Kromek Group plc
Annual Report 2016

Plain-text annual report

Advancing CZT manufacture to target significant growth opportunities in CT, SPECT and networked nuclear detection applications Business Review & Strategic Report GROWTH AREA 1 CT $900m+ market CT – (photon counting) is an x-ray based diagnostic imaging technique where slices of images are taken and then can be rendered into a 3D image – for detection of cancers, cardiac and other pathologies GROWTH AREA 2 SPECT $100m+ market SPECT – Nuclear Medicine diagnostic imaging where the patient is injected with a radio-pharmaceutical. The pharmaceutical then congregates at tumour sites 3 GROWTH AREA Nuclear Safeguard $1bn+ market Nuclear Safeguard - D3S: a portable combined gamma neutron detector which is networked via mobile phone linked to a central server. Warning system against threat of nuclear terrorism CONTENTS Directors, Secretary & Advisers Financial & Operational Highlights Business Review & Strategic Report Chairman’s Statement Chief Executive Officer’s Review Chief Financial Officer’s Review Directors’ Biographies Directors’ Report Corporate Governance Report Directors’ Remuneration Report Independent Auditor’s Report Consolidated income statement Consolidated statement of comprehensive income Consolidated statement of financial position Consolidated statement of changes in equity Consolidated statement of cash flows Notes to the consolidated financial statements Company financial statements 4 5 6-13 6 8 10 14 16 18 20 24 25 26 27 28 29 30 58 KROMEK Annual Report & Accounts 2016 Directors, Secretary & Advisers Directors, Secretary & Advisers Directors Dr A Basu Mr D Bulmer Sir Peter Williams Mr L H N Kinet Dr G K Speirs Mr J H Whittingham Company Secretary Mr D Bulmer Registered Office NETPark, Thomas Wright Way, Sedgefield, County Durham TS21 3FD Nominated Adviser and Broker Cenkos Securities plc 6.7.8 Tokenhouse Yard, London EC2R 7AS Bankers HSBC Bank plc 1 Saddler Street, Durham, County Durham DH1 3NR Auditors Deloitte LLP Chartered Accountants and Statutory Auditor One Trinity Gardens, Broad Chare, Newcastle upon Tyne NE1 2HF Legal Advisers Eversheds LLP Bridgewater Place, Water Lane, Leeds LS11 5DR Registrar Capita Asset Services 34 Beckenham Road, Beckenham, Kent BR3 4TU Public Relations Adviser Luther Pendragon Ltd Priory Court, Pilgrim Street, London EC4V 6DE 4 Financial Highlights Financial & Operational Highlights Revenue increased to £8.3m (2014/15: £8.1m) Underlying revenue* increased 11% to £8.3m (2014/15: £7.5m*) Product sales accounted for 65% of total revenues (2014/15: 46%), a growth year- on-year of 41% Gross margin was 53% (2014/15: 69%), due to product mix and non-recurring exclusivity payment of £0.6m** Loss for the year from continuing operations was £2.15m (2014/15: £2.15m loss) Loss per share was 1.5p (2014/15: 2.0p loss) Adjusted EBITDA*** was £2.4m loss (2014/15: £1.6m loss), following further investment of £3.2m (2014/15: £2.7m) of research costs expensed in preparation for the expected demand regarding D3S and SPECT Administration costs and operating expenses were £8.3m (2014/15: £8.5m) Cash and cash equivalents, net of loans and overdrafts, at 30 April 2016 were £3.9m (31 October 2015: £6.5m; 30 April 2015: £0.2m). Post year end, the Group has received £2.7m from year end debtors *Underlying revenue reflects the absence of a $1m (£0.6m) payment received last year from a top four OEM in the CT market, which represented the second of two payments made for a two-year fixed exclusivity term. **The above noted £0.6m exclusivity payment was also substantially responsible for the high gross margin reported in 2014/15. As with prior periods, gross margin is calculated before labour and overhead recovery. ***Adjusted EBITDA eliminates non-recurring other income and share-based payment expenses. See the Financial Review below for a reconciliation of adjusted EBITDA. Operational Highlights T New contracts totalling over $30m signed during the year, with Medical Imaging contracts representing the largest contribution, accounting for over 63% T Revenue growth driven by higher product sales which saw year-on-year growth of over 41% T Nuclear Detection segment experienced significant growth and represented the largest segment by revenue • • Awarded sole supplier contract by DARPA, an agency of the U.S. Department of Defense, to supply the Group’s D3S personal radiation detectors in support of DARPA’s SIGMA programme, worth approximately $6.0m Entered into two agreements with CANBERRA Industries, Inc. (“CANBERRA”), a worldwide provider of nuclear measurement solutions, for product distribution and R&D collaboration T Medical Imaging segment represented the second largest contributor to revenues and the Group won multiple contracts • Secured a five-year contract totalling $12.6m and two contracts worth $1.33m with two long-standing OEM customers in the bone mineral densitometry (“BMD”) diagnostics industry • Secured two new contracts, totalling $530,000, from existing customers - - The first contract is a repeat order for the supply of Kromek’s cadmium zinc telluride (“CZT”) detectors to a long- standing OEM customer in the Single Photon Emission Computed Tomography (“SPECT”) market The second order is for the delivery of Kromek’s ASIC, based on unique intellectual property, to a global player in the medical imaging market • Launched eVance™, a new generation of CZT SPECT Cameras that OEMs can configure into virtually any SPECT imaging system being sold T 44 new patents were granted and 16 new patent applications were filed T Appointed Sir Peter Williams CBE as Chairman 5 KROMEK Annual Report & Accounts 2016 Business Review & Strategic Report Chairman’s Statement Kromek is at the forefront in developing cutting edge radiation detection solutions for competitive markets and I remain impressed by the management team and the scale of the Group’s operations. Sir Peter Williams CBE Chairman, 18 July 2016 That Kromek is making significant progress in driving down costs through improving yield levels indicates that we are well-positioned to benefit from the shift towards mass adoption of CZT-based detectors in multiple markets. Visibility of Revenues In 2014 our full year revenues were £5.9m, so this year’s reported figure of £8.3m represents a growth of over 40% in two years. Over the past three years, dealing with government agencies and major international OEMs had made it difficult to predict the exact timing and magnitude of some contracts. However, this year we are pleased that our revenues were in line with market expectations. Recent contract wins and a strong pipeline provide improved visibility going forward, with significant order cover already in hand for projected revenues in 2016/2017. Significant Contracts The most significant breakthrough this year was our sole source supply contract with the U.S. Defense Advanced Research Projects Agency (DARPA) to supply spectroscopic personal radiation detectors (D3S) in support of DARPA’s SIGMA programme. At a value of $6.0m, this brought our total contracts awarded from DARPA over the last two years to just over $11.1m and we believe that the product we have developed continues to represent a significant opportunity for Kromek in the wider market. Government agencies around the world are increasingly concerned by the threat of a “dirty bomb” placement and the SIGMA approach provides the most advanced capability to provide early warning and monitoring. In our other key target areas of nuclear medical imaging with SPECT and BMD, we also gained increasing traction and are commencing commercial-scale delivery of our products. In particular, towards the end of the period we were awarded a new $12.6m contract with a current OEM customer, a worldwide producer and exporter of BMD diagnostics systems, for developing and supplying detectors to be incorporated into the customer’s new generation systems. The contract is expected to start during the second half of the financial year to 30 April 2017 and to be delivered over a five-year period. I am delighted to present our Annual Report for the year ended 30 April 2016, following my appointment to the role of Chairman in October last year, in succession to Lawrence Kinet, our erstwhile interim Chairman. I want to give my warm thanks to him on behalf of the Board for the excellent service he continues to provide Kromek. I am very pleased to have joined Kromek at this exciting juncture in its development and I hope to be able to make a significant contribution to the Group, based on my sector experience. Kromek is at the forefront in developing cutting edge radiation detection solutions for competitive markets and I remain impressed by the management team and the scale of the Group’s operations. Our goals for this year were to focus on the markets in which we can secure traction – nuclear detection, SPECT, BMD and the continued development of CT. On page 8, Arnab Basu, our Chief Executive Officer, provides details on operational achievements for the year. During the year, I am proud to say we were awarded contracts totalling just over $30m. This not only gives us greater visibility of revenues going forward but it also indicates the potential market size in our chosen sectors. Kromek has been able to demonstrate this year that it is has the right technology and products to capture a meaningful share of these target markets. Our continued commitment to R&D and to extending our Intellectual Property portfolio was recently recognised by the IP100 Intellectual Property League where Kromek topped the table for award-winning IP solutions. During the year we also completed a cross licensing deal with a leading, global, medical imaging company which further validates the relevance of our IP portfolio. Improving Yields and Lowering Cost of Production Following the acquisition of eV Products in February 2013 I am particularly pleased about how quickly the replication of their CZT manufacturing process occurred in the UK. It was essential that we developed this capability in the UK to add scale to our business and enhance security of supply. We are encouraged by the subsequent improvement in efficiencies in production in both the UK and USA, which supports our efforts to enhance the commercial competitiveness of our CZT-based detectors. 6 Chairman’s Statement continued The contract wins through the period represent a healthy conversion of our pipeline into orders given our long-term sales cycles. We have achieved significant milestones in commercialising our opportunities in our core markets and we remain confident of furthering our strategy of becoming the preferred component supplier to major OEMs through existing and new relationships. Board Changes Since my arrival, there has been a significant change in board governance to create a more agile and responsive structure, more appropriate to a high-growth emerging technology business. Four members of the Board have stood down and I would like to thank Charlotta Ginman and Peter Bains for their valuable contributions to Kromek. I am delighted to report that Max Robinson and Brian Tanner, who also stood down, became inaugural members of Kromek’s new Science Advisory Committee under the chairmanship of Sir John Pethica, former Vice President of the Royal Society. We look forward to constructive and helpful guidance from this new body as the Group encounters technological challenges in the future. Employees and Partners As we look to the future, I would also like to express gratitude to all those who have enabled us to reach this point. In particular, on behalf of the Board, I would like to thank all of our staff and shareholders for their on-going support. With the strengthening of Kromek’s position and long-term growth drivers showing no sign of abating, we look forward to leveraging our technical expertise and ability to innovate to grow our business and deliver shareholder value. The forthcoming years will be exciting as we deliver on the promise offered by these strong foundations. Business Review & Strategic Report 7 KROMEK Annual Report & Accounts 2016 Business Review & Strategic Report Chief Executive Officer’s Review Kromek has entered the new fiscal year with increased momentum as it has the right technology and the right products at the right price points to capture the large market opportunities in its three key target areas. Dr Arnab Basu MBE Chief Executive Officer, 18 July 2016 In addition, the Group won further contracts during the period, including a repeat order for the supply of its CZT detectors to a long-standing OEM customer in the SPECT market and another contract for the delivery of Kromek’s ASIC, based on unique intellectual property, to a global player in the medical imaging market. Kromek also launched eVance™, a new family of CZT SPECT Cameras that can be configured into virtually any OEM SPECT imaging system. This enables OEMs to integrate turn-key CZT cameras into existing nuclear medical imaging systems, for the diagnosis of cancer and other conditions based on the detection of radiation emitting from radiopharmaceutical agents injected into the patient’s body. Kromek has continued to make good progress in the delivery of a SPECT product to an OEM in Asia with which it signed a long-term contract in 2014. Significant internal product development has been undertaken during the year to supply a CZT-based full body SPECT camera to this customer and the wider market. Kromek has continued to develop its CZT detectors for the multispectral CT market working closely with a number of organisations in this sector. Developments based on Kromek’s CZT technology by its partners and customers through the year have been encouraging and full commercialisation of multispectral CT remains a high-value medium-term opportunity. Nuclear Detection In Nuclear Detection Kromek continued to grow sales and win multiple contracts to supply innovative nuclear detection products for civil nuclear and safeguarding applications following the increased threat of “dirty bombs”. The Group strengthened its relationship with DARPA, winning multiple contracts worth a total of $7.0m in 2015/16. In a significant breakthrough, Kromek was selected as sole source supplier of spectroscopic personal radiation detectors (SPRDs) in support of DARPA’s SIGMA programme. Under the contract, worth $6.0m, Kromek will deliver its D3S detectors before the end of the 2016/17 fiscal year and will also supply up to 12,000 inductive charging packs. DARPA’s SIGMA programme is aimed at developing automated cloud augmented wide area radiation detection networks combining fixed and portable sensors, that will continuously monitor radiation in U.S. cities, and that can learn and adapt in real-time to provide significant defensive capability against the threat of nuclear terrorism and so-called “dirty bombs”. Kromek made good progress during the period securing over $30m of new orders and delivered revenue in line with expectations. The Group continued to maintain its strong market position as a key supplier of CZT detection systems both to commercial and government customers globally. It won significant contracts from multiple OEMs across its different key target markets, in particular in the largest growth opportunities of Nuclear Detection and Medical Imaging. The year was characterised by the award of two of the largest contracts in the Group’s history in its key growth markets. Firstly, in Nuclear Detection, Kromek was selected as the sole source supplier by the U.S. Department of Defense agency, DARPA, to supply its D3S radiation detectors as part of the SIGMA programme in an agreement worth $6.0m. Secondly, in the Medical Imaging sector, Kromek secured a five-year contract totalling $12.6m with a long-standing OEM customer in the BMD sector. These two landmark agreements, supplemented by multiple new contracts won through the year with new and current customers, demonstrate a step change in the Group’s commercial activities, strength of order book and revenue visibility. For the full year 2015/16, revenue increased to £8.3m (2014/15: £8.1m). However, underlying revenue grew 11%, more than offsetting the absence of a $1m contribution (during the previous year) from a top four OEM in the CT market, made as part of a two-year exclusivity arrangement. Gross margin was at 53% (2014/15: 69%) reflecting the absence of the payment for exclusivity as well as the impact of changing revenue mix. Product sales grew year-on-year by over 41% and now represent 65% of total revenue. Medical Imaging Kromek made good progress in the Medical Imaging sector securing several new contracts. This included a five-year contract totalling $12.6m, the largest contract in the Group’s history, with a long-standing OEM customer that is a worldwide producer and exporter of BMD diagnostics systems. Also in the BMD segment, Kromek won two new contracts totalling $1.33m with two long-standing customers. Kromek’s detector modules, which are incorporated into the customers’ systems, produce some of the most accurate imaging to diagnose the strength and health of bones, allowing clinicians to accurately detect, monitor and treat osteoporosis in patients. 8 Business Review & Strategic Report Chief Executive Officer’s Review continued To date, Kromek has been awarded a total of $11.1m in contracted revenues under the SIGMA programme since it commenced in August 2014. The Group’s outstanding performance under this programme has enabled DARPA to accelerate their programme expectations. Kromek secured two contracts from new US-based OEM customers, worth a total of $452,000, to provide a portfolio of patented nuclear detectors to enhance their radiation detection capabilities for security applications. The majority of the orders for both contracts are expected to be completed and delivered in the current fiscal year. The Group also entered into two agreements with CANBERRA for product distribution and R&D collaboration. CANBERRA will be the exclusive global distributor for four product families from Kromek’s nuclear portfolio (excluding a limited number of territories where Kromek has pre-existing distributor networks). As an established provider and market leader in nuclear instrumentation, CANBERRA has a wide range of products, strong customer relationships and extensive channels to market that Kromek expects to leverage. Kromek also entered into a three-year, collaborative R&D programme with CANBERRA. The programme, which is expected to be worth at least $900,000 over the life of the contract, will see the two organisations work closely together on new product development and customisation of existing products by utilising Kromek’s expertise and IP. The contract progressed well and as planned during the year. Security Screening Kromek continues to work with global security groups for the supply of OEM components for a baggage screening product for aviation security and entered into new projects. During the year, one of Kromek’s OEM customers achieved TSA certification for their screening system, which provides good opportunity in this market in the near future. Kromek is also now developing a service revenue from the current installed base of the Group’s bottle scanner product. Kromek’s bottle scanners are installed in 46 airports in 10 countries in Asia, Europe and Australia. The Group continued its marketing efforts for further sales of bottle scanners as Europe is gearing up for further procurement during the 2016 calendar year driven by the European regulatory requirements. R&D and Doubling of Manufacturing Capacity Kromek continued to invest in R&D to maintain its position as a leader in the provision of innovative and high performance radiation detection solutions with regards to both technology and cost. In the year, 44 new patents were granted and 16 new patent applications were filed. In November 2015, the Group announced that it had signed a cross licensing agreement with one of the world’s leading manufacturers of medical equipment. Under the terms of the agreement, Kromek was granted a licence to use three patents of the leading manufacturer and in return it granted them a licence to three of its patents. This was a significant step to validate the relevance and strength of the Group’s IP portfolio. Kromek continued to benefit from the investment it had made in its manufacturing capacity during the year to 30 April 2015 when it successfully replicated in the UK the manufacturing processes that had previously been utilised in the US. This effectively enabled a doubling of the Group’s then production capacity. The manufacturing processes have provided improvements in efficiency and yield, and have enabled Kromek to scale up manufacturing in more than one site with the further benefit of significantly reducing the supply chain risk for its customers. Outlook Kromek has entered the new fiscal year with increased momentum as it has the right technology and the right products at the right price points to capture the large market opportunities in its three key target areas of CT, SPECT and portable advanced radiation detectors where its proprietary technologies bring important and differentiated performance advantages. The Group is making good progress on the $30m of new orders won in the year giving it revenue visibility of the majority of the market expectations for full year 2016/17. scale deployment in cities across the US and Europe over the coming years. Kromek continues to make advancements in the delivery of its SPECT contract with an OEM in Asia. The commercial opportunity in this market is significant and the management team consider it to be realisable in the near term. The Group is delivering on its DARPA contract to supply D3S radiation detectors. 3,500 units have already been shipped with the remaining to be delivered in the current fiscal year. The Group is collaborating with its partners in the SIGMA programme and making arrangements to commence full- Overall, the Group’s products continue to gain traction across the globe as Kromek deepens its relationships with long-term customers and expands its reach. With a strengthened order book in place and improved revenue visibility, the Board looks to the future with confidence. 9 KROMEK Annual Report & Accounts 2016 Business Review & Strategic Report Chief Financial Officer’s Review The Group has sought to bring forward product revenue opportunities through investment in R&D and has seen strong adoption of a number of products including D3S and for SPECT applications. Derek Bulmer Chief Financial Officer, 18 July 2016 Revenue Gross margin (%) LBT EBITDA Adjustments: Net interest Depreciation Amortisation EBITDA Share-based payments Other income Adjusted EBITDA 2015/16 2014/15 £’000 8,342 53% £’000 8,101 69% (4,143) (3,135) 83 71 709 828 (2,523) 166 (19) 673 711 (1,680) 181 (60) (2,376) (1,559) in product development in the year of £2.8m and working capital expansion in debtors and inventory of £1.8m. Strong debtor receipts of £2.7m have been seen by the Group post year end, with inventory increases enabling timely delivery of product sales. The Group also repaid £1m previously drawn down against the £3m revolving credit facility with HSBC during the period. Tax The Group continues to benefit from the UK Research and Development Tax Credit resulting from the investment in developments of technology and recorded a credit of £0.8m for the year (2014/15: £1.0m). The Group deferred tax provision saw a movement of a credit of £1.2m (2014/15: £nil) as a result of the distribution of losses between the UK and US operations. These two elements led to an overall tax credit to the income statement for the Group of £2.0m (2014/15: £1.0m). Earnings per Share (“EPS”) EPS is recorded in the year on a basic and diluted basis producing a loss of 1.5p per share (2014/15: 2.0p loss 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. The Group experienced underlying revenue growth of 11% year-on-year, after adjusting for the $1m exclusivity payment received in the prior year from a global CT partner that did not recur in the current year. Revenue growth has been driven by higher product sales at £5.4m (2014/15: £3.8m), accounting for 65% of total revenue (2014/15: 47%). This represents growth in product sales year-on-year of over 41% and reflects particular traction with the D3S and SPECT products. Gross margin (calculated before labour and overhead recovery) has moved to 53% (2014/15: 69%). This is primarily due to a higher proportion of product sales compared with government contracts and development projects as well as the impact of the aforementioned, pure profit, exclusivity payments of $1m in the prior year. Administration costs and operating expenses at £8.3m (2014/15: £8.5m) have fallen by 2% compared with the prior year as the business continued to maintain effective cost controls. This reduction has been achieved despite an increase in internal R&D expenditure expensed to the income statement of £3.2m (2014/15: £2.7m). Summary of Results As a result of increased product sales and the anticipated movement in gross margin in the year, the adjusted EBITDA result was a loss of £2.4m (2014/15: £1.6m loss), as set out in the table above right. The Group has sought to bring forward product revenue opportunities through investment in R&D and has seen strong adoption of a number of products including the D3S and for SPECT applications. As the volume of product sales increases in key revenue categories, the Group will seek, through production and yield processes together with purchasing efficiencies, to grow the margin realised on sales and optimise the operating leverage of the relatively fixed cost base. Loss for the year from continuing operations was £2.15m (2014/15: £2.15m loss). Cash and cash equivalents, net of loans and overdrafts, was £3.9m at 30 April 2016 (31 October 2015: £6.5m; 30 April 2015: £0.2m). This follows the successful placing and open offer in August 2015 of £10.3m (net), offset by the loss for the period, further investment 10 Business Review & Strategic Report Chief Financial Officer’s Review continued Monitoring Principal Risks and Uncertainties The Directors of Kromek Group plc confirm that they have carried out a robust assessment of the principal risks facing the Group, including those that would threaten its business model, future performance, solvency or liquidity. The Chairman’s Statement draws out what the Directors believe to be the Group’s most significant risk which is the visibility of revenues, including their timing and extent. The Group’s recent contract wins and strong pipeline have enhanced this visibility in the current year. The time that may occur between initially engaging with potential customers and receiving orders requires strict management of the overhead base to ensure that the Group can maximise its opportunities and has capacity for future sales growth, and to focus the Group’s spend appropriately. As noted above, whilst growing both revenue and order book, the Group has reduced operating costs year-on-year. The Group continues in its commitment to Research and Development to both advance the technology and opportunities to be taken therefrom. This helps to ensure that the Group maintains a strong competitive position relative to competitor developments and changes in the markets in which it operates, whether these be regulatory changes or general changes in appetite in the markets which the Group targets. R&D The Group invested £2.8m in the year (2014/15: £1.8m) in near-term product developments which were capitalised on the balance sheet. A further £3.2m (2014/15: £2.7m) has been incurred in the research and development of the core technology platform and manufacturing capabilities and expensed through the income statement in the period. The Group continues to undertake this investment in order to advance its commercial advantage. This has been manifest in the period in D3S and SPECT sales and opportunities and developments in relations with key nuclear product partners. This investment is considered critical and ongoing as the Group commercialises the opportunities that the technology provides and expands capabilities in the number of different applications, and also to drive efficiencies in yield and manufacturing processes. During the period the Group undertook expenditure on patents and trademarks of £0.3m (2014/15: £0.4m) and was awarded 44 new patents and filed 16 new patent applications. The Group also announced in November 2015 that it had signed a cross licensing agreement with one of the world’s leading manufacturers of medical equipment. Under the terms of the agreement, Kromek was granted a licence to use three patents of the leading manufacturer and in return granted them a licence to three of its patents. Capital Expenditure Capital expenditure in the year amounted to £0.4m (2014/15: £2.6m) to largely upgrade the IT network along with some modest manufacturing projects. The prior year had seen significant investment in the expansion of furnace capacity in the UK that has been successfully commissioned and operated during the year to 30 April 2016. 11 KROMEK Annual Report & Accounts 2016 Business Review & Strategic Report Medical Imaging SPECT SINGLE PHOTON EMISSION COMPUTED TOMOGRAPHY CT COMPUTED TOMOGRAPHY BMD BONE MINERAL DENSITOMETRY SPECT – Nuclear Medicine diagnostic imaging: the patient is injected with a radio-pharmaceutical which concentrates in healthy heart muscle or at tumour sites. CT – an x-ray diagnostic imaging technique where image slices are used for detection of cancers, cardiac, trauma and other pathologies. BMD – a low-dose x-ray diagnostic imaging technique used to identify weakened bones (osteoporosis) and measure the distribution of fat and lean tissue in the body. MEDICAL SPECT PRODUCT ARCHITECTURE KEY DRIVERS FOR ADOPTION OF CZT IN MEDICAL IMAGING Recent market developments ■ Introduction of full-body SPECT with CZT by GE ■ This is setting new standards and is expected to Technical advantages of CZT Key advantages of CZT gamma cameras include: ■ Better image resolution and contrast ■ More accurate diagnostics ■ Higher patient throughput ■ Smaller footprint and weight accelerate adoption of CZT in this market Unmet and growing need in China ■ Aging population ■ High rates of cancer ■ Fastest growing market for nuclear medicine (SPECT) 12 Nuclear Detection Business Review & Strategic Report 2014 ■ Start of development programme with DARPA 2015 ■ Kromek technology chosen in competitive process as sole source supplier 2015/16 ■ Achieved the target cost points to meet the $400 price point for the product 2016 ■ Established high volume manufacturing capability with capacity in excess of 30,000 units per year ■ Discussions started various agencies globally for commercialisation ■ Business model established for commercial phase for global deployment NUCLEAR SAFEGUARD D3S – A PORTABLE COMBINED GAMMA NEUTRON DETECTOR WHICH IS NETWORKED VIA MOBILE PHONE LINKED TO A CENTRAL SERVER. WARNING SYSTEM AGAINST SERVER. WARNING SYSTEM AGAINST THREAT OF NUCLEAR TERRORISM. D3S Gamma Spectral Analysis Web-based Situation Awareness & Analysis UI ID External System Integration D3S/Android 2x4x16 NaI Logs with UNIBASE Neutron Panels DARPA’S SIGMA SYSTEM (D3S BASED) ALLOWS UNPRECEDENTED SITUATIONAL AWARENESS OF THE RADIOLOGICAL AND NUCLEAR ENVIRONMENT 13 KROMEK Annual Report & Accounts 2016 Directors’ Biographies Sir Peter Williams Chairman Arnab Basu Chief Executive Officer Dr. Basu 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 and 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). Sir Peter Williams, CBE, FREng, FRS, Chairman, and chairman of the Audit Committee. He completed his degree and PhD at Cambridge, and then taught at Selwyn College. His PhD thesis was in “Defect structure and luminescent properties of semiconductors”. He then moved into industry, working at VG Instruments where he became Deputy Chief Executive and at Oxford Instruments, the first spin out from Oxford University, he held the positions of Chief Executive Officer and Chairman. He also was Chairman of Isis Innovation Ltd, the technology transfer arm of Oxford University. Other PLC experience includes serving as non-executive director of GKN plc and of WS Atkins plc. He received a CBE in 1992 and was knighted in the Queen’s Birthday Honours list of 1998. He is currently Chairman of the National Physical Laboratory, and Vice President and Treasurer of the Royal Society since 2005. Derek Bulmer Chief Financial Officer & In-House Counsel A qualified Chartered Accountant and Barrister, Mr. Bulmer 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. 14 Directors’ Biographies Graeme Speirs Non-Executive Director Lawrence Kinet Non-Executive Director Dr. Speirs 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. Kinet 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. Jerel Whittingham Non-Executive Director & Remuneration Committee Chair Mr. Whittingham has extensive experience in investor, operational and strategy roles with technology-rich companies including Incuvest LLC, Generics Group plc, Durlacher plc, Amphion Innovations plc, INMARSAT and a number of start- ups. He was appointed to the Board of Kromek Group plc in September 2013 and also served on the Board of DSC Ltd, a predecessor company of the group. Currently he combines NED and operational roles in technology growth companies. He also served as CEO and later Executive chairman of Myconostica Ltd, a medical technology company spun out from a leading UK university. 15 KROMEK Annual Report & Accounts 2016 Directors’ Report 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 2016. 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. Business and strategic review The information that fulfils the requirements of the strategic report and business review, including details of the results for the year ended 30 April 2016, principal risks and uncertainties, research and development, financial KPIs and the outlook for future years, are set out in the Chairman’s and Chief Executive Officer’s Statements and the Business and Financial Review, on pages 5-11. Future development Our development objectives for 2016–17 are disclosed in the Overview on pages 12-13. 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 2016. Results and dividends The consolidated income statement is set out on page 25. The Group’s loss after taxation amounted to £2.15m (2015: £2.15m). The Directors do not recommend the payment of a dividend for the year ended 30 April 2016. During the year ended 30 April 2016, the Group made political donations of £nil (2015: £nil) and charitable donations of £nil (2015: £nil). 16 Directors The Directors of the Group are shown on pages 14-15. All of the Directors were Directors for the whole of the year, with the exception of Sir Peter Williams who was appointed on 28 September 2015. In addition, the following served as Directors for part of the year as noted: ■ Mr Peter Bains (resigned 16 December 2015) ■ Ms Charlotta Ginman (resigned 16 December 2015) ■ Professor Max Robinson (resigned 16 December 2015) ■ Professor Brian Tanner (resigned 16 December 2015) The emoluments and interests of the Directors in the shares of the Group are set out in the Remuneration report. Details of significant events since the balance sheet date are contained in note 15 to the Parent Company financial statements. Information about the use of financial instruments by the Group and its subsidiaries is given in note 35 to the financial statements. The Directors, who served throughout the year except as noted, were as follows: Dr A Basu MBE Mr D Bulmer Sir Peter Williams (appointed 28 September 2015) Mr L Kinet Dr G K Speirs Mr J H Whittingham 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. Directors’ Report ■ the Director has taken all the steps that he ought to have taken as a Director in order to make himself 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 18 July 2016 17 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: ■ ■ ■ ■ ■ present fairly the financial position, financial performance and cashflows of the Group; select suitable accounting policies in accordance with IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors and then apply them consistently; make judgements and estimates that are reasonable and prudent; state whether applicable IFRSs have been followed, subject to any material departures disclosed and explained in the financial statements; and prepare the financial statements on the going concern basis unless it is inappropriate to presume that the 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. The Directors are responsible for ensuring the annual report and the financial statements are made available on the corporate 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: ■ so far as the Director is aware, there is no relevant audit information of which the Group’s auditors are unaware; and KROMEK Annual Report & Accounts 2016 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 four times per year in person and four times per year telephonically. 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. 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 Sir Peter Williams, an Independent Non-Executive Director. The other members are Lawrence Kinet and Jerel Whittingham, both Independent Non- Executive Directors, and Graeme Speirs, a large shareholder and Director of the Board. The committee meets 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 Lawrence Kinet, an Independent Non-Executive Director, and Graeme Speirs, a large shareholder and Director of the Board. 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 Directors’ remuneration report on pages 20-22. Relations with shareholders Communication with shareholders is given high priority. There is regular dialogue with major and 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. 18 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. 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 As at 30 April 2016, the Group had net assets of £24.7m (2015: £16.2m) as set out in the consolidated statement of financial position. The Directors have prepared detailed forecasts of the Group’s financial performance over the next 5 years. As a result of this review, which incorporated sensitivities and risk analysis, the Directors believe that the Group has sufficient resources and working capital to meet their present and foreseeable obligations for a period of at least twelve months from approval of these financial statements. Accordingly, they continue to adopt the going concern basis in preparing the Group financial statements. Corporate Governance 19 KROMEK Annual Report & Accounts 2016 Directors’ Remuneration Report 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 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. 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 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 have service contracts with notice periods (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 2016 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 2016 £’000 30 April 2015 £’000 16 30 16 10 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 Board, having considered the recommendations of the remuneration committee. The maximum bonus currently ranges from between 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. 20 Director’s Remuneration Report Directors’ shareholdings Beneficial interests of the Directors in the shares of the Group are shown below: 30 April 2016 30 April 2015 Arnab Basu Derek Bulmer Peter Williams Charlotta Ginman** Lawrence Kinet Max Robinson** Number 2,072,000 40,000 30,000 37,527 150,000 9,560,000 Graeme Speirs* 16,268,415 Brian Tanner** Jerel Whittingham 800,000 110,450 % 1.4 – – – – 6.3 10.7 – – Number 2,000,000 – – 37,527 30,000 9,500,000 14,792,730 750,000 110,450 % 1.8 – – – – 8.8 13.7 0.7 0.1 *Graeme Speirs is interested in Kromek Group plc through Polymer Holdings Ltd which owns 12,773,475 (2015: 11,377,790) ordinary shares amounting to 8.39% (10.5%) of the issued share capital. **Charlotta Ginman, Professor Max Robinson and Professor Brian Tanner resigned from the Board on 16 December 2015. Directors’ emoluments for the year ended 30 April 2016 Salary £’000 Fees £’000 Benefits £’000 Bonus £’000 Pension contributions £’000 Total emoluments 2016 £’000 Total emoluments 2015 £’000 Non-executive Chairman Sir Peter Williams Richard Morgan* Executive Arnab Basu Derek Bulmer Non-executive Peter Bains** Charlotta Ginman** Lawrence Kinet Max Robinson** Graeme Speirs Brian Tanner** Jerel Whittingham – – 165 137 – – – – – – – 42 – – – 29 32 47 25 39 27 42 – – 7 6 – – – – – – – – – 36 33 – – – – – – – – – 16 30 – – – – – – – 42 – 224 206 29 32 47 25 39 27 42 *Richard Morgan resigned from the Board on 27 March 2015. **Peter Bains, Charlotta Ginman, Professor Max Robinson and Professor Brian Tanner resigned from the Board on 16 December 2015. – 64 188 127 33 36 35 30 33 33 36 21 KROMEK Annual Report & Accounts 2016 Directors’ Remuneration Report Directors’ Remuneration Report continued Payments for loss of office Charlotta Ginman and Peter Bains left the Company on 16 December 2015. On cessation of their employment, they were entitled to receive the value of their fees which would have accrued during the three months’ notice period. These amounts totalled £9k and £8k respectively. Professor Max Robinson and Professor Brian Tanner also left the Company in their capacity as Directors on 16 December 2015 and waived their right to a payment for loss of office. 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 2015, an incentive award scheme for Arnab Basu and Derek Bulmer, to offer them shares up to 544,263 and 271,140 respectively, at a price of 1p per share to vest based on specified performance criteria. The remuneration committee agreed, in June 2014, an incentive award scheme for Arnab Basu and Derek Bulmer, to offer them shares up to 425,859 and 181,182 respectively, at a price of 1p per share to vest based on specified performance criteria. In October 2013, an incentive award scheme was made to 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 share incentives noted above 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 auditors As at 30 April 2016 only the shares issued in the October 2013 award had vested with the 2014 and 2015 issues remaining unvested. At 30 April 2015, no shares had vested under these incentive schemes. Share price during the year During the year to 30 April 2016, the highest share price was 49p (2015: 55.5p) and the lowest share price was 25.5p (2015: 32.5p). The market price of the shares at 30 April 2016 was 32.8p (2015: 37.0p). 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. Executive Directors’ share options Director Date of grant 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 Exercise price p 2015 number 1.5 800,000 1.5 20.0 20.0 20.0 20.0 80,000 1,000,000 500,000 125,000 250,000 Awarded during the year Exercised during the year At 30 April 2016 number Expiry date – – – – – – – – – – – – 800,000 22 September 2016 80,000 15 May 2017 1,000,000 20 September 2021 500,000 13 September 2020 125,000 15 October 2022 250,000 31 May 2023 22 Consolidated Financial Statements for the year ended 30 April 2016 Kromek Group plc KROMEK Annual Report & Accounts 2016 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 2016 which comprise the Consolidated income statement, the Consolidated statement of comprehensive income, the Consolidated and Parent Company statements of financial position, the Consolidated and Parent Company statement of changes in equity, the Consolidated and Parent Company statements of cash flows and the related notes 1 to 36 and 1 to 16. The financial reporting framework that has been applied in their preparation is applicable law and International Financial Reporting Standards (IFRSs) as adopted by the European Union and, as regards the parent company financial statements, as applied in accordance with the provisions of the Companies Act 2006. This report is made solely to the company’s members, as a body, in accordance with Chapter 3 of Part 16 of the Companies Act 2006. Our audit work has been undertaken so that we might state to the company’s members those matters we are required to state to them in an auditor’s report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the company and the company’s members as a body, for our audit work, for this report, or for the opinions we have formed. Respective responsibilities of directors and 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 24 material misstatements or inconsistencies we consider the implications for our report. Opinion on financial statements In our opinion: T T T 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 2016 and of the group’s loss for the year then ended; the group financial statements have been properly prepared in accordance with IFRSs as adopted by the European Union; the parent company financial statements have been properly prepared in accordance with IFRSs as adopted by the European Union and as applied in accordance with the provisions of the Companies Act 2006; and T the financial statements have been prepared in accordance with the requirements of the Companies Act 2006. Opinion on other matter prescribed by the Companies Act 2006 In our opinion the information given in the Business Review & 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 matters where the Companies Act 2006 requires us to report to you if, in our opinion: T T T T adequate accounting records have not been kept by the parent company, or returns adequate for our audit have not been received from branches not visited by us; or the parent company financial statements are not in agreement with the accounting records and returns; or certain disclosures of directors’ remuneration specified by law are not made; or we have not received all the information and explanations we require for our audit. Matthew Hughes BSc (Hons) ACA (Senior Statutory Auditor) For and on behalf of Deloitte LLP Chartered Accountants and Statutory Auditor Newcastle upon Tyne, United Kingdom Consolidated Financial Statements Consolidated income statement For the year ended 30 April 2016 2016 2015 Note £’000 £’000 Continuing operations Revenue 5 8,342 8,101 Cost of sales (3,913) (2,475) Gross profit 4,429 5,626 Other operating income 5 19 60 Distribution costs (181) (226) Administrative expenses (including operating expenses) (8,327) (8,524) Operating loss (4,060) (3,064) Finance income 10 1 31 Finance costs 11 (84) (102) Loss before tax (4,143) (3,135) Tax 12 1,992 989 Loss for the year from continuing operations (2,151) (2,146) Loss per share 14 – basic and diluted (p) (1.5p) (2.0p) 25 KROMEK Annual Report & Accounts 2016 Consolidated statement of comprehensive income For the year ended 30 April 2016 2016 2015 £’000 £’000 Loss for the year (2,151) (2,146) Items that are or may be reclassified to profit or loss: Exchange differences on translation of foreign operations 156 398 Total comprehensive loss for the year (1,995) (1,748) 26 Consolidated Financial Statements Consolidated statement of financial position As at 30 April 2016 2016 2015 Note £’000 £’000 Non-current assets Goodwill 15 1,275 1,275 Other intangible assets 16 11,222 8,725 Property, plant and equipment 17 3,974 4,147 16,471 14,147 Current assets Inventories 19 2,810 2,103 Trade and other receivables 21 5,159 4,089 Current tax assets 21 811 1,002 Cash and bank balances 3,857 1,183 12,637 8,377 Total assets 29,108 22,524 Current liabilities Trade and other payables 24 (4,445) (4,143) Finance lease liabilities 22 (9) (19) Borrowings 25 – (1,003) (4,454) (5,165) Net current assets 8,183 3,212 Non-current liabilities Finance lease liabilities – (10) Deferred tax liabilities 23 – (1,147) Total liabilities (4,454) (6,322) Net assets 24,654 16,202 Equity Share capital 27 1,522 1,082 Share premium account 28 44,484 34,643 Capital redemption reserve 1,175 1,175 Translation reserve 29 72 (84) Accumulated losses 30 (22,599) (20,614) Total equity 24,654 16,202 The financial statements of Kromek Group plc (registered number 08661469) were approved by the Board of Directors and authorised for issue on 18 July 2016. They were signed on its behalf by: Dr Arnab Basu MBE Chief Executive Officer 27 KROMEK Annual Report & Accounts 2016 Consolidated statement of changes in equity For the year ended 30 April 2016 Equity attributable to equity holders of the Company Share Capital Share premium redemption Translation Accumulated Total capital account reserve reserve losses equity £’000 £’000 £’000 £’000 £’000 £’000 Balance at 1 May 2014 1,080 34,612 1,175 (482) (18,649) 17,736 Loss for the year – – – – (2,146) (2,146) Exchange difference on translation of foreign operations – – – 398 – 398 Total comprehensive losses for the year – – – 398 (2,146) (1,748) Issue of share capital net of expenses 2 31 – – – 33 Credit to equity for equity-settled share based payments – – – – 181 181 Balance at 30 April 2015 1,082 34,643 1,175 (84) (20,614) 16,202 Loss for the year – – – – (2,151) (2,151) Exchange difference on translation of foreign operations – – – 156 – 156 Total comprehensive losses for the year – – – 156 (2,151) (1,995) Issue of share capital net of expenses 440 9,841 – – – 10,281 Credit to equity for equity-settled share based payments – – – – 166 166 Balance at 30 April 2016 1,522 44,484 1,175 72 (22,599) 24,654 28 Consolidated Financial Statements Consolidated statement of cash flows For the year ended 30 April 2016 2016 2015 Note £’000 £’000 Net cash used in operating activities 31 (2,845) (2,361) Investing activities Interest received 1 31 Purchases of property, plant and equipment (444) (2,558) Purchases of patents and trademarks (320) (368) Capitalisation of development costs (2,819) (1,812) Net cash used in investing activities (3,582) (4,707) Financing activities Loans paid (1,003) – Revolving credit facility – 1,000 Government grants – 857 Proceeds on issue of shares 10,281 33 Payment of finance lease liabilities (9) (12) Interest paid (84) (102) Net cash generated from financing activities 9,185 1,776 Net increase/(decrease) in cash and cash equivalents 2,758 (5,292) Cash and cash equivalents at beginning of year 1,183 6,563 Effect of foreign exchange rate changes (84) (88) Cash and cash equivalents at end of year 3,857 1,183 29 KROMEK Annual Report & Accounts 2016 Notes to the consolidated financial statements For the year ended 30 April 2016 1. GENERAL INFORMATION Kromek Group plc is a company incorporated and domiciled in the United Kingdom under the Companies Act. The address of the registered office is given on page 4. The nature of the Group’s operations and its principal activities are set out in the business review on pages 5 to 11. 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 The following new standards and amendments to standards are mandatory for the financial year beginning on 1 May 2015: ■ IFRS 13 “Impairment of Assets” ■ IFRS 10 “Consolidated Financial Statements” ■ IAS 27 “Consolidated and Separate Financial Statements” ■ IAS 36 “Impairment of Assets – Recoverable Amount Disclosures for Non-Financial Assets” ■ IFRS 12 “Disclosure of Interests in Other Entities” ■ Amendments to IAS 32 “Financial Instruments: Presentation” ■ Amendments to IAS 36 “Impairment of Assets” ■ Amendments to IAS 39 “Financial Instruments: Recognition and Measurement” ■ IFRS 10, IFRS 11, IFRS 12 Transition Guidance These standards and amendments to standards have not had a material impact on the consolidated financial statements. Standards not affecting the reported results nor the financial position At the date of authorisation of these financial statements, the following Standards and Interpretations which have not been applied in these financial statements were in issue but not yet effective (and in some cases had not yet been adopted by the EU): ■ IFRS 9 Financial Instruments ■ IFRS 11 Joint arrangements ■ IFRS 13 Fair Value Measurement ■ IFRS 14 Regulatory deferral accounts ■ IFRS 15 Revenue from Contracts with Customers ■ IFRS 16 Leases ■ IAS 7 Statement on cash flows ■ IAS 12 Income taxes ■ IAS 16 Property, plant and equipment and IAS 38 intanglble assets ■ IAS 21 Presentation of financial statements ■ IAS 27 Separate financial statements ■ Annual Improvements to IFRSs 2012-2014 Cycle The Directors do not expect that the adoption of these Standards and Interpretations in future periods will have a material impact on the financial statements of the Group, however they are currently considering the future impacts of IFRS 15. 3. SIGNIFICANT ACCOUNTING POLICIES Basis of preparation The financial statements have been prepared in accordance with International Financial Reporting Standards as adopted by the European Union (“IFRSs”) 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. 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, and profits are eliminated on consolidation. 30 Consolidated Financial Statements For the year ended 30 April 2016 3. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Going concern As at 30 April 2016, the Group had net assets of £24.7m (2015: £16.2m) as set out in the consolidated statement of financial position. The Directors have prepared detailed forecasts of the Group’s financial performance over the next 5 years. As a result of this review, which incorporated sensitivities and risk analysis, the Directors believe that the Group has sufficient resources and working capital to meet their present and foreseeable obligations for a period of at least twelve months from approval of these financial statements. Accordingly, they continue to adopt the going concern basis in preparing the Group financial statements. 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: ■ the fair value of the consideration transferred; plus ■ the recognised amount of any non-controlling interests in the acquiree; plus ■ the fair value of the existing equity interest in the acquiree; less ■ 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 expected to benefit from the synergies of the combination. Cash-generating units 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 cash-generating unit 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. 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: i) ii) Sale of goods and services The Group’s income derives from the sale of goods and from the research and development contracts which 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 are generally under FCA INCOTERMS. Revenue from research and development contracts is recognised as revenue in the accounting period in which the milestones are achieved. Revenue from grants Revenue from grants is recognised when the costs relating to the project activity have been incurred, the customer is in agreement with the expenses which are being claimed as grant revenue, and subsequent invoices have been issued to the customers. 31 KROMEK Annual Report & Accounts 2016 Notes to the consolidated financial statements (continued) For the year ended 30 April 2016 3. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Revenue recognition (continued) iii) iv) v) Long-term contracts The Group accounts for long-term contracts under IAS 11, and reflects revenue 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. 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 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. Finance leases are capitalised at the lease’s inception at the lower of the fair value of the leased asset and the present value of the minimum lease payments. The corresponding rental obligations, net of finance charges, are included in other payables. Each lease payment is allocated between the liability and finance charges so as to achieve a constant rate of interest costs charged to the income statement on the outstanding balance. 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 pound 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. 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. 32 Consolidated Financial Statements For the year ended 30 April 2016 3. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) 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 and growth (RGF) costs are recognised as income over the periods necessary to match them with the related costs of creating those jobs. 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) ii) Current tax The tax credit is based on taxable loss for the year. Taxable loss differs from net loss 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. 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 HFI 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. 33 KROMEK Annual Report & Accounts 2016 Notes to the consolidated financial statements (continued) For the year ended 30 April 2016 3. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) 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 6% to 25% Fixtures, fittings and equipment 15% Computer equipment 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: ■ the technical feasibility of completing the intangible asset so that it will be available for use or sale; ■ its intention to complete the intangible asset and use or sell it; ■ its ability to use or sell the intangible asset; and ■ how the intangible asset will generate probable future economic benefits. Among other things, the entity can demonstrate the existence of a market for the output of the intangible asset or the intangible asset itself or, if it is to be used internally, the usefulness of the intangible asset. 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. Where expenditure relates to developments for use rather than direct sales of product the cost is amortised straight line over a 15-year period. Provision is made for any impairment. Amortisation of the intangible assets recognised on the acquisitions of NOVA R&D, Inc. and eV Products, Inc. are recognised in the income statement on a straight-line basis over their estimated useful lives of between five and fifteen years. 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. 34 Consolidated Financial Statements For the year ended 30 April 2016 3. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Impairment of tangible and intangible assets excluding goodwill (continued) 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. Provision is made for obsolete, slow moving or defective items where appropriate. Items which have not shown activity for between 12-18 months will be provided for at a rate of 50%, and those which have not shown activity in 18 months or longer will be provided for at a rate of 100% after consideration is given to the full or residual value where appropriate. Given the nature of the products and the gestation period of the technology, commercial rationale necessitates that this provision is reviewed on a case by case basis. 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. i) ii) Financial assets 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 period. 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. The Group interacts with other technology-based companies to obtain market penetration for its products. These arrangements initially require funding to allow for marketing of the Group’s products, with longer lead times for sale. As a consequence, the terms with these customers are not always on normal payment terms (30 to 60 days), and management confirm that it could take longer before recoverability of the cash on these sales. 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. iv) Derecognition of financial assets 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. 35 KROMEK Annual Report & Accounts 2016 Notes to the consolidated financial statements (continued) For the year ended 30 April 2016 3. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Financial instruments (continued) 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 3 years from grant date. Details regarding the determination of the fair value of equity-settled share-based transactions are set out in note 33. 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 3 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. 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. 36 Consolidated Financial Statements For the year ended 30 April 2016 4. CRITICAL ACCOUNTING JUDGEMENTS AND KEY SOURCES OF ESTIMATION UNCERTAINTY (CONTINUED) Development costs (continued) These capitalised assets are 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. Where expenditure relates to developments for use rather than direct sales of product the cost is amortised over a 15-year period. Provision is made for any impairment. Where no internally-generated intangible asset can be recognised, development expenditure is expensed in the period in which it is incurred. Contract revenue As described in note 3 revenue and profits are determined by estimating the outcome of a contract, by determining the costs to complete the contract, in order to assess the stage of completion and whether it is profitable. 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 which require the application of certain key judgments and estimates are required to be made in respect of discount rates and future cash flows. Recoverability of receivables As disclosed in note 3, in order to obtain market penetration through technology-based customers, the Group recognises that normal payment terms from these customers may not be adhered to when assessing recoverability of receivables. This is as a result of the necessary marketing support that customers may require in promoting the products. Management have reassessed the recoverability at the balance sheet date and provided where appropriate. 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) ii) 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 assessed, usually when a product development project has reached a defined milestone. Impairment of goodwill The Group determines whether goodwill is impaired on at least an annual basis or more frequently when there are indications of pos- sible impairment. The impairment review requires a value in use calculation of the cash-generating units to which the goodwill is al- located. In estimating the value in use, management is required to make an estimate of the expected future cash flows attributable to the cash-generating unit and to choose an appropriate discount rate to calculate the present value of those cash flows. The carrying amount of goodwill at 30 April 2016 was £1,275k (2015: £1,275k). Further details are given in note 15. 37 KROMEK Annual Report & Accounts 2016 Notes to the consolidated financial statements (continued) For the year ended 30 April 2016 5. REVENUE An analysis of the Group’s revenue is as follows: 2015 2016 £’000 £’000 (Restated) Continuing operations Sales of goods and other services 6,015 5,879 Revenue from grants 227 307 Revenue from contract customers 2,100 1,915 Total revenue 8,342 8,101 Grant income 15 4 Other income 4 56 Total income 8,361 8,161 Prior year restatement In the prior year 30 April 2015 financial statements, income generated totalling £606k was classified as revenue from contract customers. It is management’s opinion that this relates to revenue generated from contract customers and so has been reclassified in the note above to provide fairer presentation. This has not impacted the total revenue generated by the Group in 2015 or 2016. 6. OPERATING SEGMENTS Products and services from which reportable segments derive their revenues For management purposes, the Group is organised into two business units (USA 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 who assess performance of the segments using the following key performances 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: 2016 2015 £’000 £’000 United Kingdom 688 387 North America 5,468 5,681 South America – 11 Middle East – 18 Asia 1,940 1,899 Europe 246 66 Australasia – 39 Total revenue 8,342 8,101 38 Consolidated Financial Statements For the year ended 30 April 2016 6. OPERATING SEGMENTS (CONTINUED) A geographical analysis of the Group’s revenue by origin is as follows: Year ended 30 April 2016 UK Operations US Operations Total for Group £’000 £’000 £’000 Revenue from sales Revenue by segment: – Sales of goods and services 3,993 2,974 6,967 – Revenue from grants 227 – 227 – Revenue from contract customers 568 1,532 2,100 Total sales by segment 4,788 4,506 9,294 Removal of inter-segment sales (393) (559) (952) Total external sales 4,395 3,947 8,342 Segment result – operating loss (2,174) (1,886) (4,060) Interest received 1 – 1 Interest expense (81) (3) (84) Loss before tax (2,254) (1,889) (4,143) Tax credit 856 1,136 1,992 Loss for the year (1,398) (753) (2,151) Reconciliation to adjusted EBITDA: Net interest 80 3 83 Tax (856) (1,136) (1,992) Depreciation of PPE 314 395 709 Amortisation 449 379 828 Non-recurring other income (19) – (19) Share-based payment charge 166 – 166 Adjusted EBITDA (1,264) (1,112) (2,376) Other segment information Property, plant and equipment additions 341 130 444 Depreciation of PPE (314) (395) (709) Intangible asset additions 1,447 1,692 3,139 Amortisation of intangible assets (449) (379) (828) Statement of financial position Total assets 19,240 9,869 29,109 Total liabilities (4,163) (292) (4,455) 39 KROMEK Annual Report & Accounts 2016 Notes to the consolidated financial statements (continued) For the year ended 30 April 2016 6. OPERATING SEGMENTS (CONTINUED) Year ended 30 April 2015 UK Operations US Operations Total for Group £’000 £’000 £’000 Revenue from sales Revenue by segment: – Sale of goods and services 2,584 4,795 7,379 – Revenue from grants 218 – 218 – Revenue from contract customers 480 1,524 2,004 – Other revenue – 638 638 Total sales by segment 3,282 6,957 10,239 Removal of inter-segment sales (376) (1,762) (2,138) Total external sales 2,906 5,195 8,101 Segment result – operating loss (2,972) (92) (3,064) Interest received 31 – 31 Interest expense (95) (7) (102) Loss before tax (3,036) (99) (3,135) Tax credit 989 – 989 Loss for the year (2,047) (99) (2,146) Reconciliation to adjusted EBITDA: Net interest 64 7 71 Tax (989) – (989) Depreciation of PPE 300 373 673 Amortisation 333 378 711 Non-recurring other income – (58) (58) Share-based payment charge 181 – 181 Adjusted EBITDA (2,158) 601 (1,557) Other segment information Property, plant and equipment additions 2,021 338 2,359 Depreciation of PPE 300 373 673 Intangible asset additions 1,224 1,013 2,257 Amortisation of intangible assets 333 378 711 Statement of financial position Total assets 11,500 11,024 22,524 Total liabilities (2,829) (3,493) (6,322) Inter-segment sales are charged on an arms-length basis. 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 intangibles assets including 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. This is the measure reported to the Group’s Chief Executive for the purpose of resource allocation and assessment of segment performance. 40 Consolidated Financial Statements For the year ended 30 April 2016 6. OPERATING SEGMENTS (CONTINUED) Revenues from major products and services The Group’s revenues from its major products and services were as follows: 2016 2015 £’000 £’000 Product revenue 5,432 3,841 Research and development revenue 2,910 4,260 Consolidated revenue 8,342 8,101 Information about major customers Included in revenues arising from USA operations are revenues of approximately £1,227k (2015: £1,224k) which arose from a major customer. Included in revenues arising from UK operations are revenues of approximately £3,047k (2015: £1,203k) which arose from the Group’s largest customer. LOSS FOR THE YEAR 7. Loss for the year has been arrived at after (crediting)/charging: 2016 2015 £’000 £’000 Net foreign exchange (gains)/losses (304) 226 Research and development costs recognised as an expense 3,178 2,669 Depreciation of property, plant and equipment 709 673 Amortisation of internally-generated intangible assets 828 711 Cost of inventories recognised as expense 3,780 1,266 Staff costs (see note 9) 5,773 5,620 8. AUDITOR’S REMUNERATION The analysis of the auditor’s remuneration is as follows: 2016 2015 £’000 £’000 Fees payable to the Company’s auditor and their associates for other services to the Group – The audit of the Company and its subsidiaries 52 25 Total audit fees 52 25 – Audit-related assurance services 10 10 – Taxation compliance services 14 11 Total non-audit fees 24 21 41 KROMEK Annual Report & Accounts 2016 Notes to the consolidated financial statements (continued) For the year ended 30 April 2016 9. STAFF COSTS The average monthly number of employees (excluding non-executive directors) was: 2016 2015 Number Number Directors (executive) 2 2 Research and development, production 86 83 Sales and marketing 10 8 Administration 13 14 111 107 Their aggregate remuneration comprised: 2016 2015 £’000 £’000 Wages and salaries 4,690 4,667 Social security costs 451 423 Pension scheme contributions 466 349 Share based payments 166 181 5,773 5,620 The total Directors’ emoluments (including non-executive directors) was £713k (2015: £615k). The aggregate value of contributions paid to money purchase pension schemes was £46k (2015: £26k) in respect of two directors (2015: two directors). The highest paid director received emoluments of £224k (2015: £188k) and amounts paid to money purchase pension schemes was £16k (2015: £16k). Key management compensation: 2016 2015 £’000 £’000 Wages and salaries and other short-term benefits 1,177 834 Social security costs 205 81 Pension scheme contributions 92 64 Share based payment expense 149 110 1,623 1,089 Key management comprise the Executive Directors and senior operational staff. 42 Consolidated Financial Statements For the year ended 30 April 2016 10. FINANCE INCOME 2016 2015 £’000 £’000 Bank deposits 1 31 Total finance income 1 31 11. FINANCE COSTS 2016 2015 £’000 £’000 Interest on bank overdrafts, loans and borrowings 84 100 Interest expense on financial liabilities measured at amortised cost – 2 Total interest expense 84 102 12. TAX Recognised in the income statement 2016 2015 £’000 £’000 Current tax credit: UK corporation tax on losses in the year 811 1,002 Adjustment in respect of previous periods 45 – Foreign taxes paid (11) – Total current tax 845 1,002 Deferred tax: Origination and reversal of timing differences 1,298 (13) Adjustment in respect of previous periods (151) – Total deferred tax 1,147 (13) Total tax credit in income statement 1,992 989 Corporation tax is calculated at 20% (2015: 20.92%) of estimated taxable loss for the year. Taxation for other jurisdictions is calculated at the rates prevailing in the respective jurisdictions. 43 KROMEK Annual Report & Accounts 2016 Notes to the consolidated financial statements (continued) For the year ended 30 April 2016 12. TAX (CONTINUED) Reconciliation of tax credit The charge for the year can be reconciled to the profit in the income statement as follows: 2016 2015 £’000 £’000 Loss before tax 4,143 3,135 Tax at the UK corporation tax rate of 20% (2015: 20.92%) 829 656 Expenses not deductible for tax purposes (40) (97) Effect of R&D 1,049 804 Rate differences effect of R&D (307) (444) Income not taxable 2 146 Unrecognised movement on deferred tax (156) 80 Effects of other tax rates/credits 722 – Effects of overseas tax rates 11 (156) Adjustment in respect of previous periods (118) – Total tax credit for the year 1,992 989 Further details of deferred tax are given in note 23. 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. The Finance Act No2 2015, which was substantively enacted on 26 October 2015, includes further provisions to reduce the corporation tax to 19% with effect from 1 April 2017 and 18% with effect from 1 April 2020. The deferred tax liabilities and assets of the Group are likely to realise at rates of 18% meaning a rate of 18% has been applied when calculating deferred tax assets and liabilities as at 30 April 2016. In addition on 16 March 2016 the Government announced in the 2016 Budget Report that there would be a further reduction in the main rate of corporation tax from 18% to 17% from 1 April 2020. This has not been substantively enacted at the balance sheet date. There is a potential deferred tax asset on excess tax deductions arising from share-based payments on exercise of share options of £1,259k (2015: £1,366k). 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 (2015: £nil). 14. LOSSES PER SHARE The calculation of the basic and diluted earnings per share is based on the following data: Losses 2016 2015 £’000 £’000 Losses for the purposes of basic and diluted losses per share being net losses attributable to owners of the Group (2,151) (2,146) 2016 2015 Number of shares Number Number Weighted average number of ordinary shares for the purposes of basic losses per share 141,337,174 107,818,329 Effect of dilutive potential ordinary shares: Share options 6,249,111 6,223,395 Weighted average number of ordinary shares for the purposes of diluted losses per share 147,586,285 114,041,724 44 Consolidated Financial Statements For the year ended 30 April 2016 14. LOSSES PER SHARE (CONTINUED) 2016 2015 Basic and diluted (1.5) (2.0) 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 £’000 Cost At 1 May 2015 1,275 At 30 April 2016 1,275 Accumulated impairment losses At 1 May 2015 – At 30 April 2016 – Carrying amount At 30 April 2016 1,275 At 30 April 2015 1,275 Goodwill acquired in a business combination is allocated, at acquisition, to the cash generating units (CGUs) that are expected to benefit from that business combination. Before recognition of impairment losses, the carrying amount of goodwill had been allocated as follows: 2016 2015 £’000 £’000 US operations 1,275 1,275 The goodwill arose on the acquisition of NOVA R&D, Inc in 2010, 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 Kromek USA (a combination of eV Products and NOVA R&D, Inc) as a cash generating unit (CGU). This is re- ported in note 6 within the segmental analysis of the US operations. 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 cash-generating unit using the management approved 5 year forecasts for each cash-generating unit. The base 5 year projection is year-on-year growth over the next 5 years, with overheads remaining relatively stable. The growth rate of the CGU is expected to remain flat in Year 1 as a result of the CGU continuing to develop its technical capabilities in the forthcoming year. Growth is then expected to increase to 128% in Year 2, 17% in Year 3, 62% in Year 4 and 37% in Year 5. These cash flows are then discounted at the Company’s weighted average cost of capital of 15% (2015: 15%). 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 2016 (2015: £nil). Management have considered various sensitivity analyses in order to appropriately evaluate the carrying value of goodwill. 45 KROMEK Annual Report & Accounts 2016 Notes to the consolidated financial statements (continued) For the year ended 30 April 2016 15. GOODWILL (CONTINUED) 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 2016. For illustrative purposes, a compound reduction in revenue of 10% in each of years 1-5 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 2016 or 2015. 16. OTHER INTANGIBLE ASSETS Patents, trademarks Development costs & other intangibles Total £’000 £’000 £’000 Cost At 1 May 2015 5,457 5,193 10,650 Additions 2,819 320 3,139 Exchange differences 101 147 248 At 30 April 2016 8,377 5,660 14,037 Amortisation At 1 May 2015 240 1,685 1,925 Charge for the year 238 590 828 Exchange differences 7 55 62 At 30 April 2016 485 2,330 2,815 Carrying amount At 30 April 2016 7,892 3,330 11,222 At 30 April 2015 5,217 3,508 8,725 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. Other intangible assets with indefinite useful lives arose as part of the acquisitions of NOVA R&D, Inc. in June 2010 and eV Products, Inc. in February 2013. The recoverable amounts of these assets have been calculated on a value in use basis at both 30 April 2016 and 30 April 2015. These calculations use cash flow projections based on financial forecasts and appropriate long-term growth rates. To prepare value in use calculations, the cash flow forecasts are discounted back to present value using a pre-tax discount rate of 15% (2015: 15%) and a flat ter- minal value growth from 2021. The Directors have reviewed the recoverable amount of these indefinite useful life assets and do not consider there to be any indication of impairment. The carrying amounts of the acquired intangible assets arising on the acquisitions of NOVA R&D, Inc. and eV Products, Inc. as at the 30 April 2016 was £1,681k (2015: £1,858k), with amortisation to be charged over the remaining useful lives of these assets which is between 3 and 13 years. The amortisation charge on intangible assets is included in administrative expenses in the consolidated income statement. 46 Consolidated Financial Statements For the year ended 30 April 2016 17. PROPERTY, PLANT AND EQUIPMENT Computer Plant and Fixtures and equipment machinery fittings Total £’000 £’000 £’000 £’000 Cost or valuation At 1 May 2015 630 6,940 167 7,737 Additions 128 288 28 444 Disposals – (4) – (4) Exchange differences 7 134 3 144 At 30 April 2016 765 7,358 198 8,321 Accumulated depreciation and impairment At 1 May 2015 475 2,999 116 3,590 Charge for the year 71 616 22 709 Eliminated on disposals – (3) – (3) Exchange differences 2 48 1 51 At 30 April 2016 548 3,660 139 4,347 Carrying amount At 30 April 2016 217 3,698 59 3,974 At 30 April 2015 155 3,941 51 4,147 Assets held under finance leases with a net book value of £39k (2015: £39k) are included in the above table within plant and machinery. 18. SUBSIDIARIES A list of the subsidiaries, including the name, country of incorporation, and proportion of ownership interest is given in note 3 to the Company’s separate financial statements. INVENTORIES 19. 2016 2015 £’000 £’000 Raw materials 1,208 596 Work-in-progress 1,142 1,010 Finished goods 460 497 2,810 2,103 The cost of inventories recognised as an expense during the year in respect of continuing operations was £3,780k (2015: £1,266k). The write-down of inventories to net realisable value amounted to £17k (2015: £43k). The reversal of write-downs amounted to £138k (2015: £30k). The partial release of the write-downs was because of a revised estimate of the net realisable value of certain inventory lines based upon actual sales made of the inventory during the period. 47 KROMEK Annual Report & Accounts 2016 Notes to the consolidated financial statements (continued) For the year ended 30 April 2016 20. AMOUNTS RECOVERABLE ON CONTRACTS 2016 2015 £’000 £’000 Contracts in progress at the balance sheet date: Amounts due from contract customers included in trade and other receivables 1,240 281 1,240 281 Contract costs incurred plus recognised profits less recognised losses to date 1,907 1,915 Less: progress billings (667) (1,634) 1,240 281 21. TRADE AND OTHER RECEIVABLES 2016 2015 £’000 £’000 Amount receivable for the sale of goods 3,386 3,458 Amount recoverable on contracts (see note 20) 1,240 281 Other receivables 275 288 Prepayments 258 62 Current tax assets 811 1,016 5,970 5,105 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 47 days. The Group initially recognises an allowance for doubtful debts of 100% against receivables over 120 days. However, this is subject to management override where there is evidence of recoverability, most notably, where specific support is being provided to strategic partners in the marketing of new products. 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. 48 Consolidated Financial Statements For the year ended 30 April 2016 21. TRADE AND OTHER RECEIVABLES (CONTINUED) At 30 April 2016, trade receivables are shown net of an allowance for bad debts of £408k (2015: £252k) arising from the ordinary course of business, as follows: 2016 2015 £’000 £’000 Balance at 1 May 2015 252 – Provided during the year 156 252 Balance at 30 April 2016 408 252 The bad debt provision records impairment losses unless the Group is satisfied that no recovery of the amount owing is possible, at which point the amounts considered irrecoverable are written off against the trade receivables directly. Ageing of past due but not impaired receivables at the statement of financial position date was: 2016 2015 £’000 £’000 31–60 days 75 363 61–90 days 102 56 91–120 days 33 159 121+ days 737 593 Total 947 1,171 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. Of the £737k 121+ days ageing, all of the cash has been received post year end. The Directors consider that the carrying amount of trade and other receivables is approximately equal to their fair value. Ageing of impaired receivables at the statement of financial position date was: 2016 2015 £’000 £’000 31–60 days – 90 61–90 days – – 91–120 days – – 121+ days 793 376 Total 793 466 Of the £793k of debtors at 121+ days a cumulative provision totalling £408k for doubtful debts has been made at 30 April 2016 as noted above. 49 KROMEK Annual Report & Accounts 2016 Notes to the consolidated financial statements (continued) For the year ended 30 April 2016 22. FINANCE LEASE LIABILITIES Finance lease liabilities are payable as follows: Minimum lease payments 2016 2015 £’000 £’000 Amounts payable under finance leases: Within one year 9 21 In the second to fifth years inclusive – 11 9 32 Less: future finance charges – (3) Present value of lease obligations 9 29 Analysed as: Amounts due for settlement within 12 months (shown under current liabilities) 9 19 Amounts due for settlement after 12 months – 10 9 29 It is the Group’s policy to lease certain of its fixtures and equipment under finance leases. The average lease term is 2 years. For the year ended 30 April 2016, the average effective borrowing rate was 0.82% (2015: 0.82%). Interest rates are fixed at the contract date. All leases are on a fixed repayment basis and no arrangements have been entered into for contingent rental payments. All lease obligations are denominated in sterling. The fair value of the Group’s lease obligations is approximately equal to their carrying amount. 50 Consolidated Financial Statements For the year ended 30 April 2016 23. 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 re- porting period. Revaluation of Accelerated Short term intangibles capital timing allowances differences Tax losses Total £’000 £’000 £’000 £’000 £’000 At 1 May 2015 1,417 573 (5) (838) 1,147 (Credit)/charge to profit or loss (197) 107 (12) (1,045) (1,147) At 30 April 2016 1,220 680 (17) (1,883) – 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: 2016 2015 £’000 £’000 Deferred tax liabilities 1,897 1,990 Deferred tax assets (1,897) (843) – 1,147 At the statement of financial position date, the Group has unused tax losses of £15,722k (2015: £13,418k) available for offset against future profits. A deferred tax asset has been recognised in respect of £6,717k (2015: £3,368k) of such losses. The asset is considered recoverable because it can be offset to reduce future tax liabilities arising in the Group. No deferred tax asset has been recognised in respect of the remaining £9,005k (2015: £10,050k) 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. 24. TRADE AND OTHER PAYABLES 2016 2015 £’000 £’000 Trade payables and accruals 3,582 3,359 Deferred income 863 784 4,445 4,143 Trade payables and accruals principally comprise amounts outstanding for trade purchases and ongoing costs. The average credit period taken for trade purchases is 59 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. Deferred income relates to government grants received which have been deferred until the conditions attached to the grants are met. The Directors consider that the carrying amount of trade payables approximates to their fair value. 51 KROMEK Annual Report & Accounts 2016 Notes to the consolidated financial statements (continued) For the year ended 30 April 2016 25. BORROWINGS 2016 2015 £’000 £’000 Secured borrowing at amortised cost Revolving credit facility – 1,003 Finance lease liabilities (see note 22) 9 29 9 1,032 Total borrowings Amount due for settlement within 12 months 9 1,022 Amount due for settlement after 12 months – 10 In February 2015 the Group agreed a 24-month facility with its bank for a £3m revolving credit facility. This facility is secured by a debenture and a composite guarantee across the Group. The terms of the revolving credit facility are a nominal interest rate of LIBOR+2.5% and a repayment term of 6 months from date of drawdown. The fair value equates to the carrying value. Finance lease liabilities are secured by the assets leased. The borrowings are at a fixed interest rate with repayment periods not exceeding five years. The weighted average interest rates paid during the year were as follows: 2016 2015 % % Revolving credit facility 3.10 3.10 Finance lease liabilities 0.82 0.82 26. DERIVATIVES FINANCIAL INSTRUMENTS AND HEDGE ACCOUNTING At 30 April 2016 and 30 April 2015 the Group had no derivatives in place for cash flow hedging purposes. 27. SHARE CAPITAL 2016 2015 £’000 £’000 Authorised, allotted, called up and fully paid: 108,173,290 (2015: 108,173,290) Ordinary shares of £0.01 each 1,082 1,082 44,037,792 (2015: nil) Ordinary shares issued at £0.01 each 440 – 1,522 1,082 During the year 567,200 shares (2015: 1,024,806) were allotted under EMI share option schemes. 28. SHARE PREMIUM ACCOUNT £’000 Balance at 1 May 2015 34,643 Premium arising on issue of equity shares 10,563 Expenses on issue of equity shares (722) Balance at 30 April 2016 44,484 52 Consolidated Financial Statements For the year ended 30 April 2016 29. TRANSLATION RESERVE £’000 Balance at 1 May 2015 (84) Exchange differences on translating the net assets of foreign operations 156 Balance at 30 April 2016 72 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. 30. ACCUMULATED LOSSES £’000 Balance at 1 May 2015 (20,614) Net loss for the year (2,151) Effect of share-based payment credit 166 Balance at 30 April 2016 (22,599) 31. NOTES TO THE CASH FLOW STATEMENT 2016 2015 £’000 £’000 Loss for the year (2,151) (2,146) Adjustments for: Finance income (1) (31) Finance costs 84 102 Income tax credit (1,992) (989) Government grants credit (15) (4) Depreciation of property, plant and equipment 709 673 Amortisation of intangible assets 828 711 Share-based payment expense 166 181 Operating cash flows before movements in working capital (2,372) (1,503) (Increase)/decrease in inventories (707) 183 Increase in receivables (1,070) (2,099) Increase in payables 302 354 Cash used in operations (3,847) (3,065) Income taxes received 1,002 704 Net cash used in operating activities (2,845) (2,361) Cash and cash equivalents 2016 2015 £’000 £’000 Cash and bank balances 3,857 1,183 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. 53 KROMEK Annual Report & Accounts 2016 Notes to the consolidated financial statements (continued) For the year ended 30 April 2016 32. OPERATING LEASE ARRANGEMENTS The Group as lessee 2016 2015 £’000 £’000 Lease payments under operating leases recognised as an expense in the year 516 392 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: 2016 2015 £’000 £’000 Within one year 509 561 In the second to fifth years inclusive 595 1,182 1,104 1,743 Operating lease payments represent rentals payable by the Group for certain of its office properties. Leases are negotiated for an average term of 5 years. At 30 April 2016 and 2015, the Group had no capital commitments or contingencies. 33. 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 ten 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. 2016 2015 Weighted average Weighted average Number of exercise price Number of exercise price share options (£) share options (£) Outstanding at beginning of the year 12,788,016 0.16 12,065,710 0.16 Granted during the year 567,200 0.28 1,024,806 0.42 Exercised during the year (25,000) 0.015 (162,500) 0.20 Forfeited during the year (825,206) 0.26 (140,000) 0.20 Outstanding at the end of the year 12,505,010 0.16 12,788,016 0.16 Exercisable at the end of the year 11,412,010 0.16 8,725,990 0.16 The weighted average share price at the date of exercise for share options exercised during the year was £0.31 (2015: £0.49). The options outstanding at 30 April 2016 had a weighted average exercise price of £0.16 (2015: £0.16) and a weighted average remaining contractual life of six years (2015: seven years). The range of exercise prices for outstanding share options at 30 April 2016 was 1.5p to 79p (2015: 1.5p to 79p). In 2016, the aggregate of the estimated fair values of the options granted is £38k (2015: £107k). The inputs into the Black-Scholes model are as follows: 2016 2015 Weighted average share price 32p 30p Weighted average exercise price 12p 19p Expected volatility 35.56% 35.56% Expected life 6 years 6 years Risk-free rate 0.44 0.44 Expected dividend yields 0% 0% 54 Consolidated Financial Statements For the year ended 30 April 2016 33. SHARE BASED PAYMENTS (CONTINUED) Equity-settled share option scheme (continued) Expected volatility was determined by calculating the historical volatility of similar listed businesses over the previous 3 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 £166k (2015: £181k) related to equity-settled share-based payment transactions. The Kromek Group Plc 2013 Long Term Incentive Plan On 10 October 2013 a new Long Term Incentive Plan 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 evenly over a 3 year reporting period, with the first having ended on 30 April 2014, and the remainder on subsequent year end dates. On 15 October 2015 1,703,354 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 £140k (2015: £125k). The amounts recognised as a share-based payment expense for the year ended 30 April 2016 was £140k (2015: £110k). The 2013 Long Term Incentive Plan award was valued using the Monte Carlo pricing model. The inputs into the Monte Carlo pricing model are as follows: 2016 2015 Weighted average share price 35p 47p Weighted average exercise price 1p 1p Expected volatility 35.12% 38.76% Expected life 3 years 3 years Risk-free rate 0.32 0.32 Expected dividend yields 0% 0% 34. RETIREMENT BENEFIT SCHEMES Defined contribution schemes 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 United States of America are members of a state-managed retirement benefit scheme operated by the government of the United States of America. 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 £466k (2015: £349k) represents contributions payable to these schemes by the Group at rates specified in the rules of the schemes. As at 30 April 2016, contributions of £30k (2015: £29k) due in respect of the current reporting period had not been paid over to the scheme. 35. FINANCIAL INSTRUMENTS 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 share- holders through the optimisation of the debt and equity balance. The Group’s overall strategy has remained unchanged between 2014 and 2015. The capital structure of the Group consists of net debt, which includes the borrowings disclosed in note 25 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 27 to 30. The Group is not subject to any externally imposed capital requirements. 55 KROMEK Annual Report & Accounts 2016 Notes to the consolidated financial statements (continued) For the year ended 30 April 2016 35. FINANCIAL INSTRUMENTS (CONTINUED) Capital risk (continued) The Group’s primary source of capital is equity. By pricing products and services commensurately with the level of risk and focusing on the ef- fective 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 revolving credit facility available, which at the year end was £nil (2015: £nil). Details of the revolving credit facility have been included in note 25. The Group considers that the current capital structure will provide sufficient flexibility to ensure that appropriate investment can be made, if re- quired, to implement and achieve the longer term growth strategy of the Group. 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 de- pend 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: 2016 2015 £’000 £’000 £ sterling 4,180 1,751 US$ sterling equivalent (657) (903) € sterling equivalent 333 335 Had the foreign exchange rate between sterling, US$ and € changed by 5%, this would affect the loss for the year and net assets of the Group by £16k (2015: £28k). 5% is considered a reasonable assessment of foreign exchange movement as this has been the movement noted be- tween 2015 and 2016. 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 in- formation and its own trading records to rate its major customers. The Group’s exposure and the credit ratings of its counterparties are con- tinuously 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. 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 21. 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 man- agement 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 continuously monitoring forecast and actual cash flows, and by matching the maturity profiles of financial assets and liabilities. 56 Consolidated Financial Statements For the year ended 30 April 2016 35. FINANCIAL INSTRUMENTS (CONTINUED) Liquidity risk (continued) The following table details the Group’s remaining contractual maturity for its non-derivative financial liabilities with agreed repayment periods. The tables have 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. Weighted average effective Less than 3 months to interest rate 1 month 1–3 months 1 year 1–5 years 5+ years Total % £’000 £’000 £’000 £’000 £’000 £’000 1 May 2015 3.1 – – 1,003 – – 1,003 Revolving credit facility – – – (1,003) – – (1,003) 30 April 2016 – – – – – – – 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 2016 2015 £’000 £’000 Financial assets Cash and bank balances 3,587 1,183 Loans and receivables 4,901 4,027 Financial liabilities Amortised cost (4,455) (5,165) 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 prior year, AIPOLAS Limited, a company under the control of Jerel Whittingham, a non-executive director, charged the Group £nil (2015: £15k) in relation to consultancy charges. At the year end the Group owed AIPOLAS Limited £nil (2015: £nil). Directors’ transactions During the year Professor M Robinson, a Director, charged the Group £72k (2015: £72k) for consultancy fees. At the year end the Group owed Professor M Robinson £7k (2015: £7k). This amount was included within trade payables. There have been no other transactions with related parties other that what has been disclosed within this note. 57 KROMEK Annual Report & Accounts 2016 Company statement of financial position As at 30 April 2016 2016 2015 Note £’000 £’000 Non-current assets Investment in subsidiaries 3 – – – – Current assets Trade and other receivables 4 16,747 14,795 Cash and cash equivalents 8,036 1,028 24,783 15,823 Total assets 24,783 15,823 Current liabilities Trade and other payables 5 (129) (33) Borrowings 6 – (1,003) Total liabilities (129) (1,036) Net assets 24,654 14,787 Equity Share capital 10 1,522 1,082 Share premium account 11 23,806 13,965 Accumulated losses 12 (674) (260) Total Equity 24,654 14,787 The financial statements of Kromek Group plc (registered number 08661469) were approved by the Board of Directors and authorised for issue on 18 July 2016. They were signed on its behalf by: Dr Arnab Basu MBE Chief Executive Officer 58 Company Financial Statements Company statement of changes in equity For the year ended 30 April 2016 Equity attributable to equity holders of the Company Share capital Share premium Accumulated Total £’000 account losses equity £’000 £’000 £’000 Balance at 1 May 2014 1,080 13,934 (58) 14,956 Total comprehensive losses for the year – – (202) (202) Share reorganisation Issue of ordinary shares 2 31 – 33 IPO costs recognised in equity Balance at 30 April 2015 1,082 13,965 (260) 14,787 Total comprehensive loss for the year – – (414) (414) Issue of share capital net of expenses 440 9,841 – 10,281 Balance at 30 April 2016 1,522 23,806 (674) 24,654 59 KROMEK Annual Report & Accounts 2016 Company statement of cash flows For the year ended 30 April 2016 2016 2015 Note £’000 £’000 Net cash used in operating activities 9 (586) (259) Financing activities Proceeds from issue of share capital 10,281 33 Loans made to group companies (1,649) _ Revolving credit facility (1,003) 1,000 Net interest paid (35) (3) Net cash from financing activities 7,593 1,030 Net increase in cash and cash equivalents 7,008 771 Cash and cash equivalents at beginning of year 1,028 257 Cash and cash equivalents at end of year 8,036 1,028 60 Company Financial Statements Notes to the company financial statements For the year ended 30 April 2016 1. 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 International Financial Reporting Standards (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. The Company’s financial statements are included in the consolidated financial statements of Kromek Group plc. Accordingly, the Company has taken advantage of the exemption from publishing an income statement, and the losses for the Company are shown within the Company Statement Changes of Equity, being equal to the total comprehensive losses for the year. 2. AUDITOR’S REMUNERATION The auditor’s remuneration for audit and other services is disclosed in note 8 to the consolidated financial statements. 3. SUBSIDIARIES Details of the Company’s direct and indirect subsidiaries as at 30 April 2016 are as follows: Place of Proportion of incorporation ownership (or registration) Class of interest Activity Name and operation shares held % % Kromek Limited United Kingdom Ordinary 100 Scientific research and development Kromek Germany Limited United Kingdom Ordinary 100 Sales and marketing Kromek, Inc United States of America Ordinary 100 Scientific research and development NOVA R&D, Inc United States of America Ordinary 100 Holding company eV Products, Inc United States of America Ordinary 100 Scientific research and development Durham Scientific Crystals Limited United Kingdom Ordinary 100 Dormant company The investments in subsidiaries are all stated at cost. TRADE AND OTHER RECEIVABLES 4. 2016 2015 £’000 £’000 Amounts due from subsidiary undertakings 16,729 14,749 Prepayments 12 10 Other receivables 6 36 16,747 14,795 Amounts due from subsidiary undertakings are due in more than 1 year. 61 KROMEK Annual Report & Accounts 2016 Notes to the company financial statements (continued) For the year ended 30 April 2016 TRADE AND OTHER PAYABLES 5. 2016 2015 £’000 £’000 Trade payables and accruals 113 33 Social security and other taxation 16 – 129 33 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. 6. BORROWINGS Details regarding the borrowings of the Company are disclosed in note 25 to the consolidated financial statements. FINANCIAL ASSETS 7. Intercompany 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. FINANCIAL LIABILITIES 8. 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. 9. NOTES TO THE STATEMENT OF CASH FLOWS 2016 2015 £’000 £’000 Loss for the year (414) (202) Adjustments for: Finance costs 36 3 Operating cash flows before movements in working capital (378) (199) (Increase)/decrease in receivables (304) 6 Increase/(decrease) in payables 96 (66) Net cash from operating activities (586) (259) 62 Company Financial Statements For the year ended 30 April 2016 10. SHARE CAPITAL 2016 2015 £’000 £’000 Allotted, called up and fully paid: 108,173,290 Ordinary shares of £0.01 each 1,082 1,082 44,037,792 Ordinary shares issued at £0.01 440 – 1,522 1,082 11. SHARE PREMIUM ACCOUNT 2016 £’000 Balance at 1 May 2015 13,965 Premium arising on issue of equity shares 10,563 Expenses arising on issue of equity shares (722) Balance at 30 April 2016 23,806 12. ACCUMULATED LOSSES £’000 Balance at 1 May 2015 (260) Net loss for the year (414) Balance at 30 April 2016 (674) 13. 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 27 to 30 to the consolidated financial statements. 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. 63 KROMEK Annual Report & Accounts 2016 Notes to the company financial statements (continued) For the year ended 30 April 2016 13. FINANCIAL INSTRUMENTS (CONTINUED) Foreign currency risk The Company currently does not undertake transactions denominated in foreign currencies. Credit risk Credit risk refers to the risk that 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 mit- igating 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 avail- able financial information and its own trading records to rate its major customers. The Company’s exposure and the credit ratings of its coun- terparties are continuously 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 man- agement 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 continuously monitoring forecast and actual cash flows, and by matching the maturity profiles of financial assets and liabilities. The following table details the Company’s remaining contractual maturity for its non-derivative financial liabilities with agreed repayment periods. The tables have 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. Weighted average effective Less than 3 months to interest rate 1 month 1–3 months 1 year 1–5 years 5+ years Total % £’000 £’000 £’000 £’000 £’000 £’000 1 May 2015 3.1 – – 1,003 – – 1,003 Revolving credit facility 2.5 – – (1,003) – – (1,003) 30 April 2016 – – – – – – – 14. ULTIMATE CONTROLLING PARENT AND PARTY In the opinion of the Directors, there is no ultimate controlling parent or party. 15. EVENTS AFTER THE BALANCE SHEET DATE There have been no events after the reporting date that require disclosure in line with IAS10 events after the reporting period. 16. RELATED PARTY TRANSACTIONS No transactions have been noted with Directors during the period ended 30 April 2016. No dividends were paid in the period in respect of ordinary shares held by the Company’s Directors. 64 Notes 65 KROMEK Annual Report & Accounts 2016 Notes 66 Kromek Group plc NETPark Thomas Wright Way Sedgefield County Durham TS21 3FD 

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