Kromek Group plc Annual Report 2014

Plain-text annual report

Kromek Group plc Annual report and accounts 2014 Kromek is a leading provider of patented radiation technologies to the medical imaging, nuclear detection and security screening markets. Our vision To be the world-leading provider of multispectral radiation detection products and technologies enabling our customers and users to take more timely decisions based on superior information. We operate in three large, growing global markets: Overview IFC Overview 1 Highlights of our year 2 At a glance 4 Chairman’s statement 6 Chief Executive’s Q&A Strategic report 8 Business review 10 Our key strengths 11 Our business model 12 Our strategy 14 Our technology 16 Our markets Corporate governance 20 Board of Directors 22 Review of principal risks 24 Corporate governance report 26 Directors’ report 28 Directors’ remuneration report Financial statements 30 Independent auditor’s report 32 Consolidated income statement 32 Consolidated statement of comprehensive income 33 Consolidated statement of ﬁnancial position 34 Consolidated statement of changes in equity 35 Consolidated statement of cash ﬂows 36 Notes to the consolidated ﬁnancial statements 61 Company statement of ﬁnancial position 62 Company statement of changes in equity 63 Company statement of cash ﬂows 64 Notes to the Company ﬁnancial statements 68 Ofﬁcers and professional advisors Medical imaging Improved and earlier diagnoses, better patient outcomes and lowering overall cost of healthcare. Nuclear detection More accurate information leads to better safeguarding of people and increases in operational efﬁciency. Security screening More detailed, reliable and efﬁcient detection of threats whilst maintaining operational efﬁciencies of airports. Read more in the business model on page 11 Read more in the at a glance on page 2 Kromek Group plc Annual report and accounts 2014 1 Highlights of our year (cid:180) Year on year revenue growth of 122% (cid:180) Product-based revenue increased from £1.8m to £4.7m (cid:180) Strong cash position of £6.6m (cid:180) Successful IPO providing access to wider shareholder base and platform for future growth (cid:180) Completed successful operational integration of eV Products, Inc., our second US acquisition (cid:180) Further improvements in CZT material and detector manufacturing processes (cid:180) 28 new patents were ﬁled or awarded (cid:180) Investment in expanded sales and marketing capability (cid:180) Multiple new and signiﬁcant contract wins in the medical imaging market: for CT, including a development contract with a top four OEM; in BMD; and also an agreement for the supply of imaging modules in China (cid:180) A number of important contracts from both commercial and government customers won in the nuclear detection market (cid:180) The start of phase one of the implementation of the EU regulatory framework on 31 January 2014, which is the key to sales of the bottle scanner product in Europe 2014 revenue (£m) £6.0 +122% 2013 revenue (£m) £2.7 2014 adjusted EBITDA (£m) £(2.5) +22% 2013 adjusted EBITDA (£m) £(3.2) 2014 cash (£m) £6.6 2014 debt (£m) £0.0 2013 cash (£m) £0.3 2013 debt (£m) £2.5 Visit us online (cid:180) www.kromek.com O v e r v i e w S t r a t e g c i r e p o r t C o r p o r a t e g o v e r n a n c e i F n a n c i a l s t a t e m e n t s 2 Kromek Group plc Annual report and accounts 2014 Overview At a glance Kromek designs, develops and produces x-ray and gamma-ray imaging and radiation detection products. (cid:180) Global customer base (cid:180) Meeting needs of customers through providing both end user products (“EUPs”) and original equipment manufacturer (“OEM”) components The Group’s business model provides a vertically integrated technology offering to customers. From the growth of cadmium zinc telluride (“CZT”) crystals to ﬁnished products or detectors, including software, electronics and application speciﬁc integrated circuits (“ASICs”). Channel Existing products and strong customer base Production World-leading CZT delivery capability Experience Experienced management team with 250 combined years’ experience Demand Large market with unmet needs For a more in-depth look at our business model, turn to page 11 Read more about our markets on page 16 Integration Vertically integrated technology offering Employees 100+ Patents 240+ Kromek Group plc Annual report and accounts 2014 3 O v e r v i e w S t r a t e g c i r e p o r t C o r p o r a t e g o v e r n a n c e i F n a n c i a l s t a t e m e n t s We constantly evaluate new opportunities for our existing and complementary technologies. Where we operate Kromek’s major operational facilities are in California, Pennsylvania and Durham. In addition to our sales ofﬁce in Germany, we have established sales and distribution relationships covering Europe, North America and Asia Paciﬁc. Corporate facilities and sales Sales and distribution partners 3 4 2 1 North America Europe and Africa Asia Paciﬁc 1 2 3 4 NOVA R&D, Inc. California eV Products, Inc. Pennsylvania Group headquarters, UK Durham Kromek Germany Limited Düsseldorf 4 Kromek Group plc Annual report and accounts 2014 Overview Chairman’s statement The Group has seen revenue growth across all three trading entities. (cid:3)(cid:180) Richard Morgan, Chairman Introduction 2013–14 was a very challenging year for Kromek but one in which important transformational changes were achieved. In addition to the successful rationalisation and integration of eV Products, which approximately doubled the number of employees in the Company, important achievements were made in the marketplace. The progress in the contractual partnership with one of the leading CT system manufacturers was an important step forward for the Company in the medical diagnostic imaging market, which is dominated by just four major companies. The foundations of this and other advances were laid while the Company was preparing for and successfully completing its initial public offering (“IPO”) and admission to AIM. Unfortunately, it became clear to the Board that some of the contracts that had been expected (most of which have subsequently been conﬁrmed) were not going to be booked and shipped in time for the revenue to be recognised in the ﬁscal year to the end of April. This included a promising alliance with an emerging Chinese company to develop novel components for the medical imaging market in China. As a result, the Board realised that the revenue was going to fall short of the budget prepared last summer and this was the subject of a public announcement on 28 March. While we have met the subsequently lowered sales forecast, which shows a signiﬁcant growth from the previous year, we are disappointed with the shortfall and have taken steps to ensure that our forecasting is much improved in the future. The Board continues to spend a lot of time reviewing in considerable detail both the strategic framework of the business and the operational procedures that feed into the ﬁnancial planning and budgeting system. I am pleased to report that the changes that were made to the Board at the time of the IPO and subsequently have strengthened it considerably and we are united in our commitment to improve all aspects of our business going forward. Completing the IPO and raising the amount of funding aimed for was a critical step for Kromek. The Company managed to achieve a lot of progress in the years leading up to the IPO with barely adequate ﬁnancial resources. This culminated in the acute ﬁnancial challenges we faced in completing the acquisition of eV Products, which we regarded as a vital strategic step in many different dimensions. That belief has been more than justiﬁed by subsequent events, and the funding raised in the public offering has allowed the Company for the ﬁrst time to focus on a number of fundamental aspects of the business and improve our operational and strategic capability. Good progress has been made in most of our target markets and the Company has started to build on the headway achieved in all three major sectors, with the addition of key sales and marketing personnel. While the security market (bottle scanners for the analysis of liquids, aerosols and gels or “LAGs”) has continued to prove challenging, we have conﬁdence in the performance capabilities of the Kromek product, which has been further reﬁned in the last two years. We have made progress in penetrating this market, which only started to become active in the second half of last year. Despite having seen some disappointments in Japan for our nuclear products, we have managed to build on the underlying product platform and have won some important new contracts from the US Government and other customers. Alongside the progress we have made in medical imaging, we feel conﬁdent that the basic metrics underpinning the business are moving in the right direction. Kromek Group plc Annual report and accounts 2014 5 “A transformational year.” O v e r v i e w S t r a t e g c i r e p o r t C o r p o r a t e g o v e r n a n c e i F n a n c i a l s t a t e m e n t s Financial results The results for 2013–14 show an increase in revenue to £6.0m (2012–13: £2.7m), with the Group returning an adjusted loss before tax of £4.3m (2012–13: loss of £4.1m). This represents strong revenue growth across the business, up £3.3m on the prior year, with second half revenues of £3.7m, ahead of those in the ﬁrst half by over 60%. This increase was driven by both product sales and revenues from government contracts, as well as commercial technology development agreements. The result for the year is stated after internal research and development costs of £2.0m (2012–13: £0.5m), which have been expensed through the income statement. These costs relate to investment in core technology, platform development and driving manufacturing efﬁciency to provide a strong and enhanced base for future proﬁtability. The Group reported a basic and diluted loss per share of 5p (2012–13: loss of 8p per share) and an adjusted loss per share of 5p (2012–13: loss of 40p per share). At the balance sheet date, Group cash stood at £6.6m (2012–13: £0.3m). Employees and partners I would like to take this opportunity to thank all of our stakeholders – customers, suppliers, employees and shareholders – whose continued efforts and support have been key to our success. I would also like to extend my thanks to Charlotta Ginman for taking over the audit committee chair in March of this year and to Jerel Whittingham for chairing the remuneration committee. Outlook Kromek’s area of expertise, radiation detection and imaging, represents one of the most basic and important techniques used globally for gaining better information about objects and the environment. Its importance can be seen on a daily basis in hospitals and airports throughout the world, as well as in its importance to those, both civil and military, serving to keep us safe from threats of various sorts. Our ﬁnancial position is robust with no debt and a strong cash position. With a strong order book and such a rich opportunity set given the Group’s key proprietary technologies, international scope and integrated business model, the Board believes the Group is well positioned for continued growth and looks forward to the future with conﬁdence. Richard Morgan Chairman 27 August 2014 6 Kromek Group plc Annual report and accounts 2014 Overview Chief Executive’s Q&A (cid:3)(cid:180) Dr Arnab Basu MBE, Chief Executive Ofﬁcer How would you describe the last year for the Group? Busy is the ﬁrst word that comes to mind! The business has moved from a technology development phase into a period where we are now focused on growth that years of investment in our technology have enabled. This has required us to be successful on several fronts: making good progress on customer-funded product development projects; completing the very successful operational integration of eV Products; attracting some important senior hires; and, of course, the IPO and admission to the AIM market. What has the IPO achieved? Joining the AIM market gave us capital, liquidity and credibility; all of these will help us grow. As well as accessing the capital needed for our expansion and scaling-up of activities, meeting the stringent requirements needed to successfully complete admission to a regulated market gives customers a higher level of trust and conﬁdence in us as potential partners. We have also beneﬁted from the greater proﬁle. Additionally, if any attractive merger and acquisition (“M&A”) opportunities present themselves, such as the eV Products and NOVA acquisitions, then our listing can only help. What do you see as Kromek’s key competitive advantages? Of course the market is competitive but we choose opportunities that best utilise our differentiators. We have deep experience, know-how and patent-protected manufacturing techniques, which allow us to produce world-leading CZT-based radiation detectors, as well as the electronics and software which analyse the improved information they capture. With our vertical integration we can put solutions together using our range of capabilities in different ways, like “Lego bricks”. This allows us to meet the new, emerging needs of our customers quickly and can deliver components and products that meet their challenges. Collectively I believe these give us a signiﬁcant competitive advantage in our target markets. Is the market adopting your products and technologies at the rate you expected? We are pleased to have seen strong growth and traction this year, but at the same time, have had delays that impacted our revenues for the year, which we notiﬁed to the market in March. We were obviously disappointed that some contracts were delayed and we weren’t able to recognise the revenues in the period where they were expected within the ﬁscal year. There is, however, a strong match between our speciﬁc capabilities and urgent customer needs in our target sectors of medical imaging, nuclear detection and security screening. Accurate, quarter by quarter proﬁling can be a challenge when dealing with very large organisations and government departments. We are proud to be selected by such large-scale organisations as there is no better validation of our technology, but what goes with that is working to their schedules. This is a lesson that we have had to learn. The pipeline and our ability to capitalise on it is as strong as ever and the focus for 2014–15 is to build on that. Why do your customers choose you? What beneﬁts does Kromek bring? Well, that can be answered in several ways, from our technology and performance differentiators to our offering of ready-to-use solutions. Ultimately, however, in all our application markets, the pressing need is for more useful and better quality information to make improved assessments of risks, whether that be of cancer, radiation contamination or a bomb. This allows either more rapid and effective interventions or, equally important, more conﬁdent reassurance that all is well. It is this basic need for deeper insight that Kromek’s imaging and detection products are repeatedly demonstrating that they can satisfy, evidenced both by new customer sales and by daily use of our products in airports and scores of hospitals. Kromek Group plc Annual report and accounts 2014 7 O v e r v i e w S t r a t e g c i r e p o r t C o r p o r a t e g o v e r n a n c e i F n a n c i a l s t a t e m e n t s “ Technology leadership forms the basis of our ability to deliver superior value to our customers. It comes from focused investment and a deep understanding of how to produce, manipulate and engineer CZT into cost-effective products for use in multiple applications.” Is your business model scalable? Our development of future products and our manufacturing capacity are scalable and our approach was designed this way. We can share base technologies to a broad degree across sectors. This also reduces development cost and risk for us and our partners. Our manufacturing can also be stepped up incrementally in line with demand. As a result, we will never have to make massive capital-intensive generational “bets” as is typical in the microprocessor world. Of course, careful investment choices will still be required at various stages of our growth. Do you have the right team in place? We are always alert to attracting and retaining the right talent to help take us further, for example, we focused especially on our sales and marketing team this year. Our acquisition of eV Products brought in a lot of additional talent too. We have more than 100 employees across the globe and 19 PhDs amongst them. We have a very accomplished and industry-experienced technology and product development team. Why are you in your chosen markets? How were they selected? Key factors are opportunity size and potential for growth and the match of the customer needs with our technology strengths. Additionally, we seek synergy overlaps in the base technologies required to address the selected segments. With competition and so many applications and needs for radiation detection, we cannot try to meet every possibility in every ﬁeld. We have to be disciplined and focused. Does any one of your core markets excite you more than the others? They excite me equally but in different ways. Medical is our biggest opportunity medium term in that, in the last year, we have made the biggest advances since the Company was founded. The development deal in CT with one of the top four OEMs is strategically important and potentially very rewarding. Shorter term, the aviation security LAGs market is expanding, effectively playing catch-up after a period of regulatory delay. That, at least, gave us an opportunity to even further strengthen our product. Over the next few years, signiﬁcant opportunities are still to come in Europe and the rest of the world. Our unique ability to become fully integrated into OEM partners’ checkpoint scanners, once the current transitional phase of standalone equipment is over, is also exciting. Finally, we are seeing some further opportunities in nuclear detection, which is already a large market and has developed a lot in the previous 12 months alone. What are the challenges of being a young company competing in large and growing international markets? Optimal channels to market can be a stretch for a youthful company with global opportunities in large markets. We cannot afford to ignore the terriﬁc opportunities that OEM partnerships offer, albeit with ultimate market access and time dependent on them. Our revenues this year represent considerable growth but we are still a small company in large competitive markets. However, despite these and other challenges, the foundation stones have now been laid for the success of the Company and the real growth phase is ahead of us. Are there further target markets? In terms of applications markets, our technology platform has multiple areas where it could make a difference, but we are extremely focused on the three sectors that we have selected. In terms of geographic markets, Asia is a very large and attractive market and we are working hard to increase penetration. We have experienced some encouraging early traction, as evidenced by recent contract wins announced since the year end. What are you hoping to achieve in the next 12 months? With so many opportunities that could be addressed we will certainly need to stay very focused. The coming year is about growing revenues, strengthening our capabilities and ensuring Kromek is recognised as the radiation detection specialist of choice in our target sectors. We want to demonstrate the full potential of Kromek by securing further blue-chip contracts with world-leading companies and deliver on our existing commercial agreements. The combination of those can deliver signiﬁcant value back to our shareholders. 8 Kromek Group plc Annual report and accounts 2014 Strategic report Business review Strategic report (cid:3)(cid:180) with Dr Arnab Basu MBE, CEO, and Derek Bulmer, CFOCFO Revenue Gross margin (%) EBITDA Exceptional items Adjusted EBITDA Result before tax Adjusted result before tax Tax Result after tax Adjusted result after tax Net cash 2013–14 £’000 5,972 65% (2,483) — (2,483) (4,295) (4,295) 1,106 (3,189) (3,189) 6,563 2012–13 £’000 2,691 47% (773) 2,418 (3,191) (1,656) (4,074) 1,013 (643) (3,061) 309 Overview During the ﬁnancial year to 30 April 2014 the Group experienced a period of signiﬁcant change and took a number of steps towards becoming the leading provider of patented radiation technologies to the medical imaging, nuclear detection and security screening markets. The Company acquired eV Products, Inc. in the US in February 2013, and the ﬁnancial and operational integration of the business has been successfully completed. The Group now has greater technological and production capability and has secured a strong range of products for the medical market to supplement those which it had previously. The management of the Group and the team in the US have successfully integrated the eV Products business during the year and executed a challenging turnaround, resulting in year on year growth and EBITDA proﬁtability for this business in a very short timescale. The Group’s shares were also successfully admitted to trading on AIM during October 2013 following a successful IPO, which raised £13.4m net from new investors. This provides funding capital for the Group to drive its growth through the expansion of its product portfolio and technology platform; an increase and investment in its sales and marketing process and capacity; and the opportunity to undertake further capital expenditure in both the UK and US to facilitate continued efﬁciency and capacity improvements. The results for 2013–14 show revenue of £6.0m (2012–13: £2.7m) and an adjusted EBITDA loss of £2.5m (2012–13: loss of £3.2m). Adjusted loss before tax was £4.3m (2012–13: loss of £4.1m), with cash at the balance sheet date of £6.6m. The Group is now debt free. Revenue grew £3.3m on the prior year, an increase of over 122% (with like-for-like growth of over 40%, assuming a full year’s prior annual revenue of eV Products). The second half revenue of £3.7m represents growth on the ﬁrst half revenue to 31 October 2013 of 60%. Despite absorbing eV Products, which was previously loss making, the Group managed to return an adjusted loss before tax of £4.3m against a loss of £4.1m for the prior year. Sales Sales in the year were £6.0m (2012–13: £2.7m), representing growth across all of the trading entities of the Group, with the UK showing growth of 18% and the US growing nearly 228% year on year (47% on a like-for-like basis) despite the challenges set by contract delays and adoption rates during the period as noted in the trading update to the market in March 2014. Details of the sales growth can be seen in note 6 to the ﬁnancial statements. The growth in sales resulted from contract wins with the bottle scanner, with devices installed in over 25 airports across Europe and Australia. The Group also saw growth in a range of medical products sold to businesses in the US, as well as securing and commencing a number of US Government contracts. Growth in revenue is a fundamental driver for any business but especially so for one that seeks to commercialise its technology. The level of sales, despite being below original estimates, indicates accelerating traction and growing adoption of the products and technology offerings that the Group provides across our target markets. The Group has invested in expanding its sales and marketing team and has recruited both senior and ﬁeld sales personnel. Kromek Group plc Annual report and accounts 2014 9 O v e r v i e w S t r a t e g c i r e p o r t C o r p o r a t e g o v e r n a n c e i F n a n c i a l s t a t e m e n t s the result for the year was impacted by the level of depreciation and amortisation of intangible and tangible assets which rose to £1.3m (2012–13: £0.7m), largely due to the full impact of eV Products for the year. Further, the result was also subject to a higher interest charge of £0.5m (2012–13: £0.2m), which will not recur following the repayment of loans. The operating and overhead cost base of the business remained stable on a comparable basis, other than the impact of the recurring costs resulting from the admission to AIM, which were in line with expectations. Tax The Group beneﬁts from the UK Research and Development Tax Credit and recorded a credit of £0.7m for the year (2012–13: £0.8m). In addition, the Group saw a movement in the deferred tax provision of £0.4m, resulting in an overall tax credit to the income statement of £1.1m (2012–13: £1.0m). Earnings per share (“EPS”) EPS are recorded in the year on a basic and diluted basis of a loss of 5p per share (2012–13: loss of 8p per share) and an adjusted basic and diluted loss of 5p per share (2012–13: loss of 40p per share). Due to the Group having losses in each of the two years, the diluted EPS for disclosure purposes is the same as the basic EPS. Cash and debt Group cash stood at £6.6m following net receipts from the IPO of £13.4m and repayment of debt and accrued interest of £3.0m. The Group repaid all previously outstanding loans by 31 October 2013 and consequently removed the debenture held over the assets of the Group by Polymer Holdings. Capital expenditure Capital expenditure for the year amounted to £0.2m, of which £0.1m was supported by receipts of a grant from the Regional Growth Fund awarded during 2012–13. Employees Employee numbers are an important measure in the cost management of the business, representing expenditure in the year of £5.1m (2012–13: £3.4m). The average employee numbers for the year were 101 (2012–13: 75), though the actual number at the year end, excluding Non-Executive Directors, was 105 (2012–13: 101), indicating that staff numbers remained broadly in line on a pro-rata basis. During the year, Derek Bulmer (CFO), was appointed to the Board as an Executive Director and Lawrence Kinet, Peter Bains and Charlotta Ginman joined the Board as Non-Executive Directors. We would also like to extend our gratitude to all of our customers, suppliers and employees across the Group who have contributed to the growth and development of the business and we look forward to their valued input as we commercialise the technology during the next year. Recent announcements relating to government contracts, the sale of bottle scanners into Asia and a number of contracts for the sale of the Group’s range of nuclear products and technology solutions provide clear evidence of the Group’s developing sales and marketing operations. Gross margin The gross margin (before direct overheads and labour costs) on sales for the year of 65% (2012–13: 47%) was favourably affected by the full-year impact of the acquisition of eV Products, stronger levels of product sales plus higher levels of revenue from government contracts and commercial development agreements. The Group continually reviews and develops efﬁciency models and considers capital expenditure options to retain and improve the margins that are achieved. This is manifest in the year and also in the Company’s continued commitment to research and development, not only into core technology and products, but also production processes and methodology. Research and development As noted above, the Group continues to invest in the development of products and its technology platform in order to advance its commercial advantage and increase margin on sales. During the year the Group undertook a total expenditure on research and development of £3.1m (2012–13: £1.4m) with £1.9m undertaken in the UK (2012–13: £1.4m) and £1.2m in the US (2012–13: £nil). The increase in the US reﬂects the impact of eV Products and NOVA, where several products have been developed in the year. Of the £3.1m spent on research and development during the year, £1.1m relates to commercial near-term product development that has been capitalised (2012–13: £0.9m). This expenditure saw eight new nuclear products and ﬁve new medical products developed. This provides further short and medium-term opportunities for sales and reﬂects the capability of the Group to draw from its technology platform and rapidly develop bespoke, need-speciﬁc products, utilising the vertical integration model that is reﬂected in the skill set and proﬁle of the employee base. The balance of R&D expenditure of £2.0m for the year (2012–13: £0.5m) was expensed through the income statement and reﬂects further investment in Kromek’s core technology, platform developments and improved manufacturing efﬁciency. This investment provides a strong and enhanced basis for efﬁciency and proﬁtability in future years and strengthens the market position of the Group’s technology. During the period, a total of 28 patents were ﬁled or awarded. All research and technology programmes, whether for product development or core technology, are subject to tightly controlled and monitored processes and project management. Result before tax Despite absorbing the full results of eV Products during the year (which was previously loss making), the Group managed to return an adjusted loss before tax of £4.3m (2012–13: loss of £4.1m) – see table opposite. Whilst the growth and change in the mix in revenue year on year has enhanced margin and resulted in an improved adjusted EBITDA of a loss of £2.5m (2012–13: loss of £3.2m), 10 Kromek Group plc Annual report and accounts 2014 Strategic report Our key strengths We are an experienced team delivering differentiated beneﬁts to an established and increasing customer base in large and growing world markets. 1. Established and growing blue-chip customer base cancerous cells or special nuclear materials. These advanced systems require multispectral detection capabilities and the means to interpret the data they collect. The Group’s customer base is global and includes market leading OEMs in the medical imaging sector, government agencies, nuclear power plant operators and decommissioning contractors in the nuclear sector. Kromek also has an increasing customer base in the security market, which includes international airport groups and OEMs. 2. Proprietary CZT production technology Kromek is the world’s only multi-site, multipurpose CZT developer and supplier. The Company’s UK and US facilities have both been chosen by the US Government for materials delivery programmes. The Group has over 20 years of experience (the most extensive in the world) with successive generations of CZT production technology. In addition to its leading current capabilities in the travelling heater method (“THM”) (a method of producing CZT), the Group is the only organisation to have developed a patented vapour phase growth technique vital to its capability of producing bulk CZT material with good structural integrity, uniform composition and high purity, which are all important qualities for future product and market needs. 3. Vertical integration Kromek’s OEM customers are involved in developing and making x-ray or gamma-ray based detection and imaging systems. These systems are designed to have signiﬁcantly higher performance and functionalities, in order to aid better detection and identiﬁcation of harmful materials such as explosives, Kromek’s ability to provide the complete chain of technologies (detectors, electronics, simulators and application design) required by the customer to adopt multispectral or CZT detectors lowers the adoption barrier and provides lower cost and a faster path to ﬁnal product for the customer. Having the “semiconductor to solutions” model also allows Kromek to be a value-added partner to OEMs. Kromek also utilises the vertical integration model, its technology building blocks, to develop and compete at selected EUP levels in our core markets. 4. Large and growing target markets with signiﬁcant unmet needs Kromek’s products address three key sectors: medical imaging, nuclear detection and security screening. There is a growing need within each of these markets for improved radiation resolution and sensitivity, to provide accurate materials identiﬁcation or differentiate between closely related materials (e.g. harmful versus benign liquids, cancerous versus normal tissue). These needs are well matched to the Group’s capabilities. The Group’s products are in commercial use in all of its three target markets. Scanners with Kromek’s detection systems are being used to diagnose cancer, osteoporosis and other diseases in hospitals around the world; its detectors are being used in nuclear power plants, research centres and nuclear decommissioning sites; and its bottle scanners are in daily use to screen liquids in European airports. O v e r v i e w S t r a t e g c i r e p o r t C o r p o r a t e g o v e r n a n c e i F n a n c i a l s t a t e m e n t s Kromek Group plc Annual report and accounts 2014 11 Our business model Markets Medical imaging Nuclear detection Security screening Products OEM components Contract development End user products Technology Systems engineering Applications development Algorithms and software ASICs and electronics Bonding and hybridisation Detector fabrication Materials and detectors Intellectual property (“IP”) Patents Trademarks Trade secrets Organisation People and infrastructure eV Products NOVA R&D Kromek UK Kromek Germany 5. Experienced management and technology team Kromek’s management team has a combined experience of over 250 years in relevant technical, commercial and operational areas. Members of senior management have worked in both large global corporates and successful high-growth start-ups, a combination that is important for the current growth phase of the Group. The team has also executed a number of successful M&A transactions and been active in managing post deal integration. The Board has a diverse and international background with substantial public market experience. Cumulative market in Kromek’s target segments* $2.67bn * See page 13 for deﬁnition and further information. 12 Kromek Group plc Annual report and accounts 2014 Strategic report Our strategy Our strategy is based on maximising the potential of our CZT technology and focusing on market segments where it can have most impact. 1 2 3 Element Integration up the value chain with a “semiconductor to solutions” model Element Address three core markets: medical imaging, nuclear detection and security screening Element Revenue from both end product and OEM sales Driver (cid:180) Enhance value capture and increase Driver (cid:180) Three of the largest growth sectors Driver (cid:180) Revenue optimisation of technology barriers to entry in radiation detection and product evolution (cid:180) Ease end user adoption in a specialised and non-commoditised technology (cid:180) Good match to capability and strong technology synergies (cid:180) Product optimisation given close (cid:180) Balance focus and diversify relationship between technology layers market risks Example execution during the year Kromek’s activity remains focused only in these markets and in carefully chosen sub-segments of each. There are signiﬁcant growth opportunities in each. Example execution during the year Additional contract wins in both OEM and EUP segments. Signiﬁcant new contract announcements in OEM medical imaging market. Example execution during the year Further strengthening of key areas. For example, additional CZT capacity in the UK, improvement in production process efﬁciency and further strengthening in software and simulation capabilities. Integrated offering allowed Kromek to effectively respond to several new opportunities, which resulted in new business wins. We operate in three of the largest segments in radiation detection within very selective sub-segments of those markets based on: (cid:180) Existing or deﬁned need in a sizeable and growing market (cid:180) Match of core competency to market need (cid:180) Synergy: strong overlap in base technologies required to serve these markets Kromek Group plc Annual report and accounts 2014 13 Strategy will be formally reviewed on an annual basis to reﬂect technology and market developments. 4 5 6 Element Focus only on applications where Kromek’s IP can have major commercial impact and utilise common product platforms where possible Element Use both organic growth and selective acquisition for growth Element Evolve towards a more sector- focused divisionalised structure Driver (cid:180) Higher margins and reduced adoption risk. Given broad opportunities, focus on those with highest differentiation and value (cid:180) Reduce cost and lower development time Driver (cid:180) Maximising growth opportunity and rate (cid:180) Access channels to market (cid:180) Consolidation of capabilities Driver (cid:180) Maximise the efﬁcacy of core technology and IP investments whilst recognising and addressing different cultures, buying cycles and needs in end user markets (cid:180) Better serve customers within the individual sectors (cid:180) Enhance sector expertise Example execution during the year Winning contract to supply Kromek’s CZT imaging modules in China. New products developed (e.g. Quant for GR1) based on common core technology. Example execution during the year Completion of highly successful operational integration and turnaround of eV Products post acquisition in the second half of the previous ﬁnancial year with sales growth and advances made in CZT growth and detector manufacturing techniques. Example execution during the year Review of IP management processes and review of IP assets versus market needs and competition. Investment in key additional sector-focused sales capability and resources. O v e r v i e w S t r a t e g c i r e p o r t C o r p o r a t e g o v e r n a n c e i F n a n c i a l s t a t e m e n t s Medical imaging $1.1bn Nuclear detection $1.2bn Security screening $370m Cumulative market size of sub-segments addressed by Kromek. 14 Kromek Group plc Annual report and accounts 2014 Strategic report Our technology Kromek has a diverse, IP-rich technology base and is continuing to build expertise based on its core competencies of materials technology and advanced x-ray imaging architectures. Why CZT? Kromek’s products are predominately based on CZT. CZT is a compound semiconductor made from the elements cadmium, zinc and tellurium and has long attracted strong market interest as the basis for advanced radiation detectors or imagers, due to its ability to absorb radiation efﬁciently and directly convert incoming radiation to an electronic signal. CZT is very dense, absorbing x-ray and gamma-ray radiation effectively, improving the sensitivity of positive detection and providing the ability to use lower doses in active imaging applications. High energy radiation Scintillator converts radiation to light Light is collected by photomultiplier or photodiode Photodetector electronics Low resolution spectra and images High energy radiation CZT directly converts radiation to electrical signals ASIC signal readout High resolution spectra and images The direct generation of an electronic signal eliminates the need for the two stage process used in scintillations, providing a signiﬁcantly improved spacial and energy resolution. The improved spacial resolution provides the ability to resolve smaller features within an image, while better energy resolution is key to identify and differentiate materials in the image. CZT detectors have the additional advantage of being operational at room temperature, which reduces the cost and increases the versatility of its implementation, an important aspect to its commercial application. CZT’s electrical properties allow the material to reveal sensitive information about the different energies of radiation being detected. The ability to detect and display different energies is analogous to detecting different colours of the spectrum of light. Energy discrimination in x-ray and gamma-ray detection, combined with Kromek’s additional proprietary technologies, can be used to reveal advanced information about the material content of an object or the environment, which aids detection of harmful substances such as explosives, cancerous cells or nuclear materials emitting dangerous levels of radiation. Kromek Group plc Annual report and accounts 2014 Group plc Annual report and ac 15 The Group has a deep expertise in CZT detector production combined with a complete set of closely integrated capabilities to utilise them in meeting customers’ needs. Commercial methods for the production for CZT: High pressure Bridgman (“HPB”) A mature method reaching the end of its lifespan. This method requires extraction of usable materials from a mixed quality boule; the quality of crystals are generally lower compared to other methods and it is limited to single-crystal grain size. The small single-crystal sizes are, however, well matched to x-ray applications. Travelling heater method (“THM”) Currently the most commonly used method. Further process improvements have been made by the Group during the past ﬁnancial year. The process takes longer than HPB; however little material extraction is required. Material uniformity offers beneﬁcial properties for gamma-ray applications. Multi-tube physical vapour transport (“MTPVT”) The most recently developed, its advantages are ﬂexibility and the ability to adapt to large wafer sizes with a high purity crystal boule requiring limited material extraction processes. One of the principal advantages of this process is the ability to tailor-make material properties. Kromek has the only vapour-based bulk growth method developed worldwide, developed over 25 years, initially at Durham University. Kromek’s technical lead in this emerging production process is critical in relation to its non-recurring engineering offerings and is an enabling technology for future products. Our competitive advantage Multispectral technology leadership based on CZT semiconductor capabilities and a complete “semiconductor to solutions” offering for customer applications and development. Medical imaging (cid:180) Gamma probe (cid:180) CT (cid:180) SPECT/Molecular breast image (cid:180) BMD Nuclear detection Nuclear safeguard Civil nuclear (cid:180) Handheld (cid:180) Network detectors (cid:180) Environmental monitoring (cid:180) Health physics (cid:180) Waste management Security screening (cid:180) Liquid scanning (cid:180) Checked baggage (cid:180) Carry-on luggage O v e r v i e w S t r a t e g c i r e p o r t C o r p o r a t e g o v e r n a n c e i F n a n c i a l s t a t e m e n t s 16 Kromek Group plc Annual report and accounts 2014 Strategic report Our markets Kromek operates in three key global markets: medical imaging, nuclear detection and security screening. The Group has developed and enhanced its market presence in 2013–14, resulting in revenue growth of 122% and important new contract wins. Medical imaging, nuclear detection and security screening all have three common and growing trends: improved radiation resolution and sensitivity; the ability to identify different radiation energies (colour); and the direct and timely identiﬁcation of materials. The Group’s products are focused on addressing each of these needs within each market. Medical imaging Nuclear detection Security screening Market CT SPECT BMD Gamma probe Safeguard Civil Liquid Checkpoint Checked Kromek offering Type OEM component Channel strategy Direct EUP and component Distribution/ white labelling/ direct EUP EUP OEM component and algorithm Distribution Distribution Direct Regulatory framework Approval based but procurement not inﬂuenced by regulation Standards-based regulations Low inﬂuence on procurement Framework for customer high Low inﬂuence on procurement Approval and implementation time scales In US, Transport Safety Administration (“TSA”) both regulator and procurement agency Nature of customer Global OEMs Niche OEMs Government agencies/OEMs Private nuclear companies and government agencies Public and private airport groups Global OEMs Competition Niche component level companies for new generation Established component level companies Established OEMs New EUP companies Niche EUP companies Established component level companies The Group has a diverse and international customer base, including a number of leading international OEMs within the medical sector, international research institutions and end product users within the medical imaging, nuclear detection and security screening markets. Kromek Group plc Annual report and accounts 2014 17 Medical imaging Adoption driver Example Kromek beneﬁt to customers Functional information-rich imaging, lower doses, earlier diagnosis, more efﬁcient treatment and lower cost of care, resulting in better clinical outcomes. Better diagnosis because there is new and better quality information for detection of cancer, cardiac abnormalities and bone mineral density in the human body. Potential addressable market for Kromek’s products $1.1bn This is a large and diverse global market estimated to be worth over $23bn p.a. with demand underpinned by growing global living standards and ageing populations. An average growth of around 5% contains signiﬁcant variation between markets. End users include hospitals, clinics and diagnostic centres. Regulators and large OEMs are both inﬂuential in market development. Various techniques involving ionising radiations (x-ray, etc.) jointly represent the largest market share. Kromek is involved only in certain sub-segments of these, including CT, bone mineral densitometry (“BMD”) and single photon emission computed tomography (“SPECT”). The largest vendors in the space are GE, Siemens, Toshiba and Philips, with over 80% market share in total. The US remains the single most important geographical market for medical diagnostic imaging (circa 35%) but the highest growth is in Asia, which already accounts for a little under 30% of the market. Drivers include the increased efﬁciency of digital rather than analogue imaging, the desire for richer diagnostic information capture, a focus on reduced diagnostic radiation doses in OECD countries and the general rapid growth in health expenditure in BRIC economies. O v e r v i e w S t r a t e g c i r e p o r t C o r p o r a t e g o v e r n a n c e i F n a n c i a l s t a t e m e n t s has Asia h Asia has the highest growth ven b driv driven by the increasing size, a aver size, average age and health of it of its population 18 Kromek Group plc Annual report and accounts 2014 Strategic report Our markets continued Nuclear detection Adoption driver Example Kromek beneﬁt to customers More accurate radiation detection and proﬁling of radioactive sources for increasing drive to improve safety for people and the environment. Better information on radiation and source type through use of high resolution CZT detectors; design allows for a small portable instrument suitable for ﬁeld and in situ use as single or networked detectors. Potential addressable market for Kromek’s products $1.2bn (cid:3)(cid:180) Civil nuclear Active and new reactors, decommissioning (cid:3)(cid:180) Nuclear safeguard First responders, military and civil defence Kromek is active in the health physics, environmental monitoring, and waste management sub-segments. Kromek can meet user needs for portable radiation detectors that are both sensitive and versatile in usage, to both monitor and characterise any hazards. Kromek’s products enable our customers to cut operational time and carry out monitoring and investigative work in a ﬁeld that is often challenging with existing products. In addition to standalone devices, Kromek has developed the capability to address the rapidly increasing interest in portable networked sensors for both civil and defence applications. There is an increasing trend towards establishing high performance detector networks that can provide real-time position and radiation information. As is common in this sector Kromek also has component level products businesses. Components provide revenue generation opportunities and are also the building blocks of EUPs in the portfolio. Globally, there are around 950 power stations in operation, plus approximately 250 research reactors and around 200 nuclear reactors on ships and submarines. Over 130 nuclear reactors have been shut down around the world, but fewer than 20 have been fully decommissioned. Drivers come from both old and new infrastructure. Signiﬁcant new build programmes are underway, especially in Asia which is driven by a desire for energy independence and a lower carbon footprint. In the US and Europe the driver is both the monitoring of current plants and the multibillion decommissioning programmes that are to be completed over the next two decades. Costs per plant vary; they are in the order of a few hundred million dollars per plant. West Europe alone has 150 plants to decommission by 2030 and GlobalData has estimated that it will cost at least $81bn. O v e r v i e w S t r a t e g c i r e p o r t C o r p o r a t e g o v e r n a n c e Kromek Group plc Annual report and accounts 2014 19 Security screening Adoption driver Example Kromek beneﬁt to customers Improved baggage scanning, lowering false alarms. Mandated demand (EU and other geographic areas) for LAGs scanners since January 2014. Simple to use with high performance in terms of explosive detection and low false alarm rate through more accurate content characterisation and ability to scan all container types, including cans. Potential addressable market for Kromek’s products $370m Kromek focuses on these areas of the security screening market: standalone liquid screening equipment, carry-on baggage screening and checked-in baggage screening. The total security screening market is estimated to be worth roughly $875m p.a. with a growth rate of about 5% with considerable variation between segments. approved by ECAC. This ability to carry such cleared materials between ﬂights is the ﬁrst part of an overall programme to relax restrictions on passenger LAGs by 2016. The market is at an early stage in its development with the majority of the global procurement still to occur. Signed on behalf of the Board of Directors Dr Arnab Basu MBE Chief Executive Ofﬁcer Chief Executive Ofﬁcer 27 August 2014 27 August 2014 Derek Bulmer Chief Financial Ofﬁcer Chief Financial Ofﬁcer It is a strongly regulated environment with the TSA in the US and the European Regulatory Committee for Civil Aviation Security (“ECAC”) in Europe being the most inﬂuential standard setters worldwide, with considerable co-ordination between them. Regulation acts not only to set standards but as a driver of replacement and upgrade cycles. Other growth drivers include: speciﬁc events (such as new w threats), a steady increase in passenger volumes and airport ort expansion – especially in the Middle East and Asia – and the the globalisation of trade boosting airfreight volumes. Material identiﬁcation is a primary focus for aviation security rity with regards to LAGs that are carried in hand luggage. EU legislation (EU Regulation 246/2013) that came into effect ct from 31 January 2014 states that it is mandatory to screen n all LAGs obtained at an airport or on board an aircraft and then d then presented at airport security for onward travel with equipment ment The LAGs market is at an early stage in its development with the majority of the global procurement still to occur 20 Kromek Group plc Annual report and accounts 2014 Corporate governance Board of Directors Mr Richard Morgan, Chairman is the CEO of Amphion Innovations plc, a London and New York-based venture capital ﬁrm listed on AIM. Richard has been directly involved in the start-up and development of more than 30 companies in the IT and medtech industries, including Celgene, MediSense, Sequus, Quidel and Vortech Data. He spent 15 years with British merchant bank Schroders plc, as a board member and founding head of the Schroder Strategy Group. Richard has a B.Eng ﬁrst class honours from Auckland University, New Zealand, and has completed the Advanced Management Program at Harvard Business School. He chaired the audit committee in an interim capacity until Charlotta Ginman’s appointment. Dr Arnab Basu MBE, Chief Executive Ofﬁcer has a PhD in physics from Durham University, specialising in semiconducting sensor materials. Arnab held senior management positions in his family business, which manufactured materials for the electronics industry serving over 250 major telecommunications and consumer electronics manufacturers, including Siemens, GEC. He worked in commercial product development for Elmwood Sensors Ltd (Honeywell Group, UK). A prominent ﬁgure within the business community, he was awarded Ernst and Young Entrepreneur of the Year (2009) and received an MBE for services to regional development and international trade (2014). Mr Derek Bulmer, Executive Director and Chief Financial Ofﬁcer is a qualiﬁed chartered accountant and barrister. Derek has worked with KPMG and undertaken a number of senior management roles with blue-chip PLCs including Bass plc, AWG plc and Ibstock plc. Additionally, and more recently, a number of roles as ﬁnance director of privately owned groups in both the IT and oil and gas industries have provided a wealth of experience in executing and managing business acquisitions plus signiﬁcant aspects of the commercial and legal disciplines of corporate management. Professor Brian Tanner, Director is dean for university enterprise and professor of physics at Durham University. With an international reputation in x-ray characterisation of materials, and in particular semiconductors, he has published over 375 papers in international peer- reviewed journals and is the author or co-author of four books. He received the Queen’s Award for Enterprise Promotion (2012) and the Barrett Award of the International Centre for Diffraction Data (2005). Brian holds, or has held, several directorships in addition to Kromek. He was a member of the governing council of Durham University for 15 years. Mr Jerel Whittingham, Director and remuneration committee chairman has extensive experience in investor, operational and strategy roles with technology-rich companies including Incuvest LLC, Generics Group PLC, Durlacher PLC, Inmarsat plc and a number of start-ups. He has been involved with Kromek since 2003 as its ﬁrst external advisor before joining the Board in 2005. Currently he combines non-executive director and operational roles in technology growth companies. Jerel is former managing director and then non-executive director of Amphion Innovations plc (AIM). He also served as CEO and later executive chairman of Myconostica Ltd. Mr Peter Bains, Director had a 23-year career at GlaxoSmithKline, where he held senior strategic and operational roles including general manager of China, head of global marketing and senior VP of international commercial operations. A consultant since 2009, he specialises in supporting strategic growth opportunities in small/medium-sized innovation-based life science companies serving as non-executive director for Tokyo listed biotech company, Sosei, and Biocon subsidiary, Syngene, and as non-executive chairman of Fermenta Biotech Ltd. Peter holds a BSc combined honours in physiology/zoology from Shefﬁeld University. Kromek Group plc Annual report and accounts 2014 21 O v e r v i e w S t r a t e g c i r e p o r t C o r p o r a t e g o v e r n a n c e i F n a n c i a l s t a t e m e n t s Professor Max Robinson, Founder Director provided business angel ﬁnance in order to establish Kromek. He is a highly respected academic and a pioneer, inventor and visionary in the ﬁeld of 3D x-ray imaging. He has been involved in the management of the interface between academic research and the commercialisation of its ﬁndings for 35 years. Max has been named as one of the top 100 academic entrepreneurs by the Times Higher Education supplement and currently holds the position of entrepreneur in residence at Newcastle University. Dr Graeme Speirs, Director is an experienced entrepreneur and owner of the Polymer Holdings Group and Polymer N2, an investment company focused on UK start-ups in the technology, life sciences and energy sectors. Graeme graduated with ﬁrst class honours in chemistry and a PhD in molecular physics from Aberdeen University, and holds a masters degree in technology and economics from Birmingham University. Involved in the oil and gas industry, Graeme is an expert in the design and manufacture of polymer composite products. Mr Lawrence Kinet, Director has 40 years’ experience in the medical device and bio-pharmaceutical industry in leadership positions, most recently as group chief executive of LMA International NV and president of Smiths Medical, London. Lawrence has raised more than $100m in funding for early stage companies, taking one through an IPO, and made over $1bn worth of acquisitions. His career began at Baxter International, running a number of overseas operations, eventually becoming president of Baxter’s international division. He holds a BSc from the University of Birmingham (UK) and an MBA from the University of Chicago. Ms Charlotta Ginman, Director and audit committee chairman brings substantial experience in ﬁnancial and operational management gained during her career in investment banking and global telecommunications. Joining Ernst & Young and later appointed to senior roles with JP Morgan, Deutsche Bank and UBS, Charlotta progressed to director of ﬁnance at Nokia Corporation, overseeing a number of acquisitions and leading the successful sale of Nokia’s luxury mobile phone division, Vertu Corporation, to a private equity group. A chartered accountant, Charlotta also holds an MSc in Economics from the Swedish School of Economics and Business Administration in Helsinki. 22 Kromek Group plc Annual report and accounts 2014 Corporate governance Review of principal risks Risks are reviewed on a regular basis by the Board to identify any changes in risk proﬁles and to consider the optimal range of mitigation strategies. Risk description Mitigation Risks associated with competition Kromek faces competition from two types of competitor: specialised companies targeting discrete markets and divisions of large integrated device manufacturers. The Group’s current and future competitors may develop superior technology or offer superior products, sell products at a lower price or achieve greater market acceptance in the Group’s target markets. Competitors may have longer operating histories, greater name recognition and access to larger customer bases and resources and so be able to respond more quickly to changing customer demands or to devote greater resources to the development, promotion and sale of their products than Kromek can. To the extent possible, Kromek carefully monitors competing technologies and product offerings. The Group intends to continue to make commercially driven investments in developing new technologies and products to maintain a strong technology position and is investing in further and more specialised marketing and sales resources. Group IP gives some additional protection and we have invested in new IP management systems and processes in the last ﬁnancial year. Risks associated with management of the Group’s growth strategy The ability of the Group to implement its strategy in rapidly evolving and competitive markets will require effective management planning and operational controls. Signiﬁcant expansion will be required to respond to market opportunities and the Group’s future growth and prospects will depend on its ability to manage this growth and to continue to expand and improve operational and ﬁnancial performance, whilst at the same time maintaining effective cost controls. Kromek’s experienced management team is well versed in the current markets available to the Group and well positioned to adapt to any changes in those markets. The Company also has detailed control systems including R&D cost control and extensive project management criteria. The Group has demonstrated its ability to identify, execute and integrate M&A opportunities with its two successful US acquisitions. Risks associated with product and technology adoption rates The rate of market acceptance of the Group’s products is uncertain as many factors inﬂuence the adoption of new products including changing needs, regulation, marketing and distribution, users’ habits and business systems and product pricing. With a widely applicable technology base the Group only chooses opportunities in which it believes there is a good match between its rare or unique capabilities and strong adoption drivers in growing large markets. The use of common technology platforms across multiple markets and applications reduces the investment risk in any given market segment and diversiﬁes overall adoption risk. Kromek Group plc Annual report and accounts 2014 23 Risk description Mitigation Risks associated with timing of customer or third party projects The Group’s strategy includes co-development with, or licensing its technologies to, large OEM partners for additional development, manufacturing or subsequent marketing. Consequently the Group will be increasingly reliant on securing and retaining such partners, and delays in the progress of the development, manufacturing or marketing of the end product, as a result of a partner’s action or inaction, may delay the receipt of product-related revenues. Exchange rate ﬂuctuations As a consequence of the international nature of its business, the Group is exposed to risks associated with changes in foreign currency exchange rates on both sales and operations. The Group is based in the UK and presents its ﬁnancial statements in pounds sterling. However, its subsidiaries eV Products, Inc. and NOVA R&D, Inc., operate in the US and earn revenues and incur costs in US dollars. A growing proportion of the Group’s future revenues are expected to be denominated in currencies other than pounds sterling. Exchange rate variations between currencies in which the Group operates could have a signiﬁcant impact on the Group’s reported ﬁnancial results. The Group has a diversiﬁed customer base and operates in a carefully selected portfolio of markets with different adoption risk and cycles. As part of its business model it also more directly controls a certain fraction of its revenues via the sale of complete EUPs in nine competing market segments. Kromek is predominantly exposed to currency risk on sales and purchases made from customers and suppliers. Sales and purchases from customers and suppliers are made on a central basis and the risk is monitored centrally but not hedged utilising any forward exchange contracts. Apart from these particular cash ﬂows, the Group aims to fund expenses and investments in the respective currency and to manage foreign exchange risk at a local level by matching the currency in which revenue is generated and expenses are incurred. O v e r v i e w S t r a t e g c i r e p o r t C o r p o r a t e g o v e r n a n c e i F n a n c i a l s t a t e m e n t s 24 Kromek Group plc Annual report and accounts 2014 Corporate governance Corporate governance report As an AIM listed company, Kromek Group plc is not obliged to comply with the UK Corporate Governance Code published in September 2012 (the “Code”). However, the Board follows, as far as practicable, the recommendations on corporate governance of the Quoted Companies Alliance for companies with shares traded on AIM. The Board The Board normally meets at least eight times per year. Its direct responsibilities include setting annual budgets, reviewing trading performance, approving signiﬁcant capital expenditure, ensuring adequate funding, setting and monitoring strategy and reporting to shareholders. Between meetings there are monthly telephonic meetings between the Chairman, Chief Executive Ofﬁcer, Chief Financial Ofﬁcer and individual Non-Executive Directors. The Non-Executive Directors have a particular responsibility to ensure that the strategies proposed by the Executive Directors are fully considered. Audit committee The audit committee is chaired by Charlotta Ginman, an Independent Non-Executive Director. The audit committee was previously chaired by Richard Morgan, the Chairman of the Group, who is currently a member of the audit committee. The other members are Peter Bains, an Independent Non-Executive Director, and Graeme Speirs, a large shareholder and Director of the Board. The committee meets at least once a year, but in practice, strives to meet at least four times a year. The audit committee is responsible for reviewing the half-year and annual ﬁnancial statements, interim management statements, preliminary results announcements and any other formal announcement or presentation relating to the Group’s ﬁnancial performance. The audit committee also reviews signiﬁcant ﬁnancial returns to regulators and any ﬁnancial information covered in certain other documents such as announcements of a price sensitive nature. The audit committee advises the Board on the appointment of external auditors and on their remuneration (both for audit and non-audit work) and discusses the nature, scope and results of the audit with the auditors. The audit committee reviews the extent of the non-audit services provided by the auditors and reviews with them their independence and objectivity. The Chairman of the audit committee reports the outcome of audit committee meetings to the Board and the Board receives minutes of the meetings. Remuneration committee The remuneration committee is chaired by Jerel Whittingham, an Independent Non-Executive Director. The other members are Brian Tanner and Lawrence Kinet, Independent Non-Executive Directors. The committee is responsible for making recommendations to the Board, within agreed terms of reference, on the Group’s framework of executive remuneration and its cost. The committee determines the contract terms, remuneration and other beneﬁts for each of the Executive Directors, including performance related bonus schemes and pension rights. Further details of the Group’s policies on remuneration and service contracts are given in the Remuneration report. Relations with shareholders Communication with shareholders is given high priority. There is regular dialogue with major and/or institutional shareholders including presentations after the Group’s announcements of the half-year and full-year results. Presentations are also made to analysts at those times to present the Group’s results and report on developments. This assists with the promotion of knowledge of the Group in the investment marketplace and with shareholders. The Board uses both the annual report and ﬁnancial statements and the Annual General Meeting to communicate directly with private and institutional investors and welcomes their participation. The Chairman aims to ensure that the Chairs of the audit and remuneration committees are available at the Annual General Meeting to answer questions. Internal control The Board is responsible for establishing and maintaining the Group’s system of internal control and for reviewing its effectiveness. The system is designed to manage rather than eliminate the risk of failure to achieve the Group’s strategic objectives and can only provide reasonable and not absolute assurance against material misstatement or loss. As an AIM listed company, the Group does not need to comply with Code provision C2.1 regarding the Directors giving a summary of the process applied by the Board in reviewing the effectiveness of the system of internal control. Instead, the Directors have set out below some of the key aspects of the Group’s internal control procedures. An ongoing process has been established for identifying, evaluating and managing the signiﬁcant risks faced by the Group. The process has been in place for the full year under review and up to the date of approval of the annual report and ﬁnancial statements. The Board regularly reviews this process as part of its review of such risks within its meetings. Where any weaknesses are identiﬁed, an action plan is prepared to address the issues and is then implemented. Each year the Board approves the annual budget. Key risk areas are identiﬁed, reviewed and monitored. Performance is monitored against budget, relevant action is taken throughout the year and updated forecasts are prepared as appropriate. Capital and development expenditure is regulated by a budgetary process and authorisation levels. For expenditure beyond speciﬁed levels, detailed written proposals have to be submitted to the Board for approval. Reviews are carried out after the purchase is complete. The Board requires management to explain any major deviations from authorised capital proposals and to seek further sanction from the Board. Kromek Group plc Annual report and accounts 2014 25 The Board has reviewed the need for an internal audit function and concluded that this is not currently necessary in view of the small size of the Group and the close supervision by the senior leadership team of its day-to-day operations. The Board will continue to keep this under review. The Group has a whistle-blowing policy and procedures to encourage staff to contact the audit committee if they need to raise matters of concerns other than via the Executive Directors and senior leadership team. Going concern The Board of Directors has conﬁdence that the Group has adequate resources to continue in operational existence for the foreseeable future. Accordingly, it continues to adopt the going concern basis in preparing the annual report and ﬁnancial statements. The Group has no external debt and at the statement of ﬁnancial position date had £6.6m of cash reserves. The Group prepares forecasts which show, taking into account reasonably possible changes in trading performance, that it has sufﬁcient resources to settle all of its liabilities as they fall due. O v e r v i e w S t r a t e g c i r e p o r t C o r p o r a t e g o v e r n a n c e i F n a n c i a l s t a t e m e n t s 26 Kromek Group plc Annual report and accounts 2014 Corporate governance Directors’ report The Directors present their annual report on the affairs of the Group, together with the ﬁnancial statements and auditor’s report, for the year ended 30 April 2014. Principal activities Kromek Group plc is the leading developer of radiation detectors based on cadmium zinc telluride, providing improved detection and characterisation capabilities within the medical imaging, nuclear detection and security screening markets. Directors The Directors of the Group are shown on pages 20 and 21. All of the Directors were Directors for the whole of the year, with the exception of the following: Derek Bulmer, who was appointed Executive Director on 10 December 2013; Charlotta Ginman, who was appointed as a Non-Executive Director on 18 February 2014; and Peter Bains and Lawrence Kinet, who were appointed Non-Executive Directors on 30 August 2013. The emoluments and interests of the Directors in the shares of the Group are set out in the Remuneration report. Future development Our development objectives for 2014–15 are disclosed in the Overview on page 7. Details of signiﬁcant events since the balance sheet date are contained in note 35 to the ﬁnancial statements. Capital structure The capital structure is intended to ensure and maintain strong credit ratings and healthy capital ratios in order to support the Group’s business and maximise shareholder value. It includes the monitoring of cash balances, available bank facilities and cash ﬂows. No changes were made to these objectives, policies or processes during the year ended 30 April 2014. Results and dividends The consolidated income statement is set out on page 32. The Group’s loss after taxation amounted to £3.2m (2013: £0.6m). The Directors do not recommend the payment of a dividend for the year ended 30 April 2014. During the year ended 30 April 2014, the Group made political donations of £nil (2013: £nil) and charitable donations of £nil (2013: £nil). Information about the use of ﬁnancial instruments by the Group and its subsidiaries is given in note 34 to the ﬁnancial statements. The Directors, who served throughout the year except as noted, were as follows: Dr A Basu MBE Mr D Bulmer (existing CFO, joined the Board on 10 December 2013) Mr R C E Morgan Professor M Robinson Professor B K Tanner Mr J H Whittingham Dr G K Speirs Mr L Kinet (appointed 30 August 2013) Mr P Bains (appointed 30 August 2013) Ms C Ginman (appointed 18 February 2014) Directors’ indemnities The Group has made qualifying third party indemnity provisions for the beneﬁt of its Directors, which were made during the year and remain in force at the date of this report. Statement of Directors’ responsibilities in respect of the Directors’ report and the ﬁnancial statements The Directors are responsible for preparing the annual report and the ﬁnancial statements in accordance with applicable law and regulations. Group law requires the Directors to prepare ﬁnancial statements for each ﬁnancial year. Under that law the Directors have elected to prepare Group and parent company ﬁnancial statements in accordance with International Financial Reporting Standards (“IFRSs”) as adopted by the European Union. Under Group 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 the parent company and of the proﬁt or loss of the Group and the parent company for the period. The Directors are also required to prepare ﬁnancial statements in accordance with the rules of the London Stock Exchange for companies trading securities on the AIM. In preparing these ﬁnancial statements, the Directors are required to: (cid:180) select suitable accounting policies and then apply them consistently; (cid:180) make judgements and estimates that are reasonable and prudent; (cid:180) state whether applicable IFRSs have been followed, subject to any material departures disclosed and explained in the ﬁnancial statements; and (cid:180) prepare the ﬁnancial statements on the going concern basis unless it is inappropriate to presume that the Group will continue in business. The Directors are responsible for keeping adequate accounting records that are sufﬁcient to show and explain the Group’s transactions and disclose with reasonable accuracy at any time the ﬁnancial position of the Group and enable them to ensure that the ﬁnancial statements comply with the Companies Act 2006. They are also responsible for safeguarding the assets of the Group and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities. Kromek Group plc Annual report and accounts 2014 27 O v e r v i e w S t r a t e g c i r e p o r t C o r p o r a t e g o v e r n a n c e i F n a n c i a l s t a t e m e n t s The Directors conﬁrm that: (cid:180) so far as each Director is aware, there is no relevant audit information of which the Group’s auditors are not aware; and (cid:180) the Directors have taken all steps that they ought to have taken to make themselves aware of any relevant audit information and to establish that the auditors are aware of that information. 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 Directors are responsible for the maintenance and integrity of the corporate and ﬁnancial information included on the Group’s website. Auditors Each of the persons who is a Director at the date of approval of this annual report conﬁrms that: (cid:180) so far as the Director is aware, there is no relevant audit information of which the Group’s auditors are unaware; and (cid:180) the Director has taken all the steps that he/she ought to have taken as a Director in order to make himself/herself aware of any relevant audit information and to establish that the Group’s auditors are aware of that information. This conﬁrmation is given and should be interpreted in accordance with the provisions of Section 418 of the Companies Act 2006. Deloitte LLP have expressed their willingness to continue in ofﬁce as auditors and a resolution to reappoint them will be proposed at the forthcoming Annual General Meeting. By order of the Board Dr Arnab Basu MBE Chief Executive Ofﬁcer 27 August 2014 28 Kromek Group plc Annual report and accounts 2014 Corporate governance Directors’ remuneration report As the Group is AIM listed, the Directors are not required, under Section 420(1) of the Companies Act 2006, to prepare a Directors’ remuneration report for each ﬁnancial year of the Group and so Kromek Group plc makes the following disclosures voluntarily, which are not intended to, and indeed do not, comply with the requirements of the Companies Act 2006. The Group has executive share option and incentive schemes, which are designed to promote long-term improvement in the performance of the Group, sustained increase in shareholder value and clear linkage between executive reward and the Group’s performance. The remuneration committee is responsible for recommending the remuneration and other terms of employment for the Executive Directors of Kromek Group plc. In determining remuneration for the year, the committee has given consideration to the requirements of the UK Corporate Governance Code. Remuneration policy The remuneration of Executive Directors is determined by the committee and the remuneration of Non-Executive Directors is approved by the full Board of Directors. The remuneration of the Chairman is determined by the Independent Non-Executive Directors. The remuneration packages of Executive Directors comprise the following elements: Basic salary and beneﬁts Basic salaries for Executive Directors are reviewed annually having regard to individual performance and market practice. In most cases beneﬁts provided to Executive Directors comprise the provision of a Group car, or appropriate allowance, health insurance and contributions to a Group personal pension scheme. Annual bonus A bonus may be awarded at the end of each ﬁnancial year, at the discretion of the remuneration committee, currently ranging from a maximum of 25–75% of basic salary to reward for Executives’ contribution to the growth in revenue, and speciﬁc targeted or strategic objectives. Long-Term Incentive Plan (“LTIP”) The Group believes that share ownership by Executive Directors and employees strengthens the link between their personal interests and those of the Group and the shareholders. The LTIP is based on total shareholder return (“TSR”) relative to an AIM peer group. Any awards made vest only after three years. Service contracts Arnab Basu and Derek Bulmer each have a service contract with a notice period (to the Company) of nine and six months respectively. The committee considers the Directors’ notice periods to be appropriate as they are in line with the market and take account of the Directors’ knowledge and experience. Non-Executive Directors The fees of the Non-Executive Directors are determined by the full Board within the limits set out in the Memorandum and Articles of Association. The Non-Executive Directors are not eligible for bonuses, pension beneﬁts or share options. Directors’ emoluments Emoluments of the Directors for the year ended 30 April 2014 are shown below. Pension contributions During the year, the Group made annual pension contributions for Arnab Basu and Derek Bulmer to a personal pension scheme (i.e. a deﬁned contribution scheme). Neither beneﬁts in kind nor bonuses are pensionable. Details of contributions payable by the Group are: Director Arnab Basu Derek Bulmer 30 April 2014 £’000 30 April 2013 £’000 30 4 24 — Directors’ shareholdings Beneﬁcial interests of the Directors in the shares of the Group are shown below: Arnab Basu Richard Morgan* Graeme Speirs** Jerel Whittingham Brian Tanner Max Robinson 30 April 2014 30 April 2013 Number 2,000,000 12,782,730 14,792,730 110,450 750,000 9,500,000 % 1.9 Number 2,000,000 11.8 12,782,730 13.8 14,792,730 0.1 0.7 8.8 110,450 750,000 9,720,000 % 2.6 16.3 18.9 0.1 1.0 12.4 * Richard Morgan is interested in Kromek Group plc through Amphion Innovations plc which owns 12,450,420 ordinary shares amounting to 11.5% of the issued share capital. ** Graeme Speirs is interested in Kromek Group plc through Polymer Holdings Ltd which owns 11,377,790 ordinary shares amounting to 10.6% of the issued share capital. Kromek Group plc Annual report and accounts 2014 29 Directors’ emoluments for the year ended 30 April 2014 Salary £’000 Fees £’000 Beneﬁts £’000 Bonus £’000 Pension contributions £’000 Total emoluments 2014 £’000 Total emoluments 2013 £’000 Non-Executive Chairman Richard Morgan Executive Arnab Basu Derek Bulmer* Non-Executive Graeme Speirs Max Robinson Brian Tanner Jerel Whittingham Charlotta Ginman** Peter Bains*** Lawrence Kinet*** — 177 48 — — — — — — — 225 39 — — 22 20 22 24 8 28 28 191 — 4 — — — — — — — — 4 — — — — — — — — — — — — 30 4 — — — — — — — 34 39 211 52 22 20 22 24 8 28 28 — 205 — — — — — — — — 454 205 * Derek Bulmer joined the Board on 10 December 2013. ** Charlotta Ginman joined the Board on 18 February 2014. *** Peter Bains and Lawrence Kinet joined the Board on 30 August 2013. Executive Directors’ share incentive scheme Share incentive scheme for Arnab Basu, Chief Executive Ofﬁcer, and Derek Bulmer, Chief Financial Ofﬁcer The remuneration committee agreed, in October 2013, an incentive award scheme for Arnab Basu and Derek Bulmer, to offer them shares up to 372,057 and 158,292 respectively, at a price of 1p per share to vest based on speciﬁed performance criteria. These are measured by a TSR condition, calculated as the average total return in comparison to a peer group. The Board receives specialist advice from the Group’s accountants. As at 30 April 2014, no shares had vested under this incentive scheme. Executive Directors’ share options Director Date of grant Exercise price p Arnab Basu 22 September 2006 Arnab Basu 15 May 2007 Arnab Basu 20 November 2011 Derek Bulmer 13 September 2010 Derek Bulmer 15 October 2012 Derek Bulmer 31 May 2013 1.5 1.5 20.0 20.0 20.0 20.0 2013 Number 720,000 160,000 1,000,000 500,000 125,000 Share price during the year During the year to 30 April 2014, the highest share price was 81.0p and the lowest share price was 36.0p. The market price of the shares at 30 April 2014 was 41.5p. Directors’ interests in material contracts No Director was materially interested either at the year end or during the year in any contract of signiﬁcance to the Group other than their employment or service contract. Awarded during the year Exercised during the year At 30 April 2014 Number Expiry date — — — — — — — 720,000 22 September 2016 160,000 15 May 2017 — 1,000,000 20 November 2021 — — — 500,000 13 September 2020 125,000 250,000 15 October 2022 31 May 2023 — 250,000 O v e r v i e w S t r a t e g c i r e p o r t C o r p o r a t e g o v e r n a n c e i F n a n c i a l s t a t e m e n t s 30 Kromek Group plc Annual report and accounts 2014 Financial statements Independent auditor’s report To the members of Kromek Group plc We have audited the ﬁnancial statements of Kromek Group plc for the year ended 30 April 2014 which comprise the consolidated income statement, the consolidated statement of comprehensive income, the consolidated and company statements of ﬁnancial position, the consolidated and company statements of changes in equity, the consolidated and company statements of cash ﬂows and the related notes 1 to 51. The ﬁnancial reporting framework that has been applied in their preparation is applicable law and IFRSs as adopted by the European Union. This report is made solely to the Company’s members, as a body, in accordance with Chapter 3 of Part 16 of the Companies Act 2006. Our audit work has been undertaken so that we might state to the Company’s members those matters we are required to state to them in an auditor’s report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the Company and the Company’s members as a body, for our audit work, for this report, or for the opinions we have formed. Respective responsibilities of Directors and auditor As explained more fully in the Directors’ responsibilities statement, the Directors are responsible for the preparation of the ﬁnancial statements and for being satisﬁed that they give a true and fair view. Our responsibility is to audit and express an opinion on the ﬁnancial statements in accordance with applicable law and International Standards on Auditing (UK and Ireland). Those standards require us to comply with the Auditing Practices Board’s Ethical Standards for Auditors. Scope of the audit of the ﬁnancial statements An audit involves obtaining evidence about the amounts and disclosures in the ﬁnancial statements sufﬁcient to give reasonable assurance that the ﬁnancial statements are free from material misstatement, whether caused by fraud or error. This includes an assessment of: whether the accounting policies are appropriate to the Group’s and the parent company’s circumstances and have been consistently applied and adequately disclosed; the reasonableness of signiﬁcant accounting estimates made by the Directors; and the overall presentation of the ﬁnancial statements. In addition, we read all the ﬁnancial and non-ﬁnancial information in the annual report to identify material inconsistencies with the audited ﬁnancial statements and to identify any information that is apparently materially incorrect based on, or materially inconsistent with, the knowledge acquired by us in the course of performing the audit. If we become aware of any apparent material misstatements or inconsistencies we consider the implications for our report. Opinion on ﬁnancial statements In our opinion: (cid:180) the ﬁnancial statements give a true and fair view of the state of the Group’s and of the parent company’s affairs as at 30 April 2014 and of the Group’s and the parent company’s loss for the year then ended; (cid:180) the Group ﬁnancial statements have been properly prepared in accordance with IFRSs as adopted by the European Union; (cid:180) 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 (cid:180) the ﬁnancial statements have been prepared in accordance with the requirements of the Companies Act 2006 and, as regards the Group ﬁnancial statements, Article 4 of the IAS Regulation. Kromek Group plc Annual report and accounts 2014 31 Separate opinion in relation to IFRSs as issued by the IASB As explained in note 3 to the Group ﬁnancial statements, the Group, in addition to complying with its legal obligation to apply IFRSs as adopted by the European Union, has also applied IFRSs as issued by the International Accounting Standards Board (“IASB”). In our opinion the Group ﬁnancial statements comply with IFRSs as issued by the IASB. Opinion on other matters prescribed by the Companies Act 2006 In our opinion 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. Matters on which we are required to report by exception We have nothing to report in respect of the following: Under the Companies Act 2006 we are required to report to you if, in our opinion: (cid:180) 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 (cid:180) the parent company ﬁnancial statements and the part of the Directors’ remuneration report to be audited are not in agreement with the accounting records and returns; or (cid:180) certain disclosures of Directors’ remuneration speciﬁed by law are not made; or (cid:180) we have not received all the information and explanations we require for our audit. David Wilkinson FCA CF (Senior Statutory Auditor) For and on behalf of Deloitte LLP Chartered Accountants and Statutory Auditors Newcastle upon Tyne, United Kingdom 27 August 2014 O v e r v i e w S t r a t e g c i r e p o r t C o r p o r a t e g o v e r n a n c e i F n a n c i a l s t a t e m e n t s 32 Kromek Group plc Annual report and accounts 2014 Financial statements Consolidated income statement For the year ended 30 April 2014 Continuing operations Revenue Cost of sales Gross proﬁt Other operating income Distribution costs Administrative expenses (including operating expenses) Operating loss Finance income Finance costs Negative goodwill released to the income statement Loss before tax Tax Loss for the year from continuing operations Losses per share: – Basic and diluted (£) – Adjusted basic and diluted (£)* * The adjusted losses per share do not take into account the negative goodwill released to the income statement in 2013. Consolidated statement of comprehensive income For the year ended 30 April 2014 Loss for the year Exchange differences on translation of foreign operations Total comprehensive losses for the year Note 5 5 10 11 12 14 Year ended 2014 £’000 5,972 (2,101) 3,871 719 (144) (8,226) (3,780) 15 (530) — (4,295) 1,106 (3,189) (0.05) (0.05) Year ended 2013 £’000 2,691 (1,431) 1,260 25 (110) (5,077) (3,902) — (171) 2,417 (1,656) 1,013 (643) (0.08) (0.40) Year ended 2014 £’000 (3,189) (641) (3,830) Year ended 2013 £’000 (643) 200 (443) Consolidated statement of ﬁnancial position As at the year ended 30 April 2014 Non-current assets Goodwill Other intangible assets Property, plant and equipment Current assets Inventories Trade and other receivables Current tax assets Cash and bank balances Total assets Current liabilities Trade and other payables Current tax liabilities Borrowings Net current assets/(liabilities) Non-current liabilities Deferred tax liabilities Total liabilities Net assets Equity Share capital Share premium account Capital redemption reserve Translation reserve Accumulated losses Total equity Kromek Group plc Annual report and accounts 2014 33 O v e r v i e w S t r a t e g c i r e p o r t C o r p o r a t e g o v e r n a n c e i F n a n c i a l s t a t e m e n t s 30 April 2014 £’000 1,275 6,965 2,285 10,525 2,389 1,907 696 6,563 11,555 22,080 30 April 2013 £’000 1,275 6,137 3,005 10,417 2,098 1,579 767 309 4,753 15,170 (3,210) (3,149) — — (3,210) 8,345 (1,134) (4,344) 17,736 1,080 34,612 1,175 (482) (1) (2,449) (5,599) (846) (1,544) (7,143) 8,027 1,175 22,278 — 159 (18,649) (15,585) 17,736 8,027 Note 15 16 17 19 20 12 23 21 22 25 26 27 28 29 The ﬁnancial statements of Kromek Group plc (registered number 8661469) were approved by the Board of Directors and authorised for issue on 27 August 2014. They were signed on its behalf by: Dr Arnab Basu MBE Chief Executive Ofﬁcer 34 Kromek Group plc Annual report and accounts 2014 Financial statements Consolidated statement of changes in equity For the year ended 30 April 2014 Equity attributable to equity holders of the Company Balance at 1 May 2012 Loss for the year Other comprehensive income for the year Total comprehensive income/(losses) for the period Issue of share capital Credit to equity for equity-settled share-based payments Balance at 30 April 2013 Loss for the year Other comprehensive losses for the year Total comprehensive losses for the period Issue of share capital net of expenses Share reorganisation Share buyback Credit to equity for equity-settled share-based payments Balance at 30 April 2014 Share capital £’000 1,175 — — — — — Share premium account £’000 20,330 — — — 1,948 — 1,175 22,278 — — — 301 779 (1,175) — 1,080 — — — 13,113 (779) — — 34,612 Capital redemption reserve £’000 Translation reserve £’000 Accumulated losses £’000 Total equity £’000 (15,064) 6,400 — — — — — — — — — — — — 1,175 — 1,175 (41) — 200 200 — — 159 — (641) (641) — — — — (643) — (643) — 122 (15,585) (3,189) — (3,189) — — — 125 (482) (18,649) (643) 200 (443) 1,948 122 8,027 (3,189) (641) (3,830) 13,414 — — 125 17,736 Consolidated statement of cash ﬂows For the year ended 30 April 2014 Net cash used in operating activities Investing activities Interest received Purchases of property, plant and equipment Purchases of patents and trademarks Capitalisation of research and development costs Acquisition of overseas trade and assets Deferred consideration Net cash used in investing activities Financing activities Loans (paid)/received Proceeds on issue of shares Interest paid Net cash from ﬁnancing activities Net increase/(decrease) in cash and cash equivalents Cash and cash equivalents at beginning of year Effect of foreign exchange rate changes Cash and cash equivalents at end of year Kromek Group plc Annual report and accounts 2014 35 Year ended 2014 £’000 Year ended 2013 £’000 (2,149) (1,245) Note 30 15 (187) (567) (1,061) — — — (58) (400) (906) (1,272) (53) (1,800) (2,689) (2,449) 13,414 (530) 10,435 6,486 309 (232) 6,563 1,949 1,948 (171) 3,726 (208) 477 40 309 O v e r v i e w S t r a t e g c i r e p o r t C o r p o r a t e g o v e r n a n c e i F n a n c i a l s t a t e m e n t s 36 Kromek Group plc Annual report and accounts 2014 Financial statements Notes to the consolidated ﬁnancial statements For the year ended 30 April 2014 1. General information Kromek Group plc is a company incorporated in the United Kingdom under the Companies Act. The address of the registered ofﬁce is given on page 68. The nature of the Group’s operations and its principal activities are set out in the Strategic report on pages 8 to 19. These ﬁnancial statements are presented in pounds sterling because that is the currency of the primary economic environment in which the Group operates. Foreign operations are included in accordance with the policies set out in note 3. 2. Adoption of new and revised standards During the current reporting period there were no new standards or amendments that had a material impact on the net assets of the Group. The following standards and interpretations issued by the IASB or IFRIC have not been adopted by the Group as these are not effective for the current year. The Group is currently assessing the impact these standards and interpretations will have on the presentation of its consolidated results in future periods: (cid:180) IFRS 15 ‘Revenue from Contracts with Customers’ (effective for accounting periods beginning on or after 1 January 2017). This amendment has not yet been endorsed for use in the EU. 3. Signiﬁcant accounting policies Basis of preparation The ﬁnancial statements have been prepared in accordance with IFRSs as adopted by the European Union and IFRIC interpretations. Therefore the Group ﬁnancial statements comply with Article 4 of the EU IAS Regulation. The ﬁnancial statements have been prepared on the historical cost basis, except for the revaluation of certain properties and ﬁnancial instruments. Historical cost is generally based on the fair value of the consideration given in exchange for the assets. The principal accounting policies adopted are set out below. Basis of consolidation The consolidated ﬁnancial statements incorporate the results and net assets of the Group and entities controlled by the Group (its subsidiaries) made up to 30 April each year. Control is achieved where the Group has the power to govern the ﬁnancial and operating policies of an investee entity so as to obtain beneﬁts from its activities. The results of subsidiaries acquired during the year are included in the consolidated income statement from the effective date of acquisition or up to the effective date of disposal, as appropriate. Where necessary, adjustments are made to results 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. Merger accounting In October 2013, when Kromek Group plc was included as the new ultimate parent entity as part of a Group reconstruction arrangement, the reconstructed Group was consolidated using merger accounting principles as outlined in Financial Reporting Standard 6 (“FRS”) “Acquisitions and Mergers” (UK) and treated the reconstructed Group as if it had always been in existence. The Company has taken advantage of merger relief available under Companies Act 2006 in respect of the share for share exchange as the issuing company has secured more than 90% equity in the other entity. The carrying value of the investment is carried at the nominal value of the shares issued. Kromek Group plc Annual report and accounts 2014 37 3. Signiﬁcant accounting policies continued Going concern The Board of Directors has conﬁdence that the Group has adequate resources to continue in operational existence for the foreseeable future. Accordingly, it continues to adopt the going concern basis in preparing the annual report and ﬁnancial statements. The Group has no external debt and at the statement of ﬁnancial position date had £6.6m of cash reserves. The Group prepares forecasts which show, taking into account reasonably possible changes in trading performance, that it has sufﬁcient resources to settle all of its liabilities as they fall due. Business combinations The Group ﬁnancial statements consolidate those of the Company and its subsidiary undertakings. Subsidiaries are entities controlled by the Group. Control exists when the Group has the power, directly or indirectly, to govern the ﬁnancial and operating policies of an entity so as to obtain beneﬁts from its activities. In assessing control, potential voting rights that are currently exercisable or convertible are taken into account. The ﬁnancial information of subsidiaries is included from the date that control commences until the date that control ceases. Intra-group balances and transactions, and any unrealised income and expenses arising from intra-group transactions, are eliminated in preparing the consolidated ﬁnancial information. Acquisitions on or after 1 May 2010 For acquisitions on or after 1 May 2010, the Group measures goodwill at the acquisition date as: (cid:180) the fair value of the consideration transferred; plus (cid:180) the recognised amount of any non-controlling interests in the acquiree; plus (cid:180) the fair value of the existing equity interest in the acquiree; less (cid:180) the net recognised amount (generally fair value) of the identiﬁable assets acquired and liabilities assumed. When the excess is negative, the negative goodwill is recognised immediately in proﬁt or loss. Costs related to the acquisition, other than those associated with the issue of debt or equity securities, are expensed as incurred. Goodwill Goodwill arising in a business combination is recognised as an asset at the date that control is acquired (the acquisition date). Goodwill is measured as the excess of the sum of the consideration transferred, the amount of any non-controlling interest in the acquiree and the fair value of the acquirer’s previously held equity interest (if any) in the entity over the net of the acquisition-date amounts of the identiﬁable assets acquired and the liabilities assumed. If, after reassessment, the Group’s interest in the fair value of the acquiree’s identiﬁable net assets exceeds the sum of the consideration transferred, the amount of any non-controlling interest in the acquiree and the fair value of the acquirer’s previously held equity interest in the acquiree (if any), the excess is recognised immediately in proﬁt or loss as a bargain purchase gain. Goodwill is not amortised but is reviewed for impairment at least annually. For the purpose of impairment testing, goodwill is allocated to each of the Group’s cash-generating units (“CGUs”) expected to beneﬁt from the synergies of the combination. CGUs to which goodwill has been allocated are tested for impairment annually, or more frequently when there is an indication that the unit may be impaired. If the recoverable amount of the CGU is less than the carrying amount of the unit, the impairment loss is allocated ﬁrst to reduce the carrying amount of any goodwill allocated to the unit and then to the other assets of the unit pro-rata on the basis of the carrying amount of each asset in the unit. An impairment loss recognised for goodwill is not reversed in a subsequent period. On disposal of a subsidiary, the attributable amount of goodwill is included in the determination of the proﬁt or loss on disposal. O v e r v i e w S t r a t e g c i r e p o r t C o r p o r a t e g o v e r n a n c e i F n a n c i a l s t a t e m e n t s 38 Kromek Group plc Annual report and accounts 2014 Financial statements Notes to the consolidated ﬁnancial statements continued For the year ended 30 April 2014 3. Signiﬁcant accounting policies continued Revenue recognition Revenue is measured at the fair value of the consideration received or receivable and represents amounts receivable for goods and services provided in the normal course of business, net of discounts, VAT and other sales related taxes and comprises: Sale of goods i) The Group’s income derives from the sale of goods and from the research and development contracts that are typically with government agencies. Revenue on product sales is recognised when the risk and reward of ownership pass to the customer. The terms of sale are agreed with each customer on an individual basis, which is generally when the goods are dispatched to the carrier. Revenue from research and development contracts is recognised as revenue in the accounting period in which the milestones and performance are achieved. ii) Long-term contracts The Group reﬂects revenue from long-term contracts by reference to the stage of completion of the contract activity at the statement of ﬁnancial position date. Revenue and proﬁts are determined by estimating the outcome of the contract and determining the costs and proﬁt attributable to the stage of completion. Any expected contract loss is recognised immediately. iii) Exclusivity contracts The Group reﬂects exclusivity payments as revenue at the point that it contractually agrees to become exclusive. Where terms of exclusivity require performance the Group reﬂects the revenue as performance is delivered. Interest revenue iv) Interest income is recognised when it is probable that the economic beneﬁts will ﬂow to the Group and the amount of revenue can be measured reliably. Interest income is accrued on a time basis, by reference to the principal outstanding and at the effective interest rate applicable, which is the rate that exactly discounts estimated future cash receipts through the expected life of the ﬁnancial asset to that asset’s net carrying amount on initial recognition. Leases Leases are classiﬁed as ﬁnance leases whenever the terms of the lease transfer substantially all the risks and rewards of ownership to the lessee. All other leases are classiﬁed as operating leases. The Group as lessee Rentals payable under operating leases are charged to income on a straight-line basis over the term of the relevant lease except where another more systematic basis is more representative of the time pattern in which economic beneﬁts from the lease asset are consumed. Contingent rentals arising under operating leases are recognised as an expense in the period in which they are incurred. In the event that lease incentives are received to enter into operating leases, such incentives are recognised as a liability. The aggregate beneﬁt of incentives is recognised as a reduction of rental expense on a straight-line basis, except where another systematic basis is more representative of the time pattern in which economic beneﬁts from the leased asset are consumed. Foreign currencies The individual results of each Group company are presented in the currency of the primary economic environment in which it operates (its functional currency). For the purpose of the consolidated ﬁnancial statements, the results and ﬁnancial position of each Group company are expressed in pounds sterling, which is the functional currency of the Company, and the presentation currency for the consolidated ﬁnancial statements. In preparing the results of the individual companies, transactions in currencies other than the entity’s functional currency (foreign currencies) are recognised at the rates of exchange prevailing on the dates of the transactions. At each statement of ﬁnancial position date, monetary assets and liabilities that are denominated in foreign currencies are retranslated at the rates prevailing at that date. Non-monetary items carried at fair value that are denominated in foreign currencies are translated at the rates prevailing at the date when the fair value was determined. Non-monetary items that are measured in terms of historical cost in a foreign currency are not retranslated. Kromek Group plc Annual report and accounts 2014 39 3. Signiﬁcant accounting policies continued Foreign currencies continued Exchange differences are recognised in proﬁt or loss in the period in which they arise. For the purpose of presenting consolidated ﬁnancial statements, the assets and liabilities of the Group’s foreign operations are translated at exchange rates prevailing on the statement of ﬁnancial position date. Income and expense items are translated at the average exchange rates for the period, unless exchange rates ﬂuctuate signiﬁcantly during that period, in which case the exchange rates at the date of transactions are used. Exchange differences arising, if any, are recognised in other comprehensive income and accumulated in equity. On consolidation, the results of overseas operations are translated into sterling at rates approximating to those ruling when the transactions took place. All assets and liabilities of overseas operations, including goodwill arising on the acquisition of those operations, are translated at the rate ruling at the statement of ﬁnancial position date. Exchange differences arising on translating the opening net assets at opening rate and the results of overseas operations at actual rate are recognised directly in other comprehensive income and are credited/(debited) to the retranslation reserve. Government grants Government grants are not recognised until there is reasonable assurance that the Group will comply with the conditions attaching to them and that the grants will be received. Government grants towards job creation (“GBI”) costs are recognised as income over the periods necessary to match them with the related costs and are deducted in reporting the related expense. Government grants relating to research and development (“GRD”) costs are treated as deferred income and released to proﬁt or loss over the expected useful lives of the assets concerned. Operating result Operating loss is stated as loss before tax, ﬁnance income and costs and other gains and losses. Retirement beneﬁt costs The Group operates a deﬁned contribution pension scheme for employees. Payments to deﬁned contribution retirement beneﬁt schemes are charged as an expense as they fall due. For these schemes the assets of the schemes are held separately from those of the Group in independently administered funds. Payments made to state-managed retirement beneﬁt schemes are dealt with as payments to deﬁned contribution schemes where the Group’s obligations under the schemes are equivalent to those arising in a deﬁned contribution retirement beneﬁt scheme. Taxation The tax expense represents the sum of the tax currently payable and deferred tax. Tax is recognised in the income statement except to the extent that it relates to items recognised directly in equity, in which case it is recognised in equity. i) Current tax The tax currently payable is based on taxable proﬁt for the year. Taxable proﬁt differs from net proﬁt as reported in the income statement because it excludes items of income or expense that are taxable or deductible in other years and it further excludes items that are never taxable or deductible. The Group’s liability for current tax is calculated using tax rates that have been enacted or substantively enacted by the statement of ﬁnancial position date. O v e r v i e w S t r a t e g c i r e p o r t C o r p o r a t e g o v e r n a n c e i F n a n c i a l s t a t e m e n t s 40 Kromek Group plc Annual report and accounts 2014 Financial statements Notes to the consolidated ﬁnancial statements continued For the year ended 30 April 2014 3. Signiﬁcant accounting policies continued Taxation continued ii) Deferred tax Deferred tax is the tax expected to be payable or recoverable on differences between the carrying amounts of assets and liabilities in the statement of ﬁnancial position and the corresponding tax bases used in the computation of taxable proﬁt, and is accounted for using the statement of ﬁnancial position liability method. Deferred tax liabilities are generally recognised for all taxable temporary differences and deferred tax assets are recognised to the extent that it is probable that taxable proﬁts will be available against which deductible temporary differences can be utilised. Such assets and liabilities are not recognised if the temporary difference arises from the initial recognition of goodwill or from the initial recognition (other than in a business combination) of other assets and liabilities in a transaction that affects neither the taxable proﬁt nor the accounting proﬁt. Deferred tax liabilities are recognised for taxable temporary differences arising on investments in subsidiaries and associates, and interests in joint ventures, except where the Group is able to control the reversal of the temporary difference and it is probable that the temporary difference will not reverse in the foreseeable future. The carrying amount of deferred tax assets is reviewed at each statement of ﬁnancial position date and reduced to the extent that it is no longer probable that sufﬁcient taxable proﬁts will be available to allow all or part of the asset to be recovered. Deferred tax is calculated at the tax rates that are expected to apply in the period when the liability is settled or the asset is realised based on tax laws and rates that have been enacted or substantively enacted at the statement of ﬁnancial position date. Deferred tax is charged or credited in the income statement, except when it relates to items charged or credited in other comprehensive income, in which case the deferred tax is also dealt with in other comprehensive income. Deferred tax assets and liabilities are offset when there is a legally enforceable right to set off current tax assets against current tax liabilities and when they relate to income taxes levied by the same taxation authority and the Group intends to settle its current tax assets and liabilities on a net basis. Property, plant and equipment Fixtures and equipment are stated at cost less accumulated depreciation and any recognised impairment loss. Depreciation is recognised so as to write off the cost or valuation of assets (other than land and properties under construction) less their residual values over their useful lives, using the straight-line method, on the following bases: Plant and machinery Fixtures, ﬁttings and equipment Computer equipment 25% 15% 25% The gain or loss arising on the disposal or scrappage of an asset is determined as the difference between the sales proceeds and the carrying amount of the asset and is recognised in income. Internally generated intangible assets – research and development expenditure Expenditure on research activities is recognised as an expense in the period in which it is incurred. An internally generated intangible asset arising from the Group’s product development is recognised only if all of the following conditions are met: (cid:180) an asset is created that can be identiﬁed (such as crystal production methodology); (cid:180) it is probable that the asset created will generate future economic beneﬁts; and (cid:180) the development cost of the asset can be measured reliably. Research expenditure is written off as incurred. Development expenditure is also written off, except where the Directors are satisﬁed as to the technical, commercial and ﬁnancial viability of individual projects. In such cases, the identiﬁable expenditure is deferred and amortised over the period during which the Group is expected to beneﬁt. This period normally equates to the life of the products the development expenditure relates to. Provision is made for any impairment. Kromek Group plc Annual report and accounts 2014 41 O v e r v i e w S t r a t e g c i r e p o r t C o r p o r a t e g o v e r n a n c e i F n a n c i a l s t a t e m e n t s 3. Signiﬁcant accounting policies continued Patents and trademarks Patents and trademarks are measured initially at purchase cost and are amortised on a straight-line basis over their estimated useful lives. Impairment of tangible and intangible assets excluding goodwill At each statement of ﬁnancial position date, the Group reviews the carrying amounts of its tangible and intangible assets to determine whether there is any indication that those assets have suffered an impairment loss. If any such indication exists, the recoverable amount of the asset is estimated to determine the extent of the impairment loss (if any). Where the asset does not generate cash ﬂows that are independent from other assets, the Group estimates the recoverable amount of the CGU to which the asset belongs. When a reasonable and consistent basis of allocation can be identiﬁed, corporate assets are also allocated to individual CGUs, or otherwise they are allocated to the smallest group of CGUs for which a reasonable and consistent allocation basis can be identiﬁed. An intangible asset with an indeﬁnite useful life is tested for impairment at least annually and whenever there is an indication that the asset may be impaired. Recoverable amount is the higher of fair value less costs to sell and value in use. In assessing value in use, the estimated future cash ﬂows are discounted to their present value using a pre-tax discount rate that reﬂects current market assessments of the time value of money and the risks speciﬁc to the asset for which the estimates of future cash ﬂows have not been adjusted. If the recoverable amount of an asset (or CGU) is estimated to be less than its carrying amount, the carrying amount of the asset (or CGU) is reduced to its recoverable amount. An impairment loss is recognised immediately in proﬁt or loss, unless the relevant asset is carried at a revalued amount, in which case the impairment loss is treated as a revaluation decrease. Where an impairment loss subsequently reverses, the carrying amount of the asset (or CGU) is increased to the revised estimate of its recoverable amount, but so that the increased carrying amount does not exceed the carrying amount that would have been determined had no impairment loss been recognised for the asset (or CGU) in prior years. A reversal of an impairment loss is recognised immediately in proﬁt or loss, unless the relevant asset is carried at a revalued amount, in which case the reversal of the impairment loss is treated as a revaluation increase. Inventories Inventories are stated at the lower of cost and net realisable value. Costs comprise direct materials and, where applicable, direct labour costs and those overheads that have been incurred in bringing the inventories to their present location and condition. Cost is calculated in the statement of ﬁnancial position at standard cost, which approximates to historical cost determined on a ﬁrst in, ﬁrst out basis. Net realisable value represents the estimated selling price less all estimated costs of completion and costs to be incurred in marketing, selling and distribution. Work in progress costs are taken as production costs, which include an appropriate proportion of attributable overheads. Financial instruments Financial assets and ﬁnancial liabilities are recognised in the Group’s statement of ﬁnancial position when the Group becomes a party to the contractual provisions of the instrument. Financial assets i) All ﬁnancial assets are recognised and derecognised on a trade date where the purchase or sale of a ﬁnancial asset is under a contract whose terms require delivery of the ﬁnancial asset within the timeframe established by the market concerned, and are initially measured at fair value, plus transaction costs, except for those ﬁnancial assets classiﬁed as at fair value through proﬁt or loss, which are initially measured at fair value. Financial assets are classiﬁed into the following speciﬁed category: “loans and receivables”. The classiﬁcation depends on the nature and purpose of the ﬁnancial assets and is determined at the time of initial recognition. The Group held no fair value through proﬁt and loss (“FVTPL”), available for sale (“AFS”) or held-to-maturity (“HTM”) ﬁnancial assets during the historical ﬁnancial information period. 42 Kromek Group plc Annual report and accounts 2014 Financial statements Notes to the consolidated ﬁnancial statements continued For the year ended 30 April 2014 3. Signiﬁcant accounting policies continued Financial instruments continued ii) Loans and receivables Trade receivables, loans, and other receivables that have ﬁxed or determinable payments that are not quoted in an active market are classiﬁed as “loans and receivables”. Loans and receivables are measured at amortised cost using the effective interest method, less any impairment. Interest income is recognised by applying the effective interest rate, except for short-term receivables when the recognition of interest would be immaterial. iii) Impairment of ﬁnancial assets Financial assets, other than those at FVTPL, are assessed for indicators of impairment at each statement of ﬁnancial position date. Financial assets are impaired where there is objective evidence that, as a result of one or more events that occurred after the initial recognition of the ﬁnancial asset, the estimated future cash ﬂows of the investment have been affected. Derecognition of ﬁnancial assets iv) The Group derecognises a ﬁnancial asset only when the contractual rights to the cash ﬂows from the asset expire, or when it transfers the ﬁnancial asset and substantially all the risks and rewards of ownership of the asset to another entity. If the Group neither transfers nor retains substantially all the risks and rewards of ownership and continues to control the transferred asset, the Group recognises its retained interest in the asset and an associated liability for amounts it may have to pay. If the Group retains substantially all the risks and rewards of ownership of a transferred ﬁnancial asset, the Group continues to recognise the ﬁnancial asset and also recognises a collateralised borrowing for the proceeds received. v) Financial liabilities and equity Debt and equity instruments are classiﬁed as either ﬁnancial liabilities or as equity in accordance with the substance of the contractual arrangement. vi) Equity instruments An equity instrument is any contract that evidences a residual interest in the assets of an entity after deducting all of its liabilities. Equity instruments issued by the Group are recognised at the proceeds received, net of direct issue costs. vii) Financial liabilities Financial liabilities are classiﬁed as “other ﬁnancial liabilities”. The Group held no ﬁnancial liabilities that would be classiﬁed as FVTPL. viii) Other ﬁnancial liabilities Other ﬁnancial liabilities, including borrowings, are initially measured at fair value, net of transaction costs. Other ﬁnancial liabilities are subsequently measured at amortised cost using the effective interest method, with interest expense recognised on an effective yield basis. The effective interest method is a method of calculating the amortised cost of a ﬁnancial liability and of allocating interest expense over the relevant period. The effective interest rate is the rate that exactly discounts estimated future cash payments through the expected life of the ﬁnancial liability, or, where appropriate, a shorter period, to the net carrying amount on initial recognition. ix) Derecognition of ﬁnancial liabilities The Group derecognises ﬁnancial liabilities when, and only when, the Group’s obligations are discharged, cancelled or they expire. Share-based payments Equity-settled share-based payments to employees and others providing similar services are measured at the fair value of the equity instruments at the grant date and spread over the period during which the employees become unconditionally entitled to the options, which is based on a period of employment of three years from grant date. Details regarding the determination of the fair value of equity-settled share-based transactions are set out in note 32. The fair value determined at the grant date of the equity-settled share-based payments is expensed on a straight-line basis over the vesting period, based on the Group’s estimate of equity instruments that will eventually vest. The vesting date is determined based on the date an employee is granted options, usually three years from date of grant. At each statement of ﬁnancial position date, the Group revises its estimate of the number of equity instruments expected to vest as a result of the effect of non-market-based vesting conditions. The impact of the revision of the original estimates, if any, is recognised in proﬁt or loss such that the cumulative expense reﬂects the revised estimate, with a corresponding adjustment to equity reserves. Kromek Group plc Annual report and accounts 2014 43 O v e r v i e w S t r a t e g c i r e p o r t C o r p o r a t e g o v e r n a n c e i F n a n c i a l s t a t e m e n t s 3. Signiﬁcant accounting policies continued Cash Cash, for the purposes of the statement of cash ﬂows, comprises cash in hand and deposits repayable on demand, less overdrafts repayable on demand. 4. Critical accounting judgements and key sources of estimation uncertainty In the application of the Group’s accounting policies, which are described in note 3, the Directors are required to make judgements, estimates and assumptions about the carrying amounts of assets and liabilities that are not readily apparent from other sources. The estimates and associated assumptions are based on historical experience and other factors that are considered to be relevant. Actual results may differ from these estimates. The estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the period in which the estimate is revised if the revision affects only that period or in the period of the revision and future periods if the revision affects both current and future periods. Critical judgements in applying the Group’s accounting policies The following are the critical judgements that the Directors have made in the process of applying the Group’s accounting policies and that have the most signiﬁcant effect on the amounts recognised in the ﬁnancial statements. Development costs As described in note 3, the Group expenditure on development activities is capitalised if it meets the criteria as per IAS 38. These capitalised assets are amortised on a straight-line basis over their useful lives. Where no internally generated intangible asset can be recognised, development expenditure is recognised as an expense in the period in which it is incurred. Impairment of non-ﬁnancial assets The Group assesses whether there are any indicators of impairment as at the transition date and thereafter for all non-ﬁnancial assets at each reporting date. Goodwill is tested for impairment annually and at other times when such indicators exist, such as negative cash ﬂows and operating losses of subsidiaries. Other non-ﬁnancial assets are tested for impairment when there are indicators that the carrying amounts may not be recoverable. When value in use calculations are undertaken, management must estimate the expected future cash ﬂows from the asset or cash-generating unit and choose a suitable discount rate in order to calculate the present value of those cash ﬂows. Valuation of acquired intangible assets Acquisitions may result in identiﬁable intangible assets such as customer relationships, supplier relationships, licences and technology being recognised. These are valued by professional valuation ﬁrms, using discounted cash ﬂow methods that require the application of certain key judgements, and estimates are required to be made in respect of discount rates and future cash ﬂows. Key sources of estimation uncertainty The key assumptions concerning the future, and other key sources of estimation uncertainty at the statement of ﬁnancial position date, that have a signiﬁcant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next ﬁnancial year are discussed below. i) Development costs Development costs are capitalised in accordance with the accounting policy noted above. Initial capitalisation of costs is based on management’s judgement that technological and economic feasibility is conﬁrmed, usually when a product development project has reached a deﬁned milestone. Impairment of goodwill ii) The Group determines whether goodwill is impaired on at least an annual basis or more frequently when there are indications of possible impairment. The impairment review requires a value in use calculation of the CGUs to which the goodwill is allocated. In estimating the value in use, management is required to make an estimate of the expected future cash ﬂows attributable to the CGU and to choose an appropriate discount rate to calculate the present value of those cash ﬂows. The carrying amount of goodwill at 30 April 2014 was £1,275k (2013: £1,275k). Further details are given in note 15. 44 Kromek Group plc Annual report and accounts 2014 Financial statements Notes to the consolidated ﬁnancial statements continued For the year ended 30 April 2014 5. Revenue An analysis of the Group’s revenue is as follows: Continuing operations Sales of goods and other services Other revenue Total revenue Grant income Insurance claims Legal settlement Total income Year ended 2014 £’000 5,329 643 5,972 229 — 490 6,691 Year ended 2013 £’000 2,691 — 2,691 — 25 — 2,716 6. Operating segments Products and services from which reportable segments derive their revenues For management purposes, the Group is organised into two business units (US and UK) and it is on these operating segments that the Group is providing disclosure. The chief operating decision maker is the Board of Directors, which assesses performance of the segments using the following key performance indicators: revenues, gross proﬁt and operating proﬁt. The amounts provided to the Board with respect to assets and liabilities are measured in a way consistent with the ﬁnancial statements. The turnover, proﬁt on ordinary activities and net assets of the Group are attributable to one business segment, i.e. the development of digital colour x-ray imaging enabling direct materials identiﬁcation, as well as developing a number of detection products in the industrial and consumer markets. Analysis by geographical area A geographical analysis of the Group’s revenue by destination is as follows: United Kingdom North America Asia Europe Australasia Total revenue Year ended 2014 £’000 385 3,416 1,089 1,054 28 5,972 Year ended 2013 £’000 85 1,240 1,165 199 2 2,691 6. Operating segments continued Analysis by geographical area continued A geographical analysis of the Group’s revenue by origin is as follows: Year ended 30 April 2014 Revenue from sales Revenue by segment: – Sale of goods and services – Other revenue Total sales by segment Removal of inter-segment sales Total external sales Segment result – operating loss Interest received Interest expense Loss before tax Tax credit Loss for the year Adjusted EBITDA Other segment information Property, plant and equipment additions Depreciation of property, plant and equipment Intangible asset additions Amortisation of intangible assets Statement of ﬁnancial position Total assets Total liabilities Kromek Group plc Annual report and accounts 2014 45 UK operations £’000 US operations £’000 Total for Group £’000 1,832 — 1,832 (10) 1,822 (3,143) 15 (530) (3,658) 1,106 (2,552) (2,526) 98 364 1,230 253 3,764 643 4,407 (257) 4,150 (637) — — (637) — (637) 43 89 373 398 307 5,596 643 6,239 (267) 5,972 (3,780) 15 (530) (4,295) 1,106 (3,189) (2,483) 187 737 1,628 560 15,290 (3,649) 6,790 (695) 22,080 (4,344) O v e r v i e w S t r a t e g c i r e p o r t C o r p o r a t e g o v e r n a n c e i F n a n c i a l s t a t e m e n t s 46 Kromek Group plc Annual report and accounts 2014 Financial statements Notes to the consolidated ﬁnancial statements continued For the year ended 30 April 2014 6. Operating segments continued Analysis by geographical area continued Year ended 30 April 2013 Revenue from sales Revenue by segment: – Sale of goods and services Removal of inter-segment sales Total external sales Segment result – operating loss Interest received Interest expense Gain on a bargain purchase Loss before tax Tax credit Loss for the year Adjusted EBITDA Other segment information Property, plant and equipment additions Depreciation of property, plant and equipment Intangible asset additions Amortisation of intangible assets Statement of ﬁnancial position Total assets Total liabilities UK operations £’000 US operations £’000 Total for Group £’000 1,548 — 1,548 (3,407) — (148) 2,417 (1,138) 765 (373) (2,909) 58 346 1,298 152 1,343 (200) 1,143 (495) — (23) — (518) 248 (270) (282) 2,222 101 2,114 112 8,370 (5,108) 6,800 (2,035) 2,891 (200) 2,691 (3,902) — (171) 2,417 (1,656) 1,013 (643) (3,191) 2,280 447 3,412 264 15,170 (7,143) Inter-segment sales are charged at prevailing market prices. No other additions of non-current assets have been recognised during the year other than property, plant and equipment and intangible assets. No impairment losses were recognised in respect of property, plant and equipment and goodwill. The accounting policies of the reportable segments are the same as the Group’s accounting policies described in note 3. Segment loss represents the loss earned by each segment without allocation of the share of losses of associates, central administration costs including Directors’ salaries, investment revenue and ﬁnance costs, and income tax expense. This is the measure reported to the Group’s Chief Executive for the purpose of resource allocation and assessment of segment performance. Kromek Group plc Annual report and accounts 2014 47 6. Operating segments continued Revenues from major products and services The Group’s revenues from its major products and services were as follows: Product revenue Research and development revenue Consolidated revenue (excluding investment revenue) Information about major customers Year ended 2014 £’000 4,746 1,226 5,972 Year ended 2013 £’000 1,786 905 2,691 Included in revenues arising from US operations are revenues of approximately £1,249k (2013: £899k) which arose from sales to the Group’s largest customer. 7. Loss for the year Loss for the year has been arrived at after (crediting)/charging: Net foreign exchange gains Research and development costs recognised as an expense Depreciation of property, plant and equipment Amortisation of internally generated intangible assets Release of negative goodwill to income statement Cost of inventories recognised as expense Staff costs (see note 9) 8. Auditor’s remuneration The analysis of the auditor’s remuneration is as follows: Fees payable to the Company’s auditor and their associates for other services to the Group – The audit of the Company’s subsidiaries Total audit fees – Audit related assurance services – Taxation compliance services – Other taxation advisory services – Corporate ﬁnance transaction services Total non-audit fees Year ended 2014 £’000 (84) 2,020 737 560 — 1,911 5,104 Year ended 2014 £’000 35 35 — 6 107 139 252 Year ended 2013 £’000 (1) 580 447 264 (2,417) 1,023 3,431 Year ended 2013 £’000 38 38 40 6 3 — 49 O v e r v i e w S t r a t e g c i r e p o r t C o r p o r a t e g o v e r n a n c e i F n a n c i a l s t a t e m e n t s 48 Kromek Group plc Annual report and accounts 2014 Financial statements Notes to the consolidated ﬁnancial statements continued For the year ended 30 April 2014 9. Staff costs The average monthly number of employees (including Executive Directors) was: Directors Research and development, production, sales and distribution Administration Their aggregate remuneration comprised: Wages and salaries Social security costs Pension scheme contributions Share-based payments Year ended 2014 Number 4 81 16 101 Year ended 2014 £’000 4,177 439 363 125 5,104 Further details on the remuneration of the Directors are included in the Directors’ remuneration report on pages 28 and 29. Key management compensation: Wages and salaries and other short-term beneﬁts Social security costs Pension scheme contributions Share-based payment expense Key management comprises the Executive Directors and senior operational staff. 10. Finance income Interest revenue Investment revenue earned on ﬁnancial assets, analysed by category of asset, is as follows: Loans and receivables (including cash and bank balances) Total interest income for ﬁnancial assets not designated at FVTPL Year ended 2014 £’000 790 99 76 45 1,010 Year ended 2014 £’000 15 Year ended 2014 £’000 15 15 Year ended 2013 Number 6 58 11 75 Year ended 2013 £’000 2,806 218 285 122 3,431 Year ended 2013 £’000 575 55 99 70 799 Year ended 2013 £’000 — Year ended 2013 £’000 — — Kromek Group plc Annual report and accounts 2014 49 11. Finance costs Interest on bank overdrafts and loans Interest on loans due to related parties Total interest expense 12. Tax Recognised in the income statement Current tax credit: – UK corporation tax on losses in the year – Adjustments in respect of previous years – Foreign taxes paid Total current tax Deferred tax: – Origination and reversal of timing differences – Adjustment in respect of previous years Total deferred tax Total tax credit in income statement Year ended 2014 £’000 17 513 530 Year ended 2014 £’000 696 — (1) 695 411 — 411 1,106 Corporation tax is calculated at 22.83% (2013: 23.92%) of estimated taxable loss for the year. Taxation for other jurisdictions is calculated at the rates prevailing in the respective jurisdictions. Reconciliation of tax credit The charge for the year can be reconciled to the proﬁt in the income statement as follows: Loss before tax Tax at the UK corporation tax rate of 22.83% (2013: 23.92%) Expenses not deductible for tax purposes Effect of R&D Rate differences effect of R&D Negative goodwill non-taxable write-off Income not taxable Unrecognised movement on deferred tax Effects of overseas tax rates Adjustments in respect of previous periods Total tax credit for the year Year ended 2014 £’000 4,295 981 (57) 791 (727) — 155 (360) 323 — 1,106 O v e r v i e w S t r a t e g c i r e p o r t C o r p o r a t e g o v e r n a n c e i F n a n c i a l s t a t e m e n t s Year ended 2013 £’000 59 112 171 Year ended 2013 £’000 767 (2) (1) 764 201 48 249 1,013 Year ended 2013 £’000 1,656 396 (14) 195 — 578 — (248) 60 46 1,013 50 Kromek Group plc Annual report and accounts 2014 Financial statements Notes to the consolidated ﬁnancial statements continued For the year ended 30 April 2014 12. Tax continued Reconciliation of tax credit continued Deferred tax liabilities of £1,329k (2013: £1,612k) arose on the acquisition of eV Products, Inc. during the year ended 30 April 2013. Further details of deferred tax are given in note 22. There are no tax items charged to other comprehensive income. The Finance Act 2013 enacted a rate reduction in the main rate of corporation tax to 21% from 1 April 2014 and to 20% from 1 April 2015. As there is no UK deferred tax recognised there is no impact on the tax provisions reported in these accounts. There is a potential deferred tax asset on excess tax deductions arising from share-based payments on exercise of share options of £1,147k (2013: £1,420k). The asset has not been recognised as it is not considered probable that there will be future proﬁts available. 13. Dividends The Directors do not recommend the payment of a dividend (2013: £nil). 14. Losses per share The calculation of the basic and diluted earnings per share is based on the following data: Losses Losses for the purposes of basic and diluted losses per share being net losses attributable to owners of the Group Number of shares Year ended 2014 £’000 Year ended 2013 £’000 (3,189) (643) Year ended 2014 Number Year ended 2013 Number Weighted average number of ordinary shares for the purposes of basic losses per share 61,870,643 7,572,337 Effect of dilutive potential ordinary shares: – Share options Weighted average number of ordinary shares for the purposes of diluted losses per share Basic and diluted Adjusted basic and diluted 5,080,789 341,429 66,951,432 7,913,766 Year ended 2014 £ (0.05) (0.05) Year ended 2013 £ (0.08) (0.40) Due to the Group having losses in each of the years, the fully diluted loss per share for disclosure purposes, as shown in the income statement, is the same as for the basic loss per share. 15. Goodwill Cost At 1 May 2013 At 30 April 2014 Accumulated impairment losses At 1 May 2013 At 30 April 2014 Carrying amount At 30 April 2014 At 30 April 2013 £’000 1,275 1,275 — — 1,275 1,275 Kromek Group plc Annual report and accounts 2014 51 15. Goodwill continued Goodwill acquired in a business combination is allocated, at acquisition, to the CGUs that are expected to beneﬁt from that business combination. Before recognition of impairment losses, the carrying amount of goodwill had been allocated as follows: US operations Year ended 2014 £’000 1,275 Year ended 2013 £’000 1,275 The goodwill arose on the acquisition of NOVA R&D, Inc. in 2011 and represents the excess of the fair value of the consideration given over the fair value of the identiﬁable assets and liabilities acquired. Goodwill has been allocated to NOVA R&D, Inc. as a CGU and is reported in note 6 within the segmental analysis of the US operations. Negative goodwill arose on the acquisition of eV Products, Inc. which has been released to the income statement in 2013. The Group tests goodwill annually for impairment or more frequently if there are indications that goodwill might be impaired, by comparing the net book value of the goodwill and non-current assets for the CGU to its value in use on a discounted cash ﬂow basis. The recoverable amount has been determined on a value in use basis on each CGU using the management approved ﬁve year forecasts for each CGU. The base ﬁve year projection is year on year growth over the next ﬁve years, with overheads remaining relatively stable. The growth rate of the CGU is expected to increase to 50% in year two as a result of the CGU continuing to develop its technical capabilities in the forthcoming year. Growth is then expected to fall to 7% in year two, 38% in year three and 2% in year four as a result of the rapid growth in year two, and 10% in year ﬁve. These cash ﬂows are then discounted at the Company’s weighted average cost of capital of 16% (2013: 18%). Based on the results of the current year impairment review, no impairment charges have been recognised by the Group in the year ended 30 April 2014 (2013: £nil). Management has considered various sensitivity analyses in order to appropriately evaluate the carrying value of goodwill. Having assessed the anticipated future cash ﬂows the Directors do not consider there to be any reasonably possible changes in assumptions that would lead to such an impairment charge in the year ended 30 April 2014. Purely for illustrative purposes, a compound reduction in revenue of 5% in each of years one to ﬁve whilst holding overheads constant would not affect the conclusion of the review. The Directors have reviewed the recoverable amount of the CGU and do not consider there to be any indication of impairment in 2014 or 2013. 16. Other intangible assets Cost At 1 May 2013 Additions Exchange differences At 30 April 2014 Amortisation At 1 May 2013 Charge for the year Exchange differences At 30 April 2014 Carrying amount At 30 April 2014 At 30 April 2013 Development costs £’000 Patents, trademarks and other intangibles £’000 2,477 1,061 — 3,538 — 56 — 56 3,482 2,477 4,296 567 (278) 4,585 636 504 (38) 1,102 3,483 3,660 Total £’000 6,773 1,628 (278) 8,123 636 560 (38) 1,158 6,965 6,137 O v e r v i e w S t r a t e g c i r e p o r t C o r p o r a t e g o v e r n a n c e i F n a n c i a l s t a t e m e n t s The amortisation period for development costs incurred on the Group’s product development is over the period during which the Company is expected to beneﬁt and the amortisation will be based on the number of units sold over the expected product lifetime. Patents and trademarks are amortised over their estimated useful lives, which is on average 10 years. 52 Kromek Group plc Annual report and accounts 2014 Financial statements Notes to the consolidated ﬁnancial statements continued For the year ended 30 April 2014 17. Property, plant and equipment Cost or valuation At 1 May 2013 Additions Exchange differences At 30 April 2014 Accumulated depreciation and impairment At 1 May 2013 Charge for the year Exchange differences At 30 April 2014 Carrying amount At 30 April 2014 At 30 April 2013 Computer equipment* £’000 Plant and machinery* £’000 Fixtures and ﬁttings* £’000 520 4,529 71 (5) 112 (215) 586 4,426 272 127 (1) 398 188 248 1,859 583 (53) 2,389 2,037 2,670 144 4 (4) 144 57 27 — 84 60 87 Total £’000 5,193 187 (224) 5,156 2,188 737 (54) 2,871 2,285 3,005 * The Directors have reviewed the property, plant and equipment in 2013, and have reclassiﬁed, at cost, £2,174k of computer equipment and £13k of ﬁxtures and ﬁttings into plant and machinery. Accumulated depreciation has also been reclassiﬁed in 2013, with £103k being reclassiﬁed from computer equipment into plant and machinery. 18. Subsidiaries A list of the signiﬁcant investments in subsidiaries, including the name, country of incorporation, and proportion of ownership interest, is given in note 39 to the Company’s separate ﬁnancial statements. 19. Inventories Raw materials Work in progress Finished goods Year ended 2014 £’000 465 1,391 533 Year ended 2013 £’000 408 790 900 2,389 2,098 The cost of inventories recognised as an expense during the year in respect of continuing operations was £1,911k (2013: £1,023k). The Directors have reviewed the inventory in 2013 and have reclassiﬁed £790k of ﬁnished goods into work in progress to ensure the correct disclosure of inventory between the three components disclosed above. 20. Trade and other receivables Amount receivable for the sale of goods Other receivables Prepayments Year ended 2014 £’000 1,501 90 316 1,907 Year ended 2013 £’000 1,161 324 94 1,579 Kromek Group plc Annual report and accounts 2014 53 O v e r v i e w S t r a t e g c i r e p o r t C o r p o r a t e g o v e r n a n c e i F n a n c i a l s t a t e m e n t s 20. Trade and other receivables continued Trade receivables Trade receivables disclosed above are classiﬁed as loans and receivables and are therefore measured at amortised cost. The average credit period taken on sales of goods is 60 days. No interest is charged on the receivables. The Group recognises an allowance for doubtful debts of 100% against all receivables over 120 days because historical experience has been that receivables that are past due beyond 120 days are not recoverable. Allowances against doubtful debts are recognised against trade receivables between 30 days and 120 days based on estimated irrecoverable amounts determined by reference to past default experience of the counterparty and an analysis of the counterparty’s current ﬁnancial position. Before accepting any new customer, the Group uses an external credit scoring system to assess the potential customer’s credit quality and deﬁnes credit limits by customer. The Group does not hold any collateral or other credit enhancements over any of its trade receivables nor does it have a legal right of offset against any amounts owed by the Group to the counterparty. Ageing of past due but not impaired receivables: 31–60 days 61–90 days 91–120 days Total Year ended 2014 £’000 70 13 550 633 Year ended 2013 £’000 111 26 109 246 Included within receivables past due but not impaired of 91–120 days are amounts relating to a distributor for whom the Group is supporting during the commercialisation process. In determining the recoverability of a trade receivable the Group considers any change in the credit quality of the trade receivable from the date credit was initially granted up to the reporting date. The concentration of credit risk is limited due to the customer base being large and unrelated. The Directors consider that the carrying amount of trade and other receivables is approximately equal to their fair value. 21. Borrowings Total borrowings Amount due for settlement within 12 months Amount due for settlement after 12 months Year ended 2014 £’000 — — Year ended 2013 £’000 2,449 — Amounts included within loans and borrowings of £nil (2013: £1,060k) carry interest of nil% (2013: 5%) per month charged on the outstanding loan balances. 22. Deferred tax liabilities The following are the major deferred tax liabilities and assets recognised by the Group and movements thereon during the current and prior reporting period. At 1 May 2013 Charge/(credit) to proﬁt or loss At 30 April 2014 Revaluation of intangibles £’000 1,765 (307) 1,458 Accelerated capital allowances £’000 Short-term timing differences £’000 441 186 627 (74) 57 (17) Tax losses £’000 (588) (346) (934) Total £’000 1,544 (410) 1,134 54 Kromek Group plc Annual report and accounts 2014 Financial statements Notes to the consolidated ﬁnancial statements continued For the year ended 30 April 2014 22. Deferred tax liabilities continued Deferred tax assets and liabilities are offset where the Group has a legally enforceable right to do so. The following is the analysis of the deferred tax balances (after offset) for ﬁnancial reporting purposes: Deferred tax liabilities Deferred tax assets Year ended 2014 £’000 2,085 (951) 1,134 Year ended 2013 £’000 2,206 (662) 1,544 At the statement of ﬁnancial position date, the Group has unused tax losses of £12,075k (2013: £9,869k) available for offset against future proﬁts. A deferred tax asset has been recognised in respect of £3,845k (2013: £2,220k) of such losses. No deferred tax asset has been recognised in respect of the remaining £8,230k (2013: £7,650k) as it is not considered probable that there will be future taxable proﬁts available. All losses may be carried forward indeﬁnitely subject to a signiﬁcant change in the nature of the Group’s trade with US losses having a maximum life of 20 years. 23. Trade and other payables Trade payables and accruals Year ended 2014 £’000 3,210 Year ended 2013 £’000 3,149 Trade payables and accruals principally comprise amounts outstanding for trade purchases and ongoing costs. The average credit period taken for trade purchases is 175 days. For all suppliers no interest is charged on the trade payables. The Group has ﬁnancial risk management policies in place to ensure that all payables are paid within the pre-agreed credit terms. The Directors consider that the carrying amount of trade payables approximates to their fair value. 24. Derivatives, ﬁnancial instruments and hedge accounting At 30 April 2014 and 30 April 2013 the Group had no derivatives in place for cash ﬂow hedging purposes. 25. Share capital Allotted, called up and fully paid 108,010,790 ordinary shares of £0.01 each 453,841 ordinary shares of £0.00004 each 950,000 A ordinary shares of £0.00004 each 600,000 B ordinary shares of £0.00004 each 550,000 C ordinary shares of £0.00004 each 174,962 D ordinary shares of £1 each 1,000,000 E ordinary shares of £0.00004 each 358,500 F ordinary shares of £0.00004 each 421,000 F preference shares of £0.00004 each 1,000,000 G ordinary shares of £0.99996 each 297,500 H ordinary shares of £0.00004 each 577,593 H preference shares of £0.00004 each 658,956 J ordinary shares of £0.00004 each 1,526,181 J preference shares of £0.00004 each 279,768 K ordinary shares of £0.00004 each 64,762 K preference shares of £0.00004 each Year ended 2014 £’000 1,080 — — — — — — — — — — — — — — — Year ended 2013 £’000 — — — — — 175 — — — 1,000 — — — — — — 1,080 1,175 Kromek Group plc Annual report and accounts 2014 55 25. Share capital continued During the year, a capital restructure was undertaken as part of the IPO. The class D and G shares of total nominal value of £1.175m in Kromek Limited were acquired by the Group for £1 each and then cancelled, thus creating a capital redemption reserve. The remaining ordinary share capital in Kromek Limited of 0.004p per share were merged into a single class of ordinary 1p shares and a bonus issue of 10% was also issued for the K ordinary and preference shares. The ordinary shares were then exchanged on a 10:1 basis for shares in Kromek Group plc. In addition, a further 29m shares were issued for a net consideration of £13.4m. During the year 532,000 shares (2013: 2,619,000) were allotted under EMI share option schemes. Unpaid share capital At the year ended 30 April 2014, unpaid share capital amounted to £nil (2013: £241k). 26. Share premium account Balance at 1 May 2013 Premium arising on issue of equity shares Transfer to capital redemption reserve Expenses of issue of equity shares Balance at 30 April 2014 27. Capital redemption reserve £’000 22,278 14,460 (779) (1,347) 34,612 During the year, a capital restructure was undertaken as a result of the IPO. The class D and G shares of total nominal value of £1.175m in Kromek Limited were acquired by the Group for £1 each and then cancelled, thus creating a capital redemption reserve. 28. Translation reserve Balance at 1 May 2013 Exchange differences on translating the net assets of foreign operations Balance at 30 April 2014 £’000 159 (641) (482) Exchange differences relating to the translation of the net assets of the Group’s foreign operations, which relate to subsidiaries only, from their functional currency into the parent’s functional currency, being sterling, are recognised directly in the translation reserve. 29. Accumulated losses Balance at 1 May 2013 Net loss for the year Effect of share-based payment credit Balance at 30 April 2014 £’000 (15,585) (3,189) 125 (18,649) O v e r v i e w S t r a t e g c i r e p o r t C o r p o r a t e g o v e r n a n c e i F n a n c i a l s t a t e m e n t s 56 Kromek Group plc Annual report and accounts 2014 Financial statements Notes to the consolidated ﬁnancial statements continued For the year ended 30 April 2014 30. Notes to the cash ﬂow statement Loss for the year Adjustments for: – Finance income – Finance costs – Income tax credit – Depreciation of property, plant and equipment – Amortisation of intangible assets – Negative goodwill released to income statement – Share-based payment expense Year ended 2014 £’000 (3,189) (15) 530 (1,106) 737 560 — 125 Year ended 2013 £’000 (643) — 171 (1,013) 447 264 (2,417) 122 Operating cash ﬂows before movements in working capital (2,358) (3,069) Increase in inventories Increase in receivables Increase in payables Cash used in operations Income taxes received Net cash used in operating activities Cash and cash equivalents Cash and bank balances (291) (386) 120 (2,915) 766 (2,149) Year ended 2014 £’000 6,563 Cash and cash equivalents comprise cash and short-term bank deposits with an original maturity of three months or less, net of outstanding bank overdrafts. The carrying amount of these assets is approximately equal to their fair value. 31. Operating lease arrangements The Group as lessee Lease payments under operating leases recognised as an expense in the year Year ended 2014 £’000 577 At the statement of ﬁnancial position date, the Group had outstanding commitments for future minimum lease payments under non-cancellable operating leases, which fall due as follows: Within one year In the second to ﬁfth years inclusive Year ended 2014 £’000 310 68 378 Operating lease payments represent rentals payable by the Group for certain of its ofﬁce properties. Leases are negotiated for an average term of ﬁve years. At 30 April 2014 and 2013, the Group had no capital commitments or contingencies. (284) (625) 1,374 (2,604) 1,359 (1,245) Year ended 2013 £’000 309 Year ended 2013 £’000 333 Year ended 2013 £’000 386 391 777 Kromek Group plc Annual report and accounts 2014 57 O v e r v i e w S t r a t e g c i r e p o r t C o r p o r a t e g o v e r n a n c e i F n a n c i a l s t a t e m e n t s 32. Share-based payments Equity-settled share option scheme The Company has a share option scheme (EMI scheme) for all employees of the Group. Options are exercisable at a price equal to the average quoted market price of the Company’s shares on the date of grant. The average vesting period is three years. If the options remain unexercised after a period of 10 years from the date of grant the options expire. Options are forfeited if the employee leaves the Group before the options vest. Details of the share options outstanding during the year are as follows: Outstanding at beginning of the year Effect of share reorganisation Granted during the year Exercised during the year Outstanding at the end of the year Exercisable at the end of the year 2014 2013 Number of share options 3,556,656 8,146,754 532,000 (522,500) 11,712,910 7,360,160 Weighted average exercise price £ 1.13 1.13 0.24 0.07 0.16 0.18 Number of share options 937,656 — 2,619,000 — 3,556,656 678,356 Weighted average exercise price £ 1.13 — 1.98 — 1.34 1.34 The weighted average share price at the date of exercise for share options exercised during the year was £0.20 (2013: £nil). The options outstanding at 30 April 2014 had a weighted average exercise price of £0.18 (2013: £0.13) and a weighted average remaining contractual life of six years. In 2014, the aggregate of the estimated fair values of the options granted is £37k (2013: £112k). The inputs into the Black-Scholes model are as follows: Weighted average share price Weighted average exercise price Expected volatility Expected life Risk-free rate Expected dividend yields 2014 39p 16p 55.33% 6 years 0.37% 0% 2013 20p 4.9p 53.13% 6 years 0.42% 0% Expected volatility was determined by calculating the historical volatility of similar listed businesses over the previous three years. The expected life used in the model has been adjusted, based on management’s best estimate, for the effects of non-transferability, exercise restrictions and behavioural considerations. The Group recognised total expenses of £117k (2013: £122k) related to equity-settled share-based payment transactions. The Kromek Group plc 2013 LTIP On 10 October 2013 a new LTIP was adopted. Under the plan, awards will be made annually to key employees. Subject to the satisfaction of the required TSR performance criteria, these grants will vest at the end of a three year reporting period with the ﬁrst ending on 30 April 2016. On 10 October 2013 735,093 (2013: nil) options were granted under the 2013 LTIP to a number of key employees, including two Executive Directors of the Group. The fair value of these options granted was £70k (2013: £nil), and the amount recognised as a share-based payment expense for the year ended 30 April 2014 was £8k (2013: £nil). 58 Kromek Group plc Annual report and accounts 2014 Financial statements Notes to the consolidated ﬁnancial statements continued For the year ended 30 April 2014 32. Share-based payments continued The Kromek Group plc 2013 LTIP continued The 2013 LTIP award was valued using the Monte Carlo pricing model. The inputs into the Monte Carlo pricing model are as follows: Weighted average share price Weighted average exercise price Expected volatility Expected life Risk-free rate Expected dividend yields 33. Retirement beneﬁt schemes Deﬁned contribution schemes 2014 20p 1p 53.13% 3 years 0.42% 0% 2013 — — — — — — The Group operates deﬁned contribution retirement beneﬁt schemes for all employees. Where there are employees who leave the schemes prior to vesting fully in the contributions, the contributions payable by the Group are reduced by the amount of forfeited contributions. The employees of the Group’s subsidiaries in the US are members of a state-managed retirement beneﬁt scheme operated by the Government of the US. The subsidiaries are required to contribute a speciﬁed percentage of payroll costs to the retirement beneﬁt scheme to fund the beneﬁts. The only obligation of the Group with respect to the retirement beneﬁt scheme is to make the speciﬁed contributions. The total cost charged to income of £363k (2013: £285k) represents contributions payable to these schemes by the Group at rates speciﬁed in the rules of the schemes. As at 30 April 2014, contributions of £27k (2013: £22k) due in respect of the current reporting period had not been paid over to the scheme. 34. Financial instruments The Group’s principal ﬁnancial instruments are cash and trade receivables. The Group has exposure to the following risks from its operations: Capital risk The Group manages its capital to ensure that entities in the Group will be able to continue as going concerns while maximising the return to shareholders through the optimisation of the debt and equity balance. The Group’s overall strategy has remained unchanged between 2013 and 2014. The capital structure of the Group consists of net debt, which includes the borrowings disclosed in note 21 after deducting cash and cash equivalents, and equity attributable to equity holders of the Company, comprising issued capital, reserves and accumulated losses as disclosed in notes 25 to 29. The Group is not subject to any externally imposed capital requirements. The Group’s primary source of capital is equity. By pricing products and services commensurately with the level of risk and focusing on the effective collection of cash from customers, the Group aims to maximise revenues and operating cash ﬂows. Cash ﬂow is further controlled by ongoing justiﬁcation, monitoring and reporting of capital investment expenditures and regular monitoring and reporting of operating costs. Working capital ﬂuctuations are managed through employing the overdraft facility available, which at the year end was £nil (2013: £nil). The Group considers that the current capital structure will provide sufﬁcient ﬂexibility to ensure that appropriate investment can be made, if required, to implement and achieve the longer-term growth strategy of the Group. Kromek Group plc Annual report and accounts 2014 59 O v e r v i e w S t r a t e g c i r e p o r t C o r p o r a t e g o v e r n a n c e i F n a n c i a l s t a t e m e n t s 34. Financial instruments continued Market risk The Group may be affected by general market trends, which are unrelated to the performance of the Group itself. The Group’s success will depend on market acceptance of the Group’s products and there can be no guarantee that this acceptance will be forthcoming. Market opportunities targeted by the Group may change and this could lead to an adverse effect upon its revenue and earnings. Foreign currency risk The Group’s operations are split between the UK and the US, and as a result the Group incurs costs in currencies other than its presentational currency of pounds sterling. The Group also holds cash and cash equivalents in non-sterling denominated bank accounts. The following table shows the denomination of the year-end cash and cash equivalents balance: Pounds sterling US dollar sterling equivalent Euro sterling equivalent Year ended 2014 £’000 6,342 200 21 Year ended 2013 £’000 249 60 — Had the foreign exchange rate between sterling, US dollar and euro changed by 5%, this would affect the loss for the year and net assets of the Group by £34k (2013: £23k). Credit risk Credit risk refers to the risk that a counterparty will default on its contractual obligations resulting in ﬁnancial loss to the Group. The Group has adopted a policy of only dealing with creditworthy counterparties and obtaining sufﬁcient collateral, where appropriate, as a means of mitigating the risk of ﬁnancial loss from defaults. The Group only transacts with entities that are rated the equivalent of investment grade and above. This information is supplied by independent rating agencies where available, and if not available, the Group uses other publicly available ﬁnancial information and its own trading records to rate its major customers. The Group’s exposure and the credit ratings of its counterparties are continually monitored and the aggregate value of transactions concluded is spread amongst approved counterparties. Credit exposure is controlled by counterparty limits that are reviewed and approved by the risk management committee annually. Trade receivables consist of a small number of customers, spread across diverse industries and geographical areas. Ongoing credit evaluation is performed on the ﬁnancial condition of accounts receivable and, where appropriate, credit guarantee insurance cover is purchased. The Group’s standard credit terms are 30 to 60 days from date of invoice. Invoices greater than 60 days old are assessed as overdue. The maximum exposure to credit risk is the carrying value of each ﬁnancial asset included on the statement of ﬁnancial position as summarised in note 20. The Group’s management considers that all the above ﬁnancial assets that are not impaired or past due for each of the reporting dates under review are of good quality. Liquidity risk Ultimate responsibility for liquidity risk management rests with the Board of Directors, which has established an appropriate liquidity risk management framework for the management of the Group’s short, medium and long-term funding and liquidity management requirements. The Group manages liquidity risk by maintaining adequate reserves, banking facilities and reserve borrowing facilities, by continually monitoring forecast and actual cash ﬂows, and by matching the maturity proﬁles of ﬁnancial assets and liabilities. The table overleaf details the Group’s remaining contractual maturity for its non-derivative ﬁnancial liabilities with agreed repayment periods. The table has been drawn up based on the undiscounted cash ﬂows of ﬁnancial liabilities based on the earliest date on which the Group can be required to pay. The table includes both interest and principal cash ﬂows. The contractual maturity is based on the earliest date on which the Group may be required to pay. 60 Kromek Group plc Annual report and accounts 2014 Financial statements Notes to the consolidated ﬁnancial statements continued For the year ended 30 April 2014 34. Financial instruments continued Liquidity risk continued 1 May 2013 Repayments 30 April 2014 Weighted average effective interest rate % 60 — — Less than 1 month £’000 1–3 months £’000 53 (53) — 158 (158) — 3 months to 1 year £’000 2,502 (2,502) — 1–5 years £’000 5+ years £’000 — — — — — — Total £’000 2,713 (2,713) — Signiﬁcant accounting policies Details of the signiﬁcant accounting policies and methods adopted (including the criteria for recognition, the basis of measurement and the bases for recognition of income and expenses) for each class of ﬁnancial asset, ﬁnancial liability and equity instrument are disclosed in note 3. Categories of ﬁnancial instruments Financial assets Cash and bank balances (including cash and bank balances in a disposal group held for sale) Loans and receivables Financial liabilities Year ended 2014 £’000 6,563 1,907 Year ended 2013 £’000 309 1,579 Amortised cost (including trade payables balance in a disposal group held for sale) (3,210) (5,599) 35. Events after the balance sheet date Since the end of the ﬁnancial year, the Directors are not aware of any other matter or circumstance not otherwise dealt within this report or the ﬁnancial statements that has signiﬁcantly or may signiﬁcantly affect the operations of the Group. 36. Related party transactions Balances and transactions between the Company and its subsidiaries, which are related parties, have been eliminated on consolidation and are not disclosed in this note. Transactions between the Group and its related parties are disclosed below. During the year, Amphion Innovations charged the Group £154k (2013: £20k) in relation to management fees. At the year end the Group owed Amphion Innovations £nil (2013: £nil). Directors’ transactions During the year Professor M Robinson, a Director, charged the Group £72k (2013: £72k) for consultancy fees. At the year end the Group owed Professor M Robinson £7k (2013: £44k). This amount was included within trade payables. Loans from related parties Michael McBraida (shareholder) Russell Grant (shareholder) Max Robinson (Director) Roger Kendrick (shareholder) Arnab Basu (Director) Amphion Innovations (shareholder) Polymer Holdings (shareholder) Year ended 2014 £’000 — — — — — — — Year ended 2013 £’000 150 445 48 300 146 365 830 There have been no other transactions with related parties other that what has been disclosed within this note. Kromek Group plc Annual report and accounts 2014 61 Company statement of ﬁnancial position As at 30 April 2014 Non-current assets Investment in subsidiaries Current assets Trade and other receivables Cash and cash equivalents Total assets Current liabilities Trade and other payables Total liabilities Net assets Equity Share capital Share premium account Accumulated losses Note 39 40 41 45 46 47 30 April 2014 £’000 — — 14,765 257 15,022 15,022 (66) — (66) 14,956 1,080 13,934 (58) 14,956 The ﬁnancial statements of Kromek Group plc (registered number 8661469) were approved by the Board of Directors and authorised for issue on 27 August 2014. They were signed on its behalf by: Dr Arnab Basu MBE Chief Executive Ofﬁcer O v e r v i e w S t r a t e g c i r e p o r t C o r p o r a t e g o v e r n a n c e i F n a n c i a l s t a t e m e n t s 62 Kromek Group plc Annual report and accounts 2014 Financial statements Company statement of changes in equity For the period ended 30 April 2014 Balance at 1 September 2013 Loss for the period Other comprehensive income for the period Total comprehensive losses for the period Share reorganisation Shares issued on IPO Issue of ordinary shares IPO costs recognised in equity Balance at 30 April 2014 Equity attributable to equity holders of the Company Share capital £’000 — — — — 779 294 7 — Share premium account £’000 Accumulated losses £’000 — — — — — 14,706 34 (806) — (58) — (58) — — — — Total equity £’000 — (58) — (58) 779 15,000 41 (806) 1,080 13,934 (58) 14,956 Company statement of cash ﬂows For the period ended 30 April 2014 Net cash used in operating activities Financing activities Proceeds from issue of share capital Net cash from ﬁnancing activities Net increase in cash and cash equivalents Cash and cash equivalents at beginning of period Cash and cash equivalents at end of period Kromek Group plc Annual report and accounts 2014 63 Note 44 Period ended 30 April 2014 £’000 (14,743) 15,000 15,000 257 — 257 O v e r v i e w S t r a t e g c i r e p o r t C o r p o r a t e g o v e r n a n c e i F n a n c i a l s t a t e m e n t s 64 Kromek Group plc Annual report and accounts 2014 Financial statements Notes to the Company ﬁnancial statements For the period ended 30 April 2014 37. Signiﬁcant accounting policies The separate ﬁnancial statements of the Company are presented as required by the Companies Act 2006. As permitted by that Act, the separate ﬁnancial statements have been prepared in accordance with IFRSs adopted by the European Union. The ﬁnancial statements have been prepared on the historical cost basis except for the remeasurement of certain ﬁnancial instruments to fair value. The principal accounting policies adopted are the same as those set out in note 3 to the consolidated ﬁnancial statements except as noted below. Investments in subsidiaries are stated at cost less, where appropriate, provisions for impairment. 38. Auditor’s remuneration The auditor’s remuneration for audit and other services is disclosed in note 8 to the consolidated ﬁnancial statements. 39. Subsidiaries Details of the Company’s direct and indirect subsidiaries as at 30 April 2014 are as follows: Name Kromek Limited Kromek Germany Limited Kromek, Inc. NOVA R&D, Inc. eV Products, Inc. The investments in subsidiaries are all stated at cost. 40. Trade and other receivables Amount receivable for the sale of goods Allowance for doubtful debts Amounts due from subsidiary undertakings Prepayments Amounts due from subsidiary undertakings are due within one year. 41. Trade and other payables Trade payables and accruals Place of incorporation (or registration) and operation Proportion of ownership interest % Proportion of voting power held % United Kingdom United Kingdom United States of America United States of America United States of America 100 100 100 100 100 100 100 100 100 100 Period ended 30 April 2014 £’000 — — — 14,749 16 14,765 Period ended 30 April 2014 £’000 (66) Trade payables and accruals principally comprise amounts outstanding for trade purchases and ongoing costs. The average credit period taken for trade purchases is 30 days. For all suppliers no interest is charged on the trade payables. The Group has ﬁnancial risk management policies in place to ensure that all payables are paid within the pre-agreed credit terms. The Directors consider that the carrying amount of trade payables approximates to their fair value. Kromek Group plc Annual report and accounts 2014 65 42. Financial assets Inter-company balances The carrying amount of these assets approximates their fair value. There are no past due or impaired receivable balances. Cash and cash equivalents These comprise cash held by the Company and short-term bank deposits with an original maturity of three months or less. The carrying amount of these assets approximates their fair value. 43. Financial liabilities Trade and other payables Trade payables principally comprise amounts outstanding for trade purchases and ongoing costs. The average credit period taken for trade purchases is 30 days. The carrying amount of trade payables approximates to their fair value. 44. Notes to the statement of cash ﬂows Loss for the year Adjustments for: – Increase in receivables – Increase in payables Net cash from operating activities 45. Share capital Allotted, called up and fully paid 108,010,790 ordinary shares of £0.01 each 46. Share premium account Balance at 1 October 2013 Premium arising on issue of equity shares Expenses of issue of equity shares Balance at 30 April 2014 47. Accumulated losses Balance at 1 October 2013 Net loss for the year Balance at 30 April 2014 Period ended 30 April 2014 £’000 (58) (14,751) 66 (14,743) Period ended 30 April 2014 £’000 1,080 1,080 £’000 — 14,740 (806) 13,934 £’000 — (58) (58) O v e r v i e w S t r a t e g c i r e p o r t C o r p o r a t e g o v e r n a n c e i F n a n c i a l s t a t e m e n t s 66 Kromek Group plc Annual report and accounts 2014 Financial statements Notes to the Company ﬁnancial statements continued For the period ended 30 April 2014 48. Financial instruments The Company’s principal ﬁnancial instruments are cash and trade receivables. The Company has exposure to the following risks from its operations: Capital risk The Company manages its capital to ensure that entities in the Company will be able to continue as going concerns while maximising the return to shareholders through the optimisation of the debt and equity balance. The capital structure of the Company consists of equity attributable to equity holders of the Company, comprising issued capital, reserves and accumulated losses as disclosed in notes 25 to 29. The Company is not subject to any externally imposed capital requirements. Cash ﬂow is controlled by ongoing justiﬁcation, monitoring and reporting of capital investment expenditures and regular monitoring and reporting of operating costs. The Company considers that the current capital structure will provide sufﬁcient ﬂexibility to ensure that appropriate investment can be made, if required, to implement and achieve the longer-term growth strategy of the Company. Market risk The Company may be affected by general market trends, which are unrelated to the performance of the Company itself. The Company’s success will depend on market acceptance of the Company’s products and there can be no guarantee that this acceptance will be forthcoming. Market opportunities targeted by the Company may change and this could lead to an adverse effect upon its revenue and earnings. Foreign currency risk The Company currently does not undertake transactions denominated in foreign currencies. Credit risk Credit risk refers to the risk that a counterparty will default on its contractual obligations resulting in ﬁnancial loss to the Company. The Company has adopted a policy of only dealing with creditworthy counterparties and obtaining sufﬁcient collateral, where appropriate, as a means of mitigating the risk of ﬁnancial loss from defaults. The Company only transacts with entities that are rated the equivalent of investment grade and above. This information is supplied by independent rating agencies where available, and if not available, the Company uses other publicly available ﬁnancial information and its own trading records to rate its major customers. The Company’s exposure and the credit ratings of its counterparties are continually monitored and the aggregate value of transactions concluded is spread amongst approved counterparties. Credit exposure is controlled by counterparty limits that are reviewed and approved by the risk management committee annually. The Company’s management considers that all the above ﬁnancial assets that are not impaired or past due for each of the reporting dates under review are of good quality. Liquidity risk Ultimate responsibility for liquidity risk management rests with the Board of Directors, which has established an appropriate liquidity risk management framework for the management of the Company’s short, medium and long-term funding and liquidity management requirements. The Company manages liquidity risk by maintaining adequate reserves, banking facilities and reserve borrowing facilities, by continually monitoring forecast and actual cash ﬂows, and by matching the maturity proﬁles of ﬁnancial assets and liabilities. Kromek Group plc Annual report and accounts 2014 67 49. Ultimate controlling parent and party In the opinion of the Directors, there is no ultimate controlling parent or party. 50. Events after the balance sheet date Since the end of the ﬁnancial year, the Directors are not aware of any other matter or circumstance not otherwise dealt within this report or the ﬁnancial statements that has signiﬁcantly or may signiﬁcantly affect the operations of the Company. 51. Related party transactions No transactions have been noted with Directors during the period ended 30 April 2014. No dividends were paid in the period in respect of ordinary shares held by the Company’s Directors. O v e r v i e w S t r a t e g c i r e p o r t C o r p o r a t e g o v e r n a n c e i F n a n c i a l s t a t e m e n t s 68 Kromek Group plc Annual report and accounts 2014 Financial statements Ofﬁcers and professional advisors Directors Dr A Basu MBE Mr D Bulmer Mr R C E Morgan Professor M Robinson Professor B K Tanner Mr J H Whittingham Dr G K Speirs Mr L Kinet Mr P Bains Ms C Ginman Secretary Mr D Bulmer Registered ofﬁce NETPark Thomas Wright Way Sedgeﬁeld County Durham TS21 3FD Bankers HSBC Bank Plc 1 Saddler Street Durham County Durham DH1 3NR Auditors Deloitte LLP Chartered Accountants and Registered Auditors Newcastle upon Tyne NE1 2HF Legal advisors Pinsent Masons LLP 1 Park Row Leeds LS1 5AB Kromek Group plc NETPark Thomas Wright Way Sedgeﬁeld County Durham TS21 3FD Tel: +44 (0) 1740 626060 Fax: +44 (0) 1740 626061

Continue reading text version or see original annual report in PDF format above