standards of corporate governance, and has chosen to adopt the QCA Corporate Governance Code. We review our corporate governance arrangements regularly and expect to evolve these over time, in line with the Company’s growth. The Board delegates responsibilities to Committees and individuals as it sees fit, with the Chairman being responsible for the effectiveness of the Board, and the Executive Directors being accountable for the management of the Company’s business and primary contact with shareholders. The Chairman is responsible for the leadership of the Board and ensuring its effectiveness in all aspects of its role. He is also responsible for creating the right Board dynamic and for ensuring that all important matters, in particular strategic decisions, receive adequate time and attention at Board meetings. The Executive Directors are responsible for the day-to-day running of the business: Keith Broadbent (Operations), Matt Wood (Finance), Ray Gibbs (Business Development) and Roger Smith (Business Development); as well as developing corporate strategy while the Non-Executive Directors are tasked with constructively challenging the decisions of executive management and satisfying themselves that the systems of business risk management and internal financial controls are robust. The role of the SID is to serve as a sounding board for the Chairman and act as an intermediary for other Directors. They are also available to shareholders if they have reason for concern that contact through the normal channels of the Executive Directors has failed to resolve. They are responsible for holding annual meetings with non-executives, without the Chairman present, to appraise the Chairman’s performance. The Board has adopted appropriate delegations of authority which sets out matters which are reserved to the Board as set out below: • • • • • • • • • • The Group’s strategy and vision Determining management’s performance and changes in senior personnel Approval of major capital expenditure Financial reporting, risk management and internal controls Contracts, including potential acquisitions or investments in new projects or products Corporate governance Approval of annual budgets Approval of annual and interim reports Approval of changes in equity or debt funding Dividend recommendations and policy The Board delegates authority to three Committees to assist in meeting its business objectives whilst ensuring a sound system of internal control and risk management. The Committees meet independently of Board meetings. Audit Committee The Audit Committee has three members, Roger Humm (Chair), Graham Eves and David Banks. The FD, Group FC and external auditors attend meetings by invitation. The Audit Committee is responsible for assisting the Board in fulfilling its financial and risk responsibilities. The Audit Committee oversees the financial reporting, risk management and internal control procedures. The Audit Committee advises the Board on the appointment and removal of the external auditor and discusses the nature, scope and results of the audit with the auditors. The Audit Committee reviews the extent of non-audit services provided by the auditors and reviews with them their independence and objectivity. The Audit Committee met four times during the year. The Audit Committee shall meet not less than three times in each financial year. 16 251936 Haydale AR pp09-pp26.qxp 27/11/2018 18:38 Page 17 Haydale Graphene Industries plc | Annual Report & Accounts 2018 Remuneration Committee The Directors’ Remuneration Report is set out on pages 18-21 of this Report and Accounts. As from 5 September 2018, the Remuneration Committee has two members, Graham Eves (Chair) and Roger Humm, with David Banks stepping down on 4 September 2018, following his appointment as Interim Executive Director. The members are all Independent Non-Executive Directors. Other members of the Board may attend the Committee’s meetings at the request of the Committee Chairman. The remit of the Committee is primarily to determine and agree with the Board the framework or broad policy for the remuneration of the Company’s Executive Directors and the Senior Management of the Group. The Remuneration Committee reviews the performance of the Executive Directors and makes recommendations to the Board on matters relating to their terms of employment and remuneration, including short term bonus and long-term incentives. The Remuneration Committee also considers the granting of share options pursuant to the Company’s share option schemes. The Remuneration Committee shall meet not less than twice a year and will meet on other occasions and as and when required. Nominations Committee The Nominations Committee was created in June 2018 and currently has three members, Graham Eves (Chair), Roger Humm and David Banks. The Nominations Committee reviews the structure, size and composition required of the Board compared to its current position and make recommendations to the Board, considers succession planning and nominates candidates to fill Board vacancies. The Nominations Committee shall meet at least once per year, and otherwise as necessary to consider proposals for Board appointments and other matters. 10. Communicate how the company is governed and is performing by maintaining a dialogue with shareholders and other relevant stakeholders The Board is committed to maintaining effective communication and having constructive dialogue with its shareholders. The Company intends to have close ongoing relationships with its private shareholders. Institutional shareholders and analysts and for them to have the opportunity to discuss issues and provide feedback at meetings with the Company. The Company receives reports from its corporate registrar and from Argus Vickers. In addition, all shareholders are encouraged to attend the Company’s Annual General Meeting. All 2017 AGM resolutions were passed comfortably. The Board maintains that, if there is a resolution passed at a General Meeting with 20% votes against, the Company will seek to understand the reason for the result and, where appropriate, take suitable action. By order of the Board David Banks Interim Executive Chairman 17 September 2018 17 T R O P E R C G E T A R T S I E C N A N R E V O G S T N E M E T A T S L A C N A N I F I N O I T A M R O F N I R E D L O H E R A H S 251936 Haydale AR pp09-pp26.qxp 27/11/2018 18:38 Page 18 GOVERNANCE Directors’ Remuneration Report REMUNERATION COMMITTEE The Company’s remuneration policy is the responsibility of the Remuneration Committee which was first established at the time of the Company’s admission to trading on AIM. The terms of reference of the Remuneration Committee are outlined below and in the Corporate Governance Statement on page 17. The members of the Remuneration Committee during the year under review and up until 4 September 2018 were Graham Eves (Chairman), David Banks and Roger Humm. As from 5 September 2018, its members are Graham Eves (Chairman) and Roger Humm, with David Banks having stepped off the committee following his appointment as Interim Executive Chairman. There is no requirement for the Company to prepare a Directors’ Remuneration Report under the AIM Rules, however the Directors have included this report voluntarily. Furthermore, the requirements of the 2006 Companies Act in respect of the Directors’ Remuneration Report have only been applied to the extent necessary as there is no requirement to prepare a Directors’ Remuneration Report under the Companies Act. The Remuneration Committee is required to meet at least twice per year and is responsible for considering executive remuneration. Executives may be invited to attend to assist the Remuneration Committee but no director or manager of the Company may be involved in any decisions as to their own remuneration. The terms of reference of the Committee do not encompass decisions to employ or dismiss Executives. The Committee does not have responsibilities for nominations to the Board, responsibility for which is with the recently formed Nomination Committee. Under the terms of reference of the Remuneration Committee, the remuneration of the Company's non-executive directors (including the chairman of the Board, if a non-executive) is a matter for the chairman of the Board (if executive) and the Company's executive directors. Directors’ remuneration for the year to 30 June 2018 is set out on page 21. The Remuneration Committee terms of reference require it to establish remuneration policy on the basis of various outcomes including developing remuneration packages needed to attract, retain and motivate executives of the quality required (but to avoid paying more than is necessary for this purpose) and to ensure that performance-related elements of remuneration form a significant proportion of the total remuneration package of executives and that such elements be designed to align executives’ interests with those of shareholders and to give such executives incentives to perform at the highest levels. Equity Based Incentive Schemes The Remuneration Committee believes that equity-based incentive schemes provide a strong incentive for retaining and attracting high calibre individuals. The Company currently has three equity-based incentive schemes in place. 2013 Share Option Scheme a) In May 2013, the Company adopted an EMI share option plan (“2013 Share Option Scheme”). During 2013, the Company granted options to executive directors and senior management over a total of 121,500 ordinary shares under the 2013 Share Option Scheme. There were no outstanding options in respect of this scheme at the year end and no further grants have been made under this scheme or are anticipated to be made in the future. 2014 Option Scheme b) In April 2014, the Company adopted a new share option scheme pursuant to which it may grant both EMI approved options and unapproved options (“2014 Option Scheme”). EMI approved options are subject to individual and overall limits. Potential grantees are employees and officers of the Company and members of the Group. During the year ended 30 June 2018, a total of 99,271 share options were granted under the 2014 Option Scheme (2017: 215,581 options granted) as follows: • 99,271 options on 15 December 2017 at an exercise price of 125.50p During the year ended 30 June 2018, 408,009 share options had lapsed (2017: nil) and no share options were exercised (2017: 39,500). At 30 June 2018, there were 619,360 unexercised options outstanding (2017: 928,098). 18 251936 Haydale AR pp09-pp26.qxp 27/11/2018 18:38 Page 19 Haydale Graphene Industries plc | Annual Report & Accounts 2018 The 2014 Share Option Scheme sets a limit of 10% of the issued share capital at the time of grant that can be used by the Company for share options. Options granted under this scheme may typically be exercised between the third and tenth anniversaries of grant provided the option holder remains an employee of a member of the Group. In certain circumstances, options may be exercised outside this window, for example in the event of death of the option holder or a change of control of the Company. Options can be granted under the scheme within 42 days of release of the annual and interim results and at other times in exceptional circumstances by resolution of the Board. No further options may be issued after the tenth anniversary of the date of adoption of the scheme. It is intended that options shall not be granted with an exercise price lower than the prevailing market value of an ordinary share at the time of grant. There are no individual or company performance targets to be met in order to be able to exercise the options. Long Term Incentive Plan (“LTIP”) c) In December 2017, the Company adopted the LTIP to incentivise the Group’s key management (“Key Management”) to deliver long- term value creation for shareholders, to ensure alignment with shareholders’ interests and to attract and retain high-quality individuals. Awards under the LTIP are structured as nominal cost options (£0.02) with a three-year vesting period and a seven-year life after vesting (“Exercise Period”). A single conditional grant of a maximum number of LTIP Awards (“Award”) can be made to the relevant member of the Key Management (“Award Holder”) at the outset. The performance conditions that dictate the proportion, if any, of the Award that is capable of exercise by the Award Holder during the Exercise Period, are based upon the Company’s sustainable share price performance during the period commencing on the first day of the 13th month following the date of grant and ending on the last day of the 120th month following the date of grant (“Performance Period”). Share price performance criteria The LTIP has been structured to ensure that value is created for shareholders before any value is delivered to the Key Management. Accordingly, should the Company’s closing mid-market share price not reach and remain at, or above, £2.20 for at least 15 consecutive trading days during the Performance Period (“Minimum Target”), then none of the Awards vest or is exercisable and the Awards will lapse in full. Should the Company’s closing mid-market share price reach and remain at or above £4.20 for at least 15 consecutive trading days during the Performance Period (“Maximum Target”), then 100% of the Awards vest and are exercisable. Between the Minimum Target and the Maximum Target, the % of the Awards that vest shall be pro-rata on a straight-line basis. The Awards may lapse in the event of cessation of employment save for certain circumstances, including inter alia, redundancy or retirement in which case, at the Company’s sole discretion and subject to performance criteria being met, the Exercise Period may be accelerated. 19 T R O P E R C G E T A R T S I E C N A N R E V O G S T N E M E T A T S L A C N A N I F I N O I T A M R O F N I R E D L O H E R A H S 251936 Haydale AR pp09-pp26.qxp 27/11/2018 18:38 Page 20 GOVERNANCE Directors’ Remuneration Report continued Grant of LTIP Awards On 15 December 2017, grants of LTIP Awards were made to the following members of the Key Management: Name and role Ray Gibbs Trevor Rudderham* Keith Broadbent Matt Wood Number of LTIP Awards granted (“Award”) Earliest exercise date Latest exercise date Minimum share price target before any Awards vest Maximum share price target for 100% of Awards to vest 819,863 14/12/20 14/12/27 409,932 14/12/20 14/12/27 409,932 14/12/20 14/12/27 341,610 14/12/20 14/12/27 £2.20 £2.20 £2.20 £2.20 £4.20 £4.20 £4.20 £4.20 * Trevor Rudderham left the Group post year end for family reasons, accordingly Mr Rudderham’s LTIP Award has lapsed. DIRECTORS’ INTERESTS IN SHARE OPTIONS The interests of directors in share options over ordinary shares during the year were as follows: 2014 Share Option Scheme Number Number of Number of EMI Unapproved Options Options First Exercise Date Exercise Price Expiry Date Director Date of Grant of LTIP Options Raymond Gibbs 3 April 2014 18 March 2015 19 May 2016 – – – 15 December 2017 819,863 Matthew Wood 3 April 2014 18 March 2015 19 May 2016 15 December 2017 341,610 101,190 39,408 3 April 2017 210p 3 April 2024 – – – – – – – 14,275 20,991 18 March 2018 134.5p 18 March 2025 19 May 2019 171.5p 19 May 2026 – 15 December 2020 2p 15 December 2027 32,337 7,137 8,396 3 April 2017 210p 3 April 2024 18 March 2018 134.5p 18 March 2025 19 May 2019 171.5p 19 May 2026 – 15 December 2020 2p 15 December 2027 David Banks 15 December 2017 – 100,000 100,000 15 December 2020 125.5p 15 December 2027 Graham Eves 3 April 2014 Roger Humm 3 April 2014 Roger Smith 3 April 2014 – – – 16,872 16,872 16,872 3 April 2017 3 April 2017 3 April 2017 210p 210p 210p 3 April 2024 3 April 2024 3 April 2024 No options were exercised by the directors during the year under review. The mid-market price of the Company’s ordinary shares at 30 June 2018 was 70p (2017: 175.50p). During the year to 30 June 2018, the mid-market price ranged from 70p to 186p (2017: 148.50p to 206p). 20 251936 Haydale AR pp09-pp26.qxp 27/11/2018 18:38 Page 21 Haydale Graphene Industries plc | Annual Report & Accounts 2018 DIRECTORS’ REMUNERATION The aggregate remuneration received by directors who served during the years ended 30 June 2018 and 30 June 2017 was as follows: £’000 Salary/Fee Benefits Year ended 30 June 2018 Year ended 30 June 2017 Total (excl. Pension) Total (incl. pension) Total (excl. pension) Total (incl. pension) Pension Pension Executive Directors R. Gibbs C. Spacie* M. Wood R. Smith** Non-Executive Directors A. Belisario *** J. Knowles**** D Banks***** G. Eves R. Humm * resigned on 31 July 2016 ** Part-time executive *** resigned on 13 December 2016 **** resigned on 13 July 2017 150 – 98 9 – 12 49 28 28 374 12 – 12 – – – – – – 162 – 110 9 – 12 49 28 28 24 398 9 – 6 – – – – – – 15 171 – 116 9 – 12 49 28 28 413 162 10 89 28 14 41 – 28 28 9 1 5 – – – – – – 171 11 94 28 14 41 - 28 28 400 15 415 ***** appointed on 13 July 2017. Mr Banks was appointed as Independent Executive Chairman on 5 September 2018 In addition to the amounts shown above, the share-based payment charge for the period was: to 30 June 2018 £’000 42 14 18 9 5 5 5 5 103 to 30 June 2017 £’000 43 7 15 9 5 5 5 5 94 Raymond Gibbs David Banks Matthew Wood John Knowles Anthony Belisario Graham Eves Roger Humm Roger Smith By order of the Board Graham Eves Chairman of the Remuneration Committee 17 September 2018 21 T R O P E R C G E T A R T S I E C N A N R E V O G S T N E M E T A T S L A C N A N I F I N O I T A M R O F N I R E D L O H E R A H S 251936 Haydale AR pp09-pp26.qxp 27/11/2018 18:38 Page 22 GOVERNANCE Statement of Directors’ Responsibilities The directors are responsible for preparing the strategic report, the annual report and the financial statements in accordance with applicable law and regulations. Company law requires the directors to prepare financial statements for each financial year. Under that law, the directors have elected to prepare the Group financial statements in accordance with International Financial Reporting Standards (IFRSs) as adopted by the European Union and the Company financial statements in accordance with United Kingdom Generally Accepted Accounting Practice (United Kingdom Accounting Standards and applicable law). Under company law, the directors must not approve the financial statements unless they are satisfied that they give a true and fair view of the state of affairs of the Group and Company and of the profit or loss for the Group for that period. The directors are also required to prepare financial statements in accordance with the rules of the London Stock Exchange for companies trading securities on the AIM market. In preparing these financial statements, the directors are required to: • Select suitable accounting policies and then apply them consistently; • Make judgements and accounting estimates that are reasonable and prudent; • • State whether they have been prepared in accordance with IFRSs as adopted by the European Union, subject to any material departures disclosed and explained in the financial statements; and Prepare the financial statements on the going concern basis unless it is inappropriate to presume that the Company will continue in business. The directors are responsible for keeping adequate accounting records that are sufficient to show and explain the Company’s transactions and disclose with reasonable accuracy at any time the financial position of the Company and enable them to ensure that the financial statements comply with the requirements of the Companies Act 2006. They are also responsible for safeguarding the assets of the Company and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities. Website Publication The directors are responsible for ensuring that the annual report and financial statements are made available on a website. Financial statements are published on the Group’s website, www.haydale.com, in accordance with the AIM Rules for Companies published by the London Stock Exchange and legislation in the United Kingdom governing the preparation and dissemination of financial statements, which may vary from legislation in other jurisdictions. The maintenance and integrity of the Group’s website is the responsibility of the directors. The directors’ responsibility also extends to the ongoing integrity of the financial statements contained therein. Going Concern The directors have prepared and reviewed detailed financial forecasts. After due consideration of these forecasts, the Group’s current cash resources, borrowing facilities and the directors’ belief that the Group will have access to additional equity or debt funding in the future, the directors consider that the Company and the Group have adequate financial resources to continue in operational existence for the foreseeable future (being a period of at least 12 months from the date of this report), and for this reason the financial statements have been prepared on the going concern basis. By order of the Board Matt Wood Finance Director and Company Secretary 17 September 2018 22 251936 Haydale AR pp09-pp26.qxp 27/11/2018 18:38 Page 23 Haydale Graphene Industries plc | Annual Report & Accounts 2018 Independent Auditor’s Report to the members of Haydale Graphene Industries Plc Opinion We have audited the financial statements of Haydale Graphene Industries PLC (the ‘parent company’) and its subsidiaries (the ‘group’) for the year ended 30 June 2018 which comprise the Consolidated Statement of Comprehensive Income, Consolidated Statement of Financial Position, Consolidated Statement of Changes in Equity, Consolidated Statement of Cash Flows, Parent Company’s Balance Sheet and Parent Company Statement of Changes in Equity and notes to the financial statements, including a summary of significant accounting policies. The financial reporting framework that has been applied in the preparation of the group financial statements is applicable law and International Financial Reporting Standards (IFRSs) as adopted by the European Union. The financial reporting framework that has been applied in the preparation of the parent company financial statements is applicable law and United Kingdom Accounting Standards, including Financial Reporting Standard 101 Reduced Disclosure Framework (United Kingdom Generally Accepted Accounting Practice). In our opinion: • • • • the financial statements give a true and fair view of the state of the group’s and of the parent company’s affairs as at 30 June 2018 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; the parent company financial statements have been properly prepared in accordance with United Kingdom Generally Accepted Accounting Practice; and the financial statements have been prepared in accordance with the requirements of the Companies Act 2006. Basis for opinion We conducted our audit in accordance with International Standards on Auditing (UK) (ISAs (UK)) and applicable law. Our responsibilities under those standards are further described in the Auditor’s responsibilities for the audit of the financial statements section of our report. We are independent of the group and the parent company in accordance with the ethical requirements that are relevant to our audit of the financial statements in the UK, including the FRC’s Ethical Standard as applied to listed entities, and we have fulfilled our other ethical responsibilities in accordance with these requirements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion. Key Audit Matters Key audit matters are those matters that, in our professional judgment, were of most significance in our audit of the financial statements of the current period and include the most significant assessed risks of material misstatement (whether or not due to fraud) we identified, including those which had the greatest effect on: the overall audit strategy, the allocation of resources in the audit; and directing the efforts of the engagement team. These matters were addressed in the context of our audit of the financial statements as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters. • Revenue recognition The Group’s revenue recognition policy is included within the accounting policies on page 32 and the components of revenue are set out in note 4. Management exercises judgement in recognising revenue arising from the provision of services where contracts are ongoing at the year end. Revenues for such contracts are recorded on a percentage completion basis unless the contract outcome cannot be reliably determined, in which case, revenue is only recognised to the extent that incurred costs are recoverable. In view of the judgements involved and estimation that could be susceptible to management bias, we considered that these matters gave rise to a significant risk of misstatement in the financial statements and therefore a key audit matter. How We Addressed the Key Audit Matter in the Audit We have assessed whether revenue recognition is in accordance with IAS 18 and the Group’s accounting policies and, in respect of service contracts ongoing at the year end, we considered the basis of estimation for accrued and deferred income. This was performed by gaining an understanding of the terms of a sample of underlying contracts and ensuring that the revenue, accrued and deferred income were recognised appropriately by testing management’s assessment of the stage of completion with reference to evidence such as costs incurred, time recording records and budgets. 23 T R O P E R C G E T A R T S I E C N A N R E V O G S T N E M E T A T S L A C N A N I F I N O I T A M R O F N I R E D L O H E R A H S 251936 Haydale AR pp09-pp26.qxp 27/11/2018 18:38 Page 24 FINANCIAL STATEMENTS Independent Auditor’s Report to the members of Haydale Graphene Industries Plc continued Our application of materiality Group materiality 30 June 2018 £300,000 Group materiality 30 June 2017 £400,000 Basis for materiality 5% of losses before tax (2017: 8% of losses before tax). This determination is based on our view that the loss before tax is a key financial measure for the group and its members in assessing financial performance as the group is primarily research and development focussed. We apply the concept of materiality both in planning and performing our audit, and in evaluating the effect of misstatements. We consider materiality to be the magnitude by which misstatements, including omissions, could influence the economic decisions of reasonable users that are taken on the basis of the financial statements. In order to reduce to an appropriately low level the probability that any misstatements exceed materiality, we use a lower materiality level, performance materiality, to determine the extent of testing needed Importantly, misstatements below these levels will not necessarily be evaluated as immaterial as we also take account of the nature of identified misstatements, and the particular circumstances of their occurrence, when evaluating their effect on the financial statements as a whole. Performance materiality was set at 70 per cent of the above materiality levels. Where financial information from components was audited separately, component materiality levels were set for this purpose at lower levels varying from £42,000 to £125,000 (2017: £25,000 to £200,000). Our determination of materiality decreased from 2017 due to a lower percentage being applied to the benchmark on the basis of our risk assessment and assessment of the group’s control environment. We consider losses before tax to be one of the principal considerations for members of the company in assessing the financial performance of the group. We agreed with the audit committee that we would report to the committee all individual audit differences identified during the course of our audit in excess of £10,000 (2016: £16,000). We also agreed to report differences below these thresholds that, in our view, warranted reporting on qualitative grounds. There were no misstatements identified during the course of our audit that were individually, or in aggregate, considered to be material in terms of their absolute monetary value or on qualitative grounds. An overview of the scope of our audit Our group audit scope focussed on the group’s principal operating locations being Ammanford, Loughborough and South Carolina, each of which were subject to a full scope audit. Together with the parent company and its group consolidation, which was also subject to a full scope audit, these locations represent the principal business units of the group and account for 91% of the group’s revenue, 90% of the group’s loss before tax and 97% of the group’s total assets. The remaining components of the group were considered non-significant and these components were principally subject to analytical review procedures. Whilst materiality for the financial statements as a whole was £300,000, each component of the group was audited to a lower level of materiality. Audits of the components were performed at a materiality level calculated by reference to a proportion of group materiality appropriate to the relative scale of the business concerned. These audits were all performed by BDO LLP with the exception of the South Carolina operations audited by BDO US. The Group audit team was actively involved in directing the audit strategy of the component auditor in South Carolina and a key member of the Group audit team visited local management and the auditors of the operations in South Carolina during the audit fieldwork. The Group audit team reviewed in detail the findings of work performed and considered the impact of these upon the Group audit opinion. 24 251936 Haydale AR pp09-pp26.qxp 27/11/2018 18:38 Page 25 Haydale Graphene Industries plc | Annual Report & Accounts 2018 Other information The directors are responsible for the other information. The other information comprises the information included in the annual report, other than the financial statements and our auditor’s report thereon. Our opinion on the financial statements does not cover the other information and, except to the extent otherwise explicitly stated in our report, we do not express any form of assurance conclusion thereon. In connection with our audit of the financial statements, our responsibility is to read the other information and, in doing so, consider whether the other information is materially inconsistent with the financial statements or our knowledge obtained in the audit or otherwise appears to be materially misstated. If we identify such material inconsistencies or apparent material misstatements, we are required to determine whether there is a material misstatement in the financial statements or a material misstatement of the other information. If, based on the work we have performed, we conclude that there is a material misstatement of this other information, we are required to report that fact. We have nothing to report in this regard. Opinions on other matters prescribed by the Companies Act 2006 In our opinion, based on the work undertaken in the course of the audit: the information given in the strategic report and the directors’ report for the financial year for which the financial statements are prepared is consistent with the financial statements; and the strategic report and the directors’ report have been prepared in accordance with applicable legal requirements. Matters on which we are required to report by exception In the light of the knowledge and understanding of the group and the parent company and its environment obtained in the course of the audit, we have not identified material misstatements in the strategic report or the directors’ report. We have nothing to report in respect of the following matters in relation to which the Companies Act 2006 requires us to report to you if, in our opinion: adequate accounting records have not been kept, or returns adequate for our audit have not been received from branches not visited by us; or the parent company financial statements are not in agreement with the accounting records and returns; or certain disclosures of directors’ remuneration specified by law are not made; or we have not received all the information and explanations we require for our audit. Responsibilities of directors As explained more fully in the directors’ responsibilities statement, as set out on page 22, the directors are responsible for the preparation of the financial statements and for being satisfied that they give a true and fair view, and for such internal control as the directors determine is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error. In preparing the financial statements, the directors are responsible for assessing the group’s and the parent company’s ability to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless the directors either intend to liquidate the group or the parent company or to cease operations, or have no realistic alternative but to do so. Auditor’s responsibilities for the audit of the financial statements Our objectives are to obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditor’s report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with ISAs (UK) will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these financial statements. 25 T R O P E R C G E T A R T S I E C N A N R E V O G S T N E M E T A T S L A C N A N I F I N O I T A M R O F N I R E D L O H E R A H S 251936 Haydale AR pp09-pp26.qxp 27/11/2018 18:38 Page 26 FINANCIAL STATEMENTS Independent Auditor’s Report to the members of Haydale Graphene Industries Plc continued A further description of our responsibilities for the audit of the financial statements is located on the Financial Reporting Council’s website at: www.frc.org.uk/auditorsresponsibilities. This description forms part of our auditor’s report. Use of our report This report is made solely to the parent 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 parent 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 parent company and the parent company’s members as a body, for our audit work, for this report, or for the opinions we have formed. Malcolm Thixton (Senior Statutory Auditor) For and on behalf of BDO LLP, Statutory Auditor Southampton 17 September 2018 BDO LLP is a limited liability partnership registered in England and Wales (with registered number OC305127). 26 251936 Haydale AR pp27-pp30.qxp 27/11/2018 18:38 Page 27 Haydale Graphene Industries plc | Annual Report & Accounts 2018 CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME For the year ended 30 June 2018 Year ended 30 June 2018 £’ 000 Year ended 30 June 2017 £’ 000 Note 4 5 6 8 REVENUE Cost of sales Gross profit Other operating income Administrative expenses Research and development expenditure Share based payment expense Other administrative expenses LOSS FROM OPERATIONS Finance costs LOSS BEFORE TAXATION Taxation LOSS FOR THE YEAR FROM CONTINUING OPERATIONS Other comprehensive income: Items that may be reclassified to profit or loss: Exchange differences on translation of foreign operations Remeasurements of defined benefit pension schemes TOTAL COMPREHENSIVE LOSS FOR THE YEAR FROM CONTINUING OPERATIONS Loss for the year attributable to: Owners of the parent Non-controlling interest Total comprehensive loss attributable to: Owners of the parent Non-controlling interest 3,403 (1,403) 3,004 (894) –––––––––––––––––––––––––––––– 2,110 901 2,000 831 (878) (291) (7,684) (908) (351) (7,090) (8,853) (6,022) (95) (8,349) –––––––––––––––––––––––––––––– (5,338) (297) –––––––––––––––––––––––––––––– (5,635) 883 –––––––––––––––––––––––––––––– (4,752) (6,117) 850 (5,267) (47) (99) (74) (36) –––––––––––––––––––––––––––––– (4,862) –––––––––––––––––––––––––––––– –––––––––––––––––––––––––––––– (5,413) (5,413) – (4,862) – –––––––––––––––––––––––––––––– (4,862) –––––––––––––––––––––––––––––– –––––––––––––––––––––––––––––– (5,413) (5,413) – (4,862) – –––––––––––––––––––––––––––––– (4,862) –––––––––––––––––––––––––––––– –––––––––––––––––––––––––––––– (5,413) Loss per share attributable to owners of the Parent Basic (£) Diluted (£) The notes from pages 31 to 61 form part of these financial statements. 9 9 (0.28) (0.28) –––––––––––––––––––––––––––––– –––––––––––––––––––––––––––––– (0.22) (0.22) 27 T R O P E R C G E T A R T S I E C N A N R E V O G S T N E M E T A T S L A C N A N I F I N O I T A M R O F N I R E D L O H E R A H S 251936 Haydale AR pp27-pp30.qxp 27/11/2018 18:38 Page 28 FINANCIAL STATEMENTS CONSOLIDATED STATEMENT OF FINANCIAL POSITION As at 30 June 2018 Company Registration No. 07228939 30 June 2018 £’ 000 30 June 2017 £’ 000 Note ASSETS Non-current assets Goodwill Intangible assets Property, plant and equipment Deferred tax asset Current assets Inventories Trade receivables Other receivables Corporation tax Cash and bank balances TOTAL ASSETS LIABILITIES Non-current liabilities Bank loans Deferred tax Pension Obligation Current liabilities Bank loans Trade and other payables Deferred income Corporation tax TOTAL LIABILITIES TOTAL NET ASSETS EQUITY Capital and reserves attributable to equity holders of the parent Share capital Share premium account Share-based payment reserve Foreign exchange reserve Retained earnings TOTAL EQUITY 10 10 11 27 12 13 14 14 19 27 26 19 18 20 18 15 15 16 2,087 2,130 5,061 550 2,115 2,152 5,074 679 –––––––––––––––––––––––––––––– 10,020 –––––––––––––––––––––––––––––– 9,828 1,022 705 362 473 5,092 1,212 798 535 345 2,091 –––––––––––––––––––––––––––––– 4,981 –––––––––––––––––––––––––––––– 15,001 –––––––––––––––––––––––––––––– –––––––––––––––––––––––––––––– 17,482 7,654 640 675 1,120 911 1,234 969 –––––––––––––––––––––––––––––– 3,114 2,435 256 2,172 78 – 359 2,305 253 65 –––––––––––––––––––––––––––––– 2,982 –––––––––––––––––––––––––––––– 6,096 –––––––––––––––––––––––––––––– 8,905 –––––––––––––––––––––––––––––– –––––––––––––––––––––––––––––– 12,541 2,506 4,941 547 27,539 1,298 (160) (16,683) 392 18,936 1,007 (113) (11,317) –––––––––––––––––––––––––––––– 8,905 –––––––––––––––––––––––––––––– –––––––––––––––––––––––––––––– 12,541 The financial statements on pages 27 to 61 were approved and authorised for issue by the Board of directors on 17 September 2018 and signed on its behalf by:- David Banks Interim Executive Chairman Matt Wood Finance Director 28 251936 Haydale AR pp27-pp30.qxp 27/11/2018 18:38 Page 29 Haydale Graphene Industries plc | Annual Report & Accounts 2018 CONSOLIDATED STATEMENT OF CHANGES IN EQUITY For the year ended 30 June 2018 Share capital £’ 000 Share premium £’ 000 Share-based payment reserve £’ 000 Foreign exchange reserve £’ 000 At 1 July 2016 305 11,840 656 Total comprehensive loss for the year Recognition of share-based payments Issue of ordinary share capital Repurchase of NCI Transaction costs in respect of share issues At 30 June 2017 Total Comprehensive loss for the year Recognition of share-based payments Issue of ordinary share capital Transaction costs in respect of share issues At 30 June 2018 Retained profits £’ 000 Other reserves £’ 000 Total equity £’ 000 (6,117) (44) 6,601 (4,787) – – (413) – – – 44 (4,861) 351 7,340 (369) (39) (74) – – – – – 87 – – – 7,253 – – 351 – – – (157) ––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––– 8,905 18,936 (11,317) 1,007 (157) (113) 392 – – – – – – – 155 – – 9,123 – 291 – (47) – – (5,366) – – – – – (5,413) 291 9,278 – (520) (520) ––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––– 12,541 ––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––– ––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––– (16,683) 27,539 1,298 (160) 547 – – – – – 29 T R O P E R C G E T A R T S I E C N A N R E V O G S T N E M E T A T S L A C N A N I F I N O I T A M R O F N I R E D L O H E R A H S Note 10 11 16 251936 Haydale AR pp27-pp30.qxp 27/11/2018 18:38 Page 30 FINANCIAL STATEMENTS CONSOLIDATED STATEMENT OF CASH FLOWS For the year ended 30 June 2018 Cash flow from operating activities Loss before taxation Adjustments for:- Amortisation of intangible assets (Profit)/Loss on disposal of intangible assets Capitalised loan costs written off Depreciation of property, plant and equipment (Profit)/Loss on disposal of property, plant and equipment Share-based payment charge Finance costs Pension – net interest expense Operating cash flow before working capital changes Decrease/(Increase) in inventories Decrease/(Increase) in trade and other receivables (Decrease)/Increase in payables and deferred income Cash used in operations Income tax received Net cash used in operating activities Cash flow used in investing activities Purchase of property, plant and equipment Purchase of Intangible Assets Proceeds from disposal of property, plant and equipment Acquisition of subsidiary – deferred consideration Purchase of non-controlling shareholding Net cash used in investing activities Cash flow used in financing activities Finance costs Proceeds from issue of share capital (net of share issue costs) New bank loans raised Repayments of borrowings Net cash flow from financing activities Effects of exchange rates changes Net increase/(decrease) in cash and cash equivalents Cash and cash equivalents at beginning of the financial year Cash and cash equivalents at end of the financial year 30 Year ended 30 June 2018 £’ 000 Year ended 30 June 2017 £’ 000 (6,117) (5,635) 149 75 – 675 (60) 291 95 37 157 – 77 560 – 351 297 – –––––––––––––––––––––––––––––– (4,193) –––––––––––––––––––––––––––––– (12) (596) 260 –––––––––––––––––––––––––––––– (4,541) –––––––––––––––––––––––––––––– 412 –––––––––––––––––––––––––––––– (4,129) –––––––––––––––––––––––––––––– 190 266 159 (4,240) (4,855) (3,971) 269 (723) (175) 83 (444) – (415) (245) – 4 (413) –––––––––––––––––––––––––––––– (1,069) –––––––––––––––––––––––––––––– (1,259) 8,216 (95) 8,757 – (446) (297) 6,058 1,408 (2,817) –––––––––––––––––––––––––––––– 4,352 –––––––––––––––––––––––––––––– 75 (771) 2,862 –––––––––––––––––––––––––––––– 2,091 –––––––––––––––––––––––––––––– –––––––––––––––––––––––––––––– 15 3,001 2,091 5,092 251936 Haydale AR pp31-pp47.qxp 27/11/2018 18:37 Page 31 Haydale Graphene Industries plc | Annual Report & Accounts 2018 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the year ended 30 June 2018 1. Accounting policies Basis of preparation The Group consolidated financial statements have been prepared in accordance with International Financial Reporting Standards, International Accounting Standards and Interpretations (collectively “IFRSs”) as adopted by the European Union (‘Adopted IFRSs’) and with those parts of the Companies Act 2006 applicable to companies preparing their financial statements under adopted IFRS. The Group’s financial statements have been prepared under the historical cost convention and in accordance with IFRS. The consolidated financial statements are presented in sterling amounts. Amounts are rounded to the nearest thousands, unless otherwise stated. The individual financial statements of Haydale Graphene Industries Plc are shown on pages 62 to 68. Basis of consolidation The consolidated financial statements incorporate the financial statements of the Company and entities controlled by the Company made up to the reporting date. The Company controls an investee if all three of the following elements are present: power over the investee, exposure to variable returns over the investee, and the ability of the investee to use its power to affect the variable returns. Control is reassessed whenever facts and circumstances indicate that there may be a change in any of these elements of control. All intra-group transactions, balances, income and expenditure are eliminated on consolidation. The consolidated financial statements have been prepared using the acquisition method of accounting. Under the acquisition method, the results of the subsidiaries acquired or disposed of are included from the date of acquisition or up to the date of disposal. At the date of acquisition, the fair values of the subsidiaries’ net assets are determined and these values are reflected in the Consolidated Financial Information. The cost of acquisitions is measured at the aggregate of the fair values, at the date of exchange, of assets given, liabilities incurred or assumed, and equity instruments issued by the Haydale Graphene Industries Group in exchange for control of the acquiree, plus any costs directly attributable to the business combination. Any excess of the purchase consideration of the business combination over the fair value of the identifiable assets and liabilities acquired is recognised as goodwill. Goodwill, if any, is not amortised, but reviewed for impairment at least annually. If the consideration is less than the fair value of assets and liabilities acquired, the difference is recognised directly in the statement of comprehensive income. Acquisition- related costs are expensed as incurred. Going concern The Group consolidated financial statements are prepared on a going concern basis which the Directors believe continues to be appropriate. The Group meets its day-to-day working capital requirements through existing cash resources which at 30 June 2018, amounts to £5.092 million. The Directors have prepared cash flow projections for the period ending no less than 12 months from the date of their approval of these financial statements. On the basis of those projections, and current cash resources, the Directors believe that the Group will be able to continue to trade for the foreseeable future. 2. Future accounting developments New standards and interpretations issued but not yet effective As at 30 June 2018, the following new or amended standards and interpretations, which have not been applied in these financial statements, have been issued by the International Accounting Standards Board (IASB) but are yet to become effective. • • • • IFRS 9 – Financial Instruments (effective for accounting periods commencing on or after 1 January 2018); IFRS 15 – Revenue from Contracts with Customers (effective for accounting periods commencing on or after 1 January 2018); IFRS 16 – Leases (effective for accounting periods commencing on or after 1 January 2019); and Amendments resulting from Annual Improvements to IFRS 2014-2016 Cycle (effective for accounting periods commencing on or after 1 January 2018). IFRS 9 - Financial Instruments replaces IAS 39. The standard is effective for the Group’s first IFRS financial statements for the period beginning on 1 July 2018 and will impact the classification and measurement of financial instruments and will require certain additional disclosures. Whilst an assessment of the new standard is ongoing, the changes to recognition and measurement of financial instruments and changes to hedge accounting rules are not currently considered likely to have any major impact on the Group’s current accounting treatment or hedging activities due to the simple nature of our financial instruments. 31 T R O P E R C G E T A R T S I E C N A N R E V O G S T N E M E T A T S L A C N A N I F I N O I T A M R O F N I R E D L O H E R A H S 251936 Haydale AR pp31-pp47.qxp 27/11/2018 18:37 Page 32 FINANCIAL STATEMENTS 2. Future accounting developments (continued) The standard also requires entities to use an expected credit loss model for impairment of financial assets instead of an incurred credit loss model. This could be expected to impact the way the Group provides for bad and doubtful receivables. However, the current expectation is that it is unlikely to have a material impact on the overall level of provisions due to historical low levels of bad or doubtful receivables, together with the credit worthiness of our customers and procedures and processes carried out before billing. There is no expectation for restatement of any 2018 comparatives within the 2019 Financial Statements. IFRS 15 - Revenue from Contracts with Customers (effective for the Group’s first IFRS financial statements for the period beginning on 1 July 2018) replaces IAS 18 ‘Revenue’, IAS 11 ‘Construction Contracts’ and related interpretations. The standard introduces a single, five-step revenue recognition model that is based upon the principle that revenue is recognised at the point that control of goods or services is transferred to the customer. The standard also updates revenue disclosure requirements. The Directors have specifically considered the adoption of IFRS 15 on the revenue recognition of the Group’s three main revenue streams, which are explained below. Goods The Directors do not anticipate that the changes made under IFRS 15 will have any material impact to the way in which sale of goods will be recognised within the Group’s financial statements. Under IFRS 15, the Group will continue to recognise revenue when the risks and rewards of ownership are passed to the customer. The Group currently have some contracts in place with customers to provide goods over a number of years. There are, occasionally, variations or amendments to these shipments of goods under these contracts. The Directors have considered the contract modification criteria with IFRS 15 and will ensure these are applied for any contract modifications that may take place. At present, the Directors do not anticipate that there will be any restatement of any 2018 comparatives within the 2019 financial statements. Services The Directors do not anticipate that the changes made under IFRS 15 will have a material impact to the way in which revenue from services will be recognised. The Group will continue to adopt the approach of recognising revenue based upon the percentage of completion method, whereby the stage of completion is determined based on the proportion of contract costs incurred compared to total estimated contract costs. Reactor Sales The recognition of reactor sales has been considered by the Directors. The recognition of revenue has historically been recognised over time on a percentage of completion basis. Under IFRS 15, it is anticipated that the revenue will continue to be recognised over time, as opposed to a point in time, given that the performance obligations of the delivery and commissioning of the reactors are linked. As a result, the recognition of revenue will continue to be recognised on a percentage completion basis, as in prior years. The Directors do no anticipate that there will be any restatement of any 2018 comparatives within the 2019 financial statements. IFRS 16 - Leases (effective for the Group’s first IFRS financial statements for the period beginning on 1 July 2019) will require all of the Group’s leases to be recognised on the balance sheet. The new standard brings most leases on-balance sheet for lessees under a single model, eliminating the distinction between operating and finance leases. IFRS 16 supersedes IAS 17 ‘Leases and related interpretations’ and its adoption requires the Group to set out the principles for the recognition, measurement, presentation and disclosure of leases. The Group has a number of operating lease arrangements which we have considered below. The main effect on the Group is that IFRS 16 introduces a single lessee accounting model and requires lessees to recognise assets and liabilities for almost all leases and will therefore result in an increase of total property, plant and equipment and total financial debt of approximately £1.6 million. All things being equal, under the new standard, trading operating profit and reported EBITDA would increase by approximately £1.4 million due to the replacement of the operating lease expense with amortisation of lease assets. This would partially be offset by an interest charge resulting in an insignificant impact on net profit. The Group is currently assessing the precise impact of the standard. 32 251936 Haydale AR pp31-pp47.qxp 27/11/2018 18:37 Page 33 Haydale Graphene Industries plc | Annual Report & Accounts 2018 3. Summary of significant accounting policies (a) Intangible assets Research and development expenditure Research expenditure is recognised as an expense when it is incurred. Development expenditure is recognised as an expense except that costs incurred on development projects are capitalised as intangible assets to the extent that such expenditure is expected to generate future economic benefits. Development expenditure is capitalised if, and only if an entity within the Group can demonstrate all of the following:- i) ii) iii) iv) v) its ability to measure reliably the expenditure attributable to the asset under development; the product or process is technically and commercially feasible; its future economic benefits are probable; its ability to use or sell the developed asset; the availability of adequate technical, financial and other resources to complete the asset under development; and vi) its intention to use or sell the developed asset. Capitalised development expenditure is measured at cost less accumulated amortisation and impairment losses, if any. Development expenditure initially recognised as an expense will not be restated as an asset in a subsequent period. Historic capitalised development expenditure is amortised on a straight-line basis over a period of 20 years when the products or services are ready for sale or use. The 20 years amortisation period is based on European Patents being 20 years from the date of filing of the application, under Article 60 of the European Patent Convention, and, although the Group now has patents granted in other jurisdictions, the Directors believe that 20 years is appropriate. New projects will be reviewed on completion, to determine the useful economic life. In the event that it is no longer probable that the expected future economic benefits will be recovered, the development expenditure is written down to its recoverable amount. Amortisation is included within administrative expenses. Acquired intangible assets An intangible resource acquired with a subsidiary undertaking is recognised as an intangible asset if it is separable from the acquired business or arises from contractual or legal rights, is expected to generate future economic benefits and its fair value can be measured reliably. Acquired intangible assets (excluding development expenditure which is in line with the above policy), including customer relationships, are amortised through the Consolidated Statement of Comprehensive Income on a straight- line basis over their estimated economic lives of between three and ten years. Goodwill Business combination are accounted for by applying the purchase method. The cost of a business combination is a fair value of the consideration given, liabilities incurred or assumed and of equity instrument issued plus the cost directly attributable to business combination. Where control is achieved in stages the cost is a consideration at the date of each transaction. Contingent consideration is initially recognised at estimated amount where the consideration is probable and can be measured reliably. Where (i) the contingent consideration is not considered probable or cannot be reliably measured but subsequently becomes probable or (ii) contingent consideration previously measured is adjusted, the amounts are recognised as an adjustment to the cost of the business combination if the remeasurement occurs within a year of the transaction and relates to information that was available at the point of acquisition. Otherwise, any remeasurements of contingent consideration is reflected in the statement of comprehensive income. On acquisition of a business, fair values are attributed to the identifiable assets, liabilities and contingent liabilities unless the fair value cannot be measured reliably, in which case the value is incorporated in goodwill. Where the fair value of contingent liabilities cannot be reliably measured they are disclosed on the same basis as other contingent liabilities. Goodwill recognised represent the excess of the fair value and directly attributable costs of the purchase consideration over the fair value to the Group’s interest in the identifiable net assets, liabilities and contingent liabilities acquired. 33 T R O P E R C G E T A R T S I E C N A N R E V O G S T N E M E T A T S L A C N A N I F I N O I T A M R O F N I R E D L O H E R A H S 251936 Haydale AR pp31-pp47.qxp 27/11/2018 18:37 Page 34 FINANCIAL STATEMENTS 3. Summary of significant accounting policies (continued) The carrying value of goodwill, and the cash-generating unit to which it relates, is reviewed at the end of each reporting period for impairment regardless of whether there is an indication that the asset may be impaired. Other non-financial assets are considered for indicators of impairment at each reporting date and full impairment reviews carried out if indicators of impairment exist. Impairment is measured by comparing the carrying values of the assets with their recoverable amounts. The recoverable amount of the assets is the higher of the assets’ fair value less costs to sell and their value-in-use, which is measured by reference to discounted future cash flow. An impairment loss is recognised in administrative expenses within the Statement of Comprehensive Income immediately it is identified. In respect of assets other than goodwill, and when there is a change in the estimates used to determine the recoverable amount, a subsequent increase in the recoverable amount of an asset is treated as a reversal of the previous impairment loss and is recognised to the extent of the carrying amount of the asset that would have been determined (net of amortisation and depreciation) had no impairment loss been recognised. The reversal is recognised in profit or loss immediately. (b) Revenue and interest income (i) Goods Revenue represents sales to external customers at invoiced amounts less value added tax or local taxes on sales. Revenue is recognised generally on delivery, or customer acceptance for where customer acknowledges the transfer of risk and reward of ownership and are liable for insuring the goods. (ii) Services Engineering design and research revenue is recognised on the percentage of completion method unless the outcome of the contract cannot be reliably determined, in which case contract revenue is only recognised to the extent of contract costs incurred that are recoverable. Foreseeable losses, if any, are provided for in full as and when it can be reasonably ascertained that the contract will result in a loss. The stage of completion is determined based on the proportion of contract costs incurred compared to total estimated contract costs. (c) Financial instruments Financial instruments are recognised in the statements of financial position when the Group has become a party to the contractual provisions of the instruments. Financial instruments are classified as liabilities or equity in accordance with the substance of the contractual arrangement. Interest, dividends, gains and losses relating to a financial instrument classified as a liability are reported as an expense or income. Distributions to holders of financial instruments classified as equity are charged directly to equity. Financial instruments are offset when the Group has a legally enforceable right to offset and intends to settle either on a net basis or to realise the asset and settle the liability simultaneously. A financial instrument is recognised initially, at its fair value plus, in the case of a financial instrument not at fair value through profit or loss, transaction costs that are directly attributable to the acquisition or issue of the financial instrument. The accounting policy for financial instruments recognised in the statements of financial position are disclosed in the individual policy statement associated with each item. Financial assets are derecognised when the contractual rights to receive cash flows from the financial assets have expired or have been transferred and the Group has transferred substantially all the risks and rewards of ownership. (i) Financial assets The group currently only holds financial assets classed as loans and receivables. • Loans and receivables Trade receivables and other receivables that have fixed or determinable payments that are not quoted in an active market are classified as loans and receivables financial assets. Loans and receivables financial assets are measured at amortised cost using the effective interest method, less any impairment loss. Interest income is recognised by applying the effective interest rate, except for short-term receivables when the recognition of interest would be immaterial. 34 251936 Haydale AR pp31-pp47.qxp 27/11/2018 18:37 Page 35 Haydale Graphene Industries plc | Annual Report & Accounts 2018 (d) Property, plant and equipment Property, plant and equipment are stated at cost less accumulated depreciation and impairment losses, if any. The cost of an item of property, plant and equipment initially recognised includes its purchase price and any cost that is directly attributable to bringing the asset to the location and condition necessary for it to be capable of operating in the manner intended by management. Depreciation is calculated under the straight-line method to write off the depreciable amount of the assets over their estimated useful lives. The principal annual rates used for this purpose are:- Leasehold improvements 10-20% per annum straight line Plant and machinery 15-33% per annum straight line Furniture and fittings 20-33% per annum straight line Motor vehicles 33% per annum straight line The depreciation method, useful lives and residual values are reviewed, and adjusted if appropriate, at the end of each reporting period to ensure that the amounts, method and periods of depreciation are consistent with previous estimates and the expected pattern of consumption of the future economic benefits embodied in the items of the property, plant and equipment. Subsequent costs are included in the asset’s carrying amount or recognised as a separate asset, as appropriate, only when the cost is incurred and it is probable that the future economic benefits associated with the asset will flow to the Group and the cost of the asset can be measured reliably. The carrying amount of parts that are replaced is derecognised. The costs of the day- to-day servicing of property, plant and equipment are recognised in profit or loss as incurred. Cost also comprises the initial estimate of dismantling and removing the asset and restoring the site on which it is located for which the Group is obligated to incur when the asset is acquired, if applicable. An item of property, plant and equipment is derecognised upon disposal or when no future economic benefits are expected from its use or disposal. The gain or loss on retirement or disposal is determined as the difference between any sales proceeds and the carrying amounts of the asset and is recognised in the income statement within administrative expenses. (e) Income taxes The charge for taxation is based on the loss for the period and takes into account deferred taxation. Current tax is measured at amounts expected to be paid using the tax rates and laws that have been enacted by the balance sheet date. The substantively enacted rate has been used for deferred tax balances, which are recognised in respect of all timing differences that have been originated but not reversed by the reporting date, except that the recognition of deferred tax assets is limited to the extent that the Company anticipates making sufficient taxable profits in the future to absorb the reversal of the underlying timing differences. The Group receives research and development tax credits for the work it performs in the field of nano-technology. Using the SME and large company schemes, these credits generate cash reimbursement in exchange for the sacrifice of applicable losses, such receipts are recognised in income tax within the Statement of Comprehensive Income. (f) Cash and cash equivalents Cash and cash equivalents comprise cash in hand, bank balances, deposits with financial institutions and short-term, highly liquid investments that are readily convertible to known amounts of cash, are subject to an insignificant risk of changes in value and have maturities of 3 months or less from inception. (g) Inventories Inventories are recorded at the lower of cost and net realisable value. Cost represents materials, direct labour, other direct costs and related production overheads, and is determined on the First-In-First-Out (FIFO) method. Net realisable value is based on estimated selling price, less further costs expected to be incurred to completion and disposal. Provision is made for slow-moving, obsolete and defective inventories where appropriate. The value of inventories used in the fulfilment of commercial or developmental programmes are charged to cost of sales in the Statement of Comprehensive Income. 35 T R O P E R C G E T A R T S I E C N A N R E V O G S T N E M E T A T S L A C N A N I F I N O I T A M R O F N I R E D L O H E R A H S 251936 Haydale AR pp31-pp47.qxp 27/11/2018 18:37 Page 36 FINANCIAL STATEMENTS 3. Summary of significant accounting policies (continued) (h) Employee benefits (i) Short-term benefits Wages, salaries, paid annual leave and sick leave, bonuses and non-monetary benefits are accrued in the period in which the associated services are rendered by employees of the Group. (ii) Defined contribution plans The Group’s contributions to defined contribution plans are recognised in profit or loss in the period to which they relate. Once the contributions have been paid, the Group has no further liability in respect of the defined contribution plans. (iii) Defined Benefit Pension plans The group acquired a non-contributory defined benefit pension plan through the acquisition of HCT (formerly ACM). The pension obligations are identified by the calculations performed by an actuary. (i) Provisions Provisions are recognised when the Group has a present or constructive obligation as a result of past events, when it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation, and when a reliable estimate of the amount can be made. Provisions are reviewed at the end of each financial reporting period and adjusted to reflect the current best estimate. Where the effect of the time value of money is material, the provision is the present value of the estimated expenditure required to settle the obligation. ( j) Government grants Revenue grants are accounted for under the accruals model, with grants being recognised within other income on a systematic basis over the period in which the group recognised the related costs for which the grant is intended to compensate. Grants received in advance of the income being recognised in the Statement of Comprehensive Income are included in grant creditors. When grant income is received for capital expenditure, it is held as deferred income on the balance sheet and released on a straight line basis over the useful economic life of the asset to which it relates. All income relating to government grants is included as ‘other income’ within the Statement of Comprehensive Income. (k) Share-based payment arrangements Equity-settled share-based payments to employees and others providing similar services are measured at the fair value of the equity instruments at the grant date. Details regarding the determination of the fair value of equity-settled share-based transactions are set out in note 16 to the Consolidated Financial Statements. The fair value determined at the grant date of the equity-settled share-based payments is expensed on a straight-line basis over the vesting period, based on the Group’s estimate of the number of equity instruments that will eventually vest, with a corresponding increase in equity. At the end of each reporting period, the Group revises its estimate of the number of equity instruments expected to vest. The impact of the revision of the original estimates, if any, is recognised in profit or loss such that the cumulative expense reflects the revised estimate, with a corresponding adjustment to other reserves. (l) Leases Operating lease payments are recognised as an expense on a straight-line basis over the lease term, except where another systematic basis is more representative of the time pattern in which economic benefits from the leased asset are consumed. (m) Transactions and balances in foreign currencies Transactions in foreign currencies are converted into the respective functional currencies on initial recognition, using the exchange rates approximating those ruling at the transaction dates. Monetary assets and liabilities at the end of the reporting period are translated at the rates ruling as of that date. Non-monetary assets and liabilities are translated using exchange rates that existed when the values were determined. All exchange differences are recognised in profit or loss. Overseas operations which have a functional currency different to the group presentation currency have been translated using the monthly average exchange rate for consolidation in to the statement of comprehensive income. The amounts included in the group statement of financial position, have been translated at the exchange rate ruling at the statement date. All resulting exchange differences are reported in other comprehensive income. 36 251936 Haydale AR pp31-pp47.qxp 27/11/2018 18:37 Page 37 Haydale Graphene Industries plc | Annual Report & Accounts 2018 (n) Critical accounting estimates and judgements The preparation of financial information in conformity with IFRSs requires the use of certain critical accounting estimates. It also requires the directors of the Haydale Graphene Industries Plc Group (the “Group”) to exercise their judgement in the process of applying the accounting policies which are detailed below. These judgements are continually evaluated by the directors and management and are based on historical experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances. The key estimates and underlying assumptions concerning the future and other key sources of estimation uncertainty at the statement of financial position date, that have a significant risk of causing material adjustment to the carrying amounts of assets and liabilities within the next financial period are reviewed on an ongoing basis. Revision to accounting estimates are recognised in the period in which the estimate is revised if the revision affects only that period, or in the period of the revision and future periods if the revision affects both current and future periods. Defined Benefit Pension Scheme In determining the pension valuation movement and the defined benefit obligation of the groups pension scheme, a number of assumptions are used in order to produce a valuation, which is sensitive to changes in the assumptions. These assumptions include an appropriate discount rate, the levels of salary increases, price inflations and mortality rates. Further details are included in note 26, including sensitivity analysis. Impairment of non-financial assets The carrying value of goodwill, and the cash generating units to which it relates, is assessed annually for impairment through comparing the recoverable amount to the CGU’s carrying value. The value in use calculations require estimates in relation to uncertain items, including management’s expectations of future revenue growth, operating costs, profit margins, operating cashflows and the discount rate applied. Future cash flows used in the value in use calculations are based on our latest Board approved five-year financial plans. Expectations about future growth reflect expectations of growth in the markets applicable to the group. The future cashflows are discounted using a pre-tax discount rate that reflects current market assessments of the time value of money. The discount rate used is adjusted for the specific risk to the group, including the countries to which cash flows will be generated. Further details are included in note 10, including sensitivity analysis. Useful economic lives of tangible assets The annual depreciation charge for tangible assets is sensitive to change in the estimated useful economic lives and residual values of the assets. The useful economic lives and residual values are re-assessed annually. Thay are amended where necessary to reflect current estimates, based on technological advancement, future investments, economic utilisation and the physical condition of the assets. See note 11 for the carrying amounts of the property plant and equipment, and the depreciation accounting policy for the useful economic lives for each class of assets. 37 T R O P E R C G E T A R T S I E C N A N R E V O G S T N E M E T A T S L A C N A N I F I N O I T A M R O F N I R E D L O H E R A H S 251936 Haydale AR pp31-pp47.qxp 27/11/2018 18:37 Page 38 FINANCIAL STATEMENTS 4. Segment analysis IFRS 8 requires operating segments to be identified on the basis of internal reports about components of the Group that are regularly reviewed by the chief operating decision maker (which takes the form of the board of directors of Haydale Graphene Industries Plc) as defined in IFRS 8, in order to allocate resources to the segment and to assess its performance. For management purposes, the Group is organised into the following reportable segments: • • Resins, Polymers and Composites (known as RPC) ; and Advanced Materials (including SiC and Inks) (known as AMAT) These strategic business units were created on 1 July 2017, prior to this date management did not distinguish between different operating segments. Comparative figures have been calculated on the basis that the operating segments existed in the previous financial year. 2018 REVENUE Cost of sales Gross profit Other income Administrative expenses Resins, Polymers & Composites £’000 1,018 (566) Advanced Materials £’000 2,385 (837) Consolidated £’000 3,403 (1,403) –––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––– 2,000 831 1,548 – 452 757 – 74 Adjustments, Central & Eliminations £’000 – – Research and development expenditure Share based payment expense Depreciation & Amortisation Other administrative expenses (475) (58) (104) (1,658) (59) (43) (334) (3,086) (344) (190) (408) (2,094) (878) (291) (846) (6,838) OPERATING LOSS Finance costs LOSS BEFORE TAXATION Taxation LOSS AFTER TAXATION Additions to non-current assets Segment assets Segment liabilities (1,974) (3,522) (2,295) (1,086) (3,036) (8,853) –––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––– (6,022) (95) –––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––– (6,117) 850 –––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––– (5,267) –––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––– –––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––– (2,962) 338 2,988 (147) 537 7,683 (4,222) 23 6,811 (572) 898 17,482 (4,941) 38 251936 Haydale AR pp31-pp47.qxp 27/11/2018 18:37 Page 39 Haydale Graphene Industries plc | Annual Report & Accounts 2018 2017 REVENUE Cost of sales Gross profit Other income Administrative expenses Research and development expenditure Share based payment expense Depreciation & Amortisation Other administrative expenses OPERATING LOSS Finance costs LOSS BEFORE TAXATION Taxation LOSS AFTER TAXATION Additions to non-current assets Segment Assets Segment Liabilities Resins, Polymers & Composites £’000 870 (639) Advanced Materials £’000 2,134 (255) Consolidated £’000 3,004 (894) –––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––– 2,110 901 1,879 – 231 660 – 241 Adjustments, Central & Eliminations £’000 – – (58) (28) (61) (1,368) (161) (7) (205) (2,294) (689) (316) (451) (2,711) (908) (351) (717) (6,373) (788) (624) (1,515) (4,167) (2,667) (8,349) –––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––– (5,338) (297) –––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––– (5,635) 883 –––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––– (4,752) –––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––– –––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––– (3,926) 527 3,092 (275) 132 7,386 (4,085) – 4,523 (1,736) 659 15,001 (6,096) Geographical information All revenues of the Group are derived from its principal activity, the sale and distribution of nano-technology and silicon carbide products or the delivery of research projects into those nano materials. The Group’s revenue from external customers by geographical location are detailed below. 2018 £’000 2017 £’000 By destination United Kingdom Europe United States of America China Thailand South Korea Japan Rest of the World 238 516 532 448 199 93 1,299 78 265 952 131 11 73 14 1,545 13 –––––––––––––––––––––––––––––– 3,004 –––––––––––––––––––––––––––––– –––––––––––––––––––––––––––––– 3,403 During 2018, 38% (2017: 51%) of the Group’s revenue depended on a single customer. During 2018, 10% (2017: 12%) of the Group’s revenue depended on a second single customer. Revenue within Europe was predominantly split between Germany (6%) and Ireland (5%) (2017: Germany 19%, and Ireland 10%), as a proportion of total group turnover for the year. All amounts shown as other income within the Statement of Comprehensive Income are generated within and from the United Kingdom. These amounts include income earned as part of a number of grant funded projects and a government grant which is being released over a period of 5 years. The residual amount is reflected in deferred income. 39 T R O P E R C G E T A R T S I E C N A N R E V O G S T N E M E T A T S L A C N A N I F I N O I T A M R O F N I R E D L O H E R A H S 251936 Haydale AR pp31-pp47.qxp 27/11/2018 18:37 Page 40 FINANCIAL STATEMENTS 4. Segment analysis (continued) Revenue from goods was £2.48 million or 73% (2017: £2.09 million or 70%) and revenue from services was £0.80 million or 24% (2017: £0.69 million or 23%). The split of revenue by type was as follows: 2018 £’000 2017 £’000 Services Reactors Goods Services Reactors Goods 836 89 2,478 691 225 2,088 –––––––––––––––––––––––––––––– 3,004 –––––––––––––––––––––––––––––– –––––––––––––––––––––––––––––– 3,403 RPC £’000 AMAT £’000 TOTAL £’000 809 – 209 836 89 2,478 –––––––––––––––––––––––––––––––––––––––––––––––––– 3,403 –––––––––––––––––––––––––––––––––––––––––––––––––– –––––––––––––––––––––––––––––––––––––––––––––––––– 27 89 2,269 2,385 1,018 The group acquired the following non-current assets during the year, split by geographical location as detailed below: Non-current asset additions By destination United Kingdom United States of America Thailand South Korea Taiwan 2018 £’000 2017 £’000 360 325 76 2 135 528 31 100 – – –––––––––––––––––––––––––––––– 659 –––––––––––––––––––––––––––––– –––––––––––––––––––––––––––––– 898 The carrying value of the group’s non-current assets split by geographical location are detailed below: 2018 £’000 2017 £’000 By destination United Kingdom United States of America Thailand South Korea Taiwan 40 5,378 3,640 142 1 117 5,691 3,552 98 – – –––––––––––––––––––––––––––––– 9,341 –––––––––––––––––––––––––––––– –––––––––––––––––––––––––––––– 9,278 251936 Haydale AR pp31-pp47.qxp 27/11/2018 18:37 Page 41 5. Other Operating Income Grant Income 6. Loss before taxation Loss before taxation is arrived at after charging: Research and development: – current period’s expenditure – amortisation of capitalised expenditure – amortisation of other intangibles Loss on disposal of intangibles – Note 10 Depreciation of property, plant and equipment Profit on disposal of property, plant and equipment Foreign Exchange Operating lease rentals: – land and buildings – plant and machinery Haydale Graphene Industries plc | Annual Report & Accounts 2018 2018 £’000 2017 £’000 831 901 –––––––––––––––––––––––––––––– 901 –––––––––––––––––––––––––––––– –––––––––––––––––––––––––––––– 831 2018 £’000 2017 £’000 878 – 149 75 675 (9) (33) 908 77 157 – 560 – (20) 447 7 –––––––––––––––––––––––––––––– –––––––––––––––––––––––––––––– 572 6 2018 £’000 24 2017 £’000 30 45 18 7 19 14 – –––––––––––––––––––––––––––––– 63 –––––––––––––––––––––––––––––– –––––––––––––––––––––––––––––– 94 The fees of the Group’s auditor, BDO LLP, for services provided are analysed below: Fees payable to the Company’s auditor for the audit of the Group’s financial statements Fees payable to the Company’s auditor and it’s associates for other services: – Audit of the company’s subsidiaries – Taxation related compliance services – Other non-audit services 41 T R O P E R C G E T A R T S I E C N A N R E V O G S T N E M E T A T S L A C N A N I F I N O I T A M R O F N I R E D L O H E R A H S 251936 Haydale AR pp31-pp47.qxp 27/11/2018 18:37 Page 42 FINANCIAL STATEMENTS 7. Employees The average number of employees during the year, including executive directors, was: 2018 No. 2017 No. Administration Research, development and production Staff costs for all employees, including executive directors, consist of: Wages and salaries Social security costs Pension costs Share-based payment expense 27 49 26 43 –––––––––––––––––––––––––––––– 69 –––––––––––––––––––––––––––––– –––––––––––––––––––––––––––––– 76 2018 £’000 2017 £’000 3,514 314 172 291 2,989 391 142 321 –––––––––––––––––––––––––––––– 3,843 –––––––––––––––––––––––––––––– –––––––––––––––––––––––––––––– 4,291 An analysis of the remuneration of the directors is detailed within the Directors’ Remuneration Report on pages 18 to 21. The total amount payable to the highest paid director in respect of emoluments was £171,000 (2017: £171,000), including pension costs of £9,000 (2017: £9,000). 2018 £’000 2017 £’000 399 63 280 33 –––––––––––––––––––––––––––––– 313 –––––––––––––––––––––––––––––– 462 388 – 204 366 –––––––––––––––––––––––––––––– 570 –––––––––––––––––––––––––––––– 883 –––––––––––––––––––––––––––––– –––––––––––––––––––––––––––––– 850 388 8. Income tax Current tax credit Total income tax credits: – for the financial year – under provision in the previous financial year Total Current Tax Deferred tax credit Origination and reversal of temporary differences Recognition of previously unrecognised deferred tax assets 42 251936 Haydale AR pp31-pp47.qxp 27/11/2018 18:37 Page 43 Haydale Graphene Industries plc | Annual Report & Accounts 2018 The reason for the difference between the actual tax charge for the year and the standard rate of corporation tax in the United Kingdom applied to the losses for the year are as follows: Loss for the year Income tax credit Loss before income taxes Tax using the Group’s domestic tax rates of 19% (2017 – 19.75%) Expenses not deductible for tax purposes Different tax rates applied in overseas jurisdictions R&D enhancement R&D costs capitalised Surrender for R&D tax credit Adjustment for under/(over) provision in previous periods Movement in unrecognised losses carried forward Movement in unrecognised fixed asset temporary differences Deferred tax: Origination and reversal of temporary differences Recognition of previously unrecognised deferred tax assets Total tax credit 2018 £’000 2017 £’000 (4,752) (883) –––––––––––––––––––––––––––––– –––––––––––––––––––––––––––––– (5,267) (850) (6,117) 1,162 (274) 26 234 36 (15) 63 (747) (23) 388 – (5,635) 1,113 (251) 53 285 – (94) 33 – – (622) 366 –––––––––––––––––––––––––––––– 883 –––––––––––––––––––––––––––––– –––––––––––––––––––––––––––––– 850 Changes in tax rates and factors affecting the future tax charge The main rate of corporation tax for UK companies reduced from 20% to 19% from 1 April 2017. The Finance Bill 2016, which was substantively enacted in September 2016, announced a further reduction to the main rate of corporation tax. The rate will reduce to 17% from 1 April 2020. The main rate of corporate tax in the U.S reduced from 34% to 21% effective from 1 January 2018 as part of the U.S tax reforms. This has reduced the deferred tax liability attributable to the group’s subsidiaries based in South Carolina. The Group has tax losses that are available indefinitely for offset against future taxable profits of the companies approximately amounting to £15,780,000 (2017: £12,629,000) and £3,843,000 (2017: £4,946,000) of fixed asset timing differences. The group currently expects to be able to utilise its US tax losses in the foreseeable future and a deferred tax asset has been recognised in respect of these tax losses accordingly. 9. Loss per share The calculations of loss per share are based on the following losses and number of shares: Loss after tax attributable to owners of Haydale Graphene Industries Plc Weighted average number of shares: – Basic and Diluted Loss per share: Basic (£) and Diluted (£) 2018 £’000 2017 £’000 (4,862) –––––––––––––––––––––––––––––– –––––––––––––––––––––––––––––– (5,413) 24,744,693 17,232,137 –––––––––––––––––––––––––––––– –––––––––––––––––––––––––––––– (0.28) –––––––––––––––––––––––––––––– –––––––––––––––––––––––––––––– (0.22) The loss attributable to ordinary shareholders and weighted average number of ordinary shares for the purpose of calculating the diluted earnings per ordinary share are identical to those used for basic earnings per share. This is because the exercise of share options would have the effect of reducing the loss per ordinary share and is therefore not dilutive under the terms of IAS 33. At 30 June 2018, there were 3,619,940 (2017: 1,634,856) options and warrants outstanding as detailed in note 16. 43 T R O P E R C G E T A R T S I E C N A N R E V O G S T N E M E T A T S L A C N A N I F I N O I T A M R O F N I R E D L O H E R A H S 251936 Haydale AR pp31-pp47.qxp 27/11/2018 18:38 Page 44 FINANCIAL STATEMENTS 10. Intangible assets Cost At 1 July 2016 Additions Additions from acquisitions At 1 July 2017 Additions Disposals At 30 June 2018 Accumulated amortisation At 1 July 2016 Charge for the period At 1 July 2017 Charge for the year Disposals At 30 June 2018 Net book value At 30 June 2018 At 30 June 2017 At 30 June 2016 Customer Relationships £’000 Development expenditure £’000 Goodwill £’000 Total £’000 285 – 869 1,129 244 55 685 – 1,429 2,099 244 2,353 –––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––– 4,696 175 (82) –––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––– 4,789 –––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––– –––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––– 1,428 175 (55) 2,114 – (27) 1,154 – 2,087 1,548 1,154 – – 58 115 215 42 273 157 –––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––– 430 149 (7) –––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––– 572 –––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––– –––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––– 257 34 (7) 173 115 – – – – 288 284 – 4,217 –––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––– –––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––– 2,087 1,264 866 4,266 –––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––– –––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––– 2,114 1,171 981 1,826 –––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––– –––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––– 685 914 227 Goodwill Goodwill arose on the acquisition of EPL Composite Solutions Ltd (now Haydale Composite Solutions Limited “HCS”) on 1 November 2014 (£634,000), on the acquisition of Haydale Ltd on 21 May 2010 (£24,000) and of the acquisition of the trade and assets of Intelligent Nano Technology Ltd (£27,000) on 12 May 2010. On the 9 September 2016, goodwill of £327,151 arose on the acquisition of Innophene Co. Ltd (now Haydale Technologies Thailand). Goodwill arose on the acquistion of HCT (formerly ACM) on the 13th October 2016 of £1,102,620. During the year Intelligent Nano Technology Limited was dissolved resulting in the disposal of £27,000 of goodwill. Customer Relationships The Customer relationships intangible asset arose on the fair value of assets on the acquisition of EPL Composite Solutions Ltd (now Haydale Composite Solutions Limited) on 1 November 2014. Additions to the assets were brought in through the acquisition of HCT (formerly ACM) on the 13 October 2016 amounting to £868,676. Development costs Development costs brought forward are made up of three areas. One of which relates to the fair value of assets on the acquisition of Haydale Ltd on 21 May 2010 for development of nano-technology projects, where it is anticipated that the costs will be recovered through future commercial activity. The second of which relates to capitalised patent costs of Innophene that were acquired a part of the acquisition of Innophene in the previous financial year. And lastly, the development of graphene enhanced epoxy resins within Haydale Limited. The group acquired £54,831 due to the acquisition of Innophene during the previous year. This was disposed of in the current financial year as the costs related to a patent that was previously capitalised, however the contract was terminated during the current year resulting in a loss on disposal of £47,379. Development expenditure of £175,069 was capitalised during the year in accordance with IAS 38 in connection with the Group’s expenditure with the development of graphene enhanced epoxy resins, where the Directors believe that future economic benefit is probable (2017: £245,369). Capitalised development expenditure is not amortised until the products or services are ready for sale or use. 44 251936 Haydale AR pp31-pp47.qxp 27/11/2018 18:38 Page 45 Haydale Graphene Industries plc | Annual Report & Accounts 2018 Amortisation Capitalised development costs are amortised over the estimated useful life of 20 years. The amortisation charge is recognised in administrative expenses. The Customer relationships intangible is amortised over the estimated useful life of 10 years with the exception of the amount pertaining to the acquisition of HCT (formerly ACM) which is being amortised over 5 years. The amortisation charge is recognised in administrative expenses. Goodwill impairment Goodwill acquired in a business combination is allocated at acquisition to the cash generating units (“CGUs”) that are expected to benefit from that business combination. Following the acquisitions of HCS, HCT (formerly ACM) and Haydale Technologies (Thailand), the Group is operating a number of different CGUs and therefore HCS and ACM goodwill has been considered against the future forecast trading outcomes of HCT and HCS as separate CGU’s. The remaining goodwill in the Group prior to the acquisitions is immaterial and has not been tested for impairment. The goodwill arising from the acquisition of Haydale Technologies (Thailand) is also immaterial and has not been tested for impairment. An analysis of the pre-tax discount rates used and the goodwill balance as at the year end by principal CGU’s is shown below: Haydale Composite Solutions Haydale Graphene Industries Haydale Ceramic Technologies LLC (HCT) Haydale Technologies (Thailand) 2017 £’000 634 51 1,103 327 –––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––– –––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––– 2018 £’000 634 23 1,103 327 2018 % 10% n/a 10% n/a 2017 % 11% n/a 11% n/a The Group tests goodwill at least annually for impairment or more frequently if there are indications that goodwill might be impaired. The recoverable amounts of the CGUs are determined from value-in-use calculations. The key assumptions for the value-in-use are those regarding the discount rates, the growth rates and expected changes to cash flows during the period for which management have detailed plans. The Directors estimate discount rates using pre-tax rates that reflect current market assessments of the time value of money and the risks specific to the CGUs. Pre-tax discount rates, derived from the Group’s post-tax weighted average cost of capital of 10% (2017: 11%), and have been used to discount projected cash flows. The calculations for HCS have been derived from the Board’s approved forecast figures for the next year. The HCS forecasts assume that its turnover will grow at 30% in the current financial year, the following year and thereafter with the growth rate tapering off 6% year on year. The forecast assumes a 3% per annum growth beyond five years. The growth rates used are based on management’s internally estimated growth forecasts for the market, together with the expected market share of HCS within those markets. The Group applies sensitivities to the projections to determine whether there is sufficient head-room in positive cash flows to support the carrying value of the underlying assets of the CGUs. The calculations for HCT have been derived from the Board’s approved forecast figures for the next year. The HCT forecasts assume that its turnover will grow at 30% in the current financial year, the following year and therafter with the growth rate tapering off 7.5% year on year. The forecast assumes a 3% per annum growth beyond five years. The growth rates used are based on management’s internally estimated growth forecasts for the market, together with the expected market share of HCT within those markets. Following this review, the Directors have determined that there is no impairment charge which should be recognised against the intangible assets of the Group, nor has any such impairment been required to be recognised in any of the periods covered by this report. Sensitivity to changes in assumptions If the revenue growth in HCS and HCT dropped below 20% p.a., assuming all other things being equal, that would result in an impairment within its financial model although, in this scenario, the Board would take mitigating action to try to prevent such an impairment, included reducing the cost base in line with the reduced revenues. 45 T R O P E R C G E T A R T S I E C N A N R E V O G S T N E M E T A T S L A C N A N I F I N O I T A M R O F N I R E D L O H E R A H S 251936 Haydale AR pp31-pp47.qxp 27/11/2018 18:38 Page 46 FINANCIAL STATEMENTS 11. Property, plant and equipment Assets Leasehold under improvements machinery and fittings vehicles construction £,000 £’000 Plant and Fixtures Motor £’000 £’000 £’000 Total £’000 Cost At 1 July 2016 492 Additions 17 Additions from acquisitions 11 FX on additions from acqn’s (1) Transfers – At 1 July 2017 519 Additions 65 FX translation (1) Disposals – Transfers – At 30 June 2018 583 2 – 32 – – 15 74 – – (15) 2,171 290 3,544 (210) 15 2,777 97 415 34 3,870 283 (227) (16) – – –––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––– 6,835 398 723 76 (11) 21 (129) (3) – – –––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––– 7,418 –––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––– –––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––– 5,810 217 (30) (124) 98 74 365 – – (98) 34 – (1) (2) – 5,971 492 341 31 Accumulated depreciation At 1 July 2016 136 Charge for the year 47 At 1 July 2017 183 Charge for the year 57 FX Translation – Disposals – At 30 June 2018 240 2 5 – – 991 467 1,201 72 560 41 –––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––– 1,761 113 675 50 26 27 (105) (3) –––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––– 2,357 –––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––– –––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––– 1,458 562 (1) (100) 7 6 – (2) – – – – 1,919 187 11 – Net book value At 30 June 2018 343 5,061 –––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––– –––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––– 4,052 305 341 20 At 30 June 2017 336 5,074 –––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––– –––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––– 4,352 285 74 27 At 30 June 2016 356 1,576 25 –––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––– –––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––– 1,180 15 – 12. Inventories Raw materials Work in progress Finished goods 2018 £’000 2017 £’000 291 271 460 274 296 642 –––––––––––––––––––––––––––––– 1,212 –––––––––––––––––––––––––––––– –––––––––––––––––––––––––––––– 1,022 The total value of inventories recognised in cost of sales during during the year was £924,091 (2017: £252,394) Raw materials and finished goods comprise functionalised carbon, chemicals and associated raw materials. Work in progress comprises recoverable costs on long-term contracts. 46 251936 Haydale AR pp31-pp47.qxp 27/11/2018 18:38 Page 47 13. Trade receivables Trade receivables 14. Other receivables Other receivables Prepayments and accrued income Corporation tax 15. Share capital and share premium At 1 July 2016 Issue of £0.02 ordinary shares At 30 June 2017 Issue of £0.02 ordinary shares At 30 June 2018 Haydale Graphene Industries plc | Annual Report & Accounts 2018 2018 £’000 2017 £’000 705 798 –––––––––––––––––––––––––––––– 798 –––––––––––––––––––––––––––––– –––––––––––––––––––––––––––––– 705 2018 £’000 2017 £’000 209 153 127 408 –––––––––––––––––––––––––––––– 535 –––––––––––––––––––––––––––––– –––––––––––––––––––––––––––––– 362 2018 £’000 2017 £’000 473 345 –––––––––––––––––––––––––––––– 345 –––––––––––––––––––––––––––––– –––––––––––––––––––––––––––––– 473 Share capital £’000 305 87 Share premium £’000 11,840 7,096 Number of shares No. 15,236,946 4,360,767 Total £’000 12,145 7,183 –––––––––––––––––––––––––––––––––––––––––––––––––– 19,328 8,758 –––––––––––––––––––––––––––––––––––––––––––––––––– 28,086 –––––––––––––––––––––––––––––––––––––––––––––––––– –––––––––––––––––––––––––––––––––––––––––––––––––– 19,597,713 7,731,060 18,936 8,603 27,328,773 392 155 27,539 547 During the year, the Company issued 7,731,060 new ordinary shares of 2p each as follows: • In October 2017, 7,731,060 shares were issued in connection with the Company's £9.3 million placing and open offer; Issue costs amounting to £520,342 (2017: £157,360) have been charged to the share premium account in the year. 47 T R O P E R C G E T A R T S I E C N A N R E V O G S T N E M E T A T S L A C N A N I F I N O I T A M R O F N I R E D L O H E R A H S 251936 Haydale AR pp48-pp61.qxp 27/11/2018 18:37 Page 48 FINANCIAL STATEMENTS 16. Share-based payment transactions Options The Company operates both an approved EMI share option scheme and an unapproved share option scheme for the benefit of employees and directors of the Company. The exercise price of the options is equal to the mid-market price of the shares on the date of grant. The options vest either one year or three years from the date of grant. The options are accounted for as equity settled share based payment transactions. The following table which illustrates the number and weighted average exercise prices (WAEP) of, and movements in, share options during the year: Balance at beginning of year Granted Exercised Lapsed Balance at end of year 2018 Weighted average exercise price Pence 166 25 – 138 2017 Weighted average exercise price Pence 159 187 93 – –––––––––––––––––––––––––––––––––––––––––––––––––– 166 –––––––––––––––––––––––––––––––––––––––––––––––––– –––––––––––––––––––––––––––––––––––––––––––––––––– Number of options No. 1,257,717 2,438,576 – (453,492) Number of options No. 1,081,636 215,581 (39,500) – 3,242,801 1,257,717 44 At 30 June 2018, there were options outstanding over 3,242,801 un-issued ordinary shares, equivalent to 11.87% of the issued share capital as follows: Number of shares Exercise price Earliest exercise date Performance criteria Latest exercise date Approved EMI scheme 03 April 2014 1 November 2014 7 November 2014 18 March 2015 25 June 2015 3 November 2015 19 May 2016 14 October 2016 26 June 2017 15 December 2017 Unapproved schemes 03 April 2014 18 March 2015 19 May 2016 14 October 2016 26 June 2017 15 December 2017 15 December 2017 Long Term Incentive Plan 15 December 2017 192,860 30,000 60,000 17,115 17,438 10,619 61,835 42,782 87,440 99,271 167,353 21,412 34,052 26,170 35,149 257,968 100,000 1,981,337 ––––––––––– 3,242,801 ––––––––––– ––––––––––– 210.00p 62.25p 61.50p 134.50p 121.00p 177.00p 171.50p 198.14p 178.50p 125.50p 210.00p 134.50p 171.50p 198.14p 178.50p 125.50p 125.50p 03 April 2017 1 November 2017 7 November 2017 18 March 2018 25 June 2018 3 November 2018 19 May 2019 14 October 2019 27 June 2020 15 December 2020 03 April 2017 18 March 2018 19 May 2019 14 October 2019 27 June 2020 15 December 2020 15 December 2020 – Share price > 160p Share price > 160p – – – – – – – – – – – – – Share price > 220p 03 April 2024 1 November 2024 7 November 2024 18 March 2025 25 June 2025 3 November 2025 19 May 2026 14 October 2026 27 June 2027 15 December 2027 03 April 2024 18 March 2025 19 May 2026 14 October 2026 27 June 2027 15 December 2027 15 December 2027 0.02p 15 December 2020 Share price > 220p** 15 December 2027 The estimated fair value was calculated by applying a Black-Scholes option pricing model. 48 251936 Haydale AR pp48-pp61.qxp 27/11/2018 18:37 Page 49 Haydale Graphene Industries plc | Annual Report & Accounts 2018 Share price at date of grant (p) 210 210 62 Fair value per option (p) 94 94 38 Award life (years) 10 10 10 Type of Number award of shares 192,860 167,353 30,000 EMI Unapproved EMI 03 April 2014 03 April 2014 1 November 2014 7 November 2014 EMI 60,000 18 March 2015 18 March 2015 25 June 2015 3 November 2015 19 May 2016 19 May 2016 14 October 2016 14 October 2016 26 June 2017 26 June 2017 15 December 2017 15 December 2017 15 December 2017 17,115 EMI 21,412 Unapproved 17,438 EMI 10,619 EMI 34,052 Unapproved 61,835 EMI 42,782 Unapproved 26,170 EMI 87,440 EMI 35,149 Unapproved 99,271 EMI Unapproved 257,968 Unapproved 100,000 15 December 2017 LTIP 1,981,337 ––––––––– 3,242,801 ––––––––– ––––––––– 62 135 135 121 177 172 172 198 198 179 179 126 126 126 126 38 82 82 74 111 101 101 113 113 179 179 55 55 47 124 10 10 10 10 10 10 10 10 10 10 10 10 10 10 10 Risk free rate (%) 1.75 1.75 1.75 1.75 1.75 1.75 1.75 1.75 0.62 0.62 0.50 0.50 0.50 0.50 0.50 0.50 0.50 0.50 Expected volatility rate Performance conditions (%) None 30 30 None 50 Share price > 160p* 50 Share price > 160p* None 50 None 50 None 50 None 52 None 51 None 51 None 49 None 49 None 34 None 34 None 51 51 None 51 Share price > 220p 51 Share price > 220p** *Share price >160p. These performance conditions are for share options issued to Employees only; there are no performance conditions for share options issued to Directors. **The LTIP has been structured to ensure that value is created for shareholders before any value is delivered to the Key Management. Accordingly, should the Company’s closing mid-market share price not reach and remain at, or above, £2.20 for at least 15 consecutive trading days during the Performance Period (“Minimum Target”), then none of the Awards vest or is exercisable and the Awards will lapse in full. Should the Company’s closing mid-market share price reach and remain at or above £4.20 for at least 15 consecutive trading days during the Performance Period (“Maximum Target”), then 100% of the Awards vest and are exercisable. Between the Minimum Target and the Maximum Target, the % of the Awards that vest shall be pro-rata on a straight-line basis. The Awards may lapse in the event of cessation of employment save for certain circumstances, including inter alia, redundancy or retirement in which case, at the Company’s sole discretion and subject to performance criteria being met, the Exercise Period may be accelerated. Grant of LTIP Awards On 15 December 2017, grants of LTIP Awards were made to the following members of the Key Management: Name and role Ray Gibbs Trevor Rudderham Keith Broadbent Matt Wood Number of LTIP Awards granted (“Award”) 819,863 409,932 409,932 341,610 Earliest exercise date 14/12/20 14/12/20 14/12/20 14/12/20 Latest exercise date 14/12/27 14/12/27 14/12/27 14/12/27 Minimum share price target before any Awards vest £2.20 £2.20 £2.20 £2.20 Maximum share price target for 100% of Awards to vest £4.20 £4.20 £4.20 £4.20 506,078 Options were exercisable as at 30 June 2018 (2017: 538,094). 49 T R O P E R C G E T A R T S I E C N A N R E V O G S T N E M E T A T S L A C N A N I F I N O I T A M R O F N I R E D L O H E R A H S 251936 Haydale AR pp48-pp61.qxp 27/11/2018 18:37 Page 50 FINANCIAL STATEMENTS 16. Share-based payment transactions (continued) The model inputs for share options granted in the year were: Share prices at grant date Exercise prices Expected volatility Risk free rate Contractual life EMI & Unapproved 15 December 2017 125.50p 125.50p 51.11% 0.50% 10 years LTIP 15 December 2017 125.50p 2.00p 51.11% 0.50% 10 years • • • No dividends are anticipated in the life of model, consistent with the Directors’ view that the Group’s model is to generate value through capital growth rather than the payment of dividends; Risk-free interest rate of 0.5 per cent., equating to the prevailing UK Gilts rate, was used for the most recent option grants, which most closely matches the expected term of the grant; and The volatility has been adjusted to reflect market based performance criteria where appropriate. The weighted average remaining contractual life of share options outstanding at 30 June 2018 is 8.8 years (2017: 7.8 years). The charge for the year for share-based payment amounted to £232,094 (2017: £292,721). Warrants Balance at beginning of year Granted Lapsed Balance at end of year 2018 Weighted Number of warrants 2017 Weighted average exercise No. price Pence 187 – – –––––––––––––––––––––––––––––––––––––––––––––––––– 187 –––––––––––––––––––––––––––––––––––––––––––––––––– –––––––––––––––––––––––––––––––––––––––––––––––––– average Number of exercise warrants No. price Pence 187 – – 377,139 – – 377,139 – – 377,139 377,139 187 No warrants were issued during the year under review. None of the warrants outstanding at 30 June 2018 are to employees or have performance conditions attached. The same pricing model was used for calculating the cost of warrants to the Group as was used for calculating the cost of the options to the Group. The weighted average remaining contractual life of warrants outstanding at 30 June 2018 is 1.14 years (2017: 2.14 years). The charge for the year for share-based payment amounted to £59,052 (2017: £58,610). 17. Reserves Share capital The share capital represents the nominal value of the equity shares in issue. Share premium account The share premium account represents the amount received on the issue of ordinary shares in excess of their nominal value and is non-distributable. Share-based payment reserve The share-based payment reserve comprises the cumulative expense representing the extent to which the vesting period of share options has passed and management’s best estimate of the achievement or otherwise of non-market conditions and the number of equity instruments that will ultimately vest. Retained earnings The retained profits and losses reserves comprise the cumulative effect of all other net gains, losses and transactions with owners (e.g. dividends) not recognised elsewhere. Foreign Exchange The foreign exchange reserve comprises of translation differences arising from the translation of the overseas subsidiary results. Revaluing those subsidiaries from their functional currency into the group presentation currency. 50 251936 Haydale AR pp48-pp61.qxp 27/11/2018 18:37 Page 51 Haydale Graphene Industries plc | Annual Report & Accounts 2018 18. Trade and other payables Trade payables Tax and social security Accruals and other creditors Corporation tax 19. Bank loans Bank loans The borrowings are repayable as follows: – within one year – in the second year – in the third to fifth years inclusive 2018 £’ 000 687 73 1,412 2017 £’ 000 380 80 1,845 –––––––––––––––––––––––––––––– 2,305 –––––––––––––––––––––––––––––– –––––––––––––––––––––––––––––– 2,172 2018 £’ 000 – 2017 £’ 000 65 –––––––––––––––––––––––––––––– 65 –––––––––––––––––––––––––––––– –––––––––––––––––––––––––––––– – 2018 £’ 000 896 2017 £’ 000 1,270 256 267 373 359 261 650 –––––––––––––––––––––––––––––– 1,270 –––––––––––––––––––––––––––––– –––––––––––––––––––––––––––––– 896 The Group’s borrowings are denominated in US dollars. The directors consider that there is no material difference between the fair value and carrying value of the Group’s borrowings. Average interest rates paid 2017 % 4 –––––––––––––––––––––––––––––– –––––––––––––––––––––––––––––– 2018 % 4 In December 2014 a three year bank loan of £500,000 was drawn by the Company and securitised by cash deposits. The loan accrued interest at 1.5% above the Bank of England base rate and was repayable in equal monthly instalments. The loan was fully repaid in February 2018. In October 2016, a five year bank loan of $1,720,000 (equivalent to approximately £1.4 million at the time) was drawn by Haydale Technologies Inc (“HTI”), the Company’s US holding company subsidiary, secured on the fixed assets of HTI and its newly acquired operating subsidiary, Advanced Composite Materials. This loan carries an interest rate of 4% and is repayable in equal instalments. In addition to this HTI has secured a working capital line of credit with a rate fixed at 5.25% on the remaining balance. 20.Deferred income Deferred income is recognised for both capital and revenue grants from governments and other funding parties, and released as income in accordance with the relevant conditions of the grant concerned. Grants Commercial Deferred Income 2018 £’ 000 7 71 2017 £’ 000 13 240 –––––––––––––––––––––––––––––– 253 –––––––––––––––––––––––––––––– –––––––––––––––––––––––––––––– 78 Commercial Deferred Income As at 30 June 2018, deferred income of £71,041 arose in relation to the sale of a reactor, which had been invoiced at the year end, however the full revenue could not be recognised until the reactor has been commissioned. As at 30 June 2017, deferred income of £240,104 arose in relation to a sale where a cash receipt was received in advance for work to be carried out over the next six months. 51 T R O P E R C G E T A R T S I E C N A N R E V O G S T N E M E T A T S L A C N A N I F I N O I T A M R O F N I R E D L O H E R A H S 251936 Haydale AR pp48-pp61.qxp 27/11/2018 18:37 Page 52 FINANCIAL STATEMENTS 21. Related party disclosures Balances and transactions between Haydale Graphene Industries Plc and its subsidiaries are eliminated on consolidation and are not disclosed in this note. Balances and transactions between the Group and other related parties are disclosed below. Remuneration of directors and key management personnel The remuneration of the senior Executive Management Committee members, who are the key management personnel of the Group, is set out below in aggregate for each of the categories specified in IAS 24 ‘Related Party Disclosures’. Short-term employee benefits and fees Social security costs Share-based payments Post-retirement benefits 2018 £’ 000 398 47 74 15 2017 £’ 000 400 46 122 15 –––––––––––––––––––––––––––––– 583 –––––––––––––––––––––––––––––– –––––––––––––––––––––––––––––– 534 During the year ended 30 June 2018, Mr G Eves, a director of the Company, earned fees through his company, Evesco International Business, totalling Nil (2017: £11,293) for corporate finance consultancy. At 30 June 2018, the balance owed to Evesco International Business was Nil. (2017: Nil). Fees totalling £47,163 (2017: £35,333) were paid to the ONE Advisory Ltd, a company of which Mr M Wood, a director of the Company, is a director, during the year ended 30 June 2018 for financial, administration, compliance and support services. At 30 June 2018, the balance owed to ONE Advisory Ltd was £3,405 (2017: £3,551). Fees totalling £100,037 (2017: £64,427) were paid to the ATL Consulting Ltd, a company of which Mr R Smith, a director of the Company, is a director, during the year ended 30 June 2018 for business development consultancy. At 30 June 2018, the balance owed to ATL Consulting Ltd was £9,081 (2017: £11,387). During the year under review, legal services were provided to the Group by ONE Legal Advisory Ltd, a company of which Mr M Wood is a director amounting to £143 (2017: £5,856). The balance owed to ONE Legal Advisory Ltd at the end of the year was Nil (2017: Nil). Other transactions Other related party transactions during the year under review are shown in the table below: Services Received T M Mather – admin support Tracey Enterprises Limited PlanarTech QM Holdings 2018 £’ 000 2017 £’ 000 7 4 110 329 –––––––––––––––––––––––––––––– –––––––––––––––––––––––––––––– 14 – 107 416 An amount of £13,885 was invoiced by Ms T M Mather to HCS during the year ended 30 June 2018 for the provision of administrative support (2017: £7,079). Ms T M Mather is the partner of Mr N Finney, a director of HCS. As at 30 June 2018, a balance of Nil was due to Ms T M Mather by HCS (2017:£3,023). Accountancy and administration services were provided by Tracey Enterprises Ltd (“Tracey”) to HCS during the year ended 30 June 2018 amounting to Nil (2017: £3,555). Mr R Tracey, a director of Tracey, was the company secretary of HCS during the year under review. There were no amounts outstanding due to Tracey at 30 June 2018 (2017: Nil). During the year an amount of £416,189 was paid to QM Holdings in respect of property rent (2017: £328,887). QM Holdings is owned by Tom Quantrille and Marvin Murrell who are officers of HCT (formerly ACM), a wholly owned subsidiary of the group. Additional payments were made in the year in respect of the deferred consideration due to the vendors of HCT, Tom Quantrille and Marvin Murrell. Payments to Tom Quantrille made in the year amounted to £333,333 (2017: £16,281) and £111,111 (2017: £5,427) to Marvin Murrell. There were no amounts outstanding at the year end. 52 251936 Haydale AR pp48-pp61.qxp 27/11/2018 18:37 Page 53 Haydale Graphene Industries plc | Annual Report & Accounts 2018 During the year, Haydale Limited procured business development services from PlanarTech, a company of which P Frantz, a director of Haydale Technologies Thailand Ltd, a subsidiary of the Company, is a director. The value of services provided by PlanarTech in the year was £106,765 (2017: £110,356). The balance outstanding to PlanarTech at the year end was £10,439 (2017: £18,169). Services provided Frangible Safety Posts Limited Aqualiner Limited Everpower Sheng Tie (Xiemen) Graphene Technology Co Ltd Everpower International Holdings Co. Ltd 2018 £’ 000 2017 £’ 000 6 72 – – –––––––––––––––––––––––––––––– –––––––––––––––––––––––––––––– 1 10 275 52 In the year ended 30 June 2018, HCS provided services to Frangible Safety Posts Limited (“FSP”), a company of which Mr G S Boyce, a director of HCS, was a director. The amounts for the year under review were £776 (2017: £6,186). There were no amounts outstanding at the year end (2017: Nil). HCS made sales to Aqualiner Ltd (“Aqualiner”) during the year ended 30 June 2017, a company in which Mr N Weatherby and Mr G S Boyce, both directors of HCS, are directors. The net sales for the year ended 30 June 2018 were £9,908 (2017: £72,429). The balance outstanding at the year end was Nil (2017: £66,534). During the year, Haydale Graphene Industries Plc made sales to Everpower Sheng Tie (Xiemen) Graphene Technology Co. Ltd for £275,000. Haydale Limited made sales to Everpower International Holdings Co. Ltd of £51,744 during the year. Everpower are part of the same group as Advanced Waste & Water Technology Environmental Ltd, who own a 7.17% shareholding in Haydale Graphene Industries Plc. The balances outstanding (due to) / from related parties at each year ended 30 June were as follows:- Aqualiner Limited Thermocomp Limited T M Mather PlanarTech Everpower International Holdings Co. Ltd 2017 £’ 000 67 (2) (3) (18) – –––––––––––––––––––––––––––––– –––––––––––––––––––––––––––––– 2018 £’ 000 – (2) – (10) 35 22. Financial instruments The Group’s activities are exposed to a variety of market risk (including foreign currency risk and interest rate risk), credit risk and liquidity risk. The Group’s overall financial risk management policy focuses on the unpredictability of financial markets and seeks to minimise potential adverse effects on the Group’s financial performance. (a) Financial risk management policies The Group’s policies in respect of the major areas of treasury activity are as follows: (i) Market risk (i) Foreign currency risk The Group is exposed to foreign currency risk on transactions and balances that are denominated in currencies other than Pounds Sterling. The currencies giving rise to this risk are primarily the United States Dollar and the Euro. Foreign currency risk is monitored closely on an ongoing basis to ensure that the net exposure is at an acceptable level. The Group maintains the ability to provide a natural hedge wherever possible by matching the cash inflows (revenue stream) and cash outflows used for purposes such as operational expenditure in the respective currencies. 53 T R O P E R C G E T A R T S I E C N A N R E V O G S T N E M E T A T S L A C N A N I F I N O I T A M R O F N I R E D L O H E R A H S 251936 Haydale AR pp48-pp61.qxp 27/11/2018 18:37 Page 54 FINANCIAL STATEMENTS 22. Financial instruments (continued) The carrying amounts of the Group’s foreign currency denominated monetary assets and liabilities at the end of each reporting period were as follows: United States Dollar £’ 000 Euro £’ 000 Total £’ 000 2018 Financial assets Financial liabilities 2017 Financial assets Financial liabilities 498 541 –––––––––––––––––––––––––––––––––––––––––––––––––– 266 –––––––––––––––––––––––––––––––––––––––––––––––––– 266 43 – 658 746 –––––––––––––––––––––––––––––––––––––––––––––––––– 131 –––––––––––––––––––––––––––––––––––––––––––––––––– 127 88 4 Foreign currency sensitivity analysis The following table details the sensitivity analysis to possible changes in the relative values of foreign currencies to which the Group is exposed as at the end of the respective financial periods, with all other variables held constant: Effects on loss after taxation/equity United States Dollar: – strengthened by 10% – weakened by 10% Euro: – strengthened by 10% – weakened by 10% 2018 Increase/ (decrease) £’ 000 2017 Increase/ (decrease) £’ 000 26 (21) 58 (50) 9 (8) –––––––––––––––––––––––––––––– –––––––––––––––––––––––––––––– 5 (4) (ii) Interest rate risk The Group’s exposure to interest rate risk arises mainly from interest-bearing financial assets. The Group’s policy is to obtain the most favourable interest rates available, while ensuring no risk to capital. Any surplus funds will be placed with licensed financial institutions to generate interest income. The current loan and credit facilities maintain a fixed rate of interest. Interest rate risk sensitivity analysis A 100 basis points strengthening or weakening of the interest rate as at the end of each financial period would have an immaterial impact on loss after taxation and/or net assets. This assumes that all other variables remain constant. (ii) Credit risk The Group’s exposure to credit risk, or the risk of third parties defaulting, arises mainly from trade and other receivables. The Group manages its exposure to credit risk by the application of credit approvals, credit limits and monitoring procedures on an ongoing basis. For other financial assets (including cash and bank equivalents), the Group minimises credit risk by dealing exclusively with high credit rating financial institutions. The Group establishes an allowance for impairment that represents its estimate of incurred losses in respect of the trade and other receivables as appropriate. The main components of this allowance are a specific loss component that relates to individually significant exposures, and a collective loss component established for groups of similar assets in respect of losses that have been incurred but not yet identified. Impairment is estimated by management based on prior experience, current market and third party intelligence while considering the current economic environment. Credit risk concentration profile To date, modest sales have meant that the credit risk profile of the Group has tended to focus on a handful of customers only. As such, no meaningful analysis can be drawn from the customer profile of the receivables outstanding at each period end under review. 54 251936 Haydale AR pp48-pp61.qxp 27/11/2018 18:37 Page 55 Haydale Graphene Industries plc | Annual Report & Accounts 2018 Exposure to credit risk As the Group does not hold any collateral, the maximum exposure to credit risk is represented by the carrying amount of the financial assets at the end of each financial period. The exposure of credit risk for trade receivables by geographical region as at the year end is as follows: United Kingdom Europe North America Rest of the world Maturity analysis The ageing analysis of the Group’s trade receivables as at the year end is as follows: Not past due Past due: – less than 3 months – between 3 and 6 months – more than 6 months Gross amount 2018 £’ 000 149 37 124 395 2017 £’ 000 132 16 265 385 –––––––––––––––––––––––––––––– 798 –––––––––––––––––––––––––––––– –––––––––––––––––––––––––––––– 705 2018 £’ 000 470 2017 £’ 000 699 200 35 – 99 – – –––––––––––––––––––––––––––––– 798 –––––––––––––––––––––––––––––– –––––––––––––––––––––––––––––– 705 At the end of each financial period, trade receivables that are individually impaired were those in significant financial difficulties and have defaulted on payments. These receivables are not secured by any collateral or credit enhancement. Collective impairment allowances, are determined based on estimated irrecoverable amount from the sale of goods and services, determined by reference to past default experience. Trade receivables that are past due but not impaired The Haydale Graphene Industries Group believes that no impairment allowance is necessary in respect of these trade receivables. They are substantially companies with good collection track record and no recent history of default, further on from this , this applies to any trade receivables held at year end which are not past due. (iii) Liquidity risk Liquidity risk is the risk that the Group will not be able to meet its financial obligations as they fall due. The Group exposure to liquidity risk arises primarily from mismatches of the maturity of financial assets and liabilities. The Group maintains a level of cash and cash equivalents and bank facilities deemed adequate by management to ensure as far as possible, that it will have sufficient liquidity to meet its liabilities when they fall due. All of the financial liabilities of the Group are due within one year, with the exception of certain long term bank loans – see note 19. 55 T R O P E R C G E T A R T S I E C N A N R E V O G S T N E M E T A T S L A C N A N I F I N O I T A M R O F N I R E D L O H E R A H S 251936 Haydale AR pp48-pp61.qxp 27/11/2018 18:37 Page 56 FINANCIAL STATEMENTS 22. Financial instruments (continued) Maturity analysis The ageing analysis of the Group’s non-derivative financial liabilities as at the year end is as follows: 2018 £’ 000 2017 £’ 000 Due: – within one year – within one to two years – within two to five years Gross amount (b) Capital risk management 2,356 267 373 2,591 261 650 –––––––––––––––––––––––––––––– 3,502 –––––––––––––––––––––––––––––– –––––––––––––––––––––––––––––– 2,996 The Group defines capital as the total equity of the Group. The Group’s objectives when managing capital are to safeguard the Group’s ability to continue as a going concern in order to provide returns for shareholders and benefits for other stakeholders and to maintain an optimal capital structure to reduce the cost of capital. In order to maintain or adjust the capital structure, Haydale Graphene Industries PLC may adjust the amount of dividends paid to shareholders, return capital to shareholders, issue new shares or sell assets to reduce debt. Haydale Graphene Industries PLC ensures that the distributions to shareholders do not exceed working capital requirements. (c) Classification of financial instruments (at amortised cost) 2018 £’ 000 2017 £’ 000 Financial assets Trade receivables Other receivables Cash and bank balances Financial Assets (at amortised cost) Financial liabilities Bank loans Trade payables Accruals and other creditors Financial Liabilities (at amortised cost) 705 209 5,092 798 222 2,091 –––––––––––––––––––––––––––––– 3,111 –––––––––––––––––––––––––––––– –––––––––––––––––––––––––––––– 6,006 896 687 1,412 1,270 380 1,845 –––––––––––––––––––––––––––––– 2,895 –––––––––––––––––––––––––––––– –––––––––––––––––––––––––––––– 2,995 (d) Fair value of financial instruments The Group has no financial assets or liabilities carried at fair values at the end of each reporting date. 23. Capital commitments The Group had the following capital commitments in the respective years: Contracted but not provided for Authorised by the directors but not contracted for 2018 £’ 000 999 37 2017 £’ 000 39 – –––––––––––––––––––––––––––––– 39 –––––––––––––––––––––––––––––– –––––––––––––––––––––––––––––– 1,036 24.Ultimate controlling party The Directors do not consider any one shareholder, individually or acting in consort with others, to have ultimate control of the Group. 56 251936 Haydale AR pp48-pp61.qxp 27/11/2018 18:37 Page 57 Haydale Graphene Industries plc | Annual Report & Accounts 2018 25. Operating lease arrangements The amounts of minimum lease payments under non-cancellable operating leases are as follows: – within one year – within two to five years – later than 5 years Aggregate amounts payable 2018 2018 2017 2017 Plant and Land and Plant and Land and buildings machinery buildings machinery £’ 000 £’ 000 7 7 8 3 – – ––––––––––––––––––––––––––––––––––––––––––––––––––– ––––––––––––––––––––––––––––––––––––––––––––––––––– £’ 000 573 976 177 £’ 000 547 1,423 – 10 ––––––––––––––––––––––––––––––––––––––––––––––––––– ––––––––––––––––––––––––––––––––––––––––––––––––––– 1,970 1,726 15 Payments recognised as an expense under these operating leases were as follows: Operating lease expense 2018 2018 Plant and Land and buildings machinery £’ 000 6 2017 2017 Plant and Land and buildings machinery £’ 000 7 ––––––––––––––––––––––––––––––––––––––––––––––––––– ––––––––––––––––––––––––––––––––––––––––––––––––––– £’ 000 572 £’ 000 447 A significant proportion of the lease arrangements relate to the premises from which HTI and HCT operate in South Carolina, USA totalling £1.11 million (2017: £1.56 million). The lease expires on 31 December 2020. Other leases pertain to the office and unit contracts for the two UK facilities of in aggregate £0.1 million (2017: £0.22 million). Of the £0.22 million, certain leases are cancellable with three months’ notice and others have break clauses 10 months after the date of these accounts. During the current year a new lease agreement has been entered into, in respect of offices at Harwell, Oxfordshire. The lease expires in March 2028. The estimated committed costs are £0.36 million (2017: nil). The facility in Thailand is leased and, at the date of these results, will expire in 16 months. The cost is £0.03 million (2017: £0.09 million). Within the minimum lease payments for plant and machinery is the cost relating the general office equipment. 26.Defined Benefit Pension Scheme HCT (formerly ACM) operated a defined benefit pension scheme, The scheme was closed in November 2006 for any new participants. The net periodic benefit cost is determined at the beginning of the year based on applicable assumptions at that time. Contributions of approximately £110,000 are expected to be made during the year ended 30 June 2019. This payment is expected to be made in September 2018. Included in the loss before tax during the year: Net Interest Expense Included in other comprehensive income during the year: Actuarial loss / (gain) from demographic assumptions Deferred Tax 57 2017 £’000 156 –––––––––––––––––––––––––––––– –––––––––––––––––––––––––––––– 2018 £’000 37 2018 £’000 125 (26) 2017 £,000 57 (21) –––––––––––––––––––––––––––––– 36 –––––––––––––––––––––––––––––– –––––––––––––––––––––––––––––– 99 T R O P E R C G E T A R T S I E C N A N R E V O G S T N E M E T A T S L A C N A N I F I N O I T A M R O F N I R E D L O H E R A H S 251936 Haydale AR pp48-pp61.qxp 27/11/2018 18:37 Page 58 FINANCIAL STATEMENTS 26.Defined Benefit Pension Scheme (continued) The following table sets forth the pension plan’s funded status as of 30 June: Accumulated benefit obligation Projected Benefit obligation Plan assets at fair value Funded Status Accrued Pension Cost 2018 £‘000 (3,830) (3,830) 2,710 2017 £,000 (3,939) (3,939) 2,970 –––––––––––––––––––––––––––––– (969) –––––––––––––––––––––––––––––– (969) –––––––––––––––––––––––––––––– –––––––––––––––––––––––––––––– (1,120) (1,120) Net amount recognised in the consolidated balance sheet as of 30 June, consisted of the following: Non current Assets Current Liabilities Non current liabilities 2018 £’000 – – (1,120) 2017 £,000 – – (969) –––––––––––––––––––––––––––––– (969) –––––––––––––––––––––––––––––– –––––––––––––––––––––––––––––– (1,120) The discount rate is based on the yield curve of government bonds in the applicable region adjusted with a credit spread of one of the two highest ratings given by a recognized ratings agency. Future cash outflows of the plans are then related with the yield curve. The average is the discount rate. The weighted average assumptions used to develop the actuarial present value of benefit obligations and net periodic benefit costs for the pension plan are as follows for the year ended 30 June 2018: Discount rate for periodic benefit costs Discount rate for benefit obligations Rate of increase in compensation levels Investment return rate Mortality Assumptions are as follows: 4.00% 4.00% 0.00% 4.00% Longevity at retirement age (current & future pensioners) – Males – Females 2018 21.08 years 23.00 years 2017 19.98 years 21.71 years Plan Assets Pension assets are managed by an outside investment manager and are rebalanced periodically. The Company establishes policies and strategies and regularly monitors performance of the assets, including the selection of investment managers, setting long-term strategic targets, and monitoring asset allocations. Target allocation ranges are guidelines, not limitations, subject to variation from time-to-time or as circumstances warrant, and occasionally, the Company may approve allocations above or below a target range. The pension plan’s investment strategy with respect to pension assets is to invest the assets in accordance with ERISA and fiduciary standards. The long-term primary objective for the pension plan assets are to protect the assets from erosion of purchasing power and to provide a reasonable amount of long-term growth of capital, without undue exposure to risk. Currently, the strategic targets are 45% for equity securities, 50% for debt securities, and no more than 5% for other categories. 58 251936 Haydale AR pp48-pp61.qxp 27/11/2018 18:37 Page 59 The fair value of the Company’s pension plan assets valued at 30 June 2018, by asset category were as follows: Haydale Graphene Industries plc | Annual Report & Accounts 2018 Description Cash Corporate Equities Fixed Income: US Government Municipal Corporate debt Mutual Funds Negotiable CD Total Assets/ Liabilities Carrying Measured at Fair Value Amount £’000 £’000 147 147 1,212 1,212 Fair Value Measurements at 30 June 2018 using Level 1 Inputs £’000 147 1,212 Level 2 Inputs £’000 – – Level 3 Inputs £’000 – – 144 10 694 334 169 – – – – – –––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––– – –––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––– –––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––– 144 10 694 – – 144 10 694 334 169 – – – 334 169 1,862 2,710 2,710 848 All corporate equities are quoted securities. The changes in the fair value of the Company’s pension plan assets for the year ending 30 June 2018, were as follows: At 01 July 2017 Contributions Distributions Earnings Net realised gain Administrative expenses Foreign exchange gain/(loss) Balance at 30 June 2018 £’000 2,970 – (262) 65 57 (73) (47) –––––––––––––––– 2,710 –––––––––––––––– –––––––––––––––– Cash Flows For current financial year, the Company expects contributions to be approximately £110,000. The Company expects benefits paid for the next five fiscal years and the five years thereafter as follows: 2019 2020 2021 2022 2023 Thereafter The company’s pension plan asset allocations by asset category were as follows as of 30 June 2018: Asset Category Cash Equities Fixed Income Mutual funds 59 £’000 243 242 237 232 226 1,080 –––––––––––––––– 2,260 –––––––––––––––– –––––––––––––––– 5% 45% 38% 12% T R O P E R C G E T A R T S I E C N A N R E V O G S T N E M E T A T S L A C N A N I F I N O I T A M R O F N I R E D L O H E R A H S 251936 Haydale AR pp48-pp61.qxp 27/11/2018 18:37 Page 60 FINANCIAL STATEMENTS 26.Defined Benefit Pension Scheme (continued) Plan Obligations Benefit Obligation at 01 July 2017 Foreign exchange movement Interest Cost Actuarial loss Benefits paid Benefit Obligation at 30 June 2018 Fair Value of Plan Assets at 01 July 2017 Foreign Exchange movement Actual Return on plan assets Interest Income Employer contributions Benefits paid Fair Value of Plan Assets at 30 June 2018 Funded Status at 30 June 2018 £’ 000 3,939 (59) 147 65 (262) –––––––––––––––– 3,830 –––––––––––––––– 2,970 (46) (61) 109 – (262) –––––––––––––––– 2,710 –––––––––––––––– (1,120) –––––––––––––––– –––––––––––––––– Defined benefit obligation – sensitivity analysis. The impact to the value of the defined benefit obligation of a reasonably possible change to one actuarial assumption, holding all other assumption constant, is presented in the table below: Actuarial Assumption Discount Rate Inflation Rate Mortality Rate Reasonably Possible Change (+/- 0.25%) (+/-1.00%) (+/-1.00%) Defined Benefit Obligation (£’000) Decrease 94 (16) (39) Increase (91) 14 39 HCT (formerly ACM) also has a defined contribution plan under Section 401(k) of the Internal Revenue Code which provides for voluntary participation. All employees who have completed one hour of service are eligible to participate in this plan beginning the first pay period of the month following the date an hour of service is first performed. Participants may contribute on a pre-tax basis from 1% to 60%, in 1% increments, of their annual base salary. Company contributions under the plan are required to be equal to 100% of that portion of participant contributions which do not exceed 6% of the participant’s annual base compensation rate. Participants are immediately vested in their voluntary contributions plus actual earnings and Company contributions. The Company contributions for the year ended 30 June 2018, were £57,725 (2017: £29,245). 27. Taxes Deferred tax is calculated in full on temporary differences under the liability method. Deferred tax assets and liabilities are measured at the tax rates that are expected to apply in the period in which the liability is settled or the asset realised, based on tax rates (and tax laws) that have been enacted or substantively enacted by the end of the reporting period. The movement on the deferred tax account is as shown below: At 1 July 2017 Recognised in profit and loss: Tax expense Recognised in other comprehensive income: Actuarial gain on defined benefit pension schemes Arising on business combinations Movement due to changes in exchange rates At 30 June 2018 60 2018 £’ 000 (555) 388 2017 £’ 000 – 570 27 – 15 (1,217) 92 –––––––––––––––––––––––––––––– (555) –––––––––––––––––––––––––––––– –––––––––––––––––––––––––––––– (125) 251936 Haydale AR pp48-pp61.qxp 27/11/2018 18:37 Page 61 Haydale Graphene Industries plc | Annual Report & Accounts 2018 Deferred tax assets have been recognised in respect of tax losses and other temporary differences giving rise to deferred tax assets where the directors believe it is probable that these assets will be recovered. The main rate of corporate tax in the U.S reduced from 34% to 21% effective from 1 January 2018 as part of the U.S tax reforms. This has reduced the deferred tax liability attributable to the group’s subsidiaries based in South Carolina. Detail of the deferred tax liability, amounts recognised in profit and loss and amounts recognised in other comprehensive income are as follows: (Charged)/ Employee pension liabilities Available losses Business combinations Net tax assets/(liabilities) Employee pension liabilities Available losses Business combinations Net tax assets/(liabilities) A deferred tax asset has not been recognised for the following: Accelerated capital allowances Deductible temporary differences Unused tax losses credited (Charged)/ credited to profit to equity or loss 2018 2018 £’ 000 £’ 000 27 (118) – (32) – 538 –––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––– 27 –––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––– –––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––– Liability 2018 £’ 000 – – (675) Net 2018 £’ 000 235 315 (675) Asset 2018 £’ 000 235 315 – (675) (125) 388 550 (Charged)/ credited (Charged)/ credited to profit to equity or loss 2017 2017 £’ 000 £’ 000 – 329 – 350 – (109) –––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––– – –––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––– –––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––– Liability 2017 £’ 000 – – (1,234) Net 2017 £’ 000 329 350 (1,234) Asset 2017 £’ 000 329 350 – (1,234) (555) 679 570 2018 £’ 000 (103) – 2,426 2017 £’ 000 (224) – 1,972 –––––––––––––––––––––––––––––– 1,748 –––––––––––––––––––––––––––––– –––––––––––––––––––––––––––––– 2,323 The unused tax losses can be carried forward indefinitely. 28. Post Balance Sheet Events From 1 July 2018, the Group changed its internal reporting system to set up a third profit-centric strategic business units (“SBUs”) known as “RPC”, “AMAT” & “APAC”. For the current financial year and beyond, the Group intends to report sales and profits under these three SBUs. Since 30 June 2018, there has been the following changes to the Board of directors of the Company: • • • • The appointment of David Banks as Interim Executive Chairman in September 2018; The appointment of Keith Broadbent as the Group’s Chief Operating Officer and a member of the Board in September 2018; The appointment of Roger Humm as Senior Independent Non-executive Director in September 2018; and The appointment of Ray Gibbs as President, Business Development, in September 2018, having previously held the position of the Group’s Chief Executive Officer. 61 T R O P E R C G E T A R T S I E C N A N R E V O G S T N E M E T A T S L A C N A N I F I N O I T A M R O F N I R E D L O H E R A H S 251936 Haydale AR pp62-imp.qxp 27/11/2018 18:37 Page 62 FINANCIAL STATEMENTS PARENT COMPANY BALANCE SHEET As at 30 June 2018 Company Registration No. 07228939 Fixed assets Property, plant and equipment Investments Current assets Debtors – within one year – after more than one year Cash at bank and in hand Creditors: amounts falling due within one year NET CURRENT ASSETS TOTAL ASSETS LESS CURRENT LIABILITIES Creditors: amounts falling due after more than one year NET ASSETS Capital and reserves Called up share capital Share premium account Profit and loss account SHAREHOLDER’S FUNDS Note 2018 £’ 000 2017 £’ 000 6 7 7 8 9 9 22 3,610 – 3,076 –––––––––––––––––––––––––––––– 3,076 –––––––––––––––––––––––––––––– 3,632 22,976 (286) 18,102 – 4,874 14,329 – 1,675 –––––––––––––––––––––––––––––– 16,004 (732) –––––––––––––––––––––––––––––– 15,272 –––––––––––––––––––––––––––––– 18,348 – –––––––––––––––––––––––––––––– 18,348 –––––––––––––––––––––––––––––– –––––––––––––––––––––––––––––– 26,322 – 22,690 26,322 547 27,539 (1,764) 392 18,936 (980) –––––––––––––––––––––––––––––– 18,348 –––––––––––––––––––––––––––––– –––––––––––––––––––––––––––––– 26,322 As permitted by section 408 of the Companies Act 2006, the Company’s profit and loss account has not been included in these financial statements. The loss of the Company for the year ended 30 June 2018 was £1,074,669 (2017: £1,666,959). The financial statements on pages 62 to 68 were approved and authorised for issue by the Board of directors on 17 September 2018 and signed on its behalf by:- David Banks Interim Executive Chairman Matt Wood Finance Director 62 251936 Haydale AR pp62-imp.qxp 27/11/2018 18:37 Page 63 Haydale Graphene Industries plc | Annual Report & Accounts 2018 Share capital £’ 000 Share Premium £’ 000 Retained profits £’ 000 Total Equity £’ 000 305 – – 87 11,840 – – 7,096 335 (1,666) 351 – 12,480 (1,666) 351 7,183 ––––––––––––––––––––––––––––––––––––––––––––––––– 18,348 (1,075) 291 8,758 ––––––––––––––––––––––––––––––––––––––––––––––––– 26,322 ––––––––––––––––––––––––––––––––––––––––––––––––– ––––––––––––––––––––––––––––––––––––––––––––––––– 18,936 – – 8,603 (980) (1,075) 291 – 392 – – 155 (1,764) 27,539 547 COMPANY STATEMENT OF CHANGES IN EQUITY For the year ended 30 June 2018 At 1 July 2016 Loss for the year Recognition of share-based payments Issue of ordinary share capital, net of transaction costs At 30 June 2017 and 1 July 2017 Loss for the year Recognition of share-based payments Issue of ordinary share capital, net of transaction costs At 30 June 2018 63 T R O P E R C G E T A R T S I E C N A N R E V O G S T N E M E T A T S L A C N A N I F I N O I T A M R O F N I R E D L O H E R A H S 251936 Haydale AR pp62-imp.qxp 27/11/2018 18:37 Page 64 FINANCIAL STATEMENTS NOTES TO THE PARENT COMPANY BALANCE SHEET For the year ended 30 June 2018 1. Basis of preparation The parent company financial statements of Haydale Graphene Industries Plc, a public company incorporated and registered in England and Wales under the Companies Act 2016 with company number 07228939 which is limited by shares, have been prepared in accordance with Financial Reporting Standard 101 Reduced Disclosure Framework. The principal accounting policies adopted in the preparation of the financial statements are set out below. The policies have been consistently applied to the years presented, unless otherwise stated. The financial statements have been prepared on a historical cost basis. The presentation currency used is sterling and amounts have been presented in round (“£000’s”). Disclosure exemptions adopted In preparing these financial statements the company has taken advantage of all disclosure exemptions conferred by FRS101. Therefore these financial statements do not include: • • • • • • certain comparative information as otherwise required by EU endorsed IFRS; certain disclosures regarding the company’s capital; a statement of cash flows; the effect of future accounting standards not yet adopted; the disclosure of the remuneration of key management personnel; and disclosure of related party transactions with other wholly owned members of the group headed by Haydale Graphene Industries Plc. In addition, all in accordance with FRS 101, further disclosure exemptions have been adopted because equivalent disclosures are included in the consolidated financial statements of Haydale Graphene Industries Plc. These financial statements do not include certain disclosures in respect of: • • • • Share based payments; Business combinations; Financial Instruments (other than certain disclosures required as a result of recording financial instruments at fair value); and Fair value measurement (other than certain disclosures required as a result of recording financial instruments at fair value). 2. Accounting policies The following accounting policies have been applied consistently in dealing with items which are considered material to the company’s financial statements: Investment in subsidiary undertakings Where the company has control over an investee, it is classified as a subsidiary. The company controls an investee if all three of the following elements are present: power over the investee, exposure to variable returns from the investee, and the ability of the investor to use its power to affect those variable returns. Control is reassessed whenever facts and circumstances indicate that there may be a change in any of these elements of control. Investments in subsidiary understandings where the company has control are stated at cost less any provision for impairment. Share-based payments When the company grants options over equity instruments directly to the employees of a subsidiary undertaking, the effect of the share-based payment is capitalised as part of the investment in the subsidiary as a capital contribution, with a corresponding increase in equity. Depreciation Depreciation is provided to write off cost, less estimated residual values, of all tangible fixed assets, evenly over their expected useful lives. It is calculated at the following rates: Furniture and fittings Computer equipment 33% per annum straight line 33% per annum straight line 64 251936 Haydale AR pp62-imp.qxp 27/11/2018 18:37 Page 65 Haydale Graphene Industries plc | Annual Report & Accounts 2018 Impairment The need for any fixed asset impairment write-down is assessed by comparison of the carrying value of the asset against the higher of realisable value and value in use. Taxation The charge for taxation is based on the loss for the period and takes into account taxation deferred. Current tax is measured at amounts expected to be paid using the tax rates and laws that have been enacted by the balance sheet date. Substantively enacted rate has been used for deferred tax balances, which are recognised in respect of all timing differences that have been originated but not reversed by the reporting date, except that the recognition of deferred tax assets is limited to the extent that the Company anticipates making sufficient taxable profits in the future to absorb the reversal of the underlying timing differences. Foreign Currency Foreign currency transactions are translated at the rates ruling when they occurred. Foreign currency monetary assets and liabilities are translated at the rate of exchange ruling at the balance sheet date. Any differences are taken to the profit and loss account. Critical accounting judgements and estimation uncertainty The preparation of the financial statements requires management to make judgements, estimates and assumptions that affect the reported amounts of revenues, expenses, assets and liabilities, and the accompanying disclosures, and the disclosure of contingent liabilities, at the end of the reporting period. However, uncertainty about these assumptions and estimates could result in outcomes that require a material adjustment to the carrying amount of the assets or liabilities affected in future periods. The key sources of estimation uncertainty that have a significant effect on the amounts recognised in the financial statements include estimation, where applicable, for items relating to revenue recognition and impairment of receivables. Impairment of Investments The company considers the impairment of investments on an annual basis. An estimate of the values of investments is calculated on a discounted cash flow basis. Our value in use calculations require estimates in relation to uncertain items, including management’s expectations of future revenue growth, operating costs, profit margins, operating cashflows and the discount rate applied. Future cash flows used in the value in use calculations are based on our latest Board approved five-year financial plans. Expectations about future growth reflect expectations of growth in the markets applicable to the group. The future cashflows are discounted using a pre-tax discount rate that reflects current market assessments of the time value of money. The impairment of investments have been considered under note 10 of the consolidated financial statements. Impairment of debtors The company makes an estimate of the recoverable value of trade and other debtors. When assessing impairment of trade and other debtors, management considers factors including the current credit rating of the debtor, the ageing profile of the debtor and historical experience. For intercompany debtors, the company considers the forecast results of the subsidiary to which the intercompany balance relates, in order to determine its recoverability. The impairment of intercompany debtors have been considered under note 10 of the consolidated financial statements. 3. Audit Fees The audit fees of the parent company have been disclosed within note 6 of the consolidated financial statements, which form part of these financial statements. 65 T R O P E R C G E T A R T S I E C N A N R E V O G S T N E M E T A T S L A C N A N I F I N O I T A M R O F N I R E D L O H E R A H S 251936 Haydale AR pp62-imp.qxp 27/11/2018 18:37 Page 66 FINANCIAL STATEMENTS 4. Employees The average number of employees during the year, including executive directors, was: Administration Staff costs for all employees, including executive directors, consist of: 2018 No. 2017 No. –––––––––––––––––––––––––––––––––– 11 7 –––––––––––––––––––––––––––––––––– –––––––––––––––––––––––––––––––––– Wages and Salaries Social Security Costs Pension Costs Share based payment expense 2017 2018 £ £ –––––––––––––––––––––––––––––––––– 385,703 46,268 14,053 147,990 –––––––––––––––––––––––––––––––––– 594,014 –––––––––––––––––––––––––––––––––– –––––––––––––––––––––––––––––––––– 683,669 80,239 22,391 159,835 946,134 5. Directors’ remuneration In respect of directors’ remuneration, the disclosures required by Schedule 5 to the Large and Medium-sized Companies and Groups (Accounts and Reports) Regulations 2008 are included in the detailed disclosures in the audited section of the Directors’ Remuneration Report on pages 18 to 21, which are ascribed as forming part of these financial statements. 6. Fixed asset investments Investment in subsidiary undertakings £’000 Capital contribution £’000 Total £’000 Cost At 1 July 2017 Additions Disposals At 30 June 2018 2,580 432 (29) 3,076 563 (29) ––––––––––––––––––––––––––––––––––––––––––––––––––– 3,610 ––––––––––––––––––––––––––––––––––––––––––––––––––– ––––––––––––––––––––––––––––––––––––––––––––––––––– 496 131 – 2,983 627 On 14 July 2017, the group setup a new wholly owned subsidiary, Haydale Technologies (Taiwan) Co Ltd (HTW), based in Kaoshing, South Taiwan. The group acquired the entire share capital for £25,251 on incorporation. HTW issued further shares of £99,057 and £307,984 on 14 September 2017 & 01 December 2017 respectively, taking the group’s investment in HTW to £432,292. This represents Haydale Graphene Industries’ 100% ownership of 1,750,000 shares of 10 TWD each in HTW. The composition of the consideration was cash. Since the incorporation of HTW to 30 June 2018, HTW has contributed £0.02 million to the Group’s total income and generated a loss of £0.21 million. The undertakings in which the company's interest at the period end is 20% or more are as follows: Name of subsidiary company Haydale Ltd Haydale Composite Solutions Limited Haydale Composites Ltd EPL Composites Limited Haydale Technologies Korea Co., Ltd Haydale Technologies Incorporated LLC Haydale Technologies Thailand Ltd Haydale Ceramic Technologies LLC (Formerly ACMC Holdings LLC) Haydale Technologies (Taiwan) Co Ltd Country of incorporation or registration England & Wales England & Wales England & Wales England & Wales South Korea North America Thailand North America Taiwan 66 Proportion of ordinary share capital held 100% 100% 100% 100% 100% 100% 100% Nature of business R&D, sales and distribution R&D, sales and distribution Dormant Dormant Sales and distribution R&D, sales and distribution R&D, sales and distribution 100% 100% Sales and distribution R&D, sales and distribution 251936 Haydale AR pp62-imp.qxp 27/11/2018 18:37 Page 67 Haydale Graphene Industries plc | Annual Report & Accounts 2018 Haydale Composites Ltd & EPL Composite Limited are exempt from audit in accordance with the Companies Act 2006, as a result of the companies remaining dormant throughout the current and previous financial years. Haydale Technologies Korea Co., Ltd and Haydale Technologies (Taiwan) Co Ltd are exempt from audit. Subsidiary Haydale Ltd Haydale Composites Ltd EPL Composites Ltd Haydale Composite Solutions Limited Haydale Technologies Korea Co., Ltd Haydale Technologies Thailand Ltd Haydale Technologies Incorporated LLC Haydale Ceramic Technologies LLC (Formerly ACMC Holdings LLC) Haydale Technologies (Taiwan) Co Ltd 7. Debtors Amounts owed by group companies Corporation tax Other debtors Prepayments and accrued income Registered office Clos Fferws, Parc Hendre, Capel Hendre, Ammanford, Carmarthenshire, SA18 3BL Clos Fferws, Parc Hendre, Capel Hendre, Ammanford, Carmarthenshire, SA18 3BL Clos Fferws, Parc Hendre, Capel Hendre, Ammanford, Carmarthenshire, SA18 3BL Unit 10 Charnwood Business Park, North Road, Loughborough, Leicestershire, LE11 1QJ 16F, Gangnam Bldg. 396, Seocho-daero, Seocho-gu, Seoul 137-857, South Korea Room 510 - 515, Tower D, 5th Floor, Thailand Science Park Phahon Yothin Road, Luang District, Pathum Thani Province, 12120, Thailand 1446 South Buncombe Road, Greer, South Carolina. 29651, USA 1446 South Buncombe Road, Greer, South Carolina. 29651, USA 10 Fl., No 251 Minghua Road, Gushan District Kaohsiung City 804, Taiwan 2018 £’ 000 17,908 115 37 42 2017 £’ 000 13,984 190 116 39 –––––––––––––––––––––––––––––– 14,329 –––––––––––––––––––––––––––––– –––––––––––––––––––––––––––––– 18,102 8. Creditors: amounts falling due within one year Bank loan Trade creditors Amounts owed to group companies Other creditors including tax and social security Accruals and deferred income 2018 £’ 000 – 110 37 29 110 2017 £’ 000 108 64 – 477 83 –––––––––––––––––––––––––––––– 732 –––––––––––––––––––––––––––––– –––––––––––––––––––––––––––––– 286 The bank loan is securitised by an equal balance held on deposit and accrues interest at 1.5% above the Bank of England base rate. The loan was fully repaid in February 2018. 9. Share capital and share premium Number of shares No. 19,597,713 7,731,060 – Share capital £’ 000 Share premium £’ 000 392 155 – 18,936 9,123 (520) Total £’ 000 19,328 9,278 (520) ––––––––––––––––––––––––––––––––––––––––––––––––––– 28,086 ––––––––––––––––––––––––––––––––––––––––––––––––––– ––––––––––––––––––––––––––––––––––––––––––––––––––– 27,328,773 27,539 547 At 1 July 2017 Issue of £0.02 ordinary shares Share Issue Costs At 30 June 2018 67 T R O P E R C G E T A R T S I E C N A N R E V O G S T N E M E T A T S L A C N A N I F I N O I T A M R O F N I R E D L O H E R A H S 251936 Haydale AR pp62-imp.qxp 27/11/2018 18:37 Page 68 FINANCIAL STATEMENTS 9. Share capital and share premium (continued) During the year, the Company issued 7,731,060 new ordinary shares of 2p each as follows: • In October 2017, 7,731,060 shares were issued in connection with the Company's £9.3 million placing and open offer; Issue costs amounting to £520,342 (2017: £157,360) have been charged to the share premium account in the year. 10. Ultimate controlling party The Directors do not consider any one shareholder, individually or acting in consort with others, to have ultimate control of the Company 11. Related party transactions The Company is exempt from disclosing transactions with wholly owned subsidiaries within the Group. Other related party transactions are included within those given in note 21 of the consolidated financial statements. 68 251936 Haydale AR pp62-imp.qxp 27/11/2018 18:37 Page 69 Haydale Graphene Industries plc | Annual Report & Accounts 2018 Corporate Directory Company Number 07228939 Directors David Doidge Richard Banks Keith Broadbent Raymond John Gibbs Matthew Graham Wood Roger Anthony Smith Graham Dudley Eves Roger James Humm Secretary Matt Wood Investor Relations Contact Gemma Smith Gemma.smith@haydale.com Head Office and Registered Office Clos Fferws, Parc Hendre, Capel Hendre, Ammanford, Carmarthenshire, Wales, SA18 3BL Website E-mail Telephone Advisers Independent Auditor Nominated Advisor and broker Registrars Solicitors www.haydale.com info@haydale.com +44 (0)1269 842946 BDO LLP Arcadia House, Maritime Walk, Ocean Village, Southampton, SO14 3TL Arden Partners 125 Old Broad Street, London, EC2N 1AR Share Registrars Limited Suite E, First Floor, 9 Lion and Lamb Yard, Farnham, Surrey, GU9 7LL Field Fisher LLP Riverbank House, 2 Swan Lane, London EC4R 3TT Intellectual Property Solicitors Mewburn Ellis LLP 33 Gutter Lane, London, EC2V 8AS 69 T R O P E R C G E T A R T S I E C N A N R E V O G S T N E M E T A T S L A C N A N I F I N O I T A M R O F N I R E D L O H E R A H S 251936 Haydale AR pp62-imp.qxp 27/11/2018 18:37 Page 70 Perivan Financial Print 251936 www.haydale.com Haydale Graphene Industries Plc Clos Fferws, Parc Hendre, Capel Hendre, Ammanford, Carmarthenshire, SA18 3BL T: +44 (0)1269 842946 F: +44 (0)1269 831062 

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