Accelerated materials innovation Annual Report and Accounts 2014 I l i k a p l c A n n u a l R e p o r t a n d A c c o u n t s 2 0 1 4 Ilika plc accelerates the invention, testing and selection of materials that can be scaled-up for commercial use. Technology Innovation Collaboration Ilika accelerates the development of new materials for energy and electronics applications through the use of its patented, high throughput techniques. Ilika’s technology enables functional materials to be made, characterised and tested up to 100 times faster than traditional techniques. Ilika has commercial partnerships with international blue- chip companies. Ilika’s high throughput technology creates large, robust datasets that can be used to fully define the performance of families of materials. This enhances the value of intellectual property and allows product performance to be fully optimised. The techniques can be used to support product improvement as well as radical new product development. Companies choose to work with Ilika in order to extend the capabilities of their in-house R&D teams. This saves materials development costs, reduces time to market and captures market share, thereby increasing return on R&D investment. Partnering with Ilika also reduces both business and technical risk, maximising the likelihood of successful project outcomes. www.ilika.com Highlights 2014 Operational highlights Developed unique processing methodology to produce stacked solid-state batteries Validated stacked architecture through electrochemical testing Increased cross-sectional area of battery cells 25x Protected battery production processes through patents European fuel cell catalyst patent granted Secured 3-year grant-funded project to develop new alloys for aerospace applications Financial highlights £7.1m Cash, cash equivalents and bank deposits of £7.1 million (2013: £1.9 million) +5% Revenues up 5% to £1.05 million (2013: £1.00 million) -20% Loss for the year reduced by 20% to £2.79 million (2013: £3.47 million) -29% Loss per share reduced by 29% to 5p (2013: 7p) Commenting on the results Ilika’s Chairman, Jack Boyer, said: “The progress achieved this year in the development of the Company’s stacked solid-state battery has been transformational. It has accelerated the engagement in discussions with new and existing commercialisation partners and has enabled the Company to reinforce the balance sheet through a fundraise which has refreshed and broadened our shareholder base. With over £600k of revenue already secured for 2014 we look forward to the coming year with optimism.” Overview 01 Highlights 02 How we do it 03 Development projects 04 Case study Strategic Report 06 Strategic review 08 Financial review 09 Principal risks and uncertainties Governance Directors’ remuneration report 10 Board of Directors 12 Directors’ report 14 17 Statement of Directors’ responsibilities 18 Corporate governance statement 20 Corporate and social responsibility statement 22 Independent auditor’s report Financial Statements 23 Consolidated statement of comprehensive income 24 Consolidated balance sheet 25 Consolidated cash flow statement 26 Consolidated statement of changes in equity 27 Notes to the consolidated financial statements Company balance sheet 41 42 Company cash flow statement 43 Company statement of changes in equity 44 Notes to the consolidated financial statements ibc Corporate directory 01 Ilika plc | Annual Report and Accounts 2014Strategic ReportOverviewGovernanceFinancial Statements How we do it How we generate growth Rapid discovery of new materials for the energy and electronics sectors Early engagement of large multinational partners which co-fund the route to commercialisation Development agreements driving revenue growth and providing a strong product pipeline Ilika’s unique process is far quicker and more efficient than traditional materials discovery processes. Ilika uses high throughput, or combinatorial, techniques which involve the rapid synthesis of a large number of different structurally related materials in a few automated steps. Discovery The production of a new material has traditionally been a slow and arduous process, taking between 7 and 10 years to move from an initial discovery through to the first commercial prototype. Ilika’s High Throughput Physical Vapour Deposition (‘HT-PVD’) proprietary technology platform delivers rapid new material discovery up to 100 times faster than traditional methods. The HT-PVD facility can deposit large numbers of films of different composition in one automated experimental run. Patented technology ensures that the deposition of all elements occurs simultaneously and that the composition profile can be carefully varied across the substrate in a controlled manner. This process enables hundreds of materials to be made in a single, automated operation and subsequently analysed in a rapid manner for specific, sought-after behaviours. Ilika’s high-throughput process has the additional attraction of enabling materials to be rapidly scaled up for commercial application once the requisite chemical and physical properties have been achieved. Partnerships Ilika collaborates with multinational partners on joint research and development projects, using its proprietary high-throughput processes to develop new patentable functional materials. These materials are then used to develop new products or improve existing product performance. By working in collaboration, business and technical risk is reduced and Ilika is able to target market areas where minimum potential for infringement exists and to fully define the surrounding area for patent protection. Ilika is able to generate candidate materials for targeted scale-up for its partners in a much reduced development time, generating significant value for its customers by helping them increase R&D return on investment and reduce the time to market for new and improved products. Ilika’s high-throughput process enables the rapid, simultaneous collection of large datasets which are then processed, analysed and presented so that meaningful conclusions about material properties can be drawn and support the submission of patents to protect any new materials discovered. 02 Ilika plc | Annual Report and Accounts 2014 Development projects Fuel cell catalysts The Carbon Trust’s Polymer Fuel Cells Challenge is supporting the commercialisation of Ilika’s proprietary high performing electro-catalysts for use in fuel cell vehicles as a platinum replacement. The Company has had kilogram scale quantities of its electrocatalyst manufactured and has provided material samples along with positive cell performance data to 3 global OEMs for evaluation. Solid-state batteries Lithium-ion batteries are widely used to store energy for consumer electronics products. There is a demand for new batteries which can store energy in a smaller volume, but can also charge and discharge rapidly while remaining safe. Ilika is working on battery designs to fulfil these criteria using solid-state technology. Tuneable dielectrics The rapidly growing consumer electronics market is driving the need for capacitors with improved performance for use as components in consumer electronic devices and other demanding applications. Working together, Ilika and a worldwide leader in the design, manufacture and sale of passive electronic components, communication modules and power supply modules, investigated a new class of dielectric materials with high voltage tuneability and low dielectric loss to deliver the necessary improved performance suitable for certain electronic components. Piezoelectrics The piezoelectric material of choice is PZT (lead zirconium titanate). The EU has now outlawed the use of PZT in its Restriction of Hazardous Substances Directive, prohibiting the use of lead in electronic materials and manufacturers have been tasked with developing piezoelectrically active materials which do not contain lead. Ilika has been working in collaboration with CeramTec to find potential replacement materials for PZT. Superalloys The aerospace industry is seeking new alloy compositions for gas turbine engines which have improved thermo efficiency which will increase performance, reduce CO2 emissions and reduce noise levels at takeoff. Ilika has been awarded grant funding by the Technology Strategy Board as part of their Aerospace Industrial Strategy, to work together with the University of Cambridge, Diamond light source and Rolls Royce to develop the innovation of these materials. 03 Ilika plc | Annual Report and Accounts 2014Strategic ReportOverviewGovernanceFinancial Statements Case study Solid-state batteries: a world first for Ilika Key features Market requirement: compact batteries that are safe, charge rapidly and last longer Solution: solid-state lithium-ion Status: – single cell battery that can be manufactured as a stack – partnering discussions in progress with battery manufacturers Plan for 2014: – conclude electrochemical testing – scale-up to production prototypes – initiate discussions for a licensing deal What is driving the need for innovation in battery technology? The biggest market for lithium-ion batteries is currently the consumer electronics market, for devices such as smartphones, tablets and laptops. In this market, improved energy density is the most urgent requirement. In other words, consumers want batteries that weigh the same and take up the same volume, but hold more charge and therefore last longer between charges. In addition, there is a need for batteries that charge more rapidly once they have run out of charge. One of the emerging markets for batteries is the transport market, particularly for electric and hybrid vehicles. Here, there is a need for an improved safety profile because, very occasionally, lithium-ion batteries catch fire and trigger costly product recalls. Battery Scale and Timelines Licensing income Mass market commercialisation 2 years 3 years Micro – Smart cards – RF id – Sensors Consumer – Mobiles – Laptops – Defence Transport – Automotive Utility – Utilities – UPS 4 years 5 years 04 Ilika plc | Annual Report and Accounts 2014 Overview Strategic Report Governance Financial Statements What is the difference between a conventional lithium-ion battery and a solid-state battery? A conventional lithium-ion battery uses a polymer separator soaked in liquid electrolyte to electrically isolate the electrodes from one another, while at the same time allowing lithium ions to migrate from one electrode to another. In a solid-state battery, the separator and liquid electrolyte are replaced by a solid electrolyte, which is often a ceramic or a glass. What are the benefits of a solid- state battery? A solid-state battery is non- flammable, charges faster, holds charge for longer and is smaller than a conventional lithium-ion battery. Why haven’t solid-state batteries already replaced conventional lithium-ion batteries? Solid-state batteries were invented in the 1990’s and some are commercially available but until now they have all been made as single cells with limited energy capacity. In particular, it has not been possible to make them in a format suitable for consumer electronic devices. Why is the stacking of solid-state batteries such a breakthrough? By using a novel process and discovering a new combination of materials, Ilika has been able to produce a stacked battery in which the cells are deposited directly on top of each other. This reduces the required packaging and therefore increases the energy density of the battery. Applying this technology enables batteries large enough to be useful for commercially relevant markets to be produced. Which markets will Ilika be addressing first? Ilika believes that the market for micro batteries is the most suitable one for the initial launch of its product. This is a rapidly growing sector where the benefits of solid- state batteries provide unique benefits. Micro batteries are in demand in increasing quantities to power sensors in wireless sensor networks (commonly referred to as the ‘Internet of Things’). Typically, the batteries are used to store energy from energy harvesting devices, ensuring the sensors are powered 24/7. This market for micro batteries is expected to be worth $10 billion by 2020 and will be the second largest market for batteries after consumer electronics. Following successful roll-out of Ilika’s solid-state battery technology for micro batteries, Ilika will continue to scale the technology for wearable devices and eventually consumer electronics. Timeline to Initial Commercialisation Development Phase I Development Phase II Development Phase III Technical Transfer Product Distributions and Sale Duration 14 months 10 months 8 months 6 months Deliverables Demonstration cell Demonstration battery Prototype batteries for customer validation Production scale manufacturing Mass market commercialisation Phase I Single Cell Phase II Stack Cells (side view) Phase III Prototype Ilika plc | Annual Report and Accounts 2014 05 Strategic review Our Strategy The Company is pursuing its objectives through the following strategies: Developing leading-edge high-throughput development processes Partnering with companies committed to developing and globally commercialising jointly developed products Using high-throughput processes to invent patentable functional materials technologies (for instance, battery versus fuel cell technology). Thereby, the Company aims to create intellectual property such that it will benefit from commercialisation rewards associated with the ultimate generally adopted technology (or technologies). The Company’s objective is to have its materials integrated into market-leading products sold by leading commercialisation partners around the world. The Company generally expects these end products to fit into or create end markets worth in excess of $1 billion per year, in which the Directors believe a number of the Company’s commercialisation partners are positioned to have a leading share. The Company is pursuing its objectives through the following strategies: • Developing leading-edge high- throughput development processes; • Partnering with companies committed to developing and globally commercialising jointly developed products; and • Using high-throughput processes to invent patentable functional materials. Operating review The Company has increased the number of its customers in the year and developed a more even spread of commercial engagements between the US, Europe and Asia. The Company has also made significant progress during the year on its two lead programmes, the development of a solid-state battery and the development of a low cost fuel cell catalyst. Solid-state batteries The mass-market commercialisation of solid-state batteries will be a step change in the evolution of battery technology; enabling lighter, non- flammable batteries which contain the same energy in half the volume while charging up to 6 times faster than the highest performance lithium-ion incumbents. The Company has been developing a proprietary solid-state battery chemistry and fabrication process, facilitating the scale-up manufacture of the next generation of solid-state lithium ion batteries. It has used its unique processing abilities to successfully turn a set of optimised high-performance materials into solid-state batteries with the following key advantages: Ilika plc is the holding company for Ilika Technologies Limited, the advanced materials innovation company. Principal activities Ilika accelerates the discovery of new and patentable materials using its unique, patent protected, high- throughput process for identified end uses in the energy and electronics sectors. This process enables hundreds of scalable materials to be made in a single, automated operation and subsequently tested for key properties. Business strategy The Company’s strategy is to use its processes to discover and commercialise novel materials for integration into products with high-value end markets. In order to ensure a high probability of commercial success, the Company prefers to develop these materials in collaboration with large multinational companies, which have the expertise to bring new end products to market to address unmet needs in their sectors. On occasion, the Company has joint development programmes, which contribute to competing 06 Ilika plc | Annual Report and Accounts 2014 • A simple fabrication process • Mechanical stability • Stackable cells (necessary for building larger capacity batteries) In January 2014, the company announced that it had achieved a unique and simple processing methodology for producing a stacked solid-state cell battery, a world-first and a solution to a key barrier to mass market entry for solid-state batteries. Electrochemical testing of the stacked solid-state batteries generated performance data that validates the stacked architecture, with two-cell stacks producing twice the voltage and power of a single cell. In one automated procedure, the Company successfully, simultaneously, produced one hundred identical solid-state batteries using the Company’s proprietary process technology. Each battery consists of two cells deposited in series producing a composite device with a second cell on top of the first. This resulted in a doubling of the voltage available from the battery to approximately 8 volts. The Company has had single solid-state lithium-ion battery cells on test, rapidly charging and discharging them over 2,200 times, which is equivalent to demonstrating a lifetime of around 6 years in a typical consumer electronics application. Demonstrations of longer lifetimes are ongoing. Further development work is continuing to increase the number of cells in each stacked battery and also their cross-sectional area. This will result in micro-batteries containing sufficient energy for initial commercialisation in network sensor applications, a rapidly growing market segment expected to be in excess of £1 billion by 2017. This scalable stacked cell architecture enables the simple fabrication of cells over a wide range of sizes. The stacking of multiple cells opens up the pathway to larger, higher power solid-state devices for the consumer electronic industry. In May 2014 Ilika announced that 2 of its patent applications, filed jointly with Toyota, had been granted in the UK. The patents cover the vapour deposition processes used to produce solid-state batteries and represent a key part of the family of patents and patent applications covering the complete methodology for producing solid-state batteries. The performance data indicated above is now being shared with Ilika’s OEM partners in the US, Japan and Europe reinforcing, and in some cases accelerating, commercialisation discussions. The pilot line for the production of Ilika’s solid-state battery technology is currently being fabricated and the infrastructure to accommodate the equipment is near completion. Prototype batteries for customer validation can be made available in H1 2015, followed by licensing and technical transfer as a prelude to production scale manufacturing. Low-cost fuel cell catalyst Reducing the cost of fuel cell technology is widely acknowledged as a key priority for enabling its adoption for both transport and stationary applications. The Company has proprietary materials that are suitable for use in so-called proton exchange membrane’s (‘PEM’) fuel cells, which are of primary interest to transport applications. PEM fuel cell technology is also being used for stationary power applications, particularly for domestic power in Japan. 40 percent of the cost of a PEM fuel cell stack is currently associated with the use of platinum as the electrocatalyst. Platinum is a scarce precious metal and therefore its price is sensitive to supply and demand pressures. The Company’s non-platinum electrocatalysts cost a third of the price, on a $/kW basis, of platinum-based equivalents. The Company has signed materials transfer agreements and delivered samples of the catalyst for confirmatory testing to original equipment manufacturers (‘OEMs’) in the USA and Japan, where Ilika has strong patent coverage. Initial feedback is encouraging and further testing is expected in this financial year with a view to entering into a license agreement with one or more manufacturing partners. Key performance indicators (‘KPIs’) The Board considers that the most important KPIs are technical and operational and relate to the progress of the scientific programmes outlined above. The most important financial KPIs are the cash position, the turnover from commercial engagements and the operating loss of the Group, all of which have improved in the year and remain under constant focus. The Company has actions in hand to further drive commercial growth. These include a new customer relationship management system, an updated branding and a marketing communications programme. 07 Ilika plc | Annual Report and Accounts 2014Strategic ReportOverviewGovernanceFinancial Statements Financial review The Financial Review should be read in conjunction with the consolidated financial statements of the Company and Ilika Technologies Limited together (‘the Group’) and the notes thereto on pages 27 to 40. The consolidated financial statements are presented under International Financial Reporting Standards (‘IFRSs’) as adopted by the European Union. The financial statements of the Company continue to be prepared in accordance with IFRSs and are set out on pages 41 to 45. Statement of comprehensive income Revenues Revenue, all from continuing activities, for the year ended 30 April 2014 was £1.05 million (2013: £1.00 million). This includes £94.000 of grant income recognised from the Technology Strategy Board (2013: £nil), £64,000 for a polymer coatings grant and £30,000 as the front end of a £0.9 million grant to work together with the University of Cambridge, Diamond Light Source and Rolls Royce to develop new alloy compositions for gas turbine engines to increase performance, reducing CO2 emissions and reduce noise levels at takeoff. Payments made by the Company’s Japan-based partners for research and development activities continue to fund the largest share of the Group’s projects with 39 percent of revenues originating in Asia (2013: 78 percent). European based customer share increased from 13 percent in 2013 to 42 percent in 2014 and US-based customers increased from 9 percent in 2013 to 19 percent in 2014. The current financial year has started strongly, with committed revenues amounting to £0.6 million secured at the time of publishing these accounts (2013: £0.2 million). 08 Administrative expenses Total administrative costs for the year were reduced from £4.02 million in 2013, to £3.57 million in 2014. An accounting adjustment for a share-based payment calculation is included within administration expenses. In 2013, because a number of options lapsed in the year, there was a share-based payment credit of £0.25 million. In 2014, there was a share-based payment charge of £0.02 million. Therefore, the underlying decrease in administration expenses in the year, after taking account of this accounting adjustment, is £0.7 million. £0.3 million of the reduction relates to reduced depreciation and amortisation charges. One-off costs in 2013 associated with the Company’s laboratory expansion to increase capacity and accommodate staff and equipment transferred from the discontinued business, together with a focus in 2014 on cost reduction, accounts for the balance. Loss on continuing activities has been reduced from £3.3 million in 2013 to £2.8 million in 2014 and loss and total comprehensive income and expense for the period has reduced from £3.5 million in 2013 to £2.8 million in 2014. Statement of financial position and cash flows At 30 April 2014, net assets amounted to £7.8 million (2013: £3.1 million), including net funds of £7.1 million (2013: £1.9 million). The principal elements of the £5.2 million increase over the year ended 30 April 2014 in net funds were: • Share proceeds (net of costs) of £7.4 million (2013: £0.1 million) • Cash used in operations of £2.5 million (2013: £3.2 million); • Research and development tax credits received of £0.3 million (2013: £0.1 million); Subscription warrants were issued in 2010 with an exercise price of 51p per warrant. During the year 7,905,883 warrants were converted to Ordinary Shares with proceeds to the Company of £4.0 million. In May 2013, 2,375,000 Ordinary Shares were issued for net proceeds of £0.7 million and in February 2014, 4,854,093 Ordinary Shares were issued for a net consideration of £2.6 million. Fundraising post year end In May 2014, a further 2,617,647 subscription warrants were converted to Ordinary Shares generating proceeds of £1.3 million. The remaining unconverted 15,686 warrants expired on 28 May 2014. Treasury policy and financial risk management Credit risk The Group follows a risk-averse policy of treasury management. Sterling deposits are held with one or more approved UK-based financial institutions. The Group’s primary treasury objective is to minimise exposure to potential capital losses whilst at the same time securing prevailing market rates. Interest rate risk The Group’s cash held in current bank accounts is subject to the risk of fluctuating base rates. An element of the Group’s financial assets is placed on fixed-term interest deposits. Currency risk During the year under review, the Group was exposed to Euro, Japanese Yen and US Dollar currency movement as it engages business development staff in each of those territories. Additionally, a small element of expense and capital spend is denominated in these currencies. The Group has arranged for some of its programmes, with customers based in these territories, to be denominated in these currencies to hedge against this exposure. Ilika plc | Annual Report and Accounts 2014 Principal risks and uncertainties Commercial risk The Company is subject to competition from competitors who may develop more advanced and less expensive alternative technology platforms, both for existing materials and for those materials currently under development. The Company is largely dependent on its partners to commercialise the end products containing the Company’s materials. The Company seeks to reduce this risk by continually assessing competitive technologies and competitors. The Company seeks to commercialise materials through multiple channels to reduce overreliance on individual partners and, in agreements with partners, it ensures that there are commercialisation milestones which must be met for the partner to retain the rights to commercialise the materials. Financial risk The Company is reliant on a small number of significant customers and partners. Termination of these agreements could have a material adverse effect on the Group’s results or operations or financial condition. The Company expects to incur further operating losses as progress on development programmes continue. There can be no assurance that the Company will ever achieve significant revenues or profitability. The Company seeks to reduce this risk by broadening the number of customers and partners and thereby reduce reliance on individual significant companies. The Company has reduced the level of its operating loss and has significantly reinforced the balance sheet with a substantial capital raise in the year along with additional funding shortly after the year end. Intellectual property risk The Group faces the risk that intellectual property rights necessary to exploit research and development efforts may not be adequately secured or defended. The Group’s intellectual property may also become obsolete before the products and services can be fully commercialised. The Company seeks to reduce this risk by employing in-house staff with extensive global experience of patenting and licensing using commercially available patent searching and landscaping software. External patent agents and attorneys are used to advise on the drafting and filing of patent applications. Dependence on senior management and key staff Certain members of staff are considered vital to the successful development of the business. Failure to continue to attract and retain such highly skilled individuals could adversely affect operational results. The Group seeks to reduce this risk by offering appropriate incentives to staff through competitive salary packages and participation in long-term share option schemes. By order of the Board Jack Boyer Chairman Graeme Purdy Chief Executive Officer 15 July 2014 09 Ilika plc | Annual Report and Accounts 2014Strategic ReportOverviewGovernanceFinancial Statements Board of Directors Jack Boyer Chairman (independent) Jack joined Ilika as Chairman in 2004. He is also chairman of iQur Ltd and a non-executive director of FTSE 250 companies Mitie plc and Laird plc and chairs the Remuneration Committee of the latter. He previously founded and was the CEO of pan-European engineering group TCG, an Executive Director at Goldman Sachs and a management consultant at Bain & Co. Jack was educated at Stanford University (B.A. Hons), the London School of Economics (M.Sc.) and INSEAD (MBA). He is a Council member of the Engineering and Physical Sciences Research Council, the Higher Education Funding Council for England’s Research Excellence Framework main panel for physical sciences and deputy Chairman of Godolphin & Latymer School in London. Graeme Purdy Chief Executive Officer Graeme was appointed to head-up Ilika from the beginning of May 2004, just before completion of the company’s seed round of funding. He led the company through two successful rounds of venture funding before floating the company on AIM in 2010. Prof. Brian Hayden Chief Scientific Officer Prior to joining Ilika, Graeme was Chief Operating Officer of a high-technology company in the Netherlands and before that worked internationally in a variety of technical and commercial roles for Shell. Graeme holds a Master’s degree in Chemical Engineering from Cambridge and an MBA from INSEAD business school in France. Graeme is a Chartered Engineer and a Sainsbury Management Fellow. Brian is a founder of Ilika and holds the executive role of Chief Scientific Officer. He is also professor of Physical Chemistry at the University of Southampton, a Fellow of the Royal Society of Chemistry, Fellow of the Institute of Physics, and a member of the International Editorial Board of Surface Science. Brian is a pioneer of surface science with a strong track record in running successful industrial collaborations and has published in excess of 100 papers in the fields of surface science, surface electrochemistry and fundamental aspects of heterogeneous catalysis and electro-catalysis. He is also the author of over 12 active patents including new catalysts and materials for low temperature fuel cells and solid state Li-ion batteries. 10 Ilika plc | Annual Report and Accounts 2014 Stephen Boydell Finance Director Having qualified with Deloittes in 1996, Stephen held a number of acquisition, treasury and group reporting roles at both Hays plc and then AGI Media before becoming Finance Director of Healthy Direct, a successful Guernsey- based group of companies. He was instrumental in the restructuring of that group and the subsequent trade sale to a competitor. He joined Ilika in 2009 as Finance Director and Company Secretary. Stephen studied Economics at Nottingham University and is a Fellow of the Institute of Chartered Accountants. Clare Spottiswoode CBE Non-Executive Director Clare’s career started as an economist with the Treasury before establishing her own software company. She is perhaps best known for her role as Director General of Ofgas between 1993 and 1998 where she oversaw the transformation of the gas industry from a monopoly, which controlled the whole gas supply chain, into a deregulated, competitive industry. Clare was a commissioner on the Independent Commission on Banking Chaired by John Vickers, and currently chairs Gas Strategies Group Limited and Flow Energy plc. She is also a non-executive director of Energy Solutions Inc. and G4S plc. Awarded a CBE for services to industry in 1999, she holds degrees from Cambridge and Yale Universities and has an honorary doctorate from Brunel. Prof. Sir William Wakeham Non-Executive Director Prof. Sir William Wakeham retired as Vice-Chancellor of the University of Southampton in September 2009. He studied Physics at Exeter University at both undergraduate and doctoral level. He is a Fellow, Senior Vice-President and International Secretary of the Royal Academy of Engineering, a Fellow of the Institution of Chemical Engineers, the Institution of Engineering and Technology, the Institute of Physics and the Portuguese Academy of Engineering. He is a Visiting Professor at Imperial College London, Exeter and Lisbon, Chair of Exeter Science Park Limited and Trustee of Royal Anniversary Trust. He was knighted in 2009 for services to Chemical Engineering and Higher Education. 11 Ilika plc | Annual Report and Accounts 2014Strategic ReportOverviewGovernanceFinancial Statements Directors’ report The Directors present their report and the audited financial statements for Ilika plc (‘Ilika’) and its subsidiary (‘the Group’) for the year ended 30 April 2014. Details of Directors’ remuneration and share options are given in the Directors’ remuneration report. Directors The Directors who served on the Board of Ilika during the year and to the date of this report were as follows: Executive Mr. S. Boydell (FD and Company Secretary) Prof. B. E. Hayden (CSO) Mr. G. Purdy (CEO) Non-Executive Mr. J. B. Boyer (Chairman) Ms. C. Spottiswoode CBE Prof. Sir W. Wakeham Dr. W. Braun (resigned 30 June 2013) The Group maintained Directors’ and officers’ liability insurance cover throughout the period. Research and development costs In accordance with the policy outlined in note 1, the Group incurred research and development expenditure of £1,642,152 in the year (2013: £1,772,605). Commentary on the major activities is given in the Strategic report. Financial instruments The use of financial instruments and financial risk management policies is covered in the Strategic report and also in note 18 of the financial statements. Dividends The Directors do not recommend the payment of a dividend. Political donations The Group made no political donations during the year (2013: Nil). Directors’ interests in Ordinary Shares The Directors, who held office at 30 April 2014, had the following interests in the Ordinary Shares of the Company: J. Boyer G. Purdy C. Spottiswoode S. Boydell W. Wakeham B. Hayden1 Number of shares 1 May 2013 30 April 2014 394,009 12,727 45,454 9,090 – – 394,009 477,427 45,454 9,090 – – 1 B. Hayden had an interest in Preference Shares of the Company amounting to 593,800 at 1 May 2013 and 426,300 as at 30 April 2014. Between 30 April 2014 and the date of this report, there has been no change in the interests of Directors in shares as disclosed in this report. 12 Ilika plc | Annual Report and Accounts 2014 Substantial shareholdings On 30 June 2014 the Company had been notified of the following holdings of more than 3 percent or more of the issued share capital of the Company. Shareholder IP Group plc Richard Griffiths Ruffer LLP Henderson Global Mackin Holdings Inc Southampton Asset Management Charles Stanley Group plc Southern Fox No. of Ordinary Shares % Shareholding 9,508,779 7,497,627 6,105,454 6,000,000 3,852,647 3,799,900 3,000,750 2,147,000 14.6 11.2 9.4 9.2 5.9 5.8 4.6 3.3 Post balance sheet events In May 2014, 2,617,647 subscription warrants, with an exercise price of 51p per warrant, were converted to Ordinary Shares and 15,686 subscription warrants lapsed. In July 2014, 250,000 Convertible Preference Shares were converted into Ordinary Shares. Auditors All 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. A resolution to reappoint BDO LLP will be proposed at the next Annual General Meeting. By order of the Board Steve Boydell Company Secretary 13 Ilika plc | Annual Report and Accounts 2014Strategic ReportOverviewGovernanceFinancial Statements Directors’ remuneration report This report is non-mandatory for AIM-quoted companies and has been produced on a voluntary basis. It includes and complies with the disclosure obligations of the AIM Rules. Remuneration Committee The Company’s remuneration policy is the responsibility of the Remuneration Committee (‘the Committee’), which was established in May 2004. The terms of reference of the Committee are outlined in the Corporate governance statement on pages 18 to 19. The members of the Committee are Jack Boyer (Chairman), Clare Spottiswoode and Prof. Sir William Wakeham. The Committee met twice during the year ended 30 April 2014. The Chief Executive Officer and certain executives may be invited to attend meetings of the Committee to assist it with its deliberations, but no executive is present when his or her own remuneration is discussed. Remuneration policy (i) Executive remuneration The Committee has a duty to establish a remuneration policy which will enable it to attract and retain individuals of the highest calibre to run the Group. Its policy is to ensure that the executive remuneration packages of Executive Directors and the fee of the Chairman are appropriate given performance, scale of responsibility, experience, and consideration of the remuneration packages for similar executive positions in companies it considers to be comparable. Packages are structured to motivate executives to achieve the highest level of performance in line with the best interests of Shareholders. A significant element of the total remuneration package, in the form of bonus and share options, is performance driven. Executive remuneration currently comprises a base salary, an annual performance-related bonus, a pension contribution to the Executive Director’s individual money purchase scheme (at between 8 percent and 10 percent of base salary) and critical illness cover. Salaries and benefits were last reviewed in March 2014 with increases taking effect from 1 January 2014, taking into account Group and individual performance, external benchmark information and internal relativities. The Company operates a discretionary bonus scheme for Executive Directors for delivery of exceptional performance against a series of financial, commercial and technology objectives. The maximum bonus payable for the year to 30 April 2014 was restricted to 30 percent of CEO base salary, 20 percent of CSO base salary and 20 percent of CFO base salary. For the year to 30 April 2015, the maximum bonus payable to the CEO has been increased to 50 percent of base salary and to the CSO to 30 percent of base salary. (ii) Chairman and Non-Executive Director remuneration The Chairman, Mr Boyer receives a fixed fee of £61,200 per annum and declined any increase in this fee for the year to 31 December 2014. Clare Spottiswoode and Prof. Sir William Wakeham received a fixed fee of £30,600 per annum for the year to 31 December 2013 and will receive £31,212 per annum for the year to 31 December 2014. The fixed fee covers preparation for and attendance at meetings of the full Board and committees thereof. The Chairman and the Executive Directors are responsible for setting the level of non-executive remuneration. The Non-Executive Directors are also reimbursed for all reasonable expenses incurred in attending meetings. All remuneration policies will be reviewed regularly to maintain adherence with best market practice as appropriate. 14 Ilika plc | Annual Report and Accounts 2014 Directors’ remuneration The aggregate remuneration received by Directors who served during the year ended 30 April 2014 and 2013 was as follows: Year to 30 April 2014 G. Purdy S. Boydell B. Hayden1 J. Boyer W. Braun W. Wakeham C. Spottiswoode Year to 30 April 2013 G. Purdy S. Boydell B. Hayden J. Boyer W. Braun W. Wakeham C. Spottiswoode Basic salary £ 158,800 102,788 53,468 61,200 – 30,804 30,804 437,864 151,067 98,950 50,333 60,400 – 30,200 30,200 421,150 Fees £ – – – – 5,200 – – 5,200 – – – – 30,200 – – 30,200 Benefits in kind £ Bonus £ Total short- term benefits £ Pension £ Total £ 444 292 – – – – – 736 367 241 – – – – – 608 25,320 11,140 5,347 – – – – 184,564 114,220 58,815 61,200 5,200 30,804 30,804 28,260 18,244 – – – – – 212,824 132,464 58,815 61,200 5,200 30,804 30,804 41,807 485,607 46,504 532,111 – – – – – – – – 151,434 99,191 50,333 60,400 30,200 30,200 30,200 27,487 16,137 – – – – – 178,921 115,328 50,333 60,400 30,200 30,200 30,20 451,958 43,624 495,582 1 B. Hayden is employed by the University of Southampton. The amounts disclosed in the table above relate to payments made directly to B. Hayden. The University of Southampton recharged employment costs of £54,327 to the Company in the year in respect of B. Hayden. (2013: £53,186). Share-based payment credit attributable to Directors in the year was £Nil (2013: £252,939). Benefits in kind include critical illness cover. Share options The unapproved share options of the Directors are set out below: G. Purdy J. Boyer B. Hayden S. Boydell W. Braun W. Wakeham C. Spottiswoode At 1 May 2013 and 30 April 2014 Number 1,050,000 1,050,000 525,000 117,600 65,100 65,100 50,100 Exercise price Expiry date 51p May 2020 51p May 2020 51p May 2020 51p May 2020 51p May 2020 51p May 2020 51p May 2020 The share options of the Directors in Ilika plc exchanged from share options in Ilika Technologies Limited. 15 Ilika plc | Annual Report and Accounts 2014Strategic ReportOverviewGovernanceFinancial Statements Directors’ remuneration report continued Approved G. Purdy G. Purdy S. Boydell Unapproved G. Purdy J. Boyer W. Braun B. Hayden 2013 Number 734,200 26,500 90,000 2013 Number 136,200 540,200 20,000 59,300 Exercised 594,700 – – Exercised – – – – 2014 Number 139,500 26,500 90,000 2014 Number 136,200 540,200 20,000 59,300 Exercise price 10p 80p 80p Exercise price 80p 10p 243p 80p Expiry date 9 June 2015 14 May 2017 1 December 2019 Expiry date 11 July 2017 29 June 2014 11 November 2018 11 July 2017 Mr. Purdy exercised 594,700 options in the year (2013 – Nil) and no options lapsed. Jack Boyer Chairman of the Remuneration Committee 16 Ilika plc | Annual Report and Accounts 2014 Statement of Directors’ responsibilities in respect of the Annual Report and the financial statements The Directors are responsible for preparing the Annual Report and the financial statements in accordance with applicable law and regulations. Company law requires the Directors to prepare financial statements for each financial year. Under that law the Directors have elected to prepare the Group and Company financial statements in accordance with IFRSs as adopted by the European Union. Under company law the Directors must not approve the financial statements unless they are satisfied that they give a true and fair view of the state of affairs of the Group and Company and of the profit or loss of the Group and Company 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 Alternative Investment Market (‘AIM’). 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 the annual report and the financial statements are made available on a website. Financial statements are published on the Group’s website in accordance with 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 financial forecasts. After due consideration of these forecasts and current cash resources, 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 a going concern basis. By order of the Board Graeme Purdy Chief Executive Officer 15 July 2014 17 Ilika plc | Annual Report and Accounts 2014Strategic ReportOverviewGovernanceFinancial Statements Corporate governance statement The Board is accountable to the Company’s shareholders for good corporate governance and it is the objective of the Board to attain a high standard of corporate governance. As an AIM listed company full compliance with the provisions of the UK Corporate Governance Code published in May 2010 (‘the Code’) is not a formal obligation. The Company has not sought to comply with the full provisions of the Code, however it has sought to adopt the provisions that are appropriate to its size and organisation and establish frameworks for the achievement of this objective. This statement sets out the corporate governance procedures that are in place. Board of Directors The Board of Directors (‘the Board’) consists of a Non-Executive Chairman, 3 Executive Directors and 2 Non-Executive Directors. The responsibilities of the Non-Executive Chairman and the Chief Executive Officer are clearly divided. The Chairman is responsible for overseeing the formulation of the overall strategy of the Company, the running of the Board, ensuring that no individual or group dominates the Board’s decision-making and ensuring that the Non-Executive Directors are properly briefed on matters. Prior to each Board meeting, Directors are sent an agenda and Board papers for each agenda item to be discussed. Additional information is provided when requested by the Board or individual Directors. The Chief Executive Officer has the responsibility for implementing the strategy of the Board and managing the day-to-day business activities of the Group through his chairmanship of the Executive Committee. The Non-Executive Directors bring relevant experience from different backgrounds and receive a fixed fee for their services and reimbursement of reasonable expenses incurred in attending meetings. The Board retains full and effective control of the Group. This includes responsibility for determining the Group’s strategy and for approving budgets and business plans to fulfil this strategy. The full Board ordinarily meets bi-monthly. The Company Secretary is responsible to the Board for ensuring that Board procedures are followed and that the applicable rules and regulations are complied with. All Directors have access to the advice and services of the Company Secretary, and independent professional advice, if required, at the Company’s expense. Removal of the Company Secretary would be a matter for the Board. Performance evaluation The Board has a process for evaluation of its own performance which is carried out annually. Board Committees As appropriate, the Board has delegated certain responsibilities to Board Committees as follows: i) Audit Committee The Audit Committee currently comprises Clare Spottiswoode CBE (Chairman), Professor Sir William Wakeham and Jack Boyer. The Committee monitors the integrity of the Group’s financial statements and the effectiveness of the audit process. The Committee reviews accounting policies and material accounting judgements. The Committee also reviews, and reports on, reports from the Group’s auditors relating to the Group’s accounting controls. It makes recommendations to the Board on the appointment of auditors and the audit fee. It has unrestricted access to the Group’s auditors. The Committee keeps under review the nature and extent of non-audit services provided by the external auditors in order to ensure that objectivity and independence are maintained. ii) Remuneration Committee Until 30 June 2013, the Remuneration Committee comprised Dr. Werner Braun (Chairman), Clare Spottiswoode CBE and Jack Boyer. With the departure of Dr. Werner Braun, Professor Sir William Wakeham has joined the Committee and Jack Boyer has become Chairman. The Committee is responsible for making recommendations to the Board on remuneration policy for Executive Directors and the terms of their service contracts, with the aim of ensuring that their remuneration, including any share options and other awards, is based on their own performance and that of the Group generally. 18 Ilika plc | Annual Report and Accounts 2014 iii) Nomination Committee Until 30 June 2013, the Nomination Committee comprised Jack Boyer (Chairman), Professor Sir William Wakeham and Dr. Werner Braun. Dr. Werner Braun has been replaced on the Committee by Clare Spottiswoode CBE. It is responsible for providing a formal, rigorous and transparent procedure for the appointment of new Directors to the Board and reviewing the performance of the Board each year. Attendance at Board meetings and committees The Directors attended the following Board and committees meetings during the year: Attendance Mr. S. Boydell Mr. J. B. Boyer Prof. B. E. Hayden Mr. G. Purdy Ms. C. Spottiswoode Prof. Sir W. Wakeham Board Audit Nomination Remuneration 7/7 7/7 7/7 7/7 7/7 7/7 – 2/2 – – 2/2 2/2 – 1/1 – – – 1/1 – 2/2 – – 2/2 2/2 Risk management and internal control The Board is responsible for the systems of internal control and for reviewing their effectiveness. The internal controls are designed to manage rather than eliminate risk and provide reasonable but not absolute assurance against material misstatement or loss. The Audit Committee reviews the effectiveness of these systems primarily by discussion with the external auditor and by considering the risks potentially affecting the Group. The Group does not consider it necessary to have an internal audit function due to the small size of the administration function. Instead there is a detailed Director review and authorisation of transactions. The annual audit by the Group auditor, which tests a sample of transactions, did not highlight any significant system improvements in order to reduce risk. The Group maintains appropriate insurance cover in respect of actions taken against the Executive Directors because of their roles, as well as against material loss or claims of the Group. The insured values and type of cover are comprehensively reviewed on a periodic basis. Employment The Board recognises its legal responsibility to ensure the well-being, safety and welfare of its employees and maintain a safe and healthy working environment for them and for its visitors. A health and safety report is reviewed at each Board meeting and policies and procedures are independently reviewed to ensure compliance with best practice. By order of the Board Jack Boyer Chairman 15 July 2014 19 Ilika plc | Annual Report and Accounts 2014Strategic ReportOverviewGovernanceFinancial Statements Corporate and social responsibility statement Ilika approaches its responsibilities to corporate social responsibility (‘CSR’) in a co-ordinated and committed way and applies a positive and systematic approach to environmental and social issues that impact on our business whilst at the same time delivering good value for the Company and continued benefit for society. We aim to include CSR in all aspects of our business. Overall responsibility for developing and implementing our CSR policies and for reviewing their effectiveness lies ultimately with the Ilika Board. Regular and consistent reviews of the scope of the Company strategy ensures we remain focused on the material issues for the business. The CSR policy and procedures are reviewed by the management team regularly and are communicated to all employees. Strong communication ensures there is both an upward and downward flow of information and ideas. The management team reports to the Board regularly to ensure the Board are fully apprised of the status of the Company’s efforts in this area. The Main areas of CSR at Ilika are: 1. Health and safety It is of paramount importance that, as a company, we ensure the well-being, safety and welfare of our employees and those who are affected by our business and to maintain a safe and healthy working environment. Health and safety has direct positive benefits for the Company and a commitment to a high level of safety makes good business sense. As a business function, health and safety must continually progress and adapt to change. At Ilika, health and safety is considered at the highest level in the Company with the ultimate responsibility resting with the Board. Health and safety is an agenda item at each Board meeting and a full report is presented annually. Our Policies and procedures are independently reviewed by experts to ensure compliance with not only legislation but also best practice. 2. Environment and sustainability Ilika is committed to achieving a real and sustainable positive impact on the broader community by adopting environmentally responsible policies. We believe it is essential that both as a Company and as individuals we operate in an environmentally conscious manner. Our objective is to minimise the impact of our business activity on the environment wherever possible. This includes ensuring our suppliers do likewise: we actively seek collaborations with those who are similarly aware of and active in this field. Ilika has implemented many changes within the business in furtherance of our policies and continues to review and monitor progress against our own targets and to creatively consider new initiatives. Our ongoing objectives are to consider environmental issues in all of our decision-making processes; to evaluate future energy usage to see how we can use low energy systems and to fundamentally reduce our impact on the environment and ask our employees, suppliers and customers to do likewise. 3. Employee rights Ilika adheres to legislation relating to employment rights and equal opportunities, with particular reference to non- discrimination on the basis of ethnic origin, religion, gender, age, marital status, disability or sexual orientation. However, Ilika’s policies go beyond the legal requirements and the Company acknowledges its moral rights to provide a safe and dignified working environment. We maintain the highest level of integrity with regard to employees, customers and all others with whom we interact. We recognise the value that our employees create for the business and our commitment to training and personal development, together with remuneration policies, are designed to reward achievement and emphasise the importance of retaining staff. Ilika will not tolerate discrimination, bullying or any other kind of harassment within our business community. The concept of ’mutual respect’ is one of our guiding principles. Employees are expected to abide by Company rules and to be honest and considerate in their various roles. Internal procedures have been established to report grievances or alleged inappropriate behaviour to other individuals or organisations. We treat dishonest actions and accusations seriously; this may result in disciplinary action in accordance with Company rules and disciplinary procedures. 20 Ilika plc | Annual Report and Accounts 2014 4. Ethics and values Ilika supports the principles of the Universal Declaration of Human Rights. This means we support freedom from torture, unjustified imprisonment without fair trial and any other oppression. In addition, we support the right of any individual to have freedom of expression and religion, political representation or in respect of any other matter. Accordingly, we will not support or work with organisations which fail to uphold basic human rights or are involved in the manufacture or transfer to an oppressive regime or are involved in the manufacture of equipment used in the violation of human rights. Neither will we work with organisations which are involved in the funding or carrying out of terrorist activities. Ilika will not provide support or work with organisations which do not conform to the most widely accepted standards for minimum labour rights or which do not cover the use of under-age or forced labour. Ilika does not give or receive any bribes, extra contractual gratuities, inducements, facilitation fees or similar payments. Any gifts, whether in cash or kind, received by employees or the Company in the course of normally accepted business entertainment are accepted subject to the prior written approval of the management. We do not donate (including sponsorship, subscriptions or provision of employee time or facilities) to any political party or similar organisation. 5. Contribution to society Ilika accepts and acknowledges that we have a corporate responsibility towards society not only by paying taxes and creating and maintaining jobs but also by using our unique research skills to develop knowledge, skills and products which will ultimately benefit society. We actively support and encourage the study of science at all levels from pre-GCSE through to post-doctoral level. We have an active Outreach department and participate in many activities designed to encourage and support the study of science. 21 Ilika plc | Annual Report and Accounts 2014Strategic ReportOverviewGovernanceFinancial Statements Independent auditor’s report to the members of Ilika plc We have audited the financial statements of Ilika plc for the year ended 30 April 2014 which comprise the consolidated balance sheet, the parent company balance sheet, the consolidated statement of comprehensive income, the consolidated cash flow statement, the Parent Company cash flow statement, the consolidated statement of changes in equity and Parent Company statement of changes in equity and the related notes. The financial reporting framework that has been applied in their preparation is applicable law and International Financial Reporting Standards (‘IFRSs’) as adopted by the European Union and, as regards the parent company financial statements, as applied in accordance with the provisions of the Companies Act 2006. This report is made solely to the Company’s members, as a body, in accordance with Chapter 3 of Part 16 of the Companies Act 2006. Our audit work has been undertaken so that we might state to the company’s members those matters we are required to state to them in an auditor’s report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the company and the company’s members as a body, for our audit work, for this report, or for the opinions we have formed. Respective responsibilities of Directors and auditors As explained more fully in the statement of Directors’ responsibilities, the Directors are responsible for the preparation of the financial statements and for being satisfied that they give a true and fair view. Our responsibility is to audit and express an opinion on the financial statements in accordance with applicable law and International Standards on Auditing (UK and Ireland). Those standards require us to comply with the Financial Reporting Council’s (‘FRC’s’) Ethical Standards for Auditors. Scope of the audit of the financial statements A description of the scope of an audit of financial statements is provided on the FRC’s website at www.frc.org.uk/ auditscopeukprivate. Opinion on financial statements In our opinion: • the financial statements give a true and fair view of the state of the Group’s and the Parent Company’s affairs as at 30 April 2014 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 IFRSs as adopted by the European Union and as applied in accordance with the provisions of the Companies Act 2006; and • the financial statements have been prepared in accordance with the requirements of the Companies Act 2006. Opinion on other matters prescribed by the Companies Act 2006 In our opinion the information given in the Strategic report and Directors’ report for the financial year for which the financial statements are prepared is consistent with the financial statements. Matters on which we are required to report by exception We have nothing to report in respect of the following matters where the Companies Act 2006 requires us to report to you if, in our opinion: • adequate accounting records have not been kept by the Parent Company, or returns adequate for our audit have not been received from branches not visited by us; or • the Parent Company financial statements 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. Paul Anthony (senior statutory auditor) For and on behalf of BDO LLP, statutory auditor Southampton United Kingdom 15 July 2014 BDO LLP is a limited liability partnership registered in England and Wales (with registered number OC305127). 22 Ilika plc | Annual Report and Accounts 2014 Consolidated statement of comprehensive income Year ended 30 April Notes 2014 £ 2013 £ Revenue Cost of sales Gross profit Administrative expenses Other operating income Operating loss Financial income Financial expense Loss before tax Taxation Loss for period on continuing activities Loss for the period on discontinued activities Loss for period/total comprehensive income attributable to owners of parent Loss per share Basic Diluted Continuing operations Discontinued operations 2 6 1,049,879 (586,869) 1,003,943 (561,584) 463,010 442,359 (3,569,696) (4,020,375) 17,133 810 4 (3,105,876) (3,560,883) 67,437 7 (4,575) 8 22,131 (1,513) (3,085,258) (3,498,021) 239,741 287,171 (2,798,087) (3,258,280) (216,693) – (2,798,087) (3,474,973) 9 3 10 (0.05) (0.05) (0.05) (0.00) (0.07) (0.07) (0.06) (0.01) 23 Ilika plc | Annual Report and Accounts 2014Strategic ReportOverviewGovernanceFinancial Statements Consolidated balance sheet Company number 7187804 ASSETS Non-current assets Intangible assets Property, plant and equipment Total non-current assets Current assets Trade and other receivables Current tax receivable Other financial assets – bank deposits Cash and cash equivalents Total current assets Total assets Issued capital and reserves attributable to owners of parent Issued share capital Share premium Capital restructuring reserve Retained earnings Total equity LIABILITIES Current liabilities Trade and other payables Provisions Total liabilities Total equity and liabilities As at 30 April Notes 2014 £ 2013 £ 11 12 793 607,627 9,425 1,105,706 608,420 1,115,131 13 9 14 15 19 572,304 248,191 1,776,767 5,329,967 7,927,229 577,505 230,000 1,455,092 407,970 2,670,567 8,535,649 3,785,698 632,660 475,354 16,082,944 8,823,770 6,486,077 6,486,077 (15,426,779) (12,643,692) 7,774,902 3,141,509 16 17 610,747 150,000 494,189 150,000 760,747 644,189 8,535,649 3,785,698 The notes on pages 27 to 40 form part of these financial statements These financial statements were approved and authorised for issue by the Board of Directors on 15 July 2014. Mr. J. B. Boyer Chairman 24 Ilika plc | Annual Report and Accounts 2014 Consolidated cash flow statement Cash flows from operating activities Loss before taxation continuing operations Loss before taxation discontinued operations Adjustments for: Amortisation Depreciation Equity settled share-based payments Loss on disposal of plant, property and equipment Loss on disposal of intangible assets Net financial income Operating cash flow before changes in working capital, interest and taxes Decrease in trade and other receivables Decrease in inventory Increase/(Decrease) in trade and other payables Cash utilised by operations Tax received Net cash flow from operating activities Cash flows from investing activities Interest received Sale of discontinued operations Sale of property plant and equipment Purchase of property, plant and equipment Decrease/(increase) in other financial assets Net cash used in investing activities Cash flows from financing activities Proceeds from issuance of Ordinary Share capital Share issue costs Capital element of finance leases Interest element of finance leases Net cash from financing activities Net increase/(decrease) in cash and cash equivalents Cash and cash equivalents at the start of the period Cash and cash equivalents at the end of the period Year ended 30 April 2014 £ 2013 £ (3,085,258) (3,498,021) (216,693) – 8,632 556,795 15,000 (145) – (20,618) 52,438 803,345 (251,851) 155 – (62,862) (2,525,594) 5,200 – 116,560 (3,173,489) 74,734 34,135 (175,966) (2,403,834) (3,240,586) 124,905 269,266 (2,134,568) (3,115,681) 29,390 – 2,450 (61,021) 59,055 50,000 – (551,591) (321,675) 2,544,908 (350,856) 2,102,372 7,716,912 (300,434) (7,544) (1,513) 149,380 – (22,633) (4,540) 7,407,421 122,207 4,921,997 407,970 (891,102) 1,299,072 5,329,967 407,970 25 Ilika plc | Annual Report and Accounts 2014Strategic ReportOverviewGovernanceFinancial Statements Consolidated statement of changes in equity As at 30 April 2012 Share-based payment Issue of shares Loss and total comprehensive income As at 30 April 2013 Share-based payment Issue of shares Expenses of share issue Loss and total comprehensive income As at 30 April 2014 Share capital £ 472,638 – 2,716 – Share premium account £ Capital restructuring reserve £ Total attributable to equity holders of parent £ Retained earnings £ 8,677,106 – 146,664 – 6,486,077 – – – (8,916,868) 6,718,953 (251,851) 149,380 (3,474,973) (3,474,973) (251,851) – 475,354 8,823,770 6,486,077 (12,643,692) 3,141,509 – 157,306 – – – 7,559,607 (300,433) – 15,000 15,000 – 7,716,913 – – (300,433) – – – (2,798,087) (2,798,087) 632,660 16,082,944 6,486,077 (15,426,779) 7,774,902 Share capital The share capital represents the nominal value of the equity shares in issue. Share premium account When shares are issued, any premium paid above the nominal value is credited to the share premium reserve. Capital restructuring reserve The capital restructuring reserve arises on the accounting for the share for share exchange. It represents the difference between the value of the issued equity instruments of Ilika Technologies Limited immediately before the share-for-share exchange and the equity instruments of Ilika plc along with the shares issued to effect the share for share exchange. Retained earnings The retained earnings reserve records the accumulated profits and losses of the Group since inception of the business. 26 Ilika plc | Annual Report and Accounts 2014 Notes to the consolidated financial statements 1 Accounting policies Basis of preparation The financial statements have been prepared on the basis of the accounting policies which apply for the financial year to 30 April 2014 and in accordance with the recognition and measurement criteria of IFRSs adopted by the European Union. The individual financial statements of Ilika plc are shown on pages 41 to 45. 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. Control is achieved where the Company has the power to govern the financial and operating policies of an investee entity so as to obtain benefits from its activities. All intra-group transactions, balances, income and expenses are eliminated on consolidation. Going concern The 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 April 2014, amounted to £7,106,734. The Directors have prepared projected cash flow information for the period ending 12 months from the date of their approval of these financial statements. On the basis of this cash flow information the Directors believe that the Group will be able to continue to trade for the foreseeable future. (a) New standards, amendments to standards or interpretations adopted early During the period ended 30 April 2014, there were no new or revised standards, amendments to standards or interpretations that have been adopted and affected the amounts reported in the financial statements. (b) New standards, amendments to standards or interpretations not yet applied The following standards, interpretations and amendments, which have not been applied in these financial statements, will or may have an effect on the Group’s future financial statements: International Accounting Standards (IAS/IFRS) IFRS 9 IFRS 10 IFRS 11 IFRS 12 IFRS 14 IFRS 15 IFRIC 21 IAS 16 IAS 19 IAS 27 IAS 28 IAS 32 IAS 36 IAS 38 IAS 39 Financial Instruments Consolidated Financial Statements Joint Arrangements Disclosure of Interests in Other Entities Regulatory Deferral Accounts Revenue from Contracts with Customers Levies Property, Plant and Equipment Employee Benefits Consolidated and Separate Financial Statements Investments in Associates and Joint Ventures Financial Instruments: Presentation Impairment of Assets Intangible Assets Financial Instruments: Recognition and Measurement Effective date for periods commencing To be confirmed 1 January 2014 1 January 2014 1 January 2014 1 January 2016 1 January 2017 1 January 2014 1 January 2016 1 July 2014 1 January 2014 1 January 2014 1 January 2014 1 January 2014 1 January 2016 1 January 2014 No other new standards or amendments are expected to have an effect on the Group. Revenue comprises the fair value for the sale of goods and services, net of value added tax and is recognised as follows: The following principal accounting policies have been applied consistently in dealing with items which are considered material in relation to the financial information. 27 Ilika plc | Annual Report and Accounts 2014Strategic ReportOverviewGovernanceFinancial Statements Notes to the consolidated financial statements continued 1 Accounting policies continued Revenue Sales of services Sales of research and development services are recognised in the accounting period in which the services are rendered, by reference to completion of the specific transaction assessed on the basis of the actual service provided as a proportion of the total services to be provided. Government grants Grants that compensate the Group for expenses incurred are recognised in the income statement on a systematic basis in the same periods in which the expenses are recognised. Leases Where a Group company enters into a lease which entails taking substantially all the risks and rewards of ownership of an asset, the lease is treated as a ‘finance lease’. The asset is recorded in the balance sheet as property, plant and equipment and is depreciated over its estimated useful life or the term of the lease, whichever is shorter. Future instalments under such leases, net of finance charges, are included within creditors. Rentals payable are apportioned between the finance element, which is charged to the consolidated income statement, and the capital element which reduces the outstanding obligation for future instalments. All other leases are accounted for as ‘operating leases’ and the rental charges are charged to the consolidated income statement on a straight-line basis over the life of the lease. Financial income and financial expense Financial income and financial expense is recognised in the income statement as it accrues, using the effective interest method. Pension and other post retirement benefits Payments to defined contribution retirement benefit schemes are charged as an expense as they fall due. Share-based payment transactions The Group issues equity-settled share-based payments to all employees. Equity-settled share-based payments are measured at fair value at the date of grant. The fair value determined at the grant date of the equity-settled share- based payments is expensed on a straight-line basis over the vesting period, based on the Group’s estimate of shares that will eventually vest and adjusted for the effect of market-based and non-market based vesting conditions. The fair value of market-based options granted by the Group is measured by use of the stochastic valuation model taking into account the following inputs: the exercise price of the option; the life of the option; the market price on the date of grant of the option; the expected volatility of the share price; the dividends expected on the shares; and the risk free interest rate for the life of the option. The fair value of non market-based options granted by the Group is measured by use of the Black-Scholes pricing model taking into account the following inputs: the exercise price of the option; the life of the option; the market price on the date of grant of the option; the expected volatility of the share price; the dividends expected on the shares; and the risk free interest rate for the life of the option. The expected life used in the model has been adjusted, based on management’s best estimate, for the effects of non-transferability, exercise restrictions, and behavioural considerations. Research and development expenditure Expenditure on the research phase is charged to the income statement in the period in which it is incurred. Development expenditure on new products is capitalised only once the criteria specified under IAS 38, Intangible Assets, have been met. Prior to and during the year ended 30 April 2013, no development expenditure satisfied the necessary conditions of IAS 38. Taxation Deferred tax is provided on temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for taxation purposes. The amount of deferred tax provided is based on the expected manner of realisation or settlement of the carrying amount of assets and liabilities, using tax rates enacted or substantively enacted at the balance sheet date. 28 Ilika plc | Annual Report and Accounts 2014 A deferred tax asset is recognised only to the extent that it is probable that future taxable profits will be available against which the asset can be utilised. Foreign currency Transactions in foreign currencies are translated at the foreign exchange rate ruling at the date of the transaction. Monetary assets and liabilities denominated in foreign currencies at the balance sheet date are translated at the foreign exchange rate ruling at that date. Foreign exchange differences arising on translation are recognised in the income statement. Property, plant and equipment Property, plant and equipment are stated at cost less accumulated depreciation and impairment losses. Where parts of an item of property, plant and equipment have different useful lives, they are accounted for as separate items of property, plant and equipment. Depreciation is charged to the profit and loss statement on a straight-line basis over the estimated useful lives of each part of an item of property, plant and equipment. The estimated useful lives are as follows: Leasehold improvements Plant, machinery and equipment Fixtures & fittings lease term 3–5 years 3–5 years Impairment The carrying amounts of the Group’s assets are reviewed at each balance sheet date to determine whether there is any indication of impairment. If any such indication exists, the asset’s recoverable amount is estimated. An impairment loss is recognised whenever the carrying amount of an asset exceeds its recoverable amount. Impairment losses are recognised in the income statement. Intangible assets Computer software Acquired computer software licenses are capitalised on the basis of the costs incurred to acquire and bring to use the specific software. These costs are amortised to administrative expenses using the straight-line method over their estimated useful lives (1–3 years). Intellectual property Acquired intellectual property is included at cost and is amortised to administrative expenses on a straight-line basis over its useful economic life of 15 years. Financial instruments Financial assets and financial liabilities are recognised on the Group’s balance sheet when the Group becomes a party to the contractual provisions of the instrument. The Group’s financial assets are all classified as loans and receivables and carried at amortised cost. The Group’s financial liabilities are all classified as ‘other’ liabilities which are carried at amortised cost. Cash and cash equivalents comprise cash balances and call deposits. Cash and cash equivalents Cash and cash equivalents include cash in hand and deposits held on call with the bank. Key sources of estimation uncertainty The preparation of the Group’s financial statements, in accordance with IAS 1, Presentation of Financial Statements, requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities at the date of the Group’s financial statements. The Group’s estimates and judgements are continually evaluated and are based on historical experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances. • Revenue recognition The Group’s revenue substantially comprised revenues from the provision of research and development services. The contracts set out defined deliverables the achievement of which trigger milestone payments. Judgement is used to determine the stage of completion and the point at which revenue is recognised. 29 Ilika plc | Annual Report and Accounts 2014Strategic ReportOverviewGovernanceFinancial Statements Notes to the consolidated financial statements continued 1 Accounting policies continued • Share-based payments The critical accounting estimates, assumptions and judgements underpinning the valuation of the option awards are disclosed in note 23. • Taxation The current tax receivable is the expected tax receivable on the expenditure for the period using the tax rates and laws that have been enacted or substantially enacted at the balance sheet date, and any adjustments to tax payable in respect of previous years. The ultimate receivable may vary from the amounts provided and is dependent upon negotiations with the relevant tax authorities. 2 Segment reporting IFRS 8 requires the Group to report on operating segments on the same basis as that used by the chief operating decision maker to assess the performance of the business segments and to allocate resources accordingly. For management purposes, the Group is analysed by the geographical location of its customer base and business development directors have been appointed to cover the Group’s three territories of focus, Asia, North America and Europe. Previously, segmentation analysis was provided by the market categories, Energy, Electronics and Biomedical. The disposal of the wound care business and the subsequent reorganisation meant that this segmentation basis was no longer appropriate. The Group’s activities originate from the production, design and development of high throughput methods of material synthesis, characterisation and screening. The Group has materials development programmes for a wide range of applications including in the battery, fuel cell and hydrogen storage sectors. Turnover Analysis by geographical market: By destination Asia Europe North America UK Grants Continuing operations total Discontinued operations – By destination – Europe Year ended 30 April 2014 £ 2013 £ 406,585 347,751 201,764 93,779 785,989 131,617 86,337 – 1,049,879 – 1,003,943 97,475 1,049,879 1,101,418 A number of customers individually account for more than 10 percent of the total turnover of the Group. The revenues from these companies are indicated below: Turnover Customer 1 Customer 2 Customer 3 Customers less than 10 percent Year ended 30 April 2014 £ 332,218 108,597 107,900 501,164 2013 £ 654,918 – – 446,500 1,049,879 1,101,418 The chief operating decision maker only reviews turnover by operating segment then reviews expenses and profit on an aggregate basis. Therefore the segmental loss before tax information, along with the segmental total assets and liabilities information has not been split out in this note. The loss before tax per the management accounts is the same as the loss before tax on the consolidated statement of comprehensive income with the exception of the share-based payment expense which is only calculated as a year end adjustment. For details of the calculation see note 23. The total assets and liabilities per the management accounts are the same as the consolidated balance sheet with the exception of the period end tax adjustment. 30 Ilika plc | Annual Report and Accounts 2014 3 Discontinued operations The results of the discontinued wound care division which have been included in the consolidated income statement were as follows: Revenue Cost of sales Gross profit Administrative expenses Other operating income Operating loss, loss before tax and loss for period on discontinued activities Year ended 30 April 2014 £ 2013 £ – – – – – – 97,475 (97,248) 227 (233,819) 16,899 (216,693) The net book value of assets sold along with the Altrika business equated to £73,000. Proceeds of disposal were £90,000 (£50,000 on disposal and deferred consideration of £40,000) less legal costs of £17,000. 4 Operating loss This is arrived at after charging/(crediting): Research and development expenditure in the year Depreciation Amortisation of intangible assets Auditors remuneration: Fees payable to the Group’s auditor for the audit of the Group’s accounts Fees payable to the Group’s auditor for other services: – The Audit of the Group’s subsidiaries – Other assurance services – interim review Operating lease rentals Share-based payment Foreign exchange differences 5 Employees The average number of employees during the year, including Executive Directors, was: Administration Materials synthesis Staff costs for all employees, including Executive Directors, consist of: Wages and salaries Social security costs Share-based payment expense Pension costs Year ended 30 April 2014 £ 2013 £ 1,642,152 556,795 8,632 1,772,605 803,345 52,438 19,700 15,000 6,800 – 201,784 15,000 3,281 6,800 10,750 234,836 (251,851) (2,464) Year ended 30 April 2014 Number 2013 Number 8 26 34 9 30 39 Year ended 30 April 2014 £ 2013 £ 1,603,975 137,254 – 102,441 1,716,057 163,602 (252,939) 112,373 1,843,670 1,739,093 31 Ilika plc | Annual Report and Accounts 2014Strategic ReportOverviewGovernanceFinancial Statements Notes to the consolidated financial statements continued 5 Employees continued The total remuneration of the Directors of the Group was as follows: Wages and salaries Pension costs Directors’ emoluments Social security costs Share-based payment expense Key management personnel Year ended 30 April 2014 £ 485,607 46,504 532,111 59,688 – 591,799 2013 £ 451,958 43,624 495,582 51,842 (252,939) 294,485 The Directors represent key management personnel and further details are given in the Directors’ Remuneration Report on pages 14 to 16. 6 Other operating income Sundry other income 7 Financial income Income from short-term deposits 8 Financial expense Interest on: Finance leases Year ended 30 April 2014 £ 810 2013 £ 17,133 Year ended 30 April 2014 £ 2013 £ 22,131 67,437 Year ended 30 April 2014 £ 2013 £ 1,513 4,575 9 Taxation (a) Tax on profit from ordinary activities There is no taxation charge due to the losses incurred by the Group during the year. The taxation credit represents R&D tax credit claims as follows: Year ended 30 April 2014 £ 248,191 38,980 287,171 2013 £ 230,000 9,741 239,741 Current tax on loss for the year Adjustments to prior period 32 Ilika plc | Annual Report and Accounts 2014 (b) Factors affecting current tax charge The tax assessed on the loss on ordinary activities for the period is different to the standard rate of corporation tax in the UK of 23 percent (2013: 24 percent). The differences are reconciled below: Loss on ordinary activities before tax Loss on ordinary activities before tax multiplied by the standard rate of corporation tax in the UK of 23 percent (2013: 24 percent) Effects of: Expenses not deductible for corporation tax R&D relief Origination of unrecognised tax losses Share options Under provision in previous years Total tax credit for the year 2014 £ 2013 £ (3,085,258) (3,714,714) (709,609) (891,531) 1,426 (248,191) 704,733 3,450 (38,980) 89,901 (30,824) 662,899 (60,445) (9,741) (287,171) (239,741) Unrecognised deferred taxation There are tax losses available for carry forward against future trading profits of approximately £13,010,000 (2013: £11,415,000). A deferred tax asset in respect of these losses of approximately £2,602,000 (2013: £2,740,000) has not been recognised in the accounts, as the full utilisation of these losses in the foreseeable future is uncertain. 10 Loss per share Earnings per Ordinary Share have been calculated using the weighted average number of shares in issue during the relevant financial periods. The weighted average number of equity shares in issue and the earnings, being loss after tax, are as follows: Weighted average number of equity shares Earnings, being loss after tax Loss per share Continuing operations Discontinued operations Year ended 30 April 2014 Number 2013 Number 52,153,675 47,431,258 £ £ (2,798,087) (3,474,973) £ (0.05) (0.05) (0.00) £ (0.07) (0.06) (0.01) 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 April 2014 there were 6,925,766 options outstanding (2013: 16,145,039 options outstanding) as detailed in notes 19 and 23. 33 Ilika plc | Annual Report and Accounts 2014Strategic ReportOverviewGovernanceFinancial Statements Notes to the consolidated financial statements continued 11 Intangible assets Cost As at 30 April 2012, 2013 and 2014 Amortisation As at 30 April 2012 Provided for the year As at 30 April 2013 Provided for the year As at 30 April 2014 Net book value As at 30 April 2012 As at 30 April 2013 As at 30 April 2014 Software licences £ Intellectual property £ Total £ 27,918 75,000 102,918 12,305 6,188 18,493 8,632 27,125 15,613 9,425 793 28,750 46,250 75,000 – 75,000 46,250 – – 41,055 52,438 93,493 8,632 102,125 61,863 9,425 793 The amortisation charge of £8,632 (2013: £52,438) is included within administrative expenses. 12 Property, plant and equipment Cost As at 30 April 2012 Additions Disposals As at 30 April 2013 Additions Disposals As at 30 April 2014 Depreciation As at 30 April 2012 Provided for the year Disposals As at 30 April 2013 Provided for the year Disposals As at 30 April 2014 Net book value As at 30 April 2012 As at 30 April 2013 As at 30 April 2014 Leasehold improvements £ Plant, machinery and equipment £ Fixtures and fittings £ Total £ 421,342 190,273 (59,557) 3,888,822 342,331 (98,856) 172,771 4,482,935 551,591 18,987 (180,459) (22,046) 552,058 9,692 – 4,132,297 51,329 (3,300) 169,712 4,854,067 61,021 (3,300) – – 561,750 4,180,326 169,712 4,911,788 392,759 51,059 (49,716) 394,102 106,936 – 2,550,110 743,025 (80,207) 3,212,928 442,289 (995) 159,809 9,262 (27,740) 141,331 7,570 – 3,102,678 803,345 (157,662) 3,748,361 556,795 (995) 501,038 3,654,222 148,901 4,304,161 28,583 1,338,712 12,962 1,380,257 157,956 919,369 28,381 1,105,706 60,712 526,104 20,811 607,627 The net book value of plant, machinery and equipment includes an amount of £Nil (2013: £31,114) in respect of assets held under finance lease contracts. There are no commitments for capital expenditure contracted but not provided for (2013: £Nil). 34 Ilika plc | Annual Report and Accounts 2014 13 Trade and other receivables Trade receivables Prepayments and accrued income Other receivables The ageing of trade receivables is as follows: 0–29 days 30–59 days 60–89 days 90+ days 14 Other financial assets – bank deposits As at 30 April 2014 £ 30,450 389,990 151,864 2013 £ 79,049 289,066 209,390 572,304 577,505 As at 30 April 2014 £ 20,123 – 10,327 – 2013 £ 77,664 424 661 300 30,450 79,049 As at 30 April 2014 £ 2013 £ Amounts receivable within one year: Sterling fixed rate deposits of greater than three months’ maturity at inception 1,776,767 1,455,092 15 Cash and cash equivalents Current bank accounts Short-term deposits with less than three months’ maturity 16 Trade and other payables Trade payables Other payables Other taxes and social security costs Lease purchase agreements Accruals and deferred income The ageing of trade payables is as follows: 0–29 days 30–59 days 60–89 days 90+ days As at 30 April 2014 £ 2013 £ 172,392 5,157,575 55,664 352,306 5,329,967 407,970 As at 30 April 2014 £ 208,135 14,034 37,824 – 350,754 2013 £ 214,372 17,341 40,997 7,544 213,935 610,747 494,189 As at 30 April 2014 £ 86,893 51,361 5,162 64,719 208,135 2013 £ 128,708 66,626 – 19,038 214,372 35 Ilika plc | Annual Report and Accounts 2014Strategic ReportOverviewGovernanceFinancial Statements Notes to the consolidated financial statements continued 16 Trade and other payables continued Lease purchase agreements Amounts payable Within 1 year As at 30 April 2014 £ 2013 £ – 7,544 Lease purchase agreements are secured on the related assets and carry interest at fixed rates. The total amount payable under leases as at 30 April 2014 was £Nil (2013: £9,058). 17 Provisions As at 1 May 2013 and at 30 April 2014 All provisions are due within one year. Leasehold Dilapidations £ 150,000 Leasehold dilapidations relate to the estimated cost of returning a leasehold property to its original state at the end of the lease in accordance with the lease terms. 18 Financial instruments The risks associated with financial instruments are set out below. Foreign currency risk The Group buys goods and services in currencies other than Sterling. The Group’s non-Sterling liabilities and cash flows can be affected by movements in exchange rates. These transactions are not significant and therefore no forward exchange contracts have been entered into. It is Group policy not to engage in any speculative trading in financial instruments. Any risk is mitigated by sales transactions being denominated in Sterling. Credit risk The Group’s credit risk is attributable to its trade receivables and banking deposits. The Group places its deposits with reputable financial institutions to minimise credit risk. The maximum exposure to credit risk for each period is the amount disclosed above as total loans and receivables. For the periods above there were no trade receivables which were past due or impaired. Risk is further mitigated through the use of credit limits, but also through the nature of the customers, who, for the most part, are large multinationals. There is no bad debt provision. Liquidity risk The Group’s policy is to maintain adequate cash resources to meet liabilities as they fall due. All Group payable balances fall due for payment within one year. Cash balances are placed on deposit for varying periods with reputable banking institutions to ensure there is limited risk of capital loss. The Group does not maintain an overdraft facility. Interest rate risk The main risk arising from the Group’s financial instruments is interest rate risk. The Group placed deposits surplus to short-term working capital requirements with a variety of reputable UK-based banks. These balances are placed at floating rates of interest and deposits have maturities of 1 to 12 months. The Group’s cash and short-term deposits are set out in note 15. Fixed-rate financial liabilities comprised of a finance lease which expired in August 2013. It had a weighted average interest rate of 13.4 percent. Floating-rate financial assets comprise cash on deposit and cash at bank. Short-term deposits are placed with banks for periods of up to 12 months and are categorised as floating-rate financial assets. Contracts in place at 30 April 2014 had a weighted average period to maturity of 127 days and a weighted average annualised rate of interest of 1.05 percent. Interest rate risk sensitivity analysis It is estimated that a change in base rate to zero would have increased the Group’s loss before taxation for the year to 30 April 2014 by approximately £20,000 (2013: £15,000). 36 Ilika plc | Annual Report and Accounts 2014 It is estimated that an increase in base rate by 1 percent would decrease the Group’s loss before taxation for the year to 30 April 2014 by approximately £25,000 (2013: £30,000). There is no difference between the book and fair value of financial assets and liabilities. Capital management The primary aim of the Group’s capital management is to safeguard the Group’s ability to continue as a going concern, to support its businesses and maximise shareholder value. The Group monitors its capital structure and makes adjustments as and when it is deemed necessary and appropriate to do so using such methods as the issuing of new shares. At present, other than finance leases, all funding is raised by equity. See note 1 for the fundraising that occurred during the year. The Group’s principal financial instruments comprise, lease financing arrangements, cash and short-term deposits as well as other various items arising from its operations such as trade receivables and trade payables which are shown in the table below. The main purpose of these instruments is to finance the Group’s working capital requirements as well as funding its capital expenditure programmes. The Group does not enter into derivative transactions such as interest rate swaps or forward exchange contracts. Financial Assets Loans and receivables Trade receivables Accrued income Other receivables Current bank accounts Bank deposits Short-term deposits Total loans and receivables Financial Liabilities Other financial liabilities Trade payables Other payables Other taxes and social security costs Lease purchase agreements Accruals Provisions Total other financial liabilities (see notes 16 and 17) 19 Share capital Authorised 62,240,019 Ordinary Shares of £0.01 each (2013: 45,874,033) 1,781,400 Convertible Preference Shares of £0.01 each Allotted, called up and fully paid 62,240,019 Ordinary Shares of £0.01 each (2013: 45,874,033) 1,025,900 Convertible Preference Shares of £0.01 each (2013: 1,661,400) As at 30 April 2014 £ 2013 £ 30,450 185,173 151,864 172,392 1,776,767 5,157,575 79,049 78,977 284,390 55,664 1,455,092 352,306 7,474,221 2,305,478 208,135 14,034 37,824 – 350,754 150,000 214,372 17,341 40,997 7,544 213,935 150,000 760,747 644,189 Year ended 30 April 2014 £ 2013 £ 622,400 17,814 458,740 17,814 622,400 10,259 458,740 16,614 632,659 475,354 37 Ilika plc | Annual Report and Accounts 2014Strategic ReportOverviewGovernanceFinancial Statements Notes to the consolidated financial statements continued 19 Share capital continued Share Rights The Ordinary Shares and Preference Shares rank pari passu in all respects other than: • The profits which the Group may determine to distribute in respect of any financial period shall be distributed only among the holders of the Ordinary Shares. The Preference Shares shall not entitle the holders of them to any share in such distributions • On a return of capital or assets on a liquidation, reduction of capital or otherwise the surplus assets of the Group remaining after payment of its obligations shall be applied: – First, in paying to the holders of the Preference Shares the amount paid thereon, being the amount equal to the par value of the Preference Shares excluding any premium; and – Secondly, the balance of such surplus assets shall belong to and be distributed amongst the holders of the Ordinary Shares. The Preference Shareholders have the right, at any time, to convert the Preference Shares held to the same number of Ordinary Shares. On 22 May 2013, 2 August 2013, 20 February 2014 and 14 July 2014, 100,000, 200,000, 335,500 and 250,000 respectively, £0.01 Convertible Preference Shares were converted to 100,000, 200,000 and 335,500 £0.01 Ordinary Shares respectively. On 22 May 2013, 2,375,000 Ordinary Shares were issued for a total consideration of £712,500 and total issue costs incurred were £3,500. On 20 February 2014, 4,854,903 Ordinary Shares were issued for a total consideration of £2,912,942 and total issue costs incurred were £296,933. Share options and warrants Employee related share options are disclosed in note 23. In addition to these, there were 107,300 non-employee share options over Ordinary Shares of £0.01 at the year end. The Company’s previous brokers also have a warrant to subscribe to 130,100 Ordinary Shares of £0.01. 594,700 share options were converted into 594,700 £0.01 Ordinary Shares on 20 February 2014 for a total consideration of £59,470. 10,539,216 warrants to subscribe to Ordinary Shares of £0.01 were issued on 14 May 2010 with an exercise price of £0.51 per warrant and an expiry date of 28 May 2014. During the year ended 30 April 2014, 7,905,883 warrants were exercised. A further 2,617,647 warrants were exercised after the year end. 20 Operating leases The total future minimum rent payable under non-cancellable operating leases is as follows: Property leases which expire: Within 1 year In 1 to 2 years As at 30 April 2014 £ 2013 £ 70,329 – 70,329 – 221,598 221,598 21 Pensions The Group operates a defined contribution group personal pension scheme. The pension cost charge for the period represents contributions payable by the Group to the scheme and amounted to £102,441 (2013: £112,373). 38 Ilika plc | Annual Report and Accounts 2014 22 Related party transactions The Directors consider that no one party controls the Group. During the year ended 30 April 2014, the Company incurred costs of £147,371 (2013: £226,724) with the University of Southampton in connection with research and development activities. The University of Southampton is the controlling shareholder of Southampton Asset Management Limited, which has an interest in the Company. At 30 April 2014, the amount unpaid in respect of these costs was £Nil (2013: £2,066). The Company incurred fees from the University of Southampton in respect of Prof. B. Hayden, a Director of the Company. These amounts are included in the costs shown above. Further details are given in the Directors’ Remuneration Report on pages 14 to 16. Details of key management personnel and their compensation are given in note 5 and in the Directors’ Remuneration Report on pages 14 to 16. 23 Share-based payments expense and share options Share-based payment expense The Group has incentivised and motivated staff through the grant of share options under the Enterprise Management Incentive (‘EMI’) scheme and through unapproved share options. The Group has recognised an expense to the consolidated statement of comprehensive income representing the fair value of outstanding equity-settled share-based payment awards to employees. The fair values were charged to the consolidated statement of total comprehensive income over the relevant vesting periods adjusted to reflect actual and expected vesting levels. The Group has calculated the fair market value of options which had market-based performance conditions at the time of grant, using the stochastic valuation model. Options with no market based performance conditions at the time of grant, have been valued using the Black-Scholes model. At 30 April 2014, the following options, whose fair values have been fully charged to the consolidated statement of total comprehensive income, were outstanding: Approved share options: Date of grant 9 June 2005 30 March 2006 14 May 2007 15 January 2008 2 February 2009 1 January 2009 Number of shares Period of option Exercise price per share 139,500 15,200 156,100 50,400 83,000 90,000 10 years 10 years 10 years 10 years 10 years 10 years £0.10 £0.10 £0.80 £1.00 £0.80 £0.80 594,700 options with an exercise price of £0.10 per share were exercised in the year. Unapproved share options: Date of grant 29 June 2004 1 December 2005 8 May 2006 11 July 2007 30 August 2007 11 November 2008 Number of shares Period of option Exercise price per share 273,100 280,000 115,500 195,500 151,600 40,000 10 years 10 years 8 years 10 years 7 years 10 years £0.10 £0.10 £0.10 £0.80 £0.10 £2.4283 39 Ilika plc | Annual Report and Accounts 2014Strategic ReportOverviewGovernanceFinancial Statements Notes to the consolidated financial statements continued 23 Share-based payments expense and share options continued Black -Scholes valuation Outstanding: At start of the period Exercised in the period Lapsed in the period At the end of the period Weighted average exercise price Number 2014 £ 2013 £ 2014 2013 0.3436 0.1000 0.4969 0.4121 0.3612 – 0.7500 0.3436 2,305,523 (594,700) (17,300) 2,414,470 – (108,947) 1,693,523 2,305,523 The exercise price of options outstanding at the end of the period ranged between £0.10 and £2.4283 and their weighted average contractual life was 2.2 years (2013: 2.9 years). These share options are exercisable and must be exercised within 10 years from the date of grant. Stochastic valuation Outstanding: At start of the period Lapsed during the period At the end of the period Weighted Average Exercise Price Number 2014 £ 0.51 0.51 0.51 2013 £ 0.51 0.51 0.51 2014 2013 3,062,900 (5,600) 5,327,100 (2,264,200) 3,057,300 3,062,900 The exercise price of options outstanding at the end of the period was £0.51 (2013: £0.51) and their weighted average contractual life was 7 years (2013: 8 years). Ilika plc Executive Share Option Scheme 2010 At 30 April 2014 the following share options were outstanding in respect of the Ilika plc Executive Share Option Scheme 2010: Date of grant 14 May 2010 01 February 2012 Number of shares Period of option Exercise price per share 44,400 103,623 10 years 10 years £0.51 £0.53 Members of staff in the Group have options in respect of Ordinary Shares in Ilika plc, which are conditional upon the achievement of a series of financial and commercial milestones. 17,900 options lapsed in the year and no options were exercised. Ilika plc unapproved share options At 30 April 2014 the following share options were outstanding in respect of Ilika plc unapproved share options: Date of grant 14 May 2010 Number of shares 3,012,900 Period of option Exercise price per share 10 years £0.51 No options lapsed in the year and no options were exercised. There are 4,477,723 options which were capable of being exercised as at 30 April 2014. Share-based payment expense/(credit): Black-Scholes calculation Stochastic valuation 40 2014 £ 2013 £ 15,000 – 15,000 9,375 (261,226) (251,851) Ilika plc | Annual Report and Accounts 2014 Company Balance sheet of Ilika plc Company number 7187804 ASSETS Non-current assets Investments in subsidiary undertaking Current assets Trade and other receivables Total net assets Equity Issued share capital Share premium Retained earnings LIABILITIES Current liabilities Trade and other payables Total liabilities Total equity and liabilities Year ended 30 April Notes 2014 £ 2013 £ 24 121,339 121,339 25 16,732,341 9,237,447 16,853,680 9,358,786 26 632,660 16,062,155 42,515 475,354 8,802,981 13,062 16,737,330 9,291,397 116,350 116,350 67,389 67,389 16,853,680 9,358,786 The notes on pages 44 to 45 form part of these financial statements. These financial statements were approved and authorised for issue by the Board of Directors on 15 July 2014. Mr. J. B. Boyer Chairman 41 Ilika plc | Annual Report and Accounts 2014Strategic ReportOverviewGovernanceFinancial Statements Company cash flow statement Cash flows from operating activities Profit/(loss) before tax Adjustments for: Equity settled share-based payments Operating cash flow before changes in working capital, interest and taxes Increase in trade and other receivables Increase/(decrease) in trade and other payables Cash utilised by operations Cash flows from financing activities Proceeds from issuance of Ordinary Share capital Share issue costs Net cash from financing activities Net increase in cash and cash equivalents Cash and cash equivalents at the start of the period Cash and cash equivalents at the end of the period Year ended 30 April 2014 £ 2013 £ 14,453 279,258 15,000 (251,851) 29,453 (7,495,026) 49,093 27,407 (153,605) (23,182) (7,416,480) (149,380) 7,716,913 (300,433) 7,416,480 149,380 – 149,380 – – – – – – 42 Ilika plc | Annual Report and Accounts 2014 Company statement of changes in equity As at 30 April 2012 Issue of shares Share-based payment Profit and total comprehensive income As at 30 April 2013 Issue of shares Expenses of share issue Share-based payment Profit and total comprehensive income As at 30 April 2014 Share capital £ Share premium account £ 472,639 2,715 – – 8,656,317 146,664 – – Retained earnings £ (14,345) – (251,851) 279,258 Total attributable to equity holders £ 9,114,611 149,379 (251,851) 2,79,258 475,354 8,802,981 13,062 9,291,397 157,306 – – – 7,559,607 (300,433) – – – – 15,000 14,453 7,716,913 (300,433) 15,000 14,453 632,660 16,062,155 42,515 16,737,330 Share capital The share capital represents the nominal value of the equity shares in issue. Share premium account When shares are issued, any premium paid above the nominal value is credited to the share premium reserve. Retained earnings The retained earnings reserve records the accumulated profits and losses of the Company since inception of the business. 43 Ilika plc | Annual Report and Accounts 2014Strategic ReportOverviewGovernanceFinancial Statements Notes to the financial information 24 Accounting polices Basis of preparation These financial statements have been prepared in accordance with IFRSs adopted by the European Union. No Directors report has been presented and the Directors responsibilities in respect of these financial statements are set out on page 17. Taxation Deferred tax is provided on temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for taxation purposes. The amount of deferred tax provided is based on the expected manner of realisation or settlement of the carrying amount of assets and liabilities, using tax rates enacted or substantively enacted at the balance sheet date. A deferred tax asset is recognised only to the extent that it is probable that future taxable profits will be available against which the asset can be utilised. Share-based payments The critical accounting estimates, assumptions and judgements underpinning the valuation of the option awards are disclosed in note 23. Financial instruments The accounting policy relating to financial instruments is disclosed in note 1. Profit of the Parent Company Profit in the year No profit and loss account is presented for the Company as permitted by Section 408 of the Companies Act 2006. The Company’s profit for the year was £14,453 (2013: £279,258). Directors’ remuneration The remuneration of the Directors is disclosed in the Directors’ remuneration report on pages 14 to 16. Auditors’ remuneration Auditors’ remuneration is disclosed in note 4. 25 Investment in subsidiary undertaking Investments in Group undertakings are stated at cost. Ilika plc has a wholly-owned subsidiary, Ilika Technologies Limited. Ilika Technologies Limited (Incorporated in the UK) made a loss for the year of £2,812,409 (2013: £5,109,602) and had net liabilities as at 30 April 2014 of £8,841,089 (2013: £6,028,679). Shares in Group undertakings (at cost) At 1 May 2013 and 30 April 2014 26 Trade and other receivables Prepayments Other debtors Amounts due from subsidiary undertakings 44 2014 £ 2013 £ 121,339 121,339 As at 30 April 2014 £ 2013 £ 594 – 16,731,747 5,983 4,016 9,227,448 16,732,341 9,237,447 Ilika plc | Annual Report and Accounts 2014 27 Share capital Authorised 62,240,019 Ordinary Shares of £0.01 each (2013: 45,874,033) 1,781,400 Convertible Preference Shares of £0.01 each Allotted, called up and fully paid 62,240,019 Ordinary Shares of £0.01 each (2013: 45,874,033) 1,025,900 Convertible Preference Shares of £0.01 each (2013: 1,661,400) As at 30 April 2014 £ 2013 £ 622,400 458,740 17,814 17,814 622,400 10,259 458,740 16,614 632,659 475,354 Share Rights The Ordinary Share and Preference Shares rank pari passu in all respects other than: • The profits which the Group may determine to distribute in respect of any financial period shall be distributed only among the holders of the Ordinary Shares. The Preference Shares shall not entitle the holders of them to any share in such distributions • On a return of capital or assets on a liquidation, reduction of capital or otherwise the surplus assets of the Group remaining after payment of its obligations shall be applied: – First, in paying to the holders of the Preference Shares the amount paid thereon, being the amount equal to the par value of the Preference Shares excluding any premium; and – Secondly, the balance of such surplus assets shall belong to and be distributed amongst the holders of the Ordinary Shares The Preference Shareholders have the right, at any time, to convert the preference shares held to the same number of Ordinary Shares. On 22 May 2013, 2 August 2013, 20 February 2014 and 14 July 2014, 100,000, 200,000, 335,500 and 250,000 respectively, £0.01 convertible Preference Shares were converted to £0.01 Ordinary Shares. The number of subscription warrants, with an exercise price of 51p per warrant, converted into Ordinary Shares during the year were converted on the following dates, 10 February 2014 – 98,039, 14 February 2014 – 238,432, 20 February 2014 – 5,078,432, 13 March 2014 – 1,980,784 and 14 April 2014 – 510,196. 450,000 warrants were converted on 6 May 2014 and 2,167,647 were converted on the 12 May 2014. On 22 May 2013, 2,375,000 Ordinary Shares were issued for a total consideration of £712,500 and total issue costs incurred were £3,500. On 20 February 2014, 4,854,903 Ordinary Shares were issued for a total consideration of £2,912,942 and total issue costs incurred were £296,933. 594,700 share options were converted into 594,700 £0.01 Ordinary Shares on 20 February 2014 for a total consideration of £59,470. 45 Ilika plc | Annual Report and Accounts 2014Strategic ReportOverviewGovernanceFinancial Statements Notes 46 Ilika plc | Annual Report and Accounts 2014 Notes 47 Ilika plc | Annual Report and Accounts 2014Strategic ReportOverviewGovernanceFinancial Statements Notes 48 Ilika plc | Annual Report and Accounts 2014 Corporate directory Company number 7187804 Directors Executive Non-Executive Graeme Purdy Stephen Boydell Brian Hayden Jack Boyer (Chairman) Clare Spottiswoode Prof. William Wakeham Secretary Stephen Boydell Registered office Kenneth Dibben House Enterprise Road University of Southampton Science Park Chilworth Southampton SO16 7NS Website www.ilika.com Advisers Independent auditors Nominated adviser and broker Registrars Public relations BDO LLP Arcadia House Maritime Walk Ocean Village Southampton SO14 3TL Numis Securities Limited The London Stock Exchange Building 10 Paternoster Square London EC4M 7LT Computershare Investor Services PLC The Pavilions Bridgwater Road Bristol BS13 8AE Walbrook PR Ltd 4 Lombard Street London EC3V 9HD I l i k a p l c A n n u a l R e p o r t a n d A c c o u n t s 2 0 1 4 Ilika plc Kenneth Dibben House Enterprise Road University of Southampton Science Park Chilworth Southampton SO16 7NS United Kingdom E info@ilika.com T +44 (0)23 8011 1400 F +44 (0)23 8011 1401 www.ilika.com