Itaconix plc
Annual Report & Accounts 2018
Polymers for Better Living™
Year in Review
Chief Executive Officer’s Report
Strategic Report
Governance
Board of Directors
Corporate Governance Report
Directors’ Remuneration Report
Audit Committee Report
Directors’ Report
Statement of Directors’ Responsibilities
Financial Statements
Independent Auditor’s Report
Consolidated Income Statement
Consolidated Statement of Other Comprehensive Income
Consolidated and Company Balance Sheets
Consolidated and Company Statements of Change in Equity
Consolidated and Company Statements of Cash Flows
Notes to Financial Statements
Appendix to the annual report
Corporate Information
Itaconix plc is a leading innovator in bio-based functional
improving the safety and performance of
ingredients for
homecare, personal care, and
Its
proprietary polymer technology generates a growing range of
new ingredients with unique functionality that meet consumer
demands for value and sustainability.
industrial products.
CHIEF EXECUTIVE OFFICER’S REPORT
YEAR IN REVIEW
GOVERNANCE
FINANCIAL STATEMENTS
Overview
I am pleased to deliver my first Chief Executive Officer’s Report to update shareholders on what was a critical
year for transforming Itaconix plc into a recognised leader in bio-based functional ingredients. In June 2018, we
began a restructuring to reduce our cost base and focus on growing revenues for our current products. In
August 2018, we completed an equity placement with net proceeds of £3.3 million to fund commercial
development and meet working capital needs as the Group moves toward profitability. Most importantly, we
now have global partners in place to take our current products worldwide in our key markets of non-phosphate
detergents, odour control, and hair styling. Commercial momentum continues to build in 2019.
Strategy
Consumers in many countries around the world are seeking or are required by laws to purchase products that
are more sustainable and safer for the environment and human use. The Group uses its proprietary
technologies to create bio-based functional ingredients that meet particular consumer needs. We then use our
direct selling efforts to acquire the first customers for a new ingredient, establish initial sales, and commercially
validate its value in end-use products. Once we achieve first sales, we look to scale demand globally through
collaboration with a market leader for ingredients in the particular application area. To date, we have executed
this strategy with Croda in odour control and Nouryon (formerly AkzoNobel Specialty Chemicals) in hair styling
and non-phosphate detergents.
Operational and Commercial Progress
We made significant advances with our strategy in 2018. The Group now has revenue growth and worldwide
partners for current products, a lower cost base, new cash resources, and a strong focus on continued revenue
growth and reaching profitability.
Through our research activities at our UK and U.S. operations over the past several years, we have built a
proprietary polymer technology platform with broad potential to meet evolving market needs. It became
evident in early 2018 that the Group’s generation of new chemistries outpaced the commercial progress of our
existing products. Consequently, to rebalance the Group’s efforts, the Board acted in June 2018 to focus on
revenue growth and reduce the Group’s cost base by consolidating research and administration activities into
the U.S. operations. In addition, the Board installed a new management team in August 2018, and completed a
restructuring of the Board by the middle of December 2018.
In July 2018, a new placement of ordinary shares raised net proceeds of £3.3 million from existing shareholders
and new U.S. investors. In May 2019, the Group generated an additional £0.24 million in cash resources
through the sale of its minority interest in Alkalon A/S, a Danish nicotine gum company.
The Group achieved important progress in 2018 at establishing the commercial value of its core products in
their major application areas. Product revenues grew by 12.9% from £0.54m in 2017 to £0.61m in 2018.
Although apparently small, I am encouraged by the breadth of early-stage product use behind this growth and
the indications that our bio-based ingredients are delivering key functional advantages to customers’ end-
products in a wide range of applications.
Odour control
Based on our collaboration started in 2017, Croda continued to expand its promotion of our ZINADOR™ odour
neutralizing polymer in homecare and industrial applications, with active development projects in North
America, Europe, Asia, Africa, and South America and important successes for future growth with major brands
in key consumer application areas.
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CHIEF EXECUTIVE OFFICER’S REPORT
YEAR IN REVIEW
GOVERNANCE
FINANCIAL STATEMENTS
Non-phosphate detergents
Nouryon completed successful product performance evaluations and notified Itaconix in May 2018 of its desire
to market our detergent polymers. The parties completed and announced an exclusive worldwide supply
agreement in January 2019, under which Nouryon will market Itaconix detergent polymers to its customers in
household, institutional, and industrial detergent and cleaner applications.
In December 2018, the Group also succeeded in securing future detergent polymer demand by licensing a
novel automatic dishwasher detergent formula to New Wave Global Services (“New Wave”), a leading
Canadian supplier of innovative products to North American retailers. Based on Itaconix® CHT™, New Wave is
using the formula to produce and supply a new triple-chamber detergent pod for the private label brands at a
growing list of major North American retailers.
In May 2019, the Group achieved initial success for Itaconix® CHT™ in Europe with its first order from a major
producer of non-phosphate automatic dishwashing detergents. We see this order as a significant milestone in
a key market for future growth based on the demanding performance requirements in the European automatic
dishwashing detergent market.
Hair styling
Interest in our polymers at Nouryon expanded from detergents into hair styling in 2018. From a small base of
activity in 2017, our direct selling efforts and distributor network generated continued growth in revenues and
active customer projects for our RevCare™ NE 100S hair styling polymer. In addition to generating 123%
growth in 2018 revenues from 2017, customer recognition of the unique functionality of RevCare™ NE 100S
created a global collaboration opportunity with Nouryon, a worldwide leader in hair styling polymers. The
parties completed and announced an exclusive worldwide supply agreement in February 2019. Nouryon
launched the polymer under its own Amaze™ SP brand in April 2019 at the world’s largest annual personal care
ingredient show and has now placed its first order with Itaconix. With this supply arrangement in place,
Itaconix is withdrawing the RevCare™ NE 100S brand from the market, with accounts and projects being
transitioned to Nouryon.
Outlook
Presenting a new claim on end-product packaging often requires extensive testing to substantiate the claim,
especially the first time a new ingredient is used. From automatic dishwashing detergents and carpet cleaners
to hair shampoos and aluminum-free deodorants, our polymers have gained initial use or are under evaluation
in a broad range of potential consumer products. Through our own work and the interest of our partners in the
functional advantages of our polymer ingredients, we expect a steady stream of projects will advance to strong
revenue growth for our current products. As noted above, for example, we reported the first use of our
Itaconix® CHT™ polymer in a European automatic dishwashing detergent. I look forward to reporting on other
new customers emerging from our project pipeline.
Beyond our key focus on higher revenues from current products, we do have an extensive portfolio of novel
chemistries with potential for new products. We continue to assess these chemistries for functional
advantages that can meet major consumer needs. For example, we have bio-based superabsorbents that may
not necessarily compete directly on cost and performance against current petroleum-based superabsorbents,
but may offer functional advantages for use in certain hygiene applications. We are also investigating
functional additives that may
improve the performance and expand the market opportunities for
biodegradable plastics. I look forward to reporting on new products emerging from our development pipeline.
I believe the Group’s polymer technology platform is set for generating stronger revenue growth in 2019 and
beyond from our current customers, new customers gained through our worldwide partners, and new
products emerging from our development pipeline.
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CHIEF EXECUTIVE OFFICER’S REPORT
YEAR IN REVIEW
GOVERNANCE
FINANCIAL STATEMENTS
People
The restructuring of our operations in 2018 generated significant changes in our organisation, Executive Team,
and Board of Directors.
In June 2018, we announced the downsizing of our research, development, marketing, and administrative
operations in Deeside, Wales, to focus on revenue growth and profitability in our three core product areas. As
of February 2019, the Group had no employees at the facility.
Details on the development of the Executive Team and Board of Directors in 2018 are outlined below in the
Strategic Report.
The sum total of these changes leaves the Group with an experienced Executive Team and Board of Directors
aligned on commercial efforts to grow revenues from its current customer pipeline and focused on reaching
profitability with a lower cost base.
I wish to thank our former Chief Executive Kevin Matthews, our former Chief Financial Officer Robin Cridland,
and our former Non-Executive Independent Director and Audit Chair Julian Heslop for their dedication and
contributions to transforming the Group from a nicotine gum business into a leading innovator in sustainable
specialty polymers over the last four years.
Shareholder Engagement
The Notice of Annual General Meeting (“AGM”) that accompanies the Annual Report sets out the business for
our forthcoming AGM on 19 July 2019 and we encourage all our shareholders to attend and participate.
Corporate Governance
With effect from 28 September 2018, all AIM companies are required to adopt a recognised corporate
governance code and to make additional corporate governance related disclosures on their website. I am
pleased to announce that the Company has adopted the Quoted Companies Alliance’s Corporate Governance
Code (the “QCA Code”). See www.itaconix.com for our governance disclosures.
Summary
After raising new funds and significantly reducing our cost base in 2018, the pace of revenue growth from the
uptake of our existing polymers into customer formulations remains our primary focus and the key dynamic to
monitor for managing our costs and our cash to reach profitability. The Board firmly believes that the
products, active customer projects, and global partnerships are in place to increase overall use of our
polymers, gain larger accounts, and generate significant new revenue growth going forward.
John R. Shaw
Chief Executive Officer
26 June 2019
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STRATEGIC REPORT
YEAR IN REVIEW
GOVERNANCE
FINANCIAL STATEMENTS
Principal Activities
Itaconix plc is a leading innovator in bio-based functional ingredients for improving the safety and performance
of homecare, personal care, and industrial products. Its proprietary polymer technology generates a growing
range of new ingredients with unique functionalities that meet consumer demands for value and
sustainability.
The principal activities of the Group are the research and production of proprietary specialty polymers that
meet significant customer needs, with a strategy of direct selling efforts to establish initial use of new
polymers, and partner development to scale global demand.
Most of the Group’s activities are focused toward homecare and personal care applications where consumer
interest and desires for safer and more sustainable products are particularly high.
Proprietary Ingredients with Unique Functionality
The Group has completed many years of exploratory research and holds an extensive patent portfolio related
to the production and use of polymers made from itaconic acid. The commercial potential for these
ingredients stems from the unique functionalities available through the chemical structure of itaconic acid and
its derived polymers, and from the bio-based production of itaconic acid through fermentation using
renewable sugar sources.
Using the Group’s process of identifying a market need and then developing a product to meet that need,
initial products from its itaconate chemistry platform have gained commercial use in non-phosphate
detergents, odour control, and hair styling. As these products generate more revenues, Itaconix expects to
identify more opportunities for additional new products within its itaconate chemistry platform.
Progress in 2018
The need in 2018 was to rebalance the Group’s research and commercial activities to focus on revenue growth
in its two core markets, homecare and personal care, with the goal of reducing cash use and reaching
profitability sooner. Major rebalancing goals were achieved by consolidating our major activities into our U.S.
operations and securing global partners to scale demand for our core products.
In conjunction with the consolidation and reduction in our cost base by over £1m per annum, the Group raised
£3.3m in net proceeds from a placing completed in August 2018.
As detailed in the Chief Executive Officer’s Statement, the Group entered 2019 with a strong cash position to
grow revenues and improve profitability with a full complement of marketing partners for its core products.
Board Changes
There were significant changes to the Executive Team and Board of Directors in 2018.
John R. Shaw, President of Itaconix Corporation, was also appointed as Chief Executive Officer and a Director
of Itaconix plc.
James Barber moved from Independent Non-Executive Director to Non-Executive Chairman in December 2018.
John I. Snow III was appointed as an Independent Non-Executive Director and Chairman of the Audit
Committee in October 2018.
Bryan Dobson moved from Non-Executive Chairman to Independent Non-Executive Director in August 2018.
Kevin Matthews moved from Chief Executive Officer to Executive Chairman in August 2018, and then stepped
off the Board in December 2018.
Robin Cridland resigned as Chief Financial Officer in August 2018.
Julian Heslop stepped down as a Non-Executive Independent Director and Chairman of the Audit Committee in
October 2018.
Michael Norris was appointed Interim Chief Financial Officer in August 2018.
Subsequent to 2018, Mike Townend stepped down as a Non-Executive Director in May 2019.
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STRATEGIC REPORT
Financial Review
Results and Dividends
YEAR IN REVIEW
GOVERNANCE
FINANCIAL STATEMENTS
The Group results are stated in the Consolidated Income Statement on page 30 and are reviewed below. The
Directors do not recommend the payment of a dividend (2017: Nil).
Financial Performance
Revenue
Total revenues for the 12-month period ended 31 December 2018 were £0.66m, representing a 20.0%
increase over 2017 revenues of £0.55m. Revenue from the sale of products grew 12.9% in 2018 to £0.61m
from £0.54m in 2017, with the balance of revenue derived from collaborative agreements. Revenues grew
primarily from increased demand for the Group’s detergent and personal care products.
Gross Profit and Loss after Tax
The gross profit fell from £0.22m in 2017 to £0.11m in 2018 primarily as a result of the scaling of capacity at
the New Hampshire, USA operations. A greater portion of overhead costs were classified as production
expenses in 2018 rather than development expenses related to the construction of the new production line in
2017. Gross profit margins are expected to improve as these overhead costs are absorbed through increased
capacity utilization from future anticipated business.
The Operating loss before exceptional items decreased from £5.2m 2017 to £4.1m for 2018, significantly
assisted by administrative expenses declining from £5.5m in 2017 to £4.3m in 2018. This 22% decrease derived
mainly from the consolidation of research and administrative activities into the New Hampshire, USA
operations.
Costs and Available Cash
The Group had net cash outflow from operations of £4.85m, partially offset by net proceeds from an issue of
shares of £3.3m, giving an overall net cash outflow of £1.5m. Net cash balances as at 31 December 2018 were
£2.1m. Furthermore, while our restructuring programme has reduced operating costs by over £2m per annum,
the Group continues to have net cash outflows from operations. Subsequent to the year end, the Group
received a £0.3m R&D tax credit refund and £0.24m from the sale of its minority interest in Alkalon A/S.
Revaluation of Deferred Consideration
As a result of revaluing deferred consideration with respect to the acquisition of Itaconix Corporation in 2016,
as per Note 20, there is an exceptional non-cash expense of £2.2m (excluding foreign exchange), which
partially offsets the £2.5m exceptional income in 2017 reflecting a change in assumptions and terms of the
deferred consideration.
Organizational Restructuring
In 2018, there was an exceptional charge of £0.89m in relation to organizational restructuring for the
consolidation of the Group’s research and administration into its New Hampshire, USA operations.
Financial Reporting
In the financial year commencing 1 January 2018 the Group applied two new accounting standards.
IFRS 9 “Financial Instruments”
IFRS 9 has replaced IAS 39 Financial Instruments: Recognition and Measurement, and has had an effect on
the Group in the following areas:
•
The impairment provision on financial assets measured at amortised cost (such as trade and other
receivables) has been calculated in accordance with IFRS 9’s expected credit loss model, which
differs from the incurred loss model previously required by IAS 39.
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STRATEGIC REPORT
YEAR IN REVIEW
GOVERNANCE
FINANCIAL STATEMENTS
•
Loans to subsidiaries measured at amortised cost have been calculated in accordance with IFRS 9’s
expected credit loss model. These loans were considered to be credit-impaired at the date of initial
adoption of the new standard. The directors have considered cash flows that may be generated
from the orderly sale of the underlying business in order to establish the assessment of lifetime
expected credit losses at initial adoption and at year end.
•
There were no material changes resulting from the adoption of IFRS 9.
IFRS 15 “Revenue from Contracts with Customers”
IFRS 15 has replaced IAS 18 Revenue and IAS 11 Construction Contracts as well as various Interpretations
previously issued by the IFRS Interpretations Committee.
(a) Sale of goods
Purchase orders with customers in respect of the sale of polymers (£0.61m) continue to be recognised
when goods are delivered to the customer, and as such control of the asset is transferred to the
customer. IFRS 15 has therefore had no impact on this revenue stream.
(b) Collaborative research
Contracts with customers in which collaborative research (£0.05m) on development stage products are
completed are recognized in agreement with milestones as identified in the contractual agreement. IFRS
15 has therefore had no impact on this revenue stream.
Key Performance Indicators (KPI’s)
The Group considers its’ three key performance indicators to be:
• Revenue
•
•
Profits before interest, tax, & non-cash expenses
Cash
The Directors consider that revenue and profits are KPI’s in measuring Group performance. The Group seeks to
commercialise its existing and new technologies, and generate revenues from a growing number of
commercial agreements with users of the products. The performance of the group is set out in the Chief
Executive Officer’s Report on pages 3 to 5.
The Directors believe that a further important performance measure is the Group’s rate of cash expenditure
and its effect on Group cash resources. Net cash outflows for the period to 31 December 2018 were £1.5m
(2017: £5.2m). Further details of cash flows in 2018 (and 2017) are set out in the Group’s Consolidated Cash
Flow Statement on page 35.
Going Concern
Analysis of Itaconix’s going concern position is detailed in the Directors’ Report on page 22.
Shareholdings and Earnings per Share
Itaconix had 269,130,071 shares in issue as at 31 December 2018. The undiluted weighted average number of
shares for the period to 31 December 2018 was 157,492,765. The difference in the two numbers is the result
of the issuance of new shares in August 2018 (see note 23). The undiluted weighted average number of shares
was used to calculate the earnings per share presented in Note 12.
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STRATEGIC REPORT
Principal Risks and Uncertainties
Commercialisation Activities
YEAR IN REVIEW
GOVERNANCE
FINANCIAL STATEMENTS
Ultimately, it is uncertain whether our range of Itaconix products will be purchased in sufficient quantity for
the Group to be successful in the commercial market. Progress in 2018 has been made to address costs whilst
looking to fill unused capacity through developing existing and new commercial partnerships.
Management of risk: The Group has sought to manage this risk by partnering with market leaders for the
worldwide promotion of our leading products, the appointment of a new Chief Executive Officer, and the
reorganization of its research and administrative activities.
Dependence on Key Personnel
The Group depends on its ability to attract and retain a limited number of highly qualified managerial and
scientific personnel, the competition for whom is intense. While the Group has entered into conventional
employment arrangements with key personnel aimed at securing their services for minimum terms, their
retention cannot be guaranteed.
Management of risk: The Group has a share incentive agreement as disclosed in Note 25, and service contracts
in place for John R. Shaw as Chief Executive Officer and Dr. Yvon Durant as Chief Technology Officer. In
addition, the Group is seeking shareholder approval at the forthcoming AGM for an Equity Incentive Plan for
potential share option grants to other key personnel at its New Hampshire, US operations.
Customer Retention
The ability to retain key customers is critical to maintaining revenue streams. The loss of key customers could
adversely impact business results.
Management of risk: Acceptance of our products in our customers’ end-product formulations is closely
monitored and managed. Our customer service includes regular engagement on the performance of both our
products and the end-products to ensure our ingredients are delivering the desired value to our customers and
end-users.
Regulatory and Legislation
Regulatory bans on the use of phosphates as ingredients in detergents have transformed the consumer
detergent markets in Europe and North America over the last ten years. Phosphates are known to enter
waterways through detergent effluent and act as a nutrient for algae growth that subsequently cuts oxygen
levels in water and harms aquatic life. We believe that phosphates are likely to be phased out in other
jurisdictions around the world over time. Itaconix polymers can act as effective replacements for phosphates
in detergent formulations and are used in numerous detergent products in North America and Europe for this
purpose.
Management of risk: The Group closely monitors regulatory developments in the use of ingredients in
consumer and industrial products to assure compliance and find new revenue potential for Itaconix polymers.
Further, the Group regularly assesses the relative performance and cost efficacy of Itaconix polymers to
current and emerging phosphate replacements to identify revenue risks and opportunities.
Competition and Technology
The production and use of Itaconix polymers are subject to technological change over time. There can be no
assurance that developments by others will not render the Group’s product offerings and research activities
obsolete or otherwise uncompetitive.
Management of risk: The Group employs experienced and highly-trained polymer chemists to develop and
protect the Group’s intellectual property. These efforts include continuous work on the performance and cost
advantages of Itaconix polymers. In addition, the staff monitors technologies and patents through
publications, scientific conferences, and collaborations with other organisations to identify new risks and
opportunities.
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STRATEGIC REPORT
Liquidity Risk
YEAR IN REVIEW
GOVERNANCE
FINANCIAL STATEMENTS
Itaconix seeks to manage financial risk by ensuring adequate liquidity is available to meet foreseeable needs
and to invest cash assets safely and profitably. Short-term flexibility is achieved by holding significant cash
balances in Itaconix’s main operational currencies, notably UK Sterling and US Dollars.
Credit Risk
The principal credit risk for Itaconix arises from its trade receivables. To manage credit risk, new customers are
subject to credit review and all customer accounts are regularly reviewed for debt ageing and collection
history. As at 31 December 2018, there were no credit risk balances.
Foreign Exchange Risk
Itaconix has operations in the UK and US, and trades with customers internationally. Revenue and costs are
exposed to variations in exchange rates and therefore reported losses. Although there is some natural hedging
of transactional foreign exchange risk, Itaconix remains subject to translation exchange risk.
Government Risk
US trade tariffs with China have caused increases to certain raw material costs, and may continue to create
volatility. These increases have not caused any major issues with profitability to date. Itaconix is assessing
alternative supply channels, and is prepared to pass cost increases through to customers if needed. The
resolution or lack of resolution of Brexit has potential risks for a macroeconomic downturn in the UK and
contagion more widely to other global economies. Itaconix has its main operations in the US, generates a small
percentage of revenues in the UK, and partners with global companies. As such we do not currently anticipate
a material impact of Brexit on the business.
This report was approved by the Board of Directors on 26 June 2019 and signed on behalf of the Board of
Directors by:
James Barber
Chairman
John R. Shaw
Chief Executive Officer
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BOARD OF DIRECTORS
YEAR IN REVIEW
GOVERNANCE
FINANCIAL STATEMENTS
Dr. James (“Jim”) Joseph Barber (aged 65) – Independent Non-
Executive Chairman
Jim joined the Board on 12 September 2016 and became Chairman
on 21 December 2018. Since 2007 he has run his own business
consultancy practice Barber Advisors LLC. Prior to this, Jim served as
President and CEO of Metabolix, Inc. from January 2000 to May 2007,
leading the transformation of Metabolix from a research boutique to
a world renowned, highly regarded leader in “clean tech” and
industrial biotechnology, with a market cap of over $500m. Prior to
joining Metabolix Inc., he had senior commercial roles at the
Organometallics and Catalysts business of Albemarle Corporation,
Ethyl Corporation, and a number of other chemicals businesses. Jim is
a non-executive director of Graham Corporation. He has a BS degree
in Chemistry from Rensselaer Polytechnic Institute and a PhD in
Organic Chemistry from the Massachusetts Institute of Technology.
John Roger Shaw (aged 59) – Chief Executive Officer
John joined the Board on 12 July 2018, when he assumed the role of
Chief Executive Officer. As a founder, John has driven the direction and
growth of Itaconix Corporation since 2008. He has over 25 years of
experience in senior management roles in the pharmaceutical,
biomedical and specialty chemical sectors and brings significant
marketing, strategy and business management expertise, along
with a broad technical understanding, to Itaconix’s management
team. John began his career holding a number of increasingly senior
roles at SmithKline Beecham, Westaim, and Mitek Systems, Inc. He
has a BA in Economics from Pomona College and an MBA from
Harvard Business School.
Dr Bryan Crawford Dobson (aged 66) – Independent Non-
Executive Director
Bryan
joined the Board on 13 September 2012, and became
Chairman on 18 September 2015. He has more than 30 years’
experience in the chemicals industry; 28 years with ICI and 5 years with
the Croda group, and was most recently President Global Operations
International. He was a member of the executive
for Croda
management teams in Croda and in a number of large specialty
chemicals businesses
ICI, and has extensive management
experience running regional and global business units in the UK, US,
Belgium and The Netherlands. He also has expertise in developing new
business in the specialty chemicals sectors; extensive functional
experience
operations, and significant M&A
experience. He is also currently non-executive chairman of Applied
Graphene Materials Plc.
in R&D and
in
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BOARD OF DIRECTORS
YEAR IN REVIEW
GOVERNANCE
FINANCIAL STATEMENTS
Michael (Mike) Charles Nettleton Townend (aged 56) – Non-
Executive Director to May 2019
investment processes. He
Mike joined the Board on 2 July 2012 and is the representative of
IP2IPO Services Limited, which had been the corporate director of
the business that is now Itaconix (U.K.) Limited since February 2006.
He has over 20 years’ experience in all aspects of equity capital
markets and
is currently Chief
Investment Officer of IP Group plc, having previously served as
Head of Capital Markets for four years. Mike joined IP Group plc
from Lehman Brothers where he was Managing Director of
European Equities and Head of Equity Sales to Hedge Funds. Mike
senior relationship management
was also a key member of the
programme. Prior to this, he was an executive director at Donaldson,
Lufkin and Jenrette with responsibility for building the Bank’s
business with hedge funds and alternatives. Mike has sourced,
co-led or led numerous private and public transactions. Mike is the IP
Group plc representative on the Boards of Modern Water plc and
Applied Graphene Materials plc and also a non-executive director of
Green Urban Transport Ltd.
John Ingalls Snow III (aged 58) – Independent Non-Executive
Director
John joined the Board and became Audit Committee Chair on 2
October 2018. He has 30 years’ experience in the private equity
market. He is currently a Managing Director at Quabbin Capital, Inc.,
a Boston based alternative investment firm. John is a non-executive
director of Upper Crust Holdings, LLC, Winchester Savings Bank,
Advanced Duplication Services, UC Management, Inc., YMCA Camp
Belknap, Endowment
for Health, and Mary Snow Designs,
Incorporated. He has a BA in Economics from Amherst College and an
MS in Accounting from New York University. John is a Chartered
Financial Analyst and a non-practicing Certified Public Accountant.
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CORPORATE GOVERNANCE REPORT
YEAR IN REVIEW
GOVERNANCE
FINANCIAL STATEMENTS
The Board is committed to ensuring that the Group has the people, strategy, and structure to deliver value to
customers and shareholders in the near and long term. We recognise that effective corporate governance is
essential to meeting this commitment and fundamental to the success of the Group.
Solid corporate governance starts with the calibre and talents of the Directors. Biographies of the Directors
are presented earlier in this Annual Report, and reveal a range of relevant experience that brings a high level
of independent judgement to Itaconix’s business.
Following changes to AIM Rule 26 in 2018, AIM-quoted companies are required to adopt and give details of
the corporate governance code which they have adopted and to show how they are following it. Of the
recognised codes generally adhered to by AIM companies, the Quoted Companies Alliance’s (QCA) Corporate
Governance Code for small and mid-size quoted companies (the “QCA Code”) was drafted with smaller
businesses using a pragmatic and principles-based approach. The Board deemed the QCA Code as the most
suitable for the Group and adopted it with effect from 28 September 2018.
As Chair, I am responsible for leading the overall effectiveness of the Board, for ensuring that the Board
maintains effective corporate governance processes, and for promoting open communication and debate
within the Board and across the Group to foster a positive governance culture. I welcome the adoption of the
QCA Code and the Company’s approach to complying with the QCA Code.
Compliance with the Quoted Companies Alliance Corporate Governance Code
The QCA Code, as revised in April 2018 to meet the new AIM requirements, identifies ten principles that
focus on the pursuit of medium- to long-term value for shareholders without stifling entrepreneurial spirit.
Itaconix’s adoption of the QCA principles is summarised in the table below. Further details are available on
our website.
1. Establish a strategy and business model which promote long-term value for shareholders
Over the last ten years, Itaconix developed an enabling chemistry technology platform for producing
specialty polymers from renewable resources. The Group uses its novel chemistries to create new
ingredients with unique functionality that create value and meet customer needs in homecare, personal
care, and industrial products. We utilise direct sales efforts to acquire initial customers and confirm the
value for a new product, then scale globally with appropriate marketing partners. The long term revenue
and profit potential of each new product relative to its near-term development cost can generate many
years of attractive returns and shareholder value. Our near-term strategy is to balance aggressive
sustained product innovation from our polymer technology platform with a focus of profitability to reach
positive cash flow and long-term financial stability. Additional information on our strategy and business
model is presented in the Strategic Report on pages 6 to 10.
2. Seek to understand and meet shareholder needs and expectations
The Board is committed to communicating and having constructive dialogues with current and potential
shareholders on a regular basis. Shareholders are encouraged to attend the Company’s Annual General
Meeting and any other General Meetings that may be held during the year. Information on significant
Group milestones and developments is readily available in news releases, interim reports, and annual
reports issued directly, broadcast widely, and posted to the Group’s website. Our CEO is the primary
contact for current and potential investors, and works closely with our Nominated Advisor and others to
interact with the broader investment community on a regular basis.
3. Take into account wider stakeholder and social responsibilities and their implications for long-term
success
The Board is committed to the Group developing and maintaining open communications and dialogues
with employees, customers, suppliers, regulators, investors, and partners. In addition to the investor
activities described above, key practical elements of this commitment include a flat organization with
ready employee access to management and the Board, regular direct contact with customers, quality
assessments and reviews with vendors, and leadership roles in industry and scientific associations.
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CORPORATE GOVERNANCE REPORT
YEAR IN REVIEW
GOVERNANCE
FINANCIAL STATEMENTS
4. Embed effective risk management, considering both opportunities and threats, throughout the
organization
The Board constantly monitors major business risks faced by the Group and ensures appropriate courses
of action to manage those risks. In 2018 the Board and management adopted a framework for the
effective identification, assessment and management of risks to the achievement of corporate
objectives. The risk management process is embedded in monthly reporting and quarterly meetings. The
risks that the Board considers to be most significant to the Group’s business are set out on pages 9 to 10.
5. Maintain the Board as a well-functioning, balanced team led by the Chairman
The QCA Code requires that Boards have an appropriate balance between Executive and Non-Executive
Directors and that each Board should have at least two Independent Directors. The Board is made up of
one Executive Director and three Independent Non-Executive Directors. The three Independent Non-
Executive Directors are experienced and independent persons who have each succeeded in their own
businesses and are not dependent upon income from the Group. They have a strong and detailed
understanding of the business, and are prepared and able to intervene and challenge the Executive
Director and management.
6. Ensure that between them the Directors have the necessary up-to-date experience, skills and
capabilities
All members of the Board bring relevant experience to the Board’s responsibilities and duties. The Board
believes its blend of experience, skills, and personal capabilities are well-suited for governing the success
of the Group. Details of the background and experience of the Directors are set out in their biographies.
These demonstrate that the Board collectively has extensive specialty chemical industry knowledge and
relevant experience on the challenges of technology-based growth businesses and publicly-traded
companies.
7. Evaluate Board performance based on clear and relevant objectives, seeking continuous improvement
The Board reviewed its structure and needs in conjunction with its decision to restructure the Group’s
operations and the results of the new financing in July 2018. By the end of 2018, the review process led
to a rotation in the Chairman position, a new Non-Executive Independent Director with responsibility as
Audit Chair, a new CEO as an Executive Director, and the former CEO, the former CFO, and the former
Audit Chair stepping down from the Board. The Board will continue to review its needs and assess
opportunities for continuous improvement as the Group’s commercial activities develop.
8. Promote a corporate culture that is based on ethical values and behaviours
Itaconix’s core values are embedded in its quality system, which commits the Group to consistently
deliver customer value, satisfaction and service through continual
improvement and employee
development. Key pillars of the culture are curiosity to use new approaches and technology to meet a
need, accuracy of scientific analyses, the safety of our products and our processes, data-driven product
claims that compel customers to reformulate, reliable order fulfilment with quality product, compliance
with all laws and regulations, and respect for the livelihoods of all stakeholders. These values and pillars
are introduced and reinforced through daily routines and periodic activities that instil ethical and
rewarding behaviour into each employee’s work practices and experience.
9. Maintain governance structures and processes that are fit for purpose and support good decision-
making by the Board
Formal Board meetings are held at least quarterly to review strategy, management, and performance of
the Group, with additional meetings between those dates convened as necessary. We have three Board
committees, the Audit Committee, the Remuneration Committee, and the Nominations Committee. The
terms of reference of these committees of the Board are available on our website.
10. Communicate how Itaconix is governed and is performing by maintaining a dialog with shareholders
and other relevant stakeholders
The Company’s approach to investor and shareholder engagement is described under Principle 2 above.
Annual reports, Annual General Meeting notices, regulatory announcements, trading updates and other
governance related materials since the year 2009 are available on our website.
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CORPORATE GOVERNANCE REPORT
YEAR IN REVIEW
GOVERNANCE
FINANCIAL STATEMENTS
The Board of Directors
The Board of Directors is responsible for the proper management of the Group by formulating, reviewing and
approving the Group's strategy, budgets, and corporate actions. In order to achieve its objectives, the Board
has adopted the ten principles of the QCA Code. Through successfully implementing these principles, the
Board aims to deliver long-term growth for shareholders and maintain a flexible, efficient and effective
management framework within an entrepreneurial environment.
It is important that the Board itself contains the right mix of skills and experience in order to deliver the
strategy of the Group. As such, the Board is comprised of:
• An Independent Non-Executive Chair, whose primary responsibility is the delivery of the Group's
corporate governance model. The Chair has a clear separation from the day-to-day business of the
Group which allows him to make independent decisions;
• One Executive Director;
•
Two Independent Non-Executive Directors.
The Board has not appointed a Senior Independent Director after taking into account the Group's size and
development stage.
Additionally, the Company has appointed Michael Norris as Interim CFO and Group Secretary to assist the
Chairman in preparing for and running effective board meetings, including the timely dissemination of
appropriate information. He provides advice and guidance to the extent required by the Board on the legal
and regulatory environment.
Each Director serves on the Board subject to re-election at the Annual General Meeting and the Board
generally meets at least four times a year.
Corporate Governance
In compliance with UK best practice, the Board has established the following committees to help the Board
discharge its responsibilities with formally delegated duties and responsibilities.
1.
Audit Committee
The purpose of the Audit Committee is to monitor the integrity of the financial statements of the Group and
to assist the Board in its oversight of risk and risk management processes.
Some of the Audit Committee's duties include:
• Reviewing the Group's accounting policies and reports produced by internal and external audit
•
functions;
Considering whether the Group has followed appropriate accounting standards and made appropriate
estimates and judgments, taking into account the views of the external auditor;
• Reporting its views to the Board of Directors if it is not satisfied with any aspect of the proposed
financial reporting by the Group;
• Reviewing the adequacy and effectiveness of the Group’s internal financial controls and internal
control and risk management systems;
• Reviewing the adequacy and effectiveness of the Group's anti-money laundering systems and controls
for the prevention of bribery and receive reports on non-compliance; and
• Overseeing the appointment of and the relationship with the external auditor.
The Audit Committee currently has three members, all of whom are Independent Non-Executive Directors
and at least one member who has recent and relevant financial experience. As at 26 June 2019, the Audit
Committee is comprised of John Snow as Chair, James Barber, and Bryan Dobson.
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CORPORATE GOVERNANCE REPORT
YEAR IN REVIEW
GOVERNANCE
FINANCIAL STATEMENTS
Remuneration Committee
2.
The purpose of the Remuneration Committee is to develop and propose to the Board the framework and
policies for the remuneration of the Group’s Executive Directors and senior management.
The Committee normally meets at least twice a year and is responsible for determining and reviewing the
policy for the remuneration of the Executive Directors and such other members of the executive
management as it is designated to consider. Within the terms of the agreed policy, it determines the total
individual remuneration of the Executive Directors. The Committee also approves the design of, and
determines targets for, any performance-related pay schemes, reviews the design of any share incentive
plans, determines the awards to the Executive Directors and sets the policy for, and scope of, pension
arrangements for each Executive Director. Finally, the Committee approves the design and principles of the
remuneration schemes for the employees of the business outside of the management team, which are
implemented by the Executive Directors.
As at 26 June 2019, the Remuneration Committee is comprised of Bryan Dobson as Chair, James Barber, and
John Snow, each of whom is an Independent Non-Executive Director.
Nominations Committee
3.
The Company’s Nominations Committee is comprised of James Barber as Chair, Bryan Dobson, and John
Snow. The Committee is normally required to meet at least once a year and is responsible for reviewing the
structure, size and composition of the Board and recommending to the Board any changes required, for
succession planning and for identifying and nominating for approval of the Board candidates to fill vacancies
as and when they arise, with a view to ensuring that the Board is composed of individuals with the necessary
skills. The Committee is also responsible for reviewing Board performance, making recommendations to the
Board concerning suitable candidates for the role of senior independent Director (if applicable) and the
membership of the Board’s committees, and the election or re-election of Directors at the annual general
meeting.
Terms of Reference
All Board committees operate within defined terms of reference and sufficient resources are made available
for them to undertake their duties. The terms of reference for each committee are available on the
Company’s website (in the Investor Relations section and under Corporate Governance).
Corporate Social Responsibility
The Board recognises the critical role of ethics, the growing concerns for social and environmental matters,
and the need to take into account the interests of the Group’s stakeholders, including its investors,
employees, suppliers and business partners, when operating the business.
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.
Relations with Shareholders
Itaconix attaches a high priority to effective communication with both institutional and private shareholders.
The AGM is the principal forum for dialogue with private shareholders. A business presentation is made at the
AGM and there is an opportunity for shareholders to put questions to the Directors. Itaconix aims to maintain
regular contact with institutional shareholders through a programme of one to one visits, group meetings and
briefings scheduled around the announcement of significant commercial developments in the business and
the preliminary and interim financial results.
P a g e | 16
CORPORATE GOVERNANCE REPORT
YEAR IN REVIEW
GOVERNANCE
FINANCIAL STATEMENTS
Share Dealing Code
The Company has adopted a share dealing code to ensure directors and certain employees do not abuse and
do not place themselves under suspicion of abusing inside information of which they are in possession and to
comply with its obligations under the Market Abuse Regulation ("MAR") which applies to the Company by
virtue of its shares being traded on AIM. Furthermore, the Company's share dealing code is compliant with
the AIM Rules for Companies published by the London Stock Exchange (as amended from time to time).
Under the share dealing code, the Company must:
•
•
•
Keep a list of each person who is in possession of inside information relating to the Group;
Procure that all persons discharging managerial responsibilities and certain employees are given
clearance by the Group before they are allowed to trade in Company securities; and
Procure that all persons discharging managerial responsibilities and persons closely associated to
them notify both the Company and the Financial Conduct Authority of all trades in Company securities
that they make.
Internal Control
The Board has overall responsibility for ensuring that the Group maintains a system of internal control to
provide its members with reasonable assurance regarding the reliability of financial information used within
the business and for publication and that the Group’s assets are safeguarded. There are inherent limitations in
any system of internal control and accordingly even the most effective system can provide only reasonable,
and not absolute, assurance with respect to the preparation of accurate financial information and the
safeguarding of assets. The key features of the internal control system that operated throughout the year are
described under the following headings:
•
•
Control environment: particularly the definition of the organisation structure and the appropriate
delegation of responsibility to operational management.
Identification and evaluation of business risks and control objectives: particularly through a formal process
of consideration and documentation of risks and controls which is periodically undertaken by the Board.
• Main control procedures: which include the setting of annual and longer term budgets and the monthly
reporting of performance against them, agreed treasury management and physical security procedures,
investment appraisal approval procedures and the definition of
formal capital expenditure and
authorisation limits (both financial and otherwise).
• Monitoring: particularly through the regular review of performance against budgets and the progress of
research activities undertaken by the Board. The Board reviews the operation and effectiveness of this
framework on a regular basis. The Directors consider that there have been no weaknesses in internal
controls that have resulted in any losses, contingencies or uncertainties requiring disclosures in the
financial statements.
Annual General Meeting
The Annual General Meeting of the Group will take place on 19 July 2019. Full details are included in the
Notice of Meeting that accompanies this Annual Report and is published on our website (www.itaconix.com).
James Barber
Chairman
26 June 2019
P a g e | 17
DIRECTORS’ REMUNERATION REPORT
YEAR IN REVIEW
GOVERNANCE
FINANCIAL STATEMENTS
I am pleased to present the report on behalf of the Remuneration Committee.
The Committee is responsible for setting the remuneration policy of the Executive Directors and other senior
staff, including terms of employment, salaries, any performance bonuses and share option awards.
Committee Composition
The members of the Remuneration Committee as at 26 June 2019 are Bryan Dobson as Chair, James Barber,
and John Snow. We are all Non-Executive Directors.
Committee Duties
The Company has established a formal and transparent procedure for developing policy on executive
remuneration and for fixing the remuneration packages of individual Directors. No Director is involved in
deciding his own remuneration.
Remuneration Policy
The key principles of the Remuneration Policy include:
•
The need to attract, retain and motivate executives who have capability to ensure the Group achieve its
strategic objectives;
•
•
•
The need to ensure that short term benefits and long term incentive plans are aligned with the interests of
shareholders;
The need to take into account the competitive landscape in the North American and European specialty
chemicals industry and current best practice in setting appropriate levels of compensation.
The Committee to meet at least twice per year.
Director’s Remuneration
The following table summarises the total gross remuneration for the qualifying services of the directors who
served during the year to 31 December 2018.
Directors’ Remuneration and Transactions
The Directors’ emoluments in the year ended 31 December 2018 were:
Basic
salary
Benefits in
kind
Pension
Bonus
Compensation
for loss of
office
2018 Total
(£000)
2017 Total
(£000)
Executive Director
John R. Shaw
Kevin Matthews (2)
Robin Cridland (3)
Non Executive Directors
James Barber
Bryan Dobson
John Snow III (5)
Julian Heslop (4)
Michael
Townend(1)
Total
84
132
138
38
54
9
30
-
-
19
9
-
-
-
-
-
-
13
14
-
-
-
-
-
-
69
65
-
-
-
-
-
-
254
237
-
-
-
-
-
84
487
463
38
54
9
30
-
-
312
284
35
60
-
40
-
485
28
27
134
491
1,165
731
An amount of £15,000 was paid to IP Group plc for the services of Mr. Townend.
Dr Kevin Mathews resigned on 21 December 2018
Robin Cridland resigned on 31 August 2018
Julian Heslop resigned on 2 October 2018
John Snow III was appointed on 1 October 2018
(1)
(2)
(3)
(4)
(5)
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DIRECTORS’ REMUNERATION REPORT
YEAR IN REVIEW
GOVERNANCE
FINANCIAL STATEMENTS
Directors’ Interests
The interests of the Directors in the share capital of the Company are disclosed below. There were 3
resignations of Directors: Robin Cridland on 31 August 2018, Julian Heslop on 2 October 2018 and Dr Kevin
Mathews on 21 December 2018. There have been no changes in the Directors’ interests since 31 December
2018.
Directors’ Interests
31 December 2018
Number of ordinary shares of 1p each
31 December 2017
Number of ordinary Shares of 1p each
John R. Shaw
Kevin Matthews (1)
Robin Cridland (2)
James Barber
Bryan Dobson
Michael Townend (5)
John Snow III (4)
Julian Heslop (3)
33,173,097
20,000
52,836
700,000
583,500
64,940
-
660,000
1,831,789
20,000
52,836
45,000
83,500
64,940
-
60,000
Julian Heslop resigned on 2 October 2018
Robin Cridland resigned on 31 August 2018
Dr Kevin Mathews resigned on 21 December 2018
(1)
(2)
(3)
(4)
(5) Mike Townend resigned on 24 May 2019 as a subsequent event
John Snow III appointed 1 October 2018
None of the Directors has a service contract with the Group requiring more than twelve months’ notice of
termination to be given. None of the Directors had, either during or at the end of the year, any material interest
in any contract of significance with the Company or its subsidiaries.
Executive Directors’ Service Contracts
The Executive Directors signed service contracts on their appointment. These contracts are not of fixed
duration. The Chief Executive Officer’s contract is terminable by either party giving twelve months’ written
notice.
Non-Executive Directors
The Non-Executive Directors signed letters of appointment with the Group for the provision of Non-Executive
Directors’ services, which may be terminated by either party giving written notice. The remuneration of the
Non-Executive Directors is determined by the Board as a whole.
The Committee met twice during the financial year to 31 December 2018.
Bryan Dobson
Chairman of the Remuneration Committee
26 June 2019
P a g e | 19
AUDIT COMMITTEE REPORT
YEAR IN REVIEW
GOVERNANCE
FINANCIAL STATEMENTS
The Audit Committee is responsible for challenging the quality of internal and external controls and or ensuring
that the financial performance of Itaconix is properly reviewed and reported.
The Committee reviews reports on the interim and annual accounts, financial announcements, the Company’s
accounting and financial control systems, changes to accounting policies, the extent of non-audit services
undertaken by the external auditor and the appointment of the external auditor.
During the period the Audit Committee reviewed the draft interim reports and associated announcements. The
Audit Committee considered the accounting policies and principles adopted in these accounts as well as
significant accounting issues and areas of judgement and complexity.
Committee Composition
The terms of reference for the Audit Committee require the committee to consist of preferably three members
but not less than two members and that a majority of the members shall be independent non-executives with
at least one of whom shall have recent relevant financial experience.
The members of the Audit Committee as at 26 June 2019 are John Snow as Chair, James Barber, and Bryan
Dobson. We are all Independent Non-Executive Directors.
The Board is of the view that the Audit Committee has recent and relevant financial experience. John Shaw,
CEO, and relevant management may attend Committee meetings by invitation.
Role of the Committee
The main duties of the Committee are set out in its terms of reference, which are available on Itaconix’s
website. The main items of business considered by the Committee included:
• Reviewing the Group's accounting policies and reports produced by internal and external audit
•
functions;
Considering whether the Group has followed appropriate accounting standards and made appropriate
estimates and judgments, taking into account the views of the external auditor;
• Reporting its views to the board of directors if it is not satisfied with any aspect of the proposed
financial reporting by the Group;
• Reviewing the adequacy and effectiveness of the Group’s internal financial controls and internal
control and risk management systems;
• Reviewing the adequacy and effectiveness of the Group's anti-money laundering systems and controls
for the prevention of bribery and receive reports on non-compliance; and
• Overseeing the appointment of and the relationship with the external auditor.
Financial Reporting
The Committee reviews whether suitable accounting policies have been adopted and whether management
has made appropriate judgements and estimates. The Committee’s remit includes reviews of accounting
papers prepared by management providing details on the main financial reporting judgements as well as
assessments of the impact of potential new accounting standards.
IFRS 9 “Financial Instruments” and IFRS 15 “Revenue from Contracts with Customers” were both adopted
during the year and, as described in Note 2 to the financial statements, did not have a material impact on the
Group.
IFRS16 ‘Leases’ is applicable for annual reporting periods beginning on or after 1 January 2019, and Itaconix has
decided not to early adopt the new standard. Further details are described in Note 2 to the financial
statements.
The Committee have concluded that the annual report and financial statements are appropriately prepared
and provide the information necessary for shareholders to assess Itaconix’s strategy and performance.
P a g e | 20
AUDIT COMMITTEE REPORT
YEAR IN REVIEW
GOVERNANCE
FINANCIAL STATEMENTS
Risk Management and Internal Controls
The risk and control management framework of Itaconix is designed to manage rather than eliminate the risk
of failure to meet Itaconix’s objectives and the system can only provide reasonable and not absolute
assurances against material misstatement or loss. Itaconix faces a number of risks, the significant ones of which
are set out in the section on Principal Risks and Uncertainties on page 9.
Through the control systems outlined in the Statement of Corporate Governance on pages 13 to 17, Itaconix
operates an ongoing process of identifying, evaluating and managing significant risks faced by the business.
This process includes the following:
• Defined organisation structure and appropriate delegation of authority;
•
•
Formal authorisation procedure for investments;
Clear responsibility for management to maintain good financial control and the production and review
of detailed, accurate and timely financial information;
Identification of operational risks and mitigation plans developed by senior management; and
•
• Regular reports to the Board from the Executive Directors.
Itaconix remains, in substance, in early stage development and is currently implementing appropriate internal
control systems and processes to reflect its size and business complexity. The Committee has been kept up-to-
date of progress in implementing these processes, reviewed the Board’s processes and the Committee is
satisfied that the risk management and internal control systems in place are currently operating effectively.
External Auditor
BDO was appointed auditor of Itaconix in 2018. The Committee considers that its relationship with the auditor
is working well and is satisfied with their effectiveness.
The Committee is responsible for implementing a suitable policy for ensuring that non-audit work undertaken
by the auditor is reviewed so that it will not impact their independence and objectivity. The breakdown of fees
between audit and non-audit services is provided in Note 7 to Itaconix’s financial statements.
The non-audit fees primarily relate to taxation advice and, as necessary, the Committee held private meetings
with the auditor to review key items within its scope of responsibility.
Taking into account the auditor’s knowledge of Itaconix and experience, the Committee has recommended to
the Board that the auditor is reappointed for the year ending 31 December 2019.
For and on behalf of the Audit Committee
John Snow III
Chairman of the Audit Committee
26 June 2019
P a g e | 21
DIRECTORS’ REPORT
YEAR IN REVIEW
GOVERNANCE
FINANCIAL STATEMENTS
The Directors of Itaconix plc (registered number 08024489) submit their report prepared in accordance with
Schedule 7 to the Large and Medium-sized Companies and Groups (Accounts and Reports) Regulations 2008
(‘Schedule 7’).
Principal Activities
The principal activity of Itaconix is the sale of functional polymers that improve the safety, performance and
sustainability of home and personal care products.
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 herein. Financial Instruments and Liquidity Risks Information about the use of financial instruments
by the Company and its subsidiaries and the Group’s financial risk management policies are given in note 21.
Directors and their Interests
The Directors of the Group at 31 December 2018 were:
James Barber (Chairman);
John R. Shaw (Chief Executive Officer);
Bryan Dobson (Non-Executive);
Michael Townend (Non-Executive);
John Snow III (Non-Executive); and
James Barber, Bryan Dobson, and Mike Townend were re-elected at the 2018 Annual General Meeting. John
Shaw and John Snow III were appointed subsequent to the 2018 Annual General Meeting. In accordance with
Article 90 of the Company’s Articles of Association, John Shaw and John Snow III are required to stand for
election at the 2019 Annual General Meeting. Mike Townend stepped down from the Board in May 2019.
Biographical details of all the Directors as at 31 December 2018 are given above on pages 11 to 12.
Liability Insurance for Directors, Officers and Employees
Itaconix has purchased insurance to cover the Directors, officers and employees of Itaconix plc and its
subsidiaries against defence costs and civil damages awarded following an action brought against them in
their personal capacity whilst carrying out their professional duties for the Group.
Dividends
Itaconix is seeking primarily to achieve capital growth for its shareholders. Its intention is to retain future
distributable profits, if any, and therefore does not anticipate paying any dividends in the foreseeable
future. The Directors therefore do not recommend payment of a dividend (2017: £nil).
Events after the Balance Sheet Date
Effective 24 May 2019, Michael Townend stepped down as a Non-Executive Director on the Board of Itaconix.
In May 2019, the Group completed its divestment in the nicotine gum business when the Group sold its
holdings (22.49%) in its associate company, Alkalon A/S to that company’s existing shareholders. The total cash
consideration was c. DKK 2.0 million equivalent to c. £242,000. The proceeds consisted of c. £194,000 for the
Group’s minority equity interest in Alkalon and c. £48,000 for the full principal and accrued interest of a
shareholder loan. The full cash proceeds were received 5 June 2019.
P a g e | 22
DIRECTORS’ REPORT
YEAR IN REVIEW
GOVERNANCE
FINANCIAL STATEMENTS
Research and Development
Details of the Group’s activities on research and development during the year are set out in the Strategic
Report on pages 6 to 10 and Chief Executive Officer’s Report on pages 3 to 5
Going Concern
Itaconix business activities, together with the factors likely to affect its future development, performance and
position are set out in the Strategic report and the financial position of Itaconix, its cash flows, liquidity position
and borrowing facilities are described in the notes to the financial statements, in particular in the consolidated
cash flow statement and in Note 21 (financial instruments).
These financial statements have been prepared on the going concern basis. In assessing the Group’s going
concern position, the Directors have reviewed its current business activities, its financial performance, and the
risks set out in the Strategic Report that may affect its future development.
As described in Note 3 on page 37, the Directors have reviewed the Group’s cash flow forecasts covering a
period of at least 12 months from the date of approval of the financial statements, which foresee that the
Group will be able to operate with its existing funding. However, the success of the business is dependent on
customer adoption of our products in order to increase revenue and profits growth. Inability to deliver this
could result in the requirement to raise additional funds.
The Directors have concluded that the circumstances set forth above represent a material uncertainty, which
may cast significant doubt about the Company and Group’s ability to continue as going concerns. However,
they believe that taken, as a whole, the factors described above enable the Company and Group to continue as
a going concern for the foreseeable future. The financial statements do not include the adjustments that would
be required if the Company and the Group were unable to continue as a going concern.
Substantial Shareholdings
In addition to the Directors’ interests, as disclosed in the Director’s Remuneration Report, as at 31 May 2019, the
Company had been notified of the following shareholdings amounting to 3% or more of the ordinary share
capital of the Company:
Institution
Woodford Investment Management
John R. Shaw
IP Group
Guy Broadbent
Hargreaves Lansdown Asset Management
David E. Shaw
Janus Henderson Investors
Shares Held % Holding
88,688,000
33,173,097
30,125,730
15,000,000
12,448,284
8,146,274
8,120,500
33.0%
12.3%
11.2%
5.6%
4.6%
3.0%
3.0%
The percentage interest has been calculated on the total voting rights of 269,130,071, being the
Company’s issued share capital on 31 May 2019. No other person has reported an interest in the ordinary shares
of the Company required to be notified to the Company.
Information Presented in Other Sections
Certain information required to be included in a directors’ report by Schedule 7, including references to future
developments, research and development and financial instruments, can be found where applicable in the other
sections of this Annual Report. All of the information presented in those sections is incorporated by reference into
this Directors’ Report and is deemed to form part of this report.
P a g e | 23
STATEMENT OF DIRECTORS’ RESPONSIBILITIES
YEAR IN REVIEW
GOVERNANCE
FINANCIAL STATEMENTS
Directors’ Responsibilities
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 the law the Directors have elected to prepare the Group and Company financial
statements in accordance with International Financial Reporting Standards (IFRSs) as adopted by the European
Union and applicable law. Under company law, the Directors must not approve the financial statements unless
they are satisfied that they give a true and fair view of the state of affairs of the Group and Company and of
the profit or loss of the Group for that period. The directors are also required to prepare financial statements
in accordance with the rules of the London Stock Exchange for companies trading securities on the Alternative
Investment Market. In preparing these financial statements, the Directors are required to:
•
• Make judgements and accounting estimates that are reasonable and prudent
•
Select suitable accounting policies and then apply them consistently;
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;
Prepare the financial statements on a 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.
•
•
Information Given to the Auditor
Each of the persons who are Directors of the Company at the date when this report was approved confirms
that:
•
•
So far as the Director is aware, there is no relevant audit information (as defined in the Companies Act
2006) of which the Company’s auditor is unaware; and
The Director has taken all steps that they ought to have taken as a Director to make themselves aware of
any relevant audit information (as defined in the Companies Act 2006) and to establish that the Company’s
auditor is aware of that information. This confirmation is given and should be interpreted in accordance
with the provisions of s418 of the Companies Act 2006.
Auditor
BDO, LLP have expressed their willingness to continue in office as auditor. A resolution concerning their re-
appointment will be proposed at the 2019 Annual General Meeting.
Approved by the Board of Directors and signed on behalf of the Board,
John R. Shaw
Chief Executive Officer
26 June 2019
P a g e | 24
INDEPENDENT AUDITOR’S REPORT
YEAR IN REVIEW
GOVERNANCE
FINANCIAL STATEMENTS
Independent auditor’s report to the members of Itaconix plc
Opinion
We have audited the financial statements of Itaconix plc (the ‘Parent Company’) and its subsidiaries (the ‘Group’) for the
year ended 31 December 2018 which comprise the consolidated income statement, the consolidated statement of other
comprehensive income, the consolidated and company balance sheets, the consolidated and company statement of
changes in equity, the consolidated and company statement of cash flows and notes to the financial statements, including
a summary of significant accounting policies.
The financial reporting framework that has been applied in the preparation of the financial statements 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.
In our opinion:
•
•
•
•
the financial statements give a true and fair view of the state of the Group’s and of the Parent Company’s affairs as at
31 December 2018 and of the Group’s loss for the year then ended;
the Group financial statements have been properly prepared in accordance with IFRSs as adopted by the European
Union ;
the Parent Company financial statements have been properly prepared in accordance with 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.
Basis for opinion
We conducted our audit in accordance with International Standards on Auditing (UK) (ISAs (UK)) and applicable law. Our
responsibilities under those standards are further described in the Auditor’s responsibilities for the audit of the financial
statements section of our report. We are independent of the Group and the Parent Company in accordance with the
ethical requirements that are relevant to our audit of the financial statements in the UK, including the FRC’s Ethical
Standard as applied to listed entities, and we have fulfilled our other ethical responsibilities in accordance with these
requirements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our
opinion.
Material uncertainty related to going concern
We draw attention to note 3 in the financial statements which indicates that the group may need to raise further finance
within the next 12 months to enable it to cover its operating expenses and meet its liabilities as they fall due. These events
or conditions, along with the other matters as set forth in note 3, indicate the existence of a material uncertainty that may
cast significant doubt about the parent company and group’s ability to continue as a going concern. Our opinion is not
modified in respect of this matter.
The calculations supporting the going concern assessment require management to make highly subjective judgements. We
have therefore spent significant audit effort in assessing the appropriateness of the assumptions involved, and as such this
has been identified as a Key Audit Matter.
Our audit procedures included the following:
•
•
•
•
Reviewing management’s assessment of going concern through analysis of the group’s cash flow forecast and
other projections from 12 months from the date of the Annual Report’s approval including assessing and
challenging the assumptions used through discussions with management and comparison against post year-end
results to date and performing sensitivity analysis to consider cash flow changes if the level of revenue and costs
were to remain static.
Reviewing the terms of the group’s existing financing, finance raised post year end and plans for future fund
raising;
Reviewing post-balance sheet events, specifically the cash flow position against budgeted performance; and
Considering the adequacy of the disclosures in the financial statements against the requirements of the
accounting standards.
P a g e | 25
INDEPENDENT AUDITOR’S REPORT
YEAR IN REVIEW
GOVERNANCE
FINANCIAL STATEMENTS
Key audit matters
In addition to the matter described in the material uncertainty related to going concern section, key audit matters are
those matters that, in our professional judgment, were of most significance in our audit of the financial statements of the
current period and include the most significant assessed risks of material misstatement (whether or not due to fraud) we
identified, including those which had the greatest effect on: the overall audit strategy, the allocation of resources in the
audit; and directing the efforts of the engagement team. These matters were addressed in the context of our audit of the
financial statements as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these
matters.
Matter
Revenue Recognition and adoption of IFRS 15:
Revenue from Contracts with Customers
The Group has adopted the new revenue accounting standard
from 1 January 2018.
This standard brings a new and detailed approach to
accounting for revenue, with a more prescriptive framework
and as such, significant emphasis has been placed on this
transition throughout the audit, resulting in the recognition of
this key audit matter.
The Group has one major revenue stream and revenue is
recognised at point in time. For the group, there is a key risk of
material misstatement arising from both the recognition of
revenue around the year end (cut-off) and the revenue
recognition policy itself, as detailed in Notes 2, 3 & 5 to these
financial statements.
Valuation of contingent consideration
Refer to the accounting policies in Note 3 and Notes 4 and 20
of the Consolidated Financial Statements.
The group balance sheet reports a £3.1m (2017: 0.61m)
provision for contingent consideration that arose from an
acquisition in the prior period. The contingent consideration is
subject to an estimate uncertainty.
How we address the matter in our audit
We assessed whether the revenue recognition policies
adopted by the Group comply with International Financial
Reporting Standard 15 Revenue from Contracts with
Customers (IFRS 15)
We have performed the following procedures:
• We agreed a sample of transactions from
throughout the year to invoice and evidence of
delivery;
• We tested a sample transactions either side of
the balance sheet date to check that they have
been recorded in the correct period;
• We performed audit procedures to confirm
whether the processing and timing of journals to
the year-end are
record
appropriate.
revenue around
We have further reviewed the requirements of the IFRS 15
transition and the client’s assessment of expected impacts.
There has been no impact to adopting the new standard to
the brought forward balances.
We have reviewed the financial statement disclosures to
check that they are in accordance with the requirements of
the standard.
We have performed the following procedures:
•
•
Confirmed that the cash flow forecast used in the
measurement of the liability is consistent with
the information approved by the Board.
Evaluated forecasts in light of historical accuracy
of management’s
forecasts and subsequent
results;
• We tested the methodology applied
in the
calculations and the mathematical accuracy of
management’s model; and
• We performed sensitivity analysis on the key
assumptions in the model
P a g e | 26
INDEPENDENT AUDITOR’S REPORT
YEAR IN REVIEW
GOVERNANCE
FINANCIAL STATEMENTS
Our application of materiality
We apply the concept of materiality both in planning and performing our audit, and in evaluating the effect of
misstatements. We consider materiality to be the magnitude by which misstatements, including omissions, could influence
the economic decisions of reasonable users that are taken on the basis of the financial statements. In order to reduce to an
appropriately low level the probability that any misstatements exceed materiality, we use a lower materiality, performance
materiality, to determine the extent of testing needed. Importantly, misstatements below these levels will not necessarily
be evaluated as immaterial as we also take account of the nature of identified misstatements, and the particular
circumstances of their occurrence, when evaluating their effect on the financial statements as a whole.
Level of materiality applied and rationale
We determined materiality for the Group financial statements as a whole to be £120,000, which was calculated with
reference to the loss before tax.
Materiality for the parent company has been capped at 65% of group materiality, at £78,000.
The individual component materiality was set at 65% group materiality, at £78,000.
We used loss before tax as a benchmark as this is the primary KPI used to address the performance of the business by the
Board, and is referenced within the RNS announcements released by the Group.
Performance materiality was set at 65% of materiality at £78,000. In setting the level of performance materiality we
considered a number of factors including the expected total value of known and likely misstatements.
We agreed with the Audit Committee that misstatements in excess of £2,340, which are identified during the audit, would
be reported to them, as well as smaller misstatements that in our view must be reported on qualitative grounds.
An overview of the scope of our audit
We tailored the scope of our audit to ensure that we performed enough work to be able to give an opinion on the financial
statements as a whole, taking into account the geographic structure of the Group, the accounting processes and controls,
and the industry in which the Group operates.
In establishing the overall approach to the Group audit, we assessed the audit significance of each component in the group
by reference to both its individual financial significance to the Group or other specific nature or circumstances. We
identified three individually significant components, which makes up 100% of the group activity.
To this extent:
The Group audit team performed a full scope audit for Itaconix Plc.
–
– We instructed our US member firm, as component auditors for Itaconix Corporation and Itaconix (U.K) Limited as
these entities books and records are located in the US, to perform a full scope audit.
– We also instructed the auditors of Alkalon A/S, an entity which is an equity investment of the group, to report to
us.
– Detailed instructions were issued and discussed with the component auditors, and these covered the significant
risks (including the Group risks of material misstatement described in the above key audit matters) that should
be addressed by the audit team.
The Group audit team was actively involved in directing the audit strategy of the components, reviewed the audit
work and findings and considered the impact of these upon the Group audit opinion. We visited the component
auditors in the USA and Denmark to carry out a review of their files and meet, as it relates to the USA, with local
management.
–
We ensured that audit teams both at group and at component level have the appropriate skills and competences which are
needed to perform the audit. Furthermore, we included specialists in the area of Valuation in our team.
The Group audit team centrally performed the audit of share options, contingent consideration and equity investment in
Alkalon.
P a g e | 27
INDEPENDENT AUDITOR’S REPORT
YEAR IN REVIEW
GOVERNANCE
FINANCIAL STATEMENTS
Other information
The directors are responsible for the other information. The other information comprises the information included in the
Annual Report and Accounts, other than the financial statements and our auditor’s report thereon. Our opinion on the
financial statements does not cover the other information and, except to the extent otherwise explicitly stated in our
report, we do not express any form of assurance conclusion thereon.
In connection with our audit of the financial statements, our responsibility is to read the other information and, in doing
so, consider whether the other information is materially inconsistent with the financial statements or our knowledge
obtained in the audit or otherwise appears to be materially misstated. If we identify such material inconsistencies or
apparent material misstatements, we are required to determine whether there is a material misstatement in the financial
statements or a material misstatement of the other information. If, based on the work we have performed, we conclude
that there is a material misstatement of this other information, we are required to report that fact. We have nothing to
report in this regard.
Opinions on other matters prescribed by the Companies Act 2006
In our opinion, based on the work undertaken in the course of the audit:
•
•
the information given in the strategic report and the Directors’ report for the financial year for which the
financial statements are prepared is consistent with the financial statements; and
the strategic report and the Directors’ report have been prepared in accordance with applicable legal
requirements.
Matters on which we are required to report by exception
In the light of the knowledge and understanding of the group and the parent company and its environment obtained in the
course of the audit, we have not identified material misstatements in the strategic report or the directors’ report.
We have nothing to report in respect of the following matters in relation to which the Companies Act 2006 requires us to
report to you if, in our opinion:
•
adequate accounting records have not been kept 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.
Responsibilities of Directors
As explained more fully in the Directors’ responsibilities statement set out on page 24, the Directors are responsible for the
preparation of the financial statements and for being satisfied that they give a true and fair view, and for such internal
control as the Directors determine is necessary to enable the preparation of financial statements that are free from
material misstatement, whether due to fraud or error.
In preparing the financial statements, the Directors are responsible for assessing the Group’s and the Parent Company’s
ability to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going
concern basis of accounting unless the Directors either intend to liquidate the Group or the Parent Company or to cease
operations, or have no realistic alternative but to do so.
P a g e | 28
INDEPENDENT AUDITOR’S REPORT
YEAR IN REVIEW
GOVERNANCE
FINANCIAL STATEMENTS
Auditor’s responsibilities for the audit of the financial statements
Our objectives are to obtain reasonable assurance about whether the financial statements as a whole are free from
material misstatement, whether due to fraud or error, and to issue an auditor’s report that includes our opinion.
Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with ISAs
(UK) will always detect a material misstatement when it exists.
Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could
reasonably be expected to influence the economic decisions of users taken on the basis of these financial statements.
A further description of our responsibilities for the audit of the financial statements is located on the Financial Reporting
Council’s website at: www.frc.org.uk/auditorsresponsibilities. This description forms part of our auditor’s report.
Use of our report
This report is made solely to the Parent Company’s members, as a body, in accordance with Chapter 3 of Part 16 of the
Companies Act 2006. Our audit work has been undertaken so that we might state to the Parent Company’s members
those matters we are required to state to them in an auditor’s report and for no other purpose. To the fullest extent
permitted by law, we do not accept or assume responsibility to anyone other than the Parent Company and the Parent
Company’s members as a body, for our audit work, for this report, or for the opinions we have formed.
Iain Henderson (Senior Statutory Auditor)
For and on behalf of BDO LLP, Statutory Auditor
London, UK
26 June 2019
BDO LLP is a limited liability partnership registered in England and Wales (with registered number OC305127).
P a g e | 29
CONSOLIDATED INCOME STATEMENT
For the year ended 31 December 2018
Continuing operations
Revenue
Cost of sales
Gross profit
Other operating income
Administrative expenses
Group operating loss before exceptional items
Exceptional (expense) income on revaluation of contingent
consideration
Exceptional expense on organizational restructuring
Exceptional expense on impairment of intangible assets
Finance income
Share of profit (loss) of associate
Operating Loss before tax from continuing operations
Release of previously recognised deferred tax liability
Taxation credit
Loss for the year from continuing operations
Profit after tax for the year from discontinued operations
Loss for the year
Basic loss per share
Diluted loss per share
YEAR IN REVIEW
GOVERNANCE
FINANCIAL STATEMENTS
2018
2017
Notes
£’000
£’000
5
6
7
20
7
9
14
10
10
11
12
12
660
553
(555)
(332)
105
96
221
112
(4,310)
(5,507)
(4,109)
(5,174)
(2,489)
2,511
(891)
-
-
(8,992)
3
90
1
(214)
(7,396)
(11,868)
-
1,229
140
465
(7,256)
(10,174)
-
33
(7,256)
(10,141)
(4.6)p
(12.9)p
(4.6)p
(12.9)p
The accompanying note 1 to 29 form an integral part of the financial statements.
P a g e | 30
CONSOLIDATED STATEMENT OF OTHER
COMPREHENSIVE INCOME
For the year ended 31 December 2018
Loss for the year
Items that will be reclassified subsequently to profit
or loss
Exchange (losses) in translation of foreign operations
Total comprehensive loss for the year, net of tax
Attributable to:
Equity holders of parent
YEAR IN REVIEW
GOVERNANCE
FINANCIAL STATEMENTS
2018
2017
Notes
£’000
£’000
(7,256)
(10,141)
(357)
(543)
(7,613) (10,684))
(7,613)
(10,684)
The accompanying note 1 to 29 form an integral part of the financial statements.
P a g e | 31
CONSOLIDATED AND COMPANY
BALANCE SHEETS
At 31 December 2018
Non-current assets
Property, plant and equipment
Trade and other receivables
Investment in subsidiary undertakings
Investment in associate undertakings
Current assets
Inventories
Trade and other receivables
Cash and cash equivalents
Total assets
Financed by
Equity shareholders’ funds
Equity share capital
Equity share premium
Own shares reserve
Merger reserve
Share based payment reserve
Foreign translation reserve
Retained earnings
Total equity
Non-current liabilities
Contingent consideration
Current liabilities
Trade and other payables
Total liabilities
YEAR IN REVIEW
GOVERNANCE
FINANCIAL STATEMENTS
Group
2018
£’000
2017
£’000
Notes
Company
2017
£’000
2018
£’000
15
17
13
14
16
17
18
23
20
19
719
–
–
131
850
980
–
–
–
980
303
711
2,083
3,097
271
706
3,606
4,583
–
2,582
793
–
3,375
–
567
1,721
2,288
–
4,820
565
–
5,385
–
283
2,638
2,921
3,947
5,563
5,663
8,306
2,686
30,301
(3)
20,361
6,632
539
(60,333)
183
787
28,603
(4)
20,361
6,404
896
(53,077)
3,970
2,686
30,301
(3)
2,455
825
-
(33,724)
2,540
787
28,603
(4)
2,455
597
-
(24,803)
7,635
3,052
607
3,052
607
712
3,764
986
1,593
71
3,123
64
671
Total equity and liabilities
3,947
5,563
5,663
8,306
The loss for the year for the Company amounted to £8,921k (2017: £3,130k). The financial statements of
Itaconix plc, registered number 08024489, were approved by the Board of Directors for issue on 26 June 2019.
John R. Shaw
Director
James Barber
Director
The accompanying note 1 to 29 form an integral part of the financial statements
P a g e | 32
CONSOLIDATED AND COMPANY
STATEMENTS OF CHANGES IN EQUITY
For the year ended 31 December 2018
Consolidated statement of changes in equity
YEAR IN
REVIEWGOVERNANCE
FINANCIAL STATEMENTS
Equity
share
capital
£’000
Equity
share
premium
Own shares
reserve
Merger
reserve
£’000
£’000
£’000
Share based
payment
reserve
£’000
Foreign
translation
reserve
£’000
Retained
deficit
£’000
Total
£’000
At 1 January 2017
Loss for the year
Exchange differences on translation
of foreign operations
Exercise of share options
Share based payments
At 31 December 2017
Loss for the year
Share issuance, net of expenses
Exchange differences on translation
of foreign operations
Exercise of share options
Share based payments
At 31 December 2018
787
–
28,588
–
–
–
–
787
–
1,899
–
–
–
2,686
–
15
–
28,603
–
1,698
–
_
–
30,301
(5)
–
–
1
–
(4)
–
–
–
1
–
(3)
20,361
–
–
–
–
20,361
–
–
–
–
–
20,361
6,220
–
–
–
184
6,404
–
–
–
–
228
6,632
1,439
–
(42,936)
(10,141)
14,454
(10,141)
(543)
–
–
896
–
–
(357)
–
–
539
–
–
–
(53,077)
(7,256)
–
–
–
–
(60,333)
(543)
16
184
3,970
(7,256)
3,597
(357)
1
228
183
Company statement of changes in equity
Equity
share
capital
Equity
share
premium
Own shares
reserve
Merger
reserve
Share based
payment
reserve
Foreign
translation
reserve
Retained
deficit
Total
£’000
£’000
£’000
£’000
£’000
£’000
£’000
£’000
At 1 January 2017
Loss for the year
Exercise
Share based payments
At 31 December 2017
Loss for the year
Share issuance, net of expenses
Exercise of share options
Share based payments
At 31 December 2018
787
28,588
–
–
–
787
–
1,899
–
–
2,686
–
15
–
28,603
–
1,698
–
–
30,301
(5)
–
1
–
(4)
–
–
1
–
(3)
2,455
–
–
–
2,455
–
–
–
–
2,455
413
–
–
184
597
–
–
–
228
825
–
–
–
–
–
–
–
–
–
–
(21,673)
10,565
(3,130)
–
–
(24,803)
(8,921)
–
–
–
(33,724)
(3,130)
16
184
7,635
(8,921)
3,597
1
228
2,540
The accompanying Note 1 to 29 form an integral part of the financial statements
P a g e | 33
YEAR IN
REVIEWGOVERNANCE
FINANCIAL STATEMENTS
CONSOLIDATED AND COMPANY
STATEMENTS OF CHANGES IN EQUITY
For the year ended 31 December 2018
The reserves described above have the purposes described below:
Share capital
Amount subscribed for share capital at par value.
Share premium
Amount subscribed for share capital in excess of nominal value.
Own shares reserve
The reserve records the nominal value of shares purchased and held by the Employee Benefit Trust to satisfy
the future exercise of options under the Group’s share option schemes.
Merger reserve
This reserve arose as a result of a common control business combination on the formation of the Group. The
premium on the issue of shares as part of a business combination is credited to this reserve.
Share based payment reserve
This reserve records the credit to equity in respect of the share based payment cost.
Foreign exchange translation reserve
This reserve arises on the translation of the assets and liabilities of overseas subsidiaries.
P a g e | 34
CONSOLIDATED AND COMPANY
STATEMENTS OF CASH FLOWS
For the year ended 31 December 2018
Net cash (outflow) / inflow from operating activities
Interest received
Proceeds from property, plant and equipment
Purchase of property, plant and equipment
Investment in associate undertaking
Cash loaned to subsidiary undertakings
Cash loaned to associate undertaking
Net cash inflow / (outflow) from investing activities
Cash received from issue of shares
Transactions costs paid on the issue of shares
Net cash inflow from financing activities
Net (outflow) in cash and cash equivalents
Cash and cash equivalents at beginning of year
Cash and cash equivalents at end of year
YEAR IN REVIEW
GOVERNANCE
FINANCIAL STATEMENTS
Notes
24
Group
2018
£’000
(4,850)
–
56
–
(26)
–
–
30
3,497
(200)
3,297
(1,523)
3,606
2,083
2017
£’000
(4,659)
1
–
(436)
(60)
–
(44)
(540)
16
–
16
(5,183)
8,789
3,606
Company
2018
£’000
2017
£’000
519
–
–
–
–
(4,733)
–
(4,733)
3,497
(200)
3,297
(917)
2,638
1,721
(85)
–
–
–
–
(1,717)
–
(1,717)
16
–
16
(1,786)
4,424
2,638
The accompanying Note 1 to 29 form an integral part of the financial statements
P a g e | 35
NOTES TO FINANCIAL STATEMENTS
For the year ended 31 December 2018
YEAR IN REVIEW
GOVERNANCE
FINANCIAL STATEMENTS
1.
Introduction and statement of compliance with IFRS
The Board has considered compliance with IFRS carefully, and made disclosures that it deems appropriate in
the financial statements and notes, with emphasis to the reader where relevant.
The Group’s and the Company’s financial statements have been prepared in accordance with International
Financial Reporting Standards (IFRS) as adopted by the European Union and with the Companies Act 2006 as
applicable to companies reporting under IFRS. The principal accounting policies adopted by the Group are
set out in note 2. The nature of the Group’s operations and its principal activities are set out in the Strategic
Report.
The Directors anticipate that the adoption of standards and interpretations issued, but not applied in these
financial statements as not yet effective, will have no material impact on the financial statements of the
Group, as further explained in note 2 below.
2.
Changes in Accounting Policies
Adoption of new and revised standards effective from 1 January 2018
The Group has applied the same accounting policies and methods of computation in its financial statements
as in its 2017 annual financial statements, except for those that relate to new standards and interpretations
effective for the first time for periods beginning on (or after) 1 January 2018, which have been adopted in
the current year’s financial statements. New standards that have impacted the Group for the year ended 31
December 2018 are:
•
•
IFRS 9 Financial Instruments; and
IFRS 15 Revenue from Contracts with Customers
IFRS 9 “Financial Instruments”
IFRS 9 has replaced IAS 39 Financial Instruments: Recognition and Measurement, and has had an effect on
the Group in the following areas:
•
•
The impairment provision on financial assets measured at amortised cost (such as trade and other
receivables) has been calculated in accordance with IFRS 9’s expected credit loss model, which differs
from the incurred loss model previously required by IAS 39. This has resulted in £nil provision for
expected losses.
Loans to subsidiaries measured at amortised cost have been calculated in accordance with IFRS 9’s
expected credit loss model. These loans were considered to be credit-impaired at the date of initial
adoption of the new standard. The directors have considered cash flows that may be generated from
the orderly sale of the underlying business in order to establish the assessment of lifetime expected
credit losses at initial adoption and at year end.
The impact of the standard on opening balances is not material and as such, the Group has chosen not to
restate comparatives on adoption of IFRS 9.
IFRS 15 “Revenue from Contracts with Customers”
IFRS 15 has replaced IAS 18 Revenue and IAS 11 Construction Contracts as well as various interpretations
previously issued by the IFRS Interpretations Committee. The Group adopted IFRS 15 using the cumulative
effect method applied to those contracts with were not completed as of 1 January 2018. The impact of the
new standard on opening balances was immaterial. It has impacted the Group in the following ways:
(a) Sale of goods
Purchase orders with customers in respect of the sale of water-soluble polymers (£0.66m) continue to
be recognised when goods are delivered to the customer, and as such control of the asset is transferred
to the customer. IFRS 15 has therefore had no impact on this revenue stream.
P a g e | 36
NOTES TO FINANCIAL STATEMENTS
For the year ended 31 December 2018
(b) Collaborative research
YEAR IN REVIEW
GOVERNANCE
FINANCIAL STATEMENTS
Contracts with customers in which collaborative research (£0.04m) on development stage products are
completed are recognized in agreement with milestones as identified in the contractual agreement. IFRS
15 has therefore had no impact on this revenue stream.
New standards, interpretations and amendments not yet effective
There are a number of standards, amendments to standards, and interpretations which have been issued by
the IASB that are effective in future accounting periods that the Group has decided not to adopt early. The
most significant of these is:
IFRS 16 “Leases” – (effective for 2019 financial report)
Adoption of IFRS 16 Leases will result in the Group recognising right of use assets and lease liabilities for all
contracts that are, or contain, a lease. For leases currently classified as operating leases, under current
accounting requirements the Group does not recognize related assets or liabilities, and instead spreads the
lease payments on a straight-line basis over the lease term, disclosing in its annual financial statements the
total commitment. The Group will only recognize such leases on its balance sheet as at 1 January 2019. In
addition, it will measure right-of-use assets by reference to the measurement of the lease liability on that
date. This will ensure there is no immediate impact to net assets on that date. At 31 December 2018
operating lease commitments amounted to £0.39m. Instead of recognizing an operating expense for its
operating lease payments, the Group will instead recognize interest on its lease liabilities and amortization
on its right-of-use assets. This will increase reported EBITDA by the amount of its current operating lease
expense.
3.
Accounting policies
Basis of accounting
These financial statements have been prepared in accordance with International Financial Reporting
Standards, International Accounting Standards and Interpretations (collectively IFRSs), which are adopted by
the EU. Set out below are the main accounting policies which applied in preparing the financial statements
for the years ended 31 December 2018 and 31 December 2017. The Group financial statements are
presented in GBP because this is the currency of the primary economic environment in which the Group
currently operates, and all values are rounded to the nearest thousand (£’000) unless otherwise indicated.
The Company’s functional currency is GBP. The financial statements have been prepared on the historical
cost basis, except for contingent consideration which has been measured at fair value.
Going concern
The financial statements have been prepared on a going concern basis. The Directors have reviewed the
Company’s and the Group’s going concern position taking account its current business activities, budgeted
performance and the factors likely to affect its future development, set out in the Annual Report, and
including the Group’s objectives, policies and processes for managing its working capital, its financial risk
management objectives and its exposure to credit and liquidity risks.
The Group made a loss for the year of £7,256k, had Net Current Assets at the period end of £2,385k and a
Net Cash Outflow from Operating Activities of £4,850k. Primarily, the Group meets its day to day working
capital requirements through existing cash resources and had on hand cash, cash equivalents and short term
deposits at the balance sheet date of £2,083k (2017: £3,606k).
During the year, the Group reduced its expenditures, restructured its operations and successfully raised net
funding of £3,297k.
The Directors have reviewed the Group’s cash flow forecasts covering a period of at least 12 months from the
date of approval of the financial statements, which foresee that the Group will be able to meet its liabilities as
they fall due. However, the success of the business is dependent on customer adoption of our products in
order to increase revenue and profits growth. Inability to deliver this could result in the requirement to raise
additional funds.
P a g e | 37
NOTES TO FINANCIAL STATEMENTS
For the year ended 31 December 2018
YEAR IN REVIEW
GOVERNANCE
FINANCIAL STATEMENTS
The Directors have concluded that the circumstances set forth above represent a material uncertainty, which
may cast significant doubt about the Company and Group’s ability to continue as a going concern. However,
they believe that taken, as a whole, the factors described above enable the Company and Group to continue as
a going concern for the foreseeable future. The financial statements do not include the adjustments that would
be required if the Company and the Group were unable to continue as a going concern.
Consolidation
The consolidated financial statements incorporate the financial statements of the Company and entities
controlled by the Company (its subsidiaries) made up to 31 December each year. The Company controls an
investee if, and only if the Company has the following:
•
•
•
Power over the investee (i.e. existing rights that give it the current ability to direct the relevant
activities of the investee);
Exposure of rights, to variable returns from its involvement with the investee; and
The ability to use its power over the investee to affect its returns.
Where necessary, adjustments are made to the financial statements of subsidiaries to bring the accounting
policies used into line with those used by the Group.
All intra-group transactions, balances, income and expenses are eliminated on consolidation.
In accordance with Section 408 of the Companies Act 2006, no profit and loss account is presented for the
Company.
Business combinations, contingent consideration and goodwill
Business combinations are accounted for using the acquisition method. The cost of an acquisition is measured
as the aggregate of the consideration transferred, measured at the acquisition date fair value, and the amount
of any non-controlling interest in the acquiree. For each business combination, the Group elects whether to
measure the non-controlling interest in the acquiree at fair value or at the proportionate share of the
acquiree’s identifiable net assets. Acquisition related costs are expensed as incurred and included in
administrative expenses.
When the Group acquires a business, it assesses the financial assets and liabilities assumed for appropriate
classification and designation in accordance with the contractual terms, economic circumstances and pertinent
conditions as at the acquisition date.
Any contingent consideration to be transferred by the acquirer is recognised at fair value at the acquisition
date. Subsequent changes to the fair value of the contingent consideration are recognised in accordance with
IFRS 9 in profit or loss.
The fair value of contingent consideration is determined by reference to the projected financial performance
in relation to the specific contingent consideration criteria for each acquisition.
Goodwill is initially measured at cost being the excess of the aggregate of the acquisition-date fair value of the
consideration transferred over the fair value of the assets acquired and the liabilities assumed in exchange for
the business combination. Assets acquired and liabilities assumed in transactions separate to the business
combinations, such as the settlement of pre-existing relationships or post-acquisition remuneration
arrangements are accounted for separately from the business combination in accordance with their nature
and applicable IFRSs. Identifiable intangible assets, meeting either the contractual-legal or separability
criterion are recognised separately from goodwill. Contingent liabilities representing a present obligation are
recognised if the acquisition-date fair value can be measured reliably.
After initial recognition, goodwill is measured at cost less any accumulated impairment losses. For the purpose
of impairment testing, goodwill acquired in a business combination is, from the acquisition date, allocated to
each of the Group’s cash-generating units that are expected to benefit from the combination, irrespective of
whether other assets or liabilities of the acquiree are assigned to those units. Each unit or group of units to
which goodwill is allocated shall represent the lowest level within the entity at which the goodwill is monitored
for internal management purposes and not be larger than an operating segment before aggregation.
P a g e | 38
NOTES TO FINANCIAL STATEMENTS
For the year ended 31 December 2018
Associates
YEAR IN REVIEW
GOVERNANCE
FINANCIAL STATEMENTS
An associate is an entity over which the Group has significant influence. Significant influence is the power to
participate in the financial and operating policy decisions of the investee, but is not control or joint control
over those policies. The considerations made in determining significant influence are similar to those
necessary to determine control over subsidiaries.
The Group’s investments in its associates are accounted for using the equity method. Each investment in an
associate is recognised (and subsequently held) at cost when acquired.
The statement of profit or loss reflects the Group’s share of the results of operations of the associate or joint
venture. Any change in other comprehensive income (“OCI”) of those investees is presented as part of the
Group’s OCI. In addition, when there has been a change recognised directly in the equity of the associate, the
Group recognises its share of any changes, when applicable, in the statement of changes in equity. Unrealised
gains and losses resulting from transactions between the Group and the associate are eliminated to the extent
of the interest in the associate.
The aggregate of the Group’s share of profit or loss of an associate is shown on the face of the statement of
profit or loss separate from operating profit and represents profit or loss after tax and non-controlling
interests in the subsidiaries of the associate.
The financial statements of the associate are prepared for the same reporting period as the Group. When
necessary, adjustments are made to bring the accounting policies in line with those of the Group.
After application of the equity method, the Group determines whether it is necessary to recognise an
impairment loss on its investment in its associate. At least at each reporting date, the Group determines
whether there is objective evidence that the investment in the associate is impaired. If there is such evidence,
the Group calculates the amount of impairment as the difference between the recoverable amount of the
associate and its carrying value and charges it to “Share of profit or loss of associate” in the statement of profit
or loss.
Discontinued operations
Discontinued operations are excluded from the results of continuing operations and are presented as a
single amount as profit or loss after tax from discontinued operations in the statement of profit or loss.
All other notes to the financial statements include amounts from continuing operations, unless otherwise
mentioned.
Revenue recognition
Revenue is recognised to the extent that services have been delivered and the revenue can be reliably
measured, regardless of when the payment is being made. Revenue is measured at the fair value of the
consideration received or receivable, taking into account contractually defined terms of payment and
excluding taxes or duty.
Revenue from the sale of goods is recognised when performance obligations have been satisfied. The delivery
date is usually the date on which performance obligations have been satisfied. However, where goods are
supplied when title does not irrevocably pass on delivery, it may not be appropriate to recognise all the revenue
immediately. The Group provides for potential sales returns based on its actual experience of returns from
customers in such cases. Where it has no such history it makes estimates by reference to minimum sales
commitments in the relevant contract, or by reference, where available, to customer retail sales data or
customer inventory levels at the financial year end, or based on other reasonable and relevant judgements.
Government grants and research income
Government grants and research income are recognised as a credit to the income statement where there is
reasonable assurance that they will be received and all associated conditions will be complied with.
When the income relates to an expense item, it is recognised as income over the period necessary to match it
on a systematic basis to the costs that it is intended to compensate. Where the income relates to an asset, it is
P a g e | 39
NOTES TO FINANCIAL STATEMENTS
For the year ended 31 December 2018
YEAR IN REVIEW
GOVERNANCE
FINANCIAL STATEMENTS
recognised as deferred income and released to income in equal annual amounts over the expected useful life
of the related asset.
Research and development costs
Research costs are expensed as incurred. Development expenditure on an individual project is recognised as
an intangible asset only when the Group can demonstrate the technical feasibility of completing the intangible
asset so that it will be available for use or sale, its intention to complete and its ability to use or sell the asset,
how the asset will generate future economic benefits, the availability of resources to complete the asset and
the ability to measure reliably the expenditure during development.
Following initial recognition of the development expenditure as an asset, the cost model is applied requiring
the asset to be carried at cost less any accumulated amortisation and accumulated impairment losses.
Amortisation of the asset begins when development is complete and the asset is available for use. It is
amortised over the period of expected future benefit. During the period of development, the asset is tested
for impairment annually.
The Group will also capitalise development costs to the extent they are intangible assets arising on
consolidation following an acquisition.
Foreign currencies
Transactions in foreign currencies are translated at the exchange rate ruling at the date of the transaction.
Monetary assets and liabilities in foreign currencies are translated at the rates of exchange ruling at the year-
end date. Non-monetary items that are measured at historical cost in a foreign currency are translated at the
exchange rate at the date of the transaction. Non-monetary items that are measured at fair value in a foreign
currency are translated using the exchange rates at the date when the fair value was determined.
Any exchange differences arising on the settlement of monetary items or on translating monetary items at
rates different from those at which they were initially recorded are recognised in the income statement in the
period in which they arise. Exchange differences on non-monetary items are recognised in the statement of
comprehensive income to the extent that they relate to a gain or loss on that non-monetary item taken to the
statement of comprehensive income, otherwise such gains and losses are recognised in the income statement.
The assets and liabilities in the financial statements of foreign subsidiaries are translated at the rate of
exchange ruling at the year end date. Income and expenses are translated at the actual rate. The exchange
differences arising from the retranslation of the opening net investment in subsidiaries are taken directly to
the ‘Foreign currency retranslation reserve’ in equity. On disposal of a foreign operation the cumulative
translation differences (including, if applicable, gains and losses on related hedges) are transferred to the
income statement as part of the gain or loss on disposal.
Property, plant and equipment
Property, plant and equipment are stated at cost, less accumulated depreciation and any accumulated
impairment in value. Such cost includes the cost of replacing part of the plant and equipment when that cost
is incurred, if the recognition criteria are met.
Depreciation is calculated to write off the cost less estimated residual value of all tangible assets over their
expected useful economic life on a straight-line basis. The rates generally applicable are:
Plant and equipment
Short leasehold equipment
Computer and office equipment
Financial assets
4-7 years
5 years
3 years
Financial assets are recognised in Itaconix’s and the Company’s statement of financial position when Itaconix
and the Company becomes party to the contractual provisions of the instrument. Under IFRS 9 the
classification of financial assets is based both on the business model and cash flow type under which the
assets are held. There are three principal classification categories for financial assets: amortised cost; fair
P a g e | 40
NOTES TO FINANCIAL STATEMENTS
For the year ended 31 December 2018
YEAR IN REVIEW
GOVERNANCE
FINANCIAL STATEMENTS
value through other comprehensive income; and fair value through profit or loss. Itaconix has not classified
any of its financial assets as fair value through other comprehensive income.
Amortised cost
These assets are non-derivative financial assets held under the ‘held to collect’ business model and
attracting cash flows that are solely payments of principal and interest. They comprise trade and other
receivables and cash and cash equivalents. They are initially measured at fair value plus transaction
costs, and are subsequently carried at amortised cost using the effective interest rate method, less
provision for impairment.
Impairment provisions for trade and other receivables are calculated using an expected credit loss
model. Under this model, impairment provisions are recognised to reflect expected credit losses based
on combination of historic and forward-looking information, the amount of such a provision being the
difference between the net carrying amount and the present value of the future expected cash flows
associated with the impaired receivable. For trade receivables, which are reported net; such provisions
are recorded in a separate allowance account. On confirmation that the trade receivable will not be
collectable, the gross carrying value of the asset is written off against the associated provision.
Cash, cash equivalents and investments
Cash and cash equivalents in the balance sheet comprise cash at bank and in hand. Investments comprise
funds placed on short term deposits.
Leases
Operating lease payments are recognised as an operating expense in the income statement on a straight-line
basis over the lease term. Operating lease incentives are recognised as a liability when received and
subsequently reduced by allocating lease payments between rental expense and reduction of the liability.
Income taxes
Current tax assets and liabilities are measured at the amount expected to be recovered from or paid to the
taxation authorities, based on tax rates and laws that are enacted or substantively enacted by the balance
sheet date.
Deferred income tax is recognised on all temporary differences arising between the tax bases of assets and
liabilities and their carrying amounts in the financial statements, with the following exceptions:
• Where the temporary difference arises from the initial recognition of an asset or liability in a
transaction that is not a business combination that at the time of the transaction affects
neither accounting nor taxable profit or loss;
Deferred income tax assets are recognised only to the extent that it is probable that taxable
profit will be available against which the deductible temporary differences, carried forward tax
credits or tax losses can be utilised.
•
Deferred income tax assets and liabilities are measured on an undisclosed basis at the tax rates that are
expected to apply when the related asset is realised or liability is settled, based on tax rates and laws
enacted or substantively enacted at the balance sheet date.
Income tax is charged or credited directly to equity if it relates to items that are credited or charged to
equity. Otherwise income tax is recognised in the income statement.
Research and development tax credit
Companies within the Group may be entitled to claim special tax allowances in relation to qualifying
research and development expenditure (e.g. R&D tax credits). The Group accounts for such allowances as
tax credits, which means that they are recognised when it is probable that the benefit will flow to the
P a g e | 41
NOTES TO FINANCIAL STATEMENTS
For the year ended 31 December 2018
YEAR IN REVIEW
GOVERNANCE
FINANCIAL STATEMENTS
Group and that benefit can be reliably measured. R&D tax credits reduce current tax expense and, to the
extent the amounts due in respect of them are not settled by the balance sheet date, reduce current tax
payable.
Financial liabilities
Financial liabilities are classified as either financial liabilities at fair value through profit or loss or other
financial liabilities.
Financial liabilities at fair value through profit or loss
Financial liabilities are stated at fair value with differences taken to the consolidated income statement.
Interest on financial liabilities up to maturity is included in the finance costs line item in the consolidated
income statement.
Trade and other payables
Trade payables and other payables are not interest bearing and are stated at their full value on initial
recognition. For disclosure purposes, the fair values of trade and other payables are estimated at the
present value of future cash flows, discounted at the market rate of interest at the reporting date. As
trade payables and other payables are short term in nature as at the reporting date, the carrying value is
considered to be a reasonable approximation of fair value.
Other financial liabilities
Other financial liabilities are initially measured at fair value, net of transaction costs. They are
subsequently measured at amortised costs using the effective interest method, with interest recognised
on an effective rate basis.
Inventory valuation
Inventories are stated at the lower of cost and net realisable value. Cost includes all costs incurred in
bringing each product to its present location and condition.
Share based payments
The Company issues equity-settled share-based payments to certain employees and these payments are
measured at fair value (excluding the effect of non-market-based vesting conditions) at the date of the grant
using appropriate pricing models. 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 Company’s
estimate of shares that will eventually vest and adjusted for the effect of non-market-based vesting
conditions.
At the date of each statement of financial position, the Company revises its estimate of the number of equity
instruments that are expected to become exercisable. It recognises the impact of the revision of original
estimates, if any, in the income statement, and a corresponding adjustment is made to equity over the
remaining vesting period. The fair value of the awards and ultimate expense are not adjusted on a change in
market vesting conditions during the vesting period.
The value of share-based payment is taken directly to reserves and the charge for the period is recorded in
the income statement. Itaconix’s scheme, which awards shares in the parent entity, includes recipients who
are employees in all subsidiaries. In the consolidated financial statements, the transaction is treated as an
equity-settled share-based payment, as Itaconix has received services
in consideration for equity
instruments. An expense is recognised in the Group income statement for the fair value of share-based
payment over the vesting year, with a credit recognised in equity.
In the subsidiaries’ financial statements, the awards, in proportion to the recipients who are employees in
said subsidiary, are treated as an equity-settled share-based payment, as the subsidiaries do not have an
obligation to settle the award. An expense for the grant date fair value of the aware is recognised over the
vesting year, with a credit recognised in equity. The credit is treated as a capital contribution, as the parent is
compensating the subsidiaries’ employees with no cost to the subsidiaries as there is no expectation to
recharge the cost. In the parent company’s financial statements, there is no share-based payment charge
P a g e | 42
NOTES TO FINANCIAL STATEMENTS
For the year ended 31 December 2018
YEAR IN REVIEW
GOVERNANCE
FINANCIAL STATEMENTS
where the recipients are employed by a subsidiary, with the parent company recognising an increase in the
investment in the subsidiaries as a capital contribution from the parent and a credit to equity
Equity instruments
An equity instrument is any contract that evidences a residual interest in the assets of the Group after
deducting all of its liabilities. Equity instruments issued by the Group are recorded at the proceeds received,
net of direct issue costs. Dividends and distributions relating to equity instruments are debited direct to
equity.
Exceptional items
The Group has classified the organizational restructuring, the fair value adjustment of the contingent
consideration, and the impairment of the goodwill and other intangible assets as exceptional items in the
income statement. These items are not considered to reoccur and are of such significance to the results that
they have been presented as exceptional to provide a fair and balanced presentation in the financial
statements.
4.
Critical accounting assumptions and key sources of estimation uncertainty
The preparation of the Group’s financial statements requires management to make judgements, estimates
and assumptions that affect the reported amounts of revenues, expenses, assets and liabilities, and the
disclosure of contingent assets and liabilities, at the end of the reporting period. However, uncertainty about
these assumptions and estimates could result in outcomes that require a material adjustment to the carrying
amount of the asset or liability affected in future periods.
Judgements
In the process of applying the Group’s accounting policies, management has made a number of judgements.
Those which have the most significant effect on the amounts recognised in the financial statements are
summarised below:
Valuation of contingent consideration
The value of any contingent consideration is also reviewed at each period end by way of comparison to the
value of expected future payments, as estimated using appropriate methodologies, e.g. discounted cash flow
techniques. See note 20 for further details.
Accounting for the investment in Alkalon
On completion of the divestment of the nicotine gum business, the consideration to Itaconix was 15% of the
equity of the new business resulting from the combination of the divested business and Alkalon’s existing
business. In addition, the Group has the right to appoint a director to the board of Alkalon (which it has
exercised), and following certain commercial contracts awarded to Alkalon during the year the interest
owned by Itaconix increased to 22.5%. Taking these factors into account, management judges it appropriate
to equity account for the investment in Alkalon under IAS 28 as an associate. At each period end the carrying
value of the investment in Alkalon is also reviewed for impairment with a view to assessing recoverability.
Share based payment cost
The estimation of share based payment costs requires the selection of an appropriate valuation model,
considerations as to the inputs necessary for the valuation model chosen and the estimation of the number
of awards that will ultimately vest, inputs for which arise from judgements relating to the probability of
meeting non-market performance conditions and the continuing participation of employees (see Note 25).
P a g e | 43
NOTES TO FINANCIAL STATEMENTS
For the year ended 31 December 2018
Fair value of Group indebtedness (Company only)
YEAR IN REVIEW
GOVERNANCE
FINANCIAL STATEMENTS
The fair value of amounts owing from group companies is impaired in those cases where the subsidiary is, at
the balance sheet date, both illiquid and not yet generating positive cash flows, or otherwise highly unlikely to
repay such indebtedness (see Note 17).
5.
Revenue
Revenue recognised in the Group income statement is analysed as follows:
Sale of goods
Geographical information
Europe
North America
Asia
2018
£’000
660
660
2018
£’000
176
477
7
660
2017
£’000
553
553
2017
£’000
249
296
8
553
The revenue information is based on the location of the customer.
Segmental information
The revenue information above is derived from the continuing operations and excludes the Nicotine Gum
segment that was disposed of during the previous year (see Note 11).
The Group therefore has one segment - the Specialty Chemicals segment which designs and manufactures
proprietary specialty polymers to meet customers’ needs in the home care and industrial markets and in
personal care. This segment makes up the continuing operations above.
Net assets of the Group are attributable to geographical location as at 31 December 2018.
Europe
North America
Asia
2018
£’000
39
124
–
183
2017
£’000
2,717
1,253
–
3,970
P a g e | 44
NOTES TO FINANCIAL STATEMENTS
For the year ended 31 December 2018
6.
Other operating income
YEAR IN REVIEW
GOVERNANCE
FINANCIAL STATEMENTS
Other operating income arises mainly from grants and research income and sale of fixed assets. Since it is not
considered to be part of the main revenue generating activities, the group presents this income separately
from revenue.
Grant and research income
Sale of assets
7.
Group operating loss
This is stated after charging:
Auditor’s remuneration:
Audit of the financial statements
Audit of the subsidiaries
Non-audit services
Total fees
Equity settled share based payment expense
Employer’s national insurance (credit) associated with
vested share options
Depreciation of owned assets
Amortisation of intangible assets
Minimum operating lease payments:
– land and buildings
Research and development expenditure
Foreign exchange differences
2018
£’000
59
37
96
2018
£’000
10
57
6
73
228
(29)
222
-
333
405
89
2017
£’000
112
–
112
2017
£’000
10
47
7
64
184
(55)
259
267
345
1,080
83
On 1 June 2018, the Group announced an operational update regarding the restructuring of its UK subsidiary
to focus the Group’s resources on growing revenues of its core products. The Group’s activities were
consolidated into its US operations, thereby improving the link between product support and manufacturing.
The Group incurred a one-time exceptional cost of £891k to restructure the UK subsidiary, to pay Director’s
and staff redundancy payments, lease termination, and facility clean-up costs.
8.
Staff costs
Staff costs for the Group, including Directors, consist of:
Wages and salaries
Invoiced by third parties
Post-employment benefits
Equity settled share based payment expense
2018
£’000
2,810
15
99
228
3,152
2017
£’000
2,993
15
130
184
3,322
Details of Directors’ fees are included in the Directors’ Remuneration Report on page 18.
Details of key management personnel fees are included in Note 26.
P a g e | 45
NOTES TO FINANCIAL STATEMENTS
For the year ended 31 December 2018
YEAR IN REVIEW
GOVERNANCE
FINANCIAL STATEMENTS
The average monthly number of Group employees, including Directors, during the year was made up as
follows:
Executive Directors
Non-executive Directors
Research and development
Finance and administration
Sales
Production
Contract staff
Itaconix plc had no employees other than the Directors.
9.
Finance income
Interest receivable on bank deposits
10.
Taxation
Corporation tax credits
Prior years’ corporation tax credits
Reduction in deferred tax liability on IP amortisation
Current year corporation tax liability
Current year corporation tax credits
Corporation tax credits
2018
No.
2
5
14
4
4
2
1
32
2018
£’000
3
2018
£’000
21
-
(6)
125
140
2017
No.
2
4
24
4
2
2
1
39
2017
£’000
1
2017
£’000
23
107
(5)
340
465
During the year ended 31 December 2018, the Group had a taxation credit, excluding exceptional items
disclosed separately, of £140k (2017: £465k), £125k of which relates to R&D tax credits estimated to be
claimable on qualifying expenditure for the year ended 31 December 2018, but also including a provision of
£6k for US taxation payable in respect of 2018 by the US subsidiary. The amount of R&D tax credits actually
received in the year of £361k relates to the submitted R&D tax claims for the year ended 31 December 2017.
P a g e | 46
NOTES TO FINANCIAL STATEMENTS
For the year ended 31 December 2018
YEAR IN REVIEW
GOVERNANCE
FINANCIAL STATEMENTS
Total tax on loss on ordinary activities
The tax for the year can be reconciled to the loss per the income statement as follows:
Loss before tax from continuing operations
Loss before tax from discontinued operations
Loss before tax relief
Loss on ordinary activities multiplied by standard
UK corporation tax rate of 19%
Effects of:
Disallowed expenses & non-taxable income
Capital allowances in excess of depreciation
Adjustments in respect of prior periods
Other timing differences
Surrender of tax losses for R&D tax credit
Movement in deferred tax not recognised
Deferred tax arising upon impairment and amortisation of intangible
assets
Current year R&D tax credit
Total tax credit for the year
Release of previously recognised deferred tax liability
(shown on the face of the income statement due to its nature)
Corporation tax credit
The Group tax credit relates to continuing operations in the year.
Deferred tax
The Group has the following net deferred tax asset which is not recognised:
Accelerated capital allowances
Other timing differences
Tax losses carried forward
Share based payments
2018
£’000
(7,396)
-
(7,396)
(1,405)
364
-
(21)
644
166
237
-
(125)
(140)
-
(140)
2018
£’000
1
22
6,283
25
6,331
2017
£’000
(11,868)
33
(11,835)
(2,278)
1,117
13
(23)
-
451
702
(1,336)
(340)
(1,694)
(1,229)
(465)
2017
£’000
(9)
-
5,943
160
6,094
The net deferred tax asset is not recognised as there is insufficient evidence of future taxable profits against
which the asset will be available for offset.
P a g e | 47
NOTES TO FINANCIAL STATEMENTS
For the year ended 31 December 2018
YEAR IN REVIEW
GOVERNANCE
FINANCIAL STATEMENTS
The table below summaries deferred tax liabilities of the Group that are recognised:
As at 1 January
Reduction in deferred tax liability on IP amortisation
Foreign exchange movement
Elimination of liability due to full impairment of intangible assets
As at 31 December
2018
£’000
-
-
-
-
-
2017
£’000
(1,458)
107
122
1,229
-
A liability arose in 2016 on the valuation of intangible assets recognised on consolidation of Itaconix
Corporation. However, in respect of 2017, as a result of slower than expected sales growth of the products
acquired with Itaconix Corporation and a consequent reduction in management forecasts, the acquired
intellectual property has been fully impaired resulting in the corresponding elimination of the deferred tax
liability.
Tax rate changes
The main rate of UK corporation tax was 19% from 1 April 2015. This will fall to 17% for the year beginning 1
April 2020.
The US federal tax rate was reduced to 21% from 1 January 2018 (prior years: 35%).
11.
Discontinued operations
On 16 September 2016, the Group announced that it had entered into agreements for the divestment of the
nicotine gum business to Alkalon A/S, a Danish company, with completion subject to the satisfaction of certain
conditions precedent including the transfer of key customer contracts and product licences to Alkalon.
Completion was announced on 2 November 2016.
The results of the Nicotine Gum segment for the year are presented below:
Revenue
Cost of sales
Gross profit
Administrative expenses
Profit before tax from discontinued operations
Tax benefit: Related to current pre-tax loss
Profit for the year from discontinued operations
2018
£’000
2017
£’000
–
–
–
–
–
–
–
25
8
33
–
33
–
33
The net cash flows incurred by the Nicotine Gum segment were nil for years end 31 December 2018 and 2017.
P a g e | 48
NOTES TO FINANCIAL STATEMENTS
For the year ended 31 December 2018
12.
Loss per share
YEAR IN REVIEW
GOVERNANCE
FINANCIAL STATEMENTS
Basic loss per share is calculated by dividing the loss attributable to ordinary shareholders by the weighted
average number of ordinary shares in issue during the year.
Loss
Loss for the purposes of basic and diluted loss per
share (£’000)
Weighted average number of ordinary shares for
the purposes of basic and diluted loss per share
(’000)
Basic and diluted loss per share
Continuing
operations
Discontinued
operations
2017
£’000
2017
£’000
Total
2017
£’000
2018
£’000
(7,256)
(10,174)
33
(10,141)
157,494
(4.6p)
78,715
(12.9p)
78,715
0.0p
78,715
(12.9p)
The loss for the period and the weighted average number of ordinary shares for calculating the diluted
earnings per share for the period to 31 December 2018 are identical to those used for the basic earnings per
share. This is because the outstanding share options (Note 23) would have the effect of reducing the loss per
ordinary share and would therefore not be dilutive.
13. Investment in subsidiary undertakings
In 2017, as a result of reduced forecasts for the Group including the products acquired with Itaconix Corporation
in 2016, management has fully impaired the intangible assets arising on acquisition and has also impaired the
value of the investment in Itaconix Corporation in the Company balance sheet proportionate to its shareholding.
Impairment was calculated by comparing the asset carrying values with the value in use of the relevant cash
generating unit, using discounted cash flow techniques. Notwithstanding this, it still expects the Group to
become a profitable specialty chemicals business in the medium term.
At 1 January 2017
Share based payments
Impairment
At 31 December 2017
Share based payments
Impairment
At 31 December 2018
Company
£’000
6,078
184
(5,697)
565
228
-
793
Name
Direct investments
Principal activity
Place of
incorporation
and operation
Proportion of
ownership
interest
Itaconix (U.K.) Limited (1)
Revolymer EBT Limited (1)
UK operating company
Trustee of Revolymer employee benefit trust
England
England
Indirect investments
Itaconix Corporation (2)
Trading US subsidiary of Itaconix (U.K.) Ltd
USA
100%
100%
100%
(1) The registered address is Fieldfisher, LLP, Riverbank House, 2 Swan Lane, London, EC4R 3TT, UK
(2) The registered address is 2 Marin Way, Stratham, NH 03885, USA
P a g e | 49
NOTES TO FINANCIAL STATEMENTS
For the year ended 31 December 2018
14.
Investment in associate undertakings
YEAR IN REVIEW
GOVERNANCE
FINANCIAL STATEMENTS
The Group’s interest in Alkalon is accounted for using the equity method in the consolidated financial
statements. The acquisition is considered to be a long term investment. The fair value of the investment at the
period end was arrived at as described below.
Fair value of Alkalon investment at 1 January 2017
Increase in investment at 18 May 2017
Share of loss of equity-accounted investees, net of tax
Gain on foreign exchange
Fair value of Alkalon investment at 31 December 2017
Increase in investment at 30 April 2018
Reclassification from impairment on loan to the investment in
associate
Reversal of prior impairment
Share of profit of equity-accounted investees, net of tax
Fair value of Alkalon investment at 31 December 2018
£’000
145
60
(214)
9
-
26
15
88
2
131
Name
Alkalon A/S (from 31 October 2016)
Alkalon A/S (from 22 June 2017)
Alkalon A/S (from 30 April 2018)
Principal
activity
Trading Danish associate of
Itaconix (U.K.) Ltd
Trading Danish associate of
Itaconix (U.K.) Ltd
Trading Danish associate of
Itaconix (U.K.) Ltd
Place of
incorporation
and operation
Proportion of
ownership
Interest
Denmark
Denmark
Denmark
15%
17%
22%
As part of a funding raise by Alkalon in 2018, the Group invested additional capital into Alkalon that increased
the Group’s interest to 22.49%.
As a result of certain commercial milestones being met during the year as laid out in the divestment
agreements from 2016, the Group’s interest in Alkalon was increased to 17.36% by the issuance of new equity
in 2017.
The following table summarises financial information relating to Alkalon for the 2018 financial year:
Intangible assets
Tangible fixed assets
Current assets
Current liabilities
Equity
2018
£’000
2017
£’000
555
231
1,819
(2,020)
585
486
221
1,844
(2,070)
481
P a g e | 50
NOTES TO FINANCIAL STATEMENTS
For the year ended 31 December 2018
Gross profit
Administration expenses
Finance income
Finance costs
Profit / (Loss) before tax
Income tax expense
Profit / (Loss) for the year (continuing operations)
Total comprehensive profit / (loss) for the year
Group’s share of profit / (loss) for the year
Revaluation in the year
Total profit / (loss) for the year
YEAR IN REVIEW
GOVERNANCE
FINANCIAL STATEMENTS
2018
£’000
2017
£’000
766
(537)
7
(228)
8
-
8
8
2
88
90
243
(1,135)
-
(66)
(958)
(347)
(1,305)
(1,305)
(214)
-
(214)
The associate had no contingent liabilities or commitments as at 31 December 2018.
During 2017, jointly and severally with all the other shareholders, the Group provided a guarantee to Alkalon’s
contract manufacturer (CMO) up to a maximum EUR200k (around GBP175k), callable should Alkalon not meet
its payment obligations to the CMO. Management did not expect the guarantee to be called to any extent, it
expired on 15 February 2018 and indeed it had not been called to any extent at expiry. Accordingly no liability
has been recorded at 31 December 2018.
During 2018, jointly and severally with all the other shareholders, the Group has provided further guarantees
to Alkalon’s CMO up to a maximum EUR800k (around GBP700k), callable should Alkalon not meet its payment
obligations to the CMO and/or not meet minimum annual orders for product. These guarantees reduce by
EUR125k (around GBP110k) every year for 4 years, down to a maximum of EUR300k (around GBP260k).
Management does not expect these guarantees to be called, and to date they have not been called to any
extent. Accordingly no liability has been recorded at 31 December 2018.
During 2018, previously recorded impairment losses against the fair value of the Group’s investment in Alkalon
was partially reversed based on the events noted below, for an amount of £88k.
During May 2019, the Group completed its divestment in the nicotine gum business when the Group sold its
holdings (22.49%) in its associate, Alkalon to the associate’s existing shareholders, who have also provided
indemnification protecting the Group against any exposure from the guarantees noted above. The Director’s
decision to divest the Group’s investment was made in 2019. Further details of this event are noted in Note
29.
P a g e | 51
NOTES TO FINANCIAL STATEMENTS
For the year ended 31 December 2018
15.
Property, plant and equipment
YEAR IN REVIEW
GOVERNANCE
FINANCIAL STATEMENTS
Group
Cost
At 1 January 2017
Additions
Disposals
At 31 December 2017
Additions
Disposals
At 31 December 2018
Accumulated depreciation
At 1 January 2017
Charge
Eliminated on disposal
At 31 December 2017
Charge
Eliminated on disposal
At 31 December 2018
Carrying Amount
At 31 December 2018
At 31 December 2017
16.
Inventories
Group
Raw materials
Work in progress
Finished goods
Computer
and office
equipment
£’000
Plant and
equipment
£’000
Short
Leasehold
equipment
£’000
211
18
(30)
199
–
(181)
18
171
21
(30)
162
18
(165)
15
3
37
1,702
418
(17)
2,103
–
(1,152)
951
1,020
217
(17)
1,220
187
(1,137)
270
681
883
359
–
(17)
342
–
(271)
71
278
21
(17)
282
17
(263)
36
35
60
2018
£’000
82
14
207
303
17.
Trade and other receivables
Current assets
Group
Company
Trade receivables
Amounts due from associate
Amounts owed by Group companies
Other receivables
2018
£’000
119
27
–
565
711
2017
£’000
127
45
–
534
706
2018
£’000
–
–
535
32
567
Total
£’000
2,272
436
(64)
2,644
–
(1,604)
1,040
1,469
259
(64)
1,664
222
(1,565)
321
719
980
2017
£’000
54
19
198
271
2017
£’000
–
–
–
283
283
Trade receivables are non-interest bearing and are generally on 30 day terms.
As at 31 December 2018, the unsecured shareholder loan to its associate Alkalon remained outstanding as the
primary credit facility with Danske Bank, remained outstanding. The initial term of the loan agreement was 12
months from June 2017 and the interest rate of 4.5%. During 2018, the loan that had become past due was
impaired £18k, as management was uncertain of the financial status of repayment. Subsequent to year end,
the loan to its associate Alkalon, has been repaid and Group has divested from its holdings in its associate (see
Note 29).
P a g e | 52
NOTES TO FINANCIAL STATEMENTS
For the year ended 31 December 2018
YEAR IN REVIEW
GOVERNANCE
FINANCIAL STATEMENTS
As at 31 December 2018, a provision of £nil (2017 – £nil) has been made to trade receivables that were
considered to be impaired. Amounts due from group undertakings have been classified as current. The
Company does not consider any of the amounts due from group undertakings to be overdue.
Included within other receivables is £486k (2017: £361k) of R&D tax credit receivables (see Note 10).
In respect of the Company
•
The loss for the year includes a release of fair value impairment of group indebtedness of £nil
resulting from a movement in provisions for this indebtedness (2017: charge £343k).
• As at 31 December 2018 the balance of the fair value of impaired debt from Group undertakings is
£26,1971k (2017: £19,761k).
•
There are no significant doubts as to the future recoverability of these balances, and as such, no
provision for bad and doubtful debts has been raised against the amounts due from group
undertakings, however to the extent the counter party is unable to do so, the Group does not intend
to recall the amounts due, within one year.
As at 31 December, the analysis of trade receivables that were past due but not impaired is as
follows:
Group
2018
2017
Neither
past due
nor
impaired
£’000
–
–
Total
£’000
119
127
<30
days
£’000
58
86
30–60
Days
£’000
31
41
60–90
days
£’000
23
–
90–120
days
£’000
7
–
>120
days
£’000
–
–
The fair value of amounts owing from Group companies to the Company has been impaired to the extent the
subsidiary (ie Itaconix (U.K) Limited) is, at the balance sheet date, both illiquid and not yet generating positive
cash flows, or otherwise unlikely to repay such indebtedness. The group provides against trade receivables
where there are significant doubts as to future recoverability based on prior experience, on assessment of the
current economic climate and on the length of time that the receivable has been overdue.
Non-current assets
Group
Company
Amounts owed by Group companies
2018
£’000
–
–
2017
£’000
–
–
2018
£’000
2,582
2,582
2017
£’000
4,820
4,820
P a g e | 53
NOTES TO FINANCIAL STATEMENTS
For the year ended 31 December 2018
18.
Cash and cash equivalents
YEAR IN REVIEW
GOVERNANCE
FINANCIAL STATEMENTS
Cash and cash equivalents comprise cash held by the Group and short-term bank deposits with a maturity of
less than three months. The carrying amount of these assets approximates their fair value.
Analysis of cash and cash equivalents disclosed in the cash flow statement:
Group
2018
£’000
2017
£’000
Cash at bank and in hand
2,083
3,606
Credit, liquidity and market risk
Company
2018
£’000
1,721
2017
£’000
2,638
The Group’s principal financial assets are bank balances. The credit risk on these assets is limited because the
counterparties are banks with high credit ratings assigned by international credit rating agencies. The
Directors have carefully reviewed the carrying value of the Group’s financial assets and consider that at the
date of this report no impairment in those values is anticipated.
19.
Trade and other payables
Current liabilities
Trade payables and other payables
Amounts due to associate
Other payables and accruals
Group
2018
£’000
126
–
586
712
2017
£’000
162
9
815
986
Company
2018
£’000
2017
£’000
29
–
42
71
16
–
48
64
The Directors consider that the carrying amount of trade and other payables approximate to their fair value.
20.
Contingent Consideration
As at 1 January
Restructuring of contingent consideration
Movement in fair value and discounting unwind
Movement in foreign exchange
As at 31 December
Current
Non-current
Contingent consideration
Group
2018
£’000
607
2,227
(38)
256
3,052
–
3,052
2017
£’000
3,414
–
(2,511)
(296)
607
–
607
Company
2018
£’000
607
2,227
(38)
256
3,052
–
3,052
2017
£’000
3,414
_
(2,511)
(296)
607
–
607
P a g e | 54
NOTES TO FINANCIAL STATEMENTS
For the year ended 31 December 2018
YEAR IN REVIEW
GOVERNANCE
FINANCIAL STATEMENTS
As part of the purchase agreement with the previous owners of Itaconix Corporation, a contingent
consideration was agreed with certain of the sellers (the “Sellers”). This would be payable to the Sellers,
subject to the achievement of revenue targets for products based on the technology acquired for the calendar
years 2017 to 2020, based on 50% of incremental annual net sales value above $3m in 2017 and in excess of
the prior year for 2018 to 2020 inclusive (and no less than $3m). The deferred performance related
consideration is capped at $6m in aggregate. Such deferred performance consideration, if any, would be
satisfied annually entirely in new ordinary shares of Itaconix plc at the then prevailing price.
During 2018 in conjunction with the fund raise, a restructuring of the contingent consideration was executed.
The contingent consideration was restructured into two components:
• A one time issue of 15 million new Itaconix plc shares to the Sellers
•
The continuation of the previous contingent consideration mechanism (i.e. up to $6m in shares), but with
the window of time for potential achievement expanded to the end of 2023 (from the end of 2020) and
including all the revenues of the Group (which are primarily from products based on the acquired
technology in any event)
It should also be noted that the second component summarised above is intended to serve as an incentive
programme for the two members of management (John Shaw and Yvon Durant) who are also Sellers and are
entitled to 63% of the total contingent consideration (in both the existing and proposed construct).
Accordingly, they will not be eligible for any cash bonus or other share incentive programme for the years 2018
to 2020 inclusive. Simultaneously the merger agreement with the former shareholders of Itaconix Corporation
and related agreements will be amended to remove various restrictive clauses, including minimum funding
requirements and employment terms.
Based on the share price at the execution of the restructuring agreement, the 15m shares had a value of
£0.3m which was expensed immediately. The value of the adjusted contingent component using the latest
Board approved forecasts and assumptions as above is $3.9m or around £3.1m.
In respect of 2018, the deferred consideration was valued using a discounted cash flow-based assessment of
the expected sales of the relevant products extracted from the latest Board approved forecasts, consistent
with the approach in prior years. A discount rate of 11.2% was used. The valuation includes elements which
are unobservable and which have a significant impact on the fair value. Accordingly, contingent consideration
is classified as Level 3 fair value measurement.
As a result of the change forecasts, earn out period and discount rate from the original value assessments, the
contingent consideration at 31 December 2018 was revalued to £3,052k. Sensitivity analysis was also
performed, summarised as follows:
•
If the sales in the period 2019 to 2022 were reduced by $1m, the fair value would be reduced by
approximately $390k or around £304k
• A 1% increase in the discount rate would reduce the fair value by $190k or around £145k
Since the forecasts used were a conservative base case, the computed fair value was deemed appropriate.
P a g e | 55
NOTES TO FINANCIAL STATEMENTS
For the year ended 31 December 2018
Financial instruments
21.
Financial risk management objectives and policies
YEAR IN REVIEW
GOVERNANCE
FINANCIAL STATEMENTS
Itaconix principal financial liabilities comprise trade and other payables and borrowings. The primary
purpose of these financial liabilities is to finance the operation. Itaconix has trade and other receivables and
cash that derive directly from its operations.
The Company has limited financial liabilities as its primary purpose is to hold investments in other group
companies. The Company’s receivables largely relate to funding the operations of Itaconix.
Financial assets
Cash
Trade and other receivables
Intercompany receivable
Financial liabilities
Trade and other payables
Contingent Consideration
Group
2018
£’000
Company
2018
£’000
Group
2017
£’000
Company
2017
£’000
2,083
711
-
712
3052
3,606
706
2,582
986
607
1,721
567
-
71
3,052
2,638
283
4,820
64
607
(970)
5,301
(835)
7,070
The Directors consider that the carrying amount for all financial assets and liabilities approximates to their
fair value.
Financial risk management
The group is exposed to market risk, which includes interest rate risk and currency risk, credit risk and
liquidity risk. The senior management oversees the management of these risks and ensures that the
financial risk taken is governed by appropriate policies and procedures and that financial risks are
identified, measured and managed in accordance with Itaconix’s policies and risk appetite.
Liquidity risk
Itaconix seeks to manage financial risk by ensuring adequate liquidity is available to meet foreseeable
needs and to invest cash assets safely and profitably. Short-term flexibility is achieved by holding
significant cash balances in Itaconix’s main operational currencies, notably UK Sterling, US Dollar.
Credit risk
The principal credit risk for Itaconix arises from its trade receivables. In order to manage credit risk, new
customers undergo credit review and customer accounts are regularly reviewed for debt ageing and
collection history. As at 31 December 2018, there were no credit risk balances.
Credit risk from cash balances with banks and financial institutions is managed in accordance with group
policy. Credit risk with respect to cash is managed by carefully selecting the institutions with which cash is
deposited
The financial assets of the group comprise cash at banks, trade receivables and other receivables. Having
reviewed the recoverability of Itaconix’s financial assets since the reporting date, as well as the likelihood
of future losses over the next 12 months and the lifetime of the assets, the Board does not consider it
necessary to recognise any credit losses.
P a g e | 56
NOTES TO FINANCIAL STATEMENTS
For the year ended 31 December 2018
Foreign exchange risk
YEAR IN REVIEW
GOVERNANCE
FINANCIAL STATEMENTS
Itaconix has operations in both the UK and trades with customers internationally. Revenue and costs are
exposed to variations in exchange rates and therefore reported losses. There is some natural hedging of
transactional foreign exchange risk, however Itaconix remains subject to translation exchange risk.
Interest rate risk
The Group finances its operations principally from equity funding and has no debt. Therefore the downside
risk associated with changes in interest rates is minimal. No sensitivity analysis has been presented for
changes in interest rates as these do not have a material impact on the loss before tax.
Currency risk
During the year, the Group received revenue in GBP, EURO and USD, whilst the majority of its cost base is in
GBP. These receipts are currently relatively small and tend to be used first to cover costs in the same
currency before conversion to GBP, and so currency risk impacting cash balances is deemed to be
appropriately managed. However, the acquisition of US-based Itaconix Corporation in the middle of the
previous year means that this risk profile has changed and will be continued to be kept under close review
accordingly. Specifically, a loan from Itaconix plc to Itaconix Corporation to fund the US operations is
denominated in USD and so is re-translated to GBP each period end, potentially resulting in significant
debits or credits to the Company’s profit and loss but with no cash or other impact on the Group as the
loan is eliminated on consolidation. Further, the deferred consideration payable to the former shareholders
of Itaconix Corporation is denominated in USD and, as well as being revalued based on likelihood of
payment, is retranslated to GBP each period end, potentially resulting in significant non cash debits or
credits to the Company and Group’s profit and loss. Management notes that such foreign exchange
movements are non cash items. No forward foreign exchange contracts were entered into during the
period (2017: Nil). At 31 December 2018 the bank balances on hand of foreign currencies were:
Currency
USD
CAD
EUR
2018
258,378
66,017
50,891
2017
180,717
80,776
1,102
The foreign currency balances are in aggregate higher than at the end of 2017, which is due to the US-
based Itaconix Corporation being the main operating entity. No sensitivity analysis has been presented for
changes in currency exchange rates, although management will keep the need for sensitivity analysis under
regular review going forward.
Liquidity risk
The Group seeks to manage financial risk, to ensure sufficient liquidity is available to meet foreseeable
needs and to invest cash assets safely and profitably. The Group’s policy through the period has been to
ensure continuity of funding by equity. The table below summarises the maturity profile of the Group’s
financial liabilities at the year-end based on contractual undiscounted payments.
At 31 December 2018:
Group
Trade and other payables
Provisions
Finance lease obligations
On
demand
Less than
3 months
3 to 12
months
£’000
–
–
–
–
£’000
126
–
–
126
£’000
–
–
–
-
1 to 5
years
£’000
–
3,052
–
3,052
> 5 years
£’000
–
–
–
–
Total
£’000
126
3,052
–
3,178
P a g e | 57
NOTES TO FINANCIAL STATEMENTS
For the year ended 31 December 2018
YEAR IN REVIEW
GOVERNANCE
FINANCIAL STATEMENTS
At 31 December 2017:
Group
Trade and other payables
Provisions
Finance lease obligations
On
demand
£’000
–
–
–
Less than
3 months
£’000
560
–
–
3 to 12
months
£’000
426
–
–
1 to 5
years
£’000
–
607
–
> 5 years
£’000
–
–
–
–
560
426
607
–
Total
£’000
986
607
–
1,593
All of the trade and other payables balances (£71k) of the Company are due for payment in less than three
months (2017: £64k less than three months)
The range of interest rates applicable to instant access deposit accounts and term deposits at 31 December
2018 was 0.25% to 1.00% per annum (2017: 0.25% to 1.00%).
Capital risk management
The Group manages its capital to ensure that it will be able to continue as a going concern while also
maximizing the operational potential of the business. The capital structure of Itaconix consists of cash and
cash equivalents and equity attributable to equity holders of the Company, comprising issued capital and
reserves as disclosed in the consolidated statement of changes in equity. Itaconix is not exposed to
externally imposed capital requirements.
Committed facilities
The Group has no floating rate committed borrowing facilities as at 31 December 2018 (2017: nil).
There are no material differences between the fair value of financial instruments and the amount at which
they are stated in the financial statements. This is due to the fact that they are of short maturity and if
payable on demand the fair value is not materially different from the carrying value.
Commitments
22.
Operating lease arrangements
The Group leases certain assets on an operating lease basis. At the balance sheet date, the Group and
Company had outstanding commitments for future minimum lease payments under non-cancellable
operating leases, which fall due as follows:
Within one year
In two to five years
Over five years
Total future minimum lease payments
Group
Company
2018
£’000
264
127
–
391
2017
£’000
334
378
–
712
2018
£’000
–
–
–
–
2017
£’000
–
–
–
–
P a g e | 58
NOTES TO FINANCIAL STATEMENTS
For the year ended 31 December 2018
23.
Share capital
At 1 January 2017 (78,657,948 shares in issue)
Issued as a result of an exercise of options
17/01/17-60,000
New share issued
Nil
At 31 December 2017 (78,717,948 shares in issue)
Issued as a result of an exercise of options
02/08/2018-577,530
New share issued
03/08/2018-15,000,000
03/08/2018-174,834,593
At 31 December 2018 (269,130,071 shares in issue)
YEAR IN REVIEW
GOVERNANCE
FINANCIAL STATEMENTS
Group
£’000
Company
£’000
787
–
–
787
–
150
1,749
2,686
787
–
–
787
–
150
1,749
2,686
Itaconix plc (previously Revolymer plc) was incorporated on 10 April 2012.
On the 3 August 2018 the Company issued 15,000,000 ordinary shares with a nominal value of 1p per share
for 2p per share as part of the restructuring of the contingent consideration for the acquisition of Itaconix
Corp (see Note 20).
On the 3 August 2018, the Company issued 174,834,593 ordinary shares with a nominal value of 1p per
share for 2p per share. The consideration was received in cash
24.
Notes to the statements of cash flow
Group
Company
Loss before tax
Depreciation of property, plant and equipment
Amortisation and impairment
Disposal of equipment
Impairment of group indebtedness
Revaluation of deferred consideration
(Gain) / loss on foreign exchange
Share based payments charge
Share of (profit) / loss from associate
Taxation
Operating cash flows before movements in working
capital
(Increase) / decrease in inventories
(Increase) / decrease in receivables
(Decrease) / increase in payables
Net cash (outflow)/inflow from continuing operating
2018
£’000
(7,396)
222
–
(16)
–
2,489
(142)
228
(90)
140
(4,565)
(32)
(5)
(248)
2017
£’000
(11,868)
259
9,259
–
–
(2,511)
(83)
184
214
465
(4,081)
(61)
18
(535)
activities
(4,850)
(4,659)
2018
£’000
(8,921)
–
–
–
6,435
2,489
257
-
–
–
260
–
227
8
519
2017
£’000
(3,130)
–
–
–
4,964
(2,511)
574
-
–
–
103
–
(205)
17
(85)
P a g e | 59
NOTES TO FINANCIAL STATEMENTS
For the year ended 31 December 2018
25.
Share based payments
YEAR IN REVIEW
GOVERNANCE
FINANCIAL STATEMENTS
An expense is recognised for share based payments based on the fair value of the awards at the date of grant,
the estimated number of shares that will vest and the vesting period of each award. The charge for share
based payments for the period to 31 December 2018 is £228k (2017: £184k) as disclosed in note 8.
During the year to 31 December 2018 no share options (2017: 4,512,460) were granted under the Itaconix LTIP
scheme as either approved options (under the HMRC approved EMI scheme) or unapproved options. The
management team received nil cost share options (either HMRC approved or unapproved) with market facing
performance conditions required for vesting (“Management Options”). The fair value of Management Options
as at the date of grant was therefore estimated using a Monte Carlo simulation model. The remaining
employees did not receive share options under the EMI scheme (and with an exercise price of the market price
as at the date of grant (2017: £0.24)) (“Employee Options”). Accordingly the fair value of the Employee
Options was estimated as at the date of grant using a Black Scholes model. Both models took into account the
terms and conditions upon which the options were granted using the following assumptions.
Grant date
2017 Option Grant
Number of options granted
Exercise price
Expected volatility
Risk free rate
Expected dividend yield
Expected option life
Unapproved
Management
Options
EMI
Management
Options
2,096,282
£nil
33.1%
0.4%
0%
36 months
1,582,127
£nil
33.1%
0.4%
0%
36 months
EMI
Employee
Options
834,051
£0.235
33.1%
0.4%
0%
36 months
The Employee Options have a vesting period of 36 months (2017: 36 months) with no performance criteria.
The vesting period of the Management Options is also 36 months (2017: 36 months) but they only become
exercisable if challenging market facing performance conditions are met; namely that 50% of the grant
becomes exercisable if the weighted average ordinary share price in the 180 day period ending on 31 May
2020 of grant is £0.40. Between weighted average ordinary share prices of £0.40 and £0.55, vesting shall be
pro-rata and on a straight line basis between 50% and 100%. Below £0.40 the grants are not exercisable and
lapse in full.
The valuation methodology used in valuing share based payments includes the key assumptions shown above.
Management have revisited and amended the assumptions in respect of expected volatility and risk free rate
in the year to 31 December 2018 The charge for share based payments for the period to 31 December 2018 is
accordingly £228k (31 December 2017 £184k).
Employee share option plan – unvested options
During the year the Company operated an employee share option plan (“the EMI plan”) for the benefit of
certain employees of the Company.
All options granted in the year are subject to the employee completing a specified period of service. All
options lapse when the employee ceases to be employed by the Company.
The following table illustrates the number and weighted average exercise prices (WAEP) of, and movements
in, unvested share options outstanding under the “EMI plan” during the year:
P a g e | 60
NOTES TO FINANCIAL STATEMENTS
For the year ended 31 December 2018
YEAR IN REVIEW
GOVERNANCE
FINANCIAL STATEMENTS
Unvested
Balance at beginning of year
Awarded during year
Lapsed during the year
Unvested options at end of year
2018
Number
of shares WAEP
£0.14
3,741,837
£nil
–
£0.36
(1,849,441)
2017
Number
of shares
2,947,888
2,416,178
(1,622,229)
1,892,396
£0.04
3,741,837
WAEP
£0.24
£0.08
£0.23
£0.14
Unapproved share option plan – unvested options
During the year, the Company operated a share option plan for the benefit of employees who had received
grants under the EMI plan up to their personal limits.
The following table illustrates the number and weighted average exercise prices (WAEP) of, and movements
in, unvested share options outstanding under the Unapproved plan during the year:
Unvested
Balance at beginning of year
Awarded during year
Unvested options at end of year
2018
Number of
2017
Number of
shares WAEP
shares WAEP
6,158,491
–
6,158,491
£nil
£nil
£nil
4,062,209
2,096,282
6,158,491
£nil
£nil
£nil
Summary of all options – vested and unvested
The following table summarises the position regarding all share options whether vested or not, including
those that vested at Admission in 2012:
Vested and unvested
Balance at beginning of year
Awarded during the year
Lapsed during the year
Exercised during the year
Balance at end of year
2018
Number
of shares WAEP
2017
Number
of shares WAEP
9,877,077 £0.08
£nil
–
£nil
(2,070,333)
(891,067) £0.01
6,915,677 £0.08
8,387,620 £0.12
4,512,460 £0.04
(2,889,503) £0.14
(133,500) £0.12
9,877,077 £0.08
P a g e | 61
NOTES TO FINANCIAL STATEMENTS
For the year ended 31 December 2018
26.
Related party transactions
Transactions with key management personnel
Remuneration of key management personnel
YEAR IN REVIEW
GOVERNANCE
FINANCIAL STATEMENTS
The remuneration of the Directors, who are considered to be the key management personnel of the
Company, is set out below in aggregate for each of the categories specified in IAS 24 ‘Related Party
Disclosures’.
Salaries and other short-term employee benefits
Post-employment benefits
Directors’ fees invoiced by third parties
Equity settled share based payment expense
Other related party transactions
2018
£’000
1,137
27
15
129
1,308
2017
£’000
690
42
15
75
822
The Group entered into the following related party transactions during the current and prior year:
IP2IPO invoiced the Group for the services of Mr Townend who has served on the Board of Itaconix plc.
In 2018 the Group invoiced Alkalon for the travel expenses of the mutual board member Robin Cridland for
attending the Alkalon board meetings in the year. In 2017 the Group invoiced Alkalon for the services of its
employee Jonathan Swanston, who assisted in the transfer of the nicotine business to Alkalon. The Group
also acted as an agent for Alkalon in its conduct of the nicotine gum business following completion of the
divestment, pending the novation and assignment of key nicotine gum contracts in favour of Alkalon. Alkalon
is an associate company of the Group.
2018
IP2IPO Services Limited
Alkalon A/S
2017
IP2IPO Services Limited
Alkalon A/S
Receipts
from related
parties
£’000
–
3
Receipts
from related
parties
£’000
–
3
Payments
to related
parties
£’000
15
–
Payments
to related
parties
£’000
15
–
Amounts due
to related
parties
£’000
4
–
Amounts due
from related
parties
£’000
–
27
Amounts due
to related
parties
£’000
4
–
Amounts due
from related
parties
£’000
–
45
All related party transactions were made on terms equivalent to those that prevail in arm’s length
transactions. There have been no write-offs of related party balances during the year and there are no
provisions against any related party balances. The terms and conditions of related party transactions are the
same as those for other debtors and creditors.
27.
Contingent assets
There were no contingent assets in 2018
P a g e | 62
NOTES TO FINANCIAL STATEMENTS
For the year ended 31 December 2018
28.
Contingent liabilities
YEAR IN REVIEW
GOVERNANCE
FINANCIAL STATEMENTS
During 2017, jointly and severally with all the other shareholders, the Group provided a guarantee to
Alkalon’s contract manufacturer (CMO) up to a maximum EUR200k (around GBP175k), callable should
Alkalon not meet its payment obligations to the CMO. Management did not expect the guarantee to be
called to any extent, it expired on 15 February 2018 and indeed it had not been called to any extent at
expiry. Accordingly no liability has been recorded at 31 December 2018.
During 2018, jointly and severally with all the other shareholders, the Group has provided further guarantees
to Alkalon’s CMO up to a maximum EUR800k (around GBP700k), callable should Alkalon not meet its
payment obligations to the CMO and/or not meet minimum annual orders for product. These guarantees
reduce by EUR125k (around GBP110k) every year for 4 years, down to a maximum of EUR300k (around
GBP260k). Management does not expect these guarantees to be called, and none were up to and including
the completed its divestment in Alkalon. Accordingly, no liability has been recorded at 31 December 2018.
29.
Post Balance Sheet Events
Effective 24 May 2019, Michael Townend stepped down as a Non-Executive Director on the Board of Itaconix.
During May 2019, the Group completed its divestment in the nicotine gum business when the Group sold its
holdings (22.49%) in its associate, Alkalon to the associate’s existing shareholders. The total cash consideration
was c. DKK 2.0 million equivalent to c. £242,000. The proceeds consisted of c. £194,000 for the Company's
minority equity interest in Alkalon and c. £48,000 for the full principal and accrued interest of a shareholder
loan. The full cash proceeds were received 5 June 2019. Furthermore, the acquirer indemnified the group
against any claim for the Alkalon guarantees detailed in Note 28.
P a g e | 63
APPENDIX TO THE ANNUAL REPORT
YEAR IN REVIEW
GOVERNANCE
FINANCIAL STATEMENTS
Corporate Information
Advisors
Auditors
BDO, LLP
55 Barker Street
London
W1U 7EU
Solicitors
Fieldfisher LLP
Riverbank House
2 Swan Lane
London EC4R 3TT
NOMAD/Broker
N+1 Singer
One Bartholomew Lane
London
EC2N 2AX
Patent Agent
Grossman, Tucker, Perreault & Pfleger, LLP
55 South Commercial Street
Suite B14
Manchester, NH, USA
03101
Registered Office
Fieldfisher LLP
Riverbank House
2 Swan Lane
London EC4R 3TT
BPE Solicitors LLP
St James’ House
St James’ Square
Cheltenham
Gloucestershire GL50 3PR
Registrar
Link Asset Services
The Registry
34 Beckenham Road
Beckenham
Kent BR3 4TU
Bankers
HSBC plc
Vista
St David’s Park
Ewloe
US Operations
2 Marin Way
Unit 1
Stratham, NH, USA
03885
P a g e | 64